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February 20, 2007 Robert W. Best, AGF Chairman Gary Gardner, AGF Executive Director

The Energy Policy Act of 2005 and Its Impact on the U.S. Natural Gas Supply/Demand Imbalance. February 20, 2007 Robert W. Best, AGF Chairman Gary Gardner, AGF Executive Director Kevin Petak, Vice President, Gas Market Modeling EEA/ICF International. American Gas Foundation.

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February 20, 2007 Robert W. Best, AGF Chairman Gary Gardner, AGF Executive Director

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  1. The Energy Policy Act of 2005 andIts Impact on the U.S. Natural GasSupply/Demand Imbalance February 20, 2007 Robert W. Best, AGF Chairman Gary Gardner, AGF Executive Director Kevin Petak, Vice President, Gas Market Modeling EEA/ICF International

  2. American Gas Foundation Independent source of information, research, and programs on energy and environmental issues that affect public policy

  3. AGF Studies • R&D in Natural Gas Transmission and Distribution (2007) • Public Policy and Real Energy Efficiency (2005) • Safety Performance & Integrity of the Natural Gas Distribution Infrastructure (2005) • Natural Gas Outlook to 2020 (2005) • Energy Price Volatility (2003) • Meeting the Gas Supply Challenge (2002) • Fueling the Future (2001)

  4. “The Energy Policy Act of 2005 and Its Impact on the U.S. Natural Gas Supply/Demand Imbalance” January 2007

  5. Study Objectives • Reexamine findings of AGF’s 2005 “Natural Gas Outlook to 2020” Study in light of recent market conditions • Compare the EPAct potential impacts to the 2005 AGF Outlook Study policy scenarios

  6. Study Summary • EPAct was a significant first step toward addressing critical supply/demand issues • EPAct has brought us approx 1/3 of the way towards achieving the market balance outlined in the Expanded Policies scenario • Reinforced principle findings of the 2005 AGF Outlook Study • U.S. natural gas market remains in a tight supply/demand balance

  7. STUDY FINDINGS

  8. Impact of Recent Events • Natural gas production was lower • U.S. LNG imports were less • Apparent “floor” on gas prices as the market balance loosens • Short-term supply disruptions can causeprices to rise dramatically

  9. Daily Spot Natural Gas Pricesat Henry Hub (Jan 05 thru Apr 06)

  10. 18 TCF 346 TCF 40% 100% 37 TCF 100% RestrictedPercentage 43 TCF 56% Major Portions of the Gas Resource Base Are Not Accessible Gulf of Mexico Energy Security Act of 2006

  11. Projected Natural Gas Consumption 2007 Source: Energy Information Administration, U.S. Dept of Energy

  12. 2005 AGF Outlook Study • Analyzed effects of key policy variables • Analyzed effects on supply availability • Outlined supply impact on natural gas markets

  13. Scenario Assumptions ExpectedExpandedExisting Drilling Moratoria Unchanged Relaxed Unchanged Intermountain W Access Unchanged Increased Unchanged Alaskan Pipeline 2014 2014 Not Built LNG in 2020 18 Bcfd 23 Bcfd 5.3 Bcfd New Gas-Fired Generation 60 GW 30 GW 60 GW

  14. Actual & Projected Natural Gas Prices (Henry Hub)2005 Outlook Study Gas Prices in the Expanded Policies scenario are 40% lower than the Existing Policies scenario, saving consumers up to $200 million per year 2008

  15. Impact to Consumers Expected Expanded Existing PoliciesPoliciesPolicies Supply Greater diversity Diversity with Reliance on Conventional; more LNG Strain on Lower-48 Demand 30.6 quads 30.6 quads 26.7 quads More Industrial; Less Electric Gen 2020 Prices $8.15 $13.76 $1 Trillion in additional cost over 15 years

  16. Impact to Consumers Expected Expanded Existing PoliciesPoliciesPolicies Supply Greater diversity Diversity with Reliance on Conventional; more LNG Strain on Lower-48 Demand 30.6 quads 30.6 quads 26.7 quads More Industrial; Less Electric Gen 2020 Prices $8.15 $5.47 $575 Billion in savings over the 15 years

  17. Energy Policy Act of 2005 • Require expeditious compliance with the National Environmental Policy Act (NEPA) and timely action on applications for oil/gas permitting on federal lands • Create a federal pilot project to streamline permitting in the Intermountain West • Improve process for issuance of permits to drill on federal lands • National Academy of Sciences study ontotal energy efficiency

  18. Progress Toward Addressing the Imbalance • Implemented – Impact of policies fully implemented • Enacted – Impact of policies that have been enacted but not yet implemented • Potential – Potential impact identified in 2005 AGF Outlook Study

  19. Progress Toward Addressing the Imbalance The total high of each bar represents the potential annual contribution as defined in the Expanded Policies case, not the maximum potential

  20. Gas Demand Reduction Enacted Score: 60% Implemented Score: 40% Potential (AGF Outlook Study): 650 Bcf per Year • EPAct has over 30 sections that address energy efficiency and conservation measures • EPAct includes some critical measures to promote coal, nuclear, and renewable generating technologies

  21. Increased Access Onshore Enacted Score: 40% Implemented Score: 20% Potential (AGF Outlook Study): 450 Bcf per Year • EPAct made some progress toward improving access to federal onshore lands, but barriers remain, particularly in the Intermountain West • An integrated, all encompassing review of restrictions in the Intermountain West is needed to coordinate and rationalize all regulations governing land access

  22. Increased Access Offshore Enacted Score: 50% Implemented Score: 0% Potential (AGF Outlook Study): 730 Bcf per Year • Unfortunately, EPAct did not take any action toward opening the OCS for oil and gas development • The Gulf of Mexico Energy Security Act of 2006 opened up 8.3 million acres of federal waters in the Gulf. However, abundant supplies in the OCS still remain off limits to development

  23. Alaska Gas Pipeline Enacted Score: N/A Implemented Score: N/A Potential (AGF Outlook Study): 2.2 Tcf per Year • Unlike other policies, this is an “all or nothing” proposition • No additional measures in EPAct, but a preliminary SGA contract agreement has been reached • For every year the project is delayed, the risk that it will be displaced by LNG imports increases

  24. LNG Imports Enacted Score: 30% Implemented Score: 15% Potential (AGF Outlook Study): 6.4 Tcf per Year • Grants FERC Federal authority over approval of LNG facilities, but still local opposition to new terminals • U.S. has added one new LNG import terminal and several more are currently under construction • The volume of LNG imports will depend on securinglong-term contracts and ability of U.S. to compete

  25. Impact of Supply/Demand Variables on U.S. Natural Gas Market Canadian Imports Lower-48 Production Demand Reduction Alaska Gas Pipeline LNG Imports Lesser Impact Greater Impact

  26. SUMMARY

  27. The Situation Hasn’t Changed • Natural gas – “bridge to the future” • Ample resources exist • Supply access and infrastructure are being constrained • Demand is growing • Prices are volatile • High prices are detrimental

  28. Policy Considerations • Appropriate and implement the natural gasprovisions in EPAct • Remove policy and regulatory constraints for supply • Ensure the Alaskan Pipeline and adequateLNG terminals are built • Promote real conservation and efficiency

  29. Conclusion Without addressing the supply/demand imbalance, the U.S. will continue to bear the burden of high and volatile natural gas prices and consumers will face billions in additionalgas costs over the next decade

  30. Thank You!Questions?

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