Is Natural Gas the Answer To Energy Needs of US?

Are we entering the golden age of natural gas?

That's the case being made by Chesapeake Energy CEO Aubrey McClendon, who recently sang the virtues of natural gas before Congress: It’s cheaper and cleaner than other fossil fuels, and available in vast quantities right in the US.

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"Imagine if tomorrow you could announce a new energy plan that would in one stroke cut your constituent’s gasoline bill in half, reduce oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emission and create tens of thousands of new jobs in the US,” McClendon told Congress last week.

All you have to do is encourage the use of natural gas (in compressed form, known as CNG) for transportation, he said.

"It's a trifecta, triple play and hat trick all rolled into one," he added. "It's actually very easy." Watch his interview on CNBC below.

It's an idea getting traction in Congress, which is considering legislation to encourage automakers to build vehicles that can run on compressed natural gas (CNG).

Texas oil tycoon Boone Pickens is also pushing greater use of wind and natural gas to slash the nation's huge oil-import bill. Watch his interview on CNBC below.

But not everyone sees natural gas as the answer to US energy needs.

A Dow Chemical executive told Congress last week that encouraging greater use of natural gas could push up prices for consumers and manufacturers that already use natural gas, pressuring some to relocate overseas. Natural gas also is gaining greater favor with electricity providers, which could boost demand—and prices—even more.

“Congress has been enticed into over-reliance on natural gas before,” cautioned Rich Wells, energy VP, for Dow, which has seen its energy and petroleum-based feedstock costs rise 42 percent in the first three months of 2008.

Other critics also question a recent Chesapeake-funded research report that asserted the US has nearly 50 percent more gas resources (dfferent from reserves) than previous estimates.

That's a fuzzy claim, say experts, such as Bob Tippee, Oil & Gas Journal editor, a 30-year industry veteran, who notes “resource numbers are even more ambiguous” than reserves, which themselves are “very imprecise.”

Making the Switch Difficult

Still, natural gas is getting more attention now that crude oil prices are at historic highs. The question is whether a transportation system long-dependent on gasoline and diesel can make the switch.

Technology is not an issue. In fact, General Motors already makes 18 models of cars and trucks that use compressed natural gas (CNG), just not in the US.

In other countries, GM is either required or encouraged to build these CNG vehicles, while today's high oil prices now seem to make building these same vehicles here a sensible option.

Congress is trying to encourage the switch. One bill, introduced last week, aims at making 10 percent of Detroit's output CNG-compatible by 2018.

It offers $90,000 tax credit to get 20,000 gas stations owners to add CNG pumps, to overcome a critical infrastructural gap that has stymied earlier moves to favor CNG.

So far, only Honda offers a CNG vehicle in the US.

It's Civic GX which has been the greenest car in the country practically since it was introduced in 1997. (A $25,000 price tag is trimmed by a $4,000 federal tax incentive.)

It may also be one of the cheapest cars to operate. With a home fueling unit, the Civic GX can be filled up at $1-1.50 per gallon equivalent, according to John German, American Honda’s environment and energy analysis manager.

Little wonder the stock of CNG-compatible cars is growing worldwide. Currently just one percent of the global vehicle stock, they make up 24 percent of vehicles in Argentina.

Natural Gas Prized by Power Sector

But this new demand from the transportation sector, overlaps—and possibly conflicts—with its growing popularity for electricity generation.

Roughly one-third of US gas consumption goes to generate power and that is projected to keep growing. (Gas produced one per cent of New England’s power in 1980; now it supplies more than 40 percent.)

That’s driving growing imports of liquidified natural gas (LNG), currently just three percent of total gas use (the rest is from North America) but soon expected to rise to 20 percent.

That’s why boosting domestic gas production is critical, argues McClendon, especially fast growing unconventional sources, which has soared 65 percent in the last decade.

Tapping these sources comes from new technologies, including improved horizontal drilling. (One example: gas is now being sucked from underneath Dallas-Fort Worth’s airport and “the drilling rigs.... are headed toward downtown," says the Department of Energy.)

John Felmy, chief economist of the American Petroleum Institute, says the Chesapeake study usefully highlights the importance of opening up more roughly 80 percent of US territory – both on and off-shore – that is closed to exploration.

But McClendon acknowledges current gang-buster unconventional gas production, should keep supply growing five percent a year for the next decade - even without opening up more public land.

Crowding Out Gas-Dependent Industry

McClendon says the US could convert 10 percent of our vehicle fleet to CNG within eight years, and only increase overall natural gas consumption by one percent.

Dow Chemicals’ Wells is not so sure about that, and he questions the even more fundamental assumption that gas will always be cheaper than oil.

He notes they were at rough parity between January 2003 and December 2005 and that gas prices were far more volatile than oil.

Increased demand will also ratchet up gas prices for both residential and business users, particularly harming industries dependent on gas for energy and feedstocks, such as chemicals and plastics, he says.

Rising prices are already taking a toll on US-based business. Foreign-sourced natural gas is far cheaper than US-produced gas - even LNG imports are two times cheaper $4-4.50 vs average US price of $10) - putting US industry at a significant disadvantage, noted Wells.

The spike in gas prices since 2001 has forced many US companies with “global market share ambitions” to relocate overseas, a trend he said would only accelerate with Pickens (and Chesapeake’s) plan, according to Wells.

“We want to invest in the US, but there must be an appropriate value proposition,” he said, noting Dow’s 2002 US sales outstripped those Germany (its second largest market), by more than six to one.

Today more than two-thirds of Dow’s total sales are generated outside the U.S.