Natural gas is being touted by some at Copenhagen as a relatively low-carbon “bridge” fuel, a life-line to take us through the next few decades until we can depend entirely on renewable and nuclear energy. Proponents, which include an array of interests from Encana, the Canadian oil and gas company, to the Worldwatch Institute, point out that natural gas emits 50-70% less emissions than coal and works well in support of intermittent renewables like wind and solar. For example, Worldwatch is co-hosting an event with the UN Foundation and the American Clean Skies Foundation (ACSF) on Monday in Copenhagen to discuss strategies for incorporating natural gas expansion in national climate change policies.

And here at home, there are plans for vastly expanding natural gas consumption, hopefully replacing some coal-fired power and even gasoline-powered vehicles. New reports suggest the United States may be the “Saudi Arabia” of natural gas, with potentially more reserves trapped in shale, a porous rock with low permeability, than even Russia, the current gas behemoth.

Traditionally, the lack of permeability in shale rocks prevented the exploitation of the methane trapped within them. Yet a new technology called hydraulic fracturing, in which enormous volumes of treated water are injected at high pressure into the ground, can break up the shale rock and permit the gas to flow to the surface. Across swathes of the country, including the Marcellus shale that stretches from West Virginia to New York, companies are drilling thousands of wells , driving prices down and reserve estimates up.

The most well-known scheme for using all this “unconventional” gas domestically is the Pickens Plan, which calls for a transition to natural-gas vehicles. In this model, compressed natural gas carried on board automobiles would power an internal combustion engine. According to the plan, “By aggressively moving to shift America’s car, light duty and heavy truck fleets from imported gasoline and diesel to domestic natural gas we can lower our need for foreign oil.”

Yet a closer look reveals substantial potential problems to this neat and tidy solution to the global coal problem, and our domestic oil problem.

First, the regulatory environment in which companies will conduct hydraulic fracturing in the United States is somewhat uncertain. Environmental groups have suggested that there is a link between hydraulic fracturing and pollution of groundwater supplies.  This is because the injected water is lubricated with gels, sand, and chemicals. According to the New York Times, “In the worst case, such pollution could damage crucial supplies of water used for drinking and agriculture.” Evidence, however, is contested by the companies and largely anecdotal.  To date, there has been no confirmed instance of groundwater pollution from hydraulic fracturing. Still, EPA is under growing pressure to regualte fracking under the Safe Drinking Water Act (from which EPAct 2005 exempted it).

The second question mark for unconventional gas is the cost of production—or perhaps more importantly, the price of natural gas required to support ongoing capital expenses in unconventional production.  Natural gas production wells have steep decline rates.  According to published company reports, decline rates in a standard well are around 81% in the first year of drilling, meaning that steady production requires steady capital investment in new wells.  Factoring in these costs, along with taxes and operating costs, Bernstein Research report recently estimated that Haynesville operators needed a natural gas price of nearly $8 per million Btu to earn a nine percent return on average capital employed (a modest return for a mid-sized operator in the natural gas business). This is equivalent to an oil price of roughly $50 per barrel.  Throughout 2009, natural gas prices have been far below this. Long-term contracts signed in 2008 – when gas prices were high – have helped many independent producers weather the storm, but 2010 could see a sharp decline in horizontal rig counts.

Thirdly, the prospect of transforming the vehicle fleet to natural gas poses significant challenges.  One is that despite the large reserve estimates we may not be able to produce enough gas to meet the needs of transportation.  Converted to a Btu basis, U.S. transportation sector demand equaled roughly 27.9 quadrillion Btu, with on-road transport amounting to 22.3 quadrillion Btu.  By comparison, total domestic production of dry natural gas totaled roughly 21 quadrillion Btu in 2008.  In other words, the United States would need to more than double domestic gas production to offset all on-road use of oil (assuming that no currently-produced natural gas would move to the transportation sector).

These problems are mirrored in the rest of the world and even inflated by issues such as high transport costs via LNG tankers or pipelines to demand centers in China and India, and concerns in Europe over dependence on Russian gas. While there is certainly an expanded role for natural gas, especially in power generation, in the years to come, it should not be viewed a panacea for oil dependence and global warming.

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