Contents

• Introduction
• Key Points
Natural Gas Consumption
• Key Global Consumers
• U.S. Consumption
Natural Gas Supply and Trade
• Natural Gas Reserves Growing
• Global Natural Gas Market Becoming More Integrated
• Natural Production
• Liquefied Natural Gas
• U.S. Development and Growth
• Global Gas Market Becoming More Integrated
• U.S. LNG Exports
• Future Developments and Trends, Global and Domestic
Gas Exporting Countries Forum Still Ineffective
• Production Widespread
• Natural Gas Prices Remain Low
• Major Statutes
• Looking Forward

Summary

The role of natural gas in the U.S. economy is expected to behas been a major part of the debate over energy policy debate in the 112^114th Congress. This report briefly explains key aspects of global natural gas markets, including supply and demand, as well asand major U.S. developments.

Natural gas is considered by some as a potential bridge fuel to a low lower-carbon economy, because it is cleaner burning than its hydrocarbon rivalsalternatives coal and oil. Natural gas combustion emits about two-thirdsone-half less carbon dioxide than coal and one-quarter less than oil when consumed in a typical electric power plant, although fugitive gas emissions offset some of the advantages. Natural gas combustion also emits less particulate matter, sulfur dioxide, and nitrogen oxides than coal or oil. Additionally, improved methods to extract natural gas from certain shale formations hashave significantly increased the resource profile of the United States, which has spurred other countries to try to develop shale gas. If the United States and other countries can bring large new volumes of natural gas to market, particularly unconventional natural gas, then natural gas could play a larger role in the world's economy. Several key factors will determine whether significant new quantities of natural gas come to market, particularly unconventional natural gas resources. These factors includethis happens, including price, technical capability, environmental concerns, and political considerations. Many countries, both producing and consuming, are watching how the development of U.S. unconventional natural gas resources evolves.

Key Points:

• Natural gas is likely to play a greater role in the world energy mix given its growing resource base and its relatively low carbon emissions compared to other fossil fuels.
• The world used over 100,000122,442 billion cubic feet (bcf) of natural gas in 20092015, of which the United States consumed almost 23,000 bcf, 27,463 bcf (the most of any country).
• World natural gas consumption in 2015 grew by 1.7%, which was below the 10-year average of 2.3% but above the 0.6% increase in 2014; U.S. consumption grew by 3%.
• U.S. unconventional natural gas reserves and production, particularly shale gas, have grown rapidly in recent years. The United States accounts for 89% of global shale gas production.
The new shale gas resources have changed the United States' natural gas position from a net importer to a potential. Between 2008 and 2009, world consumption declined about 2.6%, while U.S. consumption dropped 1.6%, or 388 bcf.
• In 2009, almost 84% of the natural gas the United States consumed was from domestic production. Another 14 % of consumption was met with Canadian imports. Liquefied natural gas (LNG), mainly from Trinidad & Tobago and Egypt, comprised just 2% of consumption.
• U.S. unconventional natural gas reserves and production, particularly shale gas, have grown rapidly in recent years. In 2009, shale gas reserves increased 76%, while production rose 47%, according to a recent U.S. Energy Information Administration (EIA) report. The new shale gas resources have changed the U.S. natural gas position from net importer to potentially a net exporter. Other countries are now exploring their own shale gas resources.

Introduction

The role of natural gas in the U.S. economy is expected to behas been a major part of the debate over energy policy debate in the 112^th Congress. This report briefly explains114^th Congress. Both the House and the Senate have held multiple hearings related to natural gas. Numerous bills have been introduced in both houses. This report highlights key aspects of global natural gas markets, including supply and demand, as well asand major U.S. developments.¹

Natural gas is considered Select statutes of U.S. law related to natural gas can be found in Appendix G. Some consider natural gas a potential bridge fuel to a low lower-carbon economy, because it is cleaner burning than its hydrocarbon rivals coal and oil. Natural gas combustion emits about two-thirdsone-half less carbon dioxide than coal and one-quarter less than oil when consumed in a typical electric power plant.² Natural gas combustion also emits less particulate matter, sulfur dioxide, and nitrogen oxides than coal or oil. Additionally,, offset somewhat by fugitive emissions.² Fugitive emissions, which can be intentional (i.e., vented) or unintentional (i.e., leaked), are natural gas that is released to the atmosphere during industry operations.³ Natural gas combustion also emits less particulate matter, sulfur dioxide, and nitrogen oxides than coal or oil. In recent years, the United States has become the home to the shale gas revolution,⁴ as improved methods to extract natural gas from certain shale formations hashave significantly increased the resource profile of the United States, which. This has spurred other countries to try to develop shale gas. , but progress is slow outside of North America. If the United States continues to and other countries can bring large new volumes of natural gas to market at a competitive price, then natural gas could play a larger role in the world's economy. In 2016, the United States started exporting liquefied natural gas (LNG) from the lower 48 states. Several key factors will determine whether significant new quantities of natural gas come to market, particularly unconventional natural gas resources.³5 These factors include price, technical capability, environmental concerns, and political considerations. Many countries, both producing and consuming, are watching how the development of U.S. unconventional natural gas resources evolves.

Key Points:

• Natural gas is likely to play a greater role in the world energy mix given its growing resource⁴ base base⁶ and its relatively low carbon emissions compared to other fossil fuels.
• The world used over 100,000122,442 billion cubic feet (bcf) of natural gas in 20092015, of which the United States consumed almost 23,000 bcf, over 27,463 bcf,⁷ or about 23% (the most of any country).
• World natural gas consumption grew by 1.7% in 2015, which was below the 10-year average of 2.3%; U.S. consumption grew by 3%.⁸
U.S. unconventional natural gas reserves⁹. Between 2008 and 2009, world consumption declined about 2.6%, while U.S. consumption dropped 1.6%, or 388 bcf.
• In 2009, almost 84% of the natural gas the United States consumed was from domestic production. Another 14 % of consumption was met with Canadian imports. Liquefied natural gas⁵ (LNG), mainly from Trinidad & Tobago and Egypt, comprised just 2% of consumption.
• U.S. unconventional natural gas reserves⁶ and production, particularly shale gas, have grown rapidly in recent years. In 2009, shale gas reserves increased 76%, while production rose 47%.⁷ According to the latest data, shale gas made up 51% of proved U.S. natural gas reserves¹⁰ and accounts for 56% of dry natural gas production.¹¹ The new shale gas resources have changed the U.S. natural gas position from a net importer to potentially a net exporter. Other countries are now exploring their own shale gas resourcesa potential net exporter. Global trade in natural gas is increasing and new players are entering on both the supply side and the import side, making the global gas market more integrated.

Natural Gas Consumption

Key Global Consumers

In 20092015, the world consumed almost 104,000about 122,442 bcf of natural gas—2412—23.8% of total global primary energy consumption and 27% of U.S. needs, placing it third behind oil and coal. The United States was the world's largest consumer of natural gas, accounting for 22,84927,463 bcf, or 22.8%, of global consumption (see Figure 1).13

Russia is the second-largest consumer of natural gas, using 13,820 bcf in 2015.¹⁴ Natural gas accounted for 53% of Russia's total primary energy consumption, ranking it above oil and coal.¹⁵ However, natural gas consumption has declined overall in Russia, decreasing 8% between 2011 and 2015,¹⁶ due to a weak economic environment.¹⁷

Figure 1. Global Natural Gas Consumption Total global consumption was 103,825 bcf in 2009

Source: BP Statistical Review of World Energy 20102016, p. 23. Note: Units = billion cubic feet (bcf). U.S. Consumption In 2015, the United States consumed 27,463 bcf of natural gas, making up nearly 23% of total global consumption. The United States is the largest consumer overall of natural gas, and the second-largest consumer overall of energy in the world. Electric power generation made up 35% of U.S. natural gas consumption in 2015; industrial use accounted for 27%, residential use for 17%, and commercial use for 12%.20 There is a noted rise in the use of natural gas for electric power generation, which can be attributed to low natural gas prices due to the abundance of domestic gas resources, and to policies that promote the use of fuels with lower emissions. Demand for natural gas for power generation has more than doubled since 200021 and is expected to grow by 40% by 2040.22 The U.S. industrial sector increased its consumption of natural gas by 10% between 2010 and 2015.23 As the United States continues to expand its growing resource base, the industrial sector will see a wider array of fuel and feedstock choices, and manufacturing industries such as bulk or primary metals could also experience further growth.24 , p. 27.

Natural Gas Supply and Trade

Natural Gas Reserves Growing

Global proved natural gas reserves¹⁰—natural gas that has been discovered and can be expected to be technically and economically produced—amounted to 6,621,153 bcf599,400 bcf (or 6,599 trillion cubic feet (tcf)) in 2015, which correlates to over a 60a 53-year supply at current production levels. (see Figure 2).²⁵ New reserves are developed every year as existing reserves are consumed, so that the ratio between the world's reserves and global production has remained around 60 years since 1980. Natural gas reserves have grown about 6% since 2007, demonstrating the success of exploration and improved recovery techniques.¹¹

Globally, over half of the world's proven natural gas reserves are controlled by the top 10 government-owned companies, with all but one being 100% state-owned. Russia's Gazprom is majority-owned by the state and acts as an arm of the government. Iran's National Iranian Oil Company is the single largest reserve holder of natural gas.

Global natural gas production in 2015 grew by 2.2%, which was below the 10-year average of 2.4%. Growth was below average in all regions except North America, Africa, and Asia Pacific. U.S. natural gas production accounted for 22% of total global production in 2015.

Overall, U.S. natural gas production is continually rising despite low prices. Between 2005 and 2015, production increased over 65%.³²

By 2040, shale gas production is projected to increase 73% to 19.6 tcf, leading to a 45% overall increase in total U.S. natural gas production, from 24.4 tcf to 35.5 tcf.³³

Figure 2. Global Natural Gas Reserves Global natural gas reserves were 6,621,153 bcf in 2009 . Global natural gas reserves have grown about 19% since 2005, demonstrating the success of exploration and improved recovery techniques.26 Of the top 10 reserve holding companies all are majority owned by their respective governments (see Appendix F). Figure 2. Global Natural Gas Reserves

Source: BP Statistical Review of World Energy 2016, p. 20. Note: Units = billion cubic feet (bcf).

Source: BP Statistical Review of World Energy 2016. Note: Units = billion cubic feet (bcf)

Source: BP Statistical Review of World Energy 20102015, p. 22. Note: Units = billion cubic feet (bcf). Liquefied Natural Gas Liquefied natural gas (LNG) is natural gas that has been cooled to a liquid state, making it 600 times smaller in volume.34 In its liquid form, natural gas can be shipped to global markets on tankers and received at LNG import terminals. LNG is becoming more prevalent in the global gas trade as new gas supplies are introduced to the market, further integrating regional gas markets.35 In 2015, LNG trade increased 1.8%, and the share of LNG in the global gas trade was 33%. In response to the increase in LNG trade, many countries are looking to expand their LNG export capacity. In 2016, Australia (in January) and the United States (in February) from the lower 48 launched their first shipments of LNG. In the past decade, the United States prepared to increase imports of LNG based on forecasts of growing consumption, and began constructing LNG import terminals. However, the rise in prices gave the industry incentives to bring more domestic gas to market, reducing the need to use import terminals. Due to the abundance of domestic natural gas, there has been a push for modification and expansion of existing LNG terminals in order to expand U.S. export capacity, which requires authorization from the Department of Energy and the Federal Energy Regulatory Commission (FERC).36 U.S. Development and Growth The U.S. natural gas market is in a period of transition. Technologies such as hydraulic fracturing and horizontal drilling have expanded the domestic natural gas supply, making possible the development of unconventional natural gas resources found in shale, coal seams, and tight lower-permeability rock formations.37 Improved efficiency has lowered production costs, making shale gas economically competitive at almost any price. Production has shifted away from the Gulf of Mexico to regions where sources of conventional natural gas are not traditionally found. (See Figure 5.) For instance, the Marcellus and Utica Basins are expansive shale resources located in the East and Northeast (West Virginia, Pennsylvania, New York, and Ohio). The location of these basins impacts the transportation of natural gas, as there is a reduced need for natural gas from the Rockies or Gulf Coast. The decrease in demand for gas from these areas and an increase in production from shale plays such as Marcellus have reduced prices and the number of imports needed from Canada and elsewhere.38 Increased production in the future is expected from the Marcellus, Eagle Ford, Anadarko, Utica, and Haynesville Basins.39 Because of the development in supply, the United States has gone from being a net importer of natural gas to being a projected net exporter by 2017.40 The first LNG shipments from the lower-48 occurred in February 2016 from the Sabine Pass LNG Terminal in Louisiana to Brazil, India, and the United Arab Emirates. On June 26, 2016, the Panama Canal reopened for commercial business, after undergoing construction for an additional ship traffic lane. The newly expanded canal eliminates about 10 days in transit time from the U.S. Gulf of Mexico to Asian markets, thus offering a potential shipping route for U.S. LNG. However, only 10% of LNG carriers are small enough to fit the canal; no LNG transits have been scheduled through the canal.41 The development in supply has placed the United States in a strategic position that may prove advantageous in the global natural gas market. However, this also raises questions for policymakers regarding the effects of the export of U.S. natural gas on domestic gas prices and the overall economy. Furthermore, questions remain about the size of U.S. shale gas resources; the price level required to sustain, p. 22.

Shale gas accounted for 21% of U.S. natural gas reserves in 2009, up from 14% in 2008.¹⁵ Nevertheless, questions still remain about the size of U.S. shale gas resources (which by most estimates is more than current U.S. natural gas reserves); the price level required to sustain their development; and whether there are technical, environmental, or political factors that might limit their development. The use and disposition of water in anthe industry process calledof hydraulic fracturing¹⁶ is 42 is one of the main issueissues facing companies and regulators. The EPA is undertaking a study to determine any adverse effects of the practice on water supplies or other environmental areas.¹⁷

Figure 3. U.S. Shale Gas Formations

Global Natural Gas Market Becoming More Integrated

Although some natural gas is traded around the world, most natural gas is predominantly consumed in the country where it is produced (Figure 4). Only about 30% of natural gas is traded internationally, mostly within regional markets. Nevertheless, the amount of natural gas traded has been increasing over the last five years. Natural gas is transported in two ways: by pipeline and as a liquid in tankers, which is an expensive process. Liquefaction capacity has increased 30% since 2008, and trade in LNG has grown almost 30% since 2005. International pipeline trade is up almost 20% since 2005. Pipelines transport gas between two fixed points, while LNG provides flexibility in the final destination.

Figure 4. Global Natural Gas Trade

Natural Gas Exporting Countries Forum Still Ineffective

The Gas Exporting Countries Forum (GECF), also referred to as gas OPEC, is a nascent cartel organization based in Qatar comprising 11 natural gas producing countries (Table 1). The GECF was formed in 2001, but only signed an organizing charter in December 2008. It controls 34% of global natural gas production and 44% of natural gas traded. Given the U.S. resource base of natural gas, it is highly unlikely that the GECF could significantly affect U.S. natural gas consumption within the next five years or, most likely, longer. Canada, by far the largest U.S. source of imported natural gas, is not a member of the GECF. Europe is probably most vulnerable to the cartel, as more than half its imports come from cartel members, particularly Russia and Algeria. Nevertheless, the current structure of natural gas markets (i.e., long-term contracts and pipelines connecting individual sellers to specific buyers) is not conducive to supply or price manipulation, and significant changes would need to be made to how natural gas is bought and sold before the GECF could have influence.

Production Widespread

Overall, global natural gas production decreased 2.1% last year, the first decline on record. This was primarily driven by the reduction in demand resulting from the widespread economic downturn.

in 2015 grew by 2.2%, which was below the 10-year average of 2.4%. The United States surpassed Russia as the world's largest natural gas producer last year for the first time since 2001in 2009. The success of the United States to date and the potential for further shale gas development has initiated an evaluation by most countries of their possiblepotential natural gas resources. However, outside of Canada, whose shale gas industry is developing alongside that of the United States, it is unlikely that significant commercial production will be achieved before the end of the decade in another country. Most countries looking at shale gas currently do not have the data, technology, or equipment required to evaluate their shale gas resources, let alone successfully exploit it, at this point.

Figure 5. Global Natural Gas Production Global natural gas production was 105,485 bcf in 2009

Source: BP Statistical Review of World Energy 2010, p. 24.

Natural Gas Prices Remain Low

The market price for natural gas has been relatively low compared to the contract price in more competitive markets. them. Natural Gas Prices Remain Low The price of natural gas in the United States, Canada, and the United Kingdom is set by the market, with centers or hubs providing buyers and sellers with competitive price data (see Figure 7). The most well-known hub in the United States is the Henry Hub in Erath, LA, which is where multiple interstate and intrastate natural gas pipelines interconnect. In the United States, thereThere are various prices for natural gas in the United States depending upon the on the category of consumer. Residential¹⁸ consumers pay the highest price, followed by various commercial users.⁵⁸

By 2040, the Henry Hub natural gas spot price is projected by EIA to rise to $7.85 per million British thermal units (MBtu) due to increased domestic and international demand. This would require an increase in the number of well completions in order to meet higher production levels.⁵⁹ EIA's projection is based on existing information and does not account for significant changes in the market, such as new technologies, regulations, or discoveries.

Outside the United States, Canada, and the United Kingdom, almost all wholesale natural gas is sold under long-term contracts. The price of natural gas within thethese contracts is commonly determined by a formula that links the natural gas price to the price of crude oil or some oil-based product. Although in many markets natural gas no longer competes as a substitute against oil-based products, this vestige of the contracts has not disappearedremained. Over the last several years, the disparity between contract prices and spot prices has raised the pressure on gas producers to do away with this concept (Figure 6). Producers have been reluctant, as oil prices are much higher than natural gas prices and the contract prices have been propped up by the difference. However, the recent fall in world oil prices may suspend this debate. Nevertheless, some producers have started incorporating thea spot price for natural gas into their pricing formulas. The price differences in Figure 6 reflect the regional nature of the natural gas industry and the disparity between contract and spot prices. Asia, in particular, has been willing to pay high prices to secure its natural gas supplies.

Figure 67. Global Natural Gas Prices Units = U.S. dollars per million British thermal unit (U.S.$/MBtu)

Source: PIRA Energy, November 8, 2010BP Statistical Review of World Energy 2016, p. 27. NotesNote: Contract price is a long-term price between a specific buyer and a specific seller, while the spot price is a short-term market price.

There are twoTwo other contract concepts that are worth highlighting: take-or-pay clauses and destination clauses. TheWith a take-or-pay clause does exactly what it says. A, a buyer of natural gas must pay the seller regardless of whether it actually receives the natural gas. Typically, in contracts, buyers must purchase at least 80% of the total volume of natural gas contracted. For example, if a contract is for 100 bcf, but the buyer only needs 80 bcf, then that is all it pays for,; but if the buyer only needs 50 bcf, it still must pay for an additional 30 bcf even if it cannot use it. A destination clause allows a cargo to be redirected to a different destination and buyer. Such abuyer. This clause was not common until recent years and contributes to a more efficient market.

Major Statutes

Looking Forward

Is it finally time for natural gas to take center stage as a primary energy source? That is the main question confronting the natural gas industry over the next decade. The International Energy Agency (IEA) projects natural gas use to grow in all three of its scenarios out to 2035 in its recently released World Energy Outlook 2010.¹⁹ Most of the new demand for natural gas is projected to come from non-OECD countries, primarily China and the Middle East. The electric power sector leads the growth in natural gas demand due to several factors, including relatively low prices, lower capital costs clause was not common until recent years and contributes to a more efficient market. Looking Forward

Is it time for natural gas to take center stage as the world's primary energy source? That is the main question confronting the natural gas industry over the next decade. The International Energy Agency (IEA) states that natural gas is one of the fastest growing fossil fuels, with an increase in demand of approximately 60% in 2040 over 2013;⁶⁰ natural gas is a major alternative for a world that looks to gradually decarbonize its energy system. Most of the new demand for natural gas is projected to come from non-OECD countries, primarily China and those in the Middle East. Nonetheless, the global landscape for energy is shifting; as North America continues to produce unconventional gas, the rest of the world's exploration of unconventional resources is occurring more gradually.

China is typically a driver in global energy trends. Recently, China has decided to change its economic model, shifting away from an industry-heavy economy to a services-focused one. This change will require 85% less energy to generate future Chinese growth;⁶¹ consequently, predictions are uncertain regarding China's future in energy consumption. India, on the other hand, is projected to be a growing contributor to global energy demand, accounting for 25% of the rise in global energy use to 2040.⁶² However, meeting India's energy demand may prove to be a huge financial commitment—nearly $2.8 trillion. Natural gas comprises about 6% of India's primary energy supply, and is projected to make up less than 10% of India's energy mix in 2040.⁶³

Appendix A. Global Natural Gas Consumption (2009 Globally, natural gas is projected to account for 28% of total world electricity generation in 2040,⁶⁴ with non-OECD countries representing 61% of this.

Natural gas production would likely need to increase to meet the rise in demand and keep prices from dramatically rising. Production and growth is projected in every region except Europe. Unconventional gas resources⁶⁵—coal bed methane, shale gas, and tight gas—account for about 60% of growth in the global gas supply. However, outside of North America unconventional resource development is slower and uneven. China does have policies that encourage production, but limited water availability, geology, and population density in resource-rich areas may hinder any attempts to fully realize its capacity.

Appendix B. Global Natural Gas Reserves (20092015)

Appendix C. Global Natural Gas Production (20092015)

Appendix D. U.S. Natural Gas Imports and Exports