EME 801
Energy Markets, Policy, and Regulation

Overview

PrintPrint

The story of the rapid shift in the North American natural gas supply/demand picture is in some sense captured by two maps created by the Federal Regulatory Energy Commission (FERC) and one from the Energy Information Administration. The links for the maps are below this paragraph. The first map shows the locations of liquefied natural gas (LNG) import terminals in the United States. If you click on the links for each terminal, you will find that prior to the late 1990s/early 2000s there were but a few LNG importing terminals in the U.S. This number skyrocketed alongside the build-out of natural gas fired power generation as industry and policymakers realized that there did not seem to be enough gas on the North American continent, deliverable to U.S. power plants, relative to demand. Analysts quaked in their boots at the thought of power plant gas demand surpassing 4 trillion cubic feet (TCF) per year. The result was a rush to build facilities to import LNG. Fast forward to the past couple of years, and to another set of maps on the FERC website showing the locations of proposed LNG export terminals that would take natural gas produced on the North American continent and export it to global markets in Europe, Asia, and elsewhere. There are currently more export terminals being proposed for approval by FERC than there are operating import terminals. Operators of import terminals, whose facilities are highly underutilized at this point, are also seeking permission from the federal government to retrofit those terminals to start exporting gas. Within the space of less than a decade, the U.S. has gone from famine to feast in terms of its natural gas supplies. The FERC site for LNG has some nice maps for existing and proposed or approved LNG import and export terminals.

The development of unconventional natural gas and oil supplies, most notably gas and oil naturally occurring in shale formations (the EIA has a nice map of where these formations are located), has been a contentious topic. Impacts on the environment and society are still in the process of being better understood. Our focus here will be on understanding how development of these resources may impact markets for energy and energy project decision-making.

Learning Outcomes

By the end of this lesson, you should be able to:

  • identify the major shale-gas and shale-oil producing regions on a map of the United States;
  • explain the shape of the production decline curve for shale gas and the importance of initial production rates in determining overall production from a shale gas well;
  • compare how natural gas contracts are priced in North America versus how similar contracts are priced in Europe or Asia;
  • explain why oil is currently traded in global markets, but natural gas is primarily traded in continental markets;
  • argue whether a cartel similar to OPEC would or would not be likely to arise in a global market for natural gas.

Reading materials

Aside from the online materials on the course website, you will need to read three background pieces on economic and political factors influencing the market for shale gas and shale oil.

  1. "Shale in the United States," an overview article from the U.S. Energy Information Administration.
  2. "Technical, Economic and Policy Factors Affecting Shale Gas" is a report for the Congressional Research Service that I co-wrote with some Penn State colleagues a few years back. Registered students can access a PDF file in the Lesson 04 module in Canvas.
  3. "It's Too Soon to Judge Shale Gas," from IEEE Spectrum. Registered students can access a PDF file in the Lesson 04 module in Canvas.
  4. "Why worry about high oil prices, when a boom in natural gas may be on the way?" is a piece by noted political scientist David Victor on the potential for a rise in a version of OPEC for natural gas in a globalizing marketplace. Available through the Economist website, or registered students can access the article in the Lesson 4 module in Canvas. While this piece is somewhat dated, the issues that it raises are just as important today as they were a decade ago.

(Note for those who are interested: the piece on Canvas is part of a larger work that I and some other Penn State folks drew up for the Congressional Research Service on water issues in shale gas extraction. This is kind of tangential to the course but I have posted the water piece on Canvas for anyone who would like to read it.)

You should also download a report from the U.S. Energy Information Administration on the potential impacts of a globalized natural gas market on U.S. energy prices.

These articles will be used as the basis for discussion questions at the end of this lesson.

What is due for Lesson 4?

This lesson will take us one week to complete. Please refer to the Course Calendar in Canvas for specific due dates. Specific directions for the assignment below can be found in Canvas.

  1. Submit responses to some analytical and calculation questions to the Lesson 04 drop box.
  2. Use the Canvas discussion forum to respond to the prompts about global natural gas markets.

Questions?

If you have any questions, please post them to our Questions about EME 801? discussion forum (not email), located in the Lesson 00 module in Canvas. I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.