Low Unconventional Gas Recovery Case and AEO2004 Reference Case

The low UGR case is designed to restrict unconventional gas production approximately to the 2002 level (e.g., 5.7 tcf in 2025, compared to 9.2 tcf in the reference case). In 2025, the net loss in unconventional gas supplies is 3.5 tcf, which makes this case more restrictive than the prior two cases.

Relative to the AEO2004 reference case, the low UGR case is projected to cause a 5-percent (1.7 tcf) decline in 2025 gas consumption (Figure 11). Although 2025 unconventional gas production is 3.5 tcf lower than the reference case, the net gas production loss in 2025 is only 3.2 tcf, because other gas supply sources increase, offseting the lower unconventional gas production. Because lower gas consumption and low overall gas production are not projected to compensate for the loss of unconventional gas production, net gas imports are 20 percent higher (1.4 tcf) in 2025 in the low UGR case, than in the reference case.

The largest reductions in end-use consumption occur in the electric generation and industrial sectors, with gas consumption reductions in 2025 of 13 percent (1.1 tcf) and 2 percent (0.2 tcf), respectively.

The increase in net gas imports, as projected for the low UGR case, is distributed among the three major foreign gas supply sources: LNG, Canadian gas, and Mexican gas.

In 2025, net LNG imports are projected at 5.4 tcf in the low UGR case, compared to the 4.8 tcf projected in the reference case (Figure 12). Similarly, net Canadian gas imports are projected to be 2.9 tcf in 2025, compared to the 2.6 tcf in the reference case. Finally, 2025 net Mexican gas exports to the United States are projected to be 390 bcf in the low UGR case, compared to 120 bcf of Mexican gas imports from the United States in the reference case. In the low UGR case, Baja California, Mexico, supplies the western United States with 550 bcf of LNG via a pipeline in 2025, 180 bcf more than in the reference case. Because this case restricts natural gas supply well beyond historical experience, it may not fully represent market conditions. So, it is possible that even more gas could be imported from LNG facilities in Canada and Mexico.

By assumption, unconventional gas production in the future remains around its 2002 production level in this case. In the period spanning 2002 through 2015, the lower 48 unconventional gas production is projected to be about 0.5 tcf per year below the 2002 level. After 2015, unconventional gas production is projected to be about 0.2 tcf below the 2002 level (Figure 13).

Under the low UGR case, the net loss of unconventional gas production amounts to 3.5 tcf in 2025. This loss in lower 48 gas supply causes wellhead gas prices to be higher throughout the forecast, which in turn initiates the earlier construction of an Alaska gas pipeline to the lower 48. In the low UGR case, the Alaska gas pipeline is projected to begin operation in 2013, which is 5 years earlier than the reference case projection. The capacity expansion of this pipeline is also projected to occur in 2018, which is 5 years earlier than in the reference case.

In the low UGR case, lower 48 conventional gas production is projected to be higher throughout the forecast period. The primary impact of the higher conventional gas production is projected to occur earlier in the forecast rather than later. For example, in 2015, the lower 48 conventional gas production is projected to be 0.6 tcf higher in the low UGR case than in the reference case. In 2025, however, the incremental lower 48 conventional gas production amounts to 0.3 tcf. This smaller increment in lower 48 conventional gas production in 2025 is due to a rapid escalation in the cost of producing this gas, which comes as a result of the considerable depletion of this gas resource by 2025.

Because the low UGR case is a more severe gas supply case than the prior two supply cases, this scenario projects a greater wellhead price impact. Figure 14 compares the projected wellhead gas prices for the low UGR and reference cases in 2002 dollars per mcf. Prices respond immediately in the low UGR case because it is assumed that less gas is ultimately available for production.

Because the low UGR case causes wellhead gas prices to be significantly higher, less new gas-fired electric power capacity is built throughout the forecast, resulting in less gas-fired electricity generation. In the low UGR case, gas-fired generation is projected to be 1,133 billion kilowatthours in 2025, compared to the 1,304 billion kilowatthours in the reference case (Figure 15). Coal-fired generation gains the most by the restriction on natural gas supply. In the low UGR case, coal-fired electricity generation is projected to be 3,127 billion kilowatthours in 2025, compared to 3,029 in the reference case. Renewable energy power generation is also higher in 2025, 538 billion kilowatthours in the low UGR case compared to 509 billion kilowatthours in the reference case. Cumulatively from 2002 through 2025, wind generation accounts for 88 percent of the increase in total renewable generation. Biomass generation comprises most of the remainder.

Busbar electricity prices in 2025 are about the same in the low UGR case as they are in the other two cases, 6.93 cents per kilowatthour (2002 dollars). The change in wellhead gas prices is minimized in the low UGR case because less gas-fired electricity is produced and gas-fired generation is only 20 percent of total electricity generation.