Briefing Report: Natural Gas

Wednesday, April 5, 2006

Introduction

Natural gas is an increasingly important fuel in California. It has long supplied homes and industry with heat. Over the past decade or two, its burgeoning use for fueling electricity generators and large road vehicles has made natural gas even more vital to the State’s economy and lifestyle. As demand has generally increased here and elsewhere for similar reasons, California’s location at the end of the natural gas pipeline system, along with dwindling gas production from existing sources, has put continuing pressure on natural gas supplies and prices. Natural gas supply uncertainty and price increases emphasize the importance for California to become more “gas-efficient” and to develop alternative sources, such as liquid natural gas (LNG).

Demand for Natural Gas

Natural gas demand here has increased markedly in the past ten years because of its increasing use as a relatively clean fuel for electricity generators. The table to the right shows 2004 natural gas demand in California for all uses and for residential uses.

Population growth, together with additional uses for electricity, will increase total demand for natural gas. The Energy Commission forecasts that residential and commercial use of natural gas will increase, respectively, by 1.3% and 1.8 % per year, while industrial demand will be level or slightly down across the west in response to increasing natural gas prices.

Increasing demand for natural gas in other states and nearby countries, chiefly Mexico, creates competition for the fuel as it becomes scarcer, driving prices up. Over the period from 2006 to 2016, U.S. demand is expected to increase by 1.64% per year, while demand in Canada and Mexico is expected to grow by 1.3% and 2.9%, respectively. In North America, fully 75% of total natural gas demand growth is expected to be a result of the increased number of electricity generators fueled by natural gas.

California recently improved its interstate and intrastate pipeline and storage capacity, enhancing its ability to meet average yearly demands. But hurricanes Katrina and Rita showed that currently available supplies are not always reliable.

Relying on successful energy efficiency programs and renewable energy sources, California has reduced natural gas use per household by more than 50% since 1975. The State’s total increase in natural gas demand is expected to be 0.7% per year for the period 2006 to 2016. Strong growth in the residential and commercial sectors is anticipated to be offset by decreasing industrial demand. Also, growth in demand by electricity generators will be slower due to the increased efficiency of newer generators and electricity end uses, plus the dampening effect of higher prices.

Supply of Natural Gas

Most of the natural gas used in the United States comes from domestic sources. The rest is imported, primarily from Canada. In 2004, the U.S. imported natural gas from eight countries and exported to three [Canada, Japan, and Mexico].

New natural gas sources are more and more difficult to find and develop nationally, and the gap between U.S. demand and domestic supplies is widening annually. The graph to the right shows that gap and the increasing role of LNG projected for the U.S. energy future.

According to the California Energy Commission, natural gas supplied by interstate pipeline comprised 84.5% of California's supply in 2004 -- 24% from Canada, 24.3% from the U.S. Rockies, chiefly Colorado, New Mexico, and Wyoming, and 36.2% from the U.S. Southwest. In 2004, 15.5% of California's natural gas supply was produced in-state, mostly lower quality gas from Inyo, Kern, and Tulare Counties, plus northern California areas and offshore. The graph to the right shows California's historical natural gas supply by source.

Natural Gas Prices

Increasing competition for diminishing North American supplies has driven prices up. California has little ability to affect national and continental market prices. Natural gas prices in California have more than doubled since 2000, even though wholesale prices here are lower than in most of the country. The national information below reflects that general price trend.

The uncertainty of North American natural gas supplies, the broader, increased demand for natural gas chiefly driven by its use to fuel electricity generators in California and other states, plus the likelihood of continuing increases in natural gas prices make it incumbent on California to take steps to address supply and demand inadequacies within its control. Those steps should include improvements to interstate delivery and storage facilities, becoming even more efficient in using natural gas, and increased access to alternate sources, such as LNG.

For more information on this report or other Energy, Utilities & Communication issues, contact Ray Thompson, Senate Republican Office of Policy at 916/651-1501.