An Oil Primer - Squeezing Oil out of Rocks - Washing More Oil from Rocks - Soap, Bugs and Other Ways to Produce Oil - Natural Gas - Factors Affecting Long Term Demand for Natural Gas

An Oil Primer

Oil keeps our country moving. Almost our entire transportation fleet - our cars, trucks, trains and airplanes - depends on fuels made from oil. Lubricants made from oil keep the machinery in our factories running. The fertilizer we use to grow our food is made from oil. We make plastics from oil. It is quite likely that the toothbrush you used this morning, the plastic bottle that holds your milk, and the plastic ink pen that you write or draw with are all made from oil.

In fact, we use more oil in the United States than any other form of energy. Oil supplies 40 percent of all the energy this country consumes. The amount of oil the world uses in a year would fill a lake 10 miles long, 9 miles wide and 60 feet deep.

Imagine a lake 10 miles long, 9 miles wide and 60 feet deep. Fill that lake with oil. That would be about as much oil as the entire world uses in one year. The United States would use about 1/4 of it.

The problem that the United States cannot produce enough oil to satisfy our needs. In fact, today, only about half the oil consumed in the United States is actually produced in the United States. The rest is pumped from oil fields in other countries and sold to the United States. We spend billions of dollars a year to buy oil from other countries.

The second problem is that the oil fields in the United States are among some of the oldest fields still producing in the world. Some have been pumping for 50 years or more. Most of the easiest oil has already been pumped out.

You will read later in this section that there is still a lot of oil left in the ground. In fact, for every one barrel of oil we produce, we leave two barrels behind. In the history of oil fields in this country - a history stretching back almost 150 years - we have produced almost 175 billion barrels of oil. But there are more than 350 billion barrels of oil remaining in the ground that we know exist. Perhaps there are billions more in fields yet to be discovered. But this oil is hard to find and even harder to produce.

If we can find a way to locate and produce more of this oil, the United States won't have to buy as much from other countries.

The History of Oil Around 300 B.C., Alexander the Great supposedly used burning oil or "petroleum" to frighten the war elephants of his enemies.

Marco Polo during his trips in the 13th Century recorded oil seeping from underground in the Caspian Sea region. Inscriptions found by archeologists indicate that oil and asphalt (a hard form of oil) were even used in 4000 B.C. in this area. Asphalt was also used by the ancient Egyptians to embalm mummies.

Ruins of early ships found by archeologists indicate that those vessels were caulked (cracks sealed to keep water out) with a form of asphalt, sometimes called bitumen or pitch.

In what is now the United States, Juan Rodriquez, a Spanish explorer, reported petroleum in 1542 near Santa Barbara, California. Oil residues from surface seepages near Nacogdoches, Texas, were used to repair the boats of the DeSoto expedition in 1593. Edwin Drake drilled the U.S.'s first commercial oil well in 1859 near Titusville, Pennsylvania, in top hat.

Today's oil industry actually began almost 150 years ago -- in 1859. In those days, melting the fat of whales made an oily fuel for lamps and lubricants. But whale oil had become expensive. A company called the Pennsylvania Rock Oil Company became interested in digging for natural oil. People drilling for salt had encountered oily rocks in Pennsylvania. At first, this "rock oil" had been used as a medicine, but if enough of it could be found, perhaps it might be a cheaper substitute for whale oil.

Digging huge pits, however, was a time-consuming, expensive operation, so the Pennsylvania Rock Oil Company came up with the idea of drilling for oil. Not everyone was convinced, however. One banker who was asked to lend some of the money for the venture remarked, "Oil coming out of the ground, pumping oil out of the earth as you pump water? Nonsense!"

But the Pennsylvania Rock Oil Company was convinced that drilling for oil -- rather than digging for it -- was the way to go. They hired a part-time railroad conductor named Edwin L. Drake to go to Titusville, Pennsylvania and see if he couldn't drill for oil. (Some books call him "Colonel" Drake, but he invented that title only to impress the local townspeople.)

Drake spent almost a year -- from 1858 to 1859 -- getting the money and building the equipment (including a steam engine) he needed to drill. In the spring of 1859, he built the derrick and started to drill. It was slow going. The investors became nervous, and late that summer, they sent a letter to Drake directing that he cease operations, pay off his debts, and give up. Within a couple of years of Edwin Drake's discovery of oil in Pennsylvania, America's oil industry was booming as this photo of Pioneer Run Creek in Pennsylvania shows.

The letter was slow in arriving at Titusville. Before he got it, Drake had drilled about 69 feet. Then, the drill dropped into an underground crevice and abruptly slid down another 6 inches. Work stopped, but the next day one of the Drakes employees went out to check the drill rig. He peered down into the pipe that had been left in the hole. There, floating on top of water in the pipe was oil. Drake had struck oil. A new industry was born.

Today, in the United States, the oil industry employs more than 300,000 workers. More than 8,000 companies produce oil in the United States. Oil flows from reservoirs underneath more than 30 States.

But in the almost 150 years since Edwin L. Drake drilled the very first U.S. oil well, a lot of oil fields have gone dry. Very little oil, for example, is still produced in Pennsylvania where the industry was born. In places like Texas, Oklahoma, Louisiana, and California, oil fields continue to produce millions of barrels of oil each day. But even these fields are slowing down.

That doesn't mean we are running out of oil, however. It means that we are running out of "easy" oil. There is still more oil left in fields that have been pumping for 20,30 or even 50 years.

Squeezing Oil out of Rocks

Imagine trying to force oil through a rock. Can't be done, you say? Actually, it can.

In fact, oil droplets can squeeze through the tiny pores of underground rock on their own, pushed by the tremendous pressures that exist deep beneath the surface. How does this happen?

Imagine a balloon, blown up to its fullest. The air in the balloon is under pressure. It wants to get out. Stick a pin in the balloon and the air escapes with a bang!

Oil in a reservoir acts something like the air in a balloon. The pressure comes from millions of tons of rock lying on the oil and from the earth's natural heat that builds up in an oil reservoir and expands any gases that may be in the rock. The result is that when an oil well strikes an underground oil reservoir, the natural pressure is released - like the air escaping from a balloon. The pressure forces the oil through the rock and up the well to the surface.

If there are fractures in the reservoir -- fractures are tiny cracks in the rock -- the oil squeezes into them. If the fractures run in the right direction toward the oil well, they can act as tiny underground "pipelines" through which oil flows to a well.

Oil producers need to know a lot about an oil reservoir before they start drilling a lot of expensive wells. They need to know about the size and number of pores in a reservoir rock. They need to know how fast oil droplets will move through these pores. They need to know where the natural fractures are in a reservoir so that they know where to drill their wells. Modern-day oil prospectors use sound waves to locate oil. In one technique, (1) a signal is sent into the rock by a vibrator turck, (2) the reflected waves are received by geophones, and (3) the data is transmitted to a laboratory truck.

Today, scientists have invented many new ways to learn about the characteristics of an oil reservoir. They have developed ways to send sound waves through reservoir rock. Sound waves travel at different speeds through different types of rocks. By listening to sound waves using devices called "geophones," scientists can measure the speed at which the sound moves through the rock and determine where there might be rocks with oil in them.

Scientists also measure how electric current moves through rock. Rocks with a lot of water in the tiny pores will conduct electricity better than rocks with oil in the pores. Sending electric current through the rock can often reveal oil-bearing rocks.

Finally, oil companies will look at the rocks themselves. An exploratory well will be drilled, rock samples, called "cores," will be brought to the surface. Scientists will look at the core samples under a microscope. Often they can see tiny oil droplets trapped inside the rock.

When companies are convinced that they have found the right kind of underground rock formation that is likely to contain oil, they begin drilling production wells. When the wells first hit the reservoir, some of the oil begins coming to the surface immediately.

Many years ago, when oil field equipment wasn't very good, it was sometimes difficult to prevent the oil from spurting hundreds of feet out the ground. This was called a "gusher." Today, however, oil companies install special equipment on their wells called "blowout preventors," that prevent "gushers", like putting a cork in a bottle.

When a new oil field first begins producing oil, Nature does most of the work. The natural pressures in the reservoir force the oil through the rock pores, into fractures, and up production wells. This natural flow of oil is called "primary production." It can go on for days or years. But after a while, an oil reservoir begins to lose pressure, like the air leaving a balloon. The natural oil flow begins dropped off, and oil companies use to bring the oil to the surface.

In some fields, natural gas is produced along with the oil. In some cases, oil companies separate the gas from the oil and inject it back into the reservoir. Like putting air back into a balloon, injecting natural gas into the underground reservoir keeps enough pressure in the reservoir to keep oil flowing.

Eventually, however, the pressure drops to a point where the oil flow, even with pumps and gas injection, drops off to a trickle. Yet, there is actually a lot of oil left in the reservoir. How much? In many reservoirs, as many as 3 barrels can be left in the ground for every 1 barrel that is produced. In other words, if oil production stopped after "primary production," almost 3/4ths of the oil would be left behind!

That's why oil producers often turn to "secondary recovery" processes to squeeze some of this remaining oil out of the ground. What are "secondary recovery" processes?

Washing More Oil from Rocks

A lot of oil can be left behind after "primary production." Often, it is clinging tightly to the underground rocks, and the natural reservoir pressure has dwindled to the point where it can't force the oil to the surface.

Imagine spilling a can of oil on the concrete floor of a garage. Some of it can be wiped up. But the thin film of oil that's left on the floor is much more difficult to remove. How would you clean up this oil?

The first thing you might do is get out a garden hose and spray the floor with water. That would wash away some of the oil. That's exactly what oil producers do in an oil reservoir. They drill wells called "injection wells" and use them like gigantic hoses to pump water into an oil reservoir. The water washes some of the remaining oil out of the rock pores and pushes it through the reservoir to production wells. The process is called "water flooding."

How effective is water flooding?

Let's assume that an oil reservoir had 10 barrels of oil in it at the start (an actual reservoir can have millions of barrels of oil). This is called "original oil in place." Of those original 10 barrels, primary production will produce about two and a half barrels (21/2). "Water flooding" will produce another one-half to one barrel.

That means that in our imaginary oil reservoir of 10 barrels, there will still be 61/2 to 7 barrels of oil left behind after primary production and water flooding are finished. In other words, for every barrel of oil we produce, we will leave around 2 barrels behind in the ground.

That is the situation faced by today's oil companies. In the history of the United States oil industry, more than 160 billion barrels of oil have been produced. But more than 330 billion barrels have been left in the ground. Unfortunately, we don't yet know how to produce most of this oil.

Petroleum scientists are working on ways to produce this huge amount of remaining oil. Several new methods look promising. Oil companies, in the future, might use a family of chemicals that act like soap to wash out some of the oil that's left behind. Or possibly, they might grow tiny living organisms in the reservoir, called microbes, which can help free more oil from reservoir rock.

Soap, Bugs and Other Ways to Produce Oil

Remember the oil spilled on the garage floor? Washing it with water would only remove some of the oil. There would still be a black, oily stain on the floor. How would you get that oil up?

You would probably add some soap to the water - perhaps some detergent that you use in a washing machine. That would help wash away a little more of the oil. Oil researchers are studying ways to inject chemicals similar to detergents into an oil reservoir. The researchers call these chemicals "surfactants." Surfactants keep the tiny oil droplets from clinging to the rock much like a soapy film keeps water droplets from clinging to the side of a glass. Steam is injected into many oil fields where the oil is thicker and heavier than normal crude oil.

Temperature can also be important in freeing oil from underground reservoirs. In some oil reservoirs -- in much of California, for example -- the oil is thicker and heavier. It hardly flows out of a jar, much less out of an oil reservoir. But if the oil is heated, it becomes thinner and more slippery. To heat heavy oil in a reservoir, oil companies boil water in huge pressure vessels on the surface and send the steam down wells. The steam works its way through the oil reservoir, heating the oil and making it easier to pump to the surface.

Another way to free trapped oil is to inject carbon dioxide. Some carbon dioxide exists naturally underground, and companies often pump it out of the ground, then back in to oil reservoirs to help produce more oil. Carbon dioxide is also given off when anything burns. Many power plants that produce our electricity burn coal, natural gas and other fuels. These plants produce large amounts of carbon dioxide, as do factories. Even you produce carbon dioxide when you breathe. It would be very hard to capture the carbon dioxide of every breathing person, but it may be possible in the future to capture carbon dioxide from big power plants or factories. This carbon dioxide can be injected into an oil reservoir to mix with the oil, break it away from the underground rock, and push it toward oil wells. Microbes inside an oil drop. The average size of these single cell organisms is about 25,000ths of an inch.

Still another technique being studied uses microscopic organisms called "microbes." Even though some scientists jokingly call these tiny microbes "bugs," they really don't have heads or legs or bodies. Instead, they are more like bacteria - tiny, single-cell organisms that can grow and multiply inside the rocks deep within oil reservoirs.

How can microbes be used to produce more oil? Actually, several ways. Some microbes can feed on nutrients in a reservoir and release gas as part of their digestive process. The gas collects in the reservoir, like air inside a balloon, building up pressure that can force more oil droplets out of the rock pores and toward oil wells. To get microbes to grow and multiply fast enough, oil scientists are testing ways to inject nutrients, or food, for the microbes into a reservoir.

Microbes can also be used to block off portions of a reservoir. After many years of water flooding, most of the water eventually finds the easiest path through the oil reservoir. Oil trapped in the rocks along that path is washed out of the reservoir, but oil in other parts of the reservoir may be left untouched. To send the water to other parts of the reservoir, scientists mix microbes, along with food for the microbes, into the water flood. As the microbes move along with the water, they ingest the food, grow and multiply. Eventually, enough microbes are created to block off the tiny passageways. Now, scientists can inject fresh water and send it to portions of the reservoir that haven't been swept clean by the earlier water flood, and more oil can be produced.

Scientists are also developing new chemicals called "polymers" that can help produce more oil. A "polymer" is long chain of atoms joined together in one large molecule. The molecule is small enough to fit through the pores of a reservoir rock, but large enough to break loose an oil droplet. In fact, scientists are developing a special type of polymer that performs two functions: one end of the molecule acts like a microscopic "sledgehammer" to break loose the oil droplet, while the other end acts like a surfactant (see above) to keep the oil sliding through the rock to an oil well.

All of these techniques show promise, but all add costs to the oil production process. Not every technique can be used in every oil reservoir. Some are better than others. But even if some, or all, of these techniques are proven to be practical, they won't get out all of the oil remaining in a reservoir.

In fact, the very best methods being tested today will allow oil companies to produce only half to, in some cases, three-fourths of the oil in a reservoir. It may not be possible to get the rest of the oil out. But even getting this amount of additional oil out of our oil fields can be very important for our energy future.

And who knows? Someday, scientists might find a way to get even more of the vast quantities of oil that we leave behind today down at the bottom of oil wells.

Natural Gas

Once a team of exploration geologists and geophysicists has located a potential natural gas deposit, it is up to a team of drilling experts to actually dig down to where the natural gas is thought to exist. This section will describe the process of drilling for natural gas, both onshore and offshore. Although the process of digging deep into the Earth's crust to find deposits of natural gas that may or may not actually exist seems daunting, the industry has developed a number of innovations and techniques, which both decrease the cost and increase the efficiency of drilling for natural gas. The advance of technology has also contributed greatly to the increased efficiency and success rate for drilling natural gas wells. Source: Anadarko Petroleum Corporation

The decision of whether or not to drill a well depends on a variety of factors, not the least of which are the economic characteristics of the potential natural gas reservoir. It costs a great deal of money for exploration and production companies to search and drill for natural gas, and there is always the inherent risk that no natural gas will be found.

The exact placement of the drill site depends on a variety of factors, including the nature of the potential formation to be drilled, the characteristics of the subsurface geology, and the depth and size of the target deposit. After the geophysical team identifies the optimal location for a well, it is necessary for the drilling company to ensure that they complete all the necessary steps to ensure that they can legally drill in that area. This usually involves securing permits for the drilling operations, establishment of a legal arrangement to allow the natural gas company to extract and sell the resources under a given area of land, and a design for gathering lines that will connect the well to the pipeline. There are a variety of potential owners of the land and mineral rights of a given area.

If the new well, once drilled, does in fact come in contact with natural gas deposits, it is developed to allow for the extraction of this natural gas, and is termed a 'development' or 'productive' well. At this point, with the well drilled and hydrocarbons present, the well may be completed to facilitate its production of natural gas. However, if the exploration team was incorrect in its estimation of the existence of marketable quantity of natural gas at a well site, the well is termed a 'dry well', and production does not proceed.

Onshore and offshore drilling present unique drilling environments, requiring special techniques and equipment.

Demand for natural gas has traditionally been highly cyclical. Demand for natural gas depends highly on the time of year, and changes from season to season. In the past, the cyclical nature of natural gas demand has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The primary driver for this primary cycle of natural gas demand is the need for residential and commercial heating. As expected, heating requirements are highest during the coldest months and lowest during the warmest months. This has resulted in demand for natural gas spiking in January and February, and dipping during the months of July and August. Base-load storage capacity is designed to meet this cyclical demand: base-load storage withdrawals typically take place in the winter months (to meet increased demand), while storage injection typically takes place in the summer months (to store excess gas in preparation for the next up cycle).

The relatively recent shift towards use of natural gas for the generation of electricity has resulted in an anomaly in this traditional cyclical behavior. While requirements for natural gas heating decrease during the summer months, demand for space cooling increases during this warmer season. Electricity provides the primary source of energy for residential and commercial cooling requirements, leading to an increase in demand for electricity. Because natural gas is used to generate a large portion of electricity in the United States, increased electrical demand often means increased natural gas demand. This results in a smaller spike in natural gas demand during the warmest months of the year. Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced.

In general, in addition to this cyclical demand cycle, there are two primary drivers that determine the demand for natural gas in the short term. These include:

* Weather - as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak. Conversely, a warm winter may result in a less noticeable winter peak. An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas.

* Fuel Switching - supply and demand in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely. While most residential and commercial customers rely solely on natural gas to meet many of their energy requirements, some industrial and electric generation consumers have the capacity to switch between fuels. For instance, during a period of extremely high natural gas prices, many electric generators may switch from using natural gas to using cheaper coal, thus decreasing the demand for natural gas.

* U.S. Economy - The state of the U.S. economy in general can have a considerable effect on the demand for natural gas in the short term, particularly for industrial consumers. When the economy is expanding, output from industrial sectors is generally increasing at a similar rate. When the economy is in recession, output from industrial sectors drops. These fluctuations in industrial output accompanying economic upswings and downturns affects the amount of natural gas needed by these industrial users. For instance, during the economic downturn of 2001, industrial natural gas consumption fell by 6 percent. Thus the short-term status of the economy has an effect on the amount of natural gas consumed in the United States.

Factors Affecting Long Term Demand for Natural Gas

While short-term factors can significantly affect the demand for natural gas, it is the long-term demand factors that reflect the basic trends for natural gas use into the future. In order to analyze those factors that affect the long-term demand for natural gas, it is most beneficial to examine natural gas demand by sector. However, it is useful to have an understanding of what natural gas is used for in each of these sectors beforehand.

The analyses of factors that affect long-term demand across all sectors are complicated. The actual demand for any source of energy relies on a variety of interrelated factors, and it is very difficult to predict how these factors will combine to shape overall demand.

Residential and Commercial Demand

The EIA expects residential energy demand to increase at an average annual rate of 1 percent per year to 2020. Residential use of natural gas is expected to increase by 0.9 percent per year over the forecast period, increasing 22 percent from 2000 to 2020. Residential natural gas consumption accounts for 22 percent of all consumption in the U.S.

Probably the most important long-term driver of natural gas demand in the residential sector is future residential heating applications. Between 1991 and 1999, 66 percent of new homes, and 57 percent of multifamily buildings constructed used natural gas heating. In 2001, 70 percent of new single-family homes constructed used natural gas. While these new homes being built are generally increasing in size, the increasing efficiency of natural gas furnaces used to heat them compensates for the increased square footage to be heated. In general, however, the increase in the number of new homes using natural gas for heat over the next 20 years is expected to provide a strong driver for residential natural gas demand.

The EIA expects energy demand in the commercial sector to increase at an average annual rate of 1.7 percent per year through to 2020. Interestingly, this is the same rate at which commercial floor space is expected to increase over the same period, which implies that energy demand per area of commercial floor space is expected to remain relatively stable. Natural gas currently supplies 20 percent of the energy consumed in the commercial sector, and this proportion is expected to hold until 2020.

Several other factors are expected to drive residential and commercial natural gas demand, according to a report published by Washington Policy Analysis Inc. (WPA) entitled Fueling the Future: Natural Gas and New Technologies for a Cleaner 21st Century. As the uses for natural gas in the commercial sector are quite similar to residential uses, their expected demand drivers are also expected to be similar. These drivers include:

* Electric Industry Restructuring - as electricity offers the greatest competition to natural gas use in the residential and commercial sector, the availability and price of electricity for retail consumers will affect the demand for natural gas. As the electric industry is restructured and deregulated, it is expected that electricity prices will remain stable or decline slightly over the next 20 years. However, it is expected that those states with low current electricity prices may see rate increases with the introduction of competition. In these states, residential alternatives to electricity, including natural gas appliances and distributed generation, are expected to become more attractive, which will increase the demand for natural gas in these states. In those areas where electricity prices decrease, however, residential natural gas demand may decline slightly, as lower priced electricity offers comparative value. However, the entrance of distributed generation technologies may offset the more competitive prices of electricity, particularly for the commercial sector

* Natural Gas Industry Restructuring - The restructuring of the natural gas wholesale and retail markets may affect the residential and commercial demand for natural gas. Most forecasts of residential natural gas prices over the next 20 years, including the EIA's analysis, show natural gas prices increasing slightly over this time frame (due to factors other than increased marketplace competition). However, the deregulation of the natural gas market, and the resulting competition in the industry for retail customers, may in fact reduce natural gas prices over the long term. It is also predicted that natural gas prices for electric generation utilities may increase faster than for residential and commercial consumers - which may drive retail electricity prices higher, and serve to make natural gas (particularly for distributed generation) more desirable for residential consumers.

* Demographics and Population Centers - The changing demographics of the U.S. population also affects the demand for natural gas. Most significantly, according to WPA, recent demographic trends have seen an increased population movement to the Southern and Western states. As these areas are generally warmer climates, there will be an increase in demand for cooling, and less of a demand for heating. As electricity currently supplies most of the nation's space cooling energy requirements, and natural gas supplies most of the energy used for space heating, population movement may decrease natural gas demand in these sectors. However, as distributed generation and residential natural gas cooling technologies advance, and residential consumers can use natural gas to supply their electricity needs, natural gas demand could in fact increase. Another demographic trend is the aging of the large 'baby boomer' generation. It is expected that as this generation ages, their requirements for cooling in warm weather and heating in cooler weather will increase, thus driving demand for both electricity and natural gas.

* Energy Efficiency Regulations - The concept of energy efficiency is continually being addressed in government, by environmental concerns, and by consumer advocacy groups. While the basic advantages to investing in energy efficient appliances are well known in both residential and commercial settings, current regulations do not take into account total energy efficiency (TEE) measured directly from the source. Natural gas is extremely efficient, losing very little of its energy value as it reaches its point of end use. Electricity, on the other hand, measured from the point of generation to the wall socket, is much less efficient. In fact, only about 27 percent of the energy put into generating electricity is available by the time it reaches your home. Thus, while an electric appliance may be extremely efficient in using the electricity it takes from the wall socket, this does not take into account the energy that is lost in generation and transmission. Increasingly strict regulations regarding total energy efficiency may thus make natural gas the more desirable efficient energy source for residential and commercial appliances. For more information on energy efficiency in the United States, visit the American Council for an Energy-Efficient Economy here.

* Technological Advancements - Currently, the majority of energy used by the commercial sector is in the form of electricity. Similarly, many common household appliances can only run on electricity. The advancement of natural gas technology in the form of offering natural gas powered applications that may compete with these electric operated appliances may provide a huge increase in demand for natural gas. Natural gas cooling, combined heat and power, and distributed generation are expected to make inroads into those applications that have traditionally been served solely by electricity.

Industrial Demand

The EIA estimates industrial energy demand to increase at an average rate of 1.1 percent per year to 2020. This may seem like a low level of growth, however it represents energy requirements for both energy-intensive manufacturing industries (which are expected to decline), and non energy-intensive manufacturing industries (which are expected to grow). Industrial demand for natural gas is expected to increase at an average rate of 1.1 percent. Industrial demand accounts for about 43 percent of natural gas demand, which is the highest of any sector.

The primary force shaping the demand for natural gas, and other sources of energy, in the industrial sector is the movement away from energy-intensive manufacturing processes, towards less energy-intensive processes. There are two driving forces behind this shift: the increased energy efficiency of equipment and processes used in the industrial sector, as well as a shift to the manufacture of goods that require less energy input. It is because of this trend that, while industrial output increased by 53 percent from 1978 to 2000, total energy consumption only increased by 8 percent. This trend is expected to hold into the future, and is the reason for modest increases in energy demand for the industrial sector.

Despite this shift from energy-intensive processes to less energy-intensive processes, the demand for energy is expected to increase in the industrial sector. According to WPA, there are several factors, which could affect the demand for natural gas over other sources of energy to meet the long-term energy requirements of the industrial sector. These include:

* Economics of the Industrial Sector - The industrial sector has been experiencing a period of consolidation that is expected to last into the future. Industrial companies have been merging at a relatively fast pace; a market scenario in which cutting costs and increasing efficiency becomes paramount. This could lead to increased demand for efficient natural gas powered applications in the sector to replace those processes, which are extremely energy inefficient. An example of this is the popularity of natural gas in the generation of steam. Natural gas fired combined heat and power systems, as well as natural gas fired boilers, can be much more efficient and cost effective than older boilers running on coal and petroleum. This is especially true if evaluated on a total energy efficiency basis. However, the replacement of this older industrial equipment with newer natural gas fired equipment requires an up-front capital investment, which may be prohibitive in some situations.

* Electricity Restructuring - The price and availability of electricity in the industrial sector will play a role in determining the demand for natural gas. Many electric generation utilities have been cutting prices for industrial consumers in the hopes of gaining increased market share in preparation for the complete deregulation of the electric industry. However, natural gas powered distributed generation technologies, as well as combined heat and power applications, offer industrial energy users with attractive alternatives to purchased electricity. Some industrial energy consumers, fearful of the effects of deregulation on the reliability and flexibility of electricity supply, may choose instead to generate their own electricity on-site, powered by natural gas.

* Environment Emissions Regulations - It is expected that the restrictions on industrial air emissions will be tightened significantly over the foreseeable future. Government regulators in California and New York have already begun to impose very strict regulations on the harmful emissions of many industrial processes. Natural gas represents a cleaner burning alternative to coal and petroleum use in the industrial sector and the imposition of stringent regulations may serve to increase the demand for natural gas in the industrial sector. Additionally, should an emissions trading market develop (in which, basically, industrial companies are allowed a certain level of emissions 'credits', which may be sold if they emit fewer harmful products than they are allowed), the cost of financing new, clean natural gas equipment may be offset by the revenue that may be brought in through the trading of surplus emissions credits.

* Technological Advancements - As with the residential and commercial sectors, the advancement of new and existing natural gas technologies will play a role in the demand for natural gas from the industrial sector. Distributed generation offers great promise in the industrial sector. The reliability and flexibility offered by the on-site generation of electricity is particularly important for the industrial sector, where loss of electricity could have disastrous consequences, including spoiled products for a manufacturer dependent on electricity. Thus, the expansion of distributed generation, and combined heat and power units, could be the next frontier for increased natural gas demand in the industrial sector.

Electric Generation Demand

The demand for electricity is predicted by the EIA to increase by an average rate of 1.8 percent per year through to 2020. In order to meet this growing demand, 355 gigawatts of new electric generation capacity is expected to be needed by 2020. Because of the relatively low capital requirements for building natural gas fired combined cycle generation plants, as well as the reduction of emissions that can be earned from using natural gas as opposed to other dirtier hydrocarbons like coal, the EIA expects 88 percent of new electric generation capacity built by 2020 will be natural gas combined-cycle or combustion turbine generation.

While natural gas fired electricity generation accounted for 16 percent of all generation in 2000, the EIA predicts it will account for 32 percent of all generation in 2020. In addition to increased demand for natural gas powered central station generation, distributed electricity generation may serve to increase the demand for natural gas for electricity generation purposes in the future.

There are two primary forces at work that serve to increase the demand for natural gas in electric generation. The increased demand for electricity in general, combined with the retirement of old nuclear, petroleum, and coal powered generation plants, leaves a significant requirement for electric generation that is to be filled by natural gas use. Natural gas is expected to fulfill the requirements for electric generation for a variety of reasons, including:

* Flexibility and Capital Investment - Natural gas electric generation plants can range in size from large-scale generation plants down to very small-scale micro turbines. Most nuclear and coal fired power plants, however, are limited to larger-scale generation, and must produce larger quantities of electricity in order to be economic. Because the demand for electricity is expected to increase modestly over the next 20 years, many electricity suppliers are wary of making the large capital investments necessary to build a coal or nuclear powered generating facility. Natural gas fired plants; with lower capital investment costs and greater flexibility (including shorter construction and lead times) are much more readily available and practical to add incremental generation capacity, as it is required.

* Environmental Concerns - Most generation of electricity in the United States comes from coal, mostly due to its extremely competitive price and domestic abundance. However, burning coal for the generation of electricity is extremely polluting. Natural gas, however, is the cleanest burning fossil fuel, and emits very few pollutants into the atmosphere. As public concern over air quality increases, and more stringent emissions regulations are adopted, natural gas is the primary clean burning, environmentally friendly alternative to coal generation.

* Efficiency - Natural gas powered combined cycle generation units are extremely energy efficient. Modern natural gas fired combined cycle generation units can approach 60 percent efficiency, whereas traditional boiler units are usually only around 34 percent efficient, regardless of fuel source. This means that using natural gas powered combined cycle technology allows for more electricity produced per unit of natural gas used. This can both increase the cost-effectiveness of the generation plant, as well as reduce the plants emissions (because less fuel is being burned).

* Operational Flexibility - Natural gas fired electric generation systems used to meet short term peak electricity demands have the advantage of being very operationally flexible. These natural gas fired generators can be quickly and easily turned on and off, allowing for the timely generation of electricity to meet short-term requirements on a moments notice. Neither coal nor nuclear generation plants have the ability to operate in this manner. Offering such flexibility in the generation of peak electricity makes natural gas an extremely attractive option for meeting these electricity requirements.

Transportation Sector Demand

Natural gas use in the transportation sector is still in its infancy, although natural gas powered vehicles present an enormous opportunity for cleaning up the emissions from this sector. Demand from the transportation sector accounts for 3 percent of total U.S. natural gas demand, and most of this demand is for natural gas to fuel the pipeline transportation of hydrocarbons. Natural gas supplies barely a fraction of the total energy used in the transportation sector, and the demand for natural gas to supply natural gas vehicle operation is almost negligible compared to the energy requirements of traditionally fueled vehicles.

The demand for alternative fuel vehicles (including natural gas vehicles) is expected to increase in the foreseeable future primarily due to new legislation and regulation surrounding emissions from the transportation sector. As more stringent emissions standards are adopted, both at the federal and state level, the automotive industry will have no choice but to devote significantly more resources into the development of feasible production line natural gas vehicles; vehicles that are environmentally sound and meet consumer preferences. However, the technology required to do so, including the need for a natural gas refueling infrastructure, are current barriers to the widespread proliferation of natural gas vehicles in the United States.