The invasion of Kuwait in August has brought the subject of U.S. dependence on oil imports to the forefront again. America now imports about half of the oil that it consumes. Most oil is used in the transportation sector, however, a large volume of fuel oil is also used in stationary applications: for space heating; for industrial process and boiler use; and for electricity generation. Oil use in stationary applications (excluding feedstocks) in 1989 amounted to 4.9 million barrels per day (b/d), or the equivalent of 68% of annual crude oil imports. Distillate and residual fuel oil, the oil products most likely to be offset by gas, make up half of that total. In contrast, natural gas is essentially a domestic resource with over 40 years of conventional supply under current consumption rates and the potential to extend the resource base well beyond the next century.

The purpose of this analysis is to demonstrate the extent to which natural gas can directly contribute to national energy security by substituting for oil in existing applications. This study updates a similar analysis published by A.G.A. in 1988. This analysis was prepared on a market-bymarket basis over different time horizons: 30-day (immediate); 1 year; 5 years; and a 10-year potential. This analysis estimates oil displacement potential - it is not a forecast. Such levels would only be achievable if government policy actively promotes natural gas.

B. Executive Summary

In an emergency or oil supply disruption scenario natural gas could immediately offset 130 thousand barrels per day (mbd) of distillate and residual fuel oil in stationary applications. Within a year the rate of displacement could increase to 420 mbd as significant penetration in the dual-fuel capable boiler markets accumulates. After five years, the combination of growing conversions in the residential and commercial buildings sector (mainly on the East Coast) and further penetration in boiler and process markets would raise the penetration rate to 1.0 million b/d. If a comprehensive government initiative was begun now with a 10-year horizon, it is estimated that 1.5 million b/d of fuel oil use could be offset by the end of the decade. Adding 240 mbd that would, in effect, be offsets of gasoline use in fleet vehicles in the transportation sector, would bring total oil displacement by natural gas to 1.7 million b/d after 10 years.

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1991 by the American Gas Association 1515 Wilson Boulevard • Arlington, VA 22209

An important component of this initiative would be increased natural gas pipeline capacity into oil-dependent regions. The volume of current planned natural gas pipeline capacity would go substantially toward accomodating the projected level of oil displacements over five years. To achieve the ten year goal, a similar increment in pipeline capacity and an increase in gas storage capacity would be needed. The exact size of the increment is dependent upon seasonal load factors and upon the volume of additional gas load that would derive from economic growth and other new

sources.

The highlights for each stationary market and for the transportation sector for each succeeding timeframe are as follows and summarized in Table 1:

The residential market for fuel oil is essentially distillate oil use concentrated on the U.S. East Coast, particularly in the Middle Atlantic census division which accounts for 5.6 million of the 11 million oil-heated households. Conversions from oil to natural gas heat already comprise the single largest source of residential conversions annually. Based on previous conversion growth rates it is possible to envision 350,000 conversions in the first year, displacing 20 mbd, rising to 500,000 conversions annually by the fifth year, resulting in oil offsets of 100 mbd after five years. If the annual rate of conversions then holds at 500,000, the cumulative potential impact after 10 years would be the displacement of 225 mbd of distillate fuel oil use - roughly half of the current consumption level. This ten year goal would require additional pipeline and storage capacity and distribution mains given the seasonality and location of this load.

• In the commercial market, both distillate and residual fuel oil are used - primarily for spaceheating, but also for water heating in large multi-family buildings. Similar to the residential sector, commercial fuel oil consumption is also concentrated on the East Coast, but to a lesser extent. In the event of an oil supply disruption, displacement of oil use in dual-fuel boilers could reach 25 mbd. After a year, the displacement of all oil in gas-served buildings, as well as in a portion of the more than three million multi-family units with gas service nearby, would increase the offsets to 100 mbd. With increased penetration in the multi-family sector, the offsets could reach 190 mbd after five years and as much as 250 mbd after 10 years, or nearly 65 percent of the current level of commercial fuel oil use.

• The industrial market is the largest stationary market for fuel oil. Even after discounting those oil applications for which natural gas is not suited for displacement (such as feedstocks, asphalt and vessel bunkering) there remains nearly 900 mbd of distillate and residual fuel oil use in boiler and process applications that theoretically could be displaced by natural gas. Oil offsets could rise from 50 mbd in the immediate term to 200 mbd after a year. This would occur predominantly in dual-fuel boiler applications where gas and residual oil, in particular, are intensely competitive. After five years, when gas penetrates more into the applications using distillate oil, the offsets are projected to increase to 400 mbd. If there is, in fact, a policy designed to minimize the use of oil in industrial applications, the extension of gas service to a high proportion of what had formerly been unserved customers could potentially see the level of offsets reach 600 mbd after 10 years. While certainly a large volume, this would only be about 15 percent of all the oil consumption (including LPG) in the entire industrial market and two-thirds of the residual/distillate oil use. Like the residential and commercial sectors, displacement of oil in the industrial market to meet the ten year goal will require significant new construction of pipeline and distribution infrastructure. Seasonal service arrangments would also have to be enhanced.

• Fuel oil consumption (almost entirely residual oil)in the electric utility market is heavily concentrated on the East Coast. Over 80 percent of this oil consumption occurs in the three census divisions along the Atlantic. Unlike the industrial market, which is made up of thousands of customers and more widely distributed, the number of power plants involved is relatively small. About 125 of the 290 or so power plants that use fuel oil are on the East Coast and some of these plants are already dual fuel capable. Consequently, the potential for oil offsets rises quickly from 50 mbd in the very short-term to 300 mbd after five years. With a concentrated national effort, three-quarters of fuel oil consumption could be offset in 10 years, reaching 400 mbd. Given the location of these plants, it is likely many plants would choose to be dual-fuel capable, interruptible gas customers. Thus complete displacement of oil year-round would be unlikely.

In the transportation sector the displacements would be limited in the early years, reflecting the fact that a natural gas vehicle (NGV) manufacturing and fuel distribution infrastructure is now beginning to develop. The oil displacement rate would move up from minimal levels in the first five years, rising quickly by the end of the decade to 240 mbd as 2 million centrally-refueled fleet vehicles in major urban areas convert to natural gas. The passage of the Clean Air Act of 1990 alone will spur oil offsets in the transportation sector.

Note: NGV market penetration grows dramatically after five years as a result of the new Clean Air Act legislation which begins to take effect in 1995. A.G.A. forecasts that by the year 2005 natural gas vehicles could displace as much as 675 mbd.