[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





  NATIONAL ENERGY POWER: ENSURING ADEQUATE SUPPLY OF NATURAL GAS AND 
                               CRUDE OIL

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 24, 2000

                               __________

                           Serial No. 106-147

                               __________

            Printed for the use of the Committee on Commerce



                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
64-772                     WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RALPH M. HALL, Texas
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Abbott, Catherine Good, President and CEO, Columbia Gas 
      Transmission Corporation, on behalf of Interstate Natural 
      Gas Association of America.................................    98
    Cavaney, Red, President and CEO, American Petroleum Institute    83
    Cooper, Roger B., Executive Vice President, Policy and 
      Planning, American Gas Association.........................   103
    Hakes, Jay, Administrator, Energy Information Administration.    37
    Johnson, Michael L., Vice President, Natural Gas and Gas 
      Products, Conoco, Incorporated, on behalf of Natural Gas 
      Supply Association.........................................    94
    Kenderdine, Melanie, Acting Director, Office of Policy, U.S. 
      Department of Energy.......................................    50
    Martin, William, Chairman, Washington Policy and Analysis....    30
    Russell, Barry, President, Independent Petroleum Association 
      of America, on behalf of National Stripper Well Association   109
    Sharp, Phil, Harvard Electricity Policy Group, John F. 
      Kennedy School of Government, Harvard University...........    24
    Watkins, James D., President, Consortium for Oceanographic 
      and Research Education.....................................    11
    Yergin, Daniel, Chairman, Cambridge Energy Research 
      Associates.................................................    18

                                 (iii)

  

 
  NATIONAL ENERGY POWER: ENSURING ADEQUATE SUPPLY OF NATURAL GAS AND 
                               CRUDE OIL

                              ----------                              


                        WEDNESDAY, MAY 24, 2000

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:15 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Shimkus, 
Wilson, Fossella, Bryant, Boucher, Hall, McCarthy, Pallone, 
Rush, and Strickland.
    Staff present: Cathy Van Way, majority counsel; Elizabeth 
Brennan, legislative clerk; Sue Sheridan, minority counsel; and 
Rick Kessler, minority professional staff member.
    Mr. Barton. The subcommittee will come to order. We are 
having a roll call vote on the floor on the Journal. Today is 
the vote on Permanent Normalized Trade Relations for China, so 
the leadership on both sides is trying to find out how many 
Members are willing to stick their head out of the foxhole 
today. As soon as we get a few more members we will start, 
probably within the next 5 minutes. I am going to wait for Mr. 
Boucher. I am told that he is on his way. So in about 5 minutes 
we will start the hearing.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We are 
going to go ahead and start. Congressman Boucher is enroute. 
His staff is not sure exactly where on the route he is but he 
is enroute, so we are going to start. I want to welcome my 
panelists today, the first panel and the second panel. This is 
almost like old home week for me. We have got Admiral Watkins, 
who I worked with on the Supercollider when he was Secretary of 
Energy; the Honorable Phil Sharp, who was subcommittee chairman 
of this subcommittee for many years and taught me quite a bit 
about the energy policy issues of the day.
    And on the second panel we have got Cathy Abbott who I 
think is one of the brightest energy experts in the world and 
taught me unbelievably important things. And my memory of her 
is almost--the last time I saw her she had at that time a baby 
on a pallet, over I think at INGAA, and was doing policy work 
as her baby was screaming that she needed a diaper change. So 
it is good to see Cathy here. So anyway we are going to have a 
serious discussion today on what our energy policy should be. 
Hopefully it is going to be done in a very positive way and 
with a lot of good feedback between the panel and the Congress.
    I think we need to take a look at our energy policy. One 
could argue the last 7 years we have been adrift in terms of a 
comprehensive, coherent, coordinated energy policy. Today's 
hearing is the first of three. We are going to focus on the oil 
and natural gas industry and some of the issues that face us in 
that arena.
    This past winter we got a wakeup call that gasoline is not 
forever going to stay below $1 a gallon at the pump. OPEC 
reemerged as a force to be reckoned with. And we had the 
situation where our Secretary of Energy, a former member of 
this subcommittee, was running around the world trying to get 
OPEC to raise their production quotas, which was not a pretty 
picture in my mind.
    As bad as the situation was this past winter, several of 
our witnesses today will paint a much more dismal picture for 
the future. And according to them, and I happen to share their 
concerns, unless we do a course correction on our national 
energy policy, the EIA representative will predict that by the 
year 2020 the United States will be dependent on foreign 
suppliers for 64 percent of its petroleum consumption and over 
50 percent of that is expected to come from the OPEC countries.
    I think that those numbers indicate that it is time for us 
to do this course correction sooner rather than later with 
respect to domestic oil and gas exploration and production 
policies in our Nation. We are a country rich in resources. 
There is no reason that we can't minimize that dependence.
    Yesterday the Energy Information Administration released a 
report that estimated that there are 10.3 billion barrels of 
oil that could be recovered from the Arctic National Wildlife 
Reserve which we commonly call ANWR. Similarly, vast areas of 
the Outer Continental Shelf have been put off limits for 
natural gas exploration and production in the last decade. The 
Destin Dome near Florida's coast is estimated to contain at 
least 2.6 trillion cubic feet of natural gas. If this is true, 
it would be one of the largest natural gas fields in the Gulf 
of Mexico.
    There are things that we could be doing to increase our 
national energy security by offering greater support to our oil 
and gas sector, especially the independent oil and gas 
producers and explorationists of this country. Marginal wells 
should be and could be kept operating much longer than most of 
them are today. We should look at ways to improve our natural 
gas infrastructure in terms of pipeline construction and things 
of this sort. This is especially important in the Northeast, 
that has to import a great deal of its energy.
    As I said at our hearing, many believe that we need an 
energy policy. I think we should have an informed energy policy 
and we should try to develop an energy policy that assures that 
the United States is in charge of its own energy future.
    Again, I look forward to hearing our witnesses today. I 
want to thank each of you personally for coming. We have made a 
really good effort to get two panels of really top-flight folks 
and I think we are going to have a very good hearing.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                               and Power
    I'd like to welcome everyone to today's hearing on energy policy. 
Today is the first of three hearings on energy policy that I hope to 
conduct. At each of these hearings I hope the Subcommittee can take a 
close look at our national energy policy and decide if we are headed in 
the right direction or if we need to do a course correction.
    Today's hearing is focused on oil and natural gas policy. This past 
winter we got a wake-up call that some aspects of our policy with 
respect to oil and natural gas were being neglected. Unfortunately, we 
found ourselves in a situation similar to the situation we faced in the 
1970's: suddenly rising fuel prices, a marketplace dominated by foreign 
players, and too few tools to address consumer's concerns.
    As bad as the situation was this past January, several of our 
witnesses paint a far more dismal picture for the future. Unless we do 
a course correction, the Energy Information Administration predicts 
that by 2020 the U.S. will be dependent on foreign suppliers for 64% of 
its total petroleum consumption. Over 50% of that petroleum is expected 
to come from OPEC countries.
    I, for one, believe that those numbers indicate that it is time for 
us to do a course correction with respect to domestic oil and gas 
exploration and production. The U.S. is a resource rich country. Yet, 
our policies deny our citizens the benefit of those resources.
    Yesterday, the Energy Information Administration released a report 
that estimated that there are 10.3 billion barrels of oil that could be 
recovered from the Arctic National Wildlife Reserve (ANWR). Similarly, 
vast areas of the outer continental shelf have been made off-limits for 
natural gas exploration and production. The Destin Dome near Florida's 
coast is estimated to contain at least 2.6 trillion cubic feet of 
natural gas, one of the largest gas fields in the Gulf of Mexico.
    There are things we can be doing to increase our national energy 
security by offering greater support to our independent oil and gas 
sector. Marginal wells should be kept operating as long as possible. We 
should also look at ways to improve natural gas infrastructure all over 
the country, and especially in the Northeast.
    As I said at our hearing in March I believe we need and energy 
policy that assures that the U.S. is in charge of its own energy 
future.
    I look forward to hearing the testimony of the witnesses. Thank 
you.

    Mr. Barton. I don't see the Honorable Mr. Boucher here yet, 
so I am going to recognize Mr. Pallone for an opening 
statement. Oh, Mr. Boucher just arrived. Do you wish to be 
recognized right off the bat or would you like a little time?
    Let me welcome my good friend from Virginia, the ranking 
member of the subcommittee, Rick Boucher, for an opening 
statement.
    Mr. Boucher. Thank you, Mr. Chairman, for organizing this 
hearing on a subject that is of high interest to the Nation's 
economy and general well-being. We are planning a series of 
several hearings in this subcommittee focusing on our domestic 
energy resources and our national energy policies. You are to 
be commended for undertaking this initiative in your initial 
term as Chairman of our subcommittee because this committee has 
not seriously and comprehensively examined the Nation's energy 
policy since the early part of this decade.
    In fact, neither the Congress nor the administration have 
spent significant time on this subject over the last few years. 
I do not intend this statement to be a criticism; it is simply 
a fact. And it is somewhat understandable when the economy is 
doing well and at a time when energy prices are generally low. 
I share the concern regarding our growing dependency on foreign 
sources of energy. And this subcommittee is an appropriate 
forum to explore the various energy policies which exist today 
and to look at proposals that are aimed at promoting a higher 
level of energy self-sufficiency.
    In 1998, the United States imported approximately 22 
percent of the energy that we consumed in that year. And the 
Department of Energy predicts that our dependence on foreign 
energy sources will continue to grow. In past years the 
Congress has taken prudent measures to address these concerns. 
For example, in 1980 Congress acted to encourage the domestic 
production of oil and natural gas by establishing the section 
29 tax credit for companies that sought to produce oil and gas 
from unconventional sources such as tight rock formations, coal 
beds and from biomass. Congress recognized the benefit to the 
Nation of developing oil and natural gas from locations that 
are very difficult to reach and not economic from which to 
produce using conventional means.
    The section 29 tax credit is scheduled to expire on 
December 31, 2002. Allowing the credit to expire would result 
in the abandonment of many wells that are producing today by 
virtue of the section 29 tax credit, and I would encourage, Mr. 
Chairman, that we recommend that the section 29 tax credit be 
extended, perhaps enduring the balance of this Congress, rather 
than waiting until the next Congress at the conclusion of which 
the credit is scheduled to expire. Having the credit expire and 
not be reauthorized would result in the loss of a substantial 
portion of our current oil and natural gas production base.
    Mr. Chairman, I think the hearing that we are holding today 
is an excellent opportunity to examine a range of proposals 
that could lead to a higher level of energy self-sufficiency 
through greater utilization of our oil and natural gas 
production capabilities, and when tied to the subsequent 
hearings that we will be holding on oil and nuclear energy 
capabilities, these hearings do in fact provide an excellent 
forum for examining our Nation's energy policies and perhaps 
recommending ways that we can achieve a higher level of energy 
self-sufficiency.
    So I commend you for organizing these forums, and along 
with you I look forward to the testimony of our witnesses.
    Mr. Barton. Thank you, Congressman. I want to let the 
panelists know that these microphones are live all the time, so 
be careful what you say up here. We would recognize Congressman 
Bryant of Tennessee for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman and ranking member, for 
this hearing and several others that you have alluded to as we 
begin to study this very important issue. We have two very 
qualified panels, and in the interest of time what I am going 
to simply do is adopt your statement as my statement in the 
record because I agree with you, Mr. Chairman, on what you said 
and yield back the balance of my time.
    Mr. Barton. We thank you, Congressman. I was told that 
Congressman Ralph Hall was actually the first member here, even 
before the Chairman. So we are going to recognize him, and for 
such time as he may consume, for an opening statement.
    Mr. Hall. Mr. Chairman, members of the committee, I join 
everyone else in thanking you, and I probably ought to just 
endorse what the gentleman from Tennessee said and go down the 
road, but I think what I have to say is very important as one 
that probably knows more about this than anybody on the 
committee because I have heard it so doggone many times.
    Mr. Barton. I just thought that was a Texas attitude.
    Mr. Hall. And your decision to hold hearings on the state 
of our national energy policy is once again in vogue again like 
it has been so many times. It seems like we go up and down the 
system. The development and implementation of a coherent and 
flexible energy policy tends to recede into the background when 
energy prices are stable but come roaring to the front when 
things go up or when the public debates the prices as they 
rise, as they have over the last year.
    So I don't believe there is a more important element of our 
economy on which Federal policy needs to be developed and 
carried out more consistently than energy. And inasmuch as I 
have to listen to your opening statements day in and day out, 
and you have heard me say this a lot of times, it is my opinion 
that we do need an energy policy and that energy policy can be 
very easy and simple. It simply is incentive to look for it and 
reward for finding it. Because the little ones look for it, 
they borrow money from the big banks to look for it, and when 
the little ones find it, the big ones buy it and redistribute 
it, make money and live happily financially ever after, while 
little ones go back to looking for a bank that will loan them 
some money. Even in high times bank won't loan money because 
there is no consistency.
    If we could just have 4 or 5 years of consistency, I don't 
care if the price is at 16, 17, 20, 30, wherever, it has got to 
be consistent for some length of time in order for people who 
are the old-timers in the business to look for it. The ones 
that kept the energy thrust alive even during World War II, 
that filled the big inch pipelines to put in the land-leased 
destroyers to keep this country going, those people are true 
heroes.
    I say this while there are some young people on the group 
that are to testify today. I see also much knowledge there in 
those of you that have been with us before and have worked with 
us. I think I don't believe there is a more important element 
in our economy. And I support the railroads, and I have said 
that before, because they are a national asset.
    Energy is a national asset. People ought to support it 
more. But it is a fight between 10 of us that produce it and 40 
of them that use it.
    I don't like Amtrak. Darn things goes from here to 
Philadelphia 38 times a day and goes from here to New York 37 
times a day and we subsidize it. It has improved in my 
district. They now whistle when they go through my district. 
They don't stop. And west of the Mississippi, we get very 
little folks west of the Mississippi out of Amtrak. But during 
national defense times, this country travels by rail and we 
have to have it. It is something you have to have. It is a 
national asset. They ought to look at energy like that.
    I have got a lot more to say but I will give back my time. 
I don't think I have time to say it. That is, unless there is 
some insistence that I do. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Ralph M. Hall follows:]
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman and Members of the Committee: I too, will join the 
others in thanking you for convening this hearing today. Your decision 
to hold hearings on the state of our National Energy Policy, or as I 
believe--the lack thereof--is very timely. The development and 
implementation of a coherent and flexible energy policy tends recede 
into the background when energy prices are stable, but comes roaring to 
the forefront of public debate when prices rise, as they have over the 
last year. However, I don't believe there is a more important element 
of our economy on which federal policy needs to be developed and 
carried out consistently than energy.
    I say that not as a representative of a producer state--obviously I 
have a vested interest in a strong and robust domestic oil and gas 
industry--but as also a representative of a state that has enormous 
potential for the development of renewable energy sources. Wind and 
solar energy have bright futures in Texas and throughout much of the 
Southwest.
    We shouldn't find ourselves attempting to choose among sources we 
need them all. In fact one of the reasons we have dithered for years on 
energy policy is that the U.S. is blessed with the greatest variety of 
viable primary energy sources in the world. Other developed nations, 
Japan and France come to mind, without indigenous energy sources have 
had to be rather single-minded about the need to meet energy demand at 
reasonable prices. Our time is coming, if in fact it hasn't arrived 
already.
    Mr. Chairman, you have put together a pair of all-star panels for 
the Subcommittee today. It good to see some old friends back before us, 
and I appreciate all of the witnesses' continuing willingness to give 
us their time and the benefit of their wisdom. Welcome to you all. I 
also look forward to the subsequent days of hearings on coal, nuclear 
and the renewables. This is some of the most important business that 
will come before the Subcommittee, and I hope that this and the 
following hearings will build momentum to seriously address energy 
policy issues.
    With that, Mr. Chairman, I yield back the balance of my time.

    Mr. Barton. We thank the gentleman for the 10-minute 
statement on the 3-minute rule. That is appreciated.
    We would like now to recognize the gentlelady from New 
Mexico, Heather Wilson, who has done tremendous work this year 
on many of the issues before the subcommittee.
    Mrs. Wilson. Thank you, Mr. Chairman. I am inclined to 
yield my time to the gentleman from Texas just because it is 
more entertaining. But in the interest of time and wanting to 
hear from several of the witnesses, what I will do is insert my 
opening remarks into the record and move it along. Thank you.
    Mr. Barton. I thank the gentlelady.
    I would like to recognize the gentleman from New Jersey, 
Mr. Pallone, who has worked long and hard on many of these 
issues.
    Mr. Pallone. Thank you, Mr. Chairman. Our national energy 
policy involves a lot of complex resource economic and national 
security issues. And I also look forward to our witnesses' 
comments on the various aspects of the Nation's energy policy. 
But, Mr. Chairman, I have to take the opportunity today to 
somewhat criticize the Republican leadership's failure with 
regard to our national energy policy.
    Mr. Barton. We would be surprised if you didn't.
    Mr. Pallone. I know. I don't mean this as a reflection on 
you or the committee; more so in terms of the Republican 
leadership in the Congress. But in the 6 years that the 
Republicans have been in the majority, they have failed to pass 
any significant legislation to protect our energy security and 
give consumers, commuters, truck drivers, homeowners, farmers, 
any protection against these volatile oil prices that we have 
been seeing for the last year or so.
    And you know, I can't help but go back to last year when 
the leadership put forward the proposal again to abolish the 
Department of Energy. In April and May of last year, long after 
OPEC's March 23, 1999 announcement and long after oil prices 
started to rise, Dick Armey, Tom DeLay, and John Kasich joined 
forces with Todd Tiahrt to introduce H.R. 1649, the Department 
of Energy Abolishment Act. And this bill would basically get 
rid of the Department of Energy, and with it oil conservation 
programs and research and renewable energy conservation and 
research. That bill basically suggests that we get rid of the 
Strategic Petroleum Reserve and sell off outright any other 
assets we have to guard against an oil shock.
    And that is why, in my opinion, probably why the 
Republicans prevented us from filling the Strategic Petroleum 
Reserve when gas was cheap. It is probably the reason why the 
Republican Congress hasn't reauthorized the law giving the 
President the authority to release oil from the Strategic 
Petroleum Reserve. We all know that that law, the Energy Policy 
and Conservation Act, expires or expired on March 31st. The 
Senate passed a bill that is pending before the House Commerce 
Committee, but the House leadership has done nothing and is on 
the verge of letting that authority slip away. I know we did 
it, we passed something in the House, but there is still 
nothing on the President's desk.
    I have to also point out that the majority leadership's 
idea of a national energy policy involves drilling the Arctic 
National Wildlife Refuge unfortunately, this is not sound 
policy. If we open the Arctic refuge to oil and gas 
development, we will only have the equivalent of 6 more months' 
worth of oil supply. Yet in the process we would destroy one of 
our Nation's greatest natural resources forever. And drilling 
the Arctic refuge will do nothing to increase our energy 
security or lower prices at the pump. Instead of drilling in 
the Arctic refuge, we should be banning exports of Alaskan oil 
to other Nations.
    Mr. Chairman, sound energy policy entails a comprehensive 
approach that includes promoting and funding commonsense 
programs to conserve energy and develop alternative energy 
sources. Such programs also would reduce our reliance on 
polluting fossil fuels and on oil imports from foreign nations. 
Regrettably, the Republican leadership has harmed the Nation's 
energy security by cutting funding for energy efficiency, 
renewable energy, weatherization and alternative fuel programs 
during the past several years.
    In the first effort after taking control of Congress, 
Republicans cut energy efficiency programs by 26 percent. Over 
the past 5 years the GOP has slashed funding for solar energy, 
renewable energy, and conservation programs by nearly 1.4 
billion below the administration's request. Again, I know that 
is not this committee; that is the Appropriations Committee. 
But we are talking about national energy policy; I have to talk 
about the Republican Congress as a whole.
    We have to help ensure our Nation's short- and long-term 
energy security independence by using mass transit, bicycles, 
other fuel-efficient vehicles. There are a lot of things we can 
do in terms of conservation measures even here in the House of 
Representatives. And I just would like to see a more proactive 
effort so that we can go home and tell our residents and our 
children that we are working to protect the Nation's energy 
security as well as their pocket books as well as our 
resources. Thank you, Mr. Chairman.
    Mr. Barton. I thank the gentleman from New Jersey. I will 
go look in my folder in my office, as Chairman of Energy and 
Power Subcommittee, for all the legislative proposals the 
Clinton Administration has sent me to introduce, some of those 
issues that you just talked about. When I checked it yesterday, 
I think it was dusty, with nothing in it, but I will go back 
and look because there may be something that I just missed.
    Actually some of your points are well taken. That is the 
whole reason we are doing these hearings. We appreciate your 
comments.
    I would now like to turn to the gentleman from Oklahoma, 
Mr. Largent, who has always focused on energy issues in his 
time in Congress, and is one of our experts. Mr. Largent, for 
an opening statement.
    Mr. Largent. Thank you, Mr. Chairman. I want to thank you 
for holding this very important hearing to examine what the 
future steps need to be from a public policy perspective to 
ensure an adequate supply of natural gas and crude oil. Last 
March this subcommittee held a hearing to look at the cause and 
effect of the recent price fluctuations in the world's oil 
markets. At that hearing I commented that unfortunately it is 
not until we experience sticker shock at the gas pump, or 
American families have to pay significantly higher prices to 
heat their homes, that oil and natural gas issues enter the 
national consciousness.
    It would be a stretch to say that energy issues continue to 
garner the same amount of national media attention as they did 
3 months ago. However, as we enter the summer driving season, 
coupled with increase in electricity use as temperatures begin 
to rise, Americans will again focus their attention to the 
price of gas at the pump and their electricity bills.
    Fossil energy, specifically natural gas and crude oil, have 
to and will continue to dominate United States energy supply. 
According to the Energy Information Administration, petroleum 
consumption in the United States is projected to increase at an 
annual rate of 1.3 percent. However, also according to the EIA, 
our domestic petroleum supply, including natural gas, is 
projected to remain nearly flat.
    What does that mean? It means that instead of currently 
relying on the rest of the world's petroleum for 52 percent of 
our domestic oil and gas consumption, in 20 years we will 
depend on foreign imports for 64 percent of our domestic 
consumption needs. Frankly, I think that estimate is 
conservative.
    Mr. Chairman, we continually hear that the engine driving 
our economic prosperity is the growth of the information 
technology sector. But without fuel for that engine, our 
economic growth could come to an abrupt halt.
    What do we need to do as policymakers to ensure our future 
energy security? A good start would be for the Federal 
Government to create policies that allow for responsible 
domestic exploration and production of our natural resources. 
Establish tax incentives such as extending the section 29 tax 
credit and eliminating the net income limitation on percentage 
depletion for marginal wells to encourage independent producers 
back into the oil patch rather than shutting down wells and 
creating a reasonable regulatory framework that protects the 
environment but does not add unnecessary compliance costs. 
These are just a few suggestions.
    Mr. Chairman, I look forward to hearing what suggestions 
our illustrious witnesses have and I yield back.
    Mr. Barton. I thank the gentleman.
    Now I would like to turn to the gentlelady from Missouri, 
the Honorable Karen McCarthy, for an opening statement.
    Ms. McCarthy. Thank you, Mr. Chairman. Thank you for having 
this very important hearing and thanks to our distinguished 
panel. I look forward to your remarks and wisdom very much. Mr. 
Chairman, if I might have the liberty of making a brief comment 
on one of the members of the panel I would like to welcome 
especially.
    Mr. Barton. If it is a positive comment.
    Ms. McCarthy. It is very positive. In 1982 I was a fellow 
at Harvard's Institute of Politics, teaching a course on the 
development or lack thereof of national energy policy. And I 
was a State legislator then, chairing the Energy and 
Environment Committee. I had come from a teaching background 
and obviously environmental issues inspired me to go into 
public service. And Dan Yergin came to my class and wowed my 
students on what it would take and what we would need to have 
in those days a cogent national energy policy. Well, he has 
gone on to become, as we know, a Pulitzer prize-winning author 
and someone who has shaped national energy policy.
    Mr. Barton. He told us the only reason he came is because 
you were on the subcommittee.
    Ms. McCarthy. I don't think he even knew. But I am 
delighted to have him here today to share his wisdom, and also 
all of the panelists, and to say to Mr. Hall, my former ranking 
member and now an esteemed colleague, that I am very grateful 
for our support of Amtrak because it whistles quite a few days 
in my district and I was a State legislator who made that 
happen. I know how important alternative uses are. And to also 
echo my current ranking member, Mr. Boucher, about renewing the 
tax credit for section 29 which would extend those tax credits 
to alternatives such as natural gas and to biomass.
    And that leads me to thank the committee and you, Mr. 
Chairman, because when Mr. Shimkus and I began our plea of 
extending credits and help to biomass to develop alternative 
fuels that would give our buses and our vans and other 
transportation systems a cleaner burning alternative for cities 
that were trying to meet those clean air standards, I know you 
looked at us, somewhat surprised, and wished we would go away. 
But thanks to you, it is now law and it is working. I hope as 
we explore a national policy that we take into consideration 
all the good things that we have accomplished as a Congress and 
as a Nation, but also the challenges we continue to face in 
order to set that standard for the world.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you Congresswoman McCarthy.
    Now I would like to recognize Mr. Shimkus for an opening 
statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I will just add to 
what my colleague, Ms. McCarthy, has mentioned in response to 
my colleague and friend from New Jersey, that this committee 
and Congress and the last Congress really passed, in addition 
to the Energy and Policy Conservation Act, on the biodiesel, 
the B-20 proposal which is probably the only significant piece 
of legislation that helped add price to a commodity of 
agricultural farm products but also moved us in the direction 
of addressing our reliance on foreign oil. And it also helped 
in the environmental aspects, because the B-20 in the biodiesel 
proposal cleans the diesel exhaust by 50 percent, a 50 percent 
reduction in emissions. It does all the things that we ought to 
be concerned with as Americans.
    I too, as a Member of Congress in 1996, questioned the role 
of the Department of Energy. I have now become convinced that 
there is a role and I look forward to working with DOE on 
provisions like this.
    I would also be remiss not to mention the ethanol aspects 
of having another renewable fuel option. The reality is we have 
an overreliance on foreign oil. And I do believe that we can 
safely go into the Arctic Wildlife Refuge. I think that was 
proven with the Alaskan pipeline. My now-deceased father-in-law 
worked on that pipeline and it has a tremendous record of the 
environmental safety of that program.
    I think we also look at the continental shelves and also 
the marginal well issue as all part of a national energy 
portfolio along with renewable fuels. I am very excited about 
this hearing and look forward to continuing to fight this cause 
in my remaining years here in Washington. I yield back my time.
    Mr. Barton. I thank the gentleman.
    No other members present. All members not present will have 
the requisite number of days to put a written statement in the 
record.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
     Mr. Chairman: I'd like to commend you for holding this hearing on 
national energy policy. As members of the 106th Congress, we are at an 
historical cross-road. We are charged with putting in place the 
policies that will carry our nation into the 21st Century. A 
comprehensive, forward-thinking national energy policy is essential to 
our continued success.
    Our economy demands abundant energy supplies at affordable prices. 
I am a strong believer in open, competitive markets. We have nearly 
twenty years of experience in letting the market set the price for oil. 
For natural gas, total deregulation of wellhead prices was finally 
completed in 1993. Soon we'll have competitive prices for electricity. 
I hope we'll be able to look back in a few years and say that occurred 
in the 106th Congress in the year 2000.
    Competition and an open marketplace have resulted in a more than 
adequate supply and lower prices. Although in the past two years, we've 
seen both record low and high oil prices, when adjusted for inflation, 
oil prices today are still lower than they were in 1981. Consumers have 
benefitted from competitive oil and gas markets, and they will benefit 
from more competitive electricity markets.
     However, market pricing for energy is just one many U.S. energy 
policies. Overall, I do not believe the U.S. has an energy policy. 
Instead we have many, often conflicting, energy policies. I believe we 
need to take a close look at these energy policies across sectors, as 
well as, look at how they interact with our environmental policies. 
Today's hearing is good first step in determining how these various 
energy policies can complement each other and where they are currently 
at odds. Knowing that I believe, will help us develop a single, unified 
national energy policy with many components.
    I look forward to hearing from today's distinguished panels of 
witnesses. I hope they will help us find the balance between energy 
security and competitive global energy markets. Thank you.

    Mr. Barton. The Chair would ask unanimous consent that 
Congressman Tauzin of Louisiana's statement be included in the 
record at this point. He is not a member of the subcommittee 
but he is a member of the full committee. Is there objection? 
Hearing none, so ordered.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, a Representative in 
                  Congress from the State of Louisiana
    Energy security for America requires not only an analysis for 
increasing domestic production but also an examination of ways to 
ensure the long-term viability of our nation's existing production. In 
the latter category, current tax incentives that have resulted in 
production from unconventional sources such as shale, tight sands and 
coal bed methane are scheduled to expire at the end of 2002.
    Part of our plans for protecting energy security in an uncertain 
world must include a review of a now uncertain tax code with its 
current risk of energy supply loss resulting from abandonment of the 
wells qualifying for the tax credits that provided the incentive for 
their production. If abandoned, such supply sources cannot be replaced.
    Extension of the tax credit system (known as Section 29) should be 
considered among the high priority options for strengthening our 
domestic resources for continued supply to Americans of low cost and 
environmentally efficient energy sources.

    Mr. Barton. We now want to welcome our panelists. I want to 
give a very warm personal welcome to our first panelist, former 
Secretary of Energy, Admiral James Watkins, one of the most 
decent people I have ever had the courtesy to know in public 
service and someone who helped me tremendously when he was 
Secretary of Energy.
    We are not going to hold you all real tight to time but we 
are going to set the clock at 7 minutes. And if you go a little 
bit longer, that will be fine. We want to give each of you 
every opportunity to elaborate on your written testimony. I 
also want to thank each of you in the second panel also for 
having your testimony in on time. Even the Department of 
Energy, I think for the first time this year, got their 
testimony in on time. That is a record and I am very very proud 
of that.
    So with that, we welcome former Secretary of Energy, 
distinguished military Admiral of the United States, Navy 
Admiral James Watkins.

   STATEMENTS OF JAMES D. WATKINS, PRESIDENT, CONSORTIUM FOR 
OCEANOGRAPHIC AND RESEARCH EDUCATION; DANIEL YERGIN, CHAIRMAN, 
   CAMBRIDGE ENERGY RESEARCH ASSOCIATES; PHIL SHARP, HARVARD 
ELECTRICITY POLICY GROUP, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, 
  HARVARD UNIVERSITY; WILLIAM F. MARTIN, CHAIRMAN, WASHINGTON 
     POLICY AND ANALYSIS; JAY HAKES, ADMINISTRATOR, ENERGY 
 INFORMATION ADMINISTRATION; AND MELANIE A. KENDERDINE, ACTING 
     DIRECTOR, OFFICE OF POLICY, U.S. DEPARTMENT OF ENERGY

    Mr. Watkins. Thank you, Mr. Chairman, for inviting me to 
testify before your Subcommittee on Energy and Power. You asked 
that my testimony today address the subject of U.S. energy 
policy and security in general and answer the question as to 
whether or not the U.S. is headed in the right direction or if 
changes are needed. You also asked that particular emphasis be 
placed on U.S. energy policy as it relates to ensuring adequate 
supplies of oil and natural gas.
    As you are well aware on this committee and from my 
experience as Secretary of Energy in helping Congress craft the 
National Energy Policy Act of 1992, the entire complex of 
energy sources, both production and consumption, needs to be 
analyzed and integrated in order to address any one of the 
individual components, like oil and gas, that aggregate to make 
up the whole.
    As a consequence, I have prepared and submitted a long 
formal statement for the record which goes back nearly 10 years 
to the formulation of the National Energy Strategy by the Bush 
Administration in 1991. Lessons learned from that process and a 
review of all components that made up the energy strategy 
indicate interconnectivity and balance between these components 
and they are demanded when considering any one of them.
    Recall that the 1991 Bush strategy was the culmination of 
nearly 2 years of intense efforts, holding hearings around the 
country to listen to all interested parties, developing a 
strategy which emerged therefrom, and drafting a report for the 
Congress. That report was reviewed by various analytically 
capable outside entities, including the Office of Technology 
Assessment here on the Hill before it was abolished, and was 
published and sent to the Hill to inspire the needed 
legislation. The strategy also included and complemented a 
number of Bush Administration initiatives which I enumerated on 
page 3 of my longer statement.
    The strategy was then used by both the Congress and the 
administration as the template for constructing and passing the 
Energy Policy Act. This act, signed into law by President Bush 
in October 1992, was among the most comprehensive energy bills 
ever enacted. The Energy Policy Act affected every aspect of 
the way this Nation produces and uses energy, including 
reshaping Federal regulation of the Nation's energy sector to 
spur competition and investment in new technologies. It stands 
today as landmark legislation, but it must be periodically 
reviewed and updated if it is to remain relevant.
    For example, an updated energy strategy is badly needed 
today to provide the broad framework within which so many other 
related pieces of legislation like the Clean Air Act, the 
Public Utility Company Holding Act, Public Utility Regulatory 
Policy Act, Nuclear Waste Act, and many others find themselves, 
and all of these related pieces have to be periodically updated 
themselves, but within some kind of overarching umbrella 
strategy because of their inherent interconnectivity.
    Our strategy in the early 1990's, for example, predicted 
about $30 a barrel in crude oil prices by the year 2000, 
recognizing cyclic variations enroute. Sure enough, that is 
where we are today. Additionally, the act passed by Congress 
had the potential to reduce oil imports by about 4.7 million 
barrels per day by the year 2010. This represented at the time 
a one-third cut in the projected level of petroleum imports. 
Not only would this enhance energy security but it would also 
positively influence balance of trade, effect considerable 
energy cost savings for consumers, and result in significant 
reduction in energy demand. Whether we are on track to achieve 
this objective I have no idea, but knowing how we are doing 
relative to that objective is germane to answering one of your 
questions.
    In this connection, before leaving office in January 1993, 
we had established a complex tracking program called the Energy 
Policy Act Information System to comply with provisions of the 
1992 act. This system has been used successfully in development 
of the National Energy Strategy and had also been reviewed by 
the Congressional Office of Technology Assessment and found to 
contain reasonable models and predictions.
    I prepared my final DOE posture statement in January 1993 
and reported the degree of compliance with the act to date. I 
also passed information regarding this tracking system to my 
successor in the new administration team.
    The first required DOE report entitled ``Implementation 
Status Report'' was then published in April 1993, shortly after 
I left office, based on our tracking system. It is very well 
detailed, every single section of the track, to see how we are 
doing against the advocacy that was contained in the act. To 
the best of my knowledge, results of the detailed tracking 
system were not reported out again. Rather, our system was 
replaced in July 1995 with what I would call a puff piece, 
called the National Energy Policy Plan, allegedly the new 
Clinton Administration's energy policy.
    The latter's direct relationship with or even reference to 
the 1992 Energy Policy Act is not clear. I have no information 
which would indicate the degree of congressional satisfaction 
in either specificity or quality of this or any of the follow-
on biennial reports required under section 801 of the DOE 
Organization Act which demands submission of a national energy 
policy plan.
    You asked in your letter whether or not the direction was 
the right one regarding energy policy and security in general, 
and oil and gas in specific. My answer, admittedly rendered 
from a distance without detailed data, is a simple no. If we 
had a clue as to the direction in which we were actually 
headed, we could have predicted the current oil crisis well 
ahead of time and may have had a chance to influence our 
national attitude toward oil, for this crisis was in part 
generated by our own failure to enhance U.S. oil production as 
initially recommended in the National Energy Strategy 10 years 
ago.
    Further, east and west offshore oil and gas moratoria 
continue, the Arctic National Wildlife Refuge remains closed. 
By the way, I don't agree with Mr. Pallone that we would 
destroy one of the great areas of the world. I have been up to 
Prudhoe Bay. I have seen large pads that were used for oil 
drilling have been taken away and reconstituted into the 
tundra, the most beautiful sight you have ever seen. It can be 
done. We have the modern technology to do it. We spent the time 
to do it. The oil and gas companies up there have been 
responsible and we ought to get on with it.
    And it won't all be dumped in 6 months. It is a 
contribution to the annual thing that will go on for 20 years. 
The gas that is available up there can be brought back down 
again through Alaska, and we can either sell it or use it at 
home.
    So I really do believe that is a very important issue but 
it has to be placed in the context of everything else. If we go 
after the Arctic National Wildlife Refuge by itself, we will 
lose today politically. But if we put it in the context of what 
else we are doing, we can win it. We ought to get on with it.
    We are importing 10 percent more oil now than we were 10 
years ago. I just heard the data coming out of the Energy 
Information Administration that it is going to be 10 percent 
higher than that 10 years from now. We watch while the OPEC oil 
cartel manipulates the world marketplace and gains more, not 
less, leverage on the rest of us. Our trade deficit soars and 
the worst is not over. We are utilizing more and more natural 
gas in our utilities and this consumption will continue to grow 
exponentially. As a result, without new offshore exploration on 
either coast, we are now dusting off our liquid natural gas 
depots again.
    Ten years from now, I predict we will decrying the fact 
that we are being held hostage on an energy security problem to 
foreign imports of LNG from states like Libya. Yes, the 
potential exists to mitigate spikes in gasoline prices through 
enhanced oil production and reduced consumption at home. 
However, with no sense of urgency on upgrading our national 
energy policy, only sporadic attention being given to the trade 
and diplomacy aspects of our dependency on OPEC's whims, 
opposition to any increase in U.S. oil or gas production, and 
an unwillingness on the part of DOE to track what we are 
already supposed to be doing under existing legislation and 
make recommendations as to new strategic direction where 
needed, there is little hope of avoiding a repetition of 
unannounced oil and gasoline spikes in the years ahead.
    Sadly, I now think we need to start the process all over 
again, similar to the one we put into place 10 years ago, and 
establish a new baseline. The new administration should be 
tasked by Congress to do this. If we get serious about energy 
policy again and follow such a path, we might be able to answer 
your question, Mr. Chairman: Are we going in the right 
direction or are changes needed?
    Thank you, Mr. Chairman.
    [The prepared statement of James D. Watkins follows:]
   Prepared Statement of James D. Watkins, President, Consortium for 
                  Oceanographic and Research Education
    Thank you, Mr. Chairman, for inviting me to testify before your 
Subcommittee on Energy and Power. In your letter of invitation, you 
stated that the subject of the hearing will be ``National Energy 
Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil.'' You 
asked that my testimony today address the subject of U.S. energy policy 
and security in general and answer the question as to whether or not 
the U.S. is headed in the right direction or if changes are needed. You 
also asked that particular emphasis be placed on U.S. energy policy as 
it relates to ensuring adequate supplies of oil and natural gas.
    As you are well aware, and from my experience in helping Congress 
craft the National Energy Policy Act of 1992, the entire complex of 
energy sources, both production and consumption, needs to be analyzed 
and integrated in order to address any one of the individual 
components, like oil and gas, that aggregate to make up the whole. As a 
consequence, I have prepared and submitted a long formal statement 
which goes back nearly ten years to the formulation of the National 
Energy Strategy by the Bush Administration in 1991. Lessons learned 
from that process and a review of all components that made up the 
Energy Strategy indicate the interconnectivity and the balance between 
these components demanded when considering any one of them. Recall that 
the 1991 Bush Strategy was the culmination of nearly two years of 
intense efforts to listen to all interested parties, develop a strategy 
which emerged therefrom, and draft a report. That report was reviewed 
by various analytically capable outside entities before it was 
published and sent to the Hill for incorporation into needed 
legislation.
    But, let me first review some of the background. In July 1989, the 
President directed me as his Secretary of Energy to develop a National 
Energy Strategy. The mission was accomplished and announced by the 
President at the White House on February 20, 1991. In his press 
conference, President Bush proposed a comprehensive and balanced 
program to ensure all Americans an energy future that is secure, 
efficient, and environmentally sound. The National Energy Strategy was 
designed to diversify U.S. sources of energy supplies and offer more 
efficiency and flexibility in the way energy is consumed.
    The National Energy Strategy was the product of twenty months of 
public recommendations and Administration consideration. In developing 
this Strategy, the Department of Energy conducted eighteen public 
hearings and received thousands of written comments.
    With the benefit of this input, the Administration analyzed the 
full array of energy options and developed a strategy that supported 
continued economic growth, increased energy efficiency, protection for 
the environment, and reduction of America's vulnerability to energy 
supply disruptions.
    The Strategy was consistent with the Administration's policy of 
reliance on market forces. Over the next two decades, with well-thought 
out and periodic updates, the Strategy would have made the U.S. more 
energy efficient and enhance our competitiveness without resorting to 
heavy-handed regulations, taxes, or import fees that could hurt 
consumers and cost Americans jobs.
    The Strategy acknowledged that the U.S. was part of an energy 
interdependent world. It recognized that it was not in our interest to 
adopt measures that may reduce imports, but inflict severe economic or 
environmental damage. Therefore, the National Energy Strategy balanced 
economic, environmental and energy security objectives.
    Over the next twenty years, we believed that such a balanced 
approach to production and conservation would power a larger U.S. 
economy while using less energy. At the same time, the U.S. would 
produce more of the energy it uses. The National Energy Strategy by the 
year 2010 would have, if pursued aggressively:

 Reduced domestic oil demand by 3.4 million barrels per day, 
        below projected levels.
 Increased domestic oil production by 3.8 million barrels per 
        day above projected levels.
 Increased the electricity produced from renewable sources, 
        such as solar, hydropower, and geothermal by 16 percent.
 Raised the use of alternative transportation fuels, such as 
        compressed natural gas, ethanol and methanol, thereby reducing 
        the need for up to 2.5 million barrels of oil per day.
 Reduced growth in electricity demand by unlocking market 
        forces through elimination of costly regulation in existing 
        law, thereby saving consumers approximately $27 billion per 
        year in electricity costs.
 With its proposals to increase the use of clean coal 
        technology, natural gas, and nuclear energy to generate 
        electricity, as well as to develop new energy efficient 
        technologies, the Strategy would have also:

    --Held U.S. emissions of greenhouse gases by the year 2010 at or 
            below 1990 levels.
    --Improved air quality by reducing emissions of pollutants that 
            contribute to acid rain and smog.
    --Mitigated solid waste problems by reducing coal ash waste 25 
            million tons per year, and by lowering coal cleaning wastes 
            by 50 million tons per year.
    The Strategy incorporated and complemented a number of Bush 
Administration initiatives. These included: (1) the 1990 provisions to 
the Clean Air Act; (2) natural gas well-head decontrol legislation: (3) 
incentives provided to domestic renewable and fossil energy producers 
in fiscal year 1991 budget agreement; (4) the energy research and 
development initiatives announced in the President's FY-92 budget; (5) 
the Administration's domestic energy supply and demand measures adopted 
in response to the Iraqi oil disruption; and (6) the Administration's 
science and mathematics education initiatives.
    To meet the challenges that lay ahead, the National Energy Strategy 
called on Federal, State, and local governments to work together to 
encourage energy conservation and new energy production through reduced 
regulation and streamlined licensing procedures, particularly in the 
natural gas, oil and gas pipeline and hydropower areas. At the Federal 
level, the Administration intended to lead by improving the energy 
efficiency of Federal buildings, Federal housing and accelerating the 
purchase of alternative fuel vehicles for the Federal fleet.
    In February 1992, one year after initially promulgating the 
National Energy Strategy, the Strategy was adjusted to fit the reality 
of the latest and continually-changing data base of knowledge that 
drove the first projections in 1991. This updated baseline was then 
used by the Congress as the template for constructing and passing the 
Energy Policy Act of 1992. This Act, signed into law by President Bush 
in October 1992, was among the most comprehensive energy bills ever 
enacted. The Energy Policy Act affected every aspect of the way this 
nation produces and uses energy, including reshaping Federal regulation 
of the nation's energy sector to spur competition and investment in new 
technologies. It still stands today as landmark legislation, but it 
must be periodically reviewed and updated if it is to remain relevant. 
For example, it is badly needed to provide the broad framework within 
which so many other related pieces of legislation like Clean Air Act; 
The Public Utility Company Holding Act (PUCHA); The Public Utility 
Regulatory Policy Act (PURPA); Nuclear Waste Policy Amendments Act; and 
the like find themselves. All of these related pieces have to be 
periodically updated themselves, but within some overarching umbrella 
strategy because of their inherent connectivity thereto.
    I present all this background before addressing your question as to 
whether or not our oil and gas policies are adequate in view of the 
recent shock to the nation on high gasoline prices at the pump. As our 
National Energy Strategy clearly articulated, the inter-coupling of all 
energy generation and conservation mechanisms must be continuously 
melded together into a sensible, comprehensive, integrated, and 
balanced relationship. If they are not, we will continue to have 
unannounced and unwanted perturbations when we could have better 
predicted and mitigated them. Our strategy in the early 1990s, for 
example, predicted about $30 per barrel in crude oil prices by the year 
2000, recognizing cyclic variations enroute. Sure enough, that is where 
we are today. Additionally, the Act passed by Congress had the 
potential to reduce oil imports by about 4.7 million barrels per day by 
the year 2010. This represented a one-third cut in the projected level 
of petroleum imports. Not only would this enhance energy security, but 
it would also positively influence balance of trade, considerable 
energy cost savings for consumers and significant reduction in energy 
demand.
    Finally, before leaving office in January 1993, we had established 
a complex tracking program called the Energy Policy Act Information 
System to comply with provisions of the 1992 Energy Policy Act. This 
System had been used successfully in development of the National Energy 
Strategy and then reviewed by the Congressional Office of Technical 
Assessment (OTA) and found to contain reasonable models and 
predictions. I prepared a final Posture Statement in January 1993 and 
reported the degree of compliance with the Act to date and passed 
information regarding this tracking system to my successor and the new 
Administration team. The first required report was then submitted to 
the Congress in April 1993, shortly after I left office including an 
assessment using the tracking system. To the best of my knowledge, the 
detailed tracking system was not used again and was replaced by 
issuance of a Strategic Plan in April 1994, followed a year later in 
July 1995 by a National Energy Policy Plan which was allegedly the new 
Clinton Administration's energy policy. This Plan's direct relationship 
with or even reference to the 1992 Energy Policy Act is not clear. I 
have no information which would indicate the degree of Congressional 
satisfaction in either specificity or quality of the biennial reports 
required under Section 801 of the DOE Organization Act which demands 
submission of a National Energy Policy Plan every two years.
    In my opinion, therefore, it is time to rebuild the National Energy 
Strategy as we did ten years ago, using a similar approach--i.e. hold 
hearings around the country, listen to all parties with a goal of 
making recommended amendments to the 1992 Energy Policy Act so as not 
to lose the Act's relevance. Unless this is done, I do not believe the 
nation will be well served by a Department of Energy (DOE) that seems 
to put out energy ``puff pieces'' that have no associated implementing 
strategy for their execution or assessment. I have in mind here the 
Administration's ``Sustainable Energy Strategy, Clean and Secure Energy 
for a Competitive Economy'' report to the Congress in July 1995 which 
was their own first real response to the two-year reporting 
requirement. This 73-page document arrived on the Hill, with little 
fanfare, and had little impact. This 1995 report pays only lip service 
to the importance of energy policy. In reality this so-called 
``Sustainable Energy Strategy'' is short on energy policy and long on 
wishful thinking. To take just two examples, among the five strategies 
set forth for a Sustainable Energy Policy are ``Reinvent Environmental 
Protection'' and ``Engage the International Market.'' Then, later, 
during his confirmation hearings before the Senate Energy Committee in 
1997, Secretary Pena promised that there would be a new National Energy 
Policy Plan (NEPP) by the fall of that year to answer growing 
Congressional concern about whether this nation has in place a program 
that addresses its energy and environmental needs for the next century. 
Subsequently, it was announced that this new NEPP would be delayed 
another six months, well past the December 1997 meeting in Kyoto at 
which commitments constituting a de facto energy policy would be made. 
Whether it ever got submitted, I have no idea. But Secretary Pena 
departed in the summer of 1998 and I can't imagine his departing shot 
at a strategy was very effective. I don't know what the Congress has 
received since, but I can't believe there has been much substantive 
clarity or direction in whatever the DOE is doing in this area.
    Further, you may recall in 1997 that President Clinton casually 
remarked to assembled students at American University here that the 
U.S. could reduce its emissions of carbon dioxide and other greenhouse 
gases by 20 percent immediately at no cost to the economy ``if we just 
changed the way we do things.'' This bold assertion was a shock to even 
his staff since it was an off-the-cuff remark. No one had a clue, even 
the President, what or how he wanted us to change. Certainly, his 
remarks had nothing to do with studies emanating from within his own 
Executive Branch that would justify such an assertion. His own 1995 
Sustainable Energy Strategy said there were no easy ways to reduce 
greenhouse gas emissions by 20 percent--immediately or over the next 
10-15 years--unless the President had in mind truly profound changes in 
the world in which we work and live, induced by carbon taxes, rising 
energy prices and slower economic growth. With a realistic National 
Energy Strategy, the magnitude of such changes would be clear, along 
with their effects on individual states and regions.
    Without a well substantiated strategy, then, enforced through 
negotiated Congressional adjustments to some logical baseline, like the 
existing Energy Policy Act of 1992, we are victims of the rhetoric of 
whatever advocacy-only minstrels wander by. Accountability and 
responsibility for our proposed actions can only be assured if we 
demand responsible analytically--based, and agreed-to frameworks which 
can span from one Administration to the next and against which we can 
monitor the reality of any plans which claim to ``save the world'' 
through advocacy only. DOE should, be held accountable to fulfill this 
responsibility on a continuing professional basis, using best available 
and accepted models. Congress should, in turn, demand an accounting of 
DOE's performance in carrying out, implementing and monitoring 
provisions of the Energy Policy Act and in making amendment 
recommendations to support an updated, well thought-out and analyzed 
strategy to justify change. If it cannot or will not do this, then the 
only function left to the DOE which has not already been made into an 
independent agency will remain unattended, as it seems to be today. If 
this situation is allowed to persist, then abolition of non-nuclear-
related segment of the DOE would be one justified outcome.
    You asked in your letter whether or not the direction was the right 
one regarding energy policy and security in general and oil and gas in 
specific. My answer, admittedly rendered from a distance without 
detailed data, is a simple no. If we had a clue as to the direction in 
which we were actually headed, we could have predicted the current oil 
crisis some time ago and may have made a course change in our attitude 
toward oil. But this crisis was in part generated by our own failure to 
enhance U.S. oil production as initially recommended in the Bush 
Strategy ten years ago. East and west off-shore oil and gas moratoria 
continue; the Arctic National Wildlife Refuge remains closed; we are 
importing ten percent more oil than we were ten years ago; and the 
worse is not over. We are utilizing more and more natural gas in our 
utilities and this consumption will continue to grow exponentially. As 
a result, we are now ``dusting off'' our liquid natural gas (LNG) 
depots again. Ten years from now we will be decrying the fact that we 
are held hostage to foreign imports of LNG from states like Libya. 
Further, we have not even maximized oil recovery from existing U.S. oil 
reserves to the extent possible. Yes, the potential still exists to 
mitigate spikes in gasoline prices through enhanced oil production at 
home. However, with no sense of urgency on upgrading our energy policy; 
apathy for any increase in oil or gas production at home; and an 
unwillingness on the part of DOE to track what we are already supposed 
to be doing, accompanied by recommendations as to new strategic 
directions, there is little hope of avoiding an accelerating series of 
unannounced oil/gasoline spikes in the years ahead. We need to start 
the process all over again that we put into place ten years ago. The 
new Administration should be tasked by Congress to do this. If we 
follow this path, we might be able to answer your question, ``Are we 
going in the right direction?''

    Mr. Barton. Thank you Admiral. We appreciate those remarks 
and especially the intensity with which you discuss the ANWR. 
That is impressive.
    We now want to recognize Dr. Daniel Yergin who is Chairman 
of the Cambridge Energy Research Associates. I have not had the 
pleasure to meet you personally, but I have read many of your 
works and books and have great respect for you. And Karen 
McCarthy did talk to me about how impressive you were not only 
in the public arena but as a person. So we are delighted to 
have you. We will recognize you for 7 minutes. Again, that is 
not a hard 7 minutes. And we will put your entire statement in 
the record.

                   STATEMENT OF DANIEL YERGIN

    Mr. Yergin. Thank you very much. Mr. Chairman, members, I 
am very honored to be part of this expert panel today. I 
certainly do want to thank Representative McCarthy for her 
gracious words. I should say before becoming an outstanding 
Member of Congress, she really was a great teacher.
    This panel is drawn together today by what we are seeing 
happening in the world oil and gas market, and there are plenty 
of energy considerations that have come to the fore again. And 
I think this series of hearings will be an important 
contribution to understanding on these matters.
    In my testimony I really want to try and provide a context 
by looking at three things; one, a subject that is really 
vexing the American people today, which is gasoline prices, and 
more generally what is happening in world oil and natural gas 
markets.
    The discussion on gasoline is drawn from a new study that 
we are releasing today at Cambridge Energy called ``Gasoline 
and the American People.'' I think we would all agree that 
gasoline is the best known price in America. We see it dozens 
of times every day. Right now it is also perhaps the most 
perplexing price.
    There is plenty of reason for the American people to be 
perplexed. In 1997, the national average gasoline price which 
was $1.23 in inflation-adjusted prices, fell to as low as 95 
cents at the beginning of 1999, which is actually lower than 
any time since recorded prices were kept; indeed, lower than 
the average price during the Great Depression. And now we are 
looking at $1.50 a gallon on a national basis, and in some 
parts of the country a good deal higher than that.
    Well, to make sense of the prices, first we must think in 
inflation-adjusted terms. With that it becomes clear that 
actually the long-term trend--and I should say the powerful 
long-term trend in gasoline prices is actually down. The major 
exception, those times of crisis: the oil shock years of the 
1970's and the Gulf crisis of 1990 and 1991, indeed even where 
prices today are lower in inflation-adjusted terms than they 
have been in most of the last 80 years.
    As we can see, despite this trend, prices do move up and 
down. This can be caused by an awful lot of different things, 
from political events, disruptions of refinery operations, new 
environmental standards. Right now to just kind of get it into 
a framework, the sharp increases in gasoline prices are the 
result of the higher crude oil prices that we are seeing, the 
very low levels of inventories, and new environmental 
regulations that are going into effect right now, because we 
are at the beginning of the summer driving season and we have a 
strong economy.
    Let me turn then to what is the price of crude oil that is 
behind gasoline prices. The main reason for the high oil prices 
of 2000 has been the low oil prices of 1997, 1998 and early 
1999. That is, these low prices resulted from the Asian 
financial crisis and created, really, a financial crisis for 
the oil-exporting countries, and also really devastated the 
domestic U.S. oil and gas industry. And as a result, these 
countries came together and we have the prices we have now, 
accentuated by the fact that the U.S. economy and other 
economies are so strong. South Korea was supposed to have zero 
percent economic growth last year. South Korea is the sixth 
largest oil market in the world. It had almost 11 percent. So 
we have a strong economy driving prices, too.
    What we do see is when prices reach around $30 a barrel, it 
brings home the fact that oil prices are one of the few prices, 
along with the price of labor and the price of money, interest 
rates, that can really affect the economy and spook the stock 
market.
    But also other factors are brought home. One is--and 
Admiral Watkins addressed it--we are very highly integrated 
into the world oil market and what happens there. But also 
things have changed a lot from the 1970's and it is the 
relative absence of confrontation that so characterized the 
1970's that is striking today. We really do have a dense 
interweaving of interests with oil-exporting nations and we 
have to look no farther than Mexico to see that.
    But keep in mind, the current oil market supply is taut. 
These prices could be subject to a great deal of volatility, 
which means going up again as well as going down, and they 
could be driven in that way by anything from another Iraqi 
showdown with the United Nations, political or technical 
problems in an exporting country, political tensions among 
exporters, to the pace of Eurasia's recovery and the strength 
of the U.S. economy. So there are a lot of things out there 
that will affect prices in the next few months.
    If prices are in the $300plus range for any period of time, 
we think that the impact of slowing economies will provide an 
inevitable correction on those prices. But this wide band of 
prices that we have seen, from 10 to $34 a barrel, in this most 
basic commodity over a little more than a year, underlies the 
inherent volatility in what is probably still the world's most 
important commodity.
    Let me in the last couple minutes turn to something that 
this subcommittee has considered a lot--and Congressman Sharp 
and I were talking about this for a very long time--which is 
natural gas prices. In a sense, this subcommittee is the home 
of consideration of that. So much of the energy consideration 
has been focused on oil recently. But the United States natural 
gas supply system right now is characterized by very tight 
supplies, and we are going to hear a lot more about that in the 
next few months. The spring market and the recent heat waves 
have shown how tight.
    Natural gas prices right now are 70 percent higher than 
they were at this time last year. Demand pressures are 
intensifying while there are few signs of growth and supply. 
And recognize how important natural gas is to our country for 
energy and environmental reasons. It provides 23 percent of our 
total energy and, increasingly, it will be the key to our 
future electricity supplies.
    Indeed, the United States is making a very big bet on the 
adequacy of future gas supplies without realizing it. Fifteen 
percent of our electricity today is generated with natural gas. 
In terms of proposed new capacity, that number goes up to 96 
percent. We have seen a slow supply response, partly because of 
the oil and gas price collapse the last couple of years.
    Greater investment is needed. We do think by the end of the 
year we will start to see a supply response. We do believe at 
Cambridge Energy that there is the gas supply potential to meet 
the challenge of increased demand from power generation at a 
price that would not discourage market development.
    But a few thoughts. One, it is very important to avoid 
short-term intervention, government intervention in the market 
that would discourage investment and supply, particularly at a 
critical time like this. Moreover, and it has already been 
suggested, we need to consider how to facilitate natural gas 
development in such a way as to support overall environmental 
objectives and not have the two separated.
    There are big challenges ahead. No. 1 is to reverse the 
decline in supply. We estimate that in round numbers we need 
half a trillion dollars' of investment in the upstream natural 
gas business to get the kind of supply that we need in 10 
years. We need to add 50 percent more reserves in this decade 
than in the last decade. We will need to connect new frontiers 
of gas development, including, as Admiral Watkins pointed out, 
the Arctic, and reduce the pressure on the gas infrastructure 
system in our country. We need to recognize the very large 
reliance we are making and we are putting on natural gas to 
power the growth of our new economy.
    Thank you.
    [The prepared statement of Daniel Yergin follows:]
    Prepared Statement of Daniel Yergin, Chairman, Cambridge Energy 
                          Research Associates
    This hearing is very timely, and the Subcommittee is to be 
congratulated for its focus on this subject. The tightening world oil 
and North American natural gas markets and higher prices at the 
gasoline pump have pushed energy policy considerations to the fore 
again. Renewed consideration is at hand about the adequacy and security 
of supply, and of energy and related foreign policy issues. This 
hearing will be an important contribution to the national understanding 
on these matters.
    In my testimony, I seek to help set the scene for this 
consideration by providing a context both for something that is vexing 
the American people--gasoline prices--and, more generally, on world oil 
and natural gas markets. The discussion on gasoline is drawn from the 
new study by Cambridge Energy Research Associates, Gasoline and the 
American People, which we are releasing today. This is a new version of 
a study we originally did during the Gulf Crisis almost a decade ago.
Gasoline and the American People \1\
---------------------------------------------------------------------------
    \1\ Gasoline and the American People, Cambridge Energy Research 
Associates, May, 2000
---------------------------------------------------------------------------
    The best known price in America is that of gasoline. Americans see 
it posted along the road a dozen or two times a day; they pull in to 
fill up every week or ten days, if not more. It's also a price that--
perhaps because of that visibility--can generate a lot of heat, 
especially when it is going up, as it has in 2000.
    This is, in fact, a price that tells a complex story--of global 
supply and demand, of technological change and environmental 
consciousness, and of shifting consumer tastes and social change. 
That's the story we seek to tell in Gasoline and the American People. 
We hope that it provides not only the context for understanding what 
makes the price what it is at any give time at the pump but a window on 
how life in America is changing.
    We produced the first edition of Gasoline and the American People 
almost a decade ago, during the Gulf Crisis, when major disruption 
threatened the security of world oil supplies right down to the retail 
market. The timing of this new edition is highlighted by the current 
volatility in gasoline prices, the need for a framework, and the 
considerable changes in consumer tastes and American society over the 
decade since. The American people have plenty of reason to be puzzled. 
In 1997, the national average gasoline price was $1.23 per gallon in 
current dollars. It fell briefly to a low of 95 cents in early 1999. In 
inflation-adjusted terms, that price was lower than at any time since 
recorded prices began--lower even than average prices in the Great 
Depression. In not much more than a year since, however, gasoline 
prices have exceeded $1.50 a gallon on a national basis and, in some 
areas, have been over $2.00--the highest they had been since the Gulf 
Crisis of 1990-91.
    Price: To make sense of price, one must think in inflation-adjusted 
terms. Those with longer memories might remember 30 cent a gallon 
gasoline from the 1960s; but, in today's prices, that would be the 
equivalent of $1.75. More people will remember the $1.25 from 1980. But 
today that would equivalent to over $2.50 per gallon. For the purposes 
of comparison, let us put all gasoline prices into inflation-adjusted 
dollars. We use 1999 real or constant prices (which, owing to low 
inflation, are very close to current prices). With that, it becomes 
clear that the long-term trend in gasoline prices is down. The major 
exceptions are the periods of crisis--the oil shock years of the 1970s 
and the Gulf Crisis of 1990-91. Since 1991, gasoline prices (again 
inflation-adjusted) have continued to come down, and even at the high 
prices of this spring are considerably lower than they were in the 
1950s and 1960s in most areas of the United States.
    Why the Fluctuations? Despite the long-term trend, prices move up 
and down a great deal. These can be caused, among other things, by 
political events, shifts in the supply and demand of fuel, weather, the 
level of inventories, disruptions in refinery operations, and the 
introduction of new environmental standards. The recent sharp increases 
in gasoline prices are the result of higher crude oil prices, very low 
inventory levels of gasoline, and new environmental regulations. At the 
recent level of $1.52 in late May 2000, they are about 25 to 30 cents 
per gallon higher than the middle-1990s and about $1 below the peak 
years of 1980 and 1981.
    How much in the gas tank? In 1999, the average driver used about 
690 gallons and paid $780 over the course of the year. That compared--
using 1999 dollars--to $936 in 1990 and $1630 in 1980. If the price of 
a gallon goes up 10 cents over the entire year, compared to the 
previous year that will cost a motorist an additional $70.
    Taxes: One thing has gone up, and that is taxes at the pump. The 
price that motorists pay for a gallon is made up of many things--the 
price of crude oil, transportation and refining costs, the costs to 
operate the filling station--and tax. In 1999, the tax component of the 
price was about 40 cents per gallon or 34 percent--just about the same 
percentage as the cost of the crude oil. About half that total, 18.4 
cents, was Federal tax, and 20 cents was the average state tax. (The 
lowest state tax is Georgia, at 7.5 cents; and the highest, 
Connecticut, at 32 cents.)
    Compared to Other Countries: From an international perspective, 
however, what is striking is how much a bargain gasoline is in America. 
Currently, the average price in the United States is $1.53 per gallon--
compared to $4.69 in Britain and $3.87 in France. The reason for the 
difference is almost entirely one thing--tax. While the tax take by 
governments in America is just 34 percent of the retail price, it is 82 
percent in Britain and 80 percent in France.
    Where? Motorists may still say ``fill'er up,'' but there are a lot 
fewer people to respond today than 20 or 30 years ago. Americans have 
opted for the lower prices of self-service over the higher prices that 
come with full service. Today, about 95 percent of the retail stations 
offer self-service. And more and more motorists (and their families) 
pull in not only to fill up on gasoline but also on carbohydrates and 
caffeine. For fully 45 percent of retail outlets now include 
convenience stores. One of the biggest costs of operating a station is 
the land, and marketers have found that they can do better by 
bolstering the revenue stream from gasoline with a separate revenue 
stream from hot dogs and Hostess Twinkies. The next stage is ``co-
branding,'' in which a gasoline station shares the same real estate 
with one of the familiar brands of fast food--and maybe a dry cleaning 
establishment too. Still unclear is whether the huge gasoline stations 
of the European style hypermarket (about half of total gasoline sales, 
for instance, in France) are ready to emigrate to the United States. 
And to what degree will gasoline, even if still pumped at the station, 
be sold over the Internet?
    How much? Americans drive more and more. In 1980, the average 
licensed driver traveled 9,700 miles. In 1998, 18 years later, they 
were driving over 13,000--an increase of 34 percent. The number of 
licensed drivers is now over 180 million. But there are still more 
registered light duty vehicles--203 million--meaning that, on average, 
each licensed driver has 1.1 vehicles. A big source of new drivers--and 
more gasoline consumption and miles traveled commuting--has been the 
entry of a significant number of women into the labor force. Now that 
the rate of women entering the workforce has slowed and vehicle 
ownership has exceed saturation, that suggests that the increase in the 
number of miles driven will flatten out. Another major new factor is 
the astonishing growth in the driver population over age 65, which has 
increased from 15.5 million in 1980 to 26.2 million in 1998. Their 
numbers are increasing, but the mileage that they put on goes down, not 
up.
World Oil
    The main reason for the high oil prices of 2000 was the low oil 
prices of 1997 and 1998 and early 1999. More than anything else, the 
low prices resulted from the Asian financial crisis. Asia was then the 
region of strongest growth in oil demand. When Asia went into sharp 
decline, the oil industry was perhaps the first major industry to feel 
the effects. Asian demand had been expected to grow by a million 
barrels per day in 1998; instead, it fell by 600,000 barrels per day. 
Worldwide production, however, remained geared to the anticipated 
demand levels, and the extra supply went into inventories, which were 
soon overflowing. Thus--the price collapse.
    The domestic U.S. oil and gas industry was ravaged by the price 
collapse, and we continue to see the negative consequences today. The 
oil exporting countries were driven to act by the dire reality. Their 
own national budgets were being devastated. Mexico has done a 
remarkable job since the early 1980s in reorienting its exports away 
from dependence upon oil. But petroleum still provides up to 40 percent 
of the national budget. The collapse in prices meant cuts in spending 
on education, health, and social needs. For most of the major exporting 
countries, $10 a barrel oil portended social and economic instability.
    All this was enough to get the exporters together. OPEC countries 
not only agreed to new production restraint but also demonstrated a 
much higher degree of adherence than some anticipated. And non-OPEC 
countries, led by Mexico, collaborated.
    What the calculations did not do was foresee the rebound in oil 
demand, driven by economic growth. Few saw how buoyant the US economy 
would be in 1999 and into 2000. A year ago, the consensus view on 
economic growth in South Korea (the world's sixth largest oil market) 
was for zero economic growth in 1999. At it turned out, economic growth 
was almost 11 percent.
    The attention on oil when prices reached $30-plus underlines the 
fact that oil prices are one of the few prices--along with the price of 
labor and the price of money (interest rates)--that can move the 
economy and spook the stock market.
    One of the major changes from the oil turmoil years of the 1970s is 
the relative absence of confrontation that characterized that earlier 
period. Nor longer is there a North-South struggle. Instead, we are in 
an era of ``emerging markets.'' Countries like Mexico and Saudi 
Arabia--recognize how integrated their economies have become with the 
United States. Mexico worries about oil prices. But, especially post-
NAFTA it also worries a great deal about the health of the United 
States economy. Exporters also have assimilated the great lesson of the 
1980s--that customers count and you do not want to risk losing market 
share. They could see that prices at recent levels could well damage 
their interests in two ways. First, they could lead to a slowing of 
economies, reducing demand and thus creating new problems for the 
exporters. Secondly, although the oil industry has been cautious in its 
spending, persisting high prices could end up stimulating the 
development of a lot of new supply. And the exporters have no interest 
in seeing oil prices turn into a big campaign issue in the United 
States.
    The message is similar for the United States. We import about half 
of our total oil supplies, and our dependence will grow. We have a 
dense web of interdependence with many of the oil-exporting countries, 
of which oil is but one, though a most important element.
    The current supply picture is taut, which means that the market 
could be subject to a great deal of volatility. With low inventories, 
prices could be driven up again by everything from another Iraqi 
showdown with the United Nations, political or technical problems in a 
major exporting country, or political tensions among exporters, to the 
pace of Asia's recovery and the strength of the U.S. and European 
economies.
    Continuing demand recovery in Asia and Latin America combined with 
further gains in North America are expected to propel world demand 
growth through 2002. We are looking at a 2.2 percent worldwide annual 
average increase in demand between 2000 and 2002c long as economies 
remain on the track on which they are. If prices are in the $30 or 
higher range for any period of time, we think that the impact of 
slowing economies will provide the inevitable if unfortunate 
corrective. Many of the exporting countries suggest that an 
``appropriate'' range for oil prices is $20-25 a barrel--a price that 
is often said to be good for consumers and good for producers. But the 
much wider band of $10 to $34 a barrel within one year underlines the 
inherent volatility in the world's most important commodity market and 
the difficulty in getting the price ``right.''
U.S. Natural Gas
    Much of the energy attention in recent months has been focused on 
oil. But the U.S. natural gas system is also characterized by very 
tight supply. The spring market and recent heat wave have shown how 
tight: Prices today are 70 percent higher than they were this time last 
year. In CERA's view, for the first time in many years, there is real 
uncertainty about the ability of North American supply to meet demand 
without sharp price rises. Demand pressures are intensifying, while 
there are few signs yet of growth in supply. The differences are being 
made up by withdrawing supplies from storage, where the levels are very 
low. There is a similarity here to the oil market. Pressures on 
inventories are driving the market. But there are major differences, 
too. In contrast to the oil-exporting nations, there are no suppliers 
withholding supplies from the market. And there is no capability to 
ramp up production quickly to reduce the pressure in the market. In the 
months ahead, we may see prices at new, higher levels that have not 
been seen since the emergence of natural gas spot markets in the mid-
1980s. How high will prices go this summer? That depends on how hot the 
summer. We could well expect $3.50 to $4.00 levels. With a hot summer, 
prices could spike to $5.
    In examining the outlook for the industry in our new study, ``The 
Future of North American Natural Gas,'' we see major challenges. 
Natural gas is a critical fuel for the United States both for energy 
and environmental reasons. It currently provides 23 percent of our 
total energy. It heats 53 million homes; it is a major feedstock for 
industry; and, increasingly, it will be the key to our future 
electricity supplies. Electricity will continue to become ever more 
central to our economy; the digital economy depends upon a very high 
quality electricity supply system. But that system, in turn, will more 
and more depend upon natural gas. Indeed, the United States is making a 
major bet on future gas supplies--without realizing it. Currently, just 
15 percent of our current electric generating capacity is fired by 
natural gas. However, 96 percent of proposed new generating capacity is 
gas-fired. The reasons are cost, flexibility, technology, and 
environmental attractiveness.
    Demand for natural gas is currently very strong, owing to the 
completion of new gas-fired power generation plants, and as economic 
growth stimulates the demand for the power that both new and existing 
gas-fired generation units an produce. At the same time, high decline 
rates in existing natural gas production require higher levels of 
drilling to maintain supply--let alone keep pace with demand.
    The supply response--new exploration and development--has been slow 
in coming. The reasons are many and varied. One is the continuing 
impact of the 1998-99 price collapse, which devastated the cash flows 
of the upstream oil and gas industry and continues to leave many 
companies cautious and capital-constrained. An industry that has been 
hurt by boom-and-bust cycles is leery of setting off another one. The 
industry has downsized so much in response to lean times that it faces 
a shortage of labor. At least until recently, capital that might 
otherwise have flowed into the industry instead went into the 
technology sector of the stock market--although that may well be 
ending.
    The result is that US supply is likely to be down this year, while 
western Canadian supplies are only now beginning to grow, and then only 
modestly. Reversing the recent declines in US wellhead supply requires 
offsetting higher decline rates in existing production and moving 
beyond the current plateau of drilling. Greater investment is needed in 
exploration as well as in development areas. Nevertheless, CERA expects 
supply to begin to show year-over-year increases in the United States 
toward the end of 2000, and in Canada supply growth is at last expected 
to be evident this spring.
    CERA does believe that there is the gas supply potential to meet 
the challenges of increased demand from power generation at a price 
that would not discourage that market development. It is very important 
to avoid short-term government intervention in the market that would 
discourage investment in supply. Moreover, we need to consider how to 
facilitate natural gas development in such a way as to support overall 
environmental objectives. There are big challenges ahead. The number 
one is to reverse the decline in supply. To meet the target of 30 TCF 
in ten years, compared to the 22 TCF today, will require something on 
the order of half a trillion dollars in U.S. upstream development. We 
will need to add 300 to 350 TCF of new reserves in this decade, which 
is 50 percent more than we added in the 1990s. We will need to connect 
to new frontiers of gas development, including the Arctic, and reduce 
the pressure on the gas infrastructure system in this country. And we 
need to recognize the very large bet that we are making on natural gas 
to power the growth of our new economy.

    Mr. Barton. Thank you, Doctor. I am a little disappointed; 
in the Harvard Man, you have got this new study out, and you 
didn't have a copy out to hold up for the cameras.
    Mr. Yergin. Thank you. I will learn from my mistakes.
    Mr. Barton. We are now going to hear from another Harvard 
man, the Honorable Phil Sharp, who is the past chairman of the 
subcommittee and is the person that I try to model myself after 
as we hold these hearings. Congressman Sharp, when he was the 
subcommittee chairman, was always courteous and fair and 
thoughtful and comprehensive. And that is a tough act to 
follow. But I enjoyed serving with you when you were the 
chairman of this subcommittee and I enjoy having you on the 
panel today to give us your thoughtful comments on what our 
energy policy should be.

                     STATEMENT OF PHIL SHARP

    Mr. Sharp. Thank you, Mr. Chairman, especially for those 
flattering remarks. And I am delighted to be back here with the 
committee and the members, some of whom know how wrong I have 
been on some of these issues over the years and I trust will 
not hold me to account at this point. And because of that 
battered experience from 1975 until 1995 on this committee, I 
do have a few general remarks to make which I hope have some 
relevance today, because I hopefully learned some things from 
all of us in this country from some of the mistakes that we 
made in the 1970's.
    Mr. Barton. We are not going to talk a lot about NGPA.
    Mr. Sharp. I would have to argue that ultimately that 
proved to be successful. It was a very difficult route to a 
good end, which I would admit readily to. But, Mr. Chairman, 
what I would like to do is just mention a few general 
principles, because already I hear the voices in the political 
system on both sides of the aisle that might deflect us from 
some things that may not be wise for the country, in my view 
and many others', because I had to learn an awful lot from 
everybody else.
    First, our basic energy policy on additives and natural gas 
and oil is to rely on the competitive marketplace. And we must 
stick with this policy. We had an intense ideological and 
political battle in this country for many years. It was very 
difficult to resolve and very difficult to finally get a 
bipartisan agreement which is effective in this country and 
which perennially we are being drawn to undermine in various 
ways.
    And so I would strongly urge that we keep in mind no price 
controls, no efforts to temporarily try to dictate the price 
and allocation of energy supplies on this front. Every time we 
have turned to that, we have made major mistakes. Now our 
policy, as everyone here has been articulating, is certainly 
not one just of laissez-faire. There are many supplementary 
policies in which we tried by various techniques, from research 
and development to tax incentives to regulations, to alter the 
forces of the marketplace on both the production and the 
consumption size. Many of those are wise and some of them we 
find great difficulty making work in any consistent manner. But 
the unsettling price swings of this last year have again raised 
doubts of this basic policy of sticking with the marketplace.
    And my overwhelming advice, I think, from all of us on the 
panel, would be just say no to any proposals for controlling 
price. Now, nobody is talking about direct price controls, but 
there are in fact a number of proposals to indirectly try to 
control the price. These are not nearly as Draconian as direct 
price controls, but nonetheless they suffer the same disability 
because they seek to outguess a very complex and rapidly 
changing marketplace: proposals like drawing down the Strategic 
Petroleum Reserve, proposals like having a reserve in New 
England for fuel oil, proposals like requiring the private 
marketplace to maintain a certain level of stocks. And I would 
applaud the President and this Congress for not drawing down 
the Strategic Petroleum Reserve and not deciding to do that 
during this price increase.
    Now we all know that the prices in the marketplace are not 
fair to everybody equally. So we do need and we do have and we 
should aggressively have policies that try to help those people 
most severely damaged and least able to cope with price swings, 
such as the low income energy assistance program.
    Mr. Chairman, let me suggest as a second proposition that 
we are interdependent on the world energy markets. We struggled 
mightily with the rhetoric in the 1970's of being independent, 
and of course it was what most Americans desired and it was a 
shock to us in the seventies that we were so involved and so 
dependent on the world oil market. But the hard fact and the 
reality is we are very much a part of that marketplace and we 
make a big mistake when we try to pretend anything otherwise. 
There were no sets of policies anybody has ever recommended 
that are acceptable economically, particularly in this country, 
to guarantee us independence. It is wise, as you and others 
have been pointing out, for us to try to reduce our reliance on 
oil in this marketplace for a variety of benefits. But we want 
to make sure that what choices we make actually make sense 
economically and from an environmental point of view.
    It also behooves us, obviously, in our international policy 
to recognize that we have a major economic and strategic stake 
in open markets. That means we don't restrict our imports, we 
don't restrict our exports. We have a major, major interest in 
the development of alternative other sources of oil outside of 
the Middle East, such as in the Caspian Basin. We have a major 
interest in the long-term development of cleaner fuels, 
renewable fuels here and abroad. We obviously have diplomatic 
interest in keeping the peace abroad.
    The third big point, which is no surprise to anybody here, 
is that if we are going to ensure adequate supplies that means 
we need both supply and we need to work on the consumption side 
as well. You have heard a number of proposals, and some of them 
are very serious and well founded, of ways that we have got to 
try to enhance our oil and gas exploration and development in 
this country. But at the same time, I would strongly urge you 
to take seriously those practical and reasonable proposals to 
try to make us more efficient in the ways in which we use 
energy in this country. And we have done a great job since the 
1970's, partly by government policy, largely by the price in 
the marketplace, of improving energy and oil sectors.
    The fourth major point is that oil and gas markets and our 
energy markets are dramatically shaped by our environmental 
policy. Indeed, the reality is that much of our energy policy 
is really environmental policy. It has to be. In fact, oil 
production and distribution and use have the greatest impact on 
our environment--land, air, and water quality--and it is 
inevitably tied up together. Therefore, it behooves us to be as 
rational and sensible and scientifically driven as we possibly 
can.
    And there is a great need for Congress and the 
administration in the years ahead to see if they can 
rationalize the Clean Air Act and the energy environmental laws 
in general. This is a Herculean task. It should not mean 
backsliding on our environmental commitment, but we do need to, 
where we can rely on market mechanisms like in the 
NOX market, as we did in SOX, 
SO2, under the Clear Air Act of 1990.
    The second part of that is more difficult to politically 
swallow perhaps today, but that is, we have got to address a 
prudent path on carbon dioxide and other greenhouse gases. The 
reality is people are pressing scientifically, politically, all 
the around the world to do this. Our energy markets must 
respond to that. They are indirectly already taken into 
account, and we need to get some greater assurance as to what 
that path is going to be so the long-term investments that have 
to be made on production and consumption will know what the 
rules are.
    Finally, on the environmental front, it is critical that we 
continue, as several members of the committee and both parties 
already indicated, support for renewable fuels. But we mustn't 
kid ourselves. They are not suddenly going to replace our 
fossil fuels and our nuclear fuels, and we have got to consider 
ways in which we enhance the clean and efficient use of those 
traditional resources. Much of that is a matter of research and 
development.
    Finally, and I am sorry to run over, Mr. Chairman, but one 
of our major priorities here, as you and others have 
articulated, is that electricity and the electricity markets, 
which, by the way, increase the demand for gas, must be 
addressed at the Federal and State levels, because the greatest 
potential, in my judgment, of interruption of supply of energy 
may be in the electricity markets rather than oil and gas 
markets, although I don't mean to diminish at all the intensity 
of your interest in oil and gas issues here. The fact is, we 
are finding it is more difficult to create competitive markets 
with this enormous transformation undertaking.
    It is much more difficult than it was in gas or oil for a 
variety of important reasons. Part of it relates to the nature 
of electricity, part it relates to the fact that the public 
policy issues that have to be resolved are bound up in a 
hodgepodge of governmental jurisdictions at the Federal and 
State level. Our political system is not designed to try to 
create a nice smooth interstate market, and it takes a lot of 
effort and a lot of cooperation to do that.
    As you know, Mr. Chairman, although the task force I 
chaired for the Secretary on this recommended, as one of its 
many points, the reliability legislation that you have 
incorporated in your bill, neither I nor anybody on that task 
force believe that alone is enough. In fact, it is one of the 
most minor parts of having reliability in the electric utility 
industry, because the rules have to be sufficiently in place, 
and investment will be attracted into generation, into 
distribution, and into the changes in consumption patterns. But 
the electricity system itself as we transform it, will become 
incredibly, in my view and many others', more efficient at all 
levels and that will help us on the environmental front and it 
will help us on meeting our energy needs.
    I applaud the effort of this subcommittee last fall to pass 
an electricity bill. I would personally strongly disagree with 
a couple of provisions that I suspect the Chairman would.
    Mr. Barton. Did vote for it, though.
    Mr. Sharp. I know you did, sir. I probably would have if I 
had been in your shoes as well. I think it is critically 
important that progress be made forward, and I know one of the 
values some Americans forget about the Congress, is that the 
multiple steps give it a chance to change and alter and adjust 
to what it learns. And the reality is the political system will 
never focus on these issues intensely until they start to move. 
Once they start to move, boy, you heard from everybody. I am 
sure you plainly know that; I don't need to tell you.
    But, Mr. Chairman, I appreciate very much your having me 
back. I hope that we can move forward. I will answer any 
specific questions that you have.
    [The prepared statement of Phil Sharp follows:]
  Prepared Statement of Phil Sharp, harvard Electricity Policy Group, 
        John F. Kennedy School of Government, Harvard University
    Mr. Chairman, thank you for inviting me to testify. For the record, 
my name is Philip R. Sharp. Currently, I am a Lecturer in Public Policy 
at the John F. Kennedy School of Government, Harvard University. 
Recently, I chaired the Secretary of Energy's Electric System 
Reliability Task Force which issued its final report, Maintaining 
Reliability in a Competitive Electric Industry, in September, 1998.
    From 1975 to 1995, I was a Member of Congress from Indiana and for 
eight years had the honor of serving as Chairman of the Energy and 
Power Subcommittee.
    During those twenty years, I participated in nearly all major 
legislative efforts regarding energy policy and clean air policy as 
well. During that time I supported policies which proved effective and 
others which did not. Fortunately, for me, no one is keeping score.
    Chairman Barton, I applaud your efforts in taking on the challenge 
of these complex issues. Undoubtedly you and the committee are being 
pressed with a plethora of recommendations. You certainly have my 
sympathy.
    Drawing from my battered experience on this committee, I would like 
to make a few general observations and will be happy to respond to 
specific questions, if I can.
Our basic energy policy for assuring adequate supplies of oil and 
        natural gas is reliance on the competitive market. Stick with 
        it.
    That has been the policy for two decades. After years of intense 
political and ideological dispute, after several ``energy crises,'' 
after experimenting with extensive economic regulation, a broad 
consensus emerged toward the end of the 1970's that market forces, not 
the government, should determine the price and allocation of oil and 
gas supplies--that market forces would be the main determinant of how 
we produce, distribute, and use oil and gas. It is a bi-partisan 
policy. It is an effective policy. It is not well understood.
    Our policy has never been, however, simply one of laissez-faire. 
For reasons of equity, security, and environmental protection, we have 
a host of supplementary policies that seek to shape those market 
forces. Some of these supplementary policies have big impacts on the 
oil and gas markets and should be periodically re-examined.
    The unsettling price swings of this past year naturally raise 
doubts about our market policy; and they inevitably give rise to 
political calls for short term-policies that will stabilize prices to 
avoid short term pain--either for producers or for consumers.
    The overriding lesson from the past: ``just say no'' to proposals 
for controlling prices--directly or indirectly. Be wary of the siren 
song that lures the government to try to smooth the price path in a 
turbulent market.
    No one yet is calling for direct price controls. Perhaps, we have 
truly learned how ineffective, counterproductive and costly oil and gas 
controls can be for consumers and the economy. Perhaps, there is also 
memory of how politically difficult it was to change or abandon them. 
Like many others in Congress, I underwent the metamorphosis from 
supporting controls to helping end them.
    Today, however, we hear proposals aimed at controlling price 
spikes--not directly, but indirectly: release crude oil from the 
nation's strategic petroleum reserve; create a regional product reserve 
in New England to quell future spikes; require private suppliers of 
fuel oil to maintain stocks at levels set by the government.
    While not nearly as draconian as direct price controls, these 
proposals suffer some of the same disabilities. They assume the 
government can regularly out-guess the complex and rapidly changing 
market place. They are not likely to produce the desired result. They 
seldom can be invoked in a timely fashion.. They often produce 
unexpected and undesirable consequences.
    Earlier this year, the President was wise not to draw down the 
Strategic Petroleum Reserve; and the Congress was wise not to 
collectively press for such action.
    Like it or not, in our enormously complex economy, it is the change 
in prices which stimulates added production, which moves products to 
where they are needed (like fuel oil to New England), and which 
encourages consumers to take seriously energy efficiency.
    Quite naturally it is harder to focus on the positive benefits of 
the market when the imperfections are apparent and the pain is real. 
But our market policy should not be casually dismissed or changed. Only 
if the economy is seriously threatened should the government utilize 
the Strategic Petroleum Reserve or adopt other short-term policies 
designed to control the price and allocation of supplies.
    The pain of price swings and the benefits of the market, of course, 
are not evenly distributed. That is why supplementary policies such as 
low-income energy assistance and weatherization are the compassionate 
courses to pursue, rather than efforts to control the price level.
We are energy ``interdependent''--integrally connected to world oil and 
        gas markets.
    While we Americans today are far more cognizant of 
``globalization'' than we were in the 1970's, it is important to remind 
ourselves that we live in an energy interdependent world which is very 
difficult for most of us to understand. This may explain why some of 
our rhetoric about energy policy is so at odds with reality and why so 
many policy proposals miss their mark.
    One of the major lessons from the 1970's: there is no set of 
acceptable import-reduction policies which can achieve anything close 
to oil ``independence.''
    In nearly every conceivable way, we are a part of the international 
market--in terms of products, prices, capital investment, environmental 
impact, etc.
    There certainly are benefits to us and to the world market if we 
can lessen our reliance on oil. But when judging proposals that purport 
to cut our imports, it is important to carefully ascertain the real 
benefits and carefully weigh them against the real costs--economic and 
environmental.
    Cutting US imports, for example, by several million barrels--would 
diminish our drain on the world export market and diminish the 
potential impact on parts of our economy if there were a disruption in 
Persian Gulf production. But such a reduction in imports would in no 
way end our strategic concern with world oil markets in general and 
Persian Gulf supplies in particular. US crude oil prices are largely 
set by the world market; the economies of our major trading partners 
rely heavily on oil; and nearly 2/3 of the world's proven oil reserves 
are located in the volatile Persian Gulf region.
    We have major stakes in the promotion of open energy markets, the 
diversification of sources of oil (as in the Caspian basin), the long-
term development of cleaner fuels, coordinated diplomatic efforts to 
advance peace in the Middle East., etc. etc. The range of international 
policy concerns is broad.
``Ensuring adequate supplies of oil and gas'' is a question of demand--
        as well as supply.
    As the Congress considers proposals to facilitate production and 
distribution, it should also consider proposals that advance efficiency 
in the use of energy.
    In the 1970's, there was much rhetorical fighting over whether we 
could ``produce'' our way out of the crisis or ``conserve'' our way 
out--as if we had an ``either-or'' choice. In the end, of course, the 
market dictated both; and policies were adopted in the name of doing 
both.
    Efficiency improvements have played and will play a major role in 
helping us economically fuel the economy in environmentally acceptable 
ways.
    Since the 1970's, significant efficiency gains have been made in 
nearly every sector of consumption. While market prices and market 
forces have been, and should be, the central driver of efficiency, 
government policies undoubtedly contributed to those gains--through R & 
D, tax incentives, jawboning, and, in a few instances, minimum 
efficiency standards.
    In the United States, if we are talking oil, we are talking 
automobiles--that is, passenger vehicles. It is disturbing that the 
projections for fleet fuel economy improvements are so dismal. This 
must be a matter of public concern.
    One of the chief reasons for moving to competition in the electric 
utility industry is to accelerate adoption of efficiency innovations 
throughout the system--from the generator to the customer.
Oil and Gas markets--all energy markets--are dramatically shaped by 
        environmental policies.
    This is necessarily so, because energy production, distribution and 
use have such significant impacts on the quality of our air, land, and 
water.
    In the next few years, the Congress would perform a valuable 
service if it could rationalize and modernize our environmental laws, 
especially the Clean Air Act, so that we can more effectively protect 
the environment as economically as possible.
    This may be a Herculean task. Where possible, for example, the law 
needs to allow more opportunities for market implementation of 
federally set requirements, as we did for SO2 in the 1990 
Amendments. Such legislating, however, should not mean backsliding on 
scientifically-identified environmental threats
    In the next few years, the United States in conjunction with other 
nations must come to grips with CO2 and other green house 
emissions and chart a prudent course--the least costly course--for 
reducing the potential impact more and more scientists claim these 
emissions will have on the global climate. It is increasingly untenable 
to engage in political denial on this issue. There will be no quick and 
easy policies.
    Participants in energy markets regularly make decisions which have 
long-term impacts on the way we produce and use energy--decisions which 
therefore have environmental consequences for years to come. The 
Congress must do the best job it can in shaping the authority of EPA in 
order to provide clarity and consistency in the rules that will govern 
those market decisions.
    It is very important for the government to support the development 
of renewable fuels in order to meet our long-term energy and 
environmental needs. There is no realistic scenario, however, in which 
the United States and much of the world will not be heavily dependent 
on fossil and nuclear fuels for the foreseeable future. Therefore, we 
must continue efforts to find cleaner, safer, and more efficient ways 
to use our main energysupplies.
Electric issues must receive priority attention.
    Our electric markets are undergoing a radical transformation. 
During this difficult transition to competition, we face increased 
risks of supply disruption. That was a major conclusion of the 
Secretary of Energy's Electric System Reliability Task Force.
    Creating competitive markets in electricity is proving more 
difficult than was deregulating oil and gas. The nature of electricity 
requires a high degree of physical coordination to keep the system 
operational. The market issues are complex. Important public policy 
issues fall into a hodge-podge of governmental jurisdictions.
    Assuring supply requires a number of public policy decisions in 
order to facilitate market development and attract needed investment. 
This, of course, is not simply a matter of adopting the ``reliability'' 
legislative proposal which deals with making and enforcing reliability 
standards.
    Although I disagree with a couple of the provisions in the bill 
passed last fall by this Subcommittee, Mr. Chairman, I certainly 
believe you and the subcommittee deserve great credit for getting the 
legislative process moving and for trying to resolve exceptionally 
thorny issues.

    Mr. Barton. Thank you former Congressman.It is amazing to 
me--before I recognize Mr. Martin--we ask you all to provide 
written testimony; you do that. We ask you to summarize it in 5 
minutes. We give you 7 minutes, and you take 10 minutes.
    Let me welcome the Honorable Bill Martin. I first met him 
when he was in the National Security Council under President 
Reagan. He later became Deputy Secretary of Energy, and I 
worked with him there. He is one of the truly Renaissance men 
that I have had the pleasure to meet since I have been a 
Congressman and we are delighted to have you here. We are going 
to give you 7 minutes also and see if you can give us back a 
little bit of that perhaps, because we still have two 
distinguished members from the Clinton Administration that we 
want to give a chance have something on the record.

                 STATEMENT OF WILLIAM F. MARTIN

    Mr. Martin. Thanks, Mr. Chairman. It is real tough to 
follow two Harvard types and an Admiral. I was thinking what 
Ralph Hall said. He has left, of course, but Steve will 
appreciate this. I come from Oklahoma. My great grandfather, my 
grandfather, my father, were all wildcatters and of course they 
went out of business. That is why I had to go into government.
    I want to give a bit of a story about natural gas today. 
The Admiral and my two Harvard colleagues and dear friends have 
told the story about energy security. Yes, we have a problem 
with rising imports, absolutely. Yes, we have a problem with 
rising CO2. Yes, the rest of the world is increasing 
their oil demand just like we are. The concentration of Persian 
Gulf exports in the next 15, 20 years is going to be 
unimaginable. Therefore, we need to take measures in order to 
protect ourselves, our environment, and our economy. So thank 
you for having these hearings.
    I am going to agree with most of what Dan Yergin said about 
natural gas. But we prepared a study for the Natural Gas 
Foundation using our model which, unfortunately, was developed 
at MIT, boys. We think in terms of numbers as opposed to 
arguments. But this model has been around for about 25 years 
and it has appeared before this committee many times--and the 
Senate. We are finally getting it right, I think. But it shows 
something very interesting about natural gas.
    I think we will all agree natural gas is the fuel of 
choice. Whether you are a Democrat or a Republican or producer 
or consumer, you like natural gas. But it is interesting, we 
found in the model that coal and nuclear power plants are being 
extended quite a bit for economic reasons. So the role of 
natural gas may not be as rosy in electrical generations. 
Certainly it is capacity, but what if new capacity is not 
replaced as quickly? So there might be a bit of a problem.
    So one of the things we looked at was the direct use of 
natural gas. Indeed this is a bit of a technology story on the 
demand side. If you look at the recent increase in use of 
turbines and fuel cells and the fact that any of us can someday 
have something the size of this chair at our house, which will 
actually convert natural gas into electricity and be economic 
and, by the way, be dependable, it is quite startling. And we 
are seeing companies, even on the stock market, that are 
investing in fuel cells going right for through the roof. So 
there a huge new technological development in natural gas.
    We ask ourselves, what role is this technology going to 
have in spurring natural gas demand? We had a rather 
encouraging result. In fact, we are even more optimistic than 
the EIA, we are probably more optimistic than anybody on 
natural gas demand. We say that natural gas demand could 
increase by 60 percent by the year 2020, roughly go from 22 
quads to 35 quads. For my Harvard friends, a quad, as you know, 
is about 10 to 15 million BTUs and a quad fuels Cleveland for a 
year, roughly--just for the sake of Harvard.
    Mr. Barton. We appreciate you for educating our Harvard men 
and our Congress.
    Mr. Martin. In any event, it is a good story for gas. It is 
not going to happen easily, meeting that type of natural gas 
demand--I think Dan and the Admiral said it well when they 
talked about access and the need for access to gas and oil and 
ANWR and the other resource base to stimulate gas production in 
this country--because we need to do some things on the supply 
side. We also have to make the rules of the game clear on the 
demand side.
    For example, let's take electrical appliance standards. You 
know, we all go to Sears and we see now here is an electric hot 
water heater, it is 90 percent efficient or something; you 
think gee, I am really doing something for the country if I buy 
that hot water unit. However, we have to recognize that 
electricity has so many enormous processing losses along the 
way that the reality is it is not 90 percent efficient, it is 
much less if you figure we lose two-thirds of the energy 
getting it to that electric hot water unit. Whereas if it is a 
gas or gas cooling, unit we don't have all those processing 
losses.
    So, for example, on the demand side, when the consumer goes 
to the store to make a decision between electric and gas, hey, 
you know, let's make it clear to him. And if he is doing 
something for the country and for the environment, let's make 
sure he is aware of that. So things like appliance labeling--
and there are a host of other things which again levelize the 
field for natural gas consumption and use.
    Now, let me mention here Dave Parker recently had a meeting 
of all the CEOs and heads of the energy associations, and they 
were talking about a national energy policy. It is interesting 
to me that while during the seventies when I worked with John 
Dingell, and in the eighties when I worked with you, Mr. past 
Chairman, they had fuel wars. But in reality our numbers 
suggest--and they are on page 12 and I commend them to you if 
you are numerative--these numbers suggest that if you increase 
natural gas demand by about 60 percent, and you could do it, 
and if you use this energy more directly you can provide the 
same amount of service to the consumer, whether it be 
automobiles or households or industry, for 6 percent less 
primary energy, again because you don't have these huge 
processing losses for electricity.
    However, this doesn't do in the coal industry. In fact, 
coal use actually increases and nuclear power does quite well. 
By the way, I am a firm supporter of nuclear power as well. We 
need nuclear power and we need renewables and we need 
efficiencies as well. But also this particular scenario which 
utilizes all domestic fuels efficiently reduces our 
CO2 by 900 million tons. So we actually make a bit 
of a commitment to climate change or acid rain or whatever the 
environmental problem is, and our oil imports are 2.5 million 
barrels less than they otherwise might be. So, in my view, it 
is a rather balanced energy scenario for the future.
    I commend the Congress as you look at your policies, look 
what the impacts are of the policies and see what they have to 
do with oil imports. My scenario, which started out to be a 
natural gas scenario, ultimately ended up as a basically 
balanced set of energy for all fuels.
    So in conclusion, Mr. Chairman, I would like to offer this 
for the record, and we also have a longer technological report. 
And I also want to again thank you for the chance to appear 
before the committee.
    Final point: This is a bit of a bipartisan study. Jack 
Gibbons, a very close friend of mine, took part in this, the 
President's Science Adviser. We had a lot of help from the DOE 
and also from distinguished colleagues at the World Resources 
Institute who are excited about natural gas not only for the 
national security but for the environmental contribution. Thank 
you.
    [The prepared statement of William F. Martin follows:]
 Prepared Statement of William F. Martin, Chairman, Washington Policy 
                              and Analysis
Natural Gas Consumption in the US Can Increase by 60 Percent in the 
        Next Twenty Years
    Washington Policy and Analysis (WPA) has prepared a number of 
energy supply and demand scenarios, both domestically and 
internationally for more than a decade. The methodology WPA uses is 
based on a spreadsheet model developed at MIT in the 1970s and refined 
over the years. WPA Global Energy is an international model that 
calculates energy supply and demand projections for 16 major countries 
and by regional breakdown. The model makes supply and demand 
projections for all fuels (coal, oil, gas, nuclear, renewables) across 
all end-use sectors (residential, commercial, industrial, 
transportation).
    In our projections, we take a relatively conservative approach to 
efficiency improvements and the real annual economic growth rate, 
basing these numbers on historical long-term trends. For a developed 
country such as the US, WPA believes that significant declines in 
energy intensity can be safely projected because of anticipated 
structural changes and rising productivity based on advanced 
information system innovations as well as economic and policy-induced 
urgings toward greater energy efficiency.
    Energy intensive industries tend to shift from mature economies to 
developing economies. This well-established trend is all the more 
evident today, as we move increasingly toward a service-based economy 
or perhaps more aptly, an internet-based economy. As the WPA model is 
global, with the US model representing just a segment of the global 
energy economy, it is noteworthy that the assumptions in our US 
projections are consistent with the global energy forecast. By 
maintaining this internal consistency, we avoid double counting that 
can occur in some modeling attempts. Overall the US economy is expected 
to grow at 2 percent annually in tandem with increasing energy 
efficiency.
    Within these parameters, how will we meet our energy needs over the 
next 20 years? What role will natural gas play? What will happen to oil 
imports? What will be the impact on our environment? How will this 
impact the US economy?
    We have answered these questions in a number of studies for a 
variety of academic, professional and government institutions, 
including: Council on Foreign Relations, The Trilateral Commission, the 
Senate Energy Committee, Los Alamos National Lab.
    In 1999, WPA approached the American Gas Foundation for support in 
our study of the US energy future. This was, in fact, our third study 
of national energy markets focusing on natural gas. WPA's first study 
completed in 1988, which was viewed as wildly optimistic in projecting 
a 25 quad consumption level by 2010, now seems rather conservative. Our 
latest study Fueling the Future: Natural Gas & New Technologies for a 
Cleaner 21st Century, reveals that consumption of natural gas could 
increase by almost 60 percent over current levels, from 22 quadrillion 
Btus (quads) in 1998 to 35 quads by 2020.
    The study was completed with the assistance of the following 
experts: Dr. William Fisher, Professor of Geological Sciences, 
University of Texas; Dr. John H. Gibbons, former Science Advisor to 
President Clinton; Dr. Nancy Kete, Director of Climate, Energy & 
Pollution Program, World Resources Institute; and Maurice Strong, 
Secretary General of the 1992 UN Conference on the Environment and 
Development in Rio.
A Business as Usual Scenario for the US Energy Future Emphasizes Coal, 
        Oil and Natural Gas
    Since the first WPA study on natural gas almost twelve years ago, 
the prospects for natural gas have improved, due in part to political 
and economic support for the natural gas industry and energy sector 
deregulation. Our energy economy has improved significantly over the 
last twenty years in terms of efficiency and our domestic energy 
resources have also expanded--especially coal, nuclear energy and 
natural gas.
    As we look to the future, we can expect that efficiencies will 
continue and that the market will be the primary driver of energy 
supply and demand. To analyze the further potential of natural gas two 
scenarios were examined by WPA. The ``business as usual'' projection, 
called the Current Trajectory in our study, assumes an economic growth 
rate of 2 percent per year on average, coupled with a continuation of 
present local and federal energy and environmental policies.
    This led WPA to the conclusion that both coal and nuclear power 
remain important for electricity generation. In fact, we expect nuclear 
and coal capacity is unlikely to decline as precipitously by 2020 as 
many forecasts predict. Our projections assume that approximately two-
thirds of all nuclear plants scheduled for retirement before 2020 
extend their licenses and remain operational. Natural gas consumption 
is also seen as growing from 22 quads in 1998 to 29.7 quads by the year 
2020, primarily in the electrical sector. We also see a significant 
increase in oil imports due in part to higher demand and declining 
domestic production.
    Under these assumptions, natural gas maintains market share in the 
electrical sector, but makes relatively few inroads into growing end-
use demand within the transportation, commercial, residential and 
industrial sectors. Foreseeable problems related to supply and demand 
constrain the expansion of natural gas usage.
    On the supply side, WPA assumes that much of domestic natural gas 
reserves, both onshore and offshore, remain restricted or off-limits to 
exploration and production. Additionally, we assume that pipeline 
growth is constrained by factors including siting problems and 
inadequate capital investment based in large part on uncertainties 
about future demand in specific areas.
    However, this scenario should not be considered a constrained 
``business as usual'' case. It postulates substantial increases in 
efficiency--along with other advances in technology on both the demand 
and the supply side. Yet, this ``conventional wisdom'' scenario 
presents a number of problems for our energy future. It indicates a 
substantial increase in CO2 levels, precipitously high oil 
import requirements, and an economy operating at less than optimum 
energy efficiency.
Natural Gas Can Play a Larger, More Direct and Dynamic Role in Meeting 
        Our Energy Needs
    WPA looked at an alternative case for the US energy future, one 
that emphasizes the developments in natural gas end-use technology and 
its potential impact on energy efficiency, environmental quality, and 
energy security.
    This High Gas Use scenario reflects conditions in which consciously 
``pro-gas'' policies are adopted on the supply and demand side, 
avoiding ``command and control'' strategies, but endeavoring to remove 
market barriers of various kinds. In this case demand exceeds 35 quads 
by the year 2020.
    We see steady penetration of gas into the electrical market, but 
the key to the success of this scenario is the penetration of end-use 
markets, including vehicles powered in a variety of ways by natural 
gas, gas-cooling and increased use by key industrial sectors. This 
projection foresees greater use of gas for distributed generation to 
site-based power for the industrial and commercial sectors, and by 2020 
even the residential sector will see growth in this category. The 
increasing share of distributed generation is reflected in WPA's 
projections by end-use sector. In the electricity sector, coal and oil 
show little or no growth in market share, but grow in absolute terms. 
In our Current Trajectory scenario, coal exceeds 61 percent of 
generation share, while in the High Gas Use scenario, it remains well 
below that at under 56 percent.
    Under this scenario natural gas consumption in 2020 is nearly 6 
quads above the Current Trajectory. Roughly half of the increase is 
attributable to the residential and commercial sectors where more new 
customers choose gas and more customers convert from other fuels to 
gas. This scenario also exhibits continued expansion in a number of 
successful new markets such as residential gas fireplaces and 
commercial gas cooling. Additionally, distributed generation in the 
form of reciprocating engines, microturbines and fuel cells advances, 
accounting for roughly 20 percent of all new electricity generating 
capacity and 5 percent of total capacity by 2020.
    Industrial gas demand is roughly 2.5 quads higher, continuing the 
robust growth of the past 10 to 15 years. Although the cogeneration 
market becomes saturated, other forms of distributed generation are 
expected to prosper, and highly efficient heating, cooling and process 
equipment continues to evolve, enabling gas to remain the dominant 
industrial energy source.
    Natural gas cars, trucks and buses consume over 1 additional quad. 
Although these vehicles account for less than 1 percent of the overall 
vehicular market in 2020, they can make significant contributions to 
air quality and operational economics, primarily in fleet applications 
in congested urban areas.
There are Adequate US Reserves of Natural Gas to Meet a 35 Quad Future 
        at Reasonable Prices
    The decade of the 1990's has demonstrated the vast and diverse 
nature of the gas resource base. Further, the resource base continues 
to ``expand'' as estimates today are larger than those made in the 
early 1990's by the same estimators--despite the fact that we have 
produced and consumed over 150 trillion cubic feet in this period. Some 
components of today's gas supply were not even acknowledged 10 to 15 
years ago. Coalbed methane, for example, which now accounts for 6 
percent of domestic gas production, was not included in most resource 
base estimates prior to 1988.
    There were tremendous technological advances in the past 10 years, 
from 3D seismology to horizontal drilling and innumerable computer-
related breakthroughs. Similar advances will be required, and should be 
anticipated over the next 20 years, in order to satisfy a 35 quad 
demand level. Such advances will enable domestic production to increase 
from over 19 quads today to over 29 quads in 2020. Canada will 
contribute a slightly greater share in the future, increasing their 
exports from 3 quads per year to roughly 5 quads. Abundant worldwide 
and Alaskan gas resources offer mid-term insurance, while methane 
hydrates and other more exotic sources provide longer-term potential.
    The natural gas industry is capital intensive, and to meet the 
demand levels of the High Gas Use Scenario will require significant 
expansion of the gas production, storage, transmission and distribution 
systems. The number of oil and gas wells drilled, for example, may have 
to double from today's level to some 50,000 wells per year. However, 
this is well below the peak levels experienced in the mid-1980's--
70,000 to 90,000 wells per year. The ramp-up for the production segment 
may prove to be more of a challenge than for the transmission and 
distribution segments.
    Natural gas prices will remain competitive, even at higher 
consumption levels. Price regulation of natural gas was eliminated 
roughly a decade ago and from 1987 through 1998 the price of gas 
delivered to consumers increased by only 3 percent while consumer 
prices overall increased by 36 percent. Thus, natural gas prices have 
declined significantly in real terms in this deregulated era.
    Although the gas levels analyzed in this report will exert somewhat 
more price pressure than conventional forecasts, we anticipate only 
modest gas price increases. In real terms wellhead prices will remain 
in the mid-$2.00 per million Btu (MMBtu) range and consumer prices will 
be relatively constant. The gas resource base expansion and 
technological advances of the past decade in finding, producing and 
delivering gas will continue. The factors that lead to declining real 
gas prices in the recent past will continue, creating future price 
stability and an increasingly competitive energy market will also 
ensure this stability.
A Shift to Greater and More Direct Use of Natural Gas Provides 
        Substantial National Benefits
    There are many reasons why the country should capitalize on this 
powerful national asset in order to clean up the environment, spur 
economic growth, reduce oil imports and conserve energy. Several key 
advantages of the High Gas Use scenario are shown below:

1. Natural gas is inherently cleaner-burning than coal or oil. 
        Switching from those fuels to gas will reduce greenhouse gas 
        emissions, acid rain, smog, solid waste and water pollution. 
        When burned, natural gas emits virtually no sulfur dioxide or 
        particulate matter and far lower levels of nitrogen oxides, 
        carbon monoxide, carbon dioxide and reactive hydrocarbons than 
        either coal or oil. Our projections show that CO2 
        emissions can be reduced by 930 million tons per year by 2020.
2. The efficiency of the natural gas system helps conserve the nation's 
        energy resources. When the entire energy cycle of producing, 
        processing and transporting energy is measured, natural gas is 
        delivered to the consumer with a total energy efficiency of 
        about 90 percent, compared with 27 percent for electricity. By 
        2020 overall US energy efficiency could be boosted by 6 
        percent, thanks in large-part to a shift to direct-use gas 
        technologies and distributed generation. To put that in 
        perspective, 6 percent (7.4 quads) is an amount equal to the 
        energy needed to power Cleveland for almost a decade.
3. Natural gas is a highly reliable North American form of energy. 
        About 85 percent of the gas consumed each year in the United 
        States is produced domestically. The balance is imported from 
        Canada. In comparison, roughly 60 percent of the oil used in 
        the United States is imported, primarily from the members of 
        OPEC. We project that oil imports could be reduced by about 2.6 
        million barrels a day (equivalent to Venezuela's current total 
        production levels).
4. Billions of dollars could be saved over the next decades as 
        distributed generation accounts for approximately 20 percent of 
        new electricity generation capacity, thus avoiding the need to 
        build approximately one hundred and fifty capital intensive 
        large-scale power plants
5. GNP and trade balance improvements would occur as global gas demand 
        spurs US exports of gas-using technologies. The US leads the 
        world in terms of its natural gas infrastructure, and US 
        companies are providing their equipment to countries in Latin 
        America, Europe and the Far East that are just beginning to 
        develop natural gas systems. As US export of gas-using 
        technologies accelerates with the global expansion of natural 
        gas usage, job creation and trade balance effects will have 
        major positive GDP effects.
Key Technologies Which Will Drive Natural Gas Growth in Residential, 
        Commercial and Industrial Markets Include Fuel Cells, 
        Microturbines, and Gas Cooling Equipment
    Our study analyzes evolving patterns of demand for energy in key 
economic sectors. The report highlights leading gas-using technologies 
that are instrumental in improving the utilization of natural gas in 
each of these sectors. The following technologies will have major 
impacts on the end-use energy consumption. By using natural gas 
directly at the source to generate power, they offer significant 
efficiency and environmental advantages. In contrast to the production 
and delivery of central station electricity that is only 27 percent 
efficient, gas is delivered to the consumer with an efficiency of 
roughly 90 percent. Gas consuming equipment is highly efficient, as 
evidenced by the fact that residential customers are using about 16 
percent less gas today than they were in 1980. These new technologies 
offer even greater efficiency improvements.
    Microturbines: Each microturbine, a small and high-speed power 
plant, consists of a generator, compressor, and turbine that share a 
single shaft, with a small rotor. Microturbines can be linked to the 
power grid or operated independently. Advantages include their small 
size, high reliability, low emissions, and quiet operation, with an 
ability to produce 25kW to 400kW of power. Microturbines are currently 
being tested and used commercially and could become cost-competitive in 
the residential sector by 2005.
    Gas Cooling Equipment: Natural Gas-powered cooling technology has a 
huge role to play in the commercial and eventually the residential 
sector. The three basic types of gas cooling are engine driven 
chillers, absorption chillers and desiccant dehumidifiers. Gas air 
conditioners have been available for decades, but they have not fully 
met customer needs in terms of performance, economics, and reliability. 
That is now changing. Residential gas absorption units are now 
available that use 30 percent less energy than their predecessors, have 
an expected 20 year life with low maintenance, are extremely quiet and 
produce no polluting CFC's or HCFC's. Gas air conditioning has great 
potential, particularly in the West and South. The clean, dry air 
produced by gas-based desiccant systems is ideal for use in hospitals, 
schools as well as office and retail space.
    Natural Gas Fuel Cells: A fuel cell is a self-contained unit that 
converts natural gas to electricity and heat through a chemical 
reaction as opposed to a combustion process. Fuel cells preclude the 
need to construct costly and disruptive transmission lines, and they 
protect consumers from power outages. They are energy efficient (40 to 
60 percent) and they can reduce a number of pollutants--including 
CO2 by 70 percent relative to coal-based electricity and 
NOX by 85 percent relative to the ultra-tight Los Angeles 
standards--with no discharge. There are a limited number of residential 
fuel cells in use today with installed costs currently in the $7,000 to 
$10,000 range, although mass production could cut the cost in half 
within the timeframe of this study.
The Enhanced Natural Gas Future Described in WPA's Study Incorporates a 
        Variety of Policy Assumptions
    A ``detached approach'' to the role of natural gas in the US energy 
mix is likely to fall short of capturing the full benefits of that 
fuel's resources and substitutive potential. It takes years to gain 
approvals for and to build pipelines, processing facilities, compressor 
stations, storage, and even local distribution networks. It could take 
the better part of another decade to develop some of the end-use 
products that can constitute a sizable part of natural gas demand in 
2020. Thus, both supply infrastructure and customer-pull were factors 
in WPA's conclusion that the current trajectory is toward consumption 
in the range of only 29 quads or so by that time.
    It is equally clear that conscious policy changes could boost that 
figure. An overarching one happens to be a concentration on total 
energy efficiency and a concomitant redirection of regulation and 
standards for both energy and environment. Life-cycle considerations 
would need to be emphasized, rather than first-costs alone. This is 
similar to a policy outlook that favors renewable energy in the longer 
run. It calls for thinking and planning for the mid-to long-term 
future, rather than a ``quick fix.''
    Our study did not spell out specific policy prescriptions, but it 
demonstrated that achievement of the High Gas Use scenario it describes 
for 2020 is feasible from the standpoint of timing, technology and 
economics. Seven policy assumptions were incorporated in the 
development of WPA's accelerated gas scenario. It is difficult to 
isolate individual assumptions and project the specific gas demand 
impact of each, but the overall collection of assumptions fosters an 
environment conducive to the realization of the accelerated scenario 
and its resulting benefits. These general assumptions are:

 Energy efficiency and environmental regulations will be 
        comprehensive, equitable and balanced
 The federal government, in recognition of increased potential 
        national benefits, will promote rather than discourage 
        increased natural gas consumption, and it will step up RD&D 
        activities
 The potential of new technologies will be fully recognized in 
        regulations that govern the natural gas industry
 Access to the natural gas resource base will not be unduly 
        restricted
 The costs of providing gas service to new electricity 
        generating plants will not be borne by residential, commercial 
        and industrial customers
 Energy markets will be free and competitive, and natural gas 
        utilities will be allowed to compete fairly in these markets
 Natural gas industry safety and reliability will not be 
        compromised in a deregulated environment
Our Future Energy Policy Should be Based on Total Energy Efficiency to 
        Achieve Environmental, Economic and National Security 
        Objectives
    We have discussed a conventional view of the US energy future and 
contrasted that with one based on more use of natural gas directly by 
consumers. After examining these alternative cases, there is an 
appropriate question we must ask. Does the conventional wisdom as 
reflected in our Current Trajectory or the EIA Reference Case, 
represent a sustainable energy outlook or, does the Higher Gas Use 
scenario offer a more sound mixture of our natural resources?
    If you look at the coal projection in the High Gas Use scenario, it 
is actually very similar to EIA--therefore our gas scenario does not 
harm the coal industry, which has long been the backbone of our 
electric generation. The estimate for nuclear power in our projection 
reveals that we expect less plant retirements than the EIA Reference 
case. An enhanced natural gas future does not preclude a strong role 
for nuclear power in the coming decades.
    One does distinguish that WPA's High Gas Use scenario offers 
significantly less dependence on foreign oil. Comparing the WPA High 
Gas Case to the EIA Reference Case reveals the energy security 
advantages of relying on North American reserves of natural gas. The 
differential in oil imports amounts to approximately 4.6 million 
barrels/day. At a price of $25/barrel, the net difference is equal to 
nearly $43 billion a year. In reality we present a much more 
sustainable energy future in the High Gas Use scenario because oil 
imports are kept to a more prudent level.
    What does make a difference in our scenario is slightly less 
dependence on electricity and more emphasis on direct-use of our 
natural gas resources--the difference in the amount of primary energy 
utilized in our two scenarios is approximately 7 quads in 2020. That 
represents a 6 percent improvement in the nation's overall energy 
efficiency. This reduced demand for primary energy supply would likely 
have a positive effect on energy prices, thus efficiency gains from the 
fuller use of natural gas translate into gains for consumers in terms 
of lower energy costs.
    Therefore, we commend to the Congress a prudent overall national 
energy plan--which includes all of the elements of our ``so called'' 
High Gas Use case. It is a prudent balance of fuels, an efficient and 
environmentally friendly scenario, and one that is strongly based on 
domestic technology and domestic resources.
    But this scenario will not happen by itself. It requires a 
concerted national effort to foster the fuller utilization of natural 
gas in accord with the principles of total energy efficiency--measuring 
efficiency throughout the fuel cycle--and sound economics.

    Mr. Barton. Thank you.
    And you finished with 7 seconds to spare. I think you have 
set the standard. A lot of numbers though, a lot of numbers. I 
am not sure we can all remember the numbers.
    Mr. Martin. I understand the numbers up here, sir.
    Mr. Barton. We want to welcome now the Administrator of the 
Energy Information Administration, the Honorable Jay Hakes, who 
is soon leaving to go to the Jimmy Carter Library down in 
Atlanta. And since this is your kind of swan song before the 
subcommittee, I want to say what a pleasure it has been to work 
with you in the years that I have been in the majority and you 
have been appearing before our subcommittee and the full 
committee on some occasions. You have always been fair, your 
studies have been well balanced. You have been very cooperative 
and responsive when the committee has asked for information.
    And I think we need to put on the record that EIA did 
predict the gasoline problem that we experienced last winter, 
about a year ahead of time, a year to 6 months ahead of time. 
So the fact that the Clinton Administration didn't act is not 
because they didn't know it was coming.
    So we wish you the very best down in Atlanta, and I am sure 
in the future you will be invited back to be a distinguished 
member or some panelist when you are in the private sector. So 
your testimony is in the record. We recognize you for 7 minutes 
to elaborate on it.

                     STATEMENT OF JAY HAKES

    Mr. Hakes. Thank you, Mr. Chairman. I am appreciative of 
your comments. One of the reasons we do the kind of work we do 
is to be of service to policymakers, and we have worked hard at 
that, and working with this committee has been a very positive 
experience for us.
    I would like to, just because the time is limited, go over 
a few of the major graphics in my presentation which, of 
course, is available in more detail. And this refers to some 
comments that have been made earlier, but it sort of puts it in 
graphic form, this gap between the supply, which is at the red 
line at the bottom over there, and consumption at the top for 
the United States.
    Mr. Barton. Could we turn the chart so that the TV cameras 
at least have a chance to see it? I know all the members can 
see it. But thank you.
    Mr. Hakes. What one can notice on the supply side is that 
we reached the peak of U.S. production for petroleum in 1972, 
and since that time have been more or less coming down. There 
have been some ups and some stable periods and we find 
ourselves now about 25 percent lower in U.S. production than we 
were at that peak back in 1972. So there has been a drop, 
although it has not been a complete dramatic fall-off.
    On the consumption side, you see it looks a little bit more 
like a roller coaster, and you got a peak in 1978 of about 19 
million barrels a day. And actually we are at about that same 
level right now. So we had this deep drop as high prices and 
things like CAFE standards brought down consumption, and then 
as prices collapsed, consumption started edging back up and has 
a lot of momentum in that direction.
    Mr. Barton. Mr. Administrator, I don't normally interrupt 
the testimony, but that chart shows about 10 million barrels 
per day of products of oil and it ends in 1998. Isn't it true 
we are about 8.5 million barrels of production a day?
    Mr. Hakes. One of the things that is a little confusing 
about the testimony is to make this chart work, you have to use 
all petroleum, which includes crude oil and natural gas 
liquids, refinery gains, and lease condensate. So in my later 
charts where I use just crude oil, you would have the number 
you are talking about. But to make the imports equal the 
difference between supply and demand, you have to include those 
other factors. So basically you have got a gap there of about 
10 million barrels a day.
    Imports rose rapidly in the 1970's, reaching a peak in 
1977. Then we had dramatic improvement as consumption dropped 
and U.S. production rebounded. And we actually didn't get back 
up to that level of imports until 1997. Again, though, there 
does seem to be a lot of momentum for more imports.
    Now, I wanted to concentrate on history so I left the 
projections off. I think, as we all realize, the projection 
business is a little bit risky. There are a lot of caveats that 
we would certainly put to any of our forecasts, but I think it 
is important to have some baselines that we deal with. You have 
about 25 million barrels a day of consumption in 2020, about 9 
million barrels a day of production, which is roughly what we 
have been seeing recently, and then a gap of 16 million barrels 
a day for imports.
    Now there is another way to look at this that I think is 
useful, and that is in figure 4 of my testimony where we look 
at who are the world's major oil producers. And if you go back 
to 1970, the United States was clearly the world's major oil 
producer. Between now and then, the Soviet Union ramped up its 
production for a while and for a while was the leading 
producer. But today we have fallen to the No. 3 position. This 
one is just for crude oil. It doesn't include natural gas 
liquids, that I included in the earlier chart. So we are still 
one of the world's major oil producers but we are not No. 1 
anymore.
    There is some encouraging news when you look at who 
produces the world oil, because crude oil production has become 
much more widely disbursed than it was in 1970. The production 
total of the top 6 producers amounted to 68 percent of the 
world's crude oil produced in 1970, but in 1999 the top 6 
countries produced just 45 percent of the world total, a drop 
from 68 to 45. Whereas 4 members of the top 6 in 1970 were 
members of OPEC, just 2 of the top 6 were from OPEC in 1999.
    Now, I don't want to slight natural gas. I want to refer to 
two graphics on gas that make some points that I think are also 
relevant to oil but I think can be seen most clearly for gas. 
Incidentally, we do have in our projections natural gas 
reaching the 30 trillion cubic feet level of consumption in 
2015. We had said 2013 back a year ago because of some of the 
factors that were mentioned about nuclear plants operating at 
higher levels and coal developments. We have moved that back to 
2015, but that is still a very substantial amount of gas.
    There are two points I would make on gas, and they also 
apply to oil. One is that technology matters. We would not be 
where we are today for domestic gas production or for domestic 
oil production if we had not seen rather incredible advances in 
exploration technologies and in drilling technologies that have 
enabled the domestic industry to operate with a great amount of 
efficiency and an ability to get the oil, frankly, that would 
not have been economic with old technology.
    So as we are looking to the role that gas may play in the 
future, particularly in the electric industry, it is going to 
make a big difference what the pace of exploration and 
development technology is. And we do assume in our models that 
there will be continuing advances in technology beyond what is 
being implemented today. If that does not happen, gas will be 
in tighter supply and at much higher prices. But technology 
does have the ability, in our opinion, to make gas available at 
a reasonable and very competitive cost.
    The final point I would make with regard to gas, and it 
also applies to oil, is that drilling matters. The level of 
drilling is not a constant. The ability to drill in many cases 
involves the ability to convince the financial community that 
they want to finance your drilling, and that is more difficult 
when prices are low and it is easier when prices are high, 
particularly if there is an expectation that those high prices 
will continue. You can see in the historical part of this, to 
the left of the line, how drilling can vary a lot. If you are 
looking back to why we would have expected high prices to have 
occurred recently, one of the reasons would be that those low 
price shocks discouraged drilling. And, whereas consumers at 
the time may have thought this was really great because they 
were getting the low prices, if they had observed what this was 
doing to the level of drilling activity, it would have become 
clear that they were planting the seeds of higher prices in the 
future.
    As you can see in our projections, in the future we 
predicted there will have to be a lot of drilling. Now we 
assume current Federal policy with regard to Federal lands, but 
wherever the drilling occurs there is going to have to be a lot 
of it. And that will be difficult if the price is jumping all 
over the place and sending confusing signals to investors.
    So I think I will leave it at that point. This is a big 
topic, and look forward to your questions.
    [The prepared statement of Jay Hakes follows:]
  Prepared Statement of Jay Hakes, Administrator, Energy Information 
                  Administration, Department of Energy
    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss the views of the 
Energy Information Administration (EIA) on prospects for oil and 
natural gas supply and demand.
    EIA is an independent statistical and analytical agency within the 
Department of Energy. We are charged with providing objective, timely, 
and relevant data, analysis, and projections for the use of the Energy 
Department, other agencies, the Congress, and the public. We do not 
take positions on policy issues, but we do produce data and analysis 
reports that are meant to help policy makers decide energy policy. 
Because we have an element of statutory independence with respect to 
the analyses that we publish, our views are strictly those of EIA. We 
do not speak for the Department, nor for any particular point of view 
with respect to energy policy, and our views should not be construed as 
representing those of the Department or the Administration.
    Today's analysis is based on EIA's Annual Energy Outlook, which 
provides projections and analysis of domestic energy consumption, 
supply, prices, and carbon emissions through 2020. These projections 
are not meant to be exact predictions of the future but represent a 
likely future, assuming known trends in demographics and technology 
improvements, and also assuming no change in current law, regulation, 
and policy. EIA does not propose, advocate, or speculate on changes in 
laws and regulations. So, one of our key assumptions is that all 
current laws and regulations remain as they were on July 1, 1999. That 
means, for example, that the Tier 2 vehicle emission and gasoline 
sulfur standards are not included in the reference case because the 
regulation was not finalized until December 1999.
Oil
    Petroleum consumption in the United States increased sharply in the 
1970's (Figure 1). From an average of 14.7 million barrels per day in 
1970, petroleum consumption rose to 18.9 million barrels per day in 
1978, a level that would not be reached again for the next 20 years. 
More than half (57 percent) of the increase was in the transportation 
sector and nearly 40 percent of the growth was attributable to motor 
gasoline. Distillate and residual fuel consumption grew by 0.9 and 0.8 
million barrels per day, respectively, between 1970 and 1978.
    Domestic oil supply (including crude oil, lease condensate, natural 
gas liquids, other liquids and processing gains) peaked in 1972 at 11.9 
million barrels per day then declined slowly in part because of price 
controls and aging fields in the Lower 48 States. Completion of the 
Trans-Alaska Pipeline System brought about a 1.0 million barrel per day 
increase in domestic oil production in 1978. The rising consumption 
combined with relatively flat supply resulted in a dramatic increase in 
net petroleum imports, from 3.1 million barrels per day in 1970 to 8.5 
million barrels per day in 1977. Ninety percent of the increase in net 
imports from 1970 to 1977 came from OPEC countries, as OPEC's share of 
U. S. imports rose from 42 percent to 72 percent.
    From 1978 to 1980, world oil prices nearly doubled (Figure 2), 
resulting in a sharp decline in consumption. From the 1978 peak of 18.9 
million barrels per day, consumption fell to 15.2 million barrels per 
day in 1983, a decline of 20 percent. Residual fuel led the decline as 
industrial users and electric utilities switched to alternative fuel 
sources. Residual fuel use fell 1.6 million barrels per day over the 5-
year period, followed by gasoline (0.8 million barrels per day) and 
distillate fuel (0.7 million barrels per day.) By 1983, petroleum 
consumption in the United States had returned to the level of 1971.
    Domestic supply remained fairly stable from 1978 to 1983, with 
rising Alaskan production making up for production declines in the 
Lower 48 States. Reduced consumption, along with steady supply levels, 
resulted in a decline in net imports from the 1977 peak of 8.5 million 
barrels per day to 4.3 million barrels per day in 1983. The decline in 
petroleum net imports from OPEC countries fell by slightly more than 
the total decrease as non-OPEC net imports increased slightly during 
this period. OPEC's share of U. S. petroleum net imports declined to 43 
percent in 1983.
    The sharp decline in U. S. and world petroleum consumption resulted 
in lower demand for OPEC oil, which in turn led to reductions in the 
world oil prices. From the 1980 peak of $63.30 per barrel, the average 
world oil price fell to $19.57 per barrel in 1986 (measured in 1998 
dollars). The lower prices and growing economy stimulated petroleum 
consumption growth. With the exception of 1991, petroleum consumption 
has remained the same or increased each year since 1983. In 1998, 
petroleum consumption reached 18.9 million barrels per day, slightly 
exceeding the previous peak in 1978. In contrast to the increase in the 
1970's, the rise in consumption from 1983 to 1998 was almost 
exclusively among the lighter petroleum products (gasoline, distillate, 
jet fuel, etc). Residual fuel consumption continued to decline during 
this period.
    After remaining stable from 1978 to 1985, domestic supply again 
started to decline in 1985 due in part to the much lower oil prices. By 
1998, supply had fallen to 9.2 million barrels per day from 11.4 
million barrels per day in 1985. Increasing petroleum consumption and 
declining supply led to rising net import levels that , in 1996, 
surpassed the 1977 peak. By 1998, petroleum net imports reached 9.8 
million barrels per day, comprising 52 percent of domestic petroleum 
consumption. Net imports from OPEC countries contributed 56 percent of 
the rise in total net imports from 1983 to 1998, in contrast to the 
1970's when they contributed 90 percent of the increase. Net imports 
from Canada and Mexico made up 24 percent of the increase from 1983 to 
1998, and in 1998, these two countries provided 26 percent of U. S. 
petroleum net imports compared to 50 percent from OPEC countries.
Projected Prices
    Just as the historical record shows substantial variability in 
world oil prices, there is considerable uncertainty about future 
prices. Three AEO2000 cases with different price paths allow an 
assessment of alternative views on the course of future oil prices. For 
the reference case, prices are projected to rise by about 2.8 percent a 
year, reaching $22.04 in 2020 (all prices in 1998 dollars unless 
otherwise noted). In nominal dollars, the reference case price exceeds 
$36 in 2020. The low price case has prices declining, after the current 
price rise, to $14.90 by 2005 and remaining at about that level out to 
2020. The high price case has prices reaching $28 by 2015 before 
leveling off. The leveling off in the high price case is due to the 
market penetration of alternative energy supplies that could become 
economically viable at that price, if it is sustained. The AEO2000 
price paths do not attempt to predict volatility. Oil prices have been 
quite volatile in the past, principally as a result of unforeseen 
political and social circumstances. The oil market volatility over the 
past 2 years has been the result of oil market fundamentals that are 
reasonably well understood but nearly impossible to predict. OPEC and 
some other producers responded to the low prices of 1998 by cutting 
back on production in the spring of 1999. This occurred just as several 
countries in Asia began to recover from their financial crisis and to 
increase oil consumption. The combination of lower production and 
higher consumption brought inventories down rapidly and, as inventories 
got to very low levels, prices rose sharply.
    All three price cases reflect considerable optimism about the 
potential for worldwide petroleum supply, even in the face of the 
substantial expected increase in demand. Production from countries 
outside OPEC is expected to show a steady increase, exceeding 45 
million barrels per day by the turn of the century and increasing 
gradually thereafter to more than 56 million barrels per day by 2020.
Petroleum Consumption Expected to Increase Steadily
    Petroleum consumption in the United States is projected to increase 
6.2 million barrels per day, from 18.9 million barrels per day in 1998 
to 25.1 million barrels per day in 2020, an annual average rate of 1.3 
percent (Figure 3). This compares to the average growth rates of 1.5 
percent per year from 1983 to 1998 and 3.2 percent per year from 1970 
to 1978. Most of the increase in petroleum consumption occurs in the 
transportation sector, which accounted for two-thirds of U.S. petroleum 
use in 1998. Petroleum use for transportation is projected to increase 
by 5.4 million barrels per day in the reference case between 1998 and 
2020.
    In the industrial sector, which accounts for more than a fifth of 
U.S. petroleum use, consumption in 2020 is projected to be higher than 
the 1998 level by 1.2 million barrels per day in the reference case. 
More than half the growth is expected in the petrochemical, 
construction, and refining sectors. Petroleum use is expected to 
decline in the residential, commercial, and electricity generator 
sectors, where oil gives ground to natural gas. For electricity 
generation, our projections show oil-fired steam plants being retired 
in favor of natural gas combined-cycle units.
    More than 90 percent of the projected growth in petroleum 
consumption stems from increased consumption of ``light products,'' 
including gasoline, diesel, heating oil, jet fuel, and liquefied 
petroleum gases, which are more difficult and costly to produce than 
heavy products. Although refinery investments and enhancements are 
expected to increase the ability of domestic refineries to produce 
light products, they are projected to compensate for less than half the 
additional demand; the remainder will be imported.
    In the forecast, gasoline continues to account for about 45 percent 
of all the petroleum used in the United States. Between 1998 and 2020, 
U.S. gasoline consumption is projected to rise from 8.3 million barrels 
per day to 11.4 million barrels per day. Increased air travel results 
in a near doubling of projected jet fuel consumption from 1.6 million 
barrels per day in 1998 to 3.0 million barrels per day in 2020. 
Consumption of liquefied petroleum gases (LPG's)--primarily in the 
industrial sector--also increases in the projections, from 2.0 million 
barrels per day in 1998 to 2.5 million barrels per day in 2020. 
Consumption of ``other'' petroleum products, mostly petrochemical 
feedstocks, still gas used to fuel refineries, and asphalt and road oil 
used in road construction, grows from 2.8 million to a projected 3.3 
million barrels per day by 2020. Distillate fuel consumption is 
projected to grow more slowly than other fuels, because of increasing 
fuel efficiency. Residual fuel use, mainly for electricity generation, 
is projected to decline by 250,000 barrels per day in the high oil 
price case but projected to increase by 530,000 barrels per day in the 
low oil price case.
Crude Oil Production Declines then Stabilizes, Total Supplies Remain 
        Flat
    In the reference case, domestic petroleum supply is projected to 
decline slightly from its 1998 level of 9.2 million barrels per day to 
9.1 million barrels per day in 2020. This is the result of two 
offsetting factors. As U.S. crude oil production falls off, refinery 
gain and production of natural gas plant liquids increase. In the low 
oil price case, domestic supply is projected to drop to 8.3 million 
barrels per day in 2020. In the high oil price case, domestic supply is 
projected to increase to 9.9 million barrels per day in 2020.
    Projected domestic crude oil production continues its historic 
decline through 2005. After 2005, technological improvements and rising 
prices are projected to arrest the decline, leading to relatively 
stable lower 48 production in the remainder of the forecast. In 2020, 
the projected domestic production level of 5.3 million barrels per day 
is 1 million barrels per day less than the 1998 level. Conventional 
onshore production in the lower 48 States, which accounted for 46 
percent of total U.S crude oil production in 1998, is projected to 
increase to a 49-percent share in 2020 because of declining Alaskan 
production.
    Crude oil production from Alaska is expected to decline at an 
average annual rate of 3.7 percent between 1998 and 2020. The overall 
decrease in Alaska's oil production results from a continuing decline 
in production from most of its oil fields and, in particular, from 
Prudhoe Bay, the largest producing field, which historically has 
accounted for more than 60 percent of total Alaskan production. 
Offshore production ranges from 1.4 to 1.6 million barrels per day 
throughout the forecast. Technological advances and lower costs for 
deep exploration and production in the Gulf of Mexico help to offset a 
decline in production from shallow waters. Production from enhanced oil 
recovery (EOR), which becomes less profitable as oil prices fall, slows 
through 2006 and then increases along with projected world oil prices 
through the remainder of the forecast. The projected EOR production in 
2020 is close to the 1998 level.
    Although the number of available drilling rigs has been declining 
since 1982, price increases are a powerful incentive for increased 
drilling and the purchase of new drilling equipment. The number of 
available drilling rigs increased by almost 16 percent annually between 
1974 and 1982--from 1,767 to 5,644--as natural gas prices more than 
quadrupled in real terms and oil prices more than doubled. This number 
dropped off as prices generally declined, and about 1,700 drilling rigs 
were available in the United States in 1998. Given the historical 
response to rising prices, even a modest increase in prices is likely 
to make additional drilling rigs available, and the forecast shows the 
number of rigs increasing to 1994 by 2020.
    Both exploratory drilling and developmental drilling increase in 
the forecast. With rising prices and declining drilling costs, 
successful crude oil well completions increase on average by 0.1 and 
3.3 percent per year in the low and high oil price cases, respectively, 
compared with a 1.7 percent projected increase in annual well 
completions in the reference case. For most of the past two decades 
lower 48 production of crude oil has exceeded reserve additions and 
production is expected to exceed reserve additions over the forecast 
period in all cases, meaning that projected U.S. oil reserves in 2020 
will be below 1998 levels.
Petroleum Imports Projected to Increase
    With consumption rising and production nearly flat, net imports are 
expected to continue to rise throughout the forecast period. Petroleum 
net imports are projected to increase to 16.0 million barrels per day 
in 2020 in the reference case from 9.8 million barrels per day in 1998. 
In 1998, net imports of petroleum climbed to 52 percent of domestic 
petroleum consumption and are projected to reach 64 percent in 2020 in 
the reference case. OPEC's share of the U. S. import market is expected 
to increase to 52 percent in 2020 while the North America and Caribbean 
share of imports is projected to reach 33 percent. Total annual U.S. 
expenditures for petroleum imports, which reached a historical peak of 
$133.7 billion (in 1998 dollars) in 1980, were $46.6 billion in 1998.
    Although crude oil is expected to continue as the major component 
of petroleum imports, refined products represent a growing share. More 
imports of refined products will be needed as growth in demand for 
refined products exceeds the expansion of domestic refining capacity. 
Net refined products make up 28 percent of net imports in 2020 in the 
reference case, compared with 12 percent in 1998.
The United States Remains One of the Top Producing Countries
    The United States was by far the largest crude oil producing 
country in the world in 1970, at 9.6 million barrels per day (Figure 
4). The Soviet Union followed with 7.0 million barrels per day followed 
by four members of OPEC. By 1999, Saudi Arabia's oil production had 
increased to 7.8 million barrels per day, the only one of the top six 
producers in 1970 that had a higher production level in 1999. The 
Soviet Union had broken apart but Russia remained in second place in 
global oil production in 1999. The United States had fallen to third 
and Iran fourth. China and Norway replaced Venezuela and Libya as the 
fifth and sixth largest oil producers.
    The top six countries produced 29.6 million barrels per day of 
crude oil in 1999, down 1.7 million barrels per day from the 1970 
combined production level. However, crude oil production has become 
much more widely dispersed than in 1970. The production total of the 
top six producers amounted to 68 percent of the world's crude oil 
produced in 1970, but in 1999, the top six countries produced just 45 
percent of the world total. Whereas four members of the top six in 1970 
were members of OPEC, just two of the top six were from OPEC in 1999.
    U.S. production has fallen, because production elsewhere has been 
less costly. The United States has remained a major producer, however, 
because of a relatively low tax regime and innovative use of advanced 
technology.
Strategic Petroleum Reserve
    The United States began putting crude oil into the Strategic 
Petroleum Reserve (SPR) in 1977 (Figure 5). The SPR is considered the 
first line of defense against an interruption in oil supplies and, 
therefore, is also considered a deterrent to possible oil import 
cutoffs. Between 1980 and 1985, inputs into the SPR averaged more than 
200,000 barrels per day. By 1990, the inventory level had reached 586 
million barrels. Since then, sales and additions have resulted in 
relatively small fluctuations in the total stockpile. The 1999 end-of-
year inventory amounted to 567 million barrels.
Natural Gas
    Demand for natural gas, with increases principally from the 
electric generation sector, is expected to rise to more than 30 
trillion cubic feet (tcf) in 2020. As demand increases, pressure on 
natural gas supply will grow. These demand-side pressures will begin to 
raise questions like: Is there enough gas to meet demand at affordable 
prices? and Can we produce the gas fast enough to keep up with demand?
    Last year U.S. natural gas consumption was just over 21tcf and 
accounted for 24 percent of domestic energy consumption. Gas 
consumption is expected to grow 1.8 percent annually from 1998 to 
2020--faster than any other major fuel source, mainly because of the 
growth in gas-fired electricity generation. Domestic gas production is 
expected to increase a bit more slowly than consumption over the 
forecast, rising from 19 Tcf in 1998 to 26 Tcf in 2020. Growing 
production reflects rising wellhead prices, relatively abundant natural 
gas resources, and improvements in technologies, particularly for 
producing offshore and unconventional gas.
    Net imports are expected to rise to make up the difference between 
domestic production and consumption, because they are generally 
expected to be lower priced than competing domestic sources (Figure 6). 
Net imports are expected to climb from 3.0 Tcf in 1998 to 5.0 Tcf in 
2020--somewhat faster than the growth in overall consumption. Projected 
imports continue to be dominated by pipeline imports from Canada over 
the forecast period.
Rising Natural Gas Demand
    The industrial sector is the largest gas-consuming sector, with 
significant amounts of gas used in the bulk chemical, refining, and 
metal durables sectors. Industrial gas consumption is expected to 
increase by 1.8 Tcf over the forecast--less than 1 percent per year--
particularly in the refining and metal durables sectors, because of 
relatively low and stable gas prices. Combined, the residential and 
commercial sectors add 1.8 trillion cubic feet from 1998 to 2020. Gas 
demand in the residential and commercial sectors is driven by 
increasing population and declining consumer prices for delivered gas. 
The declines in prices paid by the consumer reflect expected gas 
distribution efficiencies in an increasingly competitive market.
    Projected gas consumption by electric generators, not including 
industrial cogenerators, increases more than two and one half times 
during the forecast, from 3.7 trillion cubic feet in 1998 to 9.3 
trillion cubic feet in 2020. The significant growth in gas-fired 
generation is partly driven by electric industry restructuring, but is 
mainly spurred by the addition of new gas turbines and combined-cycle 
facilities and increased utilization of existing gas-fired power 
plants. Lower capital costs, short lead times, and projected 
improvements in gas turbine heat rates give gas an advantage over coal 
for new generation in most regions of the United States. In 1998 
electricity generators were the third-largest natural gas consuming 
sector. By 2020, however, the projected enormous growth in gas-fired 
generation makes electricity generators the second largest gas-
consuming sector--rising to within 1 tcf of the industrial sector. Over 
the entire forecast, natural gas consumption is projected to grow by 
more than 10 tcf, and more than half of the increase comes from the 
electric generation sector.
    Through 2020, the share of electricity produced with natural gas 
rises from 14 percent to 31 percent of the total, while the coal share 
declines from 52 percent to 49 percent. Nuclear power declines as a 
source of electric power--from 19 percent to 9 percent of electricity 
generation as no new nuclear power plants are expected to be brought on 
line between 1998 and 2020 and 40 percent of the current stock retires.
    Before the advent of natural gas combined-cycle plants, fossil-
fired baseload capacity additions were limited primarily to pulverized-
coal steam units; today, however, combined-cycle plants cost about half 
as much and are about 40 percent more efficient than new coal plants. 
The lower capital costs and higher efficiencies of combined-cycle 
plants offset their higher fuel costs (Figure 7).
    To meet the new demand growth, utilities can be expected to use 
existing plants more intensively, import power from Canada and Mexico, 
and purchase power from cogenerators and wholesale generators. Even so, 
300 gigawatts of new capacity will be needed from 1998 to 2020 to meet 
projected demand. Of that new capacity, 90 percent is projected to be 
combined-cycle or combustion turbine technology fueled primarily by 
natural gas. In other words, more than 900 of the 1,000 new power 
plants--assuming an average plant capacity of 300 megawatts--that are 
expected to be built between now and 2020 are projected to be gas-
fired. New coal plants are not projected to be cost-competitive until 
2010, when rising natural gas prices exceed the price of coal by $2 per 
million BTU, leading to the projected construction of new coal-steam 
power plants in some regions.
    Many of the new gas-fired plants built over the next 20 years will 
replace nuclear power plants. In AEO2000 about 40 percent of the 
existing nuclear capacity is expected to be taken out of service by 
2020. No new nuclear units are expected to become operable by 2020, 
because natural gas and coal-fired plants are projected to be more 
economical.
Growing Natural Gas Supply
    Over the forecast period, increased U.S. natural gas production 
comes primarily from lower 48 onshore conventional nonassociated 
sources. Conventional onshore production accounted for 35 percent of 
total U.S. domestic production in 1998 and is expected to increase to 
41 percent in 2020. Offshore production, mainly from wells in the Gulf 
of Mexico, also rises. Innovative, cost-saving technology and large 
finds, particularly in the deep waters of the Gulf, have encouraged 
interest in this area. Lower-48 offshore Gulf Coast natural gas 
production increased to 5.7 tcf in 1997--the highest yet recorded--and 
dropped off slightly in 1998 to 5.6 tcf. Unconventional gas production 
increases at the fastest rate of any other source over the forecast 
period, largely because of expanded tight sands gas production in the 
Rocky Mountain region.
    The Rocky Mountain (primarily unconventional sources) and offshore 
Gulf of Mexico regions are expected to account for just over half of 
the incremental natural gas production between 1998 and 2020, as 
improvements in both unconventional and offshore technologies continue. 
Increased production from the offshore Gulf Coast and onshore Southwest 
regions account for almost one-third of the total increase in the same 
period. Alaskan gas is not expected to be transported to the lower 48 
States through 2020,because projected natural gas prices are not high 
enough to support the required transportation system.
    One of the key activities in producing natural gas is drilling. 
With rising prices and generally declining drilling costs, drilling in 
2020 is expected to reach 22,600 wells in the reference case and result 
in 16,900 successful natural gas well completions. This level of 
drilling is below the level reached in 1981 of more than 29,000 total 
wells drilled (just under 20,000 successful), but represents 
approximately a 15-percent increase over current levels. (Figure 8)
Technological Development
    Technology improvements have both reduced effective exploration and 
development costs, and increased the recoverability of in-place 
resources. Major advances in data acquisition, data processing, and the 
technology of displaying and integrating seismic data with other 
geologic data-combined with lower cost computer power and experience 
gained using new techniques-have exerted downward pressure on costs.
    Uncertainties about the pace of technological development are one 
of the key factors that could affect natural gas production and prices. 
Alternative cases were used to assess the sensitivity of the 
projections to changes in success rates, exploration and development 
costs, and finding rates as a result of technological progress. The 
assumed technology improvement rates were increased and decreased by 
approximately one-third in the rapid and slow technology cases.
    Changes in production in the alternative technology cases reflect 
the benefits of lower costs and higher productivity for conventionally 
recoverable gas, as well as an array of technological enhancements for 
unconventional gas recovery. The changes in supply lead to price 
changes that affect new investment in gas-fired technologies, 
especially in the industrial and electricity generation sectors. Rapid 
technology improvements yield benefits in the form of both lower prices 
and increased production to meet higher consumption requirements.
    Production from unconventional gas resources (tight sands, shales, 
and coalbeds) is particularly responsive to changes in the assumed 
levels of technological progress. Whereas the reference case projects 
total U.S. natural gas production in 2020 at 26.4 trillion cubic feet, 
the rapid technology case projects 28.1 trillion cubic feet of 
production in 2020, with the increase coming primarily from offshore 
and unconventional sources.
    Offshore gas production in the Gulf of Mexico is expected to grow 
from 5.5 trillion cubic feet in 1998 to a peak of 6.7 trillion cubic 
feet in 2015 in the reference case. In the rapid technology case, 
however, offshore Gulf of Mexico production peaks at 7.7 trillion cubic 
feet in 2017, and projected cumulative offshore production between 1998 
and 2020 is 148.3 trillion cubic feet, compared with 137.1 trillion 
cubic feet in the reference case. The rapid technology assumption has a 
similar but less dramatic, effect on unconventional gas recovery (UGR). 
Cumulative UGR production between 1998 and 2020 is projected to be 
132.9 trillion cubic feet in the rapid technology case, compared with 
129.5 trillion cubic feet in the reference case. Changes in production 
in the alternative technology cases reflect the benefits of lower costs 
and higher finding rates for conventionally recoverable gas, as well as 
an array of technological enhancements for unconventional gas recovery.
Slowly Rising Natural Gas Wellhead Prices
    Wellhead prices for natural gas in the lower 48 States increase on 
average by 1.7 percent a year in the reference case to $2.81 per 
thousand cubic feet in 1998 dollars (Figure 9). The increase reflects 
rising demand for natural gas and the impact of the progression of 
discoveries from larger and more profitable fields to smaller, less 
economical ones. The natural gas price projections are highly sensitive 
to changes in the assumptions about technological progress. Over the 
projection period, lower 48 wellhead prices increase at an average 
annual rate of 3.0 percent in the slow technology case, rising fairly 
steadily to $3.74 (1998 dollars) per thousand cubic feet in 2020. In 
the rapid technology case, average natural gas wellhead prices remain 
below 1997 level of $2.39 through 2020.
Natural Gas Imports
    Net natural gas imports are expected to grow slightly in the 
forecast from 14 percent of total gas consumption in 1998 to16 percent 
in 2020. Most of the increase is attributable to imports from Canada, 
primarily from western Canada, although some new gas is also expected 
from Sable Island in the offshore Atlantic. Gas trade with Mexico is 
expected to consist primarily of exports. Conversion of power plants 
from heavy fuel oil to natural gas, in compliance with Mexico's 
environmental regulations, is expected to gain momentum and it is 
uncertain whether indigenous production can be increased enough to 
satisfy rising demand. LNG provides another source of gas imports, and 
gross LNG imports are expected to grow at a rate of 7.2 percent a year, 
reaching a level of 390 bcf by 2020.
Summary
    In summary, over the next 20 years petroleum consumption in the 
United States is expected to be driven primarily by the demand for 
``light products'' in the transportation sector. Petroleum consumption 
is expected to rise to over 25 million barrels per day in 2020, and 
domestic petroleum supply--including refinery gain and natural gas 
plant liquids--is projected to decline slightly to just over 9 million 
barrels per day in 2020. Net imports are projected to increase to 16 
million barrels per day in 2020. Continued dependence on petroleum 
imports is projected, reaching 64 percent in 2020. Although imports are 
projected to grow, the United States is one of the largest oil 
producing countries in the world, and domestic production is expected 
to remain a significant source of petroleum supply.
    Over the next 20 years the U.S. natural gas market is expected to 
be largely driven by the demand for electricity. From now through 2020 
gas consumption by electricity generators is expected to increase more 
than two and one half times. Total gas consumption is expected to rise 
to more than 31 tcf in 2020, and U.S. production is expected to 
increase to 26 tcf. Net imports, primarily from Canada, are projected 
to increase to 5 tcf by 2020. In spite of this increase, technically-
recoverable natural gas resources are believed to be adequate to 
sustain growing production volumes for many years without dramatic 
price increases.
[GRAPHIC] [TIFF OMITTED] T4772.001

[GRAPHIC] [TIFF OMITTED] T4772.002

[GRAPHIC] [TIFF OMITTED] T4772.003

[GRAPHIC] [TIFF OMITTED] T4772.004

[GRAPHIC] [TIFF OMITTED] T4772.005

    Mr. Barton. We thank you Mr. Administrator.
    Our last witness, but certainly not least, on this panel, 
the Honorable Melanie Kenderdine, who is the Acting Director of 
the Office of Policy, Department of Energy, which is the office 
that I was in when I was a White House Fellow. I am used to 
seeing Ms. Kenderdine out in the audience as she gives the 
right answers to whomever the political appointee happens to be 
who is testifying before our subcommittee. So it is good to 
have you here. So we are going to get the expert at the table 
instead of in the audience. We recognize you for whatever time 
you may consume, hoping it is going to be in the neighborhood 
of 7 minutes.

               STATEMENT OF MELANIE A. KENDERDINE

    Ms. Kenderdine. Thank you, Mr. Chairman. On that note, 
prior to becoming Secretary Richardson's senior policy advisor 
on oil and gas, I was the Deputy Assistant Secretary in DOE's 
congressional office. I saw firsthand what happened to many DOE 
witnesses when their testimony was late. And it was an 
inspiration to me, and I hope to always be on time.
    Mr. Chairman and members of the subcommittee, thank you for 
the opportunity to discuss the administration's energy policy. 
The fundamental importance of energy to the Nation's economic 
and environmental health has warranted investments by the 
Clinton/Gore Administration in a set of policies in a portfolio 
of technologies to encourage energy production to use energy 
more efficiently, to reduce its impacts on the environment, and 
to develop alternative sources of supplies.
    The administration's first principle in energy policy is 
reliance on market forces as the best means of informing supply 
and demand and getting the most for the American consumer. Our 
commitment to this principle has contributed to the longest 
period of sustained economic growth in modern times. At the 
same time that the econ-

omy and energy consumption have been steadily growing, energy 
use has been reduced. And if you look over at Chart 1, that is 
what we are demonstrating there.
    As you can see, since 1990 the economy has grown by 35 
percent. I think you all also have these charts with you. Since 
1990, the economy has grown by 35 percent, yet sulfur dioxide 
emissions have been reduced by 20 percent. Also the energy 
intensity of our economy, the amount of energy used per unit of 
economic output, has declined by 40 percent since the mid-
1970's. The point of all this is that we can have a robust 
economy, increased energy consumption and a cleaner environment 
at the same time.
    The administration's policy is supported by two national 
energy strategies, two scientific reviews of our energy R&D 
portfolios, numerous R&D road maps and two extensive energy 
portfolio characterizations and analysis which I will talk 
about shortly. We are also in the process of updating our 1998 
energy strategy and it will be done shortly.
    Our energy policy focuses on these challenges, which I 
would like to briefly discuss. Our first challenge, challenge 
number 1, is maintaining America's energy security in global 
markets. To address this challenge, the administration over the 
last 7 years has supported, taken, or proposed measures to do 
the following: .
    Spur domestic oil and gas production through the support of 
tax incentives such as the expensing of geological and 
geophysical costs and delay rentals; addressing the generally 
high cost of U.S. exploration and production through 
technologies--Mr. Hakes just alluded to how important that is 
to help lower costs of production and produce mature fields, 
which many fields in the United States are; ensure that we are 
not overly reliant on imports from a single region of the 
world; encourage the world to develop its oil resources and 
increase productive capacity; privatize the Elk Hills Naval 
Petroleum Reserve in order to put that reserve into the hands 
of private industry and extend the life of the field; increase 
the size of the petroleum reserve by 28 million barrels; 
provide deepwater royalty relief, which has increased oil and 
gas production in the last 5 years in deep water by over 250 
percent; lift the ban on Alaskan North Slope oil; simplify 
royalty collection on public lands; reduce the AMT and 
percentage depletion tax relief for small operators; promote 
the creation of a guaranty loan program for small domestic oil 
and gas producers and the reauthorization of EPCA.
    We can also reduce net imports of oil by focusing on the 
demand side of the equation. Sixty percent of our oil is used 
in the transportation sector. If you look at chart number 2, 
you will see that in the last 10 years, vehicle manufacturers 
have increased horsepower as opposed to miles per gallon. That 
is exactly the opposite of what we saw in the 1970's, which is 
the bars on the far right, where you see miles per gallon down; 
increased mile per gallon up; horsepower way down. And then you 
go over and look at the far right and you see the opposite.
    Mr. Barton. Would the gentlelady yield just a second? We 
have got a vote on the rule for PNTR. Congressman Shimkus is on 
the floor. He is supposed to come right back. So we are going 
to try to continue the hearing. If the members present want to 
go vote and come back, I will wait until Mr. Shimkus gets here 
so we can try to continue. Please continue.
    Ms. Kenderdine. Increasing the average fuel efficiency of 
America's automobiles by just 3 miles per gallon would save us 
almost a million barrels of oil per day. This demonstrates the 
value of fuel-efficient vehicles and why we have focused a 
great deal of effort on our PNTB program to produce a prototype 
80-mile-per-gallon vehicle by 2004.
    Our second challenge is harnessing the force of competition 
and restructured energy markets. Comprehensive electricity 
restructuring legislation is the centerpiece of the 
administration's energy policy. The Clinton/Gore Administration 
encourages Congress to pass comprehensive electricity 
restructuring legislation this summer before the peak 
electricity use season.
    Our third challenge is mitigating the environmental impacts 
of energy use. DOE invests in technologies to reduce the 
environmental impacts of energy by producing cleaner fuels, 
increasing the efficiency of energy use and developing 
alternative sources of energy.
    Domestically, our lead challenge is further reducing 
environmental impacts of energy use in the transportation and 
power generation sectors. Internationally, we believe our 
greater environmental challenge today is climate change.
    And finally our fourth challenge, ensuring a diverse, 
reliable, and affordable set of energy sources for the future. 
And again technology development plays a very strong supporting 
role in the Department's pursuit of all of its energy policy 
objectives.
    Chart number 3 summarizes our portfolio effort in which we 
matched our energy R&D investments against key energy 
objectives. This is a significant document, Mr. Chairman. I 
have one here and actually used it liberally when I was 
preparing my written testimony and it is very informative. I 
think it is a very important document and shows exactly how we 
are investing about $2 billion, maybe a little more than $2 
billion, in lining those up against our strategic energy goals.
    And what you see in that document is our strategic 
objectives are reliable and diverse energy supply--we are 
spending about $170 million in that area; clean and affordable 
power, $542 million; and efficient and productive energy use, 
$437 million. And in addition, the Department has a basic 
science portfolio of about $1.2 billion. These are our requests 
for 2001, by the way, which supplies the foundation for the 
applied energy R&D.
    At this point in my written testimony, I take direction 
well, Mr. Chairman, and limit at the end my oral statement to 5 
minutes. But since everyone has taken 7, I will go to my 
written testimony here where I did talk a little bit about 
natural gas. Other people at the table have also spoken about 
natural gas, and I would like to associate myself with their 
remarks.
    The administration is a very strong supporter of natural 
gas and we bear significant supply issues and significant 
distribution issues that I think we need to work on in a 
bipartisan fashion in the days ahead in order to meet the 
demand for natural gas. Jay Hakes and the EIA Office predict 
that we are going to need 1,000 new power plants in this 
country by 2020, and 900 of them will be powered by natural 
gas. And there is a lot of work to do on a whole lot of issues, 
and we would like to work with the committee on that.
    These policies and investments of the administration have 
paid big energy economic and environmental dividends. As Mr. 
Yergin pointed out, even with current high prices in today's 
dollars, we are paying substantially less for a gallon of 
gasoline than in 1980. We have diversified our supplies of 
imported oil; three out of four of our top importers are in the 
Western Hemisphere. I just looked at a list that I pulled off 
Reuters news service today of our top 11 importers of oil. Only 
four of them are OPEC nations.
    Royalty relief on the OCS, as I mentioned, has increased 
deepwater oil and gas production by over 250 percent in the 
last 5 years. Significant technology improvements have lowered 
oil and gas exploration and production costs and reduced the 
environmental footprint of energy production to one-tenth the 
size it was 20 years ago.
    The rapid development of energy efficiency and renewable 
technologies has enabled the United States to dramatically 
decrease its energy use per dollar GDP; wind energy, energy 
interest in biomass and other renewables, show tremendous 
promise for some cost-competitive power generation from 
alternative energy sources.
    Despite this track record, the potential for increased 
savings in energy demand in the U.S. economy remains enormous. 
And to meet growing energy demand, it remains essential.
    Much remains to be done. Secretary Richardson has called on 
the Congress to work with us in a bipartisan fashion to pass 
legislation for those energy incentives and programs which 
require congressional action; namely, comprehensive electricity 
restructuring; tax incentives for oil and gas production; 
energy efficiency and alternative fuels; the reauthorization of 
EPCA; the creation of a home heating oil reserve in the 
Northeast; and the supplemental appropriation to replenish 
emergency LIHEAP funds.
    The Clinton/Gore Administration is proud of its progress in 
achieving the Nation's energy goals. Thank you, Mr. Chairman.
    [The prepared statement of Melanie A. Kenderdine follows:]
Prepared Statement of Melanie A. Kenderdine, Acting Director of Policy, 
                       U.S. Department of Energy
            the clinton/gore administration's energy policy
The Administration's ``First Principle'': Reliance on Market Forces
    Mr. Chairman and members of the Subcommittee, I am pleased to be 
here today to discuss the Administration's National Energy Policy with 
the Subcommittee.
    Sound energy policy is not only important to the day-to-day 
functioning of our society, it is essential to the continued 
improvement in our standard of living. Energy is a key economic driver 
and a strategic global commodity. Energy has significant impacts on the 
environment at the same time it offers real market opportunities.
    The ``first principle'' of the Administration's energy policy has 
been a reliance on free markets as the best means of informing supply 
and demand, and getting the most for the American consumer. Our 
commitment to this principle has contributed to the longest period of 
sustained economic growth in modern times.
    The unprecedented economic expansion under this Administration has 
pushed the overall unemployment rates to 30-year lows, led to increased 
labor productivity, generated extraordinary gains in the nation's stock 
markets, given us the first federal budget surpluses in several 
decades, and helped to significantly reduce poverty rates, all while 
maintaining low levels of inflation.
    This does not mean market failure will not occur. When markets are 
insufficiently flexible to address critical national challenges . . . 
market transformations require market pushes and pulls . . . or groups 
of individuals or businesses are threatened by market disruptions or 
dislocations . . . this Administration has not hesitated to take 
appropriate action. Examples of interventions in the energy arena 
include: the release of emergency LIHEAP funds during last winter's 
home heating oil crisis; support for a home heating oil reserve in the 
Northeastern United States and support for tax incentives for renewable 
energy or to increase domestic oil and gas production.
Economic Growth, Energy Use and Environmental Protection are Not 
        Mutually Exclusive
    At the same time that the economy has been steadily growing, many 
of the environmental consequences of energy use have been reduced--this 
point is clearly made by Chart # 1 which plots growth in GDP against 
certain emissions associated with energy use. There is good news:

 Since 1990, at the same time the US economy has grown by 35 
        percent, sulfur dioxide emissions have declined by around 20 
        percent.
 The energy intensity of our economy--the amount of energy used 
        per unit of economic output--has declined by 40 percent since 
        the mid-seventies.
 In 1974, we consumed 15 barrels of oil for every $10,000 of 
        gross domestic product--today we consume only eight barrels for 
        every $10,000.
    Energy use, while increasing, has been out-paced by the economic 
growth achieved by the Clinton/Gore Administration. Also, increased 
energy efficiency--in homes, businesses and manufacturing --has helped 
insulate the economy from short-term market fluctuations in energy 
prices. Through wise policy choices and informed, targeted investments 
of public dollars, we can have an extremely robust economy fueled by 
relatively inexpensive energy, and protect the environment and the 
health of our citizens.
Policy Framework for our Energy Strategies
    The Clinton/Gore Administration has published two statements of its 
national energy policy in the last several years: Sustainable Energy 
Strategy (July 1995) and The Comprehensive National Energy Strategy 
(CNES, April 1998). Both documents provide a guide to energy policies 
proposed and implemented by the Administration, and seek to ensure that 
energy policy is well integrated into the Nation's economic and 
national security policies. We are currently in the process of updating 
the CNES and should be releasing this update shortly.
    In addition, the President's Committee of Advisors on Science and 
Technology has completed two scientific reviews of energy related 
technology development, Federal Energy Research and Development for the 
Challenges of the 21st Century, in 1997 and, more recently, Powerful 
Partnerships in 1999. These two documents provide an analysis of energy 
technologies being developed by the Department, and make 
recommendations on how to best utilize these technologies both 
domestically and internationally.
    Finally, the Department over the last several years, has engaged in 
numerous roadmapping exercises with industry, government, and academic 
stakeholder groups, and two extensive energy portfolio exercises, in 
which we matched our energy R&D investments against larger strategic 
goals of the CNES. This process, followed by an analysis of the 
portfolio, has helped us to identify gaps in our portfolio and 
opportunities for additional investments in energy technology.
    The Comprehensive National Energy Strategy, which DOE released in 
1998, identified five overarching energy goals:

 Improving the efficiency of the energy system;
 Ensuring against energy supply disruptions;
 Promoting energy production and use in ways to protect human 
        health and the environment;
 Expanding future energy choices, and;
 Cooperating internationally on energy issues.
The Nation's Energy Challenges
    In addition to identifying five energy goals, the CNES highlighted 
three major energy challenges for policy-makers. These are:

 Maintaining America's energy security in global markets;
 Harnessing the forces of competition in restructured energy 
        markets, and;
 Mitigating the environmental impacts of energy use
    While each of these challenges warrants different Government 
actions, there is a need to invest in the development of alternatives 
and longer-term technologies to meet our future energy needs. We have 
added an additional long-term energy responsibility to the three CNES 
challenges:

 Ensuring a diverse set of reliable and affordable energy 
        sources for America, now and in the future.
    I now want to summarize how the Clinton/Gore energy policy utilizes 
market forces, policies, and investments in research and development to 
address each of these challenges.
Challenge #1: Maintaining America's Energy Security in Global Markets
    The United States remains heavily dependent on crude oil. Since 
1985, domestic crude oil production has declined by 34 percent, while 
domestic oil consumption has increased by more than 22 percent. In 
1974, net imports of crude oil and products supplied about 35 percent 
of U.S. consumption. In 1999, net imports supplied about 50 percent of 
U.S. consumption.
    The Administration's response to the important role of oil in our 
economy and the increase in net imports recognizes the following:

 Consumption of oil continues to grow.
 The cost of oil production in the U.S. is high relative to 
        other producing nations.
 The price of oil is a world price. High or low prices of oil 
        worldwide will mean high or low prices domestically.
 Reducing volatility in oil prices will spur investment and 
        match supply to demand.
 Global capacity must be increased if we are to meet domestic 
        and international demand for oil.
 Increasing net imports are not only an indicator of flat or 
        declining domestic production, but also a reflection of 
        increased domestic consumption.
 Almost two-thirds of our oil is used for transportation.
    To spur domestic production and lower the costs of doing business--
without imposing quotas on imported oil, which would raise costs to 
consumers--the President has proposed tax incentives for 100 percent 
expensing of geological and geophysical costs (G&G), and allowing the 
expensing of delay rental payments. G&G expensing will encourage 
exploration and production. Delayed rental expensing will lower the 
cost of doing business on federal lands.
    The Administration has also supported and promoted virtually all 
significant energy legislation enacted by the Congress over the last 
seven years. This includes legislation for: Deepwater Royalty Relief; 
lifting the ban on the export of Alaska North Slope Oil; Royalty 
Simplification; privatization of the Elk Hills Naval Petroleum Reserve; 
the transfer and lease of Naval Oil Shale Reserves One and Three for 
production; Alternative Minimum Tax (AMT) and percentage depletion tax 
relief for small operators; and creation of a guaranteed loan program 
for small domestic oil and gas producers. The Administration has also 
proposed legislation to transfer Naval Oil Shale Reserve Two to the Ute 
Indian Tribe for production; USGS estimates that there may be as much 
as 0.6 tcf of gas on this property.
    To address higher US exploration and production costs compared to 
other countries, we have invested in a portfolio of technologies 
designed to lower the costs of exploration and production, and to 
produce hard-to-find oil in more mature fields. In large part because 
of the joint R&D efforts of government and industry, the U.S. petroleum 
business has transformed itself over the past three decades into a 
high-technology industry.
    The United States is a mature oil-producing region. While an 
estimated two-thirds of all U.S. oil remains in the ground, much of it 
is located in deep, complex reservoirs or environmentally-sensitive 
areas. Development of advanced oil and gas technologies is essential to 
efficiently maximize the production of domestic resources while 
preserving the environment.
    A single project in DOE's five-year, $118 million government/
industry Oil Reservoir Class Program has already added 2.4 million 
barrels of oil from one field and produced an additional $12.7 million 
in taxes and royalties. The final outcome of this project is expected 
to produce an additional 31 million barrels of oil and $160 million in 
federal revenues.
    The Department of Energy conducted the initial design of the 
polycrystalline drill bit, now used in about 40 percent of drilling 
worldwide, with annual industry sales in excess of $200 million. 
Innovations such as horizontal drilling have revitalized oil production 
from the Austin Chalk region of Texas to the Dundee formation of 
Michigan.
    New imaging technologies developed by DOE labs are revealing large 
hydrocarbon supplies beneath the ocean floor salt formations in the 
Gulf of Mexico and 3D seismic is now standard in the industry. 
Secondary gas recovery technologies have led to new gas production from 
south Texas and the mid-continent. In Alaska, oil is now being produced 
from wellpads that are one tenth the size of those 30 years ago. 
Industry and the Department of Interior estimate that new discoveries 
in the Gulf of Mexico may yield as much as 18 billion barrels of oil--
more than Prudhoe Bay. Technological innovations in subsalt imaging, 
reservoir characterization, and drilling technologies will enhance our 
ability to economically produce these reserves.
    To ensure that we are not overly reliant on imports from a single 
region of the world, we have diversified our sources of supply. 
Although our oil imports have increased, our sources of these imports 
have changed significantly over the last two decades. Last year, we 
imported 4.85 million barrels of oil per day from OPEC nations, down 22 
percent from the 6.19 million barrels of oil per day in 1977. Our 
imports now come from over 40 countries.
    During this same period, OPEC's share of the world market has 
dropped from 49 to around 41 percent. In 1970, the top six producers in 
the world controlled 68 percent of the world's production; this figure 
is now down to 45 percent.
    I note that just recently, a significant oil find was made in the 
Caspian Basin which is thought to have potential reserves equaling or 
surpassing the North Sea. The Administration has invested in a 
significant diplomatic effort to encourage oil development in this 
region, as well as to encourage the investment of U.S. energy firms in 
the Caspian.
    To help the world develop its oil resources and increase world 
capacity, Secretary Richardson has actively promoted investment and 
development of the world's energy resources. Most notably, Secretary 
Richardson has held two international energy summits--the Western 
Hemisphere Energy Ministers Summit in New Orleans and the African 
Energy Ministers Summit in Tucson, to discuss energy issues and plot a 
course for global energy development and future uses. In addition, the 
Secretary has traveled to virtually all the major energy producing 
regions of the world--the Caspian, Russia, the Middle East, Nigeria, 
Norway, Mexico, and Venezuela--to encourage energy production and 
business for U.S. energy companies.
    To increase the coverage provided by our ``national energy 
insurance policy,'' the Strategic Petroleum Reserve, we are adding 28 
million barrels of oil to fill the Reserve back to the 590 million 
barrel level, its approximate size prior to the revenue-raising sales 
directed by the Congress in 1996 and 1997. The replacement of this oil 
in the Reserve was also done through a unique royalty-in-kind payment, 
with no outlays for the government. In addition, we have completed 
upgrades for the Reserve--to make it safer and to extend the useful 
life of the facility. This seven-year project was completed ahead of 
schedule and under budget.
    To address volatility in world oil markets, we have strengthened 
our ties with the world's oil producing nations, worked closely with 
oil consuming nations through organizations such as the International 
Energy Agency, and launched a campaign to improve the collection, 
dissemination and understanding of world oil supply and demand data. 
Last January, prominent industry analysts and data experts met at a 
DOE-sponsored forum in Houston to discuss how the quality, timeliness 
and availability of oil data might be affecting volatility in oil 
prices. DOE will be co-hosting an international conference in Spain 
this summer as a follow-on to the earlier meeting. There is significant 
international interest in this issue and growing consensus that the 
world needs better data for producers and consumers to more accurately 
gauge oil supply and demand.
    We are also investing in reducing net oil imports by focusing on 
demand side technologies and policies. More than 60 percent of our oil 
consumption is for transportation, making vehicle fuel efficiency a 
ripe target for reducing the consumption side of the net import 
equation. Specifically, the Department's transportation program is:

 developing an 80 mile-per-gallon (mpg) prototype sedan by 2004 
        through our Partnership for Next Generation Vehicles Program;
 improving light truck fuel efficiency by 35 percent while 
        meeting newly issued EPA Tier 2 emission standards by 2004;
 developing technologies to increase fuel economy of the 
        largest heavy trucks from 7 to 10 mpg (nearly 50 percent) by 
        2004;
 increasing domestic ethanol production to 2.2 billion gallons 
        per year by 2010;
 develop production prototype vehicles that will double the 
        fuel-efficiency of tractor trailer truck and triple the 
        efficiency of heavy-duty pick-ups; and
 supporting tax credits for hybrid vehicles.
    Let me illustrate just how important these investments are. As you 
can see on Chart #2, over the past decade, vehicle manufacturers have 
focused on increasing horsepower at the expense of miles per gallon, 
the exact opposite of what occurred in the 1970's when auto 
manufacturers were more focused on fuel-efficient vehicles.
    Increasing the average fuel economy for cars and light duty 
vehicles by just three miles per gallon would save almost a million 
barrels of oil per day. This represents over 15 percent of current U.S. 
daily production. Investing in fuels and more fuel-efficient vehicles 
could substantially reduce our reliance on imported oil at the same 
time it contributes to a cleaner, healthier environment. Without 
minimizing the importance of increased oil production, it is clear that 
even a small commitment to greater vehicle efficiency will net 
significant gains in reducing net oil imports, without compromising 
pristine onshore or offshore environmental ecosystems.
Challenge #2: Harnessing the Force of Competition in Restructured 
        Energy Markets
    As I have noted, the Clinton/Gore approach to energy policy is 
built around the principle of market-oriented approaches to energy 
supply and use. A reliance on markets is not unique to our 
Administration--it spans both Republican and Democratic 
Administrations.
    Natural gas is a clear area of success for market-driven energy 
policies for recent Administrations. With deregulation, natural gas has 
emerged as a plentiful, national energy resource. In the mid-1970's, a 
labyrinth of outdated and counterproductive pricing regulations had 
handcuffed America's natural gas industry, stifling exploration and 
production and conveying the false impression that America's natural 
gas supplies were on the wane.
    Today, the onerous natural gas regulations which started in the 
1950s, have been replaced by a restructured and highly competitive gas 
market, and natural gas is now one of the most plentiful energy 
resources available to meet the Nation's future energy and 
environmental needs. The decontrol of natural gas prices, the advent of 
competition in interstate gas transportation, and the ability of 
industrial customers (and increasingly residential consumers) to 
contract directly for their own gas supplies has clearly provided major 
benefits to both producers and consumers.
    Electricity restructuring is the biggest prize of all. Over 40 
percent of the nation's energy bill goes for electricity. With over 
$200 billion in annual sales, electricity is the lifeblood of our 
economy, and the reliable supply of electricity is vital to our economy 
and to the health and safety of all Americans. The Clinton/Gore 
Administration is seeking, with Congress, to extend the role of markets 
and competition into the electricity sector.
    At one time, the debate surrounding electricity restructuring 
focused on the pros and cons of doing away with the vertically-
integrated monopoly utility that generated, transmitted and distributed 
the power consumed in a state-designated monopoly service territory. 
That debate is over. As a result of the Energy Policy Act of 1992 and 
the efforts of the Federal Energy Regulatory Commission (FERC), 
utilities are now buying power from competing generators and marketers 
at competitive rates rather than building plants on their own, and 
independent power producers are gaining an increasing share of the 
generation market.
    Restructuring and competition are not, of course, limited to the 
wholesale markets. Twenty-five states have now adopted electricity 
restructuring proposals that allow for competition at the retail level. 
Almost every other state has the matter under active consideration.
    These are positive developments--competition, if structured 
properly, will be good for consumers, good for the economy and good for 
the environment. Companies that had no incentive to offer lower prices, 
better service, or new products are now being required to compete for 
customers. Consumers will save money on their electric bills. Lower 
electric rates will also make businesses more competitive by lowering 
their costs of production. By promoting the use of cleaner and more 
efficient technologies, competition will lead to reduced emissions of 
greenhouse gases and conventional air pollutants.
    Securing a Competitive Future Requires Both State and Federal 
Action. We believe that the full benefits promised by electricity 
competition can be realized only within an appropriate Federal 
statutory framework. What we do at the Federal level, and when we do 
it, will have a profound impact on the success of wholesale competitive 
markets, as well as on state and local retail markets. Federal action 
is necessary for state restructuring programs to achieve their maximum 
potential. Electrons do not respect state borders. Electricity markets 
are becoming increasingly regional and multi-regional. Actions in one 
state can and do affect consumers in other states.
    States and the Federal government must work together. States alone 
can't ensure that regional power and transmission markets are efficient 
and competitive. They can't provide for the continued reliability of 
the interstate bulk power grid. And states can't remove the Federal 
statutory impediments to competition and enable competition to thrive 
in the regions served by Federal utilities. Clearly, some states are 
considering retail competition proposals at a less rapid pace than 
others. Nevertheless, Federal action is equally important to all 
states. If wholesale markets, which transcend state boundaries, are not 
working efficiently, the impediments to the flow of power between 
states will cause rates to go up and reliability to be endangered.
    The Clinton/Gore Administration encourages Congress to pass 
comprehensive electricity restructuring legislation. In 1998 and again 
in 1999, the Administration presented the Congress with a comprehensive 
legislative blueprint of changes needed for updating the federal 
statutory framework to support the advent of competition in electricity 
markets. Indeed, this bill was a featured element of the Comprehensive 
National Energy Strategy the Administration sent to Congress in April, 
1998.
    A well-structured electricity bill is a centerpiece of the 
Administration's energy policy, and we look forward to working in a 
bipartisan manner with both the House and Senate to pass this or 
similar legislation. Mr. Chairman, we recognize the efforts of this 
subcommittee, which reported an electricity bill last October. We urge 
this Congress to replicate the earlier bipartisan successes with 
natural gas and oil deregulation and pass a comprehensive restructuring 
bill this summer.
    Ensuring the reliability of the energy grid is a growing focus of 
the Administration's R&D efforts. While the electricity system powers 
other infrastructures, it will also be increasingly dependent on 
natural gas as a fuel source for both central power stations and small, 
distributed generation. EIA's Annual Energy Outlook, 2000, projects the 
annual growth of 4.3 percent for the use of natural gas for electricity 
generation through 2020.
    In addition, our energy delivery systems are becoming increasingly 
reliant on telecommunications and computing systems for fast, efficient 
operation. These trends will likely result in increased efficiencies 
and a range of new consumer products, but can also potentially increase 
physical and cyber threats to our energy infrastructure.
    To ensure the reliability and security of the electricity and 
natural gas infrastructures, the Administration has proposed a new 
Energy Infrastructure Reliability initiative with three components:

 electric reliability which will focus on regional grid 
        control, distributed resources and microgrids, information 
        system analysis, possible offsetting of peak summertime 
        electric load with distributed generation and natural gas 
        cooling technologies for example, and high capacity 
        transmission;
 natural gas infrastructure reliability to include storage, 
        pipeline and distribution R&D, and;
 secure energy infrastructures, vulnerability assessments, 
        interdependency analysis, risk analysis, and the development of 
        protection and mitigation technologies.
Challenge #3: Mitigating the Environmental Impacts of Energy Use
    The production, transport and conversion of energy is fundamental 
to our way of life and continued economic prosperity, but energy has 
more significant effects on the environment than any other economic 
activity. To reduce these adverse effects, the federal and state 
governments have imposed environmental restrictions on energy, from 
production to end-use.
    These restrictions have, as noted earlier, resulted in reductions 
in energy-related pollution and environmental damage, and have been 
achieved without substantial increases in energy prices, disruptions in 
energy supplies or other adverse economic impacts. This achievement is 
due, in part, to the constructive role that the Department of Energy 
has played in the development of environment-friendly energy 
technologies and the adoption of regulatory policies that have enabled 
the energy industry to minimize costs and avoid supply disruptions.
    We cannot, however, stop with the successes achieved to date. 
Domestically, one of the leading challenges facing us now is further 
reducing the environmental impacts of energy use in the transportation 
and power generation sectors. We want to minimize the negative effects 
of fossil fuel combustion in ways that do not increase prices or price 
volatility, or decrease reliability. Other domestic environmental 
challenges that will require careful monitoring include: assuring the 
continued access of the energy industry to new resource areas, in a 
manner that protects our natural heritage; and ensuring that any 
further regulation of the energy sector is based on good science and is 
cost-effective.
    Internationally, responding to the threat of climate change is the 
greatest challenge facing the energy sector. To provide the 
technologies that reduce greenhouse gas emissions, and to preserve U.S. 
competitiveness and economic growth, President Clinton has proposed an 
aggressive $4.1 billion FY 2001 climate change package. The package 
includes: the International Clean Energy Initiative, Clean Air 
Partnerships, Climate Technology Initiative and other programs that 
preserve jobs and the climate. This includes R&D and deployment 
initiatives for a broad range of technologies including those using 
fossil fuel. For example, the President's plan contains a significant 
request for Clean Coal technology funding and for carbon sequestration 
to offset the carbon emissions from fossil fuels.
    We are working with other countries to elaborate rules and 
guidelines for the flexibility mechanisms identified in the Kyoto 
Protocol--emissions trading, the Clean Development Mechanism and Joint 
Implementation. Only through the full use of market-based emissions 
trading and related mechanisms, can we substantially slow or halt the 
growth in global greenhouse gas emissions without imposing unacceptable 
costs on the United States. Many different economic analyses done both 
in the private and the public sectors, indicate that the cost savings 
from full implementation of the Kyoto Mechanisms could reduce costs in 
excess of 50 percent from more regulatory approaches.
    We have a historic opportunity to complete the elaboration of an 
internationally unprecedented market-based approach to climate 
protection that will lower costs and spur U.S. technology exports. The 
anticipated use of these mechanisms will also provide the economic 
incentive for developing countries to make meaningful commitments to 
greenhouse gas emissions reductions.
    Sound science is the cornerstone of DOE's work on energy-related 
environmental issues. The Department has been a partner with EPA and 
other regulatory agencies in developing science-based regulations. This 
was seen recently in DOE's work with EPA on coal ash; and last year in 
our work with EPA on coal combusters of fossil fuels containing cobalt 
or vanadium. These are two examples where it was demonstrated, through 
science and interagency cooperation, that regulations of the energy 
industry were not needed.
    Our work on climate change on the other hand, is part of the 
substantial body of scientific evidence that demonstrates the impacts 
of carbon emissions on the global environment, supports the 
Administration's commitment to mitigating the impacts of greenhouse gas 
emissions on the atmosphere and human health, and strongly suggests 
that significant and timely action to mitigate climate change is 
needed.
    Cost is a key consideration. The costs and benefits of alternative 
approaches must be weighed. To the extent feasible, the costs of 
reducing adverse environmental impacts should be shared fairly among 
all of the contributors to an environmental problem, not borne 
primarily by a small subset of industries or, in the case of global 
climate change, a small subset of countries.
    Most recently, the Department of Energy helped develop the economic 
analysis for treating small refiners as a separate class of businesses 
under the recently released Tier II gasoline sulfur rule. This 
treatment for small refiners will give them additional time and 
flexibility in meeting the requirements of the rule. We are similarly 
engaged with other agencies in the government on proposed low sulfur 
rules for diesel fuel and for MTBE.
    An important element of the Administration's energy policy is 
support for the development of energy technologies to reduce 
environmental impacts of energy use by:

 promoting technologies to produce cleaner conventional fuels;
 increasing the efficiency in the use of conventional energy 
        sources, primarily fossil fuels, and;
 developing alternative sources of energy.
    Cleaner Fuels. On the transportation side of fuel use, vehicles 
currently account for a large portion of urban pollution, including 77 
percent of carbon monoxide, 49 percent of nitrogen oxides, and 37 
percent of volatile organic compounds. The transportation sector also 
generates one third of U.S. carbon emissions. In coming decades, 
increasing public health and environmental concerns will likely lead to 
new environmental regulations that may be difficult or impossible to 
meet with current fuels.
    The President's Bioenergy and Biobased Products Initiative is 
intended to address this growing need. Recent scientific advances in 
bioenergy and biobased products have created enormous potential to 
enhance U.S. energy security, help manage carbon emissions, protect the 
environment, and develop new economic opportunities for rural America. 
This nation has abundant biomass resources (grasses, trees, 
agricultural wastes) that have the potential to provide power, fuels, 
chemicals and other biobased products. The President has set a goal of 
tripling U.S. use of biobased products and bioenergy by 2010, which 
would generate as much as $20 billion a year in new income for farmers 
and rural communities, while reducing greenhouse gas emissions by as 
much as 100 million tons a year--the equivalent of taking more than 70 
million cars off the road.
    DOE has also launched a new initiative this year, the Ultra-Clean 
Fuels Initiative, to address the need for cleaner fuels within the 
context of the current refining infrastructure. The Ultra-Clean Fuels 
Initiative will mobilize industry and DOE's national laboratories to 
develop and demonstrate new technologies for making large volumes of 
clean fuels from our diverse fossil energy resource base. In the nearer 
term, ultra-clean transportation fuels can be produced by upgrading 
refinery technology, and using new bio-fuel blends. In the mid-to-
longer term, ultra-clean transportation fuels can be developed through 
biotechnology, or from natural gas and coal, which enjoy high levels of 
compatibility with the existing infrastructures and could provide 
environmental benefits due to their suitability for use in advanced, 
high-efficiency vehicles.
    On the power side, fossil fuel-fired power plants emit about one 
third of the nation's carbon dioxide and significant amounts of 
NOX, SOX and particulates. These plants also 
account for 70 percent of all U.S. electricity generation and are 
projected to dominate power generation for the foreseeable future.
    Technologies for coal-fired power plants, developed by DOE, have 
resulted in improved performance at a fraction of the original cost. 
Coal is used to generate almost 52 percent of the nation's electricity 
and scrubbers are now deployed on one-third of U.S. coal plants. Our 
partnerships with industry have resulted in rapid development of low 
cost NOx technologies to address both near term needs and future 
environmental challenges. The near term challenge has been met by the 
addition of low-NOx burner technology to virtually all coal-fired 
boilers, and even more stringent technologies will be installed on a 
substantial portion of coal units. These technologies are 50-90 percent 
cheaper than options available just 10 years ago.
    To address pollution from coal and natural gas power systems, DOE 
has a program--Vision 21--with a goal of near-zero emissions from power 
generation and 60 to 70 percent generation efficiencies. The fleet of 
large, high-efficiency power systems envisioned by this program would 
produce emissions well below New Source Performance Standards for 
SOX, NOX, and particulates, with most advanced 
systems achieving near-zero emissions for regulated pollutants.
    DOE's Carbon Sequestration Program is designed to develop 
technologies and practices to sequester carbon that: are effective and 
cost-competitive; provide stable, long-term storage; and are 
environmentally benign. Increased carbon emissions are expected unless 
energy systems reduce the carbon load to the atmosphere. Accordingly, 
carbon sequestration--carbon capture, separation and storage or reuse--
must play a major role if we are to continue to enjoy the economic and 
energy security benefits which fossil fuels bring to the nation's 
energy mix.
    Increasing Efficiency in the Use of Conventional Energy Sources. It 
is particularly important to develop and deploy higher efficiency 
technology for fossil energy power generation since 85 percent of 
America's energy currently derives from oil, gas and coal. In 
electricity generation alone, energy efficiency potentially could be 
doubled through cogeneration and the application of advanced 
technologies.
    DOE's advanced turbines--fueled by natural gas or biomass, and 
capable of reducing NOX emissions and producing steam 
together with low-cost electricity--are already approaching 
efficiencies of 60 percent. High efficiency electric power systems, 
where fuel cells are joined with combined cycle plants, could improve 
efficiency to as much as 70 percent. Industrial resource recovery could 
be dramatically improved with the development of technologies such as 
an integrated gasification combined power technology, which would 
convert coal, biomass and municipal solid wastes into power and 
products.
    The U.S. uses 94 quads of primary energy a year. The nation's 100 
million households and 4.6 million commercial buildings consume 36 
percent of the total. Buildings also use two thirds of all electricity 
generated nationally. Energy consumption in buildings is a major cause 
of acid rain, smog and greenhouse gases, representing 35% of carbon 
dioxide emissions, 47 percent of sulfur dioxide emissions and 22 
percent of nitrogen oxide emissions. Clearly, more efficient buildings 
will pay big dividends in reduced energy use and a cleaner environment.
    Research and development areas for buildings include: heating, 
ventilation, and air conditioning; building materials and envelope; 
building design and operation; lighting; appliances, and; on-site 
generation. To use energy more efficiently, we are working to develop 
``intelligent building'' control systems, more efficient appliances, 
and fuel cells to power commercial buildings. Standards to improve the 
energy efficiency of flourescent lighting in commercial and industrial 
applications, proposed this March, are expected to save between 1.2 and 
2.3 quadrillion BTUs of energy over 30 years, enough energy to supply 
up to 400,000 homes per year over the same time period. We have 
recently proposed an update to the efficiency standards for water 
heaters, and expect to issue proposals for clothes washers and central 
air conditioners in the near future--each of which are likely to 
produce even greater energy and environmental benefits.
    The industrial sector consumed almost 35 quads of primary energy in 
1997--about 38 percent of all energy used in the United States. The 
industrial sector contains extraction industries, as well as materials 
processing and product manufacturing industries. Over 80 percent of the 
energy consumed in manufacturing (including feedstocks) occurs in only 
seven process industries: aluminum; steel, metal casting, forest 
products, glass, chemicals, and petroleum. These major process 
industries are becoming more capital-intensive. Markets are continuing 
to become more competitive globally.
    Reducing energy costs and waste, and reducing or eliminating 
environmental emissions upstream (closely related to energy use) are 
recognized, controllable costs that can increase productivity and 
competitiveness of U.S. businesses and decrease costs.
    The Department's primary program for industrial efficiency is 
Industries of the Future, which focuses on these seven most energy-
intensive and supports collaborative research, development, and 
demonstration efforts to accelerate efficiency in U.S. industries.
    If the Department's energy efficiency programs were fully funded, 
we could likely:

 reduce industry energy consumption per dollar of output;
 increase the average fuel efficiency of new cars and light 
        trucks by 20 percent by 2010;
 reduce the annual energy consumed by buildings; and
 by 2010, reduce energy consumption in federal facilities by 35 
        percent relative to the 1985 consumption level, saving 
        taxpayers $12 billion from 2000-2010.
    These reductions in energy demand will result in comparable 
reductions in greenhouse gas emissions, as well as reductions of other 
environmental impacts associated with energy use. Of course, none of 
this can be achieved without the active support of other agencies, 
industry and consumers. DOE looks forward to working with the Congress 
to develop and fund programs to increase the efficiency of our 
transportation, commercial, manufacturing and building sectors in order 
to save energy, increase the competitiveness of U.S. industry, and 
reduce our reliance on imported oil.
    Investing in Renewable Power Sources. Renewable resources such as 
wind, solar, photovoltaics, geothermal, biomass, hydrogen, and 
hydroelectric, are abundant. These alternatives are used for power 
generation and their primary advantage is that they produce virtually 
no emissions or solid wastes. Their primary disadvantages are the cost 
of producing power (except hydro) compared to coal and natural gas, and 
the need to create an infrastructure required to deliver this power to 
market.
    To take advantage of the environmental benefits of renewable power, 
the Department has focused on decreasing its costs and tackling 
infrastructure issues. The most feasible approach to lowering cost and 
delivering renewable power appears to be through distributed 
generation--alternatives to central power stations, where power is 
generated locally or on-site. Distributed generation technologies are a 
major R&D focus at DOE.
    In addition, the Department is working on improving the performance 
of specific kinds of renewable energy. The growth for wind power, for 
example, is the highest of all sources of energy in the world. Dramatic 
improvements in wind turbine technology has helped spur a 25 percent 
increase in wind-generating capacity over the last decade. Costs of 
wind generated power have dropped dramatically to between four and six 
cents per kilowatt hour. Photovolatic costs are down from one dollar in 
1980 to between twenty and thirty cents today. Geothermal costs are 
almost competitive with conventional power generation costs, coming 
down from fifteen cents to between five and eight cents today.
    Last year, the President issued an executive order directing 
agencies to expand their use of renewable energy. Meeting the goals of 
this order will reduce greenhouse gas emissions by 2. 4 million tons 
and save taxpayers over $750 million a year. It will also expand 
markets for renewable technologies, reduce air pollution, and serve as 
a powerful example to businesses and consumers who can reap substantial 
benefits from environmentally-friendly energy sources.
The Government's Commitment: Ensuring a Diverse, Reliable and 
        Affordable Set of Energy Sources for the Future
    The energy options within our portfolio are oil, gas, coal, energy 
efficiency, renewables, hydropower, fission, and fusion. We must 
strategically manage energy R&D with this understanding about the 
energy world as we know it: there is no single silver bullet which will 
solve all our energy needs, making science and technology--and a broad-
based energy R&D portfolio--key to meeting our long term energy needs..
    Without energy technologies, a ton of coal, a barrel of oil, a 
cubic foot of natural gas, a ton of uranium ore, a stiff breeze, or the 
sun's warmth cannot directly contribute to the prosperity of modern 
society. With the very best technologies, however, society can use 
energy resources efficiently and responsibly and with great economic 
and environmental gain. While economic and security challenges continue 
to demand investment in a robust energy research and development (R&D) 
program, environmental challenges provide additional impetus for 
increased focus on energy-related science and technology during the 
coming years.
    Technology development plays a strong supporting role in the 
Department's pursuit of all of its energy policy objectives. It 
supports improvement in the competitiveness of the energy system; the 
development of more efficient transportation, industrial and buildings 
technologies as a key objective; our goal of reducing the environmental 
impacts of the energy sector, and; the further development of 
technologies that reduce the environmental impacts of energy 
production.
    The requirements for near term returns on investment, limited 
resources and the risk averse nature of many industries warrant a 
special role for government in the support of technology development, 
especially when new technology can help address national concerns not 
fully reflected in the marketplace. Consequently, the development of 
new energy technologies has been a central mission of the Department of 
Energy's since the late 1970's. At DOE, we focus on maintaining a 
strong national knowledge base as the foundation for informed energy 
decisions, new energy systems, and enabling technologies of the future, 
and developing technologies that expand long-term energy options.
    Ensuring the success of the Department's research and development 
efforts has been a constant challenge, especially during periods of 
stable or declining energy prices, when market incentives for 
technology development and adoption are at their lowest. In addition, 
the unpredictability of technology development process and the 
continual changes in scientific knowledge, social priorities and market 
demands pose additional challenges to government efforts to effectively 
spur technology development.
    I have already discussed many of DOE's energy technologies and 
technology investments and successes. I would now like to discuss our 
energy portfolio more broadly, and then focus specifically on natural 
gas as a transition fuel.
    DOE's energy resources R&D portfolio is organized in three broad 
strategic areas: reliable and diverse energy supply ($170 million, FY01 
request); clean and affordable power ($542 million, FY01 request), and; 
efficient and productive energy use ($437 million FY01 request). In 
addition, the Department has a basic science portfolio ($1.2 billion FY 
01 request) which supplies the foundation for much of the applied R&D 
in the energy areas.
    A number of reviews and studies have been conducted that provide 
valuable information on the adequacy and focus of this portfolio. 
Overall, these studies have confirmed that our energy portfolio is 
generally well-focused on the nation's strategic energy goals. However, 
the studies also have identified a number of deficiencies in how fully 
these goals are addressed by the portfolio and made a number of 
recommendations for important portfolio changes or additions, 
including:

 Significantly enhanced R&D funding
 Renewed emphasis on electric power systems reliability
 A Nuclear Energy Research Initiative
 Carbon management R&D
 Increased bioenergy R&D
 Methane hydrate R&D
 Hydrogen R&D
 Clean fuels R&D
 Integration of fuel cell R&D efforts
 An international RDD&D effort
    The Administration strongly supports the increased use of natural 
gas. Several of these recommended changes or additions to our portfolio 
relate directly or indirectly to natural gas--power systems 
reliability, carbon management, methane hydrates, clean fuels, and 
fuels cells all involve the development of technologies to increase the 
supply, improve the delivery of, or improve the environmental 
performance of natural gas.
    Also, as I mentioned earlier, because it is abundant and relatively 
clean, natural gas will be the fuel of choice to meet the nation's 
future power generation needs. Of the 1000 powerplants the Energy 
Information Agency (EIA) projects the U.S. will need by 2020, 900 will 
probably be natural gas power plants. If we are able to produce the gas 
to meet this need, we will need the means to distribute it safely and 
efficiently. Right now, there are 85 proposed pipeline projects just 
for the years 2000 through 2002, at the same time significant 
impediments exist for pipeline and storage siting.
    Investments in natural gas R&D are critical to meet future energy 
needs. The Clinton/Gore Administration has invested roughly $1.5 
billion in natural gas R&D. DOE's joint efforts with industry have 
helped produce the fuel cells, microturbines, reciprocating engines, 
and other enabling technologies to power the gas industry of the 
future. DOE's request for natural gas R&D funding in FY 2001 is around 
$215 million and, as I mentioned earlier, includes an initiative for 
energy infrastructure reliability. The natural gas portion of this 
initiative specifically focuses on methane leakage, aging and corroding 
pipelines, and natural gas storage, to improve the safety and 
reliability of the natural gas distribution network.
    Last December, Secretary Richardson established DOE's newest 
national laboratory--the National Energy Technology Laboratory, co-
located at Morgantown, WV, and Pittsburgh, PA. This laboratory is 
dedicated to providing the nation with clean and affordable fossil 
energy and will house a new Center for Natural Gas Studies, in order to 
give added focus and emphasis to natural gas policy and ``bore hole to 
burner tip'' research and development.
    Presidential Decision Directive 63--Critical Infrastructure 
Protection--establishes safety and security of the natural gas 
infrastructure as a national security priority. In addition, the 
Administration also envisions a substantial role for natural gas as the 
transition fuel for a cleaner environment, and in reducing greenhouse 
gases. The President's Executive Order on the Greening of the 
Government promotes efficiency in federal buildings, acknowledging that 
there are substantial efficiency gains to be made by measuring energy 
from the source, not just at the site. Natural gas is a winner in this 
scenario.
    The Administration's Comprehensive Electricity Restructuring bill 
will benefit natural gas as well by providing for more rapid market 
penetration of innovative technologies on both sides of the customer's 
meter. End-use distributed generation technologies, for example, have a 
critical role to play in a restructured energy future. Along with new 
uses for natural gas, these technologies promise relatively high 
efficiencies, low emissions, increased flexibility and reliability, and 
cost-effective alternatives to the traditional utility grid 
infrastructure.
    To further develop natural gas power systems for the 21st century, 
DOE will be focusing on advanced combustion science and technology; 
interconnect devices and parameters for standard interconnect designs 
to enable distributed generation; low temperature catalysts for 
emissions control; inexpensive sensors for emissions monitoring, and; 
carbon dioxide separation and sequestration technology. For natural gas 
storage, we will be investing in developing non-damaging fluids for 
drilling, and methods for controlling reservoir damage caused by 
drilling and perforating fluids.
    We need to encourage increased natural gas supply. The National 
Petroleum Council's recent study on natural gas projects increased 
consumption for natural gas of 29 trillion cubic feet (TCF) in 2010 and 
31 trillion cubic feet (TCF) by 2015. At the same time, EIA estimates 
that in 1998, reserve additions of natural gas were only 83 percent of 
production. To meet this demand, we will need to ensure that we have an 
adequate supply of natural gas.
    Several pieces of legislation I described earlier--specifically the 
deep water royalty relief and the guaranteed loan program for small oil 
and gas producers --will benefit natural gas production, as will the 
G&G and delayed rental tax credits supported by the President. In 
addition, our energy supply R&D programs, designed to lower the costs 
of oil and gas production, will help add to the nation's supplies of 
natural gas. These include:

 a Diagnostics and Imaging Program to cost-effectively locate 
        and produce oil and gas reserves;
 the Advanced Drilling, Completion and Stimulation Systems 
        Program which focuses on the development of sophisticated 
        drilling technologies and methodologies;
 the Gas Hydrates Program, a long term R&D effort to help turn 
        potential methane hydrates into gas reserves, and;
 the Low Quality Gas Upgrading Program to purify gas reserves 
        containing high levels of contaminants.
    Clearly, much remains to be done if we are to meet significant 
increases in demand for natural gas over the next two decades. We look 
forward to working with Congress in a bipartisan effort to increase the 
nation's supplies of natural gas.
            prosperity and security are ``energy dependent''
    Energy plays a vital role in our economy. Somewhere between six and 
seven percent of our Gross Domestic Product--about $600 billion per 
year--is attributable to energy consumption. Over $200 billion per year 
is spent on transportation fuels. Approximately $200 billion per year 
is spent on electricity--to power our factories, to light, heat, and 
cool our homes, offices and schools, and to increasingly power the 
electronically-based New Economy. The electric bill for the nation's 
industrial sector alone is around $100 billion annually.
    Clearly, energy is the engine that drives our economy. At the same 
time, it represents a substantial cost to consumers and businesses--its 
fundamental importance to the nation's economic and environmental 
health has warranted investments by this and previous Administrations 
in a set of policies and a portfolio of technologies to produce more 
energy, to use it more efficiently, to reduce its impacts on the 
environment, and to find alternative sources of supplies.
    These policies and investments have paid big dividends. Over the 
20-year history of the Department of Energy, we have made a great deal 
of ``energy progress.'' In today's dollars, we are paying substantially 
less for a gallon of gasoline than in 1980. We have diversified our 
suppliers of imported oil--three out of four of our top importers are 
in the Western Hemisphere.
    We have, by far, the largest strategic petroleum stockpile in the 
world. Relatively recent policy changes and technological advances have 
spurred oil and gas production on the Outer Continental Shelf and 
extended production on Alaska's North Slope. Significant technology 
improvements have lowered oil and gas exploration and production costs 
dramatically and reduced the environmental footprint of energy 
production to one tenth the size it was twenty years ago.
    In addition, the rapid development of energy efficient technologies 
and practices and the restructuring of our industrial sector has 
enabled the United States to decrease its energy use per dollar GDP by 
around 40 percent since 1973, representing an annual energy cost 
savings of over $400 billion. Between 1970 and 1990, the average fuel 
efficiency of automobiles went from 13 miles per gallon to 20 miles per 
gallon. The efficiency of combined cycle gas turbines for electric 
power generation exceeds 60 percent and wind energy and biomass show 
tremendous promise for cost-competitive power generation from 
alternative energy sources.
    Despite this track record, the potential for increased energy 
savings in the U.S. economy remains enormous--and to meet growing 
energy demand, it remains essential. In the utility industry for 
example, only one third of all thermal energy from coal or gas is 
actually transformed into electricity in a typical power plant. In the 
transportation sector, which accounts for 60 percent of the nation's 
demand for oil, the fuel economy of passenger vehicles has actually 
declined in recent years due to the increasing market share of SUVs and 
minivans. Net imports of oil continue to increase and domestic oil 
production has declined.
    The Clinton/Gore Administration is proud of its record on energy 
policy and on our progress in achieving the nation's energy goals. 
Clearly, however, much remains to be done. Secretary Richardson has 
called on the Congress to work with us in a bipartisan fashion to pass 
legislation for those energy incentives and programs which require 
Congressional action, namely comprehensive electricity restructuring, 
tax incentives for oil and gas production, energy efficiency and 
alternative fuels, the reauthorization of EPCA, the creation of a home 
heating oil reserve in the Northeast, and a supplemental appropriation 
to replenish emergency LIHEAP funds before we enter the summer power 
season.
    We look forward to working with you in the days ahead. If we are 
going to meet the nation's energy needs of the 21st century, we have 
neither the time--nor the energy--to waste.

    Mr. Barton. The Chair will recognize himself for 5 minutes 
of questions. Admiral Watkins, I will ask you to elaborate a 
little bit on your comments about being able to environmentally 
safely produce some of the oil and gas that we think is in the 
Arctic National Wildlife Refuge.
    Mr. Watkins. We went through this in agonizing depth 10 
years ago. Members of Congress, as well as myself, went to 
Prudhoe Bay, inspected the pads that were there. They have been 
refurbished and returned to the tundra. We went over to the 
Arctic National Wildlife Refuge, we looked at the footprints 
that were required to do the horizontal drilling, used the 
technologies to be able to go from small pads, convert them in, 
say, 20 years back to tundra. We felt very comfortable that we 
could do this with modern technology, with all the things that 
we had learned at Prudhoe Bay, in a sensible way 
environmentally. I agree it is a treasured area.
    On the other hand, we have a lot of treasured areas like 
the Gulf of Mexico. We seem not to put that off limits. We 
don't mind exploiting that. What is it about? Is Alaska still a 
territory? Eighty-three percent of the Alaskans, including the 
legislature, wanted to do this. Is it the wisdom of this 
Congress that that State--we like State's rights on other 
things--closes it down when in fact we have demonstrated that 
we can do it in an environmentally sound way?
    The ramp that you see in the decline in supply is adjusted 
by just the Arctic National Wildlife Refuge alone. Not a great 
deal, but 1 million or 2 barrels a day is a lot. It keeps us 
going a little bit longer and has a little bit better 
contribution to energy security than not. So we believed both 
we could do in an environmentally sound way, that it did make 
sense over time as we transitioned out of the oil problem and 
demand in this country. And we talked about oil prices and the 
fact that it is down in real dollars to its lowest ever.
    Tell that to the little people out in the West who have the 
car as their only source of enjoyment in life. But we tried to 
raise the price of gas 5 cents--remember that in 1982--and the 
hue and cry was incredible. And the Congress wouldn't stand for 
a nickel.
    We raised it 40 cents now. Because of OPEC, there is a 
little whimper, but everybody is still driving. It is a 
fascinating set of rules. But the Arctic National Wildlife 
Refuge and these other offshore for gas places are 
environmentally sound, much more so than shipping oil and 
importing oil. We have already seen the Exxon Valdez situation 
and we know that the contamination generated by oil in these 
bottoms moving across the world are far more deleterious to the 
environment than drilling offshore and doing so competently.
    Mr. Barton. I will ask one more question, then I am going 
to have to go. Mr. Martin in his testimony talked about the 
efficiency of natural gas being converted directly to 
electricity through some of these microgenerators that are 
coming online.
    Congressman Sharp, you have studied some of these issues. I 
remember you were a leading proponent of some of the appliance 
efficiency standards that I voted against actually when they 
were before your subcommittee. Do you have a comment on what 
Mr. Martin said in terms of the overall cycle efficiency of 
direct----
    Mr. Sharp. I can't speak to the specifics of some of the 
problems, but there is no question about the higher efficiency 
and environmental soundness if you don't have to go through the 
loss in transferring into electricity, and then lost lines, 
even though we expect newly improved efficiencies there if we 
can get a marketplace working. But I don't think there is any 
doubt that there is a great deal of efficiency to be gained by 
the use of natural gas.
    Mr. Shimkus [presiding]. Thank you, Mr. Chairman. Now I 
will recognize myself for such time as I may consume or the 
ranking member gets back. And I do that because I like to get 
the gavel and I like to get some of these questions. You all 
were here on opening statements.
    Let me address a question. Part of the price equation right 
now a lot of you have referred to is the environmental issues 
or the regulatory. Can you--Dr. Yergin, I know that is in your 
testimony--can you address what some of those environmental 
issues are that are we are projecting as being an increased 
portion of the cost?
    Mr. Yergin. Over about the past decade and a half, the 
refining industry in this country has made about $22 billion of 
investment to meet environmental considerations. What is 
striking is the degree to which that part of the industry has 
continued to push down its other costs so that in effect it has 
absorbed a lot of that investment. Right now we are seeing some 
switchovers for environmental reasons to new gasoline for 
summer driving. And that is one of the factors. It is one of 
the four factors that is an element in the higher gasoline 
prices we are seeing right now.
    Mr. Shimkus. But percentage-wise, I think your initial 
response was the cost of producing at the refinery and the 
emission requirements is the cost of doing business today. Is 
that----
    Mr. Yergin. It is a substantial cost.
    Mr. Shimkus. Percentage-wise?
    Mr. Yergin. I will have to go through my papers here.
    Mr. Shimkus. We know there have been accusations about 
numerical superiority or lack thereof. Mr. Martin, do you have 
a response? I know you are natural gas.
    Mr. Martin. They might have a better feel on this.
    Mr. Hakes. We have done some detailed studies on what this 
cost is for the remaining industry. I can't cite them off the 
top of my head but we can make them available to the committee.
    [The following was received for the record:]

    EIA has done some detailed studies on the expected cost of 
Phase 2 reformulated gasoline (RFG). The cost of manufacturing 
this new gasoline varies from winter to summer and from North 
to South. For many refiners, no additional cost is expected to 
produce Phase 2 RFG in the winter months as Phase 1 RFG already 
meets the required emissions reductions. Producing summer-grade 
Phase 2 RFG, however, will require additional investments and 
changes in gasoline blending at refineries that will increase 
costs.
    As with any analysis, the results of this study are 
influenced by the premises and assumptions underlying the 
analysis. This analysis of the cost of Phase 2 reformulated 
gasoline was released in the spring of 1999 when oil prices 
were at much lower levels than today. The added energy costs as 
a result of the sharp rise in oil prices over the past year 
would increase the cost estimates. (For example, the price of 
crude oil has almost doubled and the costs of producing RFG 
could be assumed to increase proportionally. In addition, the 
spot price of MTBE, a major gasoline blending component, more 
than doubled from $0.74 per gallon in May 1999 to $1.55 in June 
2000.) In addition, some simplifying assumptions related to 
gasoline production and blending were made to facilitate the 
cost estimation. For example, in estimating the cost of 
reducing Rvp to the lower levels needed for Phase 2 RF6, a 
linear extrapolation of the price spread between two types of 
gasoline that have higher levels of Rvp was used. However, 
costs are likely to rise at an increasing rate as gasoline 
specifications become tighter. Furthermore, this study did not 
analyze the cost of producing Phase 2 RFG using ethanol as the 
oxygenate blendstock rather than MTBE. The estimates presented 
are average cost estimates for producing the new gasoline. The 
marginal cost of producing the new gasoline (i.e., the cost of 
producing the last barrel) may be higher which could affect 
prices at the pump.
    Given the caveats stated above, EIA estimated that the 
increase in cost from Phase 1 to Phase 2 RFG in the summer 
months is expected to be approximately 1.0 to 1.5 cents per 
gallon. Phase 2 RFG is expected to cost 2.5 to 4.0 cents per 
gallon, on average, more than conventional gasoline, depending 
on the region of the country and the time of year.
    Like RFG Phase 1, the fuel economy (miles per gallon) of 
Phase 2 RFG is about 1.5 to 2.0 percent lower than conventional 
gasoline. There is no need for new equipment to transport or 
distribute Phase 2 RFG, beyond that needed for Phase 1 RFG. 
However, in the past, the introduction of new types of fuel has 
led to supply problems and attendant price spikes.
    For more detailed information, see Tancred Lidderdale and 
Aileen Bohn, Demand and Price Outlook for Phase 2 Reformulated 
Gasoline, 2000, http://www.eia.doe.gov/emeu/steo/pub/special/
rfg4.html.

    Mr. Hakes. I would agree with Dr. Yergin that the refining 
industry has done an incredible job to keep these costs from 
being passed on much to the consumer because the refining 
margins in this country are very, very low. It is rather a 
small part of the overall price.
    Mr. Yergin. If I could just give you over the last couple 
of years the averages. If you look at the gasoline price, 35 
percent of it actually reflects crude oil costs. About 35 
percent represents tax. And the rest would be the refining, the 
marketing costs, including the environmental.
    Mr. Shimkus. The reason why I bring this up, I just have an 
article here from the Sun Times, to no one's surprise, that I 
am a big renewable fuel proponent of ethanol and biodiesel; 
because of the high escalation of prices, I think the oil 
industry is going to try to attack the oxygen standard, the 
clean air positive aspects of that, and say that is one of the 
major environmental components for the increase in costs.
    In fact, I will quote from the Sun Times today from a 
Phillip K. Velleger Jr., an oil expert from a Boston-based 
group, which says, ``I wouldn't be surprised if consumers pay 
$2.50 this weekend,'' which has seen gas--and then that is his 
quote. And then in the analysis, they have seen the gas prices 
rise faster than the national average, talking about the 
Chicago and Minnesota market, because of the increased use of 
ethanol in the blending process.
    Would you agree that that is a major component of the 
increased prices seen in the price of gasoline across the 
Nation, the oxygenate standard and renewable fuel portion?
    Mr. Yergin. We are switching over to summer gasolines right 
now and there are new specifications. But the bulk of the 
increase in gasoline prices, although not all of it, that we 
have seen over the last 4 months reflects the rise in crude 
prices on the world market.
    Mr. Shimkus. That mirrors the testimony pretty much across 
the board. I just wanted to put that on the record for our 
consumption.
    Admiral, I have a question on the SPR. Not just from your 
experience in the Department of Energy but from your military 
background, which I have a limited one myself, and there is 
always an assault on the SPR when the prices are high. We do 
use it, as was in the testimony, to jimmy the market and the 
supply and demand and try to affect prices. Why do we have a 
SPR?
    Mr. Watkins. We certainly don't have it to jimmy prices. It 
was never designed for that. It was designed for security 
purposes, so in the event of a turnoff, something we might have 
had during the Gulf War, it was there to use--rather low grade 
crude, as a matter of fact--but for a period of time. And we 
have tested it and moved it into the pipelines and got it to 
refineries to be able to live for a few months supplying our 
ships, aircraft, and so forth with refined products and cut 
back on the urgency of dealing with the transportation of oil 
primarily by sea. So it was designed from a national security 
point of view.
    And every time we have a gas price increase, somebody 
raises the issue, why don't you use the SPR? It is a classic 
one. I talked to Secretary Richardson when I was over there 
finding the new nuclear czar. He said, we got it again. I said, 
don't play around with it. It is not to be used to influence 
the market. In the first place, it is not that deep of a 
reserve, the pockets are not deep there. That should not be 
used.
    What we did in the Gulf War to show how important it is to 
national security is, in the fall of--and I am going to say it 
was 1990, I can't remember now but I think it was the fall of 
1990, we tested the SPR. Well, you can imagine the hue and cry 
I got from within the administration itself. Just to test the 
SPR, you are fiddling with the market.
    Well, that was the an extreme position. We were trying this 
test just to see if it would work. The fact that we tested it 
was extremely important. If you can remember what happened in 
the Gulf War, in a very short period of time we spiked to $40 a 
barrel and it came right back down. One of the reasons, in my 
opinion, is we demonstrated that we were serious about that SPR 
for national security purposes and we were not going to allow 
the Iraqis to interfere with that process.
    That is what it is important for. And it did the job then. 
And the preparation before that wasn't to keep quiet and keep 
all our data in DOE. We had a whole task group, including the 
futures market from New York, come down and participate with 
us. We set up special systems to the Saudi Minister of Energy 
that I had a private circuit with. I wanted to know what was 
going on in the Gulf all the time, whether it was fact or 
fiction that was being reported by CNN and other things. We had 
everybody connected with us and we knew that we had to do that 
so that the market wouldn't be spooked.
    But it had nothing to do with using that for those purposes 
that many want to use it for and mal-use it. It was never 
decided by Congress that we should use that for market 
manipulation, nor should it ever be.
    Mr. Shimkus. Thank you. Congressman Sharp, I know you have 
a point.
    Mr. Sharp. I want to very strongly reinforce what Secretary 
and Admiral Watkins had to say. While we did have a bit of a 
political dust-up at the time, it really is quite irrelevant to 
the proposition that we tested at that point. And the President 
announced he would use it if he needed to, and it was designed 
to deal with the enormous speculation going on in the 
marketplace at a time when we thought the Saudi fields could 
well be threatened by missiles out of Iraq. So it may have had 
some clear justification for use.
    That is the only time, the only time it has been used. And 
it should not be used just to quell the marketplace.
    First of all, you don't know that it will work. Second of 
all, you don't know if you are really trying to fight the 
cartel. They still might be in a position to totally undermine 
what you are doing in terms of prices. And, third, you will 
have a disruptive effect within the U.S. market as to where 
things flow because you will suddenly glut certain parts of the 
U.S. market. It is just not an easy, clean thing to do.
    But it is, from a security point of view, as long as we 
have got the world oil situation as it is, an important thing 
to have. And we have it, by the way, people forget, in 
conjunction with international agreements with a number of 
other of the consuming nations to also have reserves.
    Mr. Shimkus. Let me move to Ms. Kenderdine.
    Ms. Kenderdine. I just want to say for the record that the 
Clinton Administration has never advocated selling SPR oil to 
manipulate prices either. That is not allowed under the statute 
that authorizes the Strategic Petroleum Reserve. You are only 
allowed if the criteria are anticipated or actual supply 
disruption.
    In the situation in December Y2K, no one knew what was 
going to happen about our imports of oil, and so we were 
prepared with the documents to start a process to sell oil if 
an actual problem did occur or if we saw something weird, if 
Mr. Hakes had seen something early on in December out there 
that was going on in the markets because of that, but we have 
never advocated using the SPR for to manipulate prices.
    Mr. Shimkus. Then let me take this premise what we, the SPR 
for national security purposes, shouldn't use it to manipulate 
the market. It is limited, though. We all agree that is 
limited. And to really supply the fuel for a theater war, it 
takes time. And, again, it is limited.
    Do you not think that it is in our national interest, our 
national security interest, since we have an SPR that is 
limited, that we continue to move to prepare for longer 
conflicts of duration and continue to operate and work off the 
premise of making sure our marginal wells are operating, 
address the other fuel locations and also continue to help 
develop our renewable fuel opportunities, ethanol and the 
biodiesel options? Admiral.
    Mr. Watkins. I would only say that I would have to put the 
answer to that in the context of what else in the energy 
strategy? I don't believe you can decide whether you want to 
have an expanded SPR, for example. That has been debated time 
and time again. It has never looked economically sound. If you 
decide you are going to closeout all new oil exploration and 
production, you are going to closeout new technologies being 
applied to existing wells or existing fields, if you are going 
to do those kinds of things, then I think the answer is 
probably yes. But I think you have to balance off do you want 
to increase SPR or do you want to increase our production of 
oil in this country.
    I would do the latter first. I don't think the SPR is a 
great investment to go beyond just about what it is today. I 
have never seen an argument that is well laid out that says we 
have such an enemy out there such as the former evil empire 
that would demand that kind of a larger SPR. So I would say no.
    The ethanol issue I think, while it is related, is quite 
different. And we certainly were proponents of pushing that 
component of the energy supply system very hard during the 
Energy Policy Act preparation in 1992 and still feel very 
strongly about it.
    We have helped other nations as well. DOE would go to 
Brazil and show them how to better produce the ethanol. They 
are 95 percent fueled in their transportation sector by 
ethanol. They do it through the various reconstitution of their 
crops and so forth. We help them do that.
    That is what we should be doing worldwide. That is the kind 
of thing that ought to be in AID. That is the kind of thing 
that the State Department ought to be worrying more about on 
S&T and foreign policy, which they don't do. There are a lot of 
things to do on the ethanol front that have not been exploited 
well in terms of policy, execution of those policies, 
monitoring, getting into the foreign policy issue and so forth.
    So I put ethanol aside from SPR. It is hard for me to link 
those two.
    Mr. Shimkus. Anyone want to venture into----
    Mr. Martin. On the SPR, really I think Ronald Reagan got 
this started with a lot of help from this committee in the 
early eighties. It was not only an SPR for us, it was an SPR 
for everybody. To the extent we show leadership other countries 
join us, because our SPR is only as good as the SPR in Japan or 
Amsterdam or Germany or whatever. Because we coordinate these 
through the IEA. We always have to keep our mind on that. It 
would have been very bad from a leadership point of view if we 
start to use our SPR for market mechanisms.
    I agree with the Admiral on the ethanol point. That is 
really quite long-term energy policy. That is infrastructure. 
That is the need to put in place an adequate distribution 
system for the next 10 years so we are less reliant on oil. But 
we still need the SPR, and it still has to be part of the IEA.
    Mr. Hakes. I would like to make two comments that I think 
might be helpful. One is that I think there could be a tendency 
to have a false sense of security about the international 
situation in the sense that Saudi Arabia has intentionally had 
a policy over the years of having excess capacity available 
that they could bring online immediately, and under some 
circumstance that has, in effect, been almost a petroleum 
reserve. I think that has been helpful to the world market in a 
couple of instances. But I think there is the question of 
whether one would just assume that into perpetuity. So I think 
that some of the things like the reserve and other policies 
that are kind of insurance policies are important.
    I would say, on the ethanol issue, that this is even a 
better example of where technology matters. The current state 
of distilling ethanol from corn is not terribly competitive, 
but if you look at some of the less mature technologies that 
can be used on cellulose, there are dramatic changes that could 
be made.
    And, again, I would refer to another EIA study that I think 
is helpful that looks at the long-term potential for ethanol. 
And if you had a very crash program with these new techniques 
that would use things like switch grass and other forms of 
cellulose, you could conceive a situation in which ethanol 
might be cost competitive with petroleum.
    I know that we are a conservative agency in making those 
kind of estimates, but I would commend that argument to you. 
But that wouldn't happen with today's technology. It would 
require a very strong effort to invest in those technologies.
    Mr. Shimkus. I appreciate the comment because you are 
mirroring my comments on the ethanol research plant that I have 
been diligently fighting for and I hope to have some success 
this year.
    Ms. Kenderdine. I would just like to say that the Clinton 
Administration is a strong supporter of biofuels. And, you 
know, when over 60 percent of your oil use is in 
transportation, 97 percent of your transportation runs on oil, 
looking at alternatives such as ethanol is very, very 
important.
    The President put out an executive order a couple months 
ago to triple our investment in biofuels and biodiesel 
technologies--not biodiesel, biomass technologies. And also 
with what is happening with MTBE in the marketplace and the 
environmental groundwater problems that are associated with 
MTBE, we are projecting large increases in demand for ethanol. 
We already have delivery problems, infrastructure problems with 
that that we need to work on; and that will take time. But it 
has a good future.
    Mr. Shimkus. The administration is going to have an 
opportunity within the next couple months--we do see a 
disparity between the DOE and the EPA and working together. Of 
course, they are not here, but we are also talking about the 
environmental effects of this supply and-demand equation. And 
they really should be here.
    I have taken much more of my time. But that is what I get 
for being diligent and moving rapidly to the vote.
    I would like to now turn to the ranking member, Mr. 
Boucher, for his questions.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Martin, I was rather taken with your hopeful 
projections for the energy circumstance for the year 2020 
premised on a 60 percent increase in natural gas consumption 
with a corresponding increase in coal consumption and a decline 
in petroleum imports. And I wonder if you could tell us a 
little bit about where you see the natural gas that would fuel 
that 60 percent increase in consumption coming from? Is it 
purely domestic sources? Does it anticipate having access to 
the Outer Continental Shelf, production from which has been 
under moratorium since the 1980's and there is no immediate 
sign that that is about to change? Where do we get the natural 
gas that would fuel this 60 percent increase in consumption?
    Mr. Yergin says we are making quite a bet on relying to 
that great extent on natural gas in the future. Is he right 
about that? Can we with some comfort assume that the gas will 
be there for that significant increase? What will be the 
effect, in your opinion, on natural gas prices and what will be 
the effect on the price of other fuels?
    So it is a fairly comprehensive question about some of the 
more general effects of this hopeful future that you predict, 
but premised, first of all, on where we are going to get the 
gas.
    Mr. Martin. That is a good question. Thirty quads of that 
come from the United States and five from imports from Canada. 
None of this presumes gas from Alaska, although that is 
certainly an option. I think perhaps if you ask Senator 
Murkowski or some Alaskan they might say the likely market 
conditions in Asia may prefer that gas to the lower 48.
    Mr. Boucher. And the Outer Continental Shelf?
    Mr. Martin. Here I have come here----
    Mr. Boucher. I am not asking whether it is a good idea or 
not. I am----
    Mr. Martin. I think we probably will have to drill to 
achieve that level. I say this as an environmentalist. I am on 
the board of World Resources Institute, and I am one of the two 
Republicans, I guess a couple tokens, on that.
    I am always trying to point out to the Board you cannot 
achieve a clean future, you cannot achieve, if you want to meet 
your Kyoto targets, you cannot achieve lowering SO2 
and NOX without greater use of gas. And yet to do 
that you have got to drill in places which are presently off 
limits from the environmental community.
    You also have to, by the way, have nuclear power, if we are 
really serious about national security and keeping those oil 
imports low--and I should say my oil import number was, for 
2020, around 11 million barrels a day. So part of this 
challenge is putting together a mosaic which achieves 
nationality security economics and environment.
    And there are going to be some tradeoffs. And drilling in 
presently restricted areas is going to be one of those areas.
    As a guy from an Oklahoma oil and gas family, I can tell 
you that there is a lot of gas out there. Nobody wanted gas 
originally. They just wanted oil. They kept finding more and 
more and more gas. So I guess I come from that Oklahoma 
optimism about the supply side.
    Also, the cold methane, Alaska, in fact, we are very lucky 
in this country that we have so many accessible areas of gas, 
including Canada which has enormous gas reserves. If we were in 
Japan or Europe we would have to think about long distance 
pipeline, we would to think about LNG, which again would 
increase the cost.
    Final point on price, and at Harvard they are much more 
expert in price than I am, because I have learned to be very 
humble. It is a very interesting dynamic. Natural gas 
consumption has actually been rising quite rapidly in the last 
10 years, and natural gas prices have been going down. And if 
you couple that with the new technology, as EIA pointed out, I 
am not so sure we have to see a significant increase in the 
price of gas to achieve that. Yes, it will be difficult, but so 
is expanding coal and meeting environmental targets. So is 
expanding nuclear power. So is reliance on oil imports. As we 
look across the range of things I think the gas perhaps is the 
most optimistic part of the energy strategy, as I see it, in 
the future.
    Mr. Boucher. Mr. Yergin, I would be very interested to hear 
your comments on this optimistic scenario.
    Mr. Yergin. First of all, I think all these good things 
that have happened to natural gas over the last 10 years we 
should obviously attribute to the subcommittee and its wisdom.
    Mr. Barton. Of course. Mr. Sharp.
    Mr. Yergin. As I said, it is a bet that we are making. It 
is a good bet that we are making. It is a bet we have to make 
in terms of natural gas.
    Because if you look at our overall energy picture, there is 
so much discussion about the new economy that we are going to 
have is very much an electricity-based economy. It depends on 
the quality of electricity, and that is going to depend a lot 
on gas. But we have, over the last couple of years, had an 
industry that produces gas, exploring for it that has been 
injured a lot by what has happened to it with very low prices 
which most people didn't notice. And so that there is a big 
agenda there in terms of investment, in terms of access, in 
terms of infrastructure. It does mean look to the north, look 
to the frontiers.
    To some, a subject that we in our company, Cambridge 
Energy, have been very concerned about, and I hope maybe by 
September in the work we are doing that we will have some 
answers on the future of natural gas supply because it really 
is an absolutely critical question for our overall economy. And 
September is our target for that.
    Mr. Boucher. Thank you.
    I have one additional question, Mr. Chairman, if I can 
indulge the subcommittee for that.
    Mr. Barton. Sure. It is just you and I for that right now.
    Mr. Boucher. If I could indulge you for that.
    It is not within the jurisdiction of this committee to 
legislate with regard to taxes, but I think this discussion 
this morning would not be complete if we didn't address the 
question of the section 29 tax credit. And I would be very 
interested in hearing from this panel of witnesses your opinion 
with regard to the affect that the section 29 tax credit has 
had in terms of encouraging the production of oil and natural 
gas from unconventional sources and the importance of that tax 
credit going forward to encourage that very kind of production. 
And also any recommendations that you might have for ways in 
which the tax credit could be modified to better enhance our 
potential for oil and natural gas production from 
unconventional resources in the future. The credit expires at 
the end of 2002, at the end of the next Congress.
    And the final part of this question is, would it be helpful 
to have the credit reauthorized earlier, perhaps even this 
year? We will have a variety of tax measures, no doubt, to 
consider this year and would it be helpful to have it done this 
year as a way to give confidence to producers that the credit 
will be in place and encourage them to begin oil and gas 
production from nonconventional resources in the near term?
    Anyone? A mouthful of silence.
    Mr. Watkins. I am not an expert in this area, Mr. Boucher. 
I would just say this. I think it makes a lot of sense 
politically, from a public policy point of view, to let our 
great independents that are out there working these problems in 
the field know ahead of time that you are not going to let them 
down. So I can't tell you how important it is.
    Let's don't let it run to the wire and then shock them 
either one way or the other. They have got to know now so they 
can keep their pitiful investments going, whatever it is. So 
give them some hope with this.
    I only hope by saying that, however, that that doesn't 
become the national energy policy of this Congress. The trouble 
is, we come in to simple fixes like that which are wonderful 
and absolutely essential. We were on this same issue in the 
Energy Policy Act. By the same token, it isn't the answer to 
everything. It is very helpful, though. Because, you know, it 
is the little mom-and-pop outfits in Oklahoma and Texas and so 
forth that really are giving us the oil production in this 
country. The big boys have gone overseas. So we really do have 
to give them incentives as much as we possibly can to take us 
through this transitional period until we get our act together 
on oil and gas.
    Mr. Barton. The gentlelady from the Clinton Administration. 
We hope you will support your ranking member in wanting to do 
this.
    Ms. Kenderdine. Absolutely, sir. That is just from me, not 
from the administration.
    Mr. Barton. We will take it.
    Ms. Kenderdine. We recognize that section 29 has been a 
very successful tax incentive. And from a committee that 
doesn't write tax law to an agency that doesn't do tax law 
either, I think our tax law would be very different if the 
Department of Energy were directly responsible and in control 
of it. But we would be happy to examine this further.
    I know that Bob Gee, our Assistant Secretary for Fossil 
Energy, has met with industry on many occasions on this and 
talked to the National Economic Council experts about this and 
discussed the impacts and possibilities.
    Mr. Boucher. Thank you for that. While we don't legislate 
on the subject, we can certainly talk about it----
    Ms. Kenderdine. And we do all the time.
    Mr. Boucher. [continuing] what, if any, changes might be 
helpful. And to the extent that your department can give us 
advice on that subject we would welcome it.
    Ms. Kenderdine. Absolutely. We have some very good tax 
people in our Fossil Energy office. Happy to have them come 
talk to you.
    Mr. Boucher. Thank you, Mr. Chairman.
    Mr. Barton. I only have one final question for this panel. 
Then I want to welcome our second panel. I would like the staff 
to put up the EIA chart that shows the outyear gap between 
production and consumption. It is one of the last charts that 
Mr. Hakes referred to. It is right behind that. It is not that 
one. It goes out to the year 2020. That is the one.
    Now, I am looking at the Energy Information Administration 
energy info card, which is really excellent. And it shows on 
one side, I guess the backside, that the total primary energy 
production is 73 quadrillion btus in the United States and the 
total consumption is 97 quadrillion btus. So there is a gap of 
about 24 quads. And that is, I guess, in 1998 or 1999 you look 
at this chart, and this is really--show how old I am--the $64 
question. Does anybody in the audience remember the quiz show 
that the big question was the $64 question? That shows.
    Ms. Kenderdine. No, sir.
    Mr. Barton. So the $64 question of these hearings is, what 
do we do in the outyears, which means we need to act as soon as 
possible so that that net import gap is minimized?
    Now there are a lot of things we can do. If we wanted, I 
don't think we would eliminate imports. But if we made a 
massive move to nuclear power like France has done, if we made 
a massive move to coal, if we really maximized our production 
of oil and gas resources in the OCS and up in Alaska, we can do 
significant things to minimize that import gap there, that 
delta.
    So my last question--and you may want to think about it and 
submit it in written terms for the record--but this is really 
what the whole purpose of these hearings is about: What is a 
baseline supply for this Nation? I mean, how much energy are we 
capable--within our existing political environmental 
regulations capable of producing and what mix should it be? 
Should we move massively into nuclear? Should we really make a 
major political effort to open ANWR and the OCS? You know, what 
should that supply line be in terms of quads and what is the 
mix in terms of supply?
    [The following was received for the record:]

    We believe we need to rely on market forces to be the 
primary determinant of our energy future, with government 
intervention only to ensure that energy markets are 
competitive, energy supply systems are secure and reliable, the 
Nation is prepared to respond to energy emergencies, and the 
environment is protected.
    While government policies can influence energy sector 
trends, they cannot, and should not attempt to, determine our 
energy future. For this reason, our key long term objective is 
not to ensure that the success of any particular energy 
resource or technology, but rather to provide diverse energy 
technologies for the future. If we can help ensure the 
availability of a broad array of competitive energy 
technologies, we believe the Nation and the energy sector will 
be prepared to meet future energy challenges, whatever they may 
be.

    Mr. Barton. I will just open that up to the panel. Mr. 
Martin.
    Mr. Martin. I had a chart on that--let me just mention it--
on page 12. I gave this a lot of thought myself. Because you 
need a balance. Not everything is going to be a great solution 
here.
    I think we can keep our oil imports to 11 million barrels a 
day and our gas imports to about 6. Gas primarily from Canada. 
And the way you do that, first is you use some energy more 
directly. You don't electrify everything in sight. You have 
some electrification, but you don't go massively toward an 
electric solution. Coal, nuclear power, certainly gas would 
fuel most of your electricity. You use a lot of gas directly. 
That is how we get to our 35 quad. You need renewables, and you 
need energy efficiency.
    But I can get us to a scenario which is below the EIA 
reference case on energy demand, which I thought was pretty 
good for a Republican. On here, they have 121 quads. I can get 
us to 115, for example, through energy efficiency.
    It is interesting, by enhancing your energy security you 
also enhance your environment interestingly enough, because you 
are using less fossil fuels, in theory, if you are using less 
energy. So you get a nice hit with lowering CO2.
    But this is exactly the sort of debate this committee 
should be involved with. I don't think there is an easy 
solution. I think it should be market based. But I do think 
there are things the Congress can do to enhance what I call a 
low energy import future, and it is really relying on our 
domestic import base.
    Ms. Kenderdine. Mr. Chairman, the Department of Energy 
supports a very diverse portfolio of energy R&D technologies. 
But the issue of oil imports is--you are not going to have much 
effect on oil imports by increasing nuclear power or increasing 
natural gas. Our oil imports go primarily for transportation, 
and we can't run our cars on nuclear power. And so the----
    Mr. Barton. Isn't it about half?
    Ms. Kenderdine. I think it is 66 percent.
    But so if you are going to affect the oil import piece of 
this equation, you either produce more oil at this point in 
time through 2020--I mean, you are talking about our current 
fleet of vehicles is essentially what you are talking or even 
future until we develop different alternative ways to power our 
automobiles. And so if you are--you either have to increase 
your production of oil or decrease your consumption.
    And as I mentioned to you earlier that you can--if we 
increase the efficiency of our automobiles, the average 
efficiency of automobiles by just 3 miles per gallon, you would 
save a million barrels of oil per day. That is a lot of oil. 
And that is why we are working on an 80-mile-per-gallon vehicle 
because that I think is the most feasible way at this point in 
time to decrease the net imports of oil. I mean, we are also 
working, as I mentioned, on increasing production of oil. That 
is your tax incentives and lowering the cost of production.
    There are some very fruitful areas. And the Outer 
Continental Shelf, OCS, and the Gulf is very fruitful and also 
diversifying our sources of supply.
    There was a huge find in the Caspian. They are estimating 
that that might be as large as the North Sea. I think that the 
estimates of possible reserves in the deep Gulf are about 18 
billion barrels of oil. So there are places to go to increase 
our domestic production. But also we--if you want to affect 
that equation, we very much need to look at the demand side as 
well.
    Mr. Barton. Does anybody else before we recognize Mr. 
Largent? Mr. Sharp and then Mr. Yergin.
    Mr. Sharp. When we look at the import question that is very 
important because it gets our attention to a bunch of issues 
that probably need to be resolved.
    But let me be a little bit of a skunk at a garden party. I 
think if we are not careful we get so overfocused on imports we 
make a lot of foolish and costly decisions, as we did in the 
1970's. Because everything has got to be judged whether it is 
economic or not. Remember the fundamental facts of the oil 
market are it is cheaper to produce it somewhere else, that the 
really cheap stuff is in the Middle East. So you are always 
fighting the marketplace hard when you go to high-cost fuel 
sources or alternative sources or something of that sort.
    The truth is, we can adjust and moderate that through tax 
incentives, through various things to get more fuels on the 
market, but the reality is that world market will come crashing 
in on Republicans and Democrats and everybody else again and 
again and again.
    So I would be very careful about the concept that our whole 
goal is to get down to 4 million barrels a day. Because we can 
design a policy. We can also wreck the economy doing it. The 
truth is, if we drive up the cost of energy in this country we 
can become less dependent. Of course, we won't export a lot of 
our products, and our consumers will be angry, and a lot of 
things will be inefficient in our country, and will we have 
achieved the goal of import? I don't mean to overstate this 
except that it really distorts our thinking if we are not 
careful.
    I think I am in a dilemma because I think you are right to 
be focused on this. I think we ought to be examining those 
other places to produce in the United States if they are 
efficient places to get gas. The moratoria are politically 
powerful in both political parties. That is why they are on. 
That is why they stay on through Republican and Democratic 
presidents. I wish it weren't so. I think it is ridiculous in 
Florida and California we can't do more with newer 
technologies.
    Mr. Barton. Well said by the man from Indiana.
    Mr. Sharp. It was easy for us in Indiana. But I think you 
have got to work on both ends, and you have to work on the 
automobile, too. The truth is, much as we don't like it, and I 
came from a district where we manufacture automobiles, that we 
are not headed in a very good direction at the moment the way 
we are building.
    Mr. Barton. I am really asking for the balance point. I 
probably didn't do it as efficiently. But I am----
    Mr. Sharp. It is very hard to balance that. I think the 
Secretary is right, because that was the direction he tried to 
take back in the early 1990's, which was to recognize you got 
to do multiple things and in order to sell them on Capitol Hill 
or anywhere else you have to package those up together. It is 
awfully hard to get one or the other kind of proposition. With 
this election I suspect in both political parties we are hard 
to get that between now and the fall.
    Mr. Barton. Let's let Dr. Yergin answer the question.
    Mr. Yergin. Really quickly, I think it is a question of 
balance and getting the different elements together.
    I think, on the foreign policy side, the reality is that 
whatever the number is going to be, a large importer and good 
relations with the importer is extremely important, 
diversification is extremely important, an interweaving of 
interests so that the exporters see that their interest is, 
among other things, a very healthy economy. We talked about the 
needs to facilitate domestic production, and I think that is 
part of the answer.
    Certainly, listening to the discussion about cars, one of 
the things in our study is that we now as American each of us 
drives almost 35 percent more than in 1980. We are driving a 
lot more. Of course, we are driving different kind of vehicles. 
One out of two vehicles now is a sports utility vehicle or 
minivan, and they get about 21 miles to the gallon; the car 
gets about 27 miles to the gallon. Fixing that is a 
contribution.
    The emphasis on technology. I think one of the lessons I 
came from writing this book, The Prize, was how technology 
really does have such a powerful force that you don't see it. 
And continuing as the Department does, this subcommittee is 
encouraged to continue to push technology different directions, 
is ultimately going to when we get out to the year 2020, and 
there are lots of surprises there, that technology will deliver 
a lot of them.
    Mr. Barton. We are going to recognize Congressman Largent 
for 10 minutes, because Mr. Boucher and I both took at least 10 
minutes. Then we are going to excuse this panel, unless another 
member shows up before Mr. Largent leaves, to go to our second 
panel. So Mr. Largent is recognized for 10 minutes for 
questions.
    Mr. Largent. Dr. Yergin, I wanted to talk to you about your 
book a little bit. I read this book, and I really commend it to 
members of this committee. I felt like it was a very helpful 
resource in giving some history of oil. The title--in fact, the 
reason I ask for this, is that the title says, The Epic Quest 
for Oil, Money and Power. What I find missing from the 
discussion, and I think this strikes at the heart of what Mr. 
Sharp just said, what I want to take issue with, one of the 
things that I found very fascinating in particular was some of 
the historical views of World War II and the demise of the 
Japanese and the Germans and its relationship to the lack of 
supply of petroleum products.
    And one of the things that I found missing on this 
particular panel is the discussion of our dependence on this 
importation of oil as it relates to our national security. And 
I would just like you to make some comments about if there are 
some parallels that we need to be aware of what occurred to 
Japan, of what occurred to Germany to a lesser extent, in terms 
of their national security and the lack of a consistent, 
reliable energy source.
    Mr. Yergin. Thank you. It was for me one of the kind of 
amazing revelations, in terms of many years I spent researching 
that story, to look at World War II differently and to see the 
degree in which oil had been among the triggers of the war. I 
mean, why did Hitler invade the Soviet Union? Partly was to get 
the oil, of all places, Baku and the Caspian that is so much in 
attention now.
    And our embargo against the Japanese, embargoing them on 
oil prior to the Second Word War, was connected to the Japanese 
march toward what became Indonesia. And of course the conduct 
of the war and you look at it and you see that ultimately, in 
many ways, both the Japanese and the German military machines 
were immobilized by lack of fuel. And it was a great strength 
that we had that Congressman Hall had the vitality and the 
creativity and the energy of the U.S. oil industry in terms of 
really supplying the entire Allied effort.
    So I think your remarks tie into what Admiral Watkins said. 
When we talk about what the SPR is about, it is not a long-term 
answer, but it is one that provides very important time in a 
moment of crisis. And I think that underlying oil 
considerations and imports--and I think this maybe goes back to 
Congressman Barton's point, too. There is a continuing 
underlying national security consideration that depends----
    You know, the security issues, much of the time are not 
there. Some of the time, they are there; and they can come as a 
surprise. In 1990, 1991 things had tilted a little differently. 
If the world oil market had been a little bit tighter we would 
have seen a different kind of repercussion in the Gulf crisis.
    So I think that the security consideration is not always at 
the forefront, but it always has to be part of our thinking 
about something that is this vital to our well-being and the 
well-being of the countries that are our critical partners 
around the world.
    Mr. Largent. I guess maybe to focus my question a little 
bit better would be to say at what point does the red light on 
the dashboard go off in terms of national security issues? As 
we see these forecasts going from 52 percent to 64 percent, at 
what point does the light go off and say, wait a second; this 
is a real problem. What are we going to address this problem? 
Where is that line?
    Mr. Yergin. That is talked about a lot. Basically, that 
line keeps moving up as our imports keep moving up. A lot of it 
has to do with how you assess the relationship with the 
countries that are major suppliers of oil. If Iraq had not only 
kept Kuwait and was dominating the Gulf we would have looked at 
any of these numbers as very alarming. So I think it has to be 
seen within the context of overall relationships.
    I would look at the case of Mexico which gets 40 percent of 
its government revenues from oil, very vulnerable to that, but 
Mexico is equally or even more aware of how much it depends on 
the health of the U.S. economy. So that part of the security 
picture is their sense of their interrelationship and 
interdependence with us. But I don't know other people might 
maybe see where the red light flashes more clearly.
    Mr. Largent. I will go to you in just a second.
    I had one other question before I leave you, Dr. Yergin. 
That was, one of the comments that you made in your open 
statement was to caution Congress about making short--or doing 
short-term intervention. What kind of things are you talking 
about when you say that?
    Mr. Yergin. Well, I think, and I think Phil Sharp referred 
to it, there is a propensity when prices are up in these market 
situations to talk about some kind of direct or indirect price 
control interventions in the market. We saw that even this 
winter where there was legislation where any time the price got 
above $25 a barrel the administration was supposed to report to 
the Congress as to why they are not using the SPR to bring down 
the price.
    I am concerned this summer, because we could see spikes in 
natural gas prices, given how tight this market is, that if we 
had that kind of intervention that came in even discussions of 
price caps of some kind or another that we would see--as 
Admirable Watkins said, it would affect the whole investment 
environment, and it would work against what we need, which is 
to see more investment flowing rather quickly into the natural 
gas sector maybe out of the Internet sector so that we do have 
the supplies that we need to meet our national needs. So it was 
really talking about market intervention of the kind that 
recurs whenever prices are in the upper frame.
    Mr. Largent. Thank you. I am looking forward to watching 
the video series. I haven't gotten to see that yet, but I am 
planning to watch that this summer.
    Mr. Martin, you had a comment.
    Mr. Martin. Very shortly, on the red line. The red line is 
an international number I think. I think it involves all of the 
countries' dependence on the Persian Gulf. And I think we are 
getting very close to that red line. If we just look in 
isolation at the U.S., that really doesn't do much. Indeed, 
this is an international strategy we are involved with.
    That, again, is why the IEA is so important. I spent 4 
years in the IEA during the second crisis, the Iranian 
revolution. We may have it all right here, but if other 
countries are demanding more and more oil then we lose, too.
    I note, for example, that it is remarkable how much Asian 
demand is increasing on the Persian Gulf, far more than us at 
the moment. So what do we do with the Japanese, the Koreans, 
even the Chinese? And why are the Chinese sending missiles to 
Iran when they are getting oil from the Gulf? These sorts of 
questions. It is really a foreign policy point.
    And, honestly, the best way we can get our energy agenda 
through, which nobody seems to be interested in when you go to 
Cabinet meetings or in the public, but if you go with the 
national security argument at a Cabinet table, then you have 
got some other people fighting for the domestic oil producers 
in, for example, in this country. You broaden the base of 
support for a rational energy policy based on national 
security.
    Mr. Largent. Well, I obviously have colloquial interest, 
being from the State of Oklahoma and Tulsa, which is the oil 
capital, but I still view this from a national security 
perspective first, because I think that is the fundamental 
responsibility that I hold as a representative in Congress; and 
I think that that has to dominate local interests or otherwise. 
So I appreciate your comments.
    Ms. Kenderdine, I wanted to ask you a question. You talked 
about the administration encouraging domestic production. I 
want to know what specific proposals has the administration 
been promoting and initiating and proposing to increase 
domestic production?
    Ms. Kenderdine. Well----
    Mr. Largent. All the folks back in Oklahoma are really 
interested in this answer.
    Ms. Kenderdine. I was out in Oklahoma with the Secretary. 
We met a lot with your producers.
    Mr. Largent. I was there. They are still waiting to hear.
    Ms. Kenderdine. The President on I think it was March 18th 
announced support for delay rentals expensing. I know that 
there are a lot of marginal oil producers in Oklahoma and in 
other places; and, as always--I mean, you get into a discussion 
on support for marginal wells, as to whether it is cost 
effective. And you get into the types of discussions we have 
been having here.
    Because while the Department of Energy is very much 
interested in preserving marginal wells, the domestic base we 
are concerned about--we are concerned about shut-ins. We know 
what a shut-in means, but then have you other players in the 
administration who are very concerned about tax policy and 
cost, as they well should be. That is their jobs. And it is not 
monolithic. We would like to continue to work with people 
within the administration to see what we can do on marginal 
well production.
    As I mentioned earlier, we have supported and I have 
personally--I have been at the Department for 7 years--worked 
on a lot of oil and gas issues, lifting the ban on the export 
of A&S oil, supporting production and NPRA, the National 
Petroleum Reserve in Alaska, royalty relief in the Gulf of 
Mexico, and that has been a wildly successful program in the 
last 5 years, dramatic increases in oil and gas production in 
deepwater Gulf.
    And I believe that this is not our area. It is Interior 
Department relief for royalty payments for marginal producers 
on public lands. So there are a list of things that we have 
done. It is----
    But, again, the administration is not a monolith, just like 
the Congress is not a monolith; and we are working through a 
lot of issues. I feel really good about the tax incentives for 
G&G and delay rentals and hope that the Congress will pass 
those.
    Mr. Largent. Let me just say in closing--I am sure I am 
approaching my time--that to those who would question the cost 
effectiveness of addressing stripper wells and marginal wells 
let me say, first of all, it is much less expensive to enhance 
production from an existing well than to shut it in. Second of 
all, it is much more environmentally friendly to do that.
    What I would just say and hope that you will argue for as 
well is that we need to see, I think, an increase in research 
to enhance production from existing wells which is taking place 
and is an environmentally friendly--it is efficient, it is a 
less expensive way to go, as opposed to just, you know, turning 
off the tap and closing the wells.
    Ms. Kenderdine. Most of our oil supply R&D money is 
targeted for smaller producers because they are the ones who 
cannot afford what is expensive, is R&D. So we have invested a 
lot of our R&D money in marginal well production.
    Mr. Largent. Unfortunately, R&D budget is shrinking; and we 
are trying to address that in this appropriation process that 
we are in right now. But particularly targeting that research 
would be important. Thank you.
    Thank you, Mr. Chairman.
    Mr. Barton. I was going to release this panel, but the 
Honorable Phil Sharp is dying to have the last word.
    Mr. Sharp. I just wanted to respond to Congressman Largent 
because I wouldn't want to be misunderstood that I think that 
imports are not significant. The question is, it is not the 
only measure of our national security.
    I was trying to articulate--which Mr. Martin articulated 
somewhat better--which, even if we got our imports down we have 
major stakes so we must not forget there what happens in this 
world oil market. So I am a strong promoter of trying to get 
them down.
    But we sometimes make huge mistakes to raise the cost. 
Throughout the synthetic fuels corporation, which finally the 
Reagan Administration and the Democratic Congress repealed, was 
all driven by national security arguments, all driven by 
production and imports arguments, and it was a big mistake.
    Mr. Barton. Now the Honorable Admiral Watkins. Absolutely 
the last time.
    Mr. Watkins. Everybody went to the right. It was wonderful 
when I was in the Navy.
    But let me just try something on you here now. I think this 
committee could take a look at the DOE Organization Act. It 
requires a submission biennially of a national energy policy 
plan. Look at that thing, straighten it out, get it harder. The 
EIA, Mr. Martin runs a very good quasi-independent agency. They 
are great. They have good data.
    Mr. Martin. No, I don't.
    Mr. Watkins. Mr. Hakes does.
    Mr. Barton. Mr. Martin is quasi-independent.
    Mr. Watkins. He has already gotten a good track record and 
good report cards on his data.
    The Congress should demand that models be prepared on the 
integration of all these various aspects of energy. Those 
should be looked at by the private sector. Everybody else, they 
should have access by everyone. We ought to play our advocacy 
against those models, and we should demand with each 
administration that they come forward with recommended changes 
to the existing laws. If they think it is important, come up 
with the analytic data to base up those advocacies. They will 
either win or lose, but at least we will know what the new 
starting point is.
    We ought to be doing that with every session of Congress, 
in my opinion. I think that is something this committee can 
demand is a better system so we go between one administration 
and the next without discarding everything and saying that the 
Republicans did a lousy job but just listen to our advocacy. We 
shouldn't allow that in this business. We ought to get 
analytically sound.
    And people like Dan Yergin and Phil Sharp that work in this 
continuously can be participants in that process and demand it. 
Don't let the energy policy atrophy the way it has.
    The good things that we hear about DOE doing, who knows 
about it? Have they recommended changes up here to the various 
acts? Have they fought--are they up here pounding the table, 
saying this is best? Here is the analytic data. Look at these 
outfits that have assessed this.
    The IEA has looked at it in Paris. These are the things 
that ought to be demanded in this committee. Then we will get 
this thing going. Then the DOE may have some relevance.
    Mr. Barton. I appreciate the tongue-lashing that the former 
Secretary just gave this subcommittee, and I will try to honor 
some of those requests. Because they are well taken.
    We are going to release this panel. Before we do, though, I 
want to personally tell you how much I appreciate each of you 
changing your schedule. The only two we could force to come 
would be Mr. Hakes and Ms. Kenderdine, but the rest of you made 
a real effort to be here voluntarily.
    And this is going to result in something. I can't tell you 
what yet, because we still have a hearing on coal, and we have 
a hearing on renewable and alternatives. But I think at the end 
of the summer as we look back on the hearing record it is going 
to be a great record, whatever the administration is next year, 
to begin to build a comprehensive and I hope bipartisan energy 
strategy for this country. So I want to give each of you my 
personal appreciation and release you from purgatory. So you 
are released.
    Before we start the second panel I will suggest that we 
take about a 7-minute personal convenience break because the 
second panel has sat in the audience for 3 hours straight, and 
I don't want them fidgeting. So about 12:55, I want all my 
second panel to be back here. We are in recess until 12:55.
    [Brief recess.]
    Mr. Barton. If our panelists could take their seats, we 
will try to get started with the second panel. I think we have 
everybody. The subcommittee will come to order again.
    We now want to continue with our hearing. We have a very 
distinguished panel of witnesses on the second panel.
    We have Mr. Red Cavaney, who is the President and CEO of 
the American Petroleum Institute.
    We have Mr. Michael Johnson, who is Vice President of 
Natural Gas and Gas Products for Conoco. He is here on behalf 
the Natural Gas Supply Association.
    We have Ms. Cathy Abbot, who is President and CEO of 
Colombia Gas Transmission, and she is here on behalf of the 
Interstate Natural Gas Association of America.
    We have Mr. Roger B. Cooper, who is the Executive Vice 
President for Policy and Planning of the American Gas 
Association.
    And last but certainly not least, Mr. Barry Russell, who is 
President of the Independent Petroleum Association of America, 
and he is representing, in addition to IPAA, the National 
Stripper Well Association.
    Lady and gentlemen, we appreciate you being here.
    We are going to recognize Mr. Cavaney for 7 minutes. We 
want to set the record straight before we do that.
    There are some in Texas that are not sure that Tulsa is the 
oil capital of the world, but we are not going to get into a 
long-winded debate about that in this subcommittee. Your 
statement is in the record in its entirety, Mr. Cavaney; and we 
would recognize you for 7 minutes to elaborate on it.

     STATEMENTS OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN 
   PETROLEUM INSTITUTE; MICHAEL L. JOHNSON, VICE PRESIDENT, 
 NATURAL GAS AND GAS PRODUCTS, CONOCO, INCORPORATED, ON BEHALF 
   OF NATURAL GAS SUPPLY ASSOCIATION; CATHERINE GOOD ABBOTT, 
 PRESIDENT AND CEO, COLUMBIA GAS TRANSMISSION CORPORATION, ON 
BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; ROGER 
   B. COOPER, EXECUTIVE VICE PRESIDENT, POLICY AND PLANNING, 
    AMERICAN GAS ASSOCIATION; AND BARRY RUSSELL, PRESIDENT, 
  INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, ON BEHALF OF 
               NATIONAL STRIPPER WELL ASSOCIATION

    Mr. Cavaney. Thank you, Mr. Chairman.
    My name is Red Cavaney. I am president and CEO of the 
American Petroleum Institute. I appreciate the opportunity to 
offer our assessment on the state of the U.S. oil and natural 
gas industry and on how we can work with you to forge an energy 
policy that is global in nature and helps ensure that America's 
future energy and security needs are successfully met.
    I request that the statement of the Alaska Oil and Gas 
Association be included as part of my testimony.
    Mr. Barton. Without objection.
    [The statement follows:]
 Prepared Statement of Joseph H. Hegna, ARCO Alaska Inc. on Behalf of 
                   the Alaska Oil and Gas Association
    For the record, I am Joe Hegna from ARCO Alaska, Inc. I have spent 
over 20 years working in the oil industry--designing, building, and 
operating facilities. For the last 12 years I have been involved with 
various environmental management functions.
    The focus of these written remarks will be on the use of new 
technology to minimize environmental impacts for arctic oil and gas 
development. In Alaska, we call this ``doing it right''.
    Before we get into a discussion of ``doing it right'' using new 
technology, I would like to put things into perspective by describing 
the North Slope of Alaska. The North Slope is a flat treeless plain, or 
tundra, which covers 88,000 square miles, an area slightly larger than 
the state of Idaho. It stretches from the Canadian border to the 
Chukchi Sea. It is 600 miles north of Anchorage, and about 1200 miles 
south of the North Pole. Winter temperatures are typically minus 30 to 
minus 40 degrees Fahrenheit with 30 to 40 mile per hour winds. Summers 
are generally a balmy 40 degrees.
    Prudhoe Bay, the largest oil field in North America, was discovered 
in 1968 and went into production in 1977. Currently, there are 12 
separate oil producing fields. These fields occupy less than 2% of the 
total surface area. Since Prudhoe first went into production, over 12 
billion barrels of oil have been produced on the North Slope. These are 
some of the best facilities in the world--in design and operation. I 
think they are the ``best of the best''.
    Extensive research indicates that oil field activities have had no 
adverse effect on the North Slope's fish and wildlife populations. For 
example, the caribou move freely through the oil fields and have 
generally been unaffected by our facilities. In fact, the number of 
caribou in the Prudhoe Bay area has grown from 3,000 in 1972 to about 
20,000 today.
    Air quality is consistently better than required by state and 
national standards. Emission sources are closely regulated by state and 
federal agencies. The largest quantity of air emissions from North 
Slope oil operations comes from turbines that power production 
facilities. These turbines are fired by natural gas, one of the 
cleanest burning fuels available.
    All North Slope operators have a goal of zero spills. In operating 
these complex fields, however, some spills will occur. Most are from a 
pint to 10 gallons. And the vast majority of spills never reach the 
tundra or surface water because they are contained on the gravel pads 
on which the facilities are constructed, where they are easily cleaned 
up. All spills, no matter how small, are reported and cleaned up 
immediately.
    These existing facilities are very well designed and operated. 
Operating excellence, with regard to the environment, has been 
recognized by others including recently the Environmental Protection 
Agency (EPA) and the Interstate Oil and Gas Compact Commission (IOGCC). 
In 1999, the EPA's Region 10 gave Kuparuk its ``Evergreen Award'' for 
pollution prevention. In 2000, the IOGCC gave Kuparuk the Stewardship 
Award for large oil and gas facilities.
    Let's look at how new technologies and new approaches are making it 
possible to find, develop and produce new fields with even less impact 
on the environment. In the arctic, we can now explore for oil without 
leaving a footprint on the land. And when we do find new fields, we're 
able to develop them in ways that have even less impact on the land and 
the fish and wildlife that inhabit it.
    The acquisition of 3-D seismic data is a key step in the 
exploration process. It's how we identify and map the prospects we're 
interested in. Onshore seismic acquisition on the North Slope occurs 
only during the winter after the federal, state and local governments 
issue permits authorizing tundra travel. Tundra travel doesn't begin 
until the tundra is frozen and there is six inches of snow cover. We 
use specialized low-impact tundra travel vehicles which weigh more than 
10 tons. However, the tracks are long and wide, spreading the pressure 
over a large area . . . protecting the tundra from damage.
    Onshore exploration is conducted only in the winter. We use ice 
roads to move drilling rigs, camps, men and material to remote 
locations. We build ice roads with water from lakes chosen with the 
assistance of the Alaska Department of Fish and Game. The volume taken 
from each lake is determined based on water depth and whether a lake 
contains fish. Ice roads are generally six inches thick. It's not 
unusual for us to build 60 to 70 miles of ice road a year to support 
remote drilling operations. In the spring, these ice roads simply melt 
away.
    The best illustration of how we are ``doing it right'' is by a real 
example. I have brought a brochure on the Alpine Field--``Setting The 
Standard For The New Millenium''. On the cover is a drilling rig.
    A drilling rig weighs several million pounds and is moved to its 
location via ice road. The rig is set on an ice pad more than 12 inches 
thick. When drilling operations are complete, the rig and support 
facilities are removed, and all drilling wastes are transported to 
existing facilities for disposal or injected back downhole. The final 
step is to take a front end loader and shave the ice pad down to pure 
ice. Scraped material is hauled out and disposed of in approved 
facilities. Pads melt, leaving no trace.
    On the inside page is a photograph of an exploratory well at Alpine 
taken the summer after it was drilled. Six months before this picture 
was taken, a 160-toot tall, 3 million pound drilling rig stood on an 
ice pad where the well was drilled to an 8,000 foot depth. Prior to 
drilling we acquired seismic data over this entire area. You can see 
how much impact we've had.
    The only visible sign of our presence is the well tree. And this 
remains on location because we are developing the field and will one 
day produce from this well. If the well had been unsuccessful, we'd 
have plugged and abandoned it below grade, leaving virtually no trace.
    The thing that's amazing about ice-pad technology is that the 
vegetation adjacent to this well is completely undisturbed. We can 
explore without leaving visible footprints.
    Producing oil requires infrastructure and a permanent presence for 
the life of a field. Our goal is to design, build and operate fields in 
a way that minimizes impact on the land, the water, the air and on the 
fish and wildlife that use a given area. To see how, let's look at the 
Alpine field which is now being developed and which will begin 
production in 2000.
    The first step is understanding the environment. We began 
environmental studies of the Colville area in 1991, three years before 
we discovered the Alpine field.
    We mapped 24 different habitat classifications that were developed 
with the assistance of the US Fish and Wildlife Service and the Alaska 
Department of Fish and Game. Baseline studies were designed with the 
help of these and other resource agencies. We used satellite infra-red 
photography, ground-truthed by summer field parties to develop the map. 
We did regional study first, then focused on the Alpine project area 
when the discovery was made. Different kinds of habitat are important 
to different kinds of wildlife. Some kinds of habitat are scarce, 
others are not. To avoid major impacts, you have to know where the high 
value and low value areas are.
    Nuiqsut residents, who use this area for subsistence hunting and 
fishing, also played a role in this process. We used their input, 
agency input and this data to locate our facilities in areas where they 
would allow development of the field and minimize impact. At Alpine, 
for example, we moved a drill site away from a lake important to 
waterfowl and subsistence hunters.
    Extended reach drilling allows us to drain oil from a very large 
area from a single location. At the Niakuk field near Prudhoe Bay, 
where ARCO and BP have developed two offshore oil accumulations from a 
single, onshore drill site, we've done it by drilling wells with 
departures of more than 20,000 feet--or four miles. Our drilling 
targets are 9,000 feet deep and four miles away from our drilling rigs.
    To illustrate what this means, I had our engineering department 
prepare a drilling scenario for Washington, D.C. With today's 
technology, and a 21,000 foot step out well, we could build a drill 
site on the front lawn of the White House and produce oil from beneath 
most of Washington and a big piece of Arlington, Virginia. The world-
record step out well is longer than 28,000 feet--or 6 miles. With wells 
of that length you could produce from beneath the entire District of 
Columbia, all of Arlington, Alexandria, and a big piece of the Maryland 
suburbs too.
    The evolution of production pads--or drill sites--on the North 
Slope is a classic example of how we have done it right. A drill site 
is a central location from which we drill and operate as many as 50 
wells. In the early days, they were generally 65 acres in size. Wells 
were spaced 120 feet apart, and the pads included large reserve pits 
for storage of drilling wastes. Today wells are 15 feet apart and we've 
eliminated the reserve pits. At Tarn, we have space for 50 wells on a 
6.7 acre pad. Pads today are one-tenth the size that they used to be.
    Traditionally, drilling muds and cuttings have been placed in 
surface waste disposal impoundments known as ``reserve pits''. Today, 
using grind and inject technology, cuttings are crushed and slurried 
with seawater in a ball mill, then combined with the remaining drilling 
muds and reinjected into a confining formation 3,000 to 4,000 feet 
underground. This permanent and environmentally sound disposal method 
isolates the wastes, eliminates subsequent disposal problems and 
greatly reduces the spaced required for drilling operations.
    The Alpine pipeline river crossing is the first of its kind 
completed in the arctic. We proved the technology, by installing 18'' 
steel pipe in a 4,200 foot bored hole from one side of the river to the 
other. The pipe passes 100 feet below the river. A cased oil pipeline 
was then installed within the 18'' steel pipe. In short, we will have a 
pipeline within a pipeline. This design ensures instant containment in 
the unlikely event of a small leak. A state of the art leak detection 
system will also let us know if we have a problem.
    The Alpine field will be produced from just two drill sites, three 
miles apart. Pads will be joined by a gravel road that will also serve 
as an airstrip. Surface impact--gravel footprint--will comprise about 
97 acres. From this small footprint we will be able to access the 
Alpine reservoir, which encompasses some 40,000 acres-more than ten 
miles long and four miles wide. Less than 0.2 percent of the field will 
be impacted--that's less than one-tenth the percentage at Prudhoe. 
Construction is occurring during the winter, using ice roads. The 
construction will not disturb wildlife.
    The Alpine field will not be connected by a permanent gravel road 
to existing infrastructure on the north slope. The operation will be 
much like that of an offshore platform. Drilling supplies and major 
equipment will be transported in winter using ice roads. Food and 
personnel will be transported by air, and the number and frequency of 
flights will be limited for a six week period in June and early July to 
minimize disturbance of nesting waterfowl.
    Our goal is to minimize our impact on the environment and operate 
oil fields that are sanctuaries for healthy populations of fish, 
waterfowl, and wildlife. Thousands of caribou still return to our 
fields to calve and rear their young. The herd is six times larger than 
it was in the early 70's. Our waterfowl populations are healthy. We 
have turned our gravel mines into deep lakes that provide crucial 
winter habitat for fish--a rare commodity because most of the lakes on 
the North Slope freeze from top to bottom in winter. We've learned a 
lot over the years. We can explore without leaving footprints. And the 
footprint required for new developments is a tenth of what it once was.
    Alpine--with its new technology--shows you what we mean by ``Doing 
It Right.''

    Mr. Cavaney. It is particularly appropriate that we discuss 
this topic now because of the convergence of two powerful 
forces pulling the industry in opposite directions. The first 
force is the beginning--this weekend, in fact--of the vacation 
driving season, which offers a clear picture of the continued 
increase in demand for our products by American consumers.
    Gasoline-powered automobiles have been the dominant mode of 
transport for the past century and there is no evidence that 
consumers are ready to change. The automobile will remain the 
consumers' choice for personal transport because the mobility 
and independence it affords is so highly valued. While 
substitutes for gasoline may some day become prevalent, any 
such wholesale change is more than several decades away.
    The industry enters the new century with bright prospects 
for sustained and significant growth for the foreseeable 
future. Most forecasts anticipate an increase in worldwide 
demand for our products of 15 to 20 million barrels a day 
within the next 2 decades, an increase of between 20 and 25 
percent.
    The second force I referred to is represented by two 
Federal Government actions, one on diesel fuel, the other on 
gasoline.
    Last week, the EPA proposed to drastically lower the sulfur 
content of diesel fuel beyond industry's unprecedented 
commitment to reduce sulfur by 90 percent. Adopting EPA's rule 
will almost assuredly have negative consequences on our 
industry's ability to supply petroleum products to consumers.
    Concerning gasoline, on June 1, we must begin selling new 
federally mandated cleaner burning gasoline, RFG Phase 2, it is 
called, in one-third of the country.
    We certainly share government and consumer commitment to 
clean air. These latest regulations, however, are too much too 
soon. They represent yet additional layers of uncoordinated 
government regulatory restrictions being piled on at ever 
shorter intervals.
    Add to this the increasing tendency by government to deny 
our companies access to Federal lands for responsible 
exploration and production of oil and natural gas, and the 
cumulative effect is ever-increasing constraints on this 
country's energy infrastructure.
    A steadily increasing demand for our products simply cannot 
be sustained over time if government policies are consistently 
at odds with the practical operational needs of the industry. 
And let me be clear, our industry is committed to meeting the 
Nation's energy needs while contributing yet further 
significant gains in environmental protections.
    We are already seeing evidence of infrastructure stress in 
California where stringent specifications on the type of 
gasoline sold in the State has led to fewer refineries, all of 
which are operating at peak capacity. As the General Accounting 
Office pointed out in its recent report, any supply disruption 
caused by California refinery outages tends to quickly upset 
the State's tight balance between supply and demand. Surely the 
attendant volume and price volatility is not the type of future 
we want for the rest of the Nation.
    Moreover, the current situation in the Midwest, where 
summertime reformulated gasoline is in short supply and 
significant price differences are developing between 
reformulated and conventional gasolines, underscores the need 
for regulators to provide refiners the flexibility they need to 
continue to meet consumers' needs at affordable prices.
    As we enter this new century, it is essential that the 
Federal Government revisit energy policy. No change from the 
current position is a prescription for more price volatility 
and increasing concerns over supply adequacy. We urge Congress 
and the White House to adopt an energy policy that recognizes 
four very important points: .
    First, our industry's flexibility to adapt to the demands 
of rapidly changing cycles cannot be further eroded by 
uncoordinated new government restrictions without adverse 
impacts on consumers.
    Second, given our industry's significant technological 
advances, a vibrant U.S. oil and natural gas industry can 
coexist with a safe and ever cleaner environment.
    Third, our industry is highly globalized, and government 
actions that damage its efforts to conduct business abroad are 
also harmful to the Nation's economy.
    And, finally, government must begin an earnest effort to 
reconsider its view of the industry with an eye toward forging 
an energy partnership to benefit consumers, government, and 
industry.
    Because of its commitment to its consumers, our industry 
has always found ways to meet the challenges placed before it. 
Perhaps because of that, some have come to believe that there 
is no limit to the burdens they can place on our industry. I am 
here to convey what our experts tell us. There are limits to 
the stresses that can be endured without resulting impacts on 
consumers. As the heating oil situation this winter and the 
recent spike in the gasoline market point out, flexibility is 
being regulated out, as is the convenience and affordability 
our customers, your constituents, have come to expect. It need 
not be this way.
    We recognize you are faced with increasing demands to 
address these matters, and we applaud your efforts to look at 
an energy policy. To the extent to which we can help in your 
efforts to better understand the policy effects of the many 
actions that are under your consideration, we are here to help 
you.
    Thank you, Mr. Chairman and members of the committee.
    [The prepared statement of Red Cavaney follows:]
    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute
    The American Petroleum Institute (API) is pleased to have the 
opportunity to present a statement on the state of the oil and natural 
gas industry in the United States. We are also pleased to offer our 
thoughts on how industry and government can work together more 
effectively in implementing an energy policy that is global in nature 
and helps ensure that Americans' future energy and security needs are 
met.
    API represents nearly 500 companies engaged in all aspects of the 
U.S. oil and natural gas industry, including exploration, production, 
refining, distribution and marketing.
                       the state of the industry
    It is particularly appropriate that we discuss this topic today 
because, as we all know, this weekend is the beginning of what is 
traditionally known as America's vacation driving season. Perhaps 
nothing better illustrates how the products produced by our industry 
serve American consumers, how important those products are to 
consumers, and how they affect their everyday lives.
    It is important to emphasize that America's oil and natural gas 
industry is committed to supplying American consumers with a reliable 
and affordable supply of energy for all their needs. Meeting this goal 
has not been easy, particularly these last few years that have seen the 
industry through countless twists and turns, peaks and valleys. Last 
year, for instance, we experienced some of the lowest crude oil prices 
in this century, and this year we've seen some of the highest in a 
decade. Nevertheless, despite the industry's penchant for rapidly 
changing cycles, we have managed to continue fulfilling our mission--
supplying consumers with the petroleum products that they need.
    While there have been many cycles in the industry's history, and 
surely more in its future, we should not let these temporary booms and 
busts obscure some clear long-term trends that are essential to 
understanding the industry. In fact, discerning the difference between 
these short-term cycles and long-term trends is likely to be one of the 
most serious challenges to energy policy in this new century.
             oil and natural gas and the country's economy
    First, and most important, there is a clear link between the use of 
petroleum and economic development. Through all the changes that have 
occurred in our industry, one constant has been the growing use of our 
products by our customers. Gasoline-powered automobiles have been the 
dominant mode of transport for the past century. There is no evidence 
that consumers are ready to change that.
    Regardless of fuel, the automobile--likely configured far 
differently from today--will remain the consumer's choice for personal 
transport. The freedom of mobility and the independence it affords are 
highly valued. While substitutes for gasoline may someday change this 
reality, any such wholesale change is more than several decades away--
the amount of time required to fully retire the existing and still-
growing fleet of automobiles powered by gasoline and to deploy any 
replacement fuel source throughout the world.
    As a consequence of this, the industry has entered the new century, 
not with fading hopes, rather with the bright prospect for sustained 
and significant growth in demand for our products for the foreseeable 
future. Most forecasts anticipate an increase in demand for our 
products worldwide of 15 million to 20 million barrels a day within the 
next two decades. That is an increase of between 20 and 25 percent.
    It is fair to ask, then, if the industry is up to the daunting 
challenge of supplying these products.1The evidence suggests that we 
are. The remaining question, then, is whether Congress and the White 
House can demonstrate the vision and foresight to adopt an energy 
policy that assists in our efforts, or whether we will see a piecemeal 
energy strategy that extends encouragement and support with one hand 
but creates bureaucratic obstacles with the other.
    A successful energy policy must recognize four very important 
points:

 Our flexibility to adapt to the demands of these rapidly 
        changing cycles cannot be eroded anymore than it already has 
        been by impractically conceived and uncoordinated new 
        government restrictions.
 Given the great technological advances we have made, a vibrant 
        oil and natural gas industry can coexist with a clean and safe 
        environment.
 Our industry is highly globalized and any legislation that 
        would damage its efforts to conduct business abroad would also 
        be harmful to our nation's economy.
 The government must begin an earnest effort to reconsider its 
        view toward the industry with an eye toward forging an energy 
        partnership to benefit all stakeholders: consumers, government 
        and industry.
    I am pleased to say we have already seen evidence of this last 
point, in the Department of Energy under Secretary Richardson, in some 
sectors of the Minerals Management Service of the Department of the 
Interior, and in several other areas of the federal government. 
Unfortunately, the same cannot be said for all of the federal 
government. In all too many places, the oil and natural gas industry is 
viewed, not as a partner, but as a force to be controlled and regulated 
every step of the way without any full understanding of how such 
intervention will affect the industry's ability to meet its 
responsibilities to consumers and the nation. In some cases, government 
agencies even ignore laws enacted by Congress to ensure that multiple 
use (recreation, preservation and development of natural resources) of 
government lands is a fundamental consideration in implementing 
government land policy.
    A failure to move toward this kind of sorely needed reform could 
have serious implications. A steadily increasing demand for our 
products simply cannot be sustained over time if government policies 
are consistently at odds with the practical operational needs of the 
industry.
    Additionally, government needs to inform consumers of some of the 
likely consequences they undertake in dealing with the subject of 
energy. For example, in the state of California where stringent 
government specifications on the type of gasoline and diesel fuel that 
can be sold are in place, this has led to many fewer refineries, all of 
which are operating at peak capacity. As the General Accounting Office 
(GAO) pointed out in its recent report, any supply disruption caused by 
refinery outages tends to quickly upset the state's tight balance 
between supply and demand.
    Why are there fewer refineries? The economics of meeting the 
state's regulatory requirements all but create a situation where 
capacity quickly rationalizes to demand levels, eliminating much of the 
traditional flexibility which benefits consumers.
    I suspect this type of volatility is not what any of us wants for 
the rest of the nation. As we enter this new century, it is absolutely 
essential that we revisit energy policy in a new light. Circumstances 
have changed and will certainly continue changing.1Given all that's at 
stake for our nation in the area of energy policy, a closer 
collaboration between government and industry needs to be fostered. The 
oil and gas industry is not opposed to regulation; we favor smart, 
constructive and well-considered regulation, based on sound science and 
economics, which will benefit consumers.
    Moreover, our industry has repeatedly demonstrated its commitment 
to environmental protection. The lion's share of the progress made in 
reducing air pollution is attributable to cleaner cars, fuels and 
industry facilities and operations. Together, they account for 
approximately 70 percent of total emission reductions nationwide since 
1970. The U.S. oil and gas industry spent more than $90 billion on 
environmental protection during the 1990s. The industry spent $8.5 
billion in 1998 alone--and that was more than EPA's total budget and 
more than double the net income of the top 200 oil and gas companies.
              meeting the country's continued energy needs
    Our long-term ability to supply a wide range of products has been 
greatly enhanced by continual improvement of processes, technology and 
human resources. Indeed, the industry is remarkable in its ability to 
respond to adversity and develop ingenious solutions that keep our 
products coming to market in ways and at costs that consumers 
appreciate.
    The intensive use of the latest, most advanced technology is making 
the century-old oil and gas industry an innovative, visionary, and 
highly efficient new industry. Our industry has been producing, and 
intends to keep providing, both the fuels and feedstocks that make life 
simpler and safer, more comfortable and more convenient for society. 
Our heavy reliance on technology makes us an industry with an exciting 
future--a flexible, resilient industry that welcomes change and meets 
challenges.
    Our industry has embraced technology in many ways, with many 
benefits. Daily, the industry explores and operates safely in 
increasingly remote locations and in the harshest of conditions.
    Technology has driven the costs of exploration and development 
dramatically downward: the cost of finding oil has declined by 40 
percent over the past 10 years. Moreover, despite sharp increases in 
costs due to added regulations, operating costs at U.S. refineries have 
fallen by almost 20 percent per barrel, as refining has become more 
energy-efficient and new computer hardware and software have improved 
the processing of crude oil.
    Technology in our industry--and throughout the energy business in 
general--knows no boundaries.
                          recent developments
    The recent pricing and supply situation has caused some concerns 
about our ability to meet the demand for gasoline and diesel. That is 
understandable, but several important points should be understood about 
that:

 First, prices at the gasoline pump are determined by the cost 
        of crude oil, and crude oil prices are determined by supply and 
        demand in the international marketplace.
 Second, high crude oil prices have resulted from a decrease in 
        foreign oil production and a greater demand for oil from the 
        recovering Asian economies and a continued growth of Western 
        economies.
 Third, although prices rose rapidly, retail prices, after 
        adjusting for inflation, are generally 40 percent below the 
        prices of the early 80s, and we have seen those prices 
        gradually decrease as the supply of crude oil increases.
 The U.S. oil and natural gas industry is operating its 
        refineries at record production levels--within safety and 
        environmental limits--and will continue increasing through the 
        prime drive season when the demand for gasoline is at its 
        highest.
 The requirements for new federally mandated cleaner-burning 
        gasoline that will be required in about one-third of the 
        country beginning June 1 is creating uncertainties in the 
        markets because of fears that refineries might not be able to 
        supply all the reformulated gasoline necessary. First, this new 
        gasoline is more difficult to make and has required extensive 
        investments by refineries. Second, a recent decision by the 
        U.S. Court of Appeals for the Federal Circuit in a gasoline 
        patent dispute has potentially significant implications for the 
        California and federal reformulated gasoline programs. Last 
        week, the Court denied a petition to rehear this case. If the 
        decision stands, it will likely impose additional costs on the 
        manufacture and importation of fuels without providing any 
        additional air quality benefits to the public. The Federal 
        Circuit decision could also impact supplies of reformulated 
        gasoline, as refiners and importers individually evaluate 
        whether to continue to participate in the reformulated gasoline 
        programs and either pay patent royalties or incur the costs of 
        developing formulations that are outside the scope of the 
        patents. Because of the uncertainty created by the Court's 
        decision, concerns have also been expressed that importers and 
        blenders, in particular, may choose to supply less reformulated 
        gasoline to the market than they would otherwise have done to 
        avoid potentially infringing on the patents.
 Finally--and perhaps this is the most important, the decision 
        by OPEC to increase production in March may have contributed to 
        a premature and irrational exuberance. The OPEC decision 
        brought some short-term relief, but the fact remains that the 
        fundamentals of the world markets still have not changed, and 
        until this country changes its energy policy, we will continue 
        to be faced with the fact that we import over 55 percent of our 
        oil needs.
    The price increases we experienced were brought on by short-term 
shocks that resulted from sudden changes in supply and demand. Just as 
prices were up for a few weeks, they began to turn down when factors 
changed.
    In a free-market economy, we have seen time and again that price 
movements ultimately create balance between supply and demand. Leaving 
the marketplace free to continue working is what allows this balance to 
be maintained over time.
    As has been proven over and over again, the U.S. oil and natural 
gas industry can best provide American consumers with a steady and 
affordable supply for all their needs when markets are allowed to 
function as freely as possible. We are pleased that the federal 
government took a balanced approach to the current situation by 
encouraging more foreign crude oil production while refraining from 
interfering in the marketplace, which is still the best way to get 
gasoline to consumers, reliably and at the lowest cost.
    The past year and a half has seen us go from a period of extremely 
low prices to a peak where crude oil prices have reached levels that 
were three times those of the previous year. This dramatic change in 
crude oil prices contributed to increases in the prices for petroleum 
products. These changes made it difficult for consumers to plan and 
budget for expenditures and have absorbed a larger share of family 
incomes.
    These changes were brought on by increases in world demand for 
petroleum due to robust growth in world economies and reductions in 
supply by foreign oil producing nations. World petroleum stocks have 
been drawn down, and prices have been driven up.
    Despite the limitations on world supplies, our companies are 
working hard to produce all the gasoline and diesel fuel that our 
customers will need during the coming months. Refinery output of 
gasoline and distillate oil have set many records this year.
    How we got to this point is relatively simple: We have experienced 
20 years of more and more overlapping regulations that have left our 
nation's petroleum distribution system with minimal flexibility. 
Restrictions on producing petroleum in this country have led to 
declines in domestic production by one third over the past three 
decades. We now import over 55 percent of our petroleum needs. This 
large demand on foreign supplies leaves us at the mercy of world supply 
and demand conditions and open to the volatility that we have 
experienced over the past year.
                    the enormous cost of volatility
    While historically our industry and our nation have been able to 
survive the disruptions and nervousness brought on by market 
volatility, they have done so at a price. Volatility is in no one's 
best interest. Our companies suffer because it is much more difficult 
to undertake the types of long-term planning and investment needed for 
sustainability. When crude oil prices are rock-bottom, as they were 
last year, companies simply do not have the resources needed to invest 
in projects that could cost billions of dollars over many years. When 
oil prices are higher, as they are today, companies are reluctant to 
take the kind of risks necessary for future growth because they have no 
guarantee that prices will not plummet again. As one pipeline supply 
company executive told us recently, ``Uncertainty leads to paralysis.''
    Our suppliers--companies that make pipeline and other equipment 
needed for exploration and production--have to put their own interests 
first, so when producers quit buying their products because of low 
crude oil prices, they have to search elsewhere for customers. By the 
time our companies are ready to buy equipment again, those suppliers 
may no longer be making those products because they've found more 
reliable customers.
    Similarly, both producers and their suppliers are too often forced 
to lay off many of their employees and those employees get other jobs--
many in other industries--and are thus unavailable when the producers 
are once again ready to expand. In the highly specialized area of 
petroleum engineering, the number of students entering those programs 
at our universities has steadily decreased.
    In addition, if the hard times last long enough, many of our 
smaller producers and their suppliers will simply close up shop, never 
to return.
    But there are other casualties as well. The first is the confidence 
Americans have always had in our industry to provide them with the 
products when they need them at a reasonable cost. Our companies have 
strived hard to live up to that trust, and for the most part they have 
succeeded. However, there can only be so much of this volatility and 
its resulting uncertainty regarding supply and prices before that 
confidence is brought into question.
    And perhaps even more important are the national security 
implications of this volatility. As the world's only remaining super 
power, the United States has inherited a tremendous burden, at home and 
abroad. The question we must ask is this: how dependent on a reliable 
source of the products our companies make are our armed forces and 
those of our strategic allies?
    The answer, of course, is extremely dependent. Any serious 
disruption of any segment of our industry--from production to 
transportation to refining to delivery--could place severe strains on 
our armed forces' ability to do their jobs. Without a sound energy 
policy that encourages greater domestic production and lifts the 
stifling effects of over-regulation, we place too much at risk.
    It is important to point out that despite the obstacles, our 
companies are striving to supply products to consumers:
    Refinery processing of crude oil is above average and set a record 
in 1999.
    Refinery production of gasoline and distillate oil have set many 
records for this year.
    Refinery utilization is currently above average for this time of 
the year, exceeding 93 percent last week.
    These measures indicate that our industry is working as hard as 
possible to safely deliver the products that consumers need. It is also 
important to note that while world supplies are reduced, there are no 
shortages today.
    How we can meet the challenges: An effective energy policy
    Government can and should also take steps to strengthen our 
domestic oil and natural gas producing industry. Because the United 
States imports over 55 percent of the oil Americans consume, the ebbs 
and flows of the world oil market impact the industry's ability to 
continuously provide consumers the fuel they need at fully affordable 
prices. We can reduce rapid swings in prices by providing greater 
diversity in where companies get their supplies of crude oil, both at 
home and abroad.
    We can reduce our reliance on foreign supplies and also potentially 
exert downward pressure on international crude oil prices by opening 
our most attractive domestic oil and natural gas prospects to 
responsible exploration and development.
    One hundred years ago, scientists were predicting the demise of 
both coal and oil. Now, they are no longer forecasting the end of our 
coal supply, but we still hear the question asked: ``When are we going 
to run out of oil?''
    The fact is that oil is in plentiful supply--and is likely to 
remain so for the foreseeable future. According to the Oil & Gas 
Journal, the U.S. Geological Survey's 2000 World Assessment (to be 
released at this June's World Petroleum Congress) estimates that, 
excluding the United States, the world's undiscovered, conventionally 
recoverable reserves amount to 649 billion barrels of oil and 4,669 
trillion cubic feet (TCF) of natural gas.
    The USGS assessment shows that U.S. undiscovered conventionally 
recoverable reserves total 83 billion barrels of oil and 527 TCF of 
natural gas.
    Looking to the future, technology could well permit the economic 
development of the largest known source of hydrocarbons--methane 
hydrates--methane frozen in ice. Located in deep water under intense 
pressure, methane could provide the world with several more centuries 
of available clean energy. The U.S. Geologic Survey has estimated that 
the United States has 320,000 TCF of methane in hydrates, which is 200 
times the size of conventional gas reserves.
    However, our industry cannot draw upon our vast remaining 
hydrocarbon reserves unless access is provided for responsible 
exploration and development.
    Currently, many of these areas have been placed off-limits by the 
federal government. Since 1983, access to federal lands in the western 
United States--where nearly 67 percent of our onshore oil reserves and 
40 percent of our natural gas reserves are located--has declined by 60 
percent.
    Our search for new domestic offshore oil and natural gas is limited 
to the Gulf of Mexico and Alaskan waters because of the congressional 
moratoria that have placed off-limits most of the rest of our coastal 
waters. Onshore, the President has repeatedly used his executive powers 
to limit oil and gas activity on vast regions of government lands. 
Congress has refused to authorize exploration on that small section of 
the Arctic National Wildlife Refuge that was specifically set aside by 
law for possible exploration in 1980. And most recently, the U.S. 
Forest Service moved to make it more difficult for our companies to 
explore for natural gas and oil on government lands when it announced a 
plan to bar road building in virtually all of the large areas in the 
forest system, spanning a total of 43 million acres in 39 states.
    Our industry supplies the energy to keep America going strong, but 
to continue to produce domestic oil and natural gas, we must have 
improved access to federal and state lands.
    Old arguments about the incompatibility of access and a clean 
environment have been disproved. Technology has revolutionized how oil 
and natural gas are found and produced. For example, geophysicists use 
three-dimensional seismic equipment to locate oil and natural gas with 
greater precision so that more oil can be produced with fewer wells. 
Fewer wells mean a smaller environmental impact. Improved drilling 
techniques allow companies to branch out underground to reach a variety 
of oil and gas reservoirs from one location. Offshore wells can now 
safely capture oil and gas in ocean depths of thousands of feet in 
areas far offshore.
    Much has been made recently about the advantages of natural gas, 
and indeed they are many. Natural gas is a clean-burning fuel and there 
is no shortage of it, domestically. The National Petroleum Council, in 
its most recent report on natural gas demand, reported that it expects 
that U.S. gas demand will grow from 22 trillion cubic feet (TCF) in 
1998 to about 29 TCF in 2010 and could rise beyond 31 TCF in 2015. But 
the fact that seems to be lost on some is that natural gas comes from 
the same place as oil does, from reservoirs buried deep beneath the 
ground. There is no magic fountain spewing natural gas, ready to be 
harnessed and delivered to our nation's homes, factories and electrical 
generating plants. We must look for it in the same manner we look for 
oil, and to do this, we need to be allowed access to the areas where it 
is likely to be found.
    In addition to denying access for oil and gas development, the 
federal government has imposed layer upon layer of regulations on U.S. 
refineries without sufficient regard as to how these regulations impact 
refiners' ability to meet the full range of needs of American 
consumers. In many cases, companies have simply given up attempting to 
meet the increasing regulatory demands and shut down their refineries 
altogether, to the point that today we have about half the number of 
refineries we had just 20 years ago.
    Over-regulation reduces the flexibility that refineries need to 
respond to the fast-paced changes in today's world. This is 
particularly true in the ``balkanized'' distribution system that we 
already have in place as a result of federal and state government 
mandates for different types of fuels for different sections of the 
country as a result of clean air regulations.
    In the past, any refinery or distribution system disruption could 
easily be overcome by simply switching to another refinery or another 
pipeline. Today, with different refineries producing different grades 
of gasoline for different regions, such source switching has become 
extremely difficult, leaving the system vulnerable to serious supply 
problems.
    Little effort is made by the government to explain to consumers why 
this balkanized distribution system means that people in some states or 
regions of the country pay more for their fuel than do people in other 
areas. The result is too often unjustified suspicion of and anger 
toward our companies and the industry.
    The EPA's proposed regulation, announced last week, to drastically 
lower the sulfur content of diesel fuel is an example of a government 
action that could have significant, negative consequences on our 
ability to supply heating oil and diesel fuel. We share the 
government's interest in further cleaning the air. But emissions 
reductions beyond the 90 percent we have already proposed stand a good 
chance of further driving up fuel manufacturing costs unnecessarily, 
imposing yet additional burdens on our nation's truckers and farmers. 
We do not believe it is unreasonable to ask for a one-year moratorium 
on the implementation of these regulations--until sufficient studies of 
this extreme policy can be performed. We all share the same goal of 
emissions reductions but getting there sensibly without significant 
adverse impact on the industry and our nation's consumers is the smart 
way to go.
    Even with greater access and flexibility, the United States will 
continue to need to rely on foreign oil supplies. Thus, it is important 
that we maximize the diversity of those supplies to help ensure the 
reliability of a continuous flow of oil imports. Unfortunately, U.S. 
unilateral trade sanctions and the constant threat of sanctions narrow 
our sources of supply, frustrating achievement of this important 
objective.
    In recent years, unilateral economic sanctions have increasingly 
become the policy tool of choice in the conduct of U.S. foreign policy. 
One of the favorite targets of these recent sanctions has been major 
oil-producing countries. The U.S. currently has sanctions in place 
against countries comprising over 10 percent of world oil production 
and 16 percent of estimated remaining oil resources. There is little 
evidence that unilateral sanctions produce desired outcomes. There is a 
better way: working with the governments in which they do business, 
some of our companies are adopting their own human rights and 
environmental standards.
    In short, U.S. policymakers face a dilemma. Growing supplies of 
crude oil will be required to sustain world economic prosperity, and 
diverse, ample foreign supplies are needed to help ensure our own 
country's economic growth. The drive to impose unilateral sanctions is 
an obstacle to both of these objectives.
    Any effective energy policy cannot ignore the global aspects of the 
oil and natural gas industry. Every day we are becoming more and more 
integrated into a one-world economy and we cannot seek to isolate the 
United States if we want to remain a leading player in this economy. To 
that end, we must avoid all policies that make it more difficult for 
companies to operate abroad, we must encourage free trade and we must 
seek worldwide standards for technical equipment specifications to 
avoid duplicity.
    Government must also resist the siren song of politically popular 
short-term solutions that can have devastating long-term implications. 
For instance, the unexpectedly severe cold spell in the Northeast last 
winter and the resulting spike in home heating oil prices led to 
efforts to create a regional home heating oil reserve for New England. 
We are now hearing similar calls for a 1.5 million-barrel oil reserve 
for California. In both cases, the motivation behind the proposals is 
understandable. Public officials have a sincere interest in seeing that 
their constituents are not inconvenienced or harmed by supply 
disruptions that could lead to shortages or higher prices. We share 
that interest. However, we must caution against the creation of such 
reserves because they would have the ultimate effect of the government 
becoming a heavy player in the marketplace, something no one wants.
    If the federal government is in the marketplace, many operators in 
the private sector will choose to take their business elsewhere rather 
than compete head-to-head with the government. We need only look to the 
1970s to see the nature of adverse impacts when the federal government 
plays a direct role in thr daily marketplace.
    The premise behind a regional reserve is that the government would 
buy oil and release that oil into the marketplace when prices get to be 
too high. It may sound like a rational idea, until you stop to look at 
the details. Who would be responsible, for instance, for deciding 
exactly when prices are too high and how much oil to release? What 
guarantees would we have that such a crucial question would not become 
embroiled in politics, particularly in an election year?
    Equally as important are the economic considerations. With its deep 
pockets and no need to turn a profit, government has the freedom to buy 
oil at high prices and sell low to keep retail prices artificially low. 
Private industry, on the other hand, survives by being able to purchase 
large quantities of oil at lower wholesale prices and holding it until 
it can sell the oil at higher retail prices. With the government as a 
player the hope of making a fair profit evaporates and companies have 
no incentives for buying and holding large inventories. The result 
would be lower total inventories than we'd have without the government 
reserves.
                               conclusion
    In closing, we share your concern for the future of the industry 
and the security of our nation. America's oil and natural gas companies 
have a long and proud history of providing this country's consumers--
including our armed forces--with a reliable and affordable supply of 
energy to make their homes comfortable and take them where they need to 
go, when they want to go. Through good and lean years, U.S. suppliers 
of natural gas and petroleum products have kept America's armed forces 
mobile, its factories running and have provided the fuel to move goods 
from manufacturers to retailer and, ultimately, into America's homes 
and offices.
    To the extent to which we can help in your efforts to better 
understand our industry and our government can best work together to 
forge a sound and workable energy policy, we are here to assist you.

    Mr. Barton. Thank you, Mr. Cavaney.
    We would like to hear from Michael Johnson, who is here on 
behalf of the Natural Gas Supply Association.

                 STATEMENT OF MICHAEL L. JOHNSON

    Mr. Johnson. Thank you, Mr. Chairman; and greetings from 
the great State of Texas where it is hot today. I would like to 
thank you for this opportunity to discuss the important role 
natural gas can play in strengthening our economy and improving 
our environment.
    I am Michael Johnson. I am Vice President of Conoco, and I 
look after the gas and gas liquids business. As you know, 
Conoco is a major domestic and international oil and gas 
producer. I also represent the Integrated Independent Producers 
of the Natural Gas Supply Association.
    I would like to address four topics in my remarks, and then 
expand those for the record.
    I will discuss, first, the supply of natural gas; second, 
the ways that supply meets potential demands; and, third, the 
ways our industry is changing to reduce costs and increase 
investments in technology. And, last, I would like to discuss 
government policies that raise the cost of natural gas and, in 
the process, damage our economy and our environment.
    First, let me address supply. Producers are highly 
optimistic about the long-term supply of natural gas. A recent 
National Petroleum Council study estimates the recoverable 
natural gas resource space in the lower 48 States is 1,400 
trillion cubic feet. That is enough for many decades into the 
future. Today's estimate is substantially higher than in 1992. 
That is in addition to the large volume of natural gas we 
produced between those years.
    New technologies are permitting us to increase recoverable 
gas resources faster than we are consuming them. One reason for 
this increased resource base is an expansion into frontier 
areas such the Mackenzie Delta, the Beaufort Sea and the North 
Slope. Tapping into these resources is not inexpensive, 
however. Climate and terrain are frequently hostile. We must 
constantly balance cost, risk, and potential to keep natural 
gas prices cost competitive.
    Today we are winning the battle to keep natural gas prices 
competitive, and the robust supply of natural gas makes us 
confident of our ability to meet future market demand, demand 
that we all agree will increase substantially in response to 
our Nation's need to fuel our economy.
    Natural gas producers are also faced with a significant 
challenge. That is fueling the majority of new electric power 
generators that will be added in the next 20 years. We are 
confident that we can meet that challenge and are preparing to 
serve that growing demand in addition to the traditional 
markets that we have always served.
    Producers have to bear much of the responsibility to keep 
prices competitive, and we must do so by competing in the 
larger energy marketplace that is a global marketplace, and 
there are traditionally volatile prices in that marketplace. We 
must also cope with massive regulatory and technological 
changes that characterize today's international and domestic 
wholesale and retail markets.
    To meet these challenges our industry is undergoing a major 
consolidation. The companies that emerge will be stronger, 
better able to compete, better able to invest in new 
technologies and better able to control the cost of bringing 
natural gas to the marketplace. But the changes we are 
undertaking to achieve that end are difficult and quite 
painful.
    It would be nice to think that these wrenching industry 
changes would be enough to ensure continuing gas supplies at 
competitive prices to all Americans, but they are only part of 
the solution. Just as vital is a policy climate that permits 
our companies to produce resources in ways that are cost 
effective and efficient. We have the knowledge and the 
technologies to do that, we have the resource base, but we do 
not have the Federal policies we need to bring natural gas to 
the American public long-term at competitive prices.
    Mr. Chairman, you have consistently demonstrated your 
concern for energy costs and competitive markets. 
Unfortunately, not everyone in government shares your sharp eye 
for policy consequences.
    There are people in positions of power today who are 
misleading the American public. They refuse to acknowledge our 
industry's proven ability to produce natural gas in ways that 
respect and preserve the environment. They refuse to credit our 
technological breakthroughs. They refuse to respect the 
Nation's need for natural gas. As a consequence, they are 
trying to prohibit natural gas exploration and production in 
some of our richest resource bases both on shore and offshore 
that continue to be locked up.
    There are two inevitable consequences to policies that 
reduce access to America's rich natural gas resources, and 
those consequences are either higher natural gas prices or 
increased switching to higher-polluting fuels, which no one 
wants. Neither of those consequences would prove beneficial to 
the economy or to our environment.
    In conclusion, Mr. Chairman, we need your help to inform 
the Americans about the facts; and we need your help to change 
Federal policies toward natural gas production in ways that 
benefit our Nation, our economy, and all of our citizens. Thank 
you very much.
    [The prepared statement of Michael L. Johnson follows:]
  Prepared Statement of Michael L. Johnson, Vice President & General 
                          Manager, Conoco Inc.
    Thank-you, Mr. Chairman, for this opportunity to discuss the 
important role that natural gas can play in our future energy 
portfolio. I am Michael Johnson, vice president and general manager of 
Conoco, Inc.
    Conoco is an integrated, international energy company headquartered 
in Houston, Texas, and is among the top dozen or so U.S. gas producers. 
The company had revenues of $27 billion in 1999 and operates in more 
than 40 countries. Conoco's natural gas and gas products operations 
include the gathering, processing, distribution, and marketing of 
natural gas and natural gas liquids in North America, the U.K., Norway 
and Trinidad. In 1999, Conoco marketed natural gas volumes in excess of 
4.4 billion cubic feet per day in the U.S. and Europe.
    This year, Conoco is proud to be celebrating its 125th anniversary.
    I am also today representing the producers of the Natural Gas 
Supply Association. NGSA represents integrated and independent 
companies that produce and market domestic natural gas. Established in 
1965, NGSA encourages the use of natural gas and a regulatory climate 
that fosters competitive markets.
    I would like to address four topics in my remarks today:

 First, I will talk about the supply of natural gas available 
        to U.S. consumers, businesses, and industries.
 Second, I will address the ways supply meets potential demand.
 Third, I will talk about ways our industry is changing and 
        evolving to meet America's need for clean, cost-competitive 
        natural gas.
 Lastly, I will address the government policies that raise fuel 
        costs and unreasonably and unfairly limit our citizens' access 
        to the natural gas they need.
Supply
    First, let me address the supply of natural gas.
    I want to emphasize producers' optimism about the long-term supply 
of natural gas.

 Today, we supply about 23 percent of the energy America 
        consumes. That's about 19 quadrillion BTUs (or ``quads'') of 
        domestic gas, and an additional 3 to 4 quads from independent 
        and affiliated companies in Canada.
 There is no doubt that, in the future, the U.S. could--if we 
        chose to do so--dramatically increase the amount of natural gas 
        marketed domestically. The resource is there.
    There are many estimates of U.S. natural gas supply. All are highly 
positive. At the request of the Department of Energy, the National 
Petroleum Council (or ``NPC'') undertook a study in 1999 that estimates 
the recoverable natural gas resource base in the Lower-48 states at 
1466 trillion cubic feet (or ``tcf''). That estimate is significantly 
stronger than the estimate the NPC made in 1992. In fact, the new study 
finds a strong probability of at least 171 tcf more than it found in 
1992. That's in addition to the 124 tcf we produced between 1992 and 
1999.
    The reasons for this growth are the new technologies and new 
methods of locating resources that the industry has developed and 
implemented. Our strides in these area are so rapid that, as the NPC 
numbers show, we are increasing recoverable resources faster than we 
are consuming existing reserves.
    Part of this expansion of the resource base involves a re-
exploration and re-assessment of areas that had been assumed to be in 
decline, such as California. We are also expanding our reach out of the 
Lower-48 states to new frontiers such as offshore eastern Canada, where 
experts predict lie upwards of 45 tcf of natural gas. Western Canada, 
the Mackenzie Delta and Beaufort Sea, and the North Slope offer 
additional possibilities, through reservoirs in traditional formations 
and through our greatly increased ability to tap coal-bed methane.
    Tapping into the resources in these frontier areas is not 
inexpensive. Climate and terrain are frequently hostile. We must 
constantly balance cost, risk, and potential in an energy market that 
is frequently unpredictable.
Demand
    Despite the risk, however, the robust supply of natural gas makes 
us confident of our ability to meet market demand. We can, if called on 
to do so, increase both the volume of natural gas use and the 
percentage of U.S. energy supplied by gas.
    Analysts and experts agree. The most recent Annual Energy Outlook 
from the Energy Information Administration, for instance, shows natural 
gas production in 2020 at slightly more than 27 quads and imports at 
about 5.3 quads. On a consumption basis, the EIA sees natural gas as 
rising from today's 23 percent to almost 27 percent of our total energy 
market.
    Such an increase would make natural gas the nation's fastest-
growing fossil fuel. Over the next two decades, as total U.S. energy 
consumption grows at a rate of 1.3 percent annually, we see natural gas 
growth at about 1.5 percent.
    Growth could, of course, exceed that level substantially. Should 
the U.S. decide to pursue a strategy of tighter reductions in air 
emissions, the amount of natural gas needed is likely to grow 
precipitously. Some models show natural gas use rising as high as 
approximately 35 percent of the nation's energy supply should the 
Congress choose to impose stricter pollution-reduction scenarios on 
U.S. business and industry. And finally, our most significant increase 
in demand will be in electric generation. The challenge that this poses 
our industry is significant--but I am confident in our ability to 
develop and supply natural gas in whatever quantity and price is 
dictated by the market.
Industry Evolution
    At the same time as natural gas demand projections are rising above 
previous expectations, the entire energy industry is becoming more 
competitive. Restructuring of wholesale and retail markets in natural 
gas and electricity is well advanced. New technologies like 
distributive power are giving residential and business customers new 
options.
    The result has been high volatility in energy prices. It has been 
difficult for U.S. companies to predict revenue streams accurately and 
to plan capital investments. Wall Street has at times been wary of our 
industry, making it difficult for some of our companies to raise the 
capital required to expand exploration and production. You only need to 
look at our stock prices so see that.
    At the same time, we're finding that reservoirs in some areas, such 
as the Western Gulf of Mexico, deplete more rapidly than originally 
projected. That puts additional pressure on our capital budgets.
    The volatility of the global oil market has long-term negative 
effects on our companies because the vast majority of natural gas 
producers also depend on revenue from oil production. Witness the 
historically low oil prices in 1998 and 1999. The precipitous drop in 
revenue forced us to lay off tens of thousands of employees, shut in 
wells, and ratchet back on exploration budgets.
    Revenue volatility also brought on a wave of worldwide corporate 
consolidations that continues today.
    In the long run, these restructuring changes will help our industry 
recover from the aftermath of low energy prices, keeping prices 
competitive as we rehire employees and redeploy equipment into the 
field.
The Policy Climate
    Many of the market forces bringing about these changes are beyond 
the appropriate scope of U.S. government policy. But there are several 
major policy areas that will, in the long run, determine the price 
America will pay for the energy on which our economy rests.
    Let me put that another way. As I have explained here today, there 
is no question that the U.S. has vast natural gas resources and that 
our producers can bring these resources to market. That information 
does not, however, answer the question: How much will that gas cost?
    Will the policies of the U.S. government cause the American people 
to pay unreasonably high prices for the clean-burning natural gas they 
need?
    Mr. Chairman, you have consistently demonstrated your concern for 
energy costs and competitive markets. You have supported federal 
policies for the natural gas industry that have reduced the 
unreasonable regulatory costs that have burdened our industry--and our 
customers--in the past. You have moved through your committee a bill on 
electricity restructuring that shows a deep concern for the budgets of 
American families and for the competitiveness of American industries.
    Unfortunately, not everyone in government shares your sharp eye for 
policy consequences. There are those in positions of power today who 
are misleading the American people. They are endorsing a position that 
locks up increasing amounts of land--to prohibit natural gas 
exploration and production in our richest resource areas, both on- and 
off-shore. And they are misleading our citizens into believing that can 
be done without economic ramifications.
    America's richest natural gas resources--the resources we can 
produce most cost-effectively--lie under onshore and offshore federal 
lands. Our industry can produce this gas in ways that are 
environmentally sensitive, and we are committed to that goal. Advances 
in our industry have reduced the impact of gas production on the 
environment. And dozens of environmentally sensitive technologies are 
being employed by the industry.
    Yet, we hear constantly from a number of highly placed federal 
policymakers who oppose domestic natural gas production and transport. 
I do not know if they are merely misinformed, or if there is some other 
reason for their statements. What I do know is that they are trying to 
convince the American people that it is in their best interest to 
prohibit natural gas production and transport across much of this 
nation.
    It is not.
    It is in all of our best interests to ensure that Americans have 
access to the energy they need at the lowest possible cost--low-cost in 
terms of price, and low-cost in terms of environmental impact. Domestic 
natural gas production is the ideal way to meet those conditions.
    Thus, Mr. Chairman, denying access to public lands can only lead to 
two consequences--fuel switching, to the extent that is possible, and 
higher costs to future generations. We do not think either of those 
choices are good alternatives. The recent rise in gas prices and the 
high likelihood of price spikes and supply disruptions this year are 
consequences of previous policy decisions, its time to change 
directions before damage is done to the U.S. economy.
Conclusion
    Let me conclude my remarks today, Mr. Chairman, by asking for your 
help in changing federal policies toward natural gas production. We 
need your help in getting across the facts about natural gas to the 
American public. And we need your help in devising policies that give 
Americans responsible access to the clean, cost-effective energy 
resources with which our nation abounds. We will work with you and your 
staff to develop any of these needed policies.
    Thank-you.

    Mr. Barton. Thank you, Mr. Johnson.We now want to hear from 
Cathy Abbott, who is here representing the Interstate Natural 
Gas Association of America.
    Again, I just want to say for the record what a pleasure it 
was when I was in the White House Fellows program to work you 
with in the Department of Energy; and it was really, really an 
educational and a personally growing experience for me. And I 
want to let the audience know that the young baby that was 
needing a diaper change is now 6'5'' and thinking about going 
to college at Texas A&M. So times do change.
    Your statement is in the record in its entirety, and we 
would recognize you for 7 minutes to elaborate on it.

               STATEMENT OF CATHERINE GOOD ABBOTT

    Ms. Abbott. Thank you, Mr. Chairman. And I think the 
education was all the other way. You were my one and only White 
House Fellow that I had the chance to work with while I worked 
in government.
    Mr. Chairman, my name is Cathy Abbott. I am Chief Executive 
Officer of Columbia Gas Transmission Corporation and Columbia 
Gulf Transmission Corporation, which are the pipeline units of 
Columbia Energy Group. I am here to testify on behalf of INGAA, 
whose members transport 90 percent of the natural gas consumed 
in the United States.
    I am submitting to the record two INGAA studies, one on 
pipeline and storage infrastructure requirements and the other 
one on coordinating environmental agency review of new pipeline 
projects.
    As I detail in my written statements, the Nation's natural 
gas policy has come a long way toward relying on market forces. 
In addition, we believe that, in crafting energy policy, we 
should acknowledge three key public benefits of increased 
natural gas use.
    The environment. Natural gas is an environmentally clean 
fuel and will play an increasingly significant role in 
improving the Nation's air quality.
    Reliability and security of supply. The vast majority of 
the natural gas used in the United States is produced here in 
North America.
    Safety. Natural gas is delivered to millions of homes, 
voters, businesses, through underground pipelines which are by 
far the safest form of energy transportation.
    Today, natural gas provides 25 percent of U.S. energy 
consumption. My colleagues on the earlier panel from the Energy 
Information Administration project that natural gas will 
increase from about 22 Tcf today to a little more than 30 Tcf 
shortly after 2010. That reflects a 36 percent increase in use. 
The largest area of growth, about 60 percent of this total, is 
in the electric generation market where natural gas offers an 
inexpensive, clean solution to improving air quality.
    However, to achieve those public policy benefits and to 
grow the gas market, interstate pipelines will have to 
construct new facilities. A study conducted for INGAA estimates 
that 2,100 miles of new pipeline are needed every year between 
now and 2010 to serve this increased demand.
    We can only see the need for additional pipeline capacity 
from today's market signals. For example, this past winter, 
during a normal weather period, New York City, natural gas 
prices delivered to the city gate in New York, normally about 
$3, jumped to as much as $15 for a short period, indicating a 
lack of transportation capacity, not value going to the 
producers or the pipelines.
    For the coming year, the value of delivering gas to New 
York City from the producing area exceeds the actual cost of 
transportation by 50 percent, again, a market signal of 
insufficient transportation capacity.
    Finally, demand in the Northeast is expected to grow 
dramatically, largely fueled by gas-fired power plants with a 
load factor of 70 to 80 percent, and we believe that current 
pipeline capacity is insufficient to serve that load.
    Now, with an energy policy that seeks to let markets work 
where they can, what solutions do we have to offer? INGAA 
believes three criteria must be met to achieve market-driven 
growth in gas use:first, an efficient certificate and 
construction process to expedite the installation of needed 
pipeline infrastructure; second, increased regulatory 
flexibility to allow pipelines to serve the needs of a changing 
market; and, third, regulated return sufficient to reward 
companies for the risk of building new pipelines and sufficient 
to attract capital to these projects.
    Turning to the first, today the regulatory process for 
constructing pipelines is overly complex and time-consuming. A 
good example of regulatory delay is the proposed Millennium 
Pipeline Project which we are involved in to serve the mid-
Atlantic/New York/Northeast market and has more than 90 percent 
of its right-of-ways in existing utility corridors. Millennium 
filed its application with the Federal Energy Regulatory 
Commission in December 1997. Two and a half years later, the 
FERC has yet to take action.
    During that time, Millennium has spent $40 million for 
project development, mostly to comply with various legitimate 
State and Federal environmental regulations and to respond to 
almost 400 FERC environmental data requests.
    In our experience, much of the delay and associated costs 
are driven by the need to harmonize the often inconsistent 
requirements by the many State and Federal agencies with a role 
in the approval process.
    I mention Millennium because its experience is not unique, 
yet it is dramatic. While interstate pipelines are committed to 
sound environmental practices, we believe the environmental and 
regulatory review should and can be streamlined and coordinated 
to resolve tradeoffs among parties and to process contracts 
much more quickly. We must reduce these excessive delays and 
permit the timely construction of important new pipeline 
projects if we are to connect growing supplies with growing 
markets.
    Another critical issue facing pipelines and their customers 
is the need for more flexibility in structuring and delivering 
services at fair prices. Today, local gas distribution 
companies hold about two-thirds of the firm contracts for 
pipeline capacity. However, in the future, with unbundling and 
choice at the consumer level, a larger share of pipeline 
capacity will be held by marketers, producers, power 
generators, and other players. Because these new customers use 
capacity significantly differently than our traditional 
customers, they expect pipelines to respond with new kinds of 
services and new kinds of pricing packages.
    FERC recently approved a rulemaking that provides 
additional tools to meet these challenges, and we recognize and 
applaud the progress FERC has made. We urge the Commission to 
continue to press ahead with regulatory reform to allow 
pipelines to respond quickly and flexibly with these new 
services and prices in an increasingly diverse customer base.
    Mr. Chairman, while the environmental, economic and energy 
policy benefits of increased natural gas use are clear, the 
regulatory challenges facing us in meeting that demand are also 
clear. I want to thank you and the other members of the 
committee for providing me the opportunity to testify today. 
Thank you.
    [The prepared statement of Catherine Good Abbott follows:]
Prepared Statement of Catherine Good Abbott on Behalf of The Interstate 
                   Natural Gas Association of America
    Mr. Chairman, my name is Catherine Good Abbott. I am chief 
executive officer of Columbia Gas Transmission Corporation and Columbia 
Gulf Transmission Company, wholly owned subsidiaries of Columbia Energy 
Group. I am here today to testify on behalf of the Interstate Natural 
Gas Association of America (INGAA). INGAA is the trade association that 
represents interstate natural gas pipelines in the United States, the 
inter-provincial pipelines in Canada and PEMEX in Mexico. These 
pipeline systems transport 90 percent of the natural gas consumed in 
the United States.
    Thank you for providing me this opportunity to testify before you 
today.
    Natural gas today provides 25 percent of the energy consumed in the 
United States. As you know, natural gas does and will increasingly play 
a major role in improving our nation's air quality. The chart attached 
to my testimony clearly demonstrates the environmental benefits of 
natural gas. In addition to the important clean fuel benefits, the vast 
majority of the natural gas consumed in the United States is produced 
in North America; only a tiny portion of our supply comes from imports. 
Finally, transporting reliable natural gas to fuel millions of homes 
and businesses by interstate pipelines is by far the safest and most 
reliable form of energy transportation. We continuously monitor and 
inspect our facilities to ensure they operate safely.
    I'd like to discuss today the implications of a 30 trillion cubic 
foot (Tcf) market for our nation and for the natural gas pipelines that 
will transport that energy to customers across the country. 
Specifically, I will elaborate on the public policy benefits of 
increased gas use and the challenges facing U.S. pipelines in meeting 
this demand.
    First, some background on the natural gas industry is helpful in 
creating a clear picture of where we are today. The history of wellhead 
price regulation in our country is a dismal one. Ten years ago, 
Congress took steps to repeal price controls at the wellhead, which led 
to the transformation of our industry. In 1992, the historic FERC Order 
636 ended the regulation of pipeline natural gas sales, but the 
transportation of natural gas remained regulated and was restructured 
by FERC.
    In the years since Order 636, interstate pipelines operating in a 
competitive environment have become more efficient, they have reduced 
their operating costs and created and offered new services. In the 
period from 1991-1997, volumes flowing on interstate pipelines 
increased by 13 percent, while operation and maintenance costs were 
reduced by 42 percent across the industry. Today, the cost of 
transporting natural gas represents only about 16 percent of the price 
paid by the end user, down from 23% in 1986.
    The numbers show that competition works in the natural gas 
industry. We are moving more natural gas today than at any time in 
history. Natural gas pipelines bring the cleanest, most reliable and 
most efficient fuel source to our nation's communities, and we stand 
ready to take on a larger role in assuring a plentiful and reliable 
energy supply for our country in the new millennium.
         public policy issues drive demand for a 30 tcf market
    The Department of Energy's Energy Information Administration 
estimates that natural gas use will increase from about 22 Tcf today to 
30 Tcf shortly after 2010, reflecting a 36 percent increase in natural 
gas use. The largest area of growth, about 60 percent of this total, is 
expected in the electric generation market. In some areas, the 
anticipated growth is even more significant. In the Northeast, for 
example, demand for natural gas used for power generation is expected 
to increase by 250 percent!
    The primary reasons for the rapid growth in the power generation 
sector relate to the relatively low cost of gas-fired generation, and 
the low air emissions that allow these facilities to comply with 
stringent clean air standards. Advanced gas-fired combined cycle 
turbines result in cleaner and more economically priced power that 
provides equivalent or better reliability compared to other fossil 
fuels, without the resulting environmental impacts.
    Aside from other factors, this would be a positive situation, both 
for consumers and our industry. But at the same time we are 
anticipating phenomenal growth in natural gas demand, there is growing 
concern over weaknesses in the energy delivery system in the Northeast. 
These concerns were glaringly evident this past winter during the month 
of January. For a period of just a few weeks, temperatures that were 
statistically normal led to short-term energy shortages, and 
significant spikes in energy prices. On January 18, 2000, natural gas 
prices delivered to the city gate of New York City, normally about $3 
jumped to as much as $15. Since interstate natural gas pipeline rates 
are capped under current regulations, these increases did not impact 
pipeline revenues. The shortages of fuel oil, and resulting price 
increases, during this same period are also well documented.
    This is not just a winter issue. Concerns have also arisen about 
the ability of power grids to maintain reliability during the coming 
summer months if temperatures remain high for a significant amount of 
time. Several areas across the country, including the Northeast, report 
that power shortages are likely this summer. For example, the New York 
Public Service Commission noted last week that limited electric 
generation will have an impact on prices throughout the Northeast. Some 
Northeast utilities (for example, Consolidated Edison) are predicting 
significant price spikes as much as 25 percent higher this summer.
    With this set of issues before us, our challenge is to maximize the 
public policy benefits of increased natural gas use in order to respond 
to the growing needs of the marketplace. As we see it, the following 
three criteria must be met in order to achieve the ambitious objective 
of a 30 Tcf market:

 an efficient certificate and construction process to expedite 
        the installation of the infrastructure needed for the future;
 increased regulatory flexibility to serve the needs of a 
        changing market; and,
 the availability of capital.
         efficient certificate and construction process needed
    To meet the demands of a 30 Tcf market, interstate pipelines will 
need to construct a significant number of new facilities. A study 
called ``Pipeline and Storage Infrastructure Requirements for a 30 Tcf 
U.S. Gas Market'' was conducted by Energy and Environmental Analysis, 
Inc. for the INGAA Foundation. This study found that approximately 
2,100 miles of new pipeline will be needed every year between now and 
2010 to have the capacity necessary to serve this increased demand.
    The pipeline construction process has become increasingly complex. 
As you may be aware, it is simply getting more difficult to build any 
type of new facility. In the U.S., we must obtain and coordinate 
multiple state and federal environmental permits. We also must consider 
the concerns of landowners, who are becoming more interested and 
involved in our projects. To keep our projects economic, we must keep 
costs under control. And to keep the costs under control, we must 
promote more efficient review and approval processes--within our 
companies and among the regulatory agencies that ultimately decide the 
fate of the project.
    Many new pipeline proposals have encountered delays and increased 
costs at FERC due to the need to satisfy requirements under various 
environmental statutes that are administered by a variety of state and 
federal agencies. While interstate pipelines are committed to sound 
environmental practices, we believe the environmental and regulatory 
review of new pipeline proposals should be streamlined and coordinated 
to reduce such costs, reduce the excessive delays that are now 
experienced, and permit the timely construction of important new 
pipeline projects.
    As an industry, we have been working to encourage FERC, CEQ and 
other Administration Departments and agencies that participate in the 
project review of proposed pipelines, to develop an Interagency 
Agreement to coordinate this federal agency review. The INGAA 
Foundation sponsored a study to identify those points in the existing 
project review process where additional interagency coordination could 
improve the process for both applicants and participating agencies. We 
have received indications from CEQ, FERC and others that they are going 
to go forward with this important effort to seek such an agreement.
 increased flexibility required to meet the needs of a changing market
    The evolving competitive nature of the natural gas industry 
requires mechanisms allowing existing and new customers to gain access 
to natural gas pipeline services at fair prices. Currently, gas utility 
companies hold approximately two-thirds of the capacity on interstate 
pipelines. But we do not expect gas distribution companies to be our 
only major customers in the future. Marketers, power generators and 
other end-users, including producers, will join them. These customers 
use capacity differently than gas utilities. So we will have to 
transform the services we sell to meet the needs of these customers.
    The challenge of accommodating diverse new customers is both 
operational and commercial. The load profiles of gas utilities, 
industrials and electric generators are diverse, and the economic 
factors that motivate them differ greatly. In order for pipelines to 
serve all types of customers, changes are required to many pipeline 
tariffs, which are designed to provide high-quality service for 
residential customers. Non-utility customers want different services 
than the standard utility tariffs provide. In addition, some gas 
utilities want the option to buy less or different service from their 
pipelines, while others will be looking to non-pipeline sellers of 
capacity.
    Pipelines will need greater flexibility, both to negotiate 
contracts with old and new players in the capacity market as well as to 
price services appropriately for different markets. FERC has recently 
approved a rulemaking that will provide us with some additional tools 
to meet these challenges by committing to expeditiously process 
requests to implement new and innovative types of services and to 
permit new pricing structures. We recognize that the FERC has taken 
important steps in this area, and urge them to continue to provide the 
resources and attention necessary to make this a policy priority.
                    availability of capital critical
    As I mentioned earlier, between now and 2010, approximately 2,100 
miles of new gas transmission must be added each year to accommodate 
market growth to 30 Tcf. To accomplish this, the natural gas pipeline 
industry will need to invest upwards of $32 billion for pipeline 
transmission and storage facilities.
    Pipelines must compete for investment capital in the marketplace 
with S&P 500 companies with similar risk profiles for the same capital. 
In most cases, pipelines also have to compete for capital within their 
own organizations. A fundamental tenet of this decision-making process 
is that increasing risk requires a return commensurate with that risk. 
If returns on pipeline investments are not commensurate with the risks 
inherent in the pipeline business, less capital will be invested in 
pipeline projects relative to investments in other businesses that have 
a better risk/return profile.
    Risks for the pipeline industry have increased substantially in 
this decade and will likely continue. These increased risks include: 
(1) expiration of long-term gas utility transportation contracts and 
the prospect of non-renewal; (2) movement to shorter-term contracts 
with new non-gas utility customers; (3) competition from unregulated 
marketing firms who can buy capacity at regulated rates and sell it at 
unregulated rates; (4) state commission restructuring of gas and 
electric services; and (5) federal electric restructuring initiatives 
which cause uncertainty in the market that offers our best opportunity 
for future growth.
    FERC's current methodology for setting return assesses each 
pipeline's risk and sets a range of returns commensurate with that 
risk. In order for pipelines to compete effectively for capital, this 
model, which makes the reward commensurate with risk, is necessary.
                               conclusion
    INGAA supports a strong national energy policy, and we believe it 
begins with a strong natural gas industry from the wellhead to the end 
user. In today's environment, our ability to meet the anticipated 36 
percent market increase is not a given. All segments of the natural gas 
industry will have to work cooperatively to develop the 30 Tcf U.S. 
market. While the environmental, economic and energy policy benefits of 
this market are clear, also clear are the challenges facing those of us 
in the natural gas pipeline industry who are being called upon to meet 
our nation's energy needs.
    Mr. Chairman, I want to thank you and the other Members of the 
House Subcommittee on Energy and Power for providing me the opportunity 
to provide information on the public policy benefits of increased use 
of natural gas. As I have stated, INGAA believes three things are 
essential in order for interstate pipelines to help deliver those 
benefits: an efficient certificate and construction process, the 
regulatory flexibility to respond to a changing market, and capital at 
competitive rates.

       Comparative Emission Levels From a 300-Megawatt Power Plant
------------------------------------------------------------------------
                                                                New Gas-
                                          Existing   New Coal    Fired
                                            Coal      Boiler   Combined-
                                           Boiler                Cycle
------------------------------------------------------------------------
NOX Emissions (lb/MMBtu)...............       0.50       0.18       0.04
SO2 Emissions (lb/MMBtu)...............       1.20       0.42    0.00058
Particulate Matter (lb/MMBtu)..........       0.11       0.04     0.0029
CO2 Emissions (lb/MMBtu)...............        205        205        125
------------------------------------------------------------------------
Source: Energy and Environmental Analysis, 1997.


    Mr. Barton. Thank you, Mrs. Abbott.
    Mr. Barton. We now would like to hear from Mr. Roger 
Cooper, who is here on behalf of the American Gas Association.

                  STATEMENT OF ROGER B. COOPER

    Mr. Cooper. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify.
    I am here on behalf of the American Gas Association. We 
represent 189 utilities that serve over 60 million customers in 
all 50 States and the District of Columbia.
    I am here today to say ``ditto,'' to what much of the other 
panelists have said. Natural gas has come of age. It is today 
America's cleanest fossil fuel in abundant supply, as Mr. 
Johnson discussed.
    This is a room where a lot of differences are often aired, 
and today I would like to point out some similarities. We are 
at a point where there is one area of energy policy where there 
is substantial agreement across the board, and that is the use 
of natural gas will increase. Cathy Abbott says it will 
increase 36 percent by the year 2010. Bill Martin says it will 
increase 60 percent by the year 2020. These are essentially 
comparable figures.
    What will this mean? We have adequate supply. Will we be 
able to get it out of the ground? Will we have the capacity to 
move it? Will we have the capacity to get it to the ultimate 
consumer? Can we do that economically? Can we do that in an 
environmentally friendly manner?
    This morning I would like to talk about the downstream side 
of the business, some of the new technologies, and what is 
making gas so valuable to customers. Before doing that, I would 
just like to note that a number of our member companies were 
involved with the National Petroleum Council gas study; and we 
do endorse that study and the views as to what needs to be done 
to improve the gas picture at the wellhead.
    We are looking at a new energy future, and it is a good 
future. It is one that is primarily market driven. It is not 
going to need massive government intervention. It is aligned 
with the current market trends. It is consumer friendly. It is 
environmentally friendly.
    As coal was the dominant energy source for the 19th 
century, as oil was the prize of the 20th century, so natural 
gas will be the fuel of the future, will be the fuel to the 
21st century.
    It is the only fuel out there today that can bridge the gap 
between the environmental demands and the economic realities. 
It is the fuel that customers demand today.
    Bill Martin talked a little bit about the Fueling the 
Future Study which his group did for the American Gas 
Foundation, and I am not going to go through all of those 
points he made. He gave you a lot of numbers. I will repeat a 
couple of them: That gas will increase by 60 percent over 20 
years, that under that study we would decrease U.S. Energy 
consumption by 6 percent. We would do this in a very 
environmentally friendly way, reducing SOX, 
NOX, particulates and CO2 emissions; and 
we could back out 2.6 million barrels of oil a day if we did 
it.
    Where we differ at AGA somewhat from some of the other 
projections, EIA and some of the others, we all look at a 
growing gas market. We slice up the pie somewhat differently. 
We see probably a doubling of large-scale, gas-fired electric 
generation, the big turbines. EIA is probably looking at a 
tripling of that number. Where we see the growth is going to be 
in other direct uses of natural gas, primarily distributed 
generation, cogeneration, fuel cells, microturbines; and these 
systems are coming on the market today. I think they will be 
incremental.
    Sometimes people fear these sort of changes. Are we going 
to get rid of all our power plants? No. I think the Fueling the 
Future Study talks about a future that relies on coal, relies 
on nuclear, and is going to rely on some of these new 
technologies.
    One of the biggest challenges in energy policy today is the 
NIMBY issue, ``not in my backyard.'' And what you have with 
distributed generation is the opportunity for YIMBY, ``yes in 
my backyard,'' yes, I want those technologies that I can use 
that are available to me that will give Americans their own 
sense of energy independence.
    We have put together a blueprint which we will be handing 
out--and I take your cue. Mr. Yergin did not do this. Showing 
it for cameras that are not on--a blueprint on fueling the 
future and how Congress should act to implement increased gas 
use. That would include repeal of the tax on contribution and 
native construction, which is essentially a tax on hooking up 
new gas customers; further RD&D for natural gas; and a lot of 
issues that Cathy and Michael talked about at the wellhead in 
streamlining permitting.
    With that, I will conclude, and I will be happy to take any 
questions.
    [The prepared statement of Roger B. Cooper follows:]
Prepared Statement of Roger B. Cooper, Executive Vice President, Policy 
                 and Planning, American Gas Association
    Good morning, Chairman Barton and members of the committee. I am 
honored to be here today to present the views of the American Gas 
Association on natural gas demand in the 21st century.
    AGA represents 189 local natural gas distribution companies, which 
deliver natural gas to 60 million customers in the United States.
    As coal was the dominant fuel of the 19th Century and oil during 
the 20th Century, we believe that natural gas will be the fuel of the 
21st Century. That is because natural gas is the only energy source 
currently available that can bridge the gap between environmental goals 
and economic imperatives.
    Today you have heard the testimony of the author of the American 
Gas Foundation's study Fueling the Future: Natural Gas & New 
Technologies for a Cleaner 21st Century. Bill Martin described to you a 
scenario for an increase in gas demand from 22 quadrillion Btus (about 
21.4 Tcf) today to 35 ``quads'' (almost 34 TcF) in 2020. He told you 
about the enormous environmental, energy security and efficiency 
benefits that will result. If gas consumption in 2020 is 60 percent 
higher than today (35 quads) we can:

--Reduce CO2 by 930 million tons per year.
--Reduce oil imports by 2.6 million barrels per day.
--Reduce national energy consumption by 6 percent.
    Another benefit that may be of particular interest to this 
subcommittee has to do with reliability. Not only does the gas industry 
have an unparalleled reputation for reliable service, but also natural 
gas technologies can be used to support the operations and reliability 
of the electric distribution system. The recent report issued by the 
U.S. Department of Energy's Power Outage Study Team emphasized the 
value of natural gas technologies in easing strain on the electric 
power generation grid. The report noted that ``distributed 
generation,''--that is, small electric-power generation units that are 
installed on or near the customer's premises--can help relieve the 
demand on the electric grid, especially during peak demand. Natural gas 
fuel cells and microturbines are among these new distributed generation 
technologies. Substituting natural gas cooling for electric air-
conditioning can also help to level summer electric peaks. Since 
natural gas use typically peaks in the winter months, this is truly a 
win-win scenario for both the natural gas and electric industries.
    Given the key role this subcommittee has in developing a national 
energy policy, I want to emphasize that the Fueling the Future study 
projects a balanced energy future. The study does not project high 
natural gas demand at the expense of other fuels. All energy sources--
including coal, nuclear and renewables--will continue to play a 
critical part in supplying our growing energy demands in the future. 
For example, renewable energy use in 2020 will be greater under this 
study than the Energy Information Administration's projections. 
However, natural gas is the one energy source that has the attributes 
to meet our nation's policy goals and our energy needs for the 21st 
Century. Using the data from the Fueling the Future study as a 
foundation for a coherent national energy policy would be good for the 
environment, good for national security, and good for the economy and 
our consuming public.
    AGA is a strong believer in this energy future because we see every 
day that consumers--industrial, commercial and residential--want to use 
natural gas. Nationwide, natural gas was the fuel of choice for 70% of 
the new single family homes built in 1998--a continuation in a 15-year 
trend of natural gas growth. Residential, commercial and industrial 
consumers are using gas in a new and innovative ways. Gas fireplaces, 
for example, constitute a strong new market due to ease of use and 
environmental considerations. An improved generation of gas air 
conditioners has great potential in the West and the South. 
Technologies for residential scale fuel cells and microturbines are 
currently being demonstrated.
    Sophisticated and highly efficient combined cooling, heat and power 
systems (CHP) are being installed around the country, and are 
especially popular at universities and large conference centers, such 
as Opryland in Nashville and the huge McCormick Center in Chicago. 
Texas is one of the leading states in terms of industrial CHP capacity 
and is fourth behind New York, California and Pennsylvania in 
commercial capacity.
    Let me give you three examples of how natural gas technologies--
which are commercially available--will help meet the nation's energy 
goals.

--In 1994, Thomason Hospital in El Paso, which was undergoing a major 
        renovation/expansion, had to find a way to meet energy needs in 
        a cost-effective manner, while locked into the highest electric 
        rates in Texas. Its solution was a combined heat and power 
        plant that includes gas-fired reciprocating engines, dual 
        fueled boilers, gas engine driver chillers, and single effect 
        absorption chillers. This CHP system provides electricity, low 
        pressure steam (heating and hot water), and cooling for the 
        hospital complex. Benefits to the hospital include reduced 
        electric demand (330 kW), a levelized electric load and 
        $460,000 in annual savings.
--My second example describes a ``save-the-day'' situation at the 
        Brookfield Zoo in suburban Chicago. During the winter of 1998, 
        the local electric utility suffered a power failure that could 
        have resulted in suffering or death of 200 creatures ranging 
        from a massive Pacific walrus to the jellyfish. But the Zoo had 
        installed a natural gas cogeneration system that kept the 
        facility running. There's a financial benefit, as well: by 
        operating in parallel with the local utility during peak demand 
        hours, the Brookfield Zoo expects to generate a positive cash 
        flow in excess of $700,000 during the next decade. That can 
        feed a lot of walruses.
--Our final example comes from the retail sector. A Walgreen's drug 
        store in Chesterton, Indiana, became an energy pioneer last 
        year by installing a natural gas ``microturbine.'' This unit--
        about the size of a commercial refrigerator--operates quietly 
        and efficiently, using natural gas as a fuel to turn a small 
        turbine that generates electrical power. The unit is also 
        equipped with a ``desiccant dehumidification'' system that 
        pulls moisture from the air, keeping customers comfortable 
        while they shop. The biggest benefit is reliability. Because 
        this system runs on natural gas it is independent of the 
        electric grid and therefore is not affected by brownouts or 
        blackouts caused by weather extremes. Imagine how relieved 
        you'd feel if you needed to buy medicine during a local power 
        outage--and the familiar Walgreen's is the only open business 
        you see in a sea of darkness.
    I believe that these examples demonstrate why the market will drive 
natural gas demand in the future. But the Fueling the Future study also 
makes clear that to provide the adequate supply, build out the needed 
infrastructure, and develop and improve the technologies, the 
government must play a critical part in assuring that the regulatory 
and policy environment is conducive to natural gas use.
    To achieve the 35 quad future with all of its societal benefits, 
the study says policymakers at all levels must make a commitment to 
replace barriers with incentives to increase the production and use of 
natural gas. In other words, market forces cannot do it all. Congress, 
the administration and state and federal regulators each have 
responsibilities.
    A number of assumptions must become realities for this growth in 
natural gas demand to be realized. But what better time than the start 
of a new century to take action so that future generations will inherit 
a cleaner environment, improved national security, continued economic 
growth and greater conservation of natural resources. The AGA Policy 
Blueprint attached to my testimony discusses in detail eight policy 
goals and implementation steps that will ensure that the 35 quad 
Fueling the Future forecast becomes a reality. Congressional action 
will be particularly important in the areas of competitive energy 
markets; safety and reliability; environmental regulations; federal 
research and development; tax barriers/incentives and access to federal 
lands. We are very pleased to see that two of our specific 
recommendations were included in the National Energy Security Act (S. 
2557) introduced last week by Senator Murkowski. These recommendations 
include a provision that would lower the cost for American families to 
connect to natural gas and the creation of an Interagency Work Group on 
Natural Gas to develop a comprehensive policy for the use of natural 
gas. This is an excellent start and we look forward to working with the 
subcommittee on other steps to implement the policy goals of Fueling 
the Future.
    The goals are summarized below:
Goal I--Energy markets will be free and competitive, and natural gas 
        utilities will be allowed to compete fairly in these markets.
    As energy markets are opened to competition, consumers are being 
given the freedom to buy their energy and energy-related services from 
whichever suppliers they choose. Gas consumers can benefit from choice 
and from competition that is open to all competitors, including gas 
utilities and their affiliates.
    Regulators must recognize that consumers benefit when utilities and 
utility affiliates are allowed to compete and to realize economies of 
scope and scale, just as other competitors realize efficiencies from 
affiliation with a parent company. If regulators act to place utilities 
or their affiliates at a disadvantage in the marketplace, they will 
thwart the market-expansion potential for natural gas.
    Implementation of the following policies will promote fair 
competition:

 State regulation should permit utilities to offer traditional 
        utility services, allow utility affiliates to participate in 
        unregulated markets and not bar an affiliate's use of the 
        parent utility's name or logo.
 Any uniform business practices adopted by the states to 
        implement retail competition should be consistent with the 
        interests of gas utilities.
 The Public Utility Holding Company Act should be repealed.
Goal II--The historic reputation of the natural gas industry for safety 
        and reliability will not be compromised.
    Even though the U.S. natural gas industry operates one of the 
safest and most reliable gas delivery systems in the world, it 
continues to look for ways to improve. As a result, safety incidents on 
the gas distribution system during the past decade have decreased by 38 
percent, while the amount of gas delivered to customers has increased 
by nearly 25 percent.
    Because gas pipeline safety regulation involves technical issues, 
the best way to approach development or amendment of safety standards 
is for the government to take advantage of all the expertise available 
within the gas industry. It makes sense that regulators and the gas 
industry should pool resources to develop the most effective and 
reasonable measures to meet their common goal of the safe and reliable 
delivery of gas. In addition, this approach promotes increased 
knowledge and understanding among all the interested parties--the 
regulators, the industry and the public.
    While the gas industry's strong commitment has been, and will 
continue to be, a significant factor in ensuring safety and 
reliability, implementation of the following policies would improve the 
effectiveness of safety programs:

 Performance- and risk-based pipeline safety regulation and 
        regulatory alternatives should be initiated to enhance delivery 
        system safety.
 Stronger regulatory mandates should be put in place to prevent 
        pipeline damage caused by excavation.
 Regulatory treatment of unbundling programs should not 
        compromise safety or reliability.
Goal III--Energy efficiency and environmental regulations will be 
        comprehensive, equitable and balanced.
    Many energy and environmental regulations are flawed and even 
counterproductive because they are not comprehensive enough. They are 
too narrowly focused and do not take into account the overall effect of 
the regulatory decision.
    Energy-efficiency regulations that look solely at the efficiency of 
the energy-consuming equipment, and not at the efficiency of the entire 
process of providing the energy, can push consumers toward equipment 
that ultimately wastes energy, emits more pollutants into the air and 
costs more to operate.
    Similarly, environmental regulations can be counterproductive when 
they are not equitable. For example, some regulations are not ``fuel-
neutral'' but, in fact, are more stringent for natural gas than for 
dirtier-burning fuels, such as coal and oil. This ends up promoting 
consumption of dirtier fuels. In a precedent-setting move, the 
Environmental Protection Agency (EPA) in 1998 issued a fuel-neutral 
standard for industrial boilers that sets the same emission level for 
all new boilers, regardless of which fuel the boiler operates on. This 
precedent should be expanded to all applications in which natural gas 
is penalized for being cleaner.
    Regulations are out of balance when their costs and benefits are 
not accurately weighed. It is possible, for instance, to set standards 
for indoor air quality that are so stringent they virtually rule out 
the use of natural gas. This is foolish because the gains that can be 
made in improving outdoor air quality often far outweigh small changes 
in indoor air quality.
    The following policy recommendations are designed to remedy these 
kinds of situations:

 Energy efficiency standards must not discriminate against 
        natural gas.
 Regulations should encourage innovative technologies and 
        approaches to pollution control.
 ASHRAE Standard 90.1 should not be endorsed by the Department 
        of Energy or adopted by the states.
 Federal and state energy conservation programs should reflect 
        the ``total energy efficiency'' concept.
Goal IV--The federal government will aggressively promote the use of 
        natural gas through its research and development program and by 
        using innovative gas technologies in federal facilities.
    Given the significant benefits that natural gas offers the nation 
as well as its consumers, the federal government needs to promote 
greater use of the fuel by increasing the funding of the Department of 
Energy's (DOE) gas research and development program. In addition, the 
government should lead by example. Federal facilities should be 
showplaces for clean, efficient and economical gas equipment and 
technologies.
    Adopting the following policies will help ensure that natural gas 
is the fuel of the 21st century:

 Federal spending on gas-related R&D should be increased to 
        support end-user equipment advances and enhance gas delivery 
        system safety and reliability.
 Tax credits should be provided for collaborative R&D.
 Executive Order 13123 should be fully implemented.
Goal V--The potential of new technologies will be fully recognized in 
        regulations, codes and standards affecting the natural gas 
        industry.
    The federal government and standard-making bodies are required to 
review existing rules and standards periodically, as well as develop 
new ones when technological developments merit action. This sometimes 
involves evaluating the safety performance of natural gas delivery 
systems and equipment. These standards must be developed objectively, 
based on technically sound science and credible, accurate performance 
data.
    Adoption of the following policies will further this goal:

 Pipeline safety regulations should reflect new, proven 
        technologies and best practices.
 Building codes and standards should accurately reflect safety 
        performance.
 Regulations that impede promising new technologies, such as 
        distributed generation, must be modernized.
Goal VI--Access to the natural gas resource base will not be unduly 
        restricted.
    Today, access to significant portions of the U.S. natural gas 
resource base is totally or partially restricted. These restrictions 
inhibit energy exploration and production activities in the eastern 
Gulf of Mexico, most of the offshore West and East coasts and in parts 
of the Rocky Mountains.
    In general, the restrictions were imposed for environmental reasons 
and have been in place for decades. Obviously, exploration and 
production technologies and practices have changed dramatically over 
these decades. It's time to reexamine these restrictions in light of 
today's technologies and practices that are more environmentally 
sensitive than those of the past. It's also time to reassess the 
restrictions because of the national environmental, economic and 
energy-security benefits that would accrue from using more natural gas.
    Adoption of the following initiatives is recommended to implement 
the policy goal:

 The federal government should establish an interagency task 
        force capable of balancing the national benefits and costs 
        associated with increased natural gas use.
 The federal government should provide a baseline for 
        consistent land administration among the numerous national and 
        state agencies.
 The federal government should revise its land-use policies to 
        reflect the positive benefits of new natural gas exploration 
        and production technologies.
Goal VII--The cost of providing natural gas service to new electricity 
        generating plants will not be borne by residential, commercial 
        and industrial customers.
    Significant amounts of new pipeline capacity will be needed to 
serve electricity generating plants. Providing natural gas service to 
power plants requires that gas pipelines and/or gas utilities invest in 
facilities and make operational changes, such as adding new line, 
contracting for storage capacity and upgrading the ability to serve 
severe load swings.
    The costs incurred to serve new generating plants must be borne 
solely by power plant operators and not by other natural gas customers. 
Otherwise, natural gas demand among residential, commercial and 
industrial customers will be artificially constrained.
    Implementation of the following policies will help ensure that 
costs incurred for pipeline capacity expansions are appropriately borne 
by the customers being served:

 FERC's implementation of pipeline rate reforms should not harm 
        local gas utilities.
 FERC should protect the gas utilities' pipeline service from 
        degradation.
Goal VIII--The regulatory environment will facilitate expansion of the 
        natural gas infrastructure.
    To provide gas delivery service for the new uses of natural gas 
that will benefit the nation, natural gas distribution utilities will 
need to invest almost $100 billion to upgrade and expand their 
distribution systems over the next 20 years.
    Therefore, regulators should evaluate their policies in light of 
the fundamental goal of facilitating critical maintenance and expansion 
of the natural gas delivery infrastructure. The public benefits of 
increased gas use in terms of economic efficiency, environmental gains 
and energy security should be weighed fully in determining appropriate 
rates and permissions for facilities.
    Implementation of the following policies will facilitate 
infrastructure expansion:

 The lead time for obtaining permission to build new pipeline 
        and utility facilities should be shortened.
 The benefits and costs of expanding the natural gas system 
        should be reasonably and comprehensively assessed.
 The tax system should promote rather than impede natural gas 
        system expansion.
Conclusion
    Adoption of these recommendations will lead to the greater use of 
natural gas to meet a part of our nation's growing energy demand. As a 
result, these policies will lead to an energy future that is safe and 
reliable, as well as cleaner and more secure than otherwise would be 
possible.
    Natural gas is economical, abundant, clean and reliable. It is the 
energy solution of the here and now. It is the bridge fuel to the new 
millennium. It must not be overlooked; to do so would be to ignore what 
serves the best interests of our nation. We look forward to working 
with this committee to implement the policy recommendations we have 
outlined today. These recommendations, if adopted, will serve to ensure 
a strong, prosperous America--an America fully capable of continuing 
its role as leader of the free world.
    On behalf of the American Gas Association, I thank you for the 
opportunity to testify today.

    Mr. Barton. Thank you, Mr. Cooper.
    Mr. Barton. We now want to hear from Mr. Barry Russell, who 
is here on behalf of the Independent Petroleum Association of 
America and also the National Stripper Well Association.

                   STATEMENT OF BARRY RUSSELL

    Mr. Russell. Thank you, Mr. Chairman.
    I am Barry Russell, President of the Independent Petroleum 
Association of America. Today I am testifying on behalf of 
IPAA, the National Stripper Well Association, and 32 
cooperating State and regional associations. I detail a number 
of these issues in my written testimony, and I will summarize 
them here to save time.
    First, natural gas and petroleum dominate energy supply in 
the United States. Currently, they account for about 65 percent 
of the national energy needs; and they will continue to 
dominate in the future.
    Second, regardless of the changes in world politics, energy 
supply remains a national security issue. Whether we like it or 
not, our sources of petroleum come from countries with a 
history of instability, and our policies must recognize our 
country's vulnerability.
    Third, future domestic natural gas and petroleum 
exploration and production will increasingly depend on 
independent producers. The domestic industry has changed 
dramatically since 1986. Major integrated companies now focus 
their activities in the deep Gulf of Mexico and overseas. 
Today, independents drill 85 percent of the wells in the United 
States. Independents need different policies than integrated 
companies because their revenues come from one source.
    Fourth, domestic natural gas demand is estimated to 
increase by about 40 percent by the year 2010. But this 
increase in demand can be met, given the right conditions, 
through domestic and other North American resources.
    In my testimony, I discuss a number of the factors 
essential to meeting the future demand for both natural gas and 
petroleum, and I want to focus on two of them: access to 
capital and access to the natural resource base.
    First, the Federal Government needs to take action to 
improve the flow of capital to this critical industry. The most 
immediate focus should be on tax reforms. There are a number of 
specific proposals that have been either endorsed or discussed 
by President Clinton or have been introduced or passed by 
Congress within the past year. These include expensing of 
geological and geophysical costs, expensing delay rental 
payments, and a number of reforms related to marginal wells, 
such as the marginal well tax credit and other provisions that 
would direct more capital to producers.
    We are at a rare point in time when both Congress and the 
administration are moving in the same direction regarding these 
tax reforms, and now is the time to act on them.
    Second, we must address the issue of access to the Nation's 
resources under government-controlled lands. Recently, 
successful laws have addressed access like the Deep Water 
Royalty Relief Act. We believe it is crucial to continue to 
provide a royalty structure that encourages offshore 
development, and we are working with the administration to meet 
this objective.
    At the same time, it is equally important to recognize that 
a larger aspect of access to natural resources involves opening 
access to areas now not available and halting the trend to 
further embargoes of western lands. Over 200 trillion cubic 
feet of natural gas is either off limits or difficult to permit 
in these areas. It is important to understand that access 
issues differ between these areas. ANWR and offshore activities 
are constrained by policy decisions. Access to western land is 
now limited by a mosaic of regulations. Some involve lands that 
are completely excluded from natural gas and petroleum 
exploration production, other involve permitting limitations, 
and still others indirect actions by Federal agencies.
    Let me conclude with two immediate actions that can be 
taken toward the environmentally sound development of these 
resources. First, we can determine where the most likely 
resources lie. Congress should compel the development of such 
an inventory. Second, we need a clear analysis of the 
impediments that we are encountering. We need to know which 
laws, regulations and conflicting management plans are in play.
    On balance, future supply of domestic natural gas and 
petroleum will depend on a clear recognition of the value of 
these domestic resources. The domestic industry has changed 
dramatically and will continue to change to a greater reliance 
on independent producers. It will require a clear commitment 
from the Federal Government that it is prepared to implement 
policies to allow domestic exploration and production in order 
to access the capital, the resource base, the technology and 
the human resources that are needed to meet the challenges 
confronting our country.
    Thank you very much for the opportunity to speak.
    [The prepared statement of Barry Russell follows:]
   Prepared Statement of Barry Russell on Behalf of the Independent 
    Petroleum Association of America and the National Stripper Well 
                              Association
    Mr. Chairman, members of the committee, I am Barry Russell, 
President of the Independent Petroleum Association of America. Today, I 
am testifying on behalf of the IPAA, the National Stripper Well 
Association, and 32 cooperating associations of the IPAA that represent 
state and regional interests. These organizations represent independent 
petroleum and gas producers, the segment of the industry that is 
damaged the most by the lack of a domestic energy policy that 
recognizes the importance of our own national resources. NSWA 
represents the small business operators in the petroleum and natural 
gas industry, producers with ``stripper'' or marginal wells.
    Today's hearing addresses a fundamental issue--National Energy 
Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil. This 
testimony will focus first on several key factors that influence this 
issue and second on actions that should be taken to improve the future 
domestic supply.
             factors in developing a national energy policy
    There are many factors that affect the development of a sound 
national energy policy. This testimony will focus on several key issues 
in crafting a sound policy to address adequate supply of essential 
natural gas and petroleum.
    1. Fossil energy--particularly natural gas and petroleum based 
energy--will continue to dominate energy supply in the United States. 
According to the National Petroleum Council's Natural Gas study natural 
gas and petroleum account for 64.8 percent of national energy needs. 
Future projections show significant growth in the use of these fuels as 
domestic energy demand continues to increase. The U.S. economy is 
driven by the availability of adequate energy supplies whether consumed 
by manufacturing, by transportation to and from jobs, or by the 
expanding role of computer use and the Internet. It ignores this 
reality to suggest that an equally robust economy can be sustained 
without substantial energy growth. And, it ignores this reality to 
suggest that natural gas and petroleum will not be the dominant share 
of this growth.
    2. Regardless of changes in world politics, energy supply remains a 
national security issue. A decade ago energy supply from foreign 
sources would be viewed as a national security risk in the context of 
the Cold War--supply routes at risk and energy sources subject to 
control by adversaries. Today's national security issue is different, 
but it is nonetheless significant. Currently, we import over 55 percent 
of our nation's petroleum. It comes from diverse sources, but diversity 
is not security. In 1973 the OPEC oil embargo crippled this country. 
Yet, we now import over twice as much petroleum on a percentage basis 
from the OPEC countries that embargoed us--and neither Iran or Iraq 
participated in that embargo. Whether we like to address it or not, our 
sources of petroleum come from countries with a history of instability. 
We are currently importing approximately 500,000 barrels per day from 
Iraq. Clearly, this is not a reliable source. Saudi Arabia is ruled by 
a monarchy in a world without ruling monarchs; it is constantly subject 
to subversion by radical religious elements. Even Venezuela is ruled by 
a government that has dramatically shifted that country's priorities 
over the past two years and continues to be difficult to predict. We 
must recognize that shifts in any of these suppliers can dramatically 
and adversely affect our nation and our national economic security.
    The past three years have demonstrated how susceptible the U.S. 
energy supply can be to foreign actions. The precipitous drop in 
petroleum prices in late 1997 through early 1999 posed a catastrophic 
threat to domestic petroleum production and a substantial threat to 
domestic natural gas production. As a result of the extended low 
petroleum prices in 199899, capital investment in petroleum production 
throughout the world declined. Existing production was lost. In the 
U.S., production dropped from 6.5 million B/D to less than 6.0--million 
B/D. Natural gas production suffered as well because the two 
commodities are linked. This year, the country has seen the inevitable 
consequences of lost capital in the exploration and production 
industry--as worldwide demand has increased, worldwide supply capacity 
has not kept up. This year, petroleum prices have reached levels not 
seen since the Persian Gulf war. Different segments of the economy have 
been threatened. In each case, the price and supply issues have largely 
been defined by the actions of foreign producer nations. Our policies 
must recognize this vulnerability.
    3. Future domestic natural gas and petroleum exploration and 
production will increasingly depend on independent producers. Domestic 
exploration and production of natural gas and petroleum have changed 
dramatically since 1986--the time of the last petroleum price crisis 
and major revisions to the federal tax code. Since that time the role 
of independent producers has increased. Generally, for example, 
domestic petroleum production is divided roughly 60 percent from the 
lower 48 states onshore, 20 percent from the offshore, and 20 percent 
from Alaska. Since 1986, the share of onshore lower 48 states 
production by independents has increased from about 45 percent to over 
60 percent. Independents are also increasingly active in the offshore. 
In the aggregate, independents drill over 85 percent of the wells in 
the U.S., produce 45 percent of the petroleum, and produce over 65 
percent of the natural gas.
    This is a trend that will continue. The reasons are 
straightforward. Large, integrated petroleum companies are driven by 
their need to generate adequate shareholder returns. In the ``Dot Com'' 
world we are living in, this requires finding and developing large 
``elephant'' fields. Mature fields that yield more limited quantities 
of natural gas and petroleum characterize most of the U.S. Many of the 
U.S. large field prospects such as the Arctic National Wildlife Refuge 
(ANWR) are not available for development. In the offshore, moratoriums 
limit many options; those that are left are largely in the 
``ultradeep'' portions of the Gulf of Mexico. So, compelled to fill 
their refineries, major integrated companies focus their development 
funds to the deep Gulf of Mexico and overseas. This leaves the brunt of 
future domestic resource development to independent producers--large 
and small. Independents need different policies than integrated 
companies. Independents rely on revenues generated solely in the 
upstream and are more susceptible to price swings that strip away 
critical financial resources.
    4. Natural gas is an increasingly important element of domestic 
energy supply. The National Petroleum Council Natural Gas study 
concluded that domestic natural gas demand will increase from the 
current 22 trillion cubic feet per year (Tcf/yr) to 29 Tcf/yr by 2010. 
Most of this increase will be needed to fuel expanding electricity 
generation. The study concluded that:
          U.S. gas demand will be filled with U.S. production, along 
        with increasing volumes from Canada and a small, but growing, 
        contribution from liquefied natural gas (LNG) imports . . . Two 
        regions--deepwater Gulf of Mexico and the Rockies--will 
        contribute most significantly to the new supply . . . U.S. 
        production is projected to increase from 19 TCF in 1998 to 25 
        TCF in 2010, and could approach 27 TCF in 2015. Deeper wells, 
        deeper water, and nonconventional sources will be key to future 
        supply.
          Importantly, this study concludes that these future natural 
        gas needs can be met through domestic resources supplemented by 
        other North American resources. Equally important, it 
        identified key issues that had to be addressed to meet these 
        needs.
            actions that must be taken to meet future needs
    The NPC Natural Gas study identified a series of needs that serve 
to characterize the key factors to meeting future demand. They also 
apply to addressing domestic petroleum development. They can be divided 
into the following four areas: access to capital, access to the natural 
resource base, access to technology, and access to human resources. Of 
these, access to capital and access to the natural resource base are 
highly dependent on federal policy.
Access To Capital
    The federal government needs to take actions to improve capital 
flow into this critical industry. Generally, there are two areas for 
possible action--tax reforms and federally backed financial 
instruments. The most immediate focus should be on tax reforms.
    Following his recent radio address, President Clinton released 
documents indicating that he intended to propose legislation to allow 
expensing of geological and geophysical (G&G) costs and of delay rental 
payments. These are sound first steps, but more must be done.
    He also indicated that he was evaluating proposals dealing with 
marginal wells. Action regarding these wells is essential to preserve 
existing production and we believe there are four key elements that 
should be enacted immediately:

 Creating a countercyclical marginal well tax credit.
 Allowing a 5-year net operating loss carryback for independent 
        producers;
 Eliminating the net income limitation on percentage depletion 
        for marginal wells; and,
 Eliminating the 65 percent net taxable income limit on 
        percentage depletion;
    All of these have been introduced or passed in some form over the 
past two plus years. For example, Senator Kay Bailey Hutchison recently 
introduced S. 2265 incorporating the expensing proposals and the 
marginal well tax credit in one bill. Several senators introduced 
S.2557 last week that includes these provisions.
    We are at a rare juncture. Both Congress and the Administration are 
moving in the same direction regarding tax reforms for domestic natural 
gas and petroleum exploration and production. Both are looking toward 
provisions that will encourage exploration. Both are looking at ways to 
extend the life of domestic marginal wells--our true strategic 
petroleum reserve. Now is the time to act.
    Will these steps guarantee that domestic production will rebound? 
Nothing is certain, but it will guarantee that more capital will get 
into this industry when it is needed. And it will avoid the mistakes of 
1986 when Congress enacted Alternative Minimum Tax provisions, just as 
the industry needed capital to rebound from low petroleum prices. This 
was one of many factors that have resulted in the loss of about 2 
million barrels per day of domestic petroleum production from 1986 to 
1997.
    This is not all that we need to do. We should also look at other 
tax reforms that can help bring capital to this industry over the next 
decade and beyond. This industry must compete for capital against high 
technology and Internet companies that are generating far higher 
returns than are likely from this mature but risky industry. Investors 
need reasons to put their capital in domestic exploration and 
production companies. Other tax reforms that could be addressed include 
modification of the AMT, expanding the Enhanced Oil Recovery tax 
credit, considering what tax treatment should apply to the 
unconventional sources identified in the NPC study like the current 
Section 29 tax credit, considering a drilling tax credit, inactive well 
recovery, and reevaluating the elements of percentage depletion 
including the rate and the number of barrels of production that apply. 
Decisions on these reforms should be made based on the importance of 
this domestically produced resource. We must begin treating domestic 
natural gas and petroleum as a critical element of national economic 
security.
    And, we should look at federal financial instruments like the 
PADDIE MAC concept that would create a FANNIE MAE-like program to help 
lower the capital costs to the smaller producers so essential to 
maintaining the nation's marginal wells.
Access To The Natural Resource Base
    Addressing the issues of access to the nation's resources under 
government controlled lands is complicated. Recent successful laws that 
have addressed access are the Deepwater Royalty Relief Act, The Royalty 
Fairness and Simplification Act, and moratoriums on rules for illegally 
assessing new petroleum royalties. We are pleased to announce that in a 
recent decision, IPAA v. Armstrong, the District Court ruled that in 
fact the government doesn't have the legal right to require producers 
to market at no cost to the lessor, a matter at the heart of the 
petroleum royalty rulemaking. These actions have enhanced the 
development of federally controlled resources.
    The legislative requirements of the Deepwater Royalty Relief Act 
are expiring. The authority to continue royalty relief will rest in the 
hands of the Minerals Management Service. IPAA believes it is critical 
to continue to provide a royalty structure that encourages offshore 
development. The Deepwater Royalty Relief Act has proven that its 
approach works. However, while its benefits have largely flowed to the 
major integrated petroleum companies, independents are now moving more 
aggressively into the offshore generally and the deepwater more 
specifically. Major integrated companies are moving toward the ultra-
deep water where their cutting edge technologies are allowing them to 
go. IPAA and other associations, and companies involved in the offshore 
have begun working with MMS and the DOE to look at how royalty policies 
can enhance domestic offshore production. Hopefully, these efforts will 
lead to administrative actions to create a royalty structure throughout 
the offshore that will enhance domestic production. However, if this 
result does not occur, Congress will need to address offshore royalty 
policies.
    At the same time it is equally important to recognize that a larger 
aspect of access to natural resources involves opening access to that 
which is not now available and halting the trend of further embargoes 
of western lands. Unfortunately, the Administration avoids dealing with 
the clear need to open government lands to exploration and production. 
It hides behind an environmental sensitivity argument that is proven 
wrong by its own DOE report. It focuses on arguments against opening 
ANWR and avoids dealing with access issues offshore and in the Rockies 
where its own National Petroleum Council Natural Gas study concludes 
that over 200 trillion cubic feet of natural gas is either off limits 
or difficult to permit.1t is important to understand that access issues 
differ between these areas. ANWR and offshore activity off of 
California, the Eastern Gulf of Mexico, and the Atlantic are 
constrained by policy decisions, both executive and legislative, 
through prohibitions and moratoriums. These are based on outdated 
reactions to spills occurring in the past. The Administration's own 
study, Our Ocean Future, concluded unequivocally that offshore natural 
gas and petroleum production is a success story. We need to move into 
the 21st century and make enlightened decisions to use these critical 
national resources.
    Access in the Rockies won't be resolved by a single act. Here, we 
are dealing with a mosaic of limitations. Some involve land that is 
completely excluded from natural gas and petroleum exploration and 
production.

 The Antiquities Act of 1906 has been used to declare areas as 
        national monuments placing land completely off limits.
 In other areas, the Department of Agriculture is proposing to 
        expand roadless areas in national forests that will preclude 
        natural gas and petroleum development.
 Some national forests, like the Lewis and Clark National 
        Forest, projected to be a world class natural gas source, have 
        been administratively closed to natural gas and petroleum 
        development
 Wilderness areas have been created without an understanding of 
        the resources that might be lost.
    We must also deal with permitting limitations and other indirect 
actions of federal agencies.

 Because these are government lands, it is necessary that 
        federal agencies issue permits for the exploration and 
        production activities. These agencies are charged with the task 
        of developing environmental management plans for areas under 
        the National Environmental Policy Act (NEPA). NEPA can be used 
        to create effective, environmentally sound management plans, or 
        it can be used to delay and deny access. Frequently, the 
        results reflect the attitude of the agency and its leaders. For 
        example, in the Powder River basin the development of coal bed 
        methane has first been delayed by the inability of the BLM to 
        process permits. But, as the magnitude of effort was more 
        clearcut, BLM fell back to the excuse that the EIS for the area 
        was outdated and required a new plan under NEPA. This has led 
        to further delay. BLM then argues it needs additional funds, 
        requiring Congress to act and resulting in further delay. In 
        the San Juan basin, BLM has tried to argue that its management 
        plan needs updating and permitting needs to be delayed until 
        another plan can be developed despite repeated assessments of 
        the plan that demonstrate its adequacy.
 NEPA is only one of many laws that are involved in the 
        planning or permitting processes and BLM is only one of the 
        agencies that must be dealt with. Others include the Endangered 
        Species Act and the Fish and Wildlife Service, the Clean Water 
        Act that can involve both the Environmental Protection Agency 
        and the Corps of Engineers when wetlands are concerned, and 
        even the Clean Air Act.
 For example, many areas in the Rockies are limited during 
        certain times of the year because of management plans designed 
        to protect various species. While each plan individually 
        provides opportunities for resource development, collectively, 
        they interact to effectively prohibit natural gas and petroleum 
        extraction.
    If we are to provide the country with the domestic energy it 
deserves, we need to create national policies that allow 
environmentally sound development of these resources. No one can expect 
that this mosaic of limitations can be instantly revised, but we need 
to start the process.
    First, we can determine where the most likely resources lie. 
Congress should compel the development of such an inventory. When 
actions like this have occurred in the past, they allow the disputes to 
be better focused. They allow the issues to be discussed in a real 
rather than hypothetical context. And, this can lead to real solutions 
for specific areas.
    Second, we need a clear understanding of the impediments that we 
are encountering. We need to know how many laws, regulations, 
conflicting management plans, and whatever else are in play. This 
perspective is essential to provide a real sense of how these actions 
can result in effectively foreclosing any development. A recent 
assessment of one area of the Rockies showed how a mixture of 
management plans for various species effectively foreclosed any 
petroleum or natural gas development, but no single plan would result 
in such denial (a graphical presentation is attached to this 
testimony).
    Third, we cannot expect to meet our nation's needs for clean 
burning natural gas without reasonable access to the resource. The NPC 
Natural Gas study and all other analyses conclude that the Rockies 
contain significant extractable reserves of natural gas. Yet, in the 
Rockies access is being limited. It is either the unanticipated outcome 
of laws, regulations, and plans that unintentionally deny access or the 
manipulation of these laws to produce that outcome. In either case, 
access limitations are not the result of a clear policy decision. 
Consequently, we need a commitment from Congress and the Administration 
that these types of constraints will be eliminated or restrained and 
proper funding will be provided on a continued basis to allow 
environmental documents, leases, and drilling permits to be issued in a 
timely fashion.
    Clearly, there are environmental extremists who will not support 
this essential development. But, as the DOE has demonstrated in its 
report, it can be done and in an environmentally sound manner. It will 
take effort, and it will also take courage.
Other Issues
    While these issues dominate the factors that influence future 
natural gas and petroleum exploration and production, there are many 
others that must be addressed--some that are dominated by factors 
largely outside the scope of the federal government, others where the 
federal government is a key factor.
    For example, the other factors identified in the NPC Natural Gas 
study relate to access to technology and to human resources must not be 
overlooked. Domestic natural gas and petroleum development have changed 
dramatically during the past two decades through the application of new 
technologies such as 3D and 4D seismic analysis, horizontal drilling, 
and the use of advance offshore technologies. The widespread 
availability of these and other technologies will be critical to 
meeting future challenges as well. Similarly, the industry has suffered 
further declines in employment. During the 1998-99 low petroleum price 
crisis, the natural gas and petroleum extraction industry lost 65,000 
jobs of which only about 7,000 have returned. Employment has dropped 
below 300,000 from levels that exceeded 600,000 in 1984. These are 
highly skilled jobs at both the rig operator and engineering level. 
Many of the domestic industry workers are Hispanics. But, once people 
leave the industry it is hard to attract them back. Attracting new 
workers is equally difficult. For example, enrollment in petroleum 
engineering has consistently fallen over the past several years. While 
these are not issues that are dominated by federal policy decisions, 
they are nonetheless essential to meeting future natural gas and 
petroleum demand.
    At the federal level, we must continue to work with foreign 
producer nations to move toward petroleum policies that produce the 
stability needed to maintain and enhance our domestic production. And, 
as we do, we cannot assume that other countries are willing to 
sacrifice their national incomes to meet our expectations that product 
prices should be low in the U.S.
    The federal government must strive toward sound environmental 
regulatory programs that do not burden the industry with regulations 
and paperwork that provide little if any environmental benefits. For 
example, the Environmental Protection Agency (EPA) is now being sued 
again to compel regulation of hydraulic fracturing under the 
Underground Injection Program (UIC) of the Safe Drinking Water Act 
(SDWA). Study after study has shown that hydraulic fracturing is an 
environmentally sound process involving the brief injection and 
subsequent removal of fluids to place proppants necessary to open 
natural gas and petroleum formations for development. Some analysts 
believe that over 60 percent of the natural gas wells that will be 
needed to meet the projected 2010 demand will require hydraulic 
fracturing. It is exactly this type of poorly targeted regulation that 
must be avoided. Similarly, EPA is proposing new reporting requirements 
under the federal Superfund and Right-to-Know laws that will add 
nothing to the scope of information on emergency releases but burden 
natural gas and petroleum producers and other industries with needless 
paperwork. In an era when future natural gas and petroleum production 
will depend on the amount of capital that must be invested, stripping 
this capital away through unneeded regulations is counterproductive and 
unwarranted.
                               conclusion
    On balance, future supply of domestic natural gas and petroleum 
will depend on a clear recognition--first by the federal government and 
more broadly by the nation as a whole--that these commodities provide a 
value as a domestic resource. It will require a clear recognition that 
the domestic industry has changed dramatically since the 1980s and will 
continue to change toward greater reliance on independent producers. 
And, it will require a clear commitment from the federal government 
that it is prepared to implement policies to allow domestic exploration 
and production to access the capital, the resource base, the 
technology, and the human resources that are needed to meet the 
challenges confronting the country.
[GRAPHIC] [TIFF OMITTED] T4772.006

    Mr. Barton. Thank you, Mr. Russell. It is amazing. You are 
the last testifier, and you are under 5 minutes. That is 
amazing after 13 other people have gone before you, and you are 
timely. We commend you for that.
    We will recognize the gentleman from New York, Mr. Vito 
Fossella--who is not running for the Senate, at least as of 
this morning. The day is early yet----
    Mr. Fossella. We have time, the way things move in New 
York.
    Mr. Barton. [continuing] for 10 minutes for questions.
    Mr. Fossella. Thank you, Mr. Chairman. And thank you--I am 
sorry I am late, but I thank you for holding this hearing.
    I have a question for the American Petroleum Institute. 
With the impending June 1 implementation of the reformulated 
gasoline program in certain areas of the United States, 
including my congressional district, there have been some 
concerns about the problem in the Midwest as well as refinery 
capacity. In your opinion, will existing refineries have the 
capacity to meet these new, more stringent requirements and, if 
not, what needs to be done to improve this?
    Mr. Cavaney. We are facing a significant challenge, which 
is implementing this new grade, RFG Phase 2, as of June 1. 
There are some things that have developed.
    No. 1 among those is a lower court decision upholding an 
earlier decision by the court on the Unocal patent. And the 
effect of this Unocal patent, Unocal was one of six companies 
that worked collaboratively in the State of California to 
develop very low-polluting gasoline. They patented essentially 
the process or the pathway, the formulation, in order to 
produce this gasoline; and, therefore, they are entitled under 
the latest court decision to receive a royalty of about 5.7 
cents per gallon.
    That is an amount far in excess of the profit that you make 
on a gallon, so it is really something that refiners are not in 
a position to be able to accept at this time.
    So the alternative is one of two things, either to try and 
build gasoline around that particular patent, which is very 
difficult to do, or to import gasoline from abroad. One of the 
things that has been done is that many of the people who import 
gasoline are not sure whether or not they may ultimately become 
a liable party, so there are large questions about whether we 
are going to be able to import the traditional volumes, and the 
companies are working as rapidly as they can.
    But, in general, we are running flat out. We are at record 
production levels in our refineries. Our utilization rate is 95 
percent. We have most of it in place; and we think, with very 
few exceptions, that we are going to be able to be in a 
position to continue to handle this phase-in of RFG Phase 2 as 
we move through the drive season past June 1.
    There is a difference, I might add, between this phase 2 
gasoline in your district and in Mr. Shimkus' district, who was 
here earlier with us. In the Midwest, a lot of ethanol is used. 
And when you make RFG Phase 2 gasoline with ethanol, you need a 
different base blend stock than what you will need in your 
area. That blend stock that he needs for his area is a very 
much more expensive one than yours.
    See, the difference in price for making RFG Phase 2 in your 
area is going to be about as anticipated, which was somewhere 
in the 3 to 5 cents a gallon cost increase. But the difference 
in making RFG if you are going to use ethanol is significantly 
greater, not unlike the amounts he was talking about.
    These were figures that had been known as we have gone 
forward. I don't know why those figures were not brought out as 
EPA started to set these timetables there, but we have been 
working with them as we will continue to work with all of our 
customers because we are in the business of making sure that 
gasoline is delivered to consumers when and where they want it 
and that we are in compliance with the laws.
    Mr. Fossella. So you do not anticipate any supply problems 
in the Northeast?
    Mr. Cavaney. We think that we will be able to serve it 
fairly well. We cannot say that every locality will have it at 
that time, but we are confident that people will not go without 
gasoline if need be.
    Mr. Fossella. You mentioned you are working with EPA. Are 
you also working with the Department of Energy on this? Or are 
the two working together, to your knowledge?
    Mr. Cavaney. We are working with both, but this is 
essentially a regulatory requirement that was being handled 
through EPA.
    Mr. Fossella. Thank you. Thanks.
    Just a question with the representative from the Interstate 
Natural Gas Association, I guess, Ms. Abbott. You discussed the 
energy delivery systems in the Northeast and the impact that 
has on price spikes both in the winter and the summer. What 
improvements are needed, other than what you offer in your 
testimony, in the natural gas pipeline as well as our power 
industry to prevent these spikes and possible reliability 
problems?
    Ms. Abbott. Thank you, I think that is a broad spectrum of 
things. I think, largely, the broad policy of letting the 
market work is the important thing. What people building new 
power plants and trying to build new pipelines to alleviate 
those supply constraints are trying to address is complying 
with all the regulatory requirements and permitting and the 
different agencies that you have to deal with.
    So, really, the key barrier here is in making more 
efficient and getting more timely approvals for the 
construction of those projects. And if you can get that, the 
private sector will respond to that demand for additional 
pipelines and additional power plants. And that is really what 
we would like to do is to serve our customers. So it is really 
around that regulatory reform within the permitting process and 
getting to decision more quickly.
    Mr. Fossella. Have you put forward any proposals or 
suggestions on how you would reform this process?
    Ms. Abbott. Yes, we have an entire study here from INGAA on 
the exact steps we think would be needed. And really the key is 
getting the lead agencies, which in our case is the Federal 
Energy Regulatory Commission--usually, for power plants, it is 
a State agency that is the lead agency--to really take the lead 
and bring the tradeoffs to resolution in a more timely fashion.
    Mr. Fossella. I guess the consequence, as you state in your 
testimony, is ultimately higher prices. But is there--in that 
study, do you quantify more broadly or more specifically, 
depending on your point of view, on what the opportunity loss 
is here as a result of the certification process?
    Ms. Abbott. Well, a good example would be what prices in 
New York for the next year are facing where it is 35 cents, 
roughly 50 percent above the actual cost of transportation, 
which is about 60 cents right now. So you can see in very 
concrete instances if you do not have the mechanisms to allow 
the supply response to occur, whether it is in electric 
generation or in pipeline infrastructure, that increases prices 
to consumers.
    Mr. Fossella. I guess, if I heard you correctly, the 
capital is there, the folks are waiting to jump in, but, right 
now, there is just no incentive or the cost of waiting and the 
time waiting just does not make sense?
    Ms. Abbott. Well, we all have projects that we have 
proposed, and it is to get the regulatory approvals to be able 
to go ahead and build those projects.
    Mr. Fossella. I have no further questions, Mr. Chairman. 
Thank you.
    Mr. Barton. I thank the gentleman from New York.
    The Chair would recognize himself for such time as he may 
consume, seeing no other members present. If other members 
show, we will give them a chance to ask some questions.
    Mr. Fossella. I am running for Senate. I just gave it some 
thought.
    Mr. Barton. All right. I am going to start with Mrs. 
Abbott. Now, correct me if I am wrong, under Federal policy the 
Federal Government, or the FERC as its representative, has the 
right of eminent domain in terms of right-of-way for natural 
gas pipelines. Isn't that true?
    Ms. Abbott. Yes, sir.
    Mr. Barton. Has it ever exercised that right?
    Ms. Abbott. Typically what happens is, when you get a 
certificate to build an interstate pipeline and the Federal 
Government has to find that there is a public convenience and 
necessity for granting you that right of eminent domain, that 
allows then the private company who typically has gone out and 
tried to negotiate with the landowners on a voluntary basis, if 
there are any remaining landowners that have not voluntarily 
negotiated you then have the right of eminent domain with 
respect to those parties and they have an ability to get a fair 
price.
    Mr. Barton. Now, how does the right of eminent domain for 
pipeline construction interact with all of the problems and the 
permitting or the environmental issues at the State, Federal, 
and local level interact that you alluded to in your testimony?
    Ms. Abbott. That is a great question. A key part of the 
certificate process is coordination among the various State and 
Federal agencies over the environmental consequences of that 
Federal act of granting a certificate. So it is basically doing 
the tradeoffs and looking at the analysis as to what is the 
impact on the environment of a particular pipeline route, are 
there alternative routings that are necessary, and doing the 
studies necessary to do that. And what we are finding is that 
there are just inconsistencies among the various agencies that 
have a stake in that process and what is needed is a more 
timely resolution of those tradeoffs.
    Mr. Barton. Now, I want to make sure that the committee 
gets this on the record. Eminent domain gives the Federal 
Government the right to ultimately, once a route has been 
decided, require that that route be made available for 
construction. But it does not give the Federal or any other 
government the right to override all the environmental and 
local zoning restrictions. Isn't that correct?
    Ms. Abbott. Yes, yes, and so you basically have all the 
State, local, and Federal permitting processes that you must go 
through. And just as Mr. Johnson indicated I think on the 
production side, it is the web of those regulations and the 
lack of coordination to get to resolution that is the key 
issue. I will give you a couple of examples from our Millennium 
project that are quite notable.
    When we filed this project, we filed 51 inches of data 
weighing 80 pounds, a moderate-size child in terms of the 
volume of data at the front end that we filed.
    One of the things we do in this is we cross the Hudson 
River. It was a full year of wrangling among the various State 
and Federal agencies as to what the best time was to cross the 
river with our construction. We did not care when that time 
window was. But they couldn't agree for a full year. That is 
not timely decisionmaking. It does not do anything to save the 
environment when you are trying to decide. You had conflicting 
opinions, and there wasn't a mechanism to get to resolution as 
to what the best environmental answer was.
    Mr. Barton. Now I am going to ask the whole panel this 
question, but I want to start with you. In your opinion, is it 
possible for the Congress to develop a consensus pipeline 
review national legislation that would satisfy the legitimate 
requirements of the people that want to construct the pipeline 
and also the legitimate requirements of the community that 
wants to protect the environment? Can we work together with the 
stakeholders to come up with a comprehensive piece of 
legislation that would expedite the pipeline construction 
process in this country?
    Ms. Abbott. I believe it is possible, and the key is in 
holding one agency accountable for timely resolutions of 
tradeoffs. You saw, in that example, it should not take a year 
to resolve when the best time is scientifically to cross a 
river.
    Mr. Barton. From an industry perspective you are not 
advocating to the subcommittee that we lessen or in any way 
ease any of the environmental protections. You are simply 
saying let's get the Federal agencies and State and local 
agencies to have to sit down and resolve those issues in an 
expedited fashion?
    Ms. Abbott. Exactly correct.
    Mr. Barton. Now, any other panelists wish to weigh in on 
that pipeline construction question? Anybody? Mr. Cavaney?
    Mr. Cavaney. Yes, Mr. Chairman. There is currently the 
Pipeline Safety Act is under review for renewal, and that 
affects liquid pipelines, not natural gas pipelines, and I 
think it would be good to take a look there. Because there are 
several issues where parts of the Federal Government are 
arguing about having joint jurisdiction, and it is going to 
raise exactly the issue that you have just heard here and 
industry across the board is trying to argue: You need one 
definitive point of reference that can make decisions or you 
will end up repeating in the liquid pipelines the same problems 
that you have now with the gas pipelines so it can be done. 
That is a good model to look at. There are some good parts of 
that that have worked well, but there are also some lessons 
learned that we and many of the others would be glad to talk to 
you and your staff about.
    Ms. Abbott. And I think the key theme here is that, as 
industries, we are very supportive of matters to protect the 
environment and matters to protect public safety, but let's get 
to resolution and not engage in infinite dialog about the best 
way to get there. And I think it is that getting to resolution 
when you have a myriad of regulatory agencies involved, and 
legitimately involved, given their accountabilities. But 
getting to resolution I think is the key thing.
    Mr. Barton. Now, let's assume that we can untie this 
Gordian knot of pipeline construction permitting so that we 
actually get the pipelines built. That is a big if, but assume 
that. What do we need to do at the Federal level in terms of 
incentive pricing at the FERC for the transmission and 
operation of these pipelines? Because you alluded again to that 
in your testimony.
    Ms. Abbott. Right. The dramatic changes that we are 
effecting in the gas industry is that we have a different set 
of customers now. Our traditional customer is the local 
distribution companies, are now going through a choice process 
at the local level to allow the ultimate consumer to choose 
their gas suppliers; and we as an industry and AGA and INGAA 
both support that because we think choice is a good thing. It 
goes along with that market support. What it means is that 
different players now hold the pipeline capacity, and they need 
different products and services.
    So the kind of model we are suggesting is very much the 
model people have taken on the telecommunications side where 
your basic service is regulated and is fairly structured but 
enhanced services like call waiting and other kinds of things 
can be fairly quickly introduced and priced as a market moves.
    If you think about the benefits we have seen in the 
telephone industry where the option used to be the black phone 
and then we unbundled the telephone industry and you see the 
myriad of products and service--I don't think cell phones ever 
would have developed in the telecommunications business if we 
had not unbundled long line. We did not anticipate that coming. 
Pagers, all of the things that we cannot function without. And 
that is the kind of product innovation and benefits to the 
economy you get when you go that kind of a route, and it is the 
kind of model that we are suggesting.
    Mr. Barton. I am going to show some of my ignorance because 
I have not focused on this in a while. Does the FERC regulate 
the transmission rate for interstate gas pipelines today?
    Ms. Abbott. Yes, sir.
    Mr. Barton. So you want FERC to put an incentive mechanism 
in place or do you want to deregulate that?
    Ms. Abbott. We recognize that we are still considered to be 
a natural monopoly by many, so it is the form of regulation 
that we are talking about. Right today we basically provide one 
vanilla-flavor kind of service at sort of an average rate; and 
what we would like is the flexibility to, on top of that, kind 
of like call waiting, your basic telephone service is 
regulated, your dial tone is regulated on phone, but the 
products and services that you add on top of that are subject 
to more market forces and more flexible kind of regulations.
    Mr. Barton. What is the current FERC's view of your idea?
    Ms. Abbott. They have taken some good steps forward in it, 
and I think the signal is to continue to move with the market. 
Because we think as the market moves forward we are going to 
need more flexible pricing options and service options. I think 
they are open to it. It is the speed of decisionmaking and the 
resources devoted to recognizing there is a need.
    Mr. Barton. What stakeholder groups tend to oppose that?
    Ms. Abbott. We have had good support from our colleagues on 
the distribution side. I think the production segment of the 
community is somewhat for skeptical on some forms of that. 
Would that be fair?
    Mr. Johnson. Yes, that is fair. On the producer side, the 
supply side, we recognize in certain instances that it is a 
free market; and there is no problem with competition locally. 
There are other segments, interstate pipeline market, that are 
specifically monopolies. There is only one pipe out of one 
place to one other place where you want to sell your gas. And 
what we really want to make sure of is that that particular 
natural monopoly--and it is an efficient monopoly, it really 
is, but it does need to be regulated to a certain extent so 
that there is not discrimination which will add to the cost of 
things.
    Mr. Barton. I would say you would be opposed to what we 
would call price gouging, charging an unreasonable amount to 
transmit a specific amount of gas. But if you put in some sort 
of incentive mechanism that allows additional services, you 
would not oppose that.
    Mr. Johnson. No, incentive mechanisms would work for us. 
And, again, there are certain services that the interstate 
pipeline industry offers and wants to offer that, again, we are 
not concerned about. Because I think the bright light at the 
end of the tunnel on a lot of this is that the Internet is 
going to open much of this up.
    Mr. Barton. I don't think we can transmit natural gas by 
the Internet, though.
    Mr. Johnson. No, but what we are concerned about is 
transparency of transactions. Now transactions are extremely 
cloaked in secrecy; and we do not see everything that goes on 
in the market, which leads to suspicion, obviously. And I think 
what you need to do with--what the Internet will affect so that 
everyone will see the transactions that are going on. And it 
will also greatly lower transaction costs, which is a big part 
of my business and her business and everybody else's business.
    Mr. Barton. I want to switch to Mr. Russell. I did glance 
at your testimony last evening, and I have one technical 
question and one of personal curiosity.
    You have got a huge list of people that are sponsoring your 
testimony. But I am puzzled by the fact that the Texas 
Independent Producers and Royalty Owners, TIPRO, is not on 
there. Is there a reason for that? You have got North Texas and 
West Texas, but you do not have TIPRO. And they are normally 
telling IPAA what to do, I guess.
    Mr. Russell. That was a housekeeping error. They have asked 
not to be included unless they have the specific time to go 
through it in more detail.
    Mr. Barton. As far as you know, they do not oppose anything 
you are saying in here?
    Mr. Russell. That is right.
    Mr. Barton. I want to double-check, because I have a lot of 
good friends down in TIPRO.
    On the back of your testimony you have a chart, you do not 
really allude to it in your testimony, but along one axis, it 
says Wildlife Restrictions is the heading and then big game 
winter range, sage grouse lek, L-E-K, sage grouse nesting, 
mountain plover breeding, mountain plover nesting, raptor 
nesting, burrowing owl, prairie dog avoidance. Are these all 
local or Federal restrictions in the Rocky Mountains that you 
cannot drill during those times?
    Mr. Russell. A lot of them are. But it goes to the point 
that you were talking about before with the pipelines, which 
is, if you take an area of land and look at all the various 
environmental restrictions, this is just an example of some of 
the endangered species' kinds of restrictions there that block 
access during certain periods of time.
    Mr. Barton. The prairie dog is not an endangered species, 
is it?
    Mr. Russell. Yes, in some areas it is.
    Mr. Barton. It is?
    Mr. Shimkus. Stop running over them.
    Mr. Barton. Not in Texas.
    Mr. Russell. You would be surprised at the list that we 
would show you.
    But what I was going to say is it is not only this list but 
if you go through and look at not only endangered species but 
some aspects of the Clean Air Act--the permitting, the 
monitoring, some of the things that you talked about before 
which really go to this procedural aspect and the lack of 
coordination between State and Federal agencies, that what 
happens is that whole areas are essentially taken off the table 
for development. That is what we were trying to show there, and 
I can give you more supporting detail on that.
    Mr. Barton. So this is more----
    Mr. Russell. That is really more in some of the Rockies 
rather than across the country. That was put together by one of 
our Rocky Mountain associations, but we can give you a lot more 
detail on that.
    But, again, it goes to the point of what you were raising 
before, that there is an awful lot of what can be done in terms 
of coordination and in terms of not looking at the substantive 
requirements but the overall effect of overlaying one 
environmental statute over another when there is no sense of 
what the implication is going to be for further gas 
development, something that you raised this morning.
    Mr. Barton. I have two more questions, and then I will 
recognize Mr. Shimkus.
    Mr. Cavaney, Admiral Watkins earlier was fairly emphatic 
and passionate about the ability to drill in ANWR without 
harming the environment. What has been the experience in 
Prudhoe Bay in terms of environmental damage to the land and 
also to the wildlife? Has there been documented any permanent 
harm to the wildlife or to the environment in terms of Prudhoe 
Bay?
    Mr. Cavaney. Well, I think, Mr. Chairman, to the contrary; 
and we will be glad to work with the Alaska Oil and Gas 
Association to provide you a bunch of the studies and the data 
that has been collected.
    Just to give some examples, they have monitored the herds; 
and the herd development over the time. One of the herds that 
was up there was about 3,000 at the time they finished off the 
pipeline. It is up to 20,000 now. I could go on and on and on.
    Mr. Barton. So they need population control?
    Mr. Cavaney. They need population control. But, clearly, 
wildlife has done quite well up there. It is well documented. 
And a lot of that goes to the site preparation. In the 
testimony that Alaska Oil and Gas Association committed, they 
point out the most recent field, which is Alpine, they are 
going into, that they spent years of prep work in getting the 
site ready by looking at all the local indigenous situations so 
they could track and keep records of that. What we have found, 
that is a special place up there. It has a unique habitat. The 
conditions are very harsh at times, and the industry has 
brought to bear technology up in that area unlike any place 
else in the world, and we have learned a lot from it.
    Over the 20 years that the industry has been up there, they 
now take a pad size, which is the area where the wellheads go, 
and it has been reduced by over 90 percent.
    And another thing that has happened is that, over that 
period of time, we have learned instead of having to make one 
bore hole for each individual well you can now utilize--with 
directional drilling one bore hole can go ahead and handle 
multiple wells. You can actually go out as deep as 9,000 feet 
and as far out as 4 miles with directional drilling to find 
what you need and bring it through. So the footprint on the 
surface is down to close to de minimis levels.
    In terms of the operations up there on the tundra area 
where they operate, what we have learned to do is, any of the 
muds and the like that are brought out in the drilling process 
from down below they are reinjected into the ground, as is the 
gas and the others, so that by the time you leave a site 
basically, you wouldn't know that people had been there.
    So it is possible that people are concerned about looking 
at drilling operations 20 or 25 years ago and saying we just do 
not want that up there, but it does not look at the reality of 
what is going on up there today because technology continues to 
advance. We are quite confident that we could be held to the 
world's strictest standards, which we are up in Alaska, and we 
could go up in ANWR and those other areas and both respect the 
environment as well as help develop an energy policy that would 
provide more domestic production.
    Mr. Barton. Now put this in perspective. Assuming that the 
latest EIA estimate on the amount of recoverable oil and gas 
are true in ANWR, it is a huge number. It is almost as much as 
we have in the lower 48 in terms of proven reserves. It is a 
big number.
    Mr. Cavaney. Yes.
    Mr. Barton. How big would the drilling platform or the 
drilling footprint be to actually drill ANWR if everything is 
there that EIA says is there? Put it in some sort of way that 
we can understand. Bigger than the Capitol? Bigger than the 
State of Texas? How big would it be to do all the drilling?
    Mr. Cavaney. Let me give you an example of this Alpine 
field, which is not in ANWR, it is over in the plain. There you 
have an area of 40,000 acres. Now, they have done all the 
seismic and the testing, which has not been done in ANWR yet so 
you have to do a lot of work before you can get the details 
down. But they can take an amount which is less than 1 percent 
of the land mass, would be all they would ever have to touch to 
be able to access and resource that entire area. So you would 
have to go in and, first of all----
    Mr. Barton. That would be 400 acres based on 40,000 acres?
    Mr. Cavaney. Yes.
    Mr. Barton. Four hundred acres?
    Mr. Cavaney. And that is a relatively small amount and 
could be smaller based on technology.
    Mr. Barton. What is a city block? How many acres is in a 
city block?
    Mr. Cavaney. Gosh, I think a city block is considered to be 
10 or 12.
    Mr. Barton. We are going to show all of our technical 
expertise here. So if a city block is 10 acres, you can drill 
this entire area in 40 acres. Four city blocks could drill this 
entire field?
    Mr. Cavaney. I think it is not fair to extrapolate this, 
because we have not had a chance to go in with seismic and 
determine whether these reserves would all be in several large 
deposits or caverns or whether they are----
    Mr. Barton. I am trying to help. This is not an unfriendly 
question. But I am told that we could have a drilling platform 
on the parking lot of the Capitol; and if there were referable 
oil and gas reserves in the District of Columbia, one drilling 
platform centrally located could drill all the wells that would 
be needed to drain the District of Columbia.
    Mr. Cavaney. That is correct. That is correct.
    Mr. Barton. So this image of these forests of rigs like you 
remember from the 1930's in Kilgore, Texas, in reality in 
Alaska, if we are allowed to drill in ANWR, you are going to 
have very few platforms; and to the caribou or an animal 
walking through, they are probably not even going to notice the 
drilling, unless at night they stumble into it.
    Mr. Cavaney. They won't. I have stood at a site up in 
Alaska and actually had caribou walk within 50 feet of me 
undisturbed. It is not the old sepia-toned tintype of all these 
rigs and everything those are from the 1920's and 1930's.
    What you use today is modern technology. You bring the rig 
in, drill the hole, remove the rig, pull it out. You have a 
small wellhead that is there, and that is all that is seen, and 
then some lines to be able to collect the oil and move it on to 
tankers, basically. All about invisible to the eye once the 
actual bore hole has been drilled.
    Mr. Barton. I have some more questions, but I will 
recognize Mr. Shimkus for such time as he may consume, and then 
I will finish the hearing.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I think 400 acres would be classified as a small farm in 
Illinois. In fact, it is probably a small family farm that 
cannot make it today at today's commodity prices.
    Mr. Barton. That would be a backyard in Texas.
    Mr. Shimkus. I appreciate the panel's longevity and staying 
through. It is a long day, and I know most of you were here for 
the previous panel.
    I have always been very vigilant on this national energy 
policy, and if you went back to the records of other hearings I 
have bemoaned the fact that we really do not have a strategy 
that takes in these other fields that we could do, the marginal 
wells that I have in my district and, obviously, the renewable 
portion.
    Now we are going to have a hearing on the renewal portion, 
but I only wish, Mr. Chairman, that some of that renewable 
portion, especially in the fuel blending area, could have been 
today because it does fit well in the fuel debate. To separate 
it with the wind and hydroelectric and solar I think does a 
great disservice to the debate, and next time I will be a 
little bit more prompt and involved in seeing that there is 
good representation.
    So, not to be adversarial but to continue to push the 
issue, on a small portion of the national energy strategy which 
has to be that renewable portion of our portfolio, I visited 
Williams Companies' Pekin energy plant that produces ethanol 
and many other products. 100 percent, there is no residue in 
the production, and ethanol is just one of the products--feed, 
protein, starch, all this other stuff. I was just amazed at the 
lack of residue in this refinery, and I would encourage people 
to visit it. And DOE mentioned the fact and the first panel 
mentioned about science research and development will not only 
help us move us further down the line.
    I also want to take the chance to ask if anyone on the 
panel here disagrees with the EPA's evaluation of the phase 1 
RFG areas, which obviously is part of the oxygenate debate. 
There EPA says that volatile organic compounds, VOC, reductions 
average 27 percent, and the goal was 15 percent. So exceeded 
the goal by using the oxygenate standard. Air toxin reductions 
averaged 22 percent; the goal was 15 percent. Average 
NOX reductions for phase 1 is 3 percent. There was 
no requirement under the phase 1 program. And ambient benzine 
levels decreased by 43 percent of the oxygenate standards.
    Now benzine is a carcinogen. Does anyone dispute the fact 
that the oxygen standard has been very helpful in the clean air 
battle that we have been fighting the last couple years?
    Mr. Cavaney. I would like to make a point, because we have 
been through much of that. I think in the initial stages the 
oxygen mandate may have had some benefit, but I think most of 
the people who manufacture gasoline and the regulators who look 
at them can now say--how shall we say--the low-hanging fruit 
has already been realized. And you can be held to meet the 
exact same standards without using oxygen and still get those 
results out. What happens to----
    Mr. Shimkus. If I might jump in, we have had a hearing on 
the oxygen standard, and we did have the doctor from the 
Colorado School of Mines that in testimony before the committee 
would say that is true, but you then have a rise in aromatics. 
So--and the possibility of--so the question is this: Do you 
dispute the EPA standards on the reductions of the organic 
compounds, the air toxic reductions, the NOX 
reductions and the benzine reductions?
    Mr. Cavaney. All I was trying to say is----
    Mr. Shimkus. But, sir, the question is--but the question 
is, do you dispute that the oxygen standard has been beneficial 
in the Clean Air Act?
    Mr. Barton. I think you ought to give him a chance to 
answer the question.
    Mr. Shimkus. Well, he is not--the debate--the response is--
the question is, has the oxygen standard been helpful and has 
met the standards that the EPA has directed? That is the 
question.
    Mr. Cavaney. In the beginning it did, yes.
    Mr. Shimkus. How about currently?
    Mr. Cavaney. Currently, you can achieve the same effects 
without the oxygenate mandate in there.
    Mr. Shimkus. Well, and that is debatable, based upon other 
testimony that we have had.
    Mr. Barton. Would the gentleman yield? To try to help you 
out a little bit, can you achieve the same effect at the same 
cost?
    Mr. Cavaney. Actually, in some cases we can probably do it 
less expensive. We are supporters. We are the largest user of 
ethanol. What we object to is the idea of mandating. Because it 
gets you, in certain conditions, into very high-expense things 
where we have to pass that cost along to the consumer. We don't 
disagree that oxygenates have a very valid role. We think 
ethanol has a very bright future in our industry. We will be 
using significantly more of it, with or without a mandate. What 
I am just trying to say is you are asking for a blanket 
statement in a condition, that the blanket answer----
    Mr. Barton. The gentleman's statement is correct. The 
oxygen requirement under the current Clean Air Act has exceeded 
the estimates of the cleanliness of the air that would develop 
by using those standards. I think that is a true statement. I 
think----
    Mr. Cavaney. And the industry can blend without an 
oxygenate today and maintain those extra gains won't be lost in 
the process. The case that has been mentioned by the earlier 
panel, technology does change, so what was true 10 years ago 
can be done different ways now. We have to acknowledge those 
kinds of things. We are not trying to back away.
    Mr. Barton. The gentleman from Illinois is an ethanol man, 
and the gentleman from Texas is an MTBE man.
    Mr. Shimkus. Just reclaiming my time. We know what we have, 
and we know what we have works. There is dispute on other 
refinery capabilities, and this is how it ties in though--with 
the whole energy security issue.
    Also, the DOE and our testimony that we had in March, Mr. 
Chairman, the question was asked of DOE: If we would eliminate 
the oxygen standard, what would that do to the cost of fuel? 
And we had a hearing on the high cost of fuel. Their response 
was an increase of 3 to 5 cents a gallon.
    And if basic supply and demand--you are actually losing 
volume and replacing it by refined petroleum product, i.e. A 
gasoline, that, obviously, supply and demand is working in 
favor of the producers now with high prices. So if we want a 
national energy policy, we are in a schizophrenic time--a clean 
air benefit and a renewable source of fuel. That is why the 
separation of these issues in various panels sometimes is not 
very helpful. And I will continue, obviously, to fight for the 
interests of Illinois.
    Mr. Barton. That is a real news flash.
    Mr. Shimkus. Last thing is because--and I mentioned this to 
the first panel--because of the biodiesel provision in the 
Energy and Policy Conservation Act, soy diesel--demand for soy 
diesel has increased 700 percent, and there is a great 
reduction in the ability of the exhaust. We look forward to 
working with the Petroleum Institute and--working with us so 
that we can get cleaner air, but we also address our national 
energy security by--hopefully, it never happens, the oil lanes 
are closed and we start pumping out of the SPR to meet the 
demands of our military forces. In essence, that is a limited 
supply. We better have our marginal wells, we better have some 
continental United States oil production, and we better have a 
renewable portion of that portfolio.
    More statements than questions, Mr. Chairman, but that is a 
member's prerogative. With that, I will yield back my time.
    Mr. Barton. I just have a few more questions. Then we will 
close the panel.
    This is really to Mr. Cavaney. We have reauthorized the 
Energy Policy Conservation Act in both the House and the 
Senate. The bills are somewhat different; and there is some 
controversy over a provision of the House that if oil prices in 
the world market were to go below $15 a barrel we would 
authorize the first time for the Secretary of Energy to 
purchase oil at $15 a barrel for the Strategic Petroleum 
Reserve from the stripper wells.
    In the Senate, I don't know if it is in the EPCA 
Reauthorization Act, but Senator Hutchinson has a provision 
that if oil prices were to go below $15 a barrel a tax credit 
of up to $3 per barrel would be made in order for these same 
stripper wells.
    Obviously, the intent on both the Senate and the House is 
to keep the stripper well production producing when world 
prices collapse again, if they do. What is API's position? Do 
you support both provisions? Do you have a preference for one?
    Because at some point in time we are going to go to 
conference with the Senate and, obviously showing some personal 
bias since I am the author of the discretionary authority by 
the Department of Energy, I would hope that we would keep that 
in. But if Senator Hutchinson were here I know she would speak 
on behalf of the $3 per barrel tax credit.
    Mr. Cavaney. We strongly support a strong domestic energy 
production capacity, and we would work very closely and do with 
IPAA. They are the principal constituents with many of those 
people.
    Mr. Barton. We have to give Mr. Russell a chance.
    Mr. Cavaney. Whatever would work out and be good with them, 
I think you would find the API would be very supportive of 
that.
    Mr. Russell. We support both. But we support those things, 
especially the marginal well tax credit that you mentioned. 
That is the thing to preserve, the marginal wells in this 
country. We were talking before about the strategic petroleum 
reserve and we have this, the marginal wells, in this country 
that produce about as much oil as what we import from Saudi 
Arabia. So it is geared to protect that production when we have 
downturns.
    Mr. Barton. The House provision in conjunction with the 
Markey amendment on the reserve fuel oil refined product 
reserve in the Northeast passed the House like 400 to 6. So we 
have actually had a vote in the House, and it was overwhelming.
    I support Senator Hutchinson's provisions, too. Unless it 
has been voted on at committee, I don't believe it has had a 
vote in the Senate.
    Well, I am going to let this panel go. As I said to the 
first panel, I want to give you my personal appreciation for 
attending today. This is a very helpful dialog.
    I especially think the testimony of INGAA about the need to 
reform our pipeline licensing process and try to bring the 
permitting process into some sort of conformity and expedite 
the procedure is very helpful. I will be working with the 
minority. If we can come up with some consensus language to at 
least introduce for discussion purposes in this Congress, you 
know, I would like to do that.
    On the larger issues of oil and gas policy, I can assure 
you this is not a hearing just to hear ourselves talk. We are 
going to have two more hearings this summer. Next hearing is 
going to be on coal and nuclear, and then we are going to hold 
a hearing on all the renewable and alternatives, environmental 
issues. And we are going to try somewhere to put in some focus 
on electricity, which kind of uses all the base sources but is 
an end use. People look at electricity as something they use 
like natural gas or like gasoline.
    So by the end of the summer we hope to have had a 
comprehensive set of hearings and have developed a record to 
begin to try to develop, again on a bipartisan basis, a 
comprehensive national energy strategy for the next 
administration, whichever political party is in power.
    So, again, I want to thank you. This hearing is adjourned.
    [Whereupon, at 2:10 p.m., the subcommittee was adjourned.]

                                
