[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




  THE GROWING NATURAL GAS SUPPLY AND DEMAND IMBALANCE: THE ROLE THAT 
   PUBLIC LANDS & FEDERAL SUBMERGED LANDS COULD PLAY IN THE SOLUTION

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

                           OVERSIGHT HEARING

                               before the

                       SUBCOMMITTEE ON ENERGY AND
                           MINERAL RESOURCES

                                 of the

                         COMMITTEE ON RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             July 16, 2002

                               __________

                           Serial No. 107-140

                               __________

           Printed for the use of the Committee on Resources



 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
                                   or
         Committee address: http://resourcescommittee.house.gov


                                 ______
80-724              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                         COMMITTEE ON RESOURCES

                    JAMES V. HANSEN, Utah, Chairman
       NICK J. RAHALL II, West Virginia, Ranking Democrat Member

Don Young, Alaska,                   George Miller, California
  Vice Chairman                      Edward J. Markey, Massachusetts
W.J. ``Billy'' Tauzin, Louisiana     Dale E. Kildee, Michigan
Jim Saxton, New Jersey               Peter A. DeFazio, Oregon
Elton Gallegly, California           Eni F.H. Faleomavaega, American 
John J. Duncan, Jr., Tennessee           Samoa
Joel Hefley, Colorado                Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland         Solomon P. Ortiz, Texas
Ken Calvert, California              Frank Pallone, Jr., New Jersey
Scott McInnis, Colorado              Calvin M. Dooley, California
Richard W. Pombo, California         Robert A. Underwood, Guam
Barbara Cubin, Wyoming               Adam Smith, Washington
George Radanovich, California        Donna M. Christensen, Virgin 
Walter B. Jones, Jr., North              Islands
    Carolina                         Ron Kind, Wisconsin
Mac Thornberry, Texas                Jay Inslee, Washington
Chris Cannon, Utah                   Grace F. Napolitano, California
John E. Peterson, Pennsylvania       Tom Udall, New Mexico
Bob Schaffer, Colorado               Mark Udall, Colorado
Jim Gibbons, Nevada                  Rush D. Holt, New Jersey
Mark E. Souder, Indiana              Anibal Acevedo-Vila, Puerto Rico
Greg Walden, Oregon                  Hilda L. Solis, California
Michael K. Simpson, Idaho            Brad Carson, Oklahoma
Thomas G. Tancredo, Colorado         Betty McCollum, Minnesota
J.D. Hayworth, Arizona               Tim Holden, Pennsylvania
C.L. ``Butch'' Otter, Idaho
Tom Osborne, Nebraska
Jeff Flake, Arizona
Dennis R. Rehberg, Montana

                      Tim Stewart, Chief of Staff
           Lisa Pittman, Chief Counsel/Deputy Chief of Staff
                Steven T. Petersen, Deputy Chief Counsel
                    Michael S. Twinchek, Chief Clerk
                 James H. Zoia, Democrat Staff Director
               Jeffrey P. Petrich, Democrat Chief Counsel
                                 ------                                

              SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

                    BARBARA CUBIN, Wyoming, Chairman
              RON KIND, Wisconsin, Ranking Democrat Member

W.J. ``Billy'' Tauzin, Louisiana     Nick J. Rahall II, West Virginia
Mac Thornberry, Texas                Edward J. Markey, Massachusetts
Chris Cannon, Utah                   Solomon P. Ortiz, Texas
Jim Gibbons, Nevada,                 Calvin M. Dooley, California
  Vice Chairman                      Jay Inslee, Washington
Thomas G. Tancredo, Colorado         Grace F. Napolitano, California
C.L. ``Butch'' Otter, Idaho          Brad Carson, Oklahoma
Jeff Flake, Arizona
Dennis R. Rehberg, Montana


                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on July 16, 2002....................................     1

Statement of Members:
    Cubin, Hon. Barbara, a Representative in Congress from the 
      State of Wyoming...........................................     1
        Prepared statement of....................................     3
    Kind, Hon. Ron, a Representative in Congress from the State 
      of Wisconsin...............................................     4
        Prepared statement of....................................     8
    Tauzin, Hon. Billy, a Representative in Congress from the 
      State of Louisiana.........................................     8

Statement of Witnesses:
    Gooch, Lee, Chairman, Process Gas Consumers Group............    49
        Prepared statement of....................................    51
    Hutzler, Mary J., Acting Administrator, Energy Information 
      Administration.............................................    65
        Prepared statement of....................................    67
        Response to questions submitted for the record...........    98
    Peters, Eugene F., Vice President, Legislative Affairs, 
      Electric Power Supply Association..........................    58
        Prepared statement of....................................    60
    Schleede, Glenn R., Member, Advisory Council, Consumer Alert.    32
        Prepared statement of....................................    34
    Simmons, Matthew R., President, Simmons & Co. International..    77
        Prepared statement of....................................    80
    True, Diemer, Chairman, Independent Petroleum Association of 
      America....................................................    82
        Prepared statement of....................................    84
    Watson, Rebecca W., Assistant Secretary for Land and Minerals 
      Management, U.S. Department of the Interior................    14
        Prepared statement of....................................    18

Additional materials supplied:
    Article ``Alarming Drop in Production Catches Analysts by 
      Surprise'' submitted for the record........................    92
    Article ``Gas Production Falls in Second Quarter'' submitted 
      for the record.............................................    91
    New York Times Article ``Alaska, No Longer So Frigid, Starts 
      to Crack, Burn and Sag'' submitted for the record by The 
      Honorable Ron Kind.........................................     5
    Walker, David M., Comptroller General of the United States, 
      Letter submitted for the record by The Honorable Barbara 
      Cubin......................................................    12

 
  THE GROWING NATURAL GAS SUPPLY AND DEMAND IMBALANCE: THE ROLE THAT 
   PUBLIC LANDS & FEDERAL SUBMERGED LANDS COULD PLAY IN THE SOLUTION

                              ----------                              


                         Tuesday, July 16, 2002

                     U.S. House of Representatives

              Subcommittee on Energy and Mineral Resources

                         Committee on Resources

                             Washington, DC

                              ----------                              

    The Subcommittee met, pursuant to call, at 10:02 a.m., in 
room 1334 Longworth House Office Building, Hon. Barbara Cubin, 
[Chairman of the Subcommittee] presiding.
    Mrs. Cubin. The oversight hearing by the Subcommittee on 
Energy and Minerals Resources will come to order.
    The Subcommittee is meeting today to hear testimony on the 
growing natural gas supply and demand imbalance and the role 
that the public and Federal submerged lands could play in the 
solution.
    Under Committee Rule 4(g) the Chairman and the Ranking 
Minority Member can make opening statements. Since there are no 
other Members here at this time, we will include their opening 
statements in the record.

   STATEMENT OF THE HON. BARBARA CUBIN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF WYOMING

    Mrs. Cubin. The Subcommittee meets today to explore the 
roots and the magnitude of a growing natural gas supply and 
demand imbalance, an imbalance that could have a very adverse 
effect on the nation's future economic growth and development.
    We will also explore the impediments to environmentally 
responsible natural gas exploration and development on public 
lands and on Federal submerged lands where the majority of 
potential new reserves exist.
    A substantial portion of the American economy is fueled by 
natural gas and it is important to every major sector of the 
economy. It is used to heat homes, generate electricity, make 
chemicals and manufacture numerous products, including 
fertilizer for agriculture.
    Natural gas is expected to play a proportionately greater 
role in the U.S. economy in the future because it is clean-
burning and domestically produced. For instance, of the nearly 
300,000 megawatts of proposed new electricity generation 
capability, about 90 percent is expected to be natural gas 
fired. Gas demand is expected to increase over 60 percent 
between now and 2020 when the United States consumption is 
expected to reach 34 trillion cubic feet per year.
    While natural gas has become increasingly popular as a fuel 
source, supply is not keeping pace with demand. In fact, recent 
surveys of natural gas producers suggested a year-to-year 
production decline as high as 7 percent.
    Much of the current gas production is taking place in 
mature fields. Gas production from some large fields is 
depleting at a rate of over 29 percent per year. In order to 
keep up with current gas demand, which is growing at about 2 
percent annually, the gas industry must produce about six 
trillion cubic feet of gas per year.
    Given the current rate of production and consumption, new 
gas fields need to be found. The country has sufficient gas 
resources to fuel our economy for decades, but public policies 
are preventing them from being developed. Significant 
restrictions on natural gas development in the form of land 
withdrawals, development moratoria and regulatory restrictions 
lock up a large proportion of potential new reserves.
    Much of the most promising new gas reserves are on public 
lands in the Rocky Mountains, Alaska, and the Outer Continental 
Shelf. The Rocky Mountains, for instance, is a frontier natural 
gas province with about 85 percent of its known resources still 
in the ground, but a substantial percentage of those new 
resources are off limits to oil and gas production.
    Those areas that are available are often subject to 
restrictions that make them, for all practical purposes off 
limits.
    A 1999 National Petroleum Council assessment showed that 
about 40 percent of the gas resources in the Rockies are 
affected by access restrictions. Additional impediments to gas 
development in the Rockies are imposed by difficulties and 
delays in obtaining permits to drill for gas reserves in areas 
that are available for development.
    The cumulative effect of these restrictions and permitting 
difficulties is an impending natural gas shortfall. All of this 
is occurring at the same time that our economy is becoming more 
dependent on clean, natural gas.
    We are currently on a dangerous collision course. If future 
natural gas supplies cannot meet demand, the consequences could 
be devastating for our economy. We need to enact a policy that 
reverses this trend and allows increased environmentally 
responsible natural gas development on Federal lands.
    Today's hearing will focus on the current natural gas 
situation and explore policy initiatives that could boost 
supply. About a year ago, the House of Representatives passed 
H.R. 4, Securing America's Future Energy Act of 2001. This 
Subcommittee crafted several provisions in the bill that 
address a number of issues concerning access to gas reserves on 
public lands.
    These provisions are designed to reduce complexities and 
increase access to reserves. As a conferee on the Energy 
Committee, I am working to hammer out the differences in the 
bill passed by our Senate colleagues. We hope to have a strong 
energy bill that addresses the gas supply issue on the 
President's desk by October.
    From our witnesses today, we will learn more about the 
causes of the growing natural gas supply and demand imbalance, 
its potential impact on the United States families and the 
economy and the policies that could help reverse this worrisome 
trend.
    The engine that drives the U.S. economy is increasingly 
being fueled by natural gas. However, in order to keep the 
engine humming and our economy expanding, a sound energy policy 
is needed that allows access to domestic gas resources on 
Federal lands.
    [The prepared statement of Ms. Cubin follows:]

Statement of Hon. Barbara Cubin, a Representative in Congress from the 
                            State of Wyoming

    The Subcommittee meets today to explore the roots and magnitude of 
a growing natural gas supply and demand imbalance--an imbalance that 
could have a very adverse effect on our nation's future economic growth 
and development. We will also explore the impediments to 
environmentally responsible natural gas exploration and development on 
public lands and federal submerged lands where the majority of 
potential new reserves exist.
    A substantial portion of the American economy is fueled by natural 
gas and it is important to every major sector of the economy. It is 
used to heat homes, generate electricity, make chemicals and 
manufacture numerous products, including fertilizer for agriculture. 
Natural gas is expected to play a proportionally greater role in the 
U.S. economy in the future because it is clean burning and domestically 
produced. For instance, of the nearly 300,000 megawatts of proposed new 
electricity generation capacity, about 90 percent is expected to be 
natural gas-fired. Demand is expected to increase over 60 percent 
between now and 2020 when U.S. consumption is expected to reach 34 
trillion cubic feet per year.
    While natural gas is becoming increasingly popular as a fuel 
source, supply is not keeping pace with demand. In fact, recent surveys 
of natural gas producers suggested a year-to-year production decline of 
as high as 7 percent. Much of the current gas production is taking 
place in mature fields. Gas production from some large fields is 
depleting at a rate of over 29 percent per year. In order to keep up 
with current gas demand, which is growing at about 2 percent annually, 
the gas industry must produce about 6 trillion cubic feet of additional 
gas per year.
    Given the current rate of production and consumption, new gas 
production fields need to be found. This country has sufficient gas 
resources to fuel our economy for decades, but public policies are 
preventing them from being produced. Significant restrictions on 
natural gas development--in the form of land withdrawals, development 
moratoria and regulatory restrictions--lock up a large portion of 
potential new reserves. Much of the most promising new gas reserves are 
on public lands--in the Rocky Mountains, Alaska and the Outer 
Continental Shelf. The Rocky Mountains, for instance, is a frontier 
natural gas province with about 85 percent of its known resources are 
still in the ground. But a substantial percentage of those new 
resources is off-limits to oil and gas production. Those areas that are 
available are often subject to restrictions that make them, for all 
practical purposes, off-limits. A 1999 National Petroleum Council 
assessment showed that about 40 percent of the gas resources in the 
Rockies are affected by access restrictions. Additional impediments to 
gas development in the Rockies are imposed by difficulties and delays 
in obtaining permits to drill for gas reserves in areas that are 
available for development.
    The cumulative effect of these restrictions and permitting 
difficulties is an impending natural gas shortfall. All of this is 
occurring at the same time that our economy is becoming more dependent 
on clean natural gas. We are currently on a dangerous collision course. 
If future natural gas supplies cannot meet demand, the consequences 
could be devastating for our economy. We need to enact a policy that 
reverses this trend and allows increased environmentally responsible 
natural gas development on federal lands.
    Today's hearing will focus on the current natural gas situation and 
explore policy initiatives that could boost supply. About a year ago, 
the House of Representatives passed H.R. 4, Securing America's Future 
Energy Act of 2001. This Subcommittee crafted several provisions in 
that bill that address a number of issues concerning access to gas 
reserves on public lands. These provisions are designed to reduce 
complexities and increase access to reserves. As a conferee in the 
Energy Conference, I am working to hammer out the differences in the 
bill passed by our Senate colleagues and we hope to have a strong 
energy bill--that addresses the gas supply issue--on the President's 
desk by October.
    From our witnesses today we will learn more about the causes of the 
growing natural gas supply and demand imbalance, its potential impact 
on U.S. families and the economy, and the proposed policies that could 
help reverse this worrisome trend. The engine that drives the U.S. 
economy is increasingly being fueled by natural gas. However in order 
to keep the engine humming and our economy expanding, a sound energy 
policy is needed that allows access to domestic gas resources on 
federal lands.
                                 ______
                                 
    Mrs. Cubin. With that, I would like to recognize the 
ranking member, Mr. Kind, for an opening statement.

 STATEMENT OF THE HON. RON KIND, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WISCONSIN

    Mr. Kind. Thank you, Madam Chair. I welcome my colleagues 
here this morning, as I do Assistant Secretary Watson for your 
presence and your anticipated testimony, as well as the other 
panelists here today.
    This morning we meet again to review the question of 
natural gas supplies from Federal lands. This is a topic that 
the Subcommittee has taken up now in this Session of Congress 
quite a few times and it is an important topic because we know 
that natural gas provides about 15 percent of the electricity 
production in the United States today.
    We are anticipating about 90 percent of the new electricity 
coming on line is going to be natural gas generated. Canada is 
exporting roughly 15 percent of our natural gas needs right now 
into the country. There are some promising fields that we are 
taking a closer look at up in Alaska, in the Rocky Mountains 
off the Continental Shelf, in the Gulf of Mexico.
    So, this is an important hearing. I appreciate the 
witnesses' time in coming to testify about it. But I'm also 
hoping that there are some other issues that the Subcommittee 
may be able to take up during the course of this session before 
we run out of time.
    For example, just several weeks ago on June 16, The New 
York Times Sunday edition featured a front-page story on how 
the loss of the Permafrost is dramatically impacting the region 
up in Alaska. It is entitled, ``Alaska, No Longer So Frigid. It 
Starts to Crack, Burn and Sag.''
    Madam Chair, with unanimous consent, I would ask that this 
article be included in the record at this point.
    Mrs. Cubin. Without objection, it is so ordered.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T0724.035
    
    [GRAPHIC] [TIFF OMITTED] T0724.036
    
    Mr. Kind. According to the federal officials cited in the 
article, mean temperatures have risen by five degrees in the 
summer and ten degrees in the winter since the 1970's and it is 
having a dramatic impact up in Alaska.
    Further more, according to the report, Senator Ted Stevens 
said that no place is experiencing more startling change from 
rising temperatures than the State of Alaska, listing as 
possible consequences sagging roads, crumbling villages, dead 
forests, catastrophic fires, possible disruption of marine 
wildlife.
    I think the interest that the Subcommittee may have in this 
and the implications in the future is what is happening on the 
Federal lands, what impact this is going to have on pipeline 
safety, the environmental impact, the ability to produce the 
natural resources and bring them to market there and also what 
the overall financial impact is going to be to the Federal 
Government if not the State of Alaska, given what is occurring 
to the Permafrost up north.
    As the House and Senate Conference Committee meet to 
finalize a new national energy policy which may include 
provisions for the further development of a natural gas 
pipeline from Alaska to the Lower 48, it would be useful to 
hold an oversight hearing to consider how temperature changes 
in Alaska could affect pipelines in petroleum production in the 
region as well as what steps would be necessary to ensure 
public health and safety.
    Also, last week, the General Accounting Office released a 
new report entitled, ``Alaska's North Slope Requirements for 
Restoring Lands After Oil Production Ceases.''
    This report, prepared in response to a request from our 
colleagues, Representatives Gephardt, Ranking Member on the 
Full Committee, Nick Rahall, as well as Mr. Markey who is a 
member of the Committee, discusses the nature and the extent of 
dismantlement and removal and restoration requirements for oil 
industry activities that are occurring in both the Federal and 
State lands in the North Slope of Alaska.
    Madam Chair, I would ask again unanimous consent that the 
GAO report be included in the record at this time.
    Mr. Tauzin. Reserving the right to object, I think if we 
are going to include that report, we also ought to include the 
statement in the report of the State of Alaska regarding that 
report, both explaining why they thought the report was not 
only inappropriate, but why it was incorrect in many respects. 
That ought to be included as well.
    Mr. Kind. I have no objection to that.
    Mr. Tauzin. I withdraw my reservation.
    Mrs. Cubin. Without objection, it is so ordered. We will 
submit for the record both of the statements or studies.
    [The information has been retained in the Committee's 
official files.]
    Mr. Kind. Thank you. I would respectfully request, Madam 
Chair, an oversight hearing into the GAO's recommendations and 
any other witnesses you choose to call should take place to 
ensure that the North Slope is properly restored would be an 
appropriate function of this Subcommittee and our oversight 
responsibilities.
    In closing, I would respectfully suggest in the time 
remaining in this Congress the Subcommittee also try to address 
some of these issues if we have the time and the inclination to 
get into these areas.
    I have made several such requests in writing to the Chair 
and stand ready to assist you if you do decide to bring these 
issues before the Subcommittee.
    Thank you again, Assistant Secretary Watson for your 
presence and the rest of the panelists. I look forward to 
hearing your testimony.
    Thank you, Madam Chair.
    [The prepared statement of Mr. Kind follows:]

 Congressman Ron Kind, a Representative in Congress from the State of 
                               Wisconsin

    This morning we meet to again review the question of natural gas 
supplies from federal lands. This is a topic the Subcommittee has 
already reviewed several times during this Congress. While we recognize 
the role that natural gas plays and will continue to play in meeting 
our energy needs, there are other issues that we would like to see the 
Subcommittee address.
    For example, several weeks ago, on June 16, the New York Times 
Sunday edition featured a front page story on how the loss of 
permafrost is dramatically impacting the region. [''Alaska, No Longer 
So Frigid, Starts to Crack, Burn and Sag'' (front page, June 16)] 
According to this report, mean temperatures have risen by 5 degrees in 
summer and 10 degrees in winter since the 1970's.
    Further, according to the report, Senator Ted Stevens says that no 
place is experiencing more startling change from rising temperatures 
than Alaska, listing as possible consequences: sagging roads, crumbling 
villages, dead forests, catastrophic fires and possible disruption of 
marine wildlife.
    As the House and Senate Conference Committee meet to finalize a new 
national energy policy, which may include provisions for development of 
a natural gas pipeline from Alaska to the Lower 48, it would be useful 
to hold an oversight hearing to consider how temperature changes in 
Alaska could affect pipelines and petroleum production in that region 
as well as what steps would be necessary to ensure public health and 
safety.
    Also, last week, the General Accounting Office released a new 
report entitled ``Alaska's North Slope: Requirements for Restoring 
Lands After Oil Production Ceases.'' This report, prepared in response 
to a request from our colleagues, Congressmen Gephardt, Rahall and 
Markey, discusses the nature and extent of dismantlement, removal and 
restoration requirements for oil industry activities that are occurring 
on both federal and state lands in the North Slope of Alaska.
    An oversight hearing into GAO's recommendations that the Department 
should take to ensure that the North Slope is properly restored would 
be an appropriate function of the Subcommittee.
    In closing, I would respectively suggest that in the time remaining 
us in this Congress, the Subcommittee address these issues. I have made 
several such requests in the past to the Chair, and stand ready to 
assist should you decide to bring these issues before the Subcommittee.
                                 ______
                                 
    Mrs. Cubin. Thank you, Mr. Kind and thank you for your 
suggestions about topics for further hearings. However, I think 
we would run into jurisdictional problems if we went into 
pipeline building and reacting to the GAO statement. I think 
there are jurisdictional problems that we will have, but I will 
look into it.
    At this time, I would like to ask unanimous consent of the 
panel to allow the Chairman of the Commerce Committee and 
Member of the Resources Committee to give an opening statement.

    STATEMENT OF THE HON. BILLY TAUZIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Tauzin. I thank the gentle lady. I, too, want to 
welcome Secretary Watson. Thank you for all of the hard work of 
the department in so many areas and for the extraordinary 
contributions that your department has already made on H.R. 4 
and on the conference that we have begun on energy for our 
country's security future.
    I want to focus on that for a second. The gentleman who 
preceded me was very good about outlining the importance of 
natural gas in our energy future. I think the Vice President's 
report indicated that we might need as many as 1600 new power 
plants over the next 10 years to address the growing 
electricity needs of America.
    I don't think Americans have yet focused on the seriousness 
of that call. In our Energy Committee we have done some 
examination of the present and future needs of our country 
regarding electricity. We have come up with some rather 
startling numbers.
    For example, we found out that the Internet alone, and I am 
talking about the old, slow, dial-up Internet, when it is 
examined in its four quarters, its four components, 
manufacturing, the lines that are built, the businesses that 
sell services over the Internet and the businesses that 
actually operate the Internet, when you combine those four 
components, the old Internet consumes about 8 percent of the 
electricity produced in America. That is more than the country 
of Italy. That is the old Internet.
    When we go to the new, high-speed Internet with the massive 
data centers and the high-speed portals and the high-speed 
production of video and voice over broadband services, when 
television becomes fully enabled in this system, there are 
wildly swinging estimates of the enormous electricity demands 
those new systems are going to require.
    Even the predictions of the Vice President's office for 
1600 more major power plants may be very conservative. If 90 
percent of those plants are going to rely upon natural gas, we 
have a real problem. We have a huge problem in terms of 
supplying cheap, clean, affordable natural gas to these 
electricity power plants so we don't all end up in the 
situation California found itself in, where we don't have 
enough power affordably to keep our systems going.
    But it is even more serious than that. As we prepare to 
finish the work of the energy conference, and we are thick into 
it right now and Senator Bingaman and I have a very strong 
relationship we are building. I think we are building a pretty 
good plan to get the work of the conference done before we 
leave in November.
    We are reminded that every day we send Saddam Hussein $20 
million plus to purchase over one million barrels of oil from 
him every day. The dollars he gets from American citizens every 
time we buy gasoline in this country are converted, 
unfortunately, into weapons of mass destruction. It is 
converted into dollars that are paid in tribute to families 
whose sons commit suicide bombing attacks upon Israelis.
    It is spent on schools that are training young children how 
to hate this country and how to come to this country and be 
part of the terrorist operations against our cities and our 
citadels. It is dollars that Americans are paying to one of 
America's worst enemies, who is literally doing everything he 
can to develop nuclear weapons and chemical and biological 
weapons to use against not just Americans abroad, but Americans 
in this country.
    It is amazing to me that we have let ourselves be put in 
that position. I was in the Chesapeake just a couple of weeks 
ago, fishing with some of our friends. We caught some nice sea 
bass right next to a platform that was built back in the '70's.
    It has never been operated, to receive liquefied natural 
gas. It has never been operated because we have since then 
developed sufficient supplies of natural gas in the this 
country at affordable prices that we didn't have to import the 
volumes of liquefied natural gas that everyone thought we would 
have to import in the crisis of the oil and gas price controls 
of that period. It is about to go back into operation. It has 
been purchased. It is going to be retrofitted.
    We are going to see more and more imports of liquefied 
natural gas to this country. That will be brought in in 
liquefied form, warmed up, put in the pipeline to service the 
needs of this country again.
    So, we are building a situation where we not only dependent 
upon people we can't trust, people that hate us, people that 
are trying to kill us. We are building a situation where we are 
not only dependent upon them for oil, but now we are going to 
depend on more and more different countries to supply us with 
natural gas when natural gas is abundantly available in this 
country.
    I, too, am concerned about the permafrost. I don't think we 
ought to produce energy in this country without making sure we 
do it with the utmost care for the environment. We have learned 
that ugly lesson in Louisiana. We have learned how when you 
don't pay attention to that you do some pretty bad damage. We 
are paying a lot more attention to it in Louisiana.
    We are doing a much better job in Louisiana. But years and 
years of production of natural gas in Louisiana, we supply 19 
percent of the nation's needs today. Years and years of 
production offshore with pipelines that have cut our marshes up 
and in a State that has welcomed oil and gas development for 
the good of this country, for the good of the economy, has left 
us with a 35,000 to 50,000 acre loss of wetlands every year.
    I lost as much land in my district as the whole State of 
Rhode Island in 1950 and we are losing it every day.
    So, while you worry about some permafrost thinning out, and 
I'm worried about that, too, I am equally concerned about the 
damage we have already done and that is occurring every day in 
my State. It goes unmitigated.
    I can't seem to get Congress to even pay attention or try 
to help save those marshes, the same way we are saving the 
Everglades and we are saving the Chesapeake.
    So, Madam Chairman, yes, we should be looking at what 
happens to our resources in America as we develop needed oil 
and gas resources for our country. We should be developing more 
natural gas resources on Federal and State lands.
    We should not be deterred by reports on what it is going to 
cost to dismantle the operations in Alaska, any more than we 
should be discouraged by what it is going to cost to dismantle 
any business in any one of our districts that we can't estimate 
today, because that is true about every business. Nobody knows 
whether they are creating a Superfund site today. Nobody knows 
what it is going to cost to dismantle a chip manufacturing 
plant in Massachusetts any more than it is going to cost to 
dismantle a field in Louisiana.
    Those things are generally managed on State lands and the 
States generally take care of that. Our State provides for 
dismantling agreements, so does Alaska.
    We ought to be concerned about all those things. But the 
two overriding concerns we ought to have in my opinion is, No. 
1, in a national security sense we need to do everything we can 
through this conference and this Committee--and I want to thank 
this Committee for its major contributions to H.R. 4.
    We need to do everything we can so we become less, not 
more, dependent on people like Saddam Hussein. So, we produce 
resources in this country with a care for our environment, but 
nevertheless with an eye on making sure that America doesn't 
have to keep sending money to people that are spending it to 
train terrorists to attack our people.
    Then second, this Committee needs to be the extraordinary 
steward, as my friend has said, of America's wilderness area, 
our refugees and all the important places that are Federal and 
State lands in this country and that indeed are going to be a 
treasure that we yield to the future generations. We have to 
keep those in balance. But you can't do one without the other.
    We can't subject this country to any more insecurity by 
constantly refusing to do what we can do in this country to 
supply ourselves with fuels we need in a reliable and sensible 
way that respects the environment and the environmental 
conditions of our State lands and Federal lands.
    I think we can do that. That is the challenge of this 
Committee and the conference. I am glad we are taking it 
up.Thank you, Madam Chair.
    Mrs. Cubin. Thank you, Mr. Tauzin.
    Now I ask unanimous consent to submit for the record 
questions that Senator Murkowski sent to GAO and their 
responses regarding how they came to their conclusions, what 
they did and what they did not do in their study.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T0724.030
    
    [GRAPHIC] [TIFF OMITTED] T0724.031
    
    [GRAPHIC] [TIFF OMITTED] T0724.032
    
    Mrs. Cubin. Now I am happy to recognize our first panel, 
the Honorable Rebecca Watson who is the Assistant Secretary of 
Land and Minerals Management with the United States Department 
of Interior. Welcome. We are anxious to hear your testimony.

STATEMENT OF THE HONORABLE REBECCA WATSON, ASSISTANT SECRETARY, 
 LAND AND MINERALS MANAGEMENT, U.S. DEPARTMENT OF THE INTERIOR

    Ms. Watson. Thank you. Today I would like to focus on what 
all of you have talked about in your opening remarks, and that 
is the role that Federal Lands and Resources can play, 
particularly in meeting the supply and demand balance that we 
face with natural gas.
    I want to talk about short-term solutions and long-term 
solutions for meeting our nation's energy needs. I think we do 
face an energy challenge to day. Energy use, as you have 
articulated, sustains our economy and our quality of life.
    But there is a fundamental imbalance between the energy 
that we use in this country and the energy we produce.
    President Bush's National Energy Plan laid out a 
comprehensive long-term approach to meeting our nation's energy 
needs. Before I turn to natural gas, I would just like to 
highlight the provisions in that report concerning conservation 
and renewable energy fuels and a couple of initiatives we have 
at the Department of Interior.
    I think as to conservation we can look back to 1973 and how 
our industrial base reacted to the crisis at that time. That 
was with increased efficiency. Our economy grew by three times. 
Our population grew, yet we continued to consume the same 
amount of energy that we did in 1973. That is energy saved and 
money saved over the long term.
    As far as renewable energy, right now renewable energy 
supplies about 7 percent of our nation's energy consumption. It 
is predicted by 2020 that the use of renewable energy will rise 
to about 9 quadrillion btu's but it will still account for 
about 7 percent of consumption.
    So, it appears for the foreseeable future, the next 20 
years, that renewable energy will be an important part of 
diversifying our energy portfolio, but it will be an 
incremental source of supply supplementing fossil fuels.
    Over the last year, Secretary Norton convened two 
conferences on renewable resources. An Interior report 
discussing initiatives and how we can improve the use of 
renewable energies at the department is expected before the 
fall.
    At MMS we are looking at how to encourage alternate energy 
uses on Federal offshore lands, including offshore wave, wind 
and solar projects. On June 20th, this year, we presented a 
piece of legislation that would help facilitate the permitting 
of these types of projects.
    As you have mentioned earlier, the Department of Interior 
manages significant resources, over 500 million surface acres 
of land. The BLM manages 262 million of those acres and more 
than 700 million acres of sub-surface mineral estate.
    MMS manages 1.76 billion acres of offshore mineral estate. 
These Federal lands and resources contributes significant 
energy to the nation. They currently account for 30 percent of 
our domestic energy production. So you can see that Federal 
lands, Federal resources, are critical to our nation's supply 
of energy.
    Natural gas is the cornerstone of President Bush's National 
Energy Policy for two very important reasons. We have 
significant resources of natural gas domestically and it is an 
efficient and clean-burning fossil fuel.
    With regard to supply, total proven reserves of natural gas 
in 2000 exceeded 177 Tcf. Experts estimate that there are 617 
Tcf of undiscovered natural gas resources in our country.
    On the demand side, as the Chairwoman pointed out, we use 
23 Tcf of natural gas annually. We produce 84 percent of it. 
The remaining 16 percent comes from our neighbors in Canada.
    EIA predicts that in the next 20 years our use of natural 
gas will rise to 34 Tcf. I think it is pretty much common 
knowledge that natural gas is the cleanest burning fossil fuel. 
Because of its clean burning qualities, the increased use of 
natural gas was encouraged by the previous Administration and 
similarly President Bush in his National Energy Plan has also 
highlighted the important role of natural gas in meeting the 
demands of energy and also clean air.
    But these benefits--supply and environmental benefits--
create future challenge because as has been highlighted, many 
people are turning to natural gas for a source of energy. An 
ever-increasing number of our new electrical generating plants 
are switching from coal to natural gas, industrial chemicals, 
pharmaceuticals, all depend on reliable natural gas, as do the 
new high-speed Internet centers.
    Gas is a reliable form of energy that these industries 
need. We predict that that will lead to an increased demand 
over the next 10 to 20 years.
    In my new position, which I have held since the end of 
February, I have been intrigued by these facts and these 
figures. I wanted to know whether or not we have the resources 
to meet this demand in the short term. I have been talking to 
industry leaders as they come into my office.
    I have been meeting with the Department of Energy, 
Assistant Secretary Mike Smith, his colleagues and generally 
just poking around trying to find out the answer, and of 
course, relying upon my staff at the Department of Interior for 
a lot of these questions. It is a complex mix of questions, a 
complex mix of factors on demand and supply.
    On the demand side, the strength of our economy and the 
harshness of weather dictate very strongly on the demand. 
Factors that affect supply include the interrelated price of 
oil and gas, access to reliable sources and the availability of 
infrastructure to transport that product to where it is needed.
    The consensus that I have heard is that over the long term 
we will have to look more and more to imported, liquefied, 
natural gas and piped gas from Canada, Alaska and the Gulf of 
Mexico. But liquefied natural gas terminals, pipelines in 
Alaska and Canada and drilling in the deep water of the Gulf 
are all very capital intensive and they are long-term projects, 
the planning, the permitting, just the simple construction of 
these facilities takes time.
    These factors suggest that in the short term domestic 
production and transportation of natural gas may not meet the 
rapid increases in demand as our economy continues to improve 
and we may or may not experience a cold winter in the years to 
come.
    Given the importance of natural gas to Americans which the 
Chairwoman has outlined in her opening statement, the President 
does not think we should rely on luck alone to meet our natural 
gas needs.
    This is why the National Energy Plan encourages the 
environmentally responsible development of domestic natural gas 
to meet this demand.
    Two areas that we are looking at are the shallow waters of 
the Gulf of Mexico and gas reserves in the Rocky Mountain 
States. The Minerals Management Service is taking steps to 
develop economic incentives to spur activity in the shallow 
waters of the Gulf. This is deep drilling, down to 15,000 feet, 
but in shallow water. This deep gas play is expected to hold 
between five and 20 Tcf of gas and can be brought on quickly 
because there is existing infrastructure there. A final rule 
supporting this was issued on July second.
    Coal bed methane, a natural gas, accounts for about 9 
percent of the total natural gas reserve in the United States. 
The Rocky Mountain States of New Mexico, Utah, Colorado, 
Wyoming and Montana hold an estimated 30 to 48 Tcf of 
undiscovered natural gas resources associated with coal.
    This represents the second largest gas resource in the 
United States, just behind the Gulf of Mexico. The majority of 
coal bed methane is owned by the Federal Government. Over the 
short term coal bed methane, because of the nature of how it is 
produced, can be developed more economically and more quickly 
than any other deep reservoir onshore gas or any of the deep 
water offshore gas.
    Coal bed methane from public lands developed in an 
environmentally responsible manner can and should play a role 
in meeting our country's natural gas demands. The Secretary and 
I support the multiple use of public lands. We think multiple 
uses of public lands, the traditional uses, the new growing 
recreational use of our public lands; can coexist with the 
development of natural gas if they are properly managed. We are 
committed to seeing that they are properly managed.
    As I mentioned earlier, 30 percent of our domestic energy 
production comes from Federal lands. Without the contribution 
of Federal resources, the country's energy supply would lack 
needed diversity and would be almost entirely from other 
countries. This doesn't seem to be a prudent choice to make 
when we have the domestic resources in our country and these 
resources can be produced here in a more environmentally 
responsible manner than in many areas of the world.
    I would be remiss if I didn't point out that it has 
particular benefits for the public land States which are 
between 30 and 80 percent managed by the Federal Government. 
The development of these Federal resources can help diversify 
western rural economies. They can create jobs, provide new 
wealth and enhance the State's tax revenue.
    Certainly, like all natural gas resource development, coal 
bed methane and offshore oil and gas present environmental and 
social challenges that must be addressed. But I am confident 
that technology, best practices and creative thinking can 
successfully address those challenges.
    Over the long term, I will just briefly address a couple of 
things we have, looking at that time period between five and 10 
years. As was noted earlier, MMS estimates approximately 58 
percent of our country's undiscovered natural gas resources lay 
under the outer continental shelf.
    Again, we are looking at royalty relief to encourage that 
production.
    The second thing that MMS is supporting, and this is over 
the much longer term, 15 to 20 years, is the technology to 
produce natural gas hydrates from offshore. They possess many 
hundreds or more volume of natural gas in these natural gas 
hydrates. We are looking at the technology and regulations 
necessary to produce this new form of natural gas.
    Onshore we have several initiatives that I know the 
Committee is aware of, the EPCA study, which we expect to 
issue, as required, in November identifying where the Federal 
resources are and the extent and nature of any impediments to 
accessing them.
    Once we get that information, we will incorporate it into 
BLM's land use planning efforts. These land use planning 
efforts, of course, involve extensive public participation.
    I will just conclude with a couple of thoughts. The other 
long-term initiative we are working on are rights of way for 
transmission lines. I know that is a problem that Wyoming has 
recently focused on, the importance of that.
    I just want to conclude that we are going to develop these 
resources on Federal lands. We think it is important, but we 
are not going to forget the Secretary's command to us to do so 
under her guidance of four C's, cooperation, collaboration, 
communication, all in the service of conservation. We take that 
seriously. We want to work with our partners here in Congress 
and the State and Federal agencies, tribal governments and all 
interested members of the public.
    I thank you for the opportunity to testify today. I look 
forward to your questions.
    Mrs. Cubin. Thank you very much. Your presence here and 
your testimony are greatly appreciated.
    [The prepared statement of Ms. Watson follows:]

Statement of Rebecca W. Watson, Assistant Secretary for Land & Minerals 
              Management, U.S. Department of the Interior

    Madam Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear here today to discuss natural gas supply and 
demand issues. Today, I would like to outline the critical role the 
Federal lands and resources play in meeting our Nation's needs for 
natural gas, briefly discuss the supply and demand for natural gas, and 
identify short-term and long-term solutions for meeting our Nation's 
energy needs. I am accompanied by Bob Anderson, the Bureau of Land 
Management's (BLM's) Deputy Assistant Director of Minerals, Realty and 
Resource Protection; and Michael Hunt, the Minerals Management 
Service's (MMS'') Resource Evaluation Division Chief.

Our Energy Future
    America faces an energy challenge. Energy use sustains our economy 
and our quality of life, but a fundamental imbalance exists between our 
energy consumption and domestic energy production. We must look at ways 
to narrow the gap to an acceptable level between the amount of energy 
we use and the amount we produce. There is no one single solution. 
Achieving the goal of secure, affordable and environmentally sound 
energy will require diligent, concerted efforts on many fronts on both 
the supply and demand sides of the energy equation.
    President Bush's National Energy Policy report laid out a 
comprehensive, long-term energy strategy for securing America's energy 
future. While most of the media coverage focuses on the production of 
traditional energy sources, energy conservation and efficiency and the 
expanded innovation, production and consumption of energy from 
alternative and renewable sources are also critical components of the 
President's balanced and comprehensive policy.
    Good stewardship of the resources dictates that we use energy 
judiciously and conserve resources whenever possible for the benefit of 
future generations. Thus, fossil fuel development is only a part of the 
solution to our Nation's energy issues. Americans have already made 
great strides in using energy more efficiently. Since 1973, the United 
States economy has grown nearly three times faster than energy use. Had 
we continued to use energy as intensely as in the 1970's, the United 
States would have consumed about 177 quadrillion BTUs of energy last 
year, compared to actual consumption of approximately 99 quadrillion 
BTUs. To put that in perspective, the 78 quadrillion BTUs saved is more 
than the total amount of energy produced in the United States from all 
sources--oil, gas, coal, nuclear, renewable--in the year 2000.
    Alternative and renewable sources of energy can also play an 
important role in helping meet our increased energy needs. To this end, 
the National Energy Policy encourages a clean and diverse portfolio of 
domestic energy supplies. The Policy includes measures to aid in the 
development and expansion of renewable energy technologies in wide-
spread use today, including geothermal, wind, solar, and biomass, as 
well as continued research into alternative energy technologies that 
are still over the horizon such as hydrogen. Such diversity helps to 
ensure that future generations of Americans will have access to the 
energy they need.
    Between 1975 and 2000, total renewable energy production in the 
United States increased from about 4.8 to 6.8 quadrillion BTUs, 
supplying about seven percent of the nation's energy consumption in 
2000. By 2020, renewable energy production is forecast to rise to about 
9.0 quadrillion BTUs, but still will account for only about seven 
percent of consumption.
    Thus, for the present and as far as the future can be reasonably 
forecast, renewable energy is likely to remain an incremental source of 
supply supplementing fossil fuels as our primary source of energy. 
Renewable and alternative energy sources are currently considered a 
``step'' energy technology, but they can be an important component to a 
diversified domestic energy portfolio. At the Department of the 
Interior, Secretary Norton has convened two conferences focused on 
renewable resources.
    In an effort to help encourage innovative, alternative and 
renewable energy uses on Federal offshore lands, on June 20, 2002, the 
Administration officially transmitted to Congress proposed legislation 
to help facilitate the permitting of these type of projects. The 
legislation is in direct support of the President's National Energy 
Policy initiative to simplify permitting for energy production in an 
environmentally sound manner. It would allow the Secretary of the 
Interior to grant an easement or right-of-way for a range of OCS energy 
related projects--including renewable energy projects such as offshore 
wave, wind, or solar energy projects--and would provide a transparent 
and uniform permitting process. In turn, this regulatory certainty 
should help expedite such projects and their associated benefits. We 
hope that Congress will enact this legislation prior to the end of its 
current legislative session.

Energy Production from Federal Resources
    As the Assistant Secretary for Land and Minerals Management at the 
Department of the Interior, I have the administrative and managerial 
responsibility for the Bureau of Land Management (BLM), Minerals 
Management Service (MMS), and the Office of Surface Mining Reclamation 
and Enforcement (OSM). All of these bureaus are undertaking significant 
initiatives to comply with the President's National Energy Policy, and 
are working diligently to promote the environmentally sound production 
of our Nation's energy resources. The BLM and MMS have authorities to 
offer lands under their jurisdiction to produce mineral and energy 
(renewable and non-renewable) resources in an environmentally-
sustainable manner.
    The Department of the Interior manages more than 500 million 
surface acres of land, with the BLM managing 262 millions surface acres 
and more than 700 million subsurface acres of Federal mineral estate. 
MMS manages approximately 1.76 billion acres of offshore Federal 
mineral estate. These lands and resources currently account for 30% of 
total domestic energy production--including 48% of geothermal 
production, 35% of natural gas production (24% offshore and 11% 
onshore), 35% of coal production, 30% of oil production (25% offshore 
and 5% onshore), 20% of wind power, and 17% of hydropower production.
Importance of Natural Gas / Supply-Demand Equation
    Natural gas is an important cornerstone of President Bush's 
National Energy Policy for two very important reasons. First, we have 
significant resources of natural gas in the United States. Second, 
natural gas is an efficient and clean-burning fossil fuel.
    Regarding supply, our country's total proven reserves of natural 
gas in 2000 exceeded 177 Tcf. In addition, experts estimate that there 
are 617 Tcf of undiscovered natural gas resources. However, according 
to the 1999 report of the Department of Energy's Advisory Committee and 
the National Petroleum Council, 29 Tcf of the Rocky Mountain states'' 
natural gas and approximately 76 Tcf of the Outer Continental Shelf 
natural gas are unaccessible for development.
    On the demand side, meanwhile, the United States currently uses 
about 23 Tcf of natural gas annually. The U.S. produces approximately 
19 Tcf (84%) of its annual natural gas demand and imports the remaining 
4 Tcf (16%) from Canada. The U.S. Energy Information Administration 
(EIA) in its Energy Outlook 2002 reference case projects that the 
demand for natural gas will rise to just under 34 Tcf by 2020.
    Looking at environmental benefits, natural gas produces fewer 
emissions than other fossil fuels. It is simply the cleanest-burning 
fossil fuel. Natural gas development has significant bipartisan support 
due to these benefits.
    But these two factors--supply and environmental benefits of using 
natural gas--create future challenges, because they encourage 
increasing demand. We see a nationwide trend towards the use of natural 
gas. Heating and electricity generation have traditionally been the 
predominant uses of natural gas. Because of Clean Air Act standards and 
the availability of clean-burning natural gas, an increasing number of 
our electric generating plants are switching to natural gas for power 
generation. In fact, an overwhelming majority of new electric 
generation projects will be fueled by natural gas. This will lead to a 
dramatic increase in demand for natural gas in the next 10 to 20 years.
    In recent years, we have learned through hard experience how high 
natural gas prices negatively affect households, farmers, businesses 
and our economy as a whole. For example, the sharp natural gas price 
increases during the winter of 2000-2001 brought higher utility bills 
to many consumers. Low income families were especially hard hit. More 
than 5 million consumers applied for federal and state assistance--an 
increase of 1 million over the previous winter.
    Farmers also felt the impact of higher gas prices that winter. 
Farmers paid twice the 1999 price of fertilizer because of higher 
prices for natural gas, which is a major component in fertilizer 
production. Many farms, which are already operating on the economic 
edge, simply cannot survive these higher costs.
    Whether we will have reliable supplies of natural gas to meet this 
growing demand is a question I have been asking industry, petroleum 
economists, and experts at the Department of the Interior and the 
Department of Energy. On the demand side, the factors that impact it 
are the strength of the economy and the extremes of the weather. 
Factors that affect supply include the price of oil and gas, access to 
reliable sources, and availability of infrastructure. The consensus is 
that in order to meet long-term demand we will have to look to imports 
of liquified natural gas and piped gas from Canada, Alaska, and the 
Gulf of Mexico. But liquified natural gas terminals, pipelines in 
Alaska and Canada, and drilling in the Gulf are capital intensive and 
take time. These factors in the short term suggest that domestic 
production and transportation will not meet rapid increases in demand. 
At a recent meeting on oil and gas production in the United States, one 
expert noted that as a result of declining reserves in the Gulf of 
Mexico and a slow-down in drilling in 2001, the line between the 
Nation's gas surplus and gas shortage is increasingly narrow.

Short Term Solutions/Role of Coalbed Methane
    Given the importance of natural gas to all Americans--to provide 
electricity, to heat our homes, and to support our industrial needs--as 
stated by the President, we should not rely on good fortune to avoid a 
natural gas shortage. That is why his National Energy Policy encourages 
the environmentally-responsible development of natural gas to meet the 
near term natural gas demand. Without readily available gas, our 
electricity-reliant economy could suffer. Two areas currently being 
considered are the shallow waters of the Gulf of Mexico and the Rocky 
Mountain States.
    The shallow waters of the Gulf of Mexico hold the greatest promise 
for new resources of natural gas to meet the nation's near term gas 
needs. MMS is taking steps to develop economic incentives to spur 
industry activity in this area of the Gulf. MMS is issuing royalty 
relief for production from new wells drilled to deep horizons (greater 
than 15,000 feet total depth). This deep gas play, expected to hold 
between 5 and 20 Tcf of gas, can be developed quickly due to existing 
infrastructure in the shallow waters of the Gulf. MMS also issued a 
final rule on July 2, that allows companies to apply or lease 
suspensions for exploration of subsalt resources.
    Coalbed methane, a natural gas, accounts for about 9% of the total 
natural gas reserves in the United States. The Rocky Mountain States of 
New Mexico, Utah, Colorado, Wyoming, and Montana hold an estimated 30 
to 48 Tcf of undiscovered natural gas resources associated with coal. 
This represents the second largest gas resource in the United States 
behind the Gulf of Mexico. The EIA refers to this area as a possible 
``Persian Gulf for natural gas.'' While many areas of the United States 
are experiencing declining natural gas reserves, the Rocky Mountain 
resources are largely untapped and the amount of newly discovered gas 
in the area is increasing on a daily basis. The majority of the coalbed 
methane is in the Federal mineral estate. As good stewards of these 
domestic natural gas reserves, we should develop these resources in an 
environmentally-responsible manner to sustain our nation's quality of 
life in the face of our increasing demand for natural gas.
    Over the short-term, coalbed methane can be developed more 
economically and more quickly than other deep reservoir onshore gas or 
deepwater offshore gas. Coalbed methane from public lands can and 
should play a role in meeting our increasing demand. The Secretary and 
I support multiple use of the public lands. These public uses can co-
exist on public lands, if properly managed. We do not believe the 
public lands and resources should be put off limits to development. 
Today over 50% of our petroleum products are imported. Thirty percent 
of our total domestic energy production comes from Federal lands and 
resources. Without the contribution of public resources, the country's 
energy supply would be almost entirely from other countries. That does 
not seem prudent when we have the domestic resources to meet our needs 
and those resources can be developed in a much more environmentally 
responsible manner than in other areas of the world. And, of 
significance for the public lands states that are anywhere from 30% to 
80% Federally-managed, the development of coalbed methane can help 
western rural economies by creating jobs, new wealth, and tax revenue.
    But like all natural resource development, coalbed methane presents 
environmental and social challenges that must be addressed. 
Environmental concerns and issues associated with the production of 
coalbed methane vary significantly from basin to basin depending on 
water quality, gas reserves, and topography. The BLM is working with 
State, Federal and tribal governments, surface owners, environmental 
groups, and industry to address these issues, including what to do with 
the produced waters and how to reduce the impacts of gas production and 
transportation on surface owners. I am confident that technology, best 
practices, and creative thinking can address these challenges.

Long Term Solutions--Offshore
    To meet our natural gas demand in the medium and long term (5 to 10 
years and beyond) without increasing imports, we need to maintain or 
increase domestic natural gas production--both onshore and offshore. 
MMS 2000 Resource Assessments estimates approximately 58% of our 
country's undiscovered natural gas resources lie under the OCS. The 
production from this area currently contributes a quarter of our 
nation's gas supply. Over 362 Tcf of undiscovered natural gas resources 
remain to be explored and developed in the OCS. We estimate over 23 Tcf 
of discovered reserves remain to be produced.
    As I mentioned before, development of the deep water Gulf of 
Mexico, which holds the prospect of supplying the majority of the 
future offshore natural gas production, is capital intensive, and 
because of the long lead times required, new deep water reserves won't 
be available to the U.S. market for possibly another decade. MMS 
continues to provide royalty relief, on a targeted basis, for new deep 
water leasing. The continued use of royalty relief in the deep waters 
of the Gulf provides the needed economic incentive to keep industry 
moving forward on new technologies and exploring deeper water 
frontiers.
    Additionally, in the 15- to 20-year range, the technology to 
produce clean burning natural gas hydrates from offshore, which are 
present in volumes hundreds of times larger than conventional gas 
resources, may be perfected and may contribute to meet our energy 
needs.

Long Term Solutions--Onshore
    As the Subcommittee knows well, we will not be able to solve the 
imbalance between the supply of and demand for natural gas without the 
ability to access that resource. To address this access issue, the 
National Energy Policy emphasizes the importance of the ongoing 
interagency Energy Policy and Conservation Act (EPCA) study which will 
identify where the onshore resources are and the extent and nature of 
any planning impediments to accessing them. The initial report will be 
completed in November as required by the Act. All information gathered 
as a result of the EPCA effort will be integrated into the BLM's 
ongoing land use planning efforts which is a cornerstone for future 
energy production from public lands. The BLM has also prioritized a 
number of land-use planning efforts that have major oil and gas 
components.
    Once natural gas has been discovered and produced, it must be 
transported via a pipeline to the end user. The National Energy Policy 
also identifies the necessity for a comprehensive, long-term solution 
to deliver natural gas and other energy resources to industry and 
consumers in a reliable and safe manner. Federal lands are important to 
the rights-of-way needs of the energy industry and utilities, 
especially in the western United States. BLM estimates that 90% of the 
oil and gas pipelines and electric transmission line rights-of-way 
cross western Federal lands. The BLM alone administers approximately 
85,000 rights-of-way, including approximately 23,000 oil and gas 
pipeline rights-of-way.
    Our challenge is to improve and expand the existing network of 
pipelines and transmission lines to meet the increased demand for 
energy. One way to meet that challenge is to identify and designate 
right-of-way utility corridors on public lands in collaboration with 
the Western Governor's Association and the Western Utility Group, an 
industry coalition. The designation of utility corridors through BLM 
land use plans provides an important tool in the planning and location 
of future pipelines and assists in the processing of rights-of-way 
applications on the public lands.

Conclusion
    Madam Chairman, as you know, the natural gas resources of the 
Federal lands, both onshore and the OCS, provide us with an immense 
opportunity to maintain a quality of life of all Americans. As the 
Department of the Interior continues to promote the environmentally-
sound recovery of the Nation's natural gas resources, we will continue 
to operate under Secretary Norton's leadership and vision for managing 
the public resources--through communication, cooperation, and 
consultation in the service of conservation. The essence of this goal 
is to continue to forge new and stronger partnerships with other 
Federal and state agencies, Tribal governments, and all of our 
stakeholders--including Congress--to create greater opportunities for 
the responsible development of this important energy resource.
    Thank you for the opportunity to testify before you today. This 
hearing offers a unique and timely opportunity to educate all Americans 
about natural gas--an energy source that plays a vital role to our 
current and future well being. I welcome any questions the Subcommittee 
may have.
                                 ______
                                 
    [An attachment to Ms. Watson's statement follows:]

                DOI Natural Gas Development Initiatives

    Both the Bureau of Land Management (BLM) and the Minerals 
Management Service (MMS) are undertaking initiatives to comply with the 
President's National Energy Policy and to increase our Nation's natural 
gas production. A brief overview our important work related to the 
responsible development of our Nation's natural gas resources follows:
 onshore natural gas development-bureau of land management initiatives
    The BLM administers the minerals underlying on-shore Federal 
lands--a total of about 700 million acres of mineral estate throughout 
the Nation. As mentioned, these lands account for about 11 percent of 
natural gas production nationwide. Major components of the BLM's 
Federal onshore oil and gas program include: 1) land-use planning; 2) 
leasing; 3) post-lease authorizations, such as drilling permits; and 4) 
inspection and enforcement (I&E) activities. The BLM has a significant 
role in meeting the President's National Energy Policy goal to provide 
for the environmentally-sound development of natural gas on Federal 
lands. Some of these initiatives are outlined below.

Land-Use Planning
    The BLM is currently undertaking a major effort to update the land 
use plans which are the basis for all of its actions. Of BLM's twenty-
one high-priority plans scheduled for completion by 2004, ten have 
major oil and gas energy components. These will authorize the continued 
development of oil and gas resources in Alaska, Colorado, Montana, New 
Mexico, Utah and Wyoming. In particular, the Bureau's planning efforts 
related to natural gas development in the Powder River Basin of Wyoming 
and Montana continue to progress with the goal of providing for the 
responsible development of the Nation's significant natural gas 
resources in this region.

Access / ``EPCA'' Inventory
    As the Subcommittee knows well, we will not be able to solve the 
imbalance between the supply of and demand for natural gas without the 
ability to access our natural gas resources. To address the access 
issue, the President's National Energy Policy emphasizes the importance 
of the ongoing inter-agency Energy Policy and Conservation Act (EPCA) 
study. Under the Congressionally-mandated EPCA study, the BLM is 
working closely with U.S. Geological Survey, the U.S. Forest Service, 
the Department of Energy (DOE) and DOE's Energy Information 
Administration to produce a scientific inventory of both oil and 
natural gas resources and reserves. The inventory also identifies the 
extent and nature of any restrictions or impediments to the development 
of these resources. Five areas within the Rocky Mountain Region were 
identified as priority areas for study: the Powder River, Green River, 
Uinta/Piceance and San Juan/Paradox Basins and the Montana Thrust Belt. 
This inventory is underway and completion of the five priority natural 
gas producing basins is on schedule to meet Congress'' November 2002 
statutory deadline.
    As we complete the initial EPCA inventory, the BLM plans to analyze 
the data and look for opportunities to improve the Bureau's management 
of the oil and natural gas resources on Federal lands specifically to 
address the access issue. All information gathered as a result of the 
EPCA effort will be integrated into the BLM's ongoing land use planning 
efforts. By integrating the information into the BLM's planning 
process, extensive opportunities will be available for the public to 
provide comments and recommendations on the specific application of the 
information. Any changes made as a result of the EPCA project will be 
made in full compliance with all Federal statutes--those addressing 
environmental processes (National Environmental Policy Act) and 
substantive environmental protections.

Permitting / Timeliness
    Another important component of access is the certainty of being 
able to produce the natural gas to meet rising demands in an 
economically timely manner. Industry must have confidence that it can 
develop the natural gas to receive a fair and a viable rate of return 
for its investment. The BLM recognizes the importance of minimizing 
delays in its permitting role. The Bureau is working on various actions 
to expedite internal administrative processes, such as the processing 
of Applications for Permits to Drill.
    This is one of the Bureau's important tasks in implementing the 
President's National Energy Policy. In March of this year, the Bureau 
conducted an outreach meeting in Denver to open communications between 
the agency and the public regarding the processing of drilling permits. 
The BLM continues to cooperate and consult with all interested parties, 
including the oil and gas industry and environmental interests, 
regarding its efforts to more efficiently process drilling permits. The 
Bureau is also looking at revising guidance to its field offices and 
the oil and gas industry as a part of this effort. This serves to 
advance the conservation of both the mineral resources and other 
important public land values. In other efforts, the BLM is aggressively 
pursuing the use of electronic commerce in its oil and gas program. 
This would allow industry to file electronic applications and forms. By 
utilizing new technologies, both the Federal Government and the BLM's 
stakeholders can benefit from increased efficiency.

Transportation & Infrastructure
    Once natural gas has been discovered and is ready for production, a 
means of transportation, primarily by pipeline, is then required. The 
President's National Energy Policy identifies the necessity for a 
comprehensive, long-term solution to deliver natural gas and other 
energy resources to industry and consumers in a reliable and safe 
manner. Public lands are important to the rights-of-way needs of the 
energy industry and utilities, especially in the western U.S. It is 
estimated that 90 percent of the oil and gas pipeline rights-of-way in 
the western U.S. are dependent to some extent on right-of-way 
authorizations on public lands. The BLM alone administers some 85,000 
rights-of-way, including approximately 23,000 oil and gas pipeline 
rights-of-way. The BLM processes more than 600 pipeline right-of-way 
authorizations annually, and the number of applications has increased 
by more than 10 percent each year during the last couple of years. The 
demand for additional energy infrastructure is expected to increase 
this workload by as much as 15-20 percent per year over the next 5 
years.
    Our challenge is to improve and expand the existing infrastructure 
of pipelines and transmission lines to meet the increased demand for 
energy infrastructure, including oil and natural gas pipelines. The BLM 
is responding to these challenges through several initiatives and 
efforts. As part of its efforts to implement the President's National 
Energy Policy and recognizing the existing backlog of right-of-way 
applications and the anticipated increase in the number of future 
applications, the BLM has prioritized the processing of energy related 
rights-of-way. The BLM has assigned additional Project Managers to 
selected major energy related right-of-way projects, especially 
interstate projects, to assist in their expeditious processing. The BLM 
is also working closely with the Federal Energy Regulatory Commission 
(FERC) in developing cooperative procedures for the improved 
streamlining of natural gas pipeline projects. Finally, the BLM has 
also taken the initiative to identify and designate right-of-way 
utility corridors on the public lands in collaboration with the Western 
Utility Group, an industry coalition, and the Western Governors'' 
Association. The designation of utility corridors through BLM land use 
plans provides an important tool in the planning and location of future 
pipelines and assists in the streamlined processing of future right-of-
way applications on the public lands. In order to pursue these efforts, 
additional resources are being dedicated to the processing of these 
right-of-way applications, and an increase of $1.6 million is included 
in the President's fiscal year 2003 Budget request for energy rights-
of-way.

      OFFSHORE NATURAL GAS DEVELOPMENT-MINERALS MANAGEMENT SERVICE

    Since the publication of the 1999 National Petroleum Council study 
indicating the impending natural gas supply shortfall in the first 
quarter of the 21st Century, MMS has taken the initiative to implement 
a number of incentives to augment natural gas production from the Gulf 
of Mexico OCS. Some of these initiative include:

Shallow Water Deep Gas Initiative
    Production in the shallow water areas of the Gulf of Mexico has 
been steadily declining--some 13 percent from 1997 through 1999. 
Increasing gas production from OCS deep water areas is keeping that 
production in balance. However, deeply buried sediments underlying the 
shallower waters of the continental shelf remain virtually unexplored. 
Of more than 35,000 wells drilled in the Gulf of Mexico, only about 5 
percent were drilled deeper than 15,000 feet total well depth. MMS 
estimates that there could be 5 to 20 Tcf--with a most likely value of 
10.5 Tcf--of recoverable natural gas present in the deep portion of the 
OCS. Realizing the emerging natural gas potential of this area of the 
OCS, as well as higher exploration/development costs and a higher 
geologic risk, in March, 2001, MMS instituted a royalty relief 
incentive on the first 20 billion cubic feet of production from natural 
gas wells drilled at greater than 15,000 feet total well depth for the 
Central and Western Gulf of Mexico planning area. This relief applies 
to new leases acquired since Sale 178 held in early 2001. Since that 
time, MMS had been developing a program to apply a similar type of 
economic incentive to existing older leases that are drilled to deep 
depths. Proposed regulations have been drafted and are currently 
undergoing Departmental review.

Suspensions of Operations for Exploration Under Salt Sheets
    In general, exploring and developing areas under salt sheets is 
more difficult in many instances than other types of development on the 
OCS. There are instances where oil and gas companies begin to conduct 
timely analysis of geophysical data early in their primary lease term; 
however, data may be inconclusive because of problems caused by 
existence of salt sheets. Realizing this fact, MMS issued a final 
rulemaking on July 2, 2002, that would modify existing requirements for 
suspensions of operations for oil and gas leases that have salt sheets 
associated with them. Specifically, the rule allows companies to apply 
for a suspension of operations prior to drilling a well on a lease in 
order to have time to perform and complete the necessary geophysical 
analysis.

OCS Deep Water Royalty Relief
    The Deep Water Royalty Relief Act of 1995 provided a substantial 
fiscal stimulus to new leases issued between 1996 and 2000 and located 
in water depths of 200 meters or greater in the Central and Western 
Gulf of Mexico. As a result, the number of deep water leases increased 
dramatically by 2000. At this time, the mandatory royalty relief 
provisions of the Act related to new leases has expired. However, in 
order to maintain the momentum and positive benefits associated with 
that program, MMS instituted a follow-up policy in 2001, which has 
continued the strong trend of leasing and production in deep water.
    The discretionary deep water royalty relief program instituted by 
MMS in 2001 has been modified slightly for 2002. As currently 
formulated, new tracts offered in the Central and Western planning 
areas of the Gulf of Mexico are eligible to receive royalty suspensions 
on a specific amount of initially-generated production--5 million 
barrels of oil equivalent (BOE) in water depths of 400-800 meters; 9 
million BOE in water depths of 800-1600 meters; and 12 million BOE in 
water depths of greater than 1,600 meters. These volumes are not 
affected by the status or level of production generated on the field to 
which a lease is assigned, which was the case under the Deep Water 
Royalty Relief Act (1996-2000 period). Currently, under MMS 
regulations, eligibility for relief depends on the prices of 
production, with ceiling prices being equivalent to those which applied 
under the Act, plus adjustments for inflation.
                                 ______
                                 
    Mrs. Cubin. I want to start by asking about coal bed 
methane because, as you know in the Powder River Basin of 
Wyoming there is a large coal bed methane play. There is an 
environmental impact statement that is in the process of being 
completed right now.
    Now too long ago I flew over the methane fields in Campbell 
County and then took a tour on the ground and looked at some of 
the problems that there have been and how they are being dealt 
with, talked to people who are royalty owners and people who 
have production on their land who are not royalty owners. That 
is another thing that we need to look at.
    But what impressed me the most was that the people who are 
producing the coal bed methane told me if that environmental 
impact statement isn't completed soon that it will literally 
stop new drilling. And as you stated in your testimony, that is 
the easiest, least environmentally disturbing mineral that we 
have.
    So, could you give me an idea when that will be completed, 
that environmental impact statement will be completed? Will it 
be done by the end of the year? It is very important that we 
get that completed.
    Ms. Watson. I apologize for having to answer the first 
question you posed to me in this manner, but I represented one 
company, Fidelity, and they are involved in the Montana EIS and 
the Wyoming EIS. So, I am recused from discussion of either one 
of those EIS's. I am not recused from the entire topic of coal 
bed methane, but only from those two particular matters. So, we 
can get back to you with an answer to that question.
    I am aware that you sent a letter posing that question. 
Others in my office, Tom Fulton and Patricia Morrison, are 
handling those issues for me.
    Mrs. Cubin. Thank you. I don't think we have had a response 
to the letter. I would really be grateful if we could at least 
get a response to that real soon.
    Ms. Watson. I will see that it happens.
    Mrs. Cubin. Thank you.
    I wonder also, does the department have any plan or are 
they taking into consideration the image that oil and gas 
companies in exploration on public lands, and you know, the 
environmental questions that arise, is the department 
addressing any of those issues? Are you thinking about how to 
build more public support for needed policy initiatives?
    Ms. Watson. I think that is a concern that we share, the 
image of natural gas and production, the disconnect between our 
modern life style which is increasingly dependent on 
electricity and natural gas that runs that electricity and the 
lack of acceptability for any kind of resource or natural gas 
production.
    We are not, in the Department of Interior, in the role of 
cheerleader for energy. We have multiple responsibilities, 
long-term stewardship of the land as well as using the land for 
natural resource production. We are interested in making sure 
that energy companies are their own best friend.
    Some of the things we have been talking about have been the 
relationship with the surface owners. As you mentioned, some of 
the surface owners do not own the minerals. How are they 
treated as mineral owners come on to their property? Are they 
being treated in a good manner? Are there considerations for 
their long-term economic needs to run their ranch? How are 
those being incorporated? We are encouraging companies to take 
that into account. We have had very positive response from 
companies to those charges. So, we are certainly aware of it 
and we are doing what we can to provide good answers and facts 
to the concerns that people raise.
    Mrs. Cubin. Thank you. I certainly wouldn't think that the 
Department should be in any way a cheerleader for the oil and 
gas industry, but I think in the past the department has 
responded itself to what I would call ``crazy environmental 
opinions'' at times. And some of them are crazy. I mean, you 
know, to think that we can solve the forest problem with solar-
powered chainsaws is a crazy idea.
    But I think in the past the Department has responded in 
that way, has responded toward the environmental side, even at 
times when it wasn't justified. So, I just am sure and hope 
that the Department doesn't continue along that course.
    Ms. Watson. I would just be more specific and say that we 
have developed a coal bed methane fact sheet that our Public 
Affairs Office has. We use that to try and shed some light on 
some of the mythology that surrounds coal bed methane and 
again, made sure that accuracy informs public debate on this.
    Mrs. Cubin. Good. Thank you very much.
    Now, I would like to recognize Mr. Kind.
    Mr. Kind. Thank you, Madam Chair, and thank you, Secretary 
Watson, for your testimony. I appreciate your coming before us 
today. This is very serious. I think the American public 
understands that we are by and large a fossil fuel-dependent 
nation and we will be for some time.
    We are not going to be able to turn from this dependence 
any time in the foreseeable future. Natural gas will have to be 
a part--a significant part, obviously--for a comprehensive and 
sustainable long-term energy plan. I don't think there is any 
question about that.
    But I think the American public will also hope that we will 
be able to produce and deliver these natural resources in an 
environmentally sustainable fashion.
    I appreciate your statements in regards to the role of 
alternative and renewable energy sources, 7 percent now and 
probably 7 percent in the future, based on your current 
calculation.
    In fact, in your written statement you indicate that, and I 
quote, ``Energy conservation and efficiency and the expanded 
innovation, production and consumption of energy from 
alternative and renewable sources are also critical components 
of the President's balanced and comprehensive policy.''
    I agree that has to be a critical component and with all 
due respect to our distinguished conferees serving on the 
Energy Conference, I think the Energy Bill right now that we 
are looking at is a little light when it comes to our interest 
or investment in exploring the true potential of alternative 
and renewable energy sources.
    In fact, just a little while ago during a previous hearing, 
your BLM Director, Kathleen Clark, indicated that right now 
less than 5 percent of the BLM energy budget is spent on non-
oil and gas activities. Again, less than 5 percent of the 
entire Energy Budget over at BLM is actually devoted to 
expanding alternative and renewable energy sources.
    So, an energy bill that, I think, emphasizes the 
exploration and production and delivery of fossil fuels will, 
surprise, surprise, leave our nation extremely dependent 20 or 
30 years from now on fossil fuels. And a bill that does not 
emphasize replacing the investments in developing these 
alternative and renewable sources really aren't going to give 
them the chance or the potential that I think they hold in this 
country.
    Is there energy going on right now in your department at 
BLM to try to devote more resources, more investment in 
developing alternative and renewable energy sources or will 
this below 5 percent budget be the norm for sometime to come?
    Ms. Watson. The area that we are focused on right now which 
should inform the budget is the Secretary's two conferences on 
renewable energy and the report with recommendation that is 
flowing out of it. How that will inform the budget, I can't 
answer you in detail as to whether the 5 percent number will 
increase or not. I haven't looked at that particular issue, but 
I can get back to you on that.
    We are looking at that. I can tell the Committee that 48 
percent of geothermal energy is produced from public lands, so 
just like fossil fuels, public lands play a big role in 
renewable energy as well.
    Mr. Kind. I appreciate that. I think we will just follow up 
and see what is happening at the department with regards to the 
alternative and renewable energy budget in that. In fact, we 
worked hard on the Committee in order to develop a survey on 
geothermal potential in the country as well, with a particular 
emphasis obviously, in the Rockies right with a lot of the 
potential that that holds. So, hopefully, we will be able to 
work closely with you on exploring that.
    I want to ask a few questions with regards to some proposed 
legislation that administration just sent up to us late June. 
The goal is to try to get the Department of Interior involved 
in the permitting process in offshore or Outer Continental 
Shelf alternative and renewable energy programs. I think it is 
a worthwhile goal, one that we need to explore.
    The question I have is that right now under the permitting 
process you have both the Coast Guard and the Corps of 
Engineers that are involved in the permitting process of Outer 
Continental Shelf alternative and renewable energy programs 
such as offshore wave, wind, solar energy projects, things of 
this nature.
    How will bringing in another Federal department or agency 
like the Department of Interior streamline the process or make 
it more efficient than what we currently have in place with the 
Coast Guard and with the Corps of Engineers? Are you familiar? 
It is legislation that you referenced in your written 
testimony.
    Ms. Watson. I will probably have to get some assistance 
here, but my understanding of it is there are two competing 
pieces of legislation; one which would provide the Department 
of Transportation with authority over offshore permitting and 
then our proposed legislation that would put the authority in 
the Minerals Management Service.
    We are offering that legislation. We certainly think some 
regulation needs to be in place. We feel it would be better 
with Minerals Management Service because this is our area of 
expertise. This is the area that we work in, in the offshore 
area. This involves energy, so we think we would be the more 
appropriate agency to regulate that.
    Now, how the relative roles of the other two agencies that 
you mention sort out in that proposal, I don't know.
    Mr. Kind. We would be happy to follow up with you on that 
because we are taking a very close look at the proposed 
legislation right now. We may have some additional questions as 
I explore it in further detail.
    I see my time has expired. Thank you.
    Ms. Watson. Thank you.
    Mrs. Cubin. The Chair now recognizes Mr. Tauzin.
    Mr. Tauzin. Thank you, Madam Chairman.
    Madam Secretary, what is the department's definition of a 
proven reserve? By the way, before I do that, let me remind my 
friend, Mr. Kind, that the House bill we passed, which passed 
in a very bipartisan fashion, 70 percent of it was concerned 
with conservation and renewables.
    The Senate bill is about 90 percent. So, both bills are 
extremely weighted on the side of conservation and renewables. 
If we have a conference agreement that strikes a balance 
between the two and hits it around 80 percent, that is an 
enormous percentage of attention paid to conservation of 
renewables.
    I tell him that only because I support that. I think the 
President supports that. I think we have not paid enough 
attention to the extraordinary contributions of conservation. I 
think Secretary Watson, in her original statement, pointed out 
that the economy grew three times faster than our energy needs, 
which is pretty good stuff.
    So, we are not by any means neglecting that. On the 
contrary, I think we are beginning to pay much more attention 
to the power of conservation, the power of renewables. But we 
are, nevertheless, going to need more natural gas in this 
country, with all the conservation, all the renewable energy we 
can produce in the bill.
    What is the definition of a proven reserve?
    Ms. Watson. With the assistance of my able assistants back 
there, these are reserves that have been both mapped in detail 
and then an economic analysis performed.
    Mr. Tauzin. Ah, you see, you touched the right word. It is 
an economic term. A proven reserve is not physical term so much 
as an economic term. It is a definition that says you found it 
and it is producible under the economics of the day; that is, 
it is producible for a price that can earn you a profit in a 
marketplace today.
    If the price of natural gas were to drop, proven reserves 
drop because production goes out. People stop producing gas 
that is not economically feasible to produce. When the price of 
natural gas goes up, all of a sudden the proven reserve numbers 
go up because economically much more of the gas that has been 
found is available for production or gas that can easily be 
recovered at that price suddenly enters the marketplace because 
people invest in those fields.
    It is an important point because in some many of our 
discussions about what energy we have in this country and what 
is available for our country, we use these proven reserve 
terms, which are very flexible. They are very dependent upon 
what the economy of natural gas is in a given marketplace. They 
change depending upon the price.
    If we are willing to pay three times as much for natural 
gas as we are paying today, all of a sudden we have a lot more 
proven reserves available in America to be produced. That is my 
point. Price drives that determination.
    Secondly, you say the top place to go is the OCS. The 
second top place to go is coal bed methane. I want to ask you 
two questions. When gas is produced in the Federal OCS, what 
share of the royalties goes to the States on shore?
    Ms. Watson. I believe it is 25 percent.
    Mr. Tauzin. It is zero. The answer is zero.
    Ms. Watson. Oh, in offshore.
    Mr. Tauzin. Oh, yes. The answer is zero.
    Ms. Watson. There is a certain area, though, that you get 
25 percent.
    Mr. Tauzin. No. That is only in an area where there is 
drainage occurring. It is an 8(g) area where there is a dispute 
over whether the gas or oil is coming from the Federal line or 
the State line. There is an agreement to share that.
    Outside of that drainage area where the State is actually 
claiming some part of the reserve because it underlies both the 
Federal and the State line, outside of that in the Federal OCS 
the percentage that the State gets is zero.
    That is the biggest place to go. I tell you that because 
when we get through all this fighting about where are we going 
to find some more natural gas, I can tell you where we are more 
likely to go than anywhere else. We are more likely to go off 
Louisiana and Texas and a little bit off of Alabama; not much 
off of Florida because they don't want it over there.
    So, the States I live in are going to be the ones where 
everybody goes to get some more natural gas and our States get 
zero percent of the royalties from that natural gas produced on 
Federal lands off our States. But the impacts are severe on our 
States.
    Now, let's talk about coal bed because I am a big supporter 
of coal bed methane projects, too. By the way, I think the 
Senate bill on energy has a very good position that we are 
going to look favorably on in the conference. A coal bed 
methane gas is produced. How much royalty goes to the States 
there?
    Ms. Watson. Fifty.
    Mr. Tauzin. Fifty percent. You get my picture?
    Ms. Watson. I do. I knew where you were headed.
    Mr. Tauzin. Yes. So, as we begin to think about energy 
policy for our country and its impact on the environment and 
the need to mitigate damage to the environment as we produce 
it, I am just going to try to keep reminding folks, you know, 
that if you just keep coming back to Louisiana and we get zero 
percent of the royalties and all of the impacts, pretty soon, 
somebody in Louisiana is going to say, no, no, don't come back; 
go somewhere else.
    Now, some environmentalists might like that, but our 
country is going to be in much worse shape than it is today. If 
we shut off the 19 percent that Americans are getting today, 
what would it do to the U.S. economy?
    Ms. Watson. It would have a negative impact.
    Mr. Tauzin. Negative? You think the stock market looks bad 
today? The economy would go into recession or depression, 
probably. That is how much people depend on that resource 
offshore in my State. But we get zero royalties for its 
production.
    One final question. I know my time is up. You mentioned 
methane hydrates. Would you send me everything you have on 
methane hydrates? I mean everything you can send me reasonably 
so I can read about it?
    Ms. Watson. Yes.
    Mr. Tauzin. Methane hydrates is methane frozen in ice in 
beds along the coast of our country and from country in the 
world almost, big reserves of it. Eight thousand years ago 
methane hydrates exploded to the surface in the northern 
Atlantic and raised the temperature of the earth 12 degrees in 
a 10-year period of time. That is pretty dramatic stuff, that 
big release of methanes into the atmosphere. People believe 
that methane hydrate releases may be responsible for some of 
the global warming that is going on today because as the earth 
shifts and plates move around methane hydrate releases occur 
and we have dramatic increases.
    I think methane in the atmosphere has about 20 times the 
effect of CO2 on global warming. That is pretty serious stuff. 
Producing it, getting to it and producing it rather than 
letting it escape into the atmosphere and causing all this 
environmental damage, would be pretty smart stuff.
    I would like to know more about what you are doing in terms 
of encouraging research and development in this area, what is 
happening around the world in terms of production. I understand 
there are some other countries experimenting with it. You know, 
it is pretty tricky stuff, to get it out without releasing it. 
But it would be pretty good for our country and the world if we 
could get to it and stop it from being released into the 
atmosphere accidentally.
    So, I would like to know more about it and if you could 
supply me with whatever information you have about it, I would 
appreciate it.
    Ms. Watson. Yes, I would be happy to do so. I am aware that 
the Environmental Protection Agency has the Star Program, which 
is focused internationally and nationally on the capture and 
use of methane, getting it out of the atmosphere and utilizing 
it as a fuel source.
    My understanding is that Japan has been particularly 
aggressive in looking at this.
    Mr. Tauzin. I think Japan is the most aggressive. 
Obviously, learning what they are doing and what we are doing 
would be very important as we think through the future needs. 
Methane is natural gas. It is natural gas stripped of all its 
liquids. It is the basic component that we use in methane or 
natural gas-fired electricity plants and in our homes, to heat 
our homes. So, it is critically important to know more about 
that resource.
    Again, I thank you if you could share whatever you can with 
me.
    Thank you, Madam Chairman.
    Mrs. Cubin. Yes. And I would like to tell the gentleman 
from Louisiana that I absolutely agree with him about the need 
for some portion of the royalties, not royalties, but to go to 
Louisiana. I think it is inexcusable that that wealth is 
created and the benefit to the country is accrued while 
Louisiana is suffering from that.
    I am committed, Mr. Tauzin, to doing everything that I can 
do to help you with that.
    Mr. Tauzin. Thank you, Madam Chairman.
    Mrs. Cubin. The Chair now recognizes the gentleman from 
Colorado, Mr. Tancredo.
    Mr. Tancredo. Thank you, Madam Chairman.
    I just have one question. You know, as I listened to this 
discussion, I am somewhat perplexed to try to determine the 
extent to which we can deal with the problem of NIMBY, that is 
``not in my back yard.'' You know, everybody wants prisons and 
people put in prison if they have done something wrong, but 
nobody wants the prison in their back yard. Everything wants to 
use resources, but nobody wants that development in their back 
yard.
    That extends to States, of course. We have States like 
Florida that frankly, I don't know if we have any numbers, like 
how much it imports, how much it uses, I should say. What is 
the total usage of resources in that state, energy resources, 
as opposed to how much they produce?
    Montana is another example of a State that has become very, 
very difficult to deal with, especially coal bed methane. You 
know, the discharge of water in the Powder River Basin is 
causing enormous problems.
    I just wonder at what point do we have a responsibility 
here to do something either via legislation or maybe you, by 
rule, to try and deal with this phenomena, because if it 
spreads to any great extent, you know, where are we left if 
every State ends up saying, ``Gee, you know, we want the 
energy. We need the energy. We need it for our economy. We just 
won't let you produce it here.''
    Do we have a role? How do we deal with that in terms of 
State's rights, but on the other hand the overall 
responsibility for the development of these resources? I 
wonder, is it the issue of sharing of tax resources? We don't 
want to use the word ``royalties,'' but is that the incentive 
that we need? That would only work with States that have 
coastal areas.
    I am just perplexed about where we go from here and this 
phenomena that I think is going to increase as time goes by.
    Ms. Watson. It is a perplexing question. I lived in Montana 
for 6 years. During that time I saw the end of the mining 
industry which was over 100 years old that started that State.
    I saw the reduction of the timber industry and the oil and 
gas was really dormant at that point until coal bed methane 
began to be discussed. It is something I have thought about a 
lot. I don't think you can legislate or administratively 
require public acceptability.
    I think it is something that all of us in this room as 
political leaders have a role to play in talking to the public 
about. There is a moral dimension that is never discussed and 
that is we enjoy a quality of life in this country that is 
unsurpassed, yet we don't want to put the impacts on ourselves. 
We want to export those impacts to other countries. We want our 
medals, we want our energy, but please don't produce it in our 
own back yard.
    Is that the right way to think? Is that the responsible, 
adult way to think or do we have some role to help produce 
energy for our own needs instead of pushing the impacts of our 
demands elsewhere?
    I think it is a long-term educational effort. It is a 
dialog we all have to have. At the Department of Interior we 
want to listen to people and their concerns. But I think the 
trend that you describe is very real. We are seeing that 
everywhere.
    Liquefied natural gas terminals, I mentioned that those are 
the long-term direction it looks like we are going. People 
object to those. We looked at wind energy off the coast of 
Florida and off the coast of Massachusetts. Again, objections 
to those.
    So, many forms of energy that have impacts, nobody wants 
them in their backyard. They love the electricity. That is all 
I can say, I guess, that we have to talk about the issue and 
try and get the public in a dialog to take a look at the 
cumulative effect of all these NIMBY-like decisions.
    Mr. Tancredo. Does the department actually maintain any 
sort of data base that would actually look at resource usage, 
in this particular case, energy usage by State?
    Ms. Watson. I believe probably the Department of Energy and 
EIA would be the place and also individual States maintain 
those records, I know.
    Mr. Tancredo. Thank you very much, Madam Secretary. Thank 
you, Madam Chairman.
    Mrs. Cubin. I thank you very much for your testimony and 
also the members for their questions.
    Other members of the Subcommittee may have further 
questions that they were not here to be able to ask. So, we 
would ask you if we submit those questions, to respond to them 
in writing.
    Ms. Watson. Thank you.
    Mrs. Cubin. Now I would like to recognize the second panel 
of witnesses, Mr. Glenn Schleede, Member of the Advisory 
Council of Consumer Alert; Mr. Lee Gooch, Chairman of the PCS 
Nitrogen Process Gas Consumers Group; and Mr. Eugene F. Peters, 
Vice President, Government Affairs, for the Electricity Power 
Supply Association.
    I would like to remind you that the Committee rules allow 
for 5 minutes of testimony. If you are not able to complete 
your written testimony in that time, the entire written 
testimony will be submitted to the record.
    I would like to start by recognizing Mr. Schleede.

  STATEMENTS OF GLENN R. SCHLEEDE, MEMBER, ADVISORY COUNSEL, 
                        CONSUMER ALERT;

    Mr. Schleede. Madam Chair and members of the Subcommittee, 
my name is Glenn Schleede. I am appearing today on behalf of 
Consumer Alert, a nationwide, nonprofit, non-partisan consumer 
group committed to protecting consumer choice and promoting 
economic growth.
    Thank you for holding this hearing and providing an 
opportunity for Consumer Alert to outline some of the interests 
of real consumers in the adequacy and price of natural gas and 
to make some recommendations.
    We believe that the interests of real consumers are often 
overlooked as Congress considers matters before it. So, we are 
especially grateful for this opportunity. I have submitted a 
detailed statement that documents five points. I would 
appreciate it if you would put the statement in the record. I 
will merely summarize it.
    First, natural gas is playing an increasingly important 
role in supplying the energy that consumers need for their 
homes, including in generating electricity.
    Second, natural gas prices for residential customers and 
electricity generating companies have increased sharply from 
1994 and '95 levels and have been extremely volatile with 
negative impacts on customers and the economy, particularly in 
late 2000 and early 2001.
    Third, given the limitations on other sources, including 
traditional sources and non-hydro renewables, natural gas is 
the only energy sources that can be expected to make a 
significant contribution in supplying the nation's energy needs 
for the foreseeable future.
    Fourth, competition for available supplies of natural gas 
will increase, particularly for electric generation. This 
portends additional price increases for consumers using natural 
gas and using electricity generated with natural gas.
    While consumers bills are now down from the 2001 levels, 
they are likely to increase in the future due to higher gas 
prices, higher gas transportation costs and automatic tax 
increases.
    Fifth, there are actions that Federal, State and local 
governments can take to increase the availability of gas and 
help restrain price increases that damage consumers and the 
economy.
    My detailed statement lists seven steps that could be 
taken.
    One, recognize that oil and natural gas exploration and 
production can be carried out in an environmentally responsible 
manner.
    Two, remove unnecessary restrictions from oil and natural 
gas exploration and production and particularly on Federally 
controlled lands and offshore, as cited in my detailed 
statement and one other I would like to mention if there is 
time at the end.
    Three, reducing any unnecessary barriers to the 
construction of gas pipelines so capacity will be available to 
move gas from areas where it is available to markets.
    Four, encourage the administration to lift tariffs on steel 
imports that are including the price of pipe that will be 
needed to build pipelines recently approved by FERC. Higher 
prices for steel pipe would increase the cost of building gas 
pipelines and those increases will be passed on to natural gas 
consumers.
    Five, encourage State and local governments to remove taxes 
and fees, including so-called ``public benefit charges'' from 
natural gas bills, particular those that are based on a 
percentage of the bill. Those charges give consumers a double 
hit when gas prices rise or when the weather is colder than 
normal. They get hit with both the higher price for the gas and 
the higher tax.
    Six, stop the flow of tax dollars to nonprofit 
organizations that work against the interests of consumers, 
particularly through the U.S. Department of Energy and the 
Environmental Protection Agency.
    Seven, require all Federal agencies to determine the 
effects of proposed actions on real consumers to be sure that 
the interests of real consumers are represented in agency 
proceedings and assure that they are taken into account when 
considering proposed actions, just as they have been in the 
case of environmental matters.
    Both environmental and consumer interests need to be 
considered but at present consumers are being short-changed as 
Federal agencies pay a lot of attention to environmental 
issues, often ignoring the interests of real consumers.
    It is especially important to note that actions that push 
up energy prices are most harmful to people in the lower income 
levels with little discretionary income.
    If I may take another 30 seconds, I would like to point out 
that my detailed statement does not mention the promising 
natural gas production potential that has resulted from deep 
drilling in the Appalachian Basin, what is called the Trenton 
Black River Play. It is an area stretching from the southern 
tier of New York through Pennsylvania and into West Virginia.
    The good news is that the significant amounts of gas are 
being found and produced by deeper drilling than has been the 
case in the past production in that area.
    The bad news is that the Pennsylvania Department of 
Conservation and Natural Resources, pressed by environmental 
interests, recently reduced by 56.3 percent the State-owned 
acreage where gas exploration and production rights are to be 
auctioned.
    The department also set higher per acre bonus payments and 
annual per acre lease payments and tightened environmental 
criteria to limit exploration activity.
    I recognize this area may not be within your Subcommittee's 
jurisdiction, however, I believe the matter deserves attention 
because it is one more example where environmental activists 
and those who finance them are working to limit energy supplies 
and thereby push up prices to the detriment of all consumers, 
especially those at lower income levels who have little 
discretionary income.
    Thank you for the opportunity to appear.
    Mrs. Cubin. Thank you, Mr. Schleede.
    [The prepared statement of Mr. Schleede follows:]

      Statement of Glenn R. Schleede, on Behalf of Consumer Alert

    Madam Chairman and Members of the Subcommittee:
    My name is Glenn R. Schleede 1 and I am appearing today 
on behalf of Consumer Alert, a nationwide, non-profit, non-partisan 
consumer group committed to protecting consumer choice and promoting 
economic growth.
---------------------------------------------------------------------------
    \1\ I am a member of Consumer Alert's Advisory Council. I am semi-
retired after working on energy and related matters in government and 
the private sector for over 30 years. I now devote a significant 
portion of my time in analysis of and writing about (a) government 
policies, programs and regulations that are detrimental to the 
interests of consumers and taxpayers, and (b) government or private 
sector programs and projects that are presented to the media, public 
and government officials in a false or misleading way.
---------------------------------------------------------------------------
    Thank you for holding this hearing on natural gas supply and demand 
and the potential role of public and federal submerged lands. Thank 
you, especially, for providing an opportunity for Consumer Alert to 
outline for you some of the interests of real consumers in the adequacy 
and price of natural gas and to make some recommendations. We believe 
that the interests of real consumers are often overlooked as the 
Congress considers matters before it, so we are especially grateful for 
this opportunity.
    In summary, I will be making the following 5 points:
     Natural gas is playing an increasingly important role in 
supplying the energy that consumers need for use in their homes, 
including its use in generating electricity.
     Natural gas prices for residential customers and electric 
generating companies have increased sharply from 1994-95 levels and 
have been extremely volatile, with negative impacts on consumers and 
the economy (particularly in late 2000 and early 2001).
     Given the limitations on other energy sources, natural 
gas now appears to be the only energy source that can be expected to 
make a significant contribution in supplying the nation's energy needs 
for the foreseeable future.
     Competition for available supplies of natural gas will 
increase, particularly the demand for its use in electric generation, 
portending additional price increases for consumers using natural gas 
and using electricity generated with natural gas. While consumers'' 
bills are now down from 2001 levels, they are likely to increase in the 
future due to higher gas prices, higher gas transportation costs and 
automatic tax increases.
     There are actions that federal, state and local 
governments can take to increase the availability of natural gas and 
help restrain price increases that damage consumers and the economy. 
Perhaps the most important action is to remove unnecessary restrictions 
on access to public lands and federally submerged lands for gas 
exploration and development.
    The pages that follow expand on these points and provide data to 
support our findings and recommendations.
    High and Volatile Natural Gas Prices
    The graph below shows the rise in nationwide average annual prices 
for natural gas at the wellhead, at city gates, and delivered to 
electric utilities and to residential consumers as reported by the US 
Energy Information Administration (EIA). The volatility of prices is 
shown more clearly in Attachment 1, which shows prices on a monthly 
basis for the same period.
    Prices rose sharply in late 2000 and early 2001 from earlier levels 
due to:
     Inadequate gas exploration and development drilling in 
1998 and 1999 (due in part to low prices and low profit margins).
     High demand for natural gas for electric generation (due 
in part to low hydroelectric production in the Pacific Northwest).
     High demand by commercial and residential customers due 
to cold weather.
     Higher taxes on residential gas customers.
    Those high natural gas prices (and high electricity prices due 
heavily to high natural gas prices) were felt throughout the economy 
and undoubtedly contributed to the recession. Consumers feel the 
economic impact of high gas prices in several ways: directly through 
their own monthly bills, and indirectly through higher prices for the 
goods they purchase and higher taxes. (See page 5 of Attachment 2 for a 
more complete explanation of the way high natural gas bills adversely 
affect consumers, particularly those with little or no discretionary 
income.)
    The last point deserves special attention. Some states and many 
local governments impose taxes on natural gas and often those taxes are 
imposed as a percentage of a consumer's gas bill. This means that taxes 
go up when gas prices increase and even when the amount of gas used 
increases due to cold weather.
    States and local governments imposing taxes in this way enjoyed a 
tax windfall especially during the winter of 2000-2001. The magnitude 
of that windfall as well as the effects of other factors pushing up 
consumers'' prices can be seen in the analysis presented in Attachment 
2 which compares in detail the natural gas bills for December 1999 and 
December 2000 for a home in the District of Columbia. Each factor 
contributing to the doubling of the bill is identified.

[GRAPHIC] [TIFF OMITTED] T0724.001

    Fortunately, natural gas prices have moderated somewhat since early 
2001 but remain higher than in the past. Clearly, there is the 
potential for higher natural gas prices in the future. Several actions 
identified later in this statement could be taken to help restrain 
those price increases.
Increasing Role for Natural Gas
    The graph below shows recent history and EIA forecasts 2 
of US natural gas consumption through the year 2020. If EIA's forecast 
is correct, natural gas use by electric generating companies will 
increase by more than 6 trillion cubic feet--Tcf (143%) by 2020 from 
2000 levels. Industrial use is projected to increase by 1.65 Tcf, 
commercial use by 1.25 Tcf and residential use by .98 Tcf during the 
same period.
---------------------------------------------------------------------------
    \2\ Energy Information Administration, Annual Energy Outlook 2002, 
Supplementary Table 95.
---------------------------------------------------------------------------
    The important points for residential consumers is that they will be 
facing steep competition for natural gas and the price could rise if 
gas producers and transporters are unable to keep up with demand. 
Consumers will see higher costs in their own natural gas bills and in 
their electric bills as gas use in electric generation increases.

[GRAPHIC] [TIFF OMITTED] T0724.002

Natural Gas is the Only Energy Source That Can Make a Significant 
        Contribution for the Foreseeable Future.
    The EIA forecasts, summarized in a table later in this statement, 
make clear that natural gas is the only energy source that can make a 
significant contribution toward meeting the nation's growing demand for 
energy, in general, and electricity, in particular. This is quite clear 
from a brief review of the alternatives:
    1. Energy Conservation and Energy Efficiency. The US has made 
impressive gains in energy efficiency during the past 3 decades. 
According to EIA data, 3 real US Gross Domestic Product 
(GDP) increased by 126% from 1973 to 2001 while energy use increased by 
only 27%. The US accounted for 29.5% of the world's GDP in the year 
2000 but accounted for only 25.4% of the world's energy use. Gains in 
energy efficiency and reductions in energy intensity have largely been 
the result of:
---------------------------------------------------------------------------
    \3\ EIA, Monthly Energy Review, Table 1.9.
---------------------------------------------------------------------------
     Energy price-induced measures by businesses and 
individuals that have found ways to hold down energy consumption.
     Energy efficiencies that were a byproduct of 
technological changes in electronics, materials, computerization, 
telecommunications and other areas that did not have energy efficiency 
as their principal objective.
     Spin-offs from R&D supported by the Department of 
Defense, such as the much more efficient combustion turbines now being 
used to generate electricity that benefited from DOD sponsored aircraft 
engine R&D and materials research.
     Changes in the makeup of the US economy with productive 
activity trending toward less energy intensive pursuits; e.g., computer 
software and services require less energy than steel and aluminum 
production.
     Foreign competition and periodically high motor fuel 
prices that encourage the production of energy-efficient vehicles.
    While impressive gains have been made, conservation and efficiency 
will not offset the increases in energy use that will be necessary for 
a steadily expanding economy. We must have additional sources of 
energy.
    I should also point out that the much-ballyhooed government-
dictated DOE energy efficiency standards contribute very little in 
improving our nation's energy efficiency. For example, DOE's data show 
that the recently issued efficiency standards for central air-
conditioners and heat pumps mandating a 20% increase in efficiency 
above current levels will save very little energy while costing 
consumers hundreds of millions of dollars.
    Specifically, DOE claims that the new standards will save ``about 3 
quads'' of energy during the period from 2006-2030. 4 Three 
quadrillion Btu sounds like a lot of energy but it really is only 9/100 
of 1% of the 3,200 quads of energy that will be used during that 
period. That tiny amount will undoubtedly be overwhelmed by changes 
brought about by market forces and private sector technology 
developments such as those listed in bullets above.
---------------------------------------------------------------------------
    \4\ The even more costly 30% reduction standards planned by the 
Clinton Administration would have saved only less than 4 quads of 
energy, according to DOE's Technical Support Document.
---------------------------------------------------------------------------
    An additional insult to consumers is the fact that DOE admits that 
about 25% of the 140 million consumers expected to buy the air 
conditioners and heat pumps during 2006-2030 period would NEVER recover 
through energy cost savings the higher cost of the products meeting the 
DOE-dictated standard. Members of your Committee should note that self-
appointed ``non-profit'' energy efficiency advocacy groups that receive 
tax dollars via DOE and the National Laboratories have been extremely 
active in promoting tight efficiency standards that help drive up 
consumers'' costs.
    2. Renewables. Many people like the sound of getting energy from 
``renewable'' energy but, again, it is necessary to be realistic and 
look at the facts.
    a. Hydropower is the only significant source of economical 
renewable energy. Advocates of ``renewable'' energy do not like 
hydropower despite the fact that it is the one ``renewable'' energy 
source that is providing a significant contribution; in fact, over 7% 
of the nation's electricity. They favor only the non-hydro 
``renewables.''
    Furthermore, the potential for an increased contribution from 
hydropower is limited because few sites are available, there is 
opposition to expansion and the very real possibility that the 
contribution from hydropower could be reduced in the future. Reductions 
could come from diversion of water around dams to serve other needs 
(e.g., fish, recreation), breaching dams in some areas, and the slow 
pace of re-licensing of existing hydropower projects.
    b. Non-hydro ``renewables'' will provide little usable energy. The 
non-hydro renewables--wind, solar, geothermal, biomass (including wood 
and wood wastes) and municipal solid wastes 5 are, 
essentially, niche technologies that are not likely to ever make a 
significant contribution towards supplying US energy requirements. DOE 
has spent hundreds of millions in tax dollars on renewable energy R&D 
during the last 20 years.
---------------------------------------------------------------------------
    \5\ Some environmental and renewable advocates are strongly opposed 
to the use of municipal solid wastes for energy production.
---------------------------------------------------------------------------
    The small role that non-hydro renewable energy sources can be 
expected to play in supplying our energy and electricity requirements 
during the next 20 years is demonstrated clearly in the two tables, 
based on EIA data, shown on the next page. For example, the tables show 
that all non-hydro renewables combined (wind, solar, wood, wood, waste, 
biomass, geothermal, and municipal solid wastes) supplied only:
     3.67% of US overall energy requirements in 2000 and may 
reach only a 4.57% contribution by 2020.
     2.13% of US electricity generation in 2000 and are not 
expected to reach a 3% contribution by 2020.
    These small but realistic forecasts by EIA take into account the 
enormous federal and state subsidies now being provided some renewables 
such as ``wind energy.
    Furthermore, it is important to recognize that all the generous 
subsidies now being provided for ``renewable'' energy--and others being 
contemplated such as federal ``renewable portfolio standards--merely 
shift costs from renewable energy developers to consumers and 
taxpayers--and hide those costs in tax bills and monthly electric 
bills.
    Some of these technologies have negative environmental implications 
that are only now being recognized, such as the significant scenic 
impairment cause by windmills in some areas--even though the huge 
structures produce very little electricity.
[GRAPHIC] [TIFF OMITTED] T0724.003

    3. Coal. Clearly coal makes a significant contribution in supplying 
US energy requirements; specifically 22.49% of overall energy demand 
and 51.6% of electricity generation in 2000. Coal could provide an even 
larger contribution on an economically competitive basis but 
environmental requirements and concerns that are well known to this 
Subcommittee are limiting its contribution.
    4. Petroleum. Petroleum products provided 38.75% of overall US 
energy requirements in 2000 and EIA expects that share to remain about 
constant through 2020. Very little oil is used in electricity 
generation; in 2000 its share was 2.68% and it is expected to drop to 
less than 1% by 2020. However, petroleum products account for 97.5% of 
the energy used in transportation. 6 Substitutes for 
petroleum (e.g., ethanol) are still expensive and highly subsidized. 
The cost of the subsidy is hidden from consumers at the gas pump but 
shows up in tax bills paid by the nation's remaining taxpayers.
---------------------------------------------------------------------------
    \6\ EIA, Monthly Energy Review, Table 2.5.
---------------------------------------------------------------------------
    Concern about dependence on oil imports continues to dominate 
public policy debates and is likely to continue to do so. Oil imports 
accounted for about 9% of total US merchandise imports in 2001, 
7 but accounted for about 55% of the petroleum products 
supplied in the US during 2001.
---------------------------------------------------------------------------
    \7\ EIA, Monthly Energy Review, Table 1.6.
---------------------------------------------------------------------------
    5. Nuclear Energy. Nuclear energy provided over 8% of overall US 
energy requirements in 2000 and 19.7% of US electric generation. EIA 
expects the contribution to decrease somewhat in absolute terms and 
decline substantially in market share by 2020 as some plants are shut 
down. While some are still concerned about safety and proliferation 
issues, the primary obstacle to increased use of nuclear energy and new 
plants is the continuing uncertainty about long term management of 
nuclear wastes. Until that problem is solved and the public becomes 
comfortable with nuclear energy, building new nuclear plants is 
unlikely.
    6. Natural gas. There is much more that could be said about each of 
the potential energy sources but the conclusion would not change. That 
conclusion is that with current constraints on traditional energy 
sources (coal, oil, hydropower and nuclear energy) and the limited 
potential for non-hydro renewable energy, natural gas is the only 
source of energy that can be counted on to supply the nation's growing 
energy needs for the foreseeable future.
The Outlook for Natural Gas Supply and Prices
    We are not likely to run out of natural gas. However, if the demand 
for natural gas forecast by EIA (summarized earlier) and by other 
experts is to be satisfied:
     Additional supplies will have to come from:
         Natural gas from the ``Lower-48'' onshore and 
        offshore areas that are now blocked from exploration and 
        development.
         Canadian imports.
         Natural gas from Alaska and the Arctic.
         Liquefied natural gas (LNG) imports.
     Additional pipelines will have to be built.
     Natural gas prices will increase.
    Consumers (and the US economy) will suffer less if a larger share 
of natural gas can be obtained from the lower-48 states, since natural 
gas from Alaska and the Arctic and LNG will cost more. Thus, the 
greater the share from the lower-48 states and offshore lands the 
better.
    One of the country's most astute experts on natural gas supply and 
demand, Stephen Thumb of Energy Ventures Analysis, Inc., has summarized 
the situation as follows:
        ``In order for the market to increase from the current demand 
        level of 22 TCF to the projected level of 33 TCF at the end of 
        the forecast period, natural gas supply will have to increase 
        28.5 BCFD from current levels. It is fairly apparent that 
        traditional, conventional supply areas will not be able to 
        achieve this level of increase in deliverability, but instead 
        the U.S. market will have to rely on a series of evolving gas 
        resources to fill in the projected gap between supply and 
        demand'' Key among these is increased LNG supplies from 
        existing and regasification terminals. Also included are these 
        evolving plays within the U.S., namely the subsalt play in the 
        Gulf, 16 emerging coalbed methane basins and deep gas (i.e., 
        >15,000 feet)'' At the end of the forecast period Arctic gas 
        from both the MacKenzie Delta and Alaska will enter the U.S. 
        market.
        ``The potential imbalance between supply and demand appears to 
        be particularly acute during the 2003 to 2005 time frame, as it 
        takes time to develop significant results from these evolving 
        sources of supply. 8
---------------------------------------------------------------------------
    \8\ Energy Ventures Analysis, Inc., FUELCAST: 2002 Long-Term 
Outlook, p. 1-4.
---------------------------------------------------------------------------
    When focusing on the matter of land restrictions, Mr. Thumb points 
to the following areas and resource estimates 9 as key:
---------------------------------------------------------------------------
    \9\ Op Cit., Exhibit 3-15.
---------------------------------------------------------------------------
     East Coast:
         Grand Banks--10 Trillion cubic feet, which is 100% 
        restricted.
        LAtlantic Offshore shelf and slope--31 Trillion cubic 
        feet--100% restricted (including the Baltimore Canyon Trough, 
        Carolina Trough Salt Basin, and Blake Plateau Basin).
     Gulf Coast: Eastern Gulf shelf and slope--24 to 43 
Trillion cubic feet--100% restricted.
     Rockies: 137 to 346 Trillion cubic feet--40% restricted.
     Pacific Offshore shelf and slope--21 Trillion cubic 
feet--100% restricted.
     British Columbia--26 Trillion cubic feet--100% 
restricted.
    I should also note that the costs of constructing, operating and 
maintaining natural gas pipelines are, inevitably, passed along to 
consumers. Therefore, government actions that affect these costs, such 
as the higher cost of steel pipe--as a result of tariffs imposed on 
imported steel--place additional burdens on consumers.
Recommendations
    Clearly, there are actions that the federal government can take to 
temper the adverse effects on consumers that lie ahead as the demand 
for natural gas increases. Listed below is a sample of steps that could 
be taken to benefit consumers. Some may not be within the jurisdiction 
of this Subcommittee but you may be able to work through other 
committees or otherwise influence your colleagues on Committees with 
jurisdiction, in state and local governments, and in the 
Administration.
    1. LRecognize that oil and natural gas exploration and production 
can be carried out in an environmentally responsible manner.
    2. LRemove unnecessary restrictions from oil and natural gas 
exploration and production, particularly on federally controlled lands 
on shore and offshore cited earlier.
    3. LReduce any unnecessary barriers to the construction of gas 
pipelines so that capacity will be available to move gas from areas 
where it is available to markets.
    4. LEncourage the Administration to lift tariffs on steel imports 
that are increasing the price of pipe that will be needed to build 
pipelines recently approved by FERC. The higher prices of that steel 
pipe would, of course, increase the cost of building gas pipelines and 
will be passed on to natural gas consumers.
    5. LEncourage state and local governments to remove taxes and fees 
(including so-called ``public benefit charges'') from natural gas 
bills, particularly those that vary with the dollar amount of the bill. 
Such ``percentage of bill'' charges give consumers a double hit when 
gas prices rise (i.e., higher price for gas AND higher tax).
    6. LStop the flow of tax dollars to non-profit organizations that 
work against the interests of consumers, particularly through the US 
Department of Energy (DOE) and Environmental Protection Agency (EPA).
    7. LRequire all federal agencies to determine the effects of 
proposed actions on real consumers, assure that the interests of real 
consumers are represented in agency proceedings and assure that they 
are taken into account when considering proposed actions.
                                 ______
                                 
    [Attachments to Mr. Schleede's statement follow:]

    [GRAPHIC] [TIFF OMITTED] T0724.004
    
    [GRAPHIC] [TIFF OMITTED] T0724.005
    
    [GRAPHIC] [TIFF OMITTED] T0724.006
    
    [GRAPHIC] [TIFF OMITTED] T0724.007
    
    [GRAPHIC] [TIFF OMITTED] T0724.008
    
    [GRAPHIC] [TIFF OMITTED] T0724.009
    
    [GRAPHIC] [TIFF OMITTED] T0724.010
    
    [GRAPHIC] [TIFF OMITTED] T0724.011
    
    Mrs. Cubin. I would now like to recognize Mr. Gooch.

 STATEMENT OF LEE GOOCH, CHAIRMAN, PROCESS GAS CONSUMERS GROUP

    Mr. Gooch. Good morning and thank you. My name is Lee Gooch 
and I am Vice President of Potash Corp. I am here today 
speaking as Chairman of the Process Gas Consumers Group. PGC is 
a national association representing a broad cross-section of 
U.S. industry, both geographically and in terms of products 
manufactured.
    Our membership employs millions of people and represents 
over a half of trillion feet of gas purchased and consumed 
annually. Indeed, natural gas is an essential component used in 
the processing and manufacturing of a host of American products 
and access to adequate and affordable supplies are crucial to 
our economic well-being.
    According to the Energy Information Administration, EIA, 
overall demand for natural gas in the U.S. is expected to grow 
rapidly in the next 20 years. Historically, industrials have 
represented the largest consuming sector or natural gas, 
roughly 35 percent of all natural gas consumed in this country. 
And industrial consumption is expected to grow another 27.7 
percent the year 2015.
    This preference by the industrials to burn natural gas is 
not only heavily influenced by environmental mandates, but much 
of the gas used by industrials is consumed as feed stock for 
which other fuels are not physically or economically viable 
substitutes. As such, the natural gas industry has a 
substantial impact on U.S. manufacturers' ability to compete in 
an increasingly globally competitive world.
    Vice President Cheney, in his natural energy policy report, 
noted that over the next 20 years, U.S. natural gas consumption 
will grow by over 50 percent. At the same time, U.S. natural 
gas production will only grow by 14 percent, if it grows at the 
same rate that it has for the last 10 years.
    To ensure the manufacturing community continues to fully 
contribute to our nation's economic vitality, we need a 
national energy policy that will foster the development of 
adequate and reliable supplies of natural gas and other energy 
sources at reasonable prices.
    As the members of the Subcommittee know, there is an 
enormous amount of natural gas that currently is either off-
limits to exploration and production or is located where 
exploration and production activities are severely restricted.
    While PGC fully supports environmental policies designed to 
safeguard our national parks, monuments and wilderness areas, 
we are also concerned about a national policy that on one hand 
favors increased reliance on natural gas as the environmentally 
preferred fuel, while on the other hand, promotes policies that 
limit the ability to explore, produce and distribute natural 
gas to the market area.
    Not only do we need adequate supplies, but we also need 
less volatile gas prices. From the beginning of the year 2000 
to its close natural gas prices climbed from the mid-$2.00 per 
MMbtu range to $10 per MMbtu. For some U.S. manufacturing 
plants, this over 400 percent increase had devastating effects. 
For instance, in California Shasta Paper Company closed its 
plant just before Christmas, laying off more than 400 workers.
    Likewise, two potato flake processors in the west also shut 
down, one stating that it closed because its gas bill grew by 
more than tenfold in 1 year. The other said it closed because 
its gas bill for the month of January was expected to top 
$140,000, or four times that of its October bill.
    Ammonia manufacturing was also greatly affected by gas 
price volatility. By mid-year 2000, $4 gas resulted in U.S. gas 
ammonia production to fall as low as 71 percent of capacity. By 
first quarter 2001, soaring gas prices pushed that production 
rate even lower, idling 55 percent of total ammonia 
manufacturing in the United States.
    Despite today's lower gas prices, several of those plants 
remain permanently shut down. We have seen at least one major 
U.S. fertilizer company file bankruptcy and there are more yet 
likely to come.
    Adequate supplies of natural gas, expanded pipeline 
infrastructure and reasonable prices are all areas of critical 
need to PGC members because contrary to popular belief, 
switching to alternate fuels is not always possible by 
industrials. For some it is due to the increasingly stringent 
environmental regulation and difficulty in obtaining permits to 
burn coal or fuel oil. For others, natural gas is used as a 
feedstock where there is no other energy substitute.
    For example, ammonia manufacturers combine the nitrogen 
molecule with the hydrogen molecule from natural gas to create 
ammonia, the basic building block for producing nitrogen-based 
fertilizer. There is no economically viable alternate for 
natural gas as a feedstock in this process.
    For many other types of industries the use of natural gas 
is a preferred energy choice. For example, if a wallboard 
manufacturer switches to Number 6 fuel oil, that fuel oil can 
leave a sooty deposit on white wallboard that paint cannot 
cover up. Therefore, this type of manufacturer has product 
quality issues that in effect eliminate non-gas substitutes.
    In closing, I ask that you read my written testimony in 
full along with the attached PGC white paper entitled, ``The 
Industrial End User Perspective on our Nation's Energy 
Policy.'' The white paper outlines PGC's goals for the 
Administration and Congress with regard to the development of a 
National Energy Policy.
    We include a balanced approach considering a broad variety 
of energy alternatives, continued deregulation of natural gas 
commodity prices, free market competition in preventing the 
exercise of monopoly power, allowing environmental responsible 
and timely exploration and production of natural gas on public 
lands, and streamlining environmental review and the 
certification process to allow more rapid approval of pipeline 
projects.
    That concludes my prepared remarks. I thank the 
Subcommittee for the opportunity. I would be happy to answer 
any questions you may have.
    Mrs. Cubin. Thank you, Mr. Gooch.
    [The prepared statement of Mr. Gooch follows:]

     Statement of Lee Gooch, Chairman, Process Gas Consumers Group

    Good morning Madam Chairman and Members of the Subcommittee. I am 
pleased to appear before you today and wish to thank the Subcommittee 
for holding this important hearing.
    My name is Lee Gooch and I am the Vice President of Natural Gas for 
the Potash Corporation of Saskatchewan (``PotashCorp''). PotashCorp is 
the world's largest integrated fertilizer company. We mine and 
manufacture potash, phosphate and nitrogen products. Nitrogen products 
begin with the manufacture of ammonia and ammonia is derived from 
stripping the hydrogen molecule from natural gas. As such, this 
industry is one of the largest industrial consumers of natural gas in 
the U.S. and we have no alternative feedstock choices. Indeed, the 
natural gas component of ammonia production in the U.S. accounts for 
75-90% of total production cost. Yet, we compete in worldwide 
marketplaces that manufacture products from natural gas made available 
overseas at a fraction of the cost.
    As an industrial end user of natural gas, PotashCorp is also member 
of the Process Gas Consumers Group (``PGC''). I am here today, as the 
Chairman of PGC, to provide the Subcommittee with insights into the 
importance of natural gas to industrial end users such as the members 
of PGC, and the critical issues currently facing us involving access to 
adequate supplies of natural gas at reasonable prices.

I. Overview of PGC--Industrial Profile
    PGC is a national association of industrial gas consumers who 
require natural gas in many of their key operations. PGC works to 
promote coordinated, rational, and consistent federal and state 
policies relating to natural gas and its transportation.
    PGC member companies represent a broad cross-section of U.S. 
industry, both geographically and in terms of products produced. Our 
membership employs millions of people and represent over half a 
trillion cubic feet (``Tcf'') of natural gas purchased and consumed 
annually.
    Unlike other sectors of the natural gas industry, the buying and 
selling of natural gas and the pipeline capacity required to transport 
it represent only one facet, albeit an important one, of an industrial 
end user's overall business operations. Industrials generally are not 
in the natural gas business. Rather, our involvement in the natural gas 
marketplace typically is a means to an end, not an end in itself. 
Industrials purchase and consume natural gas as one of the requisite 
inputs in the processing and manufacturing of automobiles, aluminum, 
steel, metal products, fertilizer, alcohol, wallboard, insulation and 
other building products, paper products, plastics, glass, fibreoptics, 
food and grain products, and a host of other, readily recognizable 
commodities.

II. Industrial Consumption of Natural Gas and the Need for Adequate 
        Supplies
    Access to adequate supplies of natural gas is crucial to the 
economic well being of the industrial community. The studies we have 
reviewed all point toward ever-increasing demand for natural gas and 
project continued reliance on natural gas by the industrial community.
    According to the Energy Information Administration (``EIA''), 
overall demand for natural gas in the U.S. has been steadily increasing 
and is expected to grow even more rapidly over the next 20 years. 
1 Historically, industrials have represented the largest 
consuming sector of natural gas and our amount of natural gas 
consumption has grown consistently over the years. 2 
According to a recent report published by the Interstate Natural Gas 
Association of America Foundation, Inc. (``INGAA''), in Y2000, the 
industrial sector accounted for approximately 35% of all natural gas 
consumed in the country, making it the single largest consuming sector. 
3 Specifically, INGAA reports that the industrials consumed 
8,736 billion cubic feet (``Bcf'') of the total 23,321 Bcf of natural 
gas consumed that year. 4 The closest other sector was the 
residential sector at 5,084 Bcf, followed by the power generation 
section at 4,180 and the commercial sector at 3,298 Bcf. 5
---------------------------------------------------------------------------
    \1\ James Tobin, Energy Info. Admin., ``Natural Gas 
Transportation--Infrastructure Issues and Operational Trends'' at 1 
(October 2001)(herein ``EIA October 2001 Report'').
    \2\ For instance, in 1986, industrials consumed approximately 5.6 
Tcf of natural gas. Energy Info. Admin., ``Historical Natural Gas 
Annual'' at 10 (1998). By 1997, of the 20 Tcf of natural gas consumed 
nationwide, industrial consumption accounted for the largest single 
amount, approximately 8.8 Tcf or 44.2%. Energy Info. Admin., ``Natural 
Gas Annual 1997'' at 39-41 (1998). This amount does not include lease 
and plant fuel consumption, which would raise industrial gas 
consumption to 10 Tcf for 1997. Energy Info. Admin., ``Annual Energy 
Review 1997'' at 177 (1998).
    \3\ INGAA, ``Pipeline and Storage Infrastructure for a 30 Tcf 
Market, an Updated Assessment'' at 2 (2002)(herein ``2002 INGAA 
Report'').
    \4\ Id.
    \5\ Id.
---------------------------------------------------------------------------
    Moreover, in addition to growing steadily over the previous years, 
natural gas usage by industrials is predicted to continue growing well 
into the future. Again, INGAA reports that industrial consumption will 
grow to 10,545 Bcf in 2015--a 20.7% increase. 6 And, while 
it is true that natural gas for electric generation is projected to 
grow substantially (from approximately 4,000 Bcf in 2000 to almost 
8,000 Bcf in 2010 7), the fact remains that industrials 
currently consume about two times the quantities of natural gas that 
electric utilities consume. Importantly, industrials will still out-
consume power generation by about 2 Tcf in 2015. 8
---------------------------------------------------------------------------
    \6\ 2002 INGAA Report at 2.
    \7\ American Gas Association, ``Impact of Power Generation Gas 
Demand on Natural Gas Local Distribution Companies'' at 3 (October 
2001). See also Natural Gas Council, ``Overview of Natural Gas Markets: 
A Focus on Natural Gas Supply'' at 4-8 (June 11, 2002)(herein ``2002 
NGC Report''), noting that the primary driver for increased natural gas 
demand is the power sector.
    \8\ 2002 INGAA Report at 2.
---------------------------------------------------------------------------
    Similarly, EIA has also projected that natural gas consumption by 
the industrial sector will continue to grow and will continue to be the 
largest consuming sector of the economy, with industrial consumption 
projected to reach 9.39 Tcf by 2010, which is 34% of the projected 
total consumption of approximately 28 Tcf.
    Future industrial need and preference for natural gas also will be 
heavily influenced by environmental considerations as well as continued 
demands for process, fuel, feedstock, and other uses. Strengthened 
governmental mandates setting environmental limits encourage and 
increasingly require that industrials use ``clean fuels,'' particularly 
natural gas, versus coal, oil and other fossil fuels. 9
---------------------------------------------------------------------------
    \9\ Notably, the Clean Air Act Amendments of 1990 affect industrial 
gas use as they ``continue the trend toward stricter emission limits 
for industrial sources'' and mandate ``tighter control of VOC 
emissions, [and] requirements for NOx reductions from industrial 
combustion sources'' .'' Gas Research Institute, ``The Implications of 
the Changes in Industrial Energy Demand: 1985-1992'' at 78 (1999). 
Further, industrials and utilities would be affected by the need to 
shift to gas versus coal or other carbon fuels if proposals on climate 
change are adopted that require substantial greenhouse gas emissions 
reductions. See e.g., Energy Security Analysis, Inc., ``Electricity & 
Climate Change: Estimating the Effects of Compliance with the Kyoto 
Treaty'' (1998).
---------------------------------------------------------------------------
    Much of the gas used by industrials is consumed in feedstock and 
process uses, for which other fuels are not physically or economically 
viable substitutes. 10 Therefore, the access to competitive, 
reasonably priced natural gas supply and service options is absolutely 
crucial. The options and prices can significantly affect manufacturing 
costs and the ultimate price of industrial products. As such, the 
natural gas industry has a substantial impact upon industrial 
manufacturers'' ability to compete in their own, increasingly globally-
competitive, markets. Thus, both projected gas consumption growth for 
increased industrial production and increased reliance on more 
environmentally-favored natural gas dictate the industrial sector's 
need for gas as well as our compelling interest in its availability, 
price and ease of use.
---------------------------------------------------------------------------
    \10\ Gas Research Institute, ``1998 Industrial Trends Analysis'' at 
3-2 (1998).
---------------------------------------------------------------------------
III. The Need to Expand Exploration and Production Efforts
    U.S. industry has made significant strides in recent years to 
control energy costs, both through the use of more efficient 
technology, as well as through conservation measures. Nonetheless, as 
we stated earlier, our member companies are heavily dependent on 
natural gas as both as a fuel and as a feedstock and consume more than 
half a Tcf of natural gas annually in essential processing, 
manufacturing and other operations. However, despite new efficiencies, 
consumption of natural gas is still outpacing production and will 
continue to do so in the future. As noted recently by Vice President 
Cheney in his National Energy Policy Report, ``[o]ver the next 20 
years, U.S. natural gas consumption will grow by over 50 percent. At 
the same time, U.S. natural gas production will grow by only 14 
percent, if it grows at the rate of the last 10 years. 11
---------------------------------------------------------------------------
    \11\ Report of the National Energy Policy Development Group, 
``National Energy Policy Report'' at x, Figure 3 (2001).
---------------------------------------------------------------------------
    To ensure the future ability of energy-dependent companies to 
contribute fully to our nation's economic vitality, we need a national 
energy policy that will foster the development of adequate and reliable 
supplies of natural gas and other energy sources at reasonable prices.
    As the Members of this Subcommittee know, and has been reported by 
EIA and others, there is an enormous amount of natural gas that 
currently is either off-limits to exploration and production or is 
located where exploration and production activities are severely 
restricted. 12 The most recent EIA numbers that we have 
reviewed indicate that there is about 293 Tcf of natural gas in the 
Rocky Mountain region that is unproved and technically recoverable. 
13 Of that amount 33.6 Tcf is completely off limits to 
exploration and production. 14 Another 57.5 Tcf is 
considered to be de facto off limits because of the impact of 
compliance with a variety of environmental laws and regulations. 
15 Further, an additional 50.8 Tcf is located in areas where 
the costs and timing of the development is affected by the lease 
stipulations. 16 Finally, we note that significant offshore 
reserves are also off limits to exploration and production. 
17
---------------------------------------------------------------------------
    \12\ Energy Info. Admin., ``U.S. Natural Gas Markets: Mid-Term 
Prospectus for Natural Gas Supply'' at 17 (2001)(herein ``2001 Supply 
Mid-Term Prospectus''). See also, 2002 NGC Report at 31, noting that 21 
Tcf in the Pacific Offshore Shelf and Slope is 100% restricted, 24 to 
43 Tcf in the Eastern Gulf Shelf and Slope is 100% restricted, 31 Tcf 
in the Atlantic Offshore Shelf and Slope is 100% restricted and 10 Tcf 
in the Grand Banks is 100% restricted.
    \13\ 2001 Supply Mid-Term Prospectus at 17.
    \14\ Id. at 18.
    \15\ Id. at 19.
    \16\ Id.
    \17\ Id. at 19-20.
---------------------------------------------------------------------------
    PGC fully supports environmental policies designed to safeguard our 
nation's National Parks, national monuments and wilderness areas. 
However, the industrials are also concerned about a national policy 
that, on the one hand, favors increased reliance on natural gas as the 
environmentally preferred fuel of choice while, on the other hand, 
promotes policies that limit the ability to either explore for, produce 
and/or bring natural gas to the market areas. It is difficult to 
reconcile these two sets of policies. And, as discussed further below, 
as industrial consumers with limited choices except to rely on natural 
gas, we, and our employees and communities, are among those hurt by 
these conflicting policies.

IV. Price Volatility Concerns
    Not only do we need adequate supplies, we also need less volatile 
gas prices. According to EIA, the average natural gas prices in January 
2000 was $2.40 at the Henry Hub, with daily prices climbing steadily 
until the price exceeded $10 in December of 2000. 18 As 
evidenced in the various newspaper reports, the impact on this fly up 
was significant. For instance, in California, Shasta Paper Company 
``temporarily closed its plant just before Christmas [2000] and laid 
off more than 400 workers, largely because of the soaring price of gas 
used in its production process. 19 Likewise, two potato-
flake processors in the West, which also rely heavily on gas to run 
their machinery, shut down temporarily and idled dozens of workers. 
Specifically, one stated that it closed because its ``gas bill grew by 
more than tenfold from one year ago 20 and the Sunshine 
Potato Flakes of Colorado said it closed because ``its gas bill for 
January was expected to top $140,000, or four times its October bill, 
leaving it ``no choice'' but to idle a plant in the San Luis Valley. 
21
---------------------------------------------------------------------------
    \18\ Id. at 5.
    \19\ Retail Service Report, January 19, 2001.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------
    Closer to home, ammonia manufacturing is also greatly affected by 
gas price volatility. For example, when, in January 2000 the natural 
gas price was $2.40 per MMBtu, the average cost to produce a ton of 
ammonia in Louisiana was $100. By mid-year, gas prices rose to over 
$4.00 per MMBtu and ammonia manufacturing costs rose to near $170 a ton 
resulting in the entire U.S. operating rate falling as low as 71%. By 
first quarter of 2001, soaring gas prices caused ammonia production 
costs to jump to well over $300 per ton, idling 55% of total U.S. 
ammonia manufacturing. By the following year, during first quarter 
2002, natural gas prices returned to a range of low-to-mid $2.00 per 
MMBtu yet manufacturing only returned to an equivalent 75-78% range, 
suggesting some permanent shut-downs had occurred. Today, with natural 
gas prices over $3.00 per MMBtu, we've seen at least one U.S. 
fertilizer company file bankruptcy and may see more yet to come. The 
level of natural gas price volatility we have experienced in the past 
few years have created significant economic and operational impacts to 
this industry, and this volatility continues to greatly discourage 
future manufacturing growth in the U.S.
    Make no mistake, by our desire for less volatile prices we do not 
mean to imply that Congress should step in to regulate the wellhead 
price of natural gas. PGC, along with many other representatives of the 
other energy industry sectors, fully supported the legislative efforts 
that led to the decontrol of natural gas prices. 22 
Regardless of how volatile the prices are and regardless of how much 
this volatility adversely impacts our companies, we, most emphatically, 
do not want the federal government to set the price of natural gas at 
the wellhead. Rather, PGC believes that increased access to sources of 
natural gas will allow the market to stabilize the price of gas to a 
reasonable level.
---------------------------------------------------------------------------
    \22\ Natural Gas Wellhead Decontrol Act of 1989, Pub. L. No. 101-
60, 103 Stat. 157 (Jul. 26, 1989)
---------------------------------------------------------------------------
    EIA correctly noted that, ``unpredictable [natural gas] prices have 
deleterious consequences for natural gas consumers. For example, they--
can affect the financial viability of large industrial projects such as 
electricity generation plants and fertilizer plants, where natural gas 
supply is the largest component of operating costs. 23 
Although some tools are available to industry to try to mitigate these 
prices swings, the usefulness of these tools is somewhat limited in the 
long term. As the EIA report also correctly recognized, the 
``deleterious effects of cyclical prices on suppliers and consumers can 
be mitigated through long-term, fixed-price contracts and price 
hedging; however, those financial instruments are limited in their 
duration and access. 24
---------------------------------------------------------------------------
    \23\ 2001 Supply Mid-Term Prospectus at 48.
    \24\ Id.
---------------------------------------------------------------------------
    We are already seeing press reports warning of a ``major supply 
crunch'' in the winter of 2002-2003. Notably, as reported in Gas Daily 
two weeks ago, ``U.S. gas production has fallen for a fourth 
consecutive quarter, dipping about 1% in the three months ended June 
30, according to a recent report by analyst Raymond James and 
Associates. 25 According to Raymond James, ``we continue to 
believe that the U.S. is on the verge of another major natural gas 
supply shortage, which could be felt as early as this upcoming winter. 
26 As further discussed later in my testimony, this type of 
supply shortage report is cause for great concern in the industrial 
community because of the difficulties industrials face in using 
alternative fuels.
---------------------------------------------------------------------------
    \25\ Platts, Gas Daily at 1 (July 2, 2002).
    \26\ Id.
---------------------------------------------------------------------------
V. Need to Develop Sufficient Pipeline Infrastructure to Bring Supplies 
        to Market
    In addition to adequate supplies at reasonable prices, industrial 
gas consumers also have a strong interest in policies that support the 
needed growth of the pipeline infrastructure to bring gas and 
competitive transportation options to new and existing markets.
    Currently, the interstate pipeline grid in the U.S. consists of 
more than 206,000 miles of mainline transmission. 27 With 
the ever-increasing demand for natural gas supply, the pipeline network 
must also be expanded to enable reliable delivery to the domestic 
market. 28 As I indicated earlier, one of the major areas of 
expansion in the demand for natural gas is the expected growth in gas-
fired power plants. According to EIA, ``[i]n 2002, it is estimated that 
50,000 MW of new gas-fired capacity will be installed into the United 
States. That figure translates into 4.4 to 5.6 Bcf/d of new mainline 
capacity likely to be needed'' to serve these plants. 29 EIA 
goes on to note that ``[w]hile the national natural gas pipeline 
network has expanded sufficiently to meet demand growth during the past 
several decades, the large incremental needs of power plants over the 
next several decades can be expected to place unusual demands upon the 
natural gas pipeline industry. 30
---------------------------------------------------------------------------
    \27\ EIA October 2001 Report at 1.
    \28\ Id. at 22.
    \29\ Id.
    \30\ Id.
---------------------------------------------------------------------------
    To that end, PGC has long urged the Federal Energy Regulatory 
Commission (``FERC'') to maintain a pro-competitive approach to 
pipeline construction proposals and has consistently highlighted the 
following threshold concerns.
    First, in particular, PGC has requested that FERC generally trust 
the market to decide issues related to the need and proper location for 
new interstate pipeline capacity. That is, pipelines should be allowed 
to respond to perceived customer demands for new or expanded capacity, 
and potential customers should be able to exercise their own judgments 
about varied pipeline proposals. FERC should not presume to select new 
projects on behalf of the market or to so burden new projects with 
construction conditions and delays as to render otherwise viable 
projects untimely or unmarketable.
    Second, FERC should provide a foundation of stable, consistently 
implemented rate and certificate polices, to the maximum extent 
practicable. Investors who see erratic FERC policy adjustments will 
soon decide that investments in new pipeline capacity are too dangerous 
to justify such expenditures. That would not be in consumers'' 
interests.
    Third, as part of this approach, pipelines should bear a reasonable 
share of the economic risk of new construction, without receiving any 
recovery guarantees from FERC. If a pipeline builds new capacity that 
is substantially unused or that requires reservation charge discounts, 
then that pipeline's investors should bear the consequences not the 
existing shippers. At the same time, FERC should not impede the 
pipeline's ability to take risks (at its shareholders'' expense), or 
take any other shortsighted steps to ``protect'' pipelines from the 
consequences of the market's responses (or lack of responses) to their 
capacity offerings. In this regard, the industrials urge a fair 
opportunity to earn a reasonable return, while also placing the 
pipelines at risk if the projected demand falls short of the capacity 
proposed.
    Fourth, FERC should continue to streamline its certificate 
procedures, including expanding the range of automatically authorized 
projects under the blanket certificate rules.
    We appreciate the strides FERC has made in this area in recent 
years and continue to support initiatives that ensure the development 
of adequate infrastructure to meet the ever-growing demand for natural 
gas.

VI. Common Misperception About Industrials and Fuel Switching
    The need for adequate supplies of natural gas at reasonable prices 
and the infrastructure to bring it to the market are critical areas of 
concern to PGC because, contrary to popular belief, industrial fuel 
switching is difficult and at times impossible.
    There is a common misperception that, for industrial end users of 
natural gas, all we have to do is go out to our plants and flip a 
switch to stop using natural gas and, in its place, use propane, or 
Number 2 or Number 6 fuel oil, or burn some other alternative fuel so 
we don't have to rely on natural gas. We stress to the Members of this 
Subcommittee today that fuel switching is simply not always possible.
    Regardless of the economics, for some industrials, fuel switching 
is impossible and the reasons vary from industrial to industrial. For 
instance, some industrials just do not have alternative fuel 
capability. Also, some industrials that perhaps at one point in time 
had the capability to fuel switch have given up the capability because 
of the increasingly stringent environmental restrictions. In one 
instance, one PGC member wanted to expand its plant. However, in order 
to get the appropriate air and environmental permits for that 
expansion, this industrial had to give up its ability to fuel switch, 
and, as a consequence, that plant no longer has fuel switching 
capabilities.
    Also, even absent a plant expansion, with more stringent 
environmental controls, it is harder to get the kinds of permits needed 
to burn coal and fuel oil. This means that even if one of our PGC 
members decided today to try to install more fuel switching capability, 
in the current environmental or regulatory landscape, it is not at all 
easy, and in some instances may be impossible.
    The other issue that comes into play is capital investment. It 
costs money for companies to maintain a secondary fuel capability and, 
in times of economic difficulty, that capital investment may be 
foregone. Some companies have been forced to make these tough economic 
decisions.
    Furthermore, if a company is using natural gas as a feedstock there 
is often no other energy substitute. For example, ammonia manufacturers 
combine the nitrogen molecule from air with hydrogen molecules from 
natural gas to create anhydrous ammonia, the basic building block for 
producing virtually all other forms of nitrogen fertilizer and ammonia 
based industrial products. There is no economically viable alternative 
for natural gas as a feedstock in this process.
    Moreover, even if there is an alternative fuel available, for many 
types of industries, the use of natural gas is a preferred energy 
choice. For example, if a wallboard manufacturer switches to Number 6 
fuel oil, that fuel oil can leave a sooty residue on the white 
wallboard that cannot be covered by paint. Therefore, although it is 
possible to switch, these types of manufacturers have product quality 
issues that, in effect, eliminate such an option. Similarly, fuel 
switching is not an efficient option for some backup systems, such as 
propane, where more experienced operators are needed because propane 
burns as a ``touchier'' flame than does natural gas.
    One of the PGC member companies manufactures cars and uses natural 
gas for drying the paint on the cars. This company can switch from 
using natural gas to using propane but, again, the process utilizing 
propone is very sensitive and, if it is not managed very well, an 
entire day's worth of the paint-drying process can be lost.
    Regardless of whether fuel switching remains a viable option, for 
some companies, even in an emergency situation, a minimum amount of 
natural gas is needed for plant protection purposes. For example, if a 
glass manufacturing facilities loses its gas supply quickly and does 
not maintain plant protection, the entire glass-manufacturing unit 
freezes up and cannot be restarted. These industrials have to scrap the 
entire plant and rebuild it again. I have been told that this could 
cost upwards of $20 million.
    For corn milling plants in the winter, a sudden loss in gas supply 
can cause those plants to freeze up as well. Now those, when the warm 
weather comes back, will eventually thaw out. But, apparently there is 
nothing that they can do to restart them once they lose the gas supply.
    Also, for some facilities, depending on the time of year, lines can 
burst. For ammonia manufacturers, these plants operate at very high 
temperatures. And even for plant protection volumes, that is generally 
about 70 percent of their maximum daily quantity.
    Another issue arises in the case of an emergency situation that 
requires a plant to shut down. In this case, the facility that needs to 
shut down would like as much notice as possible. Some of these large 
manufacturing units have told me that an emergency shutdown is three 
days. Preferably, these plants would like to have a couple of weeks to 
shut down a plant. Three days is what they like to have on an emergency 
basis in order to do it safely and in order to protect their investment 
in their equipment.

VII. Conclusion--White Paper Principles
    To conclude, I would like to focus your attention to the PGC white 
paper (``The Industrial End User Perspective on our Nation's Energy 
Policy'') that I have attached to my written testimony. The white paper 
outlines PGC's goals for the Administration and Congress with regard to 
the development of a national energy policy and the future of natural 
gas use, including the following principles I touched on today:
     Develop a balanced national energy policy that 
appropriately considers contributions from a broad variety of energy 
sources (including natural gas, coal, nuclear and hydropower as well as 
renewables such as biomass, solar and wind).
     Continue current policies allowing deregulated natural 
gas commodity prices.
     Encourage competition and the operation of free-market 
forces while preventing the exercise of monopoly power.
     Allow environmentally responsible, and timely, 
exploration and production of natural gas on public lands.
     Streamline environmental review and certification process 
to allow more rapid approval of interstate natural gas pipeline 
projects to bring natural gas supplies to market.
    That concludes my prepared remarks but I would be happy to answer 
any questions that the Subcommittee may have. I thank the Subcommittee 
for its interest in this important matter and for the opportunity to 
present the industrial point of view with regard to natural gas supply 
issues and the formation of a national energy policy.
                                 ______
                                 
    [An attachment to Mr. Gooch's statement follows:]
    [GRAPHIC] [TIFF OMITTED] T0724.012
    
    Mrs. Cubin. The Chair would now like to recognize Mr. 
Peters.

   STATEMENT OF EUGENE F. PETERS, VICE PRESIDENT, GOVERNMENT 
          AFFAIRS, ELECTRIC POWER SUPPLY ASSOCIATION.

    Mr. Peters. Madam Chair, thank you and good morning. My 
name is Eugene Peters, Vice President of Legislative Affairs 
for the Electric Power Supply Association (EPSA). I am here 
today representing our member companies.
    EPSA is a national association that represents the 
competitive electric power supply industry which owns and 
operates more than 35 percent of the nation's installed 
generating capacity.
    Our members include the leading developers of new power 
generation in the United States. In the first 6 months of this 
year, roughly 90,000 megawatts of new power generation came on 
line. A megawatt can provide roughly enough power for 1,000 
homes. Of this capacity, more than 97 percent was gas-fired.
    Our records show that there were about an additional 
250,000 megawatts of capacity under construction or in 
development in the United States today.
    While there is renewed interest and growing interest in 
fuels such as coal, nuclear and various renewable technologies, 
we believe that 90 percent or more of this capacity under 
development is likely to be gas-fired.
    Let me describe in some detail the attributes that have 
brought about this strong interest in natural gas within the 
electric power sector.
    First, availability. The domestic gas industry has an 
excellent and reliable supply infrastructure. Natural gas 
pipelines are often obtrusive and easier to cite than energy 
alternatives.
    Two, affordability. Historically natural gas prices have 
been very competitive with other fuels. Recently natural gas 
prices have shown significant price volatility. As you would 
expect, this volatility has led developers to broaden their 
focus to include a range of alternative fuels. However, 
companies seeking to use gas take advantage of a wide variety 
of techniques to hedge prices and protect themselves and their 
customers against volatility.
    Long-term contracts for supply, what are called tolling 
agreements with natural gas and power marketers and the direct 
acquisition of natural gas reserves are strategies that are 
commonly employed to guarantee profitable projects and 
affordable electric power.
    Three, environmental impact. Project development is 
difficult at any time. Local communities may not initially 
embrace power plant development, notwithstanding the 
significant tax and employment benefits that often result.
    Inevitably, difficult negotiations with host communities 
are often critical to demonstrate minimal environmental impact. 
Natural gas facilities benefit from their compact footprint and 
low emissions of the principal air pollutants.
    Four, advanced technology. Few technologies have been more 
advanced and refined over the last 25 years than those used to 
convert natural gas to electricity. Until the early 1980's, at 
highly efficient fossil fuel power plant, gas-fired or 
otherwise, would typically convert only one-third of the input 
fuel's energy content to electricity. The result would be lost 
as waste heat.
    For natural gas this 33 percent efficiency rate has 
dramatically improved to where technologies today convert the 
energy content of natural gas to electricity at a rate of over 
60 percent. This near doubling of energy efficiency had led to 
sharply lower operating costs over time.
    In addition to cost savings from increased efficiency, 
power plant developers have had access to equipment that is 
ever more reliable with predictable plant performance and 
construction time-lines.
    Now, given the attributes of natural gas and gas-fired 
power facilities, it is not surprising that the lion's share of 
projects and developments they utilize as fuel. While concern 
about over-dependence on any one source is always an 
appropriate focus for policymakers, alarm about these trends 
certainly is not.
    The competitive power developer, plant developer, is 
flexible and acutely aware of market trends. Although most 
companies are engaged in the development of gas facilities, 
these same companies, in many cases also own and operate coal-
fired, nuclear and renewable power plants.
    For example, one EPSA member, CalPine, is both a prominent 
natural gas plant developer and the largest operator of 
geothermal power plants in the world. We believe if supply 
constraints lead to higher prices you can explain the power 
industry to react quickly and appropriately to these trends.
    In addition, it is important to understand that the 
fundamental characteristics of the electric power supply 
portfolio will change only slowly due to the size of the 
industry. The largest fuel resource for electric generation is 
currently and is likely to remain coal, with new coal plants 
under development.
    In an analysis performed by the U.S. Energy Information 
Administration, natural gas fired power plants were more than 
double their capacity between 2000 and 2010. Yet in spite of 
all this growth, the market share of gas should only increase 
from the present rate of 17 percent to 26 percent in 2010.
    Coal, which fuels 51 percent of the power market today, 
would still dominate with 49 percent of the capacity in 2010. 
IF the move toward more gas capacity continues, we believe 
there will be plenty of time to make appropriate policy 
adjustments to insure a balanced energy portfolio for U.S. 
energy consumers.
    Our industry strives to provide the most affordable power 
possible to American consumers. In a competitive market place 
that applies rigorous downward pressure on prices, the cost and 
reliability of natural gas supplies is no academic concern.
    Abundant supplies lead to lower prices and continued 
interest in building gas-fired facilities. If that supply is 
threatened, our companies will shift to alternative fuels and 
technologies. We strongly encourage Federal policies that make 
available access to economical gas resources.
    While it is clear that there may be some environmental 
costs of this new production, we believe these to be limited 
and open to mitigation. Further, any environmental costs 
associated with development must be contrasted with the 
environmental benefits of gas use.
    Once again, I thank you for the opportunity to testify 
before your Subcommittee. Natural gas is a critical fuel for 
the national economy and electric power sector. We look forward 
to working with you in the Subcommittee to ensure balanced 
energy policy and continued access to clean, affordable, and 
efficient electricity production.
    [The prepared statement of Mr. Peters follows:]

 Statement of Eugene F. Peters, Vice President of Legislative Affairs, 
                   Electric Power Supply Association

    Madam Chairwoman Cubin, Representative Kind, and members of the 
Subcommittee, I am Eugene F. Peters, Vice President of Legislative 
Affairs for the Electric Power Supply Association (EPSA), and am here 
today on behalf of EPSA's member companies. EPSA is a national 
association that represents the competitive electric power supply 
industry. Our members include the leading developers of new power 
generation in the United States. I am pleased to testify before you 
concerning the use of natural gas as a fuel source in the electric 
power industry and the need for continued access to economic resources.
    Natural gas represents an abundant, clean-burning energy resource 
that is available from secure sources. The growth of the natural gas 
industry has been critical to the continued economic expansion of the 
U.S. economy, and gas has become a vital fuel for electric power 
production. In many regions of the United States, natural gas is the 
clear fuel of choice for new electric generation. Given the 
affordability and availability of gas, its excellent environmental 
characteristics and the continued development of new highly efficient 
technologies, this should of be no surprise.
    In the first six months of this year, roughly 90,000 MW of new 
power generation capacity came online (1 MW can provide enough power 
for about 700 families). Of this capacity, more than 97 percent was 
gas-fired. Our records show that there are about 350,000 MW of merchant 
capacity currently in operation, under construction or in development 
in the United States today. While there is renewed and growing interest 
in fuels such as coal, nuclear and various renewable technologies, 90 
percent or more of this capacity under development is likely to be gas-
fired.
    Let me describe in more detail each of the attributes that have 
brought about the strong interest in natural gas within the electric 
power sector:

Availability
    The domestic gas industry has an excellent and reliable supply 
infrastructure. Natural gas pipelines are often less obtrusive and 
easier to site than other energy alternatives. Utilizing natural gas 
can allow power plants to be sited with flexibility, allowing better 
access to regional markets or particular pockets of electricity demand.

Affordability
    Historically, natural gas prices have been very competitive with 
other fuels. The emergence of extremely efficient fuel-burning 
technologies (which I will further describe later in my testimony) 
strongly enhances this cost competitiveness. Recently, natural gas 
prices have showed significant price volatility. As you would expect, 
this volatility has led developers to broaden their focus to include a 
range of alternative fuels.
    However, companies seeking to use gas take advantage of a wide 
variety of techniques to hedge prices and protect themselves and their 
customers against dangerous volatility. Long-term contracts for supply, 
``tolling agreements'' with natural gas and power marketers and the 
direct acquisition of natural gas reserves are strategies that are 
commonly employed to guarantee profitable projects and affordable 
electric power.

Environmental Impact
    Project development is difficult at any time. Local communities may 
not initially embrace power plant development, notwithstanding the 
significant tax and employment benefits that often result. In the 
inevitably difficult negotiations with host communities, it is often 
critical to demonstrate minimal environmental impact. Natural gas 
facilities benefit from their compact ``footprint'' and low emissions 
of the principal air pollutants--SO2, NOX and mercury. While the 
environmental attributes of competing fuels are steadily improving, 
natural gas facilities are likely to retain for some time a significant 
edge with respect to land-use issues and effects on air quality.

Advanced Technology
    Few technologies have been more advanced and refined over the past 
twenty- five years than those used to convert natural gas to 
electricity. Until the early 1980s, a highly efficient fossil fuel 
power plant (gas-fired or otherwise) would typically convert only one-
third of the input fuel's energy content to electricity. The rest would 
be lost as waste heat. For natural gas, this 33 percent efficiency rate 
has dramatically improved to where technologies now convert the energy 
content of natural gas to electricity at a rate of over 60 percent. 
This near doubling of energy efficiency has led to sharply lower 
operating costs over time.
    In addition to cost-savings from increased efficiency, power plant 
developers have had access to equipment that is ever more reliable, 
with predictable plant performance and construction timetables. Prior 
to 1980, all electric power plants were essentially custom-designed and 
constructed. No longer. Turn-key projects, with performance guaranteed 
by the equipment manufacturer, are the rule, not the exception. In a 
competitive setting, there is a high premium placed on the technical 
sophistication and predictability that has been engineered into the 
modern natural gas-fired power plant.

Questions of Fuel Diversity
    Given the attributes of natural gas and gas-fired power facilities, 
it is not surprising that the lion's share of projects in development 
today utilize this fuel. While concern about overdependence on any one 
fuel source is always an appropriate focus for policy makers, alarm 
about these trends certainly is not.
    The competitive power plant developer is flexible and acutely aware 
of market trends. Although most companies are engaged in the 
development of gas facilities, these same companies also own and 
operate coal-fired, nuclear and renewable power plants. For example, 
one EPSA member, Calpine, is both a prominent natural gas plant 
developer and the largest operator of geothermal plants in the world. 
If supply constraints lead to higher gas prices, expect the power 
supply industry to react quickly and appropriately to these trends.
    In addition, it is important to understand that the fundamental 
characteristics of the electric power supply portfolio will only change 
slowly, due to the size of the industry. The largest fuel resource for 
electric generation is currently, and is likely to remain, coal.
    In an analysis performed by the U.S. Energy Information 
Administration, natural gas-fired power plants will more than double 
their capacity between 2000 and 2010. Yet, in spite of all this growth, 
the market share of gas should only increase from the present rate of 
17 percent to 26 percent in 2010. Coal, which fuels 51 percent of the 
power market today, should still dominate with 49 percent of the 
capacity in 2010. If the move towards more gas capacity continues, we 
believe there will be plenty of time to make any appropriate policy 
adjustments to ensure a balanced energy portfolio for U.S. electricity 
consumers.

Gas Production from Federal Lands
    Our industry strives to provide the most affordable power possible 
to American consumers. In a competitive marketplace that applies 
rigorous downward pressure on prices, the cost and reliability of 
natural gas supplies is no academic concern.
    Abundant supply leads to lower prices and continued efforts to 
build gas-fired facilities. If that supply is threatened, our companies 
will shift to alternative fuels and technologies. We strongly encourage 
federal policies that make available access to economical gas 
resources. While it is clear that there may be some environmental costs 
to this new production, we believe these to be limited and open to 
mitigation. Furthermore, the environmental costs of production can be 
more than offset by the environmental benefits that flow from the 
development of clean-burning gas power plants.
Conclusion
    Once again, I thank you for the opportunity to testify before your 
Subcommittee. Natural gas is a critical fuel for the national economy 
and the electric power sector. Efforts to increase the supply of gas 
will pay dividends--both economic and environmental--for all Americans. 
We look forward to working with the Subcommittee to ensure a balanced 
energy strategy and continued access to clean, affordable and efficient 
electricity production.
                                 ______
                                 
    Mrs. Cubin. Thank you, Mr. Peters. I will begin questioning 
by asking all of you to respond to one question.
    What kinds of policy initiatives do you think we in 
Congress, as well as the administration, should be promoting in 
order to ensure an adequate natural gas supply?
    I will start with Mr. Schleede.
    Mr. Schleede. I think the most important one is the one 
that I hope you are focusing on here and that is opening up 
public lands, on shore and off shore. It seems to me it offers 
the best promise for early availability of natural gas and 
there are others that I mentioned, getting the pipelines built. 
Keeping the costs down on those pipelines would help a whole 
lot.
    Mrs. Cubin. Mr. Gooch?
    Mr. Gooch. I would say a balanced approach to energy. You 
can't just focus all on natural gas, even though it is very 
clean burning. There is only so much in the ground and once you 
pull it out and consume it, it is gone.
    For some of the manufacturing companies, gas is their only 
alternative. So, a more balanced approach, be it renewals, 
bringing back nuclear power or whatever, but you can't just 
focus on natural gas alone.
    Mrs. Cubin. Thank you.
    Mr. Peters?
    Mr. Peters. Yes. I note that H.R. 4, which was passed by 
this body, included important provisions dealing with Federal 
leasing management, royalty reform and technological 
development. Certainly all three of those areas need to be 
reinforced by Federal policy.
    I would add that one of the things that is very important 
for policymakers to recognize, and I think you will hear this 
on the next panel, is really the difference between the sort of 
short term costs and the long term costs.
    A lot of the electricity producers really have shifted 
toward longer term contracts in order to hedge that risk. One 
of the things that we see occasionally is political, the 
politics of that. When the spot prices drop, those contracts 
look high and you get a lot of policymakers second-guessing a 
lot of decisions that get made.
    It is very important for people to recognize the value of 
those long-term contracts to stability within the industry, 
both the electric power industry and the natural gas supply 
industry.
    Mrs. Cubin. Stability of industry certainly is of major 
concern. Mr. Gooch, I think you alluded to that in your 
testimony. What do you think a sustained period of high prices, 
say in the $8 to $10 per thousand cubic feet range, would have 
on your business and other businesses like it?
    Mr. Gooch. Well, certainly in the first quarter of 2001, 
the fertilizer business practically shut down completely, with 
prices that were upwards of $10. Even when they were $4, many 
companies could not continue to operate. We are in a very 
globally competitive environment, a worldwide environment.
    Nitrogen is manufactured in Trinidad, in Venezuela and in 
Russia for far cheaper prices. Venezuela's price of gas is 
equivalent to fifty cents right now. That is the feedstock to 
make ammonia.
    We are not going to see any expansion in this country of 
ammonia plants in the near future, I am afraid, because of high 
natural gas prices. Right now we are just struggling to 
survive. So, to answer your question, if gas again got up to 
that kind of level I think we would see permanent shutdowns, 
many more than what we have already seen, of businesses in this 
country.
    Mrs. Cubin. In addition to the shutdown, I guess the next 
step is then in order to meet the needs the plants would move 
overseas where the cost to do business is cheaper. Would you 
agree with that?
    Mr. Gooch. Yes, absolutely, especially in the fertilizer 
business, we are already seeing expansions primarily in 
Trinidad and Venezuela because they are very close to the U.S. 
from a shipping standpoint.
    Mrs. Cubin. So, if there are environmental concerns it is 
another one of those NIMBY things where the situation of the 
impact on the environment doesn't change, it just changes where 
it is. I think anyone who is interested and concerned about the 
environment has to realize that it is a global environment that 
we all live in, not just an environment here in our backyard.
    I would like to ask Mr. Peters a question. My time is just 
about up. If the trends toward diminishing gas supply continue, 
what do you think will happen to all of the new planned natural 
gas fired generation capacity that we are counting on and where 
will our power come from?
    Mr. Peters. Well, first of all, as anyone who studies the 
industry knows, nothing changes over night. The question that 
Mr. Tauzin asked about what a recoverable resource is, it deals 
with the economics. So, if the price goes to $8 and $10, you 
hope that doesn't happen, but if it does the resources will 
increase.
    What you see when you look at natural gas, you don't see 
sudden changes. It is not like today there is capacity and 
tomorrow there is not. I think the important thing is for the 
right price signals to be there so people can make the 
appropriate decisions.
    Every one of my companies can develop coal facilities. They 
can develop nuclear facilities. They can develop renewable 
resources, and they do. I think that what we want to guard 
against are policies that lead to abrupt changes in price or 
availability of supplies. As long as that doesn't happen, I 
think the planning timeframe will continue to be ten to 15 
years and people will make the right set of decisions.
    But make no mistake about it. If the prices start to become 
more volatile with more frequency, you will see, as you have 
already seen, shifting development to coal supplies, to renewed 
interest in nuclear and to renewable supplies.
    Mrs. Cubin. One last quick question, Mr. Peters, do you see 
an adequate natural gas supply for this coming winter?
    Mr. Peters. Adequate is always a question of what the--you 
know. Especially when you talk about the winter, you are 
talking really about issues that are bigger than the electric 
power industry. It is how cold it is.
    Mrs. Cubin. Nature?
    Mr. Peters. Exactly. I think that is a question that is 
probably best left to the folks that come after me. My guess is 
that there are adequate supplies for this winter. I think that 
most people believe that to be true. But again, you know, you 
are in a situation where you have a strong winter peak for a 
lot of natural gas usage.
    If you get a very cold winter, you could have increased 
price volatility. That is what you will see. You probably won't 
see gas cutoff; you will see increased price volatility. Then 
what you will see is companies that have either protected 
themselves or not. If you have protected yourself, then you 
have bought in and you look smart in retrospect because you 
will have locked in prices at a low rate and prices will 
escalate and other people will be paying more for gas.
    I think that is what you will see. You won't see a physical 
shortage, but you will see high price volatility and we hope 
that doesn't occur.
    Mrs. Cubin. Thank you. I would now like to recognize Mr. 
Kind.
    Mr. Kind. Thank you. I thank you all for coming. I 
appreciate your testimony.
    Mr. Schleede, is the problem in regards to meeting our 
natural gas potential or production a matter of being able to 
deliver to the market those reserves which exist on public 
lands or is the so called closed lands a significant issue too, 
in your opinion?
    Mr. Schleede. Well, in my opinion or at least in the 
opinion of the experts that I listen to, it is heavily due to 
the lack of access to public lands, particularly in the Rockies 
now and off the east and west coast, around Florida. That is 
the principal problem.
    Pipelines get built when there is need for them. Pipelines 
get built. There is the Federal Energy Regulatory Commission 
that has recently approved about 25 different pipeline new 
construction and beefing up of existing pipeline capacity. 
Those do get built when the supply is there and when the demand 
is there. That is the access to the resource that is important.
    Mr. Kind. Just so we are clear, are you claiming that there 
is no enough access on the public lands now in order to develop 
the natural gas reserves that are there or the access is there, 
but it is just difficult in producing it and getting it to 
market?
    Mr. Schleede. Based on the views that I have seen from 
people who know a lot more about the gas markets than I do, it 
is sufficient access to the lands for exploration and 
development.
    Mr. Kind. How much reserve capacity are we talking about if 
we deal with the access problem?
    Mrs. Cubin. Mr. Schleede, I am not sure your microphone is 
on. It is a little difficult to hear.
    Mr. Schleede. Maybe I am too far away from it.
    The numbers that I have used relying on the person I 
consider to be quite an expert in this area show that in the 
Rocky Mountains area alone 137 to 346 trillion cubic foot of 
gas, 40 percent of which is restricted. Now, our current 
consumption is around 23 or 24 Tcf, trillion cubic feet, and 
here we are talking in the Rockies of 137 to 346.
    Offshore and Pacific, another 21 trillion cubic feet. 
Offshore the east coast, 10 trillion. Off Grand Banks, another 
31. Off the Atlantic offshore and slope, and then British 
Columbia also has some restrictions on its things. So, there is 
a lot of gas there, not to mention ANWR, of course.
    Mr. Kind. Thank you. Thank you all. I appreciate your 
testimony. Thank you, Madam Chair.
    Mrs. Cubin. I would like to thank the panel for their 
testimony and once again mention that there will be members who 
have further questions and we would appreciate if you would 
respond to those in writing. Now I will call the third panel, 
Ms. Mary Hutzler, Acting Administrator of the Energy 
Information Administration; Mr. Matthew Simmons, the President 
of Simmons and Company, International; and Mr. Diemer True, 
Partner and Chairman, True Oil Company, Independent Petroleum 
Association of America.
    Once again, I welcome you. We will start the testimony with 
Ms. Hutzler. Thank you for your testimony. Please begin.

   STATEMENTS OF MARY HUTZLER, ACTING ADMINISTRATOR, ENERGY 
                   INFORMATION ADMINISTRATION

    Ms. Hutzler. Madam Chairman, I appreciate the opportunity 
to appear before you today to discuss the outlook for natural 
gas markets in the United States.
    The projections in my testimony are from the Energy 
Information Administration's July Short Term Energy Outlook and 
our Annual Energy Outlook 2002.
    Over the past several years natural gas prices have faced 
extreme volatility due to demand spikes related to weather and 
the economy. Moreover, low levels of hydroelectric generation 
in the Northwest caused higher demand for natural gas 
generation.
    When supplies are not adequate to meet demand, prices rise 
to bring supply and demand into balance. However, there is a 
lag between higher prices and higher production due to the time 
required to explore for it, drill and produce natural gas.
    Volatility in prices causes shifts in drilling investments 
which cause variations in production and it also causes 
variations in consumption.
    EIA projects natural gas demand to increase by 1.7 percent 
in 2002 with growth in both the industrial and generating 
sectors. In 2003, natural gas demand is expected to increase by 
3.5 percent, boosted by higher heating related demand and an 
accelerating economy which will return gas demand to its 2000 
levels of 22.5 trillion cubic feet.
    As of the end of June, working gas in storage was estimated 
to be 19 percent above the 5-year average and about 22 percent 
higher than a year ago. Storage is expected to remain above 
average levels through the beginning of the next heating season 
and beyond.
    Due to the low demand growth and high storage inventories, 
domestic dry natural gas production is projected to fall by 2.3 
percent in 2002. Lower natural gas prices have reduced gas 
production and gas drilling activity from their highs of last 
summer. Current supplies, including natural gas and storage 
appear to be at very comfortable levels.
    In 2003, production is expected to rebound by 4.1 percent 
as demand rises. Until last week, spot wellhead prices had been 
over $3 per thousand cubic feet since mid March. The market has 
been fairly volatile over the last several months, with spot 
gas prices varying by as much as 25 cents per thousand cubic 
feet on a daily basis.
    Weather forecasts and underground storage reports are two 
factors that have had an effect on the spot price of gas. We 
project natural gas prices to average $2.89 per thousand cubic 
feet in 2002 and $3.22 in 2003.
    Over the long term, U.S. natural gas consumption is 
expected to increase by 2.2 percent annually, from 2001 to 
2020, to nearly 34 trillion cubic feet.
    As this chart shows, most new electric generation capacity 
is expected to be fueled by natural gas, despite decreasing 
coal prices to the electric generation sector. Natural gas 
fired electric generators are expected to have advantages over 
coal-fired generators, including lower capital costs, higher 
fuel efficiency, shorter construction lead times and lower 
emissions.
    In 2001, electric generators, not including industrial 
cogenerators, were the third largest consumers of natural gas. 
By 2020, however, the projected growth in gas-fired generation 
is expected to make electric generators the largest gas-
consuming sector.
    Gas consumption by electric generators is expected to more 
than double over the forecast. Industrial consumption is also 
expected to increase driven primarily by macroeconomic growth. 
Consumption in the residential and commercial sectors increases 
as well due to increase in population, healthy economic growth 
and preference by consumers to use natural gas as a heating 
fuel.
    Long-term domestic gas production is projected to increase 
at an annual rate of 2 percent, rising from 19.3 trillion cubic 
feet in 2001 to 28.5 trillion cubic feet in 2020. Growing 
production reflects rising wellhead gas prices, relatively 
abundant gas resources and improvements in technologies, 
particularly for offshore and unconventional gas.
    Lower 48 onshore conventional, non-associated sources are 
expected to remain the largest gas production source, 
increasing from 36 percent of domestic production in 2001 to 39 
percent in 2020, as you can see from this chart.
    Off shore production, mainly from the wells and the Gulf of 
Mexico is also expected to increase, although less rapidly. 
Unconventional gas production increases at the fastest rate of 
any source, from 26 percent in 2001 to 28 percent in 2020, 
largely because of expanded tight sands gas production in the 
Rocky Mountain region.
    Alaska natural gas production rises gradually over the 
forecast to provide for consumption in the State itself and 
continued LNG exports to Japan.
    The projection forecasts are based on estimates of the 
resource base from the U.S. Geological Survey and the Minerals 
Management Service. Total technically recoverable natural gas 
resources in the United States as of January 1, 2000, is 
estimated to be 1,191 trillion cubic feet. Based on this 
estimate, the U.S. could produce almost 30 trillion cubic feet 
of natural gas a year for the next 40 years.
    The difference between consumption and production is met by 
the increasing use of imports, particularly from Canada. By 
2020, total net imports are expected to increase by 1.8 
trillion cubic feet.
    The reopening and expected expansion of mothballed 
liquefied natural gas terminals is expected to result in a 
significant increase in net LNG imports, reaching 830 billion 
cubic feet in 2020.
    National average wellhead prices are expected to increase 
to $3.26 per thousand cubic feet in 2020. That is in 2000 
dollars. In nominal dollars, it is equal to $5.56. The 
projected price of natural gas reflects the long run marginal 
cost of domestic natural gas production which depends strongly 
on technological progress.
    In our slow and rapid technology cases, we assume that the 
rate of technological improvement and production costs, finding 
rates and success rates will respectively decrease or increase 
by 25 percent relative to the historical rate in the reference 
case.
    The Lower 48 average wellhead price in 2020 in the slow 
technology case is projected to be $4.06 per thousand cubic 
feet, which is 25 percent higher than the reference case.
    In the rapid technology case, Lower 48 natural gas wellhead 
prices are projected to be $2.73 per thousand cubic feet in 
2020, 15 percent lower than the reference case.
    These price forecasts are long term price trends and as 
such do not reflect the transient conditions which cause price 
volatility.
    Thank you, Madam Chairman. I would be happy to answer any 
questions you may have.
    Mrs. Cubin. Thank you.
    [The prepared statement of Ms. Hutzler follows:]

Statement of Mary J. Hutzler, Acting Administrator, Energy Information 
                  Administration, Department of Energy

    Madame Chairman and Members of the Subcommittee:
    I appreciate the opportunity to appear before you today to discuss 
the mid-term outlook for natural gas markets in the United States.
    The Energy Information Administration (EIA) is the statutorily 
chartered 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 Department of 
Energy, other Government agencies, the U.S. Congress, and the public. 
We do not take positions on policy issues. We produce data and analysis 
reports that are meant to help policy makers determine 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. EIA's 
baseline projections on energy trends are widely used by Government 
agencies, the private sector, and academia for their own energy 
analyses.
    The projections in this testimony are from the Annual Energy 
Outlook 2002 (AEO). These projections are not meant to be exact 
predictions of the future, but represent a likely energy future, given 
technological and demographic trends, current laws and regulations, and 
consumer behavior as derived from known data. EIA recognizes that 
projections of energy markets are highly uncertain, subject to many 
random events that cannot be foreseen, such as weather, political 
disruptions, strikes, and technological breakthroughs. (Many of these 
uncertainties may be explored through alternative cases.)

Overview and Assumptions
    The Annual Energy Outlook is produced using the National Energy 
Modeling System (NEMS), a computer-based, energy-economy modeling 
system of U.S. energy markets for the period through 2020. NEMS 
projects the production, imports, consumption, and prices of energy, 
subject to assumptions on macroeconomic and financial factors, world 
energy markets, resource availability and costs, behavioral and 
technological choice criteria, cost and performance characteristics of 
energy technologies, and demographics. Two of the key assumptions in 
NEMS are world oil prices and macroeconomic growth.
    World oil prices averaged about $22 per barrel in 2001. Between now 
and 2020 they are expected to rise to about $25 a barrel in 2000 
dollars, as world oil demand increases from 76 million barrels per day 
to 119 million barrels per day. Growth in oil production in both OPEC 
and non-OPEC nations leads to relatively slow growth in prices through 
2020. OPEC production is expected to reach 58 million barrels per day 
in 2020, nearly double the 31 million barrels per day produced in 2000. 
Non-OPEC production is expected to increase from 46 to 61 million 
barrels per day between 2000 and 2020.
    Even though there was an economic slowdown in the United States in 
2001, by 2003 gross domestic product is projected to grow by 3.1 
percent and to continue to grow at an annual average rate of 3.0 
percent between 2000 and 2020. Productivity growth (GDP growth minus 
labor force growth) is expected to increase 2.2 percent per year 
through 2020. The projected rates of growth in GDP and labor force 
productivity are lower in the first 5 years of the forecast period, 
reflecting present economic uncertainty and revisions to national 
income and product account data from the Bureau of Economic Analysis. 
They are expected to pick up as productivity increases and the economy 
moves back to its long-term growth path. Total population growth is 
expected to remain fairly steady, with an annual growth rate of 0.8 
percent per year. The slowing growth in the size of the labor force 
results from the increasing size of the population over the age of 65.

Natural Gas Outlook to 2020
    U.S. natural gas consumption is expected to increase by 2.2 percent 
annually from 2001 through 2020, to nearly 34 trillion cubic feet (Tcf) 
(Figure 1). Most new electricity generation capacity is expected to be 
fueled by natural gas. Despite decreasing coal prices to the 
electricity generation sector, natural-gas-fired electricity generators 
are expected to have advantages over coal-fired generators, including 
lower capital costs, higher fuel efficiency, shorter construction lead 
times, and lower emissions. In 2001, electricity generators, not 
including industrial cogenerators, were the third-largest consumers of 
natural gas. By 2020, however, the projected enormous growth in gas-
fired generation makes electricity generators the largest gas-consuming 
sector, rising 0.2 Tcf above the industrial sector. Gas consumption by 
electric generators is expected to more than double over the forecast, 
from 4.3 Tcf in 2001 to 10.3 Tcf by 2020.

[GRAPHIC] [TIFF OMITTED] T0724.013

    Historically 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 consumption is 
expected to increase by 1.7 Tcf over the forecast, driven primarily by 
macroeconomic growth.
    Combined consumption in the residential and commercial sectors is 
projected to increase 2.1 Tcf from 2001 to 2020, driven by increasing 
population, healthy economic growth, and preference by consumers to use 
natural gas as heating fuel over other heating fuel types. Because 
residential natural gas prices are projected to be lower than the 
prices of other fuels, the number of homes heated by natural gas is 
projected to increase more than those heated by electricity. Natural 
gas currently accounts for 20 percent of commercial energy consumption 
and is projected to maintain that share throughout the forecast.
    Supply and Imports. Domestic gas production is projected to 
increase at an average annual rate of 2 percent over the forecast, 
rising from 19.3 Tcf in 2001 to 28.5 Tcf in 2020 (Figure 2). Growing 
production reflects rising wellhead gas prices from 2002 through 2020, 
relatively abundant gas resources, and improvements in technologies, 
particularly for offshore and unconventional gas. However, under the 
prices in our reference case we do not expect that additional liquefied 
natural gas (LNG) facilities will be constructed or that an Alaskan 
pipeline will be built to the Lower 48 States through 2020. The 
national average wellhead price is projected to be $3.26 per thousand 
cubic feet (Mcf) in 2000 dollars in 2020.

[GRAPHIC] [TIFF OMITTED] T0724.014

    The difference between consumption and production is met by the 
increasing use of imports throughout the forecast, particularly from 
Canada. By 2020, total net imports are expected to increase1.8 Tcf over 
2001 levels of 3.6 Tcf. While we do not expect the construction of new 
LNG terminals in the United States by 2020, expansion at the existing 
terminals and opening of mothballed terminals is expected to result in 
a significant increase over 2001 LNG import levels, from 0.24 Tcf to 
0.83 Tcf. One LNG facility, at Cove Point, Maryland, has been closed 
for years but is expected to reopen late in 2002 or early in 2003. By 
2010, this facility plus the three currently operating facilities at 
Elba Island, Georgia; Everett, Massachusetts; and Lake Charles, 
Louisiana, will be operating at full capacity, including announced 
expansions.
    Resources. The estimate of total technically recoverable natural 
gas resources in the United States as of January 1, 2000, that was used 
in developing this forecast, is 1,191 Tcf. Based on this estimate, the 
United States could produce almost 30 Tcf of natural gas a year for the 
next 40 years.
    Proved natural gas reserves were 167 Tcf in the beginning of 2000 
(Figure 3). Proved reserves are gas from known reservoirs that have 
been demonstrated with reasonable certainty (using geological and 
engineering data) as being recoverable in future years under existing 
economic and operating conditions.

[GRAPHIC] [TIFF OMITTED] T0724.015

    Inferred natural gas reserves (at 233 Tcf) are gas in known 
reservoirs that are estimated to exist, but data are insufficient as to 
the certainty of recovery. Some 79 percent of inferred reserves are in 
onshore reservoirs.
    Undiscovered resources are unproved resources that are estimated to 
exist in fields that have yet to be discovered. More than half of the 
estimated U.S. technically recoverable undiscovered resources are in 
the offshore, with 65 percent of these in deep waters, greater than 200 
meters. The largest category of unproved resources is unconventional 
gas resources, 370 Tcf, with 69 percent from tight gas (low 
permeability deposits in sandstone formations).
    Drilling. One of the key activities in producing natural gas is 
drilling. The slowdown in drilling that resulted from low natural gas 
wellhead prices in 1998 and 1999 is one of the contributing factors to 
the high winter prices of late 2000 and early 2001, and the subsequent 
boom in drilling in 2000 and 2001.
    While lower prices are expected to bring down drilling levels in 
2002, overall drilling generally increases in the AEO2002 forecast. The 
number of gas wells drilled is estimated to be 15,600 in 2000, 22,000 
in 2001, 13,000 in 2002 and 21,700 in 2020 (Figure 4). Throughout the 
forecast about 96 percent of total gas wells are drilled for 
development in proven reservoirs.

[GRAPHIC] [TIFF OMITTED] T0724.016

    Increases in drilling over the forecast are largely driven by 
growing revenues from drilling activities, as a result of both higher 
prices and higher production levels. A secondary driver of increased 
drilling is decreases in drilling costs resulting from technological 
advances. Technological improvements in the oil and gas supply industry 
are assumed to continue at historically estimated rates. For example, 
the annual rate of technological improvement in drilling costs is 
estimated to be a low of 0.9 percent for shallow wells and a high of 
2.6 percent for deep wells.
    Drilling Costs. Drilling costs are estimated at the regional level 
and take into account the separate impacts of drilling to greater 
depths, rig availability, the level of drilling activity in the given 
year, and technological progress. Technology exerts downward pressure 
on costs but drilling to greater depths, increases in drilling 
activity, and reductions in rig availability exert upward pressure on 
costs. In order for drilling costs to decline, technology must offset 
the impacts of these other components.
    Average onshore drilling costs per well have been increasing for 
the past decade as the use of relatively new, more expensive techniques 
has increased (Figure 5). Costs are estimated to increase in 2000 and 
2001, primarily because of the growth in drilling in activity and rig 
demand. As technologies continue to reduce costs and the growth in 
drilling activity stabilizes, drilling costs on average are projected 
to decline. By 2020, average onshore drilling costs per well are 
projected to be almost 26 percent lower than in 2001 (9 percent lower 
than in 1999).

[GRAPHIC] [TIFF OMITTED] T0724.017

    Historically, average offshore technology gains have been more 
substantial than average onshore gains. The average cost to drill an 
offshore well significantly increased after 1996 driven by an increase 
in drilling in the deep waters of the Gulf of Mexico. Continued 
technological improvements in deep water drilling is expected to lower 
the overall offshore drilling cost. By 2020, the cost to drill an 
offshore well is projected to be 19 percent lower than in 2001 and 15 
percent lower than in 1999.
    Finding Rates. Reserve additions are calculated through a set of 
equations distinguishing between new field discoveries, discoveries in 
known fields (also defined as extensions and new pools), and increases 
due to re-evaluation of discovered areas during the developmental phase 
(also known as revisions and adjustments).
    The finding rate equations capture the impacts of technology, as 
well as the impact of prices and declining resources. In the absence of 
technological and economic change, the yield from exploratory and 
developmental drilling declines with cumulative additions. This 
reflects the natural progression of the discovery process from larger, 
more profitable fields to smaller less economical ones. The more mature 
the region, the faster the decline. Technological advancement 
accelerates the discovery of the resource by improving the ability to 
target the more promising resources and by making current uneconomic 
resources accessible and economic--it does not create new resources.
    Natural gas finding rates have varied significantly over the 
historical period, particularly for offshore wells, but have generally 
increased from the levels seen in the early 1980's (Figure 6). Over the 
projection period, onshore gas finding rates are projected to remain 
fairly constant (roughly 1 billion cubic feet per well). Offshore 
finding rates are projected to be generally declining yet remaining 
well above the projected rate for onshore wells.

[GRAPHIC] [TIFF OMITTED] T0724.018

    Reserve Additions. For most of the past two decades lower 48 
natural gas production has exceeded reserve additions, but the pattern 
for natural gas reversed from 1994 through 1997. With the 1998 decline 
in prices, reserve additions once again fell below production, but they 
exceeded production again in 1999. After 2004, rising prices are 
projected to result in natural gas reserve additions that generally 
exceed production through 2020, even with expected increases in demand.
    The relatively high projected levels of annual gas reserve 
additions through 2020 reflect an expected increase in exploratory and 
developmental drilling (Figure 7). This increase is a result of higher 
prices and expected strong growth in demand, as well as expected 
productivity gains from technology improvements comparable to those of 
recent years.

[GRAPHIC] [TIFF OMITTED] T0724.019

    Production by Source. Domestic gas production is expected to 
increase from 19.3 Tcf in 2000 to 28.5 Tcf in 2020. Increased U.S. 
natural gas production is expected to come primarily from lower 48 
onshore conventional nonassociated sources--which accounted for 36 
percent of U.S. domestic production in 2001--with an expected increase 
of 3.9 Tcf by 2020 (Figure 8).

[GRAPHIC] [TIFF OMITTED] T0724.020

    Offshore production, mainly from wells in the Gulf of Mexico, is 
also expected to increase between 2001 and 2020, although less rapidly. 
Lower 48 offshore Gulf Coast production was 5.2 Tcf in 2001, down 
slightly from the record 5.5 Tcf level in 1996. But by 2020 this level 
is expected to increase to 6.8 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. Annual 
production from unconventional sources is expected to increase by 4.1 
Tcf by the end of the forecast. Alaska natural gas production rises 
gradually over the forecast to provide for consumption in the State 
itself and continued LNG exports to Japan.
    Incremental Production. The Rocky Mountain region, with the 
majority of the unconventional production (Figure 9), shows the 
greatest increase in production from 2000 through 2020 due to improved 
technologies and the availability of abundant resources. The highest 
producing region throughout the forecast is the offshore Gulf of 
Mexico. Innovative use of cost-saving technology in recent years and 
the expected mid-term continuation of recent huge finds, particularly 
in the deep waters of the Gulf of Mexico, support the projections. 
While the onshore Gulf Coast region is the second highest producing 
region throughout the forecast, it is the only region with a decline in 
production in the last 3 years. Both the Southwest and the Mid-
continent regions grow at about the same rate as the total U.S. 
production, generally maintaining their regional share. The Northeast 
continues to be the second lowest producing region throughout the 
forecast, but shows the greatest growth in percentage terms. The 
majority of gas production from the Northeast is from unconventional 
sources such as tight sands and gas shales in Michigan, Pennsylvania, 
and West Virginia.

[GRAPHIC] [TIFF OMITTED] T0724.021

    Historic Gas Production. The growth in natural gas production 
projected from 2000 to 2020 is not unprecedented for the natural gas 
industry. From 1952 to 1972 production increased faster than projected 
over the next 20 years (Figure 10). However, the natural gas market in 
the 1960's was quite different than today's market and from the market 
anticipated in the future. One difference is the deregulation of 
natural gas prices at the wellhead. Even in real terms prices were 
significantly lower during the earlier time frame than they are today. 
The average wellhead price from 1952 to 1971 was only 27 percent of the 
average wellhead price between 1995 and 2000 ($0.64 compared to $2.38 
per Mcf in 2000 dollars). Higher prices provide greater incentive to 
increase production.

[GRAPHIC] [TIFF OMITTED] T0724.022

    A more important difference is the quality of available prospects. 
Producers tend to first drill for the gas that is relatively cheaper to 
access and produce. Progressively over time the more expensive 
prospects are tapped. However, vast improvements in exploration and 
production technologies have brought overall costs down significantly. 
One of the key areas of improvement has been the ability to better 
determine where gas is located before drilling an expensive and 
potentially dry hole.
    Prices. Wellhead natural gas prices are expected to be more 
sensitive to variation in technological change than are the levels of 
natural gas production and consumption. The projected price of natural 
gas reflects the long-run marginal cost of domestic natural gas 
production and imports, which depends strongly on technological 
progress. Natural gas production and imports, however, vary across the 
technology cases only to the extent that demand for natural gas 
responds to the change in price.
    Natural gas demand is relatively unresponsive to price changes in 
the short term but can be more responsive over time as price 
differences among competing fuels lead to different decisions with 
regard to purchases of natural-gas-consuming equipment.
    Over the projection period, lower 48 natural gas wellhead prices 
are projected to increase from the average wellhead natural gas price 
of $2.38 per thousand cubic feet between 1995 and 2000 in the reference 
and technology cases (Figure 11). The slow and rapid technology cases 
assume that the rate of technological improvement in production costs, 
finding rates, and success rates will respectively decrease or increase 
by 25 percent, relative to the historical rate assumed in the reference 
case.

[GRAPHIC] [TIFF OMITTED] T0724.023

    The lower 48 average wellhead price in 2020 is projected to be 
$4.06 per thousand cubic feet in the slow technology case, which is 25 
percent higher than the reference case price of $3.26 per thousand 
cubic feet in 2020 ($5.56 in nominal dollars). In the rapid technology 
case, lower 48 natural gas wellhead prices are projected to remain 
relatively flat from 2005 through 2020, reaching $2.73 per thousand 
cubic feet in 2020, which is 16 percent lower than in the reference 
case. These price forecasts are long-term price trends and as such do 
not reflect the volatility in short-term markets. For example, the 
variation from the general price trajectory in any given year could be 
significant, as happened in 2001.
    Access to Restricted Federal Lands and Waters. Federal access 
restrictions substantially affect the Rocky Mountain region, where 
considerable natural gas resources are either off limits to exploration 
and development or subject to Federal lease stipulations when 
production is allowed. Federal access limitations also affect offshore 
natural gas resources in the Pacific, Atlantic, and Eastern Gulf of 
Mexico Outer Continental Shelf. If Federal access restrictions were 
reduced as described in the EIA's December 2001 study, U.S. Natural Gas 
Markets: Mid-term Prospects for Natural Gas Supply, the technically 
recoverable natural gas resource base would be expected to increase by 
86 tcf, expanding the resource base 7 percent (from 1,191 Tcf to 1,277 
Tcf), and 50.8 Tcf of resources in the Rocky Mountain region would 
become less costly to develop because of shorter lead times. This 
reduction in restrictions does not include access to the estimated 62.5 
Tcf of natural gas resources in National Parks, National Monuments, and 
wilderness and roadless areas.
    With the larger, less costly resource base, cumulative lower 48 
reserve additions throughout the forecast are projected to be 15 Tcf 
higher than in the reference case (506 Tcf compared to 491 Tcf). The 
remaining lower 48 natural gas reserves in 2020 are projected to be 11 
Tcf higher than in the reference case. With this improved reserve 
position, natural gas production in 2020 is projected to be 0.6 tcf 
higher, and the average wellhead price is projected to be 11 cents per 
thousand cubic feet lower than in the reference case (Figure 12).

[GRAPHIC] [TIFF OMITTED] T0724.024

Conclusion
    In summary, domestic natural gas production is projected to 
increase by 2 percent per year on average over the forecast period. A 
similar rate of increase is expected for the price, from a base price 
representing the average over the last 5 years of the 1990's--$2.18 per 
Mcf in 2000 dollars. With a slightly more rapid growth in imports (2.4 
percent per year), largely from Canada, sufficient supplies are 
expected to be available to satisfy the growing demand for natural gas, 
primarily from electric generators.
    Thank you, Madame Chairman and members of the Subcommittee. I will 
be happy to answer any questions you may have.
                                 ______
                                 
    Mrs. Cubin. Thank you.
    I would now like to recognize Mr. Simmons for 5 minutes.

 STATEMENT OF MATTHEW SIMMONS, PRESIDENT, SIMMONS AND COMPANY, 
                         INTERNATIONAL

    Mr. Simmons. Madam Chairman, I testified at this 
Subcommittee 15 months ago about the precarious supply demand 
balance facing North American natural gas. Since then, the 
problem has grown in its severity.
    Natural gas demand needs to grow even faster than once 
thought while supply continues to stay flat as it has done for 
the past 8 years, despite a natural gas drilling boom of 
historic proportion in both the U.S. and Canada.
    There is now a grave chance that natural gas supplies will 
fall beyond the three to 5 percent drop seen so far. By the 
time the current supply decline bottoms out, the drop could be 
severe.
    It is now becoming clear that the concept that gas supplies 
could grow to even partially meet the demand and the magnitude 
of a 30 TCF a year market is unlikely to occur in this decade. 
Even worse, if daily gas production falls by as much as 10 
percent, and the drop could be worse, this could become 
America's most serious energy wakeup call since the 1973 oil 
shock.
    Let me put some numbers behind this grave warning by 
starting with the demand side. The March 2000 National 
Petroleum Council (NPC) natural gas report presented a 
compelling case as to why gas supplies needed to grow to almost 
30 TCF by 2010.
    Since the study was done, almost as many new gas-fired 
power plants have already been built, as the NPC study assumed 
would occur by 2010. Furthermore, there are almost as many 
additional gas-fired plants still under construction as have 
been built thus far.
    Natural gas demand in 2000 was more robust than the NPC 
model assumed. Then gas demand began to weaken and the 
residential, commercial and industrial markets, largely due to 
benign weather, added by a weakened economy.
    However, gas used to create electricity grew by 16 percent 
between 1999 and 2001. The amount of gas now used to create 
electricity is almost 30 percent more than the gas consumed for 
all industrial uses.
    If the U.S. experience is a hot, muggy summer in 2002, 
similar to the summer of 1999, gas used to create electricity 
could soar to over 8 TCF this year. This is double the amount 
of electricity creation as the decade of the 90's began. On the 
supply side, daily U.S. gas production stayed mired at 50 to 53 
BcF a day, from 1990 to 1999, despite a steady increase in more 
gas wells being drilled and a dazzling array of technology 
advances.
    A drilling boom of record proportion then occurred in 2000 
and 2001. But despite this drilling boom, supply barely grew. 
Over the past decade the industry completed over 116,000 new 
gas wells, but less than 6,000 were exploratory wells.
    In the old drilling boom of 1976 to 1981, the industry 
completed almost nine times more exploratory gas wells than it 
averaged between 1995 and 1999. All this frenzied development 
drilling was also rapidly exhausting most of the available 
drill sites.
    To use a real estate analogy, it would be the equivalent to 
a large homebuilder adding record amounts of new subdivisions 
without ever buying any new raw land.
    Had the drilling boom continued, a lack of identifiable 
drills sites would have eventually brought it to a standstill? 
But the drilling boom did not persist. Instead, it collapsed.
    There is now a serious question as to how far gas supplies 
could fall. In an effort to answer this serious question, our 
firm conducted an in-depth supply analysis for 53 counties in 
Texas, which account for 65 percent of Texas' gas supply and 16 
percent of U.S. supply.
    We measure the production results from all the gas wells 
completed in 1998 through 2001. What the survey highlighted was 
the remarkable importance which new gas wells have on total gas 
supply.
    Nearly 30 percent of the production coming from 39,000 
individual wells in this 53 county survey came from less than 
3,000 wells, which were completed in 2001. More important, 167 
wells out of the 3,000 completions accounted for almost half of 
the new well production.
    Once these high volume wells reach peak production, they 
begin ferocious rates of decline. These giant gas wells are 
expensive to drill and take almost a year from spudding the 
well to reaching peak rates.
    What this highlights is the industry's evolution into a 
just-in-time supplier which created a necessity for appropriate 
access to all the best drilling sites and for stable gas prices 
to ensure steadily increasing amount of new wells were always 
being drilled. But neither of these occurred.
    Since the 2000-2001 drilling boom did not last, the U.S. 
now faces a possible gas crisis. Gas supplies will almost 
certainly continue to drop. The fall could be as severe as 10 
percent or more. There are some long-term solutions to this 
problem. The biggest solution and only genuine remedy is access 
to all possible gas resources.
    We need far more Arctic gas than a single pipeline can 
deliver. Whether two pipelines is even sufficient is a serious 
question to debate. We need all the deep water gas that can be 
developed as fast as possible. We need to find ways to drill 
the great vertical depths that the high volume giant gas wells 
in south Texas now tap.
    Unfortunately, though, these wells do not last long, so a 
far bigger fleet of high horsepower rigs is essential to make 
this important supply sustainable.
    There is an urgent need for serious research programs on 
ways to tap unconventional gas resources and to ensure ultra 
deepwater development advances fast.
    Creating such an R&D program could be the most lasting 
positive impact of a badly needed U.S. energy bill. But at the 
end of the day it all gets back to access. Ultimately access 
will need to be extended to the entire Outer Continental Shelf 
acreage of the United States and in all Federal lands where gas 
can be tapped.
    The U.S. would be wise to learn from Canada who will soon 
begin to drill deepwater gas offshore British Columbia, in 
addition to the impressive results it is now realizing in 
offshore gas development just north of New England.
    If gas supplies do drop by 10 percent or more, this should 
serve as a serious energy wakeup call for the United States. It 
would be tragic for the strongest economy in the world to be 
held hostage to an inability to grow domestic natural gas 
supply simply because the U.S. shut down any ability to find 
and develop this clean energy source in the offshore waters 
outside our two main energy producing States.
    I hope I am being overly worrisome about our pending supply 
drop, but I have reached this view through hundreds of hours of 
personal study of the issues and numbers involved.
    Thank you.
    Mrs. Cubin. Thank you.
    [The prepared statement of Mr. Simmons follows:]

      Statement of Matthew Simmons, President, Simmons & Company 
                             International

    I am Matthew Simmons, president of Simmons & Company International, 
an investment bank that has specialized exclusively in energy 
investment banking and energy research to the leading institutional 
investors in the U.S. for the past 29 years. I serve on the National 
Petroleum Council and was the Demand Task Force Chairman for the NPC's 
2000 report on the future challenges facing natural gas. I am also a 
past chairman of the National Ocean Industries Association.
    I testified at this committee 15 months ago about the precarious 
supply/demand balance facing North American natural gas. Since then, 
the problem has grown in its severity. Natural gas demand must grow 
even faster than once thought in order for America to increase its 
electricity use while supply continues to stay flat as it has done for 
the past eight years, despite a natural gas drilling boom in both the 
U.S. and Canada of historical proportion.
    There is now a grave chance that natural gas supplies will fall 
beyond the 3 to 5% drop seen so far. By the time the current supply 
decline bottoms out, the drop could be severe. Suddenly the concept 
that gas supplies could grow to even partially meet the demand in the 
magnitude of 30 TCF a year is becoming a remote dream. If supply falls 
by as much as 10%, and the drop could be far worse, this could become 
America's most serious energy wake-up call since the 1973 Oil Shock.
    The precarious supply/demand imbalance of 15 months ago is now 
headed towards a colossal mismatch between a need for demand to soar 
while supply drops. The only truism is energy is that demand can never 
exceed supply. Whatever supply becomes will define the limit to what 
demand for natural gas will be.
    Let me put some numbers behind this grave warning by starting with 
the demand side of the gas equation. The March 2000 NPC natural gas 
report presented a compelling case as to why gas supplies must grow 
from 22 TCF to almost 30 TCF by 2010. We now have on-stream close to 
the number of gas fired power plants that the NPC study assumed would 
be built by 2010. Moreover, there are almost as many additional gas 
fired plants still under construction that have been built thus far, 
despite cancellations right and left in the wake of Enron and other 
energy traders'' scandals.
    The NPC study also assumed that a large number of new gas-fired 
plants would have dual fuel switching capability. In reality, virtually 
almost all new plants are being built to use only natural gas.
    The NPC report assumed very little gas-fired plant additions in 
Canada. This also turned out to be incorrect. The combination of these 
various assumption errors created a need for far more gas supply than 
the aggressive 30-TCFneeds by 2010 suggested.
    Actual gas demand in 2000 was more robust than the NPC model 
assumed. Then gas demand began to weaken in the residential, commercial 
and industrial markets. However, gas used to create electricity grew by 
16% between 1999 and 2001, despite a particularly mild summer in 2001 
and virtually no severe winter weather in 2001/2002.
    When the gas used for non-electric utility power plants is added to 
the electric utility gas use (and subtracted from industrial gas where 
the critical component of gas demand is still listed in the EIA Natural 
Gas Statistics,) the amount of gas used to create electricity now 
exceeds the gas used for all industrial markets by a sizable 
percentage.
    The weak economy dampened gas demand by a modest degree, but benign 
weather and the demand destruction caused by $10 gas kept gas demand 
from being far higher. Had the weather not been benign, gas storage 
would now be facing a severe crisis. Instead, storage became 
sufficiently full, and, once again, gas prices collapsed. The 
difference between a storage crisis and storage being (what some 
believe) too full was a modest 5 bcf/d of lesser demand, highlighting 
the precarious balance the country faced for its most precious energy 
source as the 21st Century began.
    If the U.S. experiences a hot, muggy summer in 2002, similar to the 
summer of 1999, gas used to create electricity could soar to over 8 TCF 
for the year. This is double the amount used for electricity creation 
as the decade of the 1990s began.
    On the supply side, daily U.S. gas production stayed mired at 50 to 
53 bcf/d (18 to 19 TCF per year) from 1990 through 1999, despite a 
steady increase in more gas wells being drilled and a dazzling array of 
technological advances. A drilling boom of record proportion then 
occurred in 2000 and 2001. U.S. gas well completions totaled 15,600 in 
2000, almost 60% higher than the average new wells completed in the 
past seven to 10 years. But, this was just a prelude to the all-time 
record gas wells completed in 2001, which, at 22,086 was almost 2,000 
more new wells than were completed in 1981.
    Despite this drilling boom, supply barely grew and some data argues 
that it merely stayed flat when the added gas from natural gas liquids 
that remained in the gas stream (instead of being stripped) are taken 
out of normal gas supplies.
    It took a massive effort to keep natural gas supplies flat. Over 
the past decade, the industry completed over 116,000 new gas wells. Of 
these, 110,000 wells were development wells. In a decade, only 5,939 
exploratory gas wells were drilled. Between 1977 and 1982, the industry 
completed 8.9 times more exploratory gas wells than it averaged between 
1995 and 1999. Even during the greatest drilling boom in U.S. history 
in 2001, only 954 exploratory gas wells were completed.
    Despite a record drilling boom, little exploration was done. All 
this frenzied development drilling merely kept daily gas supply flat. 
Even if the drilling boom had continued, the industry was facing a risk 
of running out of available development drill sites. To use a real 
estate analogy, it would be like a large homebuilder adding record 
amounts of new subdivisions without ever buying any new raw land.
    A large contributor to the industry's dwindling gas well drill 
sites is a lack of access to many potentially high unexplored gas 
areas, including parts of the Rockies and most of the Outer Continental 
Shelf (other than offshore Texas and Louisiana.) If the problem of 
limited access to prime unexplored areas was not bad enough, highly 
volatile natural gas prices caused massive downsizing in skilled 
personnel and created a generation of industry participants who became 
extremely risk adverse.
    My guess is that the gas business would have soon faced some supply 
limits even if the drilling boom grew, as lack of added drilling sites 
would have eventually brought it to a standstill. But, the drilling 
boom did not occur. Instead, it collapsed as gas prices fell when gas 
storage reached a safely full level and demand weakened. Gas drilling 
stayed strong through October 2001, but thereafter, it fell rapidly. By 
mid-April of this year, gas rigs at work had declined by 43% from their 
3rd quarter 2001 peak.
    Reported gas well completions have also started to decline, even 
though the reported numbers through April 2002 still reflect higher gas 
drilling through the end of last fall. This is simply a lag effect 
between the time a gas well is completed and when it is reported. As 
soon as gas well completions for the 3rd and 4th quarters of 2002 are 
reported, they will likely drop by another 200 to 400 wells per month, 
taking the gas completion rate back to levels last seen in early 2000.
    Gas drilling has rebounded from April lows. If this increase 
continues, these low completions should bottom out by late this year. 
If the industry begins to suffer from a simple lack of drill sites, a 
drilling rebound to the levels seen throughout 2001 would be a long way 
off. There were too many signs that the peak of the 2001 drilling boom 
was unsustainable from a personnel, rig and drill-site standpoint.
    The question this raises is how far gas supplies could fall. Our 
firm conducted a massive supply analysis for 53 counties in Texas which 
account for 65% of all Texas gas and represents 16% of the U.S. supply. 
In this extensive survey, we measured the production coming from all 
the wells completed in 1998 through 2001. Nearly 30% of the production 
coming from 39,000 individual wells came from less than 3,000 wells 
completed in 2001.
    More important, a small number of highly prolific wells, amounting 
to only 5% of the new 2001 wells drilled, accounted for almost half of 
the new well production. These high volume wells maintain peak 
production for a very brief time and then begin ferocious rates of 
decline. These giant gas wells are expensive to drill and take almost a 
year from spudding the well to reaching peak rates.
    A classic example of this phenomenon is in Brooks County in South 
Texas. Ten to eleven high-volume wells make up over 75% of the total 
gas production in this county, though Brooks County has been a fast-
growing source of Texas gas and now ranks as one of the top-ten 
producing counties in the state. Once these giant wells peak, they can 
easily lose two-thirds of their production volume within six to nine 
months.
    In this 53-county analysis, 167 giant gas wells completed in 2001, 
with an average production life of less than six months, made up almost 
15% of the total production coming from 39,000 total wells.
    This highlights the risk gas supplies now face in a drilling 
decline. The industry has gone to what has literally regressed to just-
in-time supply. A just-in-time supply could have worked if appropriate 
access to all the proper drilling sites had been available, and gas 
prices created a stable environment for a steadily increasing amount of 
new wells being drilled. But, none of this happened.
    The decline rates for most of the new gas wells have never been 
higher. To fight this decline will take a steady increase in more new 
wells being drilled, not to grow supply, but to merely keep the current 
base flat.
    But, the 2000/2001 drilling boom was unsustainable. Instead, a new 
decline set in. As a result, the U.S. now faces a possible gas crisis 
that not only raises serious questions about what was believed to be 
America's most reliable energy source, but a crisis that could also put 
a lid on the country's ability to expand our generation of electricity 
until we diversify future power-plant fuel sources, weaning them off 
their current almost total dependence on natural gas.
    Gas supplies will almost certainly continue to drop. A fall of 10% 
or more is not a certainty, but the risk is high enough that America 
and the energy industry need to formulate contingency plans on how to 
react to such a supply short fall.
    There are some long-term solutions to this problem. We need far 
more Arctic gas than a single pipeline can deliver. We need all the 
deepwater gas that can be developed but it is also important to 
understand that most deepwater oil and gas projects have the same high 
decline rates that conventional gas now experiences.
    We need far more LNG infrastructure than currently exists. But 
after a handful of added unloading terminals are built, the world's 
total LNG capacity will be in balance. Thereafter, the next series of 
LNG projects need to include not just an unloading terminal but also a 
dedicated gas field, a pipeline, a liquefaction plant and dedicated LNG 
vessels. It is extremely risky for the U.S. to build a series of off-
loading terminals on the assumption that all the other components 
required to make LNG work get developed on a spot market basis.
    We need to find ways to drill to the great vertical depths that the 
high volume giant gas wells in South Texas now tap. Unfortunately, 
these wells do not last long, so a far bigger fleet of high horsepower 
rigs to make this important supply sustainable is essential.
    It is also critical that we find a way to tame the extreme price 
volatility that has now become routine in the natural gas world of 
2002. No serious business can cope with prices that bounce up and down 
by a factor of three to 10 times over the course of a year or two. This 
volatility is like an insidious cancer and will ultimately kill the gas 
business unless it is destroyed.
    One way to address the extreme gas volatility is to better educate 
energy traders that the data produced by even the best systems 
available is not very precise, and should not be used like yesterday's 
racing forms to place aggressive bets on natural gas.
    I applaud the EIA's efforts to attempt to get a good handle on the 
gas storage numbers as they are reported week by week. But, this system 
will always be subject to err. The problem is not the sketchy data, but 
the way that energy traders grab this data and translate it into billon 
dollar energy bets. This data problem and energy price volatility 
extends far beyond just natural gas.
    Finally, access is extremely important. Ultimately, access will 
need to be extended to all the Outer Continental Shelf acreage of the 
USA. We must learn from Canada, our northern neighbor, who will soon 
begin offshore Pacific drilling in addition to the impressive results 
it is realizing just north of New England. If gas supplies do drop by 
10% or more, this should serve as a serious energy wake-up call for the 
U.S. It would be tragic for the strongest economy in the world to be 
held hostage to an inability to grow domestic natural gas supply simply 
because the USA shut down any ability to find and develop this clean 
energy source in any offshore waters outside our two main energy- 
producing states.
    I commend your committee for holding this hearing to air these 
serious issues. I hope my remarks help clarify how dangerous and 
precarious a situation the country now faces with its most precious 
energy source.
    I hope I am being overly worrisome about the pending supply drop, 
but I have reached this view through hundreds of hours of personal 
study of the issues and numbers involved.
    Thank you.
                                 ______
                                 
    Mrs. Cubin. I would now like to recognize Mr. True.

   STATEMENT OF DIEMER TRUE, PARTNER AND CHAIRMAN, TRUE OIL 
     COMPANY, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA.

    Mr. True. Madam Chairman, thank you for this opportunity to 
testify. Today I am testifying on behalf of nine national trade 
associations and 33 cooperating State and regional oil and gas 
associations.
    The role of Federal lands in meeting future natural gas 
demand is a critical one and this hearing is a timely 
opportunity to address both that role and the general issues 
surrounding natural gas supply in the United States.
    The challenge facing natural gas producers is two-fold, 
maintaining existing natural gas supply and increasing that 
supply to meet future demand. Perhaps the most compelling 
challenge to maintaining existing supply is coping with 
increasing rates of depletion.
    Over the past decade, producers have seen average depletion 
rates climb from 16 percent per year to 23 percent per year. In 
somewhat simplified terms, that means producers must initiate 
new production equal to a quarter of the existing production 
each year just to stay even.
    Some experts believe that domestic natural gas production 
in 2002 will decline from last year's level and I agree with 
these assessments. They reflect the combined effects of higher 
depletion from existing production and less development of new 
wells, as Matt very clearly laid out.
    Policy makers need to understand these implications 
clearly. Increases in demand from either higher economic 
activity or weather can stress the natural gas market, quickly 
creating supply shortages and the higher prices that follow.
    Not only must these issues be addressed, but the industry 
must also be capable of increasing natural gas supply to meet 
future increased demand. Natural gas remains the most abundant 
and reliable clean-burning fuel to meet national environmental 
objectives while enhancing the use of stable domestic fuel 
sources.
    Natural gas consumption is expected to grow by over 30 
percent over the next 15 years. This cannot be done without 
more access to and development of government-controlled 
resources. However, development of these resources remains a 
substantial challenge.
    The western and central Gulf of Mexico has proven to be a 
world class area for natural gas, accounting for over 25 
percent of domestic natural gas production. The 1999 NPC study 
projects that the future production includes in these areas is 
essential to meet projected demand. However, future production 
increases will hinge on Federal offshore policies. The most 
significant of these in the western and central Gulf of Mexico 
relate to royalty policies, that is creating incentives to 
encourage the effective development of the area.
    Developing the substantial domestic natural gas reserves in 
m oversight of the eastern Gulf of Mexico, the Atlantic Ocean 
and California is prohibited by moratoria. Too often, these 
policies are predicated on the events that happened 30 years 
ago. Federal policy needs to be reviewed and to be based upon a 
sound understanding of today's technology.
    Over 70 trillion cubic feet of natural gas in these areas 
is precluded from development. Much of the onshore natural gas 
resource base is located in the Rocky Mountains where Federal 
policy limits access to an estimated 137 trillion cubic feet of 
natural gas.
    Regulations like the Forest Service road policy, which is 
currently stayed by court action, and prohibitions on leasing 
in the Lewis and Clark national forest and in wilderness study 
areas are essentially absolute.
    At the same time, the permitting process to explore and 
develop resources often can work to effectively prohibit access 
and development. These constraints range from Federal agencies 
to laying permits to revised environmental impact statements to 
habitat management plans overlaying one another prohibiting 
activity to unreasonable permit requirements to prevent 
production.
    For example, in the Jack Morrow Hills area, natural gas 
development is being delayed because the Federal Coordinated 
Activity Plan was challenged as outdated. As a result the BLM 
has revised the Federal EIS to reflect the higher level of 
natural gas development.
    Now, those who seek to prevent access to the resource are 
challenging that EIS. Similarly, in the Buffalo, Wyoming, BLM 
area new challenges are underway to existing leases based on 
the arguments that the current resource management plan does 
not allow the level of development that is underway.
    If such an interpretation is sustained, natural gas 
development in the entire Power River Basin could be strangled.
    There is no simple or single solution to these constraints. 
What is required is a commitment to develop these access 
policies with a full recognition of the important of developing 
the natural gas resources.
    The question becomes, what provisions the energy 
legislation now in conference can improve access to and 
development of the government-controlled land, both onshore and 
submerged. There are several beneficial provisions, primarily 
in the House-passed version of H.R. 4.
    In my written testimony, I have summarized our key 
interests on those provisions.
    Thank you again, Madam Chairman for the opportunity to 
provide this perspective on the challenges facing natural gas 
production in the United States.
    Mrs. Cubin. Thank you, Mr. True.
    [The prepared statement of Mr. True follows:]

 Statement of Diemer True, Chairman, Independent Petroleum Association 
                               of America

    Madam Chairwoman, members of the committee, I am Diemer True, 
Chairman of the Independent Petroleum Association of America (IPAA). 
This testimony is submitted on behalf of the IPAA, the American 
Petroleum Institute (API), the Domestic Petroleum Council (DPC), the 
International Association of Drilling Contractors (IADC), the National 
Ocean Industries Association (NOIA), the National Stripper Well 
Association (NSWA), the Natural Gas Supply Association (NGSA), the 
Petroleum Equipment Suppliers Association (PESA), the US Oil & Gas 
Association (USOGA), and 33 cooperating state and regional oil and gas 
associations. These organizations represent petroleum and natural gas 
producers, the segment of the industry that is affected the most when 
domestic energy policy does not recognize the importance of our own 
national resources.
    This hearing is directed at examining what we believe is a growing 
natural gas supply and demand imbalance and the role that public lands 
and federal submerged lands could play in the solution. The role of 
federal lands in meeting future natural gas demand is a critical one 
and this hearing is a timely opportunity to address both that role and 
the general issues surrounding natural gas supply in the United States.

The Supply Challenge
    Initially, it is important to put the current natural gas supply 
and demand situation in some perspective. At year-end 2000, we saw the 
consequences of natural gas supply shortages. As storage dwindled, 
prices soared and consumers had to deal with the consequences. The 
initial phase of this supply-demand imbalance reflected the effects of 
low oil prices in 1998-99 on capital availability to develop domestic 
natural gas supply. These historically low petroleum prices resulted in 
capital expenditure budget cuts for domestic producers exceeding 30 
percent in 1999. The natural gas drilling rig count dropped by over 40 
percent at its lowest point. In 1999, new wells failed to replace 
existing reserves.
    The petroleum price recovery and the industry's recognition that 
future natural gas demand would increase led by more and more 
electricity generated by gas powered turbines triggered a robust 
rebound in drilling for natural gas. Rig counts went to record levels. 
But, the lag in new production caused by the low petroleum prices left 
a tight market by the end of 2000. Higher prices resulted in more 
drilling rigs searching for natural gas.
    The higher prices also reduced short-term demand. In reality, the 
abatement of high natural gas prices resulted from significant demand 
decreases not from supply increases. Increased drilling activity simply 
could not increase supply in the time period that was involved.

[GRAPHIC] [TIFF OMITTED] T0724.025

    In the latter months of the 2001, prices had fallen to levels 
comparable to the first part of 1999 and rig counts began to fall as 
well. By year-end 2001 rig counts had fallen to levels last seen in 
April 2000. While rig counts have currently risen to around 700, they 
are well below the 1000 rate that was achieved in the fall of 2001. The 
implication of these lower rig counts is clear--current supply levels 
may not be sustainable.

Maintaining Existing Supplies
    The challenge facing natural gas producers is twofold--maintaining 
existing natural gas supply and increasing that supply to meet future 
demand. While analyses like the 1999 National Petroleum Council Natural 
Gas study have focused on the resources that need to be developed to 
meet future demand--particularly with regard to federal lands--the 
challenge of maintaining existing supply has not received the attention 
it deserves.
    The first and perhaps most compelling challenge to maintaining 
existing supply is coping with increasing rates of depletion. 
Conventional natural gas wells begin to deplete as soon as they begin 
to produce. But over the past decade, producers have seen average 
depletion rates climb from 16 percent per year to 23 percent per year. 
In somewhat simplified terms this means that producers must initiate 
new production equal to a quarter of existing production each year just 
to stay even. New technologies like 3-D and 4-D seismic enable 
explorationists to find smaller reservoirs. Enhanced production 
technologies like horizontal drilling are allowing better and more 
environmentally effective development of reserves. But finding smaller 
reserves and producing them more effectively makes the challenge of 
maintaining existing natural gas supply more difficult.

[GRAPHIC] [TIFF OMITTED] T0724.026

    Second, it is important to understand the extent of development of 
the existing resource base. Some opponents of accessing additional 
federal lands suggest that the current resource base should be the 
first focus. In reality, it already is. Developing the current resource 
base for both conventional and unconventional natural gas is the source 
of existing supply. When the rig count grew to 1000, this is where it 
had to grow. But this resource base has supplied natural gas for the 
past 50 plus years. These mature reserves are harder and more costly to 
develop. New reserves in these areas are smaller and deplete faster or 
are deeper and more costly to develop. But, there is no doubt that 
these resources will continue to be developed as aggressively as 
natural gas prices justify development and capital is available to do 
so.
    Some experts believe that domestic natural gas production in 2002 
will decline from last year's level. This month, Raymond James and 
Associates reported that U.S. natural gas production has fallen for the 
fourth consecutive quarter. I agree with these assessments. They 
reflect the combined effects of higher depletion from existing 
production and less development of new wells. In a sense the market is 
also reflecting this reality. Despite natural gas storage volumes that 
would suggest adequate supply, the futures prices for natural gas have 
remained near or above $3.00 per thousand cubic feet.
    Policymakers need to understand these implications clearly. Lower 
rig counts and higher depletion are adversely affecting available 
supply. Increases in demand from either higher economic activity or 
weather can stress the natural gas market, quickly creating supply 
shortages and the higher prices that follow.
    These are the conditions that are defining the current supply and 
demand balance. Not only must they be addressed, but the industry must 
also be capable of increasing natural gas supply to meet future 
increased demand.

Future Supply Challenges
    Despite the economic slowdown over the past year and despite the 
capital limitations that are devastating the merchant power industry 
that must invest in future electricity generation, natural gas demand 
will grow. Natural gas remains the most abundant and reliable clean 
burning fuel to meet national environmental objectives while enhancing 
the use of stable domestic fuel sources. National energy policy must 
recognize the importance of accessing the natural gas resource base. 
The National Petroleum Council in transmitting its 1999 Natural Gas 
study concluded:
        The estimated natural gas resource base is adequate to meet 
        this increasing demand for many decades''. However, realizing 
        the full potential for natural gas use in the United States 
        will require focus and action on certain critical factors.
    Natural gas consumption is expected to grow by over 30 percent over 
the next 15 years. While recent events may have slowed the pace of this 
growth--an issue that is being assessed again by the National Petroleum 
Council--future natural gas consumption will likely grow at a pace that 
will require an energy policy that allows the full potential of natural 
gas to be developed. This cannot be done without more access to and 
development of government-controlled resources. However, development of 
these resources remains a substantial challenge.

Offshore - Western and Central Gulf of Mexico
    These portions of the Gulf of Mexico have proven to be a world-
class area for natural gas as well as petroleum production, accounting 
for over 25 percent of domestic natural gas production. Production 
comes from the continental shelf, the deepwater, and the emerging 
ultra-deepwater. The NPC study projects that future production 
increases in these areas is essential to meet projected demand. 
However, future production increases will hinge on federal offshore 
policies. The most significant of these in the Western and Central Gulf 
of Mexico relate to royalty policies.

[GRAPHIC] [TIFF OMITTED] T0724.027

    First, offshore production is particularly suited for royalty-in-
kind (RIK)--paying the royalty with production instead of dollars. It 
is a more economical and fairer approach. Recent actions to fill the 
Strategic Petroleum Reserve could utilize 80 percent of this offshore 
royalty oil. RIK should be encouraged for natural gas. Second, the 1995 
Deepwater Royalty Relief Act was extremely successful promoting 
activity in the deepwater Gulf. However, the 1995 program expired. 
Since its expiration, the Minerals Management Service (MMS) has 
provided more limited, but useful, royalty incentives in recent lease 
sales. The National Energy Policy recognized that offshore regulatory 
policies could inhibit the sound development of these resources. Its 
recommendations should be implemented and further incentives for deep 
drilling in all depths in the deepwater, deep drilling for natural gas 
on the shelf, subsalt and highly deviated drilling should be examined.
Offshore - Eastern Gulf of Mexico, Atlantic Ocean, and California
    Developing the substantial domestic natural gas reserves in most of 
these three areas is prohibited by moratoria. President Clinton 
extended these moratoria for another ten years in 1998 saying, ``First, 
it is clear we must save these shores from oil drilling.'' This is a 
flawed argument ignoring the state of current technology; it results in 
these moratoria preventing natural gas development as well as oil. In 
fact, both the Eastern Gulf and the Atlantic reserves are viewed as gas 
reserve areas, not oil--those coasts are not at environmental risk. Too 
often, these policies are predicated on the events that occurred 30 
years ago. For example, no Eastern Gulf of Mexico sale occurred from 
1988 to 2001. The recent sale took place only under greatly reduced 
conditions.
    However, this year another ominous step was taken when the federal 
government decided to purchase leases that have not been developed, 
primarily due to regulatory limitations, in the Eastern Gulf of Mexico. 
This action led to calls for similar purchases off the coast of 
California and on other government controlled land. While each case may 
have specific merit, following such a course also serves to limit the 
available resource base at a time when it needs to be expanded.

[GRAPHIC] [TIFF OMITTED] T0724.028

    Federal policy needs to be reviewed. It needs to be based on a 
sound understanding of today's technology. When the NPC analyzed 
natural gas reserves that were being inhibited by regulation of these 
areas, it concluded that over 70 trillion cubic feet of natural gas in 
these areas are precluded from development.

Onshore Restrictions - A Mosaic of Regulations and Prohibitions
    Much of the onshore natural gas resource base is located in the 
Rocky Mountains where federal policy limits access to an estimated 137 
trillion cubic feet of natural gas. The constraints differ. Regulations 
like the Forest Service roadless policy (currently stayed by court 
action) and prohibitions in the Lewis and Clark National Forest and in 
wilderness study areas are essentially absolute. At the same time the 
permitting process to explore and develop resources often can work to 
effectively prohibit access and development. These constraints range 
from federal agencies delaying permits to revise environmental impact 
statements to habitat management plans overlaying one another 
prohibiting activity to unreasonable permit requirements that prevent 
production. Following are several examples.
     In the Lewis and Clark National Forest--a multiple use 
federal land--the forest manager concluded that natural gas development 
was inconsistent with the development of the forest because it violated 
``a sense of place'' and prohibited new leasing. There is no 
administrative mechanism to appeal such an arbitrary judgment despite 
the reality that there is no such basis for denying the use of the 
land. Court action to overturn the decision failed because the courts 
concluded that the decision was within the discretion of the forest 
manager.
     In the Jack Morrow Hills area, natural gas development is 
being delayed because the federal Coordinated Activity Plan (CAP) was 
challenged as outdated. As a result the Bureau of Land Management (BLM) 
has revised the federal Environmental Impact Statement (EIS) to reflect 
the higher level of natural gas development. Now, those who seek to 
prevent access to the resource base are challenging that EIS.
     Similarly, in the Buffalo, Wyoming BLM area, new 
challenges are underway to existing leases based on arguments that the 
current Resource Management Plan (RMP) does not allow the level of 
development that is underway. If such an interpretation is sustained, 
natural gas development in the entire Powder River Basin area could be 
strangled.
    There is no simple or single solution to these constraints. What is 
required is a commitment to develop these access policies with a full 
recognition of the importance of developing the natural gas resource. 
The National Energy Policy recognized the magnitude of these 
limitations. Executive Orders to consider energy implications in 
federal decisionmaking and to convene a task force to improve 
permitting are important first steps in developing a response. These 
early efforts have resulted in specific tasks within various Executive 
Branch departments that should improve the permitting process.

Energy Legislation Before Congress
    With these perspectives on the challenges to meet current and 
future demand for natural gas as a reference point, the question 
becomes what provisions of the energy legislation now in conference 
between the House of Representatives and the Senate can improve access 
to and development of government controlled land, both onshore and 
submerged. There are several beneficial provisions, primarily in the 
House passed version of H.R. 4. These include:
    Section 6202 provides for royalty incentives in the Western and 
Central Gulf of Mexico. It parallels the relief now being provided in 
recent lease sales--those occurring after the House passed its bill. 
The conferees need to work closely with the Administration to determine 
the most appropriate approach to assure continuing use of royalty 
incentives to maximize development of the Western and Central Gulf of 
Mexico.
    Section 6204 provides for analysis of the Gulf of Mexico field size 
distribution, international competitiveness, and incentives for 
development. Section 608 of the Senate passed bill addresses some of 
these same issues. The conferees should examine the best elements of 
each section to acquire the information needed to formulate future 
policy on offshore development.
    Section 6222 provides for the Secretary of the Interior and the 
Secretary of Agriculture to jointly undertake a study of the 
impediments to efficient oil and gas leasing and operations on Federal 
onshore lands in order to identify means by which unnecessary 
impediments to the expeditious exploration and production of oil and 
natural gas on such lands can be removed. Such an analysis could 
provide policymakers with the information needed to address some of the 
key problems associated with the leasing process.
    Section 6223 directs the Administration to eliminate unwarranted 
denials and stays of lease issuance and unwarranted restrictions on 
lease operations from the administration of oil and natural gas leasing 
on Federal land. Section 602 of the Senate passed bill seeks to ensure 
timely action on leases and permits. These sections need to be 
consolidated in a manner that both objectives can be met.
    Section 6225 addresses the type of problem raised in the Lewis and 
Clark National Forest by providing for the involvement of the Secretary 
of Agriculture in such critical decisions.
    Section 6231 and Section 606 (of the Senate bill) provide for 
suspension of leases involving subsalt formations. These formations can 
be particularly difficult to develop and the suspension will allow for 
more time.
    Section 6232 provides additional authority to develop RIK programs 
that will allow for more effective use of the highly desirable 
approach. RIK eliminates the complexities of determining the royalty 
value thereby saving both the government and the producer from the 
convoluted determinations that are now necessary and are frequently 
questioned--sometimes years after the sales occur.
    Section 6233 provides for royalty relief for marginal wells on both 
federal onshore and offshore properties for both oil and natural gas. 
As with the marginal well tax credit passed by both houses of Congress, 
this relief encourages the continued production of these wells in times 
of low oil and/or natural gas prices. Retaining production from these 
wells is in the national interest and the provision should be included 
in the final bill.
    Section 6234 provides for the reimbursement through royalty credits 
when a private party pays for environmental documents that are the 
responsibility of the federal government to prepare. Given the 
challenge of developing these key resources and the potential that 
adequate appropriations are not available, this is a common sense 
approach to meet the dual objectives of developing sound environmental 
documents and moving forward on permitting.
    Section 610 of the Senate passed bill addresses the important issue 
of hydraulic fracturing under the Safe Drinking Water Act. While this 
is not an issue under the jurisdiction of the Resources Committee, it 
is an important issue to retain in any final bill. The LEAF v. EPA 
decision in 1997 by the 11th Circuit Court of Appeals incorrectly 
concluded that Congress intended to regulate the well stimulation 
process of hydraulic fracturing as underground injection. The Senate 
passed bill legislatively addresses this issue to eliminate the 
potential of other litigation on this issue and to provide EPA with the 
tools to rely on existing state regulation of hydraulic fracturing. In 
the Rockies, hydraulic fracturing is used extensively on tight sands 
and shale formations. In the East, it is also used on coalbed 
formations because harder coal requires it to allow the natural gas to 
be released.
    Collectively, these provisions in the House and Senate passed 
energy bills address many significant access and development issues. 
Final legislation needs to include them. Similarly, Congress needs to 
continue to work with the Administration to facilitate its efforts to 
improve the permitting process and its resource management efforts. 
Money will be an important component of the Administration's efforts, 
but other authority may be necessary as well.
    Thank you for the opportunity to provide this perspective on the 
challenges facing natural gas production in the United States.
                                 ______
                                 
    Mrs. Cubin. It always makes one ponder when you hear 
testimony and it is contradictory, especially when the 
testimony is coming from a government agency that contradicts 
what people in the field actually seem to experience.
    Mr. True made a point about assumptions that need to be 
based on, for example, today's technology, when we are trying 
to figure out these numbers and what the situation really is.
    The assumptions that you base that on are most important 
and so I would like to ask you, Ms. Hutzler, in your 
assumptions about the natural gas production out to 2020, you 
show increases in the Rocky Mountain region based on 
technological improvements. What assumptions is EIA making 
about future access to gas on public lands in that regard, 
using today's technology or unknown technology? What are you 
taking into consideration on that?
    Ms. Hutzler. In our forecasts we assume that technology in 
the future will increase at the rate it has increased in the 
past. So, therefore, we are assuming improved technology in 
doing our forecasts.
    In terms of restricted lands, we do not consider them 
within our forecast. Let me give you the specifics of the Rocky 
Mountains. According to the USGS numbers, there is about 293 
trillion cubic feet of resources in the Rocky Mountain region. 
Of this particular number, there is a certain number that is 
totally off limits that you can't drill on that land at all. 
That is not included in the forecast.
    There is another set which is restricted or off limits de 
facto because of pipeline or environmental restrictions. This 
amount of lands we do have phased in over the forecast horizon.
    Then there is another amount that has Federal lease 
stipulations on it. We assume that that is available, but at a 
cost that is 6 percent higher and would take 2 years longer to 
develop. The result is that the total unrestricted amount that 
we have in the Rocky Mountain region is about 151 trillion 
cubic feet.
    Mrs. Cubin. And in your opinion adequate to meet the 
demand?
    Ms. Hutzler. Yes.
    Mrs. Cubin. I have quite a few more questions about 
assumptions, which I will submit to you rather than taking the 
time here. But I have serious concerns about the assumptions 
that are made in arriving at the conclusion that is presented 
here today.
    Mr. True, I would like to ask you, actually all of the 
panel members to start with, should we have an early warning 
system to better track production to prepare markets and 
producers for possible supply shortfalls and if you think that 
is possible, how would you explain it? How would such a system 
work?
    Mr. True. Madam Chairman, energy consumption in the United 
States is a critical factor in the future prosperity of the 
country. One of the difficult things that both government and 
industry has faced is to quantify both sides of that equation, 
the supply and demand equation.
    Experts like Matt Simmons spend almost full time worrying 
about how to gather that information accurately and then how to 
interpret it. It would be a significant benefit to the country 
if we could devise such a system to where we could understand 
the total energy picture in the United States.
    But in order to do that, that would require a great deal of 
resources, probably coming from the government in order to 
collect that because it does not good to collect it just from 
one sector of the energy industry. You would have to understand 
the total picture.
    Mrs. Cubin. There are two articles that address the supply 
and demand of natural gas. One is in Natural Gas Week and one 
is in Plattes that address the alarming drop that both you and 
Mr. Simmons discussed in gas production this year. I am going 
to enter those in the record at this time.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T0724.029
    
    [GRAPHIC] [TIFF OMITTED] T0724.033
    
    [GRAPHIC] [TIFF OMITTED] T0724.034
    

    Mrs. Cubin. Even though my time is up, if you don't mind 
staying for a few more questions, I would really appreciate 
that.
    Mr. Simmons, you present a fairly gloomy picture about 
natural gas supply. Why are we suddenly facing this situation?
    Mr. Simmons. I don't know that it was suddenly. I mean I 
look back on the statistics and think that it is fairly 
staggering to see the progress we made in technology and then 
again go back to the numbers. I used 116,000 new wells being 
drilled over the last decade and all we did was keep supply 
flat.
    So, I think there was a message building up there that we 
were headed into some real potential complexities that for one 
reason or another, even a lot of people in the industry just 
said, ``We will figure out a way around that.'' But we didn't.
    Now, we did have a drilling decline and we are going to 
have a supply collapse. It is just a matter of how bad will the 
drop be when it comes.
    Then a bigger question is: Can we basically get back to the 
52 to 53 BcF level that we basically maintained for 8 years. I 
personally don't think that is going to be a very easy task.
    Mrs. Cubin. I completely agree with your assessment.
    How do you think U.S. energy policy has contributed to the 
situation that we are in today?
    Mr. Simmons. It played a big role. When we basically had 
the facts in front of us that the off shore was really the only 
solution and yet we as a country going back for, really, this 
is a bipartisan series of mistakes, we decided that we would 
limit any form of drilling for natural gas to Louisiana and 
Texas. We were asking for the sort of problems that we now have 
in front of us.
    Mrs. Cubin. Mr. True, as a Rocky Mountain producer, can you 
describe some of the difficulties that you face in getting 
permits to drill on Federal land?
    Mr. True. Madam Chairman, yes. It is not unique to our 
firm. I mean it is widespread.
    Mrs. Cubin. Right.
    Mr. True. Currently, as you know, in the Powder River 
Basin, the Resource Management Plan is being revised and they 
are currently working on an environmental impact statement. 
What has happened is that the BLM had adopted a moratorium on 
issuing applications for permission to drill.
    These APD's are currently mired down in the BLM office in 
Buffalo. Now this is not unique just to the Powder River Basin. 
But the significance of it is that we are talking about in an 
order of magnitude of 20 Tcf of recoverable coal bed methane 
that could be brought on line in the relatively short term. The 
infrastructure is in place or being put in place.
    Right now, we have a very difficult time just gaining 
access to the resource. Now, we talk a lot about that and I 
think that is appropriate because it appears that the 
environmental extremists now have been targeting that play as, 
in their terms, the new ANWR, where they are going to stop the 
development of this resource.
    Well, it is incumbent upon government and the industry to 
bring this resource on production as soon as we can because I 
think the country needs it for the energy in the near term. I 
mean, if indeed we are seeing a significant drop in productive 
capacity year over year, this is a place we can go in the short 
term and develop it.
    But to put it in a little broader perspective, I think the 
reason comes back to the fact that the American public does not 
understand the vital role that energy plays in their own 
personal prosperity.
    In the President's Energy Plan, one of his recommendations 
is a National Energy Education effort. I think what has 
happened is to move back to what Matt was talking about over 
the years because the public hasn't understood it. The 
policymakers haven't led in the area of developing additional 
energy.
    As a result, with NIMBY and I have even heard now we have 
the acronym NOPE, not on plant Earth, what has happened is that 
in a site specific debate, those people who believe we need 
additional resources developed have been losing the public 
relations battle.
    That is what is going on, in my opinion.
    Mrs. Cubin. So, what do you recommend to be done to 
increase public support for environmentally responsible natural 
gas development?
    Mr. True. Well, Madam Chairman, one of the very first 
recommendations in the President's Energy Policy is that each 
segment of the energy industry fund and operate a National 
Education Program.
    Speaking on Behalf of IPAA, we would strongly support a 
legislative or administration initiative in that regard. The 
reason it has to come from the legislative branch or the 
executive branch is that there has to be some sort of funding 
mechanism which would require some sort of legislation.
    Speaking on behalf of IPAA, we would strongly support that.
    Mrs. Cubin. Thank you. In your estimation, what do you 
think the most important supply provisions are in the Energy 
Bill?
    Mr. True. Madam Chairman, there are a number of provisions 
in there and it is difficult to single out individual 
provisions, Madam Chairman. But I would really draw to the 
Committee's attention the provisions in House Bill 4 that deal 
with opening up access to the public lands.
    I think your efforts in that regard, and also the other 
thing I would like to mention, not only in my written remarks, 
but also the provisions for royalty in kind. That is in House 
Bill 4, Madam Chairman, one of the difficulties the industry 
has faced is the lack of certainty in the royalty payments 
process.
    The royalty in kind provisions that are incorporated in 
this bill bring a lot of clarity to that and I strongly support 
that.
    Mrs. Cubin. I completely agree, especially since I have 
been working on royalty in kind for about 6 years now.
    Mr. Simmons, what do you think a 10-percent supply drop 
would mean for natural gas prices?
    Mr. Simmons. Well, as long as we basically as a society set 
natural gas prices in the commodity exchanges with the 
skimpiest of margin requirements, they are going to be highly 
volatile. I think that the $10 gas was a very destructive 
event, but that is imbedded in the supply drop right back to 
those sort of prices.
    I think it is a dangerous situation.
    Mrs. Cubin. You are exactly right. You know, I think that a 
lot of people who aren't around the mineral producing areas 
think that the producers are all real ecstatic when the prices 
shoot up like that. They don't realize the effect that 
volatility has on not only the economy and consumers, but on 
producers as well. That is certainly significant.
    I guess I should have asked it more significantly. How do 
you think such a supply scenario would affect the United States 
economy if there were a 10-percent drop in supply?
    Mr. Simmons. I don't believe the U.S. economy can grow 
without growing electricity. That is my starting point. It 
becomes fairly complicated to do a reliable model of how we 
grow electricity in the United States if in fact gas supply 
doesn't even stay at 54 Bcf a day.
    If you follow the geometry of well production, which really 
is a totally different issue than how many resources we have 
theoretically in the ground, if we drop down into a 45-ish Bcf 
a day or lower, it really starts to become hard to figure out 
how you get back to a 53 Bcf base and we had a market need 
headed toward 70. The numbers just don't add up. It really is 
scary.
    Mrs. Cubin. In your opinion, what types of policy 
initiatives should be implemented to reverse the trend that you 
discussed earlier?
    Mr. Simmons. Well, first of all, as was laid out in the 
Bush Energy Plan, we need to diversify our energy base. I think 
history will record that one of the worst mistakes we made in 
the 90's was first of all not keeping pace with the steady 
addition to power plant growth which had happened for the last 
50 years and then at the end to do a catch-up, but in the 
branch of the United States on the premise that we had an 
abundant, readily available supply of natural gas.
    So, we are going to have to turn back to coal and hopefully 
figure out a way to get coal clean. We are going to have to 
turn back to nuclear power and we are going to have to do 
everything possible to make sure that we basically at least 
keep natural gas supplies flat, which gets back to access.
    Mrs. Cubin. That brings to mind another question. Mr. True, 
what are the obstacles that you face personally, but the 
industry as a whole, to getting gas to market and how great an 
effect does that have on the prices and the availability of 
gas?
    Mr. True. Well, Madam Chairman, right now in the Rocky 
Mountains we are facing an unusual situation where there is a 
significant price differential between what producers in the 
Rockies are receiving for their natural gas and what producers 
elsewhere are receiving.
    The differential for transportation and marketing is pretty 
traditional from 25 cents to 75 cents an Mcf and now it is over 
$1.50 and in many cases even greater than that. The difficulty 
we apparently have is the take-away capacity. In other words, 
there are pipelines where we have restricted pipeline capacity.
    Frankly, the State of Wyoming just now is starting to study 
that situation because, of course, they have a dog in the hunt 
because they get the royalties off of that production.
    It seems to me there is something else at play there other 
than simply pipeline capacity because it is my understanding 
that there is pipeline capacity to take the Rocky Mountain gas 
and move it away into market.
    I think there are other forces at work. Frankly until the 
studies are done I am just not knowledgeable enough on the 
subject and I don't think anybody is. I have heard everything 
from the conspiracy theory which I don't agree with, to the 
fact that we are filling up our storage capacity at such a rate 
to where we are going to be full and the buyers simply don't 
need the gas and so they are just not paying market prices for 
it.
    So, I think that is the situation throughout the Rockies 
right now. It is a very serious problem, frankly, for producers 
up there because just as recently as yesterday, an individual 
told me that they were getting as little as 25 cents an Mcf for 
natural gas. Now, you can not produce it for that. We certainly 
can't go out and develop new reserves for that.
    Mrs. Cubin. Thank you. I asked Mr. True this question 
earlier, but I would like to pose it to the other two members 
of the panel.
    Do you think we should have an early warning system in 
place to better track gas production, to prepare markets for 
possible supply shortfalls?
    Ms. Hutzler?
    Mr. Hutzler. Currently, what we are using for an early 
warning system is the weekly underground storage report that we 
are producing and that AGA produced before. From that report, 
as I mentioned, you can see that our storage numbers are in 
good shape and we do anticipate that by the winter heating 
season they will be at their observed maximum.
    Along with that, you have the markets and the spot price. 
That also tells you the kind of condition that supply and 
demand is in. Some people feel that more data is needed and 
production data on a weekly basis would be good.
    However, there are thousands of producers of natural gas in 
this country. Right now our data for natural gas production is 
based on data that we get from the States. It is a voluntary 
survey from the States and it tends to lag anywhere from four 
to 12 months.
    I think having better annual data would help markets as 
well. One may want to think about having better monthly or 
weekly data as well for an early warning system.
    Mrs. Cubin. Mr. Simmons?
    Mr. Simmons. I think the energy data issue is a very 
serious issue and I think we have a system today, through no 
one's fault, that is simply awful. The sheer idea that we are 
basically glancing at weekly storage numbers--and I really 
admire the effort the EIA has made to take that over from the 
AGA and try to get some reliability there. But what they have 
found so far is it is very, very difficult to get the right 
numbers.
    In the meantime, that is the only thing we have. Here we 
have the United States of America, world's largest economy, our 
single most precious energy source and we are flying blind. We 
think price signals are fairly reliable. Well, go back to this 
year. On January 28th, natural gas prices were $1.86. In April 
28, they were $3.86. Those are price signals.
    The single best data happens to be what the publicly traded 
companies report. If you go back to right before the first 
quarter reports came out, I think most of the key players in 
the industry were fairly confident that natural gas supplies 
would only drop by two to 3 percent this year. Yet, the first 
quarter numbers came in and the drop was three to 5 percent in 
the first quarter.
    So, we have no good data. I think it is a huge exposure to 
our country and to our economy.
    Mrs. Cubin. Could you get me some specifics of how we can 
collect that data.
    Mr. Simmons. It is very complicated. The complication 
starts with the fact that the most sophisticated of our 
publicly traded companies really only know their data, plus or 
minus one or 2 percent, when they produce it.
    So, collecting natural gas data turns out to be far more 
complicated than the reports that we deliver in phenomenal 
accuracy. So, I don't think you could do a weekly report. But I 
think there are probably some teeth that could be put into some 
early warnings.
    When you get to the top 50 producers in the United States, 
you have really captured the vast, vast majority of our natural 
gas. So, I don't think you need survey that would capture 2,000 
or 3,000 producers.
    I think if we are going to have a 10-percent drop it would 
probably be convenient to know it a few months ahead of time.
    Mrs. Cubin. Mr. True, do you have energy to add to that?
    Mr. True. Fred Lawrence who is on our IPAA staff is an 
economist and he did an interesting back-of-the-envelope 
analysis on natural gas producers. He estimates that as much as 
six Tcf a year is produced by privately held companies. So, 
that data would not be available out of the large publicly 
traded companies.
    I wanted to throw that in as an added complexity to trying 
to gather that kind of information because those privately held 
companies don't report. It makes it more difficult.
    Mrs. Cubin. Well, I thank all of the witnesses for their 
testimony. Once again, we will have further questions and I 
would ask that you submit answers to those questions in 
writing.
    Thank you very much.
    The hearing record will be held opportunity for 10 days. If 
there is no further business before the Subcommittee, we are 
adjourned.
    [Whereupon at 2:15 p.m., the Subcommittee was adjourned.]
    [Response to questions submitted for the record follow:]

   Response from the Energy Information Administration to Questions 
                        Submitted for the Record

EIA's Analysis of Reasons for Rapid Growth in U. S. Gas Drilling
    Q1. In your latest Annual Energy Outlook, you show a rapid 
acceleration in gas drilling in the U.S. between now and 2020. Have you 
analyzed the reasons for this growth?
    A1. The increases in drilling over the forecast period in the 
Annual Energy Outlook 2002 (AEO2002) are fueled by the growth in demand 
for natural gas. The drilling increases are largely driven by growing 
revenues from drilling activities, as a result of both higher prices 
and higher production levels, and improvements in technological 
progress--particularly, in unconventional gas recovery. There is an 
acceleration in drilling in the later years of the forecast as 
unconventional gas, which generally requires more wells for production, 
becomes a larger component of U.S. natural gas supply.

EIA's Assumptions About Future Access to Gas Resources on Public Lands
    Q2. Your assumptions about natural gas production out to 2020 show 
increases in the Rocky Mountain region based on technological 
improvements. What assumptions is EIA making about future access to gas 
resources on public lands? Do you assume access to decline, improve or 
stay the same?
    A2. LIn AEO2002, the 293.3 trillion cubic feet (Tcf) of Rocky 
Mountain unproved natural gas resources are subject to a variety of 
access restrictions (Table 1). Of these resources, 33.6 Tcf (No Access 
- Legal) are officially off limits to either drilling or surface 
occupancy. Included in this category are those areas where drilling is 
precluded by statute (e.g., national parks and wilderness areas) and by 
administrative decree (e.g., ``Wilderness Re-inventoried Areas,'' 
``Roadless Areas''). Also included are those areas of a lease where 
surface occupancy is prohibited by stipulation to protect identified 
resources such as the habitats of endangered species of plants and 
animals. An additional 57.7 Tcf (No Access - De Facto) of the resources 
are judged 1 to be currently de facto off limits because of 
the prohibitive effect of compliance with restrictions created by such 
laws as the National Historic Preservation Act, the National 
Environmental Policy Act, the Endangered Species Act, the Clean Air 
Act, and the Clean Water Act. 2 Of the 202 Tcf of resources 
that are accessible, 50.8 Tcf (Access - Lease Stipulated) are located 
in areas where Federal lease stipulations affect the costs and timing 
of development. These lease stipulations are set by either the U.S. 
Bureau of Land Management or the U.S. Forest Service. The remaining 
151.2 Tcf (Access - Standard Lease Terms) of unproved Rocky Mountain 
natural gas resources are located either on Federal land without lease 
stipulations or on private land and are fully accessible subject to 
standard lease terms. These 151.2 Tcf of resources are currently 
available for development and are included in AEO2002.
---------------------------------------------------------------------------
    \1\ Advanced Resources, International, ``Technical Memorandum: 
Federal Lands Access for the NEMS Oil and Gas Supply Module,'' FE 30 
Support Contract: DE-AC01-99FE65607 (July 2001).
    \2\ Advanced Resources, International, ``Federal Lands Analysis, 
Natural Gas Assessment, Southern Wyoming and Northwestern Colorado: 
Study Methodology and Results,'' (May 2001); National Petroleum 
Council, Natural Gas: Meeting the Challenges of the Nation's Growing 
Natural Gas Demand, (December 1999).

        In AEO2002, the treatment of access restrictions in the Rocky 
Mountain region varies by access status. Resources that are located on 
land that is legally inaccessible are removed from the model's 
operative resource base for the duration of the forecast. Resources 
located in areas that currently are de facto inaccessible because of 
regulations under various environmental statutes are made available 
gradually over the forecast period to reflect the anticipated 
development (as has been the case in the past) of new technologies that 
allow increased production while complying with applicable 
environmental requirements. Resources that are accessible but located 
in areas that are subject to lease stipulated Federal access 
restrictions are accounted for by two adjustments. One adjustment is 
that exploration and development costs for these resources are assumed 
to be 6 percent 3 higher than the costs for resources 
located in areas not subject to lease stipulated Federal access 
restrictions. This is to reflect the increased costs that these access 
restrictions generally add to a project. A second adjustment is that 2 
years are added to the assumed schedules for projects in the areas with 
lease stipulated Federal access restrictions. This is to simulate the 
delay usually incurred as a result of efforts to comply with the access 
restrictions. These two adjustments to the development of resources 
located in accessible but lease stipulated areas are applied throughout 
the forecast.
---------------------------------------------------------------------------
    \3\ This is consistent with the cost factor adjustment utilized in 
the 1999 National Petroleum Council Study - Natural Gas: Meeting the 
Challenges of the Nation's Growing Natural Gas Demand, (December 1999), 
Volume II, Task Group Reports.
[GRAPHIC] [TIFF OMITTED] T0724.037

EIA's Examination of Technology Groups In Regard to Future Growth in 
        Natural Gas Supply
    Q3. If it is largely technical change driving the growth, have you 
carefully examined the types of technologies that will be required? 
Does the ability to access resources on public lands have an effect on 
the speed at which new technologies are advanced?
    A3. Most of the Rocky Mountain natural gas resources in the 
AEO2002 (81 percent) are ``unconventional''--65 percent in low 
permeability sandstones (tight sands), 16 percent in coal formations 
(coalbed methane), and a negligible amount in low permeability shales 
(gas shales). In the construction of the unconventional gas supply 
model, we examined the following specific ``technology groups,'' to 
gauge the impact that these technologies might be expected to have on 
future growth in natural gas supply from unconventional sources.
Unconventional Gas Recovery Technology Groups
     1. Basin Assessments: Basin assessments increase the available 
resource base by a) accelerating the time that hypothetical plays 
5 in currently unassessed areas become available for 
development, and b) increasing the play probability for hypothetical 
plays--that portion of a given area that is likely to be productive.
---------------------------------------------------------------------------
    \5\ A play is a set of known or postulated oil and (or) gas 
accumulations sharing similar geologic, geographic, and temporal 
properties, such as source rock, migration pathway, timing, trapping 
mechanism, and hydrocarbon type. Hypothetical plays are those plays 
that are identified and defined based on geologic information but for 
which no accumulations of a given minimum size (e.g., one million 
barrels of oil or 6 billion cubic feet of natural gas) have, as yet, 
been discovered.
---------------------------------------------------------------------------
     2. Play Specific, Extended Reservoir Characterizations: Extended 
reservoir characterizations increase the pace of new development by 
accelerating the pace of development for emerging plays, where projects 
are assumed to require extra years for full development compared to 
plays currently under development.
     3. Advanced Well Performance Diagnostics and Remediation: Well 
performance diagnostics and remediation expand the resource base by 
increasing reserve growth for already existing reserves.
     4. Advanced Exploration and Natural Fracture Detection R&D: 
Exploration and natural fracture detection R&D increases the success of 
development by a) improving exploration/development drilling success 
rates for all plays, and b) improving the ability to find the best 
prospects and areas.
     5. Geology Technology Modeling and Matching: Geology/technology 
modeling and matching matches the ``best available technology'' to a 
given play with the result that the expected ultimate recovery (EUR) 
per well is increased.
     6. More Effective, Lower Damage Well Completion and Stimulation 
Technology: Improved drilling and completion technology improves 
fracture length and conductivity, resulting in increased EUR's per 
well.
     7. Targeted Drilling and Hydraulic Fracturing R&D: Targeted 
drilling and hydraulic fracturing R&D results in more efficient 
drilling and stimulation which lowers well drilling and stimulation 
costs.
     8. New Practices and Technology for Gas and Water Treatment: New 
practices and technology for gas and water treatment result in more 
efficient gas separation and water disposal which lowers water and gas 
treatment operation and maintenance (O&M) costs.
     9. Advanced Well Completion Technologies such as Cavitation, 
Horizontal Drilling, and Multi-lateral Wells: R&D in advanced well 
completion technologies a) defines applicable plays, thereby 
accelerating the date such technologies are available, and b) 
introduces an improved version of the particular technology, which 
increases EUR per well.
    10. Other Unconventional Gas Technologies, such as Enhanced 
Coalbed Methane and Enhanced Gas Shales Recovery: Other unconventional 
gas technologies introduce dramatically new recovery methods that a) 
increase EUR per well, and b) become available at dates accelerated by 
increased R&D with c) increased operation and maintenance (O&M) costs 
(in the case of Coalbed Methane) for the incremental gas produced.
    11. Mitigation of Environmental Constraints: Environmental 
mitigation removes development constraints in environmentally-sensitive 
basins, resulting in an increase in basin areas available for 
development.

        For conventional gas, we did not examine the impact of 
specific technologies. Coefficients on time trend variables in 
econometric equations that project drilling costs, equipment costs, 
wells drilled, finding rates, and success rates serve as proxies for 
the impact of technological progress. These equations are updated on a 
regular basis, either annually or biennially, based on historical data.
    Although it is assumed that there is access to resources on public 
lands (as described in the answer to Question 2), this access is not 
assumed to have an effect on the speed at which new technologies are 
advanced.

Importance of Access with Respect to EIA's Projections of Natural Gas 
        Production
    Q4. Unconventional gas has accounted for virtually all of the 
growth in U.S. gas supply over the past decade. Conventional supplies 
are declining at an accelerating pace. Given that much of this 
unconventional gas is on federal lands, doesn't this suggest that 
access is critical to keeping supply growing?
    A4. Continued access to currently accessible public lands, as well 
as the increased access that technological progress is able to provide 
to those areas that are currently de facto inaccessible because of 
regulations under various environmental statutes, are both key 
assumptions that underlie EIA projections of natural gas production.
Consistency of EIA's Forecasts with Observed Resource Patterns

    Q5. Have your forecasts in the last five years been consistent 
with the observed pattern of accelerating conventional resource 
depletion pointed out by many in the industry?
    A5. There are two components to ``resource depletion,'' one is a 
physical measure of a resource's production and the other is an 
economic measure of the cost of developing and producing that resource. 
With respect to the physical measure, the EIA forecasts are consistent 
with the expectation that as conventional gas production increases in 
the future due to increased domestic gas consumption, the rate of 
physical depletion increases. The AEO2002 projected domestic gas 
production to increase by 2.0 percent per year from 2000 through 2020, 
with depletion increasing in equal measure.

        In the EIA model, the economic measure is reflected in 
``finding rate'' equations, which pertain to the volume of gas 
discovered per well drilled. Generally, as the finding rate increases, 
the cost of developing and producing gas resources declines. EIA 
regularly recalibrates its oil and gas supply model equations based on 
historic and current data. The most recent cost of developing and 
producing natural gas is captured in this recalibration process. Recent 
data show the ``finding rate'' to be slightly increasing (as graphed 
below) 6, which indicates that the cost of developing and 
producing new gas resources has declined, all else equal. The EIA 
projections reflect this trend. From both a physical and economic 
perspective, there is no observed pattern of accelerating conventional 
resource depletion.
---------------------------------------------------------------------------
    \6\ This finding rate measure takes into consideration the improved 
drilling success rates by proportionally allocating ``dry-hole'' wells 
to the successful oil and gas well completions. The gas wells 
completions plus the allocated dry-holes are then divided into the 
volume of gas discovered that year.

[GRAPHIC] [TIFF OMITTED] T0724.038

EIA's Response to the EPCA Assessment of Federal Resource Inventories
    Q6. Given that the EPCA assessment of federal resource inventories 
is underway, do you feel comfortable with the assessment of the effects 
of access constraints on gas supply that you prepared in December 2001? 
Are you planning a new analysis once the inventory is complete?
    A6. Until we see the EPCA assessment results and determine how 
they line up with the access assumptions in the December 2001 access 
study, we are not able to judge our earlier projections in the light of 
that assessment. However, the EPCA assessment is a much more detailed 
and substantial effort than the work upon which the access treatment in 
our current model is based. We plan to implement the results of the 
EPCA assessment into our model when the assessment is completed and the 
necessary information (for implementation) is available. Although the 
assessment is scheduled to be completed in early November 2002, a firm 
date has not yet been set for its release.

EIA's Assumption Regarding Construction of Natural Gas Pipeline from 
        Alaskan North Slope
    Q7. Do you assume Alaska gas will reach the Lower 48 states at any 
point in your forecast?
    A7. The primary assumption regarding the construction of a natural 
gas pipeline from the North Slope of Alaska to the Lower 48 States is 
that it would require a sustained average natural gas wellhead price in 
the Lower 48 states of $3.50 (year 2000 dollars, per thousand cubic 
feet) before construction would commence. Since the Lower 48 average 
wellhead price forecast in the reference case of the AEO2002 did not 
exceed $3.26 (year 2000 dollars, per thousand cubic feet), the pipeline 
to transport gas from Alaska was not constructed in the reference case 
through 2020. However, other scenarios that we analyzed showed the 
pipeline to be economic by 2020 (e.g., the high economic growth case; 
the low oil and gas technology case).
DOE's Analyses of Effect of Land Use Restrictions
    Q8. Over the past several years, policy choices have been made or 
are being made that preclude development of much of the Eastern Gulf of 
Mexico, the entire Atlantic Coast, most of the Pacific Coast, and many 
of the most promising areas of Northern Alaska, as well as some 
significant parts of the Rocky Mountains. Has DOE performed any 
analysis that tries to estimate the cumulative effect of what appears 
to be a very restrictive pattern of land use decisions?
    A8. EIA did a study, U.S. Natural Gas Markets: Mid-term Prospects 
for Natural Gas Supply (December 2001), which analyzed the effect of 
reducing some of the restrictions on access in the Rocky Mountains and 
opening up the Outer Continental Shelf (OCS) to exploration and 
development. If Federal access restrictions were reduced as described 
in the study, the technically-recoverable natural gas resource base 
would be expected to increase by 86 trillion cubic feet (Tcf), 
expanding the resource base 7 percent (from 1,191 Tcf to 1,277 Tcf), 
and 50.8 Tcf of resources in the Rocky Mountain region would become 
less costly to develop because of shorter lead times. (This reduction 
in restrictions does not include access to the estimated 62.5 Tcf of 
natural gas resources in National Parks, National Monuments, and 
wilderness and roadless areas.) With the larger, less costly resource 
base, cumulative Lower 48 reserve additions throughout the forecast 
were projected to be 15 Tcf higher than in the reference case (506 Tcf 
compared to 491 Tcf). The remaining Lower 48 natural gas reserves in 
2020 were projected to be 11 Tcf higher than in the reference case. 
With this improved reserve position, natural gas production in 2020 was 
projected to be 0.6 Tcf higher, and the average wellhead price was 
projected to be 11 cents per thousand cubic feet lower than in the 
reference case.

        EIA also performed an analysis, The Effects of the Alaska Oil 
and Natural Gas Provisions of H.R. 4 and S. 1766 on U.S. Energy Markets 
(February 2002), for Senator Murkowski. Title V of H.R. 4, ``Arctic 
Coastal Plain Domestic Energy Security Act of 2001,'' calls for 
establishing a competitive oil and gas leasing program in the coastal 
plain of the Arctic National Wildlife Refuge (ANWR), resulting in an 
environmentally sound program for the exploration, development and 
production of oil and gas resources in this area. EIA's analysis of 
this provision showed that opening ANWR to crude oil production would 
likely increase domestic production, and reduce foreign oil dependence. 
Using the mean estimates of the available resources, opening ANWR to 
crude oil development was projected to add 800,000 barrels per day to 
U.S. crude oil production in 2020, 9 years after production in ANWR was 
projected to begin. The increased production, relative to the AEO2002 
reference case, was projected to reduce the net share of foreign oil 
used by U.S. consumers in 2020 from 62 to 60 percent, while increasing 
domestic production by 14 percent. A high resource sensitivity case 
projected that adding ANWR production could add as much as 1.5 million 
barrels per day to total Alaskan production and reduce import 
dependence to 57 percent. In a low resource sensitivity case, ANWR 
added 590,000 barrels per day by 2015, before production declined to 
510,000 barrels per day in 2020. Since the natural gas resources in 
ANWR are estimated to be about one-eighth the size of the oil 
resources, opening ANWR to natural gas production was not considered to 
have as significant an impact on U.S. energy markets and was not 
considered in this analysis.

        The DOE Office of Fossil Energy (FE) has done an analysis, The 
Greater Green River Basin Natural Gas Study (June 2001), reviewing 
restrictions on Federal lands in the Greater Green River Basin of 
Wyoming and Colorado. Working virtually on a tract-by-tract basis, 
analysts studied Federal lands in the Greater Green River Basin of 
Wyoming and Colorado and found that nearly 68 percent of the area's 
technically recoverable natural gas resource--as much as 79 trillion 
cubic feet of natural gas--is either closed to development or under 
significant access restrictions. EIA's current access parameters are 
based on the results of this study. DOE is part of an interagency team 
that is in the process of conducting similar analyses (the EPCA 
assessment of Federal resource inventories) for other basins in the 
Rocky Mountains.

EIA's Treatment of Moratoria on Offshore Drilling
    Q9. In your assumptions do the current moratoria on offshore 
drilling stay in place? Are areas dropped or added?
    A9. The current moratoria on offshore drilling stay in place 
throughout the AEO2002 forecasts.

                                   - 
