[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE DOMESTIC NATURAL GAS SUPPLY SHORTAGE
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
Thursday, June 19, 2003
__________
Serial No. 108-28
__________
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
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COMMITTEE ON RESOURCES
RICHARD W. POMBO, California, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska Dale E. Kildee, Michigan
W.J. ``Billy'' Tauzin, Louisiana Eni F.H. Faleomavaega, American
Jim Saxton, New Jersey Samoa
Elton Gallegly, California Neil Abercrombie, Hawaii
John J. Duncan, Jr., Tennessee Solomon P. Ortiz, Texas
Wayne T. Gilchrest, Maryland Frank Pallone, Jr., New Jersey
Ken Calvert, California Calvin M. Dooley, California
Scott McInnis, Colorado Donna M. Christensen, Virgin
Barbara Cubin, Wyoming Islands
George Radanovich, California Ron Kind, Wisconsin
Walter B. Jones, Jr., North Jay Inslee, Washington
Carolina Grace F. Napolitano, California
Chris Cannon, Utah Tom Udall, New Mexico
John E. Peterson, Pennsylvania Mark Udall, Colorado
Jim Gibbons, Nevada, Anibal Acevedo-Vila, Puerto Rico
Vice Chairman Brad Carson, Oklahoma
Mark E. Souder, Indiana Raul M. Grijalva, Arizona
Greg Walden, Oregon Dennis A. Cardoza, California
Thomas G. Tancredo, Colorado Madeleine Z. Bordallo, Guam
J.D. Hayworth, Arizona George Miller, California
Tom Osborne, Nebraska Edward J. Markey, Massachusetts
Jeff Flake, Arizona Ruben Hinojosa, Texas
Dennis R. Rehberg, Montana Ciro D. Rodriguez, Texas
Rick Renzi, Arizona Joe Baca, California
Tom Cole, Oklahoma Betty McCollum, Minnesota
Stevan Pearce, New Mexico
Rob Bishop, Utah
Devin Nunes, California
Randy Neugebauer, Texas
Steven J. Ding, Chief of Staff
Lisa Pittman, Chief Counsel
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 Eni F.H. Faleomavaega, American
Chris Cannon, Utah Samoa
Jim Gibbons, Nevada Solomon P. Ortiz, Texas
Mark E. Souder, Indiana Grace F. Napolitano, California
Dennis R. Rehberg, Montana Tom Udall, New Mexico
Tom Cole, Oklahoma Brad Carson, Oklahoma
Stevan Pearce, New Mexico Edward J. Markey, Massachusetts
Rob Bishop, Utah VACANCY
Devin Nunes, California Nick J. Rahall II, West Virginia,
Richard W. Pombo, California, ex ex officio
officio
------
C O N T E N T S
----------
Page
Hearing held on June 19, 2003.................................... 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.................................... 5
Statement of Witnesses:
Brown, Stephen P.A., Director of Energy Economics and
Microeconomic Policy Analysis, Federal Reserve Bank of
Dallas..................................................... 29
Prepared statement of.................................... 30
Christopherson, Al, President, Minnesota Farm Bureau
Federation................................................. 51
Prepared statement of.................................... 52
Foss, Dr. Michelle Michot, Director, Institute for Energy,
Law & Enterprise, University of Houston Law Center......... 8
Prepared statement of.................................... 10
Jewell, Bill, Vice President, Energy, The Dow Chemical
Company, The Houston Dow Center............................ 62
Prepared statement of.................................... 64
Jones, Calvin (Cal) K., President and CEO, Wyoming Sugar
Company, LLC............................................... 54
Prepared statement of.................................... 56
Kelly, Edward M., Head, North American Gas and Power
Consulting, Wood Mackenzie Global Consultants.............. 34
Prepared statement of.................................... 35
Prindle, William R., Deputy Director, American Council for an
Energy-Efficient Economy................................... 80
Prepared statement of.................................... 83
Rattie, Keith, Chairman, President, and CEO, Questar
Corporation................................................ 72
Prepared statement of.................................... 76
Additional materials supplied:
Britton, Paul, Managing Director, EnerSea Transport LLC,
Statement submitted for the record......................... 6
Calpine Corporation, Statement submitted for the record...... 98
National Petrochemical & Refiners Association, Statement
submitted for the record................................... 105
OVERSIGHT HEARING ON ``THE DOMESTIC NATURAL GAS SUPPLY SHORTAGE''
----------
Thursday, June 19, 2003
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Resources
Washington, DC
----------
The Subcommittee met, pursuant to call, at 10 a.m., in room
1324 Longworth House Office Building, Hon. Barbara Cubin
[Chairman of the Subcommittee] presiding.
Present: Representatives Cubin, Kind, Faleomavaega,
Gibbons, Souder, Napolitano, Tom Udall, Carson, Pearce, Bishop
and Nunes.
Mrs. Cubin. [presiding] The oversight hearing by the
Subcommittee on Energy and Mineral Resources will come to
order. I would like to apologize for being late. I generally
try to start these right on time. I had a little trouble with
traffic getting in here today.
The Subcommittee is meeting to hear testimony on the
potential crisis stemming from the domestic natural gas supply
shortage. Under Rule 4(g), the Chairman and the Ranking
Minority Member can make opening statements. If any members
have other statements, they can be included in the hearing
under unanimous consent. And, certainly, we are just
overcrowded up here with members, I think that any member that
wants to give an opening statement is welcome to do so.
STATEMENT OF THE HON. BARBARA CUBIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WYOMING
Mrs. Cubin. I will start if I can find my opening
statement--it is not his fault, that was mine. The Subcommittee
meets today to address an issue that could negatively impact
all American families and the United States economy at large,
which is the growing natural gas supply shortage and its effect
on energy prices. Next Tuesday we will meet again to discuss
assessments of our energy resources and impediments to
developing those resources.
Last March, natural gas storage levels fell to their lowest
levels since 1976 when accounting first began for gas shortage.
Henry Hub prices reached $19 per million Btu last winter, which
were the highest prices ever recorded. We are now in what is
known as the shoulder season, that time of year when gas
inventories are being built and prices are traditionally low.
However, shortage numbers are currently about 60 percent of
where they were a year ago, and gas prices are three times
their average over the past decade.
It appears that barring a miracle natural gas prices will
be at record levels again this year or next winter. Next week,
at the request of the Energy Secretary Abraham, the National
Petroleum is holding an emergency meeting to discuss short-term
options to heading off a major shortage, but there does not
appear to be a short-term solution. So how did we get to this
point?
Over the last 10 years our public policy has encouraged the
use of natural gas because it is a clean domestic fuel. We have
ample natural gas resources in this country, and we will have
ample resources for decades to come. In fact, the USGS
estimates that there are some 1,400 trillion cubic feet of
technically recoverable natural gas resources in the U.S. and
that over 60 percent of them are on Federal lands. A 1999
National Petroleum Council study estimates North American gas
resources to be over 2,400 trillion cubic feet. At current
consumption levels, that is enough gas to supply the Nation for
104 years.
While our policies have continued to encourage natural gas
consumption for its environmentally friendly aspects, these
same policies have discouraged domestic gas production. We
continue to shoot ourselves in the foot when it comes to our
energy policy. It is essential that we first reverse this trend
and streamline the process while still extracting the resource
in an environmentally sensitive manner. Anyone who has seen
reclaimed land where a gas well was developed would be very,
very surprised had they not seen it to know that the remaining
footprint is a stick about this high, and you have to look real
hard to find it. Reclamation and new technology truly enables
us to produce the resource in an environmentally sensitive way
and not only keep the land sensitive to wildlife and tourism
but also beautiful to the eye.
Second, we need to reverse the costly trend toward
increased litigation brought about by national environmental
groups to delay and derail energy projects in virtually every
part of the country. Finally, we need to increase pipeline
capacity by streamlining the permitting process for pipelines.
A lack of pipeline take-away capacity is currently keeping
about 500 million cubic feet per day locked up in the Rockies,
a figure that could rise to 2.5 billion cubic feet by 2010
according to FERC.
In addressing our national gas shortage, we also need to
look at the contributions that other forms of energy can make
in turning the wheels of our economy and diversifying our
energy portfolio. We have tremendous coal resources in this
country, a supply that will last 250 years at the present rate
of consumption. We have untapped geothermal potential in the
West, and we have vast wind potential, both onshore and
offshore. In order to meet our energy demand and grow our
economy, we must make use of all these forms of energy
resources that we can with today's advanced technologies and be
accessed in an environmentally responsible manner.
Over the past two decades, this Subcommittee has held
numerous hearings where we discussed the growing natural gas
supply and demand imbalance. Last July, prior to the conference
on the last energy bill, several witnesses testified before
this Subcommittee about an impending gas study shortage. Of
course, last winter, their predictions came true. Let's not
repeat the mistakes that led us to the crisis we face today.
Today, I would especially like to welcome Cal Jones, the
president and CEO of the Wyoming Sugar Company. I have read all
of your testimony, and I have heard the remarks that Cal will
make today, not only from him but from other producers around
the country with relation to the problem that high energy
prices cause for energy. Between Wyoming--or for sugar
production and business, I mean. Between Wyoming Sugar and the
Western Sugar Cooperative, our sugar beet producers in Wyoming,
they generate well over $100 million of economic activity in
Wyoming. Cal is a fine man and a great Wyoming citizen, and I
am anxious for all of us to hear his testimony. I look forward
to everyone's testimony today, and I welcome all our witnesses
as we look for ways to develop a smarter and safer natural
energy policy.
So I would like to ask the Ranking Member, Mr. Kind, for
his opening remarks.
[The prepared statement of Mrs. Cubin follows:]
Statement of The Honorable Barbara Cubin, Chairman,
Subcommittee on Energy and Mineral Resources
The Subcommittee meets today to address an issue that could
negatively impact all American families and the U.S. economy at large--
the growing natural gas supply shortage and its affect on energy
prices. Next Tuesday we will meet again to discuss assessments of our
energy resources and impediments to developing those resources. Last
March natural gas storage levels fell to their lowest level since 1976,
when accounting began for gas storage. Henry Hub prices reached $19.00
per million British thermal unit last winter--the highest prices ever
recorded.
We are now in what is known as the shoulder season, that time of
the year when gas inventories are being built and prices are
traditionally low. However, storage numbers are currently about 60% of
where they were a year ago and gas prices are three times their average
over the past decade. It appears that, barring a miracle, natural gas
prices will be at record levels again next winter. Next week, at the
request of Energy Secretary Abraham, the National Petroleum Council is
holding an emergency meeting to discuss short-term options to heading
off a major shortage. But there does not appear to be a short-term
solution.
How did we get to this point? Over the past 10 years our public
policy has encouraged the use of natural gas because it is a clean
domestic fuel. We have ample natural gas resources in this country, and
will continue to for decades to come. In fact, the U.S. Geological
Survey estimates that there are some 1,400 trillion cubic feet of
technically recoverable natural gas resources in the U.S. and that over
60 percent of them are on Federal lands. A 1999 National Petroleum
Council study estimates North American gas resources to be over 2,400
trillion cubic feet. At current consumption levels that is enough gas
to supply the nation for 104 years. While our policies have encouraged
natural gas consumption, for its environmentally friendly aspects,
these same policies have discouraged domestic gas production. We
continue to shoot ourselves in the foot.
It is essential that we first reverse this trend and streamline the
process while still extracting the resource in an environmentally
sensitive manner. Second, we need to reverse the costly trend toward
increased litigation, brought about by national environmental groups to
delay and derail energy projects in virtually every part of the
country. Finally, we need to increase pipeline capacity by streamlining
the permitting process for pipelines. A lack of pipeline takeaway
capacity is currently keeping about 500 million cubic feet per day
locked up in the Rockies, a figure that could rise to 2.5 billion cubic
feet by 2010 according to FERC.
In addressing our natural gas shortage, we also need to look at the
contributions that other forms of energy can make in turning the wheels
of our economy and diversifying our energy portfolio. We have
tremendous coal resources in this country--a supply to last 250 years
at the present rate of use. We have untapped geothermal potential in
the West and we have vast wind potential both onshore and offshore.
In order to meet our energy demand and grow our economy, we must
make use of all forms of energy resources that can--with today's
advanced technologies--be accessed in an environmentally responsible
manner.
Over the past two and a half years, this Subcommittee has held
numerous hearings where we discussed the growing natural gas supply and
demand imbalance. Just last July, just prior to the conference on the
last energy bill, several witnesses testified before this Subcommittee
about an impeding gas supply shortage. Of course, last winter their
predictions came true.
Let's not repeat the mistakes that led us to the crisis we face
today.
Today I would like to especially welcome Cal Jones, President and
CEO of Wyoming Sugar Company. Between Wyoming Sugar and Western Sugar
Cooperative, our two sugar beet producers in Wyoming, they generate
well over one hundred million dollars of economic activity in Wyoming.
He is a fine man and great Wyoming citizen.
I look forward to today's testimony and welcome all our witnesses,
as we look for ways to develop a smarter and safer national energy
policy.
______
STATEMENT OF THE HON. RON KIND, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WISCONSIN
Mr. Kind. Thank you, Madam Chair, and I too want to thank
the witnesses for your presence and your testimony here today.
I want to also just quickly apologize to the Committee. I am in
another markup in another Committee, so I might have to run in
and out during the course of this hearing, so don't think we
are not interested. In fact, this Subcommittee has been very
interested. In fact, this is the eighth hearing over the last 3
years on the natural gas supply situation affecting our
country. Last week, the Commerce Committee had a hearing;
Chairman Greenspan testified. Next week, it is my understanding
the Subcommittee will be holding a similar hearing on the
natural gas supply. So to paraphrase former Committee Chairman,
Mo Udall, everything that needs to be said about this issue has
been said, it just hasn't been said by everyone, but we are
going to find out today based on your testimony. And I have had
a chance to review much of your written testimony you have
already submitted.
To be sure, the current natural gas supply crunch with its
resulting high prices is a serious issue affecting virtually
all sectors of our economy, from chemical producers, to
farmers, to homeowners. However, it is important to bear in
mind that the natural gas supply issues didn't emerge overnight
and will not disappear overnight. In fact, there are market
forces, I think we can all acknowledge and recognize, that are
at play right now with self-correcting mechanisms that are
taking place that will hopefully result in some positive
changes in regards to the price spikes that we have seen
recently.
Chairman Greenspan noted during the Energy Committee
hearing last week, and I quote, ``Today's tight natural gas
markets have been a long time in coming, and future prices
suggest that we are not apt to return to earlier periods of
relative abundance and low prices anytime soon.''
To address the difficulties of the natural gas industry and
consumers, the Energy Subcommittee has focused on the ability
to grow our natural gas supply through identification and more
production capability. But a senior economist from the Wall
Street firm, Goldman Sachs, just noted last week, underlying
infrastructure deficiencies are one of the primary constraints
on both supply and demand growth in the natural gas market. As
he said last week, and I quote, ``Due to the current
infrastructure constraints, even if there were significant
surplus domestic natural gas, the market doesn't possess the
pipeline capacity to transport it,'' as Madam Chair just
recognized. ``And even if there were adequate pipeline capacity
to transport the gas, which there isn't, the market lacks the
capacity to store it.''
This is why I believe development of alternative
technologies and energy efficiency programs to address the
short-term effects of price volatility in the natural gas
market is very important. Adoption of a national renewable fuel
standard can help reduce price volatility and our reliance on
foreign oil. Likewise, we can reduce the adverse effects of
high prices through a series of energy efficiency options, such
as conserving power during peak use periods. I mean energy
conservation naturally occurs when prices spike anyway. Just
witness the reaction of consumers in California just a couple
of short years ago and how quickly they reacted with increase
energy efficiency and conservation practices practically
overnight.
By reducing the amount of energy we use in diversifying our
energy sources, we can help alleviate price volatility in the
natural gas market. For example, the aluminum industry, one of
the most energy-intensive industrial sectors, is already
employing improved technology to increase the efficiency of
production and on increasing the recycling of scrap and waste
products. Both the chemical and agricultural industries are not
only using more efficient industrial processes to cut down on
their energy use, but the purpose of these industries has begun
shifting toward creating products from renewable forms of
energy, such as crops that can replace products traditionally
made from petroleum.
Over the long term, our economic and environmental future
lies with using our advanced technology to develop clean,
renewable energy sources and becoming more energy efficient. In
the short term, as I described, the market has a way of self-
correcting, but it also, I think, speaks to the need for the
Congress to be serious about appropriating funds for the LIHEAP
program to provide some temporary assistance to low-income
families who are increasing these price crunches today.
In closing, Madam Chair, we would also like to note with
great sadness the recent passing of Republican Committee staff
member, John Rishel. John was a dedicated public servant. He
served the Committee well, he served all of us members well, he
served our Nation very well, and he will be sorely missed. And
with that, I yield back. I think I--do we have that letter. If
I could just ask unanimous consent to--Madam Chair, we have
also submitted a written statement by Paul Britton, Managing
Director of EnerSea in regards to today's hearing, and I would
ask unanimous consent that be included in today's record.
Mrs. Cubin. Without objection, so ordered.
[The prepared statement of Mr. Kind follows:]
Statement of The Honorable Ron Kind, Ranking Democrat,
Subcommittee on Energy and Mineral Resources
Today, the Subcommittee holds an oversight hearing on the domestic
natural gas supply situation--- for the eighth time in the past 3
years. Last week, the Committee on Energy and Commerce held a similar
hearing and next week this Subcommittee is scheduled to meet again to
discuss virtually the same topic.
To paraphrase our late colleague and Committee Chairman Mo Udall--
``Everything that needs to be said about this issue has already been
said. It just hasn't been said by everyone.''
To be sure, the current natural gas supply crunch with its
resulting high prices is a serious issue affecting various sectors of
our economy from chemical producers to farmers to homeowners.
However, it is important to bear in mind that natural gas supply
issues did not emerge overnight, and likewise, will not disappear
overnight.
As Chairman of the Federal Reserve, Alan Greenspan, noted during
the Energy Committee hearing last week, ``Today's tight natural gas
markets have been a long time in coming, and futures prices suggest
that we are not apt to return to earlier periods of relative abundance
and low prices anytime soon.''
To address the difficulties of the natural gas industry and
consumers, the Energy Subcommittee has focused on the ability to grow
natural gas supply. However, as a senior economist from the Wall Street
firm, Goldman, Sachs, noted last week, underlying infrastructure
deficiencies are the primary constraints on both supply and demand
growth in the natural gas market. As he said, ``due to the current
infrastructure constraints, even if there were significant surplus
domestic natural gas (and there is in the Rockies), the market doesn't
possess the pipeline capacity to transport it; and even if there were
adequate pipeline capacity to transport this gas, which there is not,
the market lacks the capacity to store it.''
This is why development of alternative technologies and energy
efficiency programs to address the short-term effects of price
volatility in the natural gas market is important. Adoption of a
national renewable fuel standard can help reduce price volatility and
our reliance on foreign oil. Likewise we can reduce the adverse effects
of high prices through a series of energy efficiency options, such as
conserving power during peak-use periods. By reducing the amount of
energy we use and diversifying our energy sources we can help alleviate
price volatility in the natural gas market.
For example, the aluminum industry, one of the most energy-
intensive industrial sectors, is employing improved technology to
increase the efficiency of production, and on increasing the recycling
of scrap and waste products. Both the chemical and agriculture
industries are not only using more efficient industrial processes to
cut down on their energy use, but the purpose of these industries has
begun shifting toward creating products from renewable forms of energy,
such as crops, that can replace products traditionally made from
petroleum.
Over the long term, our economic and environmental future lies with
using our advanced technology to develop clean, renewable energy
sources and becoming more energy efficient.
In closing, we would like to note with sadness, the recent passing
of Republican Committee staff member, John Rishel. John was a dedicated
public servant and he will be missed.
______
[The statement of Paul Britton submitted for the record
follows:]
June 18, 2003
The Honorable Barbara Cubin
U.S. House of Representatives
Energy and Mineral Resources Subcommittee
1626 Longworth House Office Building
Washington, DC
Dear Chairman Cubin:
It is my understanding that you will be holding a hearing on the
important issue of domestic natural gas supply and shortages on June
19, 2003. On behalf of EnerSea Transport, a Houston-based compressed
natural gas (CNG) transportation and storage company, I would like to
request the attached written testimony be submitted for the record. I
believe it will help to expand the critical discussion of new gas
sources and describe how CNG is now a viable option for transporting
and delivering increased supplies of natural gas to the marketplace.
Thank you for your consideration on this matter. I look forward to
working with you to find solutions to meet increasing natural gas
demand in the U.S.
Regards,
Paul Britton, Managing Director
cc: Jack Belcher, Staff Director, Energy and Mineral Resources
Subcommittee
STATEMENT OF PAUL S. BRITTON, MANAGING DIRECTOR,
ENERSEA TRANSPORT LLC
On behalf of EnerSea Transport, a Houston-based compressed natural
gas (CNG) transportation and storage company, I would like to submit
the following written comments for the record. My comments will be
focused on how large-scale marine transportation of CNG can make a
significant contribution to the effort to meet future natural gas
demand in the U.S.
In response to tight supplies, energy experts are relying on
development of the deepwater Gulf of Mexico and unconventional onshore
gas resources, the importation of liquefied natural gas (LNG) and the
construction of an Alaskan pipeline to help meet our growing demand for
natural gas. To complement these efforts, EnerSea Transport has
developed a unique breakthrough in CNG technology that will unlock
remote gas supplies, and provide transportation and storage, for this
important resource in a cost effective, safe and secure manner.
Through the undertaking of a multi-year, multi-million dollar
technology development program, EnerSea has been able to develop a
total delivery solution for transporting large volumes of remote and
stranded gas supplies to the marketplace. Specifically, this new CNG
system, known as VOTRANSTM (Volume Optimized Transport and
Storage) can best be described as a sea-going pipeline, comprised of a
series of interconnected large-diameter pipes contained within an
insulated structure, integrated into a ship. We have greatly advanced
the technology of previous CNG concepts by combining optimal storage
efficiency, a proprietary gas handling process, the ability to
transport both lean and rich gas, and a highly secure process for
offloading gas through offshore ports.
Using these special built vessels, our technology can transport
natural gas and offload it through offshore buoy systems located up to
twenty miles or more from population centers. These simple offshore gas
ports will cost only a fraction of the cost of offshore LNG designs.
The gas is then delivered using existing or new sub-sea gas transport
infrastructure. Our recently patented CNG technology has the ability to
transport as much as 2 billion cubic feet of gas per ship to markets up
to 4000 miles away at substantially lower cost than other gas
transportation alternatives across a wide range of applications.
In a recent natural gas hearing, Federal Reserve Board Chairman
Alan Greenspan brought up the need to expand our ability to import
natural gas to the U.S. He said, ``A growing, disperse global natural
gas marketplace as the best means to sustain the U.S. standard of
living without exposing consumers to instability. EnerSea's system
provides unprecedented flexibility and risk management capabilities to
accommodate expanding production volumes and developing markets a value
to consumers, producers and nations worldwide. We anticipate that CNG
could provide up to 2 billion cubic feet of gas per day, or more, by
2014. EnerSea Transport believes this is an exciting opportunity to
help meet our goals of energy independence.
To help meet increasing natural gas demand in the U.S., we are
working to apply our CNG technology to stranded natural gas reserves in
North and South America--specifically in places such as East Coast
Canada, ultra-deepwater Gulf of Mexico, Alaska, Venezuela, Colombia and
the Caribbean. Today, up to 80% of the natural gas fields worldwide are
stranded and have yet to be developed--potentially a tremendous
resource of clean energy.
As you are aware, these large gas reserves have been stranded
because they are uneconomic to pursue due to technical, geographic or
geopolitical constraints. Through EnerSea's technological innovation,
VOTRANSTM will reduce the need for field processing
facilities. The scalability of the VOTRANSTM technology also
allows for phased development opportunities to match prospective fields
with market demand centers. This provides the ability to pursue smaller
and more remote gas reserves. In addition, fields can typically be
brought on stream much earlier compared to more capital-intensive
alternatives. CNG can also be seen as an enabling tool for helping
develop large-scale LNG projects on a more timely and risk managed
basis.
EnerSea has undertaken several key activities to date. EnerSea
Canada was established to bring forward the development of Atlantic
Canada offshore gas, specifically in the Grand Banks Region off the
coast of Newfoundland, to supply Northeast U.S. markets. In this
application, CNG is considered as the only viable means for developing
gas resources. To that end, we are helping to establish the world's
first CNG Center of Excellence to promote and coordinate the
participation of government, academia, the exploration and production
industry and offshore service companies in the advancement of this
emerging CNG industry for worldwide applications.
In continuing our efforts to employ our innovative CNG technology
and execute world-scale projects, we have created partnerships with
several key stakeholders. We have formed alliances with Hyundai Heavy
Industries, the world's largest shipbuilder, and ``K -Line, a leading
LNG ship owner and operator. Both entities have been working with us to
develop and commercialize the technology to provide highly qualified
gas ship operations experience. In, addition EnerSea has been working
with the American Bureau of Shipping (ABS) to achieve Class Approval in
Principle of its designs, which was achieved in April of this year.
EnerSea has also been engaged in a continuing dialogue with the U.S.
Coast Guard to discuss the regulatory process for offloading natural
gas onto offshore ports. And, we have contributed to the National
Petroleum Council's ongoing Natural Gas Study by providing an industry
perspective on the anticipated contributions of new CNG imports to the
U.S. gas supply.
In addition, we have been working with all the major producers to
educate them on the benefits of CNG and specifically the application of
EnerSea's new CNG technology and services. Given these advances, we
strongly believe that CNG is a viable option in the portfolio of
technologies that will be needed to meet increasing natural gas demand.
And, we are not alone in this belief. As you know Congress passed, and
President Bush signed into law the Maritime Transportation Security Act
of 2002 that expanded the Deepwater Ports Act to create a regulatory
framework for permitting the safe and secure transport and delivery of
natural gas in a compressed or liquefied form to offshore terminals in
the United States. Given this, our plan is to have completed
transportation agreements in 2004 with gas delivery services to follow
within 30-36 months.
Our nation's growing appetite for natural gas is a great
opportunity as well as a challenge. All options must be considered for
meeting that demand. EnerSea's CNG technology is a safe, viable and
cost-effective option. When shaping the regulatory framework for the
future, I encourage policymakers, industry planners and decision makers
to be certain to include the application of CNG technologies for
delivering currently stranded natural gas to market.
Thank you for this opportunity to inform the Committee of the
advances that our company is making and the promise of CNG transport
for meeting our nation's growing demand for natural gas.
______
Mrs. Cubin. Now I would like to introduce our first panel.
Dr. Michelle Foss is the Director of the Energy Institute, the
University of Houston, College of Business Administration; Mr.
Steve Brown, Director of Energy Economics, Federal Reserve of
Dallas, Texas; and Ed Kelly, North American Gas & Power
Consulting, Wood Mackenzie Global Consultants. So I would
invite Dr. Foss to begin her testimony.
STATEMENT OF DR. MICHELLE MICHOT FOSS, EXECUTIVE DIRECTOR,
INSTITUTE FOR ENERGY, LAW & ENTERPRISE, UNIVERSITY OF HOUSTON
LAW CENTER
Dr. Foss. Thank you. Thank you for the invitation. For the
record, I do need to correct my affiliation, if you don't mind.
I am executive director of the Institute for Energy Law and
Enterprise which is part of the Law Center now. We were in the
College of Business. We were acquired by the lawyers in a
rather exciting example of merger and acquisition activity in
higher education. I also would like to--
Mrs. Cubin. I am sorry, could I just--I am sorry, I need to
interrupt you for a moment. The Chairman has instituted a
policy that I wasn't used to doing last year, and that is
swearing all the witnesses in, and I think you were all
notified that would happen, and so if you wouldn't mind
standing and raising your right hand.
[Witnesses sworn.]
Mrs. Cubin. Thank you. I knew it would be. Now please go
ahead with the unfriendly takeover.
[Laughter.]
Dr. Foss. All right. Thank you. It is a pleasure to be here
and be able to present testimony to this Subcommittee on this
very important topic. I do want to just mention a few
highlights from the testimony I have submitted for
consideration this morning. One is we do have a situation of a
tight supply/demand balance in natural gas markets at the
moment. We have had two recent price spike events, one in 2001
and one this year. These events occurred under completely
different circumstances with regard to economic activity in the
United States, weather conditions and so on. And looked at in
that regard, it is clear that we have a different set of
fundamentals today than we have had in recent years. These
fundamentals have been a long time in coming, but they have
been evident.
One of the points I would like to emphasize is that since
1992 we have actually had three distinct price cycles for
natural gas. The price floor for each of those cycles has been
higher than the previous price floor, with the price floor this
year being the highest one of all. And when you look at the
natural gas market this way, that is probably the clearest
indication that things have changed and that circumstances are
different.
Now, I think there are some reasons for why this has
happened. One is a bit of a rebound from the gas bubble that we
had in the 1990's and a bit of complacency in the United States
with regard to available supplies, deliverable natural gas
supplies and the amount of effort that it would take to deliver
that and then the prices that we could expect to pay. And I
think the second major reason is a function of investment in
the upstream businesses, which, of course, have to adjust to
changing business conditions and changing market conditions.
There are lots of drivers for expiration and production
activity in the United States, not only expectations about
natural gas prices but expectations for oil prices because a
lot of our natural gas is produced with oil, and so even though
we are in a time right now where crude oil and natural gas
prices are not as closely correlated as they often are, it is
very important to recognize that E&P activity is driven by both
commodity markets. The second major factor is the maturity of
our natural gas base in terms of our established fields, which
means that there is an increased amount of pressure to find new
resources and deliver those resources into the marketplace.
I want to also support the remark that was made with regard
to self-correcting mechanisms because there is a lot of that
going on at the moment. Gas drilling activity is on the rise,
rig activity is higher. That will mean new supplies coming into
the marketplace. We are having demand-side responses.
Conservation and efficiency are important. It is important to
let the market adjust in response to higher prices. This is
uncomfortable for everyone. There is a phrase that we like at
our institute: The political reality of volatility when it
comes to natural gas prices, it is challenging for everyone to
deal with higher prices, but in fact this is the best
correcting mechanism that we can have in open, competitive
markets.
Most of the impact on prices has been felt in the
industrial sector. One of the things I want to emphasize is the
importance of funding and procuring timely transparent data and
information on natural gas markets. I want to point out that if
you look at the available data today from the U.S. Energy
Information Administration on consumption and demand activity,
you will find that the most recent annual data on consumption
is for 2001, and we know that 2002 is going to represent an
additional decline in terms of natural gas use in the
industrial sector.
We are using natural gas for electric power generation. We
do believe that there are price impacts that are affecting gas-
fired power generation, but the data are very conflicted on
this point, and, again, it is essential that we understand what
is happening in the marketplace and that transparent, timely
information are available to all customers and developers of
this important resource.
I am an optimist in terms of the ability to deliver
additional supplies into the marketplace. We have an abundant
resource, both in the United States and worldwide. The scarce
resources are time, talent, money. Capital availability for E&P
is very constrained right now, partly because of the decline of
the energy merchants who were providing a great deal of lending
into the sector through both equity and mezzanine financing
structures.
And I just want to close with a couple of remarks on LNG.
We do have an LNG consortium that we have established at the
University of Houston to look at safety and public education
issues. This is a very broad-based consortium that includes
industry and government representatives. The Department of
Energy and the U.S. Coast Guard are participating in this. The
goal is to be able to educate the public on the safe use of LNG
and the importance of developing LNG facilities. We do think
that LNG can be a safe alternative to supplement domestic
resources, and we think that in fact we should explore all
alternatives for the safe and wise use of natural gas. Thank
you.
[The prepared statement of Dr. Foss follows:]
Statement of Dr. Michelle Michot Foss, Executive Director, Institute
for Energy, Law & Enterprise, University of Houston Law Center
Members of the Subcommittee, I am Dr. Michelle Michot Foss,
Executive Director of the Institute for Energy, Law & Enterprise and an
Assistant Research Professor at the University of Houston. I am also
current president of the International Association for Energy Economics
(and past president of the U.S. Association). I have worked on natural
gas industry, policy, and regulatory issues for about 20 years. I come
at the invitation of the Subcommittee to provide input on the current
and future prospects for natural gas in the U.S. and to comment on
various policy and other issues that affect, and are affected by, this
important natural resource. I come as an individual citizen,
professional, and expert, and do not represent the viewpoints of any
particular organization or institution.
This Subcommittee and Hearing are concerned with the potential
crisis stemming from the natural gas supply shortage which has brought
about a doubling in the cost of natural gas in the last year alone.
Focusing on domestic economic implications, from price fluctuations to
national security, the hearing will analyze the factors that have
restricted domestic natural gas production in a time when we need it
most.
My testimony deals with several aspects of the situation for
natural gas at the present time, as well prospects for the future and
key policy considerations.
HISTORICAL PERSPECTIVE ON THE NATURAL GAS SUPPLY-DEMAND BALANCE
Natural gas supply, demand, and price today are a reflection of
both past and present conditions in the industry and U.S. energy
marketplace, as well as in the macro setting for natural gas--the U.S.
economy and weather patterns (to which natural gas use is quite
sensitive). Figure 1 below illustrates that since April 1999, the U.S.
has experienced two sharp price spikes for natural gas. The first
occurred during a period of strong economic growth and turmoil in
energy markets in the western states. (The spot price for natural gas,
essentially the ``near month'' of the Henry Hub contract, does not
incorporate basis differentials for other locations, such as the
disputed California border.) The second price spike occurred this past
winter of 2003, during a period of slow economic growth and relatively
calm energy market conditions (notably, following the demise of many
large energy trading operations), but also with harsh weather
conditions that supported a more ``normal'' winter heating season.
Comparison of these price spike events, characterized by quite
different conditions with regard to demand factors (U.S. economic
activity and weather patterns) suggests that natural gas market
fundamentals may have shifted significantly relative to recent history.
Figure 1. Natural Gas Spot Prices Source: New York Mercantile Exchange
(NYMEX)
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The evidence for changing fundamentals is further supported if spot
price data is smoothed using a 12-month moving average (MA), as shown
in Figure 2 below. Smoothed data indicate that the trough of each price
cycle since 1992 has edged upward, most strongly during 2003. That is,
each price floor is higher than the floor of the preceding price cycle.
Thus, even during relatively quiet periods with respect to natural gas
demand (outside of winter heating, summer peak electric power
generation, and summer storage refill), natural gas prices have been on
an upward trend.
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Price data demonstrate that the U.S. is experiencing supply-demand
tightness, and that this tightness could persist. Several factors are
worth considering which both support a more bullish outlook on prices
(from the producer perspective) but which also could dampen prices and
contribute to surplus deliverability in the years ahead.
Current high prices might reflect a ``re-bound'' from the
prolonged effect of the ``gas bubble.'' Figure 3 below highlights some
key historical events for the natural gas industry. The gas bubble (or
``sausage'' as it came to be called) was a major driver for
consolidation in the exploration and production segment for both
operating and service companies. Surplus deliverability and low prices
discouraged investment. Drilling activity languished. Introduction of
open access helped to reduce the surplus deliverability, as did the
expansion of gas-fired electric power generation capacity (encouraged
by low natural gas prices). However, it is worth considering two
things.
1. LThe rapid build up of production deliverability during the
1970s and the surge in wellhead prices as pent-up demand was
expressed in the marketplace and wellhead decontrol unfolded
may have lulled the industry and customers into complacency
with regard to availability of supplies and associated prices.
2. LThe problem of complacency may be especially true because
business conditions while the bubble/sausage was in effect were
terrible. During the slump in wellhead prices, the Gulf of
Mexico became known as the ``Dead Sea'' as rigs were pulled out
of service for use elsewhere. It is quite likely that the
constraints on natural gas supply today and through at least
the mid-term are a result of inadequate investment upstream
from the mid-1980s through the late 1990s.
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E&P for natural gas is driven not only by expectations
for natural gas prices, but also by oil prices, because natural gas is
often associated with crude oil and therefore produced simultaneously,
and also because natural gas competes with oil at the ``burnertip.''
Many customers, such as industrial facilities and power generators, can
switch between fuel oil and natural gas to take advantage of more
favorable pricing on a Btu basis (British thermal unit, used to equate
energy content of different fuels). Oil is a fungible, global commodity
that has its own supply-demand interactions. The Organization of
Petroleum Exporting Countries (OPEC) has a large impact on both current
and expected future prices of oil, and therefore indirectly on natural
gas prices in the U.S. As shown in Figure 4 below, when OPEC decision
making is cohesive (i.e., there is little disagreement among members),
the long term oil price trend is slightly higher. Natural gas prices
tend to be higher during periods of oil price firmness. OPEC decision
making is opaque, adding an element of uncertainty to expected oil
prices and thus impacting drilling decisions and, indirectly, natural
gas production. In addition, there are two, strong, competing
viewpoints with regard to oil prices that have great consequences for
natural gas: are we in an era of ``cheap oil'' in which there is always
sufficient supply, in response to demand and price signals, to mitigate
upward pressure on prices? Or, are we in an ``oil crisis'' in which
demand growth in regions like Asia, capacity constraints in the Persian
Gulf petroleum ``breadbasket,'' conflict and political risk in key oil
producing regions (Middle East and West Africa for instance), and
uncertainty about non-OPEC production capacity and potential all
combine to keep oil prices high? Both of these competing viewpoints
bear important consequences for natural gas supply and pricing.
Finally, the collapse and prolonged slump in oil prices from the mid-
1980s until the most recent high price cycle aggravated (indeed,
caused) E&P industry consolidation and hindered investment.
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The U.S. is experiencing both depletion and steep decline
curves in established fields, and also lower rates of productivity in
new gas wells. Figure 5 below shows the E&P industry challenge. Given
the maturity of U.S. basins, it is essential that gas drilling be
maintained at a sufficient level to ensure deliverability. A central
question is whether new drilling will yield gas production at rates
equivalent to historical patterns. Indications are that well
productivity onshore may not reflect past rates of production. The
industry is also on a well known ``treadmill'' in which new drilling
and production barely offsets natural depletion and declines
(especially true for ``fast gas'' reservoirs, such as the shallow
water, continental shelf of the U.S. Gulf of Mexico). A mitigating
factor is deep water production--as sustained production flows are
established, deep water plays will make a more substantial contribution
to the U.S. supply base. However, importantly, upwards of 75 percent of
domestic production comes from onshore fields (see comments on U.S.
Gulf of Mexico resources below). Onshore, critical components of the
resource base include non-conventional reservoirs (coal seams and tight
sands and shales) that present unique risks and costs.
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Offsetting tension on the supply side are adjustments on
the demand side. In any open, competitive market, consumers will adjust
their demand for a good according to price (and their willingness to
pay, subject to other factors like income, elasticity of demand, and so
on). This is a normal, logical reaction and one that suppliers must
deal with. To the extent that demand adjustments reflect more efficient
use of a scarce resource like natural gas, we will be better off in the
long run. Conservation and efficiency have important roles to play in
the U.S. energy sector, and the best encouragement is via price
signals. Figure 6 below illustrates the process of demand adjustment
that has been taking place since the winter 2000- 2001 peak in natural
gas consumption.
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However, a certain amount of demand loss represents lost
economic activity and capacity for the nation. It appears that most of
the demand destruction taking place is in the industrial sector (Figure
7 below). Natural gas serves as feedstock for petrochemical
applications--from which come all of the essential materials we use in
everyday life. Natural gas is also an important fuel for manufacturing
and industries like steel are affected. Note that the most recent data
available for natural gas consumption is 2001. Expectations are that
2002 data will indicate an even sharper decline in natural gas use for
the industrial sector. Figure 7. Natural Gas Consumption by Sector
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Natural gas use for electric power generation has
increased dramatically since the 1980s. This is a result of advances in
natural gas turbine technologies as well as policy incentives through
termination of prohibitions on natural gas use and creation of
competitive wholesale markets for electric power (1993 Energy Policy
Act). Projections of demand for electric power have been key to natural
gas resource development. Most new gas-fired power generation is
developed along major gas pipeline routes, as shown in Figure 8 below.
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The impact of higher natural gas prices on electric power
generation is controversial. Data on gas-fired power generation are not
clear. At least one information source (Figure 9 below) suggests a
sharp impact on gas-fired generation in the higher price environment.
An important consideration for policy decisions is quality,
reliability, and timeliness of information on the electric power
component of the natural gas value chain. Major gas pipeline routes
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In summary, the picture for natural gas seems to be the following.
Supply constraints exist, a function of age of producing
fields and natural depletion and decline, the types of new reservoirs
coming on stream, and constrained investment in the E&P sector (a
result of both historical factors, including consolidation in the E&P
segment, as well as more recent business turmoil among energy
merchants).
Demand destruction is a real and logical consequence of
supply tightness and associated higher prices. Conservation and
efficiency have important roles to play, but a considerable amount of
demand destruction represents lost economic activity.
Exogenous factors such as dynamics in the global oil
market play a role.
The current tight balance between supply and demand and
resulting higher prices has been evolving for some time, but
complacency hindered recognition of these dynamics.
If economic recovery takes hold and normal or near normal
winter weather patterns remain in effect, and if oil prices remain
firm, upward pressure on natural gas prices could exist for some time.
ECONOMIC DEVELOPMENT CONSIDERATIONS OF HIGHER PRICES
As Figure 10 below illustrates, the range of potential demand loss
for natural gas is 0.7 to 7.0 billion cubic feet per day (bcf/d). A
number of variables will dictate the ultimate outcome. This range is an
indication of the economic consequences of natural gas prices. Shut-
ins, shut-downs, and switching reflect decisions mainly by industrial
users about their fuel supply mix given relative fuel prices.
Conservation and weather related impacts represent a new dynamic--that
of price induced adjustments among residential and small commercial
customers. Based on anecdotal information from large utilities, these
adjustments are expected to be permanent. Energy efficiency programs by
industrial and large commercial users are also expected to be
permanent. Should prices drop substantially as supply-demand
interactions balance the market, demand recovery would create new
pressures on supply. Importantly, it is possible that a new market
equilibrium will be reached far below previously expected levels of
total annual consumption for the U.S., lending support to the
conclusion that a 30 trillion cubic feet (tcf) market will be achieved
only if it can be supplied at a reasonable cost and price.
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CONSIDERATIONS FOR THE DOMESTIC RESOURCE BASE
Important variables for the domestic resource base are capital
availability and access to new reservoirs. With regard to capital
outlays, E&P projects require lead times, some of which are lengthy
(see Figure 11 below). The E&P industry has responded to sharp price
cycles and price volatility for oil and gas by consolidating, reducing
costs (including new technology applications and improved asset
management practices), and employing risk management. A common form of
risk management is a ``natural hedge'' in which capital budgets are
reduced when prices are not favorable for E&P investment and targeted
returns. This means constant pressure on E&P projects to compete with
other opportunities. These are long term trends that have been in place
since the oil and natural gas market disruptions of the 1970s. A new,
critical variable is the loss of capital provided by energy merchants.
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Energy merchants are the unregulated affiliates of pipelines and
utilities that have been driving energy trading and risk management in
the restructured U.S. (and Canadian) natural gas markets. Most of these
enterprises established producer finance programs in order to diversify
into upstream positions and to stimulate development of natural gas
supplies in the U.S. Senior debt from commercial banks is most easily
accessed for proved developed production (PDP). Producer finance played
a key role for higher risk investments--proved developed but
nonproducing (PDNP), proved but undeveloped (PDP), to some extent, the
highest risk category of probable and possible exploration projects.
Capital expenditures by energy merchants for volumetric production
payments (VPP) and mezzanine lending have been removed from the
producer capital marketplace as energy merchants responded to post-
Enron credit downgrades, lost liquidity for trading and risk
management, and focused efforts to restore profitability, improve
balance sheets, and achieve recovery in credit ratings and share
valuations. Companies that have exited or reduced their presence in the
producer finance marketplace include El Paso, Mirant (Southern
Companies), Aquila (Utilicorp), Enron, of course, Shell (for reasons
other than the energy merchant collapse), and Duke Energy Capital
Partners (which provided the information in Figure 12 and Figure 13).
While private equity has stepped into the void, it is difficult for
equity providers to leverage returns, limiting activity. One conclusion
to be drawn is that with inadequate capital flows into E&P projects,
the U.S. will face higher imports of both oil and natural gas (in the
form of liquefied natural gas or LNG).
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ROLE OF FEDERAL LANDS AND MANAGEMENT OF THOSE LANDS
Because the U.S. still relies heavily on onshore fields for our
natural gas supplies, Federal lands access and associated management
issues are worth consideration. Significant problems exist with respect
to data quality and availability associated with potential oil and gas
leasing. The following case study illustrates a typical situation.
A Texas independent researches an area and determines it is a good
place for new oil and gas leasing. He orders maps showing U.S. Forest
Service lands administered by the Bureau of Land Management for oil and
gas leasing. The maps do not show any restrictions for leasing. He
determines that significant U.S. Forest Service acreage is prospective
and nominates it for an upcoming oil and gas lease sale (oral auction).
During the next nine (9) months the acreage nominated for oil and
gas leasing is reviewed by the U.S. Forest Service and all of the
nominated acreage appears in an announcement for an upcoming sale.
The announcement comes out about six (6) weeks prior to the sale.
On the lease announcement is mentioned several types of stipulations
that would affect the development of oil and gas on the acreage. There
is no indication of the significance of the stipulations (no maps, no
geographic descriptions), but contact information is provided for the
independent to make inquiry to the Forest Service regarding the degree
to which development would be impacted by the restrictions.
The independent contacts the local forestry expert who describes
the extent of a bird habitat that will affect 50-85 percent of the
area. The ``No Surface Occupancy'' basically condemns the area for oil
and gas leasing. The independent drops plans for the area and moves on
to areas where minerals are in private hands.
The point of this story is that if the independent had been able to
make an early assessment of the extent of ``No Surface Occupancy'' the
acreage probably would have not been nominated in the first place,
saving both the Forest Service-BLM and the independent time and money.
POLICY INITIATIVES FOR CONSIDERATION TO ENHANCE ONSHORE E&P
Tax Credits on Low Deliverability, Long Lived Unconventional Gas
Resources/Reserves
The maturity of the U.S. gas supply has been documented
many places. Charts of decreasing well life and reserves per well are
frequently shown. Most of this data deals with conventional gas supply
that has been developed over the past 60-plus years since the
construction of major interstate pipelines in the 1940's.
Unconventional gas production from reservoirs such as
coal seams (termed coalbed methane--CBM--or coal seam natural gas),
shale gas, and tight gas sands has been developed later and until
recently more slowly than conventional gas. The reason for this was the
low deliverability from wells producing from these resources. Better
technology, higher gas prices, and pipeline infrastructure caused some
of these resources to be developed such as tight gas sands in the San
Juan Basin in the 1950's.
However it was not until the late 70's and especially the
late 80's to early 90's timeframe when new basins and new resources
began to be developed. This was a time of relatively low gas prices
(certainly compared to today), and the availability of tax credits
associated with production caused new sources of capital to come into
the industry to speed development of these resources and prove up
technologies. Examples are the Antrim Shale in Michigan, CBM in the
Black Warrior Basin and San Juan Basins, and tight gas sands in the
Rocky Mountains, especially in the Piceance and Denver-Julesburg
Basins. Over the decade of the 90's over 25 trillion cubic feet of gas
in long lived, proved reserves were developed. Over that time frame gas
unconventional gas production increase from near nil to almost 10
percent of U.S. production today--and the percentage is increasing.
While it is true that tax credits may not be as critical
to the development of these resources in times of high gas prices,
other factors are worth consideration.
* LFirst, not all of the country's producing areas have
experienced high wellhead prices over the past year. Basis
differentials between Henry Hub and the Rocky Mountains
resulted in wellhead prices of less than $1.00/mcf in the
Rockies. At this price it is uneconomic to drill new wells and
in some cases produce from existing ones. Gas prices are high
now, but just a little over two (2) years ago the Henry Hub
price was below $2.00/mcf.
* LSecond, while conventional wells produce at maximum rate on
the first day, unconventional wells typically do not reach peak
production for months or years. This dampens rates of returns
associated with unconventional reserve development making it a
less attractive investment. Tax credits have historically
helped the discounted cash flow economics on unconventional gas
to make this resource attractive enough for investment to go
forward. In fact, during times of high gas prices the industry,
fearing that high prices will not be sustained, is actually
reluctant to invest in unconventional gas and favor the higher
returns associated with conventional gas.
* LThird, some of the best unconventional gas resource basins
have been discovered and are on production. The risk associated
with finding new ones is considerable. Attracting capital to
defray the risks is a key to adding new reserves. There is a
significant step-up in risk associated with developing new
basins and new reserves.
Tax credits which played an important role in the late 80's and
early 90's could play a similar role again, done carefully and with
attention to environmental protections.
ROLE OF OFFSHORE RESOURCES IN PARTICULAR AND MANAGEMENT OF THOSE
RESOURCES
With respect to offshore natural gas resources, it is clear that
the Gulf of Mexico remains a rich province, and that deep water
exploration in particular offers good prospects for development.
Figure 14, Figure 15, and Figure 16 below shows the role of the
U.S. GOM with respect to proved reserves and production in established
areas, as well as the emerging role of deep water blocks. A critical
issue for GOM supply deliverability is transportation, including new
technologies (like compressed natural gas transport) to move gas from
production location to onshore markets.
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The deep water areas represent considerably higher risks and new
demands on technology and logistics. In spite of these constraints, the
industry has achieved success and is now better able to move toward a
lower cost structure for deep water exploitation.
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Success achieved thus far for the GOM deep water, and the ability
for the industry to maintain operations in this demanding province
overall, indicate that areas currently blocked to access by moratoria
deserve a second look. Figure 18 represents the most recent estimate of
natural gas reserves that could be accessed both onshore and offshore
with appropriate policy mechanisms, including environmental safety and
protections.
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ROLE OF LNG
With constraints on capital and limits to access for drilling, LNG
is a actively discussed option to meet U.S. natural gas supply
requirements. Currently, LNG comprises only about one percent of U.S.
natural gas consumption (Figure 19). The U.S. has a diversified supply
base for LNG (see Figure 20 below). Of interest is that our LNG imports
roughly offset natural gas exported to Mexico via pipeline.
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The U.S. also has the largest number of LNG facilities in the
world, since much of the LNG we import is used for peak-shaving by
utilitites.
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A number of new marine import terminals have been proposed to
supplement our existing 19 bcf of capacity. Two essential questions for
LNG are whether additional natural gas imports can enter the U.S.
market on a cost and price competitive basis, and whether new LNG
import facilities can be developed safely.
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On the question of cost and price, the LNG value chain represents
substantial cost and risk to the industry. However, the costs estimates
shown in Figure 23 are considerably less than when the LNG industry was
launched roughly 40 years ago. Substantial savings have been achieved
for both liquefaction and shipbuilding, and, importantly, the life
spans of LNG tankers have been extended. The LNG value chain today
encompasses significant technology improvements for both cost
reductions and safety and environmental enhancements and protections.
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The result of cost reductions across the LNG value chain is that,
by U.S. Department of Energy estimates and based on industry reports,
LNG cargos can enter the U.S. when Henry Hub prices are roughly $3.00
and provide sufficient returns on investment to support expansion of
the industry. Indeed, LNG cargos were entering the U.S. market when
Henry Hub prices were roughly $2.50, an indication of the tremendous
progress made by the industry to manage its cost structure and build
commercial expertise.
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Regulations are designed to prevent incidents at LNG facilities
from occurring and if they do occur, from human or other error, to
protect the public from any impact. Generally, the commercial framework
for LNG includes the following principles.
Contain the product. This includes metallurgy for storage
tanks; facilities design such as double hulled ships, the option to use
full containment construction for land-based storage tanks, and so on.
Prevent effects. This second layer of protections is
designed to minimize spills and entails the deployment of gas detection
systems, shut off valve systems and the like.
Secondary containment. The third layer of protection
applies to both ships and storage tanks (for example, dikes and berms
surrounding tanks that can contain more than 100 percent of the
product), with the objective of capturing product should a breach
occur.
Separation distances. Appropriate setbacks, operating
distances for tankers, and overall siting requirements ensure
protection for public areas that might be near LNG facilities.
Dispersion models, thermal radiation zones, and other requirements are
used to establish separation distances.
A comprehensive review of data and information reveals that:
The LNG industry is not without incidents but it has
maintained an enviable safety record over the last 40 years.
Technological advances and regulatory oversight will ensure maintenance
of that safety record going forward.
The industry has continued to develop advanced technology
and control systems to ensure safety and reliability.
The experience of the LNG industry demonstrates that
normal operating hazards are manageable, certainly so relative to other
public risks and hazards.
Other critical considerations for LNG include the following.
Public education is essential. An LNG consortium has been
developed at the University of Houston to assist in this effort. The
consortium includes industry, government, peer expertise in engineering
and safety design, and outside peer review for environment and safety
considerations. An overview briefing paper is currently available, and
a definitive briefing paper on safety should be in public distribution
by mid-summer 2003. For information on the consortium, go to
www.energy.uh.edu, LNG page.
As the U.S. expands our imports of natural gas, our
relationships with producing countries will become even more critical.
The development of natural gas worldwide is not only beneficial to
consuming countries, but also to producing ones. Development of LNG
will help to reduce flaring. The LNG value chain will stimulate
additional E&P investment for natural gas worldwide, and help to
support development of domestic markets for natural gas, including gas-
fired power generation, in producing and exporting countries. Training,
education, and skills development in the international arena are
essential to ensure safe, wise, and transparent development and
utilization of the global natural gas resource base.
CONCLUSIONS
The natural gas industry and its customers are experiencing the
price effects of a tight supplydemand balance. Our domestic resource
base should be the first priority--it is our largest supply pool. LNG
and other alternatives can be used to supplement our domestic base, and
help to moderate high prices. Free and transparent markets, rational
responses in conservation and efficient use, clear and timely data and
information, access to locations for drilling, and safe development of
LNG facilities can help to ensure our natural gas future.
______
Mrs. Cubin. Thank you very much. And I would like to point
out that timing lights are in front of you, so we would
appreciate it if you could stay within that time. If you can't
completely, that is fine, but your entire statement will be
entered into the record.
So now I would like to ask Mr. Brown of the Federal Reserve
in Dallas, Texas to begin his testimony.
STATEMENT OF STEVE BROWN, DIRECTOR,
ENERGY ECONOMICS, FEDERAL RESERVE, DALLAS, TEXAS
Mr. Brown. Thank you, Madam Chairman, members of the
Subcommittee. It is my pleasure to be here today to talk about
an important issue. Before I begin my remarks, I should point
out that although my trip has been paid for by the Federal
Reserve Bank of Dallas, that I am not an official spokesperson
for the Federal Reserve Bank of Dallas or the Federal Reserve
system. The remarks I will be giving are strictly my own.
Three things I am going to talk about today is why natural
gas prices have risen, what the outlook is for natural gas
prices and what the implications are for the U.S. economy.
Sharply rising prices are always the consequence of demand
expanding more than supply or supply contracting more than
demand. Demand for natural gas is very seasonal, and
inventories play an important role in balancing these markets.
Swings in inventory are the key for understanding prices in the
natural gas market.
During winter 2002-2003, rising oil prices, colder than
normal winter weather and an economic recovery that is underway
led to stronger than anticipated natural gas demand. At the
same time, natural gas production fell below expectations.
Inventories fell to 5-year lows and natural gas prices rose
sharply. And the near-term outlook is such: While rising in
2002-2003, natural gas prices pulled away from their historical
relationship with oil prices. Futures markets show that this--
expectations of this continuing indefinitely, through the end
of 2005 if you look at the Wall Street Journal, through 2009 if
you look at data that is more difficult to find.
Inventories are being rebuilt but they are only keeping up
with the normal seasonal growth, and inventories remain below
the 5-year average for June. Drilling for natural gas is
increasing but domestic production in imports are insufficient
to rebuild inventories. Over the next few years, prospects for
lower natural gas prices really depend upon luck: Colder than
normal summer weather, warmer than normal winter weather or no
outages of natural gas production in the Gulf of Mexico during
the hurricane season.
Longer-term outlook, I am afraid, is a little bit more
pessimistic. Natural gas demand, according to most forecasts,
is going to grow more rapidly than demand for other fuels.
Without adequate resource development and imports, high natural
gas prices are likely to persist. Development may require
greater access to public lands and will require new pipelines.
Increased imports will require foreign resource development and
increasing import facilities such as LNG at terminals. From
some perspective, LNG terminals are only attractive at very
high prices, so that is really not what I would consider an
attractive alternative.
Developing domestic natural gas resources and expanding our
ability to import natural gas raises environmental issues.
Natural gas is an environmentally desirable source of fuel but
additional development in imports may have environmental
consequences. As for the economic consequences, sustained
natural gas prices are a drag on the U.S. economy. They reduce
GDP growth, boost real interest rates and increase measured
inflation. Now, there is no peer-reviewed research on the
impact of natural gas prices on economic activity, but a rough
estimate adapted from the literature on looking at the impact
of oil price shocks on the economy are that a doubling of
natural gas prices, which is what we have seen, reduces real
GDP by six-tenths to 2.1 percent below what it would otherwise
be, and it would increase the GDP deflator by about the same
amount. And if there weren't some anomalies in the CPI that
have been discussed recently, we would probably have a little
bit greater impact on the CPI.
The economic effects are particularly uneven across
industries and regions with some major industries, such as the
U.S. chemical industry being greatly impacted, aluminum
producers and agriculture. Thank you very much.
[The prepared statement of Mr. Brown follows:]
Statement of Stephen P. A. Brown, * Director of Energy
Economics and Microeconomic Policy Analysis, Federal Reserve Bank of
Dallas
---------------------------------------------------------------------------
\*\ The views expressed are solely those of the author and do not
necessarily represent those of the Federal Reserve Bank of Dallas or
the Federal Reserve System.
---------------------------------------------------------------------------
It is my distinct pleasure to be here today to address you on an
important topic: the potential crisis stemming from a natural gas
supply shortage which has more than doubled spot natural gas prices
during the past year. In my comments, I will address why natural gas
prices have risen sharply, the outlook for natural gas prices, and some
of the implications for the U.S. economy.
Inventories: One Key to Understanding Natural Gas Prices
Sharply rising prices are always the consequence of demand
expanding more than supply or supply contracting more than demand. In
the case of natural gas, the analysis is complicated by strong seasonal
patterns in consumption and a very mild seasonality in production. U.S.
natural gas consumption is nearly double in January what it is in May
and June. Unusually cold winter weather or unusually warm summer
weather can further accentuate seasonal patterns.
In a market with sharp swings in consumption, inventories play an
important role. In an average year, natural gas consumption exceeds
production and imports in November, December, January, February and
March. During those months, both current production, imports and
inventories are typically used to meet consumption. During the average
year, inventories are built during the months of May, June, July,
August, September and October, when natural gas production and imports
typically exceed consumption.
Consequently, swings in inventories are one key to understanding
movements in natural gas prices. When inventories fall below normal
averages for a given month, natural gas is seen as relatively more
scarce, and its price rises. When inventories rise above normal
averages for a given month, natural gas is seen as relatively more
plentiful, and its price falls.
Oil Prices: Another Factor in Natural Gas Prices
For some industries and electric utilities, natural gas and
residual fuel oil (a petroleum product) are good substitutes. Although
declining in number, these energy users are able to switch back and
forth between these fuels quickly, depending upon which is cheaper.
Rising oil prices push these energy users toward natural gas, and
falling oil prices attracts them back to residual fuel oil.
Consequently, economic research finds that oil and natural gas prices
have tended to track each other over long periods of time.
Volatile Natural Gas Prices
In winter 2000-01, two factors contributed to sharply rising
natural gas prices. In the West, there was a drought that reduced
hydroelectric power. Other parts of the United States had colder than
normal winter weather. Both contributed to a surge in natural gas
demand. In many parts of the country, the additional natural gas was
used to heat homes and businesses. In the West, it was used to generate
electricity. The surge in natural gas demand led to a sharp reduction
in natural gas inventories, and its price rose sharply--with the spot
price averaging more than $8.50 per million Btu in January 2001.
In subsequent months, natural gas production was increased, mild
weather and weakening economic activity contributed to falling natural
gas demand, and inventories were swiftly rebuilt. By December 2001,
inventories were at a five-year high. 1 The spot price of
natural gas was just over $2 per million Btu. Throughout 2002,
inventories varied seasonally but remained at the high end of their
five-year average.
During 2002, oil prices began to rise. Oil production was disrupted
in Venezuela. Tension in the Middle East began to escalate. Rising oil
prices prompted some electric utilities and industrial energy users to
switch from residual fuel oil to natural gas, which boosted natural gas
consumption and pushed natural gas prices upward--even though natural
gas inventories remained very high. 2
During winter 2002-03, continued increases in oil prices, colder
than normal weather and a recovering economy contributed to stronger
than anticipated gains in natural gas demand. At about the same time,
natural gas production slipped below expectations. Natural gas fields
that were made economically feasible with newer technology proved to
have sharper decline rates than had been expected. Although we had
approached winter with high natural gas inventories, they were used
quickly and fell to five-year lows by March 2003. Natural gas prices
rose sharply.
The Near-Term Outlook for Natural Gas Prices
While rising in late 2002 and 2003 natural gas prices decoupled
from oil prices. That is, natural gas prices pulled away from their
historical relationship with oil prices. One old rule of thumb is that
the spot price of natural gas at Henry Hub (a delivery point in
Louisiana) is roughly $1 per million Btu for each $10 per barrel of oil
for the spot price West Texas Intermediate crude oil (WTI). By this
rule, the current price of about $30 per barrel for WTI would imply a
price of about $3 per million Btu for natural gas at Henry Hub. The
current spot price at Henry Hub is in excess of $6 per million Btu.
Although natural gas prices decoupled from oil prices for about a
year during 2000-01, the current outlook is that natural gas prices
will remain substantially high in comparison to oil prices. Futures
markets for these two fuels show expectations of a continued decoupling
of natural gas and oil prices through year end 2005. Inventories are
being rebuilt, but they are only keeping pace with normal seasonal
growth and remain below the five-year average for June. 3
Although drilling for natural gas is responding to higher prices,
domestic production and imports have been insufficient to rebuild
inventories to normal seasonal levels.
Over the next few years, the prospects for lower natural gas prices
depend largely upon an unseasonably cool summer or unseasonably warm
winter, but a lack of offshore production shutdowns in the Gulf of
Mexico during the fall hurricane season also could soften price
pressures. Although domestic drilling for natural gas has responded to
higher prices, increases in domestic production are not expected to
enable inventory rebuilding. Imports from Canada are constrained by the
current extent of resource development in that country and pipeline
capacity. Imports of Liquified Natural Gas (LNG) have risen sharply,
but substantial growth is limited by a lack of U.S. LNG terminal
facilities.
The Longer-Term Outlook for Natural Gas Prices
Over the longer-term, analysts expect natural gas demand to expand
more rapidly than that for other fuel sources. 4 In
comparison to other fuels, natural gas is seen as environmentally
desirable because it burns more cleanly. Without adequate development
of domestic natural gas resources and additional imports, rising demand
for natural gas will continue to keep natural gas prices elevated
relative to those for oil. Consequently, the decoupling of natural gas
and petroleum prices could persist. 5
Development of domestic resources may require better access to
public lands and the development of new pipeline capacity from remote
locations to markets. Increased natural gas imports from Canada will
require the exploration and development of remote fields not yet in use
and transportation through pipelines that are not yet constructed.
Increased imports of LNG will require the development of additional
terminal facilities beyond the current four (in Georgia, Louisiana,
Massachusetts, and Maryland) that currently serve the entire United
States.
Cheniere Energy, Inc. of Houston has announced plans to build two
new LNG terminals in Texas and one new terminal in Louisiana. Imports
at these Gulf Coast facilities will contribute to overall supply of
natural gas in the United States, but will depend on existing pipelines
to reach end use markets in other parts of the country. Some companies
are also considering the development of an LNG terminal in Baja
California, Mexico that could be used to import natural gas from South
America into California. A terminal serving the West Coast could
greatly relieve some of the pressure on natural gas prices in the
California market.
In further developing our domestic natural gas resources and our
ability to import additional natural gas supplies, we face important
environmental issues. Natural gas is an environmentally desirable
source of fuel, but additional development and imports may have some
environmental consequences.
Economic Consequences of High Natural Gas Prices
Sustained high natural gas prices are likely a drag on U.S.
economic activity. Higher energy prices are indicative of increased
scarcity of natural gas which is a basic input to production.
6 As such, rising natural gas prices can result in a classic
supply-side shock that reduces potential output. Consequently, output
and productivity growth are slowed. The decline in productivity growth
lessens real wage growth and increases the unemployment rate at which
inflation accelerates. 7 If market participants expect the
near-term effects on output to be greater than the long-term effects,
they will attempt to smooth their consumption by saving less or
borrowing more, which boosts the interest rate. With slowing output
growth and an increase in the real interest rate, the demand for real
cash balances falls, and for a given rate of growth in the monetary
aggregate, the rate of inflation increases. Therefore, rising natural
gas prices reduce GDP growth and boost real interest rates and the
measured rate of inflation. 8
To my knowledge, no research that has been through peer review has
quantified the effects of rising natural gas prices on U.S. economic
activity. A considerable body of research has addressed the economic
effects of higher oil prices. 9 That research can be adapted
to provide a rough approximation of the economic effects of rising
natural gas prices.
During previous oil price shocks, natural gas and oil prices have
generally moved together. Prices for other primary energy sources were
relatively unchanged. Consequently, the measured effects of oil price
shocks may represent the combined effects of both oil and natural gas
price movements. Natural gas accounts for about 40 percent of total oil
and natural gas consumption, so 40 percent of the measured effect of an
oil price shock may be a rough approximation of the effect of a natural
gas price shock by itself. On that basis, a rough estimate is that a
sustained doubling of natural gas prices would reduce U.S. GDP by 0.6
to 2.1 percent below what it would otherwise be. 10 The
increase in the GDP deflator would be about the same.
The economic effects of higher natural gas prices are likely to be
uneven across industries and regions of the country. 11
States with extensive natural gas fields will benefit from rising
natural gas prices, while states with industries that use natural gas
extensively will be hurt. Among the domestic industries most adversely
affected by rising natural gas prices are fertilizer producers, the
petrochemical industry, electric utilities, aluminum producers and the
users of these goods and services. 12
References:
Stephen P. A. Brown, ``Consumers May Not Benefit from Wellhead
Price Controls for Natural Gas,'' Economic Review, Federal Reserve Bank
of Dallas, July 1985.
Stephen P. A. Brown and Mine K. Yucel, ``Energy Prices and
Aggregate Economic Activity: An Interpretative Survey,'' Quarterly
Review of Economics and Finance, 42(2), Second Quarter 2002.
Stephen P. A. Brown and Mine K. Yucel, ``Energy Prices and State
Economic Performance,'' Economic Review, Federal Reserve Bank of
Dallas, Second Quarter 1995.
Stephen P. A. Brown and Mine K. Yucel, ``The Pricing of Natural Gas
in U.S. Markets,'' Economic Review, Federal Reserve Bank of Dallas,
Second Quarter 1993.
Stephen P. A. Brown, Mine K. Yucel, and John Thompson, ``Business
Cycles: The Role of Energy Prices,'' in Encyclopedia of Energy, Cutler
J. Cleveland, editor, Academic Press, forthcoming.
Stephen P. A. Brown and Daniel Wolk, ``Natural Resource Scarcity
and Technological Change,'' Economic and Financial Review, Federal
Reserve Bank of Dallas, First Quarter 2000.
Energy Information Administration, U.S. Department of Energy,
Annual Energy Outlook 2003, U.S. Government Printing Office,
Washington, DC, .
Energy Information Administration, U.S. Department of Energy,
``Weekly Natural Gas Storage Report,'' .
Bert G. Hickman, Hillard G. Huntington, and James L. Sweeney, eds.
(1987), The Macroeconomic Impacts of Energy Shocks, Amsterdam: Elsevier
Science Publishers, B.V., North-Holland.
Mine K. Yucel and Shengyi Guo, ``Fuel Taxes and Cointegration of
Energy Prices,'' Contemporary Economic Policy, July 1994.
notes:
1 See the Energy Information Administration's ``Weekly
Natural Gas Storage Report.''
2 The ability to switch between natural gas and residual
fuel oil is declining.
3 Natural gas inventories have remained below the five-year
seasonal average for each month since March 2003.
4 For example, see the U.S. Energy Information
Administration's Annual Energy Outlook 2003.
5 Although the imposition of price controls for natural gas
could keep natural gas prices in line with those of oil, such
controls would exacerbate the shortage rather than alleviate
it. See Brown 1985 and Brown and Yucel (1993).
6 See Brown and Wolk (2000).
7 Reduced productivity would reduce profits and expected
future profits which will reduce stock prices and wealth.
8 See Brown and Yucel (2002).
9 For surveys on the research about the aggregate economic
response to oil price shocks, see Brown and Yucel (2002) and
Brown, Yucel and Thompson (forthcoming).
10 A 1987 Energy Modeling Forum study (Hickman et al. 1987)
estimated the elasticity of the response to the U.S. economy to
an oil price shock as-0.02 to-0.076. Brown and Yucel (1995)
find it likely that the elasticity of response to an oil price
shock has declined since the 1980s. About 70 percent of
petroleum is consumed in transportation, while 75 percent of
natural gas is consumed directly by industry, electric
utilities and commercial establishments, which has led some
analysts to suggest that movements in natural gas prices could
have greater economic effects than movements in oil prices
alone. Rising oil prices result in substantial income transfers
from the United States to oil-exporting nations, but rising
natural gas prices do not result in similar transfers. To the
extent that these transfers affect economic activity, the
economic consequences of natural gas price shocks would be less
than those from oil price shocks alone.
11 See Brown and Yucel (1995).
12 Natural gas is the principal feedstock for ammonium
nitrate, a basic ingredient in fertilizer. Foreign producers
with access to lower priced natural gas gain a competitive
advantage when U.S. natural gas prices rise. Natural gas is
also the principal feedstock for the U.S. petrochemical
industry, while foreign competition primarily uses petroleum as
its feedstock. When U.S. natural gas prices rise relative to
the oil price, domestic petrochemical producers are placed at a
competitive disadvantage. Natural gas is one of many fuels that
are used to generate electricity, but it is the fuel of choice
for most peaking facilities--that is facilities that meet
transitory spikes in electricity demand. Consequently, high
natural gas prices can raise costs for an electric utility and
its customers. Aluminum production uses considerable energy
both directly and through the consumption of electricity. The
industry generates some of its own electricity with natural
gas. Combined, these factors make the aluminum industry
relatively sensitive to natural gas and electricity prices.
______
Mrs. Cubin. Thank you very much. Now, I would like to
recognize Mr. Kelly for his testimony.
STATEMENT OF ED KELLY, NORTH AMERICAN GAS & POWER CONSULTING,
WOOD MACKENZIE GLOBAL CONSULTING
Mr. Kelly. Thank you, Madam Chairman and other members of
the Subcommittee, for this opportunity, even if I am toward the
end of a long list of speakers, perhaps, over the last few
years that have made it into this room. I appreciate the
chance.
My name is Ed Kelly. I am head of North American Gas &
Power Consulting for Wood Mackenzie Global Consultants. Who we
are is a global energy firm, energy consulting firm based in
Edinburgh, Scotland but with U.S. offices in Boston and Houston
dealing with oil and gas property information worldwide but
also energy markets more generally. This is a painful period of
adjustment as the commodity moves from relative surplus to
relative scarcity out there and the price responds accordingly.
This period is here to stay for the remainder of this decade,
perhaps even longer.
You know, natural gas consumption hit a peak in 1973 of
around 23 trillion cubic feet. What a lot of people don't
remember is it went down to 16 trillion cubic feet in 1986,
creating the appearance of a surplus and the appearance of a
systemic surplus in the system. Natural gas consumption is now
back to approximately 24 trillion cubic feet based on the
substitution of power generation markets for industrial markets
largely is what has happened in that period. The result has
been a more volatile consumption as well as a higher strain on
production as we are moving forward.
What gets us out of it? Well, the resource base is mature,
the decline rate is increasing in each given well. Each given
well accesses a smaller amount of reserves so that you have to
drill faster. And, by the way, anything that stops drilling
results in a more immediate and sharper decline in production
as you go forward. So any policy that delays drilling or any
policy that delays imports results mathematically in a more
immediate and sharper decline in production; therefore, a more
immediate and sharper increase in price to end-use consumers
and others, including those residential consumers,
approximately 90 percent of which in the Midwest depend upon
natural gas for home heating. So as was mentioned by
Representative Kind, the LIHEAP is important in this adjustment
to many of those end users as well.
What can get us out of this? The self-corrective mechanisms
are already coming. Drilling is up but it is not up that much,
and it has been painfully slow to come up. We had about 37
weeks of drilling, using over 900 active rigs drilling in 2001.
We increased supply as a result of that by about 4 percent.
Supply has already declined below the level previous to that
level of drilling. We are now back up. We had our first week of
more than 900 active gas-directed rigs last week. So we have
gone down to about 550; we are back up to above 900. I hope we
are on our way up, I hope that the supply effort will be more
successful this time around. But the solutions simply take time
and capital, and in the meantime there will be this painful
period of adjustment. So, point two, active drilling is very
critically important, and anything that delays that, again, or
slows it down will result in a sharper and immediate decline in
production and a sharper and more immediate increase in price
to all consumers for natural gas.
LNG is coming, the market is attracting it, but it is years
away. Another point I want to make is that LNG is probably 10
years away from representing 10 percent of U.S. supplies. Right
now it represents something between--well, approximately 2
percent of U.S. supplies. So we are talking about a five to six
times increase over the next decade in LNG imports, but it
simply takes time and capital to get liquefaction on the
producing end somewhere in the world up and running, shipping
up and running and import regasification facilities up and
running. And the producers that invest in the liquefaction on
the upstream end do so in a global market context. So a high
U.S. price is simply one among hundreds of factors that go into
investment decision for LNG facilities worldwide. A high U.S.
price is attracting LNG investment into the U.S. It is
happening, it just happens slower than you might think. It is
not an immediate response, and it will be long-term buildup.
Arctic supplies are on the horizon; they are important next
decade. So in terms of the current kind of supply response that
we can get, arctic supplies are important in terms of ensuring
a long-term moderate supply of natural gas. For this decade,
what is on the margin is conservation, is demand efficiency and
is that U.S.-based and Canadian-based--thank goodness for the
Canadians--gas drilling, onshore and offshore U.S. And with
that I will conclude my remarks. Thank you very much.
[The prepared statement of Mr. Kelly follows:]
Statement of Edward M. Kelly, Head of North American Gas and Power
Consulting, Wood Mackenzie Global Consultants
Good morning. My name is Ed Kelly, and my position is head of North
American gas and power consulting for Wood Mackenzie Global
Consultants. Wood Mackenzie is a worldwide energy consulting firm based
in Edinburgh, Scotland (with U.S. offices in Houston and Boston)
focusing on oil and gas producing information, as well as energy
markets more generally, including natural gas. While Wood Mackenzie
serves the energy industry, we are an independent firm with clients in
all sectors of the industry itself as well as outside investors, and
are independent of any particular sector of the energy industry.
Before Wood Mackenzie I worked for over 10 years in the natural gas
practice at Cambridge Energy Research Associates or CERA, the last
three as director of research for North American Gas. Prior to that I
held a variety of strategic planning and analysis positions in the
natural gas pipeline industry. I very much appreciate the opportunity
to speak with you today about a crisis that is painful to energy
consumers to be sure, but also for many sectors of the gas industry.
What is occurring now can be characterized as a painful period of
adjustment as a commodity moves from relative abundance to relative
scarcity. While this pain is felt by many, especially low income
individuals and families dependent upon gas for heat, as well as
industrial end users dependent upon natural gas to create their
products, adjustments are occurring in a number of ways. Drilling
activity has increased and is likely to continue to do so, and a number
of new import facilities are in various stages of the investment and
planning process, and conservation is occurring. None of these
activities will alleviate the shortfall immediately or even within the
next 3-5 years, but all are necessary and should be encouraged.
I would like to use my brief time to make a few points regarding
this crisis.
I. High Prices Are Here to Stay--For This Decade and Perhaps Even
Longer
The first point I would like to make is that this is not a simple
commodity cycle. High prices are likely to endure, and imports will
continue to increase in share of the overall North American supply for
natural gas. While a large resource base--by some estimates
approximately 50 years worth of current consumption--is estimated to
exist underground, the difficulty of finding and developing this
resource base is increasing. In addition, production in many major
basins is already in decline, and the deep water Gulf of Mexico, one
basin still increasing, will enter decline within the next 3 years.
That leaves the Rockies as the only onshore U.S. basin not in decline,
and production increases there will not fully offset decline elsewhere.
These declines in production have occurred even as the U.S. has
already built the next generation of power plants--nearly all fueled by
natural gas. As the economy grows, power demand grows, and with it gas
consumption as more power generation facilities are dispatched. Under
normal economic growth or approximately 3 percent gas demand would grow
by approximately .75 to 1.0 billion cubic feet per day on average in
the US. The average price of natural gas has therefore increased from
the $1.50 - $2.50 per Mcf (or 1,000 cubic feet) level, in place for
most of the 1980s and 1990s, to the $3.50 - $5.50 per Mcf level that
Wood Mackenzie expects for the remainder of this decade, at least.
These higher prices are here to stay until----
(a) Lan import system can be developed that is capable of
transporting large quantities of gas to the US, and
(b) Lmajor new native sources of supply can be brought to market.
However, both imports and new domestic supply sources--likely from the
arctic--will require both time and capital.
Demand pressures are here and now, while supplies declined this
year and may struggle to increase through 2005, declining thereafter.
New imports and arctic supplies, however, are 5-10 years away, meaning
that gas is likely to remain expensive for at least the remainder of
this decade. During this time, price--willingness to pay--will remain
the efficient and best means of determining who chooses to burn gas and
who does not.
II. Active Drilling in the U.S. is Still Critically Important.
My second point is that, despite the inevitability of increasing
imports, consistent and higher levels of drilling in the U.S. are
critical to minimize the pain that high prices will bring. The
difference in pain between a $3.50 average price and a $5.50 price is
large, and represents many thousands of jobs and between $20-$25
billion in disposable income to residences and small businesses. Before
imports can increase substantially (the end of this decade), and before
arctic gas can reach the market in large quantities (after 2010), U.S.
and Canadian drilling levels will largely determine supply on the
margin, or whether the gas price is closer to $3.50 or $5.50 in
wholesale markets.
The market has gained some valuable and hard-won information over
the past 3 years as drilling has moved up and down in response to
volatile prices. It is now clear that drilling activity of 550-700 rigs
searching for gas will not support U.S. production, and a steep decline
in production will develop within a year if drilling activity stays
that low. Drilling activity represented by 800 or more active rigs in
use, however, will at least arrest the pace of decline in production,
buying end users valuable time. Rig activity of 900 or more rigs may,
for a while, actually increase productive capability in the US, but not
likely by much. Two years ago for example the industry employed between
1000 and 1100 rigs actively searching for gas for a 15 week period (and
employed more than 900 rigs for an additional 22 weeks). However, the
result was an increase in U.S. productive capability of less than 4
percent the following year, followed by decline later as activity
dropped off. I hope that a more sustained level of greater activity as
high prices endure will do more, but so far there remains a long way to
go. Gas-directed rig activity just broached the 900 level again last
week, for the first time since 2001.
III. Anything that Impedes Drilling Activity will Result in a Quick
Supply Decline
For two decades technology advances and imports enabled energy
costs to decline even as greater regulatory and environmental scrutiny
was placed on U.S. drilling activity. A technological revolution in
drilling in the early 1990s enabled U.S. natural gas productive
capability to increase even as natural gas prices held at very low
levels. However, this trend no longer holds. Production from existing
wells is declining at a faster rate, as new discoveries become smaller,
and the same new drilling and development techniques allow quicker
emptying of reservoirs.
The major significance, however, is that greater levels of drilling
activity are required to sustain production, and any decline in
drilling will be accompanied by an increasingly sharp and immediate
decline in productive capability. Further restrictions on drilling
activity will be accompanied increasingly quickly by higher real energy
costs, and increasing pain in consumers' pocketbooks. While I will not
attempt to judge the proper tradeoff between drilling and the
environment, policymakers should be aware of this new mathematic
reality. However noble the purposes, increased restrictions on drilling
activity have undoubtedly already played some role in the higher energy
costs now facing consumers. Added regulation and restrictions no longer
come for free.
Will another technology advance at some point allow both
environmentally pure and cheap energy? No one can say for sure, but I
am not aware of any on the horizon, yet. Is there some technology in
energy supply or power generation that may eventually make the
competition among fossil fuel sources moot? Again, no one can say with
certainty--I hope so. The greatest progress at the moment appears to be
occurring in end use efficiency--with investment encouraged by price--
and in transport systems.
On the supply side, perhaps the greatest recent shift has occurred
in the cost of LNG (liquefied natural gas) transport and delivery, with
the import costs having declined by approximately 40 percent over the
past 2 decades.
IV. LNG is Still Years Away from Alleviating the Supply Shortfall in
the US
It is absolutely correct to say that LNG is increasing in
importance in the U.S. natural gas supply mix, and that it is a
critical piece of our supply future. However, it is important to keep
in mind that the U.S. faces years of supply challenge before either LNG
or arctic supplies can come to the rescue for natural gas consumers. As
I've said, demand pressure will remain high as economic growth drives
increased demand for electricity, and natural gas supplies the vast
majority of that power demand growth. Even as this demand pressure
grows, U.S. productive capability that will begin to decline within
three to four years.
Meanwhile, LNG development decisions occur in an international
market. The U.S. must compete with other markets for LNG supplies, and
each producer decides whether or not to liquefy natural gas reserves in
the context of returns available to investment in a global energy
market. For example, investing in liquefying gas reserves to ship to
the U.S. or elsewhere competes with global drilling opportunities as
well as with pipelines or any other method of monetizing the gas
reserves. Under the most favorable circumstances, the LNG value chain--
from liquefaction of remote reserves to shipping to regasification--
usually takes 5-7 years to develop.
Even though U.S. prices are now well above the approximately $3.50
per Mcf that LNG costs to deliver into the U.S. from many sources
(depending upon shipping distances, real estate costs, royalty regimes,
and other factors), investment in LNG delivery into the U.S. is not
guaranteed. A fragile chain of investments must occur, with delay
possible at any point. While increasing LNG imports are a near
certainty, this growth should be put into perspective. Wood Mackenzie
believes that it will be 10 years or more before LNG represents even 10
percent of U.S. supplies on an annual basis. By 2010, LNG imports will
be approaching 6 billion cubic feet (Bcf) per day--more than five times
their current level (expected average of 1.1 Bcf per day for 2003)--but
representing less than 10 percent of U.S. supply in a market of near
25.0 trillion cubic feet (Tcf) in size.
Reaching even this level of imports will require timely permitting
and regulatory approvals, as well as consistent decisions by major
producers and end users to move forward with several billions of
dollars of capital investment in and near the US. As in U.S. drilling,
anything that slows this process, whether from regulators or market
participants themselves, will prolong the period of high and volatile
natural gas prices in the U.S.
Natural gas supplies from the Arctic are also Important--for the Next
Decade
Supplies from Alaska and arctic Canada are likely to play a
critical role in balancing the continental natural gas market, but will
do little to alleviate the current crisis. Alaskan supplies pose an
especially challenging dilemma for producers, requiring huge
investments (estimates range from $15 - $20 billion) based upon the
current situation in a notoriously fickle and volatile market. As such,
periods of low prices, such as occurred in 2002, will delay these
development efforts, as will the availability of attractive alternative
investments. In my experience Alaskan gas has been expected to enter
the market between 7 and 20 + years in the future--and now the figure
is around 10-15 years, depending on the source. Alaskan gas would
represent an immediate infusion of supply covering approximately 3-4
years of demand growth in the U.S. market. LNG imports, on the other
hand, can be phased in, and require smaller increments of investment.
Ultimately, however, both growing LNG imports and Alaskan gas are
likely to be required, as is increased drilling. All forms of potential
supply are necessary.
VI. In the Meantime, Demand Efficiency and Conservation will be
Important on the Margin
With increasing demand, declining U.S. supply, and a necessary
delay before LNG imports and arctic gas can help fill the supply gap,
the U.S. natural gas market needs both sustained high levels of
drilling in the U.S. and increases in end use efficiency to keep itself
in balance. Conservation is occurring as more and more consumers become
aware of the higher real costs of energy, and efficiency is increasing
as newer appliances replace old and as more advanced materials are used
in construction and industrial applications. California power demand
during that crisis, for example, dropped by 3 percent based on
voluntary conservation, and by another 7 percent as a result of high
prices. This conservation was a critical component of the easing of the
power crisis in that state.
Natural gas prices are likely to remain high enough to encourage
conservation for the foreseeable future. For some types of end use--
primarily industrial and power generation--conservation and the burning
of alternate fuels already has an important influence on price.
VII. What Government Can Do--Avoid Harm
To make this adjustment from relative surplus to scarcity in the
natural gas market as easy as possible for as many as possible,
government can:
(1) LAs much as possible, at least avoid increasing the regulatory/
permitting burdens on producers. Again, that which either delays or
restricts drilling will quickly increase the pain felt by natural gas
consumers, and this increasingly includes those paying electricity
bills. Producers and others in the natural gas industry are keenly
aware than markets are being lost to alternative fuels, to
conservation, and even to industrial closings and relocations. As such,
there is an industry-wide effort underway to attempt to build supplies
in North America. The proper level of environmental and regulatory
oversight will always be in dispute, and this dispute is legitimate and
healthy. However, the need for sustained and timely efforts to increase
supply, and the quick drop in supply that will occur if these efforts
falter, should be taken into account by regulatory/political decision-
makers.
(2) LClarify the responsibility for supply planning. Largely a
function of the states, supply planning is a critical role in the
natural gas and power markets, and especially for infrastructure
development. Under a purely market system supply would be allocated by
price, planning would be done individually based upon expectations for
price, and price volatility would be an allowed and expected part of
the market landscape. However, the U.S. system is now far from this.
Many utilities are caught in an ambiguous position--regulators like
greater competition but also like someone in the end to be responsible
for energy supply. Utilities in the future may or may not be
responsible for ensuring that energy infrastructure, whether gas
pipelines or power generation and transmission, is adequate within
their service territories. In addition, utilities are being exposed to
a greater degree of political risk than ever before in the U.S. as
energy purchasing decisions, even honest ones, are constantly second
guessed. This challenging environment makes the signing of long-term
contracts, critical for the development of gas pipelines, power
generation, and especially LNG import facilities, more difficult.
(3) LHelp lead a reasoned debate on the environment/energy cost
tradeoff. Society may in fact desire higher real energy costs in return
for greater environmental purity, but such decisions should occur in a
reasoned atmosphere with as many facts on the table as possible.
Technology has lowered the costs of environmental cleanliness for
several fossil fuels, but there has been limited acknowledgement of
this fact. For example, coal generation can be made much cleaner than
it has been, at lower overall cost than gas-fired generation, and
nuclear generation and clean liquid fuels are an increasingly important
and clean options in the future energy mix. However, many opinions
appear fixed based upon outdated impressions of environmental costs
associated with these energy forms.
(4) LAid low-income end users that have little alternative for
heating. Funding for the LIHEAP program has been increased in recent
years, and the need for programs such as this should be continually
monitored.
(5) LAvoid price controls. Price controls would prove harmful to
producers and consumers alike, would place huge burdens on regulators
themselves, and, if they had any effect, would result in an immediate
drop in supply. This would lead to a chain of unintended consequences,
likely including crude centrally directed rationing schemes, as painful
to most a the current price-based rationing.
The U.S. has grown accustomed to relatively abundant, domestic and
Canadian natural gas supplies, at relatively low cost. However, the
reliance upon natural gas for the next generation of power plants, just
as natural gas supplies in the U.S. are hitting a peak and entering a
decline, has shifted this commodity from surplus to scarcity. This
situation is unlikely to reverse. A certain amount of pain during this
adjustment period is unavoidable, but, contrary to many reports, in
some important ways the market is working. Drilling has increased and
is likely to continue to do so, and investments in import facilities
are ramping up. In the meantime, voluntary willingness to pay is
determining who buys gas and who does not, and end use conservation and
efficiency are increasing.
High prices are already doing as much as any law or regulation
could to make this painful adjustment period as short as possible, and
to encourage investments in new technologies for both supply and
demand. Ultimately, these prices even hasten economic alternatives to
fossil fuels.
I appreciate the opportunity to appear today, and thank you for
your time.
______
Mrs. Cubin. Thank you very much. I would like to begin the
questioning. I couldn't help but notice in the testimony from
each one of you there was not a particularly emphatic point
that there is a lot of gas, actually about 50 years of gas, in
the lower 48, and what your statements all talked about in
stronger terms than it did the gas that we have in the lower 48
was arctic, LNG, conservation and all those sort of things. And
so I would just like each one of you to respond, if you would,
about how important you think the reserves in the Rocky
Mountains are. Just start with you, Dr. Foss.
Dr. Foss. Oh, I think they are critical, and in fact in my
testimony, as I mentioned, I said our domestic resource base
should be the first priority. And that means looking at all of
the things that need to be done to provide access, data
management for leasing and other information. I provided a case
study. It happened to be one that was based in Texas, but you
could take the case study in my testimony of a particular issue
in getting sufficient information from a Federal agency in
order to be able to go forward leasing Federal acreage and
apply that to the Rocky Mountains, because the situation is
much worse there in terms of land management, data records,
ability to facilitate E&P activity and so on.
I think Rockies are clearly important. They are a bit
disadvantaged. One of the issues for the Rockies, in fact,
right now is that as we have been looking at natural gas prices
in the United States, Rockies' producers haven't been enjoying
as much of the price increase as other producers in other parts
of the United States, and that is an issue of transportation,
remoteness from markets and so on.
Mrs. Cubin. More than just that, there is--
Dr. Foss. And more than just that.
Mrs. Cubin. --differential there that we are going to
investigate and see exactly why--
Dr. Foss. OK. Well, we will look forward to information
coming out of the Subcommittee on that.
Mrs. Cubin. Well, thank you. And I do have to apologize to
you, because I didn't get your statement as of midnight last
night, so I didn't get yours read, but I did read all the other
panelists'. So I thank you that you did mention that in your
remarks. Mr. Brown?
Mr. Brown. I think production in the lower 48 is important,
particularly for the near future. Unfortunately, I think for
the Rockies, the opening of a recent pipeline into southern
Wyoming indicates how important transportation is to providing
better access to the gas locked up in the Rockies, and programs
to provide better access to public lands are important for the
development of those resources.
A lot of the forecasts that I have seen kind of bypass the
Rockies because they are assuming that the regulatory
constraints are going to prevent access to that gas, and most
analysts have to sort of look at what they consider not only
technologically feasible but what they consider to be
financially and politically feasible.
Mrs. Cubin. You mentioned just one sentence in your
testimony that production in the Rocky Mountains--or you didn't
say Rocky Mountains but you said in the United States was
possible but there may be environmental complications--you
didn't use the word, ``complication.'' But--
Mr. Brown. Well, there is environmental concerns.
Mrs. Cubin. What are those environmental concerns that you
have?
Mr. Brown. Personally, I don't have environmental concerns
about the development of oil and natural gas, but there are
people who do have those concerns--
Mrs. Cubin. Right. Right.
Mr. Brown. --and I think those people have a voice, and I
wanted to recognize that in my remarks.
Mrs. Cubin. Good. I appreciate that. And I think those
people definitely have a voice too. Sometimes I question,
though, whether their voice really is about protecting the
environment or if their voice is really about stopping any
activity on the public lands, because that seems to be what I
observe as we go along when there is an amendment on the energy
bill to wipe out all incentives for oil and gas. I mean it just
confuses me that we want to deal with this gas supply problem,
and people think we have too many hearings on it to get too
much information on it, I guess. But we have to expose the fact
that oil and gas exploration is technologically able to protect
the environment and still produce the resource. And I would
just like to make that very clear today.
So, Mr. Kelly, I didn't notice much about Rocky Mountains
in your testimony at all.
Mr. Kelly. It is on pen, added informally, I am on page 2.
Mrs. Cubin. OK.
Mr. Kelly. Quantitatively, just to put some numbers around
it, we expect as an organization, Wood Mackenzie does, for the
Rockies production to increase by 4.5 billion cubic feet per
day, by 20 tons. Despite that increase by 4.5 billion cubic
feet per day, overall lower 48 productive capability still goes
down by 20 ton. So that tells you how critical the Rockies are
in a demand increase environment. Increased drilling is
critical to allow that productive capacity to be reached. If,
for instance, only half of that productive capability increase
is reached, if Rockies production increases by two, to 2.5
billion cubic feet per day, that is at least $1 to $1.50 added
on to the price of natural gas. That is $7 to $10 billion taken
out of the pockets of residential consumers in order to get
natural gas into their homes. So this is a very critical amount
of productive capability for the Nation as a whole. It is the
only onshore or offshore basin in the U.S. itself that is
likely to increase.
Mrs. Cubin. And when we look at the places where we could
be importing, or from which we could be importing gas, we are
looking at Angola and other countries--Nigeria, countries that
really probably aren't real wise for investment either. And
your point that the transportation and getting the product to
market is just as big as having the resource available. And I
think laying pipelines runs right into the same environmental
problems that drilling and exploration run into: They don't
want to disturb the land at all. And I think we have to reach a
balance, and I think that is something that we have to continue
having these hearings so that the public can know what the
problem is. The public can identify and bring pressure on those
people who would like to lock up all of the resources that we
have and import those resources. I can't imagine being
dependent on imported oil and dependent on imported gas what
kind of a situation, a perilous situation that puts us in. So
thank you.
And now I would like to recognize Mr. Bishop for any
comments or questions.
Mr. Bishop. Thank you, I appreciate that. Mr. Kelly--I have
got a couple if it is possible, Madam Chairman. You mentioned
the amount of drilling was up to 900 drilling activities. What
would be the ideal? Is there an ideal number? Is that number
just always higher?
Mr. Kelly. Ideal in the sense of increasing U.S. productive
capability is--there is no scientific answer to that, but
evidence in recent years is that it is a consistent level of
drilling, somewhat north of 900 rigs. So we need to see at
least a continuous and consistent level of 900 plus to result
in an increase in U.S. productive capability. That is also in
the context of deep water development going on. We expect an
increase in U.S. productive capability to show up late this
year; in other words, the decline will be stopped and
productive capability will be on an increasing path late this
year, both as a result of having reached 900 rigs and other
developments going on offshore, largely. We expect that to hit
a peak by 2005 and a longer term systemic decline to result
after 2005-2006 and then the level required to maintain
production may actually increase above 900 to 1,000 to 1,200
rigs.
Mr. Bishop. Is there a number that you are looking at that
would give you satisfaction and happiness and security?
[Laughter.]
Mr. Bishop. Never mind. The answer is no, right?
Mr. Kelly. Looking with unease at beyond 2005-2006 when the
deep water developments hit their peak and begin a long-term
decline, at that point we have approximately 1,600 rigs that
are available out there, and this is based on 2001 construction
data. Beyond that point, I would want to see 1,100 or 1,200
active rigs searching for gas to maintain productive capability
as best as can be maintained in a mature resource base.
Mr. Bishop. Let me ask two others if I could. The first one
is if you could comment in some simply of how Great Britain,
the United Kingdom, has benefited from its offshore gas
production activities, vis-a-vis the United States and the
difference it would be there. And the second one is like the
Chairwoman I am also from the Rocky Mountain region, and it is
going to be counted on for increasing percentage of energy
production over the next 20 years. Could you or anyone else on
the panel just help us, with me at least, with some specifics
of what has to happen in Federal or State policy to encourage
that kind of development, either the comparison with what has
happened offshore drilling with the United Kingdom to benefit
them compared to what we are doing and then any specifics that
you think might need to be impacted that could help the
production level in the Rocky Mountain region.
Mr. Kelly. I am not sure that you had in mind vis-a-vis
Great Britain. They are actually--the North Sea is more mature
in terms of gas production as well, so they are going through a
separate cycle. They will probably become a net importer or
begin to become a net importer of natural gas within the
several years if they aren't already. They are sort of at that
tipping point. I think it has obviously benefited them in a
number of ways to have the North Sea reserves developed there.
So I am not exactly sure where you are going with that.
Mr. Bishop. And that is OK. You are not taking me there
anyway, so we are OK.
Mr. Kelly. OK. Good.
Mr. Bishop. It is working.
Mr. Kelly. I think from a Federal perspective, one of the
things--two things that I think are important for the Rocky
Mountains are, one, is that the development of interstate
pipelines to transport that gas to markets is something that
requires a confluence of activities. There has to be an
investor, there has to be permits, and these pipelines are
going to cross State lines, and every State gets involved in
these permits. And so you have kind of the permitting process
in the pipeline construction, and you have to have an investor
who is attracted to that. Unfortunately, some of the
instability in the natural gas industry caused by the Enron
debacle has made a little bit shallower pockets among investors
these days. The other thing that I think is necessary is
looking at the kinds of regulations that impact the ability for
people to get in and drill and get production going.
Dr. Foss. I would like to add some comments, if I may?
Mr. Bishop. Please.
Dr. Foss. First of all, on your question about rig
activity, I think there is an important point that the
Subcommittee needs to recognize, and that is that our
reservoirs are changing. As the maturity increases of U.S.
fields and basins, you can't expect the same results from
drilling activity today that we have achieved historically.
That is why there is so much uncertainty. So when that question
gets raised about what kind of drilling activity do we need,
what level of activity and so on, it is a very complicated
question because we don't know what really to expect in terms
of well productivity once wells are completed.
With regard to the question about offshore UK-Norway, I
would like to just suggest that in my opinion the United States
has a superior system. I think what needs to be revisited are
the moratoria and especially an understanding of the resources
that are available in offshore regions here. And I think that
actually certain things could be looked at, for example,
royalty structures and other arrangements that apply to the
U.S. offshore regions, and I think there are some constructive
Federal policy initiatives that could be accomplished there.
With regard to the Rockies, I agree--
Mr. Bishop. Doctor, could I--
Dr. Foss. Yes.
Mr. Bishop. --interrupt just a second? And I think where I
was trying to go on Great Britain is when we were talking about
offshore drilling in the last bill, the energy bill that came
through here, the entire concern seemed to be dealing with
environmental issues. And since that is an area that has a
mature field, they have gone through that process. Were those
environmental negatives that they faced, vis-a-vis what they
were able to produce as far as the self-sufficiency coming out
of that? Are there lessons that we can learn either from our
fears being substantiated or exaggerated in that realm based on
what their experience was?
Dr. Foss. I think absolutely. I think there is a set of
best practices emerging for offshore exploration and production
right now, and it is not just the North Sea but it is also Gulf
of Mexico and other areas. I think there have been some
incredible advances in the ability to manage offshore
activities in a way that is environmentally responsible, and I
think that needs to be recognized, and that it suggests, in
fact, given success in the North Sea and the Gulf of Mexico
that it is worth it to revisit moratoria issues for other
offshore areas in the United States. I think that you have a
case there to make in terms of the ability for the industry to
operate in an environmentally sound way that can meet
expectations, satisfy resource requirements and have it be part
of the investment structure and something that the industry can
handle. I mean I think we are at that point with regard to
offshore--
Mr. Bishop. That will help. And I am sorry to interrupt
you. If you would go onto the Rocky Mountain, that is my area.
Dr. Foss. Right. And then to the Rockies. I agree on the
pipeline transport. I did want to mention that when we look
offshore we have a transportation issue there too. I think it
is important, and the Committee has probably heard this before,
we aren't able to pull all of the natural gas especially from
our deep water blocks into the marketplace right now. We don't
have adequate transportation conduits, whether pipeline or
other alternatives, technical alternatives. We are reinjecting
gas in our deep water blocks, in many of them. So there are
solutions that are needed offshore, there are solutions that
are needed for the Rockies.
I would suggest that when you look at the Rockies resource
base one of the things I think everybody knows is that a large
portion of that resource base is non-conventional gas from
other kinds of reservoirs, coal bed methane, tight sands and
shales. These are very demanding investments. They require
additional scrutiny in terms of environmental practices, but
they can be developed safely and soundly. There have been
varying viewpoints with regard to reinstatement of incentives
for the industry to develop those reservoirs. I happen to think
that in fact you can look at creative incentives, especially
for coal bed methane because it is such a different kind of a
reservoir and requires a different production scheme as a way
of helping to provide the right kind of business environment
for the Rockies and again have it be done in the right way in
terms of environmental practices and meeting all of the, as Dr.
Brown pointed out, the expectations of certain parts of the
public with regard to the environmental responsibility that the
industry needs to maintain.
Mr. Bishop. Thank you.
Mrs. Cubin. Before I recognize the next questioner, I would
wonder if each of you would respond very briefly to other
energy sources and how they play into our portfolio? Obviously,
this hearing is about gas, but just if you could briefly talk
about the other energy sources.
Mr. Kelly. Thank you. I think there are a host of sort of
outdated assumptions regarding the environmental cost of
differing forms of energy, coal chief among them. The reality,
for instance, is coal can be made clean other than carbon,
depending on what your view is about carbon emissions. For the
75 or 80 percent least efficient plants can be made very clean
for much less cost overall than gas, at $3 to $3.50, and we are
looking at gas at $5 to $6 at this point. So coal has a
necessary role to play in this in terms of dispatch of the
existing coal units, perhaps expanding that and allowing that
kind of retrofitting to occur. That is very important for the
future energy mix.
Also, clean liquid fuels. A lot of advances are going on in
terms of clean liquid fuels in terms of those kinds of
emissions that result. Advances are going on in the
transportation systems end as well. So we need all hands on
deck, to some extent, if economic growth is to be consistent
and job growth is to be consistent moving forward as far as
energy supplies goes.
Mrs. Cubin. Mr. Brown?
Mr. Brown. The energy sources that I want to comment on are
the so-called alternative energy sources. First of all, from a
visual point of view, many of these things have a much higher
environmental cost than is typically accounted for in most
analyses. And, second, these resources are very small, and
although they may play a role in the future, they are currently
dependent upon subsidies to be economically viable, special
regulations or legislation that requires them to be part of the
mix. So these are things that may be attractive in the future
if new technology are developed, but they are really not an
important part of the mix now, and they are not something that
we can count on in the near future.
Dr. Foss. I want to echo what Ed Kelly mentioned on coal.
Before I started working on natural gas, I spent a fair amount
of time in the Rockies on coal issues. This is an important
resource. I don't think we can ignore it. I think we have to
meet the challenges of using it cleanly and wisely. I want to
suggest that conservation and efficiency should be counted as
an energy alternative. I do want to reiterate that I think the
best way to get there is by letting the market work and letting
the price signals flow through to customers no matter how
uncomfortable it may be, but I think that is the best way to
inspire innovation and creativity.
And I wanted to just mention, because it gets so much air
time, no pun intended, wind power. There is a great deal of
discussion about this. As many people know, in Texas we are
experimenting with renewable energy quite actively as part of
our electric power restructuring effort, and I would like to
suggest that in fact some of the thinking on wind is not quite
right. There is a great deal of effort to think of it as a
grid-based energy source. I think people need to think about it
differently and a little more creatively and think about
distributed wind resources and how those can come into the
marketplace to satisfy certain needs and certain requirements.
And there are plenty of experts that the Committee could visit
with on that point.
Mrs. Cubin. Can we get out of this supply and demand
imbalance by only conservation and efficiencies? Just yes or
no.
Dr. Foss. No.
Mr. Brown. No.
Mr. Kelly. No.
Mrs. Cubin. Thank you. Ms. Napolitano.
Mrs. Napolitano. Thank you, Madam Chair. Even I would say
no to that, Barbara.
[Laughter.]
Mrs. Napolitano. And coming from California, which we use a
tremendous amount of energy and we were more or less the
largest target of the Enron debacle. And, Dr. Foss, I kind of
have to ask a few questions in regard to your organization. I
take it you studied the whole energy issue for the whole United
States.
Dr. Foss. And internationally as well, yes.
Mrs. Napolitano. OK. Well, I am more concerned about the
U.S. at this point. There were reports not too--well, I would
say maybe 10 years ago that I had been briefed on when I was in
the State house that indicated that we had more than ample gas
sites, reserves, that would last us for--the same thing was
said of gasoline or petroleum or the gas itself or--you know
what I am talking about. And I am wondering what happened in
between or what has made this different, because I can remember
thinking, well, there is the alternative method of being able
to substitute, if you will, or find alternative methods to use
both. And now I am beginning to wonder what has caused that to
change or why we are now saying we will be facing a shortage. I
am sure there are, and I would like to know how we can get this
Committee to have reports on the actual sites, the current
operating sites, if you will, the possible sites or the ones
that are underdeveloped or not developed yet that we may--and
you say it is speculative because you don't know what is going
to come out until you tap into them; is that correct?
Dr. Foss. Yes. You are talking about gas reservoirs--
Mrs. Napolitano. Yes.
Dr. Foss. --and the distribution of natural gas resources--
Mrs. Napolitano. Correct.
Dr. Foss. --in the United States? Well, natural gas
reservoirs are different than oil reservoirs--
Mrs. Napolitano. Right.
Dr. Foss. --in many respects, in terms of the engineering
that needs to be done with them. I understand that natural gas
can come into the market in two different ways. When you
produce oil from an oil well, you can also produce gas. You can
also produce what we call dry gas. In essence, you are drilling
a well into our reservoir and producing methane, which--or some
combination of gas molecules that can be used in different way.
Many dry gas reservoirs pose technical challenges. They may
not have much in the way or porosity or permeability; in other
words, the conduit itself is a complicated thing. So evaluating
the gas resource base, understanding it, understanding what it
will take to extract natural gas from the kinds of reservoirs
that we will be dealing with, especially as we go forward into
the future and especially offshore because we are now in
terrain offshore that is still something that we have to
understand in a geological sense. That creates a fair amount of
uncertainty about what we actually have in the resource base
and what it will require in terms of price and an incentive in
the marketplace to develop it.
And I think that is why you have seen so much variability
in all of the studies that have been done. I think the general
scientific conclusion is that we have an abundant resource
base. But there will be technical challenges, and the technical
challenges have commercial requirements in terms of price and
the inducement that price provides to companies to explore a
technically challenging resource, the money available to deal
with that resource and so on. I hope that sort of answers the
question a little bit. And of course there are--there are
efforts right now to get a better handle on it. The National
Petroleum Council study is an attempt to try to update on that.
Mrs. Napolitano. OK. Now, I am looking at a Calpine,
Incorporation June 2003 report that indicates the U.S. has
approximately 70 years of domestic supply based on known
economic recoverable reserves not including potential
additional import capability.
Dr. Foss. Remember that, and I wanted to suggest this to
the Chairman of the Subcommittee as well, when we use numbers
like 50 years of supply or 70 years of supply, there are a
great number of assumptions that go into that, assumptions with
regard to the price. We have many more years of supply at
higher prices than we do at lower prices. I mean that is the
commercial reality for both the oil and gas industries. It
depends on the kind of reservoir and what we can assume about
how quickly we will extract the natural gas from that
reservoir. It depends on demand, which of course depends on
price, so it is--
Mrs. Napolitano. But, Doctor, then is it fair to assume, or
I am gathering from your testimony that it is going to be
cheaper to purchase it, to import it, than it will be to
develop it.
Dr. Foss. Not necessarily, no. Because any gas that is
imported into the United States has to compete in our
marketplace. And so to the extent that we are in a higher price
environment, then certainly, as Ed and Steve pointed out, that
makes imported gas attractive. When we are in a lower price
environment, that puts pressure on exporters just as it puts
pressure on domestic producers.
Mrs. Napolitano. Do you feel this might become another
Enron issue, another Enron type problem?
Dr. Foss. No, not at all. I think that was a completely
different situation and is not related to--
Mrs. Napolitano. I am sorry, not Enron. I am talking about
the Texas monopoly on the energy that affected California and
other States.
Dr. Foss. I am unsure that I understand your question.
Mrs. Napolitano. Would you--
Dr. Foss. I think what we have is a cyclical, periodic
situation. Another thing that I think is important to
understand is that investments in something like producing
natural gas are very lumpy. It takes a long time to launch an
exploration effort. It takes a long time to bring a major new
project on-stream. This is true whether it is a new gas-
producing basin or an LNG project or some other project that
brings natural gas into the United States from outside. So we
are in a period in which certain investments need to be made,
and it will take some time to get them made. The consequences
of those investments, however, will be pretty significant in
terms of the additional supplies.
Mrs. Napolitano. Thank you. Thank you. I would like the
other two gentlemen just to briefly say whether they agree or
disagree. You don't have to go into great detail.
Mr. Brown. Michelle said so many things I am not sure
whether to say whether I agree or I disagree. I do agree that
significant investment is required to make domestic natural gas
production or to boost natural gas production. And I am hoping
that we are not really looking at natural gas prices in the
future that make imports extremely attractive. LNG looks
attractive at over $4 per 1,000 cubic feet or million Btu.
Somewhere between four and five it becomes attractive. That is
pretty darn high prices, because that is going to translate
after transportation into $10 to $12 gas at a residence in
California.
As for the question as to whether there may be some
exercise of monopoly power in the natural gas markets, I don't
currently see any evidence of that. There are a lot of small
independent producers in Texas and throughout the Rockies and
Louisiana that are producing natural gas. If there is a
monopolist, it is the government.
Mrs. Napolitano. Thank you.
Mr. Kelly. Now I have heard something I disagree with. I
think LNG, depending on the producing government, flexibility
can be delivered at somewhat lower cost than that, probably 325
to 375 per million Btu, still higher than historic prices from
a long-term perspective, not something that should give us a
great deal of comfort but somewhat lower, and that will happen
over the coming years but not immediately.
Secondly, I think there is an important distinction to be
made between this what is ultimately recoverable and what can
be produced in current economics, and I would like to
reemphasize that point, that what is recoverable at current
economics--and supply investment does occur slowly and demand
can shift by day by day. Demand shifts day by day, cold winter
is immediate here and now, hot summer is immediate here and
now, and supply investment takes a long time and a long lead
time.
Thirdly, no producer produces 5 percent of the U.S. market,
so the concentration in the producing end is really not that
much. What happened in Enron, I think, was fair to say some
concentration at specific locations in the midstream, in the
wholesale trading of natural gas. So that was a different
business.
Mrs. Napolitano. Thank you so much. Thank you, Madam Chair.
Mrs. Cubin. Would you think it is fair to include in your
answer to Ms. Napolitano's question that part of those
resources that she is talking about that we can't use are
locked up in the Rocky Mountains due to expensive red tape,
expensive permitting, long-term processes in getting permitting
and so on? Yes or no across the panel.
Dr. Foss. Yes. And may I just quickly add on the LNG front
one more step and point out that we were receiving information
and news of LNG cargos coming into the United States at $2.50
to $3 Henry Hub prices, and emphasize that the cost structure
of the LNG value chain has changed considerably because of
technology advances, the abundance of supplies overseas. This
is not a $4 commodity.
Mr. Brown. Yes.
Mr. Kelly. Yes. Anything that affects the timing.
Mrs. Cubin. Mr. Nunes is recognized for questioning.
Mr. Nunes. Thank you, Ms. Chairman. There have been some
reports in the news recently about looking for natural gas and
that it is kind of a silver bullet answer to our natural gas
shortage. I would like to ask across the panel what you think
of that statement and if that perception is actually the
reality.
Mr. Kelly. It is an extremely slow-moving bullet. It takes
time and capital to develop. I think it is something that--you
know, it is an important marginal source of supply that will
develop and will come over the course of years and the next
decade or two, but, again, it maybe 10 years before it is 10
percent of our supplies.
Mr. Nunes. Do you think it will raise the floor price of
natural gas?
Mr. Kelly. Probably. A certain portion--LNG will behave
differently from our current well-head supply. Wells produce
now. In general, LNG, a certain amount of it, will shift. The
ships can shift destination depending on relative prices in one
market versus the other. So in that sense it will be responsive
to U.S. supply of prices in relationship to Europe, for
instance, especially. So, yes, I think it will be a very
elastic and flexible form of supply.
Mr. Nunes. And what do you think is a reasonable price for
LNG, $3.50, 4? I've heard all these numbers so I am just
wondering.
Mr. Kelly. Well, I will say that host governments, in other
words, the producing governments, are becoming more
sophisticated and wanting to grab a portion of that downstream
value, so Angola and Trinidad are becoming more sophisticated
and wanting to grab the downstream value. There is a lot of
methane worldwide. But, yes, $3.50 to $4.50 I think gets you
the LNG Over the years.
Mr. Nunes. Thank you, Mr. Kelly. Mr. Brown?
Mr. Brown. I think LNG will be slow to develop. First of
all, you have to have the investment in the facilities to
produce natural gas elsewhere. It is true that natural gas in
some markets has a negative value, some overseas markets'
natural gas has a negative value, but those markets are pretty
far away, and the process of converting natural gas to a
liquified natural gas, finding a terminal in the United States
and then off-loading it and regasifying it is a complicated and
expensive process. And in fact all of our terminals are likely
to be pushed to very close to full capacity with any concerted
effort to import natural gas. There are three terminals that
are underway, under construction in the Gulf part of the United
States, but those aren't close to the market; those are close
to other producing regions.
What in fact would really be necessary if you look at one
of the primary shortage areas of natural gas in the United
States is to have some sort of LNG terminal in or near southern
California. There are people who are talking about building one
in Baja, but Baja, California is trying to decide its own
trying, it is trying to decide whether it is going to be
industrial based, in which case an LNG facility makes sense to
them, or whether it wants to be tourist based, in which case
they don't want anything that reminds somebody of something
dangerous. So there are a lot of issues there that I think have
to be dealt with before LNG really becomes attractive. And I
think that in addition to moving the political and economic--
moving both the economic and political realities is going to
require prolonged prices in the neighborhood of 4 or higher to
really get LNG moving, even though it may be technically
feasible at 2.50.
Mr. Nunes. Thank you, Mr. Brown. Dr. Foss?
Dr. Foss. I think LNG will take time to develop largely
because of siting issues, pubic acceptance and other things,
which is why public education is so important with regard to
what this industry is really all about. Most commercial
strategies that we see companies developing are peak-shaving
strategies. In other words, LNG will be attracted to the U.S.
market when prices are higher, but it will shave the peak off
of natural gas prices and act to dampen prices in the
marketplace.
And then the third question as to price, it really depends
on the operator and the cost structure of the operator, the
value chain that operator faces, where the source of upstream
supply is, how--
Mr. Nunes. What range would you put the price in?
Dr. Foss. I would put it anywhere from 2.50 to 4. I think
it really depends on where natural gas is coming from and who
is bringing cargo into the United States.
Mr. Nunes. Thank you, Dr. Foss. Thank you, Ms. Chairman.
Mrs. Cubin. I would like to advise the Committee we have
two votes coming. I would like to finish the questioning. Mr.
Faleomavaega?
Mr. Faleomavaega. Thank you, Ms. Chairman. Madam Chairman,
I apologize for my being a little late; it is very difficult
having three meetings at the same time. But, Madam Chairman, I
would be the last person to claim expertise in the subject that
we are discussing this morning, but at the same time I don't
think one has to be a rocket scientist to ask some of the basic
questions that I assume our distinguished panel have already
answered, questions concerning the current status of the
natural gas that we have in our own country. The question is
how long is the supply going to last? The question is, what
kind of a competition are we having within the natural gas
industry within our country, and what kind of a foreign
competition are we getting from other countries?
My recent visit to Bolivia tells me that they recently
found a deposit, or whatever you want to call it in natural
gas, supposedly the biggest in the Western Hemisphere. There
were findings also in Kazakhstan and Russia. One of the
questions always raised in this industry is that of
environmental concerns. It seems to me--the thing that I am
concerned about, is that we put a very high premium on the
standards we put on our industries, but I don't think the
foreign competition has that same standard. I think this is
something that we need to work out in a better way.
Of course, the industry, I hope, is not involved in an
Enron type of a situation where those poor workers are being
taken out of their livelihood because of the dishonesty of some
of the executives within the energy industry, and I hope that
this is not the matter. Now that I know that you have answered
all my questions, distinguished members of the panel, I am
going to be quiet. Thank you very much, Madam Chairman.
Mrs. Cubin. Thank you. I would like one brief answer from
everyone an estimate of--we all agree that conservation and
efficiency is a source of energy in today's environment. Can
you estimate a percentage of our supply that could
realistically be attributed to those? Because another witness
that is coming on has some estimates that I have trouble
believing that they could produce as much energy.
Mr. Brown. Historically, we have had conservation in the
United States. Typically, it has been on the order of about a
half percentage point gain in energy efficiency in our economy
over the last 50 years. It is particularly strong during
episodes of sharply rising prices. There is considerable
evidence that the market does respond and produce energy
efficiency in response to higher prices. The potential for
producing energy conservation without economic incentives is
practically nil. There are numerous studies that have purported
to show that there is a 25 percent conservation that can be
had. That number is the same as it was 20 years ago when I was
doing this kind of work with another organization. Those were
the numbers that were thrown around. Lee Shipper, who left the
Lawrence Berkeley Laboratory and is now with the International
Energy Agency in Paris, has said all of the cheap, free
conservation has been had. Now we are looking at tough, costly
conservation. So I would say the answer is half a percentage
point a year over the next few years.
Mr. Kelly. I wouldn't dispute that estimate. I mean there
is an evolutionary decline in energy use per unit of GDP that
goes on, and it increases in periods of high prices and it
slows in periods of low prices.
Mrs. Cubin. I am sorry to interrupt. We have to go vote.
Mr. Kelly. OK.
Mrs. Cubin. If you could just make it as quick as possible.
Do you have an estimate of an percentage?
Mr. Kelly. Three to 10 BcF per day, some of which is
industrial shutdowns--
Mrs. Cubin. Right.
Mr. Kelly. --in a market of 65 billion cubic feet per day.
Mrs. Cubin. Thank you.
Dr. Foss. Yes. I would agree with Mr. Kelly, and this is in
my testimony. It is anywhere from about 0.8 to about three BcF
per day.
Mrs. Cubin. Thank you for your testimony. The Committee
will be gone probably 10 or 15 minutes, and we will recess now
and then reconvene in 10, 15 minutes. Yes. I would like to
excuse the panel and have the next panel ready to come forward
when we come back. Thank you.
[Recess.]
Mrs. Cubin. The Subcommittee will now come to order. Now I
would like to introduce panel two: Al Christopherson who is the
President of the Minnesota Farm Bureau Federation; Calvin
``Cal'' Jones, President and CEO of Wyoming Sugar Company; Mr.
Bill Jewell, Vice President of Energy, the Dow Chemical Company
at the Houston Dow Center; Mr. Keith Rattie, Chairman,
President and CEO of Questar Corporation; and William R.
Prindle, Deputy Director of the American Council for Energy-
Efficient Economy. I would like to welcome all of you and
remind you that signal lights are on, that they will be lit,
and if you could confine your testimony to 5 minutes, fine. I
don't mind if you go over a little bit, but I assure you that
your entire statement will be entered into the record. So with
that, I would like to recognize to present his statement, Al
Christopherson.
STATEMENT OF AL CHRISTOPHERSON, PRESIDENT,
MINNESOTA FARM BUREAU FEDERATION
Mr. Christopherson. Thank you. Chairman Cubin, members of
the Subcommittee, my name is Al Christopherson, and I am a
farmer, raise corn and soybeans and finish out hogs in south
central Minnesota. I am also president of the Minnesota Farm
Bureau, and I am here today representing the American Farm
Bureau Federation and appreciate the opportunity to express how
vitally important reliable and affordable energy is to my
industry, that of agriculture, and to share our concerns about
the looming natural gas prices, the impact the crisis is having
on U.S. farmers and ranchers, the need to have accurate
inventory data and the need to fully utilize our country's
energy resources.
A key energy feedstock of vital importance to agriculture
and associated industries is natural gas. The price spikes seen
in natural gas futures this past winter would equate to paying
over $12 for a single gallon of milk and over $9 for a single
loaf of bread. While prices have moderated somewhat--virtually
all commercial nitrogen fertilizers in the United States. The
planting season of 2000 saw fertilizer at a cost of around $100
per ton. During this spring, farmers faced prices of $350 or
more per ton, and the impact on the farmer will mean that the
American farmer will pay an extra $10 to $15 per acre more than
last year's already high fertilizer prices. Overall, the U.S.
agricultural sector estimates the added expense at $1 billion
to $2 billion more than last year just to get the crops put in
this spring.
In addition to extremely high fertilizer prices, diesel
fuel prices are 40 percent higher than historical averages and
electrical prices threatening to skyrocket as the summer heat
begins in earnest. All of these energy factors add up to much
higher production costs for American agriculture. Now, we face
some razor thin margins and the prospects of higher energy
prices for the foreseeable future. This added expense cannot be
passed on in the price of agricultural commodities.
The current natural gas crisis is a prime example of the
failure of today's U.S. energy policy. On one hand, Congress,
along with several Federal agencies and programs, have
rightfully encouraged the use of natural gas as the
environmentally friendly feedstock for electrical generation,
home heating and industrial manufacturing. At the same time,
the Federal Government has increased the regulatory burden on
domestic natural gas exploration, drilling and production and
placed moratoriums on many energy-rich areas, such as the Outer
Continental Shelf, the Gulf of Mexico and other Federal lands.
The energy price instabilities being experienced today do not
need to become serious energy crisis in the year to come nor
does America need to become dependent on foreign sources when
it comes to natural gas than what we currently are with crude
oil. Energy-rich repositories such as the Outer Continental
Shelf on the Federal lands must be reconsidered for
environmentally safe oil and gas exploration and production
immediately. The advances made in oil and gas drilling
technology will make such an effort the most environmentally
sound and responsible capturing of energy feedstocks ever
conducted.
Overall, we feel--the American Farm Bureau feels very
strongly that America must develop a diversified energy
strategy that lowers our dependence on foreign energy sources
through improving our domestic supply, including increasing
environmentally safe domestic production on our Federally owned
lands and resources, along with a strong emphasis on renewable
sources.
While there is no single solution to solving the current
natural gas crisis, Congress must take steps to add balance to
the U.S. energy equation. By acting, the 108th Congress can
strike a balance by increasing the domestic production of
energy sources on private and Federal lands along with
developing renewable energy sources. This will reduce our
reliance on foreign sources for our energy needs today and
reassert America's energy independence for future generations.
Thank you.
[The prepared statement of Mr. Christopherson follows:]
Statement of Al Christopherson, President, Minnesota Farm Bureau, on
behalf of the American Farm Bureau Federation
Chairman Cubin, members of the Subcommittee, my name is Al
Christopherson, I farm near Pennock, Minnesota and am president of the
Minnesota Farm Bureau Federation. I am representing the American Farm
Bureau Federation (AFBF) and appreciate this opportunity to express how
vitally important reliable and affordable energy is to American
agriculture. AFBF also appreciates the opportunity to share our
concerns about America's looming natural gas crisis, the impact the
crisis is having on U.S. farmers and ranchers, the need to have
accurate inventory data and the need to fully utilize our country's
energy resources.
Agriculture is more energy efficient than ever before. From the
tractors used to work the fields and raise the crops to the industries
responsible for refining raw commodities into the final products
consumed by the public, energy use has decreased dramatically in
agriculture. More than ever before, America's agricultural engine is
producing more and more economic benefit with less and less energy.
While these energy savings have been realized a growing U.S. economy
and population will need more energy security in the future.
A key energy feedstock of vital importance to agriculture and
associated industries is natural gas. According to the American
Chemistry Council the price spike seen in natural gas futures this past
winter equates to paying over $12 for a single gallon of milk and over
$9 for a single loaf of bread. While prices have moderated somewhat
following the price spike, the current price of $6 per million Btu for
natural gas is nearly three times the historical cost average of $2.
The negative economic impact of a three-fold increase in the price of
natural gas is dramatic.
Federal Reserve Chairman Alan Greenspan, in testifying to the House
Energy and Commerce Committee, stated that high natural gas prices
``have put significant segments of the North American gas-using
industry in a weakened competitive position against industries
overseas.'' Mr. Greenspan went on to say that the current crisis in the
availability and price of natural gas could have a significant negative
impact on the current U.S. economic recovery. Natural gas is the
primary feedstock in the production of virtually all commercial
nitrogen fertilizers in the United States. According to The Fertilizer
Institute, the planting season of 2000 saw fertilizer at a cost of
around $100 per ton. During this spring, farmers faced prices of $350
or more per ton. According to the USDA the impact on the farm will mean
that the American farmer will pay an extra $10 to $15 per acre more
than last year's already high fertilizer prices. Overall, the U.S.
agricultural sector estimates the added expense at $1 billion to $2
billion more than last year just to get the crops planted this spring.
Unfortunately, high natural gas prices are threatening the existence of
what remains of the fertilizer industry in this country and may further
exacerbate America's dependence on foreign sources for not only our
energy but also our food and fiber needs.
In addition to extremely high fertilizer prices, diesel fuel prices
are 40 percent higher than historical averages and electrical prices
threatening to sky-rocket as the summer heat begins in earnest. All
these energy factors add up to much higher production costs for
American agriculture. With the razor thin margins already being
experienced in agriculture and the prospects of high energy prices for
the foreseeable future, this added expense cannot be passed on in the
price of agricultural commodities.
The current natural gas crisis is a prime example of the failure of
today's U.S. energy policy. On one hand, Congress, along with several
Federal agencies and programs have rightfully encouraged, via
incentives, expanding the use of natural gas as the environmentally
friendly alternative feedstock for electrical generation, home heating
and industrial manufacturing. At the same time, the Federal Government
has increased the regulatory burden on domestic natural gas
exploration, drilling and production and placed moratoriums on many
energy-rich areas such as the Outer Continental Shelf (OCS), the Gulf
of Mexico and Federal lands. If left unchanged, the U.S. energy policy
toward natural gas today will certainly result in the loss of even more
of our energy independence tomorrow.
The energy price instabilities being experienced today do not need
to become a more serious energy crisis in the years to come. Nor does
America need to become so dependent on foreign sources when it comes to
natural gas than what we are currently on crude oil. Energy rich
repositories such as the OCS and Federal lands must be reconsidered for
environmentally safe oil and gas exploration and production
immediately. The advancements made in oil and gas-drilling technology
will make such an effort the most environmentally sound and responsible
capturing of energy feedstocks ever conducted.
Renewable energy sources must also play a vital role in America's
future energy strategy. Overall, AFBF believes very strongly that
America must develop a diversified energy strategy that lowers our
dependence on foreign energy sources and improves our domestic supply,
including increasing environmentally safe, domestic production on our
Federally owned lands and resources.
While there is no single solution to secure America's energy
future, Congress must take steps to add balance to the U.S. energy
equation. By acting, the 108th Congress can strike a balance by
increasing the domestic production of conventional energy sources and
developing renewable energy sources. This will reduce our reliance on
foreign sources for our energy needs today and reassert America's
energy independence for future generations.
______
Mrs. Cubin. Thank you, Mr. Christopherson. And, once again,
I failed to recognize the new policy by the Chairman. Would you
mind standing and be sworn in with your testimony.
[Witnesses sworn.]
Mrs. Cubin. Thank you. Now, I would like to recognize Mr.
Jones for his statement.
STATEMENT OF CALVIN JONES, PRESIDENT AND CEO,
WYOMING SUGAR COMPANY, LLC
Mr. Jones. Good morning and thank you, Chairman, and thank
you also for the kind words in your opening remarks. It is a
pleasure for me to address this Committee this morning.
Mrs. Cubin. Could you pull the microphone up closer so that
it is easier for the stenographer to get--thank you.
Mr. Jones. It is important for me this morning to testify
about the supply and demand of natural gas, as it is a very
important cost driver in our business. And I want to share with
you the importance and the demand destruction that is and may
continue to plague our industry. I am here today representing
the State of Wyoming and our company, Wyoming Sugar Company,
LLC. You see, Wyoming Sugar Company is the smallest independent
public company in the beet sugar industry.
The State of Wyoming has three beet sugar factories
currently operated by two companies, Wyoming Sugar Company and
the Western Sugar Cooperative. The beet sugar factories in
Wyoming create 684 jobs. This industry generates over $1
million in economic activity in Wyoming. The beet sugar
industry is part of the larger U.S. sweetener industry, which
consists of sugar beets, sugarcane and corn. This creates $21.1
billion in economic activity in 42 States each year.
The industry provides American consumers high-quality
sweeteners, and these same consumers pay 22 percent less than
their counterparts in other developed countries. Over
1,4000,000 acres of sugar beets are grown in 12 States with
processing done by 27 different independent sugar beet
factories. This industry creates over 372,000 full-time direct
and indirect jobs for people across this Nation.
The history of the Wyoming Sugar Company is short, as we
began business 1 year ago. Although the Wyoming Sugar Company
is new, the factory has been in Orland, Wyoming and operated
continuously since 1916. I mention this because Wyoming is at
risk of losing a business that has provided jobs and economic
activity in the Big Horn Basin region, Freemont and Hot Springs
Counties for 87 years. The culprit is costs, which I want to
address this morning.
First of all, the drought, which we have experienced the
past 4 years, and which is well documented, is a factor and
must not be overlooked. Our focus and goal has been to address
the costs we have control over. There is little we can do with
the drought situation until weather returns to more normal
patterns. I want to share with you today our major cost
drivers, one being jobs or labor and then products and supplies
or the purchases we do. First, in labor, our one factory
provides employment for 54 full-time and 125 seasonal
employees, along with another 49 contracted laborers. An annual
payroll in excess of $4 million including benefits and
workman's compensation is paid.
A reminder not included in these figures is the growers
hired labor. You see, sugar beet agronomy is very labor intense
when compared with other rotational crops, and additional field
hands to plant, irrigate, spray and harvest are needed.
Rotational crops are needed to be good stewards of the soil,
and sugar beet is a good rotational crop in the central part of
Wyoming. Our employees at Wyoming Sugar have bought into our
business by electing to take 21 days off last year to show
their commitment with an in-kind contribution to the business.
Now to speak a little bit about purchases. We at our
factory purchased nearly $17 million worth of goods, mostly
from within the State of Wyoming. The greatest single cost in
this category of costs of course is raw product sugar beets.
However, followed closely is the purchase of products and
supplies to process the sugar beets into finished goods. Our
natural gas cost is the greatest process cost we encounter.
Last year, we spent over $1.2 million for natural gas for 90
days of processing. This year, we are looking at double or two
and a half times this cost, a cost that will cause red ink to
flow in our business. This has been referred to as demand
destruction in the natural gas business. It is real destruction
of a business, and it is related to economic activity.
We have reduced our energy needs over the years and
continue to look for opportunities to become more efficient.
Wyoming Sugar Company completed the first year without hurting
our financial position. There were sacrifices, though. Our
employees have had their wages held at previous year's rates,
our shareholders did not receive a return on their investment,
and our profit picture for this year is very dismal. The
culprit is natural gas costs.
Last year's results were influenced by three items: Our
incumbent's financial instability, second one was the drought,
which I previously mentioned and the effect on sugar beet
planting, and the third was the cost of energy. This year, our
budget is influenced by the ongoing drought that I have
mentioned and the projected cost of natural gas. As Federal
Reserve Chairman Greenspan stated last Tuesday, ``High natural
gas prices could weaken some key American industry's abilities
to compete. I am here today to inform you that, grassroots
America, this is happening.
Natural gas producers also face a dilemma. The permitting
process on Federal lands has increased from 45 days a year ago
to what I am told to be 175 days currently in Wyoming. Reducing
this time lag would allow more drilling and increased
production. Unlike the power industry, the sugar industry
cannot pass onto consumers the added costs through rate
Adjustments. Our industry just simply doesn't have the
mechanism.
In closing, the beet sugar industry has since 1996 seen the
closure of eight processing factories. More recently, in
February of this year, the Western Sugar Cooperative suspended
its Greeley, Colorado factory operations due to costs. The main
issue is cost of production. Whether from the agronomic cost of
the grower or the production cost at the factory, both are
related to energy costs and availability. It is a shame my
company's business, located in the second largest producing
State, is at this kind of risk because of high commodity and
transport costs for our major cost driver, natural gas. I thank
you for this opportunity.
[The prepared statement of Mr. Jones follows:]
Statement of Calvin Jones, President & CEO,
Wyoming Sugar Company, LLC
Good Morning, and thank you Chairwoman Cubin and committee members
for allowing me this time to testify before you.
I am here representing the Beet Sugar Industry as part of a much
larger ``Sweetener Industry'' that consists of sugarbeet, sugar cane
and corn. This industry annually creates $21.1 billion of economic
activity in 42 states. The industry provides American consumers with
high quality sweeteners for various applications. American consumers
pay 22 percent less than their counterparts in other developed
countries. (Chart 1).
The beet sugar segment of this industry plants over 1,400,000 acres
of sugar beets in 12 states that are processed by 27 beet sugar
factories. The industry creates 88,200 full time direct and indirect
jobs for people across the nation.
Wyoming is one of the 12 sugar beet producing states where over 400
growers produce about 56,000 acres of sugar beets. Those beets are then
processed by three factories operated by two companies, Wyoming Sugar
Company, LLC and Western Sugar Cooperative. The economic activity
generated in the state of Wyoming each year by the Sweetener Industry
is $159,600,000.
The U.S. Sweetener Industry is integral to the national economy, as
a well as each state where sweeteners are grown and processed. Current
United States sugar policy allows efficient U.S. beet, cane and corn
growers and processors to compete against unfair foreign subsidies and
trade practices. The program provides reliable supplies of sugar at
fair and stable prices. Moreover, it operates at a minimal cost to the
taxpayer.
Sugar is the only major commodity program in the 2002 Farm Bill
that is designed to operate at no cost to the U.S. taxpayers. Most
years, in fact, U.S. sugar policy has been a revenue raiser for the
U.S. government. (Chart 2).
To cope with the declining real prices for their product, (Chart 3)
American sugar farmers and processors have made extraordinary
adjustments. Since 1996, 19 sugar beet factories or cane processing
mills have closed. That accounts for more than one-fourth of all the
factories and mills operating in 1996. (Chart 4). Some geographic
regions, including portions of Hawaii sugar cane, Northern California
beets, and all of Texas beets have exited the sugar business
altogether. Equally upsetting, other areas, such as Louisiana cane,
have been forced to concentrate their production at the most efficient
mills.
The combination of a decline in sugar prices and higher cost of
production is directly responsible for a number of plant closures. As a
case in point, the Texas beet operations that I managed for several
years were negatively impacted by high energy costs. Texas Panhandle
sugar beet growers use natural gas powered water irrigation pumps to
irrigate their crops. The high cost of natural gas negatively impacted
the economics involved in crop irrigation. Similarly, the sugar beet
processing factories were directly affected by high energy costs due to
their reliance upon natural gas as a fuel source for processing the raw
sugar beet. Both partners, the sugar beet growers and the factory, were
unable to continue in the business. The natural gas industry calls that
type of plant closure ``demand destruction.''
On February 10, 2003, the Western Sugar Cooperative announced that
it was suspending maintenance operations at its Greeley, Colorado
facility. Due to the drought, thousands of acres of beets will not be
planted in the Greeley ``growing area.''
The beets that are being grown in the Greeley factory area will be
transported to Fort Morgan, Colorado for processing. The Fort Morgan
plant has a higher ``beet slicing capacity'' and is coal fired, where
Greeley is gas fired. The additional freight costs are more then offset
by the differential in fuel costs.
The sugar beet industry has also been faced with another unexpected
``commodity challenge.'' That commodity is water, or the lack thereof.
Sugar beet crops will not grow without water. In order to sustain and
grow crops, the 21 states of beet sugar production require water either
from reservoir systems (Irrigation projects) or natural precipitation
during the growing season (Dry land production). Drought has affected
both these areas from time to time. Currently, Wyoming production is
``ground zero'' relative to the existing drought cycle. Over the past
three years, acreage planted in sugar beets and the resulting crop
yields (2003 should be considered the fourth year) have been severely
depressed due to the ongoing drought situation. (Chart 5). Please note
that the states most affected by the ongoing drought are indicated in
red. Both ``Area Harvested'' and ``Yield'' of the 2001/2002 crops have
been negatively affected. To better depict this crises, the U.S.
Drought Monitor illustrates the current situation! (Chart 6).
The sweetener business is driven by three main costs. Of course,
the growing and harvesting of the raw product accounts for the greatest
cost, which, in our case, is the sugarbeet. Our growers are our
partners in this business since the sugar price influences the
compensation the grower receives for the crop they have invested in
throughout the growing season. This concept, which is unique to the
sugarbeet industry, is defined as a ``participating contract.'' The
Wyoming Sugar Company's contracted growers made a financial commitment
to our company through the purchase of stock shares in the company.
However, an investment is not required by our company by growers to
contract and grow sugar beets for processing.
The other major costs driving the sweetener business are labor and
process purchases. Labor refers to the jobs and associated economic
activity within the local communities. Our labor force at Wyoming Sugar
Co. bought into the business with an ``in kind'' contribution of 21
days without pay last year. These are family ``bread winners'' who
risked their family budgets to see this industry succeed. Worland's
labor force has also agreed to a wage freeze for the next two years,
another indication of their commitment to our business.
``Process purchases'' refers to process supplies and energy needs.
The greatest single cost in this category is energy. I am mainly
referring to Natural Gas since this is the fuel of choice for our
company. Recently, the NYMEX prices for natural gas (Chart 7) have
dramatically risen. In contrast, sugar prices have been plummeting
(refer to chart 3). Because of these opposing price trends, one can see
the squeeze sugar companies are facing!
The beet sugar business is very labor and energy intensive. We are
one of the few industries within the United States that processes a raw
product into a consumer available finished product all within close
proximity (80 miles) to the factory. Our effort is an example of a
value added effort in the conversion of a raw product to a finished
product!
Sugar is more affordable in the United States than virtually
anywhere else in the world. In terms of ``minutes of work'' to purchase
a pound of sugar, the United States is the third lowest of the 49
countries that LMC International LTD (LMC) studied, both developed and
developing. (Chart 8). The ``1.9 minute'' U.S. figure is below the
``free Market'' Australia and Canada numbers, less than half the
developed-country average, only a third of the work average, and 70%
below Brazil.
In terms of sugar expenditures as a percent of per capita income,
the United States is the lowest in the world. (Chart 9). American
consumers also benefit from the availability of low-priced, U.S. made
corn sweetener.
Beet sugar economics also directly impact the value of farmland.
Sugar beet production affects irrigated farmland prices even in
counties that do not produce sugar beets. A significant reduction in
Montana irrigated farmland prices (19 percent to 35 percent) can be
expected in the absence of sugarbeet production. The same affect can be
expected in other sugar beet producing states that utilize similar
rotational crop choices.
That is the industry I am representing, more pointed I am
representing my company, Wyoming Sugar Company, LLC, and the beet sugar
industry of Wyoming. Wyoming is the second highest ranking state in
natural gas production. It is ironic and alarming that industries
within the state of Wyoming are at risk of closing due to high natural
gas prices. Perhaps even more ironic, natural gas producers in Wyoming
currently receive the lowest price for their commodity as compared to
any other natural gas producing region in North America. Despite the
relative ``price lag'' relationship for Wyoming gas producers, the
Wyoming Beet Sugar factories will see their cost of gas increase nearly
2.5 times last year's actual price paid.
Wyoming Sugar Company, having been a part of the state's economy
for 97 years, is at risk of closing as a result of high natural gas
prices. Unlike natural gas utilities that purchase and supply natural
gas to residential and commercial customers, the beet industry cannot
simply vote to immediately ``pass through'' its higher cost of gas to
its customers.
As the Federal Reserve Chairman, Alan Greenspan, stated on Tuesday,
June 10, 2003, high natural gas prices could weaken some key American
Industries' ability to compete. I am here today to inform you from
grass roots America that this is, in fact, happening!
We feel these price increases may be temporary. However, temporary
or not, our company and industry cannot survive long term with these
cost increases.
Natural gas producers face a dilemma as well. The approval and
issuance of permits to drill following an application has increased
three fold in the past year. I am told that in one particular Wyoming
BLM office, what in the past took 45 days for Federal land permitting,
is now, taking approximately 175 days. If this process were
streamlined, more natural gas production, or at least the potential for
more production, might be available. Additionally, the Federal
Government should consider some method of encouraging marginal natural
gas wells to become more productive or brought back into production.
Such an effort would increase supplies or at least have the potential
to do so.
We can manage with the non-controllable factors such as the drought
and weather related issues. The controllable items are the ones we all
have to address to continue our way into the future. As I have
explained today, one of these items is the burner tip cost of natural
gas at our processing factory.
______
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mrs. Cubin. Thank you. Now I would like to recognize Mr.
Jewell who has testified in front of this Committee before, I
think, or at least talked about--
STATEMENT OF BILL JEWELL, VICE PRESIDENT, ENERGY,
DOW CHEMICAL COMPANY, THE HOUSTON DOW CENTER
Mr. Jewell. Not on energy but I am glad to have the
opportunity this time.
Mrs. Cubin. Well, I am glad too. I am a chemist by
training, and I am very interested in your testimony.
Mr. Jewell. Well, good morning, Madam Chairman. I am Bill
Jewell, vice president of Energy for Dow Chemical Company,
speaking on behalf of Dow and the American Chemistry Council.
Like agriculture, the chemical industry competes globally.
Consumers will pay $70 billion more for gas in 2003 than 2002--
$70 billion. Supply and demand for natural gas are basically
out of balance resulting from policies that promote demand
overlaid with policy that restricts supply. Natural gas storage
levels are low, and it will take a cold, rainy summer to get us
to the level needed for this winter. Praying for rain is not a
substitute for rational energy policy. This shortfall developed
while the economy was weak. Industrial production peaked back
in 2000 ending with a $10 gas spike and has not recovered.
Now that is a valid question as to whether we can supply
enough natural gas to have a strong economy. The gas production
has been stagnant since 1994 and actually declined in 2002. In
the past, high prices brought a production response but that no
longer seems to be true. The natural gas industry has tripled
the number of rigs drilling new wells over 15 years and the
number of producing gas wells has also tripled and production
is declining. With gas production having peaked in the U.S. in
1971 it could not be more clear that the industry needs access
to new areas.
Demand for natural gas by residential and commercial users
has barely grown over 30 years with better insulation.
Industry's use of gas hasn't grown either, but demand for gas
and power is booming--up almost 40 percent in 5 years as almost
all new power plants have been based on gas. This over-reliance
on gas as a growth fuel for power generation is why we are
having this crisis. Chairman Greenspan was asked if Congress
could do anything short term to deal with this shortage and he
said, no. There are some things that government can do.
Conservation will reduce demand and the price. The Nation
makes 20 percent of its electricity from gas, and that 20
percent is the high cost increment. In general, any electricity
supplied would come out of--any electricity would come out of
this high-cost increment. Five percent savings in power use
would cut the gas going into power by 25 percent. No other
short-term remedy can free up as much gas. We recommend the
President set an aggressive goal to reduce electricity and gas
consumption by Federal agencies immediately. The President
should also call upon the public to conserve. And for its part,
at Dow, we have made a public commitment to improve energy
efficiency by 20 percent through 2005, and we are also engaged
in some interesting renewable projects, small but interesting.
Another way to reduce gas demand would be to promote
switching to distillate fuels. Many of the new power plants are
equipped to burn distillate but are limited by a permit to a
few days a year. This would not be a permanent answer but could
temporarily balance demand and prevent price spikes. For the
medium term, Congress, with the aid of this Committee, should
make all reasonable efforts to increase domestic natural gas
production. Congress should end the moratoria on exploration
and production for gas on Federal lands on and offshore and
direct the Department of Interior to proceed with leases in
those areas. Permitting and production facilities and pipelines
to access new gas supply should be streamlined, and other
incentives should be developed.
All this should be done while taking care on the
environmental footprint, and at that time we must also consider
the environmental consequences of not increasing domestic gas
supply. Responsibly produced natural gas is key to improving
air quality and reducing greenhouse gas emissions in all
States. Other nations with strong environmental beliefs know
the link between their environmental goals and natural gas, and
they are pushing its production on and offshore. Norway, Great
Britain, Canada are all producing gas off their shores. The
point here is that gas is being produced responsibly in
environmentally aware countries. Congress should encourage
States to support natural gas production off their shores.
Long term, we must recognize how the U.S. consumes its
energy. The largest sector of use is electric power at 40
percent of our energy. It is larger than transportation. It is
also the fastest growing sector. Oil, coal and nuclear provide
70 percent of our Nation's fuel mix. Natural gas is only able
to provide a declining 23 percent. We are trying to fuel
practically every new kilowatt of electricity with gas, a fuel
source that has been in steady decline. It won't work.
Electricity must come from a diverse mix of nuclear, cleaner
coal, renewables and new natural gas production.
I am hopeful that Congress and the Administration can
address these challenges. People speak easily of a self-
correcting mechanism. What they are really saying, what they
really mean by that are job losses. The Nation must either
stretch its gas supply or destroy jobs. Thank you.
[The prepared statement of Mr. Jewell follows:]
Statement of Bill Jewell, Vice President, Energy, The Dow Chemical
Company, on behalf of The American Chemistry Council
Dow is a leading science and technology company that provides
innovative chemical, plastic and agricultural products and services to
many essential consumer markets. With annual sales of $28 billion, Dow
serves customers in more than 170 countries and a wide range of markets
that are vital to human progress, including food, transportation,
health and medicine, personal and home care, and building and
construction, among others. Committed to the principles of Sustainable
Development, Dow and its approximately 50,000 employees provide
significant positive contributions that improve not only the global
economic condition but also the environment around us.
Dow people around the world develop solutions for society based on
Dow's inherent strength in science and technology. For over a decade,
we have embraced and advocated Responsible Care--a voluntary industry-
wide commitment to safely handle our chemicals from inception in the
laboratory to ultimate disposal. This worldwide commitment helps
consumers lead better lives, customers succeed, stockholders prosper,
employees achieve and communities thrive.
For Dow as for the Chemical Industry in general, natural gas is an
essential fuel and raw material. Natural gas is used to generate
electricity and steam using highly efficient and environmentally sound
Combined Heat and Power (CHP). Other components of natural gas, such as
ethane, propane, butane, pentane, and natural gasoline are major raw
material ``feedstocks'' used to make the basic building blocks of
organic chemistry. This dual importance of natural gas makes efficient
use of this resource an imperative for Dow and the industry. For
example, Dow working to achieve its publicly stated goal of reducing
the amount of energy needed to produce a pound of product by 2 percent
per year from 1995-2005. This is in addition to a 20 percent
improvement from 1990-1994.
In response to challenging business conditions brought about partly
from the rising cost of energy, Dow is dedicating additional resources
and programs to reduce energy usage. Dow is also undertaking projects
to use renewable energy, as evidenced by a recent decision to tap
landfill gas to power a plant on Georgia, and the announced
collaboration with General Motors to generate up to 35 megawatts of
fuel cell power at its site in Freeport, Texas, using by-product
hydrogen from its manufacturing processes.
The American Chemistry Council (ACC) represents the U.S.'s leading
companies engaged in the business of chemistry. ACC members apply the
science of chemistry to produce innovative products and services that
make people's lives better, healthier and safer. ACC is committed to
improved environmental, health and safety performance through
Responsible Care, common sense advocacy designed to address major
public policy issues, and health and environmental research and product
testing. The $460 billion business of chemistry is a key element of the
nation's economy. It is the country's largest exporter, accounting for
ten cents out of every dollar in U.S. exports. Chemistry companies
invest more in research and development than any other business sector.
Safety and security have always been primary concerns of ACC members,
and they have intensified their efforts, working closely with
government agencies to improve security and to defend against any
threat to the nation's critical infrastructure.
Today's hearing comes at a time when the United States is facing a
natural gas crisis. Prices for natural gas in the U.S. are the highest
in the world. American consumers will pay $70 billion more for gas in
2003 than in 2002--- $70 billion. Natural gas storage levels are near
record lows. Only continued record injection rates, helped by a mild
summer, will ensure adequate supplies this winter. Clearly, supply and
demand are out of balance, and weather is neither the cause nor the
answer. And, praying for rain is a poor substitute for a rational
energy policy.
Factors Fueling the Natural Gas Crisis
An array of factors is contributing the unprecedented costs for
natural gas. Here are some key indicators:
Last winter, the nation experienced the largest supply
deficit in history, 1.5 trillion cubic feet.
Current storage figures are below historical averages (25
percent below as of 6/6/03) in spite of recent record injection rates.
Domestic gas production has been decreasing as five of
the nation's largest supply areas are in decline.
Demand for natural gas by U.S. electric power generators
has risen by 33 percent in the past 5 years as nearly every power plant
constructed during that period is natural gas fired.
Imports from Canada are poised to decline sharply their
electric utilities place greater reliance upon gas to meet emissions
targets under the Kyoto Protocol and production drops off in more
mature fields.
Last month, the Northeastern NOx reduction plan
commenced, encouraging greater reliance upon natural gas for power
generation.
Markets remain jittery as Congress has shown little
willingness to support policies that would significantly increase
production.
This current shortfall developed while the economy was struggling
and was further masked by a string of mild winters. As a result,
overall demand growth was suppressed. Yet in January of 2001, prices
reached a then record high of over $10.00. In the past, price increases
have brought a production response, but today that no longer seems
true. In the wake of the January 2001 price increase the ``rig count''
peaked at over 1,000. However, these new rigs were being put into
mature fields and the result was a negligible increase in production.
As prices climbed during the summer of 2002, after falling below $4.00
in late 2001, gas producers failed to show the same response, because
they now understand that putting new rigs in old fields is not a wise
investment.
A further indication of the decline of existing domestic gas fields
is that the natural gas industry has tripled the number of rigs
drilling new wells over 15 years. The number of producing gas wells has
also tripled--yet production is still declining. With gas production
having peaked in the U.S. in 1971, it could not be clearer that the
industry needs access to new areas.
Demand for natural gas by residential and commercial users has
barely grown over 30 years--thanks to better insulation and other
efficiency improvements. Industry's use of gas hasn't grown either. But
the demand for gas in the power sector is booming--up almost 40 percent
in 5 years, as almost all new power plants have been based on gas. This
over-reliance on gas as a growth fuel for power generation is why we
have a natural gas crisis.
In his appearance before the Energy and Commerce Committee last
week, Federal Reserve Chairman Alan Greenspan was asked if Congress or
the Administration could do anything to improve the short term
situation. His answer was a flat ``No.'' Dow does not hold as
pessimistic a view as Chairman Greenspan, but we do understand that the
options are limited and would not by themselves supplant the need for
more gas production.
Policy Recommendations
Enact provisions to streamline permitting of new natural
gas production and transmission facilities
Reform the Coastal Zone Management Act to ensure timely
resolution of permit applications and provide greater certainty for all
participants
End current moratoria on exploration and production on
Federal lands both on and off-shore and direct the Department of
Interior to proceed with leases in those areas.
Bolster the recent rule by the Department of Interior to
encourage ``deep gas'' production.
Provide royalty relief and other incentives to encourage
greater production from marginal wells both on and off-shore.
Provide for reimbursement of private party NEPA costs
that are the responsibility of the Federal Government.
Among the limited options to moderate prices and improve the
storage situation going into the winter months, the most important is
conservation. Currently the nation generates a little over 20 percent
of its electricity from gas and a large portion of that is from gas-
fired ``peaker units'' that only operate at periods of high demand. A
reduction in electricity demand from conservation would first back out
power from these peaker units and save natural gas. Dow's internal
estimates, derived from data from the Energy Information Agency,
project that a 5 percent saving in power use could cut gas use for
power generation by 25 percent. For the summer months no other remedy
can free up as much gas.
To this end, we recommend that the President set an aggressive goal
to reduce electricity and gas consumption by Federal agencies
immediately. The President must also call upon the public to conserve.
For its part Dow has stepped up to the plate with a public commitment
to improve its energy efficiency 20 percent from 1995 through 2005.
Another way to reduce gas demand would be to encourage power
generators to switch to distillate fuels. Many new power plants are
equipped to burn distillate but are limited by permit to only a few
days per year. Improving flexibility for these plants can go a long way
to ensure that our natural gas supplies are not depleted for summer
power generation and are available to heat homes and power industries
this winter.
For the medium term, Congress, with the aid of this Committee,
should make all reasonable efforts to increase domestic natural gas
production. Congress should end the moratoria on exploration and
production for natural gas on Federal lands, both on and offshore. The
Department of Interior should be directed by Congress to begin the
process of leasing those areas as quickly as possible. Permitting of
production facilities and pipelines to access new gas supply should be
streamlined. Incentives for states to allow production should be
developed. All these should be done while taking care to consider the
environmental impact. However, we must also consider the environmental
consequences of our failure to increase domestic gas supply.
Responsibly produced and affordable natural gas is key to achieving our
broader environmental goals, including improving air quality and
reducing greenhouse gas emissions.
Other nations with strong environmental ethics recognize the
inextricable link between their environmental goals and natural gas,
and are encouraging production both on- and offshore. Countries such as
Canada, Great Britain, Norway, and Japan have recognized that
increasing their domestic production of natural gas will help them
improve their environmental conditions and continue to grow their
economies. Great Britain and Norway have aggressively pursued natural
gas production off their coasts in the North Sea.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
British companies have also been encouraged to explore for and
produce natural gas off of that nation's shores. Below is a map of one
company's (BG Group) natural gas and oil production operation off the
eastern coast of England. Some fields are being safely and cleanly
produced as close as 25 miles from shore. Many additional gas fields to
the North are also being produced.
England, once a nation heavily dependent upon imported energy, is
now one of the world's leading exporters of energy because of its
willingness to allow for production off its shores. The British economy
that, as recently as the 1970s, was crippled by energy shortages is now
enjoying a period of extended price stability and sustained growth.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Other European nations are benefitting from natural gas imports
from the North Sea and from the former Soviet republics. The fall of
the Eastern Bloc has allowed for natural gas once trapped due to
political boundaries to now flow into Western Europe, helping to fuel
industry and attract jobs.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Japan has also undertaken natural gas production both on-shore as
well as near shore. Its Iwaki Gas Field, less than 30 miles from the
Japanese mainland, began production in the mid-1980s and continues
today. Notoriously energy resource poor, the Japanese have welcomed
natural gas discoveries off their shores as well as those to their
north off of Russia's Sakhalin Island.
Closer to home, Canada has also realized that its environmental
goals are riding on the back of natural gas. Sizable natural gas finds
off of Nova Scotia buoyed not only Canada's energy markets but
benefitted nearby New England gas consumers. Production on these off
shore fields began in the late 1990s. More new drilling rigs are
scheduled to go into the field in the coming years, as well, to meet
Canada's growing demand and environmental goals.
Below are maps indicating the location of gas production facilities
both on and off of Nova Scotia.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Looking to the future, the U.S. must take a comprehensive look at
environmental and economic goals. As Norway, Britain, Japan and Canada
have demonstrated, there need not be a choice between a clean
environment and energy production. Natural gas prices in Europe are
currently well below those in the U.S. Canada's prices have recently
moved upward as a result of its market being integrated with ours.
Japan's market, which competes with the U.S. for shipments of liquid
natural gas (LNG) brought in by ship, has for the first time in history
enjoyed prices comparable to ours, yet more stable.
Like the United States, these countries have encouraged the use of
natural gas for electric power generation. Unlike the U.S. these
counties do not have near the reliance on gas for home heating, so its
use is limited to power generation and industrial needs.
Understandably, each nation is projecting continued growth in demand
for natural gas for their economies and the environment. As global
competition for this clean burning fossil fuel increases it will be
those nations that take the necessary steps to utilize their domestic
natural gas reserves that will be able to meet their environmental and
economic goals.
In planning for the long term we must recognize how the U.S.
consumes its energy today. The largest sector of use is electric power
at 40 percent of our energy use larger than transportation or heating.
It is also the fastest growing sector.
For too many years U.S. energy policy has violated the fundamental
law of supply and demand. It is not sustainable to promote policies
that drive up demand for an energy source yet restrict access to it at
the same time.
We are trying to fuel practically every new kilowatt of electricity
with a fuel source that is in steady decline. It won't work.
Electricity must come from a diverse mix of renewable energy, nuclear,
clean coal, LNG and natural gas produced from new domestic sources.
Finally, for those who doubt a correlation between natural gas
costs and industrial output, the following graph clearly shows the
impact of the price spike of January, 2001. Industrial production
peaked in 2000, then dropped with the $10 price spike and has not
recovered. Following that sharp increase industrial production began to
drop off of the growth that had been constant for the preceding 10
years.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
It is a valid question to ask whether we have the will to produce
enough natural gas to supply our economy. Every recession in modern
history has been preceded by an energy crisis. Natural gas shortages
have contributed to our current economic slowdown and Chairman
Greenspan promised that we have not seen the worst if costs remain
high. Furthermore, our nation's continued progress in improving the
quality of our environment will also be jeopardized unless we are able
to bring more natural gas to market at prices that were counted on when
our goals were established. In both cases, economic and environmental,
we can't get where we want to go without affordable natural gas. The
Dow Chemical Company and the American Chemistry Council remain hopeful
that Congress and the Administration will quickly address these
challenges. The nation's economic recovery depends on it.
______
Mrs. Cubin. Thank you very much. I would now like to
recognize Keith Rattie for his testimony.
STATEMENT OF KEITH RATTIE, CHAIRMAN, PRESIDENT AND CEO, QUESTAR
CORPORATION
Mr. Rattie. Thank you. Good afternoon, Madam Chairman,
other esteemed Members of Congress. It is a privilege to be
here. My name is Keith Rattie. I am Chairman, President, and
Chief Executive Officer of Questar Corporation. We are an
integrated natural gas company. We operate primarily in the
Rockies and the mid-continent. We operate in all segments of
the natural gas chain. We are an E&P company, we are in the
interstate pipeline business, and we are in the utility
business. I have been asked to appear today as a representative
of the American Gas Association and thus a representative of
the 50 some million American households and businesses that
depend on natural gas for heat and fuel. And I will try to stay
within my time.
As Alan Greenspan noted in his testimony to Congress last
week, today's natural gas market conditions have been a long
time in the making. What Chairman Greenspan didn't tell
Congress, and I think what Congress needs to understand, is
that the supply problem is largely one of our own creation. It
has as much to do with politics as it does with geology.
I have three objectives today. First, I will try to give
you some comfort that the market is responding. Barring
abnormal weather, gas prices should be lower a year from now.
Now, second, I will explain why I believe that it would be a
colossal mistake for policymakers to assume that LNG imports
alone will be enough to close what I am going to define as the
supply gap. Third, I will recommend four things that Congress
can do long term to help bring natural gas prices down to more
reasonable levels.
In the short term, we have little choice but to let the
market work, and the good news is that the market is working.
On the supply side, we are drilling more wells. As you heard
earlier, the U.S. natural gas rig count is up over 33 percent
since the 1st of the year, and it is going to rise higher. A
major pipeline expansion from Wyoming to California went into
service in May and therefore moving surplus gas from the
Rockies region to gas-short California. I would suggest that
the California delegation might want to send a thank you to the
Wyoming and Utah delegation for that. LNG import terminals on
the east coast are being expanded. There is a boom underway in
LNG ship construction. The LNG fleet worldwide is going to be
40 percent larger within a few years. Meanwhile, we can't
ignore the fact, as the others on this panel have testified,
that high prices are driving down demand, and that is at the
expense of economic activity and the well being of gas-
intensive industries, including the sugar and the petrol
chemical industry. All of this, of course, is what you would
expect from a competitive deregulated natural gas market. With
all due respect to those that are calling for government-
mandated conservation, the market is way ahead of you.
Conservation is what you get when prices rise.
Now there is more encouraging news. Last week, the EIA
reported a record injection of 125 billion cubic feet of
natural gas into underground storage. This morning, the number
came out, it was 114, the same as it was 3 weeks ago. This is a
record. We have never had three straight weeks of this level of
gas injection. The AGA member companies are stepping up natural
gas storage, which at the end of last winter stood at record
low levels is now being refilled at a record pace. And, again,
barring abnormally hot weather this summer, storage should
return to normal or close to normal by November, ensuring that
adequate supplies are available for this winter.
Of course, in response to this record storage injection,
near-term natural gas prices plunged 10 percent in 1 day last
week, just 2 days after Mr. Greenspan's testimony. Indeed, the
forward natural gas price curve signal that prices will be
about 25 percent lower 1 year from today.
And if all this sounds familiar, it is because we have seen
this movie before. Just two and a half years ago a confluence
of events, cold winter, hot summer and lackluster drilling
activity, drove natural gas prices to levels that we have been
experiencing recently. Then, as now, the market responded.
Drilling ramped up, fuel switching and conservation kicked in,
prices fell again. That is just what you expect. So in the
short run, the only sensible option for policymakers is to let
market forces work, but there is a lot we need to be doing in
this country long term, and Congress has to play a key
leadership role.
So let me turn now to the long term, and what I need to do
is give you some numbers, simple numbers to help you with some
arithmetic on this. Let me explain what I mean by the supply
gap. I think you have heard the EIA and its annual energy
outlook predicts that U.S. natural gas consumption will
increase at an average rate of about 1.8 percent per year from
about 60 billion cubic feet per day today to about 95 billion
cubic feet per day in 2025. Now, the difference between those
two numbers is what I am going to refer to as the supply gap.
That is the need for an incremental 35 billion cubic feet per
day of natural gas supply.
To put that into perspective, the current production from
the entire Gulf of Mexico is only 14 BcF a day, imports from
Canada are about 10 BcF per day. LNG imports last year were
just six-tenths of a BCD per day, just about 1 percent of the
U.S. supply. The EIA predicts that increased LNG imports will
help close the supply gap over the next two decades, and that
is a view that of course was endorsed by Mr. Greenspan.
Clearly, LNG imports can and must be counted to help us close
the gap. But I would encourage Members of Congress to be very
skeptical about some of the numbers that get tossed around on
LNG, numbers like $2.50 per McF landed in the U.S. The
questions that need to be asked when you hear these numbers are
where is that cheap LNG coming from, how much is available for
how long, and what is the price going to be when the demand for
this product doubles worldwide over the next 10 years?
In truth, global LNG production today is only about 15
billion cubic feet a day. That is about a quarter of the
natural gas that we consume in the United States, on average.
And nearly all existing capacity is dedicated to long-term
contracts for delivery to non-U.S. markets. Moreover, non-U.S.
LNG demand is growing faster than U.S. gas demand, and in many
markets LNG prices today are approaching the levels or near the
levels that we are seeing here in the U.S.
In addition, the major LNG consuming countries, countries
like Japan, Korea, Taiwan and in a few years India and China,
have minimal domestic natural gas resources and they are thus
dependent on LNG imports. Competition over the long run from
these countries that have no viable domestic gas alternative
will likely drive global LNG prices higher in the future.
So for these reasons, plus you can throw in the strong-not-
on-my-beach opposition to siting of LNG terminals in this
country, a major supply impact from LNG is clearly not a
certainty. And that uncertainty becomes even greater when you
ask someone to put their finger on the map of the globe to show
where the large stranded supplies of natural gas are, countries
like Angola, Nigeria, Venezuela, of course the Middle East. I
would suggest that these are not exactly ideal places to invest
the billions of dollars that will be needed for gas supply
development, production and liquefaction. Of course, Alaskan
gas is also mentioned as an important gap filler, and clearly
we need those supplies. Alaskan gas may add three to five BcF a
day of supply. Clearly, that is not the silver bullet for U.S.
gas supply.
Canada, which currently exports about 10 BcF per day to the
U.S., faces many of the same supply challenges as U.S.
producers do. Demand in Canada is growing, and Canadian
producers are on the same treadmill that their U.S.
counterparts are on. Under optimistic conditions, Canada may be
able to increase exports to the U.S. by about five BcF a day
over the next couple of decades. So Canadian gas is not the
silver bullet.
When you do all this arithmetic, the inescapable conclusion
is that much of the incremental supply needed to serve growing
U.S. markets must come from the U.S. lower 48, both onshore and
offshore. And, frankly, I believe it is a mistake to write off
domestic natural gas production. North America is blessed with
abundant natural gas resources. Most of us in industry believe
that the resource base is more than adequate to supply a--to
grow a supply by 35 BcF by 2025. We are not running out of
natural gas, we are not running out of places to look for
natural gas. However, we are running out of places where we are
allowed to explore for natural gas, and the truth that must be
confronted now is that as a matter of policy this country has
chosen not to develop much of its natural gas resource base.
Opponents of domestic gas development often exaggerate
environmental concerns. The irony, of course, is that by
choosing not to develop our most environmentally benign fuel,
we are burning more coal, importing more oil and running our
aging nuclear plants harder than ever. And I think the key
point has been made earlier so I will leave it for Q&A today,
but the key point is is that we don't face this either/or
option. We have proven, the industry has proven that it can
develop our domestic energy resources without harming the
environment. So the key question for policymakers is can we
afford policies that leave vast amounts of our domestic natural
gas resource base untested and undeveloped. I think if the
consequences of those policies were understood, most Americans
would answer no.
What should Congress do? Four things. First of all, let us
continue to let the market work. I think we will see prices
come down in response to price signals that consumers,
unfortunately, are having to experience, and they are very
painful. Second of all, I think we need leadership from
Congress. Congress can help forge this national consensus that
natural gas is abundant, development is good for our economy
and that our domestic natural gas resources can be developed
without harming the environment. Third, Congress needs to hold
Federal agencies accountable for significantly streamlining
permitting of high potential Federal land, particularly in the
Rockies. Fourth, we need to develop our natural gas resources
off the east and west coast and in the eastern Gulf of Mexico.
It is time to rethink our fear about exploring for and
producing gas in offshore basins. Clearly, offshore platforms
have a visual impact on the environment, but there is no
evidence that offshore platforms hurt the environment. Finally,
I just will repeat again market forces ultimately will ensure
that supply and demand come together; the question is at what
price? Madam Chairman, thank you for the opportunity today.
[The prepared statement of Mr. Rattie follows:]
Statement of Keith Rattie, Chairman, President and CEO,
Questar Corporation
Good morning, Madam Chairman, and esteemed members of Congress.
It's my privilege to appear before you today. My name is Keith Rattie.
I'm the Chairman, President and CEO of Questar Corporation. Questar is
an integrated natural gas company headquartered in Salt Lake City. We
have significant businesses in each part of the natural gas value
chain--upstream exploration and production, interstate pipelines, and
downstream retail gas distribution. We operate primarily in the Rockies
and the Midcontinent. We're one of the fastest growing gas producers in
the country. Our interstate pipeline companies move gas from the
Rockies to energy markets in the West. Our retail gas distribution
company serves over 750,000 homes and businesses in Utah, Wyoming and
Idaho.
I'm here testifying today on behalf of the American Gas Association
(``AGA'') and its natural gas utility members. AGA is grateful for the
opportunity to provide input on the natural gas supply issue that has
been so much in the news of late. AGA is comprised of 191 natural gas
distribution companies, which deliver gas throughout the United States.
AGA member companies deliver approximately 83 percent of the natural
gas used by more than 64 million customers nationwide.
This past winter, America received a wake-up call--our second in
the past three years. Natural gas prices shot above $8 per Mcf at the
Henry Hub for the first time since 2001. Spot prices in the Northeast
at times exceeded $20 per Mcf. This spring, natural gas prices have
remained well above historic levels for this time of the year. High
prices convey a simple message: we have a natural gas supply problem.
It is a problem largely of our own creation.
I have three objectives today. First, I'll briefly explain why the
only appropriate near-term response to high natural gas prices is to
let the market work, and I'll try to give you some comfort that the
market is working. Second, I'll define the magnitude of the natural gas
supply gap over the next two decades, and explain why LNG imports alone
will not be adequate to close this gap. Third, I'll recommend several
actions that Congress can take to help bring natural gas prices down
longer term.
As Federal Reserve Chairman Greenspan noted in his testimony to
Congress last week, today's natural gas market conditions have been a
long time in the making. But what Mr. Greenspan didn't tell you--and
what Congress needs to understand--is that today's high natural gas
prices are largely the result of policy choices that have encouraged
greater natural gas consumption while impeding development of new
supplies. Most American consumers are probably unaware that these
choices have been made on their behalf.
Predictably, consumers faced with higher gas bills are calling upon
their elected representatives to ``do something.'' In the short term,
about the only thing Congress can do is let the market work. The good
news is that the market is working. On the supply side, the U.S.
natural gas rig count has jumped over 33% since the first of this year,
and it will rise further. A major pipeline expansion from Wyoming to
California went into service in May, bringing new supplies and lower
prices to Southern California. LNG import terminals in Georgia and
Maryland have been expanded, and at least six new terminals are
advancing in the permitting process. LNG ship construction is booming--
the global LNG shipping fleet is set to rise by over 40% in the next 3
to 4 years. Meanwhile, high prices are driving down demand--albeit at
the expense of economic activity and the well being of gas-dependent
U.S. manufacturing companies, notably the U.S. petrochemical industry.
This is just what you'd expect from a competitive, deregulated
natural gas market. With all due respect to those in Congress who are
calling for conservation, the market is way ahead of you. Conservation
is what happens when prices rise.
There's more encouraging news. Last week, the Energy Information
Administration (EIA) reported a record injection of 125 billion cubic
feet (bcf) of natural gas into underground storage--the second straight
week in which storage injections topped the 100-bcf level, well above
historic averages. AGA member companies are stepping up--natural gas
storage, which at the end of this past winter stood at record low
levels, is being refilled at a record pace. Barring abnormally hot
weather this summer, storage should return to close to normal by
November, ensuring that consumer needs are met next winter.
In response to this record storage injection, prompt-month gas
prices plunged 10% in one day last week, two days after Mr. Greenspan's
testimony. Indeed, the forward natural gas price curves signal that
prices will be 25% lower one year from today.
To be sure, high prices are taking their toll on energy consumers.
While some sectors of our economy benefit from high prices in the short
term--notably producers and the companies that provide services to
producers--in the longer term, high prices are not in anyone's
interest. AGA members, working with state regulators, are taking steps
to soften the impact of high prices. The Low Income Home Energy
Assistance Plan (LIHEAP) is providing help to low income residential
customers, although funding for that program is chronically short of
needs. Some AGA members, with cooperation from state regulators, have
hedged to manage price volatility.
If this all sounds familiar, it's because we've seen this movie
before. Just two and a half years ago a confluence of events--cold
winter, hot summer, and lackluster drilling activity--drove natural gas
prices to levels comparable to what we have seen in 2003. Then, as now,
the market responded--drilling activity picked up, fuel switching and
conservation kicked in, and prices retreated. Again, just what you
would expect.
While the only sensible option for policymakers in the short run is
to let market forces work, in the longer term the most important thing
that Congress can do to help ensure natural gas supply keeps pace with
demand is to remove the unnecessary barriers to domestic natural gas
development.
Let me explain by first defining the ``supply gap''--that is, the
difference between current domestic natural gas supply and expected
demand.
The EIA in its Annual Energy Outlook 2003 predicts that U.S.
natural gas consumption will increase at an average rate of 1.8% per
year to about 35 trillion cubic feet (tcf) per year in 2025, from 22.7
tcf in 2001--a 50% increase over the next two decades.
Clearly, much of this demand growth has already been pre-built into
the U.S. energy market. We've added over 150,000 megawatts (MW) of new
gas-fired electric generation in the U.S. since 1999--the equivalent of
about 70 Diablo Canyon nuclear power plants. Now, some are second-
guessing the fact that this country has bet its electricity future on
natural gas. In reality, natural gas has become the fuel of choice for
power generation in part because it is the most economic and
environmentally benign fossil fuel, and in part by default. While
getting permits to build a new gas-fired power plant can be very
difficult and time consuming, it is virtually impossible to get permits
to build new nuclear, coal or hydroelectric plants. Windmills and other
renewable energy alternatives generate a lot of enthusiasm in some
circles--but not much electricity.
Given this enormous investment in gas-fired power generation, and
given the strong preference for gas in the residential and commercial
sectors, the only apparent prerequisites for natural gas demand growth
are a growing economy and normal weather. Simply put, natural gas is
the fuel of choice for many consumers.
So let's put the EIA's projected 35-tcf per year U.S. gas market
into perspective. A 35-tcf per year market implies a jump in average
daily gas production from about 60 bcf per day today to about 95 bcf
per day in 2025--a 35 bcf per-day increase in deliverability. To put
this 35 bcf per day supply gap into perspective, current production
from the entire Gulf of Mexico is only about 14 bcf per day, and
imports from Canada are about 10 bcf per day. Moreover, LNG imports
last year averaged just 0.6 bcf per day, about 1% of U.S. supply.
The EIA predicts that increased LNG imports will help close the
supply gap over the next two decades. Indeed, Mr. Greenspan summed up
his remarks by stating that a major expansion of U.S. import capability
would ensure widespread natural gas availability in the years ahead.
Clearly, there are enormous amounts of stranded gas around the
world that can be brought to the U.S. on LNG ships. Indeed, LNG
developers around the world are responding to the price signals from
the U.S. market. But given the magnitude of the supply gap, it will be
a colossal mistake, in my view, if policy makers assume that LNG alone
will solve our supply problem.
Some have suggested that the U.S. LNG imports will grow from less
than 1 bcf per day today to perhaps 10 to 15 bcf per day in 20 to 25
years. Even if this turns out to be the case (and it may not, given the
many hurdles facing LNG project developers) LNG imports would still
fall far short of covering the future 35-bcf per day gap.
I would encourage you to be very skeptical about some of the
numbers that get tossed around on LNG--numbers like a $2.50-$3.00 per
Mcf price for LNG landed in the U.S. The questions that need to be
asked when you hear these numbers are: where is that cheap LNG coming
from, how much is available, for how long, and at what price? In truth,
global LNG production today is only about 15 bcfd, and nearly all
available capacity is dedicated to existing long-term contracts for
delivery to non-U.S. markets. Non-U.S. demand is growing faster than
U.S. demand, and in many markets LNG prices today are as high as
current U.S. gas prices. The major LNG-consuming countries--Japan,
Korea, Taiwan, and within a few years China and India--have minimal
domestic natural gas resources and thus are dependent upon LNG imports.
Competition from countries that have no viable domestic gas alternative
will likely drive global LNG prices higher in the future.
For these reasons, and given the strong ``not-on-my-beach''
opposition to siting LNG terminals, a major supply impact from LNG
seems a tall order. The magnitude of the challenge is even more
daunting when one puts a finger on the map of the world where the major
stranded gas reserves are located. Angola, Nigeria, Venezuela, and the
Middle East are not exactly ideal places to invest the billions of
dollars needed for gas production and liquefaction facilities.
In addition to LNG imports, Alaskan gas will likely be developed
and transported to the U.S. lower-48. The proposed pipelines from
Prudhoe Bay and the Mackenzie Delta, which are at least five and
probably more like ten years from reality, together might eventually
deliver 3 to 5 bcf per day. Alaska gas will help--but it is not the
silver bullet for U.S. supply.
Canada, which currently exports about 10 bcf per day to the U.S.,
faces many of the same supply challenges as the U.S. Demand for gas is
growing, and Canadian producers are on the same treadmill as their U.S.
counterparts. Under optimistic conditions, Canada may be able to
increase exports to the U.S. by about 3 to 5 bcfd over the next two
decades.
So, let's do the arithmetic. To close the future supply gap, we
need to increase U.S. gas supply by 35-bcfd over the next two decades.
If we take the most optimistic projections, LNG imports, Alaskan gas,
and increased imports from Canada together might cover about half of
the 35 bcf per day future supply gap.
The inescapable conclusion is that much of the incremental gas
supply needed to serve a growing U.S. market must come from the U.S.
lower-48 onshore and offshore. That implies that the burden of
delivering a major increase in gas supply over the next 20-25 years
will fall primarily on the shoulders of U.S. independent producers.
This is a key point for policy makers. Except for Alaska and the
deepwater Gulf of Mexico--which incidentally is primarily an oil play,
not a natural gas play--the majors have essentially thrown in the towel
in the US. They've taken their know-how and their capital overseas to
drill in places like Angola, Kazakhstan, and Nigeria. With the U.S. gas
market set to boom, U.S. independents are being called upon to perform
a large and growing job on behalf of U.S. prosperity and energy
security.
There's only one way to get the job done. Simply put, we need to
drill more wells in the U.S. lower-48.
The sobering reality is that we're already drilling a lot more
wells today than we were five years ago, but production is still down.
U.S. gas producers are on an accelerating treadmill, running harder to
stay in place. The main reason: a typical well drilled today will
decline at a faster rate than a typical well drilled a decade ago. This
is partly due to technology, and partly due to the maturing of the
accessible natural gas resource base. Moreover, because up to half of
this country's current natural gas supply is coming from wells that
have been drilled in the past five years, this decline trend is likely
to continue.
Before we can grow gas supply, we first have to replace decline.
The U.S. natural gas decline rate will range from 26 to 28 % this year.
In practical terms, if we stopped all drilling today, one year from now
U.S. natural gas production would be 26-28% lower than it is today.
Accelerating decline helps explain why U.S. gas deliverability has been
stuck in the 52-54 billion cubic feet bcf per day range for the past
eight years--again, despite an increase in gas-directed drilling.
The current situation notwithstanding, it's a mistake to write off
domestic natural gas production. Yes, U.S. natural gas production has
stagnated, but that has little to do with the adequacy and potential of
the resource base. Please be assured of this point: North America is
blessed with abundant natural gas resources. The National Petroleum
Council (NPC) study in 1999 did a good job describing North American
gas potential. Most of us in the industry believe that the resource
base is more than adequate to supply a 35 tcf per year U.S. natural gas
market in 20 to 25 years.
A growing percentage of U.S. gas supply today comes from plays that
didn't even exist a decade ago. New technology has reduced both the
costs and risk of exploration. New technology allows the industry to
drill deeper, maintain or increase production in old fields, and
develop unconventional gas that only a few years ago was considered
uneconomic.
Indeed, technology will someday unlock vast amounts of natural gas
trapped as hydrates beneath the ocean floor and the Arctic tundra. Some
scientists believe that that there is enough potential in gas hydrates
to supply the U.S. market for at least 100 years.
The bottom line: we're not running out of natural gas, and we're
not running out of places to look for natural gas. However, we are
running out of places where we are allowed to look for gas. The truth
that must be confronted now is that, as a matter of policy, this
country has chosen not to develop much of its natural gas resource
base.
By some estimates 40% of this country's domestic natural gas
resource base is either off limits to development, or open under highly
restricted conditions. Onerous laws and regulations prohibit
exploration in areas where there is huge potential for new supplies.
Permitting has become next to impossible for new pipelines and LNG
import terminals.
By many estimates 30 to 40% of U.S. potential natural gas resources
are located in the Rockies region that includes Wyoming, Utah,
Colorado, New Mexico and Montana. Indeed, the Rockies is the only
region in the U.S. to deliver growth in production over the past 30
years, and it remains significantly underdeveloped. Three of the four
largest U.S. onshore gas discoveries in the last 25 years are in this
region.
The Federal Government manages more than 40% of the land in the
Rockies. Despite all the attention given to Federal agency performance
in processing applications for permits to drill on Federal lands,
permits that used to take 30 days to process can now take up to a year
or longer.
A vast and growing amount of Federal acreage has been placed off
limits for drilling. It's time to ask: how large an inventory of
untouchable acreage can the U.S. afford to maintain? Policies that
emphasize preservation of land for recreational use over other uses
have human consequences that have often been ignored--like higher
energy prices, fewer jobs, a weaker economy, not to mention lower tax
revenues for government.
Opponents of domestic gas development often exaggerate
environmental concerns. The irony, of course, is that by choosing not
to develop our most environmentally benign fuel, we're burning more
coal, importing more oil, and running our aging nuclear plants harder
than ever. Those who oppose drilling on Federal lands exploit conflicts
in Federal laws to obstruct development. They offer no viable
alternative--only fantasies about a planet free from the scourge of
hydrocarbon fuels. They prevail by intimidating lawmakers. If they
continue to prevail, the American economy may be at risk.
Like it or not, our nation's economy will run on hydrocarbons for
many years to come, and natural gas is the most benign hydrocarbon
fuel.
Moreover, the industry has proven that our energy resources can be
developed without harming the environment. Yes, drilling disturbs the
surface, but not much, and not for long. Among the many technological
advances made by the industry are improved methods of restoring land
after the drilling rig has done its thing and gone. Advances in
technology have allowed exploration and production companies to greatly
reduce the footprint of their activities over the past two decades.
Opponents of domestic energy development routinely ignore this fact.
Similarly, the argument that drilling drives wildlife to extinction
is pure fiction. To the contrary, in most cases wildlife adapts and
thrives in harmony with energy development.
The key question for policymakers is this: can we afford policies
that leave vast amounts of our domestic natural gas reserves untested
and undeveloped? If the consequences of these policies were understood,
I believe most Americans would answer ``no.''
What role can Congress play? First, we need leadership. Congress
can help forge a national consensus that natural gas is abundant, that
development is good for our economy, and that our domestic natural gas
resources can be developed without harming the environment.
Second, Congress must hold Federal agencies accountable for
streamlining permitting on high-potential Federal land in the Rockies.
Studies show that the average processing time for applications for
permits (APDs) slowed by 60 percent in 2002.
Third, we need to develop our natural gas resources off the East
and West coasts, and in the eastern Gulf of Mexico. It's time to
rethink our fear about exploring and producing gas in our offshore
basins. Clearly, offshore platforms have a visual impact on the
environment. But there is no evidence that offshore platforms hurt the
environment. And, for the folks who live along our coasts who don't
want to see a distant offshore platform on the ocean horizon, the
industry has a solution. Subsea wells can reduce or eliminate the need
for offshore platforms
Fourth, Congress should reaffirm the FERC's lead role in permitting
interstate pipelines and LNG import terminals. Opponents of pipeline
construction exploit conflicts in existing laws and overlapping
jurisdiction to block pipeline projects. For example, the Coastal Zone
Management Act has been invoked by states to block FERC-approved
natural gas pipeline projects.
Finally, Congress should continue to let market forces allocate
supply and demand. High prices signal the need for more investment. The
industry is responding to high prices today with a rapid increase in
investment. We have proven that we can get the job done--if we are
allowed to--and we can do so without harming the environment.
Madam Chairman, we applaud your focus on the natural gas supply
issue. Now, I will be glad to field your questions.
______
Mrs. Cubin. Thank you. Now it is my pleasure to introduce--
I don't see your name right there and I am sorry--yes, Mr.
Prindle. I am sorry. Thank you.
STATEMENT OF WILLIAM R. PRINDLE, DEPUTY DIRECTOR, AMERICAN
COUNCIL FOR ENERGY-EFFICIENT ECONOMY
Mr. Prindle. Thank you, Madam Chair and members of the
Committee. My name is Bill Prindle. I am deputy director of the
American Council for an Energy-Efficient Economy. The ACEEE is
a national non-profit organization whose mission is to advance
energy efficiency as a means of promoting economic prosperity
and environmental protection at the same time.
We have heard today that this is a very complex problem,
and we believe that this complex problem requires a balanced
portfolio of resource solutions. But our bottom line is that
for the near term, that is for the next 2 years especially,
demand is where the answer is going to lie. We need to moderate
energy demand sufficiently to have a moderating impact on
prices and to free up supplies for more essential uses.
Let me just say a little bit about what this thing called
energy efficiency is. It gets sort of thrown out there as a
term. Energy efficiency--we have heard the term, ``silver
bullet,' here used several times, that there is no silver
bullet for this problem. Well, that also applies to energy
efficiency, what we like to think is that we have a collection
of silver BBs, that if we use enough of them, we can get to a
satisfactory response.
But just to give you a few examples of energy efficiency,
energy efficiency is installing high efficiency gas furnaces at
90 percent efficiency or greater as opposed to the 65 percent
furnaces that were in place maybe 20 years ago. It is
installing water heaters that are 65 or even 80 percent
efficient as opposed to the 50 percent efficient models we saw
20 years ago. It is putting in electric generation capacity
that uses combined heat and power that gets 75 percent of the
energy out of the input fuel as opposed to now the average
generation fleet only gets 33 percent of the energy out of the
input fuel. And on peak, those combustion gas turbines that are
generating energy on peak are often operating at less than 20
percent efficiency. So we can do a lot across the board.
I also couldn't help noticing as I was waiting during the
interim period that this room uses a fair amount of
electricity. Just in a rough calculation, if all of the
electricity used to supply the lighting in this room came from
natural gas, it would amount to something on the order of 225
McF a year. We know that today's lighting technology can save
more than half of that energy. So there is a lot of opportunity
out there. We are not saying don't drill for gas, we are saying
let us drill for it in as many places as we can find, and we
think we can find some places in our basements, in our offices,
in our factories that can really complement the other efforts
in this whole campaign.
I also just want to point out that energy efficiency is a
significant resource, and it is a significant industry. You
don't hear a lot about the energy efficiency industries, but if
you add up all the companies that make furnaces and air
conditioners and appliances and CHP technologies and lighting
technologies that are giving us the energy efficiency solutions
we have today, it is a multibillion dollar business, and that
provides American jobs, that contributes to the American
economy just as do nuclear, oil, coal and gas.
And we also, given that this is a Subcommittee of the
Resources Committee, we want to just remind you that energy
efficiency has contributed to our energy resource portfolio
over the last 30 years. Right now we are using 26 percent less
energy than we would have if the energy intensity of the
economy has stayed the same as it was in 1973. If you put that
another way, we are essentially using the same amount of energy
per capita that we were 30 years ago. However, our GNP per
capita is up 75 percent. So energy efficiency is an essential
component of economic growth. It has really been one of the key
resources. And in fact that 26 percent is a larger number than
some of the conventional fuel resources that we see. So we just
want to point out that energy efficiency is a significant
contributor, and we know we can do more. My written testimony
has some preliminary analysis as to where we can go in terms of
future potential.
I also want to just point out probably the most relevant
recent example where efficiency and conservation solved an
energy price and supply problem. California in 2001 was faced
with a severe electricity problem, although part of that
electricity problem was driven by high natural gas prices. We
could all argue about who made what error in structuring the
particulars of that electricity market and who manipulated what
and so forth, but one thing is crystal clear about 2001: It was
a combination of energy efficiency and conservation that took
the wind out of those--in 2001, corrected for economic activity
and for weather. And I would also say that this didn't come for
free. The State spent about a billion dollars on efficiency and
conservation programs to get that result. So we don't believe
the market is completely self-correcting. There needs to be a
certain amount of activity from the government, both in terms
of incentives and bully pulpit. But we believe that we can get
that kind of response. We are not sure how much we can get in
the short term, we are still working on that.
I wanted to kind of pose a theoretical question that we get
asked a lot, which is kind of classic free market question, and
we have heard it from different folks in the room today: Won't
higher gas prices just correct the demand problem by
themselves? Why do we need policies and programs and so forth?
Well, that is a valid question, and we believe in free market
solutions. We work every day with a variety of people in the
industry, and we believe the markets ultimately will solve the
problem, they just need a little help from time to time.
The fact is that we continue to have barriers in the
market. Many, many customers in this country still are not
experiencing these high gas prices, and that is for a couple
reasons. One is that many of them are served by utilities that
have conventional rate regulation. So if the utility
experiences high gas prices, they have to go through a rate
case and get those costs recovered. That can take a year, 2
years or even more. We also have a majority of gas sold under
long-term contracts. It takes a while for those market prices
to work their way through the contract structure. So in a sense
a large portion of our population is still being lulled into
complacency by the fact that they are not seeing market prices.
So I think we need to do something in advance of the day that
those prices hit the market with full force.
There is a bunch of other market barriers that are in my
testimony, I won't go into those right now. Just suffice to say
that I have been working on this stuff for 30 years and we have
moved some of those barriers but many of them are still in
place. Bottom line for us is that we do believe that a certain
amount of government support is needed to solve this problem in
the next 2 years. I have a couple of short-term recommendations
and a fewer longer-term recommendations I would like to quickly
summarize.
The first thing that Congress needs to do is to reverse the
declining support for the cost-effective efficiency programs
that are currently out there. Yesterday, the Interior
Appropriations Subcommittee cut DOE's energy efficiency
programs by another $12 million. EPA cut its flagship energy
efficiency program, the Energy Star Program, by 30 percent this
year. We think in order to respond to this crisis Congress and
the Administration need to reverse that decline and put some
short-term funds into these kinds of programs, working with the
States, working with the utilities.
And there also needs to be a bully pulpit influence here,
that the Administration and Congress need to work with
manufacturers and with utilities and consumer groups around the
country to point out the severity of this problem and just get
people to do the common sense things that we all know we could
do if we thought about it: Keeping thermostats where they need
to be, turning off lights when they are not needed, doing the
common sense kinds of housekeeping that can give us significant
savings on the margin.
Longer term, we need to take a look at some of the energy
efficiency standards that have brought us significant increases
in efficiency. The current standard for natural gas furnaces is
currently at 78 percent. The Department of Energy recently
downgraded the priority for that rulemaking. We think that
under the current conditions they will want to upgrade that
priority and take a look at, well, should we be looking at
higher standards for furnaces? Congress is currently looking at
tax credits as part of the omnibus energy bills that are
hopefully heading for conference this year. We could certainly
look at ways to increase incentives for gas-saving technologies
in the tax credit portion of the energy bill. We could do a lot
in the utility sector. I won't go into those details here.
But last but not least, I just want to hold up one more
time the whole issue of combined heat and power, which, again,
operates at an efficiency on the order of 75 percent, which is
more than double the average power plant fleet today. And that
is probably the largest medium- to long-term area of savings
that we can explore. Thank you for the opportunity to testify
today, and I will be happy to answer any questions.
[The prepared statement of Mr. Prindle follows:]
Statement of William R. Prindle, Deputy Director,
American Council for an Energy Efficient Economy (ACEEE)
Summary
ACEEE proposes both near-term and longer-term policy responses to
the looming crisis in natural price and supply. Our testimony first
discusses the roots of the current situation, and points out the limits
of supply-side solutions. In the near term--within the next two to
three years--moderating energy demand is the most realistic and
effective approach to balancing natural gas markets.
We document the energy resource contribution energy efficiency has
made to the U.S. economy, and define its overall potential for future
contributions, including its potential for saving natural gas. We
estimate that, over time, more than 10% of U.S. gas demand can be
avoided via efficiency, and a significant portion of those savings can
be realized in the short term. In addition, saving electricity can
expand those savings because so much electricity is generated by
natural gas, especially in peak demand periods. A substantial portion
of these savings--enough to have an effect on gas prices--can be
realized in the next two to three years through an aggressive program
of energy efficiency and conservation.
ACEEE's recommendations for near term action include:
1. LSupplement current efficiency deployment programs. We recommend
Congress pass a supplemental appropriation for Federal programs that
deliver energy savings, including the Energy Star programs and support
for state-based efforts.
2. LConduct a national efficiency and conservation campaign. DOE
should lead a partnership effort among efficiency manufacturers,
utilities, states, and others to accelerate efficiency investments and
encourage short-term behavior modifications. California used this
approach with great success in responding to its 2001 crisis.
Recommendations for longer-term action include:
1. LAccelerate Federal efficiency standards. DOE should accelerate
its standards rulemakings for residential heating equipment and
commercial air conditioning equipment, and should take gas price and
supply issues into account in setting these standards.
2. LExpand incentives for high-efficiency technologies. Congress
should increase incentives for gas-saving technologies in the current
energy bills.
3. LExpand research and development. DOE budgets for advanced
technologies that save gas in the residential, commercial, industrial,
and power sectors should be increased.
4. LCreate public benefits funds for efficiency. Congress should
include a Public Benefits Fund for energy efficiency and other clean
energy initiatives in the current energy bills. While originally aimed
at electricity savings, it would be equally applicable to natural gas
utilities and their customers.
5. LCreate efficiency performance standards for utilities. Congress
should follow Texas' example and require utilities to offset a portion
of demand growth through energy efficiency.
6. LExpand support for Combined Heat and Power (CHP). Congress
should expand support for CHP by improving proposed CHP tax credits,
and by encouraging states and utilities to provide fair and reasonable
interconnection and tariff treatment for new CHP systems.
Introduction
ACEEE appreciates the opportunity to provide our comments to the
Subcommittee on the important subject of energy efficiency as a
response to the severe problems emerging in U.S. natural gas markets.
Our analysis shows that energy efficiency and conservation efforts are
the most effective response to these challenges over the next 24 to 30
months, and also offer longer-term insurance against future gas price
spikes and shortages.
ACEEE is a non-profit organization dedicated to increasing energy
efficiency as a means for both promoting economic prosperity and
environmental protection. We were founded in 1980 and have developed a
national reputation for leadership in energy efficiency policy
analysis, research and education. We have contributed in many ways to
congressional energy legislation adopted during the past 20 years,
including the current energy bills, the Energy Policy Act of 1992 and
the National Appliance Energy Conservation Act of 1987. We are also an
important source of information for the press and the public on energy
efficient technology, policies, and programs.
The Current Natural Gas Problem
Senior officials, including Chairman Greenspan and Secretary
Abraham, have recently stated that natural gas price and supply
problems are significant enough to warrant serious Federal response in
the near term. As Chairman Greenspan said in his Energy and Commerce
Committee testimony last week, gas prices are already shutting down
some industrial production, costing U.S. jobs and threatening the
sluggish economic recovery.
Gas prices are not only historically high, they are quite volatile,
meaning that the rapid swings in prices we have seen since 2000 are
likely to continue. Volatility is almost as much a threat to economic
growth as high prices, because it makes it difficult for investors to
plan rationally, either for exploration and development of new
supplies, or for energy efficiency investments. It was expected that
the sophisticated risk-management and trading techniques pioneered by
companies like Enron would provide a price-stabilizing effect in energy
markets. However, the demise of Enron and other traders has left gas
markets without the hedging options than can moderate price swings.
Natural gas is proving to be a prisoner of its own success:
increasing demands for this relatively low-emission, low-cost fuel over
the past 15 years have outrun the North American supply system. As a
result, we are experiencing prices that are both high and volatile.
Indications are that new supply initiatives in North America will have
a limited impact on this situation, especially in the near term, and
that policy actions on the demand side are the most effective near-term
measures to bring gas markets back into balance.
Natural gas markets have been largely deregulated since the 1970s,
when Federal price regulation limited supply investments, shortages
appeared in many markets, and new gas connections were embargoed by
many gas utilities. Since the late 1980s, natural gas has become more
widely available, and more popular as an environmentally-preferred,
relatively inexpensive fuel.
Electric power generation continues to be the fastest-growing
demand sector for gas. (See Figure 1.) While industrial demand remains
the largest consuming sector, its gas use has declined somewhat from
peak levels in the late 1990s. Commercial and residential natural gas
demand continues to be strong. However, the power sector has been the
dominant factor in driving gas demand recently, as gas is increasingly
preferred for environmental and other reasons. (See Figure 2.) Gas is
increasingly the dominant fuel used in peak-period generation: gas
combustion turbines are relatively inexpensive to install and can be
brought on line quickly.
However, these ``peaker'' turbines are also among the least
efficient generation technologies, with thermal efficiencies between
12% and 20%. Today's combined-cycle gas power plants can perform at
close to 50% efficiency, and combined heat and power (CHP) technology
provides efficiencies in the 75% range. The overall U.S. system average
thermal efficiency is about 33%; so gas peaking generation is about
half as efficient as average generators, and wastes more than three
times the energy as today's best generation technologies.
The disproportionate use of natural gas for peaking generation,
combined with the low efficiency of peaking units, shows that saving
electricity, especially at peak times, is a key to freeing up natural
gas for other uses. In this way, pursuing electric energy efficiency in
peak demand periods is a powerful tool for saving natural gas.
The long-term prospects for significant increases in U.S. gas
production are limited. The exploration and production of natural gas
and petroleum are historically linked. U.S. oil production peaked in
1970, and has declined since. Oil imports have steadily grown to make
up the difference. U.S. natural gas dry production peaked in 1973, and
in 2002 was 13% below that peak. Most low-cost fields have been
drilled; recovery of additional gas from existing and new fields will
come at a premium price.
Imports, mostly from Canada, have helped fill the supply gap in
recent years, but Canada's growing domestic consumption is limiting
their ability to export. Liquefied natural gas (LNG) is available in
limited supplies, and the gas industry is reactivating several LNG
terminals, but LNG bears a premium price. If we rely on LNG as the
marginal source for gas, it will tie U.S. gas markets to a permanent
higher cost baseline.
U.S. gas production and delivery can be increased on the margin in
the medium term through industry investments and policy measures.
However, these efforts will not ultimately reverse the long-term
decline in U.S. gas production. Imports may provide limited additional
supply, but as LNG they will come at a price premium and also bear
safety and homeland security risks. Most of these new supply
initiatives are likely to come at a price premium.
Given the limitations and cost premiums associated with natural gas
supply options, Congress must consider options to manage demand as part
of a balanced energy policy. Energy efficiency and conservation are
proven resources for moderating energy demand, and are also the most
effective tools to apply in the near term to bring balance to gas
markets. By combining aggressive demand management with supply
development, we can stabilize natural gas markets and husband this
strategic fuel to support America's economic growth and environmental
protection.
Energy Efficiency as a Vital National Resource
Energy efficiency is a quiet but effective energy resource,
contributing substantially to our nation's economic growth and
increased standard of living over the past 30 years. Energy efficiency
improvements since 1973 accounted for approximately 25 quadrillion
Btu's in 2002, which is about 26% of U.S. energy use and more energy
than we now get annually from coal, natural gas, or domestic oil
sources. Consider these facts which are based primarily on data
published by the Federal Energy Information Administration (EIA):
Total primary energy use per capita in the United States
in 2002 was almost identical to that in 1973. Over the same 29-year
period, economic output (GDP) per capita increased 74 percent.
National energy intensity (energy use per unit of GDP)
fell 43 percent between 1973 and 2001. About 60% of this decline is
attributable to real energy efficiency improvements and about 40% is
due to structural changes in the economy and fuel switching.
1
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\1\ Murtishaw and Schipper, 2001, Untangling Recent Trends in U.S.
Energy Use. Washington, D.C.: U.S. Environmental Protection Agency.
---------------------------------------------------------------------------
If the United States had not dramatically reduced its
energy intensity over the past 29 years, consumers and businesses would
have spent at least $430 billion more on energy purchases in 2002.
Between 1996 and 2002, GDP increased 21 percent while
primary energy use increased just 2 percent. Imagine how much worse our
energy problems would be today if energy use had increased 10 or 20
percent during 1996-2002.
Energy Efficiency's Resource Potential
Even though the United States is much more energy-efficient today
than it was 25 years ago, there is still enormous potential for
additional cost-effective energy savings. Some newer energy efficiency
measures have barely begun to be adopted. Other efficiency measures
could be developed and commercialized in coming years, with proper
support:
The Department of Energy's national laboratories estimate
that increasing energy efficiency throughout the economy could cut
national energy use by 10 percent or more in 2010 and about 20 percent
in 2020, with net economic benefits for consumers and businesses.
2
---------------------------------------------------------------------------
\2\ Interlaboratory Working Group, 2000, Scenarios for a Clean
Energy Future. Washington, D.C.: Interlaboratory Working Group on
Energy-Efficient and Clean-Energy Technologies, U.S. Department of
Energy, Office of Energy Efficiency and Renewable Energy.
---------------------------------------------------------------------------
ACEEE, in our Smart Energy Policies report, estimates
that adopting a comprehensive set of policies for advancing energy
efficiency could lower national energy use from EIA projections by as
much as 11 percent in 2010 and 26 percent in 2020. 3
---------------------------------------------------------------------------
\3\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money and
Reducing Pollutant Emissions through Greater Energy Efficiency,
www.aceee.org/energy/reports.htm. Washington, DC: American Council for
an Energy-Efficient Economy.
---------------------------------------------------------------------------
The opportunity for saving energy is also illustrated by
experience in California in 2001. Prior to 2001 California was already
one of the most-efficient states in terms of energy use per unit gross
state product (ranking 5th in 1997 out of 50 states 4). But
in response to pressing electricity problems, California homeowners and
businesses reduced energy use by 6.7% in summer 2001 relative to the
year before (after adjusting for economic growth and weather)
5, with savings costing an average of 3 cents per kWh,
6 far less than the typical retail or even wholesale price
of electricity.
---------------------------------------------------------------------------
\4\ Geller and Kubo, 2000, National and State Energy Use and Carbon
Emissions Trends. Washington, DC: American Council for an Energy-
Efficient Economy.
\5\ California Energy Commission, 2001, Emergency Conservation and
Supply Response 2001. Report P700-01-005F. Sacramento, CA.
\6\ Global Energy Partners, 2003, California Summary Study of 2001
Energy Efficiency Programs, Final Report. Lafayette, CA.
---------------------------------------------------------------------------
Energy Efficiency Potential for Natural Gas
ACEEE has conducted years of research on the energy efficiency
potential in a wide range of technologies and end-use sectors. We have
a research effort underway to refine energy efficiency potential
estimates specifically for natural gas. On a preliminary basis, we
identified a number of cost-effective efficiency measures that would
collectively save more than 10% of U.S. gas usage by 2020. A summary of
these measures is shown in Table 1.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
A significant portion of this efficiency potential could be
realized within three years through an aggressive nationwide effort. In
addition, conservation efforts aimed at short-term usage reductions
could increase these savings by at least double. The California
experience of 2001 indicates that the energy savings were divided
roughly equally between efficiency investments and conservation
behavior. The natural gas savings potential for electricity efficiency
measures is also substantial, and will add significantly to direct
natural gas end-use savings. We will be completing that analysis in the
near future.
Overall, we project that energy efficiency and conservation
initiatives, if pursued vigorously in the next two years, will moderate
natural gas demand sufficiently to have a significant impact on gas
prices.
Barriers to Free-Market Solutions to the Natural Gas Problem
An economist or a free-market advocate might argue that high
natural gas prices contain their own remedy, since by economic theory
price elasticity would cause demand to fall when prices rise. This
argument contains a fundamental element of truth, and ACEEE believes in
markets as a key focus for energy efficiency solutions. However,
several factors in today's U.S. markets keep the laws of economics from
being applied in their purest form:
Regulatory Lag. In many states, public utility
commissions set retail prices, at least for residential and smaller
business customers. In these cases, gas utilities that experience gas
commodity price increases must go through rate case proceedings to pass
through these costs in rates. This can take a year or more, and masks
the effect of market prices on customers.
Contract Structures. Most gas in the U.S. is sold under
long-term contracts, which serves to delay the impact on most
customers. Some utilities in deregulated states pass gas costs through
to customers on a monthly basis, and some industrials buy some of their
gas on the spot market. But for those with most of their supply in
multi-year contracts, it can take years to fully feel the effect of
market prices.
These factors are currently insulating many consumers from the
pending gas crisis. But they must not mislead Congress into waiting to
take action on this problem. If we wait until most customers feel the
full effect of today's gas prices, the ensuing crisis could be much
worse than if we act now to take prudent steps that will help keep
markets in balance.
In addition to these price-masking effects, a variety of market
barriers to energy efficiency keep worthwhile investments and behavior
changes from being made, even when prices rise. These barriers are
many-fold and include: ``split incentives'' (landlords and builders
often don't make efficiency investments because the benefits of lower
energy bills are received by tenants and homebuyers); panic purchases
(when a product such as a water heater needs replacement, there often
isn't time to research energy-saving options); and bundling of energy-
saving features with high-cost extra ``bells and whistles.''
Energy efficiency is also hobbled by being a ``distributed
resource''. It is found in more than 100 million homes, over 5 million
commercial buildings, and hundreds of thousands of factories. For many
homes and businesses, energy costs are a small enough percentage of
total budgets that price changes may not motivate efficiency
investments, especially when compounded by the other barriers listed
above. By the same token, the information and technical skills needed
to understand and pursue energy efficiency projects are not available
to most, smaller customers.
For these reasons, policy and program initiatives are needed to
realize the benefits of energy efficiency for the economy and the
environment as a whole.
Energy Efficiency Policy Solutions for Natural Gas Markets
Energy efficiency and conservation can help bring balance and price
stability to gas markets in the near term and the longer-term. ACEEE's
analysis indicates that several policy and program initiatives can be
effective in curbing demand on the margin. Given the sensitivity of
volatile gas markets to small changes in supply or demand, efficiency
initiatives can make enough difference on the margin to affect prices.
First, it is important to define key terms used in describing these
initiatives:
Efficiency: permanent reductions in energy use based on
changes in technology and management practice. Examples: replacement of
older gas furnaces with new high-efficiency models; installing
efficient showerheads; computerized rescheduling of building operations
to keep equipment off during unoccupied hours.
Conservation: temporary reductions in demand from
voluntary curtailments in customer end-uses. Examples: changing
thermostat settings beyond normal ranges; taking shorter showers;
reducing lighting levels.
In our experience, affecting energy demand in the near term
requires a mix of efficiency and conservation. As mentioned earlier,
the state of California used such a strategy in 2001 to bring down
state electricity use by almost 7%. This had the effect of bringing
electricity prices down substantially. And because of the link between
electricity and natural gas, this effort also helped reduce natural gas
prices.
Recommended Near-Term Steps
ACEEE recommends the following near-term actions for Congress and
the Administration to respond to the looming threat of natural gas
prices.
1. LSupplement current efficiency deployment programs. We recommend
Congress pass a supplemental appropriation for Federal programs that
deliver energy savings, including the EPA and DOE Energy Star programs,
weatherization and other state grants, LIHEAP energy assistance funds
(with a rider to expand the allowable percentage usable for
weatherization from 15% to 30%), and DOE's industrial assistance
programs. EPA's Energy Star budget has just been cut by 30%; these
funds should be restored and directed toward gas-saving measures. This
bill could also create matching grants for states that operate energy
efficiency programs with their own funds; approximately 20 states,
representing a majority of the population, fall in this category.
2. LConduct a national efficiency and conservation campaign. DOE
should lead a partnership effort among efficiency manufacturers,
utilities, states, and others to accelerate markets for efficient
technologies, and to motivate consumers and businesses to moderate
their gas usage. This campaign would include public service
announcements, educational materials, voluntary commitments from
industry, and accelerated market transformation efforts. The California
Legislature worked closely with the utility commission, utilities, and
state and local agencies to mount a campaign in 2001 that succeeded in
reducing electricity usage by almost 7%. This helped bring down both
electricity and gas prices within that same year.
These initiatives can make a difference in the next 24-30 months,
which will be critical in avoiding crippling gas price and supply
problems
Recommended Longer-Term Steps
Looking three years and beyond, ACEEE recommends the following
actions:
1. LAccelerate Federal efficiency standards. The Department of
Energy's appliance efficiency standards program currently has a
rulemaking underway for residential heating equipment. Unfortunately,
DOE recently downgraded the priority for this rulemaking. DOE should
restore this rule as a top priority, and should take higher gas prices
into account in setting the final rule. DOE should also accelerate its
commercial air conditioning standard rulemaking, as commercial cooling
is served mainly by inefficient gas-fired peaking turbines.
2. LExpand incentives for high-efficiency technologies. The current
energy bills offer tax credits for efficient technologies such as
combined heat and power systems, new and existing homes, commercial
buildings, and residential furnaces, air conditioners, and hot water
heaters. Congress should consider increasing incentive levels, years of
eligibility, and other features of these incentives to increase their
natural gas savings. For example, the existing home credits do not
cover duct sealing, which is one of the largest opportunities for
reducing gas usage.
3. LExpand research and development. Congress should increase
funding for advanced technologies that save natural gas in: buildings
through advanced heating, cooling, and hot water systems, advanced
envelope designs, and control systems; in industry through CHP,
advanced manufacturing processes, motors and other components; and in
power generation through CHP and other advanced generation
technologies, plus efficient transmission and distribution
technologies.
4. LCreate public benefits funds for efficiency. One provision
Congress has not included in the current energy bills is a Public
Benefits Fund for energy efficiency. It would place a small charge on
utility bills to fund a pool of money that would be allocated to states
for efficiency and other clean energy programs. While originally aimed
at electricity savings, it should be equally applicable to natural gas
utilities and their customers.
5. LCreate efficiency performance standards for utilities. Texas'
electricity restructuring law created a requirement for electric
utilities to offset 10% of their demand growth through energy
efficiency, and enabled them to use public benefits funds for this
purpose. Bills along these same lines have been introduced in Colorado
and Washington, and have been discussed in Congress. This kind of
performance standard also can be applied to natural gas utilities.
6. LExpand support for Combined Heat and Power (CHP). CHP generates
electricity far more efficiently than the majority of the conventional
natural gas generation. Congress should expand its support for CHP by
improving the proposed CHP tax credit by removing the minimum size
limit and restoring depreciation periods to the 10 years allowed in
current law. The Congress should also include language in the energy
bill that encourages states and utilities to provide fair and
reasonable interconnection and tariff treatment for new CHP systems.
ACEEE's experience with these programs and policies gives us
confidence that they can make a critical difference in bringing balance
to natural price prices and supplies in the coming years. We look
forward to working with the Subcommittee on these important issues.
Thank you for the opportunity to share our views with the
Subcommittee.
______
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mrs. Cubin. Thank you, Mr. Prindle. First, I would like to
recognize Mr. Bishop for a round of questioning.
Mr. Bishop. Thank you, Madam Chairman. And I apologize, I
will have to be going to present a bill in just a few moments,
and hopefully I can come back and you won't be done by that
time.
Let me give a couple of just general questions to all of
you, because I think from what I have heard so far I am going
to get a different answer from different sources on that. The
first one is, Mr. Jewell, I think it was you who said that the
options were either job loss or increasing supply. If indeed
the concept of conservation is to decrease the amount of supply
that is needed, is there then a correlation that says
conservation will ultimately also equate to job loss? Can you
make that kind of a junction? And then let me ask--let me do
all three of them, and then you can have at it, whoever wants
to.
The second one is, is because of the 23 percent of our
energy that comes from natural gas, natural gas is an
environmentally sensitive, environmentally sound process. Are
there negative environmental consequences that might result
from the failure to increase gas supply and then therefore
going to other sources of energy?
And I do have one specific question that can be either yes
or no for Mr. Jones. I am having a running battle with the Army
Corps of Engineers. Can you actually grow sugar beets in
wetlands successfully?
Mr. Jones. No.
Mr. Bishop. Thank you. That is what I have been saying.
[Laughter.]
Mr. Bishop. That was the easier of the questions, so thank
you.
Mr. Jewell. Let us see, on the energy efficiency question,
Representative Bishop, I don't see that energy efficiency
causes job loss. I think it can make our country more
competitive, allow us to compete better overseas. But a lot of
industry, the chemical industry has emphasized energy
efficiency for 20 to 30 years. We are the leader in combined
heat and power production, and the country is still out of gas.
And so we are not going to be able to save our--short term, we
are going to be able to save our way out of this gas shortage
crisis, but conservation can contribute and it can make our
country more competitive long term, and it should be a factor
in the long-term supply. But when you look at the shortfall
that we talked about in gas, you are not going to do it with
conservation. We are going to have to produce more gas or else
we are not going to be able to sustain the job level that we
currently have.
Mr. Bishop. Would anyone else like to go on that particular
one since I started off with that?
Mr. Rattie. Good afternoon, Congressman Bishop. Maybe I
could give you an example from back in your district. Back in
the 1980's, the typical customer for Crestar gas, average
annual natural gas usage was about 185 decatherms per year.
Today, the average customer is using 115 decatherms per year,
and new customers that are being added to our system are using
in the neighborhood of 90 to 110 decatherms, about half what
they were using back in 1985. Now, that happened without the
divine hand of government, to a large extent. There were some
efficiency standards placed on equipment, but I would suggest
to you that once again the way to cause conservation to happen
is to have customers see price signals. And a better approach
rather than government mandates might be the use of time
differentiated metering. So, for example, that customers that
wants to turn their dryer on at 11 o'clock on a day when the
temperature is 115 degrees outside is going to pay a
substantial amount more for that electricity than if they had
waited till 10 o'clock at night.
So I think the market will ultimately solve some of these
problems without a lot of direct mandates from government. I
strongly agree with my colleague to the right that we ought to
use the bully pulpit. I think hearings like this are extremely
useful. I wouldn't object to a modest amount of guidance to the
industry as to what efficiencies we ought to be striving for,
what is achievable within reasonable economic means, but, by
and large, the market will take care of it.
Mr. Bishop. But if I can go back to where I was trying to
go with, or at least what I was hoping the answer was there.
Expansion of the supply is the equivalent expansion of the
economy. Are we going to be able to expand the economy,
increase jobs merely through conservation or is expansion of
the supply an essential element for that?
Mr. Rattie. We have no choice. We have to grow domestic
natural gas supply. There is a strong preference for natural
gas as a fuel for power generation and certainly for
residential use. There is no alternative, by and large, to
natural gas in Mr. Jewell's and Mr. Jones' businesses, at least
not given the constraints we have put on other fuel sources.
Mr. Bishop. So what you are telling me is with or without
conservation we still have to have this policy of being able to
allow the exploration and development.
Mr. Rattie. Absolutely, Congressman Bishop; we have no
alternative.
Mr. Jewell. And I agree with that. I would say absolutely
as well.
Mr. Prindle. If I could add just briefly, Congressman
Bishop. I think we are not faced with an either/or proposition
here. I think we are faced with a both/and proposition, that we
will continue to increase our energy exploration and
consumption, but the question is can we increase it at a rate
that is more sustainable? And when you invest in energy
efficiency, you create jobs--high-efficiency furnaces, high-
efficiency homes. That is a legitimate form of investment as
well. Our analysis shows that if you invest in a balanced
portfolio of resources, you actually get more net jobs overall.
So we don't see an ultimate conflict there. We think we ought
to be investing in the supply side and the demand side to get
the best overall economic growth picture.
Mr. Bishop. And can I just ask someone just to comment on
the other question I have since you are going through there. If
we fail to increase the supply, do we create negative
environmental consequences because of that? Is that a risk of
our policy as well?
Mr. Rattie. Yes, we do. Most of the NOx reduction programs
in the east and other States do have some element of using
natural gas instead of coal. And, really, every State, as
people have said, natural gas is a very clean burning fuel. It
is not as clean as nuclear, but it is a very clean burning
fuel, and if we do not have natural gas, we are going to have
to burn more coal, and it will damage the air quality, it won't
be as good for the air quality in every State.
Mr. Bishop. Madam Chairman, I appreciate the time. I
appreciate the information. I apologize for having to leave
because it is fascinating, and if you keep talking long enough,
maybe I can come back.
Mrs. Cubin. Thank you. OK. I will try. I would like to get
something straight that I may have misunderstood, Mr. Jewell.
In response to Congressman Bishop's question, did I hear you
say that you didn't think high gas prices caused job loss?
Mr. Jewell. No, I didn't--
Mrs. Cubin. OK.
Mr. Jewell. I certainly didn't intend to say that. I didn't
recall saying that.
Mrs. Cubin. Well, I just wanted to get that clarified.
Mr. Jewell. Yes. I think high gas prices that make all of
our industry less competitive and uncompetitive with the rest
of the world absolutely causes job losses.
Mrs. Cubin. Mr. Christopherson, you talked in your written
testimony a little more in depth about the fertilizer prices
and the problems that the fertilizer industry has with natural
gas prices. Could you elaborate on that a little bit for me?
Mr. Christopherson. Certainly. As I said, in the feedstock
for production of especially the ammonia fertilizer is
primarily natural gas. With the increase that I stated there in
my own particular operation as an example, and I have a
relatively small farm in today's standards. My wife and I are
the two primary sources of labor, we are the total support or
source of management, so the blame and the buck stops either on
my doorstep or hers, depending on who happens to be there at
the moment.
Anyway, the long and the short of it is the increase over
last year is going to amount to somewhere, depending on the
breakdown, somewhere between $15,000 and $20,000 extra in terms
of production costs, or a little over $20,000 in production
costs. And, obviously, as we all know, in production
agriculture, you have very limited ability to increase or to
pass your increased costs along. So that is a big issue for us
and of great concern for the industry as a whole.
Mrs. Cubin. And that was a point I wanted to get on the
record. Why is--is it because of foreign exports that you
cannot increase the price of your crops to recoup that? Because
I think as long as Americans are not really going through, say,
what California went through this last summer, they aren't
going to realize how devastating these natural gas prices are.
And if they don't realize that, they won't realize the need to
learn more about the environmental impacts of producing gas in
the lower 48 States. So tell me why you can't pass that on to
your customers.
Mr. Jewell. Two primary reasons just off hand. First of
all, production agriculture is very diverse, and we are not
terribly organized. We are a group of individuals, and
individuals don't necessarily always want to do things in
concert with others. But even more importantly is the fact that
we are indeed in a global market. In fact, there is soybeans
and soybean meal coming into South Carolina, as an example, at
a cheaper rate than what we can ship down the Mississippi and
over to South Carolina. So that is part of the dynamics of
where we are in agriculture right now and other industries also
but I am familiar with agriculture. And so that and the fact
that we never have had the ability to be able to set a price on
our commodities and I guess for some valid reasons, perhaps.
But, nevertheless, so those are the two primary issues why we
can't pass it on.
Mrs. Cubin. And the mom and pop organizations or
operations, I should say, that I consider the backbone of the
agriculture industry in our country they are the ones that
aren't capitalized enough that they can afford to do other
things to increase the price, like the insurance companies that
buy major farms or big farms, and so it is putting the little
guy out of business, it seems to me. Would you think that is
reasonable?
Mr. Jewell. I think all farms are going to feel the impact
of this. Now, obviously, if you have larger operations, you can
spread your fixed costs over a larger land base and so you can
absorb some of these things. You still feel the pain but it is
not going to choke you. Certainly, the mid-sized farming
operations are probably the ones that are going to feel it the
most, because they are totally dependent, for the most part, on
the production of that particular farming operation for the
revenue. Now, you take the small farms, the step above,
perhaps, the hobby farm, and there you are talking about people
who are holding employment off the farm and are farming on a
part-time basis. Now, they too are going to feel the pain but
it is--
Mrs. Cubin. Right.
Mr. Jewell. --a lesser part of their total income for the
year.
Mrs. Cubin. Thank you. I would like to go to Mr. Prindle
for a second. You talked about the declining support for energy
efficiency and the Energy Star Program that was reduced, and,
you know, I kind of think I have to agree with you on that, and
I also agree with you on the fact that there is a bully pulpit
that is vacant at the present time in terms of conservation and
efficiency. I was thinking, my sister is from San Jose, she
lives in San Jose, and last year she told me they set their
thermostat at 78 degrees and middle-aged women don't like 78-
degree thermostats, I am telling you. Anyway, so I was just
looking through my house at the things that--you know, I will
open my refrigerator door and walk across the kitchen to the
sink and leave it open because I am going to go back and get
something else. And I just think there are a lot of things we
could do in terms of education. I think--well, I would like to
know your opinion of Federal, state roles in education on
efficiency and conservation.
Mr. Prindle. Thank you, Madam Chair. Well, I certainly
agree there are a lot of things we could all do in the short
term to change our behavior a little, and that is what we call
conservation. We also believe that that kind of thing typically
is only effective in the short term, because, as you say--
Mrs. Cubin. Right.
Mr. Prindle. --people don't like their thermostats where
they are not used to having them. We do think that can be
effective on the short term. The longer-term solution is energy
efficiency where you have, for example, an electronic
thermostat that allows you to smartly set it where you want it
but only when you need it.
Mrs. Cubin. But you have to be smart enough to set it. I
have got one in my apartment.
[Laughter.]
Mrs. Cubin. Could you come over there when you leave here
and set my thermostat?
Mr. Prindle. You need someone under 21 to understand how to
program that thing.
Mrs. Cubin. That is right.
Mr. Prindle. As far as the Federal and State roles go, we
are gratified to note that Secretary Abraham is holding a
summit on this next week. We will be attending that. We do
think there will be some commitments to communicate more
actively about these issues throughout the consuming public,
and we see that as a multi-partnership--the State energy
offices, many of whom have active energy efficiency programs,
many of the utilities are active in energy efficiency and can
take up some of this. There are a lot of manufacturers involved
in the energy efficiency business who are actively involved in
the Energy Star Program, companies like Sears, for example.
Mrs. Cubin. Right.
Mr. Prindle. Now, they can ramp up some of their
promotional efforts. So there is a lot of things we can do to
kind of encourage the market to respond a little quicker and a
little more completely to this challenge, and I think we can
get some small changes on the margin that will help moderate
prices, help free up gas for some of the industrial users that
really need it to keep their plants from shutting down.
Mrs. Cubin. Well, I think everyone has to admit that what
happened in California in terms of conservation was pretty
significant and it was pretty impressive, at least it was to me
and I think to most people across the country. Certainly, as
you stated, and we all agree, it is not the only answer but it
is a piece of the puzzle, and we did address that in the energy
bill that we passed. I wonder--or I guess in your testimony you
said that you thought we ought to increase the tax credits and
the other issues that you talked about here.
Mr. Prindle. Well, just for one example, the House bill,
unfortunately, does not include residential water heating and
furnace credits as the Senate bill does, so if the bills get to
conference, we hope that importance of the natural gas issue
will cause the House folks who did their work back before this
crisis was made public people will be able to rethink and
refocus some of those tax provisions.
Mrs. Cubin. We will certainly keep that in mind when we are
working in the Conference Committee. Thank you.
Mr. Rattie, I appreciated your testimony, and I appreciated
the detail in it because it was very informative. Tell me who
is suffering the most, do you think, of those who are being
impacted by the current policies of the government and the high
natural gas prices.
Mr. Rattie. Well, I think in the short term, Congresswoman,
the large industrial users are taking the big hit here, and Mr.
Jewell and Mr. Jones have already spoken to that. To some
extent, Mr. Prindle is right, in the residential sector our
customers probably won't see the ramifications of higher prices
until they get their winter bill, starting maybe November and
December, and that is when Congress can expect to hear an
outcry from a large segment of the population.
But I would like to urge Congress not to come to the
conclusion that all we have to do is use bully pulpit and issue
some efficiency standards for equipment and that will be enough
to get out of this mess. It will help but the inescapable
conclusion is that we have to do something starting now to
accelerate the development of this abundant domestic natural
gas resource base. Forty percent of our natural gas resources
are either off limits or open under highly restricted
conditions. I could give you lots of war stories about the
battles that producers have to go.
The fear of producing offshore, let me use just one
example, and I apologize for the long answer here, but offshore
eastern Canada, a new major natural gas project, came online a
couple of years ago. It is the Sable Island project. There
are--that project was developed, it is bringing gas to eastern
Canada and to the northeastern United States, and there is
significant more gas development behind it. Now, I would submit
to you, unless God pulled a fast one on the United States and
put all the natural gas in the Sedimentary Basin off the coast
of eastern Canada, that there is probably abundant natural gas
reserves off the east coast of the United States. I find it
amazing that some Members of Congress are trying to hide that
fact from the American public. I think if the American public
understood the magnitude of our resource base and then looked
at Sable Island as an example of how you can develop offshore
resources without impact to the environment, I think there
would be a change in thinking about exploring and developing
gas in our offshore basins.
Mrs. Cubin. And I find it ironic as well that there is a
proposed wind farm 25 miles out off Nantucket Sound, and those
very people who are pounding their table and demanding that we
have alternative renewable energy sources are saying, ``No, no,
no. Don't build there because we will have to look at it 25
miles out.'' And I am really disappointed that members on that
side of the aisle are not here today, because they are the ones
that pound this dais and say, ``We have to have renewables,''
and then they don't even to show up to listen, and this isn't
the only hearing. They don't want to know. What they want to do
is to keep us from developing the resources on the shores and
on the land, and they don't show up when they are faced with
facts that can't be denied. So it is frustrating for me, and I
know it is frustrating for you as well.
I want to talk a little bit also, Mr. Rattie, about LNG. I
absolutely respect Mr. Greenspan's authority and knowledge of
economics, but I am not necessarily certain he is an expert in
energy policy, because I thought that his comments on LNG were
a little bit nearsighted. Could you respond to that?
Mr. Rattie. Well, I think--I hope what Chairman Greenspan
was suggesting is that in the longer term there is abundant
natural gas resources around the world that could be developed
and brought to the United States on LNG ships. What I hope he
wasn't trying to suggest is that that is the panacea for our
natural gas supply challenges, because it clearly is not. I
have worked in the LNG business and it is--one way I would
characterize the LNG business is when all gets said and done,
more gets said than done. It is always a business that has a
lot of potential, and were there is no question we are going to
see LNG supply grow dramatically over the next couple of
decades, but it will not be enough and not nearly enough to
close that supply gap.
A lot of the numbers that get tossed around assume that the
LNG is coming from a marginal train in Trinidad using a
marginal ship with marginal gas that the producer in the host
country are willing to sell as an alternative today, as an
alternative to waiting 25 years to sell it at the end of a
longer-term contract. There is not much volume available at
250, there is going to be--a huge amount of investment is going
to have in countries like Angola, Nigeria and Indonesia,
Malaysia, Venezuela, maybe Bolivia, certainly the Middle East
to just get that supply available. And that is not going to
happen overnight. And I would submit that it doesn't make a lot
of sense for policymakers to send the jobs that are involved in
developing that supply to those countries when we can have
those jobs here.
Mrs. Cubin. Mr. Jewell, I noticed in your written testimony
that your policy recommendations are very much the same as the
provisions that were in the House version of the energy bill.
How do you think our bill will help your industry specifically,
and what else do you think Congress can do that wasn't in the
bill to help your industry?
Mr. Jewell. I think that the key element for our industry
is to get increases in natural gas production, and I think
recognition that a lot of industries, including ours, use
natural gas-based feedstocks also. We use natural gas for fuel,
and we use ethane, which comes out of natural gas, as a
feedstock. So we are all hit here; the chemical industry is
probably hit doubly with that. So I think an emphasis on
feedstock and keeping the natural gas liquids industry viable
is important. When gas prices spike high, there is a tendency
to want to put--leave all these liquids into natural gas rather
than take them out. And so that would be important to us.
I think, basically, preserving the industrial jobs and
preserving the industrial base is what is important to all of
us. If we don't produce the natural gas and we don't develop
other forms of energy, then our industry's customers who sell
to basically other industrial customers, and they leave. So I
think, basically, a strong economy, increased natural gas
production, some attention to the liquids, natural gas liquids
aspect is the primary thing that our industry needs.
Mrs. Cubin. Mr. Jones, in your testimony, you mentioned the
impact of permitting delays on natural gas supply, those
impacts on your industry. You are on the ground. Do you--and I
know that you don't have dealings with natural gas permitting
but do you talk to guys that do? I think in your testimony you
said it takes 175 days now for an APD, average, and it used to
take 30. It was in somebody's testimony, I think it was yours.
Do you talk to those guys that are working with those BLM
offices in Wyoming in coal bed methane and other areas since
you are right up in that area? What do you think can be done to
help speed up the permitting process.
Mr. Jones. Well, yes. In answer to your question, ma'am,
yes, I do talk to them because we are securing natural gas
supply for our process facility. What do I think can be done?
Some way to streamline that. It actually went from 45 days to
175 days. Some way to streamline that process to allow those
producers the ability to get the permits and go with the
drilling in a more quicker fashion. Thus, we are going to
increase the supply.
Mrs. Cubin. We have discussed things--we can't--because
there is a major play, for example, in the Powder River--or
not--yes, the Powder River Basin on coal bed methane. Because
there is a major play, we really--I mean that is not going to
be a real long-term need for employees to process APDs because
there is a glut of them and once we can get that glut taken
care of then hopefully the number of employees that we need
won't be as many, so we don't want to hire a lot of full-time
employees. So some things that had been suggested are moving
BLM employees from one part of the country to--or one area to
an area where there are a lot of APDs that are pending. We have
tossed out ideas like having the companies hire contractors
that are recommended by the BLM that could process those APDs
in which case they wouldn't become permanent employees. So are
there any other ideas out there that the guys are talking
about?
Mr. Jones. Not that I have heard, but to be perfectly
honest with you, I am not the expert on the APD application
process.
Mrs. Cubin. Right.
Mr. Jones. I just understand that the BLM office in that
Powder River Basin has a very long time lag to process those
documents.
Mrs. Cubin. Yes.
Mr. Jones. Some way to streamline that would be--
Mrs. Cubin. There are so many. We have an excellent
Director of the BLM now and she is willing to take the heat and
do what needs to be done to get those things moving, and I
appreciate her actions. In the past, I was kind of
disappointed, I got extra money for the Powder River Basin to
process APDs for coal bed methane, and I found out the BLM
bought 12 trucks. And that wasn't really wasn't what I had in
mind, so I don't think those things are going to be happening
under the new State director and under Kathy Clark, the
Director of the BLM.
We do have votes, and actually there are three, so I will
not ask you to stay any longer. I do thank all of you very much
for your testimony and the answers to your questions. And I
believe that members will have written questions that they
would like to submit to you in writing, and we will hold the
record open for 10 days if you could promptly respond to that.
So having no other business before the Committee, the
Committee is adjourned, and thank you once again for being
here.
[Whereupon, at 1:01 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows:]
[A statement submitted for the record by Calpine
Corporation follows:]
Statement submitted for the record by Calpine Corporation
Summary
Calpine Corporation is a leading North American power company
dedicated to providing electric power to wholesale and industrial
customers from clean, efficient, natural gas-fired and geothermal power
facilities. The company generates power at plants it owns or leases in
22 states in the United States, three provinces in Canada and in the
United Kingdom. Calpine is also the world's largest producer of
renewable geothermal energy, and it owns approximately one trillion
cubic feet equivalent of proved natural gas reserves in Canada and the
United States. The company was founded in 1984.
Calpine believes that natural gas continues to be the fuel of
choice for new investments in electric generating capacity. The U.S. is
facing a short-term tight balance between supply and demand, not a
long-term natural gas crisis. Gas continues to make sense not only
because of its inherent economic and environmental advantages, but due
also to the relative lack of acceptable and commercially available
alternatives.
Calpine appreciates this opportunity to submit this written
testimony in connection with the Subcommittee's on-going work on
natural gas and related policy issues. Key points of Calpine's
testimony are as follows:
The U.S. is not facing a long-term natural gas supply
crisis. Policymakers should be very cautious not to overreact to
changes in the market or make long-term decisions based on short-term
market conditions. At today's consumption level, the U.S. has
approximately 70 years of domestic supply based on known, economically
recoverable reserves, not including potential additional import
capability.
Short-term supply constraints can be partly addressed by
dispatching the most fuel efficient gas-fired units first either before
or in place of older less efficient units because new units use about
one-third less natural gas to produce the same amount of electricity.
Recent price trends in the gas market are primarily a
function of the current tight balance between supply and demand, which,
as history has shown, is likely to reconcile itself over time. U.S. EIA
forecasts that natural gas prices will fall from current levels, rising
slightly faster than inflation through 2025 to an average of $3.90/
MMBtu (in 2001 constant dollars).
As with all commodities, gas market prices send correct
signals to induce an appropriate response from suppliers. Although
there is often a lag between higher prices and increased production,
the U.S. rig count has increased 44 percent since April 2002.
Natural gas combined-cycle units continue to make the
most sense for meeting incremental electric power needs because they
represent by far the most efficient means of converting fuel to
electricity, they compare favorably in terms of life-cycle cost
relative to new coal units, and are especially cost effective when the
potential future costs of environmental regulations are considered.
Natural gas is far superior to even the cleanest coal
technologies: A modern gas-fired power plant emits almost 90% less NOx,
99.7% less SO2, 54% less CO2 and 100% less mercury on a pounds per
megawatt-hour (lb/MWh) basis, compared to a new pulverized coal plant.
Introduction
Natural gas still makes sense as a fuel for new electric generating
resources. While recent price trends and today's tight balance between
supply and demand have led to heightened political and regulatory
concern, over the long term the U.S. has access to an abundant supply
of natural gas and it is expected to remain a cost-effective and
reliable fuel. Moreover, current natural gas-fired electric generating
technology continues to offer significant cost and environmental
advantages over other commercially available alternatives.
Since the enactment of the Energy Policy Act of 1992, which
effectively created the idea of a competitive wholesale power market,
gas-fired, combined-cycle power generation has largely been the
technology of choice for new electric generating capacity. There are a
variety of reasons for this market-driven trend, including:
Recent advances in the reliability and fuel efficiency of
natural gas combustion turbines;
The relatively low capital costs of gas combined-cycle
units compared with coal and other alternatives;
The relatively short construction timeframe associated
with gas-fired units;
The small footprint/high energy density of combined-cycle
units, which eases land use concerns and enhances community acceptance;
The ability to site new units close to load centers;
The operational flexibility of combined-cycle units,
which allow them to operate in a variety of peaking, intermediate and
baseload configurations;
The overwhelming environmental benefits of clean-burning
natural gas in combination with ultra-high plant efficiency, leading to
significantly reduced air emissions per megawatt-hour of electricity
produced; and
The energy conservation benefits of replacing older, less
efficient technology with new highly efficient technology.
The adoption of gas-fired combined-cycle generation as the
technology of choice of the last decade was not only market-driven, but
was notably devoid of subsidies that have often accompanied the
introduction of new electric generating technology. 1
Moreover, the relative benefits of gas combined-cycle technology are
further enhanced by the lack of commercially available alternatives
that either make sense for consumers or the environment, as more fully
explored below.
---------------------------------------------------------------------------
\1\ During the same period, for example, we have seen more than
$3.0 billion Federal investment toward the development of cleaner coal
technology.
---------------------------------------------------------------------------
The very success of gas-fired technology has led some to question
this trend. It is extremely important, however, that policymakers not
overreact to the current situation by making long-term policy based on
short-term market behavior.
U.S. Natural Gas Demand
Total U.S. natural gas demand for the year ending December 2002 was
approximately 23 trillion cubic feet (Tcf). According to the most
recent forecast from the U.S. Department of Energy's Energy Information
Administration (EIA), natural gas demand is expected to grow at an
annual rate of 1.8 percent between 2001 and 2025. Half of this growth
is projected to come from increased gas use in electricity generation,
although this may be overly optimistic given the current slowdown in
new power plant construction across the country.
During 2002, the majority of U.S. gas demand was attributable to
the industrial sector (34 percent). With the rise in the use of gas for
power generation, that sector now accounts for the second largest use
of gas in the U.S., followed by residential and commercial use.
2
---------------------------------------------------------------------------
\2\ Recent revisions to the EIA data show a combined ``electric
power'' sector, which now includes gas used for industrial cogeneration
(combined heat and power).
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Due to the ``efficiency effect'' associated with new gas units, the
total amount of new gas-fired installed capacity does not translate
into an equivalent net increase in demand. This is because many of the
new, highly efficient combined-cycle units are displacing generation
from older, less efficient gas units. A new combined-cycle power plant
is generally more than 40 percent more fuel efficient than traditional
steam technology, which makes combined-cycle generation among the
nation's leading energy conservation technologies. 3
---------------------------------------------------------------------------
\3\ In areas such as California, New England and Texas, this is
also translating into significant environmental improvement as new gas-
fired combined-cycle capacity replaces older, less fuel efficient and
dirtier oil- and gas-fired generation.
---------------------------------------------------------------------------
Even under the most robust projections, gas-fired generation is
only one of many factors--such as weather affecting the overall balance
of supply, demand and market pricing. Indeed, a modern 500-megawatt
(mw) combined-cycle natural gas power plant running at a high capacity
factor represents an incremental annual gas demand of about 28 Bcf
(0.028 Tcf)--about one-tenth of one percent of the U.S. market.
U.S. EIA expects to see a continued rise in the amount of gas-fired
electric generation through 2025. It is interesting to note, however,
that the use of coal and gas are expected to rise at relatively the
same rate, with most other types of electricity generation remaining
flat. Therefore, coal, which currently supplies about half of the
nation's electricity, will continue to be the dominant fuel for
electricity generation in the U.S. for some time to come.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Gas Supply
The U.S. continues to meet the majority of its demand for natural
gas through domestic production, relying on Canadian and other imports
for about 17 percent of its needs.
At present, total economically recoverable reserves in the U.S. are
estimated to be 1,614 Tcf, a figure that has historically tended to
rise or fall depending on assumptions about future prices. These
estimated reserves can be translated into approximately 70 years of
supply at today's level of consumption in the U.S. Conclusions about
the long-term size of the gas resource base, however, have usually
proven to be overly conservative as new discoveries and advances in
exploration and production technology tend to expand the ultimate
supply horizon.
Although overall North American production capability remains of
vital significance, it is also important to understand the availability
of natural gas on a global level, as well as the potential for
increased trans-oceanic gas trade.
Worldwide, currently proved and estimated reserves, recoverable
with present-day technology, are huge, adding up to more than 10,000
Tcf. Furthermore, many large gas reserves have been discovered in less
developed countries that are not likely to use much of that gas but
would very much like to take advantage of those resources as a
commodity for export. Gas imports from overseas (in the form LNG) have
already been proven as a cost-effective and reliable way to meet
incremental market demand, and several large energy concerns have
announced investments in additional U.S. LNG import capacity.
4 LNG terminals have been expanded on the East Coast, are
being developed on the Gulf Coast and are being considered in
California, as well as in Mexico and Canada.
---------------------------------------------------------------------------
\4\ New England, for example, has historically relied on LNG
imports for as much as 30 percent of total winter peak day
requirements.
---------------------------------------------------------------------------
The U.S., therefore, continues to have a strong natural gas
resource base as well as significant potential for increased gas
imports both from North American and offshore sources. We are by no
means ``running out of gas.
Gas Prices
The U.S. gas market currently faces a tight balance between supply
and demand, which has translated into higher-than-normal prices. This
relatively modest imbalance in the market, however, has led to a
disproportionate impact on market prices.
Weather continues to be the dominant factor affecting natural gas
prices, and also remains among the most difficult factors to predict.
Weather affects natural gas demand due to heating loads during the
winter and air conditioning loads during the summer, to the extent a
regional power market relies on gas-fired electricity generation.
Weather also affects gas demand indirectly. For example, weather
influences the availability of hydroelectric generation. Periods of low
hydro output lead to greater reliance on other sources of generation,
including gas-fired capacity.
Another important factor affecting prices is the inherent lag time
required for production to respond to unexpected changes in demand.
This is exacerbated by the fact that historical price trends through
the 1980s and 1990s have made gas producers skeptical that today's
prices are sustainable, leading to a more cautious approach toward
capital-intensive investments in exploration and production efforts.
Current prices are also being affected by a relatively long winter
heating season during 2002-2003, which delayed the seasonal transition
from storage withdrawals to storage injections, leading to concerns
about the adequacy of storage inventories for the upcoming winter. In
addition, unusually high oil prices (including residual fuels) have
impaired the ability of some customers to fuel switch away from gas,
leading to further demand and price pressure in the gas market.
So-called ``spot'' prices for natural gas reached record peaks
during this past winter (2002-2003). Spot fuel prices, however, are not
an accurate measure of prices that consumers pay. Power generators'
fuel costs are not always highly correlated to spot fuel price because
of contracting and hedging mechanisms, and/or because they may own and
produce a significant portion of the fuel they use.
Similarly, wholesale buyers of electricity also shield themselves
from short-term fluctuations of power prices through a variety of
contracting and/or hedging mechanisms. As a result, the specific
relationship between short-term fluctuations in fuel prices and power
prices is at best moderate, and should not be the determining factor in
consideration of major changes to national energy policy.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Looking at the longer-term trend, inflation-adjusted natural gas
prices have experienced a variety of peaks over the last decade, but in
each case returned relatively quickly to normal levels.
The U.S. EIA currently predicts that future wellhead prices for
natural gas will fall from current levels and then gradually rise to
$3.90 by 2025 (in 2001 constant dollars). Therefore, while EIA expects
gas prices to rise faster than the general rate of inflation, they are
by no means expected to remain at today's high levels.
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Gas producers are now responding to higher prices. According to the
Natural Gas Supply Association, the U.S. ``rig count'' is up 44 percent
since April 2002. Historically, the North American gas market has
proved to be highly responsive to changes in supply and demand, at
least over the long term. However, recent weather and economic cycles
have made it more difficult for gas suppliers to keep up with highly
variable and unpredictable changes in the market over the short-term.
It is important to note that price spikes frequently abate much
more quickly than experts predict, as happened after the winter of
2000-2001. This makes gas producers skeptical about future price
forecasts and reluctant to jump back into the market until they develop
confidence that sustained prices will support their investments.
Today's natural gas market, however, like any commodity market, is
highly flexible and has historically been able to balance long-term
supply and demand trends. Today's higher prices inevitably lead to
tomorrow's increases in production.
Benefits of Gas-Fired Power
The efficiency effect
Combined-cycle gas units in many electric power markets are
displacing older, less efficient gas-fired plants, rather than
contributing solely to increased net demand. 5 For example,
a recent report by the California Energy Commission 6
suggests that overall state gas demand would be even higher without the
development of new combined-cycle units, since it would cause more
reliance on older, less efficient gas-fired steam and peaking units.
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\5\ This displacement could be accelerated by the adoption of
regulations that would encourage the retirement of outdated,
inefficient and typically high polluting generators. True economic
dispatch is primarily occurring in the Northeast, Texas and California
and particularly lags in the Southeast.
\6\ ``Preliminary Natural Gas Market Assessment'', California
Energy Commission, May 2003
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Operational flexibility
Combined-cycle units offer highly flexible operation with the
ability to either run as full baseload units or as intermediate
resources that can flexibly cycle to meet changing market conditions.
In a competitive market with an efficient regime for dispatch, many
combined-cycle units can and do adjust operations on a daily or even
hourly basis to reflect price and supply dynamics in both the
electricity and gas market. For example, on a cold winter day when
residential heating load is driving peak gas demand, many gas-fired
combined-cycle units slow or curtail their power output and sell gas
and/or pipeline capacity back to the market. Units with backup fuel
capability may continue to operate but use their alternate fuel.
Moreover, since gas demand peaks during the winter heating season,
while power demand peaks during the summer cooling season, such units
offer a great deal of operating flexibility and balance to the market.
Gas pipeline optimization
Combined-cycle power plants serve as ``anchor loads'' that help
lower gas transportation costs for other consumers and encourages
investment in new pipeline infrastructure. In fact, during 2002 more
than 3,571 miles of pipeline and a record 12.8 billion cubic feet per
day of natural gas pipeline capacity were added to the national
pipeline network--largely made possible by the development of new gas-
fired generating capacity.
The ultimate cost of natural gas to the end-use customer is a
function of the initial commodity price of gas combined with the
transportation costs across the interstate pipeline system and the
local utility distribution system. Transportation costs are a
significant component of the end-use customer's bill, especially in the
residential and small commercial sectors due to relatively low use and
inconsistent load factors. Combined-cycle generating units are almost
ideal customers from a gas transportation perspective and, therefore,
help utilize the existing pipeline system more efficiently. This in
turn lowers the unit cost of pipeline transportation, which benefits
all customers on the system.
Alternatives to Gas
In addition to its inherent economic and environmental benefits,
natural gas continues to be a viable and attractive fuel for
electricity generation due, in part, to the absence of realistic
alternatives. Large-scale, commercially available renewable
technologies are not yet cost-effective, and the public is not yet
ready to accept the next generation of nuclear technology. Therefore,
this discussion focuses on the merits of natural gas versus new and
existing coal-fired generation. Even with today's higher-than-normal
gas prices, natural gas combined-cycle continues to come out ahead.
Economic Considerations
The total cost of a new electric generating unit is a function of
its capital costs (including land, equipment, construction and long-
term financing, etc.) and operating costs (fuel, labor, taxes,
Operation & Maintenance, etc.). Coal has a lower unit cost per Btu of
fuel and, therefore, coal-fired generation would be expected to have a
lower short run marginal cost of production. Today, however, the up
front capital costs for new coal plants are typically two to three
times as high as they are for gas. In addition, a similarly sized coal
plant requires up to 4 years to construct compared with only 2 years
for a natural gas unit, which results in significantly higher interest
expenses during construction. Also, despite the relative fuel cost
advantage, even the most advanced coal technologies continue to be
significantly less efficient than natural gas units in terms of turning
fuel into electricity. 7
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\7\ This concept is ``heat rate'' and is measured in Btu's/kWh.
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The combination of higher capital costs and lower efficiency
dramatically erodes coal's advantage in fuel price on a life-cycle
basis. For a new coal plant to be a lower cost option than a combined-
cycle gas unit, the difference between the price of gas and the price
of coal must be very large and stay at that difference for the life of
the project, which is often 30 years or more.
Moreover, due to its lower capital costs, a natural gas plant would
be economic based on a much shorter investment horizon. Indeed,
independent power producers like Calpine will consider power sales
agreements with terms of 10 to 15 years as being sufficient to finance
and construct a new combined-cycle facility. This is an important
consideration for regulators and ratepayers, since shorter-term
obligations are inherently less risky than the longer-term obligations
required to support the economics of new coal-fired capacity.
Environmental Considerations
The environmental impacts of coal-fired generation also erode any
advantage related to fuel price. This is not only true for older coal
units built before Clean Air Act requirements but is true for new coal
units as well.
Natural gas is far superior to even the cleanest coal technologies
for all major regulated pollutants. In addition, the risk of future
regulations on emissions of carbon dioxide, or stricter regulations on
other pollutants such as mercury and particulates, need to be
considered in terms of the potential long-term cost of coal, since
consumers often bear the consequences of required environmental
retrofits. It is quite possible that the long-term environmental risks
of coal (as translated into future costs) are equal to if not greater
than the risk associated with future natural gas price volatility.
As shown in the chart below, a modern gas-fired power plant is
significantly cleaner than a new coal plant, both in terms of pounds of
emissions per Btu of fuel used, and when adjusted for the plant's
thermal efficiency as measured in pounds of emissions per megawatt-hour
(MWh) of electricity produced. This analysis compares a new combined-
cycle plant with a recently proposed supercritical pulverized coal
plant based on data pending before the Wisconsin Department of Natural
Resources.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Conclusions
The U.S. is not facing a long-term natural gas supply
crisis, and policymakers should be very cautious not to overreact to
changes in the market or make long-term decisions based on short-term
market behavior.
Recent price trends in the gas market are primarily a
function of the tight balance between supply and demand, which history
has shown is likely to reconcile itself over time.
Competent and knowledgeable market participants manage
their natural gas supply requirements with long term contractual
arrangements and other risk hedging instruments that are specifically
designed to mitigate short term volatility.
As for all commodities, gas market prices send correct
signals to induce response from suppliers, although there is generally
an inherent lag before new production is available.
Natural gas combined-cycle units continue to make the
most sense for meeting incremental power needs because they represent
by far the most efficient means of transforming fuel to electricity.
Based on current EIA forecasts ($3.90/MMBtu by 2025, in
2001 dollars) natural gas combined-cycle units compare favorably in
terms of life cycle cost relative to new coal units.
Natural gas is especially cost-effective relative to coal
when the potential costs of future environmental regulations are
considered.
Recommendations
While there is no magic bullet that can control prices in a
commodity market, there are a variety of steps that policymakers can
and should take now and over the long term to ensure the continued
availability of natural gas at economic prices, and to ensure the U.S.
continues to enjoy cost-effective, reliable and environmentally
responsible supplies of electric power.
Near-Term
Ensure the most efficient optimization of natural gas
used for electricity generation by implementing market policies that
ensure that modern, highly efficient plants are called upon to operate
before older, more expensive and less efficient gas-fired resources.
Mid-Term
Expedite permitting procedures for new gas wells and,
where environmentally appropriate, allow increased access to economic
gas reserves that are currently off limits to production;
Support development of interstate pipeline access to
Alaskan and Rocky Mountain reserves;
Support efforts to expand U.S. LNG import capability.
Long-Term
Support continued development of new, environmentally
responsible power generation technology, including renewables and clean
coal (such as Integrated Gasification Combined-Cycle), as well as
demand-side management technologies and practices.
______
[A statement submitted for the record by the National
Petrochemical and Refiners Association follows:]
Statement of the National Petrochemical & Refiners Association
NPRA, the National Petrochemical & Refiners Association, is a
national trade association whose members include virtually all U.S.
refiners and petrochemical manufacturers. NPRA appreciates the interest
of the House Committee on Energy & Commerce in the vital issue of
natural gas supply and demand. NPRA believes that diverse, ample and
affordable supplies of fossil fuels are essential to maintain U.S.
national security, economic growth, and the viability of the domestic
refining and petrochemical industries.
America's standard of living and overall economic health are
strongly linked to an adequate supply of energy at reasonable prices.
The nation faces severe challenges as it strives to balance ever-
increasing energy demands from all consuming sectors with sometimes
contradictory and short-sighted public policies that limit supply while
promoting additional natural gas consumption. These conflicting
policies, either in the short or long term, are simply no longer
compatible with continued U.S. economic growth.
NPRA believes that there is an urgent need to harmonize the
nation's energy and environmental policies, and that any national
energy plan must include traditional supply and market-oriented
policies for all fossil fuels, including natural gas.
Background
Energy is a strategic commodity. Without it, either through
insufficient supply, unreasonable cost (or both), any modern economy is
at risk. The threat of shortages can cause significant price
escalations and disruptions in the marketplace. In recent years,
domestic demand for natural gas has substantially increased while
production has recently decreased. Government, industry, and private
experts agree that natural gas demand is expected to rise by the year
2020 by as much as 60% over today's levels. It is still unclear whether
domestic gas production can increase to meet much of this new demand.
This is not a resource problem nor, lacking changes to current
edicts, will it be short-lived. NPRA believes the current ill-advised
national policy of limiting natural gas supply while encouraging gas
use because of its environmental benefits--mostly in the generation of
base and peak load electricity--has created and could exacerbate
extended higher prices and volatility. In fact, EIA reports that demand
by electricity generators is expected to account for 30% of total
natural gas consumption in 2025. This equates to a doubling of gas use
by the utility sector over current demand.
The domestic petrochemical industry, as well as others in the basic
chemical sector, is primarily based upon natural gas and natural gas
liquids. About 70% of U.S. petrochemical manufacturers use natural gas
liquids as feedstocks. In contrast, about 70% of petrochemical
producers in Western Europe and Asia use naphtha (a heavy oil) as a
feedstock. While oil is a global commodity whose price is set on the
global market, natural gas liquids are more locally traded commodities.
As such, price increases in natural gas have had a larger impact on
competitiveness in North American-produced petrochemicals.
The U.S. has generally maintained a reasonable-cost feedstock
position relative to its competitors in Europe and Asia. However, that
situation has been eroded as the price of natural gas has soared. North
American natural gas and natural gas liquids prices have risen to
unprecedented levels and placed a significant portion of the domestic
petrochemical industry at a disadvantage to European and Asian
producers. In fact, the increasing siting of base petrochemical
production and expansion projects in overseas locations is directly
attributable to this significant disparity in fuel prices. Additional
displacements will occur if the current and projected gas price and
supply situation is not addressed promptly.
Two years of extraordinarily high natural gas prices (2001-2002)
have resulted in a negative trade balance for the U.S. economy. This
negative trade balance allows foreign businesses to capture U.S. market
share in part because European and Asian producers are not experiencing
similar increased feedstock prices.
Short-Term Outlook: Focus on Conservation and Efficiency
Industry analysts report that domestic natural gas production has
declined by 6% over the last six quarters. In turn, utilization of
natural gas by the electric utility industry has caused unprecedented
demand, especially in the summer season where natural gas provides
``peaking'' power to many industrial and residential users.
Historically, the summer months have been periods to re-supply
natural gas storage facilities in preparation and anticipation of
increased winter demand for commercial and residential home heating.
The increased use of natural gas during the past summers has placed
additional constraints on storage, and the U.S. is now experiencing
some of the lowest levels of storage volumes ever--38% below normal
volumes for the end of May according to the EIA. Under current
conditions, it will take storage of 12.7 BCF per day for the remainder
of the summer season to return to storage levels entering the previous
winter of 2002-2003. Compared to the previous five-year average fill
rate of 9.2 BCF, the nation currently faces a 3.5 BCF per day shortfall
of natural gas as we enter the winter of 2003-2004.
Unfortunately, little can be accomplished from the supply side of
this equation in what is a short, but nevertheless critical time
period. In essence, our nation's natural gas energy policy for the next
8-10 months may largely depend upon good weather and good luck. We must
try to improve things, but real possibilities of doing so are limited.
We must hope that Congress and the Administration will act to provide
greater supply and price certainty to natural gas markets in the mid
and long-term.
While little may be practically accomplished on the supply-side of
the equation in the immediate future, efforts can be made to help
mitigate the problem through conservation and efficiency efforts. NPRA
urges both Congress and the Administration to act to improve energy
efficiency and conservation in the use of natural gas and power,
especially as the nation enters the summer cooling season. Any
reasonable reduction in electricity consumption would reduce natural
gas consumption by the power sector and have a positive impact on
natural gas availability. This, in turn, would help moderate natural
gas supply and price concerns. Further, if natural gas supplies become
extremely tight this summer or early fall, the Federal and local
government should consider allowing electric utilities and industrial
facilities to switch to alternative fuels in order to conserve natural
gas supplies.
Longer-Term Options: Energy and Environment Trade-offs
NPRA welcomes the Committee's review of the natural gas situation.
We urge you to review current policy thoroughly and openly. The nation
needs a frank and public debate on the future of natural gas and
natural gas supplies. As previously stated, natural gas demand is
projected to increase by 60% by the year 2020. The President's National
Energy Policy Task Force projects that over 1,300 new electric
generating power plants must be constructed to fulfill anticipated
electric energy needs over the next 20 years. DOE suggests that over
90% of these facilities will be fueled by natural gas.
Based on these and other forecasts, Congress must evaluate current
policies that inhibit or outright prohibit development of additional
natural gas supply sources. Policies regarding natural gas must be
modified to reflect both current and future realities. They must
include increased access and development opportunities to onshore
public lands as well as those on the Outer Continental Shelf. New and
promising domestic areas for development must be open for exploration
and production. In the meantime, NPRA would urge caution when Congress
and the Administration consider any policies, environmental or other,
that will accelerate the demand for natural gas when viable
alternatives exist.
Environmental progress and energy supply need not be mutually
exclusive. However, long-standing and recent environmental policies
have overwhelmingly limited fuel and energy supply choices, promoted or
even required fuel switching while at the same time they discourage
expanded domestic production of natural gas. Anticipated environmental
constraints could aggravate the current situation. This is a formula
guaranteed to make an already bad situation worse.
The National Petroleum Council (NPC) at the request of the
Secretary of Energy is currently developing recommendations and policy
options on the long-term future of natural gas as one of the key
elements of our nation's energy menu. NPRA is an active participant in
this study and urges Congress to seriously consider any and all of the
NPC's specific findings and recommended policy options.
In the interim, NPRA urges Congress and the Administration to re-
think and re-evaluate current and future policy initiatives that
inhibit or prohibit such beneficial practices as:
Fuel choice mixture and flexibility.
Gas supply source diversity.
Modernization, expansion and permitting of
infrastructure, including LNG facilities and pipelines.
Development of new technologies.
Natural gas market transparency and efficiency.
Conclusion
Natural gas and natural gas liquids serve as primary feedstocks in
domestic petrochemical plants and other industries. Their availability
at a reasonable cost is essential to keep the U.S. petrochemical
industry competitive in a worldwide marketplace. We hope that the
Congress will recognize that increased demand for natural gas supplies
will result in even tighter supplies and the cost of gas as a feedstock
will continue to rise. Policymakers should also recognize that since
natural gas is used as a fuel and an industrial feedstock, negative
impacts to our businesses will result if natural gas demand increases
but supplies remain tight. Thus the principal focus of the discussion
must be on the need for increased supply.
One thing is certainly clear: We urgently need a thorough review
and analysis of natural gas-related policies and gas supply and demand
to maintain a vibrant U.S. petrochemical industry and U.S. economy.
Natural gas will play an increasingly important role in America's
energy future. We must analyze, clarify, and correct policies to
maximize the available supply of this key resource.
For this reason, NPRA appreciates the Committee's efforts to
investigate the issues surrounding and impacting the supply, demand,
and price volatility of this nation's natural gas resources. We hope to
work with all stakeholders to craft a natural gas policy that provides
adequate supply at reasonable prices to fuel the U.S. economy and
maintain growth.
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