[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



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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.
                                 ______
                                 



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    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.


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    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.


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    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.


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    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.



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    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.


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    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
---------------------------------------------------------------------------
    \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.
                                 ______
                                 

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    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.


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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.


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    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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
    \7\ This concept is ``heat rate'' and is measured in Btu's/kWh.
---------------------------------------------------------------------------
    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.


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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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