[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                  NATURAL GAS SUPPLY AND DEMAND ISSUES

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

                                HEARING

                               before the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 10, 2003

                               __________

                           Serial No. 108-26

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

                                 ______

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                            WASHINGTON : 2003
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                      Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
CLIFF STEARNS, Florida               EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio                RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania     RICK BOUCHER, Virginia
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina         SHERROD BROWN, Ohio
  Vice Chairman                      BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia             BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois               BART STUPAK, Michigan
HEATHER WILSON, New Mexico           ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                   Dan R. Brouillette, Staff Director

                   James D. Barnette, General Counsel

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

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Caruso, Guy F., Administrator, Energy Information 
      Administration, U.S. Department of Energy..................    16
    Currie, Jeffrey R., Managing Director, Goldman, Sachs & Co...    65
    English, Carl L., President and CEO, Consumers Energy, on 
      behalf of American Gas Association.........................    30
    Greenspan, Alan, Chairman, Board of Governors, Federal 
      Reserve System.............................................    91
    Hoglund, Forrest E., Chairman and CEO, Arctic Resources 
      Company....................................................    54
    Kvisle, Harold N., President and CEO, TransCanada Pipelines 
      Limited....................................................    60
    Liuzzi, Robert C., President and CEO, CF Industries, Inc., on 
      behalf of the Fertilizer Institute.........................    38
    Mason, Donald L., Commissioner, Ohio Public Utilities 
      Commission.................................................    22
    Sharples, Richard J., Senior Vice President, Anadarko 
      Petroleum Corporation, on behalf of Domestic Petroleum 
      Council, U.S. Oil & Gas Institute, National Ocean 
      Industries Association, and Independent Petroleum 
      Association of America.....................................    25
Material submitted for the record by:
    Caruso, Guy F., Administrator, Energy Information 
      Administration, U.S. Department of Energy, response for the 
      record.....................................................   119
    Currie, Jeffrey R., Managing Director, Goldman, Sachs & Co., 
      response for the record....................................   119
    Edison Electric Institute, prepared statement of.............   110
    English, Carl L., President and CEO, Consumers Energy, on 
      behalf of American Gas Association, response for the record   120
    Greenspan, Alan, Chairman, Board of Governors, Federal 
      Reserve System, response for the record....................   117
    Interstate Natural Gas Association of America, prepared 
      statement of...............................................   113
    Mason, Donald L., Commissioner, Ohio Public Utilities 
      Commission, response for the record........................   118
    Sharples, Richard J., Senior Vice President, Marketing & 
      Minerals, Anadarko Petroleum Corporation, letter dated June 
      18, 2003...................................................   121

                                 (iii)



                  NATURAL GAS SUPPLY AND DEMAND ISSUES

                              ----------                              


                         TUESDAY, JUNE 10, 2003

                          House of Representatives,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Bilirakis, Barton, 
Upton, Stearns, Gillmor, Deal, Whitfield, Shimkus, Shadegg, 
Buyer, Radanovich, Bass, Bono, Walden, Terry, Rogers, Otter, 
Dingell, Markey, Hall, Boucher, Deutsch, Stupak, Wynn, Green, 
McCarthy, Strickland, DeGette, Capps, John, Allen, Davis, and 
Solis.
    Staff present: Bill Cooper, majority counsel; Andy Black, 
policy coordinator; Peter Kielty, legislative clerk; Sue 
Sheridan, minority counsel; and Bruce Harris, minority 
professional staff member.
    Chairman Tauzin. The committee will please come to order. 
Without objection, the committee will proceed pursuant to 
committee rule 4(e). It is so ordered.
    The Chair recognizes himself for an opening statement.
    Today's hearing is entitled ``Natural Gas Supply and Demand 
Issues.'' It sounds like the title of a chapter in an economics 
textbook, I am sure, but in an academics setting, that topic 
would probably put people to sleep. However, in this real world 
of running air conditioners to cool homes in the summer or 
running furnaces to heat homes in the winter and running 
factories to make products necessary for the 21st century for 
our economy to grow and to prosper, natural gas supply and 
demand is a hotly debated topic today.
    The seriousness of the topic is underscored by the level of 
nervousness exhibited by those dealings in the natural gas 
industry on a daily basis.
    Demand for natural gas is ever-increasing. Nearly 23 
percent of the United States' primary energy requirements are 
fulfilled by natural gas. Oil accounts for about 39 percent and 
coal represents 22 percent. Total natural gas consumption is 
expected to increase from the current rate of 21.6 trillion 
cubic feet per year to 35 trillion cubic feet by the year 2055.
    Natural gas has been advocated for a myriad of uses ranging 
from fuel for automobiles to fuel for electric power generators 
to fuel for heating homes to fuel for charcoal grills even. And 
for years we have all seen and read the advertisements saying 
that natural gas is the cleanest fossil fuel--environmentally 
friendly, produced domestically, and available in abundant 
supplies. But now we are hearing a different story. Natural gas 
production is flat and has been flat since the year 1994. As 
drilling and production technologies improved, declining rates 
for natural gas wells are climbing right now, which means wells 
are being depleted at faster rates.
    For instance, in 1990, the average decline rate was 17 
percent. In 2003, it is estimated that the decline rate is now 
28 percent.
    Technology plays an important role in the industry's 
ability to produce faster and faster. However, the industry is 
drilling for smaller and smaller reservoirs, and consequently 
huge reservoirs with long life spans are not now being drilled.
    Is this a subversive plot by energy companies to deprive 
the Nation of much-needed natural gas and to drive up the 
price? The answer clearly is ``no.'' Drilling companies are at 
work everywhere they are allowed to go. The problem is, huge 
areas of potential natural gas reserves are off limits because 
the Federal Government prohibits drilling activities on vast 
areas of lands that are now owned by the Federal Government.
    Less than 50 percent of the undiscovered gas resources on 
Federal public lands is now available for leasing; yet one of 
the difficult battles we had in passing H.R. 6 was an amendment 
to strip out an inventory of oil and gas resources on lands 
owned by the Federal Government. So drilling companies are 
doing the best they can with what they have to provide natural 
gas to a consuming public that desperately needs it.
    The Chairman of the Federal Reserve Board, Alan Greenspan, 
who will be with us later today, I think at 2 o'clock, hit the 
nail on the head when he said that we have a contradictory 
Federal policy concerning natural gas. On the one hand, the 
Federal Government encourages the use of natural gas for a 
whole host of processes. On the other hand, the Federal 
Government restricts more and more public land to natural gas 
development. So the Federal Government is the not so invisible 
hand in the marketplace increasing demand, and all the while 
decreasing supply.
    Yet, talk about market manipulation. To quote Mr. 
Greenspan, and this is his quote, ``And if on the one hand we 
have encouraged, as we have, very significant growth and 
domestic demand for natural gas, but are very readily 
constrained by our ability to increase supply, then something 
has got to give.''
    And what is giving, of course, is price. Price affects 
everybody, from the well hand to the burner chip.
    High natural gas prices are having an adverse impact on 
this economy. It is bad enough that our industries must battle 
foreign products that are unfairly advantaged by foreign 
governments such as the Russian nitrogen fertilizer industry. 
Our government should not punish industries relying heavily on 
natural gas by restricting access to supply.
    If a train wreck occurs and natural gas prices skyrocket 
and shortages occur, who will be at fault? Will it be the 
producer, the consumer, or perhaps the Federal Government? 
Well, the bottom line is, the reason we are having this hearing 
today is, we see a storm brewing on the horizon, and we need to 
prepare for it.
    I look forward to hearing the testimony from the witnesses 
today, on this topic which is so critically important not only 
to industries and economists, but to every single American who 
is now struggling to make ends meet, and to all of us who are 
hoping that Americans can go back to work and this economy can 
recover instead of going through another shock.
    And the Chair yields back the balance of his time and seeks 
members interested in opening statements.
    Mr. Boucher is recognized for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend you for convening today's hearing on natural gas supply 
and demand concerns. The topic is very timely, given the vital 
importance of natural gas to our Nation's energy portfolio and 
to our entire national economy.
    Currently, 23 percent of the United States primary energy 
requirements, including industrial, residential, commercial, 
and electric utility sectors, are met through the use of 
natural gas. According to the Energy Information 
Administration, the Nation's use of natural gas is expected to 
increase to 52 percent by the year 2025.
    In recent years, natural gas has proven to be the fuel of 
choice for electric utilities building new electricity 
generating units. This trend is expected to continue, with an 
estimated 10.4 trillion cubic feet of gas consumption by 
electricity generators predicted by the year 2025. And that is 
up from 5.3 trillion cubic feet in the year 2001.
    In addition, the Energy Information Administration 
estimates that domestic gas production is expected to increase 
more slowly than consumption during the same period of time.
    Along with the increased usage of natural gas, there has 
been an increase in price volatility and cyclical decreases in 
storage inventories. In January of 2001, natural gas prices 
peaked at nearly $9 per million BTUs. Current prices range 
between $5 and $6 per million BTUs, and natural gas inventories 
are at the present time below historic averages.
    Given the recent and projected increases in natural gas 
consumption, the many concerns regarding the availability of 
enough natural gas to meet demand, the price volatility which 
has been evident in recent years and which, given the current 
projections, we can expect to continue over time; in concerns 
related to inventory levels, natural gas usage is among the 
most critical energy policy questions that face this committee 
today.
    Natural gas certainly has many benefits, ranging from 
environmental compatibility to the comparatively low capital 
costs associated with starting a new gas-fired electric 
generating facility. However, our Nation has a number of energy 
alternatives. I would note, for example, that coal remains the 
Nation's largest domestic energy resource with reserves 
estimated for an additional 250 years.
    In addition, advances in clean-coal technologies, both 
recent and on the horizon, are ensuring that future coal-fired 
electricity plants will be able to operate with little 
environmental effect. Ensuring that fuels other than natural 
gas, including coal, play a larger role in meeting future 
energy needs will help to keep natural gas prices affordable 
for the utilities, for the residential users, and for the 
industrial consumers who depend upon natural gas.
    I look forward to the witnesses' testimony before us today, 
and I want to thank them for preparing remarks and taking time 
to join us here. The topic they are addressing, the current 
state of natural gas supply and demand, is truly timely. I 
welcome their recommendations with respect to policies that 
will ensure that this Nation does not reach a natural gas 
crisis.
    I thank you very much, Mr. Chairman, for holding this 
hearing, and I yield back.
    Chairman Tauzin. I thank my friend.
    And the Chair asks, further requests for opening 
statements? The chairman of the Subcommittee on Energy, Mr. 
Barton, is recognized for an opening statement.
    Mr. Barton. Thank you, Mr. Chairman, for holding this 
important hearing today. I appreciate your offer to conduct the 
hearing at the full committee level after we learned that 
Chairman Alan Greenspan would be willing to testify if it was a 
full committee hearing instead of a subcommittee hearing. The 
participation with Chairman Greenspan underscores the 
significance of the issue that's before the committee.
    Our Nation faces both a short-term and a long-term future 
of high natural gas prices. It is my understanding that natural 
gas prices at the wellhead today are over $6 in MCF. Many 
Americans are dependent upon affordable natural gas prices for 
their residential heating, the electricity the power companies 
sends them, many products that they use, and perhaps even their 
job. Today, we call the Nation's attention to the problems of a 
steady increase in natural gas demand and a staggering or slow-
growing natural gas supply.
    The witnesses before us represent natural gas producers, 
consumers, analysts, and infrastructure experts. I expect that 
we will hear that little can be done to reduce demand in the 
short term. Therefore, we must try to do something to improve 
the supply.
    The hearing today is timed perfectly for a number of 
reasons, Mr. Chairman. First, decisions that are made today by 
market participants will determine the amount of natural gas 
stored in inventory for the coming winter. If this winter is as 
cold as last winter was, many people expect surprisingly high 
prices.
    Second, the U.S. Senate this week is trying to complete 
work on its energy bill. I would encourage all the Members of 
the Senate to work together for whatever time agreements are 
necessary to get the energy bill done so that we can go to 
conference between the House and the Senate. As you well know, 
we passed our House energy bill several months ago.
    The energy bill is not an inside-the-Beltway bill, because 
it does affect real people. As we will hear today, energy 
affects all Americans and needs the attention of Congress. The 
House has acted, passing legislation that will do its part to 
address the problem. I know in the Senate it is often easier to 
slow things down than to speed things up, but I would hope that 
this hearing today would encourage our Senators on both sides 
of the aisle to try to work together for the Nation's energy 
business.
    The third reason that today's hearing is well-timed is that 
proponents of regulating carbon dioxide either as a pollutant 
or through some other mechanism needs to consider what added 
fuel switching would do to our natural markets and to our 
consumers. I strongly believe that our Nation should continue 
to have a broad portfolio of fuel choices, that coal should 
continue to play a leading role in electric power generation. 
The thing to do with coal burning is to improve it, not to 
reduce it.
    Next week, on June 17, my subcommittee, the Energy and Air 
Quality Subcommittee, will hold a hearing on the future options 
for generation of electricity from coal. Witnesses will discuss 
clean-coal technologies and new applications, like coal 
gasification, advanced combustion boilers, the Department of 
Energy future program, and other possibilities to have coal 
burn more cleanly, yet still play its vital role for Americans.
    Today, the focus of the natural gas supply and demand is 
before the full committee. Congress needs to hear just what the 
problems are and what the possible solutions are. We need to 
know about the investment climate that dictates whether someone 
does or does not want to invest in natural gas production. We 
need to hear what it will take to get private parties to build 
the Alaska natural gas pipeline, which will help but not by 
itself solve the supply and demand imbalance. And last but not 
least, Americans need to know what is facing us down the road 
in terms of natural gas.
    Mr. Chairman, I want to again thank you for holding today's 
hearing at the full committee; and as always, thank you for 
your leadership on energy issues.
    Chairman Tauzin. I thank the gentleman.
    Mr. Green? Does Mr. Green seek recognition for an opening 
statement?
    I see Mr. Dingell is here. My apologies. Mr. Dingell, the 
ranking Democrat of our committee, is recognized for an opening 
statement if he wishes to give one.
    Mr. Dingell. Mr. Chairman, I do.
    Chairman Tauzin. The gentleman is recognized.
    Mr. Dingell. And I thank you.
    Mr. Chairman, thank you for holding this hearing on natural 
gas supply and demand. After years of relatively low natural 
gas costs, consumers in Michigan and other parts of the country 
have experienced wide price swings in recent years. In January 
2001, gas peaked at nearly $9 per million BTU. One year later, 
prices are running $3 per BTU. But by January 2003, they 
crested again at nearly $8 million per BTU--or rather, nearly 
$8 per million BTU.
    These fluctuations make budgeting for energy use difficult 
for both residential and industrial consumers.
    Currently, gas is about $6 per million BTU and predicted to 
stay at least at that high level for the foreseeable future. 
Chairman Greenspan has noted with concern that these prices 
seem out of kilter with moderating prices for oil and gasoline 
in recent months. Secretary of Energy Abraham recently noted 
that natural gas working storage levels are 42 percent below 
the previous 5-year average, and that hot summer weather could 
hinder efforts to refill these inventories. In the event the 
storage levels remain low into the winter heating season, 
consumers could once again face skyrocketing prices.
    While Congress has attempted to deal with natural gas 
supply issues in the past, the wrinkle that makes this 
particularly difficult today is that the Nation has become 
highly dependent on natural gas for various uses that higher 
prices reverberate even more broadly throughout our economy. 
Most of the new electric generating capacity added in recent 
years is fueled by natural gas, so that when prices rise, it is 
felt not only in the homes that use natural gas directly, but 
also those that use electricity made from gas. Moreover, 
electric consumers in many parts of the country, particularly 
the Western States, have had more than their fair share of 
volatility in their utility bills. Since a number of industries 
depend also on natural gas directly or indirectly, the Nation's 
economic recovery could be jeopardized by a prolonged period of 
high prices.
    Unfortunately, it is easier to comment on the nature of the 
problem than to come up with solutions. If Congress enacts 
comprehensive energy legislation, provisions to encourage 
greater conservation and energy efficiency may provide some 
relief, but not in the short run.
    I am interested in suggestions from our witnesses regarding 
what can be done to prevent consumer hardship next winter. I 
know Secretary Abraham has called on the industry to come up 
with ideas along these lines, and perhaps some of those are 
gelling. Members of the committee led successful efforts in 
1987 to repeal most of the restrictions on natural gas use of 
the Power Plant Industrial Fuel Use Act of 1978. I would be 
interested if our current committee members have the same or a 
different opinion.
    With that, I wish to extend a special welcome to Carl 
English from Consumers Energy. That is a company that provides 
great service to Michigan consumers, and I am glad he will be 
with us today and look forward to his testimony.
    I also look forward to Chairman Greenspan's testimony and 
recommendations.
    Mr. Chairman, I thank you and my colleagues for your 
attention.
    Chairman Tauzin. I thank my friend.
    Are there further requests for opening statements on this 
side? The gentleman from Florida, Mr. Stearns, seeks 
recognition for an opening statement?
    Mr. Stearns. Yes. Thank you, Mr. Chairman.
    Chairman Tauzin. The gentleman is recognized.
    Mr. Stearns. I think we have had many hearings here in 
which we have talked about the growing gap between natural gas 
supply and demand. This is my 15th year in Congress, and I have 
been in many hearings like this.
    I applaud the Chairman for having this hearing. It is a 
long-term problem. We are not going to expect to solve it today 
or in the very near future, but I think one of the things that 
is coming across my way of thinking is that the U.S. 
Government, the States, and local municipalities own a lot of 
land; and I think Congress would help the situation if we went 
ahead and sort of deregulated and allowed private industry to 
develop the gas that might be in this Federal, State, and local 
land. That would be one area where a regulatory framework could 
be set up, established, and encouraged so that in a cost-
efficient manner we could explore this opportunity for gas in 
these, I think, a lot of resource-rich Federal lands.
    So, Mr. Chairman, I think that is one thing that we as a 
legislative body could do. And I applaud you for this hearing, 
and I hope that the witnesses will confirm some other things 
that we can do.
    In Florida, it appears that in the foreseeable future our 
demand for gas is going to double, and we don't really have any 
opportunity to develop gas in the State of Florida, so we get--
all of our gas is imported, so it is extremely important that 
even Florida look within its land territory for some type of 
way to develop some of this resource-rich Federal land.
    So I thank you, Mr. Chairman. I look forward to the 
witnesses.
    Chairman Tauzin. I thank my friend.
    The Chair asks Mr. Green if he seeks recognition. He does. 
And the Chair recognizes the gentleman from Texas, Mr. Green, 
for an opening statement.
    Mr. Green. Thank you, Mr. Chairman. And following my good 
friend from Florida, there are some gas resources off the State 
of Florida, but our committee has taken them off the production 
list.
    But I appreciate the opportunity for the chairman to have 
this, like my colleague from Florida, because just like 
Florida, all of our States are experiencing high natural gas 
prices. I feel strongly we must do everything in our power to 
raise the awareness of the natural gas crisis in our country, 
especially with our fellow colleagues in Congress. Consumers 
across the country are hit by high natural gas prices in the 
summer and the winter. Gas is a familiar fuel for furnaces in 
the northern part of our country, but 40 percent of the new 
power generation is being fired by natural gas. Consumers will 
increasingly feel the bite of gas prices in their power bills 
also.
    Over the last two decades, since the deregulation of the 
natural gas industry, we have gotten used to fluctuating 
prices, typically about $2 per million cubic feet. And those 
prices have been over $3 for almost all of the last 2 years and 
over $4 since last January. Now, it is close to $6.50 per 
million cubic feet.
    Experts predict steady U.S. demand growth for natural gas 
through the year 2030 and slowing declining domestic 
production, and that is a formula for high prices. This issue 
is of paramount importance to my constituents in the State of 
Texas because the natural gas crisis threatens the lifeblood of 
Texas Gulf Coast industry, petrochemical production. This 
industry is one of Texas' largest employers, and many of these 
jobs are in danger of being lost forever.
    Without reliable, affordable natural gas, plastics and 
other petrochemical products now made in America will be 
produced overseas. And I would point out that the chemical and 
petrochemical industry is one field of manufacturing where 
America is still a net exporter. As policymakers, we must first 
take a serious look at the obstacles to domestic gas 
production, restricted public lands onshore and offshore, 
irrational pipeline regulation, and politically motivated moves 
to open up long-term energy contracts and to cap prices.
    Most coastal States and their Washington delegations that 
have lots of new gas-fired power plants refuse to allow gas 
production offshore. The House energy bill in its current form 
does not even allow the Federal Government to study its own 
offshore reserves.
    Second, we need to ensure that we have a healthy mix of 
energy sources. Cleaner coal technology, responsible nuclear 
power, both have important roles to play. However, natural gas 
will continue to be a popular choice because of the few 
negative consequences. It burns clean, improves air quality, 
and plants will come to become more efficient. Liquefied 
natural gas technology, which allows us to tap abundant global 
resources, is also improving. But there is a serious not-in-my-
backyard problem with the location of LNG terminals that will 
need to be addressed if we want gas-fired plants. With a break-
even point near $2.50 per MCF, we need to take a hard look at 
LNG.
    I look forward to hearing some of the solutions from our 
panelists this morning. I look forward to Chairman Greenspan's 
testimony this afternoon, which hopefully will motivate my 
colleagues to take action on this issue.
    And again, Mr. Chairman, thank you for calling this 
hearing.
    Chairman Tauzin. I thank my friend from Texas.
    Further requests for opening statements on this side? Mr. 
Whitfield, waives? Mr. Rogers, waives?
    On this side, the gentlelady from California, Mrs. Capps, 
seeks recognition for an opening statement, and is so 
recognized.
    Mrs. Capps. Thank you for recognizing me, Mr. Chairman, and 
for holding this hearing.
    Ensuring we have adequate supplies of energy is critically 
important to our economy and our Nation's well-being. And some 
of the information we will hear today about natural gas 
supplies is disturbing, as natural gas has become a critical 
part of our energy stream and has allowed us to reduce 
polluting emissions. So it is good we are holding this hearing.
    Mr. Chairman, attaining energy independence and 
predictability of supplies are some of the best reasons to 
enact a national energy policy. Our country should explore and 
extract oil, gas, and coal wherever it is economically feasible 
and environmentally sensitive. But first we should also adopt 
strategies for reducing our demand for energy. Simply drilling 
for more oil and gas anywhere we can find it is a fool's 
errand. We really should start by managing our consumption 
better.
    In addition, we must have tough regulatory policies in 
place to prevent the blatant manipulation of energy markets, 
like what happened in California, when trading tricks and faked 
shortages drove prices through the roof and stole billions of 
dollars from California residents.
    Unfortunately, the House energy bill fell woefully short of 
achieving these goals and establishing a rational, forward-
looking national energy policy. Comprised mainly of subsidizing 
the oil, gas, coal, and nuclear industries, weakening 
environmental protections and lacking aggressive actions to 
reduce energy consumption, the bill is a classic missed 
opportunity.
    For example, we should have adopted Representative 
Pallone's common-sense proposal to establish a renewable 
portfolio standard for power plants, to encourage them to use 
more renewable energy. This would lessen our dependence on 
fossil fuels; and it is clearly doable, since California 
companies are already doing it.
    I do, however, want to point to one positive step the House 
took, and this has already been mentioned today: the adoption 
of a bipartisan amendment that I offered with my colleagues 
from Florida, Representative Davis, who is also a member of 
this committee, and Representative Jeff Miller. Our amendment 
removed from the bill an extremely ill-advised provision added 
by the Resources Committee that would inventory the oil and gas 
resources off our coast.
    Taking inventory sounds pretty innocuous, but this is not 
CVS, and the inventory isn't about counting toothbrushes. The 
inventory would actually undermine the long-standing national 
consensus, and two decades of executive and congressional 
action against new oil and gas drilling off some of our 
economically valuable and environmentally precious coastlines. 
And since we pretty much know where the vast majority of 
economically extractable oil and gas is--in the central and 
western Gulf, which are open to drilling--the inventory 
proposal is a thinly disguised attempt to drill off Florida, 
California, Massachusetts, and anywhere else with a beach. I am 
pleased that the House acted to check the irresponsible actions 
of the Resources Committee.
    Clearly, we must have a vibrant energy extraction industry, 
but we have to do it in a way that is compatible with our 
national goal to protect our environment and coastal economies. 
And our energy policy is lacking if we don't first look at how 
to reduce our consumption of nonrenewable sources.
    So I welcome the testimony of our witnesses, and I hope 
that this current difficulty in matching natural gas supply and 
demand is not seen as an easy excuse to push for more oil 
drilling and gas drilling off our coasts.
    I yield back the balance of my time.
    Chairman Tauzin. I thank the gentlelady.
    Further requests for time on this side? Mr. Stupak seeks 
recognition?
    Mr. Stupak. I waive.
    Chairman Tauzin. Waives.
    Anyone else? I see Mr. Davis. Mr. Davis seeks recognition 
and is so recognized.
    Mr. Davis. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    I wish we had had a chance for a more thoughtful discussion 
on this issue during the course of the energy bill debate. I 
simply wanted to ask your consent to enter into the record a 
policy report just recently prepared by Chuck Alston of the 
Progressive Policy Institute, which I think represents an 
attempt to define how we can balance some of the environmental 
sensitivities Representative Capps referred to with legitimate 
concerns about supply.
    Chairman Tauzin. Without objection, the gentleman's request 
is granted, and the record will reflect the document. The 
gentleman may proceed. Is that all the gentleman had?
    Mr. Davis. That is all.
    [The report is available at www.ppionline.org]
    Chairman Tauzin. The Chair asks, is there further request 
for time?
    The gentlelady Ms. Solis requests time. Ms. Solis is 
recognized for an opening statement.
    Ms. Solis. Thank you, Mr. Chairman.
    Good morning. I'm also pleased to be here and very anxious 
to hear from our witnesses today. I want to commend you, Mr. 
Chairman, and also Ranking Member Dingell for bringing this 
important matter to this committee's attention. And I am sure 
we will learn quite a bit about this vital natural resource and 
its implications for our economy.
    There is no doubt that natural gas will play a vital role 
in a cleaner energy future. As the least polluting fossil fuel, 
natural gas will play a central role when we finally get 
serious about reducing our greenhouse gas emissions.
    Natural gas can and should play a great role in our 
transportation alternatives. In my home State of California, 
for example, we desperately need to speed the transition to 
cleaner natural gas school buses to protect the health of our 
school children in our communities. These new applications will 
increase demand for natural gas, and this will have the 
potential to drive up prices. Keeping natural gas affordable 
will require a renewed commitment to conservation and renewable 
fuels as well as seeking new supplies of natural gas.
    There are some who would sacrifice environmental 
protections in a rush to develop new natural gas resources. I 
don't believe that in seeking solutions to one environmental 
problem we should create another.
    It has been said, for example, that environmental laws 
effectively lock up much of our public land from natural gas 
exploration. In fact, the administration's own data show that 
this claim is simply not true. A study conducted by the 
Department of Interior surveyed five Western basins that 
contain the bulk of natural gas resources on U.S. public lands, 
and show that 12 percent of these lands were restricted for 
natural gas development. Even this low number is greatly 
inflated by the inclusion of major natural parks and wilderness 
areas in the study.
    Americans overwhelmingly believe these areas should be off 
limits to resource extraction. California's famous Gold Rush 
created a contradictory legacy of economic opportunity and 
environmental destruction that we are still paying for today. 
The natural gas gold rush will also create a potential for 
economic prosperity and certainly environmental challenges. We 
would be wise to proceed thoughtfully and thoroughly as we 
consider our energy future.
    In that regard, I hope that future hearings on this matter 
will feature analysts who can speak on both the environmental 
promise and potential for damage in increasing the use of 
natural gas in our energy portfolio.
    I yield back the balance of my time.
    Chairman Tauzin. The gentlelady yields back.
    Are there further requests for opening statements?
    The gentleman, Mr. Markey.
    Mr. Markey. Do I have to make the motion to waive my 
opening statement?
    Chairman Tauzin. Actually, let me do this; en bloc, I 
think, will help. Under the rule--let me explain to the 
audience what we are doing.
    Under our new rules, if a member seeks time for an opening 
statement, he may give an opening statement. If he waives an 
opening statement affirmatively, that member is entitled to a 
little bit longer time in questioning. It is kind of an 
inducement so we can get to you quicker.
    And I will make the en bloc request of all members who have 
waived their opening statement that they be permitted under the 
rule the benefits of the rule. Is there any objection? Without 
objection, so ordered.
    The Chair will now welcome our guests, the first panel this 
morning. As I pointed out, we will have Alan Greenspan at 2 
o'clock, but we have a distinguished panel of individuals who 
can indeed tell us a lot about this issue and inform us as to 
many of the questions I know that the committee will have.
    First of all, Mr. Guy Caruso is Administrator of the Energy 
Information Agency.
    Excuse me. Before I introduce the panel, do you seek 
recognition, sir, for an opening statement?
    Mr. Hall. Mr. Chairman, if I can make a very important 
opening statement.
    Chairman Tauzin. On behalf of Texas, I assume.
    Mr. Hall. Right.
    Chairman Tauzin. The gentleman is recognized for that 
purpose.
    Mr. Hall. The Fourth District oil patch in particular.
    Chairman Tauzin. The gentleman is recognized.
    Mr. Hall. Mr. Chairman, thank you, and members of the 
committee. And I am sorry to be late.
    We have come almost full circle in my time in Congress and 
my time on this committee from a time of natural gas scarcity 
to the plentiful supply of natural gas back to a time of 
scarcity. The signs have been ominous for several years, yet we 
have chosen to ignore them, much like driving a car until the 
tank is nearly dry and then starting to look for a service 
station. Except, in this case, there is no real active service 
station on the block.
    Then, as now, we talk about a scarcity when there really 
isn't one, only a lack of available supply. What is really 
scarce is the easy-to-find-and-produce natural gas. That gas is 
rapidly being depleted, but the hard-to-find-and-produce gas is 
not being brought on quickly enough to replace what we are 
using.
    U.S. natural gas production has been virtually flat for the 
last decade. The EIA reported that the production declined in 
2002. And even though the rig count is rising again, EIA is 
very cautious in its predictions of any significant production 
increase.
    A lot of the resource is still underground, onshore and off 
our coasts, but I think we have to be smarter and have better 
tools to find and produce this gas. When ANWR fell by the 
wayside in Senate the last time, toward the end of the session, 
I called Boone Pickens and told him. I said, well, they knocked 
ANWAR out. He said, That is okay; it will still be there. It 
will always be there.
    So we have got a supply, but it is still down in the 
ground. And kind of like my preacher at home told us, he had 
good news and bad news for us. He said, the good news is, There 
is enough in church right now to pay off the entire church 
debt; and the bad news is, It is still in you-all's pockets. 
That is kind of the way we are on the production of gas.
    Much to its credit, several years ago the Department of 
Energy identified this problem and produced a road map for 
drilling and producing the gas that lies in the ultra-deep 
waters in the Gulf of Mexico in water depths in excess of 5,500 
feet. According to a University of Texas Bureau of Economic 
Geology study completed in 2000, as much as 69 trillion cubic 
feet of incremental or additional natural gas can be produced 
from the deep waters of the Gulf and from unconventional 
onshore gas reserves if advanced technologies are used and 
deployed.
    The revenues to the Federal Government from production on 
Federal waters and onshore Federal lands could be as high as 22 
billion between now and the year 2015 at a cost to the Federal 
Government of about 3 billion. That is a good deal in anybody's 
books. These are incredibly compelling reasons to make a full-
scale assault on developing these technologies on a crash basis 
and bringing this gas to our doorsteps sooner rather than 
later.
    But, Mr. Chairman, let me be clear. We will never be able 
to produce as much gas as we have in the past. Peak annual 
production occurred in the early 1970's. However, we can slowly 
and surely and greatly slow the rate of decline in our domestic 
production. We need to take the pressure off of natural gas to 
meet some of the incredible demand that is projected by the 
Energy Information Administration and others' pressure, I might 
add, that is driven largely by Federal policy, namely, clean 
air and some other things, forcing people to use natural gas 
and not coal.
    We need to use our most abundant resource, coal, but we 
also need to develop the technology that is necessary to burn 
coal with as few emissions as possible. We need to spend more 
on renewables--where it works, solar, and geothermal where it 
is available. And, of course, there is still much more to do in 
conservation, unless we use less of what we have.
    I have a bill and a part of a bill that passed the Science 
Committee. Well, as a matter of fact, the first bill I passed 
in Congress in 1981 or 1982, when I came here, was a 
conservation bill that RCS and CACS and, Mr. Chairman and Mr. 
Markey, you well remember though.
    We simply no longer have the luxury of engaging in fights 
over coal versus gas versus renewables. We need all of them, 
and we need them now to take some of the demand pressure off of 
natural gas.
    Last year, I introduced legislation not only to establish 
an industry-led offshore program to bring these technologies 
into reality, but also to develop the technologies that will 
enable us to produce the hard-to-find gas onshore, too. These 
provisions were contained in the energy bill and were ready to 
be adopted by conferees when the conference collapsed last 
year.
    The Science Committee included this language in the bill, 
H.R. 238, it reported this year. The Energy and Commerce 
Committee, Mr. Chairman, your committee had several similar 
provisions in its bill, too. So I submit that this ultra-deep 
and onshore exploration and production R&D language is really a 
production provision masquerading as an R&D provision. 
Development of these technologies under this provision will 
produce more than one-third of the gas estimated to be needed 
between now and the year 2015 at costs considerably less than 
importing an equivalent amount of LNG.
    The history of natural gas production has proven that big 
increases in production occur when technology is applied to 
break down production barriers. Coal bed methane is a case in 
point. In 1990, coal bed methane production was negligible. 
With an investment of 140 million, production began to increase 
to the point that today it is about 7 percent of annual gas 
production. There are other examples.
    So, in closing, Mr. Chairman, there is broad consensus in 
this body for this legislation. You, Mr. Markey, and the 
majority leader, Mr. DeLay, certainly have been helpful on 
keeping these provisions in the conference, but we need you and 
the rest of the conferees to stand strong and push hard on our 
colleagues in the Senate when the conference convenes.
    I don't exclude anyone else, including my friend Mr. Markey 
to the right, who is a good strong member of this committee, 
and purports and sets forth a desire to solve the energy 
problem. He has his ways and his methods, of course; and I 
can't sit here and say that he is totally wrong. He is a good 
man to work with, and we need to all work together.
    The pending energy bill may be our last best opportunity to 
make a major breakthrough on production technologies that will 
yield huge returns in additional gas supplies. We can't afford 
to let this opportunity pass us by. The cost in increased 
natural gas prices, if we fail to act, will be truly enormous.
    And I thank you, Mr. Chairman. I yield back my time, if I 
may.
    Chairman Tauzin. The gentleman has no time to yield, but we 
appreciate his opening statement.
    Mr. Hall. I could go on.
    Chairman Tauzin. We all know.
    The gentlelady, Ms. DeGette, has arrived. And the Chair 
will seek whether or not the gentlelady wishes to give an 
opening statement.
    Ms. DeGette. Just briefly, Mr. Chairman.
    Chairman Tauzin. The gentlelady is recognized.
    Ms. DeGette. I will ask unanimous consent to put my full 
opening statement in the record. And we have a large panel.
    So let me just say that, as a Westerner, I was quite 
interested in this so-called EPCA report Ms. Solis was talking 
about, which concluded that public land protections are not 
holding our Nation's gas supply hostage. And I was a little 
dismayed that none of the witnesses talked about that 
conclusion in their written testimony. I am hoping someone will 
talk about this today. As we make very important land-use 
decisions in the West, particularly regarding BLM land, we need 
to keep in mind that while we need to develop our natural gas 
supplies in the West, that does not necessarily mean 100 
percent development in all lands. And, if we have a reasonable 
land-use policy, we can still have robust natural gas 
development.
    With that, I will yield back.
    [The prepared statement of Hon. Diana DeGette follows:]
Prepared Statement of Hon. Diana DeGette, a Representative in Congress 
                       from the State of Colorado
    I want to thank our chairman, Mr. Tauzin, for holding this hearing 
on natural gas supply and demand. Gas rates directly affect my 
constituents, just as they affect the constituents of every Member 
here. Clearly, we all have an interest in decreasing volatility in 
natural gas prices.
    I believe that the panels the Chair has assembled well represent 
the supply side of the equation. And I look forward to discussing with 
our panelists the challenges and solutions of increasing the supply of 
natural gas.
    But with all due respect to the panelists who are here today, I am 
somewhat confounded by what is not included in their testimonies. Not 
one mentions the recent survey from the Bush Administration's 
Department of Interior and the United States Geological Service. The 
so-called EPCA report concluded that public lands' protections are not 
holding our nation's gas supply hostage. I hope that the study's 
omission from everyone's testimony isn't because the results of the 
survey are inconsistent with industry claims that public lands' 
protections are the bogeyman. I also hope that the rumors of provisions 
in the energy bill to commission another study, maybe one that would be 
more to the Administration's liking, are unfounded.
     I voted against the comprehensive energy bill that our committee 
marked up earlier this year because I felt it wasn't well balanced. The 
emphasis was almost entirely on production with little to address the 
need to conserve. This hearing is invoking similar flutters of deja vu.
    I am pleased that we will be hearing from Mr. Mason, Commissioner 
for the Public Utilities Commission of Ohio, who may have similar 
concerns to the utility companies in my district. An article from 
yesterday's Denver Post, my hometown paper, quotes an official from 
Xcel Energy, which supplies most of the power for my constituents' 
homes. ``It will be incumbent on us to make sure our customers know 
that higher prices are coming, and that we do all we can to encourage 
conservation and energy efficiency. Education, conservation and energy 
efficiency will be our best weapons against higher prices . . .'' After 
reading the testimony from Mr. Mason, it doesn't sound as if Xcel 
Energy's situation and approach are unique.
    That article also mentions the effect rising prices will have on 
low-income residents. It may not be the right time to discuss this, but 
I hope that the Republicans will join us in ensuring that Americans who 
are the most vulnerable will not have to make the choice between 
feeding themselves and heating their homes come next winter. I think we 
ought to plan ahead and increase the money available for LIHEAP.
    Those concerns aside, I look forward to hearing from the panelists 
assembled here today.

    Chairman Tauzin. The gentlelady yields back.
    The gentlelady has made a request that the written 
statement be made a part of the record. Without objection, that 
is so ordered. And the chairman will note, generally for all 
members who have written statements, to introduce those 
statements into the record without objection. That is so 
ordered.
    Are there further members seeking recognition?
    [Additional statements submitted for the record follow:]
    Prepared Statement of Hon. Paul E. Gillmor, a Representative in 
                    Congress from the State of Ohio
    I thank the Chairman for the opportunity to address the issue of 
natural gas supply and demand as a major element of our country's 
energy debate. I also look forward to learning from a well-balanced 
panel of witnesses, as well as the honorable Chairman Greenspan later 
this afternoon.
    Furthermore, I would like to extend a special welcome to fellow 
Buckeye Donald Mason, currently serving the Public Utilities Commission 
of Ohio (PUCO). In particular, I look forward to hearing your testimony 
regarding the volatility of natural gas prices and their affects on 
Ohio residential customers.
    Over the last several years, a number of my constituents, many of 
which are on a fixed income, have written to convey their concern and 
at times, have enclosed copies of exorbitant natural gas bills.
    Just as important, I represent a number of growers dependent on 
natural gas as the primary component in the production of commercial 
fertilizers. Northwest Ohio farmers have consistently communicated the 
need to stabilize natural gas markets to not only increase farm income, 
but become less dependent on support programs.
    At a time when natural gas consumption is nearly four times greater 
than it was 50 years ago, and production continues to be limited due to 
the unpredictability of natural gas markets, I again applaud the 
Chairman for bringing attention to this important matter today.
    I yield back the remainder of my time.
                                 ______
                                 
 Prepared Statement of Hon. Ed Whitfield, a Representative in Congress 
                       from the State of Kentucky
    Thank you Mr. Chairman. Although this hearing is focused on natural 
gas, I wanted to take the opportunity to remind the Committee about the 
fundamental role of coal-based generation in supplying our nation's 
electricity. Although natural gas will fuel the majority of new 
capacity additions in the near future, new technologies could allow 
coal-based power to add 40,000 MW in the near term. According to the 
National Coal Council, an advisory group for the Secretary of Energy, 
this would minimize economic impacts while new generation facilities 
are sited, constructed, and brought into service without increasing 
emissions at existing facilities and, in some cases, lowering 
emissions. Approximately 25% of existing facilities can be targeted for 
repowering with much cleaner and more efficient coal-based power 
generation. I hope to be able to expand upon this at next week's 
hearing. Thank you.
                                 ______
                                 
 Prepared Statement of Hon. C.L. ``Butch'' Otter, a Representative in 
                    Congress from the State of Idaho
    Thank you, Mr. Chairman, for holding this hearing today. As our 
economy begins to recover, it is more important than ever that the 
United States maintain an abundant and reliable energy supply. While 
the Energy Policy Act passed earlier this year will go a long way 
toward achieving this goal, hearings like the one we're conducting 
today will help us to see what additional effort must be taken, if any.
    Over the past several years, government policies have seemed to 
encourage the use of natural gas for environmental reasons as well as 
for energy efficiency. But those policies have not been updated to 
reflect new exploration and production technologies, most of which 
minimize environmental disruption while maximizing resource recovery. A 
consequence of these out-of-date policies has been to constrain the 
supply of gas despite growing market demand.
    It is my understanding that there are plentiful natural gas 
supplies throughout the United States and Canada. However, many of the 
existing wells that have provided so much natural gas at reasonable 
prices are becoming depleted. Production must migrate to new areas and 
we must have the federal policies in place to allow the development of 
new sources.
    Mr. Chairman, I look forward hearing from our witnesses today, to 
gain a better understanding of the outlook for natural gas in the 
United States.

    Chairman Tauzin. Then the Chair again welcomes our panel 
and will begin to introduce them.
    First, let us welcome Mr. Guy Caruso, the Administrator of 
the Energy Information Agency of our own U.S. Department of 
Energy. Welcome, Mr. Caruso.
    Mr. Richard Sharples, who is the Senior Vice President of 
Anadarko Petroleum Corporation on behalf of the Domestic 
Petroleum Council of the Oil & Gas Association. I think you are 
third, Mr. Sharples. There you are. We want to welcome you.
    Mr. Donald Mason, the Commissioner of the Public Utilities 
Commission of the great State of Ohio, from Columbus, Ohio. And 
Mr. Mason, we want to recognize and welcome you, sir.
    We have Mr. Carl English, President and Chief Executive 
Officer of Consumers Energy on behalf of the American Gas 
Association. Welcome, Mr. English.
    Mr. Robert Liuzzi, President and CEO of CF Industries, 
Inc., on behalf of The Fertilizer Institute. Welcome, Mr. 
Liuzzi. I understand you have a plant in my district as well, 
so, welcome.
    Mr. Forrest Hoglund, Chairman and CEO of the Arctic 
Resources Company in Houston, Texas. So, welcome, Mr. Hoglund.
    Harold Kvisle, President and CEO of TransCanada Pipelines 
Limited of Calgary, Alberta, Canada. We want to welcome our 
neighbor from across the Big Divide.
    And Mr. Jeffrey Currie, who is the Managing Director of 
Goldman, Sachs & Company of New York, New York. And, Mr. 
Currie, we also want to welcome you.
    A distinguished panel indeed.
    Our rules provide that we recognize you each for 5 minutes 
to summarize your written statements which are made a part of 
our record already. And we all have your written statements in 
front of us, so we would ask you not to read those statements, 
but to use the 5 minutes to summarize the key points of your 
statement, at which time we will then open the panel to 
discussion with our members, who will be recognized in order of 
appearance at the close of the opening statements.
    So we will begin with Mr. Guy Caruso of our own Energy 
Information Administration, the Administrator of that important 
agency within the Department of Energy.
    Mr. Caruso, welcome, sir. And we will take your testimony 
at this time.

STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
  ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; DONALD L. MASON, 
  COMMISSIONER, OHIO PUBLIC UTILITIES COMMISSION; RICHARD J. 
      SHARPLES, SENIOR VICE PRESIDENT, ANADARKO PETROLEUM 
CORPORATION, ON BEHALF OF DOMESTIC PETROLEUM COUNCIL, U.S. OIL 
    & GAS INSTITUTE, NATIONAL OCEAN INDUSTRIES ASSOCIATION, 
INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA; CARL L. ENGLISH, 
PRESIDENT AND CEO, CONSUMERS ENERGY, ON BEHALF OF AMERICAN GAS 
     ASSOCIATION; ROBERT C. LIUZZI, PRESIDENT AND CEO, CF 
   INDUSTRIES, INC., ON BEHALF OF THE FERTILIZER INSTITUTE; 
FORREST E. HOGLUND, CHAIRMAN AND CEO, ARCTIC RESOURCES COMPANY; 
  HAROLD N. KVISLE, PRESIDENT AND CEO, TransCANADA PIPELINES 
  LIMITED; AND JEFFREY R. CURRIE, MANAGING DIRECTOR, GOLDMAN, 
                          SACHS & CO.

    Mr. Caruso. Thank you, Mr. Chairman. I appreciate this 
opportunity to present the Energy Information Administration's 
views on the natural gas market which are contained in the 
Short-Term Energy Outlook, which was recently released on June 
6 and in our Annual Energy Outlook, which was released in 
January of this year.
    As you know, the EIA does not take positions on policy 
issues, and indeed, we are charged with providing objective, 
timely, and relevant data, analysis and projections to the 
Department as well as to other Federal agencies, Congress, and 
the public so that officials may draw on our information and 
analysis to study energy policies.
    Our outlooks, both short- and long-term, presented today 
represents our best assessment of what the current conditions 
are, including macroeconomic assumptions and our assumptions 
about things like the weather, which is critical to natural 
gas. And indeed, although our long-term energy Outlook takes 
policy in existence at the time of its publication as given we 
recognize the importance of policy changes that can very much 
affect these numbers, such as the President's national energy 
plan and the legislation you are currently debating in both 
Houses.
    So we recognize that although these numbers seem pointed 
and stark, they are not fixed in concrete, and things can 
change. And I know that is the purpose of this hearing, to see 
what can be done.
    So, with that in mind, we note that the current natural gas 
market is tight, and the potential for significant volatility 
is high. As shown in the first chart, natural gas prices are 
now above $6 per million BTUs. And we expect the price of 
between $5 and $6 per million BTUs for the remainder of this 
year. Last winter's unseasonably cold weather drove natural gas 
prices higher. It depleted storage, which is holding up that 
price today, and we expect that to continue during the spring 
and the summer because there will be tremendous demand to 
refill the storage that we depleted.
    The second chart shows the kind of storage refill that we 
face over the coming months. And we are about 29 percent below 
the 5-year average for working gas in storage as of the end of 
May as released in our latest report. So we have a steep hill 
to climb.
    We are 2 months into the rebuild season, and we are well 
below average storage levels for this time of year.
    Storage is expected to build to between 2.8 and 2.9 
trillion cubic feet by the end of October, based on our latest 
Short-Term Energy Outlook. Under normal weather conditions, 
this should be enough to satisfy winter demand and to allow 
storage to be near normal if we have a typical winter. However, 
because demand to refill working gas in storage will be larger 
than average, EIA projects that natural gas prices will average 
between $5 and $6 per million BTU for the remainder of this 
year, and the potential for volatility is considerable.
    On the supply side, natural gas production appears to have 
fallen in 2002, although data remains preliminary. Part of this 
loss is attributable to the hurricanes that occurred in the 
Gulf of Mexico in September and October.
    This year, with the higher price of gas and the increased 
drilling rates, we do expect an increase in domestic 
production, but this is by no means certain because of the need 
to drill many more wells to produce enough gas to meet this 
resurgence in demand that has already been mentioned in opening 
statements. However, this extra effort might result in enough 
production to allow an increase of about 2 percent if our 
assumptions on productivity are accurate.
    The point made about the depletion of the existing gas 
wells, by the chairman in his opening remarks, is shown, I 
think clearly, in the third chart. More than 50 percent of the 
gas that we expect to be produced in the United States this 
year is likely to come from wells drilled less than 3 years 
ago. This chart shows how high the current depletion rate is 
and points to the kind of drilling effort we need to meet 
demand. Imports are also expected to increase, but it will be 
not enough to meet the kind of refill we need.
    Chairman Tauzin. Mr. Caruso, your time has expired, sir. 
Can you wrap for us?
    Mr. Caruso. Sure.
    Let me just finish by saying that we do expect prices to 
increase, as I mentioned, staying at the $5 to $6 per million 
BTUs range. However, over the longer term, the increase in 
drilling will, we do believe, bring forth enough natural gas to 
moderate that price, so that although the short term is 
volatile, we do have hope in our long term that the increased 
production will bring that price back down into the $3 to $4 
range.
    [The prepared statement of Guy F. Caruso follows:]
Prepared Statement of Guy F. Caruso, Administrator, Energy Information 
                  Administration, Department of Energy
    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss EIA's outlook for the 
U.S. natural gas market. The source of our short term projections is 
the June 2003 release of EIA's monthly Short-Term Energy Outlook; the 
long term projections are drawn from the National Energy Modeling 
System (NEMS).
    The EIA is the statutorily chartered statistical and analytical 
agency within the Department of Energy. We are charged with providing 
objective, timely, and relevant data, analysis, and projections for the 
use of the Department of Energy, other Government agencies, the U.S. 
Congress, and the public. We do not take positions on policy issues. We 
produce data and analysis reports that are meant to help policy makers 
determine energy policy. Because we have an element of statutory 
independence with respect to the analyses that we publish, our views 
are strictly those of EIA. They should not be construed as representing 
those of the Department of Energy or the Administration.
                                summary
Short-Term Natural Gas Market (Through 2004)
    Currently, the natural gas market in the United States is tight, 
with gas storage levels lagging well behind normal levels. Spot natural 
gas prices reflect this deficit and the expectation that demand, while 
not necessarily expected to exceed levels seen in 2002 on an annual 
basis, remains at a high level relative to domestic natural gas supply 
capability. The high market prices and strong drilling efforts are 
expected to ultimately allow gas storage volumes to move closer to 
normal by the beginning of the next heating season. This expectation, 
however, is predicated on prices continuing at high levels ($5.50-$6.00 
per million Btu) through the next winter.
Longer-Term Natural Gas Market (Through 2025)
    By 2025 total natural gas consumption is expected to increase to 
almost 35 trillion cubic feet (Tcf) or 26 percent of U.S. delivered 
energy consumption. Such a demand level represents an increase of about 
52 percent from the expected 2003 level. Domestic gas production is 
expected to increase more slowly than consumption over the forecast, 
rising from 19.5 Tcf in 2001 to 26.4 Tcf in 2025. Growing production 
reflects increasing natural gas demand and is supported by rising 
wellhead gas prices, relatively abundant gas resources, and 
improvements in technologies, particularly for unconventional gas.
Short-Term Gas Market Analysis
Overview of U.S. Natural Gas Markets
    The natural gas market is tight. The natural gas spot price at the 
Henry Hub (the market location used for pricing the New York Mercantile 
Exchange gas futures contracts) is high in historical terms for this 
time of the year. Spot natural gas prices have fluctuated around $6 per 
million btu (mmbtu) over the last several weeks, and levels of natural 
gas in underground storage remain low two months into the injection 
season. At the end of May, working gas in storage stood about 38 
percent below end-of-May 2002 levels and 28 percent below the previous 
5-year average. Spot natural gas prices will likely average $5-$6 per 
mmbtu through the rest of this year. The exceptionally low level of 
natural gas storage continues to place unusually strong upward pressure 
on near-term natural gas prices. In the current environment companies 
will need to obtain large amounts of natural gas from other sources to 
refill storage for the next heating season. Moreover, if abnormally 
warm weather prevails this summer the current market may become highly 
sensitive to demand, particularly in the Western and South Central 
United States, where natural gas is heavily used for power generation. 
Such conditions could cause a mid-year run-up in prices well above 
current levels (about $6 per mmbtu). However such price run-ups are 
usually short lived.
    The projections outlined above are made at the national level, but 
it is important to emphasize that regional prices can diverge. Regional 
prices can also be highly volatile. For example, the average April spot 
price for natural gas traded at New York City was $5.94, down 
considerably from the $8.81 seen in March, a result of the usual change 
in seasonal demand levels but also of the high margins between the New 
York city gate and the Henry Hub that sometimes arise during peak 
demand periods.
Natural Gas Supply and Demand
    With high natural gas prices, natural gas demand is expected to 
remain flat in 2003. Flat demand this year is likely despite sharply 
higher weather-related demand during the first quarter of 2003. Natural 
gas demand in 2004 is expected to remain flat as high prices discourage 
use enough to offset increases that might otherwise have accompanied 
industrial growth. Gas-intensive industrial growth (i.e., a composite 
index of industrial output, weighted by industry use of natural gas) is 
likely to be well below 1 percent this year, if indeed it is positive.
    Demand for natural gas this summer is expected to fall by about 1 
percent from last summer's level. This is in part due to weaker 
industrial demand. Under our assumption of normal weather, cooling 
degree-days for the season (Q2 2003 and Q3 2003) would be close to 10 
percent below year-ago levels, reducing gas usage for power generation. 
In the event of a hotter-than-normal summer this year, natural gas 
prices could move higher as cooling-related demand would compete with 
the need to build storage inventories. The National Climate Prediction 
Center currently indicates that above-average temperatures in the U.S. 
Southwest and parts of Texas are likely in June and possibly in the 
third quarter as well. Such a development could increase gas demand for 
power generation and increase pressure on spot prices.
    Working natural gas in storage is estimated to have reached about 
1,212 billion cubic feet (bcf) at the end of May, 38 percent below the 
year-ago level. This is the second lowest aggregate inventory level for 
the end of May recorded by EIA. Eastern and producing regions stocks, 
in particular, are at very low levels. Demand for natural gas to refill 
working gas storage in 2003 will be higher than average, which means 
that prices are likely to remain volatile. Storage is expected to build 
to about 2,900 billion cubic feet by the end of October. Under normal 
weather conditions, this should be enough to allow storage to be about 
1 trillion cubic feet at the end of next winter, near to normal for 
that stage of the storage cycle.
    Natural gas production declined in 2002. Part of the loss was due 
to the effects of hurricane activity in the Gulf of Mexico in September 
and October. The last significant disruption in gas supply prior to the 
fall of 2002 was September of 1998. (While hurricanes regularly 
threaten platforms in the Gulf of Mexico, actual production impacts 
that are considered significant are not really very frequent and, when 
they do occur they tend to be short-lived.) Production is expected to 
increase by 2.2 percent this year. High natural gas prices and sharply 
higher oil and natural gas field revenues are expected to drive a 
resurgence in natural gas-directed drilling activity this year 
following a downturn in 2002. Monthly oil and natural gas field 
revenues are expected to continue to average close to $400 million this 
year. Domestic production growth should continue in 2004 but, given 
recent experience, the extra effort might result in increases of less 
than 2 percent from 2003 levels. The prospects for significant 
reductions in natural gas wellhead prices over the forecast period from 
the current high levels hinges in large measure on the productivity of 
the expected upsurge in drilling in terms of expected output.
Net Imports
    Prospects for sharp increases in net imports in 2003 are limited 
but we do expect to see an overall increase in 2003 of about 2 percent. 
Substantial increases in LNG imports are possible and we believe that 
they have made a noticeable contribution already this year. Canadian 
exports to the United States were up 3-4 percent from year ago in early 
2003. Any growth in gross imports is likely to be offset partially by 
increased exports to Mexico, which have been rising sharply in recent 
years.
Prospects for Price Volatility
    In light of the current low storage levels, chances of continued 
price volatility are great. Let me raise some factors that could 
contribute to volatility and analyze their likely impacts, as 
summarized in the Table below. To examine these effects, we ran the 
model under alternative assumptions.

                           Volatility Factors
------------------------------------------------------------------------
             Factor                   Assumption         Price Impact
------------------------------------------------------------------------
Weather.........................  10% Hotter Summer/  50%-60% higher
                                   Colder Winter       peak price this
                                   Relative to         winter
                                   Normal.
Lower than expected domestic      Productive          10%-20% higher
 supply.                           capacity            peak price this
                                   continues to        winter
                                   weaken, no
                                   production growth
                                   in 2003.
------------------------------------------------------------------------

    The table shows that a significant tightening of the U.S. natural 
gas market and much higher prices than expected in our base case are 
possible under some plausible scenarios. One development that could 
generate more difficult market conditions than are already in prospect 
is the weather. An abnormally hot summer followed by a cold winter 
could push natural gas deliverability to the limit and cause record 
average prices this winter. The severe weather case considered here is 
an extreme case but one that merits attention given the lack of storage 
cushion. It is also apparent that less robust assumptions about natural 
gas productive capacity and near-term production could shift average 
prices well above our base case. It appears that for every 1 percent 
that production falls below our base case assumptions, we can expect 5-
10 percent higher peak prices this winter. These estimated average 
impacts mask the potential for much more dramatic spikes in prices for 
short periods (a few days to a few weeks). Such spikes are 
characteristic of net demand surges in the context of low natural gas 
storage. Thus, current and prospective conditions in the U.S. gas 
market significantly increase the probability of very sharp short-term 
spikes on top of generally high levels of natural gas prices.
    There are no detailed estimates concerning the extent to which 
industrial output weakness seen since 2000 is attributable to the 
recent episodes of natural gas price strength. It is obvious, however, 
that many industries dependent upon natural gas for basic processes and 
operations have been hurt by high natural gas prices. Part of the 
short-term market response to the current imbalance in supplies may be 
to let high prices back out industrial activity to insure that higher-
valued demands, such as heating, are met. While the price volatility 
described in this section is clearly possible, it is not a foregone 
conclusion. Normal weather, improved productivity from newer natural 
gas wells and other factors could serve to moderate price increases. It 
is also important to note that recent history illustrates that price 
volatility is usually short-lived.
Longer-Term Natural Gas Market Analysis
    The longer-term natural gas projections provided in this testimony 
were produced using the National Energy Modeling System (NEMS), a 
computer-based, energy-economy modeling system of U.S. energy markets 
through 2025. NEMS projects annual production, imports, consumption, 
and prices of energy, subject to assumptions on macroeconomic and 
financial factors, world energy markets, resource availability and 
costs, behavioral and technological choice criteria, cost and 
performance characteristics of energy technologies, and demographics. 
Two of the key inputs to NEMS are re world oil prices and macroeconomic 
growth.
    World oil prices averaged about $23.43 per barrel in 2002 in 2001 
dollars. Between now and 2025 they are expected to rise to about $26.60 
a barrel in 2001 dollars, as world oil demand increases from 78 million 
barrels per day to 119 million barrels per day.1 Real gross 
domestic product (GDP) is projected to grow at an annual average rate 
of 3.0 percent between 2001 and 2025.
---------------------------------------------------------------------------
    \1\  Energy Information Adeministration, International Energy 
Outlook 2003, Table A4, page 185.
---------------------------------------------------------------------------
    The natural gas projections discussed in this testimony are based 
on the most current NEMS configuration, which EIA recently used in 
analyzing a 10 percent renewable portfolio standard, as requested by 
Senator Bingaman.
Natural Gas Outlook to 2025
    y 2025 total natural gas consumption is expected to increase to 
almost 35 trillion cubic feet (Tcf) or 26 percent of U.S. delivered 
energy consumption.
    Domestic gas production is expected to increase more slowly than 
consumption over the forecast, rising from 19.5 Tcf in 2001 to 26.4 Tcf 
in 2025. Growing production reflects increasing natural gas demand and 
is supported by rising wellhead gas prices, relatively abundant gas 
resources, and improvements in technologies, particularly for 
unconventional gas. In this forecast, economic conditions allow an 
Alaskan pipeline to begin moving gas to the lower 48 States in 2020. 
The national average wellhead price is projected to reach $3.95 per Mcf 
in 2001 dollars by 2025.
    The difference between consumption and production is made up by 
increasing use of imports throughout the forecast, particularly from 
liquefied natural gas (LNG), with a 2.1 Tcf increase expected over 2001 
levels. By 2025 we expect expansion at the four existing terminals and 
construction of three new LNG terminals.
    Consumption. U.S. natural gas consumption is expected to increase 
by 1.8 percent annually from 2001 through 2025. Gas consumption by 
electric generators is expected to double over the forecast, from 5.3 
Tcf in 2001 to 10.4 Tcf in 2025, an average annual growth rate of 2.8 
percent. Demand by electricity generators is expected to account for 30 
percent of total natural gas consumption in 2025.
    Most new electricity generation capacity is expected to be fueled 
by natural gas, so natural gas consumption in the electricity 
generation sector is projected to grow rapidly throughout the forecast 
as electricity consumption increases. Although average coal prices to 
electricity generators are projected to fall throughout the forecast, 
gas-fired generators are expected to have advantages over coal-fired 
generators, including lower capital costs, higher fuel efficiencies, 
shorter construction lead times, and lower emissions.
    Historically the industrial sector, excluding lease and plant fuel, 
is the largest gas-consuming sector, with significant amounts of gas 
used in the bulk chemical and refining sectors. Industrial consumption 
is expected to increase by 3.4 Tcf over the forecast, driven primarily 
by macroeconomic growth. The chemical and metal durables sectors show 
the largest growth.
    Combined consumption in the residential and commercial sectors is 
projected to increase by 2.5 Tcf from 2001 to 2025, driven by 
increasing population, healthy economic growth, and gradually rising 
prices in real terms. Natural gas remains the overwhelming choice for 
home heating throughout the forecast period, with the number of natural 
gas furnaces rising nearly 18 million.
    Production. The forecast estimate of total technically recoverable 
natural gas resources as of January 1, 2002, is 1,289 Tcf. These 
resource assessments come primarily from the assessments done by the 
U.S. Geological Survey for onshore regions and by the Mineral 
Management Service for the offshore.
    These resources included 183 Tcf of proved reserves (9 years of 
consumption at 20 Tcf per year), 222 Tcf of inferred reserves, and 269 
Tcf of undiscovered nonassociated conventional resources. The largest 
category was unconventional resources at 445 Tcf, with most of that in 
tight sandstones at 71 percent. Other unconventional natural gas 
resources include gas shales and coalbed methane. Alaska gas (32 Tcf) 
and associated-dissolved natural gas in lower 48 crude oil reservoirs 
(137 Tcf) round out the resource.
    Increased U.S. natural gas production through 2025 comes primarily 
from unconventional sources and from Alaska. Unconventional gas 
production increases by 4.2 Tcf over the forecast period--more than any 
other source, largely because of expanded tight sands gas production in 
the Rocky Mountain region. Annual production from unconventional 
sources is expected to account for 36 percent of production in 2025, 
more than any other source, compared to 28 percent today.
    Conventional onshore non-associated production increases by 500 Bcf 
over the forecast, driven by technological improvements and rising 
natural gas prices. However, its share of total production declines 
from 34 percent in 2001 to 27 percent by 2025. Non-associated offshore 
production adds 710 Bcf, with increased drilling activity in deep 
waters; however, its share of total U.S. production declines from 22 
percent in 2001 to 19 percent by 2025.
    Depletion. A key question facing producers and policymakers today 
is whether natural gas resources in the mature onshore lower 48 States 
have been exploited to a point at which more rapid depletion rates 
eliminate the possibility of increasing--or even maintaining--current 
production levels at reasonable cost.
    Depletion is a natural phenomenon that accompanies the development 
of all nonrenewable resources. Physically, depletion is the progressive 
reduction of the overall volume of a resource over time as the resource 
is produced. In the petroleum industry, depletion may also more 
narrowly refer to the decline of production associated with a 
particular well, reservoir, or field. As existing wells, reservoirs, 
and fields are depleted, new resources must be developed to replace 
depleted reservoirs.
    Depletion has been counterbalanced historically by improvements in 
technology that have allowed gas resources to be discovered more 
efficiently, have extended the economic life of existing fields, and 
have allowed natural gas to be produced less expensively, making 
available resources that previously were too costly to develop. In 
these natural gas projections, technological progress for both 
conventional and unconventional recovery is expected to continue to 
enhance exploration, reduce costs, and improve production technology.
    The depletion of conventional and unconventional natural gas 
resources is expected to continue over the projection period as the 
demand for natural gas increases significantly, continuing the trend 
that began in the mid-1990s. Nevertheless, with sustained wellhead 
prices generally over $3 per thousand cubic feet (in 2001 dollars) and 
continued technological improvements, lower 48 nonassociated gas 
production is expected to increase above current levels.
    Imports. Net imports of natural gas, primarily from Canada, are 
projected to increase from 3.7 trillion cubic feet in 2001 to 7.9 
trillion cubic feet in 2025. Imports contributed 16 percent to total 
natural gas supply in 2001, compared to an expected 23 percent in 2025.
    Just over half of the increase in U.S. imports is expected to come 
from LNG. Much of the increase comes from expansion at existing sites, 
but three additional facilities are also projected. By 2025, LNG 
imports are expected to equal 7 percent of total U.S. gas supply.
    Growth in pipeline imports from Canada partly depends on the 
completion of the MacKenzie Delta pipeline. The initial full flow rate 
into Alberta is assumed to be 1.5 Bcf per day. Additional Canadian 
imports will come from the Scotian Shelf in the offshore Atlantic. The 
forecast of Canadian imports largely depends on the ability of Canadian 
producers to economically produce and market their untapped 
unconventional resources, particularly coalbed methane. Net imports 
from Canada are projected to provide 15 percent of total U.S. supply in 
2025 in the reference case, about the same as in 2001.
    Wellhead Prices. In the mid-term, gas prices are projected to move 
higher as technology improvements and new supply sources prove unable 
to completely offset the effects of resource depletion and increased 
demand.
    Natural gas prices through 2025 are projected to increase in an 
uneven fashion as major new, large-volume supply projects temporarily 
depress prices when initially brought online. Examples include deep and 
ultra-deep offshore projects in the Gulf of Mexico, unconventional gas 
(tight sands, coalbed methane, shale), liquefied natural gas facilities 
(both the expansion of existing and development of new facilities), the 
MacKenzie Delta pipeline in Canada, and an Alaskan natural gas pipeline 
that delivers gas supplies to the lower 48 States.
    In the reference case, average wellhead natural gas prices are 
expected to be $3.95 per thousand cubic feet (2001 dollars) in 2025. 
The increase reflects rising demand for natural gas and the impact of 
the progression of discoveries from larger and more profitable fields 
to smaller, less economical ones. In current dollars, natural gas 
prices reach $7.15 in 2025.
    End-Use Prices. End-use natural gas prices are expected to increase 
gradually starting in about 2005 as a result of increasing wellhead 
prices. A portion of the increase in wellhead prices is expected to be 
offset by a projected decline in average transmission and distribution 
margins as a larger proportion of the natural gas delivery 
infrastructure becomes fully depreciated. The average end-use price is 
expected to increase by 40 cents per thousand cubic feet between 2005 
and 2025 (in constant 2001 dollars), compared with an increase of 72 
cents per thousand cubic feet in the average price of domestic and 
imported natural gas supplies over the same period. Part of this 
difference is attributable to an increasing share of natural gas sold 
to electric generators, the sector with the lowest prices.

    Chairman Tauzin. Thank you, Mr. Caruso.
    The Chair is now pleased to recognize Mr. Mason, the 
Commissioner of Public Utilities Commission of the great State 
of Ohio. Mr. Mason.

                  STATEMENT OF DONALD L. MASON

    Mr. Mason. Thank you, Mr. Chairman, members of the 
committee. I would like to talk more from the residential 
consumer's side of the equation. And I appreciate all the 
information provided by the DOE, EIA. And I want to comment 
that the remarks by Congressmen were all to the point, very 
succinct and very factual.
    Now, as I had information from the residential consumer 
standpoint in Ohio, the average homeowner in the southern part 
of the State uses maybe 100 MCF of natural gas and in the 
northern portion of the State maybe 110 MCF of gas every year.
    Now, what is interesting is, due to high prices 2 years 
ago, consumers have already dramatically cut back their home 
heating in terms of setting back the temperatures, modernizing 
appliances, equipment, things of that nature, so that an issue 
becomes, how much more can residential consumers do to curb 
demand for natural gas?
    Based on my discussions with Ohio utilities, I would say, 
on a minimum, today's gas being stored is between $2.50 and $3 
more an MCF than it was last year. In real terms, this means 
the average residential homeowner this winter is going to pay 
about $220 more than the previous winter.
    Now, what does $220 mean? I guess, if you think about it, 
it means that some people will be able to pay the bill, but it 
also means that some people will not. In the past, we have seen 
an increase of uncollectibles from one company doing business 
in Ohio--by uncollectibles, I mean people who couldn't pay 
their bills--jump from $10 million a year to about $26 million 
a year. Basically, that also means disconnection from services 
increased by about 50 percent for those residential customers.
    And what does it mean when a home is disconnected from a 
gas source? Well, even in the summertime, it might mean a lack 
of hot water. Additionally, as we all know, if it is still in 
the colder times of the year--and, quite frankly, in Ohio it is 
quite common to run your chimneys or furnaces even through 
early June--it means a loss of heat. It also means to some 
degree destruction of consumer credit and family stability. 
These are things that we worry about.
    Now, going back to what we were discussing earlier, yes, 
gas is being filled at about $3 an MCF higher than it was ago. 
But our grave concern is for the coming winter heating season 
with the volatility of the spot market. As indicated earlier, 
last year we had about 3.2 TCF of natural gas stored by the 
time we began the winter heating season, but unfortunately we 
drew that down very low. And so, as a regulator who works to 
maintain the fact that local gas companies are storing gas, I 
guess my big concern is the fact that our storage levels are 
still 40 to 50 percent lower than what we would like to see 
them at.
    I guess my message for residential consumers--and then 
perhaps each of you could take it back to your respective 
districts--is, we need to increase and pay attention to the 
demand side by encouraging local gas companies and regulatory 
authorities to promote budget billing and payments for 
residential customers to even out the load of the residential 
bill, so it doesn't hit them all at once. Also, we would like 
to encourage utilities to use financial and physical hedges to 
reduce the volatility of prices to those residential customers, 
especially gas bought in spot markets. Obviously, increasing 
public awareness of the benefits of home weatherization, and 
asking residential customers to once again encourage examining 
their own appliances and the settings of their temperatures.
    But finally, obviously if there is attention to the demand 
side, there must also be attention to the supply side. It has 
been discussed earlier, when appropriate--looking at opening up 
public lands and offshore to drilling activity when 
appropriate; but also, as mentioned earlier, encouraging 
technologies that promote a multitude of energy options for 
electricity generation so that residential heating customers 
are not competing against electricity utilities for gas 
consumption.
    Finally, something we can all do is work on streamlining 
gas pipeline permitting and construction in the Midwest and 
Northeast so that those markets have more gas options available 
to them; and finally, improving the tax and fiscal policies of 
our country to encourage investment of capital in energy 
exploration and pipeline transportation.
    Once again, I thank you for the opportunity to represent 
residential customers.
    [The prepared statement of Donald L. Mason follows:]
 Prepared Statement of Donald L. Mason, Commissioner, Public Utilities 
                           Commission of Ohio
    Mr. Chairman, members of the committee, my name is Don Mason and I 
am a Commissioner of the Public Utilities Commission of Ohio. I would 
like to thank you for the opportunity to discuss the impact of 
potential natural gas supply shortages on consumers. In Ohio, the 
average residential natural gas consumption ranges from 100 mcf 
annually in the southern part of the state to about 110 mcf in northern 
Ohio. It is important to note that this is 5% lower than historic 
demand. Residential consumers have already responded to high natural 
gas prices by decreasing consumption over the last several years. 
Residential consumers have modernized appliances and set back their 
thermostats. Therefore, my message to homeowners and renters is the 
conservation of energy can only have a marginal impact on their natural 
gas bills.
    Based on discussions with Ohio companies, I am anticipating that we 
will see a minimum of $2.50-$3.00 per mcf increase to residential 
natural gas customers, this winter heating season. In real terms, the 
home heating cost this winter will increase by at least $220 per 
household. That might not sound significant, but during the winter 
season of 2000-2001, one gas company in Ohio saw residential nonpayment 
jump from $10 million a year to $26 million. As a result, 2002 saw an 
increase of 50% of residential customers who were disconnected from gas 
service. It is hard to measure the suffering that takes place to a 
family that has high heating bills; only to have their hot water and 
heating disconnected, which could even occur during the summer months. 
Additionally, those families that do manage to make payments, 
substitute those payments for other important items, or delay paying 
other bills. Either outcome affects consumer credit and family 
stability.
    The natural gas which is being stored this spring and summer will 
provide the base load, or about 50% of Ohio's residential consumers' 
winter needs. I have concerns for the upcoming winter heating season. 
Natural gas going into storage is about $3.00 higher per mcf than last 
year. However, comparatively speaking, that is the good news. There is 
no good way of predicting what the cost associated with the spot market 
will be if the winter is a long, cold one without relief. This past 
year, the nation was fortunate to have about 3.2 tcf of gas in storage, 
compared to current storage level of 1.2 tcf. Typically, at this time 
we should have at least 1.7 tcf of gas in storage, and as you can see 
we are considerably behind. If the summer is hot, and natural gas-fired 
electricity generation creates a competitive demand for gas, then the 
price of stored gas will be even higher than originally anticipated. It 
is possible that we can see spot market gas at $10.00 to $12.00 per 
mcf.
    Government officials can have the greatest impact on this impending 
problem by first increasing public awareness that their gas prices are 
going to be higher this coming heating season. We can do this on our 
own as well as with the help of the local distribution companies, in 
the form of bill inserts for example. The best form of demand 
management or conservation is price signal.
    Unfortunately, gas is used BEFORE the consumer sees a bill. People 
need to know the price is going up BEFORE they use the gas, this will 
help them prepare for the ``sticker shock,'' thereby lessening the 
``shock.'' It will also help them make their own choices about how best 
to manage their energy needs.
    After examining the natural gas supply and demand curves, and 
recognizing that the prediction for high gas prices is a likely 
scenario, I would like to leave you with the following recommendations.
    Federal and state government leaders need to encourage energy 
conservation and increase the supply of natural gas.
    We need to increase attention to the demand side by:

 Encouraging local natural gas companies and regulatory 
        authorities to promote budget billing and payments for 
        residential consumers;
 Utilize regulatory authorities to encourage local gas 
        companies to utilize financial and physical hedges to reduce 
        the impacts of high gas prices, especially spot market gas 
        purchases;
 Increasing public awareness on the effectiveness of home 
        weatherization; and,
 Encouraging residential consumers to examine the temperature 
        settings and the age of their existing appliances.
    We need to increase attention to the supply side by:

 Where appropriate, opening public lands and off shore 
        locations to exploration activity;
 Encouraging technologies that promote a multitude of energy 
        options for electricity generation so that residential heating 
        consumption and gas storage do not compete against electricity 
        generation;
 Streamlining gas pipeline siting and construction so that the 
        Midwest and Northeast markets have more options available to 
        transport natural gas and product; and,
 Improving the tax and fiscal policies of our country to 
        encourage the investment of capital in energy exploration and 
        pipeline transportation.
    I would like to thank the Chairman and the Members of the Committee 
for allowing me to present my views today. I would be happy to address 
any questions you may have at the appropriate time.

    Chairman Tauzin. Thank you, Mr. Mason.
    We have heard of the hope of our agency and the problems 
consumers are facing. Now we will hear from the industry. Mr. 
Sharples is representing the U.S. Oil & Gas Association, 
Domestic Petroleum Council.
    Welcome, Mr. Sharples.

                STATEMENT OF RICHARD J. SHARPLES

    Mr. Sharples. Thank you, Mr. Chairman and members of the 
committee.
    Anadarko is the seventh largest producer of natural gas in 
the U.S., and last week we had more rigs drilling for gas than 
any other company. I appreciate the opportunity to talk with 
you about the current state of the natural gas market, because 
gas is such a big part of Anadarko's future and of the members 
of each of the associations I am also testifying on behalf of 
today.
    I think we all agree that we face a serious challenge with 
the growing gap between supply and potential demand for natural 
gas. I, too, am anxious to hear Chairman Greenspan's comments 
this afternoon, because I believe he was right on target last 
month when he called our policy toward gas exploration, 
``contradictory.''
    I would like to make three points today.
    First, the situation did not develop overnight, and we 
can't solve it overnight. Second, if we maintain the status 
quo, we will continue to see high volatility and upward price 
pressure. And, third, I believe there are ways to address the 
challenge, but only if we have the political will to do so.
    There are vast energy resources beneath Federal lands, but 
congressional action and administration practices have locked 
up that energy. Congress needs to find a way to unlock it.
    While the U.S. rig count is up this year, don't expect gas 
production to increase significantly, because traditional 
producing areas are playing out. New supplies are barely 
offsetting the effect of natural declines.
    We do have one slide, if we could put it up. This slide 
shows trends in the shallow water Gulf of Mexico, and 
illustrates how difficult it is to increase production from the 
mature producing areas. Industry has drilled here since 1938. 
The first 1,000 discoveries made on the shelf added about 40 
billion barrels of oil equivalent, most of which was natural 
gas. But the next 1,000 discoveries are expected to generate 
just 6 billion because the basin is mature. We have drilled it 
and drilled it and drilled it.
    Even with increased drilling, production is falling, new 
wells are coming on at lower rates, and their decline rates are 
steeper. Most of the gas we will find onshore in the future 
will be unconventional, gas that is higher-cost and lower-
margin. Offshore we will be drilling deeper wells in deeper 
water. Unless we are allowed to explore in less mature basins, 
price volatility and upper price pressure are a certainty.
    The economic effect on Americans will be twofold. First is 
on the pocketbook, whether it is residents paying more to heat 
or cool their homes, or businesses paying more to fuel their 
factories. It could also cost a lot of Americans their jobs. If 
we can't find cheaper gas sources, manufacturers that are heavy 
users of gas will continue to move plants to countries where it 
is cheaper.
    Make no mistake, the U.S. isn't running out of natural gas, 
but we are running out of places where we are allowed to 
explore for gas that can be developed cost effectively. The 
traditional producing States of Texas, Alabama, Louisiana, 
Mississippi, Oklahoma, and Kansas have all lost gas production 
since 1995. What growth we have seen has been primarily in the 
Western States.
    To increase supply, we have to attack the problem on 
several fronts. First, Congress needs to come up with a 
solution that will lift the moratorium on certain Federal 
acreage where the resource is the greatest. Except for House 
language that would open a small portion of the coastal plain 
of ANWR for exploration, there is nothing in either House or 
Senate bill that would remove the moratorium. We are not asking 
that Congress open up every acre of Federal land, but there are 
areas where we can explore today and develop without harming 
the environment. We have proved that is possible by using 
advanced technology that is getting better every day.
    Second, Federal land management agencies need to detangle 
the bureaucracy and eliminate unnecessary leasing and 
permitting delays that are discouraging exploration. In high-
cost areas, delay is denial, whether it is due to regulatory 
inefficiency or to lawsuits that can stall projects for months 
or even years. This is an area that was not addressed in EPCA 
study that was referenced in the opening remarks.
    We need more staff at the BLM to review backlogged 
applications and a consistent playbook to tell us up front what 
we must do to get our projects permitted. The administration 
also needs to remove regulatory barriers to pipeline permitting 
so we can unlock stranded gas from the West and, 1 day, bring 
arctic gas to the Lower 48. And, in the future, we will have to 
rely on LNG to help close the supply gap.
    So the third thing we need to do is to be able to permit 
and build regasification terminals quickly.
    A number of exploration incentives were passed in the House 
bill and are being considered by the Senate. Some of them would 
enhance existing royalty reductions for deep-water and deep-gas 
projects offshore, accelerate amortization of geological and 
geophysical costs in delay rentals, provide 7-year depreciation 
for gathering lines, and renew Section 29 credits for 
unconventional gas.
    Since most of the remaining resource is unconventional or 
in deep water, these incentives are important to developing 
more U.S. gas, and we support them.
    Ladies and gentlemen, we do face a serious challenge. 
Industry is working hard to produce new supplies, but vast 
resources that could make a difference are controlled by the 
Federal Government, and only the government can unlock them. We 
must begin making changes today in land-use policy and in how 
we balance environmental concerns with economic considerations 
if we want natural gas to be available to Americans at prices 
they can afford.
    Thank you for the opportunity to address you today, and our 
industry looks forward to working with you to provide Americans 
with affordable, reliable energy supplies.
    [The prepared statement of Richard J. Sharples follows:]
   Prepared Statement of Richard J. Sharples, Senior Vice President, 
Marketing & Minerals, Anadarko Petroleum Corporation, Also Representing 
 The American Petroleum Institute, The Domestic Petroleum Council, The 
   Independent Petroleum Association of America, The National Ocean 
Industries Association, The Natural Gas Supply Association, and The US 
                        Oil and Gas Association
    Thank you, Mr. Chairman, and members of the committee. I'm Dick 
Sharples, senior vice president of marketing and minerals for Houston-
based Anadarko Petroleum.
    Anadarko is the seventh-largest producer of natural gas in the 
U.S., and last week we had more rigs drilling for gas in the U.S. than 
any other company. So, I appreciate the opportunity to talk with you 
about the current state of the natural gas market today, because gas is 
such a big part of Anadarko's future--and of the members of each of the 
associations I am also testifying on behalf of today.
    I think we all agree that we face a real challenge with the growing 
gap between natural gas supply and demand. I'm anxious to hear Chairman 
Greenspan's comments this afternoon, because he was right on target 
last month when he called our policy toward gas exploration, quote 
``contradictory.''
    Three points I'd like to make today:
    First--the gas supply/demand gap didn't develop overnight, and we 
can't solve it overnight. This is a long-term, structural issue that 
requires major changes in our current energy policy.
    Second--if we maintain the status quo, we will continue to have 
high levels of volatility and upward pressure on price.
    And third--there are ways to solve this problem--but only if we 
have the political will to do so. There are vast energy resources 
beneath federal lands, but congressional actions and administrative 
practices have effectively locked up this energy. Congress needs to 
find a way to unlock it.
    While it's true that the U.S. rig count is up about 25 percent over 
a year ago, don't expect gas production to increase. The reason is 
simple: traditional producing areas are playing out. New supplies we 
bring on will barely offset natural declines.
    Three slides I'd like to show you illustrate my point. I've used 
the Gulf of Mexico as an example, because it provides about one-quarter 
of U.S. gas production, and the trends are pretty startling.
    (Slide 1: Exploration Challenge: Basin Maturity)
    This curve shows how difficult it is to increase reserves today: 
The first 1,000 discoveries on the Shelf in the Gulf of Mexico added 40 
billion barrels of oil equivalent of reserves, but the next thousand 
will generate a maximum of 6 billion, because the basin is mature.
    (Slide 2: Exploration Challenge: Basin Maturity)
    Here, you can see that while we've been drilling more wells every 
year--with the exception of last year when prices were in a slump--
average daily production has been falling.
    (Slide 3: Exploration Challenge: Well Productivity)
    This graph shows that over the last few years, new wells are coming 
online at lower production rates, and their decline is much steeper.
    Western Canada--which provides 18 percent of U.S. gas demand--is 
also declining. Canadian gas imports declined almost 3 percent in 2002, 
and they're expected to drop another 5 percent this year.
    Going forward, most of the gas that we'll find in this country 
onshore will be ``unconventional''--tight sands gas, shale, and coal 
bed methane--gas that is higher cost and lower margin. Offshore, we'll 
be drilling deeper wells in deeper water.
    Today, we are literally squeezing the last molecules of energy out 
of the basins where we have access. But as someone's wise old grandma 
used to say, ``we can't get blood out of a turnip.'' That's what we 
face today in the domestic industry.
    Unless we are allowed to explore in less mature basins, using 
technology that has allowed us to find and produce oil and gas more 
cost effectively and with less and less impact on the environment, 
price volatility and upward price pressure are a certainty, as the 
market struggles to balance.
    Another important point: The market is working, despite the 
tightening between supply and demand. More rigs are running . . . gas 
is getting to customers who need and value it the most . . . and gas is 
going into storage.
    But in the future, the market will have to balance at higher prices 
than we've seen in the past unless we can tap lower-cost resources.
    As in any industry, capital chases the highest returns. It makes no 
sense for producers to invest in low-margin projects in worn-out U.S. 
basins when higher-potential opportunities lay across the ocean.
    The economic effect of these higher prices will be two-fold:
    The first is on the pocketbook, whether it's residents paying more 
to heat or cool their homes, or businesses paying more to fuel their 
factories.
    The average American paid 20 percent higher prices for natural gas 
during the first quarter of this year, compared with the same period in 
2002. (Source: Consumer Price Index Data)
    It could also cost a lot of Americans their jobs. If we can't find 
more cost competitive sources, manufacturers that use large amounts of 
gas for fuel or feedstocks will move plants to countries where it is 
cheaper.
    Take ammonia, for example, which is a major feedstock for 
fertilizer. A U.S.G.S. study shows that from 1999 to 2002 alone, 
ammonia production decreased 26 percent, employment by this industry 
decreased 23 percent, and U.S. reliance on imports increased from 20 
percent to 34 percent. (Source: U.S.G.S. Geological Survey's Mineral 
Commodity Summaries)
    These job losses could become permanent. In fact, industrial 
production capacity is already beginning to relocate overseas. For 
example, 41 percent of the ammonia production capacity in Trinidad has 
been built just since 1996, representing about $700 million of 
investment. Last year 56 percent of U.S. ammonia imports were sourced 
from Trinidad while 43 percent of U.S. capacity lay idle.
    So our inability to grow supply due to misguided energy policies is 
a consumer issue, not just an industry issue. In fact, elected 
representatives of the consuming states ought to be hollering loudest 
for policy change.
    The U.S. isn't running out of gas. The U.S.G.S. and the Minerals 
Management Service estimate there are about 1,400 trillion cubic feet 
of technically recoverable gas resources in the U.S.--including the 
Lower 48, offshore and Alaska.
    But we are running out of places where we're allowed to explore for 
those gas resources that can be developed most cost effectively. Yes, 
there is a lot of natural gas left in the basins we've been producing 
for the last 60 years, and U.S. producers are actively exploring for 
and producing it. But as I explained a moment ago, because of basin 
exhaustion, this is mostly high-cost gas. Some of the most cost-
effective gas resources we have left are found on federal lands.
    In the Lower 48 alone, there is an estimated 213 trillion cubic 
feet of natural gas beneath federal lands or waters where moratoria or 
regulation make exploration virtually impossible . . . in the West, 
where much of the land is owned by the federal government . . . on the 
East and West Coasts, and in the Eastern Gulf of Mexico. That's a 10-
year supply at today's demand rate. And if history is a reliable guide, 
as more exploration takes place, these estimates could turn out to be 
very conservative.
    In the West, there is more than 290 Tcf of technically recoverable 
gas located on federal lands, but nearly half is either closed to 
exploration or so highly restricted it's not economic to explore. 
(Source: National Petroleum Council Natural Gas Study, December 1999)
    To increase supply, we have to attack the problem on several 
fronts:
    First, Congress needs to come up with a solution that will lift the 
moratoria on certain federal acreage where the resource base is the 
greatest.
    We're not asking that Congress open up every acre of federal land. 
But there are areas where we can explore and develop a lot of oil and 
gas without harming the environment. We've proved that's possible by 
using advanced technology that's getting better every day.
    (Slide 4: Alpine--A new Approach)
    A great example is the Alpine field Anadarko is a partner in on the 
North Slope of Alaska--a little over 100 miles west of the coastal 
plain of ANWR. We've developed this 430 million barrel field from 
gravel pads totaling less than 100 acres using multi-lateral well 
completions. Today, Alpine is producing over 100,000 barrels a day.
    In Alaska, tools such as ice pads and roads, multilateral well 
completions and re-injection of drilling wastes allow us to minimize 
the impact on the tundra. We use a variety of different tools to tackle 
other complex exploration and development challenges all over the 
world--safely and responsibly.
    Second, federal land management agencies need to detangle the 
administrative bureaucracy and eliminate unnecessary leasing and 
permitting delays that discourage exploration. In high-cost areas, 
delay is denial, whether it's due to regulatory inefficiency or to 
lawsuits that can stall projects for months or even years. If we could 
speed up permitting and reduce the threat of litigation, we'd see an 
immediate increase in exploration.
    (Slide 5: Grass Roots Timeline)
    As this slide illustrates, when you consider the fact that wildlife 
restrictions and other stipulations prevent us from operating more than 
half the year in some areas of the West, and you factor in all the 
steps it takes to permit a well, it can take six to seven years just to 
reach the development drilling stage. And that makes no sense.
    The administration took a good first step by ordering fast-track 
updates of resource management plans in the West. But we need more 
staff at the BLM to review backlogged applications, and we need a 
consistent play book to tell us upfront what we must do to get our 
projects permitted.
    The administration also needs to remove unnecessary regulatory 
barriers to pipeline permitting, so we can unlock stranded gas from the 
West . . . and one day bring Arctic gas to the Lower 48.
    In the future, we will have to rely on LNG to help close the supply 
gap, so the third thing we need is to be able to permit and build 
regassification terminals--quickly.
    Let me make an important point about LNG: We cannot import our way 
out of this supply crunch, either with Canadian gas or LNG, as we have 
done with imported oil. Even if we start permitting new import 
facilities today, it will take 5 to 10 years to meaningfully increase 
our supply of LNG. So this is a long-term solution, albeit an important 
one.
    Next, let's look at exploration incentives: A number of incentives 
were included in legislation passed by the House, and they're being 
considered by the Senate. These would enhance existing royalty 
reductions for deep water and deep gas projects offshore . . . allow 
accelerated amortization of G&G costs and delay rental payments' 
provide seven-year depreciation for gas gathering lines . . . and renew 
Section 29 production tax credits for unconventional gas.
    As I said a moment ago, most of the remaining resource is 
unconventional or in deep water, so these incentives will be important 
to helping producers develop more of our domestic resources.
    We know these incentives work. Passage of Section 29, for example, 
led to a tripling in the production of non-conventional gas, and it 
resulted in innovation in drilling and completion technology. (Source: 
Gas Technology Institute)
    We do have the ability to increase domestic supplies--and in doing 
so increase U.S. energy security--but only if we have the political 
will to do so.
    Ladies and gentlemen, as a nation, we face a serious energy 
challenge. Industry is working as hard as it can to produce new 
supplies. New technology and good management practices allow us to do 
so in environmentally acceptable ways, with less and less temporary 
surface disturbance. But the vast energy resource potential that could 
address this challenge is under the control of the federal government, 
and only the government can unlock it.
    We must begin to make changes today--changes in federal land use 
policy and in how we balance environmental concerns with economic 
considerations--if we want this safe, environmentally friendly fuel to 
be available to Americans at prices they can afford.
    Thank you for the opportunity to address you today. Our industry 
looks forward to working with you to provide our country with the 
affordable, reliable energy supplies that are critical to a strong, 
growing economy.

    Chairman Tauzin. Thank you, Mr. Sharples.
    Likewise, we want to welcome the President and Chief 
Executive Officer of Consumers Energy on behalf of the American 
Gas Association, Mr. Carl English.
    Mr. English, you are recognized, sir.

                  STATEMENT OF CARL L. ENGLISH

    Mr. English. Thank you, Mr. Chairman. Good morning.
    As you indicated I am the President and Chief Executive of 
Consumers Energy, a publicly owned gas utility based in 
Jackson, Michigan.
    I am appearing today also on behalf of the American Gas 
Association and its 191 member companies. AGA's membership 
includes natural gas distribution companies and utilities 
serving more than 53 million of our Nation's homes, businesses 
and industries. We appreciate the opportunity to share the 
industry's views with you on the urgent need for ample natural 
gas supplies to be made available at competitive prices.
    Natural gas is the most popular home heating source in 
America and for a good reason. More than 50 million households 
have chosen natural gas heat because it is comfortable, 
efficient and reliable. Natural gas is also the fuel of choice 
for America's economic prosperity and is gaining in popularity 
as a fuel source for electric generation, as you know.
    The current natural gas crunch has exposed millions of 
families to a roller coaster ride of prices. Two of the last 
three winters have seen abnormal and often record cold 
temperatures. Demand spikes saw prices skyrocket, jumping as 
much as 70 percent in 1 year. Prices increased because the 
extremely tight balance between supply and demand hasn't eased. 
Even with the return to summer, the wholesale price of natural 
gas is twice as high as it was last year at this time.
    In addition to heating the majority of American homes, 
natural gas also forms the energy backbone of the manufacturing 
sector. More than 50 percent of the natural gas consumed in the 
United States is used by factories and other industrial 
customers. In a world market, domestic manufacturers cannot 
remain competitive with natural gas prices that are two and 
three times higher than they were just a few years ago.
    The impact upon the residential customer cannot be 
minimized. Customers of Consumers Energy system have 
experienced the price for natural gas go from $2.84 a thousand 
cubic feet in 2000 to currently $5.18 per thousand cubic feet. 
The increase of gas prices we are experiencing today could 
unleash a fire storm of protest in the fall and winter of this 
coming season as many consumers see their natural gas bills 
double. Families will again be forced to make active decisions 
among paying the gas bill, paying the mortgage, or saving for 
future college educations. State regulators will be facing rate 
hike requests by utilities that will need to pass these price 
increases on to customers.
    Fortunately, this Congress has supported programs to assist 
the most needy through the LIHEAP program. This program 
provides needed financial assistance to pay heating bills, 
especially senior citizens on a fixed income and those citizens 
caught between living comfortably and living day to day.
    Last month, Federal Reserve Board Chairman Alan Greenspan 
emphasized the contradictions in Federal policies that have led 
to us where we are now, policies that promote increased use of 
natural gas particularly for electric power generation while 
clamping down on access to supply. We look forward as well to 
hearing the Chairman's comments today.
    We are in a growing market, and the demand for natural gas 
in the United States is expected to increase 50 percent in the 
2015 to 2020 timeframe. In Michigan, more than 4,600 megawatts 
of new generation that is exclusively gas fired has come on 
line just since 2000. This represents a 20 percent increase in 
in-State electric generation supply, all fueled by natural gas.
    The natural gas industry is definitely at a crossroads. It 
is incumbent upon industry and policymakers to make the right 
choices.
    The House should be commended for taking positive action in 
April by passing an energy bill that supports increasing 
supply. We also congratulate the House for addressing the 
energy tax issues and allowing for accelerated depreciation of 
natural gas distribution lines. This legislation will serve as 
a down payment on America's energy future.
    To wholly secure that future, AGA has developed a list of 
prioritized proposed solutions: First and foremost, the smart, 
safe, and environmentally responsible exploration of untapped 
resources in several areas of the United States. In addition, 
we also need an increased focus on nontraditional energy 
sources, such as liquefied natural gas.
    The complete detailed list of the solutions is in my 
written testimony. We have the technology, the ingenuity and 
the drive to succeed. I am confident that if we use the 
opportunities before us today we will make the right decisions 
for the future and for tomorrow. Thank you.
    [The prepared statement of Carl L. English follows:]
   Prepared Statement of Carl English, President and Chief Executive 
  Officer, Consumers Energy on Behalf of the American Gas Association
    Good morning. I am Carl English, President & Chief Executive 
Officer--Gas of Consumers Energy in Jackson, Michigan. I am testifying 
today on behalf of the American Gas Association in Washington, D.C. 
(``AGA'') and its natural gas utility members. AGA is grateful for the 
opportunity to share its views with you on the critical importance to 
the nation of ensuring ample natural gas supplies at competitive 
prices. Doing so is necessary for the nation--both to protect consumers 
and to address the energy and economic situations we currently face.
    AGA is composed of 191 natural gas distribution companies, which 
deliver gas throughout the United States. Local gas utilities deliver 
gas to more than 64 million customers nationwide. AGA members deliver 
approximately 83 percent of this natural gas.
    Our members are charged with the responsibility, under local law or 
regulation, of acquiring natural gas for the majority of their 
customers and delivering it in a safe and reliable manner. Last year, 
this Committee addressed the safety issue by taking a balanced approach 
to the important issue of pipeline safety, and we thank you, Mr. 
Chairman and members of the committee, for having done so. Safety is a 
critical issue for the industry. Likewise, today having an ample supply 
of natural gas at reasonable prices is a critical issue for AGA and its 
members. AGA members and the consumers they serve share both an 
interest and a perspective on this subject.
    It is important for you to understand that the bread and butter 
business of AGA members is acquiring and delivering natural gas to 
residential, commercial, and industrial consumers across America. Our 
members remain economically viable by delivering natural gas to 
consumers at the lowest reasonable price, which we do by operating our 
systems--over a million miles of distribution lines--as efficiently as 
possible. Exploring for and producing natural gas is the business of 
our energy-industry colleagues in the oil and gas business, whether 
they are major, independent, or ``Mom and Pop'' operators. We are not 
here to speak for them today, but their continued success in providing 
natural gas to America's consumers is of the utmost importance to us as 
well. Today we are here to speak for consumers who want reasonable 
heating bills and good jobs.
    AGA is encouraged that Congress is addressing this increasingly 
critical issue. Earlier this year we were privileged to testify before 
both the Senate Energy and Natural Resources Committee and the House 
Resources Committee with regard to the challenging issue of natural gas 
supply. We also are gratified that H.R. 6, the Energy Policy Act of 
2003, which was passed by the House of Representatives in April, 2003, 
contains a wide array of provisions designed to bring forth more of 
America's prodigious supply of natural gas to benefit consumers. That 
bill is without question more focused on natural gas supply than were 
the iterations under consideration in 2001 and 2002.
    Adequate natural gas supply is crucial to all of America for a 
number of reasons. It is imperative that the natural gas industry and 
the government work together to take significant action in the very 
near term to assure the continued economic growth, environmental 
protection, and national security of our nation. The tumultuous events 
in energy markets over the last two years serve to underscore the 
importance of adequate and reliable supplies of reasonably priced 
natural gas to consumers, to the economy, and to national security.
    AGA wishes to commend the leadership of the Committee for convening 
this important hearing so promptly upon the heels of the passage of 
H.R. 6. To be sure, there has been a crescendo of public policy 
discussion with regard to natural gas supply since the ``Perfect 
Storm'' winter of 2000-2001. Nevertheless, in the several weeks since 
AGA last testified on Capitol Hill--in February and March of this 
year--the volume and the tenor of this discussion have increased 
dramatically. Simply put, this issue becomes more critical with every 
passing day.
    Since the beginning of this year, natural gas has been trading in 
wellhead markets throughout the nation at prices floating between $5 
and $6 per thousand cubic feet. This has not been a ``price spike'' of 
the sort that we have seen in the past lasting several days or perhaps 
several weeks. Rather, it has been sustained over a period of several 
months. And there is no sign that it will abate in the near future. 
Indeed, quotes for futures prices on NYMEX over the next 24 months have 
reached a consistent record level mirroring current cash prices.
    In the course of the last several months, business consumers of 
natural gas have been raising a cry of concern over natural gas prices. 
And this concern has touched businesses of all stripes. In Connecticut, 
for example, pizza shops complain that their natural gas bills have 
increased $500-700 per month. The chemical and pharmaceutical industry, 
which uses 10% or more of the U.S. gas supply annually, has been 
reeling from increased natural gas prices. It has been projected that 
the chemical industry in Louisiana will lose at least 2,000 jobs as a 
result of high gas prices. Similarly, a major chemical company in 
Mississippi has declared bankruptcy, citing natural gas prices. That 
industry needs gas prices between $2.50 and $3.00 per thousand cubic 
feet to remain competitive on the world stage, while prices since the 
beginning of the year have been averaging in the range of $5.00 per 
thousand cubic feet. Similarly, fertilizer plants, where natural gas 
can represent 80% of the cost structure, are closing one facility after 
another. Glass manufacturers, which also use large amounts of natural 
gas, have reported earnings falling by 50% as a result of natural gas 
prices. In our industrial and commercial sector, competitiveness in 
world markets and jobs at home are on the line.
    Businesses and factories tend to purchase most of their own gas, 
and they very quickly feel increases in prices. Residential customers, 
in contrast, typically rely upon their local utilities to act as 
merchants on their behalf. As a result of the manner in which state-
approved regulatory mechanisms operate, most consumers will not begin 
to feel current high gas prices for months.
    From the point of view of the residential consumer, some families 
will pay hundreds of dollars more to heat their homes this winter, 
which will be hundreds less to spend on other things. Families will 
again be forced to make difficult decisions between paying the gas 
bill, buying a new car, or saving for future college educations. There 
are, of course, state and federal programs such as LIHEAP to assist the 
most needy. This winter the potential price increases will affect all 
families--those on fixed income, the working poor, and the lower-income 
group as well as those caught between living comfortably and living day 
to day.
    The level of gas prices we are experiencing today could unleash a 
firestorm of protest in the fall and winter of this year as some 
consumers may see their natural gas bills double. The next twelve 
months may make the winter of 2000-2001 look tame from the perspective 
of consumers, regulators, and legislators. Some forward-looking state 
public utility commissions, having learned from the 2000-2001 
experience, are beginning to express concern over the possible impact 
of the winter of 2003-2004. We are pleased that Ohio Public Utility 
Commissioner Donald Mason is here today to express those concerns. The 
Secretary of Energy has also called for an extraordinary meeting of the 
National Petroleum Council to address the situation.
    These are but the first few alarms in what seems likely to become a 
very difficult year. Moreover, unless we make the proper public policy 
choices--and quickly at that--we will be facing an even more difficult 
several years.
    The natural gas industry is presently at a critical crossroads. The 
question before you today is: What will that crossroads look like? Will 
it look like a brand new interstate highway? Or will it look like a 
100-car collision on a Los Angeles freeway?
    For the past three years, natural gas production has had to operate 
full-tilt to meet consumer demand. The ``surplus deliverability '' or 
``gas bubble'' of the late 1980's and 1990's is simply gone. No longer 
is demand met while unneeded production facilities sit idle. No longer 
can new demand be met by simply opening the valve a few turns. The 
valves have been, and are today, wide open.
    The supply tightrope has brought with it several inexorable and 
unpleasant consequences--prices in the wholesale market have gone up 
and that market has become much more volatile. During the 2000-2001 
heating season, for example, gas prices moved from the $2 level to 
approximately $10 and back again to nearly $2. In Michigan the average 
price of natural gas on the Consumers Energy system in 2000 was $2.84 
per thousand cubic feet. In 2002 the price was $3.80. Today the charge 
is $5.18. Such volatility hurts consumers, puts domestic industry at a 
competitive disadvantage, closes plants, and idles workers. The winter 
of 2000-2001 made it abundantly clear to us (and to you as well) that 
consumers do not like these price increases and that they do not like 
the market volatility that is now an everyday norm. Unless significant 
actions are taken on the supply side, gas markets will remain 
tumultuous, and 64 million gas customers will suffer the consequences. 
Today's recurrent $5 price levels may represent a new, and regular, 
level of natural gas prices for the foreseeable future, although this 
prospect can be moderated with aggressive and enlightened public 
policy.
    As gas utilities, we do have a number of programs in place to 
insulate consumers to some extent from the full impact of wholesale 
price volatility, but consumers must ultimately still pay the price 
that the market commands. We believe that there will be considerable 
economic and political pushback should natural gas prices stabilize at 
the current $5 level for anything but a brief period of time.
    The problem that we face today is not simply one of finding means 
to meet current demands in the market for natural gas. Rather, we are 
in a growing market, and the demand for natural gas in the U.S. is 
expected to increase 50 percent by 2015-2020. Growth seems inevitable 
because gas is a clean, economic, domestic source of available energy. 
It does not face the environmental hurdles of coal and nuclear energy, 
the economic and technological drawbacks of most renewable energy 
forms, or the national security problems associated with imported oil.
    A significant sector where growth is occurring is electric 
generation. Nationwide most new electric generation is expected to be 
gas fired. In Michigan more than 4,600 megawatts of new gas-fired 
generation has come online since 2000. This represents a 20% increase 
in the state's capacity.
    The challenge for both government and industry is quite 
straightforward: to ensure that the current need for natural gas is met 
and that the future need for natural gas will also be met--both at 
reasonable and economic prices. There can be no responsible question 
that facilitating this result is sound public policy. Natural gas is 
abundant domestically, and natural gas is the environmentally friendly 
fuel of choice. Ensuring adequate natural gas supply will lead to 
reasonable prices for consumers, will dampen the unacceptable 
volatility of wholesale natural gas markets, will help keep the economy 
growing, and will help protect the environment.
    America has a large and diverse natural gas resource; producing it, 
however, can be a challenge. Providing the natural gas that the economy 
requires will necessitate: (1) providing incentives to bring the 
plentiful reserves of North American natural gas to production and, 
hence, to market; (2) making available for exploration and production 
the lands where natural gas is already known to exist so gas can be 
produced on an economic and timely basis; (3) ensuring that the new 
infrastructure that will be needed to serve the market is in place in 
timely and economic fashion.
    Natural gas--our cleanest fossil fuel--is found in abundance 
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent 
of the natural gas supplied to U.S. consumers originates in the United 
States or Canada.
    The estimated natural gas resource base in the U.S. has actually 
increased over the last several decades. In fact we now believe that we 
have more natural gas in the U.S. than we estimated twenty years ago, 
notwithstanding the production of between 300 and 400 trillion cubic 
feet of gas in the interim. This is true, in part, because new sources 
of gas, such as coalbed methane, have become an important part of the 
resource base. But having the natural gas is not the same as making 
that natural gas available to consumers. That requires natural gas 
production.
    Natural gas production is sustained and grows only by drilling in 
currently productive areas or by exploring in new areas. Over the past 
two decades a number of technological revolutions have swept across our 
industry. We are able today to drill for gas with dramatically greater 
success and with significantly reduced environmental impact than we 
were able to do twenty years ago. We are also much more efficient in 
producing the maximum amount of natural gas from a given area of land. 
A host of technological advances allows producers to identify and 
extract natural gas deeper, smarter and more efficiently. For example, 
the drilling success rate for wells deeper than 15,000 feet improved 
from 53 percent in 1988 to over 82 percent today. In addition, gas 
trapped in coal seams, tight sands or shale is no longer out of reach.
    While further improvements in this regard can be expected, they 
will not be sufficient to meet growing demand unless they are coupled 
with other measures. Regrettably, technology alone cannot indefinitely 
extend the production life of mature producing areas. New areas and 
sources of gas will be necessary.
    Notwithstanding the dramatic impact of innovation upon our 
business, the inevitable fact today is that we have reached a point of 
rapidly diminishing returns with many existing natural gas fields. This 
is almost entirely a product of the laws of petroleum geology. The 
first ten wells in a field may ultimately produce 60 percent of the gas 
in that field, while it may take forty more to produce the balance. In 
many of the natural gas fields in America today, we are long past those 
first ten wells and are well into those forty wells in the field. In 
other words, the low-hanging fruit have already been picked in the 
orchards that are open for business.
    Drilling activity in the U.S. has moved over time, from onshore 
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then 
to the Rocky Mountains. Historically, we have been quite dependent on 
fields in the Gulf of Mexico. But recent production declines in the 
shallow waters of the Gulf of Mexico have necessitated migration of 
activity to deeper waters to offset this decline. These newer, more 
expensive, deepwater fields also tend to have short lives and 
significantly more rapid rates of decline in production than is the 
case with onshore wells.
    In short, America's natural gas fields are mature--in fact many are 
well into their golden years. There is no new technology on the horizon 
that will permit us to pull a rabbit out of a hat in these fields. 
These simple, and incontrovertible, facts explain why we are today 
walking a supply tightrope and why the winter of 2000-2001 may become a 
regular occurrence, particularly at the point the economy returns to 
its full vigor. Having the winter of 2000-2001 return every year will 
undoubtedly put a brake on the economy, once again causing lost output, 
idle productive capacity, and lost jobs.
    If we are to continue to meet the energy demands of America and its 
citizens and if we are to meet the demands that will they make upon us 
in the next two decades, we must change course. It will not be enough 
to make a slight adjustment of the tiller or to wait three or four more 
years to push it over full. Rather, we must come full about, and we 
must do it in the very near future. Lead times are long in our 
business, and meeting demand years down the road requires that we begin 
work today.
    We have several reasonable and practical options. And, as I hope 
you do understand, continuing to do what we have been doing is simply 
not enough. In the longer term we have a number of options:
    First, and most importantly, we must increase natural gas 
production by looking to new frontiers within the United States. 
Further growth in production from this resource base is jeopardized by 
limitations currently placed on access to it. For example, most of the 
gas resource base off the East and West Coasts of the U.S. and the 
Eastern Gulf of Mexico is currently closed to any exploration and 
production activity. Moreover, access to large portions of the Rocky 
Mountains is severely restricted. The potential for increased 
production of natural gas is severely constrained so long as these 
restrictions remain in place.
    In this vein, the Rocky Mountain region is expected to be a growing 
supplier of natural gas, but only if access to key prospects is not 
unduly impeded by stipulations and restrictions. Two separate studies 
by the National Petroleum Council and the U.S. Department of the 
Interior reached a similar conclusion--that nearly 40 percent of the 
gas resource base in the Rockies was restricted from development to 
some degree, some partially and some totally. On this issue the 
Department of the Interior noted that there are nearly 1,000 different 
stipulations that can impede resource development on federal lands.
    One of the most significant new gas discoveries in North America in 
the past ten years is located just north of the US/Canada border in 
eastern Canada coastal waters on the Scotian shelf. Natural gas 
discoveries have been made at Sable Island and Deep Panuke. Gas 
production from Sable Island already serves Canada's Maritimes 
Provinces and New England through an offshore and land-based pipeline 
system. This has been done with positive economic benefits to the 
region and without environmental degradation. This experience provides 
an important example for the United States, where we believe the 
offshore Atlantic area to have similar geology.
    In some areas we appear to be marching backward. The buy-back of 
federal leases where discoveries had already been made in the Destin 
Dome area (offshore Florida) of the eastern Gulf of Mexico was a 
serious step back in terms of satisfying consumer gas demand. This 
action was contrary to what needs to be done to meet America's energy 
needs. With Destin Dome we did not come full about, as we need to do; 
rather, we ran from the storm.
    Geographic expansion of gas exploration and drilling activity has 
for the entirety of the last century been essential to sustaining 
growth in natural gas production. Future migration, to new frontiers, 
to new fields, in both the U.S. and Canada will also be critical. 
Without production from geographic areas that are currently subject to 
access restrictions, it is not at all likely that producers will be 
able to continue to provide increased amounts of natural gas from the 
lower-48 states to customers for longer than 10 or 15 years. We believe 
that the same is true in Canada as well.
    Quite simply, we do not believe that there is any way other than 
exploring for natural gas in new geographic areas to meet America's 
anticipated demand for natural gas unless we turn increasingly to 
sources located outside North America.
    In the middle of the 20th century, when the postwar economy had 
begun its half-century climb and when natural gas became the fuel of 
choice in America, our colleagues in the producing business opened one 
new natural gas field after another in the mid-continent. In this era, 
it was not that difficult to produce a triple or a home run virtually 
every inning. As those fields developed, producers continued to hit a 
regular diet of singles and doubles, with the occasional triple or home 
run in new discovery areas. This same pattern in the mid-continent was 
repeated in the Gulf of Mexico. Today, however, it is extremely 
difficult to find the new, open areas where the producing community can 
continue to hit the ball. As things are today, America has confined 
them to a playing field where only bunts are permitted. The Yankees did 
not get to the World Series playing that kind of game.
    AGA does not advance such a thesis lightly. Over the past two years 
both the American Gas Association and the American Gas Foundation have 
studied this important issue vigorously. We have believed for several 
years that it is necessary that policy makers embrace this thesis so 
that natural gas can continue to be--as it has been for nearly a 
century--a safe and reliable form of energy that is America's best 
energy value and its most environmentally benign fossil fuel. We think 
that events in gas market in 2003 underscore that our concerns have 
been on the mark.
    When the first energy shock transpired in the early 1970s, the 
nation learned, quite painfully, the price of dependence upon foreign 
sources of crude oil. We also learned, through long gasoline lines and 
shuttered factories, that energy is the lifeblood of our economy. Yet 
thirty years later we are even more dependent upon foreign oil than we 
were in 1970. Regrettably, the nation has since failed to make the 
policy choices that would have brought us freedom from undue dependence 
on foreign-source energy supplies. We hope that the nation can reflect 
upon that thirty-year experience and today make the correct policy 
choices with regard to its future natural gas supply. We can blame some 
of the past energy problems on a lack of foresight, understanding, and 
experience. We will not be permitted to do so again.
    Meeting our nation's ever-increasing demand for energy has an 
impact on the environment, regardless of the energy source. The 
challenge, therefore, is to balance these competing policy objectives 
realistically. Even with dramatic improvements in the efficient use of 
energy, U.S. energy demand has increased more than 25 percent since 
1973, and significant continued growth is almost certain. Satisfying 
this energy demand will continue to affect air, land and water. A great 
American success story is that, with but five percent of the world's 
population, we produce nearly one-third of the planet's economic 
output. And energy is an essential--indeed critical--input for that 
success story both to continue and to grow.
    It is imperative that energy needs be balanced with environmental 
impacts and that this evaluation be complete and up-to-date. There is 
no doubt that growing usage of natural gas harmonizes both objectives. 
Finding and producing natural gas is today accomplished through 
sophisticated technologies and methodologies that are cleaner, more 
efficient and much more environmentally sound than those used in the 
1970s. It is unfortunate that many restrictions on natural gas 
production have simply not taken account of the important technological 
developments of the preceding thirty years. The result has been 
policies that deter and forestall increased usage of natural gas, which 
is, after all, the nation's most environmentally benign and cost-
effective energy source.
    Natural gas consumers enjoyed stable prices from the mid-1980s to 
2000, with prices that actually fell when adjusted for inflation. 
Today, however, the balance between supply and demand has become 
extremely tight, creating the tightrope effect. Even small changes in 
weather, economic activity or world energy trends result in wholesale 
natural gas price fluctuations. We saw this most dramatically in the 
winter of 2000-2001. We may be seeing it today on a longer-term basis.
    In the 1980s and 1990s, when the wholesale (wellhead) price of 
traditional natural gas sources was around $2 per million British 
thermal units, natural gas from deep waters and Alaska, as well as LNG, 
may not have been price competitive. However, most analysts suggest 
that these sources are competitive when gas is in a $3.00 to $4.00 
price environment. Increased volumes of natural gas from a wider mix of 
sources will be vital to meeting consumer demand and to ensuring that 
natural gas remains affordable.
    Increasing natural gas supplies will boost economic development and 
will promote environmental protection, while achieving the critical 
goal of ensuring more stable prices for natural gas customers. Most 
importantly, increasing natural gas supplies will give customers--ours 
and yours--what they seek--reasonable prices, greater price stability, 
and fuel for our vibrant economy. However, without policy changes with 
regard to natural gas supply, as well as expansion of production, 
pipeline and local delivery infrastructure for natural gas, the natural 
gas industry will have difficulty meeting the anticipated 50 percent 
increase in market demand. Price increases, price volatility, and a 
brake on the economy will be inevitable.
    Second, we need to increase our focus on non-traditional sources, 
such as liquefied natural gas (LNG). Reliance upon LNG has been modest 
to date, but it is clear that increases will be necessary to meet 
growing market demand. Today, roughly 99 percent of U.S. gas supply 
comes from traditional land-based and offshore supply areas in North 
America. But, during the next two decades, non-traditional supply 
sources such as LNG will likely account for a significantly larger 
share of the supply mix. LNG has become increasingly economic. It is a 
commonly used worldwide technology that allows natural gas produced in 
one part of the world to be liquefied through a chilling process, 
transported via tanker and then re-gasified and injected into the 
pipeline system of the receiving country. Although LNG currently 
supplies less than 1 percent of the gas consumed in the U.S., it 
represents 100 percent of the gas consumed in Japan. LNG has proven to 
be safe, economical and consistent with environmental quality. Due to 
constraints on other forms of gas supply and increasingly favorable LNG 
economics, LNG is likely to be a more significant contributor to US gas 
markets in the future. It will certainly not be as large a contributor 
as imported oil (nearly 60 percent of US oil consumption), but it could 
account for 10-15 percent of domestic gas consumption 15-20 years from 
now if pursued aggressively and if impediments are reduced.
    Third, we must tap the huge potential of Alaska. Alaska is 
estimated to contain more than 250 trillion cubic feet--enough by 
itself to satisfy US natural gas demand for more than a decade. 
Authorizations were granted twenty-five years ago to move gas from the 
North Slope to the Lower-48, yet no gas is flowing today nor is any 
transportation system yet under construction. Indeed, every day the 
North Slope produces approximately 8 billion cubic feet of natural gas 
that is re-injected because it has no way to market. Alaskan gas has 
the potential to be the single largest source of price and price 
volatility relief for US gas consumers. Deliveries from the North Slope 
would not only put downward pressure on gas prices, but they would also 
spur the development of other gas sources in the state as well as in 
northern Canada.
    Fourth, we can look to our neighbors to the north. Canadian gas 
supply has grown dramatically over the last decade in terms of the 
portion of the U.S. market that it has captured. At present, Canada 
supplies approximately 15 percent of the United States' needs. We 
should continue to rely upon Canadian gas, but it may not be realistic 
to expect the U.S. market share for Canadian gas to continue to grow as 
it has in the past or to rely upon Canadian new frontier gas to meet 
the bulk of the increased demand that lay ahead in the United States.
                            recommendations
    To promote meeting consumer needs, economic vitality, and sound 
environmental stewardship, the American Gas Association urges the 
Congress as follows:

 Current restrictions on access to new sources of natural gas 
        supply must be re-evaluated in light of technological 
        improvements that have made natural gas exploration and 
        production more environmentally sensitive.
 Federal and state officials must take the lead in overcoming 
        the pervasive ``not in my backyard'' attitude toward energy 
        infrastructure development, including gas production.
 Interagency activity directed specifically toward expediting 
        environmental review and permitting of natural gas pipelines 
        and drilling programs is necessary, and agencies must be held 
        responsible for not meeting time stipulations on lease, lease 
        review, and permitting procedures.
 Federal lands must continue to be leased for multi-purpose 
        use, including oil and gas extraction and infrastructure 
        construction.
 Both private and public entities should act to educate the 
        public regarding energy matters, including energy efficiency 
        and conservation. Federal and state agencies, with private 
        sector support and involvement, should strive to educate the 
        public on the relationship between energy, the environment and 
        the economy. That is, energy growth is necessary to support 
        economic growth, and responsible energy growth is compatible 
        with environmental protection.
 Economic viability must be considered along with environmental 
        and technology standards in an effort to develop a ``least 
        impact'' approach to exploration and development but not a 
        ``zero impact''.
 Existing moratoria for onshore lands should be lifted.
 The geologic conditions for oil and gas discovery exist in the 
        US mid-Atlantic area, the Pacific Offshore area, and the 
        eastern portion of the Gulf of Mexico.
     Although some prospects have been previously tested, new 
            evaluations of Atlantic oil and gas potential should be 
            completed using today's technology--in contrast to that of 
            20 to 30 years ago.
     The federal government should facilitate this activity by 
            lifting or modifying the current moratoria regarding 
            drilling and other activities in the Atlantic Offshore, in 
            the Pacific Offshore, and in the Gulf of Mexico to ensure 
            that adequate geological and geophysical evaluations can be 
            made and that exploratory drilling can proceed.
     The Destin Dome (181 lease area) should immediately be 
            offered for lease for oil and gas exploration.
     The federal government must work with the states to 
            assist--not impede--the process of moving natural gas 
            supplies to nearby markets should gas resources be 
            discovered in commercial quantities. Federal agencies and 
            states must work together to ensure the quality of the 
            environment but they must also ensure that infrastructure 
            (such as landing an offshore pipeline) is permitted and not 
            held up by multi-jurisdictional roadblocks.
 The Federal government should continue to permit royalty 
        relief where appropriate to change the risk profile for 
        companies trying to manage the technical and regulatory risks 
        of operations in deepwater.
 Tax provisions such as percentage depletion, expensing 
        geological and geophysical costs in the year incurred, Section 
        29 credits, and other credits encourage investment in drilling 
        programs, and such provisions are often necessary, particularly 
        in areas faced with increasing costs due to environmental and 
        other stipulations.
 The Coastal Zone Management Act (CZMA) is being used to 
        threaten or thwart offshore natural gas production and the 
        pipeline infrastructure necessary to deliver natural gas to 
        markets in ways not originally intended. Companies face this 
        impediment even though leases to be developed may be 100 miles 
        offshore. These impediments must be eliminated or at least 
        managed within a context of making safe, secure delivery of 
        natural gas to market a reality.
 The U.S. government should work closely with Canadian and 
        Mexican officials to address the challenges of supplying North 
        America with competitively priced natural gas in an 
        environmentally sound manner.
 Renewable forms of energy should play a greater role in 
        meeting U.S. energy needs, but government officials and 
        customers must realize that all forms of energy have 
        environmental impacts.
 Construction of an Alaskan natural gas pipeline must begin as 
        quickly as possible.
     Construction of this pipeline is possible with acceptable 
            levels of environmental impact.
     The pipeline project would be the largest private sector 
            investment in history, and it would pose a huge financial 
            risk to project sponsors. Many believe the project may not 
            be undertaken without some form of federal support.
 The Federal Energy Regulatory Commission (FERC) announced in 
        December of 2002 that it would not require LNG terminals to be 
        ``open access'' (that is, common carriers) at the point where 
        tankers offload LNG. This policy will spur LNG development 
        because it reduces project uncertainty and risk.
 Other federal and state agencies should review any regulations 
        that impede LNG projects and act similarly to reduce or 
        eliminate these impediments.
 Efforts should be made to encourage existing LNG terminals to 
        commence operating at full capacity at the earliest 
        opportunity.
 The siting of LNG offloading terminals is generally the most 
        time consuming roadblock for new LNG projects. Federal agencies 
        should take the lead in demonstrating the need for timely 
        approval of proposed offloading terminals, and state officials 
        must begin to view such projects as a means to satisfy supply 
        and price concerns of residential, commercial and industrial 
        customers.
 Some new LNG facilities should be sited on federal lands so 
        that permitting processes can be expedited.
 Congress should increase LIHEAP funding. Low-income energy 
        assistance is currently provided to roughly 4 million 
        households, only 15 percent of those eligible. The financial 
        burden on needy families will certainly increase this winter, 
        and LIHEAP appropriations should be increased to $3.4 billion--
        up from $2.0 billion of total assistance in 2003
 Should gas supplies become extremely tight, the federal 
        government and the states should consider easing environmental 
        restrictions on a temporary basis so that electric generating 
        facilities and industrial facilities can switch to alternative 
        fuels.
 States should be encouraged to authorize local utilities to 
        enter into fixed-price long-term contracts and to enter into 
        natural gas hedging programs as a means to dampen the impact of 
        natural gas price volatility upon consumers.

    Chairman Tauzin. Thank you, Mr. English.
    The Chair now recognizes Mr. Robert Liuzzi, the President 
and CEO of CF Industries, on behalf of the Fertilizer Institute 
which for the record uses natural gas as a raw material source, 
not just as a power source.
    Mr. Liuzzi.

                  STATEMENT OF ROBERT C. LIUZZI

    Mr. Liuzzi. Thank you, Mr. Chairman, members of the 
committee.
    The situation that the opening remarks addressed, the 
volatility in the level of price, has created an extremely bad 
situation for the nitrogen fertilizer business. The situation 
has resulted in the closure of 20 percent of U.S. nitrogen 
capacity and another 25 percent has been idled. I am here to 
urge the Congress and this committee to take action on a 
comprehensive energy policy to deal with the issue.
    CF is a farmer-owned cooperative. We are one of the largest 
nitrogen producers in North America. We operate large 
facilities in Donaldsonville, Louisiana, and Alberta, Canada. 
In Louisiana, we employ over 500 people on a full-time basis, 
which accounts for $46 million a year in wages, $8 million in 
sales and property taxes. During a normal production year, the 
facility converts 78 million BTUs of natural gas into 2.25 
million tons of ammonia, 1 and three quarter million tons of 
urea and over 2 million tons of nitrogen solution.
    CF Industries through its members accounts for one-fourth 
of all nitrogen applied to the ground in the United States and 
one-third of all the nitrogen used in the Midwest. Through our 
owners, our phosphate and nitrogen products reach a million 
farms and ranches in 48 States and two Canadian Provinces.
    As the chairman mentioned, we are slightly different than 
testimony previously. Natural gas is my raw material, my 
feedstock. It is--the primary product we make, anhydrous 
ammonia and gas, accounts for 90 percent of the total cash cost 
of ammonia production. Ammonia is also the basic building block 
for dry nitrogen such as urea and nitrogen solutions. It is 
also a raw material for ammoniated phosphatic fertilizers.
    Because it is the raw material of the feedstock, the 
current situation is having a devastating impact on our 
business. As you are aware, prices began to steadily increase 
in early 2000, rising to almost $10 per million BTUs in January 
of 2001. You can imagine what that did to fertilizer production 
costs.
    Not surprisingly, in response, the industry began to shut 
down production. Operating rates by the end of January in 2001 
had dropped to a low of 46 percent. That compares to an average 
operating rate during the 1990's of about 92 percent. We saw 
moderation after that, but then we saw escalation again. 
February of this particular year, spot natural gas prices 
soared to a record high of almost $20 per million BTUs. 
Although they again moderated, they remain well above 
historical averages. As I mentioned, we have suffered permanent 
closures and protracted idling of facilities.
    What does this all mean to fertilizer manufacturers or to 
U.S. agriculture? During the 1990's, about three-quarters of 
all nitrogen consumed in America was supplied by domestic 
production, 15 percent came from Canada, and 10 to 15 percent 
was sourced offshore. Plant closures affect rural economies. 
Chemical operating jobs are very high-paying jobs. The 
continued scenario of high prices for gas undoubtedly will lead 
to more closures and abandonment of the infrastructure and the 
people that support the fertilizer business.
    One of the most disturbing aspects of this particular 
situation is that it has created for U.S. farmers an issue of 
reliability of supply. Imports cannot come in to fill the gap 
that will result from permanent closure of plants in the United 
States.
    The infrastructure even on the Gulf Coast, Mr. Chairman, is 
not sufficient to bring product in from Russia or other places, 
move it through the inland waterway system and get it where it 
is needed when it is needed, a short planting period that uses 
large amounts of fertilizer.
    Furthermore, imports will not lower prices to American 
farmers. U.S. Plants will run as long as they can cover their 
cash cost to production. The U.S. producer is the marginal 
supplier to the U.S. market, and consequently imports will be 
priced just under that level.
    Congress, we believe, has to adopt, as everyone has said 
already, a two-pronged approach. We have got to expand supply, 
whether that is drilling in areas that are currently prohibited 
in various parts of the gulf, and we have got to curtail an 
artificially induced demand, particularly for electric power 
generation. Going forward, 90 percent of all power plants will 
burn natural gas.
    I am running over, Mr. Chairman. I thank you for the 
opportunity to be here. I will say that all the others have 
adequately summarized many aspects of my testimony. It is all 
in the record. Thank you, sir.
    [The prepared statement of Robert C. Liuzzi follows:]
Prepared Statement of Robert C. Liuzzi, President, CF Industries, Inc. 
                 on Behalf of The Fertilizer Institute
    On behalf of The Fertilizer Institute, CF Industries, Inc. is 
pleased to have the opportunity to discuss the urgent situation 
currently facing the U.S. fertilizer industry. The volatility and level 
of U.S. natural gas prices, virtually unprecedented in the history of 
our country, has resulted in the permanent closure of almost 20% of 
U.S. nitrogen fertilizer capacity and the idling of an additional 25%. 
This situation threatens to destroy an efficient U.S. industry and 
displace the thousands of workers who support it. Congress must pass a 
comprehensive energy policy that addresses both the supply and demand 
aspects of the natural gas market. This is crucial to the long-term 
survivability of the U.S. fertilizer industry.
    The Fertilizer Institute (TFI) represents fertilizer from the 
plants where it is produced to the plants where it used--and all points 
in between. Producers, retailers, trading firms and equipment 
manufacturers, which comprise TFI's membership, are served by a full-
time Washington, D.C., staff in various legislative, educational and 
technical areas as well as with information and public outreach 
programs.
    As a general background, CF Industries is a farmer-owned 
cooperative and is one of the largest nitrogen fertilizer producers and 
marketers in North America. The Company is headquartered in Long Grove, 
Illinois. CF operates world-scale production facilities in 
Donaldsonville, Louisiana, and Medicine Hat, Alberta, Canada. In 
Louisiana, CF currently employs 507 full-time and contract workers. 
This facility accounts for $46 million a year in wages and $8 million 
in sales and property taxes. During a normal production year, the 
facility converts approximately 78 million MMBtu of natural gas into 
2.25 million tons of ammonia, 1.75 million tons of urea, and 2.15 
million tons of UAN. The Complex has a daily requirement of over 200 
million cubic feet of natural gas as a feedstock and fuel.
    CF and its Member cooperatives account for approximately one-fourth 
of the nitrogen fertilizers applied in the United States and 
approximately one-third of the nitrogen fertilizers applied in the 
primary growing areas of the Midwest. The Company also mines and 
manufactures phosphate fertilizers in Hardee County and Plant City, 
Florida. Through its eight Member-owners, CF's nitrogen and phosphate 
fertilizer products reach one million farmers and ranchers in 48 states 
and two Canadian provinces.
    My purpose today is to discuss the devastating impact that the high 
level and unprecedented volatility in natural gas prices is having on 
both the fertilizer industry and the American farmer. To fully 
understand why increased and volatile natural gas prices are creating 
such fundamental difficulties for the nitrogen fertilizer industry, a 
basic understanding of our products and manufacturing process is 
necessary.
    Natural gas is the primary feedstock in the production of virtually 
all commercial nitrogen fertilizers in the United States (Figure 1). 
And it is important to be very clear about this: natural gas is not 
simply an energy source for us; it is the raw material from which 
nitrogen fertilizers are made. Our production process involves a 
catalytic reaction between elemental nitrogen derived from the air with 
hydrogen derived from natural gas. The primary product from this 
reaction is anhydrous ammonia (NH3). Anhydrous ammonia is used directly 
as a commercial fertilizer or as the basic building block for producing 
virtually all other forms of nitrogen fertilizers such as urea, 
ammonium nitrate and nitrogen solutions, as well as diammonium 
phosphate and mono-ammonium phosphate. Natural gas is also used as a 
process gas, an energy source, to generate heat when upgrading 
anhydrous ammonia to urea, but this use is minor compared to our use of 
natural gas as a raw material.
   Natural Gas (CH4)  +  Air (N2)    
                   Anhydrous Ammonia (NH3)
    Because natural gas is the only economically feasible raw material 
used in producing nitrogen fertilizers, it is by far the primary cost 
component. Today, in the case of ammonia, natural gas accounts for 90% 
of the total cash cost of production (Figure 2).
    Given this heavy reliance on natural gas, the volatility of natural 
gas prices continues to have a devastating impact on the domestic 
fertilizer industry. This can be clearly demonstrated by comparing 
natural gas costs, production costs and U.S. nitrogen fertilizer 
operating rates. As you are well aware, natural gas prices began to 
steadily increase during calendar year 2000, rising from an average of 
$2.36 per MMBtu in January to over $6.00 per MMBtu in December, 2000 
and to a record $10 per MMBtu in January 2001 (Figure 3). In turn, this 
forced fertilizer production costs to unprecedented levels. Ammonia 
production costs, for example, spiked up from approximately $100 per 
ton to $170 by June 2000, to $220 per ton in December, and to an 
average of over $350 per ton in January 2001.
    Not surprisingly, the industry began to shut down production in 
response (Figure 4). By the end of December 2000, the U.S. nitrogen 
operating rate fell to below 70% of capacity. By the end of January 
2001, operating rates dropped to an all-time low of only 46%. To put 
this into perspective, the average U.S. operating rate during the 1990s 
was 92% (Figure 5).
    Following this natural gas spike, gas prices began to moderate and 
by mid-2001 had fallen back to historic levels. In response, idled 
capacity in the U.S. quickly came back on-stream, and the industry 
operating rate climbed to just under 90% of capacity.
    Unfortunately, the lower natural gas prices and higher operating 
rates were short-lived. By mid-year 2002, natural gas prices once again 
began to slowly escalate until February 26, 2003, when spot natural gas 
prices suddenly spiked to a record high of over $20 per MMBtu. Although 
natural gas prices again quickly moderated, they have remained well 
above historic averages. Gas prices over the last month, for example, 
have been trading in the $5.50-$6.50 range--approximately 150% above 
the 1990s historic average of $2.40.
    The sharp rise in natural gas prices and the resulting curtailment 
of U.S. fertilizer production also has had a dramatic impact on 
fertilizer prices throughout the marketing chain and, in particular, at 
the farm level. Nitrogen prices at the farm level, for example, jumped 
this year to near-record high levels. According to USDA data, the U.S. 
average farm-level price for ammonia jumped this spring to $373 per ton 
compared to an average spring price last year of $250. Similarly, urea 
prices have climbed from $191 to $261 and UAN prices from $127 to $161. 
This translates into an increase in cost to a typical Midwest corn 
farmer of $10 to $15 per acre (Figure 6).
    Unfortunately, there appears to be no end in sight. According to 
Department of Energy (DOE) Secretary Abraham, current stocks of natural 
gas are low due to a combination of cold weather and declines in both 
domestic production and net imports. The 696 billion cubic feet of gas 
in storage this spring represented the lowest level since 1976, when 
the Energy Information Agency began keeping records. Storage has 
increased since that time, but it is still only half the level of a 
year ago, and 42% below the previous five-year average. According to 
most industry analysts, the current tight inventory situation will 
likely keep natural gas prices at extremely high levels throughout the 
remainder of this year and into next year.
    Absent a substantial long-term reduction in natural gas prices, the 
U.S. nitrogen fertilizer industry and, therefore, farm-level supply is 
at serious risk. Of the 20 million tons of ammonia capacity that 
existed in the U.S. prior to 2000, approximately 3.5 million tons have 
already been permanently closed. According to a recent study completed 
by Fertecon, (Figure 7) the world's largest fertilizer consulting 
company, another four million tons is at risk of closing within the 
next two years. In addition, it is anticipated that the remainder of 
the industry will likely operate on a ``swing basis.'' That is, plants 
will only run when natural gas prices are low enough and/or fertilizer 
prices are high enough that producers can, at a minimum, cover their 
cash costs of production (Figure 8).
    So what does all of this mean to American fertilizer manufacturing 
and for U.S. agriculture? To fully answer that question, it is 
necessary to provide some additional background information. Since the 
1940s, when commercial fertilizers were introduced into the market on a 
large-scale basis, farm demand for nitrogen fertilizers was always 
supported by a large, efficient, domestic fertilizer industry. During 
the 1990s, for example, approximately 70-75% of the nitrogen 
fertilizers consumed by American farmers was supplied by domestic 
production with another 15% supplied from nearby Canadian plants. The 
remaining 10-15% of the volume was sourced from offshore suppliers 
(Figure 9).
    At the heart of the domestic fertilizer industry are production 
facilities designed to manufacture fertilizer products annually at full 
capacity. Many of these facilities are located near the source of raw 
materials but far from the major consuming regions. Furthermore, it is 
important to understand that most U.S. nitrogen fertilizer is consumed 
within a very short time frame in the fall and spring application 
seasons. As a result, an extensive distribution and storage 
infrastructure has been developed over the years to bridge this 
geographic and seasonal gap to ensure that American farmers would have 
adequate supplies at the right time. This system is specifically 
designed to move and handle large volumes of product from domestic 
production sites to the major consuming areas. Thus, the distribution 
and storage infrastructure is purposely integrated into the domestic 
production system to ensure efficiency, economies of scale and 
reliability of supply.
    Domestic fertilizer manufacturing facilities have historically 
provided top-paying jobs and additional employment opportunities in 
local communities. According to a recent Baton Rouge Advocate article 
1, jobs in chemical manufacturing are at the top of the pay 
scale among Louisiana manufacturers. The average chemical industry wage 
in February was $25.23 per hour, with a 44.2-hour workweek producing 
$1,115 per worker per week, compared to a general manufacturing wage of 
$17.63 per hour or $756 on a 42.9-hour workweek. Chemical industry jobs 
also have a high multiplier effect. In East Baton Rouge Parish, for 
example, each chemical job is estimated to support another 4.6 
positions in the overall job market.
---------------------------------------------------------------------------
    \1\  Bongiorni, S. (2003, May 11). Overseas business threatens 
Louisiana's chemical industry. The Baton Rouge Advocate.
---------------------------------------------------------------------------
    A scenario of continued high natural gas prices will undoubtedly 
lead to more U.S. plant closures and abandonment of marginally 
profitable infrastructure in rural communities. While higher volumes of 
imports will fill part of the potential loss in U.S. supply, domestic 
production and distribution must remain viable to fully meet farmer 
demand. Because the current distribution and storage system within the 
U.S. was constructed around a U.S. supply base, there is limited 
infrastructure to off-load, store and transport larger and larger 
volumes of imports. The lack of infrastructure is particularly apparent 
for anhydrous ammonia, which requires refrigerated or pressurized 
tanks, pipelines, railcars and barges. Massive new investment and 
considerable lead-time will be needed if the existing infrastructure 
assets are left permanently stranded. Much like the proposed 
improvements to liquefied natural gas infrastructure, restructuring the 
domestic fertilizer distribution system to efficiently handle adequate 
levels of imports will be on a decennary time scale.
    The answer is not simply to say that we will just rely on imported 
fertilizer. Increased reliance on imports would also result in a 
considerable increase in the potential for supply and price volatility. 
The vast majority of the U.S. industry was constructed to meet U.S. 
demand. Offshore supply, on the other hand, was largely constructed to 
opportunistically compete in a world market. In other words, putting 
aside unfairly traded product, cargoes are generally sold and shipped 
to those international markets that will yield the highest netback 
prices. Imports are also subject to changes in world economic 
conditions, fluctuating exchange rates and political and/or policy 
changes in other countries.
    Moreover, increased U.S. reliance on imports will not result in 
lower prices for U.S. farmers. Nitrogen fertilizers are a fungible 
commodity product for which prices are set by supply/demand conditions 
and, therefore, by the cash costs of the marginal producer. Under a 
continued environment of high natural gas costs, the marginal supplier 
to the market will be the U.S. producer. Consequently, higher import 
volumes will not translate to lower prices to U.S. farmers.
    High natural gas prices present the most serious threat to the 
fertilizer sector, and to farmers in general, since the energy shocks 
of the 1970s. The fertilizer industry believes it is imperative that 
the U.S. develop a comprehensive and balanced energy policy--one that 
encourages the development of additional supplies and, at the same 
time, promotes the efficient use of a variety of energy sources and 
technologies.
    More specifically, the fertilizer industry stresses that the most 
effective measure to deal with high natural gas prices over the short-
term are incentives and other regulatory measures that will reverse 
decades of artificially induced demand for natural gas over other fuel 
technology for electric power generation. Congress itself is among 
those who share in the responsibility for this problem, as the 
requirements of the Clean Air Act have made it increasingly difficult 
to permit, construct and enlarge the nation's coal-fired plants. Where 
the nation once relied on coal for the lion's share of its electric 
power, over 90% of all new power plant construction intends to rely on 
natural gas. Recent proposals to impose further rules on mercury and 
CO2 emissions will only add to the burden of coal-fired generators and 
hasten the move to natural gas. This, of course, will cause a 
tremendous new demand to be placed on the existing gas supply base, 
ensure high prices into the foreseeable future, and threaten the 
viability of the domestic nitrogen fertilizer industry--an industry, 
unlike the electric power industry, that does not have an alternative 
to natural gas. Accordingly, any legislation passed by this Committee 
should ensure that all coal, nuclear and hydroelectric plants are able 
to operate safely at their full capacity, and that incentives are 
provided and obstacles removed to ensure that new coal and nuclear 
facilities are constructed.
    The fertilizer industry also supports a thorough review of those 
policies that severely restrict oil and gas production on multiple-use 
federal lands and large portions of the continental shelf. We believe 
that access to these reserves can be substantially beneficial towards 
meeting the Nation's energy needs without compromising other legitimate 
interests.
    For those of us in the fertilizer industry, ``the future is now.'' 
We encourage this Committee, the Congress, and the Bush Administration 
to continue to aggressively look for ways to even further expedite 
projects which not only increase supplies, but also help get supplies 
to the fertilizer industry in the near term. We think bold, creative 
initiatives are needed. In fact, we understand that domestic supplies 
are being found which cannot get to market because the delivery systems 
are just not there. Anything that this Committee, the Congress and the 
Administration can do to expedite the creation of new modes of delivery 
for untapped domestic natural gas supplies or to facilitate imports can 
help our industry in the immediate future. This can take the form of 
new pipelines and even more innovative solutions such as encouraging 
the development of the maritime transportation of natural gas in the 
form of compressed natural gas or CNG.
    Specifically, I would like to commend this Committee and the 
Congress for its efforts just completed last year to facilitate the 
importation of new supplies of natural gas by enacting provisions of 
the Maritime Transportation Security Act of 2002 that created deepwater 
natural gas ports. This is an important first step in helping to 
increase natural gas availability in the United States and help to 
bring supply and demand back into better balance.
    There is a deep-water port project right off the Louisiana coast 
that can come on-stream sooner rather than later because of its unique 
history. Freeport-McMoRan Sulphur LLC's permit is to be submitted in 
the next few months to the Coast Guard and other agencies for 
regulatory approval. Freeport is currently working to convert this 
massive offshore complex that once produced sulfur, to a deepwater 
natural gas port. The ``Main Pass Energy Hub,'' will offload LNG from 
tankers and re-gasify the gas on the platforms formerly used for sulfur 
production. Since the facility is located on a giant salt dome--two 
miles across in diameter--Freeport envisions providing major storage 
facilities for the re-gasified gas in salt caverns created and accessed 
by wells drilled from the existing platforms. The Department of the 
Interior would regulate the storage, in offshore salt caverns, of 
natural gas produced from outside the waters of the Outer Continental 
Shelf (OCS); thereby enabling Freeport to store imported gas in salt 
caverns underlying OCS waters.
    In addition to this unique project and to substantially increase 
the supply of natural gas in the market, we urge that Congress 
encourage the development and acceptance of the maritime transportation 
of natural gas in the form of compressed natural gas or CNG. As opposed 
to LNG, where natural gas (methane) is cooled and stored as a liquid, 
the CNG gas remains in the gaseous phase and is stored under such 
pressure so that it is compressed. This enables the transportation and 
storage of a much greater volume of gas.
    Although the technology of maritime transport of LNG has become 
accepted for use in the waters of the United States, the technology of 
maritime transport of CNG is now under review. The potential for the 
acceptance of maritime transport of CNG to increase natural gas 
supplies is tremendous because it is less expensive and is within 
shorter distances than LNG to transport and re-gasify.
    Its acceptance will enable the production and delivery to market of 
a gas produced in federal waters of the Gulf of Mexico that would 
otherwise be uneconomical to produce. Such gas may either be found 
underlying the shallow waters of the Gulf of Mexico where it is 
economically ``stranded'' due to distance from a pipeline. It may be 
associated with oil produced in the deep waters of the Gulf of Mexico, 
but is likewise stranded due to distance from a pipeline. As the oil is 
produced, the associated gas is pumped back into the geological 
formation from which it came due to the uneconomical nature of the 
process. The Department of the Interior has informed OCS producers that 
they may return this gas to the reservoir as long as they have a plan 
for producing it sometime in the future. The delivery of this gas, as 
well as gas produced from elsewhere nearby in the Western Hemisphere 
will be made economical with the approval of CNG transport in U.S. 
waters. We urge the acceleration of efforts to approve the use of this 
technology in U.S. waters.
    We are in no position to be an expert on Freeport's project or any 
other specific project underway. Regardless, we must urge the Congress 
and the Administration to take a very close look and consider 
expediting permits for any project that can help save our industry and 
the jobs that we create. We are very excited about potential projects 
that would enhance the supply of gas coming to our Nation on an 
expedited basis.
    In summary, the fertilizer industry believes that a balanced and 
comprehensive energy policy is not only long overdue, but also 
essential to the long-term viability of this strategic sector. It is 
also crucial to the American farmer, given that almost one-third of 
U.S. crop production is derived from nitrogen fertilizer (Figure 10).
    Thank you for the opportunity to discuss these issues with you 
today. We look forward to working with you over the next few months, 
and I would be pleased to answer any questions you may have on the 
fertilizer industry and natural gas pricing issues.
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    Chairman Tauzin. Thank you very much, Mr. Liuzzi.
    We are pleased to welcome Mr. Forrest Hoglund, Chairman and 
CEO of Arctic Resources Company of Houston Texas. Mr. Hoglund.

                STATEMENT OF FORREST E. HOGLUND

    Mr. Hoglund. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to testify today.
    The most significant action that can be taken to improve 
natural gas supplies is defined as an economic and 
environmentally satisfactory way of accessing the 44 trillion 
cubic feet of proven reserves in Alaska and Canada and the 160 
trillion cubic feet of Arctic gas potential. Let me assure you 
high-cost, mandated pipelines are not the answer. In fact, 
Congress is in the midst of playing local politics with the 
most important energy project in the United States.
    The question of tapping Arctic gas has been around for a 
long time. Industry studied the situation in the mid-1970's and 
almost all companies agreed one northern route picking up 
Canadian and Alaskan gas was the way to go. Two longer and more 
expensive pipelines was not the answer. Unfortunately, Canada 
blocked the one pipeline answer at that time because aboriginal 
land claims were not in place.
    Now the route question is back again; and our estimates 
show that the two-pipeline Alaskan approach is twice as long, 
goes through 900 miles of mountains and is twice the cost of 
the one-pipeline northern route--$14.6 billion versus $7.8 
billion.
    Not surprisingly, the major producers who want a subsidy 
don't agree. They say that the routes are close in cost, but 
that claim should be examined.
    First of all, they say it would cost $20 billion to lay 
clear to Chicago. It doesn't appear that they need to go beyond 
Edmonton, Alberta; and that would save $5 billion.
    Second, after they saw they might get subsidies, a $4 
billion contingency was added to their northern route 
estimates, apparently the ice affecting summertime 
construction. We are proposing wintertime construction.
    Also, they never mentioned the additional $3 billion needed 
for the Canadian pipeline segment.
    The point that should be made is that there are regulatory 
bodies in the U.S. and Canada to decide these issues. Congress 
should not pick winners or losers on questionable one-sided 
data.
    Who is for the Alaskan approach? The Alaskans, of course, 
and two major oil companies who think they can get others to 
accept the economic risk. They have convinced Congress to 
mandate their line even though the administration is soundly 
against it.
    Also, Canada is not being included in the discussion when 
two-thirds of the Alaskan route goes through Canada. Canada has 
expressed strong opposition to subsidized natural gas from 
Alaska and lately has called for a bilateral commission to 
analyze the situation. They are in a position to block the 
projects and have given indications they might.
    Why is Alaska so strongly behind the issue? They want the 
short-term construction jobs and profits, plus they would get 
natural gas to Fairbanks, and that is understandable if the 
costs weren't so huge. On the other hand, they would be giving 
up an extra $4 to $5 billion in State revenue based on their 
own estimates due to higher royalty and severance taxes. They 
would get more long-term jobs for additional exploration and a 
better assurance of the project being completed.
    There are a lot of things conceptually wrong with the 
current proposal being considered in the Senate.
    First, why the mandate? Obviously, they are trying to 
preclude any other alternatives; and when a mandate is pushed 
all kinds of alarms ought to go off in everybody's ahead.
    Second, the majors want debt guarantees of up to $18 
billion to take the gas clear to Chicago, which is a gigantic 
overreach. Normal industry practice would be see how other 
intersecting pipelines near Edmonton could carry the gas to 
market utilizing any spare capacity and low-cost expansions 
available.
    Third, the majors want a tax credit of up to 52 cents for 
MCF if the gas prices drop below $1.35 MCF. This basically 
guarantees them an 80 cent price. If they have gigantic cost 
overruns, like they did when they built the Alaskan oil 
pipeline, the $18 billion loan guarantee might be called, but 
the producers would still get their 80 cents. That is a pretty 
nice deal.
    The proponents say this is similar to a section 29 tax 
credit. It is not at all. Section 29 credits are given when you 
need that to produce the resource. Here you have a cheaper 
alternative that you are trying to mandate out and not even 
consider.
    The intellectual concept behind this U.S. House and Senate 
action is seriously flawed. People who agree include the Bush 
Administration, the Democratic Progressive Policy Institute, 
Taxpayers for Common Sense, the Wall Street Journal, the 
Washington Post, National Environmental Trust, CATO Institute, 
National Center for Policy Analysis and a large number of 
independent producers and associations.
    What should be understood is that Alaska could be the key 
in getting this project done right. If they would agree to work 
for the most economic and best environmental pipeline, then 
industry and government would quickly get behind the right 
project. When the energy bill goes to conference I urge you to 
reconsider the House-passed route mandate and stay firmly 
against the need for tax subsidies for Alaskan gas. Let's pass 
an Energy Bill that will truly pave the way for development of 
Alaskan and other Arctic gas resources.
    Thank you, Mr. Chairman.
    [The prepared statement of Forrest E. Hoglund follows:]
   Prepared Statement of Forrest E. Hoglund, Chairman & CEO, Arctic 
                           Resources Company
    Chairman Tauzin, Congressman Dingell, Members of the Committee: 
Thank you for the opportunity to speak here today on the importance of 
adequate natural gas supplies to our nation's energy security and 
economic vitality. My name is Forrest Hoglund, and I am the CEO of 
Arctic Resources Company (ARC), a sole purpose company developed to 
facilitate permitting, construction and operation of a natural gas 
pipeline from Alaska's North Slope to gas-hungry markets in the lower-
48 states.
    Chief among this nation's opportunities to increase our domestic 
natural gas supplies and increase our energy security is facilitating 
construction of a natural gas pipeline from Alaska's North Slope to 
markets in the lower-48 states in the lowest cost, shortest, and most 
environmentally sensitive manner available. Without Congressional 
impediments currently included in the House and Senate energy bills, 
the market will ensure that this line is constructed and operates to 
the benefit of all natural gas consumers, gas producers and explorers, 
the U.S. government, U.S. taxpayers, Alaskans, Native Peoples and the 
Canadian government.
    Construction of an Arctic natural gas pipeline is the biggest 
impact energy project available and the most important to America 
today. The question to Congress is this: Should a pipeline be 
constructed in the lowest cost and most environmentally responsible 
manner that provides the most benefit for taxpayers and natural gas 
consumers, or should Congress mandate that a high cost, economically 
risky project be undertaken to appease some Alaskan political interests 
and economically benefit the largest oil companies in the world by 
shifting the project risk from the companies to the U.S. tax payers? I 
submit that if the Congress passes legislation in the form that is 
currently being considered, no pipeline will be built.
    The construction of an Arctic gas pipeline has an interesting 
history. There was a big push by industry, the U.S. and the Canadian 
governments for construction of a line 28 years ago. Industry spent 
about $750 million and almost all the stakeholders decided that a 
Northern Route was preferable both economically and environmentally. 
One buried pipeline laid in a good pipeline construction path was much 
better than two pipelines, one of which had to run through 
approximately 900 miles of mountains. The same remains true today. 
Unfortunately in the 70's, due to Aboriginal opposition and Aboriginal 
land claims that were not settled at that time, a Canadian Commission 
called for a 10 year moratorium on a pipeline through the Mackenzie 
Valley, and that ended up blocking the Northern Route. With the 
Northern Route ruled out, President Jimmy Carter approved the Southern 
route in the Alaskan Natural Gas Transportation Act (ANGTA), but it was 
so uneconomic it was never built. Alaskan politicians and labor unions 
kept the ANGTA Route as their dream and kept working to find ways to 
get someone to subsidize its construction.
    Today, Alaska, BP and ConocoPhillips think they have found the way. 
Both last year and apparently this year they have convinced Congress to 
mandate the uneconomic Southern Route. The U.S. Senate is also 
seriously considering some very flawed tax and other economic 
incentives in its energy bill that it knows are needed since the 
mandated route is uneconomic. The Bush Administration is firmly against 
the mandate and these incentives, and considers that approach bad 
energy policy as evidenced in their May 8, 2003, Statement of 
Administration Policy (attached).
                       comparing the two options
    The Alaskan proposal requires two pipelines--the Alaskan Highway 
(or Southern) Route and another to connect Canadian reserves through 
the Mackenzie River Valley. Below are maps of the two separate pipeline 
routes that would be needed to transport both Alaskan North Slope and 
Canadian Mackenzie Valley natural gas to markets.
    This Southern Route parallels the oil pipeline right of way to 
Fairbanks, and then proceeds down the Alaska Highway to pipeline 
interconnects near Edmonton, Alberta. Interestingly, two-thirds of the 
Southern Route line must be laid in Canada. The Mackenzie Valley only 
line originates in the Mackenzie River Delta and follows the Mackenzie 
River Valley south to Edmonton.
    The following map shows the proposed Arctic Resources pipeline 
route. This proposal is very close to the preferred route proposed 28 
years ago.
    The Arctic Resources proposed pipeline proceeds offshore from 
Prudhoe Bay to the Mackenzie River Delta, connects the Canadian 
reserves, and then continues down the Mackenzie River Valley to 
Edmonton, Alberta. The offshore segment of the pipeline will be buried 
in a 15 foot trench and will be constructed during the winter months. 
This route is shorter, faster to construct, and has a lower cost. This 
project does not need subsidies or financial incentives. All one needs 
to do is look at the maps to decide which answer is best.
    As shown in Chart 3, in comparing the competing pipeline proposals, 
one must realize that a Southern Route requires two pipelines whose 
combined total will be twice as long (3490 miles versus 1665 miles) and 
twice the cost ($14.6 Billion versus $7.8 Billion) of a single Northern 
Route. Proponents are working to have the Southern Route subsidized.
    The Northern Route does not need to be subsidized. In fact, the 
Northern Route should create significant tax revenue for both the 
United States and Alaska. Pipeline tariffs on the Northern Route are in 
the range of 50 to 75 cents per thousand cubic feet (Mcf) lower than a 
Southern Route alternative, which means better economics for the 
natural gas explorers and therefore more natural gas will be found for 
American consumers. In any business where a product is a long way from 
the market, the lower-cost transportation system is always more 
desirable. When politics get in the way of sound economics, nothing 
good happens.
    If the economic comparison is so compelling, why are the major 
producers not backing the Northern Route? Good question. They did 28 
years ago, but now, two of the three North Slope majors--BP and 
ConocoPhillips--have fallen in lockstep with the Alaskans. They dispute 
the cost differences (not the distances) and their latest answer is 
that both routes cost nearly the same. It is interesting that this new 
position came after Congress showed a willingness to subsidize the 
Southern Route. Several parts of their estimate need to be expanded 
upon. First, they added roughly a $4 billion cost contingency for 
summertime offshore construction in the Beaufort Sea evidently due to 
more ice problems. This does not affect our estimate since we are 
talking about winter construction. They also say construction costs are 
around $20 billion to get the gas all the way to Chicago when there is 
no clear economic evidence to show that a pipeline needs to go beyond 
the existing pipeline interconnects near Edmonton, Alberta. These two 
producers evidently feel that if the U.S. taxpayers will guarantee the 
debt and subsidize a line to Chicago, why not try for it?
    They also never mention the cost of the line in Canada. Keep in 
mind that they want a mandate so that the projects cannot be compared. 
ARC is not seeking a mandate; we are willing to stand on merit, 
markets, geometry and statutory regulatory requirements. Buying the 
mandate argument is like letting the wolf design how strong the hen 
house will be. The real question should be: Why is Congress mandating a 
route rather than letting the regulatory process and market forces work 
as they were designed? The Bush Administration has recognized this 
important question and has asked the Congress not to mandate a route 
and not to subsidize the pipeline with tax credits. Such Congressional 
action is unnecessary. It could be very expensive for the taxpayers. 
And, it will jeopardize the construction of any pipeline by aggravating 
our Canadian neighbors.
                  important interests not represented
    Several important parties and issues are being ignored in the 
current Congressional debate on construction of this natural gas 
pipeline. First of all, Canada is a very important player in this 
pipeline debate because the National Energy Board (NEB) of Canada must 
approve the pipeline plans for either route. About two-thirds of the 
Southern Route goes through Canada (if Edmonton is the terminus), and 
about 90% of the Northern Route is in Canada. Applications must be 
filed with the NEB and the Board must consider economic, regulatory and 
environmental aspects of the line. It will not be in Canada's interest 
to approve a subsidized line for Alaskan gas that will disadvantage 
Canadian gas in the marketplace.
    The Canadian government has been vocal on this issue. The Canadian 
alternative is to build a Canadian-only line which is not very economic 
either. Two high-priced pipelines will definitely limit the exploration 
potential in Alaska and Canada due to higher pipeline tariffs and less 
profit on the lines, to the detriment of both countries. Additionally, 
there are significant Canadian Aboriginal land claim problems with the 
Alaskan route that are being glossed over. The likelihood that Canada 
will delay or block the Alaskan plan is high.
    As previously mentioned, two high cost pipelines into Alaska and 
Canada will limit the exploration efforts in both the North Slope and 
Canada's Mackenzie Valley. A subsidized pipeline will be an economic 
discouragement to exploration and production interests in all other 
North American producing regions. A number of independent companies and 
industry associations have protested against the Congressional actions. 
One low cost pipeline system, selected through market competition in an 
open and transparent regulatory process, with open access features for 
new volumes, is what is needed to maximize the exploration potential in 
each area. This is the most important energy project in North America; 
both countries and other interested parties need to be involved in the 
process.
    Two high cost pipelines, particularly one that goes all the way to 
Chicago from Prudhoe Bay, will be very expensive to U.S. and Canada 
taxpayers and natural gas consumers. The subsidies being considered for 
the Southern Route are designed to move only the current proved 
reserves on the North Slope of Alaska. The Northern Route does not need 
subsidies and, in fact, would create significant tax revenues for both 
Alaska and the United States government. In mandating an uneconomic 
route and forcing taxpayers to subsidize the construction and operation 
of the line, Congress seems to not be fairly representing the majority 
of its constituents.
    Natural gas consumer interests are also not being adequately 
represented. The lowest cost system will create the largest gas 
supplies and the best economic results. If the U.S., Canada and Alaska 
will support the lowest-cost system, it will also be the fastest line 
to be built.
    The project can also be a definite plus for U.S. and Canadian 
businesses if done right. The Southern Route (ANGTA) pipeline plan 
involves laying 52-inch high pressure pipeline through approximately 
900 miles of mountains and the chances of significant cost overruns are 
present. There are no pipe mills in North America that can manufacture 
any significant quantity of 52-inch pipe; only German and Japanese 
mills can manufacture the steel for a pipeline of this magnitude and 
pressure.
    Construction of this natural gas pipeline would be the largest 
steel order in North American history. It would be a shame to 
congressionally mandate a project in which North American pipe mills 
could not participate. The Arctic Resources plan for laying two 36'' 
lines in succession would allow Canadian and U.S. pipe mills to help 
fill the orders. In addition, standard construction equipment could be 
used to lay the pipeline. There is currently no construction equipment 
to lay 52-inch pipe, so contractors would have to build new equipment 
for the project. Operating in mountainous terrain is another cost risk. 
Limited pipe suppliers and unfamiliar equipment are recipes for cost 
overruns. With regard to jobs, there is no great differential between 
the routes. Many qualified people will be needed, and either route will 
have to employ significant labor from Canada, Alaska, and the lower-48.
                           the route mandate
    There are several flaws in the route mandate and the subsidies 
being proposed in the House legislation (H.R. 6) and the Senate version 
(S. 14).
    First of all, there is a better route than the Southern Route. A 
single Northern Route is preferable to two--an expensive Alaskan line, 
plus another line through the Mackenzie Valley for the Canadian 
reserves. As noted, in ARC's view, the two lines would be twice as long 
and cost twice as much as one Northern line. In addition, the footprint 
of the pipeline would be 3,400 miles instead of 1700.
    A mandate for the more costly option does nobody any good over the 
long term and should be fought as hard as the tax and economic subsidy 
being proposed.
                         the tax credit subsidy
    This Senate's proposed subsidy package also has several 
questionable features. The $.52 per million British thermal units 
(MMBtu) tax credit that the Senate Finance Committee has endorsed would 
kick in when wellhead prices dip below $1.35 per/Mcf. There are two 
objectionable features in that approach.
    First, proponents claim that up to 20% of U.S. gas has Section 29 
credits, so they should get these credits as well. What the Senate has 
proposed is not a Section 29 tax credit. Section 29 credits are 
normally given when it has been established that they are needed to 
develop the resource. The credits would not be given if there were less 
costly ways of developing the resource. Alaska and two major companies' 
logic is to first mandate that a high-cost route be built, then a 
subsidy would obviously be needed. A much better, free market approach 
would be to have no mandate and no subsidy. In the alterative, if 
Congress deems that subsidies are necessary, then they should apply to 
any route built and be available to any gas that moves through the 
pipeline.
    Secondly, basing the tax credit on the North Slope wellhead price 
is a way of shifting the cost/risk responsibility from the North Slope 
gas producers (BP, ConocoPhillips and ExxonMobil) to the pipeline debt 
holders or guarantors. If the high-cost approach being taken by the 
majors ends up costing considerably more, the multi-national oil 
company producers would still be guaranteed at least $.52/Mcf after 
taxes (that is more like an $.80 wellhead price), no matter how high 
the pipeline tariff goes. The major producers have found a tricky way 
to shift the risk away from them. Congress should recall that the last 
time the majors built a big pipeline in Alaska, the Alaskan oil 
pipeline, the cost estimate of roughly $900 million ended up ballooning 
to $9 billion.
                            other subsidies
    In another questionable maneuver, the majors also want to include 
the gas conditioning plant in the pipeline tariff before getting to a 
wellhead price. The plant is needed to clean out CO2 and 
nitrogen from the gas and, under normal industry practices, that cost 
would not be included in a pipeline tariff. For example, if other 
producers have clean gas, they would not need a gas conditioning plant 
and they would not want to pay for a portion of the majors' plant. By 
trying to include the plant in the tariff, the total pipeline tariff is 
higher and, therefore, the wellhead price lower, which means the tax 
credit is triggered faster.
    They also want and the Senate legislation provides for federal debt 
guarantees of up to $18 billion for the pipeline. That level of 
guarantee is needed to get the pipeline all the way to Chicago so that 
the majors can control the gas going to market there. Normally the line 
would stop near Edmonton where existing or expanded intersecting 
pipelines would move the gas to markets on the West Coast, Midwest, or 
wherever else they may be needed.
    But, if the Alaskan parties can convince the government to 
guarantee the loan, the line can be constructed all the way to Chicago 
and the other pipelines will be bypassed. That would limit competition 
and further exacerbate the problems of industrial and other consumers 
as they struggle with high gas prices. A much better approach would be 
to only approve enough in loan guarantees (approximately $8 billion) to 
get the gas to Edmonton and to make it applicable to all routes. The 
Canadians may also wonder why the U.S. is guaranteeing all the debt for 
a pipeline that is two-thirds in Canada, particularly when the 
Canadians oppose this treatment.
    It is difficult to get the right thing done for taxpayers and 
natural gas consumers when the major reserve holders have fallen into 
the Alaskan web. They have been convinced that the taxpayers will 
backstop any project financial risk due to the Alaskan political 
strength. It must be difficult when the major stakeholders spent a lot 
of money 28 years ago and decided the Northern Route was lower cost, 
shorter to construct and was better environmentally to now try to argue 
the other side. Intellectually, many Alaskans, consumers and taxpayers, 
natural gas producers and others who have studied the problem are 
confounded. The Southern route is 20th century solution of necessity. 
Now, 30 years later, the country needs a 21st century solution to bring 
Alaskan and other Arctic gas to market.
                            the right answer
    The first thing that has to happen to ensure that the appropriate 
pipeline is constructed is to convince Alaska that U.S. taxpayers will 
not take all the risks on the project, and the most economic project 
and the best environmental project is the one that should ultimately be 
built. They also should understand that the Canadian government has a 
legitimate role in approving and permitting the pipeline, and should be 
involved in the planning phase.
    Recently, Canadian Minister Robert Nault called for a Bilateral 
Commission to be formed to study this subject with the U.S. and Canada 
participating. I believe that this is an excellent approach to solving 
the problem. The U.S. also has a lot at stake since a good deal of the 
future exploration potential lies on federal lands; it is not all in 
Alaska.
                             alaska's stake
    It should be noted that Alaskan long term economic impacts will be 
much better with the most economic project being built. Prior studies 
in Alaska have shown that with the Northern Route they should make 
about $4 billion more from severance taxes and royalties due to the 
higher wellhead prices resulting from the lower transportation tariff. 
With the lowest-cost system, Alaska also will have more exploration 
activity and therefore more future gas reserves will be discovered, 
which equates to more long-term jobs in the State. Any short-term 
construction jobs gained from building the Alaskan line do not offset 
the high project cost to the taxpayer or lower long-term gains for 
Alaska.
    When once again Congress refuses to provide tax subsidies for a 
Southern Alaskan line, Alaska's best option will be to work with the 
other states and Canada to get the right project built as quickly as 
possible. When Alaska drops its opposition to the Northern Route, a 
project will then be able to move forward fast, and will end up being 
the best answer for all.
                      what should congress do now?
    The House has passed the route mandate in H.R. 6, and it appears 
the Senate is poised to pass the mandate as well as the tax subsidy and 
debt guarantee package in its energy bill, S. 14. This is exactly what 
happened in the last Congress.
    During the energy conference, the House should remain steadfastly 
opposed to the tax subsidy and debt guarantee package, and, just like 
last session, realize that the mandate without the subsidy is harmful 
to all U.S. natural gas consumers. The Bush Administration is 
supporting the no mandate or subsidy position and instead is promoting 
good energy and financial policy allowing the market to work for the 
right decision.
    As you join with your Senate colleagues in a conference committee 
on your respective energy bills, I would encourage conferees to oppose 
the massive subsidy package and route mandate for an Arctic natural gas 
pipeline. If the route mandate and subsidies are struck from a final 
compromise bill during the Conference Committee, then we can all start 
working on the right answer for everyone. Once that happens, then 
Alaska and the major producers will be free to pursue the most economic 
route available in an expeditious manner and all of the country will 
benefit.
    It should be noted that there are several provisions in the House 
and Senate legislation that would be beneficial to expediting 
construction of an appropriate natural gas pipeline to get these 
reserves to market. Passage of those provisions would lead to greater 
regulatory certainty in pipeline construction, and I would encourage 
you to retain these provisions in conference.
    Thank you, Mr. Chairman, for the opportunity to present this 
testimony before you here today. I appreciate your willingness to 
listen to my concerns, and I hope you will take my recommendations 
under serious consideration when you go to conference with your Senate 
colleagues. I look forward to answering any questions you may have for 
me today.

    Chairman Tauzin. I have got someone I want you to meet. His 
name is Don Young.
    Mr. Hoglund. I have met him.
    Chairman Tauzin. The gentleman next is the TransCanada 
Pipeline Limited President and CEO, Mr. Harold Kvisle.

                  STATEMENT OF HAROLD N. KVISLE

    Mr. Kvisle. Thank you, Mr. Chairman. Thank you to the 
committee for allowing me to address you today.
    TransCanada, first of all, is one of the largest gas 
transmission companies in the world. We transport about 75 
percent of western Canada's gas, and much of that goes to U.S. 
markets. We move significant volumes to markets in California, 
in the U.S. Midwest, and over to New York and New England as 
well. One of our subsidiaries is Foothills Pipe Lines, which 
holds the certificates to construct the Canadian portion of the 
Alaskan natural gas transportation system, the Alaska highway 
project.
    Over the next decade, we do agree that demand for natural 
gas in the United States will grow significantly. We see demand 
growing by about 18 BCF, and we see North American conventional 
supply growing by only 5 BCF. That leaves a gap of more than 10 
BCF that must come either as imported LNG or from frontier 
basins.
    People have expected that much of this gas will come from 
western Canada, but today we see production growth flat-lining 
in western Canada, and there is very significant increase in 
demand in no small part due to the oil projects that exist at 
Fort McMurray and which will supply a very large portion of 
North America's future crude oil requirements.
    On the supply side, we see production growing from various 
parts in the United States. We see one or two BCF a day coming 
from the Rockies, the Gulf Coast, and from western Canada. But 
that growth represents only 5 BCF a day of incremental gas, as 
compared to the 10 BCF a day that I mentioned earlier that we 
will need to balance supply and demand.
    The most significant increase that is available to us today 
I would submit is from the frontier basins in Alaska and 
northern Canada. Let me speak specifically about the Alaska gas 
project.
    In the late 1970's, Canada and the United States signed a 
treaty to govern the transportation of Alaska gas to market. 
Canada enacted the Northern Pipeline Act, which granted 
Foothills the certificates to construct the Canadian portion of 
the project.
    Sorry about the slides.
    We also in Canada established the Northern Pipeline Agency 
to oversee construction of the project. Over the past 25 years, 
Foothills and the Canadian government have maintained those 
certificates and maintained the route entitlements that would 
enable us to get that pipeline built quickly. In 1982, we built 
the Prebuild portion of that pipeline. This does in fact today 
deliver western Canadian gas to markets in California and the 
Chicago regions of the Midwest.
    Under the existing treaty, we think Canada brings you a 
quick and expeditious alternative to get that pipeline built 
through the Canadian portion of the project. By using the 
Foothills structure, you can ensure utilization and 
optimization of existing infrastructure and reduce both capital 
costs and the risk of cost overruns for the project. In 
addition, we can provide market diversity for Alaska gas, 
moving it to markets both east and west of the Rockies, to 
California and to the Midwest. We think this is a significant 
advantage that should not be overlooked.
    With respect to routing, we think that broad stakeholder 
interests are served by two pipes, one to move Mackenzie gas 
down through Canada and through our systems into our North 
American markets and the other to move Alaska gas; and this is 
what TransCanada as proposed for several years now.
    TransCanada and Foothills have been essential to developing 
the transportation infrastructure for northern gas for almost 
30 years. This is not a new project for us. This is something 
that we are prepared to proceed with and implement in the most 
expeditious way. We have never wavered in our belief that both 
Alaska and Mackenzie natural gas will be needed by the North 
American economy. We have patiently maintained both Alaska and 
Canadian transportation projects, and we do intend to play a 
central role in developing the most efficient way to move 
northern gas to market.
    Thank you again for allowing me the opportunity to present 
my views this morning.
    [The prepared statement of Harold N. Kvisle follows:]
   Prepared Statement of Hal Kvisle, President and CEO, TransCanada 
                              Corporation
                              introduction
    Good morning, Chairman Tauzin, Congressman Barton, Members of the 
Committee. My name is Hal Kvisle. I am the President and CEO of 
TransCanada Corporation (TransCanada). Last month, TransCanada 
announced the purchase of the remaining share of Foothills Pipe Lines 
Ltd. (Foothills) it did not already own. Once Canadian Government 
approvals required for the transaction are in hand, TransCanada will 
own 100% of Foothills. TransCanada and Foothills have a longstanding 
interest in the development of northern gas and welcome the opportunity 
to participate in this proceeding.
    Foothills is the owner of the Canadian section of the Alaska 
Natural Gas Transportation System (ANGTS or Alaska Highway Pipeline) 
and joint owner with TransCanada of the Alaskan segment. Foothills 
holds the certificates awarded by the Government of Canada to construct 
the Canadian portion of the Alaska Highway natural gas pipeline 
project. The Prebuild portion of the ANGTS was constructed in the early 
1980's to transport surplus Canadian gas to the United States. The 
Prebuild pipeline has been expanded several times over the past 20 
years. It currently has assets of US$1 billion, a total capacity of 3.3 
Bcf/d and it transports approximately 30% of total Canadian gas exports 
to the United States.
    Foothills' eastern leg runs from central Alberta eastward to a 
point on the Canada/U.S. border where it interconnects with Northern 
Border Pipeline Company to serve gas markets in the Midwest. Foothills' 
western leg extends from central Alberta to a point on the Canada/U.S. 
border where it interconnects with Pacific Gas Transmission to serve 
gas markets in California and the Pacific Northwest.
    TransCanada is a leading North American energy company. It owns one 
of the largest natural gas transmission systems in the world--over 
24,000 miles and has operations and facilities extending across Canada 
and into the northern United States. TransCanada transports 
approximately 75% (5 tcf/year) of western Canada's natural gas 
production to markets across North America. TransCanada also manages or 
controls more than 4,100 MW of electric generation in Canada and the 
United States.
    TransCanada is headquartered in Calgary, Alberta, Canada. Its 
shares trade on the Toronto and New York Stock Exchanges. TransCanada 
has 2,400 employees and total assets of US$14 billion. Our 2002 net 
income was approximately US$500 million.
         assessment of overall north american supply and demand
    TransCanada expects the growth in natural gas demand in North 
America to outpace supply from traditional gas sources over the next 
decade necessitating new gas supply from frontier basins. We believe 
that natural gas from the Mackenzie Delta in Canada's north, Prudhoe 
Bay gas from Alaska and liquefied natural gas (LNG) are all required in 
the next decade if North America is to have acceptable gas prices.
Natural Gas Demand
    TransCanada forecasts total demand in the U.S. and Canada to grow 
by 18 Bcf/d in the ten-year period from 2002 to 2012. The adjacent 
chart highlights Canadian growth of approximately 3.7 Bcf/d or almost 
50% over this timeframe. This dramatic growth in Canadian gas demand 
will require new supply sources to permit western Canadian gas to 
continue to serve its traditional markets. The three U.S. regions that 
are served by Canadian gas exports will increase their gas demand by 
7.6 Bcf/d or approximately 25% in this same timeframe. The remaining 7 
Bcf/d of demand growth will occur in the southern United States.
    The significant growth in Canadian gas demand is focused on western 
Canada and is primarily driven by substantial industrial demand growth 
in Alberta from oilsands and heavy oil development. This chart 
highlights the components of Alberta gas demand over the next decade.
    The Alberta oilsands have recoverable reserves of 315 billion 
barrels. Oil production from the oilsands is expected to grow 
dramatically over the next decade. This increase in oil production will 
replace declining conventional oil production in Canada and provide a 
secure and growing source of oil for North American markets in the long 
term. The oilsands produced 0.8 million barrels per day in 2002. This 
production is expected to nearly triple to 2.3 million barrels per day 
by 2015.
    Achieving this increased oil production, however, is an energy-
intensive process. It will consume approximately 1.5 Bcf/d of 
additional natural gas to extract the oil from the oilsands, produce 
in-situ heavy oil reserves and provide the necessary electricity 
generation for that region. The adjacent map illustrates the current, 
or expected new oil sands or heavy oil sites in northeastern Alberta 
near Fort McMurray over the next decade. Many of these new projects are 
producing or under construction.
    There are several critical uncertainties that would affect our 
forecast of North American natural gas demand. Long-term growth rates 
of the U.S. and Canadian economies, the level of oil prices, and the 
relative price of natural gas to other fuels could all have a 
significant impact on natural gas demand over the next decade. The 
current uncertainties in the power sector, the effect of environmental 
policies such as the Kyoto Protocol in Canada and the conventional 
natural gas supply response will also affect gas prices and demand.
Supply
    Currently, there are some concerns that inadequate natural gas 
supply could cause sustained high gas prices and negatively impact the 
North American economy over the long term. TransCanada expects that gas 
supply from traditional U.S. and Canadian natural gas sources will grow 
by approximately 5 Bcf/d from 2002 through 2012, leaving a gap of more 
than 13 Bcf/day to be filled by new sources of supply. Without new gas 
resources, natural gas prices could be expected to rise high enough to 
restrict gas demand, thereby balancing the market. We forecast both 
sources of Arctic gas coming on-stream by 2012--Mackenzie Delta gas 
from northern Canada in late 2008 and Prudhoe Bay gas from Alaska in 
late 2011. Significant new LNG will also be required; beyond the 
capacities of the existing four LNG terminals.
    The chart above indicates that the Rockies, the Gulf Coast and the 
Western Canadian Sedimentary Basin (WCSB) are the only traditional 
exploration basins expected to increase their gas supply over the next 
decade. The relative growth in the Rockies is significant, with much 
more modest growth rates in the Gulf Coast and western Canada. More 
than 5 Bcf/d from northern Canada and Alaska is required by 2012, as 
well as an additional 7 Bcf/d of LNG to balance the market and bring 
gas prices back to US$4.00 per MMbtu and keep them in that range.
    Western Canadian gas production increased more than 50% in the 
1990's, but has leveled off post-2000 despite a significant increase in 
wells drilled and connected. More than 10,000 wells are expected to be 
drilled per year going forward to allow western Canada to maintain and 
modestly increase its natural gas production. The increasing maturity 
of the basin and the annual depletion of approximately 3.5 Bcf/d 
necessitates high levels of drilling each year. This same situation 
exists in the Lower 48 gas basins.
    The modest increase of 1.2 Bcf/d in western Canadian production 
from 2002 to 2012 is clearly insufficient to meet the expected growth 
in Canadian gas demand of some 3.7 Bcf/d over this period, let alone 
provide any additional supply to meet U.S. demand. Natural gas 
production from conventional sources in western Canada is at, or is 
approaching, its peak and is forecast to begin a significant decline 
within a decade.
    Unconventional sources, primarily coal bed methane, are projected 
to begin to make a contribution to western Canadian gas supply over the 
next 10-15 years. Unconventional supply from western Canada should be 
approaching 2 Bcf/d by the time that Alaskan gas is in-service. Gas 
from Canada's North will be available this decade to partially meet the 
growth in demand in western Canada.
    Natural gas production from Canada's East Coast near Sable Island 
has currently plateaued at approximately 0.5 Bcf/d. Our projections 
have this growing to nearly 1 Bcf/d by 2010. Significant uncertainties 
in the near term exist with regards to the specific timing of new 
production from Canada's East Coast.
    Total natural gas supply from traditional sources in Canada and the 
United States will be insufficient to meet projected growth in gas 
demand, in our view. Natural gas from frontier basins in Alaska and 
Canada's north are required within a decade to supplement new LNG 
supplies to ensure North America has competitively priced natural gas.
                           alaska gas project
    In the late 1970's, Canada and the United States signed an 
Agreement on Principles (a ``treaty'') to govern relations between the 
two countries for the transportation of Alaskan gas to market. After a 
protracted competitive regulatory process, the Government of Canada 
passed into law the Northern Pipeline Act to effect the terms of this 
treaty. The Northern Pipeline Act awarded Foothills Pipe Lines Ltd. the 
certificate for the construction of the Canadian portion of the Alaska 
Natural Gas Transportation System along the Alaska Highway. The 
Canadian Government also established the Northern Pipeline Agency as a 
single window regulatory body to oversee the construction of the 
pipeline in Canada. Changes in the North American natural gas supply/
demand balance postponed actual construction of the pipeline from 
Alaska.
    Over the past 25 years, the governments of Canada and the United 
States have maintained the pipeline treaty. The Government of Canada 
and Foothills have maintained Foothills' certificate to construct the 
Canadian portion of the pipeline. The Northern Pipeline Agency 
continues as the regulatory body to oversee the construction in Canada. 
Foothills' certificates to transport Alaskan gas across Canada remain 
valid today. Foothills pipeline through Canada can connect to a 
pipeline in the State of Alaska constructed under the Alaska Natural 
Gas Transportation Act or other U.S. legislation.
    In 1981/82, Foothills used its certificate to construct the 
Prebuild pipeline to transport available Canadian gas to U.S. markets 
in advance of the startup of Alaskan gas. Utilization of the Foothills 
system through Canada under the Northern Pipeline Act provides 
regulatory structure and certainty for Alaskan gas, as no new 
legislation or regulations are needed in Canada. It is the most 
expeditious and preferred means to advance the Alaska pipeline project 
within and across Canada.
    The Foothills Prebuild system is integrated with the existing 
western Canadian pipeline grid. Construction of the Alaska project in 
Canada under the Northern Pipeline Act will ensure utilization and 
optimization of existing infrastructure, and provide market diversity 
for Alaskan gas east and west of the Rocky Mountains. The Canadian gas 
infrastructure currently has approximately 2 Bcf/d of spare capacity, 
and we forecast there will be significant spare pipeline capacity at 
the time Alaskan gas is delivered to market. The Alaska project is 
expected to initially transport 4.5 Bcf/d. Integration of the project 
into the existing infrastructure will reduce the capital costs and cost 
overrun risks for a new project, reduce regulatory risks and minimize 
environmental and other societal impacts. All of these benefits are 
available for Alaskan gas by using the existing Canada/U.S. treaty, 
existing Canadian legislation (the Northern Pipeline Act) and 
integration via Foothills with the existing North American pipeline 
grid.
    As is evident from our supply/demand testimony, Foothills and 
TransCanada believe that Alaskan gas is needed soon to meet North 
American gas demand. We believe that using the Foothills system under 
the Northern Pipeline Act in Canada will expedite the Alaska project, 
avoid a new round of negotiations between the U.S. and Canada and 
provide maximum benefits to both countries.
Routing
    With respect to overall northern natural gas development, Foothills 
and TransCanada believe that broad stakeholder interests are best 
served by a two-pipeline solution to move Mackenzie Delta and Prudhoe 
Bay natural gas to market through two separate pipelines. TransCanada 
has been actively engaged to make a stand-alone Mackenzie Valley 
pipeline a reality. The Mackenzie Valley pipeline proponents are 
expected to file a preliminary information package with Canadian 
regulators soon, with a formal application to follow late this year.
    Based on our own in-depth engineering study, TransCanada's and 
Foothills--assessment is that the Alaska Highway route continues to be 
the most economic, least risky and most timely route to transport 
Alaskan gas to market. An over-the-top route has serious, 
uncontrollable weather risks, technology and environmental issues, all 
without a cost advantage. The Prudhoe producers also concluded one year 
ago that the capital cost for an Alaska Highway route was approximately 
the same as an over-the-top route. With the over-the-top risk issues, 
the Canadian certification for the Alaska Highway route in hand, and 
the State of Alaska opposing an over-the-top route, TransCanada and 
Foothills do not consider over-the-top as a viable route option.
    The Mackenzie Valley project is proceeding on its own at this time 
and is currently on target for an in-service date of late 2008. Gas 
from Prudhoe Bay could be delivered to U.S. markets via the Alaska 
Highway pipeline by late 2011. The market has chosen the two-pipeline 
strategy.
                              conclusions
    Conventional sources of natural gas are not expected to be 
sufficient to meet expected growth in natural gas demand in North 
America over the next decade. Either new gas sources must be connected, 
or alternative fuels at competitive prices must be proven quickly, or 
gas prices will rise to mute demand growth. TransCanada and Foothills 
believe that the frontier gas sources already discovered in northern 
Canada and Alaska can be connected on competitive terms in this 
timeframe to meet market demands. Construction of two pipelines from 
Alaska and northern Canada will spur additional exploration for natural 
gas in those regions. This will provide additional supply for North 
American consumers, beyond the already substantial proven Arctic gas 
reserves.
    Mackenzie Delta gas is expected to be in-service in approximately 
five years. This gas will primarily serve growing demand in western 
Canada and will therefore permit conventional western Canadian gas to 
serve its traditional markets in Canada and the U.S. Alaskan gas can be 
in-service by 2011 by moving along the Alaska Highway and across Canada 
under the existing Canada/U.S. treaty and the Northern Pipeline Act 
using the Foothills system. Significant benefits are available by 
integration with the existing North American pipeline grid in Alberta.
    TransCanada and Foothills have been engaged in developing the 
transportation infrastructure for northern gas for almost thirty years. 
We have never wavered in our belief that both Alaskan and Mackenzie 
natural gas will be needed by the North American economy. TransCanada 
and Foothills have patiently maintained, since the 1970's, both the 
Alaskan and Canadian transportation projects and clearly intend to 
continue to play a central role in developing the most efficient 
transportation system for northern gas.
    Thank you for this opportunity to present our views on the North 
American supply and demand picture and, particularly, northern gas from 
the Canadian Arctic and Alaska.

    Chairman Tauzin. Thank you very much, Mr. Kvisle.
    Now, finally, Dr. Jeffery Currie, Managing Director of 
Goldman, Sachs of New York, New York, to give us the financial 
perspective on this looming crisis.
    Mr. Currie.

                 STATEMENT OF JEFFREY R. CURRIE

    Mr. Currie. Thank you, Mr. Chairman and members of the 
committee, for this opportunity to testify before you today 
about the short-term and long-term issues surrounding the U.S. 
natural gas market. I am a Managing Director at Goldman, Sachs 
where I am the senior energy economist, but I want to emphasize 
that the views presented here today are my own and do not 
represent the views of Goldman, Sachs.
    The core problem with the U.S. natural gas market is 
inadequate infrastructure. This makes the current shortage very 
different from a normal cyclical shortage and will require much 
more dramatic action than simply allowing the markets to 
function.
    Although the public attention has been focused on the 
ability to grow natural supply in the current environment, 
however, the underlying shortages in storage and transportation 
are the primary constraints on both supply and demand growth. 
The infrastructure in natural gas is so depleted that much of 
the adjustment has been and will continue to be in demand. The 
reason for this is that demand is the quicker and lower cost 
margin of adjustment, not supply.
    Another way to view this is that destroying demand is much 
faster and cheaper than building expensive pipelines with long 
lead times. As a result, price spikes typically lead to demand 
destruction, not new supply. The demand destruction, in turn, 
creates dramatic price declines and, hence, the price 
volatility that we currently see today.
    However, the much-needed investment in new infrastructure 
is ultimately discouraged by the increasing risky price 
environment in the core returns on these assets. Demand 
destruction is not a long-term solution to the problem. 
Shortages will develop again once demand recovers and create 
subsequent pricing spikes.
    What we have on our hands right here is a vicious cycle 
that continues to repeat itself. But not only do these 
infrastructure constraints restrict demand growth, they also 
restrict the ability to grow supply. What this suggests is that 
solving the basic supply problem will not in itself solve the 
deliverability problems currently facing the natural gas 
market.
    The basic supply question of whether to open up areas of 
drilling or depend upon LNG is a very important long-term 
issue, and I do not want to dismiss it. However, in the current 
environment, even if there was significant surplus gas, and 
there is surplus gas in the Rocky Mountains, the market doesn't 
possess the pipeline capacity to transport it. And even if it 
had the pipeline capacity to transport it, the market lacks the 
storage capacity to store it.
    To demonstrate the critical importance these infrastructure 
constraints play, let's review the winter and summer of 2001. 
That winter severe shortages developed from a combination of 
cold weather and a lack of supply. Once inventories were 
exhausted, physical shortages turned critical. This resulted in 
a massive price spike to $10 that destroyed price-sensitive 
industrial demand to make room for heating demand. The loss to 
industrial demand was massive, a 20 percent permanent decline 
that resulted in the loss of at least 200,000 manufacturing 
jobs.
    The price spike also triggered a modest supply response 
which then, combined with the sharp drop in industrial demand, 
created a very large surplus in gas that took only 6 months to 
completely overwhelm the entire U.S. natural gas 
infrastructure.
    By the end of summer of 2001 surplus gas had nowhere to go. 
Gas prices collapsed to under $2, and ultimately production had 
to be shut in.
    So the broader question really becomes, why is the 
infrastructure so inadequate? The answer in its simplest form 
is that investing in energy infrastructure is distinctly 
unprofitable. A combination of regulation, taxes, and direct 
market intervention has made the return on capital in the 
energy industry a break-even proposition at best.
    In 2001, a period of record high gas prices and record high 
equity evaluations, the entire gas industry--supply, 
transmission, and distribution--was actually valued at only 73 
percent of the total cash invested. It is no wonder the capital 
markets have responded by not providing the capital to expand, 
and the net result is the capacity constraints that you see 
today.
    The paradox of all this is that the underinvestment in 
infrastructure by the market is the correct economic outcome, 
given these poor rates of return. The best use of capital is in 
other industries where rates of return are higher. As the 
market solution is not concerned with volatility but rather 
with the expected rate of return, the market fails to generate 
the excess capacity or reserve capacity that is required to 
lower the price volatility. What this suggests is that 
transportation and storage assets should be viewed as public 
goods and treated just like a freeway or toll road.
    The key policy aim in this context should be to create 
excess capacity that the market fails to generate. Such a 
policy would dramatically reduce price volatility, investment 
risk and create a more conducive environment for demand and 
growth.
    That concludes my remarks, and thank you very much for your 
time to present my views.
    [The prepared statement of Jeffrey R. Currie follows:]
 Prepared Statement of Jeffrey R. Currie, Managing Director, Goldman, 
                              Sachs & Co.
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify before you today about the short-term and long-
term issues surrounding the natural gas market.
    My name is Jeffrey Currie. I am a Managing Director of Goldman 
Sachs, where I am the Senior Energy Economist. The views presented here 
today are my own and do not necessarily reflect the views of Goldman, 
Sachs & Co.
    The current shortage in the natural gas market is quite different 
from a normal cyclical shortage, and more dramatic action than simply 
allowing the market to function will be necessary to address the core 
problem, which is significant underinvestment in basic infrastructure. 
Public attention has been focused on the ability to grow natural gas 
supply. However, in this case, the underlying shortages in storage and 
transportation are the primary constraint on both supply and demand 
growth.
    The infrastructure in natural gas is so depleted that much of the 
adjustment has been and will continue to be in demand. Since demand is 
the quicker and lower-cost margin of adjustment, rather than supply, 
price spikes are likely to lead to demand destruction, which will 
quickly result in dramatic price declines. The much-needed investment 
in new infrastructure, however, has been and continues to be 
discouraged by poor returns that are exacerbated by an increasingly 
risky price environment. Since demand adjustments are not a long-term 
solution to the problem, shortages will develop again once demand 
recovers, creating a subsequent spike in prices.
    Further, these shortages in basic underlying infrastructure have 
prevented efficient use of existing supplies and efficient development 
of new supplies, which suggests that solving the basic supply problem 
will not, by itself, resolve the deliverability problems currently 
facing the natural gas market. The basic supply question of whether to 
open up areas to drilling or depend on LNG imports is a very important 
long-term issue. However, 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. Similar operational constraints also 
apply to potential LNG imports.
    As a case study, the winter and summer of 2001 demonstrate the 
economic impact of constraints on storage and pipeline capacity. That 
winter, severe shortages developed from a combination of cold weather 
and a lack of supply. Once inventories were exhausted, physical 
shortages turned critical, resulting in a massive price spike to 
$10.00/mmBtu that destroyed price-sensitive industrial demand to make 
room for essential heating demand. The loss in industrial demand was 
massive: a 20% permanent decline that resulted in the loss of at least 
200 thousand manufacturing jobs (see Exhibit 1). Yet, the price spike 
also triggered a modest supply response, which when combined with the 
sharp drop in industrial demand, created a very large surplus of gas 
that took only six months to completely overwhelm the entire US natural 
gas infrastructure. By the end of the summer of 2001, surplus gas had 
nowhere to go, gas prices collapsed to under $2.00/mmBtu, and 
ultimately production had to be shut in (see Exhibit 2).
    The reason for this rapid reversal is straightforward economics--
the industry did not possess the infrastructure to store or transport 
the surplus gas for a future supply shortage. When another shortage 
occurred only a year later in the winter of 2002/2003, the market had 
insufficient inventories to handle it. Looking forward from today, even 
if the industry filled storage to capacity by the end of this October, 
the inventory would still only cover 75% of all potential winter 
outcomes, leaving the market with a 25% chance of running into severe 
shortages before the end of next winter even under an improved supply 
outlook.
 lack of storage capacity is the key determinant of natural gas price 
                               volatility
    These experiences of the last couple of years show that storage 
capacity is the key determinant of natural gas price volatility. 
Storage capacity provides the system with a buffer to supply and demand 
shocks by allowing it to run surpluses and deficits that smooth the 
normal cyclical swings in prices. As storage capacity has failed to 
keep pace with growth in demand over the past two decades, this buffer 
has shrunk relative to the size of the market, resulting in chronically 
higher-than-normal price volatility.
    In the 1980s, we had about 1,400 bcf of storage beyond that which 
is necessary to operate the system and deal with winter demand swings. 
This storage represented about 26 days of forward consumption, a 
significant shock absorber that generated relatively stable natural gas 
prices. Today, we have only 330 bcf of storage beyond what is necessary 
to run the system, which at today's higher demand levels is only 6 days 
of forward consumption. In response, price volatility has exploded to 
nearly three times the historical average (see Exhibit 3). Thus, fairly 
small deficits or surpluses will cause the market to move from full to 
empty and from $2 to $10/mmBtu or back in a relatively short amount of 
time.
       poor rates of returns have resulted in underinvestment in 
                             infrastructure
    The broader question is, ``Why has storage capacity and related 
infrastructure failed to keep pace with demand?'' The answer in its 
simplest form is that a combination of regulation, taxes, and direct 
market intervention have made the return on capital in the energy 
industry a breakeven proposition at best and have made investing in the 
downstream (transportation, storage and other aspects of the 
infrastructure) distinctly unprofitable. The market has responded by 
not providing the capital to expand, and the net result is the capacity 
constraints that you see today.
    If you look at the industry as a whole during 2001, a year which 
posted the highest annual gas prices on record, and saw historically 
high energy equity valuations during the 1H2001, the industry was not 
even valued at the cash that had been invested into it, hardly a 
compelling return. Worse, if we exclude the super majors, the rest of 
the gas supply, transmission, and distribution industry was actually 
valued at only 73% of the cash invested (see Exhibit 4). It is hardly 
surprising that the market has not supplied sufficient additional 
capital to meet current demands.
    If we look deeper into the numbers, the lack of investment in basic 
core infrastructure (storage and transportation) becomes even clearer. 
E&P, the drilling part of the business, has earned a 5.6% return on 
assets on average over the last three years, while distribution and 
transmission, the infrastructure part of the industry, has earned only 
a 2.4% return on assets (see Exhibit 5). This return on assets for 
downstream companies is considerably below the 5.0% return on assets 
earned by the broader S&P 500 index in the second half of the 1990s.
    The reality of modern capital markets is that only industries with 
significant positive returns on cash invested above the cost of capital 
attract new capital. If you compare return on cash invested across 
industries over the last decade for companies in the S&P 500, the 
reason for today's energy shortages become quite transparent. Utilities 
and energy companies managed to produce slightly less than a 9% return 
on cash invested while the rest of the market produced returns on cash 
invested of 12.5% and above (see Exhibit 6). It is hardly surprising 
that most of the investment activity has occurred elsewhere, stressing 
our energy infrastructure to its limits.
      controlled ``deregulation'' increases risks on poor returns
    Worse, the risks associated with these poor returns have increased 
significantly since the mid-1990s due to ``deregulation'' and 
``environmental rules.'' Clearly, the introduction of competition over 
the last decade has increased the risks associated with investments in 
energy infrastructure. In natural gas storage and transmission, 
controlled deregulation as opposed to true competition has dramatically 
increased risks (primarily volume risks). However, the rates of return 
on these assets have not risen over the last decade to compensate for 
the higher risks. Rather, the rates of return have fallen, which makes 
the situation worse on a risk-adjusted basis. Further, following 
``deregulation,'' the rates of return were supported primarily through 
cost reduction, as the emphasis in the industry shifted from 
reliability to efficiency, i.e. through getting rid of the excess. This 
is all too apparent in the drop in transmission and gathering pipeline 
capacity that was deemed ``excess'' during the 1990s (see Exhibit 7).
    To internalize these risks, the industry in the past has relied 
upon long-term forward contracts or some form of vertical integration. 
Current regulations, however, discourage both of these forms of risk 
management, as the emphasis is placed on the use of spot prices and the 
transparency they provide to both consumers and producers. This spot 
price transparency is very effective in providing market signals for 
efficient drilling and consumption patterns, which are relatively low-
capital intensive activities. However, for more capital intensive and 
longer lead-time activities, such as building infrastructure, a spot 
market price signal is a lagging indicator of an investment that should 
have already been made. Instead, forward contracts of sufficiently long 
duration are needed to internalize the risks and induce the needed 
investment in advance of shortages. Further, current regulations 
require any long-term contracts to build infrastructure to have such a 
high subscription rate, near 80%, that excess capacity will rarely be 
built, which reinforces the underinvestment problem.
policy needs to create reserve capacity that market forces are failing 
                              to generate
    The paradox of the current situation is that the underinvestment in 
infrastructure by the market is the correct economic outcome given the 
poor rates of return, as the best use of capital is in other industries 
where the rates of return are higher. The market solution is not 
concerned with volatility, but rather the expected rate of return. This 
solution only leads to new infrastructure when it is absolutely needed, 
which is usually too late. Just look at the only large infrastructure 
projects of the last several years--the Alliance, Kern River, and Gulf 
Stream pipelines--projects brought about by extreme pricing.
    However, reserve or excess capacity should be viewed as a public 
good, just like a road, where markets fail to find a solution. This 
inability of the market to provide adequate incentives for investment 
in reserve infrastructure is where the market fails and why more 
dramatic action is required. Further, the current market and regulatory 
structure reinforces this price volatility as it emphasizes efficiency 
over reliability. Accordingly, the aim of policy should be to reduce 
the price volatility through creating excess capacity without 
significantly sacrificing the efficiency and transparency of a market-
based system.
    Forcing excess capacity through regulation has not been met with 
much success in the past. Before the 1980s, regulatory practices 
emphasized reliability by requiring pipeline companies to demonstrate 
sufficient capacity to serve additional customers before projects would 
be approved. To internalize the risks of such ambitious projects, 30-
year long-term contracts with regulated price caps were often used. 
These price caps were fixed and ultimately led to significant market 
distortions, as the market could not clear properly. The stranded costs 
generated during this regulatory period have been estimated at $80 
billion in 2002 dollars.
    Interestingly, the costs to consumers due to increased volatility 
in the post-``deregulation'' period are not much smaller. Since 1995, 
these costs, measured as the cumulative difference between the price 
paid and marginal cost of production is near $75 billion in 2002 
dollars, nearly the same as stranded costs generated from the 
regulatory period, and this does not include the costs of the 
California crisis and the long-term loss of manufacturing activity. 
Further, with the cost of an arctic pipeline estimated at $10 billion, 
these costs would have paid for new infrastructure and then some.
    What this suggests is that transportation and storage assets may be 
thought of as public goods and could be treated just like a freeway or 
toll road. The US energy consumer would have most likely been made 
better off had the government taxed natural gas prices and used the 
proceeds to build infrastructure, just as it taxes gasoline to build 
roads. The key issue is to create excess capacity that market forces 
are failing to generate. This would dramatically reduce price 
volatility, investment risk, and create a more conducive environment 
for demand growth.
  the lack of infrastructure is a limiting factor on economic growth.
    Energy is rapidly becoming a major limiting factor on economic 
growth. If the core energy infrastructure in the United States does not 
improve, energy crises are likely to become progressively more 
frequent, more severe, and more disruptive of economic activity. 
Without significant new investment, each crisis further damages the 
system by permanently destroying the price-sensitive demand that serves 
as a pressure valve and by giving companies incentives to stress 
existing facilities to meet excess demand, leading to accidents and 
capacity losses.
    The long-term consequences of either allowing infrastructure to 
remain inadequate or sacrificing environmental concerns in the name of 
economic expediency are unacceptable. Finding a ``workable'' solution 
will require imagination and flexibility from both a market and policy 
perspective. Economic solutions depend on diversification of risk and 
flexibility of response, both of which are lacking under the current 
market and regulatory structure.
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    Chairman Tauzin. Thank you very much.
    The Chair recognizes himself for 5 minutes for the purpose 
of questions.
    I have in my hand a story by the Reuters news service today 
in which it details how the Energy Secretary Spence Abraham is 
literally scheduling an emergency meeting on June 26th to 
consider ways to conserve in this critical area. So the 
Department of Energy is obviously very concerned, Mr. Caruso, 
when your boss is scheduling this kind of a deal.
    Then, Mr. Mason, I look at your testimony, and I want to 
quote from it. It is a pretty strong message. You say, 
therefore, my message to home owners and renters is the 
conservation of energy can only have a marginal impact on their 
natural gas bills. In effect, the residential consumers have 
already, at least in your State, done the bulk of the 
conservation methods they can achieve. Is that correct?
    Mr. Mason. Thank you, Chairman, Members of Congress.
    It is my belief, based on the fact there was a serious 5 
percent drop over the last 2 years when, on a normal cycle 
basis, there would be a half percent efficiency gained. So I 
think people took serious steps already. That doesn't mean 
other things can't be scrutinized.
    Chairman Tauzin. But you are basically saying the bulk of 
it has already been done. We are about to have an emergency 
conference on what else we can do to conserve. You are telling 
us, at least from Ohio, we have done most of that already.
    Mr. Mason. Congressman, I am stating from the residential 
standpoint, which is only about 25, 26 percent of the total gas 
load.
    Chairman Tauzin. So then we turn back to Mr. Caruso, and we 
note that you give us a hopeful message that you think we can 
ride this out. But, in the extreme, if we have abnormally low 
temperatures and the economy does begin to pick up and demand 
increases, we could have some problems, couldn't we?
    Mr. Caruso. Definitely. Mr. Chairman, that is the reason I 
mentioned that markets are not only tight but the potential for 
volatility remains high with weather or other unusual 
circumstances.
    Chairman Tauzin. Unforeseen circumstances. You also say in 
your statement, in the current environment companies will need 
to obtain large amounts of natural gas from other sources to 
refill storage for the next heating season. What do you mean 
``from other sources?''
    Mr. Caruso. Well, on the supply side, although we have 
heard from our Canadian colleague that that may be difficult, 
we certainly need to increase our imports from both Canada and, 
to the extent possible, limited ability for LNG. But the other 
side of that is the destruction of the demand which has been 
mentioned by several witnesses.
    Chairman Tauzin. That is the other side. But if we are 
limited to other sources, we also face very limited options 
there, don't we? We face limited options in liquid natural gas 
imports to this country; we face limited options in terms of 
Canadian imports. Is that right, Mr. Kvisle? Right now, until 
we have new infrastructure, Mr. Currie, to permit delivery, we 
could be in some pretty tight spots, couldn't we?
    Mr. Caruso. Yes, sir.
    Chairman Tauzin. It is not just the homeowner and the 
consumer. Now we are looking at serious concerns for the farm 
community.
    I want to quote from your testimony, Mr. Liuzzi: High 
natural gas prices present the most serious threat to the 
fertilizer sector and to farmers in general since the energy 
shocks of the 1970's. That is a pretty strong statement. I 
remember those energy shocks in the 1970's. In fact, I was 
elected to Congress in 1980 to come and hopefully straighten 
out the Federal policy that resulted from that.
    What resulted from that was the Federal Government trying 
to control the price of natural gas through government fiat. We 
ended up with the worst disruptions of the natural gas markets 
this country has ever seen.
    My concern is, are we building another problem like that? 
Are we going to face a situation where, because everyone wants 
natural gas to make electricity, it is the most environmentally 
popular source of fuel for electricity, homeowners will start 
seeing their fuel bills go up, shortages could develop 
depending upon weather conditions that we can't predict, and 
all of a sudden, you know, we can't get it fast enough? We 
can't blame Canada this time like the kids from South Park did. 
Canada is trying to get gas to us to the extent they can.
    So we are left with a situation where even our fertilizer 
manufacturers are telling us we might not have the natural gas 
critical to the raw material production of essential 
fertilizers to the farm community and imports can't satisfy 
some of that demand because of critical infrastructure problems 
again in ports and distribution systems. Are we building 
another case where we are going to be debating Federal price 
controls again?
    Can anyone give us a better answer, any one of you out 
there? Mr. Kvisle.
    Mr. Kvisle. I would offer a couple of comments.
    First of all, in the near term there is virtually nothing 
that can be done to significantly increase the supply of 
natural gas. This is a multi-year process. And the big 
projects, whether it is LNG importation or natural gas from the 
north, will----
    Chairman Tauzin. Or gasification of coal, which my friend 
from----
    Mr. Kvisle. These are all 5, 10 years. So the near-term 
market balancing mechanism, as Dr. Currie said, will in fact 
demand destruction.
    I have great sympathy for people in industries like 
fertilizer, but it is the reality of what will balance the 
market in the near term. There is not just an infrastructure 
problem from Canada. We have supplied 50 percent of your 
incremental gas in the past 10 years, and our industry is now 
running flat out. There is not much more production increase 
available.
    Chairman Tauzin. So, to summarize it, short term we got 
very limited options. All we can do is press conservation as 
tough as we can in many circles. Long term, we need some policy 
to get supply back and infrastructure developed to make sure 
people can use it. We need to, long term, think about an 
alternative sources for natural gas in the marketplace; and so 
I yield to my friend from coal country for a discussion of that 
subject.
    Mr. Boucher. Thank you, Mr. Chairman.
    Mr. Caruso, I have several questions of you concerning the 
very enlightening testimony you have presented this morning. 
Among other things, you are projecting an increase in natural 
gas consumption by electricity generators from 5.3 trillion 
cubic feet in 2001 to 10.4 trillion cubic feet by 2025. In 
preparing that projection, what is your assumption about the 
number of new electricity generating plants that will be 
constructed between now and 2025 and how many of those new 
plants do you anticipate will be fueled with natural gas?
    Mr. Caruso. Our Outlook calls for almost 450 gigawatts of 
new capacity to be built between now and 2025. Of that, 80 
percent is assumed to be natural gas-fired; and the largest of 
the remainder would be coal. Then there is a relatively small 
amount that would be wind-generation and other sources of 
renewable energy. That is on the assumption, of course, that, 
as I mentioned in the testimony, that prices for natural gas do 
retreat from these high levels we are seeing this year; and we 
see them continuing probably for 2 or 3 years. But the 
increased availability of gas from our unconventional sources 
does bring that price back into the $3 to $4 per million BTU 
range, a critical assumption in reaching conclusion that 80 
percent of our new electric power plants will be fueled by 
natural gas.
    Mr. Boucher. Okay. You are also predicting that coal prices 
during the course of that period will decline. But you are 
saying that, even with falling coal prices, natural gas is 
going to continue to enjoy an advantage.
    I wonder if you have taken a look at the provisions in the 
Senate version of the energy bill that extends a range of tax 
credits, production tax credits and investment tax credits, to 
electric utilities that use a new generation of clean coal 
technology? The information we have had from the utilities is 
that the level of tax credit afforded by the Senate bill would 
encourage a large number of them to use coal instead of natural 
gas in their new generating units. I wonder if you have taken 
any independent look at that and, if you have, if you could 
share it with us.
    Mr. Caruso. We haven't actually looked at that particular 
provision, but we certainly would be willing to do that, sir, 
if you would so desire.
    Mr. Boucher. If we ask for it. Thank you.
    Let me ask you also about the statement that you made on 
page 17 where you predict that increased U.S. gas production 
through 2025 will come from unconventional sources and also 
from Alaska. Two basic questions about that.
    First of all, what kind of assumptions are you making about 
Alaska gas? We have had a lot of testimony concerning it here 
this morning. Are you assuming that a new pipeline will be 
built? And do you think that that--that this assumption that 
you have made is based upon any level of government support 
such as a loan guaranty or price floor with respect to natural 
gas production?
    Mr. Caruso. Yes, Congressman Boucher. The assumptions about 
the Alaskan natural gas in our long-term Outlook are that a 
pipeline will be built and, based on the outlook for prices 
that I mentioned earlier, that approximately $3.50 per million 
BTU price in today's dollars would be sufficient to attract 
that project. The other assumption we make is that existing 
policies are the basis of that judgment. There are no new 
subsidies that would be included. It would come on line, based 
on our latest Outlook, around the year 2020 using the route 
that was mandated by law, the fact that being the State of 
Alaska has prohibited the so-called northern route.
    Chairman Tauzin. If I can, that was done by statute, was it 
not?
    Mr. Caruso. Yes.
    Mr. Boucher. Let me ask you also about liquefied natural 
gas imports. To what extent do you see any growth in those as 
you make these projections about gas usage?
    Mr. Caruso. We have LNG imports increasing to about 2 
trillion cubic feet by 2025.
    Mr. Boucher. What is the level today?
    Mr. Caruso. It is quite low today, around 200 billion.
    Mr. Boucher. So you are projecting a major increase in LNG 
increase. Do you think that wise? Do you think that is good 
policy?
    Mr. Caruso. Well, I am not in the policy business. But to 
the extent that more options are available to meet growing 
needs, that makes the market more robust and less regional.
    Mr. Boucher. One final question and that is, do you see a 
role for coal gasification as a possible way of bringing a new 
and unconventional means of gas production to the United 
States?
    Mr. Caruso. Our long-term Outlook has very little of that 
in it at this time.
    Mr. Boucher. Thank you very much, Mr. Caruso.
    Chairman Tauzin. Thank you, Mr. Boucher.
    The gentleman, Mr. Whitfield, is recognized I believe for 8 
minutes for questions.
    Mr. Whitfield. Thank you, Mr. Chairman; and I want to thank 
the panel for being with us this morning and for their 
testimony on this important issue.
    Mr. Caruso, in your testimony you talked about in 2025 the 
demand would be 35 trillion cubic feet per year; and the supply 
would be in the neighborhood of 26 or so. Now, on the supply, 
are you including liquefied natural gas in supply on that 
supply side? In the 26 trillion cubic feet, is that including 
liquefied natural gas?
    Mr. Caruso. No, that would be part of net imports needed to 
fill that difference between the 35 trillion cubic feet and the 
26.9 of domestic production.
    Mr. Whitfield. All right. Now, Mr. Liuzzi in his testimony 
referred to artificially induced demand for natural gas; and I 
am assuming you are talking about the Clean Air Act and other 
regulatory matters, is that correct, Mr. Liuzzi?
    Mr. Liuzzi. Yes, sir.
    Mr. Whitfield. Do you all agree with him that there has 
been an artificially induced demand for the supply of gas 
through the policy of the government? Would anybody else like 
to address that issue?
    Mr. Kvisle. TransCanada is also a power generation company, 
including here in the United States. We have used natural gas 
as a fuel for power generation, but those decisions were taken 
in an era where natural gas was quite inexpensive, in the $2 
range. It is a different ball game when natural gas is north of 
$5. I don't know that it is so much a policy inducement as just 
gas was very cheap and a lot of major investments were 
committed. Whether people would commit to that in an era of 
higher gas price I am not certain.
    Mr. Whitfield. Mr. English, would you agree with that 
comment. That there is an artificially induced demand for 
natural gas?
    Mr. English. I am not sure I would term it ``artificial.'' 
There certainly is need based upon current regulations to have 
an environmentally friendly source of fuel for electric 
generation. But I think what we have to continue to keep in 
mind is that we do need a balanced portfolio of fuels for 
electric generation, and we do have an awful lot of coal in 
this country, we have nuclear option that has not been fully 
explored recently for a variety of reasons, lots of options out 
there, that we need have some balance rather than to think that 
we can depend upon just one source of fuel.
    Mr. Whitfield. Well, I certainly agree with that. Like Mr. 
Boucher, being from a coal area, we have such a tremendous 
resource in coal. I, for one, think we need to address and look 
in a new way at this environmental standard that we have in 
America today.
    My friend, Mr. Shimkus, here has a book with him today 
which I have called The Skeptical Environmentalist, written by 
a Professor Lomborg in Europe, who was Mr. Green in Europe. The 
New York Times wrote a large article about his book and another 
book, One Moment on the Earth, written by an environmental 
writer for the New York Times. In both of those books they 
question the models being used in projecting global warming.
    When you talk about this issue of global warming and acid 
rain, people just automatically accept arguments that are being 
made by a lot of environmentalists; and I think that this book 
and others are now bringing to the forefront that this is an 
area that needs objectivity in analyzing some of the models 
being used, particularly when you think of the impact that all 
of this has on our economy.
    I would also like to ask a question about jobs and 
manufacturing. Do any of you feel like that we have lost a lot 
of manufacturing jobs in the U.S. over the last number of years 
as a direct result of this scarcity and pricing of natural gas?
    Mr. Kvisle. Yes.
    Mr. Whitfield. Yes.
    Mr. English. Certainly we have seen the evidence of the 
demand destruction just a couple of years ago has very 
definitely pushed jobs out of this country.
    Mr. Whitfield. When we hear about loss of manufacturing 
jobs, we primarily hear about low wages in China or Mexico or 
whatever and their environmental standards are not as demanding 
as ours. All of this obviously fits in together. But in opening 
statements this morning we heard--and I am not sure which 
report was referred to--but I know our friend from Colorado and 
also California referred to a recent report from the government 
that said that this lack of supply of natural gas, the fact 
that it is not being explored in some of our public lands 
really has nothing to do with that.
    I may be simplifying their comment, and I am sure Ms. 
DeGette will get to it later, but there was some comment like 
that. And yet you all have been testifying this morning that 
you need access to at least part of these public lands. Most of 
you agree with that statement, is that correct?
    Ms. DeGette. Would the gentleman yield real quick?
    Because, actually, they do have access to most of the 
public lands. The question really is, do they--in fact, I 
intend to ask that when it comes up to me. The question is not 
do they need access to public lands, because even I would 
agree, yes, they do. The question is, do they need access to 
some of the public lands like wilderness areas or national 
parks where drilling is not allowed as part of the management 
plan? Because in the vast majority of public lands, oil and gas 
exploration is allowed and, in fact, encouraged.
    Mr. Shimkus [presiding]. Would the gentleman yield for a 
second?
    We are trying to get a handle on there have been a couple 
of reports listed. We would like to ask a UC that these 
reports, whatever is being quoted, be submitted for the record 
so that we could review whether there is one report or two 
reports. If you have the exact report that is being cited, any 
member, if would you like to do that.
    Ms. DeGette. Mr. Chairman, the report I am referring to is 
a study which was prepared at the request of Congress under 
provisions of the 2000 Energy Policy and Conservation Act by 
the Department of Interior, which was released, I believe, in 
December of 2002. I would add to the unanimous consent that 
that report be made a part of the record of this proceeding.
    Mr. Shimkus. Is there objection? Hearing none, so ordered.
    [The report is available at http://www.doi.gov/epca/]
    Mr. Shimkus. The gentleman still has a minute.
    Mr. Whitfield. Mr. Otter.
    Mr. Otter. I thank the gentleman for yielding.
    In responding to earlier comments, I think what we need is 
access to public lands where the gas is; and I think that is 
the report--that is what we want to glean from the report. 
Because I think, at this point at least, if I have read the 
same report when I was on the Resources Committee, the report 
has been grossly misquoted here this morning and way above the 
12 percent that was referred to earlier.
    I thank the gentleman for yielding.
    Mr. Whitfield. Of course, another comment that we can make 
about this, and it was referred to in your testimony, was that 
even if you have access and you are able to bring on new 
supplies of natural gas, being able to transport that and have 
the infrastructure in place is a serious issue as well.
    So, Mr. Chairman, I see my time has already expired. So 
thank you.
    Mr. Shimkus. I would like to thank my colleague from 
Kentucky.
    Now the Chair recognizes the gentleman from Michigan for 8 
minutes.
    Mr. Stupak. Thank you, Mr. Chairman; and thank you to some 
of our witnesses. Sorry I missed some of it. I had to run off 
and do a quick meeting there.
    On this public lands issue, since we seem to be going back 
and forth on it, can you, any of you, give us an estimate how 
much natural gas you believe is tied up on Federal lands? Does 
anyone have an idea, a guesstimation? Other than a bunch. No 
one has an estimation. Yes, sir.
    Mr. Sharples. At the risk of misquoting without numbers in 
front of me, we run--there is confusion about gas that is 
technologically recoverable gas that is economically 
recoverable and whether or not gas is available.
    As to the last point, while we heard that only 12 percent 
of the lands in the West in this EPCA report are technically 
off limits, which would be the parks primarily, wilderness 
areas, that number goes to 40 percent if you look at areas that 
are subject to significant lease restrictions. The number goes 
even higher, and the study did not get to this issue, of lands 
that are subject to very significant post-leasing restrictions.
    Mr. Stupak. I understand all those differentiations, but 
are you all saying this is off limits? But if there is not 
enough gas there to go after, why worry about it then?
    Mr. Sharples. My recollection is that, just looking at the 
Western States, there is an excess of 200 trillion cubic feet 
that is technologically recoverable.
    Mr. Stupak. Two hundred trillion. How long will that take 
this country in our gas consumption?
    Mr. Sharples. Eight years.
    Mr. Stupak. There has been a lot of discussion about new 
gas coming in from Canada. It is going to take another 
pipeline, I take it, to bring that gas down, correct?
    Mr. Kvisle. The issue in Canada is that western Canada 
produces about 17 BCF a day, and the decline rates in western 
Canada are such that that is about as high as it is going to 
get. You are not going to see a lot of increased production out 
of western Canada. In fact, there is increased demand in 
western Canada in the oil sounds so you should not count on 
increased imports from there.
    The only Canadian source that will be significant for you 
in the near term is the McKenzie Delta, where about 1 BCF a day 
will come on stream within the next 5 or 6 years, and that will 
in fact flow through to U.S. markets because it is gas on the 
margin.
    Mr. Stupak. Would you have to build a new pipeline to get 
that gas down or could you use existing infrastructure?
    Mr. Kvisle. That project was first proposed 30 years ago 
when a 3,500 kilometer pipeline to the U.S. was proposed. 
Today, only 1,200 kilometers is required to get it to northern 
Alberta where our existing systems have enough capacity to----
    Mr. Stupak. To pick it up from there.
    Mr. Kvisle. Yes.
    Mr. Caruso. Congressman Stupak, we participated in this 
study with Interior; and our estimate is that if Federal 
legislation were enacted to rescind the State moratorium on 
outer continental shelf development, that would add about 58 
trillion cubic feet of resources. And in the Rocky Mountains, 
if, again, legislation were enacted to allow greater access and 
standard lease, that would add about 70 TCF to resources 
available.
    Mr. Stupak. Good.
    Mr. Caruso were mentioning about current prices around 
$5.50, near $6. You felt that it would stay that way through 
this year.
    Mr. Caruso. Yes, sir.
    Mr. Stupak. In January, will we see a spike like we have 
seen in the last couple of years?
    Mr. Caruso. This morning's spot price of natural gas at 
Henry Hub was $6.25 a million BTU. Our estimate is that the 
average price, which, of course, is based on some longer-term 
prices as well, would be between $5 and $6 per million BTUs. 
However, given possible weather conditions such as a warm 
summer adding to natural gas demand for electricity production 
or wintertime demand for heating, we could very well see price 
spikes that could reach $10 per million BTU in a given 
timeframe such as 1 week or so.
    The good news is most of the historical experiences with 
price spikes are that they are relatively short-lived.
    Mr. Stupak. What we saw in January, 2001, with the $9 was--
and it was nearly $8 last January, so you are saying January 
this year could get as high as 10 and these spikes are for a 
short period of time.
    Mr. Caruso. Certainly a possibility.
    Mr. Stupak. Is it correct to assume that most of the 
natural gas used in this country is used for industrial use as 
opposed to home heating use?
    Mr. Caruso. The industrial use is about 35 to 40 percent of 
our total use of natural gas.
    Mr. Stupak. In that industrial use does that include 
generating electricity?
    Mr. Caruso. No, that is separate.
    Mr. Stupak. How much is generation?
    Mr. Caruso. Generation of electricity, excluding co-
generation, is about 24 percent.
    Mr. Stupak. So, really, about 55 to 60 percent of all the 
natural gas is used for industrial use, either for electric 
generation or for industrial use.
    Mr. Caruso. That is correct, sir.
    Mr. Stupak. But about 60 percent of American homes are 
heated with natural gas. Back in 1978 to 1987, Congress 
restricted the use of natural gas for generation of electricity 
under the Fuel Use Act. It required that power plants be 
capable of generation with natural gas or coal. That law 
obviously expired. Do you think it would be wise to recommend 
any kind of policy like that?
    It seems like we have big users of natural gas for 
generation of electricity--I know we talk about other fuel, 
nuclear, or someone mentioned it earlier. Should we look for 
other ways to generate electricity as opposed to natural gas if 
we are running into this wall of short supply since so many 
homes are heated with natural gas?
    Mr. Caruso. Well, the EIA is not in the policy business, 
but you are correct that the 1990's witnessed an enormous 
explosion of demand for natural gas for electricity generation. 
We certainly expect that would continue in our long-term 
forecasts under existing rules and regulations.
    Mr. Stupak. But if that demand continues, there is going to 
be a point in time, if you can use the word, the ``bubble'' is 
going to burst here pretty quick unless you open up new areas 
to drilling, which may or may not happen. And if you did that, 
that is going to take time. And even if you do open up new 
areas you have to build pipelines to move it and everything 
else. Would it seem more practical or logical to say, hey, 
let's start prioritizing who is going to be using natural gas 
and we have to look at other energy alternatives to produce 
electricity?
    Just throwing that out if anyone cares to comment.
    Mr. Mason.
    Mr. Mason. Chairman, Congressman, in my prepared comments 
one of the things I commented, it is the residential customer, 
as you indicated, who is bound to use natural gas as his energy 
source. But, in fact, many new boilers being constructed also 
have dual-fuel capability so they can go to heating fuel or 
even to coal. I know of two facilities in Ohio alone, 
industrial, not burning natural gas because they have already 
fuel shifted. You do have that kind of demand destruction when 
the price goes up into the $6 range and beyond.
    Now, going back to an earlier comment, we can't play down 
the effect in the wintertime of peaking or spikes in gas, 
because, in fact, that means it has gotten unusually cold; and, 
obviously, that is when the residential customers need it for 
home heating.
    Mr. Stupak. Anyone else care to comment? Yes, sir.
    Mr. Kvisle. I don't believe that the U.S. Government would 
need to regulate or set out guidelines for how natural gas 
needs to be used. I believe the market would take care of that. 
But I would support your question that other sources of 
electric generation should be examined and should be encouraged 
and should be pursued.
    I believe you also made the observation that this would 
take some time, and that is correct. In the near term we have a 
few options, but to use the facilities that are available to 
us, a significant portion of it is gas fired.
    Mr. Stupak. It seems like some of our energy policy is to 
get us through next January and February, then we will worry 
about it again next year. But if you are talking about energy, 
you almost have to start thinking about it long term, 10 and 15 
years out, if you are going to really address it.
    Thank you, Mr. Chairman.
    Mr. Shimkus. My colleagues will have to give me more time 
if he takes more time off the clock.
    Mr. Stupak. I received an extra 3 minutes because I didn't 
do my opening.
    Mr. Shimkus. You ran over already.
    Mr. Stupak. Three minutes, not 3 seconds.
    Mr. Shimkus. The Chair now recognizes my colleague, Mr. 
Shadegg, for 5 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman.
    I want to try to get further information on this issue of 
available resources in the United States and the restriction of 
Federal lands. In that regard, I guess, Mr. Sharples, I want to 
start with you.
    In your testimony, you state flatly that there is a great 
deal of natural gas left in basins which we are not producing 
from. You specifically referred to in the lower 48 there is an 
estimated 213 trillion cubic feet of natural gas behind below 
Federal lands or waters where moratoria or regulation make 
exploration virtually impossible.
    Ms. DeGette has already raised this issue and discussed it. 
I think she makes the point that it is unlikely the Congress is 
going to open up either natural parks or wilderness areas. Your 
testimony does not expand on whether this supply or how much of 
this supply is beneath natural parks or wilderness areas. Can 
you further elucidate the committee on that point?
    Mr. Sharples. I can only extrapolate on a portion of it 
right now. We can certainly get you the information.
    The EPCA study that has been repeatedly referred to, which 
looked at only five basins in the West----
    Mr. Shadegg. Is this the study that Ms. DeGette referred to 
and put in the record?
    Mr. Sharples. Yes, sir. About 12 percent of the lands in 
that study were absolutely off limits, which in my estimation 
would be parks and wilderness areas. The rest of the lands are 
either subject to restrictions on leasing or restrictions on 
permitting or other issues but not necessarily off limits.
    As I said in my testimony, our industry is not looking for 
blanket access. We are looking for a reasonable balance between 
economic needs and environmental concerns. We do think, though, 
there are areas which can be exploited, and those areas can be 
exploited in an environmentally responsible manner. But not a 
blanket access, sir.
    Mr. Shadegg. But you believe that to be--I am sorry, did 
you say less than 12 percent of that total?
    Mr. Sharples. No. I am saying that if we just exclude the 
12 percent that is parks and wilderness and don't even touch 
that, of the remainder, there are certainly areas where the 
resource could be exploited on an environmentally responsible 
and economic basis.
    Mr. Shadegg. In your testimony also, Mr. Sharples, I 
believe you make a reference to two studies. You say a National 
Petroleum Council study and a U.S. Department of Interior 
study, both of which say that there is a tremendous amount of 
natural gas available in the Rocky Mountain region that is 
available and is not, as I understand it, under either national 
parks or wilderness areas. Is that correct?
    Mr. Sharples. Yes, sir.
    Mr. Shadegg. Is this one of those two studies? This is a 
natural gas--meeting the challenges of the Nation's growing 
natural gas demand?
    Mr. Sharples. I believe so, sir.
    Mr. Shadegg. This particular study identifies, I believe, 
137 trillion cubic feet in the Rocky Mountain area that is 
restricted; and it also references 31 trillion cubic feet off 
the east coast of the United States. Could you get for the 
committee information on how much of that is in these truly 
environmentally sensitive areas where no one is going to agree 
to go in and explore a wilderness area or a national park 
versus how much of it is restricted for other reasons?
    Mr. Sharples. We will work on that for you, sir.
    Mr. Shadegg. Mr. English, you testified on the same point. 
Are you familiar with the study Ms. DeGette referred to?
    Mr. English. No, I am not an expert on that.
    Mr. Shadegg. Are you familiar with the Department of 
Interior study which reached the conclusion that has these 
numbers in it showing substantial resources in the Rocky 
Mountains and off the east coast that are restricted?
    Mr. English. I am familiar with the report.
    Mr. Shadegg. Is it your belief that there are substantial 
quantities there that could be obtained without either going 
into national parks or going into wilderness areas?
    Mr. English. I am not expert enough to answer that, either.
    Mr. Shadegg. Okay. Well, if you could get us information on 
that, I think it would be tremendous help to the committee. I 
think there would be consensus that we are not going to go into 
wilderness areas or national parks. But it seems to me if there 
are unduly restrictive provisions of our other environmental 
laws where the areas are not in fact as sensitive, I think we 
could build a consensus around going after them; and the book 
that the Chairman, Mr. Shimkus, referred to talked about the 
fact that some of these supplies could be accessed.
    Yes, sir.
    Mr. Sharples. If I may, sir. We referred repeatedly to this 
Energy Policy and Conservation Act phase one study about areas 
that are----
    Mr. Shadegg. EPCA you are referring to that Ms. DeGette 
has?
    Mr. Sharples. Yes, sir, on these five basins. I think it is 
important to go beyond what this study did and look beyond just 
what is technically off limits and look at the effect of post-
leasing restrictions, difficulty in acquiring permits, time 
during which one is allowed to operate. Things that, because of 
the relatively low margins of some of these properties, 
effectively deny access and see if there are areas where 
improvement is possible in that area as well.
    Mr. Shadegg. Would it be your recommendation--my time has 
run out. But would it be your recommendation that the Congress 
order or direct that a study of all those issues be conducted? 
Or are the resource information already available? Is the 
information available?
    Mr. Sharples. It is my personal opinion that I don't 
believe the information is available.
    Mr. Shadegg. So we need to take a look at that, given the 
price structure and the pieces of these restrictions that cause 
the price to go up.
    Mr. Shimkus. The gentleman's time has expired.
    The Chair recognizes my colleague from Colorado for 5 
minutes.
    Ms. DeGette. Thank you, Mr. Chairman.
    You know, I think we are finding some common ground here. 
This is great.
    Mr. Sharples, in your written statement you said there were 
two things the government needed to do to increase natural gas 
development: one, allow greater access to certain resource-rich 
Federal lands and waters that are currently closed to 
exploration; and, two, create a regulatory framework that 
allows and encourages exploration. But when I first read this I 
thought maybe you were talking about drilling in wilderness 
areas and national parks, but that is not what you are talking 
about at all, is it?
    Mr. Sharples. That is certainly not the major thrust of 
what we are looking at.
    Ms. DeGette. But I think you just told Mr. Shadegg you 
don't think we should drill in those areas.
    Mr. Sharples. I personally don't. If an adequate assessment 
of economic benefits versus environmental issues have been 
taken into account, no. I think there are a lot of other things 
we can do.
    Ms. DeGette. Right. And what you are really concerned about 
is what you just said, which is laws and regulations and 
restrictions on leases that in effect stop exploration because 
they make it economically infeasible, right?
    Mr. Sharples. That is correct, ma'am.
    Ms. DeGette. And do you have some sense or do you know 
about a study about what percentage of the public lands we are 
looking at where those types of barriers exist to drilling?
    Mr. Sharples. I don't believe that has been quantified. In 
fact, as I mentioned, I think that a phase two of the EPCA 
study that looked beyond just what is available for leasing 
would be very, very valuable.
    Ms. DeGette. So do we have any other information? And, by 
the way, to Mr. Shadegg, the study I was referring to is a 
Department of Interior study, okay?
    But so what you are saying is, let us do another study 
which shows what kinds of regulatory barriers are there to the 
development of the other lands that should be available for 
development, right?
    Mr. Sharples. Yes, ma'am.
    Ms. DeGette. Well, I think that is a great idea, too; and I 
think, Mr. Shadegg, maybe we can work on that.
    What kinds of regulatory barriers exist to development of 
natural gas in areas where it would be acceptable?
    Mr. Sharples. We could perhaps start--we have already 
discussed whether or not you can lease and then what kind of 
restrictions on operations are placed in leases. Those are 
relatively easy to quantify.
    Ms. DeGette. And do we have any sense about those 
restrictions that are included in leases, how much development 
those are stopping?
    Mr. Sharples. Actually, to some extent that is addressed in 
phase one of this EPCA study. What is not is extensive delays 
in granting leases--excuse me, granting permits to operate, 
extensive delays once the permit for an exploration well is 
granted, and assuming it is successful in going on to 
development.
    Ms. DeGette. I hate to interrupt you. They only give us 5 
minutes.
    Mr. Sharples. But a lot of those kinds of technical issues.
    Ms. DeGette. Right. And a lot of those barriers are due to 
what Mr. English was talking about, which is insufficient 
resources to the regulators who are supposed to be granting 
these, right?
    Mr. Sharples. Absolutely, ma'am.
    Ms. DeGette. So one thing that we could really do on a 
bipartisan basis that could help, that Congress could do, is 
beef up resources in particular to the BLM to allow regulators 
to review more quickly these leasing applications.
    Mr. Sharples. We would wholeheartedly support that.
    Ms. DeGette. Now, Mr. English also talks and others on the 
panel talk about a lack of resources going toward 
infrastructure. Let us say you go into some of these areas that 
are remote. I have been to many of these areas in the Rocky 
Mountains. Let us say you go in and you find a successful well. 
Getting the natural gas out is also a problem, correct, Mr. 
English?
    Mr. English. That is true. It does----
    Ms. DeGette. Can you speak up?
    Mr. English. It does indeed take infrastructure to move the 
natural gas from where it is found to move it to people's homes 
and businesses.
    Ms. DeGette. And let us say we eliminate some of the 
regulatory barriers and the regulatory delays. What can we do 
to speed up development of infrastructure so we can actually 
remove the resources and get it into people's homes?
    Mr. English. Well, certainly what has been discussed is 
appropriate, that we speed up the actual regulatory process so 
that those particular facilities can be sited. And certainly 
the action taken by the House in order to speed up depreciation 
of those investments is also a big----
    Ms. DeGette. That will help with development of 
infrastructure. Great.
    Thank you so much, Mr. Chairman.
    Mr. Shimkus. I want to thank my colleague, and I will now 
recognize myself for 5 minutes. And let me start with Mr. 
English.
    If natural gas becomes cost prohibitive or physically 
unavailable, what will the people use as an alternative?
    Mr. English. Well, first of all, I don't think it is going 
to become unavailable. Certainly----
    Mr. Shimkus. Well, okay. Let us don't use ``unavailable.'' 
Let us use ``unable to deliver.''
    Mr. English. Certainly, we have explored in the discussions 
today the fact that, under the right circumstances, there can 
indeed be scenarios where there could be shortages. All gas 
distribution companies in this country have emergency 
procedures that deal with those kinds of situations, because 
you can never predict how cold a winter is going to be or just 
what kind of problems you may face in terms of supply at any 
given point in time.
    So the situation is if there is a--if there is not enough 
available at any given point in time, then the procedures are 
such that we begin to not serve particular customers, which 
generally starts out with industry and in many cases with 
electric generation. The last thing on the list ends up being 
homes and schools and that sort of thing. Those are the kinds 
of problems we faced in the 1970's and certainly hoped that we 
wouldn't have to face that kind of thing again, which is the 
reason that we are here today.
    Mr. Shimkus. Let me continue on. I have always spoken on 
this committee about a diversified energy portfolio and the 
fact that we ought to--the market will be the best means of 
distributing the best fuel at the lowest price, if you don't 
put external demands or, as Mr. Whitfield said, the cost of 
doing business, sometimes a successive government regulation, 
whether it is not able to get natural gas off of Federal lands.
    Let me make a point just for clarification. Public land is 
by definition multi-use. That is an important point to be made. 
Public lands is multi-use land versus wilderness areas which 
are defined as not being multi-use. So this whole debate about 
public lands, the use of those public lands for exploration and 
recovery is well within the purview of what we ought to be 
doing as good public policy.
    I wanted to ask Mr. Caruso. On your report, you mentioned 
unconventional recovery. In fact, I lost what--I think it was 
on page 17--and you talked about the increase from, I don't 
know, 28 to 36 percent by 2025. That is probably not the exact 
percentage. In that unconventional recovery, are you talking 
about coal, coal bed methane gas?
    Mr. Caruso. Yes, sir. It is not only coal bed methane but 
also tight sands gas, which is a large part of the 
unconventional resources and is the largest single block of new 
gas resources that we have in our long-term forecast. That gets 
us to the 26.7-26.8 TCF by 2025.
    Mr. Shimkus. And I want to just mention that, because of 
the line of questions of the ranking member and Mr. Boucher and 
also my friend, Mr. Whitfield--because, obviously, in coal 
States with untouched locations still available, plus old mines 
that have been left, there is an opportunity there in the 
extraction of coal bed methane to meet those needs.
    I wanted also to go to Mr. Currie on this--just this 
debate. I made a comment a few minutes ago about the market, 
and I think probably you all look at the market based upon 
investments. I had a new natural gas line built in my 
congressional district last summer. I think the company was NI 
Gas that put it in, and at great expense. Worked probably 5 or 
6 months, a lot of equipment, a lot of land, and now it is in 
place.
    Can we in this debate talk about--when I talk about the 
diversified energy portfolio, can we trust the market if we--
trying to make things as equal as possible from the cost of 
doing business from the government regulatory end, to be a 
better means of distributing economic growth and opportunity 
and a return on the investment, should we allow the market to 
determine which fuel is the best use for which use, versus what 
you will hear here is an attempt for government to manipulate 
and micromanage the market based upon our perception of how we 
can best determine the best fuel for the best use?
    Mr. Currie. I think, in terms of thinking about the market, 
it doesn't care about the price volatility. It actually cares 
about the expected rate of return off of these assets. And we 
look at a competitive marketplace. It is just going to build 
assets to just the amount that it needs to keep the system 
running, which is what we are currently seeing at this point 
right now. It will not build excess capacity beyond what is 
required that would actually diminish the volatility. So even 
if we saw the supply problem today and found all the supply and 
brought it out there, as long as we have the market continuing 
building the infrastructure, they are just going to build 
enough to get by.
    So that question really becomes, how do you incentivize the 
market to build the excess or spare capacity that will actually 
tame the volatility? Because, ultimately, when we see these 
prices--I want to emphasize, prices were $2 or $1.80 18 months 
ago, and they were $10 24 months ago. The cycle goes up and 
down, but the average price has only creeped up modestly, and 
the rates returns have only gone up modestly.
    So when we think about the rates return, they don't care 
about the volatility. The consumer, the producer cares about 
the volatility. So if we want to actually incentivize that 
spare capacity to take down the volatility, it is going to take 
more dramatic action than simply letting the market function.
    Mr. Shimkus. Is there a role for the government in that 
aspect?
    Mr. Currie. I can see the government playing a role, but 
one of market intervention, but rather just build these 
pipelines and storage facilities just like they build freeways 
or toll roads. Essentially, there are--if you want the spare 
capacity. If you are fine with the high level of volatility, 
that is what the market will provide you with. If you want to 
have the spare capacity to reduce the volatility, it will take 
more dramatic action. By not advocating regulation of prices or 
regulation of the market in general, it is just like building a 
road and letting the market function on its own.
    Mr. Shimkus. I am out of time.
    I would like to now go to my colleague from Texas, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    I have a question for both Mr. Currie and also Mr. Caruso, 
although anyone can chime in. What policies could States and 
the Federal Government enact to encourage the needed energy 
infrastructure investment, including sanctity of a long-term 
contract? But if we make changes to pipeline siting policy like 
we did in the energy bill for power lines at FERC, are local 
obstacles reaching a level that require Federal intervention 
for pipelines?
    Mr. Kvisle. TransCanada and its partners have worked for 5 
or 6 years to build a pipeline into the New York City region 
that has been stymied by local opposition. That local 
opposition is for whatever reasons, but it has proved to be a 
significant barrier to the construction of pipelines like that. 
I cite one example, but there are dozens of those in the United 
States, and equally they exist in Canada. So I do believe that 
some means of addressing this problem needs to be examined.
    Mr. Green. Anyone else? I mean, I understand the New York 
situation.
    Mr. Currie. In general, we would argue that the 
restrictions on the development of infrastructure is one of the 
forces currently impeding the rates return on these assets. 
Freeing up these restrictions would obviously help the matter. 
But, again, I want to emphasize, the real question is, you need 
to have not just enough capacity to function, but you need to 
have spare capacity if you want the volatility reduced, which 
is going to be much more difficult than just lifting the 
current restrictions on where you can develop pipelines.
    Mr. Green. Anyone else?
    Thank you, Mr. Chairman.
    Mr. Shadegg [presiding]. Does the gentleman yield back his 
time?
    Mr. Green. I yield back my time.
    Mr. Shadegg. Okay. We have been joined by the gentleman 
from Massachusetts, Mr. Markey. There being no one on the other 
side, the Chair would recognize him for 8 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Caruso, to what extent does the EIA believe that the 
natural gas prices track prices for crude oil? Historically, 
isn't there a rough overall correlation between the two?
    Mr. Caruso. Yes, sir. There is a certain amount of 
competition between natural gas and oil prices to the extent 
that certain users can switch to, perhaps, residual fuel oil, 
distillate fuel oil. There is a linkage between the two.
    Mr. Markey. So when oil prices spiked upwards in the months 
leading up to the war in Iraq, that played a significant role, 
did it not, in driving the price of natural gas upwards as 
well?
    Mr. Caruso. It was one of the reasons that led to the 
upward pressure.
    Mr. Markey. Was it a significant factor, in your mind?
    Mr. Caruso. I think it was an important factor, yes. There 
were, obviously, the points made earlier about whether the fact 
that we had low storage and the fact that, with high oil 
prices, the incentive to switch out of gas into residual fuel 
oil was less significant. So it was a number of factors, and 
that was one of them.
    Mr. Markey. So Chairman Greenspan, who is testifying later 
this afternoon, noted in a recent speech that, while oil prices 
have declined since the end of the war, that natural gas prices 
have remained high. Do you agree with that?
    Mr. Caruso. That is correct. The low storage of gas 
continued to put upward pressure on demand to refill that 
storage, which is the main reason for that.
    Mr. Markey. You are saying that is the key factor in the 
delinkage between the natural gas and crude oil prices?
    Mr. Caruso. That has been the key factor since the end of 
the winter.
    Mr. Markey. And the cause of that is?
    Mr. Caruso. That we came out of the winter with such a low 
level of working gas in storage, there was unusually high 
demand for refilling that storage in April and May, and, as 
mentioned in the testimony, we expect that to continue 
throughout the summer in order to get us where we need to be by 
the winter.
    Mr. Markey. Going back to your earlier point, historically, 
though, and on a continuing basis, there is an important link 
between the price of crude oil and the price of natural gas? 
That continues to be very real. It is a factor.
    Mr. Caruso. Yes. It is a factor. Yes, sir.
    Mr. Markey. And it is more than at the margin. It is a 
significant factor. It is an important factor, in your own 
words.
    Mr. Caruso. And as you know, at the margin it can be 
important. It can be important because of the marginal nature 
of the pricing of energy. Supply is very inelastic, 
particularly when you reach the kind of storage levels that we 
are at right now.
    Mr. Markey. Now, on the front page of today's New York 
Times, Mr. Caruso, there is a report that widespread looting 
has left Iraq's oil industry in ruins, and that, as a result, 
it could take several months to a year to get Iraqi oil 
production back to its pre-war levels. Given this important 
linkage between crude oil and the global marketplace and the 
price of natural gas, do you think that, as a result of that, 
that there is a higher price for natural gas because the price 
for crude oil is staying unnaturally high because Iraq is not 
coming back on line as quickly as had been projected?
    Mr. Caruso. I don't think right now that is a major factor.
    Mr. Markey. Is it a factor?
    Mr. Caruso. It is a factor. But I would downplay its 
importance at this point in time, given the seasonal nature of 
where we are. In other words, the winter spikes and pressure on 
prices was partly due to the economic disincentive to switch in 
many cases. Right now, you don't have that. That circumstance 
does not exist.
    Mr. Markey. Well, the point I am making is that the Bush 
Administration secured the oil fields from being blown up by 
Saddam Hussein, but they did not secure the oil fields from 
being systematically dismantled by looters, accomplishing the 
very same goal. So the Bush Administration touted their great 
success in ensuring that the oil fields were secured in the 
first 2 weeks of the war, but then they did not secure the oil 
fields from being looted and, as a result, we have not secured 
the peace, either in terms of the revenues being used to 
rebuild Iraq or in terms of that additional oil going on to the 
global marketplace and having an impact as a result upon the 
competitiveness of natural gas as a substitute and putting 
pressure, downward pressure on the price of natural gas. Do you 
agree with that?
    Mr. Caruso. It is outside of our analysis on the point you 
just made. But I think that it is much too soon to give up on 
how quickly the Iraqi oil can come back into the marketplace.
    Mr. Markey. Well, when will we know that answer, Mr. 
Caruso? Because, obviously, the natural gas marketplace is 
dependent upon their bet on that issue. If they think going 
through the end of this year and into the coming winter that 
that additional 2 million barrels of Iraqi oil at the margin is 
not going into the marketplace, that obviously is going to make 
it more likely that they have got a much better marketplace to 
sell their natural gas and to keep prices high, affecting the 
consumers of New England and those all across the country. This 
is a huge mistake by the Bush Administration if it is not 
rectified by the fall.
    Mr. Caruso. Our Short-Term Energy Outlook has crude oil 
prices trending downward, given the return of Iraq and the fact 
that other producers continue to produce.
    Mr. Markey. So when do you expect then, Mr. Caruso, for 
natural gas prices to trend down, given all of the identical 
factors?
    Mr. Caruso. I think the main factor is getting natural gas 
into storage.
    Mr. Markey. Well, when will that occur?
    Mr. Caruso. I think----
    Mr. Markey. When will the prices trend down?
    Mr. Caruso. We should start seeing prices coming down a bit 
in 2004. And, as I mentioned earlier, over a longer term we see 
them coming back into the $3 to $4 per million BTU range.
    Mr. Markey. So if natural gas prices are high and likely to 
remain so in the near future, why isn't the profit incentive 
sufficient for companies to increase storage and increase 
production as well?
    Mr. Caruso. I think the incentive is there, and we are now 
seeing some refueling going on at a good pace. Our expectations 
are that the drilling rig activities that have increased this 
year and the additional monies available will bring forth some 
additional supplies. But it takes time. It is not 
instantaneous.
    Mr. Shadegg. The time of the gentleman has expired--well 
expired.
    Mr. Markey. Thirty-two seconds. For anyone who is watching 
C-SPAN. You see, the Republican chairman thinks that 32 seconds 
is well expired.
    Mr. Shadegg. And I think we gave you ample time.
    I don't believe there are any further members. I want to 
thank this panel for their testimony. We will recess until 2 
o'clock. We very much appreciate each of you for your 
testimony.
    [Brief recess.]
    Chairman Tauzin. The committee will please come to order. 
Let me first announce that the Ranking Member Dingell is on his 
way, but I think we need to get started to accommodate our 
guest today. It is my extreme pleasure to introduce for the 
committee Mr. Alan Greenspan, the Chairman of the Board of 
Governors of the Federal Reserve System, who has agreed to come 
and testify today on this most important topic of natural gas 
and its effect upon the U.S. economy.
    We certainly want to welcome you, Mr. Greenspan. You have 
been a frequent visitor to the committee in the past, and we 
want to thank you for all the courtesies and the time you have 
spent with us both in public meetings such as this and when we 
have called upon you for advice and counsel. So we welcome you 
today.
    I ask unanimous consent that Mr. Greenspan be allowed 15 
minutes to present his statement.
    Mr. Greenspan, it is our intention to try to get you out of 
here by 3. I understand that is your time schedule, and we will 
accommodate that.
    Mr. Greenspan.

   STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, 
                     FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman. I am very 
thankful to be invited before this committee on what I consider 
to be a most important subject, one which has not been getting 
as much notice as I think it deserves considering the broad 
nature of the policies that are related to it.
    As you know, Mr. Chairman and members of the committee, in 
recent months, in response to very tight supplies, prices of 
natural gas have increased sharply. Working gas in storage is 
currently at very low levels relative to its seasonal norm 
because of a colder-than-average winter and a seeming inability 
of increased gas well drilling to significantly augment net 
marketed production. Canada, our major source of imported 
natural gas, has had little room to expand shipments to the 
United States, and our limited capacity to import liquefied 
natural gas effectively restricts our access to the world's 
abundant supplies of gas.
    Our inability to increase imports to close a modest gap 
between North American demand and production, a gap, 
incidentally, we can almost always close in the case of oil, is 
largely responsible for the marked rise in natural gas prices 
over the past year. Such price pressures are not evident 
elsewhere. Competitive crude oil prices, after wide gyrations 
related to the war in Iraq, are now only slightly elevated from 
a year ago. And where spot markets for natural gas exist, such 
as in Great Britain, prices exhibit little change from a year 
ago. In the United States, rising demand for natural gas, 
especially as a clean-burning source of electric power, is 
pressing against a supply essentially restricted to North 
American production.
    Given the current infrastructure, the U.S. market for 
natural gas is mainly regional, is characterized by relatively 
longer-term contracts, and is still regulated, but less so than 
in the past. As a result, residential and commercial prices of 
natural gas respond sluggishly to movements in the spot price. 
Thus, to the extent that natural gas consumption must adjust to 
limited supplies, most of the reduction must come from the 
industrial sector and, to a lesser extent, utilities.
    Yesterday the price of gas for delivery in July closed at 
$6.31 per million Btu. That contract sold for as low as $2.55 
in July of 2000 and for $3.65 a year ago. Futures markets 
project further price increases through the summer cooling 
season to the peak of the heating season next January. Indeed, 
market expectations reflected in option prices imply a 25 
percent probability that the peak price will exceed $7.50 per 
million Btu.
    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 
any time soon. It was little more than a half century ago that 
drillers seeking valuable crude oil bemoaned the discovery of 
natural gas. Given the lack of adequate transportation, wells 
had to be capped, or the gas flared. As the economy expanded 
after World War II, the development of a vast interstate 
transmission system facilitated widespread consumption of 
natural gas in our homes and business establishments. On a 
heat-equivalent basis, natural gas consumption by 1970 had 
risen to three-fourths of that of oil. But natural gas 
consumption lagged in the following decade because of 
competitive incursions from coal and nuclear power. Since 1985, 
natural gas has gradually increased its share of total energy 
use and is projected by the Energy Information Administration 
to gain share over the next quarter century, owing to its 
status as a clean-burning fuel.
    Recent years' dramatic changes in technology are making 
existing energy reserves stretch further while keeping long-
term energy costs lower than they otherwise would have been. 
Seismic techniques and satellite imaging, which are 
facilitating the discovery of promising new natural gas 
reservoirs, have nearly doubled the success rate of new-field 
wildcat wells in the United States during the past decade. New 
techniques allow far deeper drilling of promising fields, 
especially offshore. The newer recovery innovations reportedly 
have raised the average proportion of gas reserves eventually 
brought to the surface. Technologies are facilitating Rocky 
Mountain production of tight sands gas and coalbed methane. 
Marketed production in Wyoming, for example, has risen from 3.4 
percent of total U.S. output in 1996 to 7.1 percent last year.
    One might expect that the dramatic shift away from hit-or-
miss methods toward more advanced technologies would have 
lowered the cost of developing new fields and, hence, the long-
term marginal costs of new gas. Indeed, those costs have 
declined, but by less than might have been the case, because 
much of the innovation in oil and gas development outside of 
OPEC has been directed at overcoming an increasingly 
inhospitable and costly exploratory physical environment.
    Moreover, improving technologies have increased the 
depletion rate of newly discovered gas reservoirs, placing a 
strain on supply that has required increasingly larger gross 
additions from drilling to maintain any given level of dry gas 
production. Depletion rates are estimated to have reached 27 
percent last year compared with 21 percent as recently as 5 
years ago. The rise has been even more pronounced for 
conventionally produced gas because tight sands gas, which 
comprises an increasing share of new gas finds, exhibits a 
slower depletion rate than conventional wells.
    Improved technologies, however, have been unable to prevent 
the underlying long-term price of natural gas in the United 
States from rising. This is most readily observed in markets 
for natural gas where contract delivery is sufficiently distant 
to allow new supply to be developed and brought to market. That 
price has risen gradually from $2 per million Btu in 1997 for 
delivery in 2000 and presumably well beyond to more than $4.50 
for delivery in 2009, the crude oil heating equivalent rising 
from less than $12 a barrel to $26 a barrel. Over the same 
period, the distant futures price of light sweet crude oil has 
edged up only $4 per barrel and is selling at a historically 
rare discount to comparably dated natural gas.
    Because gas is particularly challenging to transport in its 
cryogenic form as a liquid, imports of LNG have been 
negligible. Environmental and safety concerns and cost have 
limited the number of LNG terminals and imports of LNG. In 
2001, LNG imports accounted for only 1 percent of U.S. gas 
supply. Canada, which has recently supplied a sixth of our 
consumption, has little capacity to significantly expand its 
exports, in part because of the role that Canadian gas plays in 
supporting growing oil production from tar sands.
    Given notable cost reductions for both liquefaction and 
transportation of LNG, significant global trade is developing, 
and high gas prices projected in the American distant futures 
market have made us a potential very large importer. Worldwide 
imports of natural gas in 2000 were only 26 percent of world 
consumption, compared to 50 percent for oil.
    Even with markedly less geopolitical instability 
confronting world gas than world oil in recent years, spot gas 
prices have been far more volatile than those for oil, 
doubtless reflecting, in part, less developed global trade. The 
updrift and volatility of the spot price for gas have put 
significant segments of the North American gas-using industry 
in a weakened competitive position. Unless this competitive 
weakness is addressed, new investment in these technologies 
will flag.
    Increased marginal supplies from abroad, while likely to 
notably damp the levels and volatility of American natural gas 
prices, would expose us to possibly insecure sources of foreign 
supply as it has for oil. But natural gas reserves are somewhat 
more widely dispersed than those of oil for which three-fifths 
of proved world reserves reside in the Middle East. Nearly two-
fifths of world natural gas reserves are in Russia and its 
former satellites, and one-third are in the Middle East.
    Creating a price-pressure safety valve through larger 
import capacity of LNG need not unduly expose us to potentially 
unstable sources of imports. There are still numerous 
unexploited sources of gas production in the United States. We 
have been struggling to reach an agreeable tradeoff between 
environmental and energy concerns for decades. I do not doubt 
we will continue to fine-tune our areas of consensus, but it is 
essential that our policies be consistent. For example, we 
cannot, on the one hand, encourage the use of environmentally 
desirable natural gas in this country while being conflicted on 
larger imports of LNG. Such contradictions are resolved only by 
debilitating spikes in price.
    In summary, the long-term equilibrium price for natural gas 
in the United States has risen persistently during the past 6 
years from approximately $2 per million Btu to more than $4.50. 
The perceived tightening of long-term demand/supply balances is 
beginning to price some industrial demand out of the market. It 
is not clear whether these losses are temporary, pending a fall 
in price, or permanent.
    Such pressures do not arise in the U.S. market for crude 
oil. American refiners have unlimited access to world supplies, 
as was demonstrated most recently when Venezuelan oil 
production shut down. Refiners were able to replace lost oil 
with supplies from Europe, Asia, and the Middle East. If North 
American natural gas markets are to function with the 
flexibility exhibited by oil, unlimited access to the vast 
world reserves of gas is required. Markets need to be able to 
effectively adjust to unexpected shortfalls in domestic supply. 
Access to world natural gas supplies will require a major 
expansion of LNG terminal import capacity. Without the 
flexibility such facilities will impart, imbalances in supply 
and demand must inevitably engender price volatility.
    As the technology of LNG liquefaction and shipping has 
improved, and as safety considerations have lessened, a major 
expansion of U.S. import capability appears to be under way. 
These movements bode well for widespread natural gas 
availability in North America in the years ahead.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of Alan Greenspan follows:]
  Prepared Statement of Alan Greenspan, Chairman, Board of Governors, 
                         Federal Reserve System
    In recent months, in response to very tight supplies, prices of 
natural gas have increased sharply. Working gas in storage is currently 
at very low levels relative to its seasonal norm because of a colder-
than-average winter and a seeming inability of increased gas well 
drilling to significantly augment net marketed production. Canada, our 
major source of imported natural gas, has had little room to expand 
shipments to the United States, and our limited capacity to import 
liquefied natural gas (LNG) effectively restricts our access to the 
world's abundant supplies of gas.
    Our inability to increase imports to close a modest gap between 
North American demand and production (a gap we can almost always close 
in oil) is largely responsible for the marked rise in natural gas 
prices over the past year. Such price pressures are not evident 
elsewhere. Competitive crude oil prices, after wide gyrations related 
to the war in Iraq, are now only slightly elevated from a year ago, and 
where spot markets for natural gas exist, such as in Great Britain, 
prices exhibit little change from a year ago. In the United States, 
rising demand for natural gas, especially as a clean-burning source of 
electric power, is pressing against a supply essentially restricted to 
North American production.
    Given the current infrastructure, the U.S. market for natural gas 
is mainly regional, is characterized by relatively longer term 
contracts, and is still regulated, but less so than in the past. As a 
result, residential and commercial prices of natural gas respond 
sluggishly to movements in the spot price. Thus, to the extent that 
natural gas consumption must adjust to limited supplies, most of the 
reduction must come from the industrial sector and, to a lesser extent, 
utilities.
    Yesterday the price of gas for delivery in July closed at $6.31 per 
million Btu. That contract sold for as low as $2.55 in July 2000 and 
for $3.65 a year ago. Futures markets project further price increases 
through the summer cooling season to the peak of the heating season 
next January. Indeed, market expectations reflected in option prices 
imply a 25 percent probability that the peak price will exceed $7.50 
per million Btu.
    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. It was 
little more than a half-century ago that drillers seeking valuable 
crude oil bemoaned the discovery of natural gas. Given the lack of 
adequate transportation, wells had to be capped or the gas flared. As 
the economy expanded after World War II, the development of a vast 
interstate transmission system facilitated widespread consumption of 
natural gas in our homes and business establishments. On a heat-
equivalent basis, natural gas consumption by 1970 had risen to three-
fourths of that of oil. But natural gas consumption lagged in the 
following decade because of competitive incursions from coal and 
nuclear power. Since 1985, natural gas has gradually increased its 
share of total energy use and is projected by the Energy Information 
Administration to gain share over the next quarter century, owing to 
its status as a clean-burning fuel.
    Recent years' dramatic changes in technology are making existing 
energy reserves stretch further while keeping long-term energy costs 
lower than they otherwise would have been. Seismic techniques and 
satellite imaging, which are facilitating the discovery of promising 
new natural gas reservoirs, have nearly doubled the success rate of 
new-field wildcat wells in the United States during the past decade. 
New techniques allow far deeper drilling of promising fields, 
especially offshore. The newer recovery innovations reportedly have 
raised the average proportion of gas reserves eventually brought to the 
surface. Technologies are facilitating Rocky Mountain production of 
tight sands gas and coalbed methane. Marketed production in Wyoming, 
for example, has risen from 3.4 percent of total U.S. output in 1996 to 
7.1 percent last year.
    One might expect that the dramatic shift away from hit-or-miss 
methods toward more advanced technologies would have lowered the cost 
of developing new fields and, hence, the long-term marginal costs of 
new gas. Indeed, those costs have declined, but by less than might have 
been the case because much of the innovation in oil and gas development 
outside of OPEC has been directed at overcoming an increasingly 
inhospitable and costly exploratory physical environment.
    Moreover, improving technologies have also increased the depletion 
rate of newly discovered gas reservoirs, placing a strain on supply 
that has required increasingly larger gross additions from drilling to 
maintain any given level of dry gas production. Depletion rates are 
estimated to have reached 27 percent last year, compared with 21 
percent as recently as five years ago. The rise has been even more 
pronounced for conventionally produced gas because tight sands gas, 
which comprises an increasing share of new gas finds, exhibits a slower 
depletion rate than conventional wells.
    Improved technologies, however, have been unable to prevent the 
underlying long-term price of natural gas in the United States from 
rising. This is most readily observed in markets for natural gas where 
contract delivery is sufficiently distant to allow new supply to be 
developed and brought to market. That price has risen gradually from $2 
per million Btu in 1997 for delivery in 2000, and presumably well 
beyond, to more than $4.50 for delivery in 2009, the crude oil heating 
equivalent of rising from less than $12 per barrel to $26 per barrel. 
Over the same period, the distant futures price of light sweet crude 
oil has edged up only $4 per barrel and is selling at a historically 
rare discount to comparably dated natural gas.
    Because gas is particularly challenging to transport in its 
cryogenic form as a liquid, imports of LNG have been negligible. 
Environmental and safety concerns and cost have limited the number of 
LNG terminals and imports of LNG. In 2001, LNG imports accounted for 
only 1 percent of U.S. gas supply. Canada, which has recently supplied 
a sixth of our consumption, has little capacity to significantly expand 
its exports, in part because of the role that Canadian gas plays in 
supporting growing oil production from tar sands.
    Given notable cost reductions for both liquefaction and 
transportation of LNG, significant global trade is developing. And high 
gas prices projected in the American distant futures market have made 
us a potential very large importer. Worldwide imports of natural gas in 
2000 were only 26 percent of world consumption, compared to 50 percent 
for oil.
    Even with markedly less geopolitical instability confronting world 
gas than world oil in recent years, spot gas prices have been far more 
volatile than those for oil, doubtless reflecting, in part, less-
developed global trade. The updrift and volatility of the spot price 
for gas have put significant segments of the North American gas-using 
industry in a weakened competitive position. Unless this competitive 
weakness is addressed, new investment in these technologies will flag.
    Increased marginal supplies from abroad, while likely to notably 
damp the levels and volatility of American natural gas prices, would 
expose us to possibly insecure sources of foreign supply, as it has for 
oil. But natural gas reserves are somewhat more widely dispersed than 
those of oil, for which three-fifths of proved world reserves reside in 
the Middle East. Nearly two-fifths of world natural gas reserves are in 
Russia and its former satellites, and one-third are in the Middle East.
    Creating a price-pressure safety valve through larger import 
capacity of LNG need not unduly expose us to potentially unstable 
sources of imports. There are still numerous unexploited sources of gas 
production in the United States. We have been struggling to reach an 
agreeable tradeoff between environmental and energy concerns for 
decades. I do not doubt we will continue to fine-tune our areas of 
consensus. But it is essential that our policies be consistent. For 
example, we cannot, on the one hand, encourage the use of 
environmentally desirable natural gas in this country while being 
conflicted on larger imports of LNG. Such contradictions are resolved 
only by debilitating spikes in price.
    In summary, the long-term equilibrium price for natural gas in the 
United States has risen persistently during the past six years from 
approximately $2 per million Btu to more than $4.50. The perceived 
tightening of long-term demand-supply balances is beginning to price 
some industrial demand out of the market. It is not clear whether these 
losses are temporary, pending a fall in price, or permanent.
    Such pressures do not arise in the U.S. market for crude oil. 
American refiners have unlimited access to world supplies, as was 
demonstrated most recently when Venezuelan oil production shut down. 
Refiners were able to replace lost oil with supplies from Europe, Asia, 
and the Middle East. If North American natural gas markets are to 
function with the flexibility exhibited by oil, unlimited access to the 
vast world reserves of gas is required. Markets need to be able to 
effectively adjust to unexpected shortfalls in domestic supply. Access 
to world natural gas supplies will require a major expansion of LNG 
terminal import capacity. Without the flexibility such facilities will 
impart, imbalances in supply and demand must inevitably engender price 
volatility.
    As the technology of LNG liquefaction and shipping has improved, 
and as safety considerations have lessened, a major expansion of U.S. 
import capability appears to be under way. These movements bode well 
for widespread natural gas availability in North America in the years 
ahead.

    Chairman Tauzin. Thank you very much, Mr. Chairman.
    It is the Chairman's pleasure to recognize Members for 
questions in order of their appearance this morning, and I will 
advise all Members Mr. Greenspan needs to be out of here at 3, 
so we will hold to a strict timetable. The Chair recognizes 
himself for--quickly for 5 minutes under the rules.
    Mr. Chairman, you obviously talk about the updrift in 
volatility of the spot price for gas having put a significant 
segment of the North American gas-using industries in a 
weakened competitive position. I suppose the first question we 
need to know is what is your appraisal of that weakened 
competitive position if it maintains? Does that bode any 
serious consequences for the overall economy?
    Mr. Greenspan. Eventually it has significant impacts. It 
has not as yet had impacts which one sees in the macrodata. I 
mean, for example, in a number of subtle places like 
nonfinancial nonenergy corporations the rise in natural gas 
costs has knocked a couple of tenths off profit margins. And 
since profit margins are a critical aspect in general of 
capital investment and broad economic development, this is one 
of many areas where you can begin to see the impact of the big 
surge in gas prices. And have no doubt if it continues, and if 
we stay at these very elevated prices, we are going to see some 
erosion in a number of macroeconomic variables which are not 
evident at this stage.
    Chairman Tauzin. At the heart of your evaluation of the 
problem is this sort of schizophrenic position our country 
finds itself in where we are encouraging dramatically the use 
of natural gas because of its environmental status, and at the 
same time we are obviously operating without encouraging new 
supplies--you mentioned liquefied natural gas as an example of 
something we might want to encourage dramatic increases to 
satisfy some of that new demand. Are there other ways this 
country ought to think about satisfying that demand we are 
artificially creating?
    Mr. Greenspan. Mr. Chairman, I think we are all quite 
familiar with a number of different potential sources of supply 
which have not as yet be exploited in this country. And here 
where the major concerns arise, there are obviously tradeoffs, 
as you well know better than I, between environmental concerns 
and energy. And it is not as though there is a formula which 
suggests a tradeoff. There is no joining of value systems, and 
the Congress has got to make some very important judgments with 
respect to this. I mean, we obviously know that the tight sands 
technology, especially in the Rocky Mountains, is one area 
where fairly significant new ``lower 48'' natural gas 
capabilities reside. We also know that there are potentially 
significant additional reserves. We have got Alaska, we have 
the potential of not only an Alaska pipeline bringing down 
Alaskan gas, but also the MacKenzie River line bringing 
additional reserves down from Canada as well. So we have 
innumerable sources.
    The reason I put emphasis especially on LNG is that if we 
could get that market functioning, it is a vast reserve. I 
wouldn't say unlimited, obviously, but it has many of the 
characteristics of what our international oil market is. As you 
know, the size of the international market in gas relative to 
consumption is half that of oil, and it is a crucial safety 
valve in maintaining price stability in oil, and it could be in 
gas as well.
    Chairman Tauzin. Well, again, in analyzing that as the 
answer to our demand shortfalls, and to what could happen 
economically if we don't address it relatively soon, we turn to 
foreign imports. Would that not further exacerbate the problems 
we have with foreign trade deficits and the problems that has 
on our economy?
    Mr. Greenspan. There are innumerable questions that one has 
to confront with respect to foreign sources of oil, gas and 
everything else, national security being obviously at the top 
of the list. This is a whole series of tradeoffs. I think we 
can define what the nature of the gas market is or should be 
under various different legislative initiatives, and we can 
define what we reasonably well know is available with respect 
to both proved and nonproved reserves, especially in 
nonconventional gas.
    Chairman Tauzin. My time has run. How much time do we have 
to find an answer before we have serious economic impacts?
    Mr. Greenspan. Well, that is extremely difficult to say. 
All we can really rest upon is our best judgment of what the 
markets are telling us. And we do have 6-year-forward markets 
in natural gas as we have in crude oil. Those markets are 
telling us that $2 gas is a historic relic, at least for the 
time being. And a very significant amount of natural gas using 
infrastructure in the American economy was based on $2 gas, 
which means a lot of noncompetitive structures are sitting out 
there. And if the $4.50 gas which I quoted in my prepared 
remarks continues, I think some very important structural 
changes are going to hit us.
    Chairman Tauzin. Thank you, Mr. Chairman.
    The ranking member of our committee Mr. Dingell is 
recognized for a round of questions.
    Mr. Dingell. Mr. Chairman, thank you.
    I would like to welcome you Mr. Greenspan. It is a 
privilege to have you here before the committee.
    Mr. Greenspan's statement has been an excellent one. I have 
no further comment. Thank you. And welcome, Mr. Greenspan.
    Thank you, Mr. Chairman.
    Chairman Tauzin. Thank you, Mr. Dingell.
    The Chair recognizes the gentleman Mr. Upton from Michigan, 
who was first at the committee, for a round of questions.
    Mr. Upton. Thank you, Mr. Chairman. I actually--at meetings 
like this, I like to ask my question is this the right time to 
refinance, but I will save that for another day.
    Mr. Greenspan. If you have a natural gas well, maybe.
    Mr. Upton. I will remind somebody about that in my family.
    You know, as I look back at the year 2000 and 2001, coming 
from Michigan, I thought that one of the very earliest signs 
about our economy slowing down was the spike that we had in the 
Midwest with regard to gasoline prices. And it took a number of 
months to trickle through, but, in fact, we had some real 
problems, and thank goodness things seem to be back in some 
balance now. But to me this is another parallel. As you 
indicated, there are so many industries and home owners that, 
in fact, went out and converted to natural gas, and as we have 
seen this price double or triple, there are real problems. As 
we look at one of the solutions, as we are debating--as we 
debated an energy bill so to try and open up more lands for 
domestic production, but I think most people would say that is 
much more of a long-term solution rather than a short one. And 
I am just wondering as you talk about creating, in your 
testimony, a price-pressure safety valve through larger import 
capacity of LNG need not unduly expose us to potentially 
unstable sources of imports, how quickly do you think we can do 
that?
    Mr. Greenspan. It is obviously not a matter of months. It 
is going to take time.
    Mr. Upton. Could be another long winter.
    Mr. Greenspan. It could very well be, largely because there 
are similarities here to the electric power problems that we 
had in the past where there is a long lead time when you have a 
commodity which either has no capacity for inventorying, such 
as electric power, or limited capacity, which we have for 
natural gas. That creates a longer timeframe of adjustment 
usually than we see in many other economic areas.
    My own view is that if we can get LNG moving reasonably 
quickly, and there are an awful lot of potential exporters of 
LNG--I mean, Russia is clearly looking to get into that market; 
Indonesia, Algeria, Trinidad--they are all very heavy potential 
exporters, and there is a potential of this market expanding 
fairly quickly.
    If we have a safety valve in the import area to absorb any 
imbalance in domestic supply, that gives us the capability of 
then making other judgments as to what is the tradeoff between 
the environment and domestic energy production and the like. If 
we do not have that international safety valve, then we 
confront some very tight decisions.
    And while I acknowledge that there are obvious problems 
involved when you expand your overall international exposure, 
at least we know as an ultimate fallback, as we have in oil, we 
can always get the gas.
    Mr. Upton. Do we have the import structure at our ports to 
take in imports of that magnitude?
    Mr. Greenspan. Not yet. As I am sure you know, Congressman, 
we have four major LNG terminals which are projected to expand, 
and as I recall, the Energy Information Administration is 
projecting several new terminals. My own judgment is that we 
ought to be doing more rather than less in this area. Because 
the technological advances in LNG have brought the cost down, 
safety factors have been markedly improved, and I think it 
gives us the best way that we can handle essentially unforeseen 
problems in the gas industry. What we do over and above that, I 
think, clearly is another set of issues.
    Mr. Upton. Thank you.
    I yield back, Mr. Chairman.
    Chairman Tauzin. The gentleman yields back.
    The Chair recognizes the gentleman Mr. Green from Texas for 
a round of questions.
    Mr. Green. Thank you, Mr. Chairman. And thank you, Chairman 
Greenspan, for being here.
    In your comments before the Joint Economic Committee last 
month and today, you suggested that in the situation that we 
are now seeing--this long-term trend rather than just short-
term spikes that we have grown accustomed to--LNG is a 
potential, but we also continue to need more exploration both 
in the continental United States and offshore that would bring 
supply and demand back into balance; is that correct?
    Mr. Greenspan. There is no question that from what industry 
observers have been able to ferret out, there are significant 
unexploited gas reserves in the lower 48 and obviously up in 
Alaska as well.
    Mr. Green. Our energy bill actually provided for that gas 
pipeline, and I think the Senate's will, too, once they finish 
their debate. My concern is the consequences, not just the cost 
of the gas--the natural gas to our consumers, but I have heard 
that these high natural gas prices are having an effect on 
possibly shifting our industrial jobs from the United States to 
countries where the prices are lower, particularly in the 
chemical area, since gas is feed stock, and even certain Middle 
Eastern countries. Is this correct? And can you describe that 
for me?
    Mr. Greenspan. We are not sure exactly how serious the 
issue is at the moment because it is unclear at this stage 
whether a number of the industries, which, as I mentioned 
before, were largely built on $2 gas, are presuming that the 
spike or whatever they are looking at now is temporary. And 
they are making temporary adjustments on the presumption that 
gas prices will recede very significantly.
    If they prove wrong, and it looks as though, as the market 
is apparently trying to tell us, that there is a far more 
persistent higher level of prices out there than we are hoping 
for, then you begin to get permanent changes in structure. You 
can obviously absorb excess spikes in natural gas prices for a 
while, and indeed, many have done that over the last number of 
years. You change the capital structure and the competitiveness 
of your economy and your production process if a major input 
cost becomes permanently higher than that which you 
contemplated when the capital investment was made.
    And so the answer to the question is we do not see 
significant shifts as yet, but it is hard to believe that that 
will not happen if prices stay up.
    Mr. Green. Okay. From my college economics class, I 
remember you have to have access to capital, a work force, and 
also energy to produce. So what you are saying is that any of 
those three and particularly the cost of energy could make some 
long-term shifts.
    Mr. Greenspan. Yes, sir.
    Mr. Green. Do you know of any actions this Congress or the 
President could take to increase production in the short term?
    Mr. Greenspan. No.
    Mr. Green. Okay. Mr. Chairman, I thank you, and I yield 
back my time. I wish we had some solutions on the short term. 
Thank you.
    Chairman Tauzin. The gentleman yields back.
    The Chair is pleased to recognize for a round of questions 
Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. And like others, I 
want to extend a welcome to Chairman Greenspan. You have 
indicated in your testimony and in answering questions that you 
are uncertain about the impact that the spike in natural gas 
prices may have had on our economy. Over the last year or so we 
know from economic data that we have lost a large number of 
manufacturing jobs in our country. We have had some growth in 
service sector jobs. But I would ask you what in your view are 
the primary factors contributing to our loss of manufacturing 
jobs?
    Mr. Greenspan. I am sorry, manufacturing jobs you say?
    Mr. Whitfield. Yes.
    Mr. Greenspan. The aggregate amount of gross product in 
manufacturing has drifted only slightly lower relative to the 
total GDP. So the answer is not a major hollowing out of 
manufacturing per se, although various measures do suggest that 
there has been some decline in aggregate output relative to the 
national product.
    What is obviously creating significant decline in jobs is a 
very dramatic increase in output per hour. The overall 
productivity growth in the economy as a whole has been very 
impressive, but ``manufacturing'' has been especially so. And 
the arithmetic of maintaining no more than just an average 
growth rate of aggregate output in manufacturing, coupled with 
an above average increase in output per hour must of necessity, 
arithmetically, reduce the proportion of manufacturing jobs to 
total jobs.
    And that is a process which has been going on, as you well 
know, for quite a while, and there is no immediate evidence of 
that turning around, so that long term we are getting two 
things happening: We are getting actually a redefinition of 
what we mean by manufacturing. Total output of goods per dollar 
for real dollar value has been going down very dramatically. 
You know, it was 50 years ago that American manufacturing meant 
big assembly plants for cars, huge-style complexes turning out 
vast complexes of heavy-weighted goods. Now the most valuable 
stuff we turn out of manufacturing is virtually impalpable and 
very difficult to find. And surely if you try to weigh it, it 
doesn't weigh a fraction of what its counterpart weighed 30 to 
50 years ago.
    Mr. Whitfield. You were saying that our productivity has 
been increasing at such a rate that that has contributed. As I 
go around in my district and attend town meetings, this issue 
always comes up about loss of manufacturing jobs which may or 
may not be real. But many people do have the sense that we are 
becoming more of a service-oriented society rather than a 
manufacturing society. If you were trying to give assurances to 
employees in America, how would you respond to their concern 
about that?
    Mr. Greenspan. I think this is a very important question, 
and I think one that gets raised every 5 or 10 years. And I 
think that the best way of answering it is to look at our 
history. This country has grown enormously in the last 100 
years, and unemployment rates have on occasion gone up pretty 
high, but they have always drifted back down to somewhere 
around 4 or 5 percent of the total labor force, which 
necessarily means that jobs are created year in and year out. 
And as those various areas of our economy become obsolescent, 
new ones come in. And indeed, what tends to happen is that 
people who are in jobs with no real future or running companies 
which are in bad shape, they tend to seek different activities 
and are re-employed.
    So overall, we don't know what the job structure will look 
like 20, 30 years from now. What we do know is that we have 
every reason to believe that somewhere in the area of 95 
percent of our work force is going to be employed as it always 
has.
    Mr. Whitfield. Thank you.
    Chairman Tauzin. The gentleman's time has expired.
    The Chair recognizes the gentlelady from California Mrs. 
Capps for a round of questions.
    Mrs. Capps. Chairman Tauzin, thank you very much. Chairman 
Greenspan, thank you for your testimony and for being with us 
at this important hearing today.
    My question relates to some of the specific points in your 
testimony; for example, your statement of a need for increased 
availability of imports of natural gas and expansion of 
facilities to handle it, specifically liquid natural gas or LNG 
facilities. And following along the line of questioning of my 
colleague, Mr. Upton, there are some inherent costs with this 
proposal, are there not? For example, the basic costs of 
liquefaction, transportation, regasification, not to mention 
the construction of these facilities. And this will raise the 
cost of imported natural gas versus what we could produce 
domestically or from Canada. I understand that you have 
acknowledged that increase. And in addition, I would think we 
would also want to recognize the safety aspects of these 
facilities, and especially the security aspects of LNG 
facilities. If we set down a number of these places, are we not 
adding yet another potential site ripe for terrorist 
activities? Lots of questions still remain about how far along 
we are in securing existing chemical and nuclear plants, and we 
know that terrorists at least had the drawings of some of our 
nuclear facilities in mind.
    I have a particular concern with these security questions 
because there are proposals to put an LNG facility right off my 
district near the fairly large city of Oxnard, which is the 
gateway to Channel Islands National Park. My concerns are 
heightened by provisions contained in the House energy bill 
that would weaken the review process for LNG to facility 
siting. These provisions essentially give the proponents of LNG 
facilities an advantage or a leg up in the process. I am 
concerned that these safety and security questions may not 
receive the scrutiny they deserve.
    Other associated questions such as safety, security, 
environmental effects impact on fishing, tourism and 
recreation. I am anticipating the site in one proposal to 
convert an offshore oil platform into an LNG facility right 
there at that gateway and the effect that might have on the 
local fishing industry.
    So my question is if you could comment on the associated 
costs perhaps with this decision whether or not to import 
natural gas.
    Mr. Greenspan. Yes. Congresswoman, you are raising a lot of 
important questions. Let me just say first that we have been 
fortunate in that the technological advances that have occurred 
in liquefaction and in transportation and degasifying have been 
really quite marked, including the storage. This is not a new 
technology. Remember, we have got a liquefaction plant sitting 
up in Alaska which I believe has been there since 1969 and 
indeed is shipping LNG to Japan because that is the only direct 
route that they can commercially do it at.
    If you take a look at the cost and prices coming out of 
imports in a number of the new LNG importing areas in the 
Middle East and other areas of the world, prices are not 
particularly elevated. There is no question, of course, that 
building these plants and terminals and the like cost money, 
but the technologies have improved very considerably, and the 
cost as a consequence has come down. Also, the technology has 
enabled, in many respects, the safety standards to be 
significant, we are not dealing with a technology which is 
dangerous in any meaningful sense of the word, but having said 
that, as I said before the Joint Economic Committee the other 
day, there is no way to create energy without any risk. It is a 
question of choice.
    On the issue of environmental questions, as I said before, 
there is no simple algebraic formula which can tradeoff 
environment against energy and the economy and other 
characteristics. We are looking at two really incompatible 
value systems, and both are crucial to human existence. And the 
only way to make judgments is for individuals to make those 
tradeoffs, and indeed, it is those judgments as reflected in 
the Congress which in a sense makes national policy. But you 
can't ask an economist, for example, to tradeoff the 
environment against economic activity because I don't know what 
the language translation is. In fact, there is none.
    Mrs. Capps. I know my time is up, but----
    Chairman Tauzin. I have to hold to very strictly; otherwise 
people are going to miss the chance.
    The Chairman of the subcommittee of energy Mr. Barton is 
recognized.
    Mr. Barton. Thank you, Mr. Chairman.
    Chairman Greenspan, you talked about the trends in the 
natural gas industry in this country in your testimony. You did 
not--or if you did, I didn't catch it--make a policy statement 
about whether we should try to be self-sufficient in natural 
gas production and consumption. We could do it technically if 
we wanted to. Should we?
    Mr. Greenspan. I think not. I think we are committed 
irrevocably to a global economy and a global environment for a 
very good reason. You get all of the advantages of the division 
of labor in a global marketplace, and while we don't put much 
stress on that in recent years, one of the most important 
aspects of the flexibility of the American economy which has 
been so important given the shocks that we have had in recent 
years, a very considerable part of that flexibility reflects 
our global status, our ability to interact around the world in 
so many different areas.
    My view is that it is the interest of this country not to 
endeavor to localize, to be protectionist, to pull in our 
horns. At the end of the day, I don't think we will succeed. I 
don't think we have a choice but to deal in a global economy 
and still have the standards of living that we so much cherish.
    Mr. Barton. Are there--notwithstanding that answer, which 
is a very good answer, by the way--are there areas in the 
United States that you think should be drilled for natural gas 
that are currently off limits because of various political 
bans?
    Mr. Greenspan. Well, I am an economist. My view is if you 
are looking for natural gas, you got to know whether it is 
there, and the only way to find out ultimately is to drill a 
hole. And if that drilling of the hole violates environmental 
standards, those are the tradeoffs that the Congress has got to 
make.
    Mr. Barton. It is a very political answer from a supposedly 
nonpolitical appointee.
    Mr. Greenspan. When you ask a political question, you get a 
political answer.
    Mr. Barton. All right. Let me ask another nonpolitical 
question. We had testimony this morning from various 
individuals who had a preference for a specific pipeline route 
for the Alaskan natural gas pipeline. Do you have any 
preference, or do you think that should be a market-based 
decision, or should it be a political-based decision?
    Mr. Greenspan. Congressman, if we have got a problem as I 
try to outline it of the significant possibility of gas prices 
being higher than we would like, I suggest to you that we allow 
the market to make judgments as to whether or not we bring gas 
down from either Alaska or through the MacKenzie River or 
whatever or whenever.
    The reason why I put so much emphasis on LNG is that I 
think the timeframe involved in any of these pipeline projects 
is far distant in the future. I know, for example, the Energy 
Information Administration puts the possibility of the Alaska 
pipeline at 2021 or something like that. That is pretty far 
out. And conceivably it could be earlier.
    But I think the more important issue is up front we have a 
far greater capability of significant supplies from LNG than we 
have from a number of those sources, and my own judgment is 
that the at the end of the day, those pipelines will be built, 
and they will be built because the market will be very strongly 
pressuring that type of construction.
    Mr. Barton. Let me ask my last question in the last 45 
seconds. Your testimony has focused, as it was supposed to be 
focused, on natural gas, but if the goal of a national energy 
policy is the overall economic viability of our economy, would 
it not be a positive to enhance the possibility of using other 
fuel sources like nuclear power and coal to relieve some of the 
prices on natural gas demand?
    Mr. Greenspan. I have always testified in favor of 
reexamining what I think is a policy which is mistaken, namely 
our views toward nuclear power. I do think that the 
technologies have improved immensely, and the advantages that 
they obviously have, I don't have to go into. I am sure you 
know them far better than I. I do think an overall policy of 
energy cannot dismiss the issue of nuclear power. You may at 
the end of the day decide that the desirability of it, granted 
environmental costs, security and other problems, is such that 
it is not advisable, but at least look at it rather than 
dismiss it out of hand.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Greenspan. I say the same for coal.
    Chairman Tauzin. The gentleman Mr. Stupak is recognized for 
a round of questions.
    Mr. Stupak. Thank you, Mr. Chairman.
    Thank you, Mr. Greenspan, for coming here today and 
testifying.
    You have emphasized and you have testified that increased 
natural gas supply for U.S. consumption will have to come at 
least in part from increased imports. You have also noted that, 
and I am looking at page 6 of your testimony, access to world 
natural gas supplies will require major expansion of LNG 
terminal import capacity. You go on further to say that as the 
technology of LNG liquefaction and shipping has improved, and 
as safety considerations have lessened, a major expansion of 
U.S. import capability appears to be under way.
    In light of the present overall state of the economy, do 
you have concerns about the availability of capital for 
investment in these new facilities?
    Mr. Greenspan. I do not, no.
    Mr. Stupak. How will the present economic downturn then 
affect this type of investment in the short term, long term? I 
don't see anyone investing in these terminals if we are going 
to need them to increase the imports of LNG.
    Mr. Greenspan. If prices stay anywhere near where they are 
in the longer-term futures markets, the potential profitability 
of investments of that type will be far in excess of the normal 
rate of return on capital investment.
    Mr. Stupak. As you know, we had testimony this morning, we 
are talking about LNG, and when you take a look at it, we 
import about 16 percent of our natural gas, 15 percent from 
Canada and 1 percent from outside North America as liquefied 
natural gas. So even if we doubled the capacity, that would 
only be 2 percent that we would be importing. Is the investment 
worth it to go from 1 percent to 2 percent?
    Mr. Greenspan. No. I envision a number very significantly 
higher than that.
    Mr. Stupak. What realistically do you think we could expect 
from imports?
    Mr. Greenspan. I don't know. I would just let the market 
make that determination. I think that as costs go down in the 
construction of these terminals, and the whole question of 
safety declines as well, I think the markets will open up in a 
very significant manner, because remember, it is not only our 
import capability, it is the availability of LNG in export 
sites, whether Indonesia or Algeria or Trinidad. I mean, it is 
the development of a market which is very much smaller than the 
international oil market. As a consequence its potential for 
expansion is very substantial.
    Mr. Stupak. So to develop this market it wouldn't 
necessarily require tax breaks and offsets from the U.S. 
Government. You feel that the natural gas prices would override 
any of those conditions for investment?
    Mr. Greenspan. Implicit in my testimony, Congressman, is 
that this is not something requiring subsidies. This is 
something which requires private capital investment. And unless 
the markets are wrong, and they have been wrong on occasion, 
and the general view of the long-term equilibrium price for 
natural gas is where the markets are saying it is, if that 
stays there for a while, there will be significant capital 
investment coming specifically in import technologies, 
especially LNG.
    Mr. Stupak. Well, no matter what industry you look at, 
whether it's coal, gas, nuclear or anything, in this country 
when it comes to energy, have not taken a long-term look at our 
needs. It seems like we try to get through each winter, see 
where the spikes are, there is some reaction. But I would think 
if you are going to do the LNG terminals, nuclear, even clean 
coal technology, whatever it might be, a pipeline even, which 
might be 2021 before one gets online, we have to take a longer 
view or longer look at these potential problems on the horizon 
and not just react every January and February when it spikes. 
So--and I don't see anyone out there doing the investment that 
is going to take right now. So how do we get these investments 
and arrive at a long-term energy policy or goal for this 
Nation?
    Mr. Greenspan. I think there are two ways of coming at it. 
You can subsidize the system, which I think is, one, 
unnecessary and, two, undesirable; or two, set up a legal 
structure and a regulatory structure which enables people to 
invest in a profitable manner, because it is only under those 
conditions that markets can effectively function and we can 
resolve problems which are rather difficult. And I don't deny 
that.
    My own view is I trust that what the Congress will do is 
try to find ways to facilitate capital investment, but not 
subsidize it.
    Chairman Tauzin. The Chair thanks the gentleman.
    The Chair recognizes the Chairman of the Commerce, Trade, 
Consumer Protection Subcommittee Mr. Stearns for a round of 
questions.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Greenspan, we certainly welcome your comments. Judging 
from your testimony, what other Members have said, I think in 
the short term there is probably nothing that Congress could do 
with less than adequate storage and inability to import 
sufficient LNG combined with an increase in demand for natural 
gas. It comes down to almost Mother Nature, I guess, all of us 
just praying for a light winter.
    But I wanted to follow up on two of your points. One, you 
talked about the flexibility of the economy, and the other is 
you talked about a mistake in policy, if I heard you correctly, 
on nuclear energy. So, I would like to take the latter question 
first.
    I heard you say that this country has a mistake in policy 
with nuclear energy. And if I heard you correctly, I would like 
to you elaborate what do you think the United States should do, 
because the technologies have changed since we have built 
nuclear, and in many ways that would relieve some of the 
problem here. So I would appreciate your comments.
    Mr. Greenspan. I think the policy which I find less than 
impressive is more neglect than anything. I don't know what the 
appropriate nuclear policy should be with respect to the whole 
energy program. It is a very complex set of issues. But the one 
thing I am reasonably certain of is we are spending very little 
time relative to the size of the problem in raising the 
question and examining the question and all the various 
alternatives as to whether we should be doing more nuclear. The 
French, for example, have very large nuclear programs and very 
little problem that I am aware of exists as a consequence of 
that.
    A major endeavor to examine this whole program is where I 
think we ought to be, and I don't deny at the end of the day 
that a judgment of the Congress might be that it is not 
desirable to move forward in this area.
    But my own suspicion is that is not the way it will come 
out, but it is perfectly possible it might.
    Mr. Stearns. So what you are saying is we have no policy 
now, there is no discussion. You recommend a full-blown 
nationwide discussion on nuclear energy and what we should do. 
And you are saying the outcome is in doubt? What we would do as 
a result of, but you are actually saying that it has been very 
poor on the United States to turn and put its head in the 
ground and not look at nuclear energy as an alternative and try 
to find out what solutions could be done?
    Mr. Greenspan. Well, I didn't choose those words, but I 
find myself agreeing.
    Mr. Stearns. Okay. Well, that is good. I told my staff if I 
could get a no or yes partly, I would be very happy.
    Let me just follow up on my other thought I had. In your 
testimony, you say nearly two-fifths of the world's natural gas 
reserves are in Russia and its former satellites, and one-third 
are in the Middle East. Does that include Iraq?
    Mr. Greenspan. Yes. Although Iraq is not a major natural 
gas producer. It has got well over 110 billion barrels of crude 
oil, but not all that much natural gas.
    Mr. Stearns. Why couldn't we say to the industrial plants 
and the power plants, let us just let the market decide and let 
the price go up, instead of Congress stepping in? I am just 
conjecturing this. And the industrial and the power plants will 
start to get diversity and redundancy, which they should have 
anyway. And then just take care of the residential, which I 
think in the big scheme of things, the residential is a lot 
smaller percentage of everything. And that is the only way we 
can get this country to innovate and to come up with solutions.
    So I guess my question is, maybe as a follow-up, couldn't 
we have alternative coal, we mentioned nuclear, hydro for 
people other than gas, and try to get them to realize that gas 
is just one commodity and maybe we can go other places.
    Mr. Greenspan. There is a history of our regulations which 
most recently goes back to the 1970's when we tried to manage 
every little nook and cranny in our energy system, and we ended 
up with long lines at gasoline stations. We have an 
extraordinary energy economy in this country. If we let it 
function fully, freely, I think we might find that it is 
producing a great deal more than it currently is producing.
    Mr. Stearns. Thank you, Mr. Chairman.
    Chairman Tauzin. I thank the gentleman.
    The Chair recognizes the gentleman from Louisiana, Mr. 
John, for a round of questions.
    Mr. John. Thank you, Mr. Chairman.
    And I too want to congratulate you and to thank you for 
coming to this very important committee hearing. This issue is 
very important to me, being from Louisiana, and from an 
economic standpoint of the district that I represent, about 300 
miles of the Louisiana coastline where a major portion of the 
natural gas in the Gulf of Mexico comes onshore. In fact, Henry 
Hub is in my district. So it is an issue that I know a little 
bit about, but I have a couple of questions I would like to ask 
you. And I guess first, from listening to your answers to some 
of my colleague's questions and from your concluding remarks as 
it relates to LNG. You feel that the LNG area could be a 
possible short and/or long-term solution to some of these 
problems that we are dealing with relating to price spikes. You 
state that access to world natural gas supplies will require a 
major expansion of LNG terminal import capacity--that is in the 
last paragraph of your remarks. If you believe that, and if 
that is so, what are the consequences, and are you concerned 
about America's dependence on another fuel source as it relates 
to energy stability/energy security as we find ourselves very 
volatile and vulnerable with the importation of oil?
    Mr. Greenspan. I think we have to make the choice, Mr. 
John. The choice basically is whether we want to maintain a 
standard of living which does require access to international 
resources both in energy and elsewhere, but carries with it the 
insecurity risk and various other problems which a number of 
other of your colleagues have mentioned.
    My own judgment is that there is probably no real 
alternative here but to resort to international sources of 
energy, because there is no way we can be self-sufficient. We 
certainly cannot be self-sufficient in oil without changing our 
lifestyle in ways which I doubt very much whether the American 
people would coountenance. And it is not quite the same thing 
with gas, but gas, remember, is currently close to two-thirds 
the heating value of oil. So it is a rather large industry and 
has very large ramifications. And so I would say much the same 
thing about gas as I would about oil.
    Mr. John. And I would agree, that the increased activity in 
the LNG area, with new technology, is certainly a piece of the 
puzzle of the portfolio of energy that we must have in this 
country. I just don't want to see us get ourselves, especially 
in light of the instability in the Middle East, where I have 
seen us reliant upon oil imports and where we have been very 
vulnerable to OPEC and some other sources because it is so 
important to our economy. I can say with a lot of confidence 
that home heating and the air conditioning that natural gas 
produces through electricity is important. But I also have 
major petro chemical plants up and down the Mississippi River 
and in Lake Charles, Louisiana that are losing jobs left and 
right--most recently Koch Energy--because of the price of 
natural gas. So we are talking jobs that are being lost because 
of this. Do you think that our domestic natural gas reserves, 
that we have not been able to access because of some of the 
decisions that are made up here on the Hill, and I understand 
they are very political, could meet our demand to prevent the 
reliance on supply of natural gas from LNG?
    Mr. Greenspan. Well, let me also just point out, which I 
tried to do in my prepared remarks, that there is a much 
greater dispersion of natural gas reserves throughout the 
world, and hence we are not as subject, or shouldn't be as 
subject, to the type of problems we have when say three-fifths 
of our crude oil reserves currently exist in a very small area 
of the world.
    So, I don't deny that there are security problems with 
natural gas supply, but they are less than for oil, because we 
have got fairly significant reserves of natural gas in areas 
which are not serious problems with respect to national 
security for the United States.
    Chairman Tauzin. The gentleman's time has expired. Mr. 
Chairman, we are at 3 o'clock. Members are still begging me to 
have a chance to ask you a question. Would you permit me to 
recognize a few more members for one question each, or do you 
have to go?
    Mr. Greenspan. I think I can do for about 5 to 7 minutes--
--
    Chairman Tauzin. Let me try to do this.
    Mr. Greenspan. [continuing] because I have to go to the 
airport.
    Chairman Tauzin. Mr. Rogers, for one question quickly.
    Mr. Rogers. Thank you, Mr. Chairman, for being here. I just 
want to follow up in Mr. Whitfield's line of questioning. One 
of your responses that caught me a little bit off guard, you 
said, we haven't seen a significant shift in manufacturing, at 
least offshore. I have to tell you----
    Mr. Greenspan. I meant by that, permanent shift.
    Mr. Rogers. Well, you said a slight shift, and it was not 
something we ought to be concerned of. It may be a slight shift 
if you are an economist in Washington, DC, but if you are a 
manufacturer in Michigan, this thing is an avalanche. We have 
lost over 2 million manufacturing jobs. They are citing energy 
as one of their top concerns, unfair trade, regulatory costs, 
litigation costs, and tax structure. Not once have they said it 
is productivity. So maybe you can help me understand this.
    Mr. Greenspan. Well, all I can say to you is that the data 
is unequivocal in this regard. I mean, if you look at the 
arithmetic, the question is, are manufacturing levels of output 
or value-added eroded only marginally, relative to the total 
GDP. But the number of jobs have gone down very dramatically, 
and it means that you can produce a higher level of output with 
fewer people. That is what the numbers tell us, and I have 
every reason to believe that they are accurately reported.
    Chairman Tauzin. Thank the gentleman.
    Mr. Markey, for one short question.
    Mr. Markey. Mr. Chairman, most natural gas is used for home 
heating, and most houses are purchased with mortgages. And 
Freddie Mac and Fannie Mae are the companies that are used to 
do most of that mortgaging. My question to you is--that is a 
loose nexus, but I am trying----
    Mr. Greenspan. I know where you are heading, Congressman.
    Mr. Markey. [continuing] There is a wave of accounting 
scandals now hitting Freddie Mac, and they are exempt from 
having to register their securities with the Securities and 
Exchange Commission. In your opinion, is it wise for that 
exemption to be allowed to continue, or would we be better to 
have both of those companies have to register their securities 
at the Securities and Exchange Commission, like every other in 
the United States?
    Mr. Greenspan. I believe in past questions, I have agreed 
with your general point of view on that. In other words, there 
is no reason to differentiate Fannie and Freddie from the rest 
of the securities industry, as far as I am concerned.
    Mr. Markey. Thank you, Mr. Chairman.
    Chairman Tauzin. Mr. Otter, for a short question, quickly.
    Mr. Otter. Thank you, Mr. Chairman.
    I had quite a few questions here, Mr. Chairman, but I am 
going to narrow it down to one, and relative to a statement 
that you made that markets decide. And it has been my short 
experience since I have been in Washington, DC. That it seems 
to me like the government decides. We say we want conservation, 
yet we go out and we heard testimony this morning from the 
gentleman from PUC in Ohio saying we had to have more 
government programs that paid people during the winter months 
when their heat bill goes up. So when we end up subsidizing 
consumption, then there is no market demand. There is no high 
price for people to conserve. Yet, we know that the lowest 
hanging fruit in the energy orchard is conservation. So, tell 
us how we can adjust those two positions of our willingness to 
start programs that pay people to consume, yet we also try to 
have programs that say please consume.
    Mr. Greenspan. I agree with you. There is a contradiction 
that has to be resolved.
    Mr. Otter. Well, that was quick. Could I have another one?
    Chairman Tauzin. No, you had it. Mr. Allen, for a short 
question.
    Mr. Allen. Mr. Chairman, Chairman Greenspan, thank you for 
being here. I will be quick. U.S. oil production peaked 
sometime ago, around 1970. I am struck by looking at the 
numbers in some of the charts. We have been presented with the 
fact that it looks to me like the projections for domestic 
natural gas production are very flat. You know, you can add on 
Alaska, but otherwise they look flat. And you testified that it 
is harder and harder to get natural gas out of certain sources 
here. Are you at all concerned that there is the possibility 
that the peak production for natural gas in the United States 
may come in the next decade or two?
    Mr. Greenspan. This is a very big issue amongst geologists. 
And the conventional gas probably creates concern. But there is 
a general presumption that the nonconventional gas, the tight 
sands gas, the coal bed methane and shale all have significant 
possibilities for much greater expansion than we currently 
contemplate. And the reserves, the so-called nonproved 
reserves, expected geological formations and the like, suggest 
significant possibilities there. But I do think that we had 
this debate, I remember, on oil and it was exactly the same. In 
other words, we were sitting there with crude oil production in 
the United States continuing to rise, and there were those who 
were saying that the peak is near and those who were saying 
that it is five decades off. I don't think we really know. But 
I do know that there is a big debate going on, and it is an 
issue which is obviously crucial. The reason I say that the LNG 
is important is it will help either way, if I may put it that 
way.
    Chairman Tauzin. The last question, Mr. Bilirakis, and then 
we will wrap up.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Mr. Chairman, in the interest of time. I studied petroleum 
engineering, got a degree in it many years ago. We had a thing 
in the law at that time called the oil depletion allowance, and 
then it went by the wayside. I have been here for 21 years, and 
I don't think anybody has ever brought it up. But we can talk 
about the problems being this and that, that sort of thing. I 
think we are just short in production. We don't have the 
incentives, et cetera, et cetera. That is my opinion. But I 
would ask you, should we consider bringing back some form of an 
oil depletion allowance, something to encourage, if you will, 
better, more production?
    Mr. Greenspan. Well, I am not sure that we need incentives 
in the sense that, at the prices that currently exist, 
profitability and exploration and development within the United 
States, especially in the Gulf and offshore, are more than 
adequate, in my judgment, to maintain levels of production to 
the extent that we can. Remember, that we are dealing with 48 
States and the Gulf of Mexico which has been plugged full of 
holes. And you would know, certainly far better than I. And 
there is a law of diminishing returns that we are not getting. 
I mean, you can stamp hard in some places of the Middle East 
and you get a gusher. Here, it requires some very sophisticated 
technology to find new reservoirs of oil.
    Chairman Tauzin. Thank you, Mr. Chairman. The committee is 
in your debt again for the service you provide the country, and 
we appreciate your testimony, sir.
    Mr. Greenspan. Thank you very much, Mr. Chairman.
    Chairman Tauzin. The committee stands adjourned.
    [Whereupon, at 3:10 p.m., the committee was adjourned.]
    [Additional material submitted for the record follows:]
          Prepared Statement of The Edison Electric Institute
    The Edison Electric Institute (EEI) and its Alliance of Energy 
Suppliers (Alliance) are pleased to submit this statement for the 
record of the Committee's June 10 hearing on ``Natural Gas Supply and 
Demand Issues.'' EEI is the trade association of the U.S. shareholder-
owned electric utilities and affiliates and associates worldwide. The 
Alliance is a Division of EEI that focuses on the generation business 
and related wholesale business issues in the supply of electricity.
    Record natural gas prices have gotten everyone's attention, from 
the homeowner who uses natural gas for heat to the electricity 
generator whose operating costs are substantially influenced by the 
cost of natural gas. Because generators of electricity are an important 
and increasingly significant end-user of the nation's natural gas 
supplies, EEI appreciates the opportunity to submit written testimony, 
and to address the concern that this sector has with the current and 
foreseeable imbalance between demand and supply.
    While we believe there are limited opportunities in the short term 
for reducing demand in our sector--primarily by encouraging large 
industrial users to switch to off-peak times of consumption--there are 
longer term solutions for assuring adequate natural gas supplies in 
this country. These include helpful conservation and careful policies 
to identify, tap and bring to market available known reserves and new 
reserves--both here and abroad. It is the combination of increased 
supply and the efficient use of that resource that will--result in 
lower--natural gas prices.
    But from the perspective of the electric power industry, which is 
searching for ways to continue the production of low-cost electricity 
essential for the United States to compete in a global economy, one of 
the most important long term solutions is for Congress and the 
President to make sure that federal policies assure that an adequate 
and diverse fuel supply is available for the generation of electricity. 
Fuel diversity means that coal, nuclear, hydro, wind, solar, natural 
gas--and other fuel sources as they become available--can continue to 
be used by generators of electricity to mitigate price or supply risk 
in any one source. It also means ``fuel switching'' or maintaining a 
``dual fuel capability,'' where natural gas-fired plants are 
constructed and permitted to allow a switch between natural gas and oil 
products in times of either high prices or limited natural gas 
supplies.
    Policies advanced by the Congress and the Administration need to 
maximize the diversity of fuel sources available for the generation of 
electricity while allowing market forces to dictate the choice, in any 
given circumstance, of how to assure the low-cost production of 
electricity. Fuel diversity needs to include the ability to move large 
blocks of power between regions so that diverse electric supplies can 
move into various regions. For example, the potential of wind 
development throughout The Great Plains is limited by a lack of high-
voltage transmission lines to carry the abundant raw resource to 
markets, either East or West. A more robust transmission system would 
permit more inter-regional powerflows, which might permit coal, 
nuclear, hydroelectric and renewable technologies to penetrate markets 
displacing other fuels.
    Of course, stimulation of investment in transmission will do little 
to help if permitting of new transmission lines continues to take more 
than a decade. As to improving transmission siting, EEI compliments the 
Committee on its decision to include in H.R. 6 provisions to establish 
the Department of Energy (DOE) with lead agency authority to coordinate 
the federal authorization process for transmission lines, including 
project specific coordination requirements, and to give last-resort 
backstop siting authority to FERC. Together with the corridor 
designation provisions of the bill, these new provisions will introduce 
transparency into the permitting process and facilitate timely 
decisions. We strongly urge the Committee to fight for these provisions 
when H.R. 6 is conferenced with the Senate energy bill.
    As transmission is helpful in distributing electricity, a market 
basket of generating technologies (coal, nuclear, hydroelectric and 
renewables as well as natural gas) is helpful to fuel diversity and 
price stability. The price of converting different fuels to electricity 
varies by technology, but generally, the broader the selection of 
technologies and fuels available to the generator, the better for all 
classes of customer. When hydro generating capacity is reduced by a 
non-functional and prolonged hydro licensing process and federal 
policies render coal generation less economical, the short fall in 
generating capacity must be made up elsewhere. Carefully established 
hydro and coal policies that allow these fuel sources to continue to 
play a serious role in the nation's fuel mix will help alleviate 
pressure on natural gas supply.
    The current Clean Air Act's complex and multiple, overlapping 
requirements for electric power generators constrain the use of coal 
generation. This puts additional pressure on using natural gas to 
generate electricity. The Clear Skies Act (H.R. 999) would reduce such 
pressures on natural gas by providing certainty to coal generators, 
while achieving roughly 70 percent emission reductions in sulfur 
dioxide, nitrogen oxides and mercury emissions over a timeframe that 
would promote immediate environmental improvements and industry 
stability through certain and cost-effective emissions reductions. By 
contrast, the Clean Power Act (H.R. 2042) would exacerbate natural gas 
cost and supply concerns.
    Congress should be concerned that federal energy, environmental and 
economic policies do not: (1) inadvertently create an economic climate 
wherein one fuel, such as natural gas, becomes the only practical 
option for new generation (2) in effect preclude the use of certain 
abundant and low-cost fuels or (3) sharply limit the generators 
flexibility to select a fuel mix that can optimize the production of 
electricity.
    Electricity is the backbone of the modern economy. Advancements in 
technology have increased U.S. productivity and driven growth, but 
technology depends on ever increasing amounts of electricity. 
Currently, coal generation provides 50.1% of the nation's electricity 
supply, nuclear generation provides 20.3%, natural gas provides 18.1%, 
hydropower and other renewables provide 9.1%, and oil generation 
provides 2.4%.
    In the past 10 years, natural gas-fired generation has been 
critical to providing the low-cost electricity that is crucial to 
assuring that the United States can compete in the global economy. 
Natural gas has become the fuel of choice for new power plants because 
plants fueled by natural gas are highly efficient, have predictable and 
short construction cycles, and lower emissions. The trend was aided by 
the historically low cost of natural gas and the pressures on the costs 
of the other traditional sources of fuel for generating electricity.
    While natural gas-only-fired power plants account for 18% of the 
fuel used by all generation nationwide, 88% of the new electric 
capacity built in the last 10 years use natural gas as their primary, 
and in many cases only, fuel. Numbers of this magnitude indicate that 
the percentage of natural gas used as fuel for electric generation will 
most likely increase. There are good reasons for this.
    First, power plants fired by natural gas have become very 
efficient. Combustion turbines fueled by natural gas (simple cycle) 
were originally designed to augment large baseload producers of 
electricity (coal, nuclear, and hydroelectricity). They were designed 
to run for brief periods of time or a few hours annually to help meet 
peaking requirements. By being smaller and specialized, the combustion 
turbine minimized capital costs of construction and could be quickly 
installed. This was especially desirable when the nation had excess 
baseload supply and when cost overruns were common in the construction 
of baseload units, particularly for nuclear projects.
    The advent of higher efficiency combustion turbines in the 1990's 
further accelerated the role played by natural gas-fired power plants 
in the nation's generation mix. The ``Heat Recovery Steam Generator,'' 
where waste heat from a combustion turbine is used to produce steam and 
turn a steam turbine--hence the term ``combined cycle''--created 
efficiencies greater than 50% per each BTU of energy combusted. This 
compares to efficiency rates of 35-40% for coal plants. Highly 
efficient combined cycle plants in 2003 now have an efficiency rate 
over 55%. Thus, some are now being used for baseload operations, rather 
than just for peaking or load-following. Second, the construction lead-
times for natural gas-fired generation are shorter than those for coal 
and nuclear. This benefits owners and developers by limiting the 
exposure of capital because there is a shorter period when costs are 
being incurred but no electricity is being sold.
    Third, construction costs for gas-fired generation are easier to 
estimate and much less likely to be subject to construction cost over-
runs than other types of power plants. This makes it easier for owners 
and investors to take the risk of investing millions of dollars in a 
new power plant.
    Fourth, it is much easier to get environmental permits for natural 
gas power plants because of their lower emissions profile relative to 
more traditional coal or oil units.
    Fifth, natural gas has traditionally been a relatively cheap fuel 
source.
    Sixth, natural gas-fired units can often be sited to optimize 
location on both the natural gas transmission system and the high-
voltage electric transmission system.
    Finally, for the electric system, one crucial advantage of natural 
gas technology is its quick start capability and ability to move from 
zero output in a combustion turbine, to full power in less than an 
hour. A combined cycle takes longer because of the longer time required 
to receive power out of the heat recovery steam generator. This ability 
to easily load follow is very helpful in an industry which constantly 
rebalances between supply and demand for voltage control purposes.
    We recognize that this presents challenges, however, to the natural 
gas transmission industry and, if un-coordinated with pipeline dispatch 
operations, can create operational difficulties. The amount of gas 
demanded by a combustion turbine going to full power or shutting down 
rapidly because of fall-off in electricity demand can create imbalances 
in the pipeline system and natural gas storage and even liquefied 
natural gas (LNG) helps in managing operational requirements of gas-
fired generation. Further development of storage facilities throughout 
the natural gas market area, including LNG facilities, will be crucial 
to the balancing of gas supply and demand, as well as to electric 
operations.
    In some regions of the country, dependence on natural gas is 
pronounced. For example, in the gas-producing Southwest, some utilities 
came to rely on natural gas as a boiler fuel for electric production 
when other market uses for natural gas were not well developed. Because 
they were using boilers to generate electricity, they could switch 
fuels from natural gas to various grades of oil for either price or 
supply reasons. Some of these units are now being retired, further 
reducing the fuel flexibility of the electric industry. Only 24% of the 
168,760 MW of gas-fired generation in operation since 1993 have dual 
fuel capability, and that percentage is declining. According to the 
RDI's PowerDat data base, by 2011, only 7% of the 188,215MW of new 
natural gas capacity planned is identified to have dual fuel 
capability, which represents 71% of total new electric generation. 
While some power plants can burn oil in addition to natural gas, there 
are three main impediments to actually making the switch to oil. The 
physical impacts on the combustion turbine, such as increased 
maintenance requirements and possible warranty limitations from the 
turbine manufacturer, discourage switching to oil Additionally, 
environmental permits may preclude the use of oil because of increased 
NOX emissions associated with the use of distillate oil 
(FO2). Finally, many local zoning regulations do not allow the 
construction of oil storage tanks.
    All of these factors associated with the lack of fuel switching 
capability contribute to increased inflexible demand by the electric 
industry for natural gas for electric production, which, in turn, can 
contribute to increased natural gas commodity prices and increased 
levels of price volatility.
    The nation benefits from robust and diverse natural gas supplies. 
The Congress, the Administration and the Federal Energy Regulatory 
Commission should publicly encourage the development of new production, 
new pipeline capacity and market-area storage to assist in meeting the 
demand of the electricity producer and other end users for natural gas.
    There may be those who would advocate end-use restraints on natural 
gas. EEI firmly believes that these are not an appropriate solution to 
resolving natural gas supply and demand problems. The market has the 
ability to ration supply, and over time will return to equilibrium. The 
market needs to be allowed to send price signals that will stimulate 
investment in alternative generating technologies, dual-fuel 
opportunities, and development of new gas supplies. End-use restraints, 
even if applied prospectively, have the potential to create 
considerable economic inefficiency and would be counterproductive.
    In conclusion, the use of natural gas to create electricity has 
been good for consumers and should remain an accessible fuel source for 
electric generators. There are strong economic, efficiency, and 
environmental reasons to use natural gas in the generation of 
electricity. Even if, as a nation, we transition to greater reliance on 
renewable resources, natural gas will continue to be a necessary 
backstop. It is therefore essential that we take the steps that are 
necessary to assure an adequate supply. It is also crucial, however, 
that Congress and the President provide greater regulatory certainty to 
the generators of electricity--particularly as to the environmental 
standards that new and existing generating sources of all types will 
have to meet--and that the permitting and siting processes be 
streamlined to reduce the current long-lead times.
                                 ______
                                 
Prepared Statement of The Interstate Natural Gas Association of America
                              introduction
    The Interstate Natural Gas Association of America (``INGAA'') 
represents North America's interstate and interprovincial natural gas 
pipeline companies. INGAA's members build and operate natural gas 
transmission pipelines and provide pipeline transportation services for 
third parties. These activities are regulated by the Federal Energy 
Regulatory Commission (``FERC'') in the United States and by the 
National Energy Board in Canada.
    For over a decade, interstate pipelines have operated purely as 
non-discriminatory, open access transporters of natural gas on behalf 
of third party shippers and have not been in the business of purchasing 
and reselling natural gas. This development followed the wellhead 
decontrol of natural gas by the Congress and the competitive 
restructuring of the natural gas industry by the FERC (and similar 
deregulation and restructuring in Canada). While interstate pipelines, 
in some cases, are affiliated with producers, marketers and 
distributors of natural gas, the natural gas industry generally is 
vertically disaggregated, with separate production, transportation and 
distribution segments.
    Natural gas consumption in the United States has grown steadily 
over the past decade as our nation's economy has grown and as this fuel 
has been valued for its reliability, affordability and environmental 
attributes. The interstate pipeline industry has added greatly to North 
America's transmission pipeline infrastructure to facilitate the 
delivery of increased supplies of natural gas from producers to growing 
consumer markets. The Energy Information Administration (``EIA'') 
projects that natural gas demand will continue increasing dramatically 
over the next 15 years. This will occur, however, only if natural gas 
supply and pipeline capacity can keep pace with demand, thereby keeping 
prices within a reasonable range.
                         the current situation
    Competition and restructuring increased the efficiency of the 
natural gas industry and brought close to 20 years of moderate prices 
for natural gas delivered to local distribution companies and direct 
end-use consumers. Now, however, a confluence of factors has resulted 
in a much tighter balance between natural gas supply and demand and, as 
an inevitable consequence, higher natural gas prices and greater price 
volatility. These factors, which have been documented in greater detail 
elsewhere, include: the end of the excess natural gas production 
capacity that characterized the industry from the early 1980s through 
the late 1990s (the ``gas bubble''); significant growth in the demand 
for natural gas, particularly for new electric generators; the decline 
in drilling activity following the collapse of natural gas prices in 
2002; accelerated decline rates for production from natural gas wells 
as a result of the combination of improved technology and the 
diminished quality of accessible drilling prospects; and a hot summer 
in 2002 followed by, in some parts of the country, a cold winter in 
2002-2003, which resulted in significantly depleted natural gas storage 
entering the spring and summer of 2003.
    It is likely that that the balance between natural gas supply and 
demand will remain tight for the next several years before significant 
new natural gas resources can be brought to the market. There will be 
pressure on elected officials and regulators for action to shield 
consumers and industry from the effects of higher natural gas prices 
and greater price volatility. While there may be certain constructive 
steps that can be taken in this regard, it will be important to resist 
government interventions in the marketplace that will be 
counterproductive to an efficient, long-term solution to the supply 
problem.
    Experience demonstrates that markets are superior to government at 
allocating resources. Government intervention in the market can lead to 
rationing and price regulation. Prices play a critical role in 
providing incentives for developing new resources, infrastructure and 
technology and in causing consumers to make efficient choices between 
fuels and between consumption and energy efficiency. The best energy 
policy is one that, first, promotes rational economic decisions about 
consumers' choices in fuels and technologies and that, second, removes 
artificial barriers to developing energy resources in an 
environmentally responsible manner.
    With this as background, INGAA offers its comments on several near-
term and long-term issues that have garnered attention in connection 
with the focus on natural gas supply and demand:
Natural Gas Storage
    The rate at which natural gas storage is being refilled in advance 
of the next winter heating season has received great attention 
recently. In connection with this, it is useful to review the roles of 
the respective industry segments in refilling storage and the 
limitations on how quickly storage can be refilled.
    As an integral part of their transmission systems, interstate 
natural gas pipelines own and operate a majority of the natural gas 
storage capacity in the United States. Still, as a result of natural 
gas industry restructuring and FERC's open access policies, it is the 
pipelines' customers who own the natural gas in storage and who dictate 
the injection and withdrawal of natural gas from storage. Such 
customers' ability to inject and withdraw gas from storage, however, is 
dictated by the availability of sufficient interstate pipeline 
capacity. This could be an important factor should this year's storage 
refill continue to lag historic rates. That is, unless storage 
customers have reserved firm pipeline capacity at levels sufficient to 
complete their storage refills, they could find themselves competing 
with customers seeking to use pipeline capacity for other purposes, 
such as fueling electric generators in response to summer peak demand.
Interstate Pipeline Construction
    Interstate natural gas pipelines are not constructed on 
speculation. Rather, given the significant market and development risks 
for new pipelines, pipeline companies will not invest the huge capital 
required for a new pipeline unless the investment is underwritten by 
long-term contracts with creditworthy shippers. In recent years, 
transportation contracts with natural gas merchants and with electric 
generators supported much of the new interstate pipeline construction. 
Therefore, it is not surprising that the overall slowdown in the 
nation's economy and, in particular, the severe economic distress in 
the merchant energy and non-utility generation sectors of the energy 
industry has caused a corresponding slowdown in the expansion of 
interstate pipeline capacity.1
---------------------------------------------------------------------------
    \1\ See: Expansion and Change on the U.S. Natural Gas Pipeline 
Network--2002; Energy Information Administration, May 2003.
---------------------------------------------------------------------------
    Historically, natural gas producers, and especially small 
independent producers, have been reluctant to sign firm contracts and 
undertake the long-term financial commitment associated with new 
pipeline capacity. Still, there are signs that this is changing. The $1 
billion Kern River Gas Transmission Company expansion--which extends 
from Opal (in southwest Wyoming) to southern California and southern 
Nevada--entered service in May. This project, which is fully 
underwritten with firm contracts, doubled the capacity of the Kern 
River pipeline and provides a means for additional Rocky Mountain 
natural gas production to reach markets. In addition, El Paso Natural 
Gas recently announced plans to proceed with its Cheyenne Plains 
project which will transport Rocky Mountain production from the 
Cheyenne hub in Wyoming to interconnections with pipelines in the 
Midwest. This project is supported primarily by contracts with Wyoming 
producers.
    Even if the expansion of interstate pipeline capacity is retarded 
temporarily, the long-term trends point to the need for significant new 
pipeline capacity to keep pace with growth and to connect new supply 
sources. The INGAA Foundation has estimated that between $60 and $70 
billion in new pipeline investment will be required over the next 12 to 
15 years in order to meet the demands of the market.2 A 
financially sound pipeline industry and a supportive public policy and 
regulatory environment will be necessary for such capital formation to 
occur efficiently.
---------------------------------------------------------------------------
    \2\ Pipeline and Storage Infrastructure for a 30 TCF Market--An 
Updated Assessment; The INGAA Foundation, January 2002.
---------------------------------------------------------------------------
    Capital formation remains the ``coin of the realm'' for getting new 
pipeline projects off the ground, and the current trend is not 
encouraging. This is illustrated by the fact that capital investment in 
the previously-mentioned Kern River expansion equaled the value in 
total of the eight largest transmission expansions completed in 2002. 
While part of the answer here lies in commitments from creditworthy 
shippers willing to subscribe firm transportation capacity, the ability 
to attract capital to the pipeline sector would be improved by removing 
the impediment to capital formation created by the Public Utility 
Holding Company Act (``PUHCA''). The Act currently serves as a barrier 
for some investors who might otherwise be able to provide capital for 
the natural gas industry, by potentially making then subject to PUHCA's 
restrictive provisions. In the 21st century, the need for this statute 
no longer exists, and therefore INGAA strongly advocates PUHCA repeal. 
Any purpose served by keeping this anachronistic statute on the books 
is overwhelmed by the harm it causes in limiting investment in the 
regulated energy sector.
    It also is important to understand how pipeline construction 
opponents are exploiting conflicts between existing laws and 
overlapping jurisdictions to delay and, in some cases, possibly defeat 
pipeline projects. For example, the Coastal Zone Management Act 
(``CZMA'') has been invoked by two states to block interstate pipeline 
projects for which the FERC already has issued a certificate of public 
convenience and necessity; and, in one of these cases, this effort has 
been abetted by the National Oceanic and Atmospheric Administration 
within the Department of Commerce engaging in a protracted review of 
the appeal from the state's action. In other words, a federal law is 
being used by individual states to block the construction of federally 
authorized, interstate projects that are important to meeting the 
energy needs of the nation at large.
    Also, with the likelihood that we will be increasingly reliant on 
natural gas resources developed on federal lands, such as in the Rocky 
Mountain States, it is important to address the process for siting and 
permitting interstate pipelines on federal land. The FERC needs a clear 
mandate for facilitating greater cooperation between government 
agencies. While the FERC has the primary responsibility under the 
Natural Gas Act for approving interstate pipeline construction, it 
defers to federal and state agencies on environmental and land use 
permitting. Often these other agencies operate at cross purposes, 
resulting in a cumbersome and time consuming process for the applicant 
pipeline.
    A few months ago, FERC signed a memorandum of understanding with 
nine other federal agencies with the goal of making the permitting 
process less onerous for pipelines. The signatories to this MOU agreed 
to review pipeline construction permits concurrently, rather than 
serially. This is a positive step and the various agencies should be 
held to their commitment. Avenues for engaging state agencies in such 
commitments also should be explored.
    Finally, economic regulation should not blunt the price signals 
that provide the incentive for customers and the industry to commit to 
new pipelines, storage and powerplants. While it is understandable that 
elected officials and regulators want to respond forcefully to alleged 
misconduct in California and the Western states, it is important that 
they not dampen the role that scarcity and price play in signaling the 
need for new energy investment that can restore the balance between 
supply and demand and thereby produce reasonable prices for consumers. 
A shift toward a policy that just and reasonable prices must be the 
lower of cost or market would greatly increase the perceived regulatory 
risk associated with investment in regulated U.S. natural gas and 
electric power markets and would sow the seeds for future shortages and 
price volatility.3
---------------------------------------------------------------------------
    \3\ See: Price Revision in Western Energy Markets: What Standard 
for Market Intervention; Cambridge Energy Research Associates, Inc., 
May 2003.
---------------------------------------------------------------------------
 Gas-Fired Electricity Generation
    Some have expressed concerns that the electric power industry is 
becoming overly dependent on natural gas and that this fuel should be 
preserved for so-called ``high value'' uses, i.e., space heating and 
industrial process uses.
    This sentiment sounds remarkably like the arguments made during the 
artificial shortages of the 1970s that resulted from wellhead price 
controls and the bifurcation of the interstate and intrastate natural 
gas markets. The mistaken perception that the nation was running out of 
natural gas and the resulting policy decision to husband this resource 
for ``high value'' uses led to enactment of the Powerplant and 
Industrial Fuel Use Act of 1978 and other initiatives to affect fuel 
choice through government market intervention. The Fuel Use Act was 
repealed by the Congress a decade later to end the distortions it was 
causing in energy markets. The legacy of this 1970s energy policy 
should teach us a lesson about the adverse consequences of substituting 
government intervention for market economics in choosing fuels and 
electric generating technologies.
    Natural gas has been the fuel of choice for new electric generators 
because gas-fired turbines offer advantages over other technologies in 
terms of capital cost, siting and environmental permitting, modularity 
and speed of installation. If there is a legitimate public policy 
concern that the current regulatory and market environment skews the 
choice of generating technology to favor natural gas, the appropriate 
answer is not to impose artificial limits on the deployment of gas-
fired technologies, but rather to remove unnecessary impediments to 
other generating technologies. Does the regulatory process for siting, 
permitting and constructing generators create a bias against other 
generating technologies? Do the structure and rules governing wholesale 
electricity markets create a bias? If so, the most appropriate public 
policy would be one that removes such bias. (This would have to be done 
carefully, however. Past attempts at overtly favoring particular 
generating technologies produced unintended, adverse results.)
    In addition, in considering whether there is a looming 
overdependence on natural gas for electric generation, it is important 
to place the question in its proper perspective. Clearly, most of the 
recent additions to power generation are natural-gas-fired. During the 
period from 1999 to 2002, about 144 gigawatts of new generation was 
added to the grid, of which 138 gigawatts (96 percent) is natural-gas-
fired. Still, natural gas generators are intended primarily to supply 
peak and intermediate capacity, not baseload. Coal continues to 
dominate baseload generation, and still commands 52 percent of all 
electric generation. EIA expects that the total amount of electric 
generation from coal only will decrease to 47 percent by 2025, despite 
the rise of gas-fired generation.
    Natural gas' share of electricity generation now is at 17 percent, 
and is expected to grow to 29 percent by 2025, according to EIA. 
Nuclear generation is expected to remain flat over the next 20 years, 
with the result being an overall decrease in nuclear power's share of 
power generation. Natural gas is expected to overtake nuclear power as 
the nation's second-largest source of electricity by 2006. In sum, 
while dependence on natural gas for electricity generation will grow 
over the next two decades, the U.S. electric power industry will 
continue to have a diverse and balanced generation portfolio.
The Natural Gas Resource Base
    In responding to suggestions that natural gas be conserved for 
``high value'' uses, it is important that we not fall into the trap of 
addressing this issue with a scarcity mentality. While the balance 
between supply and demand in natural gas markets has tightened 
considerably, there clearly is a natural gas resource base in North 
America that can support expanding natural gas markets.
    The National Petroleum Council in its 1999 study estimated that the 
natural gas resource base in the lower-48 states is nearly 1500 
trillion cubic feet (tcf). In addition, the NPC estimated Canada's 
resource base at nearly 700 tcf. To place these numbers in perspective, 
the United States will consume approximately 23 tcf of natural gas this 
year.
    The challenge is whether we can develop this resource base and the 
associated infrastructure at the pace needed to keep up with demand. In 
responding to this challenge, the natural gas industry is seriously 
handicapped by current public policy, which reflects a choice not to 
develop much of the country's natural resource base. By some estimates, 
30 to 40 percent of our country's potential natural gas resource base 
is either off limits or else is open to development under highly 
restricted conditions. The question for policy makers is whether we as 
a nation can afford policies that leave vast amounts of our domestic 
natural gas reserves untested and undeveloped. Until recently, the 
long-lived excess of natural gas production capacity masked the true 
cost of such policies and permitted elected officials and their 
appointees to make politically popular decisions that energy resource 
and infrastructure development would not occur ``in my backyard'' or 
``off my beach.'' Those days are over, and we now must be assessing and 
developing a variety of new natural gas supply options, rather than 
hoping that all of our supply needs can be met by incremental additions 
to already-developed resources.
    There is no silver bullet response to the need to replace current 
natural gas production and to add incremental production to meet the 
increasing demand for natural gas. It will take the development of 
resources and infrastructure from multiple locations, including the 
Rocky Mountains, the Deepwater Gulf of Mexico, arctic frontier regions 
in Canada, the Alaska North Slope and imported liquefied natural gas 
(``LNG''). All of these options are possible, and affordable, if only 
policy makers respond favorably on the fundamental, threshold questions 
on developing the nation's natural gas resource and infrastructure 
base. Furthermore, all of these options are needed collectively for 
meeting the demand for natural gas in the coming decades.
    One of those critical resource basins is the North Slope of Alaska, 
which gives rise to the need for new pipeline infrastructure to deliver 
North Slope natural gas to the Lower 48 states. While an Alaska natural 
gas pipeline was first authorized by the Congress more than 25 years, 
the need for these natural gas resources and the infrastructure for 
delivering this gas to American consumers has never been greater. While 
the United States cannot pin its hopes solely on Alaska gas, neither 
can it realistically hope to meet projected demand without it. INGAA 
hopes that comprehensive energy legislation will include the necessary 
provisions ensuring that this pipeline becomes a reality.
One Final, Cautionary Note
    One of the most important provisions of the Pipeline Safety 
Improvement Act of 2002 is the mandate for ``integrity assessments'' 
for natural gas systems in populated areas. This new law establishes 
strict timeframes for baseline integrity assessments and re-assessment 
intervals. Beginning this year and continuing throughout the decade, 
significant pipeline segments will be removed from service in order to 
perform assessments and any resulting repairs. Furthermore, because 
this will be occurring in a competitive industry, pipeline operators 
may not coordinate the scheduling of their assessment activities, due 
to anti-trust concerns.
    This unprecedented integrity program will almost certainly affect 
natural gas deliverability and delivered natural gas prices. This 
effect could be compounded by the fact that, coincidentally, the 
integrity assessments will be occurring during a period of tight 
natural gas supplies. In view of this, the details of the rulemaking 
implementing the pipeline safety legislation that is currently pending 
before the Research and Special Programs Administration (``RSPA'') of 
the Department of Transportation could have a significant effect on 
just how severely compliance with the integrity management program will 
affect natural gas deliverability. This is an important factor to bear 
in mind as the Congress performs oversight of RSPA's rulemaking.
                                 ______
                                 
  Response for the Record of Hon. Alan Greenspan to Questions of Hon. 
                              Richard Burr
    Question 1. In your estimation, what is the best approach for our 
nation's energy policy to establish the North Slope pipeline project? 
Purely market driven? Subsidization through tax incentives and loan 
subsidies? Loan subsidies alone?
    Response: If, as I outlined in my statement, our nation has a 
problem of the significant possibility that gas prices remain higher 
than we would like, I suggest that we allow the market to make 
judgments as to whether or not we bring gas to the lower 48 states from 
either Alaska, through the MacKenzie River, or by some other means. 
Investment in these pipelines is not something requiring subsidies; 
construction of these pipelines requires private capital investment 
that will be supplied in response to the market's signals of the need 
for their construction.
    Question 2. Would subsidizing the project through tax incentives as 
proposed in the other Chamber's legislation create a tax revenue drain?
    Response: The subsidies would lower tax revenues generated from the 
operation of the pipelines.
    Question 3. What are the factors inhibiting investment in new 
baseload coal and nuclear capacity? What policy options are available 
to the federal government to stimulate investment in these electric 
generation technologies that could relieve the stress on natural gas 
markets?
    Response: Analysts cite an uncertain regulatory environment as well 
as uncertain future environmental standards among the factors 
inhibiting additional investment in nuclear energy and coal in the 
power sector. In the absence of a resolution of these regulatory 
issues, it is difficult for anyone to determine whether the economics 
would justify additional investment, at least in increasing nuclear 
capacity. It appears to me that we are spending very little time 
relative to the size of the problem in raising and examining the 
question whether there should be additional investment to create power 
generating capacity using more nuclear energy and coal. Congress needs 
to make a judgment of the future course of our national policy toward 
nuclear energy. If we wish to augment our electric generation 
capability through greater use of coal and nuclear energy, we need a 
stable legal and regulatory structure which enables people to invest in 
a profitable manner, should the economics justify such investment, 
rather than attempting to accomplish this goal through various types of 
subsidies.
                                 ______
                                 
                        Public Utilities Commission of Ohio
                                                       July 2, 2003
The Honorable W.J. ``Billy'' Tauzin,
Chairman
U. S. House of Representatives
Committee on Energy and Commerce
Washington, DC 20515-6115
    Dear Chairman Tauzin: I am writing in response to questions posed 
by Congresswoman Hilda Solis, and would like to thank her for her 
interest. Conservation and energy efficiency are key as we strive to 
control costs on our heating and cooling bills. Setting back your 
thermostats, checking your insulation and having your heating and 
cooling systems checked and possibly tuned up are a few ways to lower 
your natural gas usage. Attached, you will find a graph which shows the 
results of a survey conducted by a local distribution company of 
residential customers in Ohio and Maryland, which is a breakdown of 
energy efficiencies and conservation measures. Additionally, I have 
attached information collected by the Department of Energy/Energy 
Information Administration, which shows Natural Gas Consumption by 
Sector and Proportion of Natural Gas Consumption in Residential and 
Commercial Sectors by State.
    I believe that when looking at natural gas consumption it is 
important to note that residential customers only account for 25% of 
usage. Therefore, a 5% reduction in residential usage only reduces 
consumption by about 1%. In conclusion, the only way that prices will 
drop is if commercial, industrial and generation demand is reduced. 
Electricity generation demand is largely a function of weather, heat in 
the west and cold in the east. Furthermore, industrial demand is a 
function of economic growth.
    Congresswoman Solis also requested information on incentive 
programs that exist in Ohio to encourage energy efficiency, and we are 
unaware of any such programs that exist, which have contributed to the 
reduction of natural gas consumption. The energy efficiency programs 
that do exist in Ohio are funded by other means.
    I hope this information is helpful and provides a better 
understanding of the impacts on natural gas prices. Thank you for 
giving me the opportunity to testify and respond to questions of the 
Committee.
            Sincerely,
                              Donald L. Mason, Commissioner
                                Public Utilities Commission of Ohio
                                 ______
                                 
Response of Jeffrey R. Currie, PhD., Managing Director, Goldman, Sachs 
               & Co., to Question of Hon. Hilda L. Solis
    Your analysis shows that price fluctuations are caused more by lack 
of transportation and storage infrastructure, rather than lack of 
supply. You further note that profits from drilling for gas are much 
greater than profits for creating infrastructure. Doesn't this suggest 
that the repeated calls to open up federal lands to drilling is more 
profit driven than motivated by interest in stabilizing prices?
    Although the upstream or drilling part of the energy industry 
generated better returns on assets during the late 1990s than the 
downstream or infrastructure part of the industry, what is more 
important is that the entire energy sector, including the upstream part 
of the industry underperformed the broader market. More specifically, 
during the 1990s the upstream part of the industry had an 8.7% cash 
return on cash invested versus an average market return on cash 
invested of 12.5% for companies in the S&P 500. Further, it is 
reasonably assumed by most estimates that the cost of capital during 
that same time period was between 10-15%. The reality of modern capital 
markets is that only industries with significant positive returns on 
cash invested above the cost of capital attract new capital. Over the 
last decade, the upstream part of the energy industry did not meet this 
requirement. As a result, it is extremely unlikely that excess returns 
have motivated the ``repeated calls to open up federal lands to 
drilling.''
    The paradox of the current situation is that the underinvestment in 
the energy industry by the market is the correct economic outcome given 
the poor rates of return, as the best use of capital is in other 
industries where the rates of return are higher. The market solution is 
not concerned with volatility, but rather the expected rate of return. 
This inability of the market to provide adequate incentives for 
investment in reserve capacity to reduce price volatility is where the 
market fails and why more dramatic action is required. Further, the 
current market and regulatory structure reinforces this price 
volatility as it emphasizes efficiency over reliability. In addition, a 
combination of regulation, taxes, and direct market intervention have 
further reduced the return on capital in the energy industry. As a 
result, the market has responded by not providing the capital to 
expand, and the net result is the capacity constraints that you see 
today.
                                 ______
                                 
  Response of Guy Caruso, Administrator, Office of Energy Information 
           Administration to Questions of Hon. Hilda L. Solis
Natural Gas Supply and Demand
    Question 1. Mr. Caruso, your testimony focuses on the supply side 
of natural gas. I would like to know if, as you find, a 1% drop in 
natural gas production leads to 5-10% higher prices, what would a 1% 
drop in demand do in terms of lowering prices.
    Answer 1. A 1% drop in demand (for whatever reason) would tend to 
lower peak winter prices by about 5%-10%, a reaction roughly similar in 
absolute magnitude (but opposite in sign) to the impact from production 
shifts.
Natural Gas Price Fluctuations
    Question 2. Mr. Caruso, your testimony indicates that fluctuations 
in weather have major impacts on the price of natural gas. Computer 
models of expected climate change due to greenhouse gas emissions 
predict that weather fluctuations will become more extreme in the 
future, and some evidence suggests that this is already occurring. Have 
you analyzed how expected and observed climate changes will affect 
natural gas price fluctuations?
    Answer 2. EIA has not done an analysis that links global climate 
change to increased domestic weather variability to natural gas price 
volatility.
                                 ______
                                 
                                         CMS Energy
                                                Jackson, MI
                                                      July 21, 2003
The Honorable Billy Tauzin
Chairman, Energy and Commerce Committee
2125 Rayburn House Office Building
Washingtn, DC 20515
    Dear Mr. Chairman: Thank you for the opportunity to appear before 
the Energy and Commerce Committee on June 10, 2003, to testify about 
natural gas supply and demand issues. It was a great opportunity for 
the local distribution industry to get our message out.
    I have attached, at your request, answers to questions provided by 
Congresswoman Hilda Solis.
    Again, thank you for the opportunity to testify before your 
committee.
            Sincerely,
                                            Carl L. English
            President and Chief Executive Office , Consumers Energy
                      the honorable hilda l. solis
    Question 1. Mr. English, your testimony claims that federal 
policies have ``locked up'' resources for development. Yet the EPCA 
``Scientific Inventory of Onshore Federal Lands' Oil and Gas Resources 
and Reserves and the Extent and Nature of Restrictions or Impediments 
to their Development'' shows that only 12% of the major western basins 
known to contain most of the gas supplies are off limits to drilling. 
Would you suggest that more than 88% of public lands be open to 
drilling?
    Response: At a time when natural gas demand is expected to increase 
as much as 50 percent in the next 20 years, up to 59 percent of the gas 
resources yet to be discovered are expected to be found on federal 
lands or in offshore waters, according to the United States Geological 
Survey. In the Rocky Mountains, as much as 40 percent of gas resources 
are off-limits to leasing or have highly restrictive lease conditions. 
The issue is not necessarily the ``known'' producing gas basins--but is 
the opportunity to make new gas discoveries is areas less drilled and 
thus add ``new'' supplies for the nation's gas energy requirements. 
Ultimately, environmentally sound testing of gas prospects--with the 
drill bit--is the only way to know if natural gas can be developed from 
an area.
    Question 2. Given that the 12% closed to drilling includes major 
National Parks and wilderness areas, would you ask to open these areas 
to drilling, despite overwhelming public support to protect these areas 
from resource extraction?
    Response: Clearly not all areas should be opened to drilling or 
mining or other surface activities. But the debate must be examined on 
the basis of good science and choices be made regarding the impacts of 
energy development activities. Citizens should have a voice in these 
decisions, as they should regarding the implementation of any 
sustainable energy resource, such as wind and solar power generation, 
biomass and other options. Unfortunately, no sustainable energy 
resource is a zero impact proposition. Therefore, actions should be 
measured and carefully examined. However, no action is a poor choice 
for our economy and our people.
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