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



                                                        S. Hrg. 108-773

                 THE LONG-RUN ECONOMICS OF NATURAL GAS

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 7, 2004

                               __________

          Printed for the use of the Joint Economic Committee



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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Robert F. Bennett, Utah, Chairman    Jim Saxton, New Jersey, Vice 
Sam Brownback, Kansas                    Chairman
Jeff Sessions, Alabama               Paul Ryan, Wisconsin
John Sununu, New Hampshire           Jennifer Dunn, Washington
Lamar Alexander, Tennessee           Phil English, Pennsylvania
Susan Collins, Maine                 Ron Paul, Texas
Jack Reed, Rhode Island              Pete Stark, California
Edward M. Kennedy, Massachusetts     Carolyn B. Maloney, New York
Paul S. Sarbanes, Maryland           Melvin L. Watt, North Carolina
Jeff Bingaman, New Mexico            Baron P. Hill, Indiana

                    Paul A. Yost, Executive Director
                Wendell Primus, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                      Opening Statement of Members

Senator Robert F. Bennett, Chairman, U.S. Senator from Utah......     1
Senator Jack Reed, U.S. Senator from Rhode Island................     3

                               Witnesses

Statement of Daniel Yergin, Ph.D., Chairman, Cambridge Energy 
  Research Associates, Cambridge, Massachusetts..................     5
Statement of Paul Sankey, Senior Energy Analyst, Deutsche Bank, 
  New York, NY...................................................     8
Statement of Logan Magruder, President, Independent Petroleum 
  Association of Mountain States (IPAMS), Denver, Colorado.......    10
Statement of William R. Prindle, Deputy Director, American 
  Council for an Energy-Efficient Economy (ACEEE), Washington, DC    12

                       Submissions for the Record

Prepared statement of Senator Robert F. Bennett, Chairman........    29
    Along with a study entitled ``The Pressures of Natural Gas 
      Prices''...................................................    31
Prepared statement of Senator Jack Reed..........................    35
Prepared statement of Dr. Daniel Yergin, Chairman, Cambridge 
  Energy Research Associates.....................................    36
Prepared statement of Paul Sankey, Senior Energy Analyst, 
  Deutsche Bank..................................................    47
Prepared statement of Logan Magruder on behalf of the Independent 
  Petroleum Association of Mountain States (IPAMS)...............    95
Prepared statement of William R. Prindle, Deputy Director, 
  American Council for an Energy-Efficient Economy (ACEEE).......   101

 
                       THE LONG-RUN ECONOMICS OF 
                              NATURAL GAS

                              ----------                              


                       THURSDAY, OCTOBER 7, 2004

             Congress of the United States,
                          Joint Economic Committee,
                                                     Washington, DC
    The committee met at 10 a.m., in room SD-628 of the Dirksen 
Senate Office Building, the Honorable Robert Bennett, Chairman 
of the Joint Economic Committee, presiding.
    Senators present: Senators Bennett, Reed, and Bingaman.
    Staff Present: James Brannon, Reed Garfield, Mike Ashton, 
Colleen I. Healy, Nancy Marano, Chad Stone, and Nan Gibson.

OPENING STATEMENT OF SENATOR ROBERT F. BENNETT, CHAIRMAN, U.S. 
                       SENATOR FROM UTAH

    Chairman Bennett. The Committee will come to order. I want 
to welcome everyone to today's hearing.
    It's on a very important subject, and I have an opening 
statement, which I will read, but as I prepared for this, I had 
a thought come to me out of my previous experience in 
education. I was something of a student of the Communist 
revolution in Russia, and I remember that Mr. Lenin had a very 
strong view about the middleman, the hated middleman, that he 
thought was a fixture of the decadent capitalist world.
    Wheat would cost X-amount at the farm, a loaf of bread 
would cost so much more in the store. The middleman was making 
profits that were obscene, and he was going to get rid of that. 
He had a very simple solution: He shot them.
    As a consequence, the Soviet Union never, ever developed a 
distribution system for its goods and services. I have a little 
of the feeling, coming into today's hearings on natural gas, 
that we're faced with the same problem.
    Now, we're not shooting anybody, but we have an inadequate 
distribution system to get ample quantities of natural gas, 
both in this country and the world, to the people who need it, 
and that strikes me as one of the major issues that we will 
discuss here this morning.
    With that, I'll get back to the prepared text, but I 
couldn't resist that particular comment that came to me as I 
was looking over the testimony that we're going to get today.
    As we enter the fourth year of our current economic 
expansion, and all of the signs look good for the future, there 
is one black cloud that's threatening to rain on our parade, 
and that's the specter of high energy prices. The modern 
economy runs on energy more, perhaps, than any other single 
thing.
    Most people have taken note of the high oil prices of late, 
since they eventually trickle down to the consumer in the form 
of high gasoline prices, and we see them every day as we fill 
our cars.
    But just as worrisome are the high natural gas prices that 
have beset our economy in the past few years. After a 
protracted period of low and stable prices, the cost of natural 
gas has skyrocketed.
    What's more, natural gas prices now display almost 
unprecedented volatility, wrecking havoc on the ability of 
utilities and other companies to use gas to plan for the 
future. It's important that we address the problem of high 
natural gas prices, as soon as possible, and that's the impetus 
behind this hearing.
    The high prices act like a brake on the American economy. 
They impact every business and household in America, but 
certain industries have suffered particularly hard.
    For instance, the chemical and plastic industries use 
natural gas as a feedstock, and, therefore, have been 
particularly hammered by high prices. The Manufacturers 
Alliance estimates that 90,000 jobs have been lost in the 
chemical industry alone, since the year 2000.
    Also, it's important to remember that there's not a single 
integrated market for natural gas in this country. We simply do 
not have the infrastructure to ship gas easily from one region 
to another, should there develop a localized shortage. That's 
the thing I was referring to in my comment earlier.
    The lack of infrastructure shows no signs of being 
alleviated in the near future. According to a recently released 
Energy Administration report, they state that new investment in 
pipelines actually fell in 2002, the last year for which we 
have any reliable data.
    We don't have to look too far to remember natural gas 
prices on the East Coast tripling to $20 per million cubic 
feet, while topping out at $7 in Cheyenne.
    We know the proximate causes for the run-up in the cost of 
natural gas. A few years after prices were deregulated in the 
1980's, the Congress passed laws that, in effect, encouraged 
its use to produce electricity, and that sharply increased 
demand.
    Today, it's the fuel of choice in almost every electric 
generating plant, but, at the same time, the production from 
extant wells began to decline, and environmental restrictions 
made the exploration and drilling of new wells, more difficult. 
It doesn't take an economist to see that policies that increase 
demand and decrease supply will sharply increase prices.
    Let me make clear: There does exist enough natural gas in 
the world to meet our needs in the foreseeable future. We're 
not running out of natural gas, by any stretch of the 
imagination.
    Here in the United States, we have significant reserves in 
the lower 48 states, as well as Alaska, and there are vast 
amounts of natural gas reserves all over the world. As I 
indicated in my opening comment about Mr. Lenin, companies and 
countries have just begun to contemplate the massive 
investments needed for a distribution system that will get 
these reserves to the marketplace, thus creating a truly global 
market in natural gas.
    The pipelines, cooling plants, tankers, and the 
regasification plants that are necessary, will ultimately cost 
hundreds of billions of dollars, and the central question for 
those of us who are policymakers is, what can we do to 
facilitate these investments and cause them to happen sooner, 
rather than later?
    Diagnosing the causes of high prices is easy. Forecasting 
future prices and prescribing policies to alleviate the high 
prices, is not.
    The standard response would be that high prices alone will 
attract new investment in production, and more conservation by 
the users of natural gas, and the forces of supply and demand 
will eventually produce balance.
    We have witnessed some of this. The rise in natural gas 
consumption has tapered off in the last year or two, and the 
current rig count in the United States is at an all-time high.
    However, major new investments to increase supply or 
conservation will not take place in an environment of major 
price and policy uncertainty. The latter is only, in part, our 
fault, and although we've tried to remedy this, the current 
Congress will most likely get out of town tomorrow without 
doing anything to ameliorate the situation.
    We've also contributed to the former, that is, the lack of 
new investments by passing laws that stimulate a natural gas 
demand, without fully thinking through their long-term 
consequences and dealing with them when they were more 
knowledgeable.
    I will leave the question of what do we do now to our 
esteemed panel of experts who are assembled here today. The 
Committee is honored to have you with us. We anxiously await 
your thoughts on the natural gas market of today and in the 
future.
    Senator Reed.
    [The prepared statement of Senator Bennett appears in the 
Submissions for the Record on page 29.]

            OPENING STATEMENT OF SENATOR JACK REED, 
                 U.S. SENATOR FROM RHODE ISLAND

    Senator Reed. Thank you very much, Mr. Chairman. I want to 
thank the witnesses for what I know will be very interesting 
and insightful testimony.
    You've been very adept at picking the timing for this 
hearing, Mr. Chairman, with the reports yesterday of a cold 
winter and increased energy costs.
    As you pointed out, natural gas, because of its 
environmental qualities and its relative cheapness, has become 
the fuel of choice. It continues to be such a fuel.
    What we're looking at now is high and volatile natural gas 
prices as a problem, not only for industry, but for American 
households. Families face higher home heating costs, factories 
face higher costs that deter plans for expansion and encourage 
the search for cheaper production opportunities outside of the 
United States, and farmers are finding it more expensive to 
fertilize and irrigate crops.
    I suspect that we'll learn at this hearing that the 
conditions that have produced high, volatile natural gas prices 
are going to be with us for some time. Once a real and 
sustainable economic recovery takes hold, demand for natural 
gas will increase even further.
    We are likely to find it harder and harder to expand supply 
from our traditional sources: domestic production and imports 
from Canada. Rising demand and a limited supply are a recipe 
for higher prices.
    These are also conditions in which unexpected events can 
produce sharp price fluctuations. I believe very strongly that 
the best strategy that we have for dealing with these 
conditions in the natural gas market is to put a much greater 
emphasis on energy efficiency and conservation.
    The National Petroleum Council, in its report, ``Balancing 
Natural Gas Policy,'' finds that such an approach is vital to 
the near-term and long-term strategy for moderating price 
levels and reducing volatility. I know that Mr. Prindle will be 
testifying that the American Council for an Energy-Efficient 
Economy has reached similar conclusions.
    I do recognize that supply-oriented policies can also have 
an important role to play in a balanced strategy. These 
policies include increased domestic production, taking due 
care, of course, to be environmentally responsible; investments 
in production research and development; and increased liquefied 
natural gas imports.
    I will be especially interested in what our witnesses have 
to say about the prospects for LNG. This is an important issue 
for my State and my region, and I have been urging the Federal 
Energy Regulatory Commission to develop a regional strategic 
plan for the siting of new terminals, and to improve their 
process of addressing safety and security concerns.
    While I recognize that environmentally responsible policies 
aimed at increasing the supply of natural gas may yield 
benefits, especially in the long run, I come back to my main 
point: All indications are that energy conservation and 
increased efficiency appear to be the best solutions, 
especially in the next few years.
    Given the problems we face in the natural gas market, I and 
a number of other legislators in the Northeast and Midwest, 
were dismayed to learn that the Bush Administration has decided 
to discontinue the Interagency Working Group on Natural Gas.
    Perhaps this hearing can provide some additional impetus 
for the Administration and Congress to make a concerted effort 
to address natural gas and other energy policy issues in a 
constructive manner.
    Again, let me thank the Chairman and the witnesses for what 
I think will be an interesting and informative hearing. Thank 
you, Mr. Chairman.
    [[The prepared statement of Senator Reed appears in the 
Submissions for the Record on page 35.]
    Chairman Bennett. Thank you.
    Our normal procedure is that the Ranking Member and the 
Chairman, only, make opening statements, but we're joined by 
Senator Bingaman, and I think we will stretch the precedent to 
the Senator, if you'd like to make an opening statement. Then 
anybody who shows up further, we tell them they're too late, 
but we'd be happy to hear from you.
    Senator Bingaman. Mr. Chairman, I don't want you to stretch 
any precedents on my behalf. Let me just thank you for having 
the hearing. It's a very important issue, and one that we need 
to better understand as we head into this winter season.
    I appreciate the witnesses being here very much. You have a 
very distinguished group of witnesses, and I'm anxious to hear 
them. Thank you.
    Chairman Bennett. Very good. We appreciate you being here. 
We will start with Dr. Daniel Yergin. He's Chairman of the 
Cambridge Energy Research Associates in Boston, and has 
testified a number of times.
    Then we'll go to Paul Sankey, who is a Senior Energy 
Analyst for Deutsche Bank in New York, and then we'll go to 
Logan Magruder, who is the Vice President of Berry Petroleum 
and President of IPAMS, the Independent Petroleum Association 
of the Mountain States in Denver.
    Finally we'll come back to Washington, DC with Bill 
Prindle, who is the Deputy Director of the American Council for 
an Energy-Efficient Economy.
    Gentlemen, again, thank you for being here, and we will 
hear from you in that order.
    Dr. Yergin.

 STATEMENT OF DANIEL YERGIN, PH.D., CHAIRMAN, CAMBRIDGE ENERGY 
         RESEARCH ASSOCIATES; CAMBRIDGE, MASSACHUSETTS

    Dr. Yergin. Thank you, Mr. Chairman, Senator Reed, and 
Senator Bingaman. It's a pleasure to be here.
    Mr. Chairman, I wasn't sure where you were going with your 
analogy, at first, about the Russian Revolution, but I'm 
relieved that the Leninist principles will not be applied to 
witnesses testifying today.
    [Laughter.]
    Dr. Yergin. I want to congratulate the Committee on holding 
this hearing. Senator Bennett, I think you've provided a very 
effective framework for the discussions, and I think that 
Senator Reed pointed to the importance of conservation.
    A central point that I would like to make is that at CERA 
we work a lot of conservation and efficiency into our 
projections for the future, and with that, we still see very 
major supply issues before us. I think, as Senator Bennett 
identified in the hearing, perhaps the biggest risk to the 
economic expansion now is energy prices.
    This past week, the IMF raised their forecast for world 
economic growth to 5 percent this year, the best in a 
generation, in almost three decades, in fact, I believe they 
said, and pointed to energy prices as indeed the biggest risk.
    We tend to focus on oil because it's so much more visible, 
but as the Chairman pointed out, natural gas prices are very 
important. Natural gas is almost a quarter of our total energy 
supply in the United States, and it's very dramatic to see 
what's happening right now.
    Today, the future prices are three times the average prices 
in the 1990's. We're seeing dramatic changes throughout the 
energy markets. They're very tight, and natural gas is a very 
important part of it.
    There is a shift from looking to natural gas as a fuel of 
choice, to ``is it a fuel of risk?'' Yet this is a time when 
we're counting on natural gas to be a clean, competitive fuel 
to meet both economic and environmental challenges. That is 
very much embodied in the large number of new power plants that 
are based upon gas.
    The high prices we're seeing are not a failure of markets. 
It's basically geology that has driven this, a maturity in 
terms of geology, and yet it's imposing many burdens on our 
economy.
    The term that is applied is a ``maturity of supply.'' 
Productive capacity in the United States peaked in 1994, and 
it's lower than that today.
    The United States has looked to Canada to be our source of 
surge supply. Canada meets 16 percent of consumption, but it 
appears that Canada is flattening out, and we haven't seen 
large major discoveries in the last few years.
    This time, it appears that the drilling rig, by itself, 
will not solve the problem, as it has in previous decades. This 
new era of natural gas was really inaugurated with the turn of 
the new century. Prices went up, and as in the past, the 
drilling rigs went to work, but in that period of 2000 to 2001, 
they did not--and this was a surprise for the industry--they 
did not provide the upturn in supply that would normally have 
been expected.
    We will continue to see a very high degree of spending and 
effort by the industry, and that's very important, because it's 
going to be a very major challenge, basically to keep things 
where they are and not have them slide too much.
    The problem, as Senator Bennett pointed out, is that we are 
on a course of rising demand. That graphic up there shows 
what's happening, which is an enormous shift to natural gas for 
electric power generation.
    Over the last few years, this country has added something 
like 200,000 megawatts of electric power capacity. This is a 
huge number. That is equivalent to a quarter of the entire 
installed capacity we had in the year 2000.
    Almost all of that is based upon natural gas, and so we've 
built in a rising demand. Gas was selected because it appeared 
to be an inexpensive fuel and also a very environmentally 
attractive fuel. We're facing a maturity in our supply on a 
continental basis, and at the same time, rising demand.
    We're going to see a growing gap between supply and demand. 
How do we fill it? We fill it with additional supplies, which 
means LNG coming from across the waters, and, over a longer 
term, Arctic and Alaskan gas.
    The challenge is, how do we get there? The United States 
only has around 3 percent of the world's natural gas reserves; 
the rest of the world is awash in natural gas supplies.
    Natural gas reserves, on a global basis, are as large as 
oil reserves, yet they're far less utilized. What do we need to 
do?
    First, we need more conservation. Second, we need to keep 
production from sliding further; we need a stronger effort, and 
we'll hear about that, I think, from the panel. And, third, we 
do need to be looking to alternative sources.
    Today, LNG provides just 3 percent of our supplies. When we 
do our numbers at CERA, working in conservation and efficiency, 
working in the kind of the effort that will be necessary in 
North American supplies, we see that LNG could be, in order for 
us to have a healthy economy, upwards of 25 percent or even 30 
percent of our supply by the year 2020--not so far away!
    We have to think in continental terms. It's not only the 
United States; it's a flattening in Canada, an increasing gas 
demand in Canada, and Mexico now imports 20 percent of its 
natural gas from the United States.
    There is a near-term problem. What happens in the next few 
years? In a sense, we're confronting that question right now 
when we could see natural gas in much higher prices, $8 and we 
could have $10. Look at the prices. The futures markets today 
are $7 or $8, when we were accustomed to $2 or $2.50. That 
shows how tight the market is and how susceptible it is, not 
only to economic growth, but to specific events, in this case, 
Hurricane Ivan, which has still incapacitated a substantial 
part of the natural gas from the Gulf of Mexico.
    As Senator Bennett said, with higher prices, the impact may 
be felt in the economy through lost jobs, it will be felt in 
gas-intensive industries, it will be felt in the export of 
whole industries.
    The term that's used is ``demand destruction.'' Industrial 
consumers, in order to be competitive in a global economy, have 
to look to go outside the United States.
    We see the additional LNG supplies starting to be 
available, assuming that permits and construction proceed, in 
2008 and 2009. In between is a period of higher prices and a 
period of risk for the economy, for important segments of the 
economy.
    What do we do in the next few years? In our study, 
``Charting the Path: Options for a Challenged North American 
Natural Gas Market,'' we tried to point to some of the measures 
that can help to manage natural gas demand and exposure to 
price volatility during this bridge period of 2004 to 2009.
    It begins, certainly, with effective customer education----
    Chairman Bennett. Are you about to--could you cut some out?
    Dr. Yergin. I'm done in 30 seconds.
    Chairman Bennett. Good, we'll give you 30 seconds.
    Dr. Yergin. Effective consumer education, flexible gas 
procurement mechanisms by utilities. Fuel flexibility for new 
and existing electric power capacity is very important. 
Resolution of the mismatch in contracting in the natural gas 
industry, and acceleration of gas production in the near term 
by streamlining opportunities and permitting processes for 
activities.
    To sum it all up, it's a difficult market environment for 
the next few years. It's a challenge for the industry, for the 
public, for regulators, policymakers, and consumers, but there 
are measures and things that we can do that will provide real 
relief for consumers in the coming few years, and ensure 
natural gas's deserved place as a fuel for economic growth and 
environmental quality. Thank you.
    [[The prepared statement of Daniel Yergin appears in the 
Submissions for the Record on page 36.]
    Chairman Bennett. Thank you very much. For those that can't 
read the chart which was prepared by our staff here, the total 
line is the generating capacity brought online by fuel type, 
and it's 30 years or more than 30 years. It goes back to 1970.
    [The chart entitled ``Generating Capacity Brought Online By 
Fuel Type 1970-2002'' appears in the Submissions for the Record 
on page 46.]
    The yellow at the bottom, is coal. Each new production 
capacity that came online was coal. Natural gas is the dark 
blue, which is there, and then the other categories are 
nuclear, petroleum, and then other.
    The petroleum is the orange, and then nuclear is purple. 
So, you see, as we get into the 1980's, nuclear plays a bigger 
role as coal starts to shrink.
    But look at what happens at the end of the 1990's, the dark 
blue, which is natural gas, dominates. Coal disappears, 
absolutely and nuclear tapers off. There's just a little bit of 
orange in the petroleum there, but there's no question that the 
new production capability, No. 1, the total line goes up very 
dramatically, and No. 2, most of that entire total is natural 
gas.
    Dr. Yergin was referring to that chart, and for those that 
don't have a copy of it, that's what the colors mean, and 
that's what the bars mean.
    Thank you very much.
    Mr. Sankey.

STATEMENT OF PAUL SANKEY, SENIOR ENERGY ANALYST, DEUTSCHE BANK, 
                       NEW YORK, NEW YORK

    Mr. Sankey. Mr. Chairman and members of the Committee, 
Senator Reed and Senator Bingaman, it's an honor to be invited 
to address you here in this most august of institutions. I am a 
former global gas industry consultant and now I'm an equity 
analyst working on Wall Street, covering the major U.S. oil 
corporations like ExxonMobil, Chevron, and so on. We'll be 
happy to answer questions on the policies and strategies of 
those particular companies regarding the natural gas industry.
    The primary reason I'm here, I believe, to address you, is 
because of a research report that I wrote in the middle of this 
year, entitled ``Global LNG: Exploding Myths,'' which 
addressed, as implied, some of the myths surrounding the 
potential and issues of the global LNG industry, going forward.
    If I could start by just supporting the comments of Dr. 
Yergin, there's no material disagreement at all between any of 
the members here, I believe, having seen their testimony, on 
the future of the gas industry, and I will attempt not to cover 
the same issues that he has already covered so comprehensively.
    Just to be clear on LNG, it's the liquid natural gas. It is 
essentially pure methane. It's a relatively simple process. 
There's no great technological breakthrough in this area, 
really, in the last 30 years.
    The key improvements in economies that we've seen, regard 
scale. The LNG plants, from a supply perspective, are getting 
larger and larger. The ships are getting bigger and bigger, and 
the regasification terminals are getting larger and larger, 
which is improving the economics, but the technology is 
relatively simple.
    Basically you have a giant fridge in the gas country with 
large gas reserves. The fridge makes super-chilled gas, which 
turns to a liquid, and you then put it in the giant thermos 
flask, which is essentially the ship, and then attach it to a 
nozzle here in the United States and you have methane, almost 
pure methane delivered.
    As we have highlighted in the testimony that I delivered to 
you, looking at the economics of this trade, what I've done 
there is listed the various countries in the world that have 
major gas reserves available, and I will illustrate a few, the 
price of delivered gas available from those countries.
    [The chart appears in the Submissions for the Record on 
page 66.]
    To explain the chart somewhat, Trinidad II and III refer to 
the expansion trends at Trinidad, as an example. You have a 
breakdown there of the cost of production, of liquefaction, 
that is, taking the gas out of the ground and then turning it 
into a liquid, the cost of shipping, and the cost of 
regasification. You will see that gas is available from 
Trinidad at around $2 per MMBtu.
    I'm sure you're aware that the current U.S. gas price is 
around $6 per MMBtu, and essentially there's a major profit 
opportunity here for companies that can develop these projects, 
and that is, indeed, what they intend to do.
    There is a huge amount of gas available. We've covered 
that, I think, in enough detail, but here, alone, you could 
probably see a thousand Tcf of gas that's available at these 
prices, where the U.S. economy now consumes 22 Tcf of gas per 
year, so you have plenty of gas, really, for the next century.
    Conceptually, I want you to think of a 20th Century that 
was driven by U.S. oil, cheap U.S. oil, cheap U.S. gas, and now 
a 21st Century that will be driven by international gas, and 
you have to recognize that while the $2 from Trinidad looks 
relatively cheap, the reality is that that's more expensive 
than you've paid in the past, and you're going to have to come 
to terms with that.
    The key issue here is the disconnect between the potential 
of supply here in these countries, and the reality of the 
current supply, which is short.
    The issue of short supply is related to the arguments that 
I made about exploding myths. The common view is that there's a 
problem with regasification capacity in the United States. The 
reality is that it's not utilized.
    The other is lack of international energy available right 
now. I think there are two primary reasons for that: One, a 
shortage, globally, of energy that we're all aware of. An 
interesting subtlety is a major Japanese nuclear crisis, which 
for the first time began to drag LNG cargoes that were 
available for delivery into the U.S. market, toward Asia.
    There's an important industry point beneath this, which is 
that the U.S. market historically has been dependent on spot 
supply of LNG, which is to say, non-long-term contracted 
volumes that become available through the seasonal pattern of 
the year, and the fact that as we have now a tight energy 
supply complex, not least for natural gas, contracted customers 
in Europe and in Japan, are exercising all their rights to LNG, 
leaving very little LNG available for delivering into the 
United States.
    As an illustration of the shortage of LNG available 
globally, this year so far, we've had LNG delivered into the 
U.S. market from Australia and from Malaysia, which you can 
imagine is an illogical trade, frankly. It's a long way and you 
drive across almost all the gas in the world and it's not a 
good job driving the ship, because it's so far.
    We have under-utilized regasification capacity. As Dr. 
Yergin highlighted, supply is relatively a short-term problem, 
and that's really the problem that you face here.
    In terms of industry planning, industry planning 
assumptions are only just moving toward the aggressive 
developments of LNG. If we take the example of ExxonMobil, they 
have only just moved their planning assumption for U.S. natural 
gas, up from previously $2.50 per MMBtu to $3.50 per MMBtu, and 
as a result, are now approving major investments in LNG.
    Another problem is that the scale of the investment 
requirements in LNG makes this a relatively long-term process. 
The fastest LNG plant developed, essentially took 6 years from 
discovery of gas to first delivery. That will be basically 
Egypt, which will commence delivery next year, and it's 
illustrative, again, of the issues surrounding global LNG, that 
that plant will, in fact, deliver into Europe and not into the 
United States.
    As I've said, there is something of a myth that there's a 
shortage of regasification. I think that, over time, there may 
be the development of an issue here, but ultimately we've 
looked at the oil market as the leader. I refer to the 
conceptual idea of the history being one of U.S. oil, the 
future being one of international gas.
    The oil market is highly dependent on imports through the 
Gulf of Mexico. It only takes about 10 major import ports to 
meet 75 percent of the U.S. import requirement. Our ultimate 
conclusion here is that regasification is not the issue, but 
that the issue will be the development of supply over time.
    As we've highlighted in the testimony, the requirements are 
huge and they are in difficult countries, from a geopolitical 
and technical point of view, which is to say, you need a lot 
more supply here from Nigeria, from Angola, from Algeria, the 
other countries around the world with major gas supply to 
provide an investment challenge, and you have to be aware of 
that, going forward.
    I think I will leave it there. I have covered the main 
issues from my perspective. We would applaud FERC for the work 
that they've done in accelerating the regasification permitting 
process. I think you should be aware that there are at least 
two permitted projects now which are not being developed, 
because of a lack of LNG supply.
    Further, I would just highlight that there are excess ships 
available for LNG, to underline my primary point, which is that 
the development of a global LNG supply will be a multi-year 
process, and essentially there's, in all likelihood, a shortage 
for the next 2 to 3 years, at the least.
    The final point would be that ultimately Dr. Lee Raymond of 
ExxonMobil expects the U.S. gas market to become as gas-import-
dependent as it is now oil-import-dependent, so, clearly, the 
future is here, and, again, to support Dr. Yergin, you have a 
5-year or 6-year interim period where you have a bit of an 
issue, quite frankly.
    [[The prepared statement of Paul Sankey appears in the 
Submissions for the Record on page 47.]
    Chairman Bennett. Thank you very much.
    Mr. Magruder.

 STATEMENT OF LOGAN MAGRUDER, PRESIDENT, INDEPENDENT PETROLEUM 
    ASSOCIATION OF MOUNTAIN STATES (IPAMS), DENVER, COLORADO

    Mr. Magruder. Mr. Chairman and Committee Members, thank you 
very much for the opportunity to join you today. My name is 
Logan Magruder, and I'm Senior Vice President of Berry 
Petroleum's Rocky Mountain and Mid-Continent Regions, and my 
end of the business is on the production side. We drill wells 
and we produce, so just to put it into perspective, I'm also 
President of IPAMS, the Independent Petroleum Association of 
Mountain States. We have 300 member companies, covering about 
13 states in the Rockies, so our focus is the Rocky Mountains.
    What I'd like to tell you today is that the Rocky Mountains 
is a warehouse of natural gas resource that's idle right now, 
and with Congress's help and policymakers' help, we can 
probably unleash that resource into the marketplace. We talked 
about the 4- or 5-year interim period, and the Rockies could 
play a vital role in that process over the next 5 years.
    I'd like to just paint a little picture for you. I'm not 
going to recite my testimony that I submitted, but we consume 
about 23 to 24 trillion cubic feet of gas per year in the 
United States.
    We only produce about 19 trillion cubic feet, so, as Mr. 
Yergin mentioned, the deficit or the deficiency is imported 
primarily from Canada. There's a tremendous resource in the 
Rockies right now.
    Pipeline take-away was perceived to be an issue. The take-
away term, for the layman, that's the ability to get natural 
gas into a pipeline at known quantity out of the Rockies. 
Currently, the Rockies is not curtailed by limited pipeline 
capacity. The Rockies has about 4.6 billion cubic feet. I'm 
switching from trillion cubic feet to billion cubic feet, 
because we tend to use that in daily quantities.
    The Rockies can move around 4.6 billion cubic feet of gas 
out of the region right now. We're scheduled to increase that 
to about----
    Chairman Bennett. In what period? Is that 4.6 billion a 
year? A month? A day?
    Mr. Magruder. Per day, OK? The industry is scheduled to 
increase that to around 6.5 billion cubic feet per day within 
the next 24 months.
    The thing that's hindering our ability to get more natural 
gas into the pipeline system or into the market is a regulatory 
constraint right now, and a lot of other issues. There's been a 
tremendous breakthrough in the Rockies over the past 10 years, 
from the standpoint of technology and understanding gas-bearing 
reservoirs in the Rockies.
    As a result of that, we're drilling more wells per given 
area of land. If you take a section of land, 640 acres, 
typically, 10 years ago or more, maybe we only drilled one or 
two wells per section of land. Today, we're able to more 
efficiently complete wells, extract the natural gas, and, as a 
result of that, we're commercially or economically able to 
develop the resource on a much tighter spacing, more wells per 
given section of land.
    In a lot of cases, we drill 16 to 32 wells per section, 
where we were only drilling one or two previously. That's 
created a tremendous demand on the permitting process for the 
BLM, the Bureau of Land Management, so that's really where the 
angst is now, and everybody is certainly trying to make 
breakthroughs in accessing the Federal lands to be able to 
drill more and to supply more natural gas.
    The Rockies has about 26 percent of the known resource in 
the United States. There's about 1300 Tcf, trillion cubic feet 
of gas known, and the Rockies has about 26 percent. We're a 
large stakeholder.
    In the Rockies, we're unique, because 50 percent of the 
lands are regulated by the Federal Government. BLM is the 
landlord there.
    Twenty-six percent of that 1300-trillion cubic feet is 
about 338-trillion cubic feet. I think someone mentioned before 
the hearing, that we have about 160 or so trillion cubic feet 
of proven reserves. The Rockies alone has probably about two or 
three times that amount of potential resource available to us 
right now.
    The pipeline capacity is there. We need access to drill 
wells, basically.
    The Rockies is unique. A lot of companies are migrating to 
the Rockies. It's a long-term supply. It's not a real high 
decline rate-type production, so it's very attractive to 
companies.
    The industry has the financial capabilities to develop this 
resource, and we're poised and ready to act, so over this next 
4- to 5-year period, I think you can see a tremendous output of 
natural gas available from the Rockies, and the infrastructure 
is there, we just need the ability to access and drill.
    [[The prepared statement of Logan Magruder appears in the 
Submissions for the Record on page 95.]
    Chairman Bennett. Thank you very much.
    Mr. Prindle.

  STATEMENT OF WILLIAM R. PRINDLE, DEPUTY DIRECTOR, AMERICAN 
COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY (ACEEE), WASHINGTON, DC

    Mr. Prindle. Thank you, Mr. Chairman, Senator Reed, and 
Senator Bingaman, for inviting me here today.
    My colleagues on the panel have painted, I think, a very 
expert and comprehensive picture of the gas market situation, 
and particularly on the supply side, and I'd like to turn the 
Committee's attention for a moment to the demand side of the 
equation, because, after all, markets are composed of supply 
and demand.
    Our research shows that over the next 5 years--and I think 
we've heard that the next 5 years between now and 2010, are 
really the crucial challenge for natural gas markets--we 
estimate that energy efficiency can provide more relief to gas 
markets and more support to the economy than any single 
resource policy strategy. Certainly we're going to need new 
supply, but for the next 5 years, we think energy efficiency 
can be a key swing producer, if you will, a first responder 
kind of resource.
    Based on our analysis, we've developed a four-point policy 
response for Federal and State governments to consider, that 
can bring a lot of benefits to the economic recovery, as well 
as to the gas markets.
    We're talking about a $7 billion, 5-year initiative that 
would generate about $23 billion in private investment in 
efficiency, and, more importantly, it would create more than 
$100 billion in direct economic benefits.
    Some have estimated that the effective tax that high gas 
prices have exacted on the economy over the last 4 years or so 
is already exceeding $100 billion. We think we can get that 
back in the next 5 years. We think it's worth doing.
    By way of background, energy efficiency, of course, has 
been a key part of the economic growth picture of the United 
States for the last 30 years. For the last 30 years, we've kept 
per capita energy use in this country virtually flat, while GDP 
per capita has gone up 75 percent, so efficiency is really the 
little engine that could, when it comes to supporting economic 
growth.
    We've done this by reducing the energy intensity in the 
economy, the number of BTUs it takes to produce a dollar's 
worth of economic output. If we hadn't done that, we'd have to 
be producing another 25 percent more on the resource side than 
we currently produce.
    If that were the case, just imagine the predicament we'd be 
in here today in terms of gas market prices.
    Given all the gains we've made in the last 30 years, you 
might think, well, we've kind of squeezed that barrel dry; 
there's not much energy efficient potential left. Well, I'm 
happy to report that that's actually not the case.
    We've done analysis, five of the National Laboratories have 
done major studies in the last 4 years, and several states have 
done their own analyses, and the general convergence of the 
analysis on this is that we can reduce energy demand in gas and 
electricity markets by 20 to 25 percent over the next 20 years. 
That's below the reference case forecast that EIA produces.
    That's why the National Petroleum Council felt confident in 
calling for a similar level of energy efficiency in their 
balanced future scenario, and it's also why the Western 
Governors Association, led by Governors Schwarzenegger and 
Richardson, have called for a 20 percent reduction in energy 
use below the baseline forecast by 2020.
    Why does efficiency potential stay high when we've made all 
these gains? Well, first, there are persistent barriers that 
keep the markets from working perfectly.
    Certainly, markets work, but they don't work well enough. 
Second, technology continues to be on the march.
    We have refrigerators today that use one-third the energy 
of those made 20 years ago. As of 2006, home air conditioners 
will be roughly double the efficiency they were 20 years ago. 
Heating systems, water heaters, home appliances, lighting 
technology, windows, electric motors, industrial processes, and 
a whole litany of venues has continued to improve their 
technological efficiency.
    This advance in the technological side not only keeps the 
efficiency potential growing, but it keeps the economy growing 
through new investment and expanded markets for these products.
    Let me focus in a little bit on the research that we've 
done in this area over the last year or two: Our work started 
last year as Secretary Abraham was preparing for his Natural 
Gas Summit in June, and as the National Petroleum Council, 
under the Secretary's direction, was preparing its major report 
entitled ``Balancing Natural Gas Policy.'' We consulted with 
the Department of Energy and the National Petroleum Council 
staff during this period, and it became apparent to us that 
their plate was very full. There were a lot of issues they were 
looking at, and demand was only one of them.
    We decided it would be useful to take a closer look at the 
demand side of the market to get a more exact idea of what kind 
of contributions efficiency could make. So we developed a 
moderate set of projections for the potential contribution that 
we could get from energy efficiency, and also from renewable 
energy over this next key 5-year period.
    What we found was that we estimate we can realistically 
drop natural gas demand by about 4 percent below the baseline 
forecast by 2010. That's not a wild or unattainable number by 
any stretch. We also estimate, based on a range of expert 
opinion and analysis, that renewable energy could contribute 
another 3.6 percent of electricity generation in that period.
    What we did was, we worked with the same model that the 
National Petroleum Council used, which is owned and operated by 
Energy and Environmental Analysis. We ran this scenario through 
the same model that National Petroleum Council operated and we 
found, as you might guess in a tight market situation, that 
small changes in demand had very large price impacts.
    Our analysis showed that wholesale gas prices at Henry Hub 
would fall about 20 percent in 2009 through this scenario. That 
was in 2003. We're doing an update in 2004, and we're finding 
that markets are even tighter and that the price impact would 
be closer to 26 percent in 2010.
    Incidentally, while this forecast was made last summer when 
gas prices looked soft, we're seeing the markets today confirm 
what that prediction was. Today's NYMEX spot price is over $7, 
and it took us to mid-December to get to that price last year. 
The front-month prices for December through March are now over 
$9.
    This is the highest sustained futures price trend we've 
ever seen in this country, so it's going to be a rough winter.
    As I mentioned, we're talking about a $100-billion net 
economic benefit from this efficiency and renewables scenario, 
and this is very consistent with what the National Petroleum 
Council found.
    If you read their report, you'll see those numbers 
correspond rather well. We found, interestingly, that the 
majority of the savings come not from direct natural gas 
savings, but from electricity savings.
    You ask why is that. Well, electricity, as Dr. Yergin and 
others have pointed out, has been the fastest growing source 
for natural gas consumption.
    Chairman Bennett. Can you wrap it up?
    Mr. Prindle. I'll try and wrap it up.
    Chairman Bennett. Yes, if you would.
    Mr. Prindle. Electricity is a key part of the solution, as 
well. By saving electricity, we actually save more gas, and I 
can speak more to that in the Q&A, if you'd like.
    Why don't we see the markets taking care of this, if there 
is so much energy efficiency out there? Well, the bottom line 
is that while free markets are working, they are not working 
well enough and they're not working fast enough.
    We need a policy, a modest policy boost to get the kind of 
demand-side response that we need to re-balance markets in the 
next 5 years. We have a four-point recommendation:
    The first is to increase funding for Federal programs. The 
Appropriations Committee could do that in the next 3 to 4 
months.
    Second, we'd like to see the states expand their public 
benefits programs for energy efficiency. Rhode Island and Utah 
are both active in this area.
    Third, we'd like to see tax incentives. We almost got there 
in the bill that the Conferees passed last night, but we didn't 
quite get there. Hopefully, that will get done in the next year 
or so.
    Last but not least, we need a bully pulpit response. We 
need people at the highest level of governments to call this 
out as an important priority for every American.
    I'll stop there now, and I'll be happy to answer your 
questions as they come up. Thank you.
    [The prepared statement of Bill Prindle appears in the 
Submissions for the Record on page 101.]
    Chairman Bennett. Thank you very much. Thank you to all of 
you.
    Mr. Magruder, you talked about the permitting process at 
the BLM. Senator Bingaman and I are both very much involved 
with the BLM in our various Committee assignments.
    One of the things that disturbs me the most about the BLM 
currently is that by various estimates, as much as 50 percent 
of the BLM's total budget goes for litigation or for defensive 
actions so that they can be better prepared for litigation.
    Virtually everything they try to do with respect to 
encouraging development is challenged in the courts by a 
variety of groups.
    What is your experience with the permitting process? Is it 
substantially slower than it could be? Is there a great barrier 
there, or are you escaping the kind of litigation attack that 
has occurred in other parts of the BLM?
    Mr. Magruder. Good case in point on the litigation, my 
company just participated in the Utah lease sale, which was a 
record sale for the BLM in Utah this past September. It raised 
$22 to $28 million.
    My company accounted for about $8 million of that in 
anticipation of leases, so it's very important to us.
    197 of the 250, plus or minus, parcels that were let in the 
entire lease sale, were protested or contested immediately, 
with the Internet and the ability to have just form letters, I 
mean, the protests were almost instantaneous and simultaneous 
to the lease.
    Our company is obligated to, within 10 days, to pay, in our 
case, $8 million, for those leases, I think, by law, or just 
typically, the BLM should issue those leases in 60 days, but it 
will probably take us at least a year to get those leases. Our 
money has been parked with the BLM. If they knew there were 
going to be protests, we probably should have just put a down 
payment or something like that, but we've taken a lot of the 
resource, taken it away from the actual drilling of wells, in 
that case, and with there is the anticipation that we'll get it 
through the litigation, but the protests are almost 
instantaneous.
    A good success story is occurring in the Buffalo, Wyoming 
area, Powder River Basin, which is a huge resource of natural 
gas. The Appropriations Committee made money available for the 
Buffalo office.
    The Buffalo, Wyoming BLM field office area was handling 
about 1,000 to 1,500 wells per year. That was their capability. 
The State of Wyoming Oil ans Gas Conservation Commission can 
handle about 12,000 permits a year and within a much shorter 
timeframe. The same type of well on private or state property 
next door to Federal property is close enough to take a 
pitching iron and hit a golf ball from one well to the next. 
That well looks no different and is drilled and completed using 
the same technique as a well on Federal property. The 
difference, however, is in the permitting requirements for the 
Federal well versus the State well.
    But through Kathleen Clark's efforts and many people of the 
leadership in Buffalo, they were able to work with the industry 
and compromise and come up with a permitting process that has 
been very successful. They have increased their output from 
1,500 wells a year and they are approaching 3,000. That's their 
goal, and they're almost at that point now.
    There are many other cases. Glenwood Springs, Colorado on 
the Western Slope is a very critical source of natural gas. It 
has a very efficient process working right now.
    But, you go into areas like Jonah, Southwest Wyoming, it's 
very difficult to get permits. The industry is just poised and 
ready to go there. The only question is why is there this 
backlog of permits?
    As I mentioned earlier, the technology has improved for 
drilling more wells per given area. It's triggering the NEPA 
process and everything that goes along with the obligations of 
the BLM to manage and steward those lands, and it's just 
creating a long regulatory process to get a well drilled.
    In my experience, sir, I really have not seen a great deal 
of impact as a result of my proposal, the APD, the application 
to drill the well, and the outcome. Just timing is the big 
issue.
    Chairman Bennett. Well, I'm very concerned about it. We 
call it the 37-cent appeal. For the price of a postage stamp, 
something can be held up for a full year.
    The BLM or Forest Service are subject to the same kind of 
appeal in a variety of environmental issues and inevitably win 
in court, once it finally gets to court, but people don't file 
on the basis of merit; they simply file on an attempt to hold 
things up.
    Mr. Magruder. Exactly.
    Chairman Bennett. If I hear what you're saying, things that 
should take place in 60 days, you routinely expect they will 
take a year?
    Mr. Magruder. Yes, sir.
    Chairman Bennett. Just to work through that, that's very 
distressing.
    Mr. Magruder. I wish there was some kind of cause and 
effect. I mean, if there was a valid concern, then certainly it 
will stand on its own merits, but if it's just a frivolous 
lawsuit, then we really need some recourse against those 
situations.
    Chairman Bennett. All right. I will observe the 5-minute 
rule, and we will look to multiple rounds among those that are 
here.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. Thank you, 
gentlemen, for your testimony.
    Dr. Yergin, you indicated that you assume energy efficiency 
in your modeling. Are those energy efficiencies things like Mr. 
Prindle has talked about, that we'd have to undertake 
legislatively?
    Dr. Yergin. I don't know what, in detail, is in his 
proposal. As he points out--something, in particular, that 
critics outside the United States have not necessarily 
recognized, is that we were a lot more efficient than we are 
today. The United States has had a steady progression of it, 
and we're assuming future efficiency. A great deal of it is 
embodied in new technology, and as you turn over your capital 
stock, you get more efficient.
    Senator Reed. Essentially, the question here for us, 
particularly, is what do we have to do to encourage efficiency? 
Do you think there's a role for us to play, as Mr. Prindle 
pointed out, in terms of accelerating the use of new 
technology, providing tax incentives and credits? Is that 
something that is necessary?
    Dr. Yergin. Well, I think that certainly has a role. How do 
you get efficiency, greater efficiency? You get it by 
jawboning, the bully pulpit; you get it by turning over your 
capital stock; you get it, as we've seen, through regulation; 
you get it through price.
    Of course, that last one is maybe the least popular way to 
go about it. I think a lot of it is actually in research and 
development.
    Several years ago, I chaired a task force for the 
Department of Energy on energy R&D, and it continues to be that 
the impact of technology is usually underestimated. The 
question is, how do you promote that technological innovation 
and the adaptation of it?
    Senator Reed. Thank you. Mr. Sankey, I was very interested 
in your comments on LNG, and particularly the notion that 
there's excess capacity for regasification and also ships, and 
that the constraint is the supply.
    As you are aware, there is a renewed energy--no pun 
intended--to develop these LNG facilities in the United States, 
regasification facilities.
    With this over-capacity, are those developments necessary, 
or what's your view?
    Mr. Sankey. No, they are certainly necessary, going 
forward. I think, in fact, ironically, some of them are just 
too big to be filled at the moment and that's the problem.
    If we're going to see, let's say, LNG accounting for 10 
percent of U.S. gas supply by the end of the decade, you're 
clearly going to need at least one, if not up to probably four 
more terminals to bring the gas in.
    My comment would just simply be that FERC, the Federal 
Energy Regulatory Commission, has done well here to accelerate 
the process, and you actually have two permitted terminals, 
potentially available to begin construction, that actually are 
not beginning construction because you don't have the supply.
    Therefore, I wouldn't, from my perspective, worry so much 
about the permitting process any longer. I think we've overcome 
that one. It is difficult to build in the Northeast; it is 
difficult to add in Boston, but in the Gulf of Mexico, I think, 
in Louisiana, you can expect to see more.
    Senator Reed. Given the national nature of the energy 
markets here, in fact, the international nature, is it 
necessary to have terminals in certain places in the country? 
Or is it simply that three more terminals with adequate 
capacity, anyplace in the country, could serve the market?
    Mr. Sankey. Well, that becomes a question of price. The 
best place to put a terminal would be where it's most needed, 
at the extreme ends of the infrastructure, which would be in 
the Northeast, but, of course, they say that's the hardest 
place to put them.
    Whereas, in the Gulf, where you have tremendous amounts of 
gas infrastructure and the potential to move gas right across 
the United States, you're most likely to see the new 
infrastructure. I think, again, that my view on that would be 
it would tend to be a market issue. The most efficient, biggest 
plants will be in the Gulf area where you have the most 
infrastructure to move the gas, and you'll have niche players 
with continued attempts to build regasification right at the 
extreme ends of infrastructure, because you'll get the highest 
price there, and so, right now, the highest price in the United 
States is probably in the Boston area. It's a much lower price 
down at Henry Hub, and you have to keep that in mind.
    I would add that there's a seasonal element here, as well, 
to keep in mind, which is one of the problems you face with LNG 
in that everyone, globally, consumes gas during winter, and 
doesn't during summer, and that's simply another challenge.
    Senator Reed. You commented on the FERC permitting process. 
One of the issues that we've seen and observed, is the 
disconnect between the FERC process and other agencies that 
have a role to play, for instance, with marine terminals, the 
Coast Guard, for security, transportation, and access. Do you 
have any comments on that disconnect?
    Mr. Sankey. Well as far as we can make out, the Coast Guard 
is also approving terminals, and there is the potential for 
off-shore terminals. The only comment there would be that they 
are extremely expensive; technologically perhaps slightly 
untested. There is not one in the world yet.
    The net result of this tends to be that they are extremely 
large in order to justify their expense. From a permitting 
point of view, they are preferable insofar as they are what are 
called ``over the horizon'' so you do not have this so-called 
NMBI issue with them, but you have the attendant additional 
expense.
    Senator Reed. You also indicated in your testimony that one 
of the problems with the prices we are paying in the United 
States is that we rely on the spot market more than long-term 
contracts.
    That would seem to me to be something that could be 
addressed by the industry immediately.
    Mr. Sankey. Yes. I mean you are in a situation where Dow 
Chemical now has provisionally signed up to take long-term 
LNG--and it is symptomatic of where we are going here that a 
chemical company in the United States will now switch to LNG 
supply on a term, what we call a ``term basis.'' Again the 
disconnect right here, right now, is that there are not 
contracts in place; and you will, if you like, rival buyers of 
gas globally who do have contracts. Again I would say this 
winter you may actually see, and I think you are seeing now, 
declining LNG delivery into the United States into a rising 
price, and that is simply because the other contractual 
payers--who may be paying less, in fact,--are taking 
precedence.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bennett. Senator Bingaman.
    Senator Bingaman. Thank you very much.
    I think I have identified a difference of opinion among 
those of you here. Let me just ask a question about that.
    Mr. Prindle's testimony states that, ``if we rely on LNG as 
a marginal source for gas, it will tie U.S. markets to a 
permanent higher cost baseline.'' Mr. Sankey, I thought I 
understood you to say that over the long term there is an 
enormous amount of cheap gas out there, and once the 
infrastructure has been developed to bring it to market that we 
were going to see the price of gas substantially lower than 
current future prices and current prices would reflect.
    Am I interpreting your testimony correctly?
    Mr. Sankey. No. I specifically made the point that, whilst 
potential supply of LNG is lower than current future prices, it 
is also higher than historic prices in the United States. So 
that your deep history of gas prices being around $1, maybe $2 
per MMBtu, you have to recognize that the lowest cost gas from 
LNG is $2 to $3 per MMBtu. I think actually we are agreeing.
    If I could take the liberty of adding on efficiency, I 
think the single biggest issue that is faced here is actually 
efficiency in the vehicle fleet, and cars and SUVs and so on 
becoming less efficient over time, which is obviously a 
contrary trend to everything else we have seen in energy demand 
here in the United States, and that would be the focus of where 
I would make my efforts if I was trying to improve efficiency 
in the United States.
    The point being that very clearly oil prices and gas prices 
are linked here and you do have a $52 oil price right now that 
is certainly supporting a very high United States gas price 
because there is a degree of interchangeability between the use 
of oil and the use of gas at the margin. As I said, it would 
help gas prices lower--and I mean natural gas prices--if you 
could get gasoline prices maybe a little bit higher, or get 
efficiency of use a bit better.
    Dr. Yergin. Senator.
    Senator Bingaman. Dr. Yergin.
    Dr. Yergin. The picture that I would like to suggest is 
that we are on a much higher plane for natural gas prices than 
we have ever been accustomed to in the United States, and that 
will last until perhaps 2008, 2009, perhaps the year is 2010, 
until we start to see supplies, new supplies coming in, 
principally LNG.
    The picture in mind is that we will see that prices, given 
the cost of LNG, of maybe $3.25 or $3.50 will be the platform, 
or the base, or the plateau for natural gas prices that is 
higher than what we have had historically but a good deal lower 
than what we are looking at over the next few years.
    Senator Bingaman. We currently have in place OPEC that has 
a substantial impact on the world price of oil. Is there 
currently, or in the relatively near future, expected to be 
something comparable to OPEC in gas producing countries that 
will essentially dictate to us what we pay for natural gas to 
heat our homes?
    Dr. Yergin, go ahead.
    Dr. Yergin. I will give it a try because we have tried to 
do some thinking and research on that. I think you are holding 
out the question--and it is an inevitable question--will OPEC 
be joined by a sibling called OGEC, Organization of Gas 
Exporting Countries. Probably there will be associations of gas 
exporters.
    The way we look at it, the bigger, the more diversified, 
the more global, the more flexible LNG markets are in the 
world, the better off we will be and so will exporters. The 
countries involved do not overlay completely by any means with 
OPEC. Trinidad, Australia, others, will be important exporters. 
Moreover even if you have a larger, more flexible global energy 
market--this notion of a new global gas market different from 
what we have today--there is still an inter-dependence between 
the suppliers and the consumers. They have a pretty strong 
interest, the suppliers, in a stable relationship with their 
consumers.
    There is a risk there of it. It seems to us that 
diversification, the scale of the market, and the fact that you 
still have a great deal of pipelined gas--more LNG--would 
offset that risk. The bigger risk is this perpetuation of a 
very tight North American gas market.
    Senator Bingaman. Does anybody else have a comment on that?
    Mr. Sankey. I would concur with that idea. At the moment, 
there is essentially a shortage of gas, and that does not tend 
to encourage or require a cartel to be formed in order to 
support prices.
    Equally I think that the history of OPEC whereby 
essentially it related to the behavior of foreign companies 
within now OPEC-member countries has essentially--it is a 
process that has occurred in terms of the exits of those 
companies from those countries and a change in the fiscal 
regimes within those countries which applies both to gas and to 
oil.
    I think the sense of injustice, I would again have to defer 
to Dr. Yergin on this, but the sense of injustice that caused 
the formation of OPEC is not necessarily there in terms of the 
way the gas market operates, and I would equally support all he 
said about the liquidity of the market and the diversification 
of supply, again which makes it a difficult proposition.
    Senator Bingaman. Thank you, Mr. Chairman.
    Chairman Bennett. Let me go back to my opening observation 
about the importance of an infrastructure and the importance of 
a distribution system, and see if I have it right or if I 
overreacted to some of the information that I went through in 
preparation for the hearing.
    In order for a market to be efficient, goods and services--
in this case natural gas--has to be able to move freely 
throughout the market. We try to make markets efficient by 
lowering tariff barriers. We try to make markets efficient by 
lowering regulatory barriers.
    Let's say LNG shows up in New Orleans and the shortage is 
in Providence, Rhode Island. Do we have the distribution system 
that can get the LNG from New Orleans to Providence, Rhode 
Island, easily?
    Suppose there is a sudden cold snap in Montana? How easily 
can we, in the United States, move supplies around? Mr. Prindle 
is pushing energy efficiency, and the nice thing about that is 
that there are no barriers. If you develop a better window that 
keeps more of the cold out in the form of a thermal barrier, it 
is available everywhere and you do not have to move it around. 
You develop a better air conditioner, and everybody sells the 
better air conditioner, and so on.
    To try to attack this problem from the supply side, as 
opposed to the conservation side, we have to have an efficient 
distribution system. My sense is that that is not there, and it 
probably means a fairly significant capital investment on which 
we hope to get a return later on down the road.
    Am I missing something? You who are in this business, Mr. 
Magruder or Mr. Sankey? How good is our distribution system 
right now?
    Mr. Sankey. Well I would begin, but I would defer to Mr. 
Magruder on the specifics of the infrastructure. I would say 
what you do have is a very good pricing system here. You have a 
very liquid market with very visible pricing that ultimately 
will solve any short-term dislocations in supply and demand. 
You should rely on that.
    Chairman Bennett. Yes, but do we need--my fundamental 
question, to try to correct my own ignorance--do we need a 
significant infrastructure capital investment in this country 
to get where we want to go to the point where Dr. Yergin is 
talking about where we can see the price come back down to 
$3.50 or $4 as opposed to where it is now?
    Mr. Magruder, do you have----
    Mr. Sankey. Again I will defer to Mr. Magruder, but my 
primary point, stated in my testimony, was that the 
infrastructure requirement is abroad. You know, the 
regasification problem is overstated as the problem here, and 
the reality is where you need infrastructure is in Angola, and 
in Nigeria, and in Algeria, not so much in the United States.
    Mr. Magruder. I would agree that most of the capital is 
going to be focused on the liquification end or the point of 
the source. It has been awhile since I have worked in the Gulf 
of Mexico, so I am not the correct person to ask to recite 
current statistics, but you do have those main pipeline systems 
that were built back in the 1940's after the War that serviced 
the Northeast, and those major systems are still in there: 
Texas Eastern, the Texas Gas System, TransCo, all those old 
main pipelines are in place. The shelf, the central part of the 
Gulf of Mexico, is on decline.
    You have the deep water Gulf of Mexico providing a new 
source of natural gas, but it just seems logical that the Gulf 
of Mexico could satisfy the little bit of natural gas that is 
going to be associated with LNG.
    It will be a situation where you are going to utilize the 
storage capacities you have in the East--the old Consolidated 
Natural Gas Systems--and all those old storage fields will 
probably come in handy to store this product and make it 
readily available for the winter time during peak demand 
periods.
    I think that is the key to storage, to make sure that you 
get out of the volatility of a supply and demand situation and 
make sure you just have enough resource here to go through the 
winter months and eliminate the volatility.
    Chairman Bennett. You smooth the volatility by storage?
    Mr. Magruder. Sure.
    Chairman Bennett. If you get what you want in the Rockies, 
you can put that in a distribution system and virtually sell it 
anywhere in the United States?
    Mr. Magruder. Yes. I was about to say, the Rockies is 
unique in that it is a net exporter of natural gas that 
distributes to the East, the Central, the Midwest, the East 
Coast, and the West Coast. We are kind of unique from that 
standpoint because it is----
    Chairman Bennett. The pipeline network as it currently 
exists is efficient enough that your natural gas could 
physically go virtually anywhere in the United States?
    Mr. Magruder. Yes. We can go, especially with the Kern 
River Expansion that occurred last year, which had a tremendous 
impact on the ability to get natural gas out of the Rockies. 
That was a Bcf alone per day.
    Chairman Bennett. My understanding was incorrect. We 
probably do not need that massive capital infusion in 
infrastructure in the United States. Whether natural gas comes 
from the Rockies or whether it comes from LNG in New Orleans, 
it can physically move rapidly in the United States?
    Mr. Magruder. Well, the basic infrastructure is there. The 
Rocky Mountains, as an example, is putting major capital in 
place right now with the anticipation of more supply being 
available out of the Rockies.
    As I mentioned earlier in my testimony to you, our current 
capacity out of the Rockies is 4.6 billion cubic feet per day 
moving toward 6.5. That is incremental, too. That is a lot, you 
know, for just one small region.
    I am not personally familiar with any new pipeline systems 
scheduled from the Gulf Coast to the Northeast, but I know that 
those were some major systems that were installed years ago and 
they're still there and operational.
    Chairman Bennett. Well not to belabor the problem, but I go 
back to the comment I made where the price can be $20 in one 
part of the country and $7 in another part of the country. That 
is a factor of availability.
    Mr. Sankey. It is also a tremendous incentive to build 
infrastructure.
    Chairman Bennett. Yes. That is why I am saying, should we 
not have, or are we not looking at as a Nation additional 
infrastructure so that the price becomes $7 nationwide?
    Mr. Sankey. Well I think Mr. Magruder is saying that where 
the price dislocations occur, the infrastructure is added. I do 
not really see an issue there. Remember, the market as 
highlighted isn't growing.
    Dr. Yergin. Last winter in the Northeast we saw with very 
cold weather and utilities, residential, with everybody pulling 
on the pipe at the same time, we hit the limits; and we saw 
prices really reflect the fact that we were at or exceeding 
capacity.
    You look at some regions, and you look at Long Island, whom 
I think only has one pipe supplying it, and you say from a 
diversification point of view that is not good; it should have 
a second one. Then you get into the same morass of regulatory 
and permitting questions.
    I think also from a sort of security diversification point 
of view, from a national point of view, it probably would make 
sense to have at least one new LNG facility on the East Coast, 
and also have one on the West Coast, going to the point, 
Senator, that you are making of having supply closer to the 
demand centers.
    Chairman Bennett. OK. Thank you.
    Senator Reed.
    Senator Reed. Mr. Sankey, you indicated that at the present 
time where the capital should flow is to places like Angola, 
Nigeria, and Algeria to develop their fields and get supply. 
What is inhibiting that?
    Mr. Sankey. Nothing. It is going now.
    Senator Reed. It is going on?
    Mr. Sankey. Yes.
    Senator Reed. So that is----
    Mr. Sankey. Primarily, as I mentioned, there is an issue 
with planning assumptions of the oil companies where they use a 
long-term view, and we still have the memory in fact here of 
1998-1999 when you saw a $12 oil price still somewhat feeding 
through into assumptions. Assumptions are only gradually rising 
about what is a safe future forecast for prices. When you are 
putting $5 to $10 billion into Angola, you have to have a huge 
degree of comfort that the price you are going to achieve is 
going to make a good return for you. The companies find, 
broadly speaking, that it is better to be conservative than to 
be over-aggressive.
    The global picture here is that in the 1980's you had spare 
U.S. regasification capacity. OPEC had 15 million barrels a day 
of spare oil production capacity. Too many refineries in the 
United States.
    We have gone from an over-invested energy infrastructure to 
an under-invested energy infrastructure. Really we are in the 
fulcrum period that I mentioned that will see very high prices 
encouraging more investment, but we are right at that point 
now.
    Dr. Yergin. Senator, the scale of the investment in the 
upstream has greatly grown. A typical project 10 or 15 years 
ago might have been $300 million. It is $3 to $5 billion. When 
it comes to writing a check for a $5 or even a $10 billion 
project, you do take a deep breath before you do it.
    I think that one issue is of course the efficiency of 
governments. I am not talking about our government, but other 
governments in terms of their understanding that it is a 
competitive market; that the price cannot be taken for granted. 
It is interesting to see a country like Qatar which has emerged 
as perhaps the fulcrum of LNG because its government has been 
more efficient in working with international companies and 
mobilizing the investment in resources that is necessary to be 
competitive.
    Senator Reed. Just a follow-on question that I think is 
implicit in what you have said; that this growing demand for 
LNG is not restricted to the United States and North America, 
that it is worldwide?
    Mr. Sankey. Correct.
    Dr. Yergin. Yes. If you go to China, they have some growing 
numbers. Those numbers are going to obviously end up being a 
lot higher as they get ready for the 2008 Olympics. They want 
natural gas for environmental reasons. The world is waking up 
to China as a market for all commodities, and it will be a 
major market for LNG as well. Europe is going to need LNG 
supplies as the North Sea declines.
    Senator Reed. Thank you.
    Thank you very much, Mr. Chairman.
    Chairman Bennett. Senator Bingaman.
    Senator Bingaman. Thank you, again.
    Dr. Yergin, you talked about a built-in rising demand for 
natural gas over the next several years, as I understood your 
testimony, and I also thought I heard--perhaps you said this, 
or Mr. Sankey, or one of you--that 26 percent of the demand for 
natural gas, or the utilization of natural gas, is by utilities 
to produce electricity.
    We have got a circumstance where several years ago we had a 
lot of utilities rushing out to build more gas-fired generating 
capacity because the thought was the price of gas was cheap, 
and these plants were relatively cheap to construct.
    Then the price started going up, and the economy flagged, 
and people started shutting down some of those plants.
    I guess once you have built one of these plants you have an 
investment there, and there is an incentive to go ahead and use 
it even when the price of gas is relatively high? I assume that 
is the case.
    Are there policies that we should be adopting that would 
discourage utilities from going out and further increasing 
demand for natural gas by further constructing natural gas-
fired generation capacity when there are cheaper ways to 
produce electricity that we are all aware of?
    I mean, if we in fact have agreement that we are going into 
a period here of high natural gas prices and we are looking for 
ways to take pressure off that price, Dr. Yergin?
    Dr. Yergin. You have gone right to a question we are 
looking at now. The United States are still working out of the 
over-capacity, as you describe, that it built up when we had 
that great boom and many thought the so called ``new 
economy''--internet, computers, and everything--meant that we 
were going to have this great need for electricity.
    Lo and behold, you look out toward 2010, 2011, you start to 
see we are going to need new capacity again. You see people 
struggling with exactly the question that you have described. 
What are your alternatives?
    Nuclear? It is hard to see any utility committing to new 
nuclear capacity in the United States in the years immediately 
ahead. Conservation obviously is an element in it, but it comes 
down now to the question of the tradeoff between how much gas 
do you build in new capacity and how much coal? There is going 
to be a real interaction.
    We think that in the next major wave of electric generation 
capacity, coal will play a much larger role than people would 
anticipate right now.
    Senator Bingaman. I had a gentleman in my office just 2 
days ago who is in the business of building wind generation, 
generating capacity, and he said that he goes to utilities and 
says ``I can turn this plant over to you, or this production 
over to you, at 2 cents per kilowatt hour from wind 
generation,'' and they turn him down because they already have 
so much generating capacity of their own, presumably natural 
gas capacity and other types of capacity, that they have no 
interest in purchasing wind power at that price.
    Dr. Yergin. Actually your State is one of the leaders in 
terms of wind power. I think that we have seen the cost of wind 
power--I don't know about 2 cents, but wind power costs have 
come down. Obviously there are some incentives for that, but it 
can be competitive.
    There are issues about if you get a certain scale of wind 
power. Wind is intermittent. What do you do about it? Wind is a 
competitor, but it still seems likely to be a niche competitor 
rather than base load on a large scale.
    Senator Bingaman. He was acknowledging that you had to 
supplement it with generating capacity from natural gas or 
something for the time when you can't produce power from wind, 
but it does seem as though we are into a situation where we are 
captive of the decisions that have earlier been made about 
where we are going to have the generating capacity and what 
kind of generating capacity we are going to, or each utility is 
going to construct.
    The more they decide to construct gas-fired generating 
capacity, the more we are locked into a growing demand for gas 
and a high price of gas it seems to me, going forward.
    Dr. Yergin. That's right. It was really quite a natural gas 
band wagon. I think now you are going to see a drive for 
diversification, and renewables will be part of that.
    The numbers in terms of what we use in electricity and 
growth, even with conservation, are big numbers to be met in 
the years ahead.
    Mr. Prindle. Senator, could I respond to that as well? Ten 
years ago, most states in the United States conducted what we 
used to call Integrated Resource Planning. If a utility wanted 
to construct a new power plant, they basically had to look at 
all the resource options that were available to them, including 
energy efficiency, renewable energy, and conventional 
generation.
    With restructuring we have today, we have largely lost that 
capability. I think that is why you see an increasing mismatch 
between supply and demand in wholesale markets. There is no 
rational framework today in which a State or FERC can say, 
``Well, it looks like we are going to need some new resources, 
what is the least-cost way to do it?''
    I think that is a mistake. Some states have retained that 
capability, and in fact California, which some could say has 
seen the most damaging potential fruits of unconstrained 
restructuring, has actually gone back to a policy where they 
are requiring utilities to look first to the demand side and to 
spend whatever is cost-effective to make sure the demand growth 
rate is reasonable before they commit to new generation.
    Several states are starting to look at that again. We think 
that is a trend that needs correction; that the restructuring 
situation in this country has probably swung a little bit too 
far and there needs to be some kind of resource planning 
process by which we get the mix right.
    Certainly we are going to need new supply, but we need the 
right mix of demand, renewables, and conventional supply. Thank 
you.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    Chairman Bennett. Thank you.
    You talked about LNG and the impact it would have. What 
would be the impact if the Alaskan Pipeline were to finally 
come about? We import now from Canada. Presumably Alaska could 
compete with Canada in terms of supply.
    If the Alaskan Pipeline were built, what impact would that 
have?
    Mr. Sankey. I would just highlight that in my testimony 
actually I have included the Alaskan Gas Pipeline in terms of 
its price, which indicates that it would deliver gas at about 
$4 per MMBtu. It is actually more expensive gas than the 
majority of LNG that could come in.
    I think that from our perspective regarding U.S. gas you 
need all you can get. You need Rockies. You need LNG. You need 
efficiency. You name it. Alaskan Gas Pipeline will be part of 
that.
    I have mentioned planning assumptions several times. Exxon-
Mobil as an example raised its view of gas prices, as I 
mentioned, from $2.50 in the United States to $3.50 in the 
United States. The key driver of that decision was a view that 
the Alaskan Pipeline will not occur in the next decade 
essentially, and that was the primary reason they gave for that 
move.
    I think that the issues surrounding the difficulties which 
we have referred to of actual construction, the very high price 
which to me seems surprisingly high but nevertheless a very 
high price that is quoted for the pipeline, are all issues that 
make those companies basically now prioritize LNG over Alaska 
with a view that Alaska will happen eventually.
    Chairman Bennett. Help me out here. You are saying that the 
prices will come down to $3.50. Your people are saying they 
have a built-in long-term assumption of $3.50, and Alaska is at 
$4? If Alaska is at $4, it will never, ever be built.
    Dr. Yergin. Alaska is a great resource in terms of natural 
gas. It has been on the agenda now it seems for, hard to 
believe, three decades of discussion.
    Chairman Bennett. Yes.
    Dr. Yergin. You are driven, as we are, as we look at the 
future, to develop a set of scenarios for the future because 
there is so much that of course we do not know about the 
future, by definition. When we look out and we see the Alaska 
Pipeline would be completed maybe sometime in the middle of the 
next decade, the impact on prices in our scenarios would not be 
massive by that point because the supplies would be needed and 
they could be absorbed.
    The risk obviously for the private developers is the 
downside risk. $50-plus a barrel for oil was not in any 
company's forecast 2 years ago, nor was $12 in an earlier 
period, and their fear is what Paul described of what happens 
if say there is a huge overbuild of LNG, prices crash, and 
meanwhile you are building, inching along mile by mile with 
this pipeline.
    We should assume that eventually that resource, that very 
valuable strategic resource to the United States, will 
eventually reach our markets.
    Chairman Bennett. Well if the Alaska Pipeline is approved 
immediately, let's say in this Congress or in the early months 
of the next Congress, what impact would that have on people's 
planning?
    I am assuming from what you are saying they are planning? 
Eventually means a long time away?
    Dr. Yergin. It would have some impact. We can see what Paul 
thinks about this, the tradeoffs, in terms of how aggressively 
and what number of regasification facilities people would push 
in the United States.
    There will be an effort to balance it. It is also a 
question of where people apply that limited resource called 
``capital.''
    Paul.
    Mr. Sankey. Yes, I mean I think it goes to the heart of the 
problem essentially, which is that the companies continue to 
plan on low prices and therefore prices are high. If eventually 
they begin to plan on high prices, prices will go low. When you 
are playing with $15 billion, which is what they are talking 
about here, it is better to be conservative and say, ``Look, we 
will wait on that.''
    The only observation I would make is that the $15 billion 
price tag seems very high on a very simple per kilometer basis, 
and I have never fully understood why that is. That would be my 
other observation, that possibly the $4 price that we are 
using, which we are deriving from a $15 billion cost, may be 
too high. Certainly at the moment, even if it was approved 
within let's say the next year, legally it would take at least 
4 to 5 years before you would see the first gas.
    Chairman Bennett. Yes, that is true.
    Well while I have you, I will take advantage of your being 
here and go to another totally different subject but one on 
which you have hinted, the $50 oil.
    If $50 becomes the new benchmark instead of turning out to 
be a spike, and people in Mr. Sankey's world start saying $50 
oil is where we are going to live, at $50 a barrel there is 
more oil in Utah and Colorado through oil shale and tar sands 
than there is in Saudi Arabia or Iraq. We can efficiently--we 
can economically get it out under the umbrella of $50 oil, that 
is, if the environmental groups will allow that to happen, and 
that is a political decision rather than an economic decision--
but let's just assume for the moment that it could happen. Talk 
about that future.
    Dr. Yergin. First some of the people who come in front of 
your Committee periodically to report on the economy would 
change their outlook for economic growth in the United States, 
and those numbers would be lower.
    It is remarkable to think that just a little over a half a 
decade ago the price of oil was $10 a barrel and it was 
supposed to go to $5, and somehow there is an extra zero in 
there now and it is $50.
    Chairman Bennett. Yes.
    Dr. Yergin. I think it will be cyclical.
    Right now this is an incredibly tight oil market. The oil 
market is tighter now than it was on the eve of the 1973 oil 
crisis. The only time it has been tighter was in those months 
immediately after Saddam Hussein invaded Kuwait and Kuwait and 
Iraq were out of the market. That means the market is very 
vulnerable to anything until we start to see more supply.
    I do think what you are pointing to is that there is a lot 
of pessimism in some circles now about the future of oil. I 
think that that view is under-estimating again the impact of 
technology. I think that as we look out, at least over the next 
10 or 15 years, we are going to see a widening of the 
definition of what oil is to include unconventional oil.
    You certainly see that Canadian oil sands, which were sort 
of way over on the side, are now going to be a major source of 
growth of supply for the United States in a way that had not 
been anticipated.
    I think oil shale is still in another category. The oil 
price does not have to be $50. It can be $30 and a lot of 
things become economic that are not at $10.
    Chairman Bennett. There are folks at the University of Utah 
who insist they can get the oil out of the oil shale at $13 a 
barrel. Unfortunately they have been insisting that for about 
30 years.
    [Laughter.]
    Dr. Yergin. Do they adjust for inflation?
    [Laughter.]
    Chairman Bennett. No, it stays at $13 somehow. It hangs in 
there all the way through.
    Well I know that is not the subject of the hearing, but I 
wanted to take advantage of your expertise because we 
appreciate your being here.
    Thank you so much for your testimony. Thank you for the 
work that went into the formal statements that you have filed 
with the Committee, which will of course be printed in their 
entirety in the record, and we appreciate your sharing your 
expertise with us here today.
    The Committee is adjourned.
    [Whereupon, at 11:30 a.m., Thursday, October 7, 2004, the 
Committee hearing was adjourned.)

                       Submissions for the Record

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

       Prepared Statement of Senator Robert F. Bennett, Chairman

    Good morning and welcome to today's hearing. As we enter the 4th 
year of the economic expansion there is one black cloud threatening to 
rain on our parade, and that is the specter of high energy prices. Most 
people have taken notice of the high oil prices of late, since they 
eventually trickle down to the consumer in the form of high gasoline 
prices. However, just as worrisome are the high natural gas prices that 
have beset our economy over the past few years. After a protracted 
period of low and stable prices, the cost of natural gas has 
skyrocketed in recent years to unprecedented heights. What's more, 
natural gas prices now display almost unprecedented volatility, 
wreaking havoc on the ability of utilities and other companies that use 
gas to plan for the future.
    It is important that we address the problem of high natural gas 
prices as soon as possible. The high prices act like a brake on the 
American economy, impacting every business and household in America. 
However, certain industries have suffered especially hard. For 
instance, the chemical and plastics industries, which use natural gas 
as a feedstock, have been hammered by the high prices. The 
Manufacturers' Alliance estimates that 90,000 jobs have been lost in 
the chemical industry since the year 2000.
    Also, it is important to remember that there is not a single 
integrated market for natural gas in this country. We simply do not 
have the infrastructure to easily ship gas from one region to another 
should there develop a localized shortage, and as a result prices 
across the country often differ greatly. The lack of infrastructure 
shows no signs of being alleviated in the near future, according to a 
recently released Energy Information Administration report stating that 
new investment in pipelines actually fell in 2002, the last year for 
which we have reliable data. We do not have to hearken too far to 
remember gas prices on the east coast tripling to over $20 per mcf 
(million cubic foot) while topping out at $7 in Cheyenne.
    We know the proximate causes for the run up in the cost of natural 
gas. A few years after prices were deregulated in the 1980's the 
Congress passed laws that in effect encouraged its use to produce 
electricity, sharply increasing demand. At the same time, the 
production from extant wells began to decline and environmental 
restrictions made the exploration and drilling of new wells more 
difficult. It doesn't take an economist to see that policies that 
increase demand and decrease supply will sharply increase prices.
    Let's be clear about one thing: there exists enough natural gas in 
the world to meet our needs for the foreseeable future. We are not 
running out of natural gas by any stretch of the imagination. Here in 
the U.S. we still have significant reserves in the lower 48 states and 
Alaska. More significantly, vast amounts of natural gas reserves are 
available all over the world.
    However, companies and countries have just begun to contemplate the 
massive investments needed to get to these reserves and create a truly 
global market in natural gas. The pipelines, cooling plants, tankers, 
and regasification plants necessary will ultimately cost hundreds of 
billion dollars. A central question for policymakers is ``what can we 
do to facilitate these investments?''
    Diagnosing the causes of high prices is easy; forecasting future 
prices and prescribing policies to all high prices is not. The standard 
response would be that high prices alone will attract new investment in 
production, more conservation by the users of natural gas, and the 
forces of supply and demand will eventually balance. To be sure, we 
have witnessed some of this--the rise in natural gas consumption has 
tapered off in the last year or two, and the current rig count in the 
U.S. is at an all time high. However, major new investments to increase 
supply or conservation will not take place in an environment of major 
price and policy uncertainty. The latter is only in part our fault, and 
although we've tried to remedy this, the current Congress will most 
likely escape tomorrow without ameliorating the situation. We've also 
contributed to the former as well by passing laws that stimulated 
natural gas demand without fully thinking through their long run 
consequences and dealing with them when they were more manageable.
    I will leave the question of ``what do we do now?'' to our esteemed 
panel of experts that we have assembled today. The Committee is honored 
to have you with us today and we anxiously await to hear your thoughts 
on the natural gas market of today and the future.

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Prepared Statement of Senator Jack Reed, U.S. Senator from Rhode Island

    Thank you, Chairman Bennett. I want to thank you for holding this 
hearing on a very important and timely topic. Natural gas is the most 
environmentally friendly fossil fuel, and it used to be thought of as 
relatively abundant and relatively cheap--a fuel of choice in many 
sectors of the economy. Natural gas instill an attractive, relatively 
clean-burning fuel, but prices have skyrocketed in the past few years.
    High and volatile natural gas prices are a problem right now for 
America's households and for industrial users. Families face higher 
home heating costs; factories face higher costs that deter plans for 
expansion and encourage the search for cheaper production opportunities 
outside the United States; and farmers are finding it more expensive to 
fertilize and irrigate crops.
    I suspect we will learn in this hearing that the conditions that 
have produced high and volatile natural gas prices are going to be with 
us for some time. Once a real and sustainable economic recovery takes 
hold, demand for natural gas will increase. But we are likely to find 
it harder and harder to expand supply from our traditional sources--
domestic production and imports from Canada. Rising demand and a 
limited supply are a recipe for higher prices. These are also 
conditions in which unexpected events can produce sharp price 
fluctuations.
    I myself believe very strongly that the best strategy we have for 
dealing with these conditions in the natural gas market is to put a 
much greater emphasis on energy efficiency and conservation. The 
National Petroleum Council, in its report, Balancing Natural Gas 
Policy, finds that such an approach is vital to the near-term and long-
term strategy for moderating price levels and reducing volatility. I 
know Mr. Prindle will be testifying that the American Council for an 
Energy-Efficient Economy has reached similar conclusions.
    I do recognize that supply-oriented policies can also have an 
important role to play in a balanced strategy. Those policies include 
increased domestic production, taking due care to be environmentally 
responsible; investments in production research and development; and 
increased liquefied natural gas (LNG) imports.
    I will be especially interested in what our witnesses have to say 
about the prospects for LNG. This is an important issue for my State 
and my region and I have been urging the Federal Energy Regulatory 
Commission to develop a regional strategic plan for the siting of new 
terminals and to improve their process for addressing safety and 
security concerns.
    While I recognize that environmentally responsible policies aimed 
at increasing the supply of natural gas may yield benefits, especially 
in the longer run, I come back to my main point. All indications are 
that energy conservation and increased efficiency appear to be the best 
solutions, especially in the next few years.
    Given the problems we face in the natural gas market, I and a 
number of other legislators in the Northeast and Midwest were dismayed 
to learn that the Bush Administration has decided to discontinue the 
Interagency Working Group on natural gas. Perhaps this hearing can 
provide some additional impetus for the Administration and the Congress 
to make a concerted effort to address natural gas and other energy 
policy issues in a constructive manner.
    I thank the Chairman and look forward to hearing from the 
witnesses.

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