[Senate Hearing 108-113]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-113
 
                       HIGH PRICE OF NATURAL GAS

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

TO DISCUSS THE REASONS BEHIND THE HIGH PRICE OF NATURAL GAS, ITS EFFECT 
          ON THE ECONOMY, AND TO CONSIDER POTENTIAL SOLUTIONS

                               __________

                             JULY 10, 2003


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     MARIA CANTWELL, Washington

                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                Scott O'Malia, Professional Staff Member
                   Deborah Estes, Democratic Counsel



                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bunning, Hon. Jim, U.S. Senator from Kentucky....................     2
Craig, Hon. Larry E., U.S. Senator from Idaho....................     2
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Feinstein, Hon. Dianne, U.S. Senator from California.............     4
Ferguson, J. Brian, Chairman and CEO, Eastman Chemical Company, 
  Kingsport, TN..................................................    44
Garman, David K., Assistant Secretary, Energy Efficiency and 
  Renewable Energy, Department of Energy.........................    33
Grant, Richard L., President and CEO, Tractebel LNG North America 
  LLC............................................................    39
Greenspan, Alan, Chairman, Board of Governors, Federal Reserve 
  System.........................................................     5
Murkowski, Hon. Lisa, U.S. Senator from Alaska...................     5
Thompson, Bruce, Executive Director, Public and Industry Affairs, 
  Forest Oil.....................................................    54

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    69

                              Appendix II

Additional material submitted for the record.....................    73


                       HIGH PRICE OF NATURAL GAS

                              ----------                              


                        THURSDAY, JULY 10, 2003

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.

    The committee met, pursuant to notice, at 10:04 a.m. in 
room SH-216, Hart Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. The hearing will please come to order. I will 
tell you what I would like to do. One of the staffers--I know 
we have done the best we can, but I would like you to take that 
chart that is over there and sitting on the side and you would 
like to sit it up here at the table alongside of Dr. Greenspan 
so everybody can see it. Kind of turn it a little bit his way. 
There you go, and put it back just slightly, ma'am. There you 
go.
    I guess, Dr. Greenspan, that is quite obvious: generating 
capacity brought on line by fuel type. And you can see that 
what is happening--that red line is what is happening the last 
few years to natural gas in terms of generating capacity 
brought on line by, the red one being natural gas; and you can 
see the earlier years, the various mixes that made up America's 
energy capacity.
    With that, thanks, everyone, for coming. But in particular, 
thank you, Dr. Greenspan, for coming and for agreeing to 
appear. Your recent statements have brought much attention to, 
needed attention, to the issue of this Nation's growing 
dependence on natural gas and the resultant price increases 
that have occurred in recent years.
    Gas-fired powerplants now account for 88 percent of new 
electric generation. In the increasingly deregulated 
electricity market, gas has become the fuel of choice--that is 
for generators--and that is because they seek low emissions, 
low capital costs, and until now low fuel cost generating 
technology.
    But there are troubling signs. New reserves tend to be 
smaller than earlier discoveries and total reserves are 
depleting faster than ever before. You are quite right, if we 
have read your previous statements accurately, we are 
increasingly in need of importing gas in the form of liquefied 
natural gas. At current prices that is certainly apt to happen.
    The additional demand for gas and corresponding price 
increases are causing particular concerns among industrial 
consumers of natural gas, for whom feedstock price sometimes 
represents 60 percent of the total product cost. Those 
industries may be permanently affected if long-term prices 
remain where they are currently.
    Mr. Chairman, I am advised that month-ahead gas prices will 
probably remain in the $4.50 to $9.00 range through this 
winter, with the deciding factor being how cold this winter is. 
I have talked to a variety of experts and I am convinced that 
there is not much the Government can do in the near term to 
affect that price by more than 25 cents in any direction, a 
negligible amount considering the effect the weather will have 
all by itself.
    I believe there are two long-term answers: we must 
diversify our fuel mix by making coal, nuclear, and other fuels 
equally attractive for new electricity generation; and we must 
expand our capacity and access to domestic production and for 
LNG. Having said that, I would very much appreciate your views 
as to any changes that should be made to government policy 
going forward to address these very weighty issues so integral 
and important to our social wellbeing.
    With that, we ask you, Mr. Chairman, if you will please 
talk with the committee. Your statement will be made a part of 
the record and after you have finished we will proceed to ask 
questions.
    Dr. Greenspan.
    [The prepared statements of Senators Bunning, Craig, 
Feinstein, and Murkowski follow:]
   Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
    Thank you Mr. Chairman.
    This is a very important hearing that we are having today. I am 
pleased to have this opportunity to examine how we can more effectively 
deal with the price of natural gas.
    Higher prices have placed a strain on the American family's budget 
and on manufacturers. Natural gas' high price has affected the bottom 
lines of many companies. This means that the jobs of many employees 
have also been put at risk.
    I have heard from many companies in Kentucky who are upset about 
the price of natural gas. The high prices have made it more difficult 
for companies to continue their operations with a profit.
    We need to act to reduce the economic burden of high natural gas 
prices on Americans.
    One way to lower the cost of natural gas is to increase domestic 
supply. The increased demand for natural gas with little increased 
production over the past decade has contributed to the price problem.
    Another way to lower the cost of natural gas is to go back to using 
other energy sources. With new technology, other sources of energy such 
as coal are cleaner burning fuels.
    Finally, we must promote conservation of energy and increase the 
efficiency of natural gas use.
    I look forward to hearing from our witnesses today and thank each 
of them for taking the time to come testify before us.
    Thank you.
                                 ______
                                 
   Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
    Mr. Chairman, thank you for this opportunity to examine the current 
high price of natural gas and its impact on our economy.
    I especially want to thank you for inviting Chairman Greenspan to 
help us work through this growing problem. His recent testimony before 
the House Energy and Commerce Committee highlighted some of the 
significant pressures that are contributing to the rigidity of natural 
gas supply and he offered constructive opinions on how we might avoid a 
full blown supply crisis. His suggestion to expand our use of Liquified 
Natural Gas is one worthy concept to explore. But I fear that siting 
LNG terminals will be exposed to the same opposition arrayed against 
other energy developments.
    Today, I'm interested in exploring the simple interaction between 
demand, supply, and the forces that shape demand and supply. I, for 
some time now, have pointed to supply restrictions as the prime cause 
of the rigidity of natural gas supply. Indeed, following the 
Committee's vote on the energy bill last April, I went to the Floor in 
early May and expressed my belief that limitations on drilling on 
federal lands by constricting potential exploration options have made 
supply more inelastic.
    When that factor is combined with the environmental pressures 
occurring largely in the 1990s to build power plants that are fueled by 
natural gas in order to economically comply with new source review 
regulations introduced in the 1970s, it is not hard to see why we are 
facing high prices for this increasingly valuable commodity.
    Although the new source review compliance is a compelling pressure 
on natural gas use--and I note the recent New York State NSR settlement 
with the Mirant Corporation requiring more use of natural gas--there 
are other pressures complicating the transportation of natural gas that 
cannot be ignored, such as the current Millenium Pipeline Project 
controversy over New York's application of the Coastal Zone Management 
Act.
    According to several energy industry analysts--and I am very 
interested in Chairman Greenspan's views on this--the focus on natural 
gas as the way to achieve environmental improvements without increasing 
power generation costs has had an unfortunate, and likely unforeseen 
and unintended, consequence of reducing the resiliency of natural gas 
markets.
    These analysts conclude that:

          [R]egulatory mandates have constrained us away from being 
        able to apply the lessons of portfolio diversification to our 
        energy choices, and our inability to diversify our fuel input 
        portfolios makes for markets that do not adapt to unanticipated 
        and changing conditions.

    The recent ratification and current implementation of the Kyoto 
Protocol in Canada I fear will compound and exacerbate this costly 
balkanization of fuel portfolios. As Chairman Greenspan stated in his 
House testimony, Canada is our major source of imported natural gas. 
Canada's implementation of Kyoto will require Canadian electricity 
generators to substitute natural gas for coal in order to meet carbon 
dioxide reduction targets that will be even more stringent by 2025.
    Barring a substantial increase in Canadian production, there will 
be much less Canadian natural gas available for export to the United 
States. The dislocation to our natural gas market could be staggering.
    All of these constraints will force us to look once again at our 
entire energy portfolio. Assistant Secretary David Garman is here from 
the Department of Energy to provide testimony on how near term 
increases in efficiency and energy conservation can ease the squeeze on 
natural gas supplies. This is a near term, and in my view, no regrets 
kind of strategy.
    On a much longer term horizon, I hope also that our witnesses will 
address the expanded use of nuclear energy--something I am a strong 
proponent of. The Senate energy bill contains provisions which support 
the expanded use of nuclear energy. Nuclear plants are fueled for a 
year or two at a time. Since fuel costs make up a smaller percentage of 
the cost of nuclear power, these plants can shield consumers from the 
kind of rampant price volatility that we are predicting in natural gas 
markets. While these nuclear provisions are a longer term investment in 
energy security, they are essential and we must stay focused on their 
importance.
    Given the growing tightness in natural gas supply and the 
intensifying environmental pressures in our country to move away from 
coal and oil as a fuel source, what set of criteria or questions should 
guide us in determining national energy goals that assist in growing 
our economy?
    Shouldn't Congress develop those national energy goals for the 
purpose of ensuring our nation's global competitiveness and national 
security in an ever changing geopolitical world--a world that contains 
developing nations such as China and other Asian countries that present 
considerable current and future threats to our economic well-being?
    A key question that I'm sure will be addressed during consideration 
of this Committee's energy bill on the Senate Floor later this month is 
whether we can or should substantially reduce coal use in this country 
when we have over 250 years of domestic supply? Coal currently accounts 
for over 50 percent of our cheapest electricity generation.
    Another important question is whether we should now pass energy 
legislation that continues the trend to pressure more use of natural 
gas and even higher gas prices?
    We must have a clear understanding of how the answers to these 
questions effect our economy and it is a real pleasure to have Chairman 
Greenspan with us today to help us ensure that we do clearly understand 
the consequences of our actions.
    I look forward to his wise counsel and also to the views of the 
other witnesses you have invited to testify today.
    Thank you, Chairman Domenici.
                                 ______
                                 
       Prepared Statement of Hon. Dianne Feinstein, U.S. Senator 
                            From California
    Mr. Chairman thank you very much for holding this hearing. I am 
very concerned about the natural gas situation and in particular I am 
interested to discuss how we can reduce our consumption of natural gas 
and increase our capacity to import liquified natural gas or LNG.
    Mr. Chairman, in March, after a year-long investigation, the 
Federal Energy Regulatory Commission released its ``Final Report on 
Price Manipulation in Western Markets'' which confirmed widespread and 
pervasive fraud and manipulation during the Western Energy Crisis.
    One of the key findings by the Commission was that natural gas and 
electricity are ``inextricably linked, and that dysfunctions in each 
fed off one another during the [Western Energy] crisis.''
    The day after the FERC report was issued all three Commissioners 
came before this Committee to testify. I agree with Chairman Pat Wood 
and Commissioner Bill Massey who both made it very clear that the 
Energy bill presents an opportunity for Congress to enact more consumer 
protections and provide greater authority to the Commission so that 
FERC can be a more effective regulator.
    I asked Chairman Wood, ``Doesn't it make sense to establish the 
same penalties and refund authority to deter fraud and manipulation in 
the natural gas sector since FERC found that markets for natural gas 
and electricity are inextricably linked?''
    Chairman Wood answered ``YES'' and Commissioner Massey also 
testified in support of harmonizing the refund and penalty provisions 
in the Natural Gas Act with the Federal Power Act.
    As Commissioner Massey said, ``If the Commission is to be the cop 
on the beat of competitive markets, we must have the tools needed to 
ensure good behavior. Refunds alone are not a sufficient deterrent 
against bad behavior. The consequences of engaging in prohibited 
behavior must be severe enough to act as a deterrent.''
    In January of this year, FERC issued its natural gas market 
assessment, which concluded that market manipulation has been occurring 
and may be likely to occur in the future. The Commission found that 
manipulation is possible in the natural gas markets if companies:

   use market power to manipulate prices in physical markets; 
        and
   use information about capacity availability to take 
        positions in a marketplace more advantageous than their 
        competitors.

    Westerners have seen evidence of this type of manipulation quite 
recently and this illegal behavior forced the price of natural gas to 
soar in California.
    In September, an Administrative Law Judge at FERC issued a landmark 
ruling concluding that El Paso Corporation withheld natural gas from 
California, illegally exercised market power, and violated its 
certificate obligations.
    FERC Judge Curtis L. Wagner recommended penalty proceedings against 
El Paso because of the following findings:

   ``El Paso Pipeline withheld extremely large amounts of 
        capacity that it could have flowed to its California delivery 
        points . . . which substantially tightened the supply of 
        natural gas at the California border.''
   ``El Paso Pipeline had the ability to exercise market power 
        and that El Paso Pipeline did in fact exercise market power by 
        withholding substantial volumes of capacity to its California 
        delivery points, which tightened the supply.''

    High natural gas prices played a significant role in the Western 
Energy Crisis. Since much of the electricity generated within 
California is fueled by natural gas, when natural prices soared, so did 
electricity prices. Since El Paso carries most of the natural gas to 
Southern California, the company was able to exercise unprecedented 
market power to drive up the price of natural gas.
    Let me mention some additional specific findings by the FERC 
Administrative Law Judge Against El Paso:

   ``El Paso failed to post and make available at least 345 
        million cubic feet per day of available capacity at its 
        California delivery points. Consequently, the record in this 
        case now demonstrates an exercise of market power by El Paso 
        Pipeline.''
   El Paso Pipeline and El Paso Merchant Energy were guilty of 
        affiliate self-dealing.
   ``El Paso Pipeline never requested authority to abandon any 
        portion of [its] certificated capacity. El Paso Pipeline was 
        under an obligation to make 3,290 million cubic feet per day 
        available to its California delivery points. . . . Since the 
        average flow during the relevant period was only 2,594 million 
        cubic feet per day, there was a withholding of 696 million 
        cubic feet per day to the California delivery points. . . . The 
        Chief Judge finds this failure to operate at or near Maximum 
        Allowable Operating Pressure constitutes a clear withholding of 
        available capacity by El Paso Pipeline, and is a clear 
        violation of its duty to fulfill its certificate obligation.''
                                 ______
                                 
  Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
    Thank you, Mr. Chairman, for convening this important hearing to 
examine the impact of high natural gas prices on the economy.
    This issue is already impacting businesses in many regions of the 
country, including in my state of Alaska. Companies that rely on 
natural gas as a feedstock for their production are currently facing 
very difficult decisions. They are deciding whether they can afford to 
continue production or whether they must lay off employees. Agrium, 
Inc. a large manufacturer of fertilizer in Kenai, Alaska is facing just 
this problem.
    Unfortunately, companies like Agrium face serious risks even if 
they reduce production for a short period of time in hopes that the 
price of natural gas will eventually come down. The customers they 
provide fertilizer to will not disappear, at least we hope they won't 
disappear. If they continue to buy fertilizer they may be forced to 
find other suppliers--most likely outside the U.S. That is bad for U.S. 
jobs and our farmers and the overall economy.
    At worst, companies like Agrium may lose permanent market share if 
prices remain too high for too long. A secure, abundant and reasonably 
priced supply of natural gas is critical to our economy.
    Indeed, Chairman Greenspan recognized this in his recent 
Congressional testimony before the House Commerce Committee in June. 
Natural gas currently represents almost a quarter of all energy 
consumed in the United States. It heats 50 percent of existing homes 
and nearly 70 percent of newly built homes. Consumers who are used to 
reasonable natural gas bills may soon find they are unable to pay their 
bills, especially as contracts come up for consumers who are on the 
budget plans that are based on last year's gas prices.
    An additional $300 per month in energy bills is a car payment for 
many families. It is bad for the economy when they have to decide 
against buying a new car, or against putting that $300 dollars per 
month into their retirement accounts or their kids' college savings 
account.
    Access to more of the resource is key. That is one reason why I am 
pushing so hard to build the Alaska Gas Pipeline, because Alaska has 
huge amounts of gas that can help the U.S. meet its needs. In addition, 
Alaska's gas can be transported to the Lower 48 as LNG. While Chairman 
Greespan notes in his testimony that LNG would play a significant 
factor in meeting U.S. gas supplies into the future, I want to make 
sure people remember Alaska already produces some LNG for export, and 
more could be made available for LNG exports to the West Coast if we 
can get this project going.

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

    Dr. Greenspan. Thank you very much, Mr. Chairman.
    Today's tight natural gas markets have been a long time 
coming and distant futures prices suggest that we are not apt 
to return to earlier periods of relative abundance and low 
prices any time soon.
    It was little more than a half century ago that drillers 
seeking valuable crude oil bemoaned the discovery of natural 
gas. Given the lack of adequate transportation, wells had to be 
capped or gas flared. As the economy expanded after World War 
II, the development of a vast interstate transmission system 
facilitated widespread consumption of natural gas in our homes 
and business establishments. On a heat-equivalent basis, 
natural gas consumption by 1970 had risen to three-fourths that 
of oil. But consumption lagged in the following decade because 
of competitive incursions from coal and nuclear power.
    Since 1985, natural gas has gradually increased its share 
of total energy use and is projected by the Energy Information 
Administration to gain share over the next quarter century 
owing to its status as a clean-burning fuel.
    Recent years' dramatic changes in technology are making 
existing energy reserves stretch further, while keeping long-
term energy costs lower than they otherwise would have been. 
Seismic techniques and satellite imaging, which are 
facilitating the discovery of promising new natural gas 
reservoirs, have nearly doubled the success rate of new field 
wildcat wells in the United States during the past decade. New 
techniques allow far deeper drilling of promising fields, 
especially offshore.
    The newer recovery innovations reportedly have 
significantly raised the average proportion of gas reserves 
eventually brought to the surface. Technologies are 
facilitating Rocky Mountain production of tight sands gas and 
coalbed methane. Marketed production in Wyoming, for example, 
has risen from 3.4 percent of total U.S. output in 1996 to 7.1 
percent last year.
    Moreover, improving technologies have also increased the 
depletion rate of newly discovered gas reservoirs, placing a 
strain on supply that has required increasingly larger gross 
additions from drilling to maintain any given level of dry gas 
production. Depletion rates are estimated to have reached 27 
percent last year, compared with 21 percent as recently as 5 
years ago.
    The rise has been even more pronounced for conventionally 
produced gas because tight sands gas, which comprises an 
increasing share of new gas finds, exhibits a slower depletion 
rate than conventional wells.
    Improved technologies, however, have been unable to prevent 
the underlying long-term price of natural gas in the United 
States from rising. This is most readily observed in markets 
for natural gas where contract delivery is sufficiently distant 
to allow new supply to be developed and brought to market. That 
price has risen gradually from $2 per million Btu in 1997 for 
delivery in the year 2000 and presumably well beyond, to more 
than $4.50 for delivery in 2009, the crude oil heating 
equivalent of rising from less than $12 per barrel to $26 per 
barrel. Those prices, incidentally, are as of the close of 
yesterday.
    Over the same period, the distant futures price of light 
sweet crude oil has edged up only $4 per barrel and is selling 
at a historically rare discount to comparable dated natural 
gas.
    Because gas is particularly challenging to transport in its 
cryogenic form as a liquid, imports of liquefied natural gas 
have been negligible. Environmental and safety concerns and 
cost have limited the number of LNG terminals and imports of 
LNG. In 2002 such imports accounted for only 1 percent of total 
U.S. gas supply.
    Canada, which has recently supplied a sixth of our 
consumption, has little capacity to significantly expand its 
exports, in part because of the role that Canadian gas plays in 
supporting growing oil production from tar sands.
    Given notable cost reductions for both liquefaction and 
transportation of LNG, significant global trade is developing 
and high gas prices projected in the American distant futures 
market have made us a potential very large importer. Worldwide 
imports of natural gas in 2002 were only 23 percent of world 
consumption, compared to 57 percent for oil.
    Even with markedly less geopolitical instability 
confronting world gas than world oil in recent years, spot gas 
prices have been far more volatile than those for oil, 
doubtless reflecting in part less developed price-dampening 
global trade.
    The updrift and volatility of the spot price for gas have 
put significant segments of the North American gas-using 
industry in a weakened competitive position. Unless this 
competitive weakness is addressed, new investment in these 
technologies will flag.
    Increased marginal supplies from abroad, while likely to 
notably damp the levels and volatility of American natural gas 
prices, would expose us to possibly insecure sources of foreign 
supply, as it has for oil. But natural gas reserves are 
somewhat more widely dispersed than those of oil, for which 
three-fifths of proven world reserves reside in the Middle 
East. Nearly two-fifths of world natural gas reserves are in 
Russia and its former satellites and one-third are in the 
Middle East. Creating a price pressure safety valve through 
larger import capacity of LNG need not unduly expose us to 
potentially unstable sources of imports.
    There are still numerous unexploited sources of gas 
production in the United States. We have been struggling to 
reach an agreeable tradeoff between environmental and energy 
concerns for decades. I do not doubt we will continue to fine-
tune our areas of consensus, but it is essential that our 
policies be consistent. For example, we cannot on the one hand 
encourage the use of environmentally desirable natural gas in 
this country while being conflicted on larger imports of LNG. 
Such contradictions are resolved only by debilitating spikes in 
price.
    In summary, the long-term equilibrium price for natural gas 
in the United States has risen persistently during the past 6 
years, from approximately $2 per million Btu to more than $4.50 
today. Although futures markets project a near-term modest 
price decline from current highly elevated levels, contracts 
written for delivery in 2009 are at prices more than double the 
levels that had been contemplated when much of our existing 
gas-using capital stock was put in place.
    The perceived tightening of long-term demand-supply 
balances is beginning to price some industrial demand out of 
the market. It is not clear whether these losses are temporary, 
pending a fall in price, or permanent. Such pressures do not 
arise in the U.S. market for crude oil. American refiners have 
unlimited access to world supplies, as was demonstrated most 
recently when Venezuelan oil production shut down. Refiners 
were able to replace lost oil with supplies from Europe, Asia, 
and the Middle East.
    If North American natural gas markets are to function with 
the flexibility exhibited by oil, unlimited access to the vast 
world reserves of gas is required. Markets need to be able to 
effectively adjust to unexpected shortfalls in domestic supply.
    Access to world natural gas supplies will require a major 
expansion of LNG terminal import capacity and development of 
the newer offshore regasification technologies. Without the 
flexibility such facilities will impart, imbalances in supply 
and demand must inevitably engender price volatility. As the 
technology of LNG liquefaction and shipping has improved and as 
safety considerations have lessened, a major expansion of U.S. 
import capability appears to be under way. These movements bode 
well for widespread natural gas availability in North America 
in the years ahead.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of Dr. Greenspan follows:]
  Prepared Statement of Alan Greenspan, Chairman, Board of Governors, 
                         Federal Reserve System
    Today's tight natural gas markets have been a long time in coming, 
and distant futures prices suggest that we are not apt to return to 
earlier periods of relative abundance and low prices anytime soon. It 
was little more than a half-century ago that drillers seeking valuable 
crude oil bemoaned the discovery of natural gas. Given the lack of 
adequate transportation, wells had to be capped or the gas flared. As 
the economy expanded after World War II, the development of a vast 
interstate transmission system facilitated widespread consumption of 
natural gas in our homes and business establishments. On a heat-
equivalent basis, natural gas consumption by 1970 had risen to three-
fourths of that of oil. But consumption lagged in the following decade 
because of competitive incursions from coal and nuclear power. Since 
1985, natural gas has gradually increased its share of total energy use 
and is projected by the Energy Information Administration to gain share 
over the next quarter century, owing to its status as a clean-burning 
fuel.
    Recent years' dramatic changes in technology are making existing 
energy reserves stretch further while keeping long-term energy costs 
lower than they otherwise would have been. Seismic techniques and 
satellite imaging, which are facilitating the discovery of promising 
new natural gas reservoirs, have nearly doubled the success rate of 
new-field wildcat wells in the United States during the past decade. 
New techniques allow far deeper drilling of promising fields, 
especially offshore. The newer recovery innovations reportedly have 
significantly raised the average proportion of gas reserves eventually 
brought to the surface. Technologies are facilitating Rocky Mountain 
production of tight sands gas and coalbed methane. Marketed production 
in Wyoming, for example, has risen from 3.4 percent of total U.S. 
output in 1996 to 7.1 percent last year.
    Moreover, improving technologies have also increased the depletion 
rate of newly discovered gas reservoirs, placing a strain on supply 
that has required increasingly larger gross additions from drilling to 
maintain any given level of dry gas production. Depletion rates are 
estimated to have reached 27 percent last year, compared with 21 
percent as recently as five years ago. The rise has been even more 
pronounced for conventionally produced gas because tight sands gas, 
which comprises an increasing share of new gas finds, exhibits a slower 
depletion rate than conventional wells.
    Improved technologies, however, have been unable to prevent the 
underlying long-term price of natural gas in the United States from 
rising. This is most readily observed in markets for natural gas where 
contract delivery is sufficiently distant to allow new supply to be 
developed and brought to market. That price has risen gradually from $2 
per million Btu in 1997 for delivery in 2000, and presumably well 
beyond, to more than $4.50 for delivery in 2009, the crude oil heating 
equivalent of rising from less than $12 per barrel to $26 per barrel. 
Over the same period, the distant futures price of light sweet crude 
oil has edged up only $4 per barrel and is selling at a historically 
rare discount to comparably dated natural gas.
    Because gas is particularly challenging to transport in its 
cryogenic form as a liquid, imports of liquefied natural gas (LNG) have 
been negligible. Environmental and safety concerns and cost have 
limited the number of LNG terminals and imports of LNG. In 2002, such 
imports accounted for only 1 percent of U.S. gas supply. Canada, which 
has recently supplied a sixth of our consumption, has little capacity 
to significantly expand its exports, in part because of the role that 
Canadian gas plays in supporting growing oil production from tar sands.
    Given notable cost reductions for both liquefaction and 
transportation of LNG, significant global trade is developing. And high 
gas prices projected in the American distant futures market have made 
us a potential very large importer. Worldwide imports of natural gas in 
2002 were only 23 percent of world consumption, compared to 57 percent 
for oil.
    Even with markedly less geopolitical instability confronting world 
gas than world oil in recent years, spot gas prices have been far more 
volatile than those for oil, doubtless reflecting, in part, less-
developed, price dampening global trade. The updrift and volatility of 
the spot price for gas have put significant segments of the North 
American gas-using industry in a weakened competitive position. Unless 
this competitive weakness is addressed, new investment in these 
technologies will flag.
    Increased marginal supplies from abroad, while likely to notably 
damp the levels and volatility of American natural gas prices, would 
expose us to possibly insecure sources of foreign supply, as it has for 
oil. But natural gas reserves are somewhat more widely dispersed than 
those of oil, for which three-fifths of proved world reserves reside in 
the Middle East. Nearly two-fifths of world natural gas reserves are in 
Russia and its former satellites, and one-third are in the Middle East.
    Creating a price-pressure safety valve through larger import 
capacity of LNG need not unduly expose us to potentially unstable 
sources of imports. There are still numerous unexploited sources of gas 
production in the United States. We have been struggling to reach an 
agreeable tradeoff between environmental and energy concerns for 
decades. I do not doubt we will continue to fine-tune our areas of 
consensus. But it is essential that our policies be consistent. For 
example, we cannot, on the one hand, encourage the use of 
environmentally desirable natural gas in this country while being 
conflicted on larger imports of LNG. Such contradictions are resolved 
only by debilitating spikes in price.
    In summary, the long-term equilibrium price for natural gas in the 
United States has risen persistently during the past six years from 
approximately $2 per million Btu to more than $4.50. Although futures 
markets project a near-term modest price decline from current highly 
elevated levels, contracts written for delivery in 2009 are more than 
double the levels that had been contemplated when much of our existing 
gas-using capital stock was put in place. The perceived tightening of 
long-term demand-supply balances is beginning to price some industrial 
demand out of the market. It is not clear whether these losses are 
temporary, pending a fall in price, or permanent.
    Such pressures do not arise in the U.S. market for crude oil. 
American refiners have unlimited access to world supplies, as was 
demonstrated most recently when Venezuelan oil production shut down. 
Refiners were able to replace lost oil with supplies from Europe, Asia, 
and the Middle East. If North American natural gas markets are to 
function with the flexibility exhibited by oil, unlimited access to the 
vast world reserves of gas is required. Markets need to be able to 
effectively adjust to unexpected shortfalls in domestic supply. Access 
to world natural gas supplies will require a major expansion of LNG 
terminal import capacity and development of the newer offshore 
regasification technologies. Without the flexibility such facilities 
will impart, imbalances in supply and demand must inevitably engender 
price volatility.
    As the technology of LNG liquefaction and shipping has improved, 
and as safety considerations have lessened, a major expansion of U.S. 
import capability appears to be under way. These movements bode well 
for widespread natural gas availability in North America in the years 
ahead.

    The Chairman. Thank you very much, Mr. Chairman.
    We will now follow the 5-minute rule, excepting for Senator 
Bingaman, who will be allowed as much time as he desires. All 
will then follow with 5 minutes each.
    Mr. Secretary, I have three questions. I will try to make 
them brief. First, in February the committee held the last 
hearing on natural gas when the price spiked to $9 per Mcf and 
there were accusations that the market was being manipulated. 
Although prices have come down since our last hearing, prices 
are more than double where they were last year.
    My question is: Do you see any manipulative behavior in the 
market or are the sustained high prices the result of 
legitimate forces at work in the market?
    Dr. Greenspan. Mr. Chairman, as best I can judge the spikes 
that we have observed and indeed the levels of natural gas 
prices we are now finding in our markets can be fully explained 
by the relative balances of supply and demand as they have 
developed over the last several years. Manipulation is a very 
difficult thing to ferret out. I can say this, that you do not 
need to advert to manipulation to understand what is going on, 
and I would suspect that a vast amount of people who try to 
manipulate these markets indeed fail.
    The Chairman. My second question has to do with another 
matter I noted in my opening remarks. I believe that there is 
very little that can be done in the short term to relieve the 
high prices of natural gas. At best, new production will take 3 
to 6 months to get to market, demand management is likely to 
provide modest savings, and fuel-switching is severely limited. 
I believe our policy options should focus, however, on 
diversifying our fuel mix, expanding our access to domestic 
productions, and LNG.
    Do you agree with this assessment or are there other 
specific short-term policy alternatives that have not been 
considered? If there are, what might they be?
    Dr. Greenspan. Mr. Chairman, I agree with your assessment. 
I am not aware of any short-term expedients that can be 
employed at this stage to significantly alter the path that 
will occur in prices over the next 6 to 9 months or a year. 
Weather will be the major factor, frankly, which will determine 
the price patterns that occur.
    The Chairman. I do want to comment just as an observation, 
something you are fully aware of. I had a visit within the last 
week by a major American manufacturer of chemical products, I 
guess the world's largest. I was absolutely shocked to hear the 
president and CEO say that the price of natural gas is so high 
here that they are moving production to Germany--I could hardly 
believe it--for the production of chemical products that 
require natural gas as a base.
    I conclude that he has to be right or he would not be 
saying it, which means that, in addition to our domestic prices 
at our households, where we are seeing these bills go up, which 
people are very upset about, this is a huge potential jobs 
issue for the United States if we cannot rectify it as soon as 
possible. Is that correct?
    Dr. Greenspan. Well, it is certainly the case that natural 
gas, as differentiated from oil, can have major regional price 
differences. You cannot have them in oil because we can 
transport oil and arbitrage markets around the world and do. So 
when you get major price increases in crude oil, you do not get 
differential international competitive pressure because 
everyone is looking at the same price.
    But today we are looking at price levels--for example, the 
spot price is now somewhat over $5 per million--Mcf--or Btu's, 
which is roughly the same. It is half that or just a little 
more than half in Europe, even in the spot markets of the 
United Kingdom. So it is not that we are looking at a world 
shortage of natural gas. We are looking at a domestic problem 
and one which is undoubtedly the basis for the type of comments 
you heard from your friend.
    The Chairman. Have you analyzed the overall impact to the 
economy of our country and quantified in any way--and I can 
understand it if you have not--the number of jobs that will be 
lost if gas prices do not decline or stabilize, and what do you 
foresee for the future?
    Dr. Greenspan. It is very difficult to make that judgment. 
I mean, we do see the obvious loss of jobs that will go with 
the inevitable movement of gas-using productive capacity to 
foreign shores because it has made us largely uncompetitive in 
a number of industries in which gas is a very critical input.
    It has not happened yet. In other words, we do see 
significant reductions in production in certain very specific 
high gas-using areas, but aside from the switches that we have 
seen from gas to residual fuel oil or coal where those 
exchanges are possible, you do not see all that much direct 
economic impact except in households. We are going to clearly 
see significantly higher bills if the futures markets in fact 
are correct forecasts of the spot market as we go into the 
winter.
    The Chairman. Thank you very much.
    Senator Bingaman.
    Senator Bingaman. Thank you very much for being here and 
thank you for speaking out on this issue. I do think it is very 
important that the country focus on it and the Congress focus 
on it.
    There is an interesting article in the morning Washington 
Post which, while recognizing that supply and demand 
considerations are largely responsible for the relatively high 
price of natural gas, the article tries to make the point that 
a secondary factor contributing to the high price of natural 
gas may be the lack of liquidity and lack of confidence in the 
markets for natural gas as a result of Enron, the collapse of 
Enron, and other traders exiting that market.
    There is a quotation from Christine Teezak, who is an 
energy analyst with Schwab Capital Markets, saying that: 
``Having fewer traders in the market means there are fewer 
offers to buy and sell. Instead of rising in small steps, 
natural gas prices are jumping by bigger increments.''
    I wondered if you had any thoughts as to whether this lack 
of liquidity and the pulling back of a lot of companies from 
the trading in this area has been a factor in the current 
prices.
    Dr. Greenspan. It has likely been a factor, but it is 
unquestionably quite small because, as I mentioned to the 
chairman a minute ago, there is very little in the price 
patterns that we are recently seeing which is just not fully 
explained by the balance of aggregate supply and demand.
    Remember, what happens in markets which are illiquid is 
that you have a number of quasi-monopolistic positions where 
individuals can get somewhat higher prices than they would 
otherwise get in a market in which there was fully competitive 
movement of product. You do not have that, for example, in the 
Chicago wheat markets. You have it in areas where inventories 
are rather difficult to create or are virtually nonexistent.
    Electric power has no inventory capability to speak of, 
with the rare exception of backing up in some hydroelectric 
reservoirs for short periods. Natural gas has got inventories, 
but they are very difficult to manage because we are dealing 
with an ephemeral product. As a consequence of that, inventory 
management is more difficult than it is, for example, with 
wheat or copper or anything else, and unless you get liquidity 
in those markets you do have the capacity for local monopoly 
niches which can eke out a slightly higher price.
    But my guess over the long run is that effect is really 
quite de minimis.
    Senator Bingaman. Let me ask--this was sort of dealt with, 
I think, in your statement, but I can remember about 15 years 
ago I started getting concerned about the rising current 
account deficit and imbalance in trade between ourselves and 
the rest of the world. Of course, it has continued to grow or 
is certainly at a very high level now.
    But I remember asking someone from the Commerce Department, 
I think, to come over and brief me on what the administration 
was doing about that. This was back in the mid-eighties. The 
response I got was interesting. He said: ``You know, a lot of 
that, that trade imbalance that you are looking at, is 
structural and we cannot do anything about it.''
    I said: ``Well, what do you mean, structural''? And he 
said: ``It is oil and we are dependent on foreign oil in a very 
big way and that is a permanent part of our trade imbalance.''
    It sounds to me like what you are suggesting is that as we 
become a larger and larger importer of LNG we will be building 
into our trade relationship with the rest of the world another 
so-called structural trade imbalance that could have adverse 
consequences for us going forward, and I would be interested in 
your thoughts as to whether or not we are essentially adopting 
policies that will, by encouraging more use of natural gas, and 
encouraging more importation of LNG and we are setting 
ourselves up for another long-term structural deficit.
    Dr. Greenspan. Senator, I do not know who the economist or 
official was or what his reasons were. But just remember, at 
the same time, or even now, the Japanese have had, and have 
very large surpluses and they import all their oil. So that 
cannot be the explanation.
    It is true there are structural problems with respect to 
American trade in the sense that our propensity to import goods 
and services relative to our income is higher than our trading 
partners' and that if you consider what the world economy would 
look like if everyone were growing at the same rate, we would 
have a progressively increasing trade deficit. So that there 
are structural problems involved.
    I cannot say that you can argue that energy is specific to 
that, because you go around the world and we are in somewhat 
better shape than most of our trading partners who have 
surpluses.
    The size of what we are talking about with respect to 
increasing imports of natural gas is not all that large. I 
would say that I would prefer that we not increase imports of 
natural gas. I would like to see a facility available to have 
the flexibility to use it when we need it. But I would much 
prefer that we met domestic consumption with effectively North 
American production.
    But I regret to say that the problems that are emerging in 
endeavoring to do that suggest that we may be using LNG for 
more than just price stability. We may be using it for base 
supply of natural gas in the years ahead, unless we can find 
means to create a domestic, and that would mean a U.S. source, 
because the Canadians are increasingly less likely to be able 
to fill in our growing need for gas, especially in the context 
of that chart, if you extended it, it would continue the red 
lines for quite a while.
    Senator Bingaman. Let me just ask one other question that 
relates to this provision that we have in the energy bill this 
year, that we are considering in the Senate floor, and in 
provisions we have reported out of the Finance Committee to try 
to encourage the construction of a pipeline to bring natural 
gas from the North Slope of Alaska.
    Have you looked at the question of to what extent that 
might alleviate some of the price pressures that we are 
anticipating in the future? I know it would be many years after 
a decision was made to construct that pipeline before we would 
actually see any guess coming from the North Slope down to the 
Lower 48. But long term, I have thought that that would be a 
partial solution to the anticipated high price of natural gas.
    Do you agree with that or not?
    Dr. Greenspan. Unquestionably, the more gas we get down 
into the lower 48 the better. I think that we are going to find 
significant amounts of Alaskan gas coming down, either through 
a pipeline or, as your Senate colleague from Alaska mentioned, 
through LNG exports from, if you want to put it the way, from 
Alaska to the lower 48.
    I do not believe that one needs to encourage that. I mean, 
with long-term $4.50 gas, the profitability in doing that is 
quite adequate by any measure, and indeed the MacKenzie Delta 
project that is the development of a pipeline from the Canadian 
MacKenzie Delta into the lower 48, is going forward as best I 
understand it with minimal to no subsidies at all. It is a 
fully commercial project.
    Senator Bingaman. Thank you.
    The Chairman. Thank you very much, Senator Bingaman.
    I did want to ask. If it is all right with the committee, 
what I have chosen to do is to follow the format of calling on 
Senators as of time of arrival. Is that satisfactory?
    [No response.]
    The Chairman. If that is the case, I will proceed on that 
basis.
    I will make one comment before I proceed to the next 
Senator, which is Senator Murkowski. The Senate is now on 
record that we will take up the energy bill on the last week of 
this session before we go out for recess. We will start on 
Monday and the Leader has announced, for at least the fifth 
time to my recollection this morning, that we will stay until 
we complete it.
    So if we plan recesses, we better make sure that we 
understand that we have got an energy bill to finish before we 
take those recesses. I believe the testimony we have heard 
today does not do much other than to add to the importance that 
we do that.
    Having said that, Dr. Greenspan, there are people certainly 
in this crowd who are LNG advocates, owners, proprietors, and 
they may not agree with your testimony. They may perceive that 
LNG should become an integral ongoing part of America's 
solution. I would like to comment as chairman. My own feeling 
is that your observations are correct, but the market will have 
something to do with that, I am sure, as will the environment.
    Having said that, I would now call on--this is the list: 
Senators Murkowski, Campbell, Craig, Thomas, Burns, Alexander, 
Bayh, Bunning, Dorgan, and Landrieu. Please proceed, 5 minutes 
each.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Chairman, welcome and thank you for your comments. I 
particularly appreciate your remarks regarding Alaskan natural 
gas and our ability, I believe, to help address the shortages 
that we are facing as a Nation.
    I want to talk a little bit about energy security 
initially. I agree with your comments, when we are talking 
about LNG and imports, that world gas supplies are different 
than the world oil supplies. They are more spread out, and a 
recognition that, I think to use your terms, they are more 
dispersed and I think your comment was that as an energy 
security issue it is not as--it is not the same situation as 
with oil.
    But I think we need to recognize that those situations can 
change, and as we use our gas for feedstocks and electricity 
and heating that the international dynamics of some of our gas-
rich nations can change. Those countries that we might have 
good relationships with today might not necessarily maintain 
those good relationships 25, 30 years from now and we may place 
ourselves in a situation where we are reliant on these 
countries who could be construed then as unsecure sources, but 
we have placed ourselves in a situation of reliance for our gas 
supplies, as we have currently with oil.
    I get concerned that as a country we are moving towards a 
policy that could make us more dependent on foreign sources of 
gas, as we currently are with foreign sources of oil. So my 
question to you is why, other than as a source of cheap gas, 
should we pursue a policy that will make us more dependent on 
foreign gas now when we do have the resources within our 
country to at least delay some of our dependence on foreign 
sources?
    Dr. Greenspan. Senator, for two reasons. First, I certainly 
agree with you that any commodity which we import is subject to 
insecure sources of supply and indeed over the years we have 
run into difficult problems. I remember when we had platinum 
and palladium problems because they were very heavily Soviet 
Union types of commodities and we were in some difficulty.
    But the problem rests with the question of an overall 
policy. If we choose to emphasize environmentally efficient 
energy sources, which necessitates by merely the physics and 
chemistry of what we are dealing with that we employ very 
significant amounts and growing amounts of natural gas, then 
the question is we have to be prepared, if we do not wish to be 
dependent on any foreign natural gas, to find ways of producing 
it internally.
    We did not have a problem with crude oil in this country up 
until about 1970, because we had shut-in capacity in the Texas 
Gulf, and indeed the Texas Railroad Commission rationed the 
production of U.S. crude oil and as a consequence of that we 
found that we had far more capacity domestically than we 
needed.
    That changed, obviously, in 1970 and beyond. But we have 
got that same sort of problem confronting us today in natural 
gas. If we can find a means to assure that we will have a 
surplus of gas and capped wells because of the excess supply 
versus demand or facilities of, say, very significant amounts 
of LNG storage, for example, we can function in this market 
with non-volatile or stable prices, low internationally viable 
prices, competitive prices I should say, and a less volatile 
pattern of prices.
    But unless we can assure that, the fallback position is in 
my judgment only LNG. That does not mean that we need to have a 
significant base, as I indicated earlier, of LNG as a 
fundamental source of supply, but it does mean that unless we 
create adequate domestic sources of supply.
    The way I look at it is, first of all, the degree of price 
volatility and spikes I would consider unacceptable, 
unacceptable in that you cannot invest in that type of 
environment for gas-using facilities, and it makes internal 
corporate planning exceptionally difficult. The only way to 
eliminate is to make sure that you have a safety valve in 
markets where inventories are very difficult to hold, and if 
you have that safety valve then you will get smooth, non-
volatile pricing and a risk structure which enables competitive 
capital investment in gas-using establishments.
    However, if we cannot be sure we have got that, LNG is the 
ultimate safety valve, even if we do not use it. So my argument 
is that we have not exhibited in this country an obvious 
success in resolving a lot of these problems and, rather than 
say we shall do so, I think it would be far more sensible to 
assure ourselves at a minimum a backup facility which will 
provide us in the event of need and hope that that need is de 
minimis.
    Senator Murkowski. Mr. Chairman----
    The Chairman. The Senator's time has expired.
    Senator Murkowski. Okay. I just wanted you to comment on 
the Alaska LNG and whether or not that was factored into, when 
you discuss LNG imports, how Alaska LNG is being factored into 
the equation.
    Dr. Greenspan. Well, I think, Senator, as you know, there 
is a facility that produces LNG in Alaska, with a big chunk of 
it being shipped to Japan. I would say to the extent that one 
can bring Alaska gas down through LNG to the lower 48, I would 
say that may very well turn out to be a highly profitable 
activity. And I would suspect that if you do not have 
regulations which inhibit the flow of capital that is what is 
going to happen.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Senator Campbell.
    Senator Campbell. Thank you, Mr. Chairman.
    Dr. Greenspan, you did say you prefer, as many of us do, 
that we increase domestic production of natural gas. I 
certainly agree with that. But one of the big problems we have, 
of course, is that we all know that government does not produce 
gas any more than it does oil. Private industry does that, and 
they only do it if there is some kind of an incentive.
    Usually the incentive is going to be the profit margin. I 
am sure they are all very patriotic, but they have got 
stockholders that they have to satisfy. If there is no profit 
margin or no reason for doing it, they will not.
    Much of the gas, like oil, is done on public lands and what 
I think the gas companies are facing is basically when they try 
to increase the domestic production, it mirrors what the 
domestic oil companies face and that is environmental 
opposition through lawsuits. In fact, in January of this year 
Peter Morton of the Wilderness Society declared: ``If you bid a 
lease on public land, you can expect environmental 
litigation.''
    Well, a good deal of our natural gas is on public lands. So 
I do not know if you are really prepared to have an answer for 
this, but maybe you could give us a suggestion on how, what we 
ought to be doing in Congress to make it easier to increase 
that domestic production when we obviously are going to face 
environmental opposition at every turn?
    Dr. Greenspan. Senator, we are confronted with a very 
unusual situation here, in the sense that there are two value 
systems, the economic value system and the environmental value 
system, and there is no tradeoff. There is a tradeoff in that 
part where they merge on issues of health, where you can really 
determine what type of effluent creates various difficult 
problems with the Nation's health.
    But there is a very fundamental value which all human 
beings I think are attracted to, the pristine nature of a 
wilderness. When I go out West into your area, Senator, Jackson 
Hole, it is a very impressive sight. And there is no question 
that there are deep-seated human values that are involved in 
maintaining that type of environment the best we can.
    But there are other human values on the economic side, and 
there is only one human being. In other words, we have got to 
make those tradeoffs. They are very difficult and if there was 
a ratio of one to the other or some form of mechanistic 
tradeoff that you could make to find an optimum balance, it 
would be easy. But on the issue of pristine wilderness versus 
economics there is no tradeoff. The only tradeoff is in human 
beings making that value judgment of what it is they want, and 
essentially it is up to the Congress to try to reflect that.
    I mean, I have my own personal views, but other people have 
other views, and I think it is a very difficult but necessary 
tradeoff. What the tradeoff is, is to the extent that there is 
adequate gas and one need not worry about it, which has been 
the case in a good deal of our recent history, then there is no 
concern about the issue of the environmental tradeoff against 
the economics and the issue never came up. It has come up now 
and there is no simple alternative to recognize.
    But no one is going to give you a mathematical equation 
which is going to say, putting these variables in, you will 
find that the optimum balance between pristine environmental 
issues and natural gas exploration and development is X. You 
will not get that.
    Senator Campbell. Thank you. I believe what have said is we 
in Congress are in for some intensive debates and difficult 
decisions. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Are you finished, Senator?
    Senator Campbell. Yes.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman.
    Thank you, sir, for a very thoughtful presentation. I guess 
we are now on the verge of going back to talking about an 
energy policy. It seems to me that that is kind of what we 
lack, and I would be interested in knowing about that.
    First of all, when you ask about access to public lands, 
remember it is not all wilderness. There is a great deal there 
that is not wilderness. There are various categories. So in 
order to do some of the things--you mentioned Wyoming as being 
a possibility--why, permitting is a problem. We have got to 
have transportation to get it out of there. Yes, there is gas 
there. We just have not been able to get it out for a number of 
reasons.
    But more importantly, for instance coal. We have 250 years 
of coal available. It is far less expensive per Btu than is 
gas. What has happened is over the last number of years, why, 
practically all of the generation plants have been gas, largely 
because you can build gas plants smaller, put them closer to 
the market, and you do no have the transportation problem. 
There is concern about the environment part of coal, of course, 
but we can work on that.
    Do you not think that one of the Government 
responsibilities is to have a policy as to where we ought to be 
in terms of what, for instance, maybe how we use these 
resources, and then have incentives to cause that policy to be 
implemented?
    Dr. Greenspan. I certainly do, Senator. The issue of what 
one does with, say, Rocky Mountain gas reserves, which, as you 
know far better than I, are really quite extensive and would be 
a major contribution to the available domestic supply of gas, 
and there is no doubt that if we advert to coal for a good deal 
of our utility operation, or nuclear for that matter, it will 
take a good deal of pressure off the gas market.
    It is difficult for an economist such as myself not to be 
more attracted to the economics than the wilderness issue, 
because that is my profession. But I would be mistaken to 
believe that that is the general view which everybody holds. I 
do say this: I say that it is essential that one recognizes 
what the cost in energy policy is if you restrict the access to 
certain areas where preliminary seismic analysis has indicated 
very significant capabilities in gas.
    There are clearly improving coal technologies, coal 
gasification, coalbed methane, which so far as health concerns, 
which is another part of the environmental structure--I think 
people tend to lump what I would call pristine environmentalism 
and health environmentalism as though they are the same. They 
are not. They in themselves are two different sets of values.
    On the issue of health, all I will say is that our history 
does suggest that as our wealth increased over the generations 
so did our health. The biggest increases in life expectancy in 
the United States occur when our economy is developing the 
capability of creating clean water and the ability to actually 
create an environment in which the atmosphere is breathable.
    So you cannot really argue that it is a tradeoff. In one 
respect I would argue over the long run a viable economy may 
well be the most effective way to maintain the Nation's health. 
But that does not mean that you do not have very significant 
and subtle tradeoffs which have got to be made, and there is no 
other vehicle in a democratic society to make those tradeoffs 
except the Congress.
    Senator Thomas. Thank you, and I hope that we can in our 
policy develop a better balance between protecting the economy 
and producing a product. I think that we can and I guess all 
that I am saying to you is I believe that one of our failures 
has been the lack of a policy to direct us to do those things. 
So thank you, sir.
    The Chairman. Thank you very much, Senator.
    Senator Burns.
    Senator Burns. Thank you, Mr. Chairman, and I will be very 
brief because you have covered most of the areas of interest, 
Chairman Greenspan.
    I was interested in your comment today comparing all 
commodities, especially that of wheat in Chicago. There is one 
element that is left out of our ability to be competitive on 
the world market in exports and everything else in our 
production. There is another element that goes with natural gas 
that is very concerning in the agricultural community and that 
is the production of fertilizer.
    Since agriculture is still our largest contributor to our 
GDP in this country, I think it goes without saying that it has 
to be a part of the economic makeup whenever we make our 
decisions in energy policy and how that affects our 
competitiveness in agricultural production. So I know I am not 
telling you anything new, but we very seldom hear it heard here 
in this 17 square miles of logic-free environment of what goes 
on in the rest of the country in the production of food and 
fiber, and I wanted to make that point and bring it to the 
attention of the committee and to the attention of the American 
consumer, because not only does it impair us to produce more 
efficiently, but also the ability to market and to keep our 
commodity within the range of everybody that is hungry.
    Going on the other--you may want to comment on that.
    Dr. Greenspan. No, no. I agree with you fully, Senator. I 
think that fertilizer happens to be one of the most gas-
intensive products we produce, and I think that if you double 
the price on a fairly large acreage and that is a lot of cash.
    Senator Burns. It is tremendous.
    Then the rules and regulations of getting coalbed methane 
on line and making it a part of the energy mix as far as 
natural gas is concerned, because they are of the same 
qualities environmentally and everything else. So we are very 
disappointed in my State after, 70 days after issuing a record 
of decision on the EIS in the Powder River Basin and the Tongue 
River Basin, this administration still has not issued one 
permit of Federal leases as far as drilling to start down 
there.
    So those are the delays we encounter. They are not only 
expensive delays, but they are also--in the gas market, but 
also expensive to those people who are charged with the ability 
of lifting that resource.
    Dr. Greenspan. Senator, the most expensive part of that is 
the rise in risk premiums that occur as a consequence of the 
uncertainty of the supervisory regulatory process that we go 
through. So that whatever we can do to bring the level of 
uncertainty down, the more we are apt to lower the cost of 
capital on gas-using types of facilities.
    Senator Burns. I thank the chairman, and I thank the 
chairman for appearing today.
    The Chairman. Thank you very much.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Thank you, Mr. Greenspan, for being here. Your two 
paragraphs of comment before the Joint Economic Committee a few 
weeks ago on an emerging crisis on natural gas helped focus the 
country's attention on this problem in an important way and I 
thank you for that. We talked during that hearing, and I would 
like to continue that line of discussion now, on putting this 
in the focus of one word, which is ``jobs.''
    The morning paper in Nashville said that the Nashville Gas 
Company has advised everyone who buys gas, business or 
residential, that gas prices this winter will be up at least 30 
percent. There will be a witness from another company before us 
in a while where the management and the workers have taken a 
pay cut a few weeks ago, a few months ago, because of the 
higher price of natural gas.
    It seems, at a time when our greatest challenge for our 
country longer term is how do we keep our manufacturing jobs 
from moving overseas, and we know that a big part of that is to 
try to keep unexpected costs low for those manufacturers so 
they will not move to Mexico or China or somewhere, these 
energy policies that we fail to adopt here are having a direct 
impact on everyday jobs.
    Now, one kind others have talked about, which is we have 
restricted access to our own supply of natural gas. That has 
raised its price and that sends the jobs to Mexico and China. 
There may be another kind of regulatory policy which you might 
be able to help me understand better. I would like to go 
specifically to coal gasification, which is an obvious possible 
option for an alternative fuel to natural gas. It seems to 
work. That has been proven. The technology works. There is 
plenty of coal. The price of gas is now up, which ought to help 
an alternative fuel like coal gasification.
    My question would be: Are there any regulatory barriers 
that we can fix that would make it easier for coal gasification 
to become an alternative fuel and help keep energy prices down 
and jobs--and keep jobs from moving overseas?
    Dr. Greenspan. Incidentally, before I respond to that 
question let me correct a statement I made to Senator Burns. I 
said that the reduction in uncertainty would create improved 
investment for gas-using industries and I meant to say gas 
producers, obviously.
    With respect to coal gasification, the technology has been 
around for quite a while, as you know. I am not familiar with 
the structure of regulation which is inhibiting it at this 
stage, but I am, obviously, aware of the essential negative 
aspect in all of our regulations, both current and pending, to 
the use of coal, use in any of its variations, because it is 
true, coal is carbon. I mean, that is what it is when you 
employ it.
    So I am not sure exactly either what the state of the 
technology is or what the specific regulations are. But I would 
certainly agree with you that if there is a way to bring it 
forth, granted the extraordinary amount of coal reserves that 
we have, that is something we should seek to do.
    Senator Alexander. One other question there. Many of the 
older powerplants have backup ability to produce fuel. Most of 
those older powerplants which are producing electricity by 
natural gas, if they were to switch to a backup fuel, would be 
producing electricity in a much dirtier way, a much more 
environmentally unacceptable way than they are today.
    Have you studied that or taken into account the attitude we 
might take on that or the consequences of that?
    Dr. Greenspan. Well, Senator, that gets back to the whole 
question of how we regulate the utilities. The problem with 
utilities, as I mentioned before, which is unique to electric 
power is that there is no capacity to have inventories, which 
enables one to effectively move production to the most 
efficient and the most environmentally appropriate forms of 
production.
    So that gets back to the very complex structure of problems 
that everybody has been having with so-called electric power 
deregulation, which some say is misnamed and others say does 
not work. But you cannot, I believe, come to grips with the 
particular problem which you point to, which I think is a 
serious problem and one which the way you described it I think 
is quite accurate, until we come to grips with how we are going 
to create a viable competitive electric power system. And at 
the moment I think we have taken a few false steps and have not 
made very much progress or, to put it more exactly, have made 
far less progress than we should have made at this stage. There 
are areas of the country which are doing rather well in that 
regard.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Bayh.
    Senator Bayh. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman. It is good to be with you again.
    I hope I am not being unduly irreverent when I comment that 
a congressional hearing on the subject of natural gas may be 
the perfect meeting of venue and subject matter. It occurred to 
me that that may very well be the case.
    You have touched upon most of my concerns. I would like to 
follow up on something that Senator Alexander was saying. As I 
understand the import of your testimony, it is your belief that 
the use of domestic coal reserves and possibly the further 
utilization of nuclear power could contribute substantially to 
the stability of energy production in the country and 
moderation of price increases in the country, but it involves 
the reconciliation of differing values: health concerns, 
environmental concerns on the one hand, economic growth 
concerns on the other hand.
    He was asking you about coal and the production of 
electricity and that sort of thing. As we ramp up our ability 
to import LNG, does it make sense also to continue our 
investments or perhaps to expand them in such things as clean 
coal technology, which might allow us to reconcile the use of 
some carbon-based supplies that we have with environmental and 
health concerns?
    Dr. Greenspan. Well, Senator, I believe we are doing that. 
There are innumerable endeavors to find a much better way of 
taking particulates and a number of its less desirable gaseous 
products out of coal. I think that will continue.
    I believe that we have got the potential of a very 
effective energy industry in this country and a very effective 
interface with the international energy system. We have got a 
number of bottlenecks, a number of things which we do poorly, 
and I would think that if we could allow competition far more 
sway in our markets I think we would find far quicker, cheaper, 
and more productive solutions.
    It is remarkable what happens when you deregulate things. I 
remember, for example, when we took off all controls on 
petroleum in the early 1980's everyone was terribly concerned 
that prices would go out of hand, the system would collapse. 
And within a very short period of time the system was in 
balance.
    I think we do too little of that in our energy policy these 
days, and what we find is we have a regulation X which cures 
problem X, but also creates problem Y, and we find ourselves 
running around in circles trying to make a system balance, when 
that is what Adam Smith taught us back in 1776 works very 
effectively with the so-called invisible hand. He was right 
back then and I think he would be right today.
    Senator Bayh. You had mentioned that there had been some 
barriers heretofore to expanding our LNG importation capacity. 
I think you mentioned security concerns, environmental 
concerns. Could you expand upon that just a bit? What has been 
the historic reluctance to expand this capacity?
    Dr. Greenspan. It is the ``not in my back yard'' syndrome. 
These are big facilities and these are not the types of things 
you want in your back yard. Indeed, what is happening as a 
consequence of that is there is a very significant effort in 
LNG technology to move the whole process of import offshore. 
There are technologies which are now developing in which you 
are getting LNG carriers which can regasify on the ship and 
connect 20, 30, 40, 50 miles out into a regular natural gas 
pipeline which could interconnect with our basic system.
    So we may find that the newer technologies will be less LNG 
terminals that are fixed and a good deal more of this flexible 
technology which enables ships parked out over the horizon to 
regasify LNG into standard gas and just pipe it into the 
system. I think that that is likely to happen more and more, 
but if we just let the market determine where the capital is 
put I think we will be quite satisfied with how that comes out.
    Senator Bayh. A combination of market forces and 
technological advances may be our best allies here.
    I see my time has expired, Mr. Chairman. I just have one 
final comment. You testified that two-fifths of proven gas 
reserves are in Russia?
    Dr. Greenspan. No, in the former Soviet----
    Senator Bayh. The former Soviet Union.
    Dr. Greenspan. It is about 30 percent in Russia itself.
    Senator Bayh. It struck me that this has some obvious 
implications for the importance of that relationship going 
forward.
    Dr. Greenspan. Yes, sir.
    Senator Bayh. Thank you, Mr. Chairman.
    The Chairman. Senator Landrieu.
    Senator Landrieu. Thank you, Mr. Chairman.
    Mr. Greenspan, thank you for your comments and for helping 
us focus attention on this very, very important issue.
    The Chairman. Senator Landrieu, might you permit me to 
comment on a visit that I recently took to your State?
    Senator Landrieu. Please, Mr. Chairman.
    The Chairman. I think it has something to do with the 
testimony that the distinguished witness has had here regarding 
values.
    Mr. Chairman, I was privileged to fly out on a helicopter 
about 5 miles out into the Gulf of Mexico and land in a 
helicopter on a bed out there, a great big configuration that 
looked much like, when you look at it from the inside, like the 
size of a nuclear powerplant. 156 people live there day and 
night.
    There are ten wells down into the ocean bed that bring 
forth large quantities of oil and gas. They did not drill until 
they knew it was there using modern techniques. They were very 
proud to tell us that in all their efforts from the beginning 
to that date they had spilled into the waters of the Gulf 
three-quarters of a cup of oil. That was the extent of the 
environmental damage that they contributed to that particular 
water.
    I recall, as do you better than I, the arguments against 
doing what is being done there, most of which were based upon 
non-objective arguments that had to do with spoilation and 
environmental degradation. The other most interesting thing was 
you could see from the place where you sat and watched, you 
could see that there were more fish of large sizes and, believe 
it or not, more fishing boats by large amounts out there near 
that platform than there were anywhere else around.
    I merely cite that because this Senator has been a staunch 
advocate, obviously, of what you have spoken about today in the 
market, and I cite it because truly the issue on balance is not 
always just balance. One of the big issues is how do you try to 
make sure the American people get the facts, not the 
contentions of those from each side of the equation.
    Senator Landrieu.
    Senator Landrieu. Well, I thank the chair. It was a quite 
wonderful trip for us to be able to share the bounties of south 
Louisiana and the coast and for the chairman to fly out and 
land on a rig. He was lucky we got him out a day before the 
storm, but we made sure of that. The last thing I wanted to do 
as a rookie member of this committee was to lose a chairman out 
in the Gulf of Mexico. So we, Mr. Greenspan, ushered him out 
rather safely before the storm.
    But seriously, I wanted to ask a few questions, but comment 
that Steven Brown, who is the Director of Energy Economics at 
the Dallas Federal Reserve Bank, stated recently that ``Nine of 
the ten last recessions have been preceded by high energy 
prices.'' He went on to add that: ``If high gas prices 
continue, the Nation's gross domestic production could fall 
anywhere between .6 percent to 2.1 percent short of where it 
would otherwise have been. Some estimate this could translate 
into a loss of between 770,000 jobs and 2.7 million jobs.''
    The reason I raise this and will ask you just to comment if 
those figures seem within reason is because a lot of these jobs 
are in Louisiana. We are a huge, not only producer of natural 
gas, as the chairman has indicated, but we consume a lot of 
natural gas, which produces the fertilizer that grows the crops 
in the Senator from Montana's State, ammonia being the main 
component of fertilizer.
    We had nine fertilizer chemical plants in Louisiana 3 years 
ago. We are now down to three. More than 3,500 employees; it is 
now down to 1,000. There are plants that the chairman has 
commented have come to his office indicating they are either 
closing, consolidating, or moving.
    I want to say that, while this is an energy bill, I 
perceive it as a jobs bill. And while this is a hearing on 
natural gas, it really is a hearing on jobs in America. So 
would you comment, please, about this information from Mr. 
Brown? Do you agree or disagree? Do you think that is a 
reasonable estimation that we could lose millions of jobs more 
if we do not try to redirect some short and intermediate 
efforts to change this trend?
    Dr. Greenspan. Well, Senator, I would have to see the 
actual calculations. My initial response is I am a little 
surprised at the size of the numbers he has gotten, largely 
because natural gas, unlike oil, is, as you know, about 83 
percent domestically produced. When you get a rise in domestic 
prices for natural gas, it is not the same thing as if you were 
importing crude oil, which is essentially a tax. All of the 
difference goes to the producer of crude oil.
    Here, the price rise is a transfer between a consumer and a 
producer, both in the United States. The general view is that 
the propensity to spend by the consumer is higher than that of 
the producer and therefore higher gas prices do in general 
lower the GDP. They certainly make considerable difficulties 
for households and for selected industries, and clearly ammonia 
and fertilizer are crucial industries and just as importantly 
in your State, Senator, the whole issue of petrochemical 
feedstocks and the petrochemical industry is involved.
    So that there are significant economic effects. I would be 
a little surprised at the size of the numbers that my colleague 
came up with. But without looking at his assumptions and the 
details of his calculations, I really cannot make a judgment on 
the quality of the estimates.
    Senator Landrieu. I appreciate your comments.
    Let me ask you on a subject the chairman raised, which is 
the inventory, either proven or unproven inventory, of domestic 
reserves, proven or unproven domestic reserves in our country 
as well as on the continental, Outer Continental Shelf. When 
you comment about proven reserves in Russia, can you comment 
about the possibilities of there being more reserves in the 
United States than perhaps we have even estimated domestically 
because there are certain regulations currently that prevent us 
from actually inventorying what our complete assets are?
    It is one of the things the chairman feels strongly about, 
getting an accurate inventory. Could you comment, in that you 
are advocating for more reasonable domestic production, which I 
tend to agree with?
    Dr. Greenspan. Well, the notion of proved and unproved 
reserves is more of an art than a science, regrettably. There 
is no question that unless and until you drill a hole you are 
really not certain you have got anything. Therefore, the 
inability to drill in areas where seismic and satellite 
technologies suggest the very high probability of oil or gas 
tends to make it difficult to judge whether or not you really 
have got those reserves.
    I think it is everyone's general view that the so-called 
unproved reserves, the potential reserves in the United States 
that are economically potentially competitive, are really quite 
substantial. Unfortunately, we will not know that unless and 
until we go in and take a look.
    Senator Landrieu. Finally, last question. We have been 
fairly, very generous actually, with tax credits for all sorts 
of items in the last several years here. Would it be of your 
mind that perhaps we could either look or relook at some 
potential tax credit or tax relief to give some relief to the 
users of natural gas, even as a temporary measure until our 
regulatory and policy issues can catch up with the 
extraordinary demand that is going to occur in this country? 
Some estimate a doubling or a tripling of the demand in the 
next 10 to 15 years.
    Dr. Greenspan. Well, Senator, that is a judgment that the 
Congress has to make. You may recall when a similar situation 
arose with home heating oil the issue did create action on the 
part of the Congress. You have to be a little careful, however, 
to make sure if you do that you do not eliminate the normal 
rationing that occurs from higher prices in households. So that 
you have to be sure that what it is that one pays out in a 
government transfer payment is not tied to the price of gas 
directly, because if it is what you will find is that it could 
be counterproductive in a sense, because there is no question 
that when the price of natural gas goes up householders do cut 
back on consumption, as they should, and accordingly they 
assist the balancing of overall supply and demand.
    So you do not want to abort that particular process by any 
form of subsidy. So I would merely suggest that if you do it 
make certain that it is not a function of how high the price 
is.
    Senator Landrieu. Thank you.
    The Chairman. Thank you very much, Senator.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Thank you, Chairman Greenspan, for being here. I think we 
have a real conflict in the United States of America. We have--
on the one hand we have a policy of the Federal Government over 
the past 15 years pushing and encouraging the use of natural 
gas to produce electricity, and on the other hand we have this 
supposed shortage or limited supply of natural gas, and 
therefore we have a direct conflict.
    The conflict is between what we use to make electricity 
with and what we use for natural gas on the other hand. There 
are many other uses for natural gas. So that has been a big 
conflict and that is the reason we have spikes up to $9 and 
that is the reason we have a cost, Btu cost, of about $4.50 
from a $2.25 just in the recent past.
    Let me ask you the question, have you had a chance at all 
to read the new energy policy bill that we are about to take up 
at the end of this month?
    Dr. Greenspan. Senator, I have glanced through it, but I 
cannot say that I am fully familiar with it in detail.
    Senator Bunning. Okay. We address many of these conflicts 
in this new energy bill that we are going to address on the 
last week in July. One is how we look at coal. One is how we 
look at natural gas. One is how we overall supply and where we 
can environmentally soundly produce from coal and from natural 
gas, the conflict that you talked about, where we can resolve 
part of that.
    I believe unless we look at all alternative fuels and the 
use of what we have now in direct relationship to natural gas, 
we will never solve that problem that you talked about, whether 
it is pristine wilderness, whether it is wilderness that is, as 
some of our colleagues on this committee say, it is not 
pristine.
    We have to have the ability somehow to produce domestically 
a larger supply of our own natural gas, and we have to also be 
able to use coal and other fuels to produce better results 
environmentally and economically for the market. I would agree 
100 percent with you that the market should dictate the cost of 
these production and these fuels.
    My question is, do you think the Government's shift to the 
use of natural gas in the production of electricity has had a 
dramatic effect on the cost of natural gas over the past few 
years?
    Dr. Greenspan. It certainly has, Senator, and one need only 
look at the price of natural gas in other countries, which is 
significantly below where we are. And even though many of them 
have similar policies, they do not have it to the extent that 
we do relevant to our supply-demand balance. Had we not had 
this type of situation, there is no question that the domestic 
price of natural gas would be lower than it is today.
    Senator Bunning. I happen to agree with you 100 percent.
    You have indicated you think that liquified natural gas 
coming into this country would be a big help or could help 
alleviate some of the problems we are having.
    Dr. Greenspan. Senator, our experience with crude oil tells 
us that we do have the capability, when confronted with a 
production shortfall or a crisis, to bring in crude or products 
from any place in the world fairly quickly and prices never get 
out of hand. In fact, as I mentioned in my prepared remarks, 
the Venezuelan situation was one that could have been a real 
serious problem, and it was not.
    But we have got a 62-year supply in the world of natural 
gas and only 43 years of supply in crude oil. So there is this 
vast amount of gas that is out there, which if it comes into 
this country at competitive prices will essentially solve the 
price problem or, I should say, the price volatility problem. 
It will not solve the security problem because clearly it will 
make it worse.
    So I think we as a minimum ought to at least have a standby 
LNG system, even with the capital cost that that implies.
    Senator Bunning. The storage areas, you are talking about?
    Dr. Greenspan. The storage areas, the capacity in an 
emergency to bring in either spot or short-term cargoes of 
natural gas--an ability to address any price problems which are 
strictly temporary imbalances of supply and demand. But 
recognize that longer term, while we do have that backup, we 
should work to try to eliminate it as a backup in producing far 
more domestic supply.
    Senator Bunning. My last question. I know my time has run 
out. Liquefied natural gas can be brought to this country and, 
as you suggested, with the right facility and right storage 
facility, can be converted immediately into natural gas and 
therefore put right into the supply system. If we can do that 
in a reasonable and rational fashion over the next year or 
two--and I think we can do that; it is just a question of 
whether we want and have the will to do it--if we pass the bill 
that we have before the Congress at the end of this month, we 
will have solved an awful lot of these problems. And I hope 
that you take a little better look or you have a little more 
time to look at it.
    Thank you.
    Dr. Greenspan. I shall.
    The Chairman. Thank you very much.
    Senator Talent and then, Senator Craig, will you wrap this 
up. We are going to have votes. You close it down and I will be 
back and open the next session.
    Senator Talent. Thank you, Mr. Chairman.
    Chairman Greenspan, I am grateful to you for spotlighting 
this issue. I think you have done a real effective job of doing 
that. I know you are here because, at bottom, because you are 
concerned about the impact of rising natural gas prices on the 
economy, on economic growth and our ability to recover from the 
recession. I mean, that is really what it comes down to, is it 
not?
    Dr. Greenspan. Exactly.
    Senator Talent. Now, have you or has the Fed quantified 
that at all? I mean, are you able to give us any estimates 
about what this doubling in natural gas prices has done to GDP 
or unemployment or any of the other economic indicators?
    Dr. Greenspan. We have looked at it to date. To date the 
damage is still quite minimal, with the obvious exclusion of 
the chemical industry, very specifically ammonia, fertilizer, 
and a number of petrochemical feedstock operations. We do not 
find at this particular stage that aggregate manufacturing 
production has been significantly affected, but we do find that 
the profit margins of non-energy, non-financial corporations 
have been squeezed, and clearly over the longer run that has 
got to have a negative effect overall. We have not yet had the 
impact which, if the market follows the futures market pattern 
into the winter, we are going to have with respect to 
households.
    So as yet the effect has been containable. But if you 
project it out over the longer run it has clearly quite 
negative effects.
    Senator Talent. Okay. So what you are telling us is that 
maybe you cannot quantify it, give us a percentage of GDP, but 
there is no question that the economy has been hurt to some 
degree already by this and will be hurt more unless we do 
something; is that your testimony, then?
    Dr. Greenspan. Yes, sir.
    Senator Talent. I wanted to get that right on the record.
    Now, the only other line I wanted to explore, Mr. 
Chairman--I know we are short on time--is your statement about 
the value choices we have to make and the tradeoff between the 
pristine environment and economic--and a supply of energy and 
therefore economic growth in this case. I want to explore that 
a little bit, because I am wondering if this is not a case of 
what my old professor, Murray Weidenbaum, who I know you know 
very well, used to call a false conflict, one that looks like a 
conflict, but when you actually get into it isn't much of a 
conflict.
    I mean, for example, you testified that economic growth not 
only does not hurt environmental health, but it helps. In other 
words, the more the economy grows the healthier the environment 
is just in terms of human health.
    Dr. Greenspan. That is correct. I try to distinguish, 
however, Senator, between two different aspects of so-called 
environmentalism which I think are really quite distinct. One 
is the values that one achieves from viewing pristine 
wilderness. I do not know a human being who is not struck by 
some of those sights that we see in our West, for example. That 
is not the same thing as the issue of particulates in the 
atmosphere and unclean water or pollution, toxic chemicals, and 
a variety of other things. Those do clearly over the long run 
become a function of economic growth, not the more growth the 
more pollution, but the other way around.
    In the short run it is correct that you rev up industry, as 
we did for example in Britain with the beginning of the 
Industrial Revolution, and there was just a huge amount of 
pollution in that environment. Yet the population was higher 
than it would otherwise have been. So it tells you that 
underneath the general growth of an economy are the mechanisms 
by which you tend to improve health, and, as I mentioned 
before, we do not recognize how critical clean water was in 
this country to creating a very significant increase between, 
say, 1900 and 1920, 1925, in life expectancy.
    Senator Talent. What I wonder and my final really inquiry 
is whether you have studied, the Fed has studied, the 
connection between economic growth for an economy at our 
level--you see, I think we are a mature first world economy, 
obviously--and the pristine aesthetic quality of the 
environment. Because you see, common sense tells me that it is 
the poorer countries around the world that not only have an 
environment that is less healthy, but also have an environment 
that is less pristine, precisely because in order to produce, 
they do not have the affluence, they do not have the 
technological innovations to do it in a way that protects the 
pristine quality of the environment.
    I am wondering if at the stage we reached as an economy, 
whether continued economic growth at a robust quality is not 
essential to preserving the pristine quality of the 
environment. I will let you comment and then thank the chair 
for letting me.
    Dr. Greenspan. I would agree with that and I would merely 
stipulate that if you go back to the United States in the 
1890's you will find that you had very heavy effluents and very 
poor environment in the areas where factories were. We do not 
have that today, and I fully agree that the evidence does 
suggest that the higher the standard of living the--I do not 
know whether it is the pristine environment issue, because 
people tend to think of the pristine environment as one 
untouched by human activity. It is a very subtle, very tricky 
valuation issue, but it is something we have to at least 
recognize and identify if there is going to be an appropriate 
judgment on the part of the Congress.
    Senator Talent. I agree. I just think when we do that we 
will find that about 90 percent of this conflict is what 
Professor Weidenbaum used to call a false conflict.
    Dr. Greenspan. It may well be.
    Senator Talent. Thank you.
    Dr. Greenspan. He has been right more often than not on 
such issues.
    Senator Talent. I thank you. And thank you, Mr. Chairman.
    Senator Craig [presiding]. Senator, thank you.
    We have been joined by our colleague from New York, Senator 
Schumer. Do you have a question of the chairman?
    Senator Schumer. Thank you, Mr. Chairman. I again 
appreciate your erudition here.
    The first question I would like to ask is this. There are--
I know Senator Burns while I was out--we had another hearing--
had touched on this, but I wanted to ask a little further. 
There are certain industries that are very dependent on natural 
gas, the chemical industry for instance. And with the high 
costs of natural gas right now, even if we were to alleviate 
them 5 years from now, from what I understand large parts of 
the chemical business will go offshore, never to return, 
because it is a capital-intensive business.
    What can we do about that? Would you think that a certain 
set-aside of natural gas at a certain price for that industry 
would be worthwhile? I understand that is non-economic, but 
having this industry leave and come back--you know, we do have 
externalities. We do have transaction costs that make certain 
non-economic things worthwhile.
    Could you talk about that for a little bit, because it is 
something I worry about.
    Dr. Greenspan. Yes, and it is something if you do it I 
worry about, and I will tell you why. I have observed these 
types of solutions year after year and they seem to work for 
one industry and then you find that you are creating more 
problems for other industries. I am not certain if you put 
aside say some LNG storage selected strictly for the chemical 
industry that that would make all that much difference, because 
they are thinking longer term and unless they knew that there 
was a long-term solution here which brought the price of 
natural gas down to world competitive levels, the mere 
existence of a short-term fix is not going to keep them here.
    Senator Schumer. Well, let me modify the question. If we 
were to come up with a long-term solution, would this short-
term solution also be a worthwhile thing to pursue?
    Dr. Greenspan. I frankly doubt it, but----
    Senator Schumer. I did not think you would change your 
mind.
    Dr. Greenspan. I am open to evidence on that question.
    Senator Schumer. From what I am told, for instance, it is a 
very small percentage of total natural gas use that has huge 
effects on an industry, a capital-intensive industry that 
cannot go back and forth very much. So I think you need both. I 
could not agree with you more, no one is going to--no one is 
going to be able to stay here if there is not a long-term 
solution.
    But if it were half of one percent of total domestic 
natural gas production and created a huge multiplier effect of 
things staying here, it is something I think worth considering.
    Dr. Greenspan. Senator, I would suggest that if your long-
term solution was credible that you do not need the short-term 
solution.
    Senator Schumer. We will see if we can come up with a long-
term solution.
    Next question I have is about conservation. We have talked 
mostly in this committee about new production, as have you, and 
I have not been averse to new production. I am not an ideologue 
on these things. I think we need some of each. But I do think 
that probably if you gave a--if you did a bird's eye view of 
our immediate problem, that some forms of conservation and 
efficiency might help alleviate the problem as quickly and as 
economically efficiently as new production.
    Do you disagree with that?
    Dr. Greenspan. No. If demand exceeds supply, you bring the 
gap down either by increasing supply or by decreasing demand.
    Senator Schumer. And do you have any adverse--I mean, you 
may, knowing you as much as I do and respect--knowing you as 
well as I do and respecting you as much as I do. But certain 
governmental measures to increase that efficiency, would you 
necessarily rule those out, or would you just wait for the 
market to produce them?
    Dr. Greenspan. No, I think most of the action that probably 
would be helpful in this area is unwinding previous government 
regulations. But I do not deny that certain standards which you 
can set up could actually be effective in that regard.
    Senator Schumer. Glad to hear that.
    The next question is a little bit about the Rocky Mountain 
gas area, where I am open to looking at it. I was one of the 
Democrats who voted to explore in the east coast, in the east 
Gulf, much to the chagrin of my Florida colleagues. But I asked 
the environmentalists what was the problem with oil in the west 
Gulf, give me the environmental problems? There were virtually 
none. So I said, well, then we should be open--you know, we had 
a vote on opening some tract or other.
    Senator Landrieu. You did a great job.
    Senator Schumer. Yes, you would know better than me.
    Well, the same thing, the same thing with the Rocky 
Mountains. There are some areas that we would not want to see 
touched. They are beautiful, they are pristine areas, national 
parks, national monuments. Then there are some areas which 
already are open to complete exploration.
    The rub occurs in the level two areas, where there are some 
restrictions right now, but not prohibitions. What would be 
your view of this? Here is the basic argument. The people--some 
people come in to me and say: The best thing we can do, we do 
not need to change those level two areas; it is the level three 
areas where you have production; you can make it more efficient 
and that can happen on its own and that can most increase the 
production of natural gas, which we all agree we need.
    I mean, I just have to tell you, New York State--is my time 
up? I am sorry, Mr. Chairman.
    The Chairman [presiding]. It is.
    Senator Schumer. I apologize.
    Do you think there is a greater chance of looking at 
existing places in the Rockies and just increasing the 
efficiency there or changing the regulations, removing some of 
the regulations, and going into the level two areas, just in 
terms, not making the environmental way--that is our job, as 
you say--but in terms of bringing more gas quickly to the fore?
    Dr. Greenspan. I think that if you took a look at level two 
and you made the whole structure of regulation much easier and 
not as prolonged, you would bring down the risk premiums 
involved in new investment in those areas, which probably would 
create more than anything else you can do. I merely say that 
because, looking at the various different requirements that are 
involved to get permits, the risk premiums with the 
uncertainties and the arbitrariness of some of the things that 
go on--the elimination of that has got more possibilities of 
getting effective production.
    Senator Schumer. Thank you, Mr. Chairman and Mr. Chairman.
    The Chairman. Thank you very much, and I was very pleased 
to hear your comments, Senator. I did not mean--I rattled by 
mistake. I was not trying to stop you.
    Senator Schumer. You were applauding me, one of the rare 
moments.
    The Chairman. That is exactly it.
    Thank you so much.
    Senator Schumer. I am finished.
    The Chairman. And he happens to be right, without being 
from out in the West, too. The problem is not the wilderness 
with a capital ``W''; the problem is how long it is taking for 
the non-wilderness areas. It is equivalent to being closed 
because it takes so long. Those people who take risks equate 
that with being closed and therefore give up. That is what he 
is referring to.
    Senator Craig.
    Senator Craig. Thank you, Mr. Chairman.
    Let me comment to my colleague from New York, Senator 
Schumer. About 5 or 6 years ago I was out on the Rocky Mountain 
Front looking at potential production sites and looking at 
rehabilitated exploratory sites. I think Chairman Greenspan 
would appreciate this. We were landing in a helicopter and as 
we dropped into this mountain valley Jackson Hole, Wyoming, 
which is one of the favorite recreational spots in the western 
world today, disappeared from the skyline as we settled into 
this valley to look at a well drilling site.
    We could not find this rehabilitated site. It was not 
visible, the grass was so robust, the reclamation had been so 
thorough. And as we landed where they thought it had been, an 
elk cow and her calf jumped up out of the grass and took off. 
She was resting on the old drilling site, and the reason she 
was was because the rehabilitation had been so effective that 
there was better grazing there for her and her calf. And we 
were in eyeshot of Jackson Hole, Wyoming.
    That just tells you what can happen when we do it right. 
But what is the conflict and what we try to address in our new 
legislation is allowing them to get to that site to drill in 
the first place. Once they get there, and if production is 
found, fine; if not, they rehabilitate it and move on. There 
lies our greater conflict.
    Mr. Chairman, over the 4th of July I was in north Idaho and 
in north Idaho a marvelous new gas-fired electric turbine, 
electrical generating turbine, had been in operation for about 
2 years, straddled one of Williams' pipelines coming down out 
of Canada. That turbine is now off, shut off; the price of gas 
too high. And yet that was, of course, the answer to the energy 
crisis that had bled up into the Pacific Northwest out of 
California a couple of years ago. So the marketplace is 
working, obviously. That price--that facility came off line 
some months ago.
    My question or my thoughts for you to respond to are in 
that nature, because according to several energy industry 
analysts the focus on natural gas as a way to achieve 
environmental improvements without increasing power generating 
costs has had an unfortunate and a likely unforeseen and 
unintended consequence of reducing the resilience of the 
natural gas market. That is now what you have spoken to, the 
inability to have elasticity in it.
    The analysts go on to say regulatory mandates have 
constrained us away from being able to apply the lessons of 
portfolio diversification to our energy choices and our 
inability to diversify our fuel input portfolios makes for 
markets that do not adapt to unanticipated and changing 
conditions--less flexibility.
    I would appreciate hearing your thoughts and your 
conclusions as it relates to your views on how Congress might 
compound--might avoid, if you will, compounding the 
exacerbating, costly balkanization of our fuel portfolio, 
because that is really what has happened, it appears, at this 
moment. That is what we are trying to address in the bill. You 
have spoken to the fact that you have not looked at it in 
detail per se, but additional thoughts you might have that 
bring us back to that kind of flexible portfolio.
    Dr. Greenspan. My own impression, Senator, is that we have 
a lack of appreciation of how important competition is in the 
area of energy, as it is everywhere else. It is important, 
however, to recognize that, unlike other areas of industry 
which produce tangible goods, we have got two major aspects of 
our energy system in which the output is either wholly 
ephemeral or close to that in electric power and in natural 
gas, which means that the normal competitive mechanisms which 
largely work through inventories have to be looked at 
differently.
    In other words, if you are dealing with an electric power 
system what you really ultimately try to do is, before you 
build a plant, is to lock in a series of contracts which 
effectively over the lifetime of the plant creates adequate 
revenues so that the cost of capital is met or exceeded. Unlike 
something in which you can inventory anything, you need 
something which gives you long-term contracts, and long-term 
contracts are one of the very few ways you can get around a 
system where no inventories are possible.
    Similarly, we have something close to that in natural gas. 
We for example even in LNG do not have pure spot markets. What 
we have is short-term markets where there is a period over 
which LNG will be brought in, but the substantial part of LNG, 
at least in its original form, was long-term contracts. In 
effect, you built the liquefaction plant and you built the 
shipping and you financed it essentially by long-term 
contracts, as indeed an office building builder would do in 
making sure he got long-term leases.
    So I think it is in that context of trying to understand 
where competition is most effectively placed that I think most 
of the improvement can be made in this country with respect to 
our energy structure.
    Senator Craig. Mr. Chairman, thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. We are going to call our next witnesses even 
though we are suffering under the possibility of a vote, in 
which event we will just take turns. I would rather get them 
finished than make them wait and come back after lunch. We will 
just have more scheduling problems.
    Having said that, Dr. Greenspan, thank you once again for 
your help. I consider it not testimony, but help. We are going 
to try to do something for our country with reference to a 
policy. You will not like it in every respect because there are 
some things we are going to try to promote, and sometimes our 
way of promoting things is a little different than pure, at 
least pure as you so adequately state, which your word for pure 
is ``competition,'' I would assume, and we cannot do that in 
every respect.
    As a matter of fact, we have concluded that something 
happened to nuclear power that is not just a market issue and 
as a consequence I have convinced this committee and the Senate 
that we should do something a little bit different and see if 
we cannot get a couple of them built. I am not sure I could 
ever sell you on that, but it would be a very interesting 
subject matter for discussion.
    When you look at that chart, not only do you see where we 
were when we had coal and nuclear powerplants and when we had 
natural gas--of course, natural gas there is in such small 
quantities in the earlier years, because you and I both 
remember we had made a terrible mistake and regulated natural 
gas.
    When I first started working on it it was regulated at 7 
cents. You might recall those days. Seven cents was the 
regulatory price. As a consequence, we were told we had none, 
we had no natural gas. You are now telling us that if you look 
at the world it is probably, of the great energy sources, 
probably the most abundant and most available worldwide of all 
of them, and we were told there were none.
    Now here we are, we have just about abandoned everything 
for one reason or another, and this bill is going to make an 
effort to say in 10 years the line should not be quite such a 
totally red spike; it should have some other things in it. We 
hope we can succeed as well as you have put the problem to us 
with some solutions.
    With that, we thank you again and we excuse you and call 
our next panel. Thank you, Dr. Greenspan.
    Dr. Greenspan. Thank you very much, Mr. Chairman.
    The Chairman. Thank you.
    The next panel, please: Honorable David Garman, Assistant 
Secretary of Energy Efficiency and Renewable Energy from the 
Department. Would you please take your seat. Richard Grant, 
president and CEO of Tractebel LNG North America of Boston; 
Brian Ferguson, chairman and CEO of Eastman Chemical, 
Kingsport, Tennessee; and Bruce Thompson, executive director of 
Industry and Public Affairs for Forest Oil of Denver.
    I think what we will do, fellow Senators, is just start as 
they were called up, with David Garman first.
    Would you please just understand now, the statements, if 
you have them prepared, they are part of the record as of now. 
You do not have to ask that and that is done. Would you please 
limit your remarks to about 5 minutes and then we will try to 
question you thereafter.
    We will start with you, please. We will state it again: You 
are the U.S. Government's manager of our energy efficiency and 
renewable energy in the Department. And it is interesting to 
note, I believe, that if you look at that last line there, that 
little yellow on the top, while that is not all within your 
portfolio, that is beginning to show the effects of renewables 
on that, on the top end of that, beginning to show some 
significance.
    Please proceed.

   STATEMENT OF DAVID K. GARMAN, ASSISTANT SECRETARY, ENERGY 
     EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Garman. Thank you and thanks for the opportunity to 
appear today. As the committee well knows, current stocks of 
natural gas in storage are at unusually low levels due to a 
combination of cold winters in the Northeast and Mid-Atlantic 
regions this past winter and declines in both domestic 
production and net imports. As a consequence, gas in storage as 
of July 4th was 15 percent below the previous 5-year average.
    Average wellhead prices for natural gas this year are now 
expected to average $2 per thousand cubic feet higher than last 
year, a 68 percent increase. If we are to get 3 trillion cubic 
feet or more into working storage by the start of the winter 
heating season, we need to inject an average of roughly 75 
billion cubic feet each week between now and November. In 
normal years we have injected an average of 53 billion cubic 
feet per week during the weeks remaining in the refill season. 
So it is encouraging that this year's weekly reinjection rate 
has averaged about 84 billion cubic feet per week. Today's 
number, which was just announced at 10:30 this morning, is that 
in the week ending July 4th we were able to store 111 billion 
cubic feet, which is very encouraging.
    But we cannot take too much comfort in these numbers as we 
are mindful that the highest electricity demand of the summer 
is likely ahead of us and that some of our capability to place 
this much gas in storage may be coming as a consequence of 
demand disruption among industrial gas users, and that is not 
the way we want to address the problem.
    Unfortunately, no single course of action will address this 
challenge either in the long term or the short term and no 
single entity or group--the Congress, the administration, 
industry or consumers--can meet this challenge working alone.
    Back in the spring of 2002 Secretary Abraham requested the 
National Petroleum Council to conduct a comprehensive study of 
natural gas in North America, including supply, demand, and 
infrastructure issues through 2025. The results of this study 
will be delivered in September of this year and we believe it 
will be helpful as we work toward long-term solutions.
    But we also need to act in the short term. On June 26, 
Secretary Abraham and the National Petroleum Council hosted a 
natural gas summit in Washington, D.C., to identify those 
actions that can be taken immediately to address short-term 
supply constraints. The summit brought together a variety of 
representatives from consumer groups, industry, State and local 
governments, along with experts in energy efficiency and 
conservation.
    One of the suggestions coming out of the summit was to 
undertake an immediate public awareness campaign to promote 
energy efficiency and conservation as one of the primary short-
term tools available in meeting the gas supply challenge. 
Yesterday Secretary Abraham launched our ``Energy Smart'' 
public awareness campaign designed to inform consumers of the 
steps they can take now to save money, save energy, and help 
alleviate energy price and supply issues before they become 
more acute.
    This is a multifaceted campaign and has many elements. Our 
new EnergySavers web site is now up and running at 
www.energysavers.gov. We are increasing our efforts with 
retailers and other Energy Star partners to promote energy 
efficient products. We are collaborating with public and 
investor-owned utilities on bill inserts, public service 
announcements, and other methods to reach consumers. We are 
working with States on ways we can speed and improve 
communications with Governors and State energy offices and 
leverage existing State energy emergency plans in light of the 
current situation, and we are doing many other things as well.
    Yesterday, the Secretary and I were in New York in support 
of this campaign. Today, the Secretary is in Philadelphia, 
Columbus, Ohio, and Milwaukee. Next week we expect to be in 
Atlanta. And we will continue this campaign with a series of 
regional summits and events across the Nation in the weeks 
ahead.
    Since the Federal Government is the largest single user of 
energy in the Nation, with 500,000 buildings that consume 
electricity or natural gas or both, we believe we have a 
continuing responsibility to lead by example. On June 12, the 
Office of Management and Budget directed the Federal agencies 
to redouble their efforts to reduce energy consumption in light 
of the current natural gas situation. Additional efforts are 
under way.
    Promoting energy efficiency as a foundation for action in 
the near and long term is important, but it is not enough. 
Congress should complete action on comprehensive energy 
legislation that is mindful of supply as well as demand. 
Congress should pass the President's Clear Skies Act. This 
legislation will provide some badly needed regulatory certainty 
for coal-fired generators while lowering emissions of 
SOX, NOX, and mercury by 70 percent from 
today's levels with greater speed and at a lower cost to 
consumers than existing law.
    We must encourage liquefied natural gas supplies in the 
future. On Tuesday Secretary Abraham announced that he would 
bring together energy ministers and industry officials in an 
LNG summit in the United States later this year.
    We must encourage responsible--environmentally 
responsible--domestic production in Alaska, the Outer 
Continental Shelf, and on our public lands whenever it can be 
balanced with responsible environmental protections.
    We must maintain a diversity of supply by maintaining 
nuclear power and continuing the development of our renewable 
energy resources, including hydropower, wind, solar, and 
biomass. In those regards and many others, we appreciate the 
leadership, support, and encouragement that the members of this 
committee have provided in the past and we look forward to 
working with you as we move ahead to address this challenge.
    With that, I will be happy to answer any questions you may 
have either now or in the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Garman follows:]
      Prepared Statement of David K. Garman, Assistant Secretary, 
      Energy Efficiency and Renewable Energy, Department of Energy
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to appear today to discuss the Department of Energy 
programs for energy efficiency and renewable energy and how our 
technologies will make a difference in conserving electricity and 
natural gas.
    Our current stocks of natural gas in underground storage are 
unusually low due to a combination of cold weather in the Northeast and 
Mid-Atlantic regions this past winter, and declines in both domestic 
production and net imports. As of June 27, gas in storage was 17 
percent below the previous five-year average, although there was a 
record storage build for the month of June. Nevertheless, a hot summer 
could increase natural gas demand, causing price volatility and 
hampering economic growth. Wellhead prices for natural gas in 2003 are 
now projected to average $2 per thousand cubic feet higher than in 
2002, a 68 percent increase.
              promoting energy efficiency and conservation
    A balanced energy policy must address issues of supply and demand. 
More than half the 105 recommendations in the President's National 
Energy Policy (NEP) address efforts to improve our energy efficiency 
and to improve the performance and lower the cost of alternative forms 
of energy.
    The NEP also included a variety of recommendations for increasing 
the availability and affordability of our Nation's natural gas 
supplies. These include:

   enacting comprehensive energy legislation;
   expediting the building of an Alaska natural gas pipeline;
   examining the potential for greater electricity generation 
        from sources other than natural gas;
   streamlining the permitting of energy infrastructure;
   increasing energy conservation and efficiency;
   providing funding for advanced technologies.

    One of the specific recommendations in the NEP is to improve the 
energy efficiency of appliances by supporting the appliance standards 
program, and setting higher standards where technologically feasible 
and economically justified. Moreover, the NEP recommends an expansion 
of the program to new appliances when technologically and economically 
justified.
    In keeping with this recommendation, the Department has identified 
residential furnaces and boilers as one of its ``high'' priority energy 
efficiency standards and is currently drafting the rulemaking. Such a 
rulemaking has the potential to save both electricity and natural gas. 
In addition, the Department has identified as ``high priority 
rulemakings'' the efficiency standards for distribution transformers, 
and commercial air conditioners and heat pumps and is currently 
drafting these rulemakings. Furthermore, the Department plans to add to 
the program new covered products such as torchieres, ceiling fans and 
commercial refrigeration equipment.
    As important as they are for driving market transformation to more 
efficient appliances over the long term, new appliance standards cannot 
be brought to bear in time to address our near term challenge.
                           near-term actions
Completing the National Petroleum Council (NPC) Natural Gas Study
    In the spring of 2002, Secretary of Energy Spencer Abraham 
requested that the NPC conduct a comprehensive study of natural gas in 
North America, including supply, demand, and infrastructure issues 
through 2025. The results of this study will be delivered in September 
of this year.
    The study will examine new supplies, new technologies, and new 
perceptions of risk that may affect supplies and consumption in the mid 
and long-term. It will provide insights on market dynamics, including 
price volatility and future fuel choice, and sustainability of natural 
gas supplies. The study will provide the most comprehensive analysis 
available of the issues affecting natural gas supply, demand, and 
transmission and distribution through 2025. Then NPC has collaborated 
with the Canadian and Mexican governments to ensure that the whole 
North American natural gas picture is considered.
Natural Gas Summit
    Secretary Abraham also called on the NPC to host a Natural Gas 
Summit on June 26, 2003, in Washington, D.C. to discuss problems and 
solutions, and identify those actions that can be taken immediately to 
ease short-term supply constraints. The Natural Gas Summit brought 
together representatives from consumer groups, industry, environmental 
groups and federal, state and local governments, along with experts in 
energy efficiency and conservation, all of whom offered their ideas on 
these issues. At the Summit, Secretary Abraham announced a Natural Gas 
Data Initiative and a series of regional conferences.
    There was a consensus among the participants that promoting public 
awareness of the natural gas supply situation and promoting energy 
efficiency and conservation are the primary short-term tools available 
to us.
Secretary Abraham Unveils ``Energy Smart'' Public Awareness Campaign
    Yesterday, Secretary Abraham launched our ``Energy Smart'' public 
awareness campaign designed to inform consumers of the steps they can 
take today to save money, save energy, and help alleviate energy price 
and supply issues before they become more acute. Our new ``Energy 
Savers'' website is up and running at www.energysavers.gov; we are 
collaborating with public and investor-owned utilities on bill inserts, 
public service announcements and other methods to reach consumers; and 
the Secretary is on the road today in Philadelphia and Columbus in 
support of this public awareness campaign. We expect to continue this 
campaign with a series of regional summits and events across the nation 
in the weeks ahead.
Working With States
    We also recognize the importance of working with States to promote 
energy efficiency and renewable energy technologies in the short term. 
The Department's State Energy Program (SEP) provides funding to states 
to design and carry out their own energy efficiency and renewable 
energy programs, and we are exploring new ways we can speed and improve 
communications with Governors and State Energy Offices, and leverage 
existing State energy emergency plans in light of the current 
situation.
Leading by Example
    The Federal Government, the largest single user of energy in the 
nation, has 500,000 buildings that consume electricity, natural gas, or 
both. Thus, we have an obligation to lead by example.
    As a consequence of the energy savings targets in both statute and 
executive order, the Federal Government is on target to reduce its 
energy use 30 percent by 2005 compared with a 1985 baseline. We have 
already achieved a 23 percent improvement overall, and many agencies 
such as the Department of Energy has done even better. On June 12, 
2003, OMB directed the federal agencies to redouble efforts to reduce 
energy consumption in light of the current natural gas situation. 
Additional efforts are under consideration.
Leveraging the Power of Consumer Action and Choice
    Collectively, the nation has a tremendous capacity to use energy 
more efficiently, although it is a challenge to get consumers to act 
prior to feeling the full brunt of a price spike. There are things that 
we can all do in our homes to help conserve natural gas and save on our 
utility bills:

   Check the insulation in your attic and basement. We've found 
        that only 20 percent of the homes built before 1980 had 
        adequate insulation.
   Consider investing in a programmable thermostat. You can 
        save as much as 10 percent a year on your heating and cooling 
        bills by simply turning your thermostat back 10 to 15 percent 
        for 8 hours.
   Replace your home lighting using compact florescent lamps 
        (CFLs). The lamps are much more efficient than regular light 
        bulbs and last 6 to 10 times longer. If every household in the 
        United States replaced one incandescent light bulb with an 
        ENERGY STAR qualifying compact fluorescent light bulb, the 
        energy saved would be enough to avoid the need for more than 16 
        new power plants.
   If you're ready to replace an appliance, look for one that 
        has the ENERGY STAR label. This identifies the appliance as 
        among the most energy-efficient on the market.
   Maintain your existing appliances properly, including 
        changing the filter frequently in your heating, ventilation and 
        air conditioning systems.

    Mr. Chairman, while these ideas may seem intuitive, we've found 
that implementing these simple tips does make a difference in consumer 
energy bills, and can make a difference in overall energy demand, 
including natural gas and electricity--some of which is generated using 
natural gas.
    Secretary Abraham recently provided these tips, and other energy 
saving ideas, to all Members of Congress, and we urge you to do 
everything in your power to share these energy saving tips with your 
constituents. You are welcome and encouraged to provide links to the 
``energysavers.gov'' website through your own Senate websites.
               mid- to long-term solutions: eere programs
    Pursuing greater energy efficiency is not simply a short-term 
undertaking. Many of the programs in our office are developing 
technologies to reduce energy usage in the mid- to long-term.
    For example, our Industrial Technologies Program works in 
partnership with energy-intensive U.S. industries to increase their 
energy efficiency both now and in the future. While the Program 
addresses all industrial energy use, natural gas accounts for about 
one-third (7.5 quadrillion Btu annually) of all energy used by American 
industry.
    Over the past decade, DOE and industry have co-funded the 
development of many energy efficient gas-based technologies that are 
already making an impact on natural gas conservation. Here are some 
examples:

   The High-Luminosity Burner replaces air with oxygen to 
        increase the efficiency of gas use and boost production rates 
        in glass-melting furnaces.
   The Forced Internal Recirculation Burner operates at high 
        efficiency throughout its firing range in various boiler 
        systems, while also reducing NOX emissions to less 
        than 10 parts per million.
   Methane de-NOX technology injects small amounts 
        of natural gas into coal- and biomass-fired boilers to increase 
        efficiency and reduce emissions. This allows boiler operators 
        to meet environmental regulations cost-effectively while 
        continuing to burn biomass and coal rather than straight 
        natural gas.

    The Department and its industry partners are continuing to develop 
several other high-efficiency natural gas technologies that can further 
stabilize gas demand. We have recently announced a joint project with 
the glass industry and the gas industry to develop a Next-Generation 
Glass Melter, which could save as much as 25 to 30 Bcf of natural gas 
per year. The following three ongoing natural gas-based technology 
developments could collectively save more than 500 Bcf of gas per year 
when fully deployed (which is equivalent to about 10 days of U.S. gas 
consumption):

   The Super Boiler, designed to produce steam at 10 percent 
        higher efficiency in thousands of industrial and commercial 
        applications.
   Oscillating Combustion technology, to increase energy 
        efficiency in a wide range of industrial gas furnaces while 
        also reducing 50 percent NOX emissions.
   A Self-Optimizing Combustion System for metal melting and 
        processing that precisely delivers heat where needed while also 
        minimizing metal oxidation losses during the energy-intensive 
        production process.

    Overall energy use may account for 10 percent or more of an 
industry's total operating costs. Our plant-wide energy assessments 
activity works with industrial facilities to investigate their energy 
use and highlight opportunities for best energy management practices 
including the adoption of new, efficient technologies. For example, a 
plant assessment at a metal heat-treating facility in Pennsylvania 
reduced natural gas use by over 50 billion Btu annually.
    Industry is very price sensitive and deploys the technologies 
developed under these DOE-Industry R&D partnerships as they become 
available and conditions are favorable. Increasingly, DOE is now 
encouraging industry to undertake such near- to mid-term R&D itself 
while reserving DOE's funds for longer term research partnerships in 
breakthrough technologies. These have the potential to dramatically 
reduce energy use, including direct natural gas consumption and 
electricity generated by natural gas, in the longer term.
    Electric power generation is becoming increasingly dependent on 
natural gas, as gas combustion turbines are comparatively inexpensive 
to install and can begin operating quickly. An electric power sector 
heavily reliant on natural gas for combustion engines could lead to 
higher electricity prices for industry and consumers if natural gas 
prices increase substantially.
    As industry deploys the renewable energy technologies developed in 
partnership with EERE, the demand for electricity generated by fossil 
fuels, including natural gas, will be offset. New renewables, such as 
wind energy, biopower, solar energy, and geothermal energy, are all 
currently making contributions to U.S. electricity supplies and have 
the potential to dramatically increase their role. Wind energy has been 
the fastest growing source of electricity in the United States in 
recent years with 2100 MW added in the past two years, nearly doubling 
the total U.S. installed wind capacity to about 4700 MW.
    Traditionally, natural gas has been the clean fossil fuel used for 
mid-range and peak electric power generation, as well as for space and 
water heating, and process heating at the building or industrial site.
    EERE's Combined Heat and Power (CHP) research and development 
program helps provide highly-efficient on-site power generation and 
thermal energy, such as for steam or hot water, at the same time.

   The CHP systems recycle the waste heat from the electricity 
        generation process that is normally vented to the atmosphere 
        and instead productively use it for drying, heating, cooling 
        (through absorption technology), and humidity control, 
        effectively raising the fuel use efficiency from 25 - 50 
        percent, to 60 - 88 percent.
   CHP systems on customer premises also save the energy that 
        otherwise would be lost in transmission lines.

    In contrast to traditional generators, which produce electricity 
only and do not recapture waste heat, increased deployment of CHP 
systems could reduce natural gas consumption compared to providing 
electricity from a central station natural gas turbine and separate on-
site use of natural gas for thermal energy. We believe that combined 
heat and power systems are one solution that can help mitigate the 
effects of natural gas price and supply problems on the electric 
industry and consumers as the nation's economy grows and the demand for 
electricity, particularly from natural gas, increases.
              federal promotion of combined heat and power
    The Federal government has the potential to be a significant end-
user of CHP systems--more than 1500 megawatts of potential capacity. 
CHP offers flexibility in power systems and can help meet Federal 
energy-efficiency and emissions-reduction goals. It also lays the 
foundation for the integration of sustainable fuels and future 
technologies, such as fuel cells. And, as natural gas prices rise, CHP 
economics improve. The Federal Energy Management Program is working 
with Federal facility managers and industry, trade associations, energy 
service companies, and utilities to address regulatory and policy 
barriers to CHP deployment in Federal facilities.
    One example of CHP systems is right here in our own back yard. Last 
year, the General Services Administration installed a CHP system at its 
Central Heating and Refrigerating Plant in Washington, DC, which serves 
several buildings, including the Department of Agriculture, the 
Department of Energy, and the Smithsonian Institute museums. The system 
provides 10 megawatts of electricity and 17,000 tons of refrigeration.
                               conclusion
    Mr. Chairman, as we move forward to increase energy efficiency and 
the use of renewable energy to conserve our natural gas resources, it 
is important to realize that the Federal government can only do this in 
partnership with other public and private organizations. States and 
regional governing bodies play a critical role in eliminating barriers 
to and developing markets for these advanced energy technologies. 
Industrial and commercial users, equipment manufacturers, energy 
service providers, and National Laboratories need to work together and 
with all levels of government to achieve performance targets, develop 
reliable and high-quality systems, and integrate them into our existing 
energy infrastructure.
    We at the Department look forward to continuing to work with the 
Congress to promote energy efficiency in the short and long term. We 
also look forward to working with the Congress in passing energy 
legislation that includes provisions ensuring our Nation a plentiful 
supply while promoting the efficient use of natural gas.
    This completes my prepared statement. I would be happy to answer 
any questions you may have, either now or in the future.

    The Chairman. Thank you very much. Thank you very much.
    The president and CEO of Tractebel LNG North America. Nice 
to have you with us, Mr. Grant.

       STATEMENT OF RICHARD L. GRANT, PRESIDENT AND CEO, 
                TRACTEBEL LNG NORTH AMERICA LLC

    Mr. Grant. Thank you, Mr. Chairman and members of the 
committee, for inviting me to present testimony regarding LNG's 
role in the energy marketplace. I want to start off by noting 
two features of the current energy market. I think this has 
been referred to by a number of people. First, in the natural 
gas industry, supply growth is tightening; and second, demand 
growth continues essentially unabated.
    As a result, many are concluding that LNG will be one of 
the long-term features of energy markets. Why are people 
looking carefully at LNG? I think the advantages are clear, but 
let me take a moment to note some of the most important ones.
    LNG helps us access ample supplies of natural gas around 
the world. I think that has been referred to many times today. 
Estimates of the total world supply of natural gas hover around 
6 quadrillion cubic feet. Much of this is stranded a long way 
from the U.S. market. Liquefying natural gas and shipping it is 
more economical than transporting it by pipelines for distances 
of more than about 700 miles offshore and 2,200 miles onshore.
    LNG can contribute substantially to a region's energy 
supply. Our Everett, Massachusetts, terminal meets 15 to 20 
percent of New England's natural gas demand, with LNG through 
other facilities throughout the region meeting 35 to 40 percent 
of the region's demand on peak days. In addition, we are 
supplying the fuel for a new 1,550 megawatt powerplant which is 
adjacent to our facility, which can generate enough electricity 
for approximately 1.5 million homes per year. If LNG resources 
were not available in New England, supplies would be far 
tighter and consumers would suffer.
    LNG's technology is improving. The overall cost of LNG 
delivery has been reduced by almost 30 percent over the last 20 
years.
    LNG also keeps downward pressure on prices by helping to 
diversify a region's energy supply, again something that has 
been mentioned a number of times today. By competing openly and 
fairly with gas delivered via pipeline, LNG helps ensure that 
consumers get the best possible deal.
    The industry receives and desires no preferential tax or 
regulatory treatment relative to other competitors in the 
natural gas industry.
    LNG is a very flexible energy source. LNG import facilities 
can be upgraded quickly and substantially to meet increases in 
demand and, more importantly, once in operation can increase or 
decrease their output very rapidly.
    LNG is as safe, if not safer, to transport and store than 
most other fuels. It is not explosive, it does not pollute land 
or water resources, it is not transported or stored under 
pressure. Further, even when LNG revaporizes as natural gas it 
is not as flammable as other common fuels, such as gasoline.
    I would like to make three important points before I 
conclude: First, LNG needs to be thought of as complementary to 
our current resource base rather than a substitute for it. LNG 
should be considered an and, not an or, proposition to our 
other North American natural gas supplies in helping to meet 
our Nation's energy needs. Policymakers cannot and should not 
allow our very sensible and successful approach to LNG to 
obscure the fundamental reality that we as a country need to 
better access and develop our Nation's natural resource base.
    Second, LNG will continue to grow as a resource for the 
United States. In our ongoing effort to diversify our supply of 
energy, LNG's exceptional and exclusive ability to bring to 
market what was once stranded natural gas from various sources 
around the world can only help. In short, increased global 
access to energy reserves helps us reduce our dependence on any 
one source.
    Third, LNG can and must be an important participant in 
long-term markets. Our company both buys and sells much of its 
LNG under long-term contracts. Doing so helps provide 
certainty. An earlier comment about a safety valve and using 
LNG facilities there, the one caveat or the one thing that I 
would add to that is that I think that you do not want 
investments that basically have no returns on them. A stranded 
investment waiting there, which is what happened in the LNG 
business for a number of years, does not create investment 
opportunities or bring investors in.
    But you could have it both, because in effect you could 
have baseload LNG coming in and the ability to ramp up on a 
daily basis, an annual basis, to meet increased energy needs 
can happen very quickly, and in fact that is what is happening 
in the United States today.
    Again, Mr. Chairman, thank you and the members of the 
committee for inviting me to present our thoughts. I look 
forward to answering any questions you might have and working 
with the committee on these very important issues.
    [The prepared statement of Mr. Grant follows:]
      Prepared Statement of Richard L. Grant, President and CEO, 
                    Tractebel LNG North America LLC
    Thank you, Mr. Chairman and members of the Committee for inviting 
me to present testimony regarding possible approaches to help moderate 
natural gas prices and, more specifically, the role of liquefied 
natural gas (LNG) in the larger marketplace.
    Before discussing LNG's place in the market today--and I'd like to 
emphasize that I view LNG as an important energy source in addition to 
other North American natural gas supplies, not a substitute for them--I 
think it might be helpful to put into the record important facts about 
the technology and fuel itself. These include:

   LNG is the same natural gas used by millions of Americans 
        for heating and cooking, only in a different form.
   LNG is natural gas that has been cooled to -260 degrees 
        Fahrenheit, at which point it condenses into a liquid. 
        Liquefaction reduces the volume of the gas by approximately 600 
        times.
   Liquefaction of natural gas provides us with enormous 
        flexibility because it allows us to store and transport the 
        resource--the energy residing in the natural gas--to places 
        that are not or cannot be fully served by natural gas 
        pipelines.
   Liquefaction allows natural gas to be transported and stored 
        efficiently and economically. It can be re-vaporized and sent 
        to customers via pipeline or remain in liquid form for 
        transport by truck to customers with their own storage tanks.
   Currently there are 113 active LNG facilities in the U.S., 
        including marine terminals, storage facilities, and operations 
        involved in niche markets. Worldwide there are 17 LNG export 
        terminals, 40 LNG import terminals and 136 specially-designed 
        LNG ships.
                            the marketplace
    I think it might be helpful to examine some of the history of the 
technology and the fuel, as well as some of the history of the 
marketplace in general.
    During the oil embargoes of the 1970s, entire countries (including 
the United States), as well as regions within the United States 
(including New England), discovered the wisdom of diversifying fuel 
sources. At the same time, gas-rich countries without the need for 
additional energy resources began thinking about ways to leverage 
stranded gas reserves. For example, today LNG development is especially 
important for countries like Trinidad, Angola, and Nigeria. In these 
countries, most of the natural gas that is produced with crude oil is 
flared because there are few alternatives for usage or disposal of the 
excess gas.
    Four marine LNG import terminals were built in the United States 
between 1971 and 1982. They are in Everett, Massachusetts, Cove Point, 
Maryland, Elba Island, Georgia, and Lake Charles, Louisiana. After 
reaching a peak in 1979 (253 Bcf), LNG imports declined over time for a 
variety of reasons. By 1995 imports had dropped to 18 Bcf. However, LNG 
imports are now on an upswing, with about 240 Bcf imported in 2001. 
Import operations are now poised to achieve new peak levels through the 
re-activation and expansion of the existing facilities. Within this 
year, Cove Point will re-open its LNG import operation. In 2001, the 
Elba Island import facility was reactivated. All existing import 
facilities are undertaking expansions. Beyond the activities of 
existing facilities, several new LNG projects are now pending before 
the Federal Energy Regulatory Commission, and there are numerous other 
LNG projects proposed to serve the U.S. market that have been 
announced.
    Currently, in the gas industry more generally, many fields in the 
United States are getting more difficult to develop since most of the 
easy-to-access, highly productive reserves already seem to be accounted 
for. In Canada, key fields are also maturing while the country is 
experiencing its own increase in natural gas demand.
    At the same time, natural gas demand is growing both overall in the 
U.S. and in the Everett Terminal's New England home base. There is a 
significant increase in new natural gas-fired electric power plants, 
which use less fuel than older, more polluting gas and oil power 
plants. In addition, there is steady growth in demand for natural gas 
from residential, industrial, and commercial customers. More 
specifically, according to the Energy Information Administration (EIA), 
natural gas production in the U.S. is predicted to grow from 19.5 Tcf 
in 2001 to about 26.4 Tcf in 2025. At the same time, total natural gas 
consumption is expected to increase to about 35 Tcf in 2025.
    As a result of these factors, many are concluding that LNG 
represents an important part of the long-term natural gas supply 
solution.
    Currently, anticipated expansions on LNG facilities are expected to 
raise the United States' import capacity from 1 Bcf per day to 4 Bcf 
per day by the end of 2004. Applications pending could raise that to 9 
Bcf per day by 2007, and other projects under consideration could more 
than double that by 2009.
    The advantages of LNG are clear, but let me take a moment to note 
the most important ones.

   LNG helps us access the ample supplies of natural gas around 
        the world. Estimates of the total world supply of natural gas 
        hover around 6 quadrillion cubic feet, and more reserves of 
        natural gas continue to be discovered. Much of this natural gas 
        is stranded a long way from market, in countries that do not 
        need large quantities of additional energy. For purposes of 
        perspective, the U.S. natural gas reserves increased by 3.4%, 
        to 183 Tcf, between 2000 and 2001.
   Liquefying natural gas and shipping it is more economical 
        than transporting it in pipelines for distances of more than 
        about 700 miles offshore or more than 2200 miles onshore.
   LNG can contribute substantially a region's energy supply. 
        In the northeastern United States for example, Tractebel 
        provides a substantial portion of the energy used in 
        residential heating and electric generation. For example, our 
        Everett Terminal, which began operation in 1971, is the 
        longest-operating LNG facility in the U.S. It meets 15-20% of 
        New England's natural gas demand, and LNG from our terminal and 
        that from a network of local storage tanks, which for the most 
        part receive their LNG via truck from our facility, is capable 
        of meeting 35-40% of region's demand on peak days.

    During the winter of 2002/2003, the terminal achieved its top 10 
days of gas deliveries in company history. In addition to heating and 
other uses, Tractebel is very important to New England's electricity 
supply. The Everett terminal will supply the fuel for a new 1,550 MW 
power plant, also in Everett, which can generate enough electricity for 
approximately 1.5 million homes each year in Greater Boston. In short, 
if LNG resources were not available in New England, energy supplies 
would be far tighter and consumers would suffer.

   LNG's technology is improving. Processing and shipping costs 
        have decreased and the technology has improved. The result of 
        all these improvements is that the overall cost of LNG delivery 
        has been reduced by almost 30% over the last 20 years.

   LNG keeps downward pressure on prices by helping to 
        diversify a region's energy supply. By competing openly and 
        fairly with gas delivered via pipeline, LNG helps ensure that 
        consumers get the best deal possible. The industry receives--
        and desires--no preferential tax or regulatory treatment 
        relative to other competitors in the natural gas industry.
   LNG is a very flexible energy source. LNG import facilities 
        can be upgraded quickly and substantially to meet increases in 
        demand, and more importantly, once in operation can increase or 
        decrease their output very rapidly.

    In our specific instance, the Everett LNG Terminal is a major 
supplier that helps to keep supply relatively stable, particularly on 
peak days. For example, the Maritimes and Northeast Pipeline from 
eastern Canada (which is the main Canadian supplier to New England) 
experienced a delivery problem in January 2000. The company also 
experienced a production problem in January 2003, which further 
tightened supplies. Absence of LNG during these periods would have 
resulted in gas utilities' not being able to serve residential 
customers.
                               next steps
    Having talked a bit about the technology of LNG, and the larger 
marketplace in which we find ourselves, I think it might be helpful for 
me to give you an idea of what we think about the future of the energy 
industry in general, and the LNG industry specifically. Those thoughts 
fall into a few broad categories.
    First, LNG needs to be thought of as complementary to our current 
resource base, rather than a substitute for it. This is a very 
important point. Policymakers cannot and should not allow our very 
sensible and successful approach to LNG to obscure the fundamental 
reality that we need to better access and develop our Nation's natural 
resource base.
    We agree with the American Chemistry Council, which wrote the 
following to Chairman Domenici in January 2003: ``The U.S. must 
increase its domestic production of natural gas. Recent legislative, 
regulatory and market trends have placed greater demands on our gas 
supply without taking commensurate steps to increase production. 
Congress needs to ensure adequate supplies, produced in an 
environmentally protective manner. . . . Access to new reserves is 
necessary not only to meet new demands, but simply to sustain current 
production levels.''
    Second, precisely because it provides unique flexibility, LNG will 
continue to grow as a resource for the United States. In our ongoing 
effort to diversify our supply of energy, LNG's exceptional and 
exclusive ability to transport what was once stranded natural gas from 
various sources can only help. In short, increased access to global 
reserves of energy helps us reduce our dependence on any one source.
    Additionally, as response to demand becomes more important, our 
ability to move natural gas to where it is needed, freed in part from 
the constraints of pipelines, will ensure that LNG is an increasingly 
important element in our Nation's energy supply portfolio. Simply put, 
LNG offers greater trade flexibility than pipeline transport, allowing 
cargoes of natural gas to be delivered where the need is greatest and 
the commercial terms are most competitive.
    This trend can already be seen. As the Energy Information 
Administration has noted, LNG imports have increased by more than 13 
times--from 18 Bcf in 1995 to nearly 240 Bcf in 2001. Factors ranging 
from additional sources of supply to lowered costs for liquefaction and 
shipping have contributed to the increase. Recent proposals for new LNG 
facilities include at least five terminals to serve the California 
markets, three terminals to be built in the Bahamas (to serve the 
Florida market via undersea pipelines) and a floating semi-mobile 
offshore facility.
    Third, LNG can and must be an important participant in long-term 
markets. Currently, there seems to be a misapprehension that LNG is 
solely a spot-market phenomenon. The reality is that it is an important 
component in the long-term energy markets. Our company both buys and 
sells much of its LNG under long-term contracts; doing so helps provide 
certainty, both for us and our customers.
                                 safety
    Finally, let me address--and hopefully put to rest--the very 
important issues of safety and security.
    First off, I want to note that LNG is as safe, if not safer, to 
transport and store than most other fuels. It is not explosive, 
corrosive, carcinogenic, or toxic. It does not pollute land or water 
resources. It is not transported or stored under pressure.
    Like other fuels, LNG has risks associated with its improper 
handling; however, LNG has certain characteristics which minimize some 
of the dangers that may result from mishandling. For example, compared 
to other fuels, LNG is less likely to ignite in a well ventilated area.
    With respect to the transportation, LNG ships, with their double-
hull construction, are among the best-built, most sophisticated, most 
robust in the world. According to shipping expert Lloyd's Register, 
there has never been a recorded incident of collision, grounding, fire, 
explosion, or hull failure that has caused a breach to a cargo tank of 
an LNG ship. In fact, over the last 40 years there have been 33,000 LNG 
carrier voyages, covering more than 60 million miles without major 
accidents or safety problems either in port or on the high seas.
    It is also important to note that in the extremely unlikely event 
that an LNG vessel were involved in an incident that ruptured a cargo 
tank, and the LNG vapor released met with an ignition source, the 
likely consequence would be a localized fire, and not an explosion as 
is often feared.
    With respect to the storage of LNG, there has never been a report 
of any off-site injury to persons or damage to property resulting from 
an incident at any of the LNG import terminals currently in operation 
worldwide, including our Distrigas terminal in Everett, Massachusetts. 
This is due to excellent equipment and facility design, excellent 
safety procedures employed in the industry, stringent design and safety 
codes governing design, construction, and operation of storage 
facilities, and a well-trained, highly experienced workforce.
    Our company has always had a deep commitment to safety and 
security, but after September 11th, we developed an even greater 
commitment, increasing our already substantial investments in 
personnel, equipment, and varied services. These investments include:

   Private security personnel
   Enhancements to the perimeter of the Everett Terminal
   Municipal police and fire details
   State Police details
   Investment in two high-powered tugboats. These tugs include 
        state-of-the-art fire control equipment to offer unprecedented 
        marine towing and firefighting capabilities to the Port of 
        Boston.
   Development of detailed security plans with deployment based 
        on Homeland Security and USCG threat levels

    In short, Tractebel is a pacesetter in public-private partnerships. 
The LNG carrier Berge Boston, which is under a long-term charter to us, 
is the first vessel in the world to meet the new International Code for 
the Security of Ships and of Port Facilities certification. Other ships 
in the company's portfolio will soon follow that lead. In addition, our 
work with the U.S. Coast Guard to bring LNG ships into the Port of 
Boston became the model for the Coast Guard's Operation Safe Commerce 
Project, a nationwide effort initiated after September 11th to enhance 
transportation safety and security while facilitating commerce.
    Thank you again, Mr. Chairman and Members of the Committee for 
inviting me to present our thoughts on possible approaches to help 
moderate natural gas prices and, more specifically, the role of 
liquefied natural gas in the larger marketplace. I look forward to 
answering any questions you might have and working with the Committee 
on these very important issues.

    The Chairman. We are going to have to run. You see, the 
lights say we are. But we will be back, Mr. Ferguson, Mr. 
Thompson.
    Mr. Grant, I think your testimony, for the restraints, 
constraints we put on you of being brief, was excellent. I 
appreciate it very much and enjoyed it.
    Mr. Grant. Thank you.
    The Chairman. We will be back shortly to hear from the 
remaining two witnesses. We are in recess.

    [Recess from 12:08 p.m. to 12:45 p.m.]

    Senator Craig [presiding]. The full committee will be back 
in order and let us turn to Brian Ferguson, chairman and CEO of 
Eastman Chemical, Kingsport, Tennessee.
    Mr. Ferguson, welcome to the committee. Please proceed.

           STATEMENT OF J. BRIAN FERGUSON, CHAIRMAN 
        AND CEO, EASTMAN CHEMICAL COMPANY, KINGSPORT, TN

    Mr. Ferguson. Thank you, Mr. Chairman. I very much 
appreciate this opportunity to appear before you to discuss the 
impact of soaring natural gas prices and possible solutions.
    Today I want to share with you Eastman's enthusiasm for one 
solution in particular, the production of electricity through 
coal gasification. As has been mentioned by others, the prices 
for natural gas in the United States are now the highest in the 
world, largely as a result of what you saw on this chart 
earlier. Chemical companies like Eastman depend on natural gas 
not only as an energy supply, but also as a raw material. This 
is contrary to our European competitors, who derive most of 
their raw materials from globally traded oil feedstocks. As a 
result, the current situation threatens the entire U.S. 
chemical industry as we try to compete with this now-
disadvantaged feedstock.
    Short to medium term, solutions include reducing natural 
gas demand and increasing natural gas production, as was 
discussed in the first panel. Long term, however, Federal 
environmental, energy, and economic policies must achieve 
better alignment. It is economically unsustainable to continue 
policies that drive natural gas demand while simultaneously 
limiting access to natural gas supplies and without providing a 
balancing energy alternative.
    One of the long-term alternatives to help alleviate this 
natural gas crisis is by tapping into America's vast coal 
reserves through the use of competitive coal gasification 
technology to reduce natural gas demand. Eastman is a pioneer 
in the commercial use of coal gasification to produce 
chemicals. In the early 1980's we installed two large Chevron-
Texaco gasifiers at our Kingsport, Tennessee, chemical 
manufacturing complex. The original plant was completed in 1983 
and we have made continuous process improvements since then.
    Now, as we celebrate our 20-year milestone, Eastman is 
widely recognized as the leading coal gasification operator in 
the United States. To leverage our leadership position, Eastman 
has recently formed a subsidiary to help other gasification 
project owners to achieve faster startup, to maximize their 
plant value, and to improve the long-term performance of their 
plants.
    As Eastman has marketed our gasification expertise, we have 
repeatedly encountered three questions about coal gasification-
based electrical powerplants: One, how expensive are they to 
build and operate? Two, are they reliable? Three, what are the 
environmental benefits? These three questions are pertinent to 
this morning--this afternoon's hearing, so I will try to answer 
each in turn.
    Question one: How expensive are coal gasification 
powerplants to build and operate? Mr. Chairman, based on our 
20-plus years of operating experience, we believe that coal 
gasification can be competitive right now and is becoming more 
cost competitive with each passing day. Let me cite some 
specifics.
    According to data compiled by Eastman, Chevron-Texaco, GE, 
and others, the capital costs of coal gasification powerplants 
are currently projected to run between $1,200 and $1,400 per 
kilowatt of capacity and are trending downward. This compares 
favorably with the newest generation of pulverized coal plants, 
which have projected capital costs in the same range, but are 
trending upward as a result of new environmental control 
restrictions.
    Although operation and maintenance costs are somewhat 
higher for coal gasification plants, these costs are offset by 
lower fuel costs from higher efficiency and by lower 
environmental treatment costs and waste disposal costs. In 
addition, the coal gasification process produces saleable 
byproducts by removing over 99 percent of the sulphur.
    As additional commercial coal gasification plants are 
built, the cost competitiveness of this environmentally 
superior technology should become more evident.
    Number two, how reliable are coal gasification powerplants? 
Mr. Chairman, this is a question that Eastman is uniquely 
qualified to answer. Our system, with its dual gasifiers, has 
achieved an average on-stream availability of 98 percent since 
1984 and an estimated single gasifier availability of 90 
percent. Perhaps most remarkable, our forced outage rate is 
only about 1 percent. Further, Eastman has continuously 
improved the performance of our gasification processes. The 
time between gasifier switches, for example, is now about once 
every 2 months, which is a six or sevenfold improvement since 
20 years ago.
    Another useful measure of performance is maintenance costs. 
In the last 6 years alone, our maintenance costs have declined 
by more than 40 percent.
    Now, importantly, question number three, brought up earlier 
by one of the other Senators: What are the environmental 
benefits of coal gasification? Let me answer that directly. The 
principal environmental benefits associated with coal 
gasification as compared with coal combustion processes are: In 
the short term, you remove over 99 percent of the elemental 
sulphur, nearly all of the mercury, and you also have lower 
NOX. In the long term, it can be a more cost 
efficient way of sequestering carbon dioxide because it is 
collected in very concentrated streams.
    There are many more environmental benefits of gasification, 
but the take-away from this is one simple fact: Coal 
gasification is the cleanest of the clean coal technologies.
    Before concluding, let me express Eastman's support for 
both FutureGen and the Clean Coal Power Initiative. Like any 
business, the electric power industry must understand new 
technologies before they implement them. Thus, even though 
Eastman believes that coal gasification is ready for 
commercialization right now, some additional market incentives 
such as the CCPI and the proposed clean coal tax credits are 
useful and necessary inducements to those industries. We thank 
the members of this committee for your leadership on these 
specific issues and on advancing coal gasification in general.
    Mr. Chairman, let me summarize my testimony. First, the 
natural gas crisis you heard about today is real. It is 
severely impacting U.S. industry in general and the chemical 
industry specifically. Secondly, short- to mid-term solutions 
include energy conservation and increasing natural gas and LNG 
supplies, as you heard. Third, long-term solutions must include 
more reliance on clean coal, our most abundant fossil fuel, and 
that will in turn reduce our natural gas demand. Eastman 
believes that this is economically competitive with other clean 
coal processes now.
    Finally, as Eastman has proven through 20 years of 
experience, coal gasification plants can be operated at maximum 
efficiency with a high degree of reliability.
    Mr. Chairman, speaking on behalf of my company, on behalf 
of my industry, and as a citizen, we are all very concerned 
that we are walking down the same road with natural gas that we 
have already walked with oil. The technology I am testifying on 
today is not a theoretical future thing that has not happened. 
For us it is just another day at the office, and it is an 
economic, reliable, environmentally friendly, practical 
technology that really does give us choices right now.
    Thank you very much for this opportunity and I will await 
your questions.
    [The prepared statement of Mr. Ferguson follows:]
      Prepared Statement of J. Brian Ferguson, Chairman and CEO, 
                Eastman Chemical Company, Kingsport, TN
                                summary
    Eastman Chemical Company is a globally competitive chemical company 
that manufactures intermediate chemicals from natural gas, coal, 
petroleum-based, and wood-based feedstocks. Like the chemical industry 
in general, Eastman also uses natural gas and coal for making steam 
heat and electricity used in its manufacturing processes. Unlike others 
in the chemical industry, Eastman is a pioneer in using coal 
gasification to produce chemicals. Coal gasification is among the major 
rational responses to present and foreseeable natural gas shortages and 
price increases. Other responses include conservation, increased access 
for exploration and drilling, and imports of LNG.
    The present natural gas shortage and the foreseeable natural gas 
crisis adversely affect American chemical manufacturers including 
Eastman, and the wider U.S. manufacturing sector. Natural gas supply 
shortages and price increases have resulted from conflicting and long-
standing environmental policies that have limited access for 
exploration and production, while simultaneously driving electric power 
generation and other demand for natural gas. Natural gas is a regional 
fuel and chemical feedstock with little global trade.
    Electricity demand is relatively inelastic with regard to price. 
The economically regulated domestic electric utility sector is able to 
pass through natural gas costs to ratepayers with little resistance. 
Electricity demand growth drives relentless increases in natural gas 
consumption and prices, while domestic industrial natural gas consumers 
are rendered uncompetitive in a world market and chemical production is 
shifted to foreign sources with lower feedstock costs. Since industry 
is the marginal consumer, ``demand destruction'' will result, without 
new natural gas supplies or fuel substitutions for electricity. As a 
consequence, job losses and economic downturn could be substantial.
    Immediate action is necessary to mitigate damages of demand 
destruction. These immediate actions include conservation through 
reduction in peak consumption of electricity, utility fuel switching to 
distillates, and reconsideration of environmental requirements to allow 
fuel substitutions. Medium-term actions include increasing access for 
exploration and drilling of natural gas and increasing LNG port 
facilities and capacities.
    Finally, in the absence of substantial nuclear power or renewables 
growth, medium and long-term actions will require reversal of the 
decline in the proportion of coal-based electricity generation, and 
improvement in coal-fleet productivity not seen since before the early 
1960s. Coal is the most abundant and price-stable fossil energy 
resource in the United States. Chemical industry history strongly 
suggests that abundant and low cost feedstocks, market competition, and 
stable geopolitics are major factors in technological innovation and 
economic sustainability. Coal gasification is the coal technology that 
offers the best opportunity to support environmentally responsible and 
competitively sustainable basic manufacturing and electricity 
generation in the United States. Coal gasification is also the coal 
technology bridge to the Hydrogen Economy because it is the only 
technology that can directly convert coal to hydrogen.
    In the absence of market structure that resembles global 
competition and absent environmental policy that rewards the superior 
performance of coal gasification, federal funding of RD&D (research, 
development, and demonstration) and tax credits for commercialization 
of coal gasification technology in the electric utility market will be 
necessary. Federal funding is necessary to overcome long-standing risk 
averse behavior and achieve initial technology transfer with 
foreseeable follow-on technology improvements (e.g., Clean Coal Power 
Initiative, and FutureGen, carbon sequestration and a hydrogen 
economy). Electric utility market restructuring would likely drive 
economic benefits of coal gasification technology faster, deeper, and 
wider. As broad basic industry, gasification facilities can be 
configured for ``polygeneration;'' i.e., operational flexibility to 
make chemicals, liquid fuels, fertilizer, hydrogen, and generate 
electricity (including via fuel cells), as open and competitive market 
conditions dictate.
            eastman and general chemical industry background
    Beginning in the middle of the 19th century in Europe, chemistry 
became the first science-based, high technology industry. The chemicals 
industry has since generated technological innovations for other 
industries, such as automobiles, rubber, textiles, construction, 
publishing, entertainment, and metals. The industry illustrates the 
general tendency for internationally competitive industries to 
spillover, spin-on, and spin-off other industries. Until now, with 
cheap, abundant natural gas, the American chemical industry has been a 
success story and is one of the few major high-technology industries in 
which the United States has maintained its competitive lead in 
international trade. The chemical industry growth rate has exceeded 
that of the overall economy since World War II.
    Eastman is a prime example of the evolution of the U.S. chemical 
industry out of German chemical import shortages that developed during 
World War I. In 1920, George Eastman founded Eastman to provide a 
stable source of chemicals for Eastman Kodak Company's photographic 
business. In addition to the effects of geopolitical conflict, anti-
trust law shaped a focus by George Eastman on R&D as a means to achieve 
continued growth.\1\ These two longstanding Eastman performance 
characteristics of globally competitive and stable supplies and 
continuous internal innovation have shaped Eastman's present leadership 
in coal-gasification technology.
---------------------------------------------------------------------------
    \1\ Paths of Innovation: Technological Change in 20th Century 
America, David C. Mowery and Nathan Rosenberg, Cambridge University 
Press, 1998, pp. 14-15.
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    Eastman became independent from Kodak in 1994. Today Eastman is the 
largest producer of polyethylene terephthalate (``PET'') polymers for 
packaging, based on capacity share, and is a leading supplier of raw 
materials for paints and coatings, inks and graphic arts, adhesives, 
textile sizes and other formulated products, and of cellulose acetate 
fibers and acetyl chemicals. Eastman has 41 manufacturing sites in 17 
countries that supply major chemicals, fibers, and plastics products to 
customers throughout the world. Revenues in 2002 were $5.3 billion.
feedstocks, technology, and geopolitical stability: major factors that 
            shape the globally competitive chemical industry
    For Eastman, as for the U.S. chemical industry in general, natural 
gas is an essential fuel and raw material. Between 1920 and 1930, 
automotive demand, petroleum resources, and a large American market 
stimulated the rise of the domestic petrochemical industry and the 
development of continuous-process technologies. With process technology 
cost improvements, during the interwar years the U.S. chemical industry 
shifted from coal to petroleum and natural gas feedstocks.\2\
---------------------------------------------------------------------------
    \2\ U.S. Industry In 2000, Studies In Comparative Performance, 
David Mowery, Editor; ``The Dynamics of Long-term Growth: Gaining and 
Losing Advantage in the Chemical Industry,'' Ralph Landau, and Ashish 
Arora, National Research Council, National Academy Press, Washington 
D.C., 1999, at 24-26.
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    In contrast, the German chemical industry, throughout the period of 
1890 to 1945, focused on development of synthetic products from coal 
such as synthetic ammonia and gasoline. One of the most important 
developments of the 20th Century was the Haber-Bosch process for 
nitrogen fixation (critical to agriculture and the military) developed 
and commercialized by BASF in 1913. Despite governmental expropriation 
of U.S. patents of BASF technology in 1918 and a wartime program at 
Muscle Shoals, Alabama, American experts could not replicate the Haber-
Bosch process. Only after WWII were the catalytic technology and the 
construction information for high-pressure equipment mastered, along 
with a prolonged learning experience in scaling-up from the laboratory 
to commercial operations.\3\ Natural gas displaced coal as preferred 
feedstock for ammonia manufacture.
---------------------------------------------------------------------------
    \3\ Paths of Innovation, pp. 74-76.
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    World War II also transformed the rubber industry. Synthetic rubber 
was the first synthetic polymer to be produced in major quantities from 
petroleum-based feedstocks. The program for this transformation was 
second only to the Manhattan Project in the mobilization of human 
resources. However, the federal government invested $700 million to 
construct 51 plants to produce the necessary chemical intermediates for 
synthetic rubber manufacture. These plants were sold to private firms 
by the mid-1950s.\4\
---------------------------------------------------------------------------
    \4\ Paths of Innovation, pp. 89-92.
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    World War II effectively reduced technology and patent-based 
barriers to entry resulting in a rapid growth in firms to make 
plastics. Between 1945 and 1971 production of plastic materials grew at 
an average annual rate of more than 13 percent. Polyethylene expansion 
was among the most important results of WWII on U.S. industry. Product 
development in synthetic fibers began before WWII, but like other post-
war synthetics, abundant domestic petroleum and natural gas reserves 
were key.\5\
---------------------------------------------------------------------------
    \5\ Paths of Innovation, pp. 87-88, 92-94.
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    By 1950 half of total U.S. production of organic chemicals was 
based on natural gas and oil. By 1960 the proportion was nearly 90 
percent. After WWII German and British chemical production was rebuilt 
and shifted from coal to petrochemical production. The development of a 
worldwide market in oil reduced the comparative advantage of 
petrochemical production in the United States. By the end of the 1960s, 
Europe and Japan had closed the competitive gap. Since then, relative 
shares of world output from the U.S., Europe, and Japan have largely 
remained constant.
    Thus, European-based chemical manufacturers are based primarily on 
globally traded oil feedstocks, while U.S.-based chemical manufacturers 
are based primarily on a regional feedstock, i.e., natural gas. Federal 
government policy may explain this fundamental and important 
difference. Beginning in the late 1930s, the domestic oil industry was 
regulated to prop up the domestic price of oil. After WWII the 
regulations extended to restrict oil imports. This created prices for 
U.S. refineries that were 60-80 percent higher than landed prices in 
Europe throughout the 1950s and 1960s. This helps to explain the fact 
that post-war U.S. chemical feedstock reliance is predominantly natural 
gas, while European reliance is petroleum.\6\ Now, in the face of 
present and foreseeable natural gas shortages, European producers hold 
a clear competitive advantage.
---------------------------------------------------------------------------
    \6\ U.S. Industry In 2000, Studies In Comparative Performance, 
David Mowery, Editor, ``Chemicals,'' Ashish Arora, and Alfonso 
Cambardella, National Research Council, National Academy Press, pp., 
46-47.
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                 eastman's coal gasification experience
    Many of the chemicals that Eastman produces at our large (8,000-
employee) Kingsport, Tennessee, complex are created through chemical 
reactions involving, at the front-end of the process, simple molecules 
such as hydrogen (H2) and carbon monoxide (CO). To produce 
these molecular building blocks in the large volumes required in 
subsequent steps of the manufacturing process, our facility has always 
required great quantities of hydrocarbon raw materials.
    However, a 1970 Eastman study predicted that coal would become a 
more attractive energy source than petroleum and an important chemical 
feedstock for acetic anhydride (a strategic product for plastics, 
fibers, coatings, photographic films and pharmaceuticals) in the long 
term. The location of abundant coal supplies in proximity to its main 
facility influenced Eastman to act on this prediction. New technology 
developed by Monsanto in 1970 made existing ethylene-based processes 
obsolete for production of acetic anhydride. With the oil embargo of 
1973 and the natural gas crisis of the late 1970s, Eastman acted to 
replace natural gas with locally available coal, as the feedstock for 
stable competitive production of acetic anhydride.\7\
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    \7\ From Coal to Acetic Anhydride, Victor H. Agreda, David M. Pond, 
and Joseph R. Zoeller, Chemtech, March 1992, 174-175.
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    In the early 1980s, Eastman obtained a license from Texaco (now 
ChevronTexaco) and installed two large coal gasification units using 
the Texaco technology. The installation was completed in 1983 and 
continuous improvements have been made. Eastman's coal gasification 
investment was wholly private.
    Twenty years of continuous improvement, driven by global market 
competition, made the Eastman gasification investment perform at levels 
of environmental efficiency and reliability unmatched by coal-fired 
electric utility boilers. Total gasification life-cycle costs are now 
head-to-head with pulverized coal (PC) technology and trending 
downward. PC costs are trending upward.
    Today a key business objective, particularly in light of the 
present natural gas crisis, is for Eastman is to use its two decades of 
coal gasification experience to help other companies design, build, and 
operate similar facilities for the production of electricity, 
chemicals, or other end-products, such as hydrogen.
    Many experts consider Eastman to be the world's leading 
gasification operator for the following reasons:

   First Commercial Facility in the United States. The 
        Kingsport, Tennessee facility was the first commercial coal 
        gasification project built in the United States. It was built 
        wholly with private funds. Our facility just celebrated twenty 
        years of successful operation.
   Operating Performance and Availability. Tennessee Eastman 
        coal gasification has the world's best operating performance. 
        For the last 19 years, Eastman has achieved an average on-
        stream rate of 98 percent (91 percent in the initial startup 
        year). The annual forced outage rate is now less than one 
        percent. This performance rivals the best PC boiler 
        performance.
   Safety. The Kingsport gasification site has achieved an OSHA 
        recordable rate of 1.0 and no lost time accidents in the last 
        11 years.
   Environmental Performance. Eastman's coal gasification 
        facility removes more than 99.9 percent of the sulfur in the 
        synthesis gas (syngas created from coal) and removes nearly all 
        of the volatile mercury present in the syngas stream. Eastman 
        also has a patented sulfur-free gasifier start-up process.
   Operating Costs. Continuous process improvements have 
        resulted in a 40+ percent reduction in annual maintenance costs 
        over the last six years.

    Eastman is confident that gasification technology is a competitive 
alternative and has formed a subsidiary--Eastman Gasification Services 
Company--to help other gasification project owners achieve faster 
start-up, maximize plant value, and improve long-term performance. 
Eastman has a cooperative agreement with ChevronTexaco, which allows 
Eastman to provide operation, maintenance, management, and technical 
services to other ChevronTexaco gasification licensees.
     natural gas: use, price, production, demand, crisis solutions
    Use. Natural gas is used by the chemical industry to generate 
electricity and steam using highly efficient and environmentally sound 
cogeneration or combined heat and power (CHP) technology. Components of 
natural gas, including ethane, propane, butane, pentane and natural 
gasoline are major raw material feedstocks. These components are used 
to make the ``building blocks'' of organic chemistry, the backbone of a 
high technology materials society. The dual role of natural gas makes 
use efficiency a high priority across the chemical industry. Chemical 
companies, including Eastman, set public goals to reduce energy needed 
per pound of product. Market drivers motivate efficiency improvements.
    Price. Prices for natural gas in the United States are now the 
highest in the world. US consumers will now pay $70 billion more for 
gas in 2003 than in 2002. Record withdrawals from inventories resulted 
in record low natural gas storage levels in spring 2003. Only record 
injection rates and mild summer weather will assure adequate supply 
into the winter. The run-up in natural gas prices beginning in early 
2001 was a major contributor to a drop in industrial production after a 
sustained 10-year rise. The same effect can be expected for 2003, and 
in the years ahead.
    Production. In the past, price increases resulted in some increased 
production. The January 2001 price of over $10.00 per Kcf resulted in a 
peak drilling rig count of over 1,000. But they operated in mature 
fields and achieved poor results. With price increases in the summer of 
2002, producers did not dispatch rigs to old fields. United States 
production peaked in 1971; production declines have been experienced 
over the past 15 years even as the number of rigs and wells tripled.
    Demand. Demand for natural gas by industrial, commercial, and 
residential consumers has grown little in the last 30 years. But demand 
growth in the electric power sector has been very high, up 40 percent 
in the past 5 years. Further, demand growth in the electric power 
sector is expected to double by 2025 and account for 33 percent of end 
use.\8\
---------------------------------------------------------------------------
    \8\ EIA Annual Energy Outlook 2003 at 77.
---------------------------------------------------------------------------
    Crisis Solutions. Short-term options to reduce natural gas demand 
and avert a winter crisis include conservation of electricity 
consumption during summer peaks. Another suggestion is to encourage 
power generators to switch to distillate fuels. Medium-term options 
include efforts to increase domestic natural gas production by opening 
productive on- and offshore areas. In the long-term, federal 
environmental, energy and economic policy must achieve better 
alignment. It is economically unsustainable to establish policy that 
drives natural gas demand and simultaneously establish policy to limit 
access to natural gas supplies. Coal-based generation is declining as a 
percentage of all generation. Policy must encourage greater diversity 
of renewable energy, nuclear, LNG, domestic production of natural gas, 
and coal gasification.
              the problem of innovation in electric power
    In the 50 year period between 1907 and 1957, innovation in electric 
power was most impressive, resulting in significant efficiency 
improvements in coal mining, coal transportation, conversion to 
electric energy, delivery of electric energy, and conversion to end 
use. Household consumption aside, whole industries depended upon the 
new infrastructure: including steel and aluminum. No doubt, the 
cumulative effect of the end-to-end electricity system was responsible 
for the highest rate of total factor productivity of the U.S. economy 
in the first half of the 20th Century.
    But ``during the 1960s . . . the long trajectory of productivity 
improvement came to an abrupt end. . . . Although the causes of the end 
of this productivity-growth trajectory are by no means fully 
understood, it is clear that it contained a large technological 
component.''. . . The ``productivity-enhancing possibilities in further 
expansion in the scale of coal-fired generation were exhausted by the 
mid-1960s.'' \9\
---------------------------------------------------------------------------
    \9\ Paths of Innovation, Electric Power, at 116.
---------------------------------------------------------------------------
    Thermal efficiency of power plants failed to improve above levels 
achieved in the early 1960s. Efficiencies had increased on average from 
21.8% in 1948 to 32.2% in 1965; by 1980 it was nearly the same (32.8%). 
Attempts to raise the performance to ``supercritical'' generating units 
(1,200 degrees F, and over 4,000 pounds pressure) and larger scale, 
failed. Beginning in 1970, new environmental requirements began to 
impose an energy penalty on coal-fired units. Relative prices of 
electricity began to rise starting in the late 1960s and continuing 
into the mid-1980s.\10\
---------------------------------------------------------------------------
    \10\ Paths of Innovation, Electric Power, at 120-121.
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    In the mid-80s, the opportunity for driving thermal efficiencies 
presented itself in coal gasification combined cycle technology (CGCC) 
with demonstration of the Cool Water project.\11\ But the technology 
was dropped by the electric power sector soon thereafter as it turned 
to natural gas. Ten years later, two DOE funded CGCC demonstration 
projects (each approximately 260 MW) were built that operate today. 
After four decades of stagnant thermal efficiency, and nearly twenty 
years since Cool Water, the improvement opportunity is still coal 
gasification combined cycle technology. This technology is currently 
approximately 40 percent efficient, with the promise of 50 percent 
efficiency in the near future (i.e., 10 years) and perhaps 60 percent 
efficiency with hydrogen fuel cell technology.
---------------------------------------------------------------------------
    \11\ Cool Water (USA), 100 MW, ChevronTexaco, 1984-1985.
---------------------------------------------------------------------------
    But except for two 50 percent federally-funded coal gasification 
projects in the late 90's, the coal-fired, risk averse, largely 
economically regulated, electric utility sector took no risks to 
exploit the benefits of gasification technology. Regulated market 
structure, combined with environmental policy, precluded coal 
technology risk-taking and narrowed generation capacity growth options 
to natural gas and its consequential natural gas ``demand 
destruction.''
    Against the dead-end of CGCC in the electric power sector, 
Eastman's contemporaneous investment and continuous operation of Texaco 
gasifier technology, and its stunning success, is an irony explained in 
part, by the basic market differences between the chemical and electric 
utility sectors.
       one solution to the natural gas crisis: coal gasification 
                       combined cycle technology
    Coal gasification combined cycle technology now offers a serious 
alternative to PC technology and thereby a chance to reverse the 
decline in the coal based market share of domestic electricity 
generation. There are primarily three reasons for this. First, the 
costs of CGCC are now roughly at parity with PC units and declining, 
while PC costs are rising. Second, CGCC, based on Eastman experience, 
can be every bit as reliable and available as any PC unit. Third, the 
environmental benefits of CGCC technology are far greater than any 
other coal technology. Additionally, the potential for yet greater cost 
reduction, efficiency, and environmental performance gains are 
unrivaled by any other coal technology.
                                 costs
    Capital Expenses. According to data compiled by Eastman, 
ChevronTexaco, GE, and others, the capital costs of coal gasification 
power plants are currently projected to run between $1,200 and $1,400 
per kilowatt of capacity and are trending downward. This compares 
favorably with the newest generation of pulverized coal power plants, 
which have projected capital costs in the same range.
    Pulverized coal capital costs have risen in recent years as the 
result of ever-tightening federal air pollution and other environmental 
regulations. Coal gasification, on the other hand, has fewer potential 
environmental side-effects, and the capital costs of such plants are 
decreasing as accumulated learnings are incorporated into new designs 
and as the electric power industry gains more familiarity with the 
technology. [See Figure 1]
    Operational Costs. Although operation and maintenance costs are 
somewhat higher for coal gasification plants, these costs are offset by 
lower fuel costs (from higher efficiency and reduced total fuel costs) 
and by lower environmental treatment costs and subsequent waste product 
disposal costs. In addition, the coal gasification process produces 
saleable by-products, such as elemental sulfur.
    Total variable costs--O&M, fuel, waste product disposal, and by-
product credits--are currently lower for coal gasification than any 
other fossil fuel-based electric power generation technology, including 
natural gas. Moreover, the costs associated with the removal of 
volatile mercury and with carbon dioxide capture and sequestration (if 
and when such removals are required) are much less for gasification 
than for competing technologies. [See Figure 2]
    Fuel Costs. In general, coal gasification is competitive with 
natural gas when natural gas prices are in the range of $3.50-4.00/
million Btu. Many energy experts now predict that natural gas prices 
will remain above $5.00/million Btu through most of this decade. 
Sustained natural gas prices at that level would continue to harm 
America's chemical industry.
    In summary, when comparing capital costs, operational costs, and 
fuel costs, the generation of electricity from coal gasification can be 
competitive now. As additional commercial-sized coal gasification 
plants are built, the cost-competitiveness of this environmentally 
superior technology should become more evident, especially if the best 
practices Eastman has developed over the years are incorporated into 
future designs and operations.
availability and reliability eastman has successfully operated a major 
 coal gasification system for the last 20 years, longer than any other 
                     company in the united states.
    Operating a coal-to-chemicals facility is considerably more 
complicated than a coal-to-electricity power plant. But the basic coal 
gasification process is the same regardless of whether the ultimate 
end-product is chemicals or electricity. [See Figure 3]
    Availability. Eastman's gasification system has achieved an average 
on-stream availability of 98 percent since 1984. Even during the 
initial startup year, on-stream availability was 91 percent. Perhaps 
most remarkably, the forced outage rate is now only about one percent. 
While this extraordinary performance is due in part to that fact that 
there are two gasifiers, with one unit always serving as a ``hot 
standby,'' even the single unit availability rate is estimated to be 90 
percent. [See Figure 4]
    The extraordinary Eastman availability rates are due in part to the 
global competitive standards of the industry and the time-honored 
standards of the company. The potential costs of an unplanned shutdown 
are incredibly high.
    Performance. Eastman has continuously improved the performance of 
the gasification system during the last two decades. In 1983, for 
example, gasifiers were switched weekly. In 2002, the average time 
between switches was 62 days. Another useful measure of performance is 
maintenance costs. In the last six years alone, annual maintenance 
costs for the gasification system have decreased by over 40 percent. 
[See Figures 5 and 6]
                         environmental benefits
    The principal environmental benefits associated with coal 
gasification are: (1) significantly lower air pollution emissions in 
the short-term; and (2) more cost-efficient carbon dioxide 
(CO2) capture and sequestration in the long-term.
    In the future, America's electricity requirements may be met 
primarily by renewable energy sources such as wind and solar or perhaps 
even by nuclear fusion. It is prudent for America to explore those 
options. However, it is obvious to anyone who has studied our nation's 
energy situation in depth that coal can and must continue to play a 
leading role over the next several decades (at a minimum).
    Unfortunately, there are two major environmental issues the public 
associates with traditional coal combustion processes and even with 
much newer (and cleaner) coal combustion technologies: criteria 
pollutants and mercury; and carbon dioxide. When coal is burned it 
produces certain air pollutants, most notably sulfur dioxide 
(SO2), nitrogen oxides (NOX), particulate matter 
(PM), and mercury (Hg). In coal-fired power plants these pollutants 
must be removed from the exhaust (stack) gases using expensive and 
often relatively inefficient processes.
    The combustion of coal also produces substantial quantities of 
CO2. If and when CO2 capture and sequestration is 
eventually required, it will be difficult and prohibitively expensive 
for coal-fired power plants to meet such requirements.
    By contrast, coal gasification is a chemical process. As such, it 
is possible to remove the sources of SO2 and Hg and the 
CO2 from the synthesis gas before combustion, when it is 
much easier and thus less expensive to remove. Also, because the syngas 
is much cleaner than the raw coal itself, lower quantities of 
NOX and PM are produced during the combustion process. [See 
Figure 7]
    There are many more environmental benefits of gasification such as 
minimal solid waste generation, nominal water consumption, and the 
generally pleasing aesthetics of facilities and operations. Coal 
gasification is by far the cleanest of the clean coal technologies.
                      gasification market barriers
    Until recently, the usual market barriers to CGCC technology or 
polygeneration (facilities that make multiple products from coal 
gasification) have been low cost natural gas, high capital costs, and 
regulatory and management resistance to technology transfer.
    Today natural gas costs appear to have increased and will remain 
high for the rest of the decade. Capital costs for CGCC have declined 
substantially, and unless efficiency requirements are added to protect 
competing technology, capital costs will remain competitive and decline 
with a few generations of construction and operation of base-load 
commercial scale facilities. Greater efficiencies will be realized by 
RD&D and commercialization. But here at least, a domestic, economically 
regulated market does not have the incentives comparable to global 
competition that would take RD&D, and commercialization risks, to adopt 
gasification technology and then achieve higher performance 
efficiencies.
    The superior environmental benefits of coal gasification compared 
to either existing coal plants or to other new clean coal technologies 
have largely been unrewarded by regulators. Coal gasification is by far 
the cleanest of the clean coal technologies, with potential to remove 
almost all volatile mercury and to reduce the criteria pollutants to 
levels that are a fraction of the levels achieved by other coal 
processes. Capture and sequestration of carbon dioxide from coal 
gasification can also be readily done, but at a current cost and 
efficiency penalty.
    However, the penalty is only a fraction of that for other coal 
technologies. Failure to reward the benefits of gasification's enhanced 
environmental performance and capability through either regulation or 
incentives has been, and continues to be, a market barrier to 
commercialization of this superior but emerging technology. So long as 
carbon constraints are uncertain, any coal-based technology, including 
gasification, faces barriers.
    However, the most perplexing barrier may be the fact that this 
technology has been, and continues to be largely foreign to the 
electric utility sector. Familiarity could come through more robust 
competition, as in the global chemical industry. However the prospects 
for more competitive electricity generation markets do not appear 
great. The traditional and ritualized nature of utility ratemaking 
simply appears unable to simulate the effects of global markets, 
particularly the risks and rewards of innovation.
    Regulatory commissions long ago opted to accept low capital cost 
natural gas based generation and their potential for high variable fuel 
costs. CGCC has high capital costs, but low variable costs, and 
environmental benefits that go beyond compliance. Reliability, surely a 
function of human resources, has been affirmatively proven outside the 
utility sector, but not persuasively within the sector.
    The opportunity costs of the regulatory barriers are many. Coal 
reserves are exhausted sooner for lack of application of the more 
efficient technology. Environmental loadings are unnecessarily high. 
Natural gas remains the fuel of choice to meet new electricity demand 
growth. Natural gas demand destruction in the domestic industrial 
sector continues unabated. The innovation of a creative, globally 
competitive and critical infrastructure sector of the U.S. economy is 
simply consumed and production is driven overseas. Jobs are lost.
    In the absence of market restructuring, the next best alternative 
is to engage in federal funding of RD&D and commercialization through 
investment and production tax credits. Thus Eastman supports this 
federal role for two reasons. First, industry generally views the role 
of government in the national technology enterprise as reducing risk on 
large-scale research projects, and providing a level playing field for 
U.S. industry. A federal role here will reduce risks, and the playing 
field needs to be made more level between the utility and industry 
sectors to maintain global competitiveness, particularly in the U.S. 
chemical sector. Second, when it comes to clean, sustainable energy 
domestically and world-wide, there are very few actionable ideas, i.e., 
there is little long-term vision about what technologies might become 
available to meet significant need.\12\ Coal gasification technology 
offers a long-term vision that meets multiple objectives: economic, 
energy, environment, materials, and manufacturing competitiveness.
---------------------------------------------------------------------------
    \12\ New Forces At Work: Industry Views Critical Technologies, 
Steven Popper, Caroline Wagner, Eric Larson, RAND, Critical 
Technologies Institute, funded by Office of Science and Technology 
Policy, 1998, at 61-62, 92.
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             futuregen and the clean coal power initiative
    Eastman supports FutureGen and the Clean Coal Power Initiative 
(CCPI), two research, development, and demonstration programs initiated 
by the Bush administration.
    FutureGen. Eastman supports this program. Current market 
circumstances strongly suggest that government must lead the way in 
demonstrating both the feasibility of large-scale hydrogen production 
from coal and the sequestration of carbon dioxide from coal-based power 
plants. If properly conceived and executed, FutureGen could help 
achieve these two purposes while accelerating the commercialization of 
coal gasification. However, Eastman is concerned that budget 
constraints in future years will make the 80 percent federal funding 
commitment to FutureGen difficult to sustain.
    If forced to choose between funding for FutureGen and the Clean 
Coal Power Initiative, Eastman would choose the latter. The CCPI 
program--with its biennial competitive solicitations provides a long-
term source of support for a diverse array of technologically promising 
but commercially risky coal gasification process improvements. While 
the goals of FutureGen are laudable, the CCPI is more important for 
incremental improvements in coal gasification.
    Also, if the FutureGen project does go forward, Eastman agrees with 
our colleagues on the Gasification Technologies Council (GTC) that this 
project ought to be designed and executed in close collaboration with 
the gasification industry.
    Attached to this statement, for inclusion in the record, is a copy 
of the comments submitted by the GTC to the Department of Energy on the 
FutureGen proposal. The position of the gasification industry on the 
FutureGen project is set out in detail in this document.
    Clean Coal Power Initiative. Eastman supports the Senate version of 
the CCPI program. H.R.6 includes a requirement that at least 60 percent 
of the CCPI funds ``shall be used only for projects on coal-based 
gasification technologies, including gasification combined cycle, 
gasification fuel cells, gasification co-production, and hybrid 
gasification/combustion.'' Eastman supports an 80 percent level as 
presently pending before the Senate. (This position was recently 
supported by a report from the National Research Council.)
    The electric power industry is highly regulated and hence 
conservative when it comes to embracing new technologies. Thus, even 
though Eastman believes that coal gasification is ready for further 
commercialization right now, some additional market incentives such as 
the CCPI and the proposed clean coal tax credits are useful and 
necessary inducements.
                          concluding thoughts
    The gasification services team at Eastman Chemical Company has 
spent a lot of time contemplating the barriers-both real and 
perceived--to widespread acceptance of coal gasification by the 
electric power industry. Many of the perceived barriers have been 
addressed above. To summarize Eastman's position--

   The natural gas crisis is real and the near, mid- and long-
        term solutions include:

          --new supplies (increased access and production, LNG 
        imports);
          --conservation, efficiency, fuel switching to distillates;
          --meeting new and existing electricity demand by substituting 
        natural gas based generation with coal-based generation, 
        particularly coal gasification; and
          --leveling the competitive playing field between the chemical 
        and electric utility sectors;

   Gasification is economically competitive with other clean 
        coal processes and offers cross-sector benefits: electricity, 
        chemicals, general manufacturing, and agriculture. Barriers 
        exist that can be removed to fully realize these benefits.
   Gasification is the environmentally superior coal-based 
        technology and holds great promise for transition to a Hydrogen 
        Economy.
   And, as Eastman has proven through 20 years of experience, 
        coal gasification plants can be operated at maximum efficiency 
        with a high-degree of reliability.

    [The following attachments have been retained in committee files.]

    Fig. 1. Gasification Capital Cost Trends
    Fig. 2. Cost of Electricity Comparison
    Fig. 3. The Flexibility of Coal Gasification
    Fig. 4. Forced Outage Rate of Eastman's Gasification Plant
    Fig. 5. Days Between Gasifier Switches for Eastman's Gasification 
Plant
    Fig. 6. Maintenance Costs for Eastman's Gasification Plant
    Fig. 7. Syngas Contaminants Removed Prior to Combustion
    Letter from the Gasification Technologies Council regarding the 
FutureGen project

    The Chairman [presiding]. Thank you very much.
    Could you tell me, how big is Eastman Chemical sizewise?
    Mr. Ferguson. We have worldwide revenues of approximately 
$6 billion. We employ 16,000 people and we are in nearly every 
country of any size in the world.
    The Chairman. Your principal business today is?
    Mr. Ferguson. Petrochemicals and fibers and plastics.
    The Chairman. Thank you very much.
    Bruce Thompson, would you please testify now.

       STATEMENT OF BRUCE THOMPSON, EXECUTIVE DIRECTOR, 
            PUBLIC AND INDUSTRY AFFAIRS, FOREST OIL

    Mr. Thompson. Yes, Mr. Chairman. Thank you. It is a 
pleasure to be here today. I appreciate this opportunity----
    The Chairman. I am sorry for the delay.
    Mr. Thompson. Oh, no problem at all. I understand.
    There are three points that I would like to make at today's 
hearing. The first is that the current natural gas situation 
was foreseeable and was in fact forewarned. Second, that there 
are no short-term solutions; however, we must learn from the 
situation we find ourselves in and use it as a basis to make 
better policy choices going forward. And third, there will be 
some who advocate failed policies of the past, such as fuel use 
allocation or restrictions on gas use or controlling prices, 
and we think we are strongly in favor of avoiding these 
choices.
    Taking my last point first, some have proposed that new 
natural gas electricity generation capacity be prohibited or 
restricted. This would be a serious mistake. Natural gas 
generation capacity is a source of clean power, it is very 
efficient, and these new and efficient facilities are much 
better than what is currently on stream and we should encourage 
this type of capacity rather than discourage it.
    It is essential to recognize that the current gas situation 
is the consequence of past decisions. We have had a number of 
reports over the years, both private and government-funded, 
that told us we had an adequate resource base, but that we were 
going to have to develop policies to access the resource base 
appropriately. We ignored these clear signals for appropriate 
policy development.
    In terms of solutions, the current challenge we have is to 
simultaneously address short-term needs and to alter policies 
to produce better results in the future. There are four options 
that we see as important:
    First, of course, as we have discussed, is demand 
limitation or conservation. That is an important piece. The use 
of LNG is also important; development of Arctic natural gas 
sources; and the improvements in the lower 48 and offshore. In 
the short term, demand alterations are really the only 
realistic option to do anything today. The IPAA and the 
Domestic Petroleum Council both believe that the attention 
should be directed toward conservation measures that can be 
implemented in the short term.
    However, we must be careful not to generate--let this slip 
into demand destruction rather than demand reduction. We do not 
want a negative impact on the economy.
    LNG is a critical component, as we have heard today, and I 
would support Chairman Greenspan's remarks along those lines, 
as my other colleagues here at the table. Additionally there is 
Arctic gas, Canadian gas, and Alaskan gas that will be 
available, but it is a long ways out. It is 4 years to 10 years 
depending on the estimate you look at.
    The responsible solution for the expansion of supply is to 
develop our lower 48 resources and we need an improved approach 
to do that. Much of these resources are on Federal lands. A 
perfect example in the way we have done this responsibly over 
the years is, as the chairman has noted and the other Senators 
have, the western and central Gulf of Mexico have been a source 
of natural gas supply for over 25 years and it has done very, 
very well.
    A number of other offshore areas are under moratoria today. 
These policies are predicated on events that occurred long ago 
and on technology that has long since been outdated. We need to 
reexamine these policies in light of current technology.
    In addition, we must not overlook the importance of public 
education, as we have talked about here today.
    A lot of today's lower 48 gas resources are concentrated in 
the Intermountain West and these are resources that we need to 
have greater access to and be able to go at these resources in 
a responsible manner, which we have proven we can do over time.
    There is also a strategy that some of the opponents of 
development have evolved over the years and that is one of 
litigation to starve our development efforts. A classic example 
of this is what has happened in the Powder River Basin, and 
that is really highlighted more in my written testimony and I 
will not spend time on that here. But that is one that has been 
a long delay for the industry and has caused a shortage of 
capital coming in.
    Like any industry, ours requires capital. The historical 
extreme price volatility generates uncertainty and it 
discourages inflows of necessary capital which are required to 
sustain supply at affordable prices. The current policies that 
we have have pushed us to this point.
    Going forward, the ideal policy would be one which 
encourages and permits reasonable and responsible access to the 
resource base, resulting in a smoother price cycle, fewer and 
less extreme price spikes and plunges, less uncertainty, and a 
sustainable, affordable, secure supply of natural gas.
    I thank the committee for this opportunity and I appreciate 
this chance to testify and I look forward to your questions.
    [The prepared statement of Mr. Thompson follows:]
       Prepared Statement of Bruce Thompson, Executive Director, 
          Public and Industry Affairs, Forest Oil Corporation
    Mister Chairman, members of the committee, I am Bruce Thompson, 
Executive Director Public and Industry Affairs, Forest Oil Corporation. 
This testimony is submitted on behalf of the Independent Petroleum 
Association of America (IPAA), the National Stripper Well Association 
(NSWA), the Petroleum Equipment Suppliers Association (PESA), the 
Association of Energy Service Companies, and 34 cooperating state and 
regional oil and gas associations. These organizations represent 
petroleum and natural gas producers, the segment of the industry that 
is affected the most when national energy policy does not recognize the 
importance of our own domestic resources.
    The purpose of the hearing is to discuss the reasons behind the 
high price of natural gas, its effect on the economy and to consider 
potential solutions. While this testimony will address these issues in 
more detail, there are three key points that it will emphasize.
    First, the natural gas price situation that is now being addressed 
was foreseeable and, in fact, was forewarned.
    Second, there are no simple, short-term solutions. However, what 
has happened can be the basis for making better policy choices in the 
future and those choices need to be made.
    Third, there will be some who will advocate the failed policies of 
the past policies like limiting the use of natural gas or controlling 
its price. These choices must be avoided. Their past failures alone 
demonstrate that they will not result in the development of the natural 
gas supply that is needed to meet demand.
                          avoiding bad choices
    Taking this last point first, the use of natural gas to generate 
electricity is drawing a significant amount of current attention. Some 
question whether natural gas should be the fuel of choice in most of 
the new electrical generation capacity. Some have proposed that new 
natural gas electricity generation capacity be prohibited. Few seem to 
recognize that the driving force behind these investments are the 
national environmental policies that value the clean burning benefits 
of natural gas. Fewer still suggest what alternative energy sources 
would provide the new electricity that is needed while maintaining 
these environmental standards. And unfortunately, only a tiny number 
recognize that the new gas fired electricity generating facilities are 
40 to 50 percent more efficient than existing gas fired capacity which 
allows the same amount of electricity to be generated with roughly half 
the volume of natural gas.
    Policymakers need to clearly understand the nature of the natural 
gas industry before rushing to judgments on limiting its use. Far 
better solutions are available through encouragement of conservation 
and sound expansion of supply.
      the supply challenge--it was foreseeable; it was forewarned
    Initially, it is important to put the current supply and demand 
situation in some perspective. The United States will remain 
principally dependent on oil and natural gas for the foreseeable future 
to meet its energy demands. Recent projections by the Energy 
Information Administration (EIA) show the oil and natural gas will 
provide for about 65 percent of domestic energy over the next several 
decades.
    Second, it is essential to recognize that current natural gas 
prices and supply constraints are the consequences of past decisions. 
More importantly, they are the result of failures to respond to clear 
forewarnings that action needed to be taken.
    Back in 1999, when the National Petroleum Council (NPC) transmitted 
its Natural Gas study, it concluded:

          The estimated natural gas resource base is adequate to meet 
        this increasing demand for many decades . . . However, 
        realizing the full potential for natural gas use in the United 
        States will require focus and action on certain critical 
        factors.

    It was a clear signal that action needed to be taken. Moreover, it 
was a call that was echoed by those in the industry that have sought 
greater access to the national resource base. IPAA was one of those 
many voices. Looking back at testimony IPAA has presented both before 
and after the NPC study, there has been a clear and increasingly urgent 
call for changes to national policies.
    For example, in January 1999, Steve Layton testifying before this 
Committee about the damage being done to the domestic oil and natural 
gas industry from the low oil prices of 1998-99 described the 
consequences to domestic natural gas production as follows:

          Without this infrastructure it is not only the nation's oil 
        industry at risk but its future natural gas use as well. This 
        country has a vision of building a future on expanded use of 
        clean burning natural gas. The industry has been challenged to 
        increase natural gas production by about 40 percent--that is a 
        net increase of 40 percent. It will require production not only 
        for that increase but to replace supplies that are depleted 
        during the same timeframe. It cannot happen without a healthy 
        oil industry. Oil and gas are found together. They rely on the 
        same tools, the same science, the same skills, the same 
        financial resources.

    In June 2000, Jerry Jordan testifying before this Committee 
described the increasing importance of natural gas in domestic energy 
supply:

          1. Natural gas is an increasingly important element of 
        domestic energy supply. The National Petroleum Council Natural 
        Gas study concluded that domestic natural gas demand will 
        increase from the current 22 trillion cubic feet per year (Tcf/
        yr) to 29 Tcf/yr by 2010. Most of this increase will be needed 
        to fuel expanding electricity generation. The study concluded 
        that:

                  U.S. gas demand will be filled with U.S. production, 
                along with increasing volumes from Canada and a small, 
                but growing, contribution from liquefied natural gas 
                (LNG) imports. . . . Two regions deepwater Gulf of 
                Mexico and the Rockies will contribute most 
                significantly to the new supply. . . . U.S. production 
                is projected to increase from 19 TCF in 1998 to 25 TCF 
                in 2010, and could approach 27 TCF in 2015. Deeper 
                wells, deeper water, and nonconventional sources will 
                be key to future supply.

          Importantly, this study concludes that these future natural 
        gas needs can be met through domestic resources supplemented by 
        other North American resources, but only if conditions are met.

    He then described the critical need to address access to the 
national resource base:

          For example, we cannot expect to meet our nation's needs for 
        clean burning natural gas without reasonable access to the 
        resource. The NPC Natural Gas study and all other analyses 
        conclude that the Rockies contain significant extractable 
        reserves of natural gas. Yet, in the Rockies access is being 
        limited. It is either the unanticipated outcome of laws, 
        regulations, and plans that unintentionally deny access or the 
        manipulation of these laws to produce that outcome. In either 
        case, access limitations are not the result of a clear policy 
        decision. Consequently, we need a commitment from Congress and 
        the Administration that these types of constraints will be 
        eliminated or restrained and proper funding will be provided on 
        a continued basis to allow environmental documents, leases, and 
        drilling permits to be issued in a timely fashion.

    Earlier this year, Diemer True testifying before the House 
Committee on Resources summarized the dynamics of the past several 
years on natural gas supply in 2003:

          Going back to year-end 2000, we briefly saw the results of 
        natural gas supply shortages. As storage dwindled, prices 
        soared and consumers had to deal with the consequences. The 
        initial phase of that supply-demand imbalance reflected the 
        effects of low gas prices and unusually low oil prices in 1998-
        99 on capital availability to develop domestic natural gas 
        supply. These historically low petroleum prices resulted in 
        capital expenditure budget cuts for domestic producers 
        exceeding 30 percent in 1999. The natural gas drilling rig 
        count dropped by over 40 percent at its lowest point. In 1999, 
        new wells failed to replace existing reserves.
          The petroleum price recovery and the industry's recognition 
        that future natural gas demand would increase led by more and 
        more electricity generated by gas powered turbines triggered a 
        robust rebound in drilling for natural gas. Rig counts went to 
        record levels. But, the lag in new production caused by the low 
        petroleum prices left a tight market by the end of 2000. Higher 
        prices resulted in more drilling rigs searching for natural 
        gas, but production still declined. U.S. natural gas production 
        today is lower than it was five years ago.
          The higher prices also reduced short-term demand. In reality, 
        the abatement of high natural gas prices resulted from 
        significant demand decreases not from supply increases.
          In the latter months of the 2001, prices had fallen to levels 
        comparable to the first part of 1999 and rig counts began to 
        fall as well. By year-end 2001 rig counts had fallen to April 
        2000 levels. While rig counts rose to around 700, they were 
        well below the 1000 rate that was achieved in the fall of 2001. 
        The implication of these lower rig counts was clear--supply 
        levels would not be sustainable.
          Now, in early 2003, the implication has become reality. 
        Natural gas supplies have been stressed by a cold winter and 
        natural gas prices are in the range of $6.00 per thousand cubic 
        feet. Natural gas drilling rig counts are in the range of 750. 
        Estimates suggest that domestic natural gas production fell by 
        around 2.8 percent in 2002. Clearly, the challenge facing 
        natural gas producers is twofold--maintaining existing natural 
        gas supply and increasing that supply to meet future demand. 
        Access to federal resources play a significant role in meeting 
        this challenge as well as barriers to development, which also 
        adversely affects production. This remains complicated and new 
        events suggest a worsening situation.

    Since that testimony, prices have continued at high levels as 
winter demand drew down natural gas storage levels. Storage is now 
being replenished with an expectation that it might reach normal levels 
before next winter depending on summer demand. However, the continuing 
high prices have put pressure on demand, particularly in the process 
gas user component of the industry. Meanwhile, producers are responding 
with increased drilling activity. Drilling rig counts are 25 percent 
higher than they were at the beginning of 2003. Nevertheless, natural 
gas that is found today can take from 3 to 18 months to reach the 
market depending on where it is found and what infrastructure exists to 
get it to the market.
            managing the short-term; learning from the past
    Over the long-term, meeting domestic natural gas demand will 
require a diversity of supply sources. The current challenge is to 
determine what options make the most sense to meet short-term needs and 
how to alter policies to produce better results in the future. Most 
frequently, there are four options that draw the greatest attention:

   Demand reduction;
   Increased use of Liquefied Natural Gas (LNG);
   Development of Arctic natural gas;
   Improvements in the development of lower-48 and offshore 
        natural gas.

    It is appropriate, then, to examine each of these.
    In the short-term, demand alterations will be the only realistic 
option if the market remains as tight as it has been. IPAA believes 
that attention should be directed toward conservation measures that can 
be implemented in the short-term to reduce the pressure that has 
occurred in the market and has probably had its greatest effect on the 
process gas users. This component of the natural gas marketplace is an 
important element of the nation's manufacturing infrastructure. Because 
it largely competes in the international marketplace, it is more 
susceptible to price shifts and has shown in the past that it can exit 
the United States if forced to that choice. In the 2000 2001 period of 
high natural gas prices, shifts in demand--particularly in the 
fertilizer industry were significant factors in the market that 
ultimately led to lower prices. Unfortunately, the dramatic shift that 
occurred also had the effect of reducing investment in new supply.
    While LNG must grow to be a larger component of the natural gas 
supply mix, it is not the panacea that some analysts have seemed to 
consider it. First, it will take several years for the necessary 
investments to be made and for permitting of facilities to take place 
before significant growth in its share of the market will occur. 
Second, these investments will only occur if the natural gas price 
justifies them. A precipitous drop in price like that of 2001 would 
chill interest in LNG. Regardless, a major impact in supply from 
imported LNG is years away. Moreover, the experience of stumbling into 
the current structure of crude oil imports--with all the reliance on 
unstable sources that it entails--should trigger wariness in 
policymakers about how reliance on foreign sources of natural gas 
should be handled.
    Although there has been significant interest in the development of 
Arctic natural gas, both Alaskan and Canadian, and the pipeline options 
to deliver it to the lower-48 states, all the estimates of its 
development predict that additional Canadian natural gas will not be 
available for another 4 to 5 years and Alaskan natural gas will not be 
a factor until the next decade.
    Consequently, expanding domestic supplies inevitably requires 
better development of the resources in the lower-48 states and the 
federal offshore.
    While analyses like the 1999 National Petroleum Council Natural Gas 
study and the newly released EPCA study by the Bureau of Land 
Management have focused on the resources that need to be developed to 
meet future demand--particularly with regard to federal lands--the 
challenge of maintaining existing supply has not received the attention 
it deserves.
    The first and perhaps most compelling challenge to maintaining 
existing supply is coping with increasing rates of depletion. 
Conventional natural gas wells begin to deplete as soon as they begin 
to produce. But over the past decade, producers have seen average 
depletion rates climb from 16 percent per year to 28 percent per year. 
In somewhat simplified terms, this means that producers must initiate 
new production essentially equivalent to the current annual production 
from the Western and Central Gulf of Mexico each year just to stay 
even. New technologies like 3-D seismic enable explorationists to find 
smaller reservoirs. Enhanced production technologies like horizontal 
drilling are allowing better and more environmentally effective 
development of reserves. But finding smaller reserves and producing 
them more effectively makes the challenge of maintaining existing 
natural gas supply more difficult.
    Second, it is important to understand the extent of development of 
the existing resource base. Some opponents of accessing additional 
federal lands suggest that the current resource base should be the 
first focus. In reality, it already is. Developing the current resource 
base for both conventional and unconventional natural gas is the source 
of existing supply. When the rig count grew to 1000, this is where it 
had to grow. But this resource base has supplied natural gas for the 
past 50 plus years. These mature reserves are harder and more costly to 
develop. New reserves in these areas are smaller and deplete faster or 
are deeper and more costly to develop. But, there is no doubt that 
these resources will continue to be developed as quickly as access is 
provided, natural gas prices justify development and capital is 
available to do so.
    Policymakers need to understand these implications clearly. These 
are the conditions that are defining the current supply and demand 
balance. Not only must they be addressed, but the industry must also be 
capable of increasing natural gas supply to meet future increased 
demand.
    Natural gas consumption is expected to grow by almost 50 percent by 
2025. While recent events may have slowed the pace of this growth--an 
issue that is being assessed again by the National Petroleum Council--
future natural gas consumption will likely grow at a pace that will 
require an energy policy that allows the full potential of natural gas 
to be developed. This cannot be done without more access to, and 
development of, government-controlled resources. However, development 
of these resources remains a substantial challenge.
              offshore--western and central gulf of mexico
    These portions of the Gulf of Mexico have proven to be a world-
class area for natural gas as well as petroleum production, accounting 
for over 25 percent of domestic natural gas production. Production 
comes from the continental shelf, the deepwater, and the emerging 
ultra-deepwater. The NPC study projects that future production 
increases in these areas is essential to meet projected demand. 
However, future production increases will hinge on federal offshore 
policies. The most significant of these in the Western and Central Gulf 
of Mexico relate to royalty policies. However, improvements to coastal 
zone management review policies could also help avoid costly delays in 
developing new supplies.
    Legislation reported by this committee includes a number of 
provisions designed to enhance exploration and production in this 
offshore region. These include:

   Provisions for royalty incentives in the Western and Central 
        Gulf of Mexico. It should parallel and extend the relief now 
        being provided administratively in recent lease sales--those 
        occurring after the House passed its bill.
   Provisions to address deep drilling for natural gas on 
        existing leases.
   Provisions to create additional authority to develop RIK 
        programs that will allow for more effective use of the highly 
        desirable approach. RIK eliminates the complexities of 
        determining the royalty value thereby saving both the 
        government and the producer from the convoluted determinations 
        that are now necessary and are frequently questioned--sometimes 
        years after the sales occur. Offshore production is 
        particularly suited for royalty-in-kind (RIK)--paying the 
        royalty with production instead of dollars. It is a more 
        economical and fairer approach. Recent actions to fill the 
        Strategic Petroleum Reserve could utilize 80 percent of this 
        offshore royalty oil. RIK should be encouraged for natural gas.
   Provisions for royalty relief for marginal wells on both 
        federal onshore and offshore properties for both oil and 
        natural gas. This relief encourages the continued production of 
        these wells in times of low oil and/or natural gas prices. 
        Retaining production from these wells is in the national 
        interest and the provision should be included in the final 
        bill.
    offshore--eastern gulf of mexico, atlantic ocean, and california
    Developing the substantial domestic natural gas resources in most 
of these three areas is prohibited by moratoria. President Clinton 
extended these moratoria for another ten years in 1998 saying, ``First, 
it is clear we must save these shores from oil drilling.'' This is a 
flawed argument ignoring the state of current technology; it results in 
these moratoria preventing natural gas development as well as oil. In 
fact, both the Eastern Gulf and the Atlantic resources are viewed as 
gas resource areas, not oil--those coasts are not at environmental 
risk. Too often, these policies are predicated on the events that 
occurred 30 years ago. For example, no Eastern Gulf of Mexico sale 
occurred from 1988 to 2001. The recent sale took place only under 
greatly reduced conditions.
    However, this year another ominous step was taken when the federal 
government decided to purchase leases that have not been developed, 
primarily due to regulatory limitations, in the Eastern Gulf of Mexico. 
This action led to calls for similar purchases off the coast of 
California and on other government controlled land. While the merits of 
each case should be reviewed, following such a course also serves to 
limit the available resource base at a time when it needs to be 
expanded.
    Federal policy needs to be reconsidered. It needs to be based on a 
sound understanding of today's technology. When the NPC analyzed 
natural gas resources that were being inhibited by regulation of these 
areas, it concluded that over 70 trillion cubic feet of natural gas in 
these areas are precluded from development. Unfortunately, as soon as 
any discussion of offshore development begins, a barrage of reaction 
occurs claiming that any such discussion threatens the resort based 
economies of those coastal states--a consequence that has failed to 
occur in those states where offshore development exists and resort 
economies also thrive. IPAA commends the Senate for rejecting a recent 
amendment that would have eliminated a provision in the current Senate 
bill that authorizes an inventory of offshore energy resources.
     onshore restrictions--a mosaic of regulations and prohibitions
    Much of the onshore natural gas resource base is located in the 
Intermountain West. Yet, much of this resource base is constrained. 
And, it is clear that this area is a critical battleground between 
those who seek to develop domestic natural gas and those who seek to 
prevent development. Not only must energy producers navigate through a 
mosaic of regulatory constraints, producers must now deal with a series 
of strategic efforts to delay and prevent the necessary use of these 
national resources.
    The regulatory framework to obtain permits to develop energy 
resources on federal lands is layered with complex and sometimes 
conflicting requirements. Federal Land Managers must operate through 
Resource Management Plans (RMPs) that require extensive Environmental 
Impact Statements (EISs). These address a wide variety of impacts 
regarding the use of the land. Formulating these RMPs and EISs requires 
consultation and, in some cases, concurrence with other federal 
agencies and the states. These agencies, such as the U.S. Fish and 
Wildlife Service, are tasked with implementing laws, like the 
Endangered Species Act (ESA), that do not consider the balance needed 
between their wildlife management objectives and national energy needs. 
Yet, the Federal Land Manager is developing a plan in most cases for 
multiple use federal lands.
    This process creates delay, confusion, and conflict. It produces a 
series of access and development limitations. Collectively, the effects 
are significant. The NPC's Natural Gas study estimated that access to 
137 trillion cubic feet of natural gas in the Intermountain West was 
limited by regulation. Taking a different approach, the Bureau of Land 
Management (BLM) released its EPCA access report and reached a 
conclusion that roughly 40 percent of the natural gas resources in the 
federal lands it studied was restricted. Moreover, these studies were 
largely focused on constraints that exist at the leasing phase of the 
process. Even in those areas where the EPCA study suggests that there 
are no stipulations, that assessment applies only at the leasing level. 
When Applications for Permits to Drill (APDs) are sought, stipulations 
can still be required. Such stipulations can be extensive. For example, 
at one southwestern Wyoming site that was analyzed, stipulations 
effectively limit operations to only about six weeks per year.
    There are no simple answers to this issue or a single solution that 
will address the problems. What is required is a commitment to develop 
these access policies with a full recognition of the importance of 
developing the natural gas resource. The National Energy Policy 
recognized the magnitude of these limitations. Executive Orders to 
consider energy supply implications in federal decision making and to 
convene a task force to improve permitting are important first steps in 
developing a response. These early efforts have resulted in specific 
tasks within various Executive Branch departments that should improve 
the permitting process.
    Adequate agency funding and staffing is needed at the key field 
offices responsible for permitting and it needs to be directed toward 
the permitting process. Lack of funding has limited the ability of the 
agencies to permit, to monitor permits, and to enforce permit 
requirements leading to consequences that encourage conflicts between 
the different users of federal land. It has resulting in shifting the 
federal responsibility for developing EISs and other National 
Environmental Policy Act (NEPA) requirements to private parties where 
it was never intended to reside.
    But the direct permitting aspect of addressing these access issues 
is only one part of a much larger debate. Besides these issues, energy 
producers are also confronting broad and aggressive efforts to 
otherwise delay or prevent access--strategies of misdirection, of 
litigation, and of division. Congress needs to recognize these efforts 
for what they are and react accordingly.
    Prior to the EPCA study, development opponents consistently used a 
strategy of misdirection. They alternated between suggesting that the 
issues of federal land access were related to opening national 
monuments or that 95 percent of the federal lands were open to 
permitting and there was no issue. The EPCA study has helped focus the 
debate on the real areas of concern federal lands available for 
multiple use and the restrictive lease stipulations that inhibit their 
use. But, even with this new information, it is likely that development 
opponents will try to minimize the very significant issues associated 
with land use stipulations.
    It is equally clear that development opponents are undertaking an 
aggressive strategy of litigation to thwart access in the Intermountain 
West. When the EPCA study was released, the reaction was quick and 
certain:

        ``If you bid on a lease on public land, you can expect 
        (environmental litigation).''--Peter Morton, The Wilderness 
        Society, Dow-Jones Newswires, January 21, 2003

    The federal government is now confronted with litigation threats 
and actions at every step in its process. Litigation has been filed to 
prevent exploration activities designed to identify possible resources. 
Litigation is filed over granting permits, challenging existing RMPs 
and opposing revisions to EISs. The primary result of this litigation 
is delay and more delay--and no new energy supplies. Delay is a key 
component of the strategy. Energy producers must invest capital, must 
replace and expand their production. If opponents to development can 
forestall access, it forces producers to shift their investment 
elsewhere. The longer producers are delayed, the higher the likelihood 
that they will give up on an area. This is the ultimate objective of 
this strategy of litigation, but it is ultimately a strategy that costs 
the nation domestic natural gas and impacts our energy security.
    The circumstances surrounding efforts to develop resources--
particularly coal bed natural gas--in the Powder River Basin of Wyoming 
and Montana demonstrate the type and magnitude of these challenges. The 
events in this area have unfolded over the past two decades and present 
a characteristic pattern of the problems confronting natural gas 
development in the Intermountain West. The following is a rough 
chronological review of the events in the Powder River Basin.
timeline for powder river basin (prb) oil and gas environmental impact 
                            statement (eis)
1985 & 1986--Buffalo & Platte River Resource Management Plans (RMPs) 
are approved. Neither of the plans specifically addresses coal bed 
natural gas drilling.
1992--1997 Buffalo RMP is revisited and evaluated. The evaluation 
results in determining that the RMP planning and management decisions 
are still valid.
Throughout 1990's--Environmental analyses are conducted on a variety of 
coal bed natural gas project proposals in compliance with NEPA. Each of 
the analyses covered the effects of the proposed actions and 
alternatives, including the cumulative effects of the projects combined 
with other development and actions within the area. Based on these 
analyses, it was determined that amendments to the Buffalo RMP were not 
necessary.
March 1998--BLM begins an EIS to analyze the development of 3,000 to 
5,000 coal bed natural gas wells in the Wyodak project area of the 
Powder River Basin. During development of the EIS, coal bed natural gas 
drilling on state and private lands increases dramatically in the PRB.
May & June 2000--BLM announces its intent to conduct an environmental 
impact analysis of oil and gas development in the PRB. Notice of Intent 
to prepare an EIS published in the Federal Register on June 21, 2000.
August 2000--BLM determines that levels of development approved in the 
Record of Decision, analyzed in the Wyodak EIS, have been reached. BLM 
will no longer approve Applications for Permits to Drill (APDs) for 
coal bed natural gas wells on federal lands and/or minerals within the 
PRB. BLM essentially places an embargo on new coal bed natural gas 
development on federal lands in the PRB. Coal bed natural gas projects 
on state and private lands are allowed to proceed.
January 2002--Draft EISs (DEIS) issued for coal bed natural gas 
development in the PRB in Wyoming and in the entire State of Montana.
May 2002--Public comment period on the DEIS closed. Over 17,000 comment 
letters were received on the two documents. US EPA Region 8 Office 
questions the validity of the DEIS.
January 2003--Final EISs issued for coal bed natural gas development in 
the PRB and the State of Montana. One month protest period announced 
for both documents.
April 30, 2003--Record of Decision (ROD) regarding oil and natural gas 
development in the PRB and Montana issued by the BLM. The ROD will 
allow up to 51,000 coal bed natural gas wells to be drilled in the 
entire region.
May 1, 2003--Coalition of environmental groups and landowners file suit 
in Montana to block implementation of the ROD.
Present--Suit attempting to block implementation of ROD pending in the 
courts. No stay preventing approval of APDs has been granted.

    The history of the Powder River Basin EIS process presents two 
particularly perplexing issues. The first occurred when the EPA Region 
8 Office raised objections to the DEIS after it had been under 
development for several years. This raises serious questions regarding 
the procedures used by the federal government in addressing energy 
permitting. The second issue is now unfolding. Clearly, there is a 
strategy of litigation being pursued to prevent development of the 
federal resource base in the Powder River Basin. However, while the 
tactic is clear, the courts have not succumbed to the strategy by 
issuing a stay of permitting. Nevertheless, a large backlog of APDs 
exists at the BLM and there appears to be no movement to expedite 
approval of these APDs. It appears that the BLM is self-imposing a stay 
on permitting.
    The pending Senate legislation includes provisions to address the 
first of these issues. A pilot program is included that would enhance 
the coordination between the various federal agencies in the most 
active field offices. The intent of these provisions is to avoid future 
situations where one federal agency prevents another federal agency 
from carrying out its energy leasing and permitting activities because 
it was not involved in the EIS process early in its development. This 
approach offers the potential for improved federal agency interactions. 
Similar efforts are being developed by the administration's energy 
permit streamlining task force.
    However, these efforts only address the leasing and permitting 
process from the federal agency perspective. The larger question that 
the Congress and the administration must consider is whether more 
direct efforts are necessary to either compel or allow action in the 
face of the strategies that are being used to prevent development of 
the federal resource base. Other proposals have been suggested to force 
timely agency action. In the past proposals have been developed based 
on peril points where conditions are so critical that the President 
would be authorized to alter procedural requirements while maintaining 
substantive environmental protections.
    Congress has an opportunity to address these other limitations. It 
can provide an improved process to assure that environmentally sound 
natural gas development can occur. If Congress believes that the 
current natural gas market situation--high prices, concerns over 
adequate natural gas supply--warrants more aggressive approaches to the 
leasing and permitting processes on federal lands, it has the power to 
create such processes.
    Thank you for the opportunity to provide this perspective on the 
challenges facing natural gas production in the United States.

    The Chairman. Thank you very much.
    Senator Akaka, do you have any questions or observations?
    Senator Akaka. Yes, thank you very much, Mr. Chairman. I 
appreciate you holding this hearing on natural gas prices, 
production, and its challenges in the future. My questions 
concern liquefied natural gas as a fuel for the future, the 
long-term perspective. I would like to ask just two questions, 
Mr. Chairman.
    The Chairman. Please.
    Senator Akaka. Mr. Grant, the challenges for increasing the 
use of natural gas and LNG are very, very important for the 
Nation and particularly for Hawaii. During my years in Congress 
I have continued to focus on energy sources for the future and 
opportunities for Hawaii to reduce dependence on petroleum. 
Just as in agriculture, depending on only one crop, or one 
source of energy, is a recipe for price spikes or economic 
disaster, or both.
    As you probably know, in Hawaii we depend on petroleum for 
over 90 percent of our energy needs. We are a relatively small 
market with relatively high delivery costs and we are isolated 
from other States on the continent.
    LNG provides the advantage of mobility without pipelines. 
LNG, however, requires an extensive infrastructure that Hawaii 
does not have. I am concerned about how Hawaii will participate 
in the opportunity to move toward LNG. Under what conditions 
will Hawaii attract the capital for investments in the 
necessary infrastructure for LNG?
    Mr. Grant. Thank you for the question. I think it comes 
down to, if you look at the recent expansion that we did in our 
plant in Everett near Boston, Massachusetts, you look for an 
anchor tenant. In this case it was a powerplant, and it allowed 
us to expand our facility. It gave that powerplant the 
flexibility that LNG facilities have, which is to go from zero 
to 100 almost instantaneously; the ability for, as the 
powerplants go up and down we can match those type of things. 
There is also some potential savings between hot and cold 
exchange type of things.
    But that was the anchor tenant, and I think for Hawaii, 
particularly on the power side, our company is looking at 
expanding its LNG operations within the United States to a 
terminal in the Bahamas that would serve southern Florida. 
Again, it is based upon power growth similar to what the chart 
is there. Generally, LNG--and I think people have talked about 
it--has been a long-term supply and so you have both supply--
you have got a supplier that likes that market and the 
infrastructure starts with something like a powerplant and then 
can expand from there.
    Senator Akaka. Thank you.
    My final question is to my friend, David. As usual, it is 
good to see you here. I am pleased to see the Department's 
investment in energy efficiency and renewable resources are in 
good hands.
    Mr. Garman. Thank you, Senator.
    Senator Akaka. As Chairman Greenspan has noted, significant 
global trade in LNG is developing. But Hawaii may find it 
difficult to attract capital investment in LNG. When the market 
does not work, I believe there is a role for the Federal 
Government to create a more level playing field by providing 
opportunities to reduce the Nation's dependence on foreign oil.
    There are precedents for Federal financial assistance to 
States to overcome their unique difficulties, and the Nation's 
challenges in building infrastructure for the development of 
new technologies, and it may be necessary to provide economic 
incentives to attract the infrastructure necessary to 
participate in the conversion to natural gas.
    Are there models of public-private partnerships that you 
can suggest which could include the role of the Department of 
Energy to assist States to meet this goal?
    Mr. Garman. I am not aware of any program that we have at 
the Department or elsewhere that would provide assistance with 
direct capital contributions to infrastructure development in 
Hawaii. We do of course have a State energy program run in my 
office, around $40 million a year, where we provide grants to 
States to help them understand how they can employ new 
technologies that fit the needs of those States. We work very 
closely with Maurice Kaya, of Hawaii of the State energy 
office. I will be happy to engage Maurice and others in the 
Department to see if there is something I might not be aware of 
beyond the State energy program.
    Senator Akaka. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator, I have one question, then I will yield to you. I 
have just this question. It is my understanding that the 
Department--this is for Bruce, Mr. Thompson--that on April 30 
the Department of the Interior completed all the appropriate 
environmental reviews to allow new coalbed methane production 
in the Powder River Basin. However, there are over 2,000 
drilling applications awaiting departmental approval.
    Can you explain to me why, in the midst of this natural gas 
crisis, the Department has waited nearly 3 months and still has 
not approved a single permit?
    The follow-on would be something that you should not be 
surprised to find in the bill as an amendment: Would you 
support legislation that would require that the Federal land 
managers respond to permits within 45 days time period in order 
to prevent unnecessary and bureaucratic delays? Would this help 
improve the investment climate and the ability to raise capital 
for that area of exploration and development?
    Mr. Thompson. Senator, it would clearly, something like 
that would clearly help raise capital. Anything that reduces 
uncertainty increases the ability to bring capital to an 
industry.
    To answer the first part of your question, I have no idea 
why there are 2,000 permits still pending when the EIS, the 
record of decision is done and we should be up and moving. It 
is a function, I think--there is a lack of funding in some of 
these offices, that is part of it. There is also the tendency 
not to move when there is a threat of litigation hanging over 
people's heads. People do not want to make decisions that are 
second-guessed. That is a problem.
    It is critical for our industry that we access this 
resource base. We need to be able to deal with things like 
this. This is a critical situation we find ourselves in and a 
speedier permitting process, however it is mandated, is one 
that we would be in favor of.
    The Chairman. We are going to do our share.
    Senator Craig, what always happens is we find these areas 
and then the answers generally are: Well, we ran out of money, 
or OMB did not give us enough last year. Well, we have got to 
start picking some of these where it is quite obvious that 
there is no excuse of that type.
    Mr. Thompson. We have some information we would be able to 
provide and help out on that.
    Senator Craig [presiding]. Well, let me thank all of you. I 
have got a couple of questions and then I think we will have 
this hearing concluded.
    Secretary Garman, you have heard, I think Mr. Ferguson 
talked about increased efficiencies and efforts that have gone 
under way in the gasification of coal. Mr. Thompson mentioned a 
priority list of things that can be done in the immediate 
sense, and the top of that was conservation. There is certainly 
no disagreement that movements in the area of efficiencies and 
conservation are a no-regrets kind of policy in the near term 
that all of us agree to.
    The question is, how much low-hanging fruit is left out 
there that is going to affect in any way the bottom line of 
that spike or the top line of that spike, if you will? Could 
you speak to that? Has the Department looked at that? I know 
that high-priced markets oftentimes bring efficiencies that 
otherwise some did not think were there, although capital 
markets today and competition has brought a great deal of that. 
How much is left?
    Mr. Garman. We think that in certain areas there is a 
significant amount of low-hanging fruit still available. I 
think your point is well taken, though. If memory serves, 
residential consumers of natural gas over the last decade or so 
have become more efficient by 22 percent as a consequence of 
new appliances, new windows, tighter building envelopes, and a 
variety of things that builders are putting into homes.
    That does not mean that tremendous other opportunities do 
not exist. They do come at a cost. For example, all of us have 
things we can do to our homes, ranging from low-cost items like 
compact fluorescent light bulbs to high-cost items such as new 
windows or new cladding for the home, that could produce 
tremendous energy savings. The question is: is it cost 
efficient to do so and will that consumer do that based on the 
capital cost of the improvements that need to be made?
    We in the Federal Government, owners as we are of 500,000 
buildings, are learning this. In the Department of Energy, I 
believe we have lowered our energy use in the Department 
against the 1985 baseline by over 40 percent. But you are 
correct, it is getting harder and harder to find new 
opportunities to achieve additional savings, and that is the 
nature of the beast.
    Senator Craig. Well, I know that we have been at this for 
some time and I am sure there are others out there. But I do 
not think any of us can anticipate in an ever-increasing demand 
curve in our markets that conservation gets us there. It is 
nice to see that ``other'' margin on that chart over there 
growing, but the reality is--and I think this committee has 
recognized it, as most of you do or all of you do, and our work 
product that will be on the floor the last of July demonstrates 
it. It is a very balanced approach. We have incentivized more 
conservation. We have incentivized renewable technologies. But 
we have recognized the raw and clearly understandable need to 
produce in all segments of the portfolio.
    Mr. Grant, there is one thing that has been brought up 
consistently about LNG facilities since September 11, and that 
is of course their safety, the ability to site them. We have 
seen a considerable desire to shut down or expression of a 
desire to shut down an LNG facility in Maryland because of its 
proximities and all of that.
    Could you comment on the issue of safety, target hardening 
if you will--or maybe I should not use that phrase--facility 
hardening, as it relates to the security of the operation of 
these so that they would be less inclined to be a potential 
target?
    Mr. Grant. Thank you for the question. Actually, it has 
been referred to in our area as ``target hardening.''
    Senator Craig. It really has? Well, all right. Well then, 
we will use that.
    Mr. Grant. I have addressed a little bit of that in my 
testimony. But it is one of those things where you do not have 
to take my word or our company's word for it. The history 
safety and security-wise of the LNG industry is almost 
unprecedented. These ships are very sturdily built. As a 
company we have taken safety and security very, very seriously, 
when you look at the things the Department of Energy has done, 
Department of Transportation has done around these things.
    I think the biggest issue that we have is an education 
issue. When you look at Japan and Korea, who are almost 100 
percent dependent on LNG for their natural gas usage, when you 
look at Spain, who takes over half of their gas in the form of 
LNG into that country, it is a very normal part of their 
infrastructure.
    Except for New England, LNG is seen as something very kind 
of unique here.
    Senator Craig. Yes.
    Mr. Grant. They forget that it is basically just another 
way to bring natural gas here. The ship is a surrogate for the 
pipeline. I think when you get past that--the way that these 
things are constructed, the ships are all double-hulled. You 
have seen a lot of things in oil about everything should be 
double-hulled. They have always been. The ships are--it is not 
under pressure.
    We have done a number of things over the years working with 
the Coast Guard, working with the Department of Energy, 
Department of Transportation, that preceded 9-11, just to make 
sure that the security and the safety of these ships--the 
standards have always been there, and the industry believes 
very strongly in safety and security.
    But I think the number one thing is education, getting the 
record out there, getting the experts like Lloyd's to talk 
about it. The Department of Energy has got a number of experts 
as well, in addition to industry officials. But it is something 
we take as an industry very, very seriously. But again, we 
believe it is an educational issue around the product because 
of how unique it is perceived in the United States.
    Senator Craig. So I think I am understanding from you that 
if you look at all energy sources as a potential target, this 
is no more or less dangerous than any other that is out there?
    Mr. Grant. Yes, and we would believe--yes is the first 
answer. We also believe, because of the construction both of 
the tanks and of the ships, and also the security measures--I 
mean, our company has spent $3.5 million more on security post-
9/11 to make sure that we do harden the target. We have got--
you probably know that Boston is considered a model port right 
now--the cooperation that we have done with the Coast Guard and 
the people in those areas.
    We think that is a very important part of doing business 
and it is something we are committed to, to working with the 
government and local people to do.
    Senator Craig. How realistic--Chairman Greenspan spoke 
briefly about offshore locating these kinds of facilities. How 
reasonable is that and is that technology being looked at?
    Mr. Grant. The technology is being pursued right now. I 
think that there are opportunities both onshore and offshore. 
One of the issues with offshore, if you are talking about--and 
I think the chairman mentioned regasification ships is you 
literally have to have the ship parked there while it is 
vaporizing the gas, which means you have got an infrastructure 
that is out there. Logistics are a very big part of our 
business. The production drives the shipping, which drives the 
market. They do not like to shut down a billion dollar 
liquefaction plant because the market will not absorb the 
product, and that is the way it is built.
    Can that be a supplement? Yes. Is that the answer by 
itself? No, because I think as a country if we said that there 
is a technology available to move every oil import terminal 
offshore, every chemical plant offshore, every hazardous cargo 
of any kind offshore, of course we would like that. But it 
comes with a cost and it comes with a cost to the 
infrastructure.
    Senator Craig. Well, gentlemen, thank you very much for 
your patience and your testimony before the committee. We are 
moving into a critical time frame here in the Senate, in which 
we have a window of opportunity to pass what I think and I 
think most committee members believe to be a significant piece 
of energy policy for our country.
    If we can pass it in the Senate, we will have it on the 
President's desk for his signature by late year. I believe that 
can happen. Let me ask all of you to take time in your busy 
lives to visit with your industry and your industry CEO's--I do 
not often do this from the dais--to make the phone call to my 
colleagues here in the Senate, to encourage them to get with 
the business of passing this critical policy.
    I really believe it is that important for our country and 
our country's future. We have done something that is 
bipartisan, that is balanced, that has as much conservation in 
it, it has phenomenal incentives, $17 billion worth of 
incentives in it, and it has production in it. You can help all 
of us in the next month by working this issue as hard as some 
of us will. And if you do and we do, it will become a reality, 
I do believe, and that chart will level out over there in time.
    Gentlemen, thank you very much. The committee will stand 
adjourned.
    [Pause.]
    Senator Craig. Oh, yes, I am supposed to wrap up here. You 
are free to go.
    I will reconvene the committee and I will remind members 
and staff that we will require members' statements and 
questions to be submitted for the record by the close of 
business today.
    We are re-readjourned.
    [Whereupon, at 1:17 p.m., the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

    [Note: Responses to the following questions were not 
received at the time this hearing went to press.]

    Responses of David K. Garman to Questions From Senator Bingaman
    Question 1. Yesterday the Department kicked off a ``Smart Energy 
Use'' Education Campaign. I understand that it involves a new website 
and several regional meetings. Can you describe this strategy in more 
detail? How much money has been dedicated to this effort? Do you have 
specific goals in mind for saving energy? How will the states 
participate in this effort?
    Question 2. I am concerned that the DOE outreach programs that can 
have the most impact on natural gas and electricity demand may be 
underfunded in light of this emerging crisis and your plans to deal 
with it.
    For example, your testimony highlights the programs under the 
Office of Industrial Technology and their success in reducing gas 
demand. At the Natural Gas Summit your industrial ``best practices'' 
program was highly praised. Can you explain why the President's request 
for FY 2004 decreased the Industrial program from $91.4 million to 
$64.4 million or a 32% cut?
    Similarly, you have reduced what you call ``Gateway Deployment'' 
programs by 33%. These are the outreach and technical assistance 
programs like Energy Star, building codes training and energy 
efficiency information. Are you planning to reprogram additional funds 
in order to support the Smart Energy Campaign? Will DOE seek 
supplemental appropriations, or reallocate funds internally, to support 
a national campaign and boost support for key deployment programs such 
as Energy Star and industrial programs?
    Question 3. What is the Department doing to accelerate energy 
efficiency standards that can save natural gas, including residential 
heating equipment and commercial air conditioning?
    Question 4. Are you focusing on electric efficiency to save gas, 
starting this summer, since so much of our summer peak electricity 
generation comes from natural gas? What can be done to encourage 
utilities to dispatch their most efficient units rather than older 
inefficient gas plants?
    Question 5. For longer term gas savings in the power sector, 
combined heat and power systems are at least twice as efficient as 
average powerplants. What is DOE doing to significantly expand its CHP 
Challenge program?
     Responses of Brian Ferguson to Questions From Senator Bingaman
    Question 1. In addition to coal gasification technology, do you 
support increasing the amount of electricity that is produced by wind, 
solar and other renewable forms of energy in order to reduce the 
pressure on gas supplies?
    Question 2. In addition to supporting coal gasification technology, 
is there anything the Department of Energy could be doing in the near 
term to assist industrial gas consumers to improve the efficiency of 
their operations and reduce or find alternatives to natural gas use?
    Question 3. Has the Combined Heat & Power potential within the 
chemical industry been fully exploited? What are the barriers to 
increasing the use of CHP?
    Responses of Richard L. Grant to Questions From Senator Bingaman
    Question 1. In your testimony, you note that ``. . . today LNG 
development is especially important for countries like Trinidad, 
Angola, and Nigeria. In these countries, most of the natural gas that 
is produced with crude oil is flared because there are few alternatives 
for usage or disposal of the excess gas.''
    The flaring of excess natural gas is a terrible waste of valuable 
energy resources. There are many places around the globe where the 
venting and flaring of natural gas continues but needs to be curtailed. 
What can we do to get the necessary attention devoted to these areas, 
to stop this wasteful practice? As you note, LNG projects in places 
like Nigeria seek to harness this resource. What were the keys to 
successful projects that you have worked on in these areas?
    Question 2. Do you agree with EIA's projections for the expansion 
of LNG import capacity in the U.S. (about 11% increase per year)? What 
are the major challenges from a project development perspective--
including all of the required investment--production, liquefaction, 
shipping, and regasification?
    Question 3. Does the LNG industry have any coordinated public 
education programs on LNG operations and safety?
    Question 4. We have heard from the DOE that there are more than 30 
applications active for LNG-based projects in the U.S., most beyond the 
permitting process. Some of these are facilities on offshore platforms. 
What do you think the future landscape for LNG terminals will look 
like? Are most of them going to by based offshore? What does this mean 
for the building of additional infrastructure and necessary 
environmental and safety precautions?
    Question 5. In your testimony you mention that LNG technology is 
improving. What are you improving, and what does this mean for LNG 
economics, or essentially the cost to the consumer?
    Question 6. Some have raised the issue that our growing dependence 
on imported LNG could be the beginning of a situation that could 
quickly resemble our dependence on OPEC for oil import. How do you view 
this? What nations do your cargoes come from? What does this mean to 
you as a terminal operator?
    Question 7. In your testimony, you note Tractebel's pacesetter 
actions on public-private partnerships and safety. Specific reference 
is made to the Berge Boston, the first vessel in the world to meet the 
International Code for the security of ships. How long will it be 
before most LNG ships meet this code? Can they be retrofit? Are there 
deadlines in place?
              Responses to Questions From Senator Bunning
    Question 1. Our nation has become extremely dependent on natural 
gas and with low levels of natural gas inventories its high prices are 
affecting our economy. This situation was foreseeable and will only get 
worse if we do not change the demand and supply ratio. Do you think 
that this country should begin relying more on other sources of energy 
such as cleaner burning coal to meet our energy needs rather than just 
on natural gas?
    Question 2. Demand for natural gas should be reduced and promotion 
of conservation of energy is one good way to do this. What is the 
Department of Energy doing to encourage manufacturers to increase 
efficiency in their use of natural gas?
    Question 3. We have not even begun to tap into all the natural gas 
supply that this country has. Much of our natural gas supply is off 
limits for production or development is severely restricted. Do you 
think that we should develop more areas in the United States to 
increase our natural gas supply?
        Response of Alan Greenspan to Question From Senator Kyl
    Question. If Congress enacts multi-pollutant legislation or carbon 
dioxide regulation legislation that forces utilities to switch from 
coal to natural gas for electricity generation, what effect would it 
have on natural gas supply and markets?
    Responses of Alan Greenspan to Questions From Senator Feinstein
    Question 1. Your testimony did not mention the fraud and 
manipulation that has pervaded our energy markets over the last few 
years. As I said before, the recent FERC report on Price Manipulation 
in the Western Markets states, ``markets for natural gas and 
electricity in California are inextricably linked.'' Do you believe our 
regulators should have the ability to issue the same penalties and 
refunds in both sectors so that natural gas consumers are protected in 
a manner consistent with electric consumers?
    Question 2. Let me take you through some other examples of fraud 
and manipulation in the natural gas sector and ask you about some 
specifics of the Energy bill now pending in the Senate.
    On January 27, 2003, Michelle Marie Valencia, a 32-year-old former 
senior energy trader for Dynegy was arrested on charges that she 
reported fictitious natural gas transactions to an industry 
publication.
    On December 5, 2002, Todd Geiger, a former vice president on the 
Canadian natural gas trading desk for El Paso Merchant Energy, was 
charged with wire fraud and filing a false report after allegedly 
telling a trade publication about the prices for 48 natural gas trades 
that he never made in an effort to boost prices and company profit.
    CMS Energy, Williams, American Electric Power Company, and Dynegy 
have each acknowledged that its employees gave inaccurate price data to 
industry participants.
    Fraud and manipulation extended beyond just false reporting.
    Dynegy, Duke Energy, El Paso, Reliant Resources Inc., CMS Energy 
Corp., and Williams Cos. all admitted engaging in false ``round-trip'' 
or ``wash trades.''
    Section 1172 of the Energy bill now pending in the Senate prohibits 
the filing of false information and prohibits round trip or wash 
trading in electricity markets. Shouldn't the Senate expand this 
provision to ban false reporting and wash trades in the natural gas 
markets?
    Question 3. You mention that the long-term price for natural gas 
has risen persistently during the past six years from approximately $2 
per million BTU to more than $4.50. How much of that increase do you 
attribute to market manipulation, especially when you consider that no 
transparency and no audit trail is required in off-exchange energy 
markets--where an overwhelming amount of natural gas trading takes 
place?
    Question 4. This morning's Washington Post Business Section had an 
article describing how companies are pulling back from trading and a 
lack of liquidity is causing prices to increase in our natural gas 
markets. In the article, one analyst said having fewer traders in the 
market means there are fewer offers to buy and sell. Instead of rising 
in small steps, natural gas prices are jumping by bigger increments, 
according to analysts.
    You signed a letter of June 11, 2003 to oppose the Energy Market 
Oversight Amendment I offered to the Energy Bill. I fail to understand 
your continued opposition to my legislation which, by the way, does not 
at all impact financial derivatives. In light of this recent pullback 
from trading, wouldn't increased oversight and transparency boost 
consumer and investor confidence in our troubled energy markets?
    Question 5. By increasing energy efficiency quickly and 
dramatically in 2001, California prevented the severe electricity 
shortages that dogged the state throughout the previous summer from 
becoming worse. Savings were achieved through a combination of rules, 
incentives, and public education. Do you support similar efforts on the 
federal level and do you support new efficiency standards for gas 
furnaces, air conditioners, electrical transformers and other equipment 
that by some estimates could save nearly 10 trillion cubic feet (tcf) 
of natural gas over the next 20 years?
    Question 6. In your testimony, you mention that industrial users 
are the leading consumers of natural gas. In addition to the chemical, 
aluminum, and fertilizer industries--the ethanol industry is also 
dependent on natural gas. Since most ethanol plants rely solely on 
natural gas, is this the time to mandate billions of gallons of ethanol 
into our fuel supply and force many more ethanol plants using natural 
gas to be built?
   Responses of Richard K. Garman to Questions From Senator Feinstein
    Question 1. Mr. Garman, by increasing energy efficiency quickly and 
dramatically in 2001, California prevented the severe electricity 
shortages that harmed the state throughout the previous summer from 
becoming worse. Savings were achieved through a combination of rules, 
incentives, and public education. What is the Department of Energy 
doing to enlist State and Local governments, as well as the industry, 
in conservation and efficiency efforts? What does Congress need to do?
    Question 2. Mr. Garman, does the Bush Administration support new 
efficiency standards for gas furnaces, air conditioners, electrical 
transformers and other equipment that by some estimates could save 
nearly 10 trillion cubic feet (tcf) of natural gas over the next 20 
years?
    Question 3. Mr. Garman, what is the potential for increasing 
imports of LNG? What are the realistic expectations? And in what time 
frame? There are several projects under consideration in California and 
in Baja California south of the border. Are there any LNG projects in 
particular that you see more likely to come online than others?
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

     Statement of the National Petrochemical & Refiners Association
    NPRA, the National Petrochemical & Refiners Association, is a 
national trade association whose members include virtually all U.S. 
refiners and petrochemical manufacturers. NPRA appreciates the interest 
of the Senate Energy and Natural Resources Committee in the vital issue 
of ensuring adequate supplies of natural gas to industrial consumers. 
NPRA believes that diverse, ample and affordable supplies of fossil 
fuels are essential to maintain U.S. national security, economic 
growth, and the viability of the domestic refining and petrochemical 
industries.
    America's standard of living and overall economic health are 
closely linked to the need for an adequate supply of energy at 
reasonable prices. Our nation currently faces severe challenges as it 
strives to balance ever-increasing energy demands from all consuming 
sectors, largely due to contradictory and short-sighted policies that 
have limited supply while promoting additional natural gas consumption. 
These conflicting policies, either in the short or long term, are 
simply incompatible with continued U.S. economic growth.
    NPRA also believes that there is an urgent need to harmonize the 
nation's energy and environmental policies, and that any national 
energy plan must include traditional supply and market-oriented 
policies for all fossil fuels, including natural gas.
                               background
    Energy is a strategic commodity. Without it, either through 
insufficient supply, unreasonable cost (or both), any modern economy is 
at risk. The threat of shortages can cause significant price 
escalations and disruptions in the marketplace. In recent years, 
domestic demand for natural gas has substantially increased, while 
production has recently decreased. Our experience with high natural gas 
prices and short supplies last winter was a reality check for the 
nation's flawed policies, and we must act now to correct that 
situation. Government, industry, and private experts agree that natural 
gas demand is expected to rise by the year 2020 by as much as 60% over 
today's levels. It is still unclear whether domestic gas production can 
increase to satisfy this new demand.
    This is really not a resource problem that we face. But, if changes 
are not made to existing policies, our predicament will not be short-
lived. This means that policymakers and gas issue stakeholders must act 
or accept responsibility for the ultimate consequences of short 
supplies, lost U.S. jobs, a worsening trade balance and further loss of 
U.S. industrial leadership. There is no OPEC to blame for this natural 
gas supply crisis; the United States has an abundant supply of domestic 
gas. Flawed government policies have prohibited its development in many 
areas. Thus, the blame for insufficient U.S. natural gas supplies rests 
on our nation alone. NPRA believes the current ill-advised national 
policy of limiting natural gas supply while encouraging gas use because 
of its environmental benefits--mostly in the generation of base and 
peak load electricity--has created and could exacerbate continuing 
higher gas prices and volatility. In fact, EIA reports that demand by 
electricity generators is expected to account for 30% of total natural 
gas consumption in 2025. This equates to a doubling of gas use by the 
utility sector over current demand. Under present policies, it is not 
clear that adequate supplies will be available to accommodate this 
demand figure unless current natural gas users in core industries are 
forced to switch fuels or close.
    The domestic petrochemical industry, as well as others in the basic 
chemical sector, is primarily based upon natural gas and natural gas 
liquids. About 70% of U.S. petrochemical manufacturers use natural gas 
liquids as feedstocks. In contrast, about 70% of petrochemical 
producers in Western Europe and Asia use naphtha (a heavy oil) as a 
feedstock. While oil is a global commodity whose price is set on the 
global market, natural gas liquids are generally more locally traded 
commodities. Thus, price increases in natural gas have had a larger 
impact on competitiveness in North American-produced petrochemicals.
    The U.S. has generally maintained a reasonable-cost feedstock 
position relative to its competitors in Europe and Asia. However, that 
situation has been eroded as the price of natural gas has increased. 
North American natural gas and natural gas liquids prices have recently 
risen to unprecedented levels and placed a significant portion of the 
domestic petrochemical industry at a disadvantage to European and Asian 
producers. The trend towards increased siting of base petrochemical 
production and expansion projects in overseas locations is directly 
attributable to this growing disparity in fuel prices. Additional 
displacements will occur if the current and prospective gas price and 
supply situation is not addressed promptly.
    Chemical exports are usually significant contributors to U.S. trade 
receipts. Unfortunately, two years of extraordinarily high natural gas 
prices (2001-2002) have resulted in a depressed chemical export market 
and a negative trade balance for the U.S. economy. This negative trade 
balance allows foreign businesses to capture U.S. market share, in part 
because European and Asian producers are not experiencing similarly 
increased feedstock prices.
short-term outlook: encourage conservation and efficiency, but increase 
                        supply wherever possible
    Industry analysts report that domestic natural gas production has 
declined by 6% over the last six quarters. In turn, utilization of 
natural gas by the electric utility industry has caused unprecedented 
demand, especially in the summer season where natural gas provides 
``peaking'' power to many industrial and residential users.
    Historically, the summer months have been periods to re-supply 
natural gas storage facilities in preparation for increased winter 
demand for gas for commercial use and residential home heating. The 
increased demand for natural gas during the past summers has placed 
additional constraints on storage, and the U.S. is now experiencing low 
levels of storage volumes--624 Bcf less than last year at this time and 
348 Bcf below the 5-year average volumes for the end of June, according 
to the EIA. This is roughly 17 percent below the 5-year average for the 
report week, and more than 27 percent below the level last year for the 
same week. Under current conditions, it will take daily storage volumes 
of record proportions for the remainder of the summer season to return 
to storage levels entering the previous winter of 2002-2003. Although 
recent data indicate a larger than normal storage rate over the past 
few weeks, we should not be lulled into complacency because favorable 
weather patterns have led to what may be only a temporary increase in 
these daily gas storage levels.
    In addition, gas injection rates are only one facet of the natural 
gas supply dilemma. Industry must deal with the manifold implications 
of a generally higher price level for natural gas, also accompanied by 
more price volatility. Both factors mean trouble for all consumers--
industrial, commercial, residential--regardless of gas storage volumes.
    Unfortunately, much must be accomplished on the supply side of this 
equation in what is a short, but nevertheless critical, time period. In 
essence, our nation's natural gas supply for the next 8-10 months may 
largely depend upon good weather and good luck this summer and next 
winter. We must try to improve things, but real possibilities of doing 
so are limited in the short term. In order to address this shortfall in 
supply meaningfully, we must hope that Congress and the Administration 
will act to provide greater supply and price certainty to natural gas 
markets in the mid and long-term. And this requires a change in current 
policy to put greater emphasis on supply.
    In the immediate future, efforts should also be made to help 
mitigate the supply problem through voluntary conservation and 
efficiency efforts. NPRA urges both Congress and the Administration to 
act to improve energy efficiency and conservation in the use of natural 
gas and power, especially as the nation enters the summer cooling 
season. This could be accomplished by offering appropriate incentives. 
Any adjustment in electricity consumption would reduce natural gas 
consumption by the power sector and have a positive impact on natural 
gas availability. This, in turn, could help to moderate natural gas 
supply and price concerns. Further, if and when natural gas supplies 
become extremely tight this summer or early fall, the federal and local 
government should allow electric utilities and other industrial 
facilities to switch to alternative fuels in order to conserve natural 
gas supplies. Pre-emptive efforts to encourage fuel switching would be 
even more helpful.
        longer-term options: avoid distractions; focus on supply
    For all these excellent reasons, NPRA welcomes the Committee's 
review of the natural gas situation. We urge you to study and assess 
current policy thoroughly and openly. The nation needs a frank and 
public debate on the future of its gas supplies. As we earlier stated, 
natural gas demand is projected to increase by 60% by 2020. The 
President's National Energy Policy Task Force projects that over 1,300 
new electric generating plants must be constructed to fulfill 
anticipated electric energy needs during the next 20 years. DOE 
suggests that over 90% of these facilities will be fueled by natural 
gas. This increase in gas usage for electric generation may not be 
achievable, and should be one subject of the Committee's investigation.
    We must also develop policies that promote continued environmental 
progress without reducing the supply of natural gas and other petroleum 
products needed for a healthy economy and the nation's security. We 
need to forge a diversified national energy policy that reduces our 
dependence on foreign energy sources while increasing our domestic 
production. These policies must include increased access and 
development opportunities to onshore public lands as well as those on 
the Outer Continental Shelf. We must also bring Alaskan natural gas to 
lower 48 markets as soon as possible. New and promising domestic areas 
for development must be open for exploration and production. In the 
meantime, NPRA would urge caution when Congress and the Administration 
consider any policies, environmental or other, that will accelerate the 
demand for natural gas when other policy options exist.
    Environmental progress and energy supply need not be mutually 
exclusive. However, long-standing and recent environmental policies 
have significantly limited fuel and energy supply choices. They have 
promoted or even required fuel switching while at the same time 
discouraging expanded domestic production of natural gas. Anticipated 
environmental constraints could aggravate the current situation. This 
is a formula guaranteed to make an already bad situation worse.
    The National Petroleum Council (NPC), at the request of the 
Secretary of Energy, is currently developing recommendations and policy 
options on the long-term future of natural gas as one of the key 
elements of our nation's energy menu. NPRA is an active participant in 
this study and urges Congress to seriously consider any and all of the 
NPC's specific findings and recommended policy options.
                            recommendations
    NPRA urges Congress and the Administration to re-think and re-
evaluate current and future policy initiatives. We should focus on all 
energy options, including fuel choice mixture and flexibility; gas 
supply source diversity; modernization, expansion and permitting of 
infrastructure, including LNG facilities and pipelines; development of 
new technologies; and natural gas market transparency and efficiency. 
As a nation, we can not afford to inhibit options that are beneficial 
to supply.
                               conclusion
    Natural gas and natural gas liquids function as primary feedstocks 
in domestic petrochemical plants and other industries. Their 
availability at a reasonable cost is essential to keep the U.S. 
petrochemical industry competitive in a worldwide marketplace. We hope 
that the Congress will recognize that increased demand for natural gas 
supplies will result in even tighter supplies, and that the cost of gas 
as a feedstock will continue to rise. Policymakers should also 
recognize that since natural gas is used as a fuel and an industrial 
feedstock, negative impacts to core U.S. businesses will result if 
natural gas demand increases but supplies remain tight.
    Refineries are also significant users of natural gas to run their 
facilities. Many switched to natural gas use for this purpose at the 
urging of environmental authorities such as the EPA. The result is that 
natural gas supply and price have considerable impact on the output of 
the nation's petroleum products as well as on refining industry 
profitability. Remember that refiners face a tight supply/demand 
balance for petroleum products and limited profitability under normal 
circumstances.
    Thus, any analysis of the current and projected natural gas supply 
and demand makes one thing very clear: we urgently need a thorough 
review of natural gas-related policies to maintain and retain the U.S. 
petrochemical and other manufacturing industries in the context of a 
healthy and growing U.S. economy. It is clear that natural gas will 
play an increasingly important role in America's energy future; but we 
must analyze, clarify, and correct policies to maximize the available 
supply of this key resource. Therefore, we repeat that the principal 
focus of the gas policy discussion must be on the need for increased 
supply.
    For this reason, NPRA appreciates the Committee's efforts to 
investigate the issues surrounding and impacting the supply, demand, 
and price volatility of our nation's natural gas resources. We hope to 
work with all stakeholders to design a natural gas policy that provides 
adequate supply at reasonable and predictable prices to fuel the U.S. 
economy and maintain growth.
                                 ______
                                 
   Statement of M. John Kennedy, President, Kennedy Oil, Gillette, WY
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to submit this testimony. I am grateful you are holding 
this hearing on this important national issue and look forward to 
working with you and other Members of Congress to determine the best 
method to access our natural gas resources in an environmentally sound 
manner.
    Kennedy Oil is a small, independent oil and gas producer located in 
Gillette, Wyoming. I am the owner of Kennedy Oil and employ 35 people 
in Wyoming. We currently operate 581 wells and produce approximately 12 
bcf of natural gas annually.
    As everyone on this Committee is aware, the United States will soon 
face a natural gas shortage that could result in dramatically higher 
prices for natural gas, negatively impacting consumers and the economy. 
U.S. gas production is decreasing at approximately 10% annually, 
existing wells are producing less gas, and fewer reserves are found per 
well. Although we currently import significant amounts of natural gas 
from Canada, Canadian production is decreasing as well.
    The area of the country known as the Rocky Mountain region, holds 
nearly one third of U.S. proven gas reserves and is an easily 
accessible, proven way to supply the natural gas needed to fuel our 
economic growth. In fact, the Rockies is the only region that has shown 
an increase in production over the last three decades and is the only 
significant onshore supply growth area in the United States.
    In Wyoming alone, with new technologies now available to produce 
gas from coal and from tight gas sands and shales, there is enough 
recoverable gas to contribute up to 25% of the natural gas our Nation 
needs. With natural gas consumption projected to be 30 tcf per day by 
2010, Wyoming's recoverable reserves will supply the nation for the 
next 40-50 years.
    However, these reserves are not being developed. The Powder River 
Basin, which contains Coal Bed Natural Gas (CBNG) recoverable reserves 
projected at 30 tcf, suffers from lack of pipeline take-away capacity. 
Producers are unable to commit to additional pipe out of Wyoming to 
areas in need of new gas supplies because of an inability to forecast 
with any degree of certainty when Federal drilling permits will be 
issued. This lack of take-away capacity has depressed the value of 
Wyoming gas. In the past 12 months the State of Wyoming received $280 
million dollars less for its gas than the value it should have 
received, based on normal index pricing.
    At the same time, the Federal government suffered a $90 million 
dollar shortfall in its royalty income from Wyoming gas, for the same 
reason. The Environmental Impact Statement (EIS) for the Powder River 
Basin was delayed two years longer than anticipated and permits are 
still not being issued due to various lawsuits objecting to the Record 
of Decision (ROD).
    President Bush and Congress have given the order to move forward 
with the development of the enormous known natural gas reserves located 
on Federal rangelands in Wyoming and other parts of the Rockies. This 
natural gas is clean burning, easily developed, and is the centrally 
located fuel of choice. The development of these gas reserves will 
create wealth within this country, will create tens of thousands of new 
jobs, hold down consumer prices and save industrial jobs. 
Unfortunately, significant hurdles exist to accessing this natural gas.
    Kennedy Oil is prepared to drill 250 new CBNG wells in the center 
of the Powder River Basin--we are only waiting for Federal drilling 
permits. At the same time, we have submitted Federal permit 
applications for a 20 well project in southwest Wyoming--which is the 
lead in for over 200 CBNG wells in the area. Kennedy Oil has been 
waiting for 22 months now for these 20 permits and we are still 
waiting. Winter is around the corner. High gas prices and low storage 
numbers are inevitable. Jobs will be lost and people will be 
unnecessarily penalized.
    These lengthy delays and uncertainties create a difficult business 
environment. As you are aware, the Bureau of Land Management (BLM) is 
the agency responsible for administering the permits necessary to 
drill. Some field offices can be more responsive than others, and in 
some cases, it would appear that personal agendas can play a role in 
delaying particular projects. In addition, it appears that because of 
the great disparity in how permit applications are treated, some 
offices have significant resource problems.
    For example, last week we called the BLM-Rock Springs Field Office 
(RSFO) (Wyoming) inquiring about a Right-of-Way (ROW) Application we 
had submitted in June 2002, 13 months ago. The ROW grant is needed to 
access a drillsite for a shallow gas well. The ROW applied for is for 
use of an existing, upgraded, gravel road on Federal surface. RSFO 
informed us that the ROW grant is held up for archaeological review. 
After talking to the BLM archaeologist in charge of doing cultural 
clearance on this ROW application we were told that he has 600+ like 
projects on his desk and to ``get in line''.
    I believe that permitting could be expedited in a fair and 
environmentally sound manner if the State Offices had the authority to 
implement standard procedures and time lines to be implemented by each 
field office. Currently, the time limits keep shifting and requirements 
differ for every permit for which we apply.
    The American economy and the American consumer continues to suffer 
the consequences of volatile gas prices and supplies. Industry is 
prepared to make the investment in exploration and development. Our 
nation needs the natural gas. Kennedy Oil believes congressional 
intervention is necessary to help alleviate the permit back log and 
avert the energy crisis that threatens this nation.
    Thank you for the opportunity to submit this testimony and I look 
forward to working with Congress and the agencies to promote 
responsible, timely resource use policies.
                                 ______
                                 
               Statement of the Edison Electric Institute
    The Edison Electric Institute (EEI) and its Alliance of Energy 
Suppliers (Alliance) are pleased to submit this statement for the 
record of the Committee's July 10 oversight hearing on natural gas. EEI 
is the trade association of the U.S. shareholder-owned electric 
utilities and affiliates and associates worldwide. The Alliance is a 
division of EEI that focuses on the generation business and related 
wholesale issues in the supply of electricity.
    EEI will address three main issues in this statement. First, 
generators use natural gas because it is a relatively clean, efficient, 
and cost-effective fuel, and gas-fired generators are easier and faster 
to build than other types. Second, federal policies should facilitate 
increasing the supply of natural gas and must provide greater certainty 
for the use of other fuels. These include provisions related to 
transmission siting and Clear Skies legislation. Congress should also 
fully fund LIHEAP to assist low income consumers with their energy 
usage. Third, there should not be arbitrary restrictions on the use of 
natural gas to provide electricity to consumers.
    Throughout America, people are paying attention to the price of 
natural gas. Whether it is the homeowner who uses natural gas for heat, 
the fertilizer manufacturer who uses natural gas as a feedstock, or the 
electricity generator whose operating costs are substantially 
influenced by the cost of natural gas, all are paying careful attention 
to the current cash and forward prices of natural gas. EEl appreciates 
the opportunity to submit written testimony and to address the concern 
that generators have with the current and foreseeable imbalance between 
natural gas demand and supply.
          short term recommendations improve energy efficiency
    There are some useful short term actions the federal government can 
take to address end-use efficiency of natural gas. For example, through 
the Energy Star program, the government can promote the purchase of 
high-efficiency gas furnaces and boilers for those homeowners and 
businesses with old systems that need to be replaced. For homeowners 
with gas water heaters, the government can educate consumers about the 
new efficiency standards that will take effect in January 2004, and 
help consumers find units that exceed those standards. For consumers 
and businesses with newer equipment, there should be promotion of tune-
ups before the winter season or the lowering of thermostats where 
possible (e.g., down to 120 F or lower on gas water heaters and below 
68 F for gas furnace/boiler systems).
    For homeowners with gas water heaters and older water using 
appliances, the Energy Star program can be used to promote Energy Star 
dishwashers and clothes washers, which significantly reduce the usage 
of hot water. In addition, the government could encourage people not to 
purchase cooking equipment with continuously burning standing pilot 
lights.
    The government can also ``lead by example'' by making sure that 
gas-fired equipment at its facilities are well-maintained, that new 
equipment purchased exceeds Energy Star standards, and that all 
thermostats and setback controls function properly.
               long term recommendation: increase supply
    While we believe there are limited opportunities regionally for 
reducing short term demand for gas in our sector--primarily by 
encouraging large industrial users to shift some of their use to off-
peak times of consumption--there are longer term solutions for assuring 
adequate natural gas supplies in this country. These include efforts to 
encourage the wise use of energy and careful policies to identify, tap 
and bring to market available known reserves and new sources--both here 
and abroad. It is the combination of increased supply and the efficient 
use of that resource that will result in lower natural gas prices. EEI 
recognizes that the current natural gas situation did not develop 
overnight, nor will it be resolved overnight. We recommend that the 
Nation embark on a program to augment natural gas supply through the 
following:

          (1) prompt passage of enabling legislation to allow 
        certification of pipeline capacity for Arctic natural gas. This 
        will enable market signals to determine when and how Arctic gas 
        will make it to markets in the lower-48;
          (2) increased domestic production of natural gas where there 
        are proven gas reserves, including, where appropriate, onshore 
        and offshore federal lands that are currently off limits. We 
        recognize that this step will be politically difficult, but as 
        Federal Reserve Board Chairman Alan Greenspan pointed out in 
        his testimony before the House Energy Committee on June 10, 
        Congress must find the appropriate balance in energy and 
        environmental policy that will assure to the American economy 
        and the American people low-cost, competitive energy while 
        protecting the environment;
          (3) rapid approval by the Department of Energy of Liquified 
        Natural Gas (LNG) import applications, coupled with streamlined 
        certification of infrastructure projects (LNG terminals and 
        requisite pipeline facilities) by the Federal Energy Regulatory 
        Commission (FERC) and the U.S. Coast Guard and, as important, 
        timely approvals by states under the Coastal Zone Management 
        Act and the Clean Water Act;
          (4) development of deepwater resources throughout the Gulf of 
        Mexico; and
          (5) advocacy of vigorous conservation programs for 
        residential, commercial, and industrial users of natural gas 
        through federal, state, and utility-delivered programs designed 
        to utilize natural gas more efficiently. For example, well-
        maintained and tuned-up furnaces and boilers can help reduce 
        natural gas demand by more efficient applications, thereby 
        having a positive impact on supply.
  long term recommendation: enhance fuel diversity and infrastructure
    The electric power industry is searching for ways to continue the 
production of low-cost electricity essential for the United States to 
compete in a global economy. From our perspective, one of the most 
important steps Congress and the President can take is to advance 
federal policies that will assure the availability of an adequate and 
diverse fuel supply for the generation of electricity. Fuel diversity 
means that coal, nuclear, hydro, wind, solar, natural gas--and other 
fuel sources as they become available--can be used by generators of 
electricity to mitigate price or supply risk in any one source. It also 
means ``fuel switching'' or maintaining a ``dual fuel capability,'' 
where natural gas-fired plants are constructed. Permit conditions 
should be developed that allow for switching between natural gas and 
oil products in times of either high prices or limited natural gas 
supplies.
    Policies advanced by the Congress and the Administration need to 
maximize the diversity of fuel sources available for the generation of 
electricity while allowing market forces to dictate the choice, in any 
given circumstance, of how to assure the low-cost production of 
electricity. Fuel diversity needs to include the ability to move large 
blocks of power between regions so that diverse electric supplies can 
move into various regions. For example, the potential of wind 
development throughout The Great Plains is limited by a lack of high-
voltage transmission lines to carry the abundant raw resource to 
markets, either East or West. A more robust transmission system would 
expand inter-regional powerflows, providing a more diverse generation 
mix to regions that now have limited fuel options.
    Stimulation of investment in transmission will do little to help if 
permitting and siting of new transmission lines continues to take more 
than a decade. EEI acknowledges the positive language contained in S. 
14 on permitting and recommends to the Senate the more specific 
provisions in H.R. 6, the House Energy bill. These provisions give the 
Department of Energy (DOE) lead agency authority to coordinate the 
federal authorization process for transmission lines and establishes 
project specific coordination requirements. Another provision gives 
last-resort backstop siting authority to FERC. Together with the 
corridor designation provisions H.R. 6, such new provisions will do a 
great deal to introduce transparency into the permitting process and 
facilitate timely siting decisions.
    As transmission is helpful in distributing electricity, a market 
basket of generating technologies (coal, nuclear, hydroelectric and 
renewables as well as natural gas) is helpful to fuel diversity and 
price stability. The price of converting different fuels to electricity 
varies by technology, but generally, the broader the selection of 
technologies and fuels available to the generator, the better for all 
classes of customers. When hydro generating capacity is reduced by a 
non-functional and prolonged hydro licensing process and federal 
policies unnecessarily hinder the appropriate use of coal, the short 
fall in generating capacity must be made up elsewhere. Carefully 
established hydro and coal policies that allow these fuel sources to 
continue to play a serious role in the nation's fuel mix will help 
alleviate pressure on natural gas supply. EEI vigorously supports the 
licensing provisions of Title III of the Senate Energy bill because 
they will improve the functionality of the hydroelectric licensing 
process.
    The current Clean Air Act's complex and multiple, overlapping 
requirements for electric power generators constrain the use of coal 
generation. This puts additional regulatory pressure on using natural 
gas to generate electricity. The Clear Skies Act (S. 485) would reduce 
such pressures on natural gas by providing certainty to coal 
generators, while achieving roughly 70 percent emission reductions in 
sulfur dioxide, nitrogen oxides and mercury emissions over a timeframe 
that would promote immediate environmental improvements and industry 
stability through certain and cost-effective emissions reductions. In 
contrast, both the Clean Power Act (S. 366) and the Clean Air Planning 
Act (S. 843) would severely exacerbate natural gas cost and supply 
concerns. In addition, current Clean Air Act New Source Review (NSR) 
policy and guidelines exacerbate the natural gas challenge because NSR 
creates great uncertainty for coal-based power generators.
    Congress should be certain that federal energy, environmental and 
economic policies do not: (1) inadvertently create a policy climate 
wherein one fuel, such as natural gas, becomes the only practical 
option for new generation; (2) effectively preclude the use of certain 
abundant and low-cost fuels; or (3) sharply limiting the generators' 
flexibility to select a fuel mix that can optimize the production of 
electricity, thereby providing low cost power to consumers. In 
addition, EEI supports Congressional efforts to reauthorize and extend 
the production tax credits for renewable energy sources as the best 
means of incentivizing renewable technologies.
     the value of natural gas as a fuel for generating electricity
    Electricity is the backbone of the modern economy. Advancements in 
technology have increased U.S. productivity and driven growth, but 
technology depends on ever increasing amounts of electricity. 
Currently, coal generation provides 50.1% of the nation's electricity 
supply, nuclear generation provides 20.3%, natural gas provides 18.1%, 
hydropower and other renewables provide 9.1%, and oil generation 
provides 2.4%.
    In the past 10 years, natural gas-fired generation has been 
critical to providing the low-cost electricity that is crucial to 
assuring that the United States can compete in the global economy. 
Natural gas has become the default fuel for new power plants because 
plants fueled by natural gas are highly efficient, have predictable and 
short construction cycles, and produce lower emissions. The trend was 
aided by the historically low cost of natural gas and the pressures on 
the costs of the other traditional sources of fuel for generating 
electricity.
    While natural gas-only-fired power plants account for 18% of the 
fuel used by all generation nationwide, 88% of the new electric 
capacity built in the last 10 years use natural gas as their primary, 
and in many cases only, fuel. The percentage of natural gas used as 
fuel for electric generation will most likely increase in the future. 
There are good reasons for this.
    First, power plants fired by natural gas have become very 
efficient. Combustion turbines fueled by natural gas (simple cycle) 
were originally designed to augment large baseload producers of 
electricity (coal, nuclear, and hydroelectricity). They run for brief 
periods of time or a few hours annually to help meet peaking 
requirements. By being smaller and specialized, the combustion turbine 
minimized the capital costs of construction and could be quickly 
installed. Simple cycle power plants became especially desirable when 
the nation had excess baseload supply and when cost overruns were 
common in the construction of baseload units, particularly for nuclear 
projects.
    During the 1990's, the emergence of higher efficiency combustion 
turbines accelerated the role played by natural gas-fired power plants 
in the nation's generation mix. The ``Heat Recovery Steam Generator,'' 
where waste heat from a combustion turbine is used to produce steam and 
turn a steam turbine--hence the term ``combined cycle''--created 
efficiencies greater than 50% per each BTU of energy combusted. This 
compares to efficiency rates of 35-40% for coal plants. Highly 
efficient combined cycle plants in 2003 now have an efficiency rate 
over 55%. Thus, some are now being used for baseload operations, rather 
than just for peaking or load-following.
    Second, the construction lead-times for natural gas-fired 
generation are shorter than those for coal and nuclear plants. This 
benefits owners and developers by limiting the exposure of capital 
because there is a shorter period when costs are being incurred but no 
electricity is being sold.
    Third, construction costs for gas-fared generation are easier to 
estimate and much less likely to be subject to construction cost over-
runs than other types of power plants. This also makes it easier for 
owners and investors to take the risk of investing millions of dollars 
in a new power plant.
    Fourth, it is much easier to get environmental permits for natural 
gas power plants because of their lower emissions profile relative to 
more traditional coal or oil units. There is also a belief in the 
financial community that gas-fired plants have less regulatory risk. 
They have, therefore, been easier to finance than other more capital-
intensive types of generating plants.
    Fifth, natural gas has traditionally been a relatively cheap fuel 
source.
    Sixth, natural gas-fired units can often be sited to optimize 
location on both the natural gas transmission system and the high-
voltage electric transmission system.
    Finally, for the electric system, one crucial advantage of natural 
gas technology is its quick start capability and ability to move from 
zero output in a combustion turbine, to full power in less than an 
hour. A combined cycle takes longer than the combustion turbine because 
of the longer time required to receive power out of the heat recovery 
steam generator. This ability to easily ``load follow'' is very helpful 
in an industry that constantly rebalances supply to serve customers 
instantaneously (for voltage control purposes).
    We recognize that load following presents challenges to the natural 
gas transmission industry that, if not coordinated with pipeline 
dispatch operations, can create operational difficulties. The amount of 
gas demanded by a combustion turbine going to full power or shutting 
down rapidly because of fall-off in electricity demand can create 
imbalances in the pipeline system. Natural gas storage and even 
liquefied natural gas (LNG) helps in managing operational requirements 
of gas-fired generation. Further development of storage facilities 
throughout the natural gas market area, including LNG facilities, will 
be crucial to the balancing of gas supply and demand, and to electric 
operations.
    In some regions of the country, dependence on natural gas is 
pronounced. For example, in the gas-producing Southwest, some utilities 
came to rely on natural gas as a boiler fuel for electric production 
when other market uses for natural gas were not well developed. Because 
utilities were using boilers to generate electricity, they could switch 
fuels from natural gas to various grades of oil for either price or 
supply reasons. Some of these units are now being retired, further 
reducing the fuel flexibility of the electric industry. Only 24% of the 
168,760 MW of gas-fired generation in operation since 1993 have dual 
fuel capability, and that percentage is declining. RDI's PowerDat data 
base predicts that by 2011, only 7% of the 188,215 MW of new natural 
gas capacity planned is identified to have dual fuel capability. The 
figure of 188,215 MW represents 71% of total new electric generation 
under construction until 2011. While some new gas-fired power plants 
can burn oil, there are three main impediments to actually making the 
switch to oil. The physical requirements of the combustion turbine, 
such as increased maintenance needs and possible warranty limitations 
from the turbine manufacturer, discourage switching to oil. 
Environmental permits may preclude the use of oil because of increased 
NOX emissions associated with the use of distillate oil 
(1702). Finally, many local zoning regulations do not allow the 
construction of oil storage tanks.
    All of these factors associated with the loss of dual fuel 
capability at gas-fired power plants add inflexibility to the increased 
demand for natural gas in generating electricity. The increased demand, 
along with weather conditions, economic growth, and increased end use 
demand for natural gas--such as the 70% of new homes that are built 
each year with natural gas heating systems, can contribute to higher 
natural gas commodity prices and greater price volatility.
    The United States benefits from robust and diverse natural gas 
supplies. Congress, the Administration and the FERC should publicly 
encourage the development of new production, new pipeline capacity, and 
market-area storage to assist in meeting the demand of the electricity 
producer and other end users of natural gas. EEI supports the oil and 
natural gas production incentive provisions in the Senate and House 
energy bills and, as previously mentioned, believes Congress can do 
more to assure low-cost, competitive energy, while protecting the 
environment.
    There are those who advocate end-use restraints on natural gas. 
These are not appropriate solutions for addressing natural gas supply 
and demand problems. The market has the ability to manage supply, and 
over time will return to equilibrium. The market needs to be allowed to 
send price signals that will stimulate investment in alternative 
generating technologies, dual-fuel opportunities, and development of 
capital intensive new gas supplies. End-use restraints, even if applied 
prospectively, have the potential to create considerable economic 
inefficiency and would be counterproductive.
    For those concerned about impacts of high natural gas prices on 
residential gas users directly, and electricity customers indirectly, 
we urge Congress to fully fund LIHEAP and other consumer related 
organizations assisting those who have a difficult time paying monthly 
utility bills. EEI strongly recommends that the Congress appropriate 
the full $3.4 billion authorized for LIHEAP funding for FY '04. 
Weatherization program expenditures can assist those in need by 
reducing their demand for space heating or cooling.
                               conclusion
    In conclusion, the use of natural gas to create electricity has 
been good for consumers and should remain an accessible fuel source for 
electric generators. There are strong economic, efficiency, and 
environmental reasons to use natural gas in the generation of 
electricity. Even if, as a nation, we transition to greater reliance on 
other diverse fuel sources and generation technologies, natural gas 
will continue to be a necessary backstop. It is therefore essential 
that we take the steps that are necessary to assure an adequate 
supply,. It is also crucial, however, that Congress and the president 
provide greater regulatory certainty to the generators of electricity--
particularly as to the environmental standards which new and existing 
generating sources of all types will have to meet--and that the 
permitting and siting processes be streamlined to reduce the current 
long-lead times.
                                 ______
                                 
  Statement of David N. Parker, President & Chief Executive Officer, 
                American Gas Association, Washington, DC
                           executive summary
    The American Gas Association represents America's local natural gas 
utilities. AGA member companies acquire natural gas supply for, and 
distribute it to, 53 million homes and businesses. As a result, 
adequate supplies of competitively priced natural gas are of critical 
importance to AGA and its member companies. Similarly, ample supplies 
of reasonably priced natural gas are of critical importance to the 
millions of consumers that AGA members serve. We are here today to 
speak for those consumers.
    The natural gas industry is currently at a critical crossroads. The 
``gas bubble'' of the 1980s and 1990s disappeared prior to the winter 
of 2000-2001. Supply and demand is now in precarious balance. The 
industry today no longer basks in prodigious supply; rather, it treads 
a supply tightrope, bringing with it unpleasant and undesirable 
economic and political consequences--most importantly high prices and 
higher price volatility. Both consequences harm natural gas consumers--
residential, commercial, and industrial.
    Since the beginning of this year, the circumstances in which our 
industry finds itself have become plainly evident through significantly 
higher natural gas prices. Natural gas prices have consistently hovered 
around or above $5 per thousand cubic feet in most wellhead markets. 
Similarly, the forward price curve in recent months for natural gas 
traded in futures markets has reached an all-time high. Simply put, 
natural gas prices are high, and the marketplace is predicting that 
they will stay high.
    Energy is the lifeblood of our economy. Millions of Americans rely 
upon natural gas to heat their homes, and high prices are a serious 
drain on their pocketbooks. High, volatile natural gas prices also put 
America at a competitive disadvantage, cause plant closings, and idle 
workers. Directly or indirectly, natural gas is critical to every 
American.
    It is expected that natural gas demand will increase by 
approximately 50 percent over the next two decades. This growth will 
occur because natural gas is the most environmentally friendly fossil 
fuel and is an economic, reliable, and homegrown source of energy. It 
is in the national interest that natural gas be available to serve the 
demands of the market. The federal government must address these issues 
and take prompt and appropriate steps to ensure that the nation has 
adequate supplies of natural gas at reasonable prices.
    Many of the fields from which natural gas is currently being 
produced are mature. Over the last two decades, technological advances 
have greatly enhanced the ability to find natural gas as well as to 
produce the maximum amount possible from a field. While technology will 
undoubtedly continue to progress, technology alone will not be 
sufficient to maintain or increase our domestic production.
    As Federal Reserve Chairman Greenspan noted in his testimony, 
today's tight natural gas markets have been a long time in coming but 
there are still numerous unexploited sources of gas production in the 
United States. Today, we are not running out of natural gas and we are 
not running out of places to look for natural gas. Nevertheless, we are 
running out of places where we are allowed to look for gas. The truth 
that must be confronted now is that, as a matter of policy, this 
country has chosen not to develop much of its natural gas resource 
base.
    If America's needs for energy are to be met, there is no choice 
other than for exploration and production activity to migrate into new, 
undeveloped areas. There is no question that the nation's natural gas 
resource base is rich and diverse. It is simply a matter of taking E&P 
activity to the many areas where we know natural gas exists. 
Regrettably, many of these areas--largely on federal lands--are either 
totally closed to exploration and development or are subject to so many 
restrictions that timely and economic development is not possible. As 
we contemplate taking these steps, it is important that all understand 
that the E&P business is--again as a result of technological 
improvements--enormously more environmentally benign today than it was 
25 years ago. In short, restrictions on land access that have been in 
place for many years need to be reevaluated if we are to address the 
nation's current and future energy needs.
    The House of Representatives has recognized these concerns, which 
are plainly evident in H.R. 6. We are also gratified that this 
committee recognized them in passing S. 14. The most important next 
step the entire Congress can take to address these pressing issues is 
to enact a comprehensive energy bill with provisions ensuring that 
lands where natural gas is believed to exist are available for 
environmentally sound exploration and development. Additionally, it is 
appropriate to create incentives to seek and produce this natural gas. 
These steps are necessary to help consumers and the economy.
                           written testimony
    I am David N. Parker, President & Chief Executive Officer of the 
American Gas Association (``AGA''). AGA is grateful for the opportunity 
to share its views with you on the critical importance to the nation of 
ensuring ample natural gas supplies at competitive prices. Doing so is 
necessary for the nation--both to protect consumers and to address the 
energy and economic situations we currently face.
    AGA is composed of 191 natural gas distribution companies, which 
deliver gas throughout the United States. Local gas utilities deliver 
gas to more than 64 million customers nationwide. AGA members deliver 
approximately 83 percent of this natural gas.
    AGA members are charged with the responsibility, under local law or 
regulation, of acquiring natural gas for the majority of their 
customers and delivering it in a safe and reliable manner. Having an 
ample supply of natural gas at reasonable prices is a critical issue 
for AGA and its members. AGA members and the consumers they serve share 
both an interest and a perspective on this subject.
    It is important to understand that the bread and butter business of 
AGA members is acquiring and delivering natural gas to residential, 
commercial, and industrial consumers across America. Our members remain 
economically viable by delivering natural gas to consumers at the 
lowest reasonable price, which we do by operating our systems--over a 
million miles of distribution lines--as efficiently as possible. 
Exploring for and producing natural gas is the business of our energy-
industry colleagues in the oil and gas business, whether they are 
major, independent, or ``Mom and Pop'' operators. We are not here to 
speak for them today, but their continued success in providing natural 
gas to America's consumers is of the utmost importance to us as well. 
Today, we are here to speak for consumers who want reasonable heating 
bills and good jobs.
    I have three objectives today. First, I will briefly explain why 
natural gas prices have jumped this year. Second, I will describe the 
magnitude of the natural gas supply challenge facing this country over 
the next two decades. Third, I will recommend a number of steps that 
Congress can take to help bring natural gas prices down in the long 
term.
    AGA is encouraged that Congress is addressing this increasingly 
critical issue. This year we have been privileged to testify before 
this Committee, the House Resources Committee, and the House Energy and 
Commerce Committee with regard to the challenging issue of natural gas 
supply. We also are gratified that H.R. 6, the Energy Policy Act of 
2003, which was passed by the House of Representatives in April 2003, 
contains a wide array of provisions designed to bring forth more of 
America's prodigious supply of natural gas to benefit consumers. That 
bill is without question more focused on natural gas supply than were 
the iterations under consideration in 2001 and 2002. Similarly, we are 
gratified by the efforts of this Committee in approving S. 14 and the 
efforts of the Senate Finance Committee in approving S. 1149. Both 
bills contain important, substantial provisions aimed at solving our 
natural gas supply situation.
    Adequate natural gas supply is crucial to all of America for a 
number of reasons. It is imperative that the natural gas industry and 
the government work together to take significant action in the very 
near term to assure the continued economic growth, environmental 
protection, and national security of our nation. The tumultuous events 
in energy markets over the last two years serve to underscore the 
importance of adequate and reliable supplies of reasonably priced 
natural gas to consumers, to the economy, and to national security.
    AGA wishes to commend the leadership of the Committee for convening 
this important hearing so promptly after considering S. 14. To be sure, 
there has been a crescendo of public policy discussion with regard to 
natural gas supply since the ``Perfect Storm'' winter of 2000-2001. 
Nevertheless, in the time since AGA first testified on Capitol Hill in 
February and March of this year, the volume and the tenor of this 
discussion have increased dramatically. Simply put, this issue becomes 
more critical with every passing day.
    Since the beginning of this year, natural gas has been trading in 
wellhead markets throughout the nation at prices floating between $5 
and $6 per thousand cubic feet. This has not been a ``price spike'' of 
the sort that we have seen in the past, lasting several days or perhaps 
several weeks. Rather, it has been sustained over a period of several 
months. And there is no sign that it will substantially abate in the 
near future. Indeed, quotes for futures prices on NYMEX over the next 
24 months have recently reached a consistent record level mirroring 
cash prices.
    In the course of the last several months, business consumers of 
natural gas have been raising a cry of concern over natural gas prices. 
And this concern has touched businesses of all stripes. In Connecticut, 
for example, pizza shops complain that their natural gas bills have 
increased $500-700 per month. The chemical and pharmaceutical industry, 
which uses 10% or more of the U.S. gas supply annually, has been 
reeling from increased natural gas prices. It has been projected that 
the chemical industry in Louisiana will lose at least 2,000 jobs as a 
result of high gas prices. Similarly, a major chemical company in 
Mississippi has declared bankruptcy, citing natural gas prices. That 
industry needs gas prices between $2.50 and $3.00 per thousand cubic 
feet to remain competitive on the world stage, while prices since the 
beginning of the year have been averaging in the range of $5.00 per 
thousand cubic feet. Similarly, fertilizer plants, where natural gas 
can represent 80% of the cost structure, are closing one facility after 
another. Glass manufacturers, which also use large amounts of natural 
gas, have reported earnings falling by 50% as a result of natural gas 
prices. In our industrial and commercial sector, competitiveness in 
world markets and jobs at home are on the line.
    Businesses and factories tend to purchase most of their own gas, 
and they quickly feel increases in prices. Residential customers, in 
contrast, typically rely upon their local utilities to act as merchants 
on their behalf. As a result of the manner in which state approved 
regulatory mechanisms operate, most consumers will not begin to feel 
current high gas prices for months.
    This winter, some families will pay hundreds of dollars more to 
heat their homes, which will be hundreds of dollars less they will have 
to spend on other things. Families will again be forced to make 
difficult decisions between paying the gas bill, buying a new car, or 
saving for future college educations. There are, of course, state and 
federal programs such as LIHEAP to assist the most needy. This winter 
the potential price increases will affect all families--those on fixed 
income, the working poor, and the lower-income group, as well as those 
caught between living comfortably and living day to day.
    America received its first wake-up call on natural gas supply two 
years ago when a confluence of events--a cold winter, a hot summer and 
a surging economy--created the so-called ``perfect storm.'' This jump 
in demand sent natural gas prices soaring. Drilling boomed, supply grew 
(slightly), demand fell, and gas prices retreated--just what one would 
expect from a competitive, deregulated natural gas market. Falling 
natural gas prices predictably led to a slowdown in drilling. The 
industry drilled 30% fewer gas wells in 2002 than in 2001. This 
downturn in drilling in 2002 set the stage for another run-up in prices 
this year.
    Today, natural gas prices are back at winter 2001 levels because 
demand is up and supply is down. Demand is up in part because we had a 
normal winter. Frankly, consumers are fortunate we did not have a 
colder-than-normal winter. Moreover, high oil prices this year are 
propping up natural gas prices. In certain markets, notably the U.S. 
Northeast, gas competes with oil products. Unlike in 2001, when high 
gas prices led to the substitution of oil for gas, substitution has not 
kicked in as quickly this year as it did two years ago. Meanwhile, 
while demand is up, U.S. natural gas production in the fourth quarter 
of 2002 was down about 4% from the fourth quarter of 2001. Indeed, U.S. 
natural gas production today is lower than it was five years ago--
despite a big jump in drilling in recent years.
    The level of gas prices we are experiencing today could unleash a 
firestorm of protest in the fall and winter of this year as some 
consumers may see their natural gas bills double. The next twelve 
months may make the winter of 2000-2001 look tame from the perspective 
of consumers, regulators, and legislators. If history is any guide, 
angry consumers will soon be calling on Congress to ``do something'' 
about high natural gas prices. Some forward-looking state public 
utility commissions, having learned from the 2000-2001 experience, are 
beginning to express concern over the possible impact of the winter of 
2003-2004. Last month, the Secretary of Energy held a Natural Gas 
Summit with the National Petroleum Council to address the situation.
    These are only the first few alarms in what seems likely to become 
a very difficult year. Unless we make the proper public policy 
choices--quickly--we will be facing many more difficult years.
    The natural gas industry is presently at a critical crossroads. The 
question before you today is: What will that crossroads look like? Will 
it look like a brand new interstate highway? Or will it look like a 
100-car collision on a Los Angeles freeway? It is important to remember 
that at the heart of this intersection are America's consumers.
    For the past three years, natural gas production has operated full-
tilt to meet consumer demand. The ``surplus deliverability'' or ``gas 
bubble'' of the late 1980's and 1990's is simply gone. No longer is 
demand met while unneeded production facilities sit idle. No longer can 
new demand be met by simply opening the valve a few turns. The valves 
have been, and presently are, wide open.
    The supply tightrope has brought with it several inexorable and 
unpleasant consequences--prices in the wholesale market have gone up, 
and that market has become much more volatile. During the 2000-2001 
heating season, for example, gas prices moved from the $2 level to 
approximately $10 and back again to nearly $2. Such volatility hurts 
consumers, puts domestic industry at a competitive disadvantage, closes 
plants, and idles workers. The winter of 2000-2001 made it abundantly 
clear to us (and to you as well) that consumers dislike these price 
increases and the market volatility that is now an everyday norm. 
Unless significant actions are taken on the supply side, gas markets 
will remain tumultuous, and 63 million gas customers will suffer the 
consequences. Today's recurrent $5 price levels may represent a new, 
and regular, level of natural gas prices for the foreseeable future, 
although this prospect can be moderated with aggressive and enlightened 
public policy.
    As gas utilities, we have a number of programs in place to insulate 
consumers to some extent from the full impact of wholesale price 
volatility, but consumers must ultimately pay the price that the market 
commands. We believe that there will be considerable economic and 
political pushback should natural gas prices stabilize at the current 
$5 level for anything but a brief period of time.
    The problem that we face today is not simply one of finding means 
to meet current demands in the market for natural gas. Rather, we are 
in a growing market, and the demand for natural gas in the U.S. is 
expected to increase 50 percent by 2015-2020. Growth seems inevitable 
because natural gas is a clean, economic, and domestic source of 
available energy. It does not face the environmental hurdles of coal 
and nuclear energy, the economic and technological drawbacks of most 
renewable energy forms, or the national security problems associated 
with imported oil.
    In its recent Annual Energy Outlook 2003, the Energy Information 
Administration predicts that U.S. natural gas consumption will increase 
at an average rate of 1.8% per year to about 35 trillion cubic feet per 
year in 2025, from 22.7 trillion cubic feet in 2001. Much of this 
growth in natural gas demand will occur in the electricity market. In 
fact, the U.S. now has over 150,000 megawatts of new gas-fired power 
plants on line that did not exist in the summer of 1999--the equivalent 
of about 70 Diablo Canyon nuclear power plants.
    A 35 trillion cubic foot market implies an increase in average 
daily gas supply from about 60 billion cubic feet per day today to 
about 95 billion cubic feet per day in 2025--a 35 billion-cubic-foot-
per-day increase in deliverability. (To give you some perspective on 
this potential increase, current production from the entire Gulf of 
Mexico is only about 14 billion cubic feet per day, and imports from 
Canada are about 10 billion cubic feet per day.)
    The challenge for both government and industry is quite 
straightforward: to ensure that both the current and future needs for 
natural gas are met at reasonable and economic prices. There can be no 
responsible question that facilitating this result is sound public 
policy. Natural gas is abundant domestically and is the environmentally 
friendly fuel of choice. Ensuring adequate natural gas supply will lead 
to reasonable prices for consumers, will dampen the unacceptable 
volatility of wholesale natural gas markets, will help keep the economy 
growing, and will help protect the environment.
    America has a large and diverse natural gas resource; producing it, 
however, can be a challenge. Providing the natural gas that the economy 
requires will necessitate: (1) providing incentives to bring the 
plentiful reserves of North American natural gas to production and, 
hence, to market; (2) making available for exploration and production 
the lands--particularly federal lands--where natural gas is already 
known to exist so gas can be produced on an economic and timely basis; 
(3) ensuring that the new infrastructure that will be needed to serve 
the market is in place in a timely and economic fashion.
    Natural gas--our cleanest fossil fuel--is found in abundance 
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent 
of the natural gas supplied to U.S. consumers originates in the United 
States or Canada.
    The estimated natural gas resource base in the U.S. has actually 
increased over the last several decades. In fact, we now believe that 
we have more natural gas in the U.S. than we estimated twenty years 
ago, notwithstanding the production of more than 300 trillion cubic 
feet of gas in the interim. This is true, in part, because new sources 
of gas, such as coalbed methane, have become an important part of the 
resource base. Nonetheless, having the natural gas is not the same as 
making that natural gas available to consumers. That requires natural 
gas production.
    Natural gas production is sustained and grows only by drilling in 
currently productive areas--or by exploring in new areas. Over the past 
two decades a number of technological revolutions have swept across our 
industry. We are able today to drill for gas with dramatically greater 
success and with a significantly reduced environmental impact than we 
were able to do twenty years ago. We are also much more efficient in 
producing the maximum amount of natural gas from a given area of land. 
A host of technological advances allows producers to identify and 
extract natural gas deeper, smarter, and more efficiently. For example, 
the drilling success rate for wells deeper than 15,000 feet has 
improved from 53 percent in 1988 to over 82 percent today. In addition, 
gas trapped in coal seams, tight sands, or shale is no longer out of 
reach.
    While further improvements in this regard can be expected, they 
will not be sufficient to meet growing demand unless they are coupled 
with other measures. Regrettably, technology alone cannot indefinitely 
extend the production life of mature producing areas. New areas and 
sources of gas will be necessary.
    Notwithstanding the dramatic impact of innovation upon our 
business, the inevitable fact today is that we have reached a point of 
rapidly diminishing returns with many existing natural gas fields. This 
is almost entirely a product of the laws of petroleum geology. The 
first ten wells in a field may ultimately produce 60 percent of the gas 
in that field; yet it may take forty more wells to produce the balance. 
In many of the natural gas fields in America today, we are long past 
those first ten wells and are well into those forty wells in the field. 
In other words, the low-hanging fruit have already been picked in the 
orchards that are open for business.
    Drilling activity in the U.S. has moved over time, from onshore 
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then 
to the Rocky Mountains. Historically, we have been quite dependent on 
fields in the Gulf of Mexico. But recent production declines in the 
shallow waters of the Gulf of Mexico have necessitated migration of 
activity to deeper waters to offset this decline. These newer, more 
expensive, deepwater fields tend to have short lives and significantly 
more rapid rates of decline in production than is the case with onshore 
wells.
    The sobering reality is that America's producers are drilling a lot 
more wells today than they were five years ago. Nevertheless, supply is 
still down. U.S. gas producers are on an accelerating treadmill, 
running harder just trying to stay in place. For reasons that are 
partly due to technology, and partly due to the maturing of the 
accessible natural gas resource base, a typical well drilled today will 
decline at a faster rate than a typical well drilled a decade ago. 
Moreover, because up to half of this country's current natural gas 
supply is coming from wells that have been drilled in the past five 
years, this decline trend is likely to continue.
    Before we can meet growing gas demand, we must first replace the 
perennial decline in production. The U.S. natural gas decline rate will 
be in the range of 26-28 this year. In practical terms, if all drilling 
stopped today, in twelve months U.S. natural gas production would be 
26-28% lower than it is today. The accelerating decline rate helps 
explain why U.S. gas deliverability has been stuck in the 52-54 billion 
cubic feet per day range for the past eight years, notwithstanding an 
increase in gas-directed drilling.
    In short, America's natural gas fields are mature--in fact, many 
are well into their golden years. There is no new technology on the 
horizon that will permit us to pull a rabbit out of a hat in these 
fields. These simple, and incontrovertible, facts explain why we are 
today walking a supply tightrope and why the winter of 2000-2001 may 
become a regular occurrence, particularly at the point the economy 
returns to its full vigor. Having the winter of 2000-2001 return every 
year will undoubtedly put a brake on the economy, once again causing 
lost output, idle productive capacity, and lost jobs.
    If we are to continue to meet the energy demands of America and its 
citizens and if we are to meet the demands that will they make upon us 
in the next two decades, we must change course. It will not be enough 
to make a slight adjustment of the tiller or to wait three or four more 
years to push it over full. Rather, we must come full about, and we 
must do it in the very near future. Lead times are long in our 
business, and meeting demand years down the road requires that we begin 
work today.
    We have several reasonable and practical options. It is clear that 
continuing to do what we have been doing is simply not enough. In the 
longer term we have a number of options:
    First, and most importantly, we must increase natural gas 
production by looking to new frontiers within the United States. 
Further growth in production from this resource base is jeopardized by 
limitations currently placed on access to it. For example, most of the 
gas resource base off the East and West Coasts of the U.S. and the 
Eastern Gulf of Mexico is currently closed to any exploration and 
production activity. Moreover, access to large portions of the Rocky 
Mountains is severely restricted. The potential for increased 
production of natural gas is severely constrained so long as these 
restrictions remain in place.
    To be direct, America is not running out of natural gas, and it is 
not running out of places to look for natural gas. America is running 
out of places where we are allowed to look for gas. The truth that must 
be confronted now is that, as a matter of policy, this country has 
chosen not to develop much of its natural gas resource base. We doubt 
that that many of the 63 million American households that depend on 
natural gas for heat are unaware that this choice has been made on 
their behalf.
    In this vein, the Rocky Mountain region is expected to be a growing 
supplier of natural gas, but only if access to key prospects is not 
unduly impeded by stipulations and restrictions. Two separate studies 
by the National Petroleum Council and the U.S. Department of the 
Interior reached a similar conclusion--that nearly 40 percent of the 
gas resource base in the Rockies was restricted from development to 
some degree, some partially and some totally. On this issue, the 
Department of the Interior noted that there are nearly 1,000 different 
stipulations that can impede resource development on federal lands.
    One of the most significant new gas discoveries in North America in 
the past ten years is located just north of the U.S./Canada border in 
eastern Canadian coastal waters on the Scotian shelf. Natural gas 
discoveries have been made at Sable Island and Deep Panuke. Gas 
production from Sable Island already serves Canada's Maritimes 
Provinces and New England through an offshore and land-based pipeline 
system. This has been done with positive economic benefits to the 
region and without environmental degradation. This experience provides 
an important example for the United States, where we believe that the 
offshore Atlantic area has a similar geology.
    In some areas we appear to be marching backward. The buy-back of 
federal leases where discoveries had already been made in the Destin 
Dome area (offshore Florida) of the eastern Gulf of Mexico was a 
serious step back in terms of satisfying consumer gas demand. This 
action was contrary to what needs to be done to meet America's energy 
needs. With Destin Dome we did not come full about, as we need to do; 
rather, we ran from the storm.
    Geographic expansion of gas exploration and drilling activity has 
for the entirety of the last century been essential to sustaining 
growth in natural gas production. Future migration, to new frontiers, 
to new fields, in both the U.S. and Canada, will also be critical. 
Without production from geographic areas that are currently subject to 
access restrictions, it is not at all likely that producers will be 
able to continue to provide increased amounts of natural gas from the 
lower-48 states to customers for longer than 10 or 15 years. We believe 
that the same is true in Canada as well.
    Quite simply, we do not believe that there is any way, other than 
exploring for natural gas in new geographic areas, to meet America's 
anticipated demand for natural gas unless we turn increasingly to 
sources located outside North America.
    In the middle of the 20th century, when the postwar economy had 
begun its half-century climb and when natural gas became the fuel of 
choice in America, our colleagues in the producing business opened one 
new natural gas field after another in the mid-continent. In this era, 
it was not that difficult to produce a triple or a home run virtually 
every inning. As those fields developed, producers continued to hit a 
regular pattern of singles and doubles, with the occasional triple or 
home run in new discovery areas. This same pattern in the mid-continent 
was repeated in the Gulf of Mexico. Today, however, it is extremely 
difficult to find the new, open areas where the producing community can 
continue to hit the ball. As things are today, America has confined 
them to a playing field where only bunts are permitted. The Yankees did 
not get to the World Series playing that kind of game.
    AGA does not advance this thesis lightly. Over the past two years 
both the American Gas Association and the American Gas Foundation have 
studied this important issue vigorously. We have believed for several 
years that it is necessary for policy makers to embrace this thesis so 
that natural gas can continue to be--as it has been for nearly a 
century--a safe and reliable form of energy that is America's best 
energy value and its most environmentally benign fossil fuel. We think 
that events in gas market in 2003 underscore that our concerns have 
been on the mark.
    When the first energy shock transpired in the early 1970s, the 
nation learned, quite painfully, the price of dependence upon foreign 
sources of crude oil. We also learned, through long gasoline lines and 
shuttered factories, that energy is the lifeblood of our economy. 
Nevertheless, thirty years later, we are even more dependent upon 
foreign oil than we were in 1970. Regrettably, the nation has since 
failed to make the policy choices that would have brought us freedom 
from undue dependence on foreign-source energy supplies. We hope that 
the nation can reflect upon that thirty-year experience and today make 
the correct policy choices with regard to its future natural gas 
supply. We can blame some of the past energy problems on a lack of 
foresight, understanding, and experience. We will not be permitted to 
do so again.
    Meeting our nation's ever-increasing demand for energy has an 
impact on the environment, regardless of the energy source. The 
challenge, therefore, is to balance these competing policy objectives 
realistically. Even with dramatic improvements in the efficient use of 
energy, U.S. energy demand has increased more than 25 percent since 
1973, and significant continued growth is almost certain. Satisfying 
this energy demand will continue to affect air, land, and water. A 
great American success story is that, with but five percent of the 
world's population, we produce nearly one-third of the planet's 
economic output. Energy is an essential--indeed critical--input for 
that success story both to continue and to grow.
    It is imperative that energy needs be balanced with environmental 
impacts and that this evaluation be complete and up-to-date. There is 
no doubt that growing usage of natural gas harmonizes both objectives. 
Finding and producing natural gas is accomplished today through 
sophisticated technologies and methodologies that are cleaner, more 
efficient, and much more environmentally sound than those used in the 
1970s. It is unfortunate that many restrictions on natural gas 
production have simply not taken account of the important technological 
developments of the preceding thirty years. The result has been 
policies that deter and forestall increased usage of natural gas, which 
is, after all, the nation's most environmentally benign and cost-
effective energy source.
    Natural gas consumers enjoyed stable prices from the mid-1980s to 
2000, with prices that actually fell when adjusted for inflation. 
Today, however, the balance between supply and demand has become 
extremely tight, creating the tightrope effect. Even small changes in 
weather, economic activity, or world energy trends result in wholesale 
natural gas price fluctuations. We saw this most dramatically in the 
winter of 2000-2001. We may be seeing it today on a longer-term basis.
    In the 1980s and `90s, when the wholesale (wellhead) price of 
traditional natural gas sources was around $2 per million British 
thermal units, natural gas from deep waters and Alaska, as well as LNG, 
may not have been price competitive. However, most analysts suggest 
that these sources are competitive when gas is in a $3.00 to $4.00 
price environment. Increased volumes of natural gas from a wider mix of 
sources will be vital to meeting consumer demand and to ensuring that 
natural gas remains affordable.
    Increasing natural gas supplies will boost economic development and 
will promote environmental protection, while achieving the critical 
goal of ensuring more stable prices for natural gas customers. Most 
importantly, increasing natural gas supplies will give customers--ours 
and yours--what they seek: reasonable prices, greater price stability, 
and fuel for our vibrant economy. On the other hand, without policy 
changes with regard to natural gas supply, as well as expansion of 
production, pipeline and local delivery infrastructure for natural gas, 
the natural gas industry will have difficulty meeting the anticipated 
50 percent increase in market demand. Price increases, price 
volatility, and a brake on the economy will be inevitable.
    Second, we need to increase our focus on non-traditional sources, 
such as liquefied natural gas (LNG). Reliance upon LNG has been modest 
to date, but it is clear that increases will be necessary to meet 
growing market demand. Today, roughly 99 percent of U.S. gas supply 
comes from traditional land-based and offshore supply areas in North 
America. Despite this fact, during the next two decades, non-
traditional supply sources such as LNG will likely account for a 
significantly larger share of the supply mix. LNG has become 
increasingly economic. It is a commonly used worldwide technology that 
allows natural gas produced in one part of the world to be liquefied 
through a chilling process, transported via tanker, and then re-
gasified and injected into the pipeline system of the receiving 
country. Although LNG currently supplies less than 1 percent of the gas 
consumed in the U.S., it represents 100 percent of the gas consumed in 
Japan.
    LNG has proven to be safe, economical and consistent with 
environmental quality. Due to constraints on other forms of gas supply 
and increasingly favorable LNG economics, LNG is likely to be a more 
significant contributor to U.S. gas markets in the future. It will 
certainly not be as large a contributor as imported oil (nearly 60 
percent of U.S. oil consumption), but it could account for 10-15 
percent of domestic gas consumption 15-20 years from now if pursued 
aggressively and if impediments are reduced.
    It is unlikely that LNG can solve the entirety of our problem. 
About ten new LNG import terminals have been proposed, each with 
capacities of about 1 billion cubic feet per day. Even if all of these 
LNG terminals were built (which is frankly not a likely scenario), LNG 
would only supply about 10-15% of the expected market in 2025 of 35 
trillion cubic feet. Given the intense ``not on our beach'' opposition 
to siting new LNG terminals, a major supply impact from LNG may be a 
tall order indeed.
    Third, we must tap the huge potential of Alaska. Alaska is 
estimated to contain more than 250 trillion cubic feet--enough by 
itself to satisfy U.S. natural gas demand for more than a decade. 
Authorizations were granted twenty-five years ago to move gas from the 
North Slope to the Lower-48, yet no gas is flowing today nor is any 
transportation system under construction. Indeed, every day the North 
Slope produces approximately 8 billion cubic feet of natural gas that 
is re-injected because it has no way to market. Alaskan gas has the 
potential to be the single largest source of price and price volatility 
relief for U.S. gas consumers. Deliveries from the North Slope would 
not only put downward pressure on gas prices, but they would also spur 
the development of other gas sources in the state as well as in 
northern Canada.
    Fourth, we can look to our neighbors to the north. Canadian gas 
supply has grown dramatically over the last decade in terms of the 
portion of the U.S. market that it has captured. At present, Canada 
supplies approximately 15 percent of the United States' needs. We 
should continue to rely upon Canadian gas, but it may not be realistic 
to expect the U.S. market share for Canadian gas to continue to grow as 
it has in the past or to rely upon Canadian new frontier gas to meet 
the bulk of the increased demand that lies ahead for the United States.
    The pipelines under consideration today from the Prudhoe Bay area 
of Alaska and the Mackenzie Delta area of Canada are at least five 
years from reality. They are certainly facilities that will be 
necessary to broaden our national gas supply portfolio. We must 
recognize, however, that together they might eventually deliver up to 8 
billion cubic feet per day to the lower 48 States, just 8% of the 95 
billion cubic feet per day that is envisioned for the 2025 market.
    I would like to return to my first point above. There is much talk 
today of the need for LNG, Alaska gas, and Canadian gas. There is no 
question that we need to pursue those supplies to meet both our current 
and future needs. Nonetheless, it is equally clear that, in order to 
meet the needs of the continental United States, we will need to look 
principally to the lower 48 States.
                            recommendations
    To promote meeting consumer needs, economic vitality, and sound 
environmental stewardship, the American Gas Association urges Congress 
as follows:

          Current restrictions on access to new sources of natural gas 
        supply must be reevaluated in light of technological 
        improvements that have made natural gas exploration and 
        production more environmentally sensitive.
          Federal and state officials must take the lead in overcoming 
        the pervasive ``not in my backyard'' attitude toward energy 
        infrastructure development, including gas production.
          Interagency activity directed specifically toward expediting 
        environmental review and permitting of natural gas pipelines 
        and drilling programs is necessary, and agencies must be held 
        responsible for not meeting time stipulations on leases, lease 
        review, and permitting procedures.
          Federal lands must continue to be leased for multi-purpose 
        use, including oil and gas extraction and infrastructure 
        construction.
          Both private and public entities should act to educate the 
        public regarding energy matters, including energy efficiency 
        and conservation. Federal and state agencies, with private 
        sector support and involvement, should strive to educate the 
        public on the relationship between energy, the environment, and 
        the economy. That is, energy growth is necessary to support 
        economic growth, and responsible energy growth is compatible 
        with environmental protection.
          Economic viability must be considered along with 
        environmental and technology standards in an effort to develop 
        a ``least impact'' approach to exploration and development but 
        not a ``zero impact''.
          Existing moratoria for onshore lands should be lifted.
          The geologic conditions for oil and gas discovery exist in 
        the U.S. mid-Atlantic area, the Pacific Offshore area, and the 
        eastern portion of the Gulf of Mexico.

   Although some prospects have been previously tested, new 
        evaluations of Atlantic oil and gas potential should be 
        completed using today's technology--in contrast to that of 20 
        to 30 years ago.
   The federal government should facilitate this activity by 
        lifting or modifying the current moratoria regarding drilling 
        and other activities in the Atlantic Offshore, in the Pacific 
        Offshore, and in the Gulf of Mexico to ensure that adequate 
        geological and geophysical evaluations can be made and that 
        exploratory drilling can proceed.
   The Destin Dome (181 lease area) should immediately be 
        offered for lease for oil and gas exploration.
   The federal government must work with the States to assist--
        not impede--the process of moving natural gas supplies to 
        nearby markets should gas resources be discovered in commercial 
        quantities. Federal agencies and states must work together to 
        ensure the quality of the environment, but they must also 
        ensure that infrastructure (such as landing an offshore 
        pipeline) is permitted and not held up by multi-jurisdictional 
        roadblocks.

    The Federal government should continue to permit royalty relief 
where appropriate to change the risk profile for companies trying to 
manage the technical and regulatory risks of operations in deepwater.
    Tax provisions such as percentage depletion, expensing geological 
and geophysical costs in the year incurred, Section 29 credits, and 
other credits encourage investment in drilling programs, and such 
provisions are often necessary, particularly in areas faced with 
increasing costs due to environmental and other stipulations.
    The Coastal Zone Management Act (CZMA) is being used to threaten or 
thwart offshore natural gas production and the pipeline infrastructure 
necessary to deliver natural gas to markets in ways not originally 
intended. Companies face this impediment even though leases to be 
developed may be 100 miles offshore. These impediments must be 
eliminated or at least managed within a context of making safe, secure 
delivery of natural gas to market a reality.
    The U.S. government should work closely with Canadian and Mexican 
officials to address the challenges of supplying North America with 
competitively priced natural gas in an environmentally sound manner.
    Renewable forms of energy should play a greater role in meeting 
U.S. energy needs, but government officials and customers must realize 
that all forms of energy have environmental impacts.
    Construction of an Alaskan natural gas pipeline must begin as 
quickly as possible.
    Construction of this pipeline is possible with acceptable levels of 
environmental impact.
    The pipeline project would be the largest private sector investment 
in history, and it would pose a huge financial risk to project 
sponsors. Many believe the project may not be undertaken without some 
form of federal support.
    The Federal Energy Regulatory Commission (FERC) announced in 
December 2002 that it would not require LNG terminals to be ``open 
access'' (that is, common carriers) at the point where tankers offload 
LNG. This policy will spur LNG development because it reduces project 
uncertainty and risk.
    Other federal and state agencies should review any regulations that 
impede LNG projects and act similarly to reduce or eliminate these 
impediments.
    Efforts should be made to encourage existing LNG terminals to 
commence operating at full capacity at the earliest opportunity.
    The siting of LNG offloading terminals is generally the most time-
consuming roadblock for new LNG projects. Federal agencies should take 
the lead in demonstrating the need for timely approval of proposed 
offloading terminals, and state officials must begin to view such 
projects as a means to satisfy supply and price concerns of 
residential, commercial and industrial customers.
    Some new LNG facilities should be sited on federal lands so that 
permitting processes can be expedited.
    Congress should increase LIHEAP funding. Low-income energy 
assistance is currently provided to roughly 4 million households, only 
15 percent of those eligible. The financial burden on needy families 
will certainly increase this winter, and LIHEAP appropriations should 
be increased to $3.4 billion--up from $2.0 billion of total assistance 
in 2003.
    Should gas supplies become extremely tight, the federal government 
and the States should consider easing environmental restrictions on a 
temporary basis so that electric generating facilities and industrial 
facilities can switch to alternative fuels.
    States should be encouraged to authorize local utilities to enter 
into fixed-price long-term contracts and/or natural gas hedging 
programs as a means of dampening the impact of natural gas price 
volatility upon consumers.

                                    

      
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