[Senate Hearing 112-215]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-215
 
                         LIQUEFIED NATURAL GAS

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   TO

   CONSIDER MARKET DEVELOPMENTS FOR U.S. NATURAL GAS, INCLUDING THE 
    APPROVAL PROCESS AND POTENTIAL FOR LIQUEFIED NATURAL GAS EXPORTS

                               __________

                            NOVEMBER 8, 2011


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               Committee on Energy and Natural Resources



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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington           MIKE LEE, Utah
BERNARD SANDERS, Vermont             RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan            DANIEL COATS, Indiana
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire        JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota                DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia      BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Collins, Jim, Director of Underground Utilities, Hamilton, OH....    35
Medlock Kenneth B., III, James A. Baker III and Susan G Baker 
  Fellow in Energy and Resource Economics, James A Baker III 
  Institute for Public Policy, Rice University, Houston, TX......    27
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     2
Slaughter, Andrew, Shell Exploration & Production Company, 
  Houston, TX....................................................    33
Smith, Christopher, Deputy Assistant Secretary for Oil and 
  Natural Gas, Office of Fossil Energy, Department of Energy.....     3
Wright, Jeff C., Director, Office of Energy Projects, Federal 
  Energy Regulatory Commission...................................     8

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    53

                              Appendix II

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


                         LIQUEFIED NATURAL GAS

                              ----------                              


                       TUESDAY, NOVEMBER 8, 2011

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:32 a.m. in 
room SD-366, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. OK, we'll get started. Thank you all for 
coming today. The subject of this hearing is discussing 
liquefied natural gas or LNG, and what role it might play in 
the future of the U.S. natural gas industry.
    We had a hearing in 2005 on the future of LNG and the 
hearing topics from 2005 and today sound similar. However, in 
2005 we were thinking about and anticipating the need to import 
growing quantities of LNG. Today we're thinking about what role 
LNG exports might play in our energy future.
    As I see it there are 2 main objectives of our hearing 
today.
    First, it's important to understand that laws and 
regulations that govern LNG exports were put into place 
assuming the United States would be an importing country, not 
an exporting country. Therefore it probably makes sense to take 
a new look at them in light of the new market situation.
    The second purpose of the hearing, is to understand how 
exports might affect the domestic natural gas market. The 
implications of increased gas exports for U.S. job creation and 
balanced payments could be very positive. At the same time I 
note that U.S. energy security requires reliable and affordable 
energy prices, not just reliable supplies. Therefore, 
understanding how exports might affect domestic prices is also 
critical.
    Currently U.S. natural gas prices are considerably lower 
than prices in most of the rest of the world. How can we ensure 
that our export policy is consistent with our continued ability 
to reap the benefits of our new found abundance of natural gas?
    I thank the witnesses for coming to share their 
perspectives today. Let me defer to Senator Murkowski for any 
opening statement she has.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. Welcome to the 
witnesses.
    I think it is perhaps, somewhat remarkable, as you note, 
the changes that we have seen in just a few years. It was maybe 
5 or 6 years ago that we were fearing that LNG imports would be 
necessary at a pretty large scale to meet our domestic demands. 
I was eager to avoid that for obvious energy security reasons 
and believe that there would be a greater need for Alaska's 
natural gas in the lower 48 market. Really the technology seems 
to be telling us something very different now.
    So I want to preface my remarks by noting that for all of 
the grand planned, all the ideas to establish a national energy 
policy that had emerged over the years, most of them have 
missed what would turn out to be the most important development 
of all. Suddenly we see at our fingertips a massive supply of 
natural gas which goes a long way toward achieving many of our 
most fundamental goals whether that's cleaner burning energy or 
simply more secure, more affordable and certainly more domestic 
fuel.
    As some bit of credit, I think, may be due to our 
Department of Energy's Fossil R and D program. But I don't 
think that we should fool ourselves. The government did not 
make this happen. The natural gas resource is proving up under 
existing conditions without any mandate, without any tariff or 
moratorium, without so much as a tweak in any laws or 
regulations. While Congress has largely talked about fixing a 
problem, the private sector was taking a huge step toward 
actually fixing it.
    Now Americans are faced with a great problem. This is a 
great problem to have. What do we do with all of our natural 
gas?
    My own opinion is that we do well not to try and make those 
decisions from behind this dais up here, but instead let the 
market work as much as possible. Our proper course won't be 
sweeping legislation or layers of new regulation. Instead, it 
will be to ensure a degree of comfort that our new found energy 
security can be maintained under current export rules.
    Now I happen to have some experience on the issue of LNG 
export in much more challenging conditions than we're 
discussing today. Many people don't realize that Alaska has had 
an LNG export terminal for over 4 decades now. We've been 
shipping gas to Japan from our offshore oil fields in Cook 
Inlet. In the past several Congresses I've supported renewal of 
that export license even though the local conditions were 
somewhat challenging both in terms of price and supply.
    That was a complex, difficult decision, especially since we 
didn't have the luxury of abundant and cheap gas like we do 
now. But we did have to face reality. The option of exporting 
LNG served as an incentive for producers in Alaska to keep 
those supplies coming, especially when local demand was not 
high enough to merit strong production there in Cook Inlet. 
Instead what helped keep production flowing was the decision to 
ensure that companies would sell their excess supply to the 
always hungry Asian markets.
    From experience we should know that we can't expect 
producers to go out and find natural gas that they cannot, on 
occasion, expect to--when they can't expect to sell it to high 
bidders. That's generally why the industry developed in the 
first place. That's why the technology has arrived here today.
    I've stated publicly and very clearly that there is a 
Federal interest in our rigorous process for making a 
determination that exports be in the public interest. Law 
currently provides that all export licenses be reviewed on a 
case by case basis. There are no calls to repeal those 
requirements even though we're in an environment of very low 
prices and abundant supply. I wouldn't support or encourage 
such a proposal.
    There's caution built into this system, certainly more than 
there is for other products which we export. I think that 
that's a good thing.
    I'm going to close by suggesting that we would perhaps 
sleep better at night, I hope, if we knew that our Nation was, 
again, an energy exporter and with a sufficient supply to 
comfortably remain an exporter while still doing productive 
things with plenty of our own supply here at home. Think of the 
good that we could do.
    Instead of dollars flowing out of our country, we would see 
dollars flowing in.
    Instead of jobs being created, investments being made 
abroad, those benefits would be retained here.
    That would do wonders for both our energy security, our 
trade balance and the growth of our economy.
    Mr. Chairman, I appreciate the fact that we are considering 
these issues today and look forward to the testimony from both 
panels.
    The Chairman. Thank you very much.
    Let me introduce our first witnesses here, our first panel.
    Mr. Chris Smith is the Deputy Assistant Secretary for Oil 
and Natural Gas in the Office of Fossil Energy in the 
Department of Energy.
    Our other witness is Mr. Jeff Wright, who is the Director 
of the Office of Energy Projects with the Federal Energy 
Regulatory Commission.
    Why don't you proceed in that order unless there's some 
reason to do it in a different order, but we appreciate if you 
could give us 5, 6 or 7 minutes of summarizing the main points 
you think we need to understand. We will include your full 
statements in the record.
    Mr. Smith, go right ahead.

STATEMENT OF CHRISTOPHER SMITH, DEPUTY ASSISTANT SECRETARY FOR 
  OIL AND NATURAL GAS, OFFICE OF FOSSIL ENERGY, DEPARTMENT OF 
                             ENERGY

    Mr. Smith. Thank you very much, Chairman Bingaman, Ranking 
Member Murkowski and members of the committee. I appreciate the 
opportunity to be here to discuss Department of Energy's 
regulation of liquefied natural gas exports.
    DOE's authority to regulate the export of LNG arises from 
Section Three of the Natural Gas Act and Section 301B of the 
DOE Organization Act.
    Section 301A of the Natural Gas Act creates a rebuttable 
presumption that a proposed export of natural gas in the public 
interest and requires DOE to grant an export application unless 
the record in the proceeding overcomes this presumption.
    The Energy Policy Act of 1992 introduced a new section, 
3(c), to the Natural Gas Act. This new section created a 
different standard of review for applications to export LNG to 
most countries with which the United States has a free trade 
agreement. Section 3(c) defines those applications to be 
consistent with the public interest, to be granted without 
modification or delay. DOE does not conduct a public interest 
analysis of these applications and cannot condition them.
    On the other hand, DOE conducts a full public interest 
review of applications to export LNG to non-free trade 
agreement countries. Utilizing a publicly transparent process 
DOE conducts a wide range of--considers a wide range of 
criteria including domestic need for the natural gas proposed 
for export, U.S. energy security and other relevant issues.
    Over the last several years, domestic natural gas 
production, primarily from domestic shale formations has 
increased significantly. Natural gas prices and imports of LNG 
have therefore declined. This has led to an interest by 
industry in exporting LNG to international markets where higher 
prices can be obtained.
    DOE issued the first order granting long term authority to 
export lower 48 produced LNG to non-free trade agreement 
countries in May 2011 to Sabine Pass Liquefaction, LLC. In that 
order DOE stated that the cumulative impact of the Sabine Pass 
authorization and similar future authorizations would need to 
be evaluated to ensure that the total volume of authorized 
exports by all such authorizations did not threaten the public 
interest.
    DOE presently has before it 4 long term applications to 
export lower 48, domestically produced LNG to countries with 
which the United States does not have a free trade agreement. 
The volumes of LNG that could be authorized for export in these 
non-free trade agreement applications, including the 2.2 
billion cubic feet per day authorized for export in Sabine 
Pass, total 6.6 billion cubic feet per day which represents 
about 10 percent of the total current domestic natural gas 
daily produced in the United States. Consistent with the 
Natural Gas Act the Department of Energy already has granted 
authorization from these 5 facilities to export the same volume 
to free trade agreement countries.
    In order to address the potential cumulative impact of a 
grant of the pending applications, the Department of Energy has 
commissioned 2 studies, one by EIA and the other by a private 
contractor. These studies will address the impacts of 
additional natural gas exports on domestic energy consumption, 
production and prices, as well as a cumulative impact on U.S. 
economy including the creation of new jobs, impact on GDP and 
balance of trade and other factors. We anticipate that these 
studies will be completed in the first quarter of the calendar 
year, 2012.
    Thank you very much. I would be happy to answer any 
questions that you may have.
    [The prepared statement of Mr. Smith follows:]

Prepared Statement of Christopher Smith, Deputy Assistant Secretary for 
   Oil and Natural Gas, Office of Fossil Energy, Department of Energy

    Thank you Chairman Bingaman, Ranking Member Murkowski, and members 
of the Committee; I appreciate the opportunity to be here today to 
discuss the Department of Energy's (DOE) program regulating the export 
of natural gas, including liquefied natural gas (LNG). DOE's Statutory 
Authority DOE's authority to regulate the export of natural gas arises 
under section 3 of the Natural Gas Act, 15 USC 717b, and section 301(b) 
of the DOE Organization Act, 42 USC 7151. That authority is vested in 
the Secretary of Energy and has been delegated to the Assistant 
Secretary for Fossil Energy.
    Section 3(a) of the Natural Gas Act sets forth the standard for 
review of most LNG export applications:

    --[N]o person shall export any natural gas from the United States 
            to a foreign country or import any natural gas from a 
            foreign country without first having secured an order of 
            the [Secretary of Energy] authorizing it to do so. The 
            [Secretary] shall issue such order upon application, unless 
            after opportunity for hearing, [he] finds that the proposed 
            exportation or importation will not be consistent with the 
            public interest. The [Secretary] may by [the Secretary's] 
            order grant such application, in whole or part, with such 
            modification and upon such terms and conditions as the 
            [Secretary] may find necessary or appropriate.

    Section 3(a) thus creates a rebuttable presumption that a proposed 
export of natural gas is in the public interest, and requires DOE to 
grant an export application unless DOE finds that the record in the 
proceeding of the application overcomes that presumption. Section 3(a) 
also authorizes DOE to attach terms or conditions to the order that the 
Secretary finds are necessary or appropriate to protect the public 
interest.
    In the Energy Policy Act of 1992 (EPAct 92), Congress introduced a 
new section 3(c) to the Natural Gas Act. Section 3(c) created a 
different standard of review for applications to export natural gas, 
including LNG, to those countries with which the United States has in 
effect a free trade agreement requiring the national treatment for 
trade in natural gas. Section 3(c) requires such applications to be 
deemed consistent with the public interest, and requires such 
applications to be granted without modification or delay.
    There are currently 15 countries with which the United States has 
in place free trade agreements that require national treatment for 
trade in natural gas. These 15 countries include:

    --Australia, Bahrain, Canada, Chile, Dominican Republic, El 
            Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, 
            Nicaragua, Oman, Peru, and Singapore.

    There also are two countries--Israel and Costa Rica--that have free 
trade agreements with the United States that do not require national 
treatment for trade in natural gas. Additionally, there are three more 
countries--South Korea, Colombia, and Panama--that have negotiated free 
trade agreements with the United States. While these three free trade 
agreements have recently been ratified by the U.S. Senate, the 
agreements have not yet taken effect. However, as negotiated, the 
agreements require national treatment for trade in natural gas, which 
will have the effect of bringing applications to export LNG to those 
three countries under section 3(c) of the Natural Gas Act.
    Because applications under section 3(c) must be granted without 
modification or delay and are deemed to be in the public interest, DOE 
does not conduct a public interest analysis of those applications and 
cannot condition them by the insertion of terms which otherwise might 
be considered necessary or appropriate.
    For applications requesting authority to export LNG to countries 
that do not have free trade agreements requiring national treatment for 
trade in natural gas, DOE conducts a full public interest review. A 
wide range of criteria are considered as part of DOE's public interest 
review process, including:

    --Domestic need for the natural gas proposed for export
    --Adequacy of domestic natural gas supply
    --U.S. energy security
    --Impact on the U.S. economy (GDP), consumers, and industry
    --Jobs creation
    --U.S. balance of trade
    --International considerations
    --Environmental considerations
    --Consistency with DOE's long-standing policy of promoting 
            competition in the marketplace through free negotiation of 
            trade arrangements
    --Other issues raised by commenters and/or interveners deemed 
            relevant to the proceeding

    DOE's review of applications to export LNG to non-free trade 
agreement countries is conducted through a publicly transparent 
process. Upon receipt of an application, DOE issues a notice of the 
application in the Federal Register, posts the application and all 
subsequent pleadings and orders in the proceeding on its website, and 
invites interested persons to participate in the proceeding by 
intervening and/or filing comments or protests. Section 3(a) applicants 
are typically given an opportunity to respond to any such comments or 
protests and, after consideration of the evidence that has been 
introduced into the record, DOE issues an order either granting the 
application as requested, granting with additional terms or conditions, 
or denying the application.
    Under the Natural Gas Act, DOE's orders are subject to a rehearing 
process that can be initiated by any party to a proceeding seeking to 
challenge DOE's determinations. Court review is available as well after 
the rehearing process is exhausted.

                   RECENT DEVELOPMENTS IN LNG EXPORTS

    Over the last several years, domestic natural gas production has 
increased significantly, primarily due to the development of improved 
drilling technologies, including the ability to produce natural gas 
trapped in shale gas geologic formations. The most recent data and 
analysis prepared by the Energy Information Administration (EIA) within 
DOE shows an increasing volume of shale gas production. Specifically, 
EIA indicates that domestic gross gas production from shale increased 
to 3.4 trillion cubic feet (Tcf) in 2009, compared to 2.3 Tcf in 
2008.\1\ Further, in the Annual Energy Outlook 2011 (AEO 2011), EIA 
projected that, by 2015, annual dry shale gas production will increase 
to 7.2 Tcf and, by 2035, to 12.2 Tcf. Natural gas prices have declined 
and imports of LNG have significantly declined. Recently, the domestic 
price of natural gas at the Henry Hub for November 2011 delivery was 
$3.60 per million Btu.\2\ International prices of LNG are significantly 
higher. Due in part to these changing market economics, DOE has begun 
to receive a growing number of applications to export domestically 
produced lower-48 natural gas to overseas markets in the form of LNG.
---------------------------------------------------------------------------
    \1\ EIA, Natural Gas Gross Withdrawals and Production, Release 
Date: October 29, 2011 http://www.eia.gov/dnav/ng/
ng_prod_sum_dcu_NUS_a.htm
    \2\ The November 2011 contract price as of October 24, 2011, was 
$3.60 per million Btu.
---------------------------------------------------------------------------
    Insofar as these applications have involved exports to free trade 
agreement countries, they are by statute, deemed consistent with the 
public interest and DOE is required to grant them without modification 
or delay. To the extent the applications involve non-free trade 
agreement countries, as I have indicated above, DOE conducts a thorough 
public interest analysis and attaches terms and conditions which are 
necessary or appropriate to protect the public interest.

                     SABINE PASS LIQUEFACTION, LLC

    DOE received the first application for long-term (greater than 2 
years) authority to export LNG produced in the lower-48 States to non-
free trade agreement countries on September 7, 2010, from Sabine Pass 
Liquefaction, LLC (Sabine Pass), a subsidiary of Cheniere Energy, Inc. 
This followed on DOE's earlier issuance of authority to Sabine Pass to 
export a like volume of natural gas to free trade agreement countries 
on September 7, 2010. A notice of the non-free trade agreement export 
application was published in the Federal Register and the public was 
provided 60 days to intervene and/or protest the application.
    Sabine Pass' non-free trade agreement export application sought 
authority to export the equivalent of up to 2.2 billion cubic feet per 
day (Bcf/d) of natural gas, equivalent to about 3.3 percent of current 
domestic consumption. In its application, Sabine Pass pointed to 
several economic and public benefits likely to follow on a grant of the 
requested authorization, including:

    --Creation of several thousand temporary and permanent jobs, both 
            through direct and indirect job formation; and
    --Improvement in U.S. balance of payments valued at approximately 
            $6.7 billion from LNG exports and the impact of increased 
            production of natural gas liquids.

    Additionally, Sabine Pass addressed the question of the domestic 
need for the gas to be exported; the volume of domestic supplies; and 
the likely impact of the proposed exports on natural gas prices. To 
this end, it included with its application several economic and 
technical reports indicating that any increase in natural gas prices 
from the proposed exports would be relatively modest and not 
detrimental to domestic energy security.
    Sabine Pass's application was opposed by the Industrial Energy 
Consumers of America and the American Public Gas Association. Those 
groups challenged Sabine Pass' claims of economic benefits and no 
detrimental impact on domestic energy security. However, neither 
opponent of the application introduced economic or technical studies to 
support their allegations.
    DOE closely analyzed the evidence introduced by the applicant and 
by those opposing the application. Mindful of the statutory presumption 
favoring a grant of the application, the agency found that:

    --The studies introduced by applicant indicated LNG exports will 
            result in a modest projected increase in domestic market 
            price for natural gas, which reflects the increasing 
            marginal costs of domestic production; and
    --The public record supported the conclusion that the requested 
            authorization will yield tangible benefits to the public 
            whereas the allegations of negative impacts submitted by 
            interveners opposing the application were not substantiated 
            on the record. In particular, the interveners failed to 
            offer any rebuttal studies of natural gas supply, demand 
            and/or price analysis to support their claim the 
            application was not consistent with the public interest.

    Following a review of the record in this proceeding, DOE concluded 
that the opponents of the application had not demonstrated that a grant 
of the requested authorization would be inconsistent with the public 
interest, and DOE granted the requested authorization subject to 
several terms and conditions.

                    PENDING LNG EXPORT APPLICATIONS

    As indicated above, applicants are increasingly seeking 
authorization from DOE to export domestic supplies of natural gas as 
LNG to higher priced overseas markets. The Natural Gas Act favors 
granting applications to export to non-free trade agreement countries 
unless it can be demonstrated that a proposed export is inconsistent 
with the public interest. In the case of exports of LNG to free trade 
agreement countries that require national treatment for trade in 
natural gas, DOE is without any authority to deny, condition, or 
otherwise limit such exports.
    Mindful of the growing interest in exporting domestically produced 
LNG, DOE recognized in the Sabine Pass order that the cumulative impact 
of Sabine Pass and additional future LNG export authorizations could 
pose a threat to the public interest. DOE stated that it would monitor 
the cumulative impact and take such action as necessary in future 
orders.
    DOE presently has before it four long-term applications to export 
lower-48 domestically produced LNG to countries with which the United 
States does not have a free trade agreement that requires national 
treatment for trade in natural gas. The volumes of LNG that could be 
authorized for export in these non-free trade agreement applications, 
including the 2.2 Bcf/d authorized for export in Sabine Pass, would 
total 6.6 Bcf/d, which represents 10 percent of total current domestic 
natural gas daily consumption in the United States. Consistent with the 
Natural Gas Act, DOE already has granted authorization from these five 
facilities to export this same volume to free trade agreement 
countries.
    In order to address the potential cumulative impact of a grant of 
the pending applications, DOE has commissioned two studies: one by the 
EIA and the other by a private contractor. Taken together, these 
studies will address the impacts of additional natural gas exports on 
domestic energy consumption, production, and prices, as well as the 
cumulative impact on the U.S. economy, including the effect on gross 
domestic product, jobs creation, and balance of trade, among other 
factors. We anticipate that these studies will be completed in the 
first quarter of calendar year 2012. In this regard, we are mindful of 
the need for prompt action in each of the proceedings before us. 
However, we believe that a sound evidentiary record is essential in 
order to proceed to a decision and that the studies being undertaken 
are important elements of such a record.

                               CONCLUSION

    I am happy to answer any questions that you may have.

    The Chairman. Thank you very much.
    Mr. Wright.

    STATEMENT OF JEFF C. WRIGHT, DIRECTOR, OFFICE OF ENERGY 
         PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Wright. Chairman Bingaman, Ranking Member Murkowski, 
members of the committee, my name is Jeff Wright. I'm the 
Director of the Office of Energy Projects at the Federal Energy 
Regulatory Commission and the views I express are my own and 
not those of the Commission or any individual Commissioner.
    The Office of Energy Projects is responsible for, among 
other things, the authorization and oversight of the 
construction and operation of onshore and near shore liquefied 
natural gas terminals pursuant to Section 3 of the Natural Gas 
Act or Natural Gas Act.
    Today I'll discuss the process which the Commission uses to 
review applications for facilities for the export of LNG. With 
respect to LNG, the Commission is an environmental and safety 
regulatory agency. The Commission does not authorize the import 
or export of the commodity. That authority rests with the 
Department of Energy. Accordingly applications for the 
construction and operation of facilities necessary to perform 
such imports or exports must be submitted to the Commission.
    The Commission's review process is the same for either LNG 
import or export facilities. It is comprised of 3 phases: Pre-
filing review, application review and post authorization 
review. Each stage of the review process requires the 
submission of detailed information that involves a review and 
consultation with key stakeholders and other Federal agencies 
such as the Coast Guard and the Department of Transportation.
    Prospective applicants seeking Commission authority to 
construct and operate an LNG terminal are required under 
Section 3(a) of the Natural Gas Act to participate in a pre-
filing process for a period of at least 6 months. This is the 
beginning of the Commission staff review. It involves not only 
an early analysis of the project proposal, but also provides a 
transparent forum for consultation and discussion.
    The pre-filing process is designed to engage all 
stakeholders in order to identify and resolve potential issues 
related to the construction and operation of a facility before 
the filing of the formal application. During this process 
issues are raised throughout the environmental scoping process 
and/or other means such as open houses, public meetings, site 
visits or filed comments. At this stage information needs are 
identified and studies are conducted as necessary to fill data 
gaps.
    Once the formal application has been filed any interested 
person may intervene in Commission proceedings. Interveners 
become participants in the proceeding and have the right to 
request re-hearing of Commission orders and seek relief of 
final agencies actions in the U.S. Circuit Courts of Appeal. In 
addition all interested parties have the opportunity to place 
their concerns regarding a project into the record and file any 
evidence they feel is important for the Commission to consider.
    During the application phase the Commission staff reviews 
the formal application. Once sufficient information to address 
environmental and safety issues exists in the record, 
establishes a schedule for the production of the environmental 
review document.
    The environmental document is issued for public comment and 
comments received on that document are addressed. The final 
environmental document contains staff's conclusions regarding 
the safety and environmental impacts associated with the 
proposed facilities. The document also includes any recommended 
measures for ensuring safety and mitigating any environmental 
impacts identified through analysis, other proposals and 
consideration of concerns raised during the pre-filing and 
application review.
    After issuance of the final environmental document the 
Commission considers the entire record of the proceeding. If 
the Commission finds that the environmental and safety impacts 
from the construction and operation of the LNG facility are 
acceptable and authorizes the proposal, the project specific 
mitigation measures recommended in the environmental document 
are included as conditions to the authorization.
    During the post authorization review phase detailed plans 
for the Commission required mitigation are developed. Approval 
of these detailed plans must be received before any 
construction may commence.
    During the construction period mitigation measures are 
implemented and monitored. As part of its ongoing post 
authorization reviews staff inspects the construction and 
progress to ensure all required measures are implemented.
    Construction inspections review quality assurance and 
quality control plans, non conformance reports and 
commissioning plans to ensure that the installed design is 
consistent with the safety and operability characteristics of 
the proposal approved by the Commission.
    Finally at the end of the construction, the project sponsor 
will file a request for authorization to commence operation of 
the facility. This final request will not be granted unless all 
measures to ensure safe and secure operations and the necessary 
environmental protections are in place and serving their 
intended purpose. Once the facility is placed in service it is 
subject to inspections by Commission staff for the life of the 
facility. This ensures that the facility will continue to be 
operated and maintained in accordance with the Commission's 
original authorization.
    This concludes my testimony. I'll be happy to answer any 
questions you may have.
    [The prepared statement of Mr. Wright follows:]

   Prepared Statement of Jeff C. Wright, Director, Office of Energy 
             Projects, Federal Energy Regulatory Commission

    Mr. Chairman and Members of the Committee:
    My name is Jeff Wright and I am the Director of the Office 
of Energy Projects (OEP) at the Federal Energy Commission (FERC 
or Commission). I appear today as a Commission staff witness 
speaking with the approval of the Chairman of the Commission. 
The views I express are my own and not necessarily those of the 
Commission or of any individual Commissioner.
    The Office of Energy Projects is responsible for the 
licensing, administration, and safety of non-federal hydropower 
projects; the certification of interstate natural gas pipelines 
and storage facilities; and the authorization and oversight 
over the construction and operation of on-shore and near-shore 
liquefied natural gas (LNG) terminals. Thank you for the 
opportunity to appear before you today to discuss the process 
which the Federal Energy Regulatory Commission uses to review 
applications for facilities for the export of LNG.
    With the creation of the Department of Energy (DOE) in 
1977, Congress directed all applications for authorization for 
the exportation or importation of natural gas to or from a 
foreign country to be submitted to the Secretary of Energy.
    In accordance with the Natural Gas Act and 15 U.S.C. Part 
717, no entity may import or export natural gas without first 
having secured an order from the DOE authorizing it to do so. 
The Secretary of Energy subsequently delegated to the 
Commission the authority to approve or deny applications for 
the construction and operation of those facilities used for the 
import or export of natural gas.\1\ This delegation was most 
recently re-affirmed in 2006 by DOE Delegation Order No. 00-
004.00A.
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    \1\ DOE Delegation Order No. 0201-112. Federal REgister, 49 Fed. 
Reg. 6684 (1984).
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    With respect to LNG, the Commission is an environmental and 
safety regulatory agency. The Commission does not authorize the 
import or the export of LNG as a commodity; that authority was 
retained by the DOE. Accordingly, applications for authority to 
import or export the commodity of natural gas must be submitted 
to the DOE, while applications for the construction and 
operation of the facilities necessary to perform such imports 
or exports must be submitted to the FERC.
    The FERC requirements for filing an application for the 
authorization of LNG import or export facilities are located in 
Title 18, C.F.R., Part 153. Section 153.6 requires an applicant 
to state whether DOE authorization for the import or export of 
natural gas is required and whether DOE has granted the 
required authorizations. Section 3 of the Natural Gas Act (NGA) 
states that the importation of LNG is consistent with the 
public interest. Section 3 also provides that LNG exports to 
countries with which the United States has executed a free 
trade agreement are in the public interest. In those situations 
where applicants are seeking to export (or import) LNG to non-
free trade agreement countries, Section 3(a) of the NGA 
requires the DOE to make a determination on whether such 
exports (or imports) will not be consistent with the public 
interest. The Commission's review process is identical for 
either LNG import or export terminals. This process is 
comprised of three distinct phases: pre-filing review, 
application review, and post-authorization review. Each stage 
of the review process requires the submission of progressively 
more detailed information and involves an exhaustive review and 
consultation with key stakeholders and other federal agencies 
such as the U.S. Coast Guard and the U.S. Department of 
Transportation. How these phases build upon each other is 
described below.
    Section 311 of the Energy Policy Act of 2005 requires 
prospective applicants seeking Commission authority to 
construct and operate an LNG terminal to participate in the 
Commission's Pre-Filing Process for a period of at least six 
months. This is the beginning of the Commission staff review 
and it involves not only an early analysis of the project 
proposal, but also provides a transparent forum for 
consultation and discussion among participants in the process 
(namely, the prospective applicant, FERC staff, affected 
landowners, other federal agencies, state and local entities, 
and the public). The Commission's Pre-Filing Process is 
designed to engage all stakeholders at the earliest point to 
identify and resolve potential issues related to the 
construction and operation of a facility before the filing of a 
formal application. During this process, project-specific 
issues are raised through the environmental scoping process 
and/or other means, such as open-houses, public meetings, site 
visits, or filed comments. Information needs are identified and 
studies are conducted as necessary to fill data gaps. The end 
of the Pre-Filing Process occurs when the applicant files its 
formal application.
    Once the formal application has been filed, any individual 
or organization has the option to intervene in the Commission 
proceeding. Intervenors become participants in a proceeding and 
have the right to request rehearing of Commission orders and 
seek relief of final agency actions in the U.S. Circuit Courts 
of Appeal. In addition to intervention, all interested entities 
have the opportunity to place their concerns regarding the 
project into the record and file any evidence they feel is 
important for the Commission to consider,
    During the application review phase, the Commission staff 
reviews the formal application and, once sufficient information 
to address environmental and safety issues exists in the 
record, establishes a schedule for the production of the 
environmental review documents. The environmental document is 
then issued for public comment, and comments received on that 
document are addressed.
    The final environmental document contains staff's 
conclusions regarding the feasibility, safety, and 
environmental impacts associated with the proposed facilities. 
The document also includes any recommended measures for 
ensuring safety and mitigating any environmental impacts 
identified through analysis of the proposal and consideration 
of concerns raised during the pre-filing and application 
review.
    After issuance of the final environmental document, the 
Commission considers the entire record of the proceeding. If 
the Commission ultimately finds that the environmental and 
safety impacts from the construction and operation of the LNG 
facility are acceptable and authorizes the proposal, the 
project-specific mitigation measures recommended in the 
environmental documents, and any others identified by the 
Commission as necessary, are included as conditions to the 
authorization.
    Development of the information and the consultation 
required by these mitigative measures are the subject of the 
third phase of the Commission's process: post-authorization 
review. It is during the post-authorization review phase that 
detailed plans for the Commission-required mitigation are 
developed. Approval of these detailed plans, and the specified 
conditions of an order, must be received before the 
Commission's second authorization, the authorization to 
commence construction, will be issued. Authorization to 
commence construction will not be issued until the conditions 
requiring pre-construction approval have been satisfied, with 
input as appropriate from all named agencies and other parties.
    During what is typically a multi-year construction period, 
mitigation measures are implemented and monitored. Frequently 
during this period, on-the-ground conditions are identified 
that require modifications of the mitigation plans that were 
developed prior to the start of construction. As part of its 
ongoing, detailed post-authorization project review, staff 
inspects the construction in progress, as do third-party 
inspectors, ensuring that all required measures are 
implemented.
    FERC staff's inspections during construction entail the 
review of quality assurance and quality control plans, non-
conformance reports, and cool down and commissioning plans to 
ensure that the installed design is consistent with the safety 
and operability characteristics of the proposal approved by the 
Commission. Finally, at the end of construction, the project 
sponsor files a request for authorization to commence operation 
of the facility.
    The information contained in this request must demonstrate 
how the project sponsor has complied with all of the Commission 
requirements and must be consistent with the results of the 
Commission's inspections. This final authorization from the 
Commission will not be granted unless all measures to ensure 
safe and secure operations, and the necessary environmental 
protections, are in place and serving their intended purpose.
    Once a facility is placed in service, it is subject to 
continuing inspections by FERC staff for the entire life of the 
facility. This ensures that the facility continues to be 
operated and maintained in accordance with the Commission's 
original authorization.
    This concludes my testimony. I will be happy to answer any 
questions you may have.

    The Chairman. Thank you very much. Let me start with a few 
questions.
    Mr. Smith, let me start with you first of all. What I 
understand of your position or your authority is there in the 
Department of Energy, when there is an application to export 
natural gas to a country that we do not have a free trade 
agreement with, there's a rebuttable presumption that that is 
in the public interest, that export of natural gas. But you 
have the ability to hold a hearing and determine that it's not 
in the public interest, as I understand it.
    Am I right about that so far?
    Mr. Smith. Thank you, Senator, for the question.
    Yes, that's fundamentally correct. When we get an 
application that's for a non free trade country, the 
requirement that the Department of Energy has is to make a 
determination of public interest for that particular 
application. So if it is not determined that going forward and 
approving that application is not in the public interest, then 
that particular application would be approved.
    The Chairman. OK. You also indicate here that you've got 
various applications pending and that the combined volumes of 
LNG that would be authorized for export under those would 
represent 10 percent of total current domestic natural gas 
consumption in the United States. That consistent with the 
Natural Gas Act you have already granted the authorization for 
these 5 facilities to export this 10 percent of the natural 
gas--or volume that represents 10 percent of what we consume in 
this country.
    Is that all accurate?
    Mr. Smith. Senator, that is correct. So there's, as we 
mentioned there's 2 types of applications, one to free trade 
and one to non free trade countries.
    The Chairman. Right.
    Mr. Smith. So given that the applications to free trade 
countries by statute we're required to authorize without delay 
or modification, those have already been authorized consistent 
with the Natural Gas Act.
    The Chairman. OK. Now as to when you make your 
determination as to whether there is any problem with going 
ahead with these permits for the non free trade countries and 
your determination of whether the public interest is adversely 
affected is, to a substantial extent, dictated by what you 
think is going to happen to price. Is that accurate?
    Mr. Smith. Price is one factor that we consider. So when 
we're looking at the public interest determination we consider 
a very wide range of factors.
    We look at impact to the local economy.
    We look at impact to GDP.
    We look at creation of jobs.
    We look at energy security and supply.
    We look at impact on price and the impact that price may 
have on--price changes may have on other industries.
    So we're taking a comprehensive look that considers price, 
but also considers the broad range of impacts that LNG exports 
might bring to our economy.
    The Chairman. OK. I notice we have a report from the 
Congressional Research Service that was just completed. It says 
in its summary here, a significant rise in U.S. natural gas 
exports would likely put upward pressure on domestic prices but 
that the magnitude of any rise is currently unclear.
    You indicate you have some studies going that are going to 
clarify how much of a price change could result from these 
increased exports. Is that accurate?
    Mr. Smith. Yes, sir. So as we look at the studies that are 
currently underway we have a study that's before EIA which is 
going to be looking at what would be, potentially, the increase 
in prices that would come from an incremental increase in 
demand that would be represented by the LNG exports.
    We are also looking at an external contractor, who will 
take that as an input and then based on that potential price 
increase what would be the overall net impact to our economy 
including economic activity increase and jobs, balance of 
trade, etcetera.
    So those are the 2 studies that we have ongoing currently 
that we expect results that will lead to----
    The Chairman. If we deny export permits to export to non 
FTA countries because of expected impacts on our domestic 
prices for natural gas, does this violate the World Trade 
Organization agreements we've entered into?
    Mr. Smith. Senator, I'd actually have to respond to that 
question for the record. But I can give one clarification that 
the public interest determination is a broader determination 
than just the impact on price. So it would be looking at a 
broad range of factors, include all the other economic and 
security of supply issues that we would be concerned about in 
terms of public interest.
    The Chairman. Alright.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Smith, continuing with you. It would seem that one of 
the determining factors when we're looking at capacity for 
export would be the size of the gas resource. You've got a 
whole host of different entities out there. You mentioned EIA, 
but you've got MIT, PGC, ICF. Who does the DOE rely on in terms 
of assessing the resource?
    Is there an entity that you turn to?
    Mr. Smith. Thank you, Senator, for that question. So as you 
note there's a wide range of opinions in terms of the size of 
the natural gas resource. Certainly the first resource that we 
rely on is the EIA estimate in terms of the size of natural gas 
resources.
    The EIA came out with a study earlier in this year that 
took the shale gas estimated resource in the United States from 
somewhere in the order of magnitude of 400 TCF to over, I 
believe, 800 trillion cubic feet. That was one of the larger 
single year increases in reserve assessments that EIA has 
evaluated. That's a figure that's roughly in line with many of 
the other studies that you cite.
    Senator Murkowski. Is it accurate that these estimates 
don't contain any of the undiscovered gas whether it's in 
places like Alaska or the Antrium and the Utica shales?
    Mr. Smith. I know that the EIA considers all of those 
factors in various resource estimates. The number that I just 
quoted just now refers to shale gas resource estimates. So I'm 
not sure that includes some of the undiscovered gas.
    Senator Murkowski. I don't think it does the undiscovered.
    We had some, hopefully, what we consider to be good news 
this past weekend. Escapeta had an announcement in the Cook 
Inlet of what we hope to be some substantial reserves of 
natural gas. We've been exporting again out of Cook Inlet now 
for about 40 years.
    Do you consider that Alaska's resource base and its 
geography place it in a unique position in terms of possible 
export options?
    Mr. Smith. Thank you for the question, Senator.
    Certainly Alaska has a very attractive resource base, one 
that's, of course, of interest to the Department of Energy and 
a lot of the work that we do. I would say that in terms of the 
future potential for exports or what direction exports will 
take that's very likely going to be a direction that's 
determined by the market. There are a number of factors that go 
into that determination.
    So should there be an export opportunity from Alaska the 
process that we follow here would be the same process as the 
process that we've outlined here in my earlier comments. In 
addition to that, there are some stipulations in the Alaska 
Natural Gas Transportation Act for North Slope gas that the 
Department of Energy would also be compelled to consider.
    Senator Murkowski. One last question then I'll go to Mr. 
Wright here.
    Is it accurate that the licenses for LNG export are focused 
or concerned with dry gas as opposed to the natural gas liquids 
that are used for feed stock?
    Mr. Smith. So the exports for LNG would be coming from LNG 
that--the natural gas that actually goes into the LNG process. 
So we're not looking with these export applications at export 
of anything other than natural gas that's been converted to, 
through this cryogenic process to LNG for export in the LNG 
market.
    Senator Murkowski. Thank you.
    Mr. Wright, you had indicated in your testimony that the 
process is the same for either LNG import or export terminals 
when you do the review. Can you clarify for me if is it 
possible for a terminal to go through both reviews, both for an 
export and for an import terminal? How easy is it to switch 
back and forth?
    Mr. Wright. Thank you, Senator.
    If we're talking first about an existing import terminal 
the process is fairly simple.
    Senator Murkowski. So if there was an expansion of that 
terminal you're saying it would be relatively easy?
    Mr. Wright. Yes. If the terminal were in operation, the 
tanks were there. The berths were there for the ships. All that 
we'd need to be added on would be refrigerant, pumps, things to 
make the gas into liquid and be loaded onto the boats.
    I don't want to say it's simple. But it's a lot better. 
It's a lot shorter process than if you were starting on a 
complete green field operation.
    If you were starting from scratch and you didn't have 
anything there. You're talking probably a construction period 
of around 3 to 4 years. The critical path being the 
construction of the LNG storage tanks which is the longest 
piece of equipment time taking that needs to be installed.
    Senator Murkowski. But you can go back and forth in terms 
of a review process. The procedure that you have in place 
allows for that.
    Mr. Wright. Yes.
    Senator Murkowski. OK. Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    I want to get into a little different area, gentlemen. I 
come to this debate really with 2, sort of, fundamental 
principles.
    First, I've been a strong supporter of natural gas. Will 
continue to be. It's exceptionally important to American 
industry whether it's paper, steel, autos, a whole host of 
companies. Obviously to scores and scores of our consumers, who 
depend on natural gas to heat their homes.
    But second, we have seen a dramatic development, which my 
colleagues have talked about, and that is the rapid expansion 
and conversion of these import facilities into export 
facilities. That means that in the future North American 
natural gas prices are going to be tied to world natural gas 
and oil prices. Of course, the old saying is a picture 
illustrates just about everything.
    I want to just show a picture that came from the Wall 
Street Journal recently. It's really a chart. It's titled, Asia 
calling, published 2 weeks ago in the October 27th edition of 
the Wall Street Journal.
    The red line is the spot price for LNG in Asia. The green 
line is the natural gas futures prices for us here in the 
United States. So it's very understandable why North American 
natural gas producers would want to build LNG export terminals 
so they can sell natural gas to Asia and other overseas markets 
at 4 or 4 times the prices here. What's less clear is how this 
is going to be beneficial for our businesses and our consumers 
who are going to have to compete with these prices.
    So let me start with you, Mr. Smith, with a question. In 
your decision to approve the first big LNG export terminal, 
this is the Sabine facility, DOE accepted the applicant's 
analysis on the impact that just this one terminal would have 
on U.S. natural gas prices. That analysis which DOE cited in 
its own approval concluded that just this one terminal would 
raise U.S. natural gas prices by more than 10 percent in 2015 
and by more than 7 percent as far out as the year 2035.
    Now since then, DOE and the National Energy Board in Canada 
have either approved or received applications for LNG exports 
that total almost 5 times the amount of exports DOE first 
approved for Sabine or just under 13 percent of current, daily 
North American demand. So clearly the Department believes that 
raising natural gas prices by 10 percent meets the public 
interest test required by the Natural Gas Act.
    My question is does the Department believe that raising 
natural gas prices by 5 times that amount would be in the 
public interest?
    Mr. Smith. Thank you very much for the question, Senator.
    So I'll touch on a couple of points here. When the public 
interest determination was made for the Sabine Pass 
application, Sabine Pass, when they were--when Cheniere was 
putting forth their application, they did include some studies 
which gave some estimates. Those were studies that were entered 
into the public record and those were the studies that you are 
referring to in your comments.
    Natural gas itself is a very volatile commodity inherently. 
Historically if you look at the price volatility of natural gas 
we've seen a dramatic decrease in natural gas prices over the 
last several years because of an increase in supply. The 
estimate for 2015 and 2030 would be a potential increase in gas 
prices over a base case based on an incremental demand. But 
again, those were studies that were put forward by the 
applicants.
    So as we go forward and we look at the non free trade 
applications that we're currently considering, the Department 
of Energy will be doing a broader public interest determination 
that will look at a more fine model that looks at impacts 
potentially on price and on all the other factors.
    Senator Wyden. My time is short.
    I'm trying to get my arms around where the Department is 
going to draw the line. I mean, given the fact that prices 
overseas are many times higher than North American prices, my 
question really deals with how high do you think the price of 
natural gas in the United States can go up as a result of these 
exports and still meet the public interest test? Is there 
anything else you can tell me about how the Department is going 
to draw the line here so that we can tell American businesses 
and American consumers that they're going to be able to get 
affordable natural gas in light of this new export policy?
    How is this line going to be drawn?
    Mr. Smith. Thank you, Senator.
    So when we look at the public interest determination it is 
going to be multi-factorial. I can't give a number for one 
factor simply because when we're looking at what's in the 
public interest we're going to be looking at impact on GDP. 
We're going to be looking at impact on jobs. We're going to be 
looking at impact on the balance of trade.
    Some of those factors will be impacted by price itself. So 
we understand the importance that price holds. We also 
understand that natural gas at these export levels, it remains 
an inherently local, domestic commodity.
    Prices are higher in Asia, but if you look at the--if you 
compare say natural gas with oil. Oil is the globally fundable 
commodity in which you've got enough transportation 
infrastructure to move oil from market to market. Whereas the 
ability to couple prices in the United States with prices in 
Asia simply there's not the infrastructure that would allow you 
to do that at this point in time.
    Senator Wyden. My time is up. Exports in the United States 
are going to make natural gas like the oil market. That's why 
I'm concerned about what these price hikes could mean for our 
businesses and our consumers.
    Mr. Chairman, thank you.
    The Chairman. Thank you.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    You all the most polite witnesses we've had in a long time. 
Thank you so much.
    Mr. Smith, do you believe what Senator Wyden just said is 
true? That over time with the, you know, expansion of exports 
that we will actually be at prices that are equal to the spot 
market in Asia. Do you believe that to be true or not true?
    Mr. Smith. That's going to be subject of our studies. So 
the, you know, as we look at the public interest determination 
we're going to make sure that we're quantifying these 
questions, that we're understanding them in detail. So the 
answer to that question is going to be revealed by these in-
depth studies that we are undertaking so that we understand the 
impact of any given LNG export application. That we understand 
what truly is in the public interest before we authorize.
    Senator Corker. What are the cost factors in converting 
natural gas to LNG and transporting to Asia? I mean, give us a 
relative increase of cost of actually, to the producer, in 
doing that.
    Mr. Smith. Senator, I'm just not going to know that fact 
off the top of my head. I'm sorry.
    Senator Corker. I guess our next panel will do that.
    Mr. Smith. I could add to that for the record.
    Senator Corker. OK.
    Let me, as you all look at overall--first of all I can 
understand why people who produce natural gas would want to 
seek the highest price available to them as long as, from their 
perspective, why they would want to do that. I understand that. 
I think we all understand that.
    Let me ask this question though. As far as our own U.S. 
consumption, at what point are there trends where you see, even 
in spite of the tremendous amount of production that is taking 
place in this country, thankfully. Is there a place where our 
usage actually at some point out in the future 10 or 20 years 
will be greater than the amount we're producing? Where this 
reverses again like it has in the last 5 years?
    Mr. Smith. Again, Senator, I think the detailed answers to 
a lot of those questions about what's going to happen in the 
future, what's going to happen after the potential 
authorization of various exports. That's going to be a 
hypothetical which we're going to be able to answer within more 
detail as we go forward. We conduct our studies.
    But these are the types of questions that we are looking at 
answering as part of the public interest----
    Senator Corker. You deal in this every day. I mean, what's 
your sense of the demand/supply issue in our country over the 
next 20 years?
    Mr. Smith. Certainly over the next 20----
    Senator Corker. Just your sense.
    Mr. Smith. Over the 20 years I think if you look at the EIA 
figures and other independent figures you'd say that we'd 
certainly be in a position of oversupply for 20 years, for that 
period of time that we'd be looking at having natural gas from 
shale gas resources to supply our economy making the assumption 
and something that we have to confirm and that we have to 
ensure that we produce that resource in a way that's 
environmentally sustainable and safe.
    Senator Corker. So again, if you would, just what are the--
when you look at the public interest in trying to determine the 
permitting of additional export facilities what are some of the 
other public interest issue that you look at other than just 
the price of the commodity itself?
    Mr. Smith. Our job is to look at all things that impact the 
public. So the primary ones that we've talked about today would 
be impact in price, impact on economic activity, impact on 
balance of trade, impact on security of supply and national 
security, impact on creation of jobs, all the things that would 
impact our economy and our society.
    Senator Corker. You know, it's interesting we're having 
this hearing. I thank both of you for coming and for your 
testimony. So here we have a situation in our country where 
fortunately we've found tremendous reserves of natural gas. 
We're actually exporting. I think that's a place that all of us 
are really glad to be and hopefully over time even more natural 
gas usage within this country because of such an abundant 
resource.
    Yet at the same time, on the flip side, in both of your 
departments, I guess, we aren't opening up enough crude oil 
exploration to really offset the balance on the other side. I'm 
wondering if you all ever discuss what a dichotomy that is here 
in our country where on one hand we have this wonderful 
situation with natural gas that hopefully stays for a long, 
long time. On the other hand, we do everything we can to, in 
many ways, to keep from making more crude oil available.
    Do you all have any comments in that regard?
    Mr. Smith. Senator, I can make one comment. You know, 
within the Department of Energy if you look at the goals and 
the mission of the Department of Energy, particularly with 
regards to natural gas with oil, our Department's mission is 
specifically geared toward ensuring the environmental 
sustainability and safety of deep water exploration production 
all the way through shale gas.
    If you look at the key factor that's going to ensure that 
we're able to produce this resource in a way that's sustainable 
and a way that creates value and that prudently develops a 
resource. It's going to come down to being able to do it safely 
because we're producing these resources on the backyards where 
people in live, in communities where people go to school, where 
they work.
    So the work the Department of Energy is working on 
currently in this area is to make sure that we listen to 
communities. We understand what the concerns of communities 
are, that we're addressing those concerns through good science. 
So as we go through regulatory process of ensuring that we're 
mitigating risks through good rulemaking, that those rules are 
based on risks that have been appropriately scientifically 
qualified and that we understand that we're communicating in 2 
directions with communities and can show that we're doing this 
well.
    We truly believe that's going to be a critically important 
thing to do to make sure that we're able to get the full 
benefit out of our resource base. That's a mission that we're 
working on right now on a daily basis.
    Senator Corker. Thank you, Mr. Chairman.
    The Chairman. Senator Coons.
    Senator Coons. Thank you, Mr. Chairman. Thank you for 
calling this hearing and for an opportunity to have a dialog 
with these great witnesses.
    So Secretary and Director, I just would be interested in 
continuing along the line of the questioning that Senator 
Corker was just on. Obviously natural gas is and always will be 
very important to the manufacturing and the chemical industries 
in the United States. But it is also now emerging as a great 
resource for the United States both with job creation and 
wealth creation and potentially an export opportunity as we're 
now the world's leading natural gas producer.
    But when we've had some, I think, some conflicting signals 
from the Energy Information Administration and the National 
Petroleum Council about how abundant is the supply, for what 
timeline, what will the pricing look like? I have some 
questions about how you will take into account the potential 
economic impact for some of our core industries here at home 
should licensing of export begin.
    So, do you have a sense of--have you looked at whether 
there's enough natural gas to answer the whole range, the whole 
diversity of likely or potential demands within the United 
States for it. Is there a regional difference in this country 
in terms of export potential given infrastructure questions?
    Then second, if I might, is it a greater benefit to be 
exporting a raw material, like natural gas, or finished 
materials like chemicals or higher value goods that have been 
made possible by the use of that natural gas in refining 
manufacturing or chemical production here in the United States?
    Mr. Smith. Thank you, Senator, for that question.
    Some of the factors that you're asking about in terms of 
eventual impacts on price and what's the size of the resource 
base and is there going to be enough to supply? Those are going 
to be issues that we are addressing in the public interest 
determination. I mean that's at the core of what we need to 
understand in a very detailed way.
    I would say that there's already a tremendous amount of 
data out there that points to the size of the resource base and 
the years of supply that we have in terms of shale gas. If--we 
have not only the information we've gotten from the EIA and our 
private studies but also there is recently a National Petroleum 
Council study that was commissioned by Secretary Chu which 
specifically focused on to what degree can natural gas 
contribute to some of our energy sustainability goals if it's 
prudently developed.
    So those are all factors that we take into account when 
we're looking at these public interest determinations. In terms 
of your second question on would we prefer to be exporting 
natural resources or exporting finished goods, that would be, I 
think it's a question that would be outside of my, you know, my 
personal subject matter expertise. That would be a question we 
could take for the record.
    Senator Coons. Certainly.
    There is also a number of countries, Poland, Argentina, 
China, I believe that are proceeding fairly rapidly with 
exploration development of shale gas. There may be many others 
in the future. I know the evolution of a global marketplace is 
something like gas is difficult to predict, but are you taking 
the impact of a potentially large overseas developments into 
account as you're developing your pricing models and as you're 
doing that public benefit calculation?
    Mr. Smith. Those are things we do take into account.
    In fact the Department of Energy does work with other 
countries. We're looking not only at, you know, the--potential 
for exporting LNG which is the purpose of this hearing. But 
here's also an opportunity for American innovators and American 
companies to export the technology itself.
    We're working, you know, hand in hand with companies and 
with our counterparts in--from Brazil to China to look at ways 
in which we can create opportunities for American companies 
which also is going to increase the global supply of natural 
gas which I think potentially would have a downward impact on 
prices around the world.
    Senator Coons. Great. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. I was told Senator Hoeven came in next. Is 
that right or is it Senator Barrasso?
    Senator Hoeven. Senator Barrasso.
    The Chairman. Senator Barrasso, go ahead.
    Senator Barrasso. Thank you, Mr. Chairman. Thank you for 
holding this hearing. It gives us another opportunity to 
consider the developments in the American natural gas market. 
You know, I think it is safe to say and all of us would agree 
that the developments that we've seen in the last decade are 
nothing short of extraordinary. I mean, the very fact that 
we're having a hearing to focus on American LNG exports really 
says it all.
    Less than a decade ago the United States was preparing to 
become a major importer of LNG. Now with the growth of 
America's natural gas supply there's interest in exporting 
American natural gas in the form of LNG. Of course, Alaska has 
been doing this since, as our Ranking Member has said, for a 
long time, actually I think back to 1969.
    But now the proposal is to export additional LNG come from 
the lower 48. The proposals raise several important questions, 
specifically what are the costs and what are the benefits of 
new LNG exports? Will the new exports affect consumers such as 
families trying to pay their heating and electricity bills, 
companies deciding whether or not to invest in the United 
States? We all must ask whether new LNG exports will affect the 
incentives for America's natural gas producers and revenues to 
local and State governments as well as the Federal Government.
    Finally we need to ask whether the new LNG exports would 
impact American energy independence. You know, on Friday David 
Brooks wrote a column in the New York Times entitled the Shale 
Gas Gas Revolution. Don't know if you've had a chance to take a 
look at that, Mr. Chairman. I'd like to actually introduce a 
copy of that article by David Brooks for the record.
    Talks about the significant impact and the significant 
changes in just in the last decade. So when I think about what 
Senator Wyden said. He said, you know, where's the Department 
going to draw the line? I think that's the basis of a lot of 
the discussion and the questions.
    For Mr. Smith, I know you've answered some of this and I 
just want to try to fine tune some of the things that you've 
talked about because you did talk about the Department of 
Energy commissioning the 2 studies to consider the potential 
cumulative impact of pending LNG export applications. I think 
you talked a little bit about the one study being done by the 
Energy Information Agency and then also the other by the 
private contractor and how you were going to blend those 
together.
    How do you, specifically, how do the criteria for the 2 
studies kind of compare to the criteria used by the Department 
in the public interest review process for individual LNG export 
applications when you try to take a look at the cumulative 
impact?
    Mr. Smith. Thank you, Senator, for that question.
    So the criteria is going to be fundamentally similar except 
for as we're now considering a number of applications and the 
total volume, you know, the total maximum volume for all the 
applications we're considering now is around 6.6 billion cubic 
feet per day. It becomes a larger and more detailed, more 
complicated question, a more complicated equation. So the 
Department made the decision that we did have to have a more 
precise process, that we had to make sure that we quantified 
some of these things in a way that was open and transparent and 
helped us make sure that we're taking into account all the 
factors that we're concerned about.
    Senator Barrasso. You talked in your testimony about the 
impact on the public, on consumers, on how it affects industry 
and the implications throughout. When you go through the public 
review, the public interest review process, you're going to 
consider the impacts on it said, mineral interest owners when 
they can be private owners.
    They can be State governments and then the Federal 
Government, who has a significant impact and ownership of the 
mineral interest. Will the studies consider the impacts of 
those mineral interest owners because there are impacts in 
terms of tax consequences, of income to the government and in 
terms of our overall economic situation.
    Mr. Smith. You know, in terms of value for producing those 
incremental BTUs of gas for export those would all fall into 
the scope of the study.
    Senator Barrasso. Any insight into whether LNG exports 
might provide long term stability to price of American natural 
gas. I mean, we saw the numbers that Senator Wyden put up in 
terms of the world market, in terms of, you know, families 
dealing with prices, businesses trying to make decisions 
because there's been quite a bit of flexibility and fluctuation 
in the price on the market.
    Mr. Smith. Alright. Again, Senator, those would all be 
factors that we'd consider in the study. Price volatility, 
price levels, what impact it would have on consumers and what 
impact it would have on businesses, those would all be factors 
that would be of interest in making the public interest 
determination.
    Senator Barrasso. OK. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman. Again, I think 
this is a very informative meeting. I would ask I guess, Mr. 
Smith, to you.
    Do you believe and Mr. Wright also with FERC, do you 
believe that the United States could become energy independent 
with all the new resources that we're finding with the oil that 
we have that's been developed and undeveloped and natural gas 
that we're finding now with all the value added to that and 
also our coal and everything that we have. Do you believe if we 
had a good energy policy we could be energy independent and not 
relying on foreign oil?
    Mr. Smith. Yes. Thank you for that question, Senator.
    That is probably a question of breadth and scope that would 
go beyond.
    Senator Manchin. You would know the volumes of resources 
that we have, sir, in your position and also in your prior 
position. Do you not believe if we had an energy policy that 
used all of our resources that we could be energy independent?
    Mr. Smith. Again, Senator, I understand the question. But 
in terms of being able to take what we can quantify and declare 
at this moment and make a determination one way or the other on 
a hypothetical question.
    Senator Manchin. You know we have enough resources, 
correct?
    Would that be fair to say?
    With the new find of natural gas now, you have the 
Marcellus and Utica shale and what we have going on in our 
fossils that we have and our oil that we have, our deposits. If 
you utilized that in the most balanced, economic, environmental 
way, you mean, you don't have an opinion on that?
    Mr. Smith. Senator, I would say that we can observe through 
the figures and production figures and resource figures that we 
do have an oversupply in the current term of natural gas. So 
that oversupply of natural gas is creating an opportunity to 
export natural gas to other markets.
    In terms of how the natural gas resource combines with oil 
and all the other sources of energy that we have in the United 
States, that's just a determination I'm not able to make----
    Senator Manchin. Would the Department of Energy have the 
data to give me an answer on that?
    Mr. Smith. Yes, Senator. I'm sure that the data exists and 
in terms of interpreting the data to come to a conclusion about 
a future state that would be an exercise.
    Senator Manchin. Do you know how much investment from 
foreign countries that we have right now just in a natural gas 
play?
    Mr. Smith. I don't know the answer to that question, 
Senator.
    Senator Manchin. You don't how--you don't know who is 
holding these resources? Is it American solely owned companies 
or major investments from foreign countries that have interest?
    Mr. Smith. There have been investments from foreign 
companies particularly in terms of shale gas. There is an 
interest in the technical and operational competence that has 
been developed between the United States. So I know there is--
--
    Senator Manchin. Let me ask you hypothetically then. If a 
country that has an investment needs the product that comes 
from, let's say the LNG, and they want to start taking it from 
the United States and shipping and exporting it to their 
country. Would they not, in a sense, control pricing of what 
goes on here too?
    Mr. Smith. Senator, again, I think that's a question that 
goes beyond something I'm going to be able to address here in 
this hearing.
    Senator Manchin. How is gas traded? What's the pricing? I 
mean, how is gas priced?
    Would it be subject to global pricing then?
    Mr. Smith. Senator, I mean, if you look at how gas is 
priced, for example, compared to oil. I mean, one thing we can 
say is that gas right now in the current global market is a 
fairly fundamentally local commodity. There is some ability to 
move natural gas from one basin into the other.
    But if you look at the fungibility verses the fungibility 
of oil, you come to the conclusion that oil is truly a more 
fungible commodity than gas. You move about half of the oil 
goes from basin to basin because you can put it easily in a 
ship. There's a global fleet of about 11 to 12,000 crude 
tankers verses LNG that has a global fleet of in the hundreds, 
you know, around 300 LNG tankers.
    So your ability to close arbitrage just from market to 
market for natural gas is considerably less than your ability 
to do so for oil.
    Senator Manchin. I would like to make a formal request, if 
you could, with the resources that our country has, the United 
States of America, if it's plausible for us to be energy 
independent.
    It's a shame that this Nation doesn't have an energy 
policy. That's the thing I'm saying. You're a part of the unit 
of the Energy Department. For us to not have, from our Energy 
Department, a request from this government to have an energy 
policy that uses all of our resources in an environmentally, 
economically friendly way that makes us less dependent on 
foreign oil.
    I just find that hard to believe in the 21st century that 
this country can't move an energy policy that's truly 
independent and the price that we're paying in so many 
different ways on the oil that we seem to be chasing and 
demanding around the world. Natural gas with the play you have 
now with Utica, Marcellus, your fossil fuel deposits of coal 
and your oil and then also the renewables that are coming on 
strong.
    If you can give me a report on that or if you have anything 
in house that would help me out I'd appreciate it.
    Mr. Smith. Thank you, Senator. We look forward to 
responding to that request.
    Senator Manchin. Thank you.
    The Chairman. Senator Hoeven.
    Senator Hoeven. Thank you, Mr. Chairman.
    Director Wright, how much more gas do we produce than we 
consume? What's the growth path on it?
    Mr. Wright. I was glancing at some numbers provided by the 
EIA. Currently I believe we produce probably on average about 5 
BCF per day more than we consume.
    Going forward I don't have a prediction other than looking 
at their long range predictions of the Annual Energy Outlook 
that's put out by EIA. That tends to go to 2035. That shows 
that we will have adequate supplies for the demands that are 
expected for that timeframe.
    Senator Hoeven. But is your projection that we not only 
produce more than we consume now, but that will continue to 
grow which will not only put us in position to export as we're 
discussing today, but also will tend to reduce the price for 
natural gas, make it more--make it cheaper for our use as well.
    Mr. Wright. I don't predict prices and my agency doesn't. 
But operating on your premise that more production, more supply 
could dampen price levels. That is certainly plausible.
    Senator Hoeven. Where I'm going with this and I'll ask 
Secretary Smith the same question now. That is in our State 
we're drilling and producing a lot of oil in the Balkan and the 
Three Forks. We're working on some other geologic formations 
now.
    But in the process we produce a lot of natural gas. Some of 
the infrastructure we're building. We're adding pipeline 
infrastructure. We're gathering systems and transportation to 
markets building pipeline interstate pipelines as well.
    But one of the challenges we have is being able to do that 
as these wells are drilled primarily for oil and so we're 
flaring gas. So we're looking for ways to encourage the 
industry to capture more of this gas, build the gathering 
systems, build the interstate pipelines and get it to markets. 
I would like your ideas on how we can continue to encourage 
that.
    What things can we do to see that instead of flaring that 
gas we get it to market? I'm going to ask Secretary Smith the 
same question.
    Mr. Wright. From an infrastructure perspective we have over 
220,000 miles of interstate pipelines, over 80,000 miles of 
intrastate pipelines. We have storage opportunities in this 
country upwards of 4 trillion cubic feet that can be stored. 
There's much more opportunities a, to expand the infrastructure 
system and the storage system where more of that gas can be 
actually placed in storage and used when it is needed during 
peak seasons.
    That said, there's other ways in terms of possibly 
encouraging more vehicular use of natural gas, more fleet use 
of natural gas. It's a very small proportion of the natural gas 
consumption mix right now.
    If you look at projections it looks like electric 
generation is going to consume an increasingly larger portion 
of the natural gas in this country. Certainly an area that 
could be pushed along with renewables and many studies have 
shown that renewables and--
    Senator Hoeven. Let me rephrase. What specifically are you 
doing at FERC and Secretary Smith, what specifically are you 
doing at Department of Energy that will help us get more of 
this gas captured and delivered to a market where it can be 
sold.
    Mr. Wright. Let me say that FERC is a regulatory agency. In 
that sense it is a reactive agency. People have to propose and 
we dispose.
    What we do do is when people come to us with proposals for 
infrastructure, interstate natural gas infrastructure, under 
our jurisdiction we strive to get that infrastructure approved 
in an environmentally friendly and in a safe way. I would think 
if you looked from the year 2000 to present we've approved over 
16,000 miles of natural gas pipelines and almost a trillion 
cubic feet of underground storage. So in terms of getting 
infrastructure in place to take gas away from the fields, I 
believe FERC has done--
    Senator Hoeven. So you're moving that--well you don't have 
a backlog and it would apply to anything that's interstate be 
it storage or transmission--transportation?
    Mr. Wright. I mean, we always have cases pending. But I 
believe we move things in a fairly expeditious fashion.
    Senator Hoeven. OK. Very good.
    Secretary Smith, your ideas on specifically what we can do 
and what you are doing to get more of this gas captured and 
sold, marketed rather than flared.
    Mr. Smith. Senator, the point you raise is largely an issue 
that is a, driven by the capital decisions that companies make, 
independent operators make, in a market economy and is also 
driven by the State Regulatory agencies that determine the 
limits for flaring.
    So the Department of Energy is a--we're a technology 
organization. We develop technological solutions for energy. So 
we have initiatives in place in which we cooperate with State 
level agencies to try to solve problems.
    There are not a lot of things I can--that I could say that 
build upon Director Wright just mentioned in terms of potential 
solutions, the current infrastructure build out, what can be 
done in terms of storing gas, looking for opportunities for 
increasing demand for gas locally. But it would be something 
that I'd be interested and willing to collaborate with your 
staff or the folks in your State to look for additional 
solutions.
    Senator Hoeven. Mr. Chairman, my time is up. But Secretary 
Smith, if you could I would like your top 5 ideas, if you would 
check with the DOE.
    I'd like your top 5 ideas for how we can do more to 
encourage industry to gather the gas and get it to market 
rather than flaring.
    Mr. Smith. Alright. We'd be glad to provide that.
    Senator Hoeven. Thank you.
    The Chairman. Thank you all very much. We do have one or 2 
other questions before we go to our second panel as I 
understand it.
    Let me ask one question then see if Senator Murkowski does. 
I know Senator Wyden has a question.
    Our joint staff here on the committee has given us a memo 
in preparation for today's hearing. It says in here most LNG 
imports are priced on a formula index to crude oil prices. Is 
that accurate, Mr. Smith?
    Mr. Smith. Yes, Chairman, that's generally accurate.
    The Chairman. So the distinction when we look at the price 
of natural gas, the price of natural gas here in the U.S. is 
not indexed to world oil prices. The price of LNG imports are 
indexed to oil prices. Presumably the price of LNG exports are 
going to be indexed relative to oil prices. So we need to keep 
the distinction between how LNG gets priced and how natural gas 
gets priced in our domestic market.
    Is that the key issue?
    Mr. Smith. Mr. Chairman, that's a complex issue. But I can 
say the general answer is that natural gas that is consumed 
here in the United States is going to be priced based on the 
natural gas market domestically. As natural gas producers in 
the United States are looking for opportunities to export 
natural gas via LNG to other markets there's going to be an 
evolving series of mechanisms that will determine how that will 
be priced.
    That's as LNG becomes a more liquid, more tradable 
commodity that's something that's evolving. But natural gas 
prices say in Japan or in Korea or in other markets where this 
gas will be going is going to be driven by a number of factors 
that are fundamentally different than the factors that drive 
natural gas prices here in the United States.
    The Chairman. Alright.
    Senator Murkowski, did you have additional questions?
    Senator Murkowski. Yes, very quickly, Mr. Chairman.
    This goes to you, Mr. Smith. Can you describe the authority 
that exists within DOE to deal with a situation? Say you've got 
a terminal and you've got a long term contract for export that 
has been put in place. But say you have a national security 
issue that presents itself.
    What authorities exist within DOE to preserve the situation 
so that here, domestically, we're not subject to a long term 
contract that might jeopardize the security issue?
    Mr. Smith. Thank you for the question, Senator.
    First of all, you know, a fundamental principle of how we 
exercise our authority under the Natural Gas Act is that the 
Department of Energy recognizes and values the importance of 
sanctity of contracts. So as we look at doing the work to 
authorize these export applications we're going to be judicious 
to make sure that the public interest determination stands up 
to scrutiny.
    The order that was issued for Sabine Pass did include a 
footnote that noted that the Department of Energy, under the 
Natural Gas Act, under that statute, does have the authority to 
come back and look at issuing a clarifying order or making a 
change if there is fundamental change in supply and demand that 
would impact either security of supply for the United States, 
national security, our ability to supply natural gas 
domestically, etcetera.
    So if there was something that fundamentally changed the 
supply and demand balance in the United States the Department 
of Energy would have the authority to go back and look at the 
order. But again, that note, that footnote in that particular 
order that was issued for Sabine Pass was simply restating the 
authority that the Department of Energy has and has been 
granted by the Natural Gas Act. So it's an obligation that our 
agency has.
    Senator Murkowski. Thank you, appreciate that.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Also, Mr. Chairman, 
if I could just put into the record. A number of my 
constituents asked that their views be entered into the record 
as well.
    The Chairman. Yes, we obviously will enter the article that 
Senator Barrasso talked about and this article as well.
    Senator Wyden. Thank you, Mr. Chairman.
    Just one question for you, Mr. Wright. It illustrates why 
Oregonians are trying to sort through this and I'm asking these 
questions.
    Less than 2 years ago your agency approved the Jordan Cove 
LNG import terminal in Coos Bay over the objections then of the 
State of Oregon. The State argued that Northwest natural gas 
needs could be met with North American supplies. FERC staff, 
the Commission, basically told folks in Oregon, nope. The 
Pacific Northwest needs the imports.
    So this past September, 21 months after FERC insisted that 
the import project was essential to meet demand in the 
Northwest, Jordan Cove did a complete about face. They filed an 
application to export even more gas, 1.2 billion cubic feet a 
day than FERC had previously licensed it to import. So my 
constituents are trying to make sense out of all this.
    I think what I'd like you to do is explain this and explain 
after something like this they ought to be confident that you 
all have the ability to tackle these issues because they really 
can't sort out particularly what happened in Coos Bay.
    Mr. Wright. Thank you, Senator.
    At the time that Jordan Cove proposed its project there was 
a need for gas in the U.S., a need that could not be met via 
domestic supplies. Jordan Cove was one player in many of the 
players around the U.S. who thought the best idea would be to 
import gas via LNG. At the time of the decision, that seemed to 
be a good idea.
    Like we've discussed here we've had a shift, if you will, 
in terms of the supply dynamics of the United States. The shale 
gas has become much more economic to produce. There's a much 
larger base than we ever probably conceived.
    Now that is why we're probably seeing this move toward 
exporting gas. That's just the dynamics of the beast.
    Senator Wyden. I'm going to review this with you all in the 
days ahead. I mean, the State disagrees with you, obviously. 
Then of course, there was an application to export even more 
gas than had been previously licensed to import.
    We'll continue this discussion. But obviously my State 
disagrees strongly with your views.
    Thank you, Mr. Chairman.
    The Chairman. Let me ask if either Senator Hoeven or 
Senator Barrasso had another question.
    Thank you both very much for your testimony. We appreciate 
it. We will go ahead to the second panel at this point.
    If the second panel of witnesses can come forward. I'll 
introduce them as they are coming forward. We have 3 witnesses 
on the second panel.
    Dr. Ken Medlock, who is a Fellow in Energy Resource 
Economics and Deputy Director of the Energy Forum at Rice 
University in Houston.
    We have Mr. Andrew Slaughter, who is a Business Environment 
Advisor with Upstream Americas, Shell Exploration Production 
Company in Houston.
    Mr. Jim Collins, who is Director of Underground Utilities 
in the city of Hamilton, Ohio.
    So we appreciate all of you being here. If you could each 
take about 5 minutes and summarize the main points you think we 
need to understand about this set of issues. Then we will have 
some questions.
    Dr. Medlock.

 STATEMENT OF KENNETH B. MEDLOCK, III, JAMES A. BAKER III AND 
SUSAN G BAKER FELLOW IN ENERGY AND RESOURCE ECONOMICS, JAMES A 
    BAKER III INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY, 
                          HOUSTON, TX

    Mr. Medlock. Thank you. Thank you for the opportunity to be 
here today to talk about this issue. I actually found the 
initial panel very enlightening to hear about how operators 
within the Federal Government are actually thinking about these 
issues is always useful.
    At its very face if you want to get really down at the very 
basic level to try to understand what exactly will determine 
domestic price verses foreign price. Fundamentally what you 
have to understand is what domestic supply actually looks like. 
So what I mean by that is really a reference to a term that 
economists use a lot when we think about the shape of a supply 
curve, if you will, which is elasticity.
    In effect if you have a situation where domestic supply is 
highly elastic, so it's very price responsive. In other words, 
which means if we see a small increase in price we'll see a 
pretty dramatic increase in production. Then the introduction 
of exports from the U.S. market will not actually have, in a 
very fundamental way, a very large impact on domestic price.
    On the other hand, if domestic supply is what we would term 
as inelastic so you have a very steep supply curve, in other 
words. Then you would actually see from the introduction of 
exports a pretty dramatic increase in price.
    I know this is kind of a take you back to ECON 101 
description of the issue. But I think if we're really going to 
address this issue and try to understand what exports could 
potentially mean. Sometimes it really does take, you have to 
take a step back and go back to fundamentals to really 
understand what we're talking about.
    With regard to all of the proposed export terminals that 
are on the plate, you know, up to 6.6 billion cubic feet a day, 
have been filed for export license. That is actually quite a 
large number when we think about where we've been with regard 
to the North American market, particularly when we think about 
where we were just 10 years ago when we were thinking about 
importing LNG in massive quantities. At one point 10 years ago 
there were over 47 different terminals that had received 
certification for construction to import natural gas to this 
country.
    So we have actually done quite a massive about face. So 
what we ultimately have to do is understand why that's happened 
and how transformative ultimately it really is. At the root of 
all this is what's been happening on the shale gas front. Just 
10 years ago a lot of what we talk about today was not believed 
to be technically nor commercially feasible.
    Yet today we sit here in a situation where it is. What 
that's done is effectively taken domestic supply and made it 
very elastic. It stretched our domestic supply curve.
    That, to be very frank, is why we're actually having this 
conversation about exports to begin with because as you 
remember, as I just mentioned, 10 years ago everybody was 
talking about imports. We were talking about inexorable 
declines from the North American resource base. But that is 
completely different today.
    So what we ultimately have to understand since we're really 
thinking about long term type of futures here, is what is the 
elasticity of supply. How abundant is the resource? At what 
cost can it be developed?
    Those are actually pretty critical, fundamental, 
engineering and economic questions about which there is a lot 
of very good research being done. The work that we've actually 
done at the Baker Institute indicates that there are upwards of 
350 to 400 trillion cubic feet of gas available at prices 
between $5 and $6 an MCF. That's actually a pretty large 
quantity that can be used to support export projects should 
they be deemed to be commercially viable which is another issue 
that I can address in Q and A.
    But if there are better, sort of, those supplies are better 
served serving domestic demands then so be it. But that's 
something that actually commercial interests in the market will 
determine. It's something that the commercial interest in the 
market have determined actually quite well to wit what we've 
seen in shale gas production developments in the last 10 years.
    One quick note about and I think it's actually worth me 
making this comment because the slide was actually put up by 
Senator Wyden. When we look at the drift between international 
natural gas prices and domestic natural gas prices there's a 
very key component here that I think often is omitted from the 
conversation. That's the role of the U.S. dollar.
    Natural gas when we think about prices in Europe for 
example or prices in Asia for example in domestic markets there 
is not traded in dollars per M and BTU. It's traded in local 
currency units. So one other thing you have to actually do to 
look at the potential arbitrage opportunity that exports would 
portend would actually be to multiply by an exchange rate.
    If you look at the direction the U.S. dollar is actually 
taking over the last several years, it has not been--it has 
been very positive for that arbitrage opportunity. So when you 
think about the potential for LNG exports that's actually a 
commercial risk when we think about the nominal value of that 
arbitrage that the developers have to consider.
    [The prepared statement of Mr. Medlock follows:]

 Prepared Statement of Kenneth B. Medlock, III, James A. Baker III and 
 Susan G Baker Fellow in Energy and Resource Economics, James A Baker 
     III Institute for Public Policy, Rice University, Houston, TX

    During the past decade, innovative new techniques involving the use 
of horizontal drilling with hydraulic fracturing have resulted in the 
rapid growth in production of natural gas from shale. Although 
geologists have long known about the existence of shale formations, 
accessing those resources was long held to be an issue of technology 
and cost, and recent innovations have yielded substantial cost 
reductions and made shale gas production a commercial reality. In fact, 
shale gas production in the United States has increased from virtually 
nothing in 2000 to over 10 billion cubic feet per day (bcfd) in 2010, 
and a recent Baker Institute analysis indicates it could reach over 50 
percent of domestic natural gas production by the 2030s.
    Without doubt, the natural gas supply picture in North America has 
changed substantially, and it has had a ripple effect around the globe 
not only through displacement of supplies in global trade but also by 
fostering a growing interest in shale resource potential in other parts 
of the world. Thus, North American shale gas developments are having 
effects far beyond the North American market, and these impacts are 
likely to expand over time. Prior to the innovations leading to the 
recent increases in shale gas production, huge declines were expected 
in domestic production in the United States and Canada, which comprise 
an integrated North American market. This foretold an increasing 
reliance on foreign supplies at a time when natural gas was becoming 
more important as a source of energy.
    Throughout the 1990s, natural gas producers in the Middle East and 
Africa, anticipating rising demand for liquefied natural gas (LNG) from 
the United States in particular, began investing heavily in expanding 
LNG export capability, concomitant with investments in regasification 
being made in the United States. At one point in the early 2000s there 
were over 47 regasification terminals with certification for 
construction, which was a clear signal regarding industry-wide 
expectations for the future of the U.S. supply. But the rapid growth in 
shale gas production has since turned such expectations upside down and 
rendered many of those investments obsolete. Import terminals for LNG 
are now scarcely utilized, and the prospects that the United States 
will become highly dependent on LNG imports in the coming years have 
receded, with proposals now emerging for exports of LNG from North 
America.
    Rising shale gas production in the United States is also impacting 
markets abroad. LNG supplies whose development was anchored to the 
belief that the United States would be a premium market are now being 
diverted to European and Asian buyers. This has presented consumers in 
Europe with an alternative to Russian pipeline supplies, and it is 
exerting pressure on the status quo of indexing gas sales to a premium 
marker determined by the price of petroleum products. In fact, Russia 
has already had to accept lower prices for its natural gas and is now 
allowing a portion of its sales in Europe to be indexed to spot natural 
gas markets, or regional market hubs, rather than oil prices. This 
change in pricing terms signals a major paradigm shift in Europe, and 
could be the first signal for Asian buyers that oil-indexation may 
become a thing of the past. This is an important point when considering 
the current profit margin available to potential LNG exports, 
particularly when those export projects hinge on oil-indexed prices and 
a wide oil-gas price differential.
    Certainly rising shale gas production has contributed to lower 
domestic natural gas prices. This, in turn, has led various interests 
to promote greater use of natural gas in power generation through 
substitution opportunities with coal, and renewal of industrial demands 
which had previously been fading. In addition, there has been interest 
in creating new demands, such as the use of natural gas in 
transportation particularly as the price of crude oil remains 
substantially higher than the price of natural gas on an energy 
equivalent basis. Finally, as noted above, there has been growing 
interest in developing LNG export capability to capture the arbitrage 
opportunity that currently exists with domestic natural gas prices 
substantially below prices in Europe and Asia.
    On the point of LNG exports, there are several key factors that (a) 
determine whether or not they occur and (b) the impact, if exports do 
occur, on domestic prices. Critical factors addressed herein that 
determine the quantity of exports and the effect on domestic price are 
(i) the elasticity of domestic supply, (ii) the elasticity of foreign 
supply, (iii) the exchange rate, and (iv) the cost of exports. For the 
purpose of this discussion, we will assume the cost of exports is not 
prohibitive unless otherwise stated.

                      THE DOMESTIC SUPPLY PICTURE

    With regard to point one above, a comparison of the two diagrams 
below* illustrates very simply the effect of the elasticity of domestic 
supply on the impact of increased exports on domestic price. In 
particular, if domestic supply is highly elastic as in the first 
diagram, meaning production can be profitably increased with only small 
changes in price, then exports, which are shown here as an increase in 
demand for domestic resources, will not raise price by much. This 
contrasts to the case in the second diagram where supply is not very 
elastic. In this case, the same export quantity will raise price by a 
substantial amount.
---------------------------------------------------------------------------
    * Graphs have been retained in committee files.
---------------------------------------------------------------------------
    While this is an admittedly simple way to examine the posed 
problem, it can yield some powerful insights. We still need to 
understand the effects of the elasticity of foreign-sourced supply as 
well as the exchange rate, but these issues will largely determine the 
quantity of exports if allowed to increase unconstrained. However, we 
are still left with the task of understanding how elastic the domestic 
supply of natural gas is. To do so, we must first understand the 
magnitude of the technically recoverable domestic resource base, 
something which has changed rapidly over the last decade.
    As recently as 2003, the National Petroleum Council\1\ estimated 
about 38 trillion cubic feet (tcf) of technically recoverable resources 
were spread across multiple basins in the North America. In 2005, the 
Energy Information Administration (EIA) used a mean estimate of 140 tcf 
in its Annual Energy Outlook for technically recoverable shale gas 
resources. In 2008, Navigant Consulting, Inc.\2\ estimated a mean of 
280 tcf of technically recoverable resources from reviewable geologic 
literature, but a survey of producers indicated up to 840 tcf. In 2009, 
the Potential Gas Committee\3\ put its mean estimate at just over 680 
tcf. In 2011, Advanced Resources International reported an estimate of 
about 1,930 tcf of technically recoverable resource for North America, 
with over 860 tcf in U.S. gas shales alone.\4\ Although the assessments 
listed above are from independent sources, the estimates are increasing 
over time, which is a pattern that is largely coincident with more 
drilling activity and technological advances, which is an indication of 
the learning-by-doing that is still occurring. While there remains 
disagreement about the exact size of the shale resource base, the 
disagreement is about magnitudes which are all substantially larger 
than our state of knowledge even just six years ago.
---------------------------------------------------------------------------
    \1\ NPC, Balancing Natural Gas Policy: Fueling the Demands of a 
Growing Economy, September 2003.
    \2\ Navigant Consulting, North American Natural Gas Supply 
Assessment, July 4, 2008.
    \3\ The Potential Gas Committee, Potential Gas Committee Biennial 
Assessment, June 18, 2009.
    \4\ World Gas Shale Resources: An Assessment of 14 Regions outside 
the United States, a report prepared by Advanced Resources 
International for the United States Energy Information Administration, 
April 2011.
---------------------------------------------------------------------------
    The introduction of shale to the US supply portfolio has 
effectively stretched the domestic supply curve. Equally importantly, 
however, is the cost of recovery as cost determines how much of the 
resource is commercially recoverable at a particular price. To 
understand this, most analysts examine data involving the costs from 
acreage acquisition to well completion and the production profile and 
estimated recoverability of each well. This enables a cost ranking of 
wells and the construction of a distribution of ``type'' wells. 
Usually, these analyses indicate a great degree of heterogeneity among 
wells drilled in a single shale play, with some wells profitable at 
relatively low prices and others at much higher prices, meaning some 
wells drilled are indeed uneconomic. However, the producer's decision 
to develop is based on a portfolio of wells, and even uneconomic wells 
can inform future development decisions in that they reveal information 
about the acreage being developed. In fact, it is this latter point 
that can bear long term returns, as witnessed in the Barnett shale 
today.
    The Barnett shale, the most mature of the shale plays and where the 
venture into shale began in earnest less about a decade ago, is a good 
barometer for the ``learning-by-doing'' that occurs as shale wells are 
drilled. In the Barnett to date, over 12,000 horizontal wells have been 
drilled. In the last 3 years, operator efficiency has dramatically 
improved, as witnessed by the fact that rig counts are down from 192 
per week in September 2008 to 64 per week in September 2011, but 
production was higher. Much of this owes to operators finding the so-
called ``sweet spots'' in the shale and understanding better an optimal 
drilling strategy. Moreover, there are ongoing innovations that will 
challenge our understanding of both cost and recoverability as drilling 
is being reduced from 80 acre spacing to 40 acres, with some operators 
now testing 20 acre spacing. In all, as operators develop shale they 
learn about the resource and apply those lessons to reduce costs. In 
the upstream in general, this is nothing new, and it tends to make 
supply more elastic.
    Bringing it all together, many estimates indicate there is a very 
large quantity of shale resource that is economically recoverable at 
between five and six dollars per thousand cubic feet. The Baker 
Institute, for example, estimates that up to 350 trillion cubic feet of 
shale gas is commercially viable in North America at prices up to six 
dollars. So, using this as a benchmark, we can say that the domestic 
supply curve has effectively been stretched horizontally with the 
commercialization of shale. In other words, it is as if we have moved 
from a world that more closely resembled the supply curve in the second 
diagram above, to one which more closely resembles the supply curve in 
the first diagram, i.e.--shale has rendered domestic supply to be much 
more elastic.
    An important factor that could limit the amount of shale gas that 
could be developed at particular prices pertains to regulation. 
Specifically, regulations that inhibit development will effectively 
render domestic supply to be more inelastic. Thus, if concerns exist 
that exports will raise price domestically, then it is important to 
juxtapose any potential set of regulations that could limit domestic 
production in certain regions against the regulatory approval of export 
projects.
    In relation to European and Asian markets, the United States has a 
well-developed, competitive regulatory framework governing natural gas 
infrastructure development, transportation services, marketing, and 
mineral rights ownership and acreage acquisition. This regulatory 
environment has promoted the rapid development of shale resources, and 
it may not be fully or quickly replicable in other markets around the 
globe where state involvement in resource development and 
transportation is more prevalent. For example, investor access to shale 
resources is likely to be more heavily controlled in most Asian and 
European countries, where land ownership is generally distinct from the 
ownership of mineral rights. This will in general render US supply to 
be more elastic, particularly in the context of shale gas, than foreign 
supply. However, it is difficult to argue that foreign supply is 
inelastic when one considers the vast quantities of resources available 
in Russia, Australia, the Middle East and North Africa. Thus, we are 
left with a situation in which both domestic and international supplies 
are relatively elastic, albeit they are so at different marginal costs.
International Factors
    Perhaps the most voiced concern regarding export of LNG from the US 
is one which posits the domestic natural gas price will rise to 
international parity. To understand whether or not this will indeed 
occur, one must first understand under what circumstances it could 
occur. First, it must be true that export capacity be sufficient to 
fully arbitrage the difference between domestic and international gas 
prices. In other words, there can be no constraint on export capacity. 
If export capacity is constrained, then, all else unchanged, the 
international price will remain substantially above the domestic price, 
but of course, this would provide incentive for investments in export 
capacity.
    Second, if we pose no constraints on export capacity, the change in 
the domestic price will depend on the shape of the international supply 
curve, as well as the exchange rate, assuming of course that cost is 
not an impediment. In general, if foreign supply is inelastic, then the 
price in the foreign market should be lowered as foreign suppliers are 
driven out of the market by lower cost supplies from US exporters. If 
domestic supply is very elastic, then the domestic price will not 
change much, but the foreign price would. In fact, if this were the 
case, the long run price in overseas markets would simply be the 
domestic price plus the cost of exports. In other words, most of the 
price action would occur in overseas markets.
    If, however, domestic supply is relatively inelastic, then price 
would be driven up domestically at the same time price is driven down 
in the foreign market. But, this dynamic would limit the quantity of 
exports as profitability would quickly become challenged. In either 
case involving inelastic foreign supply, the domestic price will not 
simply increase to the current foreign price. Instead, it will rise to 
something below it, but the degree to which domestic price increases 
will depend on domestic supply elasticity.
    Assuming domestic exports are profitable, if foreign supply is very 
elastic, then exports would increase until either almost all foreign 
supply is displaced (if domestic supply is very elastic) or until the 
domestic price is driven up to the point where exports are no longer 
profitable (if domestic supply is very inelastic). Again, the domestic 
price impact is largely determined by domestic supply elasticity, but 
now the price impact could be one in which the domestic price rises 
while the foreign price is relatively unchanged. This would only occur, 
however if domestic supply is inelastic and foreign supply is elastic.
    Another point worth noting, as done is a recent Baker Institute 
working paper, is the effect that the exchange rate has on the 
commercial feasibility of exports. In the US, natural gas is traded in 
dollars per million British thermal units ($/mmbtu). In the UK, for 
example, natural gas is traded in pence per therm (p/therm). In order 
to assess the arbitrage opportunity that exists through exporting 
natural gas from the US to the UK, we must multiply the UK price by a 
heating conversion, which is constant, and the exchange rate. Thus, if 
the US dollar is relatively weak, then the arbitrage opportunity 
expands. However, this type of opportunity arises due to nominal 
exchange rate movements, and investments made on this basis will be 
subject to substantial risk based solely on exchange rate movements.
    To put the exchange rate risk into the context discussed above, one 
only need understand that movements in the exchange rate would 
effectively shift the foreign supply curve (when denominated in $/
mmbtu) up and down, so long as we are measuring things in nominal 
terms. Hence, a stronger dollar would effectively lower the foreign 
supply curve and limit the commercial feasibility of exports. Thus, any 
investment in export capacity made today that does not account for this 
could run a serious risk of being ``upside down'' in the future.
Concluding Remarks
    To summarize, the effect of US LNG exports on the price of natural 
gas in the US depends on a number of factors. In general, LNG exports, 
if allowed to increase to the point where all arbitrage opportunities 
are allowed, would both increase the domestic price and decrease the 
foreign price. However, the degree to which each price moves will 
depend on the relative elasticity of supply in each market. Research 
done at the Baker Institute indicates that the long run elasticity of 
supply is relatively high both domestically and internationally. This 
means that capacity constraints on the ability to trade between markets 
heavily influence regional price differences. Furthermore, such 
constraints represent real opportunities that may signal real 
investment opportunities in developing export capacity.
    Highly elastic supply curves both domestically and internationally 
suggest that prices in the US if exports are allowed will not likely 
increase much, particularly not given the combined capacity of the 
current slate of LNG export projects. Nevertheless, an assumption that 
all exports will be valued at an oil-indexed premium in all future 
years may be a strong one. By adding low cost supply to a market, the 
effective supply curve becomes more elastic, which will tend to reduce 
the ability for producers to price their supplies above marginal cost.
    Finally, movements in the exchange rate contribute to nominal price 
differences, although these differences should not generally signal 
investment opportunities. Specifically, exchange rate motivated 
arbitrage opportunities are likely to be transitory.

    The Chairman. Thank you very much.
    Mr. Slaughter.

 STATEMENT OF ANDREW SLAUGHTER, SHELL EXPLORATION & PRODUCTION 
                      COMPANY, HOUSTON, TX

    Mr. Slaughter. Chairman Bingaman, Ranking Member Murkowski, 
distinguished committee members, thank you for providing me 
this opportunity to discuss our Nation's new found natural gas 
abundance and the emerging market developments it's driving.
    Above all these resources can and must be developed in 
environmentally responsible and sustainable ways. Risks must be 
managed and mitigated. Best available technologies and 
operating practices must be employed. Operators should set and 
meet high standards and support a regulatory regime that does 
the same.
    Shell's operating principles for onshore upstream 
operations in North America set high standards for preventing 
and mitigating risks and impacts. This is part of our 
commitment to safety and environmental stewardship. It's the 
foundation of our investment program.
    We're looking at very important investments because we know 
that America now has enough natural gas to power the country 
stably and affordably for well over a century even taking into 
account sustained demand growth. This is good news for 
consumers in all sectors and for U.S. industrial 
competitiveness. Indeed these trends offer potential for a 
rebirth in the American manufacturing sector.
    Expand in natural gas supply has several important 
implications for new and existing gas markets in the U.S.
    First, it is clear that affordable, domestic natural gas 
supplies will provide reliable fuel at stable prices for U.S. 
power generation, other industrial sectors and households for 
decades to come. This is an economic benefit to utilities and 
consumers but also offers significant environmental benefits 
thanks to lower levels of pollutants, waste and CO2 
associated with natural gas relative to other fossil fuel 
sources. That's not all.
    Natural gas abundance is also driving emerging new economic 
sectors with great potential for the U.S. Shell is considering 
significant new investments in these areas all founded in our 
deep confidence in the robust and affordable U.S. natural gas 
supply outlook. Here are some examples.
    In the gas to chemicals area in the Northeast Shell 
recently announced we are evaluating construction of a new 
world class facility to manufacture base chemicals in the 
Marcellus shale region. This will be the first of its kind in 
several decades. Seven other companies have also indicated that 
they might construct similar facilities in the U.S.
    Rising gas supplies are giving the U.S. chemical industry a 
new lease on life and creating thousands of jobs in the 
process. A recent study by the American Chemistry Council noted 
potential for 17,000 new, knowledge intensive, high paying jobs 
in the U.S. chemical industry, another 400,000 jobs outside the 
chemical industry and more than $130 billion in new U.S. 
economic output. All associated with the shale gas revolution.
    We're also expanding into new markets for which we've 
developed innovative technologies. Potential new lines of 
investment include LNG for transport. Recently Shell announced 
a plan to make LNG available as a fuel for heavy duty fleet 
trucks beginning in 2012 in Western Canada. By making LNG 
available on the areas heaviest truck route, we are creating an 
infrastructure opportunity for the market to choose LNG as a 
sustainable transport fuel.
    Gas to liquids. This technology converts domestically 
produced natural gas into liquid fuels such as ultra pure, 
clean burning diesel and aviation fuel instead of importing it 
or refining imported crude. Shell pioneered this technology and 
recently brought online a world class GTL facility in Qatar.
    LNG for exports. Managed properly LNG exports can spur 
greater investment in U.S. supply and infrastructure, create 
domestic jobs and position this country as an energy exporter. 
The abundance of supply means that exports can be pursued in 
addition to the expansion of the domestic markets adding 
balance of trade benefits to domestic economic benefits.
    Developing markets for natural gas is a clear long term, 
sustainable win for the U.S. Shell is making significant 
investments in these areas because we are confident in natural 
gas's potential to be the most promising energy opportunity in 
the U.S. for decades to come. We are ready to work with fellow 
operators, regulators and yourselves to safely and responsibly 
realize multiple opportunities and benefits made possible by 
this huge, abundant, new domestic gas resource.
    Thank you. I'm ready to answer questions on any of these 
topics.
    [The prepared statement of Mr. Slaughter follows:]

Prepared Statement of Andrew Slaughter, Shell Exploration & Production 
                          Company, Houston, TX

    Chairman Bingaman, Ranking Member Murkowski, distinguished 
committee members; thank you for providing me this opportunity to 
discuss our nation's newfound natural gas abundance and the emerging 
market developments it is driving.
    Above all, these resources can and must be developed in 
environmentally responsible and sustainable ways. Risks must be managed 
and mitigated. Best available technologies and operating practices must 
be employed. Operators should set, and meet, high standards, and 
support a regulatory regime that does the same.
    Shell's operating principles for onshore upstream operations in 
North America set high standards for preventing and mitigating risks 
and their impacts. This is part of our commitment to safety and 
environmental stewardship, and the foundation of our investments.
    And they are important investments. Because we know that America 
has enough natural gas to power the country stably and affordably for 
well over a century, even taking into account sustained demand 
growth.\1\ This is good news for consumers in all sectors and for US 
industrial competitiveness--indeed these trends offer potential for no 
less than a rebirth of the American manufacturing sector.
---------------------------------------------------------------------------
    \1\ Although estimates of the remaining US technically recoverably 
natural gas resource base vary widely, all experts concur that the US 
endowment of natural gas is vastly greater than they had previously 
understood it to be. Between 2008 and 2010, Colorado School of Mines' 
Potential Gas Committee revised their estimates of the US Future Gas 
Supply upward by 89%. (See: http://www.potentialgas.org/) The US 
Geological Survey conducted focused research on the Marcellus Shale 
region in 2002 and again in 2011. In 2002, the USGS's mean estimate of 
the technically recoverable natural gas in the Marcellus Shale was 
roughly 2 trillion cubic feet. In 2011, they estimated that the 
Marcellus Shale holds 84 trillion cubic feet--a 4100% increase from 
their 2002 estimate. (See: http://www.usgs.gov/newsroom/
article.asp?ID=2893)
---------------------------------------------------------------------------
    Expanded natural gas supply has several implications for new and 
existing gas markets in the U.S.
    First, it is clear that affordable, domestic natural gas supplies 
will provide reliable fuel at stable prices for U.S. power generation 
and other existing industrial demand sectors for many decades. This is 
an economic benefit for utilities and consumers, but it also offers 
significant environmental benefits thanks to the lower levels of 
pollutants, wastes and CO2 associated with natural gas as measured 
against other fossil fuel sources.
    But that's not all. Natural gas abundance is also driving emerging 
new economic sectors with great potential for the U.S. Shell alone is 
considering several significant investments--all founded on our 
confidence in the robust and affordable U.S. natural gas supply 
outlook.
    Some examples:

   Gas to Chemicals: In the Northeast, Shell recently announced 
        that we are evaluating construction of a world-class facility 
        that will manufacture base chemicals in the Marcellus shale 
        region--the first of its kind in decades. Seven other companies 
        have also indicated that they may also construct similar 
        facilities in the U.S.

  Rising gas supplies are giving the U.S. chemical industry a new lease 
        on life and creating thousands of jobs in the process. A recent 
        study by the American Chemistry Council noted the potential for 
        17,000 new knowledge-intensive, high-paying jobs in the U.S. 
        chemical industry, another 400,000 jobs outside the chemical 
        industry and more than $132 billion in U.S. economic output--
        all associated with the shale gas revolution.\2\
---------------------------------------------------------------------------
    \2\ See study conclusions here: http://www.americanchemistry.com/
ACC-Shale-Report
---------------------------------------------------------------------------
  We're also expanding into markets that were unthinkable a few years 
        ago in the United States. Potential new lines of investment 
        include:

   Liquefied Natural Gas (LNG) for use as a transport fuel: 
        Recently, Shell announced a plan to make LNG available for 
        heavy-duty fleet and trucking companies to use as a 
        transportation fuel beginning in 2012 in Western Canada. By 
        making LNG available on the area's heaviest truck route, we are 
        creating an infrastructure opportunity for the market to choose 
        LNG as a sustainable transportation fuel.\3\
---------------------------------------------------------------------------
    \3\ According to a study by Resources for the Future, LNG trucks 
may be the most cost-effective way of both reducing oil consumption and 
CO2 emissions. http://www.rff.org/RFF/Documents/RFF-BCK-
Krupnick-NaturalGasTrucks.pdf
---------------------------------------------------------------------------
   Gas to Liquids (GTL): This technology converts domestically 
        produced natural gas into liquid fuels, such as ultra-pure, 
        clean burning diesel and aviation fuel, instead of importing it 
        or refining imported crude. Shell pioneered this technology and 
        recently brought a world class GTL facility online in Qatar.
   LNG for export: Managed properly, LNG export could spur 
        greater investment in U.S. supply and infrastructure; create 
        domestic jobs and position our country as an energy exporter. 
        The abundance of supply means that exports can be pursued in 
        addition to expanding domestic uses of natural gas--adding 
        balance of trade benefits to domestic economic benefits with 
        little impact on gas prices.

    Developing markets for natural gas is a clear long-term, 
sustainable win for the U.S. Shell is making significant investments in 
this area because we believe in natural gas' potential to be the most 
promising energy opportunity for decades to come. But to realize its 
full potential, we must bolster public confidence in tight gas as a 
safe and sustainable energy resource.
    We stand ready to work with our fellow operators, regulators and 
yourselves, to safely and responsibly realize the manifold 
opportunities and benefits made possible by this domestic gas bounty.
    Thank you.

    The Chairman. Mr. Collins, go right ahead.

 STATEMENT OF JIM COLLINS, DIRECTOR OF UNDERGROUND UTILITIES, 
                          HAMILTON, OH

    Mr. Collins. Chairman Bingaman, Ranking Member Murkowski 
and members of the committee, I appreciate this opportunity to 
testify before you today and thank the committee for calling 
this important hearing on market developments for United States 
natural gas and the approval process and potential for 
liquefied natural gas exports.
    My name is Jim Collins and I am the Director of Underground 
Utilities for the city of Hamilton, Ohio. Since 1890 the city 
of Hamilton has provided customer owned utility service to its 
residents. Hamilton is the largest municipal gas utility in the 
State of Ohio and currently serves approximately 23,000 
customers.
    There are approximately 1,000 public gas systems located in 
36 States. Publicly owned gas systems are not for profit, real 
distribution entities owned by and accountable to the citizens 
they serve. Over the past several years technological advances 
in natural gas drilling techniques have made access to the vast 
domestic shale reserves possible. Assuming that the 
environmental concerns associated with these new drilling 
technologies are overcome, which seems likely, the energy 
landscape of the United States will have been unquestionably 
and forever altered.
    The U.S. now has a unique window of opportunity to 
implement its long declared but never seriously pursued policy 
of energy independence and thereby fundamentally transformed 
key variables affecting both our national security and domestic 
economy. Pursuit of energy independence requires the United 
States to wean ourselves of its imported oil which accounts for 
approximately 50 percent of domestic use.
    Two major consumers of foreign oil in the United States are 
the transportation sector and the industrial sector. By 
converting commercial vehicles to natural gas and recognizing 
the significant increase in natural gas for electric generation 
where that makes sense. For example, to firm up power for 
intermediate resources the United States can take giant steps 
toward energy independence and reducing greenhouse gas 
emissions. To accomplish this goal natural gas in the United 
States must remain plentiful and reasonably priced.
    Several applications have been filed at the DOE for the 
export of LNG. Just the volumes enumerated in these few 
applications would make the United States the second largest 
exporter of LNG in the world. If granted by the DOE would 
permit just the export of just under 3 trillion cubic feet of 
natural gas which represents over 10 percent of our consumption 
on an annual basis.
    This potential level of export could have seriously adverse 
implications not only for U.S. national security, but for 
domestic consumers of natural gas. U.S. natural gas prices 
today are affordable, competitive and stable in contrast to the 
situation just a few years ago. This important change in gas 
pricing is a product of both the new available supplies of 
natural gas and the fact that our natural gas market is largely 
limited to North America.
    At these prices natural gas vehicles are priced competitive 
with gasoline. By contrast the large scale export of natural 
gas via LNG would not only play havoc with the current supply/
demand situation and hence the price of natural gas but will 
also because the price of natural gas abroad is tied to the 
international oil market, inevitably link the price of domestic 
gas to these international oil markets which are substantially 
more volatile and less transparent than our domestic market.
    In addition, since commodities such as natural gas are sold 
where the price is the highest irrespective of national 
boundaries and since many foreign Nations have substantially 
higher price for natural gas, U.S. natural gas would likely 
fall abroad in times of shortage further increasing prices for 
domestic consumers and further undermining efforts to maintain 
domestic gas prices at competitive levels.
    APGA is not against free trade. But when important policies 
collide Nations must make choice. U.S. policymakers must 
carefully consider and prioritize the use of domestic resources 
according to the national interest over both the long and short 
terms.
    APGA submits that the decision to export LNG should be 
thoroughly vetted in the context of a national energy policy. 
The wise choice of our elected officials at this time in our 
history is to limit the export of natural gas so they may 
realistically pursue the goal of greater energy independence. 
Those who argue that this matter is not an either/or situation 
are wagering our long term national well being on short term 
profits.
    We urge the committee to carefully consider the adverse 
impact that exporting LNG will have on millions of homes and 
the natural gas consumers in the United States, who feel the 
impact of higher prices resulting from exposure to the global 
export market.
    We thank you for the opportunity to submit testimony and 
look forward to working with the Commission on this important 
issue.
    [The prepared statement of Mr. Collins follows:]

 Prepared Statement of Jim Collins, Director of Underground Utilities, 
                              Hamilton, OH

    Chairman Bingaman, Ranking Member Murkowski and Members of the 
Committee, I appreciate this opportunity to testify before you today 
and I thank the Committee for calling this important hearing on market 
developments for U.S. natural gas and the approval process and 
potential for liquefied natural gas (LNG) exports. My name is Jim 
Collins and I am the Director of Underground Utilities for the City of 
Hamilton, OH. Since 1890, the City of Hamilton has provided customer-
owned utility service to its residents. Hamilton is the largest natural 
gas municipal utility in the State of Ohio and currently serves 
approximately 23,000 customers.
    I testify today on behalf of the American Public Gas Association 
(APGA). APGA is the national association for publicly-owned natural gas 
distribution systems. There are currently approximately 1,000 public 
gas systems located in 36 states. Publicly-owned gas systems are not-
for-profit, retail distribution entities owned by, and accountable to, 
the citizens they serve. They include municipal gas distribution 
systems, public utility districts, county districts, and other public 
agencies that have natural gas distribution facilities. Public gas 
systems range in size from the Philadelphia Gas Works, which serves 
approximately 500,000 customers, to the City of Freedom, Oklahoma, 
which serves some 12 customers.
    As non-profit utilities, public gas systems' primary focus is on 
providing reliable and affordable service to their customers. As a 
trade association that represents public gas systems, APGA ultimately 
represents the interests of natural gas consumers. Our members have a 
vested interest in working towards long-term affordable energy prices 
and allowing their citizens to keep their dollars in the community as 
opposed to flowing upstream via high energy prices.

          OVERVIEW OF POLICY IMPLICATIONS OF LNG EXPORT ISSUE

    This Nation is at an energy policy crossroads. Today, for the first 
time in a very long time, gas prices are affordable and stable, as 
contrasted with the price volatility experienced for most of the past 
20 years during which time prices for natural gas bobbed up and down 
from $15 to $5 to $10, with little rhyme or reason in terms of market 
fundamentals. Our Nation now has a unique opportunity to pursue a 
longstanding goal--energy independence--with optimism. Today, for the 
first time in almost forever, this Nation has the opportunity to be 
able to foresee the day when it can conduct foreign policy without 
being preoccupied by Middle East oil and hence Middle East politics.
    Why is our Nation in this most fortuitous situation and what can we 
do to realize these obtainable goals?
    The key reason we are in this posture is that suddenly, due to 
advances in technology relating to the acquisition of gas reserves from 
shale rock, it appears reasonable to prognosticate that the United 
States will not have to look abroad for natural gas supplies to 
supplement waning gas reserves in this country. This has obvious 
ramifications for natural gas policy; but even more importantly, it has 
huge potential ramifications for national energy policy (and therefore 
our national security).
    Pursuing energy independence means dramatically reducing our 
reliance on foreign oil. The major reason accounting for oil imports 
into the United States is our use of oil and its derivatives in all 
forms of transportation--cars, trucks, busses, planes, and the like. By 
converting our transportation sector to reliance on alternative energy 
sources--including Compressed Natural Gas (CNG), electricity, hybrid 
vehicles using CNG or LNG, and the like--we can reduce oil imports 
dramatically to the point where foreign oil no longer dictates events 
in this country--be it foreign policy or consumer grousing about 
skyrocketing prices at the gas pump.
    What other benefits will this Nation reap from substituting natural 
gas for oil products? The answer, of course, is greatly reduced CO2 
emissions. Natural gas is a fossil fuel and not to be confused with 
renewable energy sources, but it is so far superior to oil in terms of 
its impact on the environment that its greater use in lieu of oil is 
unquestionably in the public interest. In addition, natural gas in 
fast-ramping power plants is essential for reliable power supply in 
connection with renewable resources such as wind and sun due to their 
intermittent nature.
    What is the single greatest threat to the scenario just described? 
Assuming that the shale gas revolution is real, a subject we will 
address in our comments below, and assuming that substantial amounts of 
natural gas can be extracted from shale rock deep in the earth in an 
environmentally acceptable fashion, which seems a reasonable assumption 
based on experience to date, the only road block to success is that the 
natural gas that we should be using domestically for transportation, 
for power plants, not to mention enhanced residential and commercial 
use, is exported abroad and that we become part of a global and 
unstable natural gas market, just as we have with oil. What seems clear 
beyond cavil is that if we export significant quantities of natural gas 
(in the form of LNG), we will become part of an international market in 
order for short-term profits to be made by the affected producers and 
exporters. But long-term the effects will be predictable and 
disastrous--we will experience price increases and the price volatility 
of the past will return, and our opportunity to displace foreign oil 
will be wasted--all for short-term profits of a few. You must not 
permit that result; but without action by Congress that is the 
inevitable result of current Department of Energy (DOE) policy on LNG 
exports.

                           NATURAL GAS SUPPLY

    Over the past several years, technological advances in natural gas 
drilling techniques have made access to vast domestic natural gas 
reserves possible. The U.S. Energy Information Administration (EIA) 
2011 Annual Energy Outlook reports that in 2010, U.S. shale gas 
production reached 4.87 trillion cubic feet (TCF) which equates to 23 
percent of total U.S. natural gas production, compared with 0.39 TCF in 
2000. This shows both the rapid growth and absolute importance of the 
shale gas resource to the United States. The energy landscape of the 
U.S. appears to have been unquestionably and forever altered.
    APGA certainly hopes that the prospects for shale gas in this 
country are as bright as have been painted. However, as stated by EIA, 
there remains ``considerable uncertainty about the ultimate size of the 
technically and economically recoverable shale gas resource base in the 
onshore lower 48 States and about the amount of gas that can be 
recovered per well, on average, over the full extent of a shale gas 
formation.''\1\ EIA notes that some of the uncertainties associated 
with shale gas formations include the fact that ``most shale gas wells 
are only a few years old, and their long-term productivity is 
untested'' and that ``[i]n emerging shale formations, gas production 
has been confined largely to `sweet spots' that have the highest known 
production rates for the formation,'' which means that ``[w]hen the 
production rates for the sweet spot are used to infer the productive 
potential of an entire formation, its resource potential may be 
overestimated.''\2\ Articles appearing in the national press indicate 
that there may be other troubling concerns at EIA about the shale gas 
phenomenon that are not being advertised in EIA's formal 
publications.\3\
---------------------------------------------------------------------------
    \1\ EIA, Annual Energy Outlook 2011
    \2\ Id.; see also, Rodney White, Professor: NY Shale Reserves May 
Disappoint, Gas Daily (July 7, 2011) (reporting that Marcellus Shale 
gas reserves in New York may not be nearly as lucrative as already 
developed locations in Pennsylvania).
    \3\ Ian Urbina, ``Behind Veneer, Doubt on Future of Natural Gas,'' 
N.Y. Times, June 26, 2011; http://www.nytimes.com/2011/06/27/us/
27gas.html?_r=2&hp
---------------------------------------------------------------------------
    In addition to the technical issues noted by EIA, there are serious 
environmental concerns being raised at the state and national level 
about the technology associated with hydraulic fracturing, now commonly 
known as ``fracking.'' While these concerns do not affect EIA's 
projections, which are based on technical and economic data, they 
should not be ignored by those making policy decisions on applications 
that depend entirely for their viability on ample future natural gas 
from shale formations. While it is true that there has been much 
extreme rhetoric on both sides of the ``fracking'' issue,\4\ there can 
be no doubt that the affected states and the Federal Government are 
taking the health-related issues seriously.\5\ The outcomes of those 
investigations are not now known, and will not be for some period of 
time. Thus, to draw any policy conclusions based on the ``shale gas 
revolution,'' as some call it, would be a mistake of immense 
proportions--especially when those decisions have the very real 
potential to affect our national security.
---------------------------------------------------------------------------
    \4\ The newspapers are replete with articles chronicling the 
uncertain future of shale gas exploration. See, e.g., Ian Urbina, 
Regulation Lax as Gas Wells' Tainted Water Hits Rivers, N.Y. Times 
Online (Feb. 26, 2011); Ian Urbina, Wastewater Recycling No Cure-All in 
Gas Process, N.Y. Times Online (March 2, 2011); Ian Urbina, Pressure 
Limits Efforts to Police Drilling for Gas, N.Y. Times Online (March 4, 
2011); Darryl Fears, Sitting Atop Huge Gas Reserve, Md. Debates 
Drilling Practice, Washington Post Online (March 28, 2011); Ian Urbina, 
Insiders Sound an Alarm Amid a Natural Gas Rush, N.Y. Times (June 25, 
2011). Contrary views also abound: e.g., http://
johnhanger.blogspot.com/2011/06/statement-about-todays-nyt-front-
page.html
    \5\ In its Fiscal Year 2010 Appropriation Conference Committee 
Directive to EPA, the U.S. House of Representatives ordered the EPA to 
conduct a study of hydraulic fracturing. That study is currently 
underway. Seehttp://water.epa.gov/type/groundwater/uic/class2/
hydraulicfracturing/index.cfmhttp://water.epa.gov/type/gro undwater/
uic/class2/hydraulicfracturing/index.cfm.; On May 5, 2011, U.S. 
Secretary of Energy Stephen Chu impaneled a group of environmental, 
industry, and state regulatory experts to study and make 
recommendations to ``improve the safety and environmental performance 
of natural gas hydraulic fracturing from shale formations.'' See http:/
/www.energy.gov/news/10309.htm. Platt's Gas Daily for July 14, 2011, 
contains an article entitled ``DOE Panel Questions Fracking's SDWA 
Exemption.''
---------------------------------------------------------------------------
    The history of the fossil fuels industry is replete with 
miscalculations regarding supplies. For example, not too long ago many 
of the corporate parents of those now pursuing LNG export predicted 
that the U.S. natural gas market would benefit significantly from the 
import of LNG.\6\ Billions of dollars were spent on projects that are 
now charitably referred to as white elephants.
---------------------------------------------------------------------------
    \6\ See, e.g., BG LNG Services, LLC, Application of BG LNG 
Services, LLC for Long-Term Authorization to Import Liquefied Natural 
Gas from the Federal Republic of Nigeria, Docket No. FE 03-76-LNG 
(November 3, 2003) (application for import authority through the Lake 
Charles LNG terminal related to 20-year LNG purchase agreement).
---------------------------------------------------------------------------
    In addition, the nation's first LNG export facility in Kenai, 
Alaska is slated to terminate exports sooner than expected because 
drilling activity in Alaska's Cook Inlet has not offset declines in 
production rates, making it unfeasible to continue LNG exports.\7\
---------------------------------------------------------------------------
    \7\ Isabel Ordonez, Conoco to Stop LNG Exports from Kenai Plant in 
Alaska, Wall Street Journal Online (Feb. 10, 2011).
---------------------------------------------------------------------------
    If the U.S. has less recoverable gas than projected, it certainly 
should not exacerbate the situation by approving export applications 
premised on a domestic over-supply. Additionally, lower than projected 
amounts of recoverable gas would worsen exponentially the risks 
inherent in tying U.S. natural gas prices to volatile international 
markets.

                               LNG EXPORT

    To date, five applications for the export of LNG have been filed 
DOE. Applications have been filed by Sabine Pass and Lake Charles 
Exports in Louisiana and by Freeport LNG in Texas. More recently, we 
have seen an application filed for Dominion in Cove Point, MD. A fifth, 
Jordan Cove Energy Project, Oregon has yet to be published in the 
Federal Register. Some of these applications have already been granted 
and many more are expected to be filed.
    Just the volumes enumerated in these few applications would make 
the United States the second largest exporter of LNG in the world. 
These five applications, if granted by DOE, would permit the export of 
just under 3 TCF of natural gas, which represents over 10% of our 
consumption on an annual basis. This level of export would have serious 
adverse implications not only for domestic consumers of natural gas but 
also for U.S. national security.
    When applications are filed at DOE, there is a public interest test 
that must be met--but not by the applicants. In cases where the 
application is specific to identified countries with which the U.S. has 
a free trade agreement, the application is deemed to be consistent with 
the public interest and granted without modification or delay. In cases 
where an application is seeking exportation of LNG to countries with 
which the U.S. does not have free trade agreements, the burden is on 
those opposed to the application to demonstrate that the application is 
not consistent with the public interest. The structure of this process 
under which opponents of an export must prove a negative is counter-
intuitive on its face and makes it extremely difficult, if not 
impossible, for opponents to defeat an application for the export of 
LNG. APGA supports the passage of legislation that places the burden of 
proof where it should be, on the applicant to demonstrate to DOE how 
the approval of that application is in the public interest.
    It is also important to note that shale gas formations are not 
unique to the United States--this is not a U.S. phenomenon; it is a 
world-wide phenomenon.\8\ The State Department launched the Global 
Shale Gas Initiative (``GSGI'') in April 2010 in order to help 
countries identify and develop their unconventional natural gas 
resources.\9\ To date, partnerships under GSGI have been announced with 
China, Jordan, India, and Poland.\10\ The big energy players, including 
ExxonMobil, Chevron, Shell, BP, etc. are spending billions world-wide 
to pursue shale gas plays.\11\ The point to be made, of course, is that 
the United States, which is at the forefront technologically of the 
development of shale gas reserves, should be exporting its technology 
and expertise--not spending billions of dollars to build facilities in 
order to export a commodity that can play such a vital role in 
contributing to our national well-being and that also may be abundant 
world-wide before the LNG export facilities can even be completed.
---------------------------------------------------------------------------
    \8\ E.g., ``Shale Gas: Global Game Changer,'' by Dallas Parker, Oil 
and Gas Financial Journal (Feb. 8, 2011), http://www.ogfj.com/index/
article-tools-template/_printArticle/articles/oil-gas-financial-
journal/unconventional/shale-gas_global.html; ``Worldwide Gas Shales 
and Unconventional Gas: A Status Report,'' Vello A. Kuuskra and Scott 
A. Stevens (``The final segment of this ``paradigm shift''--the 
worldwide pursuit of gas shales and unconventional gas--has only just 
begun, with Australia, China and Europe in the lead. Europe's gas shale 
geology is challenging, but its resource endowment and potential are 
large.'') http://www.rpsea.org/attachments/articles/239/
KuuskraaHandoutPaperExpandedPresentWorldwideGasShalesPresentation.pdf. 
Debajyoti Chakraborty, Asia's First Shale Gas Pool Found Near Durgapur, 
Times of India Online, (January 26, 2011); Hillary Heuler, Shale Gas in 
Poland Sparks Hope of Wealth, Energy Security, Voice of America Online 
(June 11, 2011) (Reporting on efforts by U.S. and other western gas 
companies to develop gas from shale deposits). ``The Shale Gas Run 
Spreads Worldwide,'' by Mark Summor IPS, Deccan Herald (Aug. 1, 
2011)(``Recent discoveries of deeply buried oil shale layers containing 
natural gas or oil are being reported in Australia, Canada, Venezuela, 
Russia, Ukraine, Poland, France, India, China, North Africa and the 
Middle East. Taken together, say some energy analysts, these `plays' 
could become a game-changer, making Australia and Canada into new Saudi 
Arabias.'').
    \9\ See http://www.state.gov/s/ciea/gsgi/
    \10\ Id. see also, Rakteem Katakey, India Signs Accord with US to 
Assess Shale-Gas Reserves, Bloomberg News (November 8, 2010) (The US 
signed a memorandum of understanding with India to help it asses its 
shale gas reserves and prepare for its first shale gas auction at the 
end of this year.); Kate Andersen Brower and Catherine Dodge, Obama 
Says US, Poland Will Cooperate on Economy, Energy, Bloomberg News (May 
28, 2011) (Reporting on President Obama's pledge to share U.S. shale 
gas extraction expertise and technology on a recent trip to Warsaw); 
see also, Energy in Poland: Fracking Heaven, The Economist (June 23, 
2011).
    \11\ ``Big Oil Betting on Shale Gas,'' by Ken Silverstein, 
EnergyBiz (July 31, 2011)
---------------------------------------------------------------------------
                          IMPACT ON CONSUMERS

    U.S. natural gas prices are now among the lowest in the developed 
world. The large-scale export of natural gas via LNG will play havoc 
with the current supply/demand situation and hence the price of natural 
gas. Even supporters of LNG exports acknowledge that such exports will 
increase prices and price volatility in the domestic natural gas 
market.\12\
---------------------------------------------------------------------------
    \12\ See, e.g., The BWMQ Energy Advisory, Volume 7, Issue 1 dated 
October 2011 (at page 4): ``As we return to the world market, consumers 
will have to pay the higher world price because that is the minimum 
price that U.S. producers can get by offering their entire supply to 
the world market. The higher price will also increase price volatility. 
More exports will result in a tightening of domestic natural gas 
supplies in the future.''
---------------------------------------------------------------------------
    Exporting domestically produced LNG will tie U.S. natural gas 
prices to international markets that, today, yesterday and likely for 
the foreseeable future, will demand higher prices and undermine current 
domestic natural gas price stability. In Europe and Asia, natural gas 
markets are less liquid and prices are higher and often indexed to 
international oil markets, which are substantially more volatile and 
less transparent than our domestic market. Exporting domestically 
produced natural gas from the United States in any real quantities will 
link domestic commodity prices to international fluctuations.
    The current domestic natural gas market is competitive, liquid and 
transparent while simultaneously, since it is a North American market, 
less susceptible to unstable regimes, rapacious cartels, and distant 
events than foreign natural gas markets, which are tied to the global 
energy market.\13\ At present, the U.S. natural gas market benefits 
from the security and political stability in North America. United 
States policymakers should act to preserve rather than undermine the 
stability of domestic commodity markets
---------------------------------------------------------------------------
    \13\ See IFandP Newsroom, Commodities: Oil Price Volatility Up On 
Libya Rumours, US Natural Gas Continues its Slide, Industrial Fuels and 
Power Online (March 3, 2011) (reporting on rising prices and volatility 
in the international market for crude oil and unperturbed, declining 
prices for domestic natural gas).
---------------------------------------------------------------------------
    In addition to tying U.S. natural gas prices to international 
volatility, LNG exports would inflate demand and prices by forcing U.S. 
consumers to compete with end-users in other nations that are required 
to pay more for natural gas. This would incontrovertibly increase the 
price for natural gas in the domestic market, especially in times of 
supply shortfall and further undermine efforts to maintain domestic gas 
prices at competitive levels.

                              JOB CREATION

    Because of the high unemployment rate in this country today, some 
LNG export advocates argue that their projects are in the public 
interest because they will create jobs. However, what we should be 
looking for is real, durable job growth in the transportation sector 
due to infrastructure construction and related activities, rather than 
ephemeral job growth in a sector (LNG exports) that will likely 
disappear overnight when foreign countries begin to exploit their own 
shale gas reserves, making our LNG export facilities as useless as our 
LNG import facilities.
    APGA respectfully submits that any national plan for durable job 
growth prioritize investment in domestic use of natural gas in the U.S. 
transportation fleet and in electric power generation. The U.S. 
transportation fleet is almost wholly dependent upon petroleum, which 
imperils our energy and national security. APGA submits that domestic 
investment in transforming our transportation fleet to Compressed 
Natural Gas (CNG) vehicles will provide significant job creation while 
also improving our national security.
    Congress needs to look no further than legislation that has already 
been introduced in the House of Representatives to see the job creation 
potential of CNG vehicles: the New Alternative to Give Americans 
Solutions Act (NAT GAS Act), H.R. 1380. This bipartisan proposal 
introduced by Representatives Sullivan (R-OK), Boren (D-OK), Larson (D-
CT), and Brady (R-TX) targets the replacement of the heavy-duty vehicle 
fleet by offering tax credits (for five years) for alternative fuel 
infrastructure installation, alternative fuel vehicle purchases, and 
alternative fuel credits, as well as other incentives. According to the 
bill's sponsors, this legislation has the potential to create 500,000 
new jobs over the life of the legislation. It is important to note that 
this legislation targets only one subsector of one application of 
natural gas in the United States. The fact that this legislation could 
create half a million jobs in just one subsector, is indicative of the 
broad job creation potential of all applications of natural gas from 
vehicles to generation.

                            ENERGY SECURITY

    A government that has the pursuit of energy independence as its 
declared national policy should not authorize exportation of a valuable 
commodity whose value at home is incalculable and whose supply is 
unknown with any degree of certainty at this point in time. 
Policymakers should seize this window of opportunity to implement our 
long-declared (but never seriously pursued) policy of striving towards 
energy independence. The pursuit of energy independence requires that 
the United States wean itself off of imported oil, which accounts for 
approximately 50% of our domestic use.
    The two major consumers of foreign oil in the United States are the 
transportation sector and the industrial sector. Instead of exporting 
domestic natural gas, the United States should maximize its use 
domestically in order to displace the current reliance on imported 
petroleum products and on carbon-intensive coal. For instance, as the 
Secretary of Energy has made crystal clear, domestic natural gas should 
play a much larger role as a transportation fuel.\14\ Currently, the 
U.S. imports billions of dollars worth of oil from around the globe, a 
great deal of which is used for gasoline to fuel vehicles. The 
replacement of current gasoline-powered fleets with natural gas 
vehicles (and support infrastructure) would significantly reduce U.S. 
dependence on foreign oil, and thereby enhance U.S. security and 
strategic interests and reduce our trade deficit.
---------------------------------------------------------------------------
    \14\ ``The most direct way to reduce our dependency on foreign oil 
is to simply use less of it, starting with the cars and trucks we 
drive. Nearly 70 percent of our oil use is for transportation, and more 
than 65 percent of that amount is for personal vehicles... energy 
independence means changing how we power our cars and trucks from 
foreign oil to new American-made fuels and batteries.'' Nobel Physicist 
Steven Chu, U.S. Secretary of Energy, Pulling the Plug on Oil, 
Newsweek, April 4, 2009.
---------------------------------------------------------------------------
    Policymakers should also encourage the direct use of natural gas 
for residential and commercial end uses such as space heating, water 
heating, and the like where the greater efficiency and lower emissions 
of natural gas (on a source to site basis) has been amply 
demonstrated.\15\
---------------------------------------------------------------------------
    \15\ Review of Site (Point-of-Use) and Full-Fuel-Cycle Measurement 
Approaches to DOE/EERE Building Appliance and Energy Efficiency 
Standards, National Academies of Sciences (May 27, 2009) available at 
http://www.nap.edu/catalog.php?record_id=12670.
---------------------------------------------------------------------------
    Given its clean burning nature, it is logical to assume that 
natural gas will also play a role in distributed and other power 
generation to decrease reliance on coal and complement clean, albeit 
intermittent, energy sources such as wind and solar. APGA observes that 
most electric generation built since 2000 is fueled with natural gas, 
and the EIA projects that most new electric generation plants will be 
fueled by natural gas,\16\ which has obvious significance for the 
demand for natural gas in the immediate and long-term future. Finally, 
APGA observes that increased use of natural gas domestically in lieu of 
oil imports will benefit the U.S. economy by reducing our trade 
deficit.\17\
---------------------------------------------------------------------------
    \16\ EIA, Annual Energy Outlook 2011 at 41 (Finding that in each 
cost scenario considered by the EIA, the majority of new electric 
generation capacity will be natural gas-fired.); see also, Mark Watson, 
Gas Generation to Double by 2020: Report, Electric Power Daily (July 
12, 2011) (Reporting on an ICF International forecast that coal plant 
retirements, increased reliance on intermittent power sources, and the 
availability of shale gas will cause gas-fired electric generation to 
more than double between 2010 and 2030).
    \17\ For example, as recently reported, ``[t]he trade deficit in 
the U.S. widened in May to the highest level in almost three years, 
reflecting a surge in the cost of imported crude oil. The gap grew 15 
percent to $50.2 billion, exceeding all forecasts of 73 economists 
surveyed by Bloomberg News and the biggest since October 2008, Commerce 
Department figures showed today in Washington.'' Alex Kowalski, Trade 
Deficit of US Unexpectedly Surges on Increase in Crude-Oil Imports, 
Bloomberg News, (July 12, 2011).
---------------------------------------------------------------------------
    However, to accomplish our goal of energy independence, natural gas 
in the United States must remain plentiful and reasonably priced. Today 
U.S. consumers enjoy natural gas prices that are the product of both 
the new available supplies of natural gas and the fact that our natural 
gas market is largely limited to North America. If this trend is 
permitted to continue, then there is light at the end of the energy 
independence tunnel. The export of large quantities of domestic gas 
threatens our ability to obtain this goal because the key to greater 
use of natural gas in all sectors is that it remains affordable and 
avoids the volatility pitfalls of the past. That will only happen if we 
remain de-linked from the international market. We know that from 
experience; we should learn from that experience. The cost of ignoring 
that experience will be a lost opportunity to advance this Nation's 
essential energy independence and national security goals.

                               CONCLUSION

    APGA is not against free trade, but when important policies 
collide, nations must make choices. U.S. policymakers must carefully 
consider and prioritize the use of domestic resources according to the 
national interest over both the short and long-terms. APGA submits that 
the decision to export LNG should be thoroughly vetted in the context 
of a national energy policy, and the wise policy choice by our elected 
officials, at this critical time in our history, is to limit exports of 
natural gas so that we may realistically pursue the greater goal of 
energy independence. Those who argue that this matter is not an either-
or situation are wagering our long-term national well-being on short-
term profits. We urge the Committee to carefully consider the adverse 
impact that exporting LNG will have on millions of homes and natural 
gas consumers in the U.S. who will feel the impact of higher prices 
resulting from exposure to the global export market. We thank you for 
the opportunity to submit testimony and look forward to working with 
the Committee on this important issue.

    The Chairman. Thank you very much. Thank you all for your 
testimony. Let me ask a few questions here starting with you 
Dr. Medlock.
    One of the issues that sort of is floating around this set 
of problems is whether this shale gas, this newly found 
abundant natural gas source, is just something that we in the 
United States and Canada and perhaps Mexico, but North America 
have a corner on or whether this is really something that the 
rest of the world is going to find they've got just about as 
much as we've got. Are we in a circumstance where we're gearing 
up to export to markets that are going to find out that they've 
got plenty of what we're trying to export to them already or 
not?
    Mr. Medlock. Thank you for the question.
    That's certainly a real risk that I'm sure companies 
involved both in the export projects and proposed from North 
America as well as shale gas exploration and development 
overseas are wrestling with. Certainly outside of North America 
there is shale. We know that.
    As a matter of fact we knew shale existed here. It really 
was, when you think about the shale gas revolution in this 
country, it's a technological revolution because geologists 
have long been writing about shale formations and things such 
as gas in place. I've actually read dissertations in the annals 
of the AAPG that date back to 1971 on the Marcellus shale. So 
the existence of the formations was not new. It was really the 
application of new technologies.
    Whether or not those technologies are transferrable abroad 
I think is not really the fundamental issue as to whether or 
not we see the type of development that we've seen in North 
America, outside of North America. I think probably the most 
off--underappreciated factor in what we've seen in this country 
has to do with market structure. In this country individual 
operators, some very small operators actually have the ability 
to develop acreage and access a market. There's very little to 
block entry, so to speak. If you go outside of North America, 
save for one country, and that's Australia, that's not the 
case.
    So when we think about shale gas developments abroad 
certainly the potential is there, but there are things that are 
above ground, so to speak, that could really serve as long term 
impediments and open a window potentially for LNG exports.
    The Chairman. OK.
    Mr. Slaughter, did you have a point of view on that?
    Mr. Slaughter. I'd just like to say that if you look at the 
long term future of energy markets around the world. You might 
have seen the recent IEA report on the golden age of gas, this 
shows that natural gas will be one of the cornerstones of 
energy growth around energy demand growth around the world over 
the next 20 or 30 years. So that draws forth supply from all 
sorts of different options including from North America.
    So we need to provide all sorts of alternative forms of 
supply of natural gas to the global market as well as to the 
North American market.
    The Chairman. Let me just pursue that a minute. I assume 
Shell is actively pursuing opportunities to develop shale gas 
in lots of places in the world in addition to the U.S. Am I 
right?
    Mr. Slaughter. Yes, that's correct.
    The Chairman. To the extent you're successful with that, 
our opportunity to export and the market for the export of 
shale produced LNG from the United States diminishes. Is that--
--
    Mr. Slaughter. That's not necessarily correct. What I was 
trying to get at in my previous answer was that the global 
market for natural gas is growing. So it's opening up new 
opportunities for many sources of supply.
    So it's not a zero sum game where you develop in Poland. 
You'd need to develop less in North America. There will be a 
bigger gas market in the world over the next several decades.
    The Chairman. OK.
    Mr. Collins, I gather from your testimony you think that we 
need to be very wary of approving increased exports of LNG 
because you think it's going to adversely affect the price that 
consumers have to pay for natural gas. Is that accurate?
    Mr. Collins. That's correct. Yes.
    The Chairman. You say that Congress needs to act. What do 
you propose Congress should do?
    Mr. Collins. One of the things I think Congress should do 
is look at the NAT Gas Act that's been proposed. In that act 
there has been some funding available for infrastructure for 
natural gas fueling stations and also for vehicles. I think 
that's where we need to concentrate to get some of our funds 
available to the country to work on energy independence to get 
natural gas vehicles on the road.
    One of the bill's sponsors proposed this legislation that 
has the potential to create 500,000 new jobs. I think that 
would have a----
    The Chairman. But this is not legislation that would 
directly affect exports of natural gas out of the country. 
Instead it would increase the demand for natural gas here. Then 
indirectly, I guess, that does lessen the attractiveness of 
exports.
    Is that accurate?
    Mr. Collins. That's correct, yes. We feel that, APGA feels 
that in order to pursue energy independence that the United 
States should be looking at using natural gas internally not 
only for the direct use of natural gas for heating homes, 
industry, electric generation.
    The Chairman. Alright.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Slaughter, you are seemingly very bullish on natural 
gas. I appreciate that. I think the words that you used were, 
``deep confidence.'' Shell is demonstrating that by the 
investments in LNG export as well as the gas to chemicals 
facility that you are moving forward with in the Marcellus.
    Talk to me about how geography will play a role in what 
happens with our natural gas development here in this country. 
Obviously when you have the resource, for instance, sitting 
there in West Virginia you can put a chemical, gas to chemical 
facility there. But in a more geographically remote location 
like Alaska without as many options for the value at it without 
the proximity to the market, what then happens with those 
business judgment decisions?
    You've got the gas. What do you do?
    Mr. Slaughter. As you know we recognize that Alaska has 
huge energy resources and you know that Shell is working 
diligently to try and realize those opportunities as we have 
been for several years.
    I think in terms of Alaska natural gas if you look at its 
relation to the market and to other markets I think you can 
envision a future where potentially the development of natural 
gas for export from Alaska can lead to the development of 
infrastructure which can anchor developments. Lead perhaps in 
the medium to longer term to integrate Alaska natural gas into 
the North American market more.
    But clearly the geographical proximity to Asian markets is 
there. So it could be that that route allows Alaskan gas to be 
monetized earlier and develop the infrastructure to hook it up 
to systems which will connect with the North American market.
    Senator Murkowski. OK.
    The discussion that has been going on in terms of the price 
in the global markets--and this is a question probably to you, 
Dr. Medlock, as well as you, Mr. Slaughter. You have indicated 
that it's not a zero sum game in terms of you develop here, you 
have to take it offline somewhere else. Discuss, if you would, 
the potential impact of North American LNG exports on the 
domestic natural gas price volatility.
    Dr. Medlock, you kind of took us through our ECON 101, but 
we're getting a different perspective from Mr. Collins here. 
I'd like to have just a little bit more discussion on this.
    Mr. Medlock. Sure. Thanks for the question.
    To make an argument that increasing LNG exports would drive 
the price of natural gas domestically up to parody with the 
world say, you're basically implicitly making 2 very critical 
assumptions.
    The first one being that the domestic supply curve is not 
price responsive. So in other words we face capacity 
constraints with regard to how much new supply we can bring 
online in the face of growing demands and increasing prices.
    The second one is that you're making an assumption that 
foreign supplies are also not necessarily going to respond to 
the introduction of new supplies from the North American 
market. So in effect what you're doing is you're arguing that 
some foreign suppliers won't be back out of the market which 
means the price there will effectively be unchanged. Yet 
consumers in North America will face much higher prices because 
effectively what you're doing is you're diverting natural gas 
molecules that would otherwise go to future consumption to 
current consumption overseas.
    That in and of itself, is a pretty strong assumption. As a 
matter of fact no matter how many different ways we paint 
domestic supply and domestic demand and foreign supply and 
foreign demand, that's the only situation which you get that 
particular outcome. In every other single outcome, you really 
have to assume there are no constraints on export capacity, 
evaluate how much of the price action occurs in the foreign 
market and how much of the price action occurs in the domestic 
market.
    So there could very well be a happy medium in which prices 
do indeed rise in North America. But they also fall abroad. 
It's more likely however given the abundance of natural gas 
resources and the shape of the supply curve for North American 
gas that there would be a capacity constraint on export 
potential, particularly if you think about a 6 BCF a day export 
arrangement.
    In which case and this is a fundamental truth of any sort 
of an economic lesson that I've ever known or I've ever taught 
or been taught, the capacity constraint is where the rents 
accrue. So what you get across a capacity constraint is a wide 
differential in prices. So what means is if I have a very 
abundant supply of natural gas in North America if I constrain 
the amount of exports that are in place, say at 6.6 BCF a day, 
then you will actually see a pretty large gap between foreign 
and domestic natural gas prices.
    Senator Murkowski. Mr. Slaughter, very quickly.
    Mr. Slaughter. I'd echo what Chris Smith said in the first 
panel. Pricing dynamics in each of the major global markets, 
East Asia, Europe and North America are very different and 
depend on local conditions. Now an LNG export facility is a 
large capital expenditure, capital intensive facility. There 
are not going to be so many of them that you flip the balance 
in the domestic market between the dominance of domestic 
pricing dynamics verses international pricing dynamics.
    Domestic supply/demand conditions will prevail given the 
relative size of the likely export market verses the huge and 
growing domestic market.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Collins, let me go back to this chart with the Wall 
Street Journal that I've been citing. Red line is spot prices 
for LNG in Asia. Green line natural gas futures prices here in 
the United States.
    Now of course, you represent consumers, you know, business, 
folks who use natural gas to heat their home. What's the impact 
on your customers if you, as a natural gas distribution company 
in the market for purchasing for your customers. What does it 
mean for you all if you have to compete head to head with 
competitors in Asia or other parts of the world for natural gas 
supplies?
    Mr. Collins. Thank you, Senator, for that question.
    In the city of Hamilton the median income is about $35,000 
per year. Right now at the 360 and MMBTU are $4. Natural gas is 
affordable for customers to heat their homes and also for 
businesses.
    If the prices continue, if they increase to match 
international prices, it's going to be that much harder for 
families to heat their home, the businesses to compete with 
each other and the Nation.
    Senator Wyden. Let me ask a question for all of you because 
to me what I've been trying to get my arms around in this 
debate is trying to get an accurate picture of what the size of 
the export market is and what the impact is going to be on 
North American consumers. I was struck. A few weeks ago the 
National Petroleum Council issued a major report on the 
subject. The assessment assumed that North American exports of 
LNG would be 5 billion cubic feet a day base, not on any in 
depth analysis of what the potential export market would be but 
on the size of the first applications filed with the United 
States from the Canadian government.
    So then we've had U.S. DOE and the Canadian National Energy 
Board approving applications already for more than that amount, 
significantly more than that amount. They've got pending 
applications that are double the amount that the Council 
assumed and more export terminals are in the works.
    The reason I'm asking this is one, because I think it 
illustrates how uncertain the climate is on the 2 kinds of 
central questions. The size of the export market. What it's 
going to mean for consumers.
    The Petroleum Council is a very professional outfit. This 
is not intended to say, oh they did something wrong or didn't 
look at the right factor or anything of the sort. What it 
reflects though is the, to me, the uncertainty of the 
fundamental facts that policymakers are going to have to sort 
through.
    Why don't we just go down the row?
    Mr. Collins, I've got a couple of minutes I guess from my 
round. Just your reaction to the analysis that I'm bringing on 
this, you know, question that there is an awful lot of 
uncertainty. It's why it seems to me policymakers ought to be 
doing what Chairman Bingaman and Senator Murkowski are doing 
here today which is try to get the facts so that when we start 
laying out some policies they're actually based on the most 
objective judgments about what's ahead in terms of the market.
    Your reaction, just on this point.
    Mr. Collins, Mr. Slaughter, just right down the row.
    Mr. Collins. Thank you, Senator, for the question.
    APGA's opinion on that policy is that Congress should move 
slowly. You know, right now we're looking at the EPA is doing a 
study on hydraulic fracking. What impacts that would have 
environmentally to the Nation with chemicals that are used 
during that process.
    So as far as setting a limit or an amount that should be 
exported, I think we just need to move cautiously because we 
don't know exactly in the future. The reserves are there but we 
need to find a way to economically and safely extract the 
natural gas to be used.
    Senator Wyden. Mr. Slaughter.
    Mr. Slaughter. As a member of the National Petroleum 
Council Study Team which produced that report I can tell you 
that the export numbers that were built into that analysis were 
based on expert judgment on what we thought was likely to get 
developed. That's not necessarily the same number as the amount 
of which is permitted. You expect some attrition from permit to 
actual construction.
    These are very high capital intensive projects. Not many 
companies have the ability to finance construction and operate 
these. So expect the actual number to be somewhat lower than 
the amount of permits that are issued.
    The analysis that we came up with was that this did not 
stress the supply system. Certainly if you think of the growing 
market for natural gas in the North America that becomes a 
significantly lower percentage of the absolute total.
    Senator Wyden. Let me give your colleague a chance to 
respond as well. I just know, again, following in the press 
that Shell is looking at another big project that isn't even on 
the list. So again that's why I'm trying to get my arms around 
this.
    Mr. Medlock. Yes, certainly. I think what Andrew just 
indicated with regard to, you know, the license for export 
capacity and actually the volumes that move through the 
facilities is an important point to consider. I mean, you think 
about the quantity of import capacity that was actually 
approved for construction and constructed that now sits idle.
    That really goes to show you that the economics of the 
issue is actually a very important issue to grapple with as 
well. So cost matters.
    We can talk all day about the abundance of the resource 
base relative, you know, North America relative to everywhere 
else in the world and demand here relative to everywhere else 
in the world. But at the end it has to be cost effective or 
else it won't happen.
    Senator Wyden. Thank you, Mr. Chairman.
    The Chairman. Senator Hoeven.
    I just advise everyone we started a vote. So we'll try to 
have Senator Hoeven and then Senator Shaheen and then conclude 
the hearing. So go ahead.
    Senator Hoeven. Thank you, Mr. Chairman. I'm going to 
follow on a line of questioning I had with the former panel. 
I'm going to start with you, Mr. Slaughter.
    We're producing more natural gas, as you've indicated. Our 
State is an example. But we actually produce it in developing 
our oil fields.
    Mr. Slaughter. Yes.
    Senator Hoeven. So what ideas do you have that we can 
implement? What can government do at the Federal level, 
particularly? But maybe also at the State level to draw on any 
examples that you've seen that have been successful or anything 
that Shell is doing?
    What can we do from a legal tax and regulatory standpoint 
that will encourage private investment in the gathering systems 
and the transportation to capture gas that is now being flared 
off these oil wells and get it to market whether it's marketed 
domestically here in current uses and what you see as a 
transition, transitional uses for natural gas as we go forward 
or for export?
    Mr. Slaughter. I think that's a very good question. Thank 
you for that. What we have to realize here is that this is not 
a speculative future. This is actually happening right now.
    The U.S. has added 15 BCF a day of incremental new gas 
supply over the last 5 years. So it's actually happening. 
Pipelines are getting developed and gathering systems are 
getting developed.
    So I think what we would like to see is no new impediments 
to natural gas upstream development. I think that's the key 
thing. We have a system which seems to work in developing 
infrastructure. The major basins are getting connected to 
markets.
    So as long as we operate and continue to operate in an 
environmentally responsible and safe way, I think we're looking 
for no new impediments to development.
    Senator Hoeven. So right now you feel that that legal tax 
and regulatory environment is conducive to the infrastructure 
development that you need to move the gas we produce from all 
these different markets around the country to some commercial 
use?
    Mr. Slaughter. It does seem to be happening from the major 
gas basins, yes. If you look at the Haynesville shale or the 
Marcellus shale there is a fairly substantial infrastructure 
build out to connect them to market.
    Senator Hoeven. OK. Thank you.
    Dr. Medlock.
    Mr. Medlock. I would actually only echo that. It's sort of 
an echo really. With the current regulatory framework actually 
is very conducive to construction particularly of the 
interstate gathering and transportation network.
    Intrastate, that's a bit more of a patchwork. So those are 
things that certainly wouldn't be addressable necessarily at 
the Federal level though. They would be tackled by State 
regulatory agencies.
    But with regard to the ability to permit and construct long 
haul transportation that crosses State borders you actually 
don't see it happen anywhere in the world faster than it 
happens in the United States. It's actually a very clean 
system.
    Senator Hoeven. That's encouraging.
    Mr. Collins, your thoughts?
    Mr. Collins. As far as infrastructure one thing that we 
would like to see, as I mentioned earlier, the increased use of 
natural gas vehicles. In the city of Hamilton last year 
received a grant from Clean Fuels Ohio to convert 4 vehicles to 
natural gas. We're also in the process of constructing a 
public/private fueling station.
    So we would like to see more tax credits, funding available 
for infrastructure for transportation sector.
    Senator Hoeven. Mr. Slaughter, can you give me any specific 
fields to look at where you think they've done a particularly 
good job as they've increased production, particularly in oil 
development of going in and working with the companies to 
encourage the capture of natural gas that's being flared or 
some examples that you would cite that we could look at?
    Mr. Slaughter. I'll get back to my upstream team and get 
you some examples. Yes. I don't have them right here today.
    Senator Hoeven. Same thing, Dr. Medlock? Any examples that 
you can think of as well as, again, any things that they've 
specifically done that have helped stimulate that private 
investment and make the transition?
    Mr. Medlock. I think one of the critical aspects, 
particularly with regard to your State and the 13 month license 
to flare when a new oil production facility comes online is the 
lack of gathering infrastructure. I think a lot of that relates 
to cost and the ability to actually move oil in a fundamentally 
different way because there's a lot of oil that's actually 
being moved by tank truck out of North Dakota right now which 
is, if you ask me, a very high cost way to transport oil. But 
the opportunity set is so large in North Dakota that they're 
doing it anyway.
    Ultimately what needs to happen is there needs to be some 
sort of development of local use markets if that gathering 
infrastructure is not going to be developed to move it longer 
distances. Perhaps that's where, you know, State regulators or 
even at the Federal level there can be some involvement to 
encourage that kind of use.
    Senator Hoeven. So a real focus on the gathering of 
systems.
    Mr. Medlock. Yes.
    Senator Hoeven. You'd say that would be an area of 
emphasis.
    Mr. Medlock. Absolutely.
    Senator Hoeven. Thank you. Thank you, Mr. Chairman.
    The Chairman. I would just mention. I think most States 
limit the number of days that you can flare when you're 
starting up an oil well.
    I think in our State it's maybe 60 days. In your State it's 
150. So one way to encourage people to hook up and use the 
natural gas instead of just flaring it is to shorten that time 
period.
    Senator Shaheen.
    Senator Shaheen. Thank you, Mr. Chairman.
    My State of New Hampshire is in New England. In the 
Northeast we haven't used natural gas as you have in Ohio, Mr. 
Collins and much of the Midwest as much for heating our homes. 
Much of it has gone to power utilities, to provide generation.
    Obviously we would be concerned, as I think you heard other 
members of the panel and talking about how the effect of 
exporting LNG might affect prices. I tried to listen pretty 
carefully to what each of you said on that issue. It didn't 
sound to me like there was unanimity coming from the panel 
about what that impact would actually be.
    So, I guess, given that there is reason to be concerned 
about what the impact of pricing on gas would be here in 
America depending upon how much exporting is allowed.
    So, Mr. Slaughter, you talked about the potential for LNG 
export. You used it in the context of when managed properly and 
I just wondered what you would include as proper management of 
that export.
    Mr. Slaughter. I think when managed properly we were 
talking about the operational aspects, the environmental 
aspects of operating, developing and operating an industrial 
facility. Clearly that's always at the top of our mind when 
we're looking at large investments of safety and environmental 
impact. I think that was the main point I was referring to 
there.
    In terms of the price impact of LNG imports, again, I would 
come back to my export--sorry. I'd come back to my previous 
statement that this is likely to be a rather small percentage 
compared to the domestic market in North America in the U.S. 
The pricing dynamics that exist in the domestic market with 
multiple supply sources, very developed infrastructure, that 
should still dominate in terms of price formation in this 
market.
    I do not expect this to migrate to an Asian type pricing 
regime.
    Senator Shaheen. So when you were talking about proper 
management you were not talking about how the export market 
might be managed. You were more talking about how are we 
getting the gas out of the ground then.
    Mr. Slaughter. Yes.
    Senator Shaheen. To follow up then in a couple of those 
areas. We did a hearing in the Water and Power Subcommittee of 
this committee a couple of weeks ago where we tried to focus 
specifically on some of the challenges in the Northeast where 
because of the population accessing the Marcellus shale is a 
little more problematic than in North Dakota, for example. One 
of the concerns that we heard was how chemicals are used and to 
what extent are those identified for the public and how much 
transparency is available so the public actually knows that.
     Wonder if you or Dr. Medlock, if you could comment on what 
you think is the most effective way to make sure that there is 
transparency about the chemical use.
    Mr. Slaughter. So I'll lead off on that. As you may know 
there is an industry initiative called Frack Focus where the 
chemical components of drilling and fracturing fluids are made 
transparent and available to the public. They are listed by 
participating companies. We're in favor of increased 
transparency in that regard because the chemical components of 
a fracking fluid tend to be a rather small percentage, but it's 
important for people to know what they are.
    The industry is a process of developing these platforms for 
transparency like Frack Focus or following local legislation 
like in the State of Texas which now has a legislative 
requirement to disclose. We're in favor of that.
    Senator Shaheen. I appreciate that. I think that's very 
important. My recollection though and I don't remember the 
numbers exactly, but that the people who are actually 
disclosing on Frack Focus were a very small percentage of the 
amount of fracturing that was going on. So, you know, one of 
the things we quizzed people about was whether this should be 
regulated as you point out, Texas has just done that whether 
the voluntary approach was really working.
    I don't know, Dr. Medlock do you have in my 10 seconds that 
I have left, do you have a perspective on this?
    Mr. Medlock. I think it would be nice if we could envision 
a world where voluntary transparency was the rule of law, so to 
speak. But unfortunately that's not necessarily the case 
always. So I think at the end of the day adopting measures like 
those that have been adopted in the State of Texas is something 
that either each State or something at the Federal level is 
ultimately going to have to be done to ensure that transparency 
is truly followed.
    Senator Shaheen. Thank you all very much.
    The Chairman. I believe our vote is coming to a close. So 
we need to get to the floor.
    Thank you all very much. I think it's been very useful 
testimony. That will conclude our hearing.
    [Whereupon, at 12:29 p.m., the hearing was adjourned.]


                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

    Response of Christopher Smith to Question From Senator Bingaman

    Question 1. According to the Natural Gas Act, the Department of 
Energy has the ability to deny applications to export natural gas to 
countries with which the U.S. does not have a standing Free Trade 
Agreement, if DOE finds the export to not be in the public interest. 
The United States has trade obligations under other international 
agreements, such as those arising from membership in the World Trade 
Organization. When reviewing an export application, what criteria does 
the administration use to decide whether its decision is consistent 
with United States obligations under international agreements?
    Answer. DOE's authority to regulate imports and exports of natural 
gas arises under section 3 of the Natural Gas Act. Section 3(c) of the 
Natural Gas Act, as amended in 1992, provides that applications for 
authority to import or export natural gas from or to most nations with 
which the United States has entered into a free trade agreement must be 
granted without modification or delay. With respect to other countries, 
Section 3(a) of the Natural Gas Act requires DOE to grant an export 
application unless DOE finds that the proposed export is not consistent 
with the public interest. DOE takes international obligations 
seriously, in addition to other factors, in conducting its public 
interest analysis. In an order issued May 10, 2011 in Sabine Pass 
Liquefaction, LLC, FE Docket No. 10-111-LNG, for example, DOE conducted 
its own review of applicable laws, reviewed all of the pleadings 
submitted in the proceeding before it, and consulted with other 
executive branch agencies, as necessary, to ensure consistency with 
United States international trade obligations.

     Responses of Christopher Smith to Questions From Senator Wyden

    Question 1. In DOE's decision to approve the first big LNG export 
terminal export--Sabine Pass--DOE accepted the applicant's analysis on 
the impact that raising natural gas prices by more than 10% meets the 
public interest test required by the Natural Gas Act. While your 
testimony today is that DOE has commissioned two studies of export 
impacts, I am still uncertain of the criteria that DOE uses to 
determine whether or not a proposed export meets the Natural Gas Act 
test. What are the Department's formal or informal criteria for 
determining whether an export meets the public interest test? How were 
these criteria developed?
    Answer. Section 3(a) of the Natural Gas Act creates a rebuttable 
presumption that a proposed export of natural gas is in the public 
interest, and requires DOE to grant an export application unless DOE 
finds that the record in the proceeding of the application overcomes 
that presumption.
    The criteria used in a public interest review, which were developed 
within DOE, include, to the extent determined to be relevant or 
appropriate: domestic need for the natural gas proposed for export; 
adequacy of domestic natural gas supply; U.S. energy security; the 
impact on the U.S. economy (GDP), consumers, and industry; job 
creation; U.S. balance of trade; international considerations; 
environmental considerations; consistency with DOE's long-standing 
policy of promoting competition in the marketplace through free 
negotiation of trade arrangements; and other issues raised by 
commenters and/or interveners deemed relevant to the proceeding.
    Question 2. Your testimony today was that DOE believes that the 
Natural Gas Act creates a rebuttable presumption that the export should 
be approved unless ``DOE finds that the record in the proceeding of the 
application overcomes the presumption.'' What is DOE's role and 
obligation to develop a complete record that could support a negative 
finding? To what extent does DOE depend on intervenors in the case to 
develop the record to support a negative finding and to what extent 
does DOE have a burden to develop and document adverse conditions and 
facts that result from the proposal?
    Answer. With respect to applications to export natural gas to 
countries with which the United States does not have a free trade 
agreement providing for the national treatment for trade in natural 
gas, the burden under Section 3(a) of the Natural Gas Act is, in the 
first instance, on interveners and protesters to introduce evidence 
that overcomes the statutory presumption that the application is 
consistent with the public interest. Where deemed necessary or 
appropriate, DOE has taken and will continue to take administrative 
notice of additional evidence in the public record to ensure that a 
complete record is developed. Additionally, because of the potentially 
far-reaching implications of recent applications to export liquefied 
natural gas to non-free trade agreement countries, DOE is preparing a 
cumulative impacts study which it intends to make part of the records 
for review and comment by parties in pending and future proceedings 
where such export authority is being requested.
    With respect to applications arising under Section 3(c) of the 
Natural Gas Act, i.e. applications to import or export natural gas, 
including LNG, from or to countries with which the United States has 
entered into a free trade agreement providing for national treatment 
for trade in natural gas, or to import LNG from other international 
sources, DOE does not conduct a public interest review. Since the 
amendment of Section 3(c) by the Energy Policy Act of 1992, those 
applications have been deemed by statute to be in the public interest 
and DOE is required to grant them without modification or delay.
    Question 3. North American natural gas markets and transmission 
systems are interconnected. The National Energy Board of Canada 
recently approved a 1.4 billion cubic feet per day export authorization 
from British Columbia. To what extent are the analyses that DOE has 
commissioned to examine the impacts of LNG exports analyzing the role 
that Canadian and Mexican natural gas markets and regulatory decisions, 
such as the recent NEB export authorization, have on the cumulative 
effects of LNG exports and the public interest test? To what extent 
does DOE consider developments in Canada and/or Mexico, such as the 
impact of NEB export authorizations, in determining the Natural Gas Act 
public interest test?
    Answer. DOE is aware of the recent NEB authorization, as well as 
other applications before the NEB, to export North American natural gas 
as LNG from British Columbia, Canada. The DOE-commissioned studies that 
will address the cumulative impact of LNG exports include sensitivity 
analyses of LNG exports with volumes in excess of those applications 
received by DOE, which could be used to approximate the impact of U.S. 
and Canadian exports.
    Question 4. There are a variety of factors that determine the price 
that consumers pay for natural gas, including constraints on pipeline 
capacity and wellhead prices. What factors did DoE take into account 
when calculating the impact of additional export licenses on domestic 
prices? Did DoE consider the impact on consumer prices or wellhead 
prices alone? Has DoE taken into account regional differences--for 
example, did DoE consider differences between exports from Alaska 
versus Gulf of Mexico regions? Did DoE look at factors creating 
seasonal pricing between consumer prices and wellhead prices?
    Answer. DOE has commissioned studies from EIA and a private 
contractor to review these issues but it has not yet received the 
results of the studies. The EIA study will use the National Energy 
Modeling System (NEMS), which incorporates current pipeline 
constraints, and reflects prices throughout the entire value chain from 
wellhead to end-user. The private contractor study will evaluate the 
macroeconomic impact of LNG exports using a general equilibrium model 
of the U.S. economy, and will incorporate the EIA case study output 
from NEMS. The contractor study will also evaluate the impact that LNG 
exports could have on multiple economic factors, but primarily on U.S. 
gross domestic product (GDP), employment, and real income. The focus of 
the studies is on the impact of natural gas exports from the lower-48 
states on an annual basis through 2035, and will not show seasonality. 
The studies also will not evaluate LNG exports from Alaska.
    Question 5. Shale gas is a new source of natural gas. Estimates of 
proved resources have already been adjusted by the Energy Information 
Administration. How has the uncertainty of this supply affected your 
analysis of the domestic impact of these export licenses?
    Answer. DOE continues to monitor the Energy Information 
Administration's (EIA) estimates of domestic shale gas resources and 
reserves, as well as ongoing resource assessments developed by others. 
The DOE-commissioned studies that will address the cumulative impacts 
of LNG exports will include a sensitivity analysis that addresses 
supply uncertainty.

     Responses of Christopher Smith to Questions From Senator Coons

    Question 1a. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.
    In your view, is the role of the federal government strategically 
focused enough from a policy perspective to oversee and encourage the 
use of natural gas in various, relevant domestic and international 
markets?
    Answer. The federal government is sufficiently and strategically 
focused from a policy perspective to oversee and encourage the use of 
natural gas in various, relevant domestic and international markets. As 
further described below, the Department of Energy (DOE) and other 
federal agencies are addressing key policy issues concerning the 
oversight and advancement of domestically-produced natural gas, and 
this coordinated effort will enable expanded domestic production and 
economic growth, support energy security and bolster our standing 
within the international community.
    The Secretary of Energy Advisory Board (SEAB) Natural Gas 
Subcommittee recently released a report identifying critical strategic 
issues and recommendations to support and enable expanded domestic 
production of natural gas from shale gas formations while ensuring that 
activities are conducted in an environmentally responsible manner. The 
National Petroleum Council is concluding a study of the natural gas 
resources in North America which will also inform policy and technical 
issues associated with development activities.
    DOE is working with the Council of Environmental Quality, the 
Department of State, the Department of the Interior and the 
Environmental Protection Agency through an interagency workgroup to 
establish the policy and regulatory frameworks to encourage and monitor 
domestic natural gas development. The Department of State's Global 
Shale Gas Initiative is developing and will share with the 
international community governmental and industry insights, expertise, 
and institutional capabilities that enable safe, sustainable, and 
economic extraction and development of unconventional natural gas 
resources. The Environmental Protection Agency is conducting a study of 
the technical aspects of the development of unconventional natural gas 
resources and, along with the Department of the Interior study of the 
technical aspects of offshore natural gas development, will assist in 
the framing and addressing of critical policy issues. Other country-
specific bi-lateral programs are being initiated by the Department of 
State to share U.S. expertise and experience in assessing and 
developing conventional and unconventional natural gas resources and 
will include joint technical studies, technical workshops, site visits, 
and other exchanges facilitated through bi-lateral forums and with the 
assistance of various Federal agencies.
    Question 1b. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.
    What considerations are made when considering the tradeoffs of 
exports vs. domestic use--among them reducing gas price volatility, 
determining the balance of trade, creating jobs, counteracting 
geopolitical influences, producing higher valued domestic goods?
    Answer. A wide range of criteria are considered as part of DOE's 
public interest review process, including, to the extent deemed 
relevant or appropriate: domestic need for the natural gas proposed for 
export; adequacy of domestic natural gas supply; U.S. energy security; 
the impact on the U.S. economy (GDP), consumers, and industry; job 
creation; U.S. balance of trade; international considerations; 
environmental considerations; consistency with DOE's long-standing 
policy of promoting competition in the marketplace through free 
negotiation of trade arrangements; and other issues raised by 
commenters and/or interveners deemed relevant to the proceeding.
    Question 2a. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    What should be the take away for policymakers in terms of utilizing 
natural gas for the transportation sector or export market without 
creating economic distortions for other consuming industries?
    Answer. The abundance, low cost, and domestic supply of natural gas 
makes it an increasingly attractive candidate for captive fueling 
applications (DOE Quadrennial Technology Review (QTR) p. 63), where 
vehicle fleets with their own fueling infrastructure could benefit from 
specialized fuels. However, these are specialized applications, and 
technology pathways that leverage existing infrastructure are more 
likely to succeed in mass markets. (DOE QTR, p. 49) With respect to LNG 
export applications, DOE considers a number of criteria as part of its 
public interest review. This includes the domestic need for the gas 
proposed for export, as well as the impact of the proposed export on 
the economy, consumers, industry, and domestic natural gas prices.
    Question 2b. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    Other countries in Asia (China), Europe (Poland), and South America 
(Brazil and Argentina) are expected to develop shale gas reserves in 
the future. Do you think that this will dampen the low-cost advantage 
that the U.S. currently has for domestic exports right now? Is the 
federal government taking these new reserves into consideration when 
considering its permit approvals?
    Answer. Potential future shale gas resource development is one of 
many global natural gas supply and demand factors that can affect 
global natural gas price markets. DOE's focus in reviewing LNG export 
applications is principally on the domestic impact of natural gas 
exports on the public interest, and it has not considered potential 
future global shale gas resource development.
    Question 2c. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    Has the federal government looked at whether there is enough 
natural gas to satisfy the diversity of demand? Are there regional 
differences in terms of export potential?
    Answer. As part of the public interest review process for LNG 
exports, DOE considers the adequacy of domestic natural gas supply and 
the domestic need for the natural gas proposed to be exported among the 
review criteria. DOE will continue to monitor future assessments of 
domestic natural gas supply and demand.
    There are regional differences in terms of LNG export potential to 
the extent that LNG export facilities are not currently proposed for 
every geographic region of the United States.
    Question 2d. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    What factors are weighed when considering the benefit of exporting 
a raw material (natural gas) or a finished product in the form of 
chemicals and higher valued goods?
    Answer. The potential benefits of exporting a product, whether a 
raw material or finished product, would be to stimulate new domestic 
economic activity as the exporting industry expands to produce more of 
the product for the new export market. This could result in more jobs, 
and new Federal, state, and local tax revenues paid by the exporting 
industry and the new workers. It could also benefit the U.S. trade 
balance by adding new revenues to the domestic economy from foreign 
entities buying the exported product. Additionally, DOE considers the 
domestic need for the natural gas proposed for export as part of its 
public interest review process.
    In order to address the potential cumulative impact of a grant of 
pending LNG export applications to non-free trade agreement countries, 
DOE has commissioned two case studies: one by the EIA and the other by 
a private contractor. These studies will address the impacts of 
additional natural gas exports on domestic energy consumption, 
production, and prices, as well as the cumulative impact on the U.S. 
economy, including the effect on gross domestic product, job creation, 
and balance of trade, among other factors. We anticipate these studies 
will be completed no later than the first quarter of calendar year 
2012.

   Responses of Christopher Smith to Questions From Senator Murkowski

    Question 1. Mr. Smith, several studies have emerged on the size of 
the gas resource and it seems to me this is a key fundamental in 
determining our capacity for export. DOE has even sanctioned some of 
this work in assessing the resource. Apart from EIA's, can you outline 
which estimates--whether MIT, PGC, ICF, NPC--also inform DOE policy? Is 
it accurate that these estimates don't contain any undiscovered gas, 
such as that in underexplored places like Alaska as well as the Antrim 
and Utica shales?
    Answer. DOE utilizes various reference sources in its efforts to 
stay up-to-date in understanding U.S. natural gas resources, and is 
aware of the above mentioned studies. It is DOE's understanding that 
natural gas estimates in these studies do, in fact, contain 
undiscovered gas.
    Question 2. What attributes of Alaska's resource base and its 
geography seem to place it in a distinct position from the rest of the 
US in terms of its export options?
    Answer. Alaska has a large natural gas resource base that is closer 
to Pacific Basin LNG importing countries compared to other states with 
respect to LNG export options.
    Question 3. To be clear, is it accurate that licenses for LNG 
export are concerned with dry gas, not the natural gas liquids (NGVs) 
which many of our industrial consumers need as a feedstock?
    Answer. Section 3 of the Natural Gas Act gives authority to the 
Secretary of Energy to regulate the export of natural gas, including 
liquefied natural gas. DOE has no authority under section 3 of the 
Natural Gas Act to regulate the export of Natural Gas Liquids (NGLs), 
such as ethane, propane, or butane.
    Question 4. Finally, can you outline the authority DOE can preserve 
over export licenses to ensure we aren't getting into a situation where 
terminals are locked into long term contracts even if export were 
suddenly taking place during a national and/or energy security crisis?
    Answer. In the event of an emergency natural gas supply shortage, 
the Natural Gas Policy Act (NGPA) provides for implementation of 
curtailment priorities in order to protect high priority users, 
including residential and small commercial consumers. If the 
curtailment priorities are exhausted, the NGPA authorizes the President 
to declare a natural gas supply emergency and to make emergency 
purchases of natural gas. If those efforts still are not enough to 
protect high priority users, the President may issue emergency orders 
allocating gas supplies.
    In the event of an unusual or extraordinary threat, the President 
is authorized by the International Emergency Economic Powers Act to 
declare a national emergency and to investigate, regulate, or prohibit 
any importation or exportation of any property in which any foreign 
country or a foreign national has any interest by any person, or with 
respect to any property, subject to the jurisdiction of the United 
States.
    The Energy Policy and Conservation Act, at 42 USC 6212, provides 
the President with additional independent rulemaking authority to 
restrict exports of natural gas.
    After opportunity for a hearing and for good cause shown, DOE is 
also authorized by section 3 of the Natural Gas Act to issue 
supplemental orders modifying or rescinding prior orders to protect the 
public interest. Additionally, DOE is authorized by section 16 of the 
Natural Gas Act ``to perform any and all acts and to prescribe, issue, 
make, amend, and rescind such orders, rules, and regulations as it may 
find necessary or appropriate'' to carry out its responsibilities.
                                 ______
                                 
      Responses of Jeff C. Wright to Questions From Senator Wyden

    Question 1. While FERC has approved a number of import terminals on 
the assumption that they were needed to provide additional regional 
supply, such as its approval of Jordan Cove to meet Northwest demand, 
exports will not provide such supply and may, in fact, reduce supply 
and raise prices in regional markets as U.S. consumers compete with 
off-shore buyers. What are FERC's criteria for assessing the need for 
export facilities in meeting regional energy needs? What precedent is 
there for finding that an export facility can meet the Commission's 
obligations to determine the need for a facility under the Natural Gas 
Act and under the National Environmental Policy Act?
    Answer. The Commission has not yet acted on any of the proposed 
projects to export LNG. Similar to the processing of an import 
terminal, I expect that the Commission would develop a complete record 
regarding any proposed LNG export terminal, including any available 
information on the impact of a proposed facility on regional energy 
markets. In my experience, the Commission has no preconceived criteria 
in this regard, but bases its decisions on the evidence before it. It 
is important to note, however, that the authority to approve or deny 
applications to import or export natural gas resides with the 
Department of Energy (DOE) and it is DOE that is responsible for 
determining whether the exportation of natural gas, in particular, is 
consistent with the public interest.
    Question 2. In approving import terminal applications, the 
Commission assumed economic and environmental benefits from these 
import facilities which no longer appear valid. When the Commission 
considers applications for conversion of import terminals for export 
purposes, will the Commission discount these previously assumed 
benefits in meeting its obligations under both the Natural Gas Act and 
NEPA?
    Answer. Commission decisions regarding LNG import and export 
terminal applications, as with all of the Commission energy 
infrastructure decisions, are made on the basis of the complete record 
before the Commission, I anticipate that the Commission will act on any 
future LNG export terminal applications based on the best information 
available at that time.
    Question 3a. In December 2009, FERC approved the Jordan Cove LNG 
import terminal in Coos Bay, Oregon over the objections of the State of 
Oregon and other intervenors who argued that Northwest natural gas 
needs could be met with North American supplies. In your testimony 
today, you reiterated that there was a need for imported gas at the 
time the staff and the Commission approved the project despite evidence 
presented by the State. Indeed, the Commission's December 17, 2009 
order goes to great lengths to justify a need which not only did not 
materialize, but which the applicant has now determined no longer 
exists and that the terminal should export an even greater amount of 
gas.
    Given the fact that the staff and the Commission clearly erred in 
accepting and defending the needs assessment for the project, why 
should the original authorization be sustained?
    Answer. The Commission is currently considering requests for 
rehearing of its decision on the Jordan Cove LNG project. As a pending 
proceeding before the Commission, the staff cannot comment on the 
substance or merits of the Jordan Cove LNG project.
    Question 3b. Will the Commission reconsider the original Jordan 
Cove order and/or needs assessment either on its own or as part of an 
application to modify the facility for export? If not, why not?
    Answer. I cannot comment on Commission action with respect to the 
original Jordan Cove order, because requests for rehearing of that 
order are pending before the Commission. Should Jordan Cove file an 
application to modify the proposed facility for export, Commission 
staff will analyze all issues relevant to that application.
    Question 3c. The original Jordan Cove authorization was for a 
terminal capable of handling the equivalent 1.0 billion cubic feet a 
day of natural gas. The export permit application for Jordan Cove is 
for the equivalent of 1.2 billion cubic feet per day. To what extent 
will FERC require review of the original safety, marine transit, 
environmental, operational and security requirements of the facility in 
light of the significant increase in plant capacity proposed by the 
applicant?
    Answer. Jordan Cove has not filed an application with the 
Commission to change either the terminal capacity or its status from an 
import terminal to an export terminal. If such an application is filed, 
the Commission would conduct an analysis of the impacts associated with 
the proposed modifications, including issues related to siting, 
construction, and operation.

      Responses of Jeff C. Wright to Questions From Senator Coons

    Question 1. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.

          a. In your view, is the role of the federal government 
        strategically focused enough from a policy perspective to 
        oversee and encourage the use of natural gas in various, 
        relevant domestic and international markets?
          b. What considerations are made when considering the 
        tradeoffs of exports vs. domestic use--among them reducing gas 
        price volatility, determining the balance of trade, creating 
        jobs, counteracting geopolitical influences, producing higher 
        valued domestic goods?

    Answer. With respect to the construction of LNG and other natural 
gas projects, the Natural Gas Act focuses on Commission review of 
individual projects, rather than on broader strategic issues. 
Consequently, I have no views on these matters.
    Question 2. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''

          a. What should be the take away for policymakers in terms of 
        utilizing natural gas for the transportation sector or export 
        market without creating economic distortions for other 
        consuming industries?
          b. Other countries in Asia (China), Europe (Poland), and 
        South America (Brazil and Argentina) are expected to develop 
        shale gas reserves in the future. Do you think that this will 
        dampen the low-cost advantage that the U.S. currently has for 
        domestic exports right now? Is the federal government taking 
        these new reserves into consideration when considering its 
        permit approvals?
          c. Has the federal government looked at whether there is 
        enough natural gas to satisfy the diversity of demand? Are 
        there regional differences in terms of export potential?
          d. What factors are weighed when considering the benefit of 
        exporting a raw material (natural gas) or a finished product in 
        the form of chemicals and higher valued goods?

    Answer. As noted above, questions regarding the nation's strategic 
energy planning are beyond the limited authority granted the Commission 
with respect to the construction of natural gas facilities.

    Responses of Jeff C. Wright to Questions From Senator Murkowski

    Question 1a. Mr. Wright, as your testimony notes, The Commission's 
review process is identical for either LNG import or export terminals.
    Can you clarify for me then, may a terminal go through both reviews 
at once if it is an identical review?
    Answer. Yes. If an applicant proposes to construct an LNG facility 
project capable of both import and export operations, the application 
to the FERC would have to provide the requisite information for all the 
project facilities and services, and the project would be reviewed in 
its entirety. While the review process is the same, the scope of the 
Commission staff's safety and environmental review is based on the 
equipment being proposed. Some equipment, such as storage tanks, pumps, 
and marine berths, would be required for either import or export. The 
primary differences would be related to the equipment needed for 
natural gas sendout for an import facility (e.g., vaporizer and high-
pressure LNG pumps) and the liquefaction facilities needed for export.
    Question 1b. If so, may an existing terminal switch back and forth 
between import and export easily?
    Answer. If an LNG terminal receives the necessary approvals from 
the Commission and DOE for both import and export, no further approvals 
would be needed to switch between operations. An LNG terminal could 
physically switch back and forth between import and export operations 
if all the necessary equipment exists to provide both services.
    Question 1c. How much of that review process needs to be repeated 
if an expansion of import or export capacity is sought?
    Answer. The project sponsor would have to apply to both FERC and 
DOE to change facilities and/or purpose of the LNG terminal. The extent 
of Commission review that would be required would depend on the extent 
and impacts of the proposed expansion.
    Question 2. Mr. Wright, can you provide for the record a 
description of the way LNG behaves physically--how it must be handled, 
whether it is as dangerous as gasoline or other energy products, and 
what risks it carries in the event of a leak or spill?
    Answer. Natural gas becomes a liquid (LNG) at -260F and therefore 
as LNG it must be processed and stored in materials suitable for these 
low (cryogenic) temperatures. LNG vaporizes rapidly when exposed to 
ambient heat sources such as water or soil, and typically the vapors 
would travel in the direction of the prevailing wind, continuously 
mixing with the warmer air, until the vapors become lighter than air 
and are dispersed below flammable levels. The principal hazards are the 
heat from a fire following an accidental release of LNG that either 
forms a pool fire or flammable vapor cloud. (I would note that the 
accidental release of LNG is extremely rare.) In addition, LNG, as well 
as fuels such as butane, ethane, and propane, is categorized by the 
Coast Guard as a high consequence cargo which can pose a threat to 
maritime safety and security. Extensive coordination is done with the 
Coast Guard in determining if a waterway is suitable for LNG transit.
    With the exception of the fact that LNG fires would likely burn 
hotter than a similar-sized petroleum fire, the hazardous properties 
associated with LNG are not markedly different than other fuels. 
However, because LNG rapidly evaporates and is dissipated in the air, a 
spill of LNG does not pose the same sorts of long-lasting environmental 
consequences on land or in the marine environment that have resulted 
from spills of petroleum fuels.
                                 ______
                                 
 Responses of Kenneth B. Medlock, III, to Questions From Senator Coons

    Question 1a. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.
    In your view, is the role of the federal government strategically 
focused enough from a policy perspective to oversee and encourage the 
use of natural gas in various, relevant domestic and international 
markets?
    Answer. Domestically, natural gas has become such an important fuel 
to so many different stakeholders in the US economy precisely because 
of government action. Beginning with the Natural Gas Act in the late 
1970s the US government has, through various regulatory agencies, 
transformed the natural gas industry in a profound manner. The industry 
used to be characterized by long-term take-or-pay contracts between 
producer and consumer--a model that still holds in Asia and is 
beginning to unravel in Europe. This limited the ability of small 
producers to enter the market. However, a series of regulations have 
created in the US natural gas market what is perhaps the most efficient 
market in the world, and it serves as a model for other governments and 
regional interests, such as the current efforts in the EU. The 
regulations include, but are not limited to, the moves to (i) unbundle 
transportation capacity from pipeline ownership, (ii) establish a 
market for tradable capacity rights, (iii) establish regulatory 
oversight to limit monopoly power of pipeline developers by regulating 
rates of return on new facilities and establishing procedures for 
soliciting pipeline capacity interest from third parties, and (iv) 
allowing hub services to evolve so that spatial and temporal arbitrage 
opportunities could be seized. Over the last couple of decades, the 
market transformation has fostered market entry by small producers, 
which is an important point considering it is the entrepreneurial 
endeavors of the independent producers in the US that triggered the 
movement to commercial shale development.
    In my opinion, it is important that the government not undo what it 
has done. In other words, by establishing the market rules in the 
manner it has, the opportunity for entry and the proper market signals 
are not masked. Absent this, we could easily revert to a market that 
results in inefficient distribution and use of natural gas. It is also 
important that the government not take steps that could lead to 
consolidation in the upstream in the interest of scale overcoming new 
cost burdens. This would undermine the very force that led to shale gas 
development. By the same token, there are certain low cost polices that 
could achieve the level of regulatory oversight that is needed to 
ensure this is done safely--regulations aimed at mandating transparency 
is one example. Efforts should be directed at identifying these and 
acting on them.
    Internationally, encouraging a replication of the regulatory and 
market structures in place in the US would do a lot to encourage 
broader market development in other countries. This could serve both 
economic and environmental goals, again, if done properly, and is 
something we have written extensively on at the Baker Institute. Here 
again, the US could take a leadership role in establishing regulations 
governing shale gas development that are sorely needed.
    Question 1b. What considerations are made when considering the 
tradeoffs of exports vs. domestic use--among them reducing gas price 
volatility, determining the balance of trade, creating jobs, 
counteracting geopolitical influences, producing higher valued domestic 
goods?
    Answer. This is a very interesting question. It is apparent that a 
battle among special interests has emerged in the wake of the recent 
supply growth we are witnessing in the US. Specifically, this conflict 
is basically rooted in who gets the rents. On the one hand, producers 
see high prices overseas and they believe they can capture a 
substantially higher price for their supplies by shipping to those 
markets. On the other hand, large industrial consumers see an 
opportunity to capture low cost supplies to export an intermediate or 
finished product to an international market that may be losing the 
ability to compete. Both premises are flawed because they rely on a set 
of assumptions that are inconsistent.
    Producers argue that highly elastic domestic supply will enable an 
increase in exports without a large increase in price. There is little 
available data to dispute this claim, and in fact, elastic supply is 
important for producers and consumers alike. However, an increase in 
exports adds liquidity to the international market, which will reduce 
price abroad and pressure traditional pricing paradigms.
    The current price differential between Asia and the US garnered 
much attention at the hearing. In the short run, the current high price 
in Asia and Europe has been largely driven by the wake of the disaster 
at Fukushima. Japanese consumers were forced to buy as many available 
cargoes of LNG to provide electricity to domestic consumers. This 
resulted in the global LNG market approaching its capacity limit, which 
is why prices have increased. Any relaxation of this inelastic supply 
condition will result a rapid decline in price abroad, not a rise in 
price domestically.
    In short, it is also important to consider the elasticity of supply 
in other countries because international trade is a two-way 
conversation. The total liquefied natural gas trade in 2010 was about 
30 billion cubic feet per day. This stands to grow in the next couple 
of years, but even so, if the US were to enter this market in the scale 
indicated by applications for license to export, it would have a 
significant impact on global gas trade--it would add an increment of 
about 20% to the current market. This is actually an important factor 
when trying to understand the potential influence on price volatility, 
balance of trade, and geopolitical impacts. Lower international price 
reduces the rents flowing to current exporters and diminishes the 
likelihood of other suppliers entering the market. This is something we 
have written about at the Baker Institute--most recently in a DOE 
sponsored study entitled ``Shale Gas and US National Security'' 
(2011),* which is attached hereto for reference. Importantly, the act 
of exporting natural gas from the US would also, by corollary, reduce 
the rents of the activity and thus reduce the incentive to export.
    Regarding price volatility, in a paper written for the National 
Commission on Energy Policy and the American Clean Skies Foundation 
(also attached for reference)* I demonstrated that allowing trade does 
not increase volatility; rather, it reduces it. Moreover, concerns 
about a linkage to oil market volatility are misguided. First, 
annualized oil price volatility over the last 30 years, except 2008, 
has been consistently lower than natural gas price volatility in the 
US. In fact, this is why many large consumers in Europe were willing to 
purchase gas on an oil-indexed basis, because it ties the price to a 
commodity that is many times more liquid and hence fungible.
---------------------------------------------------------------------------
    * Documents have been retained in committee files.
---------------------------------------------------------------------------
    As for consumer groups, they usually argue that exports will raise 
both price and volatility, and thereby reduce the competitive advantage 
they seek. The principle is flawed, however, because data do not 
support that supply is relatively inelastic, which is what would have 
to be the case for their claim to be true. To carry the argument to its 
end, they then typically argue that the abundant domestic resource 
should be used to grow domestic manufacturing and industry, but this 
would also increase domestic natural gas demand. Thus, the result 
higher demand in the model they offer would be the same given their 
conjecture about exports--higher prices and higher volatility. The 
argument has a fatal inconsistency.
    Repeating a point I made in answering question 1, the US government 
and federal regulatory agencies have done a wonderful job of designing 
and regulating the US natural gas market over the last couple of 
decades, and natural gas as a result has grown in importance to the US 
economy. One has to ask ``what evidence is there to change it?''
    Question 2a. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    What should be the take away for policymakers in terms of utilizing 
natural gas for the transportation sector or export market without 
creating economic distortions for other consuming industries?
    Answer. The takeaway should be one of cautious optimism. The 
government should allow existing regulations regarding transportation 
and domestic natural gas trade to function as they are currently 
designed. For consumers, effectively subsidizing one industry by acting 
to discourage another is distortionary by definition, so this has to be 
weighed in the calculus of action.
    On the upstream end, it is important that the US government not be 
heavy-handed, and considers regulations that would encourage 
transparency and a level of oversight to ensure it. There are ways to 
do this without substantially raising costs to upstream producers. 
Altogether, this would limit any unintended distortionary impact 
because the market signals would be clear enough for all constituencies 
to perceive and invest upon.
    Question 2b. Other countries in Asia (China), Europe (Poland), and 
South America (Brazil and Argentina) are expected to develop shale gas 
reserves in the future. Do you think that this will dampen the low-cost 
advantage that the U.S. currently has for domestic exports right now? 
Is the federal government taking these new reserves into consideration 
when considering its permit approvals?
    Answer. Development of supplies abroad certainly could dampen the 
current low-cost advantage the US enjoys today. However, this has 
largely been deemed a commercial consideration that is factored into 
the decision to file for an export license. If the resources abroad can 
be developed in a low-cost manner, then it is likely that US export 
terminals will sit largely unutilized, much like the recently 
constructed LNG import terminals in the US do today. But, the 
government has to weigh whether this is an issue better left classified 
as commercial risk. My understanding that this is indeed the case, as 
the DOE does not consider anything related to a forward-looking measure 
of profitability, other than what is reported in the license 
application, in its national interest calculation.
    Question 2c. Has the federal government looked at whether there is 
enough natural gas to satisfy the diversity of demand? Are there 
regional differences in terms of export potential?
    Answer. The government is currently commissioning a study aimed at 
just this. So, the answer here is that it is an ongoing endeavor. I 
think in the interest of constituency buy-in, it is important that the 
DOE seek external review of the study they commission, and that those 
reviews be held as anonymous until they are all collected. This could 
allow a truly unbiased assessment of the work that is done.
    Regionally, there are likely differences regarding export 
potential. The Gulf Coast region, for example, has very developed 
pipeline and production infrastructure as well as port facilities, 
which makes exports relatively lower cost than say regions along the 
East and West Coasts. However, even along the East Coast there is 
heterogeneity in this regard. For example, feeding the Cove Point 
facility in Maryland with gas from the Marcellus shale--either directly 
or by displacement--would be a relatively easy thing to do because much 
of the necessary infrastructure is already in place.
    Question 2d. What factors are weighed when considering the benefit 
of exporting a raw material (natural gas) or a finished product in the 
form of chemicals and higher valued goods?
    Answer. These assessments are typically made by different 
commercial entities. However, in point of fact international trade 
theory suggests that the impact on domestic prices will similar. Theory 
suggests that if an activity is increased because there are high 
returns to it, then the factors of production that are used most 
intensively will also see higher returns (see Heckscher-Ohlin, Stolper 
Samuelson, Rybczynski, etc.). Thus, if we export natural gas, the 
returns to gas producers will rise. If we export products that use 
natural gas intensively as an input, then the returns to natural gas 
will increase. In both cases, the returns to gas producers go up, 
although the magnitudes are likely different as in the latter case the 
income earned is split amongst a larger number of participants. 
However, neither of these considers cost, and the most efficient 
allocation of the domestic natural gas resource is one which also 
minimizes cost.

    Responses of Kenneth B. Medlock, III, to Questions From Senator 
                               Murkowski

    Question 1. Growth in the global LNG trade will continue to create 
greater ``interconnectedness'' between previously disconnected markets. 
Mr. Medlock, can you please speak to the extent to which increasing 
energy supply diversity will help us to achieve our energy security 
goals?
    Answer. Greater supply diversity, a goal achieved by making 
multiple supplies available at a competitive rate, contributes to 
broader goals of energy security in a major way. As new sources of 
energy supply are made available at competitive costs, it abates the 
demand for traditional sources of supply. To the extent new supplies 
are available from domestic sources rather than foreign sources, the 
potential costs associated with foreign-sourced disruptions in supply 
are reduced. In this way, energy security arguments used to justify 
expansion of renewable sources of energy such as wind and solar, also 
apply to natural gas. However, since we use very little oil in the 
power generation sector in the US, the option to displace oil by 
adopting renewables is limited unless further policies are used to 
encourage the adoption of electric vehicles. Natural gas is a lower 
cost option for enhancing energy security, and could in fact be used as 
a transitory bridge in transforming the transportation infrastructure 
and the power generation sector, which in turn would provide the energy 
security benefit often sought in conversations regarding a reduction in 
oil imports.
    Question 2. Would it be safe to say that this interconnectedness 
will reduce price volatility as well as the risks associated with 
supply disruptions?
    Answer. Yes. Increasing connectedness between markets provides 
arbitrage opportunities, and hence liquidity, that did not exist 
previously. This means that price imbalances across regions can be 
quickly eliminated. The global gas market has not yet reached this 
point, but the evolution has begun. In a paper written for the National 
Commission on Energy Policy and the American Clean Skies Foundation 
(attached for reference) I demonstrated that allowing trade does not 
increase volatility; rather, it reduces it. Moreover, concerns about a 
linkage to oil market volatility are misguided. Annualized oil price 
volatility over the last 30 years, except 2008, has been consistently 
lower than natural gas price volatility in the US. In fact, this is why 
many large consumers in Europe have been willing to purchase gas on an 
oil-indexed basis--because it ties the price to a commodity that is 
many times more liquid, more fungible, and historically less volatile.
    Question 3. The tremendous growth that we have seen in our domestic 
natural gas resource will clearly have wide-ranging implications. Given 
the research that you have conducted on this subject at Rice, can you 
please explain to this committee the impact that these supplies will 
have on prices, market volatility and ultimately supply diversity?
    Answer. First, it is important to distinguish between types of 
market volatility. Normal price fluctuations in the presence of 
changing demand and supply conditions in the short run are signals of a 
well-functioning market. The type of volatility that most major 
consumers are concerned about is actually an inaccuracy of price 
expectations over a given planning horizon (such as 5-10 years). If 
utilities and other major gas consumers are uncertain about the future 
price environment they will be less apt to invest heavily in gas-using 
infrastructure.
    Development of abundant domestic resources that can supplied at 
relatively low cost can result in more stable prices, and as a result, 
encourage investment in energy-using infrastructure--such as those made 
by utilities--that favors the use of that resource. In effect, as the 
natural gas supply curve is made more elastic, fluctuations in long-
term demands can be met with little change in market price. Thus, by 
providing a more stable environment, investments will be made that 
result in greater penetration of natural gas in the energy mix. This, 
in turn, moves the domestic energy use portfolio to one that is more 
heavily domestic-focused, and provides a diversification benefit.
    Importantly, the current market structure that facilitates 
efficient arbitrage is also critical to this end as it provides the 
mechanism for the clear market signals needed to facilitate the 
aforementioned investment opportunities.
    Question 4. It is a well-established principle that inventories 
generally reduce volatility--to what extent will reducing price 
volatility make it easier for businesses to make long term investment 
decisions?
    Answer. See answer to question 3. It is well-established that price 
volatility, in the sense that it creates uncertainty about future 
prices, lowers investment activity. There is an option value to waiting 
when there is a high degree of uncertainty. Reducing uncertainty lowers 
the option value to waiting and makes firms more receptive to higher 
levels of investment.
    Question 5. If high price volatility translates to reduced 
investment, increased unemployment, and lower output, is it likely that 
lowering price volatility will lead to increased investment, employment 
and economic output?
    Answer. See answer to questions 3 and 4. Yes. The preponderance of 
economic literature indicates there is a positive benefit to lower 
uncertainty, but it is also inaccurate to say the scale of the benefits 
with low uncertainty are symmetric to the scale of the costs associated 
with higher uncertainty. The evidence indicates that there is a larger 
negative impact on investment with higher uncertainty than there is a 
positive impact from lower uncertainty. Again, it is important to 
recognize normal short term volatility is different than uncertainty 
about future market price. An extreme argument is one that stipulates 
price controls are the best mechanism to regulate high levels of 
investment. However, by masking the supply-demand signals that 
materialize through price, governments run the risk of massive, 
destabilizing unexpected shifts in price--Indonesian gasoline prices, 
for example.
    Question 6. In the US, how do LNG, the domestic shale gas resource, 
and domestic storage interact? In particular, are regional impacts 
different than what is seen at the Henry Hub?
    Answer. LNG in the US, with the exception of Alaska, has been a 
story of imports. There is evidence that LNG cargoes have been diverted 
to the US in low demand periods in Europe and Asia simply because there 
is little risk of market access and there is abundant storage 
capacity--so lots of liquidity. Thus, the US storage market has been 
used to arbitrage seasonal prices abroad in the absence of robust 
storage capacity in overseas markets, meaning LNG and storage certainly 
have interacted in the past.
    The emergence of shale in the US has put additional stresses on the 
availability of storage capacity as domestic production growth has 
outpaced growth in demand. This has pushed prices down and left LNG 
imports at all-time lows. Notably, however, recent regulatory moves to 
make storage in the US follow market-based pricing have encouraged an 
increase in investment in storage capacity.
    It is important to note that if demand were to increase, LNG import 
capacity actually provides a stabilizing effect on any upward price 
pressure that could emerge. By the same token, LNG exports could 
provide some price support from the low side. In total, with the 
capacity to both import and export the world could more effectively use 
the large storage capacity that exists in the US, and US prices would, 
as a result, remain in a range defined by the arbitrage opportunities 
represented by storage, imports and exports.
    Regionally, these impacts will vary, and will be reflective of 
regional weather patterns, storage capability, pipeline capacity, and 
LNG terminal existence. For example, the New England market will likely 
remain reliant on LNG imports and pipeline supplies from the producing 
regions due to a lack of indigenous supply options and no real storage 
capacity. The Gulf Coast region will stand in stark contrast due to the 
ability to import, export, produce, and store natural gas due to 
massive infrastructures already in place and continued emergence of new 
opportunities.
    Question 7. If there are any potential adverse impacts of a 
globalized gas trade and increased domestic LNG exports, in your 
opinion, are there policy options available to mitigate these impacts?
    Answer. I see no real negative impacts under the status quo. The 
research I am involved in relies on scientific assessments and cost 
analysis based on existing data on well-performance indicates there is 
a large amount of resource available at a relatively stable range of 
prices between $5 and $6 per mcf. While this is above the current 
market price, movement into that range is likely sustainable for a long 
period of time. Not to mention three have been sustained improvements 
in productivity--which are verifiable through analysis of well file 
data available from the HPDI database from Drilling Info--that serve to 
lower breakeven prices over time, meaning the aforementioned range is 
likely conservative to the high side.
    However, recent concerns about water contamination and localized 
air pollution associated with domestic drilling could result in the 
imposition of burdensome costs. This, in the extreme case, could make 
domestic supply much more inelastic, which would push us into a period 
of higher price and higher price volatility. In other words, the 
largest real risk for adverse impacts may be policy itself.
    This is not to say that costs of activities should not be 
internalized, because they should be if we truly seek a socially 
efficient outcome. But, it is important to identify means to force that 
internalization in the least costly way possible. This includes 
transparency in the regulatory framework with some lead time for 
operators to adjust. I have addressed the consequence of uncertainty 
for investment in the price dimension above, but policy uncertainty can 
be equally, if not more so, detrimental to investment activity. 
Therefore, the first rule of policy should be one of transparency and 
adequate adjustment leads for adoption of regulatory changes.
    The actual policy options can be wide-ranging, but the appropriate 
action in some instances needs to be informed by scientific study. By 
some estimates, over 80% of all wells drilled involve fracture-
stimulation techniques. Thus, regulations on this front extend beyond 
shale gas and shale oil. This needs to be considered. It is important 
that scientific assessment be expedited. Shale gas wells are being 
drilled by the thousands on an annual basis, and delaying release of 
the EPAs study to 2014 will make policy response increasingly 
difficult. By 2014, US shale gas production will account for over 35% 
of domestic production--in other words the ship is already sailing. It 
is also important that EPA regional offices do a full scientific 
assessment, a flaw that was exposed in its recent analysis of water 
wells on a ranch in the Barnett Shale region. These sorts of short cuts 
invalidate previous and subsequent analyses, a point I am sure policy-
makers do not want to have to grapple with at length.
    Question 8. Will exports from the United States necessarily make 
natural gas markets track with, or behave similarly to, oil markets?
    Answer. No. In fact, exports from the US could increase 
international gas market liquidity and encourage further evolution in 
Europe and Asia toward hub based pricing. In other words, liquidity 
makes price discrimination more difficult, and to be sure, oil-
indexation is a form of price discrimination. This point is discussed 
in a recent paper published by the Baker Institute and attached 
hereto--a DOE sponsored study titled ``Shale Gas and US National 
Security.'' It is more likely that US LNG exports will help to push 
international gas market evolution to one that is better characterized 
by gas-on-gas pricing. In addition, exports from the US actually 
provide a link to a very large, liquid US gas market with more storage 
capacity than any other regional market in the world. This facilitates 
arbitrage and encourages consumers to seem gas market outlets for 
shedding price risk.
                                 ______
                                 
     Responses of Andrew Slaughter to Questions From Senator Coons

    Question 1a. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.
    In your view, is the role of the federal government strategically 
focused enough from a policy perspective to oversee and encourage the 
use of natural gas in various, relevant domestic and international 
markets?
    Answer. The growth of natural gas supply in the U.S. and the growth 
in its future potential have largely been achieved without explicit 
federal government policy support. In the US, onshore hydrocarbon 
development rights may be obtained from private landowners, states, or 
the federal government. On the market side, again up to this point, 
growth in natural gas demand has been the consequence of choices made 
by industrial and residential consumers and electric utilities, 
comparing fuel choice and investment choice on grounds of economic 
preference and reliability of supply. It could be argued that federal 
and state policy actions have served to restrict the opportunity 
available to natural gas by means of mandates and subsidies for various 
forms of renewable energy, particularly in the electric power sector. 
In general terms, we would favor federal government policies and 
strategies which enable natural gas to compete on equitable terms with 
other fuels and fuel supply chains, allowing consumers to make informed 
choices based on their economic preferences.
    Question 1b. What considerations are made when considering the 
tradeoffs of exports vs. domestic use--among them reducing gas price 
volatility, determining the balance of trade, creating jobs, 
counteracting geopolitical influences, producing higher valued domestic 
goods?
    Answer. From the perspective of a company which is investing 
heavily in the natural gas value chain, we examine sets of 
opportunities to serve both the domestic U.S. market, in existing and 
emerging demand sectors, and the international market, via exports. 
From an overall supply perspective, the recent increases in natural gas 
resource assessments, coupled with the actual increases in domestic 
natural gas production in recent years, provide Shell with a high level 
of confidence that both domestic and export markets can be supplied 
with U.S. natural gas for the foreseeable future. Natural gas 
development for both domestic and international markets provides 
opportunity for direct and induced job growth, while exports also 
provide a positive balance of trade impact.
    Question 2a. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    What should be the take away for policymakers in terms of utilizing 
natural gas for the transportation sector or export market without 
creating economic distortions for other consuming industries?
    Answer. As a result of the large increases in moderate cost natural 
gas resources described in the recent National Petroleum Council study, 
Shell does not believe that consuming industries or other demand 
sectors will be in a position of competing for limited natural gas 
supplies.. In fact, the natural gas resource is indeed able to support 
production growth in line with likely increases in demand in existing 
and new market sectors. A risk to this outcome would be if there were 
to be some new policy-led restrictions on U.S. natural gas development, 
such that this country would need to become more reliant on natural gas 
imports. Both absolute prices and price volatility in the natural gas 
market have declined in the past three years, co-incident with the 
emergence of shale gas, and it is likely that these conditions can be 
sustained into the foreseeable future.
    Question 2b. Other countries in Asia (China), Europe (Poland), and 
South America (Brazil and Argentina) are expected to develop shale gas 
reserves in the future. Do you think that this will dampen the low-cost 
advantage that the U.S. currently has for domestic exports right now? 
Is the federal government taking these new reserves into consideration 
when considering its permit approvals?
    Answer. There are indeed shale gas resources distributed widely 
around the world, in the countries mentioned and in many others. The 
U.S. has a favorable context for more rapid development to scale of 
these resources because of its system of mineral rights, its well-
developed service sector and supply chain, its successful track record 
in development and rapid deployment of appropriate technology, its 
large number of drilling companies, and its tax/royalty fiscal regime. 
These advantages are not easily replicable in other jurisdictions, so 
it is probable that shale gas will develop more slowly outside the U.S. 
Having said that, the market for natural gas globally is expected to 
grow faster than for most other fuels, expanding the opportunity for 
all sources of natural gas. We do not know if, and to what extent, the 
federal government is taking into account potential global gas supplies 
in determining export permit approvals, but would submit that the 
investors in these projects are well suited to assessing the commercial 
risks and opportunities.
    Question 2c. Has the federal government looked at whether there is 
enough natural gas to satisfy the diversity of demand? Are there 
regional differences in terms of export potential?
    Answer. Department of Energy representatives have stated that they 
have commissioned two new studies on the potential impact of exports on 
the domestic market. Shell will be happy to review and comment on these 
studies when they are available in early 2012. In terms of regional 
differences in export potential, North America is a well-integrated 
market with a well-connected high-capacity pipeline system, so there 
should be no discernible regional differences from a supply 
perspective. However, from an investment perspective, those regions 
with existing sites for liquid natural gas (``LNG'') import and 
regasification have an advantage in that they will benefit from lower 
investment requirements, with such facilities as jetties and LNG tanks 
already in place. Although new investments in liquefaction trains will 
be substantial, the overall costs will be significantly less than for a 
completely new facility on a greenfield site. For the same reasons, 
construction and operating permits will also likely to be more 
straightforward to obtain at sites previously permitted for LNG 
imports. Most existing import sites are on the U.S. Gulf Coast.
    Question 2d. What factors are weighed when considering the benefit 
of exporting a raw material (natural gas) or a finished product in the 
form of chemicals and higher valued goods?
    Answer. As stated in the responses to 1b and 2a above, Shell 
believes that competitive and reliable natural gas supply can be 
obtained for the foreseeable future to serve LNG exports and an 
expanded U.S. chemical industry. The trade-offs implied in the question 
are unlikely to be a real factor in commercially-driven investment 
decisions.

   Responses of Andrew Slaughter to Questions From Senator Murkowski

    Question 1. I see that Shell is investing to monetize our domestic 
natural gas resources in a variety of different ways. It is especially 
heartening to see that you are simultaneously pursuing investments in 
both LNG export as well as a new gas to chemicals facility in the 
Marcellus. Is it safe to say that you believe that there are sufficient 
domestic natural gas supplies to support both of these activities and 
do so profitably?
    Answer. The evidence reported in the recent National Petroleum 
Council study, as well as from a wide variety of public sources and 
from a private, confidential survey of industry participants, provided 
Shell with a high level of confidence in the long-term sustainability 
of growing U.S. natural gas supply at moderate cost. While Shell has 
not made any final investment decision regarding an LNG export facility 
or a gas chemical facility, the confidence we have in long-term growth 
of the US natural gas supply is now being manifested in Shell's serious 
consideration very significant (multi-billion dollar) investment 
opportunities in upstream natural gas development in the US and in 
expanding uses for U.S. natural gas in several sectors. Shell believes 
that sufficient competitive domestic natural gas supplies will be 
available to support these and other opportunities to grow the U.S. 
natural gas market and open up opportunities for LNG export.
    Question 2. Your testimony indicates that there's room for many, 
many options insofar as the US making use of its gas resources. Can you 
talk about how geography plays into this? Obviously, a chemical plant 
in West Virginia is sited according to where the resource lies, but 
what about a more distant place like Alaska without as many options for 
value added, and without as much proximity to markets?
    Answer. Alaska has world-class oil and natural gas resources, and 
Shell is actively preparing to begin a new round of offshore 
exploration which can make a major contribution to realizing Alaska's 
long-term potential as a world-scale oil and gas producer for decades 
to come. The development of Alaska's natural gas has faced unique 
challenges stemming from the scale, complexity and cost of building the 
infrastructure needed to connect Alaskan natural gas with other North 
American markets. However, we note that Alaska has a long-standing 
history of exporting LNG to Asia, although on a relatively small-scale. 
Because of expected growth in Asian gas demand, and Alaska's relative 
proximity to the large Asian LNG markets, it may be that the 
development of world-scale LNG liquefaction and export facilities could 
provide an earlier opportunity to significantly increase Alaskan 
natural gas production, and provide at least some of the anchor 
infrastructure which will ultimately be needed to connect Alaskan gas 
to the main North American market.
    Question 3. Does LNG export make much more sense from some 
locations within the US than others, even though the gas is ultimately 
a national resource?
    Answer. As stated in the response to Senator Coons' question 2c 
above, in terms of regional differences in export potential, North 
America is a well-integrated market with a well-connected high-capacity 
pipeline system, so there should be no discernible regional differences 
from a supply perspective. However, from an investment perspective, 
those regions with existing sites for LNG import and regasification 
have an advantage in that they will benefit from lower investment 
requirements, with such facilities as jetties and LNG tanks already in 
place. Although new investments in liquefaction trains will be 
substantial, the overall costs will be significantly less than for a 
completely new facility on a greenfield site. For the same reasons, 
construction and operating permits will also likely to be more 
straightforward to obtain at sites previously permitted for LNG 
imports. Most existing import sites are on the U.S. Gulf Coast.
    Question 4. The emergence of shale gas has significant implications 
for the global gas trade. Will you outline potential impacts of North 
American LNG exports on domestic natural gas price volatility, to the 
extent your firm has analyzed this?
    Answer. The emergence of a geographically diverse and moderate cost 
U.S. natural gas supply allows natural gas production to grow 
incrementally in line with demand growth. A higher rate of demand 
growth, including new demand from LNG exports, will result in a higher 
rate of supply growth, and vice versa. This is because shale gas 
development occurs via drilling of multiple wells across multiple 
geographical basins, and is not dependent on a small number of highly 
capital intensive facilities and pipelines, as would occur for offshore 
gas development, for example. As such, the pace of development is 
responsive in the very short term to market signals to either 
accelerate or slow down the pace of development. This increased supply 
elasticity is a major contributor to lower natural gas price volatility 
than in the past. Short-run weather-related volatility should also 
decline in some circumstances, for example with a more diversified 
onshore gas production portfolio, the price spikes resulting from 
hurricane-related interruptions of offshore supply, as occurred in 2005 
and 2008, are expected to have a much lower impact.
    Question 5. Given the relatively long timeframes within which LNG 
cargoes can be contracted--10 or 20 years--is there great risk that the 
volumes necessary to meet contract obligations might not be available 
at any point within that timeline?
    Answer. The evidence presented in the National Petroleum Council 
study indicates that reliable, competitive supply should be available 
from the U.S. for many decades to come. Commercial entities which enter 
into LNG export agreements will do so on the basis that they understand 
the natural gas supply outlook and that they are willing to bear any 
associated commercial risk. By executing such agreements these entities 
will be expressing their confidence that sufficient competitive and 
reliable natural gas supply will be available for the duration of their 
contracts.
                                 ______
                                 
        Responses of Jim Collins to Questions From Senator Coons

    Question 1a. Domestic supplies of natural gas are increasing and 
market demand is growing. Additionally, natural gas has become a bridge 
fuel for achieving a more secure, lower carbon economy in several ways. 
For example, natural gas can help with renewable energy intermittency. 
The market is also driving conversion of vehicle fleets to natural gas, 
and increasingly, coal-fired plants are shifting to natural gas because 
of emissions requirements. Further, natural gas is and always will be 
very important to the manufacturing and chemical industry.
    In your view, is the role of the federal government strategically 
focused enough from a policy perspective to oversee and encourage the 
use of natural gas in various, relevant domestic and international 
markets?
    Answer. The short answer is no. The longer answer is that long-term 
planning, which is essential to a ``strategically focused'' federal 
government, appears not to be a priority of the U.S. Congress. While 
APGA believes that the wise development and use of natural gas should 
be a key component of an overall energy policy that has as its 
centerpiece the pursuit of energy independence, is there any real 
prospect in the near-term of Congress adopting a coherent energy 
policy? APGA is not by nature cynical, but is mindful that this Nation 
has had a policy goal of energy independence since the 1970s, a policy 
that has been articulated by each White House occupant since that time, 
and never seriously pursued.
    In lieu of a comprehensive energy policy, Congress has constructed 
primarily a patchwork of short-term tax policies to incentivize some 
aspect of natural gas production or use. For example, over the past 
several years, the Congress has offered several valuable, short-term 
tax credits for natural gas vehicles (NGVs) and refueling 
infrastructure. Though helpful in temporarily advancing NGVs, which are 
a key component of weaning this Nation off of imported oil, the fact 
that such credits are typically in place for short durations creates a 
boom and bust cycle that leaves businesses unable to make significant 
investments over the long-term.
    The Energy Policy Act of 2005 created two tax credits: Alternative 
Fuel Vehicles and Alternative Fuel Infrastructure, which provided 
consumers with incentives for the purchase of alternative fueled 
vehicles and the installation of refueling infrastructure. The 
Alternative Fuel Vehicle credit expired in 2010 and the Alternative 
Fuel Infrastructure credit is scheduled to expire in 2012.
    If the United States had a long-term energy independence strategy, 
these credits, which are essential to industry's ability to make long-
term investments, would not be allowed to expire. In short, sound 
investment decisions can only be made by businesses with a clear 
understanding of the costs and benefits over the long-term.
    Another example of the inability of Congress to act coherently in 
the pursuit of energy independence is the plight of the New Alternative 
to Give Americans Solutions Act (NAT GAS Act). This bipartisan proposal 
introduced by Representatives Sullivan (R-OK), Boren (D-OK), Larson (D-
CT), and Brady (R-TX) targets the replacement of the heavy-duty vehicle 
fleet by offering short-term tax credits (for five years) for 
alternative fuel infrastructure installation, alternative fuel vehicle 
purchases, and alternative fuel credits, as well as other incentives. 
According to the bill's sponsors, this legislation has the potential to 
create 500,000 new jobs over the life of the legislation. It is 
important to note that this short-term legislation targets only one 
subsector of one application of natural gas in the United States. The 
fact that this legislation could create half a million jobs in just one 
subsector in the short-term, is indicative of the broad job creation 
potential of all applications of natural gas from vehicles to 
generation. Moreover, this legislation elucidates the fact that a long-
term commitment to NGVs as a part of a comprehensive energy policy and 
generation as a part of a comprehensive energy policy has enormous, 
durable job creation potential which dwarfs even the most optimistic of 
pro-export job assessments. Tragically, this common sense, bipartisan 
legislation to reduce our dependence on foreign oil has been stymied.
    Moreover, our lack of a national energy policy is also illustrated 
on the supply side. The history of offshore drilling is well known--and 
nymbyism (Not in My Backyard) has meant that huge, readily accessible 
oil and natural gas reserves have been left in the ground. As for shale 
gas, the approach to determining the safest, most efficient means of 
conducting the fracturing that is the key to unlocking the shale gas 
reserves is totally disjointed, with states and various agencies of the 
federal government doing studies, reviews, analyses, etc., with 
coordination apparently being the furthest thing from anyone's mind.
    Given the absence of a coherent national energy policy, APGA is 
deeply concerned that the Department of Energy would authorize LNG 
exports in large quantities of a commodity, natural gas, the domestic 
supply of which is uncertain (due to the well-publicized ``fracking'' 
issue) and whose value in achieving energy independence is 
incalculable. The first step of a coherent energy policy is a fact-
based determination regarding the extent of this valuable commodity 
that that can be produced over the long-term and the manner in which 
this Nation can use that commodity in lieu of imported oil. APGA 
believes that a decision on exporting natural gas be made in the 
absence of such determinations is shortsighted.
    APGA similarly asserts that Congress is not yet sufficiently 
focused from a policy perspective to oversee international markets for 
natural gas. Though basic metrics about foreign natural gas markets 
such as price and volumes of natural gas are readily available and well 
known to the Department of Energy (DOE), Congress, and those in favor 
of export, what is not well known is the cumulative price impact of 
large-scale export of liquefied natural gas from the U.S. to 
international markets.
    As Mr. Chris Smith, Deputy Assistant Secretary for Oil & Natural 
Gas, Office of Fossil Energy, DOE, testified during the hearing, two 
studies have been commissioned by the DOE to examine this question: one 
by the Energy Information Administration (EIA) and one by an 
independent contractor. These studies may provide Congress with a clear 
picture of what impacts its current unrestrained pro-export policies 
are already having on U.S. consumers and businesses.
    APGA asserts that to continue to allow a veritable ``export 
highway'' of domestic natural gas to be established, thereby preempting 
ongoing government studies, is as predictable as it is disastrous--we 
will experience price increases and the price volatility of the past 
will return, and our opportunity to displace foreign oil will be 
wasted--all for the short-term profits of a few.
    The more prudent course is to limit exports in accordance with all 
trade agreements until the conclusions of such studies are known and 
Congress can make an informed decision based on upon unbiased, reliable 
information.
    Question 1b. What considerations are made when considering the 
tradeoffs of exports vs. domestic use--among them reducing gas price 
volatility, determining the balance of trade, creating jobs, 
counteracting geopolitical influences, producing higher valued domestic 
goods?
    Answer. APGA believes that the overriding consideration should be 
the pursuit of energy independence, given the huge (and highly 
unfortunate) role that our Nation's dependence on foreign oil has had 
in dictating foreign and domestic policy. Further, APGA believes that 
exporting natural gas will by definition increase the domestic price of 
natural gas, increase price volatility, be less helpful to our balance 
of trade than a well-functioning U.S. economy that is not dependent on 
foreign oil, and create fewer jobs than a vibrant U.S. economy in which 
natural gas plays a major role in displacing imported foreign oil in 
the transportation sector. And these are just a few of the advantages 
to this Nation of importing less foreign oil because of our ability to 
rely on natural gas as a substitute fuel. Needless to say, exporting 
natural gas in substantial quantities is antithetical to achieving 
these important goals.
    Question 2a. The U.S. is now the world's largest natural gas 
producer. We are fortunate to have an abundant supply of natural gas, 
and our manufacturing economy needs to continue to develop those 
resources. However, demands can outpace supply without careful 
consideration. Recent reports from the Energy Information 
Administration have estimated very modest demand growth for natural gas 
in the U.S. in the next few years. At the same time, the National 
Petroleum Council issued a recent report that concluded that the North 
American natural gas resource potential is so large that it can supply 
``even the highest demand scenario.''
    What should be the take away for policymakers in terms of utilizing 
natural gas for the transportation sector or export market without 
creating economic distortions for other consuming industries?
    Answer. APGA respectfully submits that the primary take away for 
policymakers in terms of utilizing natural gas for the transportation 
sector or export market without creating economic distortions for other 
consuming industries is the fact that export of domestically-produced 
natural gas will inevitably create the very economic distortions for 
all domestic natural gas consuming industries that Congress seeks to 
prevent.
    Currently, the general demands on natural gas are: electric 
generation, industrial processes, direct use and NGVs. Assuming 
questions about hydraulic fracturing policy and resource estimates are 
satisfactorily answered, the current natural gas resource supply 
appears to be adequate to meet the growing needs of the aforementioned 
sectors, now and in the foreseeable future. Even projecting robust 
growth in demand in all sectors, the U.S. shale gas resources seem 
capable of providing low-cost natural gas for use by all areas.
    However, if Congress allows the large-scale export of natural gas 
to occur, the addition of world demand for relatively inexpensive U.S. 
natural gas on top of current domestic demand seems highly likely to 
cause significant economic distortions in the form of artificially 
increased prices for natural gas for all sectors of the U.S. natural 
gas industry. Moreover, the fact that large-scale export of natural gas 
will inevitably link the U.S. market with international markets that 
are substantially more volatile and less transparent will also reverse 
the current trend of price stability in the domestic natural gas 
market.
    APGA believes that the best means of protecting all natural gas-
consuming U.S. industries is to encourage domestic use of natural gas 
and to limit exports to the extent possible under current trade 
agreements. Such a policy might also be a blessing in disguise to those 
now seeking to spend billions of dollars to export natural gas as the 
world supply of shale gas is vast and thus the arbitrage opportunities 
that exist today are sure to diminish substantially over a relatively 
short period of time.
    Moreover, APGA also believes that should Congress choose to 
continue to allow export of domestically-produced natural gas, the 
application process should be altered to more accurately reflect the 
public interest. When applications are filed at DOE, there is a public 
interest test that must be met--but not by the applicants. In cases 
where the application is specific to identified countries with which 
the U.S. has a free trade agreement, the application is deemed to be 
consistent with the public interest and granted without modification or 
delay. In cases where an application is seeking exportation of LNG to 
countries with which the U.S. does not have free trade agreements, the 
burden is on those opposed to the application to demonstrate that the 
application is not consistent with the public interest. The structure 
of this process under which opponents of an export must prove a 
negative is counter-intuitive on its face and makes it extremely 
difficult, if not impossible, for opponents to defeat an application 
for the export of LNG. APGA supports the passage of legislation that 
places the burden of proof where it should be, on the applicant to 
demonstrate to DOE how the approval of that application is in the 
public interest.
    Question 2b. Other countries in Asia (China), Europe (Poland), and 
South America (Brazil and Argentina) are expected to develop shale gas 
reserves in the future. Do you think that this will dampen the low-cost 
advantage that the U.S. currently has for domestic exports right now? 
Is the federal government taking these new reserves into consideration 
when considering its permit approvals?
    Answer. APGA believes that the exportation of advanced drilling 
technologies to other countries such as China, Poland, Brazil and 
Argentina will ultimately dampen the low-cost advantage that the U.S. 
has for exports of domestic natural gas. Shale gas formations are not 
unique to the United States--this is not a U.S. phenomenon; it is a 
world-wide phenomenon.\1\ The State Department launched the Global 
Shale Gas Initiative (``GSGI'') in April 2010 in order to help 
countries identify and develop their unconventional natural gas 
resources.\2\ To date, partnerships under GSGI have been announced with 
China, Jordan, India, and Poland.\3\ The big energy players, including 
ExxonMobil, Chevron, Shell, BP, etc. are spending billions world-wide 
to pursue shale gas plays.\4\ The point to be made, of course, is that 
the United States, which is at the forefront technologically of the 
development of shale gas reserves, should be exporting its technology 
and expertise--not spending billions of dollars to build facilities in 
order to export a commodity that can play such a vital role in 
contributing to our national well-being and that also may be abundant 
world-wide before the LNG export facilities can even be completed.
---------------------------------------------------------------------------
    \1\ E.g., ``Shale Gas: Global Game Changer,'' by Dallas Parker, Oil 
and Gas Financial Journal (Feb. 8, 2011), http://www.ogfj.com/index/
article-tools-template/_printArticle/articles/oil-gas-financial-
journal/unconventional/shale-gas_global.html; ``Worldwide Gas Shales 
and Unconventional Gas: A Status Report,'' Vello A. Kuuskra and Scott 
A. Stevens (``The final segment of this ``paradigm shift''--the 
worldwide pursuit of gas shales and unconventional gas--has only just 
begun, with Australia, China and Europe in the lead. Europe's gas shale 
geology is challenging, but its resource endowment and potential are 
large.'') http://www.rpsea.org/attachments/articles/239/
KuuskraaHandoutPaperExpandedPresentWorldwideGasShalesPresentation.pdf. 
Debajyoti Chakraborty, Asia's First Shale Gas Pool Found Near Durgapur, 
Times of India Online, (January 26, 2011); Hillary Heuler, Shale Gas in 
Poland Sparks Hope of Wealth, Energy Security, Voice of America Online 
(June 11, 2011) (Reporting on efforts by U.S. and other western gas 
companies to develop gas from shale deposits). ``The Shale Gas Run 
Spreads Worldwide,'' by Mark Summor IPS, Deccan Herald (Aug. 1, 
2011)(`` Recent discoveries of deeply buried oil shale layers 
containing natural gas or oil are being reported in Australia, Canada, 
Venezuela, Russia, Ukraine, Poland, France, India, China, North Africa 
and the Middle East. Taken together, say some energy analysts, these 
`plays' could become a game-changer, making Australia and Canada into 
new Saudi Arabias.'').
    \2\ See http://www.state.gov/s/ciea/gsgi/
    \3\ Id. see also, Rakteem Katakey, India Signs Accord with US to 
Assess Shale-Gas Reserves, Bloomberg News (November 8, 2010) (The US 
signed a memorandum of understanding with India to help it asses its 
shale gas reserves and prepare for its first shale gas auction at the 
end of this year.); Kate Andersen Brower and Catherine Dodge, Obama 
Says US, Poland Will Cooperate on Economy, Energy, Bloomberg News (May 
28, 2011) (Reporting on President Obama's pledge to share U.S. shale 
gas extraction expertise and technology on a recent trip to Warsaw); 
see also, Energy in Poland: Fracking Heaven, The Economist (June 23, 
2011).
    \4\ ``Big Oil Betting on Shale Gas,'' by Ken Silverstein, EnergyBiz 
(July 31, 2011)
---------------------------------------------------------------------------
    Question 2c. Has the federal government looked at whether there is 
enough natural gas to satisfy the diversity of demand? Are there 
regional differences in terms of export potential?
    Answer. APGA is aware that the federal government has partially 
examined the question of the adequacy of natural gas supply to meet the 
diversity of demand. In its Annual Energy Outlook 2011, the EIA modeled 
four natural gas resource assessment scenarios and included price 
projections with the primary assumption of a continuation of current 
law: two high resource scenarios and two low resource scenarios. This 
assumption is critical as it signifies that advanced drilling 
techniques and hydraulic fracturing remain primarily state regulated. 
Significant uncertainty surrounding the future of hydraulic fracturing 
and therefore access to shale gas resources exists due to the EPA's 
pending study on fracking and the potential for Congressional action 
based upon the EPA study. In short, should access to shale gas 
resources be restricted by the Federal Government or the states, EIA's 
analysis would be rendered moot.
    Moreover, it is important to note that EIA included this 
qualification of its own modeling on pages 37-38, AEO 2011,

          There is also considerable uncertainty about the ultimate 
        size of the technically and economically recoverable shale gas 
        resource base in the onshore lower 48 States and about the 
        amount of gas that can be recovered per well, on average, over 
        the full extent of a shale formation. Uncertainties associated 
        with shale gas formations include, but are not limited to, the 
        following:

           Most shale gas wells are only a few years old, and 
        their long-term productivity is untested. Consequently, 
        reliable data on long-term production profiles and ultimate gas 
        recovery rates for shale gas wells are lacking.
           In emerging shale formations, gas production has 
        been confined largely to ``sweet spots'' that have the highest 
        known production rates for the formation. When the production 
        rates for the sweet spot are used to infer the productive 
        potential of an entire formation, its resource potential may be 
        overestimated.
           Many shale formations (particularly, the Marcellus 
        shale) are so large that only a portion of the formation has 
        been extensively production tested.
           Technical advances can lead to more productive and 
        less costly well drilling and completion.

    APGA respectfully asserts that if this type of uncertainty 
regarding shale gas resources exists at the federal government's top 
repository of energy data and analysis, then Congress should halt any 
export of natural gas resources until a more definitive, unbiased 
assessment of the resource base is complete and a long-term national 
energy strategy based on that assessment is developed.
    As to the question regarding regional differences in terms of 
export potential, APGA believes that this is a national issue that must 
be addressed from the standpoint of a national policy on production and 
use of natural gas in such a fashion as to responsibly further a 
national policy of energy independence.
    Question 2d. What factors are weighed when considering the benefit 
of exporting a raw material (natural gas) or a finished product in the 
form of chemicals and higher valued goods?
    Answer. Given what appear to be the obvious downsides of exporting 
natural gas (in terms of raising domestic prices, undermining price 
stability, and ultimately undermining America's ability to wean itself 
off of foreign oil), the answer, in APGA's view, is a no-brainer. 
Natural gas used domestically in the production of chemicals and higher 
valued goods will not only be good for America in terms of jobs and 
trade balances, but will further, rather than undermine, our hoped-for 
march toward energy independence. While there are undoubtedly other 
factors to consider, and APGA defers to experts in the field as to 
these other factors, APGA submits that none of these factors outweighs 
the need for America to adopt and pursue a policy of energy 
independence--a policy that demands that we produce and use natural gas 
domestically in an efficient fashion.

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                                  November 3, 2011.
                          Shale Gas Revolution
By David Brooks.

    The United States is a country that has received many blessings, 
and once upon a time you could assume that Americans would come 
together to take advantage of them. But you can no longer make that 
assumption. The country is more divided and more clogged by special 
interests. Now we groan to absorb even the most wondrous gifts.
    A few years ago, a business genius named George P. Mitchell helped 
offer such a gift. As Daniel Yergin writes in ``The Quest,'' his 
gripping history of energy innovation, Mitchell fought through waves of 
skepticism and opposition to extract natural gas from shale. The method 
he and his team used to release the trapped gas, called fracking, has 
paid off in the most immense way. In 2000, shale gas represented just 1 
percent of American natural gas supplies. Today, it is 30 percent and 
rising.
    John Rowe, the chief executive of the utility Exelon, which derives 
almost all its power from nuclear plants, says that shale gas is one of 
the most important energy revolutions of his lifetime. It's a cliche 
word, Yergin told me, but the fracking innovation is game-changing. It 
transforms the energy marketplace.
    The U.S. now seems to possess a 100-year supply of natural gas, 
which is the cleanest of the fossil fuels. This cleaner, cheaper energy 
source is already replacing dirtier coal-fired plants. It could serve 
as the ideal bridge, Amy Jaffe of Rice University says, until renewable 
sources like wind and solar mature.
    Already shale gas has produced more than half a million new jobs, 
not only in traditional areas like Texas but also in economically 
wounded places like western Pennsylvania and, soon, Ohio. If current 
trends continue, there are hundreds of thousands of new jobs to come.
    Chemical companies rely heavily on natural gas, and the abundance 
of this new source has induced companies like Dow Chemical to invest in 
the U.S. rather than abroad. The French company Vallourec is building a 
$650 million plant in Youngstown, Ohio, to make steel tubes for the 
wells. States like Pennsylvania, Ohio and New York will reap billions 
in additional revenue. Consumers also benefit. Today, natural gas 
prices are less than half of what they were three years ago, lowering 
electricity prices. Meanwhile, America is less reliant on foreign 
suppliers.
    All of this is tremendously good news, but, of course, nothing is 
that simple. The U.S. is polarized between ``drill, baby, drill'' 
conservatives, who seem suspicious of most regulation, and some 
environmentalists, who seem to regard fossil fuels as morally corrupt 
and imagine we can switch to wind and solar overnight.
    The shale gas revolution challenges the coal industry, renders new 
nuclear plants uneconomic and changes the economics for the renewable 
energy companies, which are now much further from viability. So forces 
have gathered against shale gas, with predictable results.
    The clashes between the industry and the environmentalists are now 
becoming brutal and totalistic, dehumanizing each side. Not-in-my-
backyard activists are organizing to prevent exploration. 
Environmentalists and their publicists wax apocalyptic.
    Like every energy source, fracking has its dangers. The process 
involves injecting large amounts of water and chemicals deep 
underground. If done right, this should not contaminate freshwater 
supplies, but rogue companies have screwed up and there have been 
instances of contamination.
    The wells, which are sometimes beneath residential areas, are 
serviced by big trucks that damage the roads and alter the atmosphere 
in neighborhoods. A few sloppy companies could discredit the whole 
sector.
    These problems are real, but not insurmountable. An exhaustive 
study from the Massachusetts Institute of Technology concluded, ``With 
20,000 shale wells drilled in the last 10 years, the environmental 
record of shale-gas development is for the most part a good one.'' In 
other words, the inherent risks can be managed if there is a reasonable 
regulatory regime, and if the general public has a balanced and 
realistic sense of the costs and benefits.
    This kind of balance is exactly what our political system doesn't 
deliver. So far, the Obama administration has done a good job of trying 
to promote fracking while investigating the downsides. But the general 
public seems to be largely uninterested in the breakthrough (even 
though it could have a major impact on the 21st-century economy). The 
discussion is dominated by vested interests and the extremes. It's 
becoming another weapon in the political wars, with Republicans 
swinging behind fracking and Democrats being pressured to come out 
against. Especially in the Northeast, the gas companies are demonized 
as Satan in corporate form.
    A few weeks ago, I sat around with John Rowe, one of the most 
trusted people in the energy business, and listened to him talk 
enthusiastically about this windfall. He has no vested interest in 
this; indeed, his company might be hurt. But he knows how much shale 
gas could mean to America. It would be a crime if we squandered this 
blessing.
                                 ______
                                 
               The Wall Street Journal, October 27, 2011
                   bg, cheniere forge gas-export pact
By Daniel Gilbert and Guy Chazan.

    HOUSTON--The U.S. moved a step closer to becoming a major exporter 
of natural gas Wednesday as British energy company BG Group PLC agreed 
to buy liquefied natural gas from a facility on the Gulf Coast to 
supply Asian and European markets.
    The deal to buy the liquefied gas from Cheniere Energy Partners LP, 
the first of its kind in the U.S., calls for BG to pay Cheniere about 
$8.2 billion over 20 years. It underscores how quickly the shale-gas 
boom has transformed the U.S. energy landscape, as surging domestic 
production is prompting companies that built facilities to import 
natural gas to reverse course and use them to export the resource 
instead.
    The contract ``is the first step towards the U.S. becoming a large-
scale LNG exporter,'' said Frank Harris, head of liquefied natural gas, 
or LNG, at energy consultancy Wood Mackenzie.
    The deal is a coup for Houston-based Cheniere as it seeks contracts 
for its liquefied gas, which will be super-cooled for export in ocean-
going tankers, before beginning construction of a $6 billion facility 
in Cameron Parish, La., next year. It expects to begin exporting the 
gas in 2015.
    It is also significant for BG, which will buy gas comparatively 
cheaply and sell it for much higher prices in Europe and Asia. ``This 
gives us first mover advantage, and allows us to steal a march on our 
rivals,'' BG spokesman Neil Burrows said.
    Energy companies in the U.S., Canada and Australia are planning or 
have already begun building more than a dozen projects to liquefy and 
export natural gas as they seek to capitalize on growing demand for 
liquid-gas imports. Asia is the hottest market: its demand for 
liquefied gas is expected to grow 68% between 2010 and 2020, according 
to advisory firm Poten & Partners.
    BG, formerly one of the largest importers of LNG into the U.S., is 
now seeking permits to convert a facility in Lake Charles, La., to 
export gas. Freeport LNG Development LP has teamed with Macquarie Group 
to export LNG from a Texas facility.
    In Canada, Apache Corp., Encana Corp. and EOG Resources Inc. 
earlier this month received approval from Canadian regulators to export 
LNG from a facility in British Columbia. And Royal Dutch Shell PLC last 
week said it acquired a site in British Columbia to potentially export 
LNG. Charif Souki, Cheniere's chairman and chief executive, said he is 
confident that the ``enormous market'' for LNG will more than 
accommodate the new supply. He said the company expects to strike a 
deal that will lock in most of the LNG capacity not yet under contract 
from its facility in the next few weeks.
                                 ______
                                 
                    Industrial Energy Consumers of America,
                                 Washington, DC, November 22, 2011.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, 304 Dirksen Office 
        Building, Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Committee on Energy and Natural Resources, 304 Dirksen 
        Office Building, Washington, DC.
    Dear Chairman Bingaman and Ranking Member Murkowski:

    Thank you for having the hearing on the ``approval process and 
potential for liquefied natural gas exports'' on November 8, 2011. We 
offer the following comments for the record.
    As substantial industrial consumers of natural gas and natural gas 
fired electricity, we are not opposed to natural gas exports but we do 
have concerns regarding the approval process for permitting of 
waterborne exports of natural gas. The hearing is especially timely 
because six export applications have been filed and many more are 
anticipated.
    Natural gas availability and price is a public health, safety, jobs 
and economic matter. Unlike other traded products, natural gas exports 
have the potential to impact every citizen of the country. 
Manufacturing competitiveness, energy independence and security is an 
issue. Consuming domestically produced natural gas to make value-added 
products here and ship them offshore is a better alternative for 
manufacturers and the country.
    It is also important to note that while natural gas prices have 
been fairly flat for the last couple of years, the Chicago Mercantile 
Exchange price of natural gas eight years from now is selling for over 
84 percent above today's price (see chart in appendix), substantially 
above EIA Energy Outlook price forecasts. In other words, the market is 
changing quickly and it is very important for Congress to ensure that 
the interest of the public is served within the process of considering 
approval of export requests.
    The Natural Gas Act provisions that guide natural gas export 
applications were written at a time when our domestic natural gas 
supply was in question and accelerating LNG imports was the priority. 
We know, because IECA was strongly in support of LNG imports. The 
Natural Gas Act of 1938 never anticipated that the U.S. would 
potentially export natural gas. For all of the above reasons, it is 
very timely for the Congress to review existing law and make important 
changes that are common sense and truly protect the interest of the 
public.

1. Congress needs to re-evaluate the process of reviewing natural gas 
        export applications
    The Natural Gas Act assumes that exporting natural gas is in the 
``interest of the public.'' Doing so sets up a ``rubber-stamp'' 
approval process for shipments to free-trade agreement countries and 
does not have adequate checks and balances. Approving applications to 
export natural gas for a 20-year period of time has potentially 
significant long term implications for the U.S. consumer and needs to 
be carefully done, with transparency and a lot of careful study. In our 
view, careful evaluation is not happening.
    Exporting natural gas, the equivalent of increasing demand, 
increases the relative price of natural gas and electricity. Exporting 
natural gas will result in higher costs to heat and cool homes, run 
factories and produce electricity than what it would cost without 
natural gas exports.
    Congress should change the Natural Gas Act to not assume that 
exporting is in the interest of the public as an underpinning 
assumption. Each export application needs to be evaluated straight-up 
on its merits and with up to date market forecast data.
    Examples that undermine the assumption that exporting natural gas 
is in the interest of the public are too numerous to list. We offer two 
examples below.

          a) The study provided by Sabine Pass LNG Terminal to DOE to 
        support their application said that exports from their terminal 
        would increase the price of natural gas by 10.6 percent by 
        2015. A 10.6 percent increase to residential consumers would 
        increase their annual cost about $5.9 billion. Higher natural 
        gas prices will also increase electricity prices. Both reduce 
        manufacturing competitiveness. How could higher natural gas and 
        electricity prices be in the interest of the public? Since 
        then, five other applications have been received. According to 
        DOE data, these terminals would increase demand by about 14 
        percent and several other companies are preparing their 
        applications. Considering that U.S. demand has only increased 
        by 3.4 percent since 2000, these terminals represent a 
        substantial increase in demand that will surely raise natural 
        gas prices well above the 10.6 percent estimate by the Sabine 
        Pass application.
          b) Taxpayers will spend about $4.5 billion of scarce federal 
        dollars to fund LIHEAP to lower the cost of energy to families. 
        Given the above mentioned price increases, exporting is 
        inconsistent and in conflict the public policy that funds 
        LIHEAP.

2. Upon receiving an export request to ship to a free trade agreement 
        (FTA) country, the DOE is not required to make the public aware 
        of the request. There will be no announcement of the request in 
        the Federal Register or opportunity for the public to comment
    Transparency is needed. The public should be informed and should be 
given the opportunity to file comments.

3. The process wrongfully relies heavily upon studies provided by the 
        export applicant to justify approval
    When the DOE receives an application to export, it also receives a 
study that justifies the approval of the application. There is absolute 
certainty that the study is going to say that exporting is in the 
interest of the public. The DOE should not rely upon the applicant's 
study in determining whether the application is in the public interest.

4. No study is done by the DOE to ensure that the interest of the 
        public is served
    One apparent problem is that the DOE does not do any study of its 
own that would consider real time changes in the supply and demand 
picture as it evaluates the application. And, simply looking at EIA 
forecasts are not a solution either because EIA forecasts do not 
include recently approved export terminals and pending EPA regulations 
on the electric generation industry and the industrial sector that will 
substantially increase demand.
    The Natural Gas Act needs changed to require the DOE to complete a 
study for each application. The Natural Gas Act designates the DOE as 
the protector of the public interest. There is an assumption that 
exporting is in the interest of the public yet there is no DOE study to 
ensure that approval actually is in the ``interest of the public.'' The 
study needs to take into consideration a 20-year look at supply, demand 
and price and consider, for example, an estimate of natural gas demand 
that will occur as a result of recently approved export terminals and 
pending EPA regulations on the electric generation industry and the 
industrial sector.

5. The export approval process does not give adequate time for 
        intervening parties to develop their own study for 
        consideration by the DOE for Non-Free Trade applications
    The DOE relies upon independent third parties to intervene either 
for or against the applicant. If a party wishes to oppose the terminal, 
they will need to provide a study that makes the case--and there is 
insufficient time to do so. The studies that the DOE would consider by 
an intervener would be similar in scope to the studies filed by the 
export applicant. It takes several months to develop and implement such 
studies and puts interveners at a significant disadvantage. IECA 
recommends that interveners be given six months to provide a study.

6. The EIA data is used as a reference point for supply, demand and 
        price by both the DOE and the export applicant do not include 
        significant pending natural gas demand from EPA regulations or 
        exports that are already approved
    For example, page 9 of the Sabine Pass application cites the EIA 
Annual Energy Outlook 2010 ``which estimates that annual domestic 
demand will grow only 0.2 percent to reach 24.86 Tcf in 2035.'' The 
problem is that EIA Outlook forecasts do not include the increases in 
natural gas demand that will occur as a result of pending natural gas 
export applications nor pending EPA regulations on the electric utility 
or industrial sector that will result in substantial increases in 
demand. Using the EIA forecast under-estimates forward demand and 
price. IECA recommends that DOE be required to have the EIA run a new 
demand/price scenario for each application that incorporates already 
approved export terminals and pending EPA regulatory impacts.

7. The application process does not consider the long term implication 
        of U.S. prices potentially being set by international demand--
        just as it is with crude oil
    With each export terminal approval, we move closer to the reality 
that U.S. natural gas prices will eventually be priced by international 
demand--just as crude oil is today. Right now, U.S. consumers are 
insulated from global demand and their prices are lower because of it. 
IECA recommends that this scenario needs to be included with each 
application because each application takes us another step closer to 
global pricing. Pricing U.S. natural gas at international levels would 
almost triple the price and increase electricity prices.
8. Export permit approvals should include consumer safe guards
    The Natural Gas Act says that exporting natural gas is in the 
interest of the public but does not require sufficient actions and safe 
guards to ensure that the public interests are served over the 20-year 
period of time. All approvals should have consumer protections. In that 
way, the interest of the public will be served over the 20 year period 
covered by the export terminals.
    Thank you for having the hearing and we look forward to further 
discussions on this important topic.
            Sincerely,
                                                Paul Cicio,
                                                         President.
                                 ______
                                 
                                                  November 4, 2011.

Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Chairman Bingaman and members of the Committee,

    The United States is faced with a choice today as gas companies are 
lining up to export inexpensive American gas to foreign markets. We 
respectfully request that you oppose exporting our natural gas because 
of the harm to American consumers and our communities.
    By choosing to export domestic gas, the United States will:

   Ship huge volumes of U.S. gas to foreign nations. One 
        Liquefied Natural Gas (LNG) tanker can carry away 8.8% of the 
        U.S. daily gas consumption with each shipment.
   Raise energy prices for every American. The U.S. Department 
        of Energy estimated that export from just one Gulf Coast LNG 
        terminal would raise gas prices at Henry Hub in Louisiana by up 
        to 11.6%.\1\
---------------------------------------------------------------------------
    \1\ U.S. DOE Order approving LNG export from Sabine Pass LNG 
terminal at p. 11, citing Navigant Consulting's Market Analysis for 
Sabine Pass LNG Export Project (NCI Report) at p. 14. See also Natural 
gas prices set to jump with exports--Pittsburgh Tribune-Review http://
www.pittsburghlive.com/x/pittsburghtrib/s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
   Undercut U.S. energy independence. While we import expensive 
        OPEC oil, gas companies will make billions sending inexpensive 
        natural gas overseas.
   Condemn land for LNG export. Shockingly, pipelines for LNG 
        export have the power of eminent domain to take private farms 
        and forest lands. Gas companies could condemn private land to 
        send gas overseas, with no public need.
   Increase fracking. Exporting LNG will raise the price of 
        gas, which will make gas companies more aggressive in fracking 
        gas.

    Oregon's leading newspaper, the Oregonian framed the idea of 
exporting U.S. natural gas this way:

          It's a jaw-dropping contradiction, a classic bait-and-switch. 
        It's a thumb-in-the-eye of energy independence and the sort of 
        numbing stupidity that, T. Boone Pickens argues, will confirm 
        our legacy as ``the dumbest generation.''
          Yet we continue to stumble along, strung out between Big Oil 
        and a diminished president, moving inexorably toward the export 
        of this nation's vast reserves of natural gas.\2\
---------------------------------------------------------------------------
    \2\ The Oregonian, September 17, 2011, http://www.oregonlive.com/
news/oregonian/steve_duin/index.ssf/2011/09/
so_much_for_energy_independenc.html

             manufacturers and consumers oppose lng export
    With very little public debate on this important topic, the U.S. 
Department of Energy recently granted preliminary approval for one of 
America's first LNG export terminal at Sabine Pass, Louisiana. The 
Oregonian noted:

          Paul Cicio, president of the Industrial Energy Consumers of 
        America (750,000 employees strong), has been raging against the 
        U.S. Department of Energy policy for months.

          ``They should be champions of energy independence,'' Cicio 
        said Friday. ``They're supposed to be looking out for the 
        interests of the public. What this export policy does, instead, 
        is benefit a small handful of exporters to the potential demise 
        of every American and American-manufacturing competitiveness.'' 
        \3\
---------------------------------------------------------------------------
    \3\ U.S. DOE Order approving LNG export from Sabine Pass LNG 
terminal at p. 11, citing Navigant Consulting's Market Analysis for 
Sabine Pass LNG Export Project (NCI Report) at p. 14. See also Natural 
gas prices set to jump with exports--Pittsburgh Tribune-Review http://
www.pittsburghlive.com/x/pittsburghtrib/s_741745.html#ixzz1QOd1TrPm

    In addition, consumer groups oppose LNG export because export will 
increase the price we pay to heat our homes. A June 16, 2011 letter to 
---------------------------------------------------------------------------
this Committee from the American Public Gas Association (APGA) stated:

          APGA is not anit-free trade, but when important policies 
        collide, nations must make choices. APGA submits that the wise 
        policy choice at this critical time in our history is to limit 
        exports of natural gas so that w may realistically pursue the 
        greater goal of energy independence. Those who argue that this 
        matter is not an either-or situation are wagering our long-term 
        national well-being on short-term profits.

    Our organizations are also concerned about the effect on our 
communities, including the impact of building new gas export pipelines 
through family farms, forestland, and salmon habitat. Columbia 
Riverkeeper, Rogue Riverkeeper, Friends of Living Oregon Waters and 
Bark are conservation groups in Oregon and Washington that collectively 
have thousands of members adversely impacted by proposed LNG terminals 
and pipelines.
                          facts on lng export
          1. LNG terminals were marketed and approved to import gas

    All active LNG terminals were approved to import gas. Only in the 
last year, have the gas companies acknowledged that they intend to 
export gas. The low price of natural gas in the United States has 
triggered a wave of recent proposals to export U.S. gas in the form of 
Liquefied Natural Gas (LNG) into the high-priced Asian and European gas 
markets. In those markets, gas currently sells for 200% to 300% above 
U.S. prices.\4\ Five of the existing ten LNG import terminals in the 
United States have publicly announced plans to start exporting LNG. The 
U.S. Department of Energy (USDOE) recently approved the first export 
proposal from Cheniere Energy's Sabine Pass LNG terminal in 
Louisiana.\5\ Two LNG export projects have also been proposed in 
British Columbia\6\ and Sempra is considering converting its Baja LNG 
import terminal to export.\7\ All of these terminals were originally 
permitted to bring gas into the United States. Export proposals 
represent a major change in the U.S. gas market.
---------------------------------------------------------------------------
    \4\ Henry Hub price of June 15, 2011 of $4.52/mmbtu. http://
www.neo.ne.gov/statshtml/124.htm; Japanese preearthquake LNG prices 
from January 2011 were $11.96/mmbtu4 and as of June 2011 had 
risen to nearly $ 14 mmbtu. Japan's December LNG Import Bill Rises 3.9% 
on Crude, Bloomberg News By Dinakar Sethuraman--Jan 30, 2011 http://
www.bloomberg.com/news/2010-12-29/japan-s-november-lng-import-bill-
increases-6-after-crude-oil-pricesgain. html; http://www.asahi.com/
english/TKY201106220170.html.
    \5\ Sabine Pass terminal, LA (http://www.bloomberg.com/news/2011-
05-20/cheniere-surges-45-after-u-s-expands-itslng-export-
approval.html); Freeport terminal, TX (http://www.platts.com/
RSSFeedDetailedNews/RSSFeed/NaturalGas/6617360); Cameron terminal, 
TX(http://www.lngworldnews.com/usa-cameron-lng-asks-ferc-for-export-
authorization/); Lake Charles terminal, LA (http://www.chron.com/
business/energy/article/Energy-companies-seek-export-license-for-LNG-
1693487.php); Cove Point terminal, MD (http://www.reuters.com/article/
2011/02/01/lng-dominion-export-idUSN0122810220110201)
    \6\ a100.gov.bc.ca/.../
1226700475492_8e248a8d30d89bba23feaf7f461ca741d9738f8be453.pdf; http://
www.theglobeandmail.com/report-on-business/industry-news/energy-and-
resources/another-bc-company-jumps-onlng-bandwagon/article1955836/
    \7\ http://www.reuters.com/article/2011/06/07/lng-export-sempra-
idUSN079630320110607

---------------------------------------------------------------------------
          2. LNG companies repeatedly denied plans to export U.S. gas

    Exporting U.S. gas as LNG is controversial. Companies behind two 
proposed LNG import terminals in Oregon have repeatedly denied that 
they intended to export U.S. gas. The companies told the public and 
regulators that LNG was needed to increase local gas supplies and 
therefore decrease consumer prices. As recently as March 17, 2011, the 
World newspaper in Coos Bay, Oregon, newspaper stated, ``the project 
manager of the proposed Jordan Cove LNG terminal hastened Wednesday to 
disclaim a report that his company was considering changing the 
terminal into an export facility.''\8\ The Jordan Cove manager, Bob 
Braddock, stated that they have had never considered exporting LNG 
because export ``is a stupid idea.'' \9\ Just a few months later, 
Jordan Cove and other LNG companies now acknowledge plans to export 
shale gas from the Rockies to the highpriced Asian market. Mr. Braddock 
stated that their project ``provides the most cost effective method for 
delivering LNG from North America to the Pacific Basin. . .''\10\ Just 
months after calling LNG export ``stupid,'' Mr. Braddock stated, 
``there is currently no need for import into North America. . . We 
acknowledge that if anything makes sense, its export.''\11\ Jordan Cove 
recently applied for a license to export LNG.
---------------------------------------------------------------------------
    \8\ http://theworldlink.com/news/local/article_c6798042-a186-5472-
b8bb-c7bf7df57754.html
    \9\ http://theworldlink.com/news/local/article_c6798042-a186-5472-
b8bb-c7bf7df57754.html
    \10\ Jordan Cove press release Aug. 18, 2011: http://
www.oilvoice.com/post/Company_News_Release/
Jordan_Cove_Confirms_Support_for_World_LNG_Series_Asia_Pacific_Summit_20
11/4b35f2759d.aspx
    \11\ http://www.oregonlive.com/business/index.ssf/2011/09/
el_paso_corp_launches_680-mile.html
---------------------------------------------------------------------------
    The price of gas in southern Oregon, for example, has averaged $3.9 
per million btu (MMbtu) over the last year\12\ while the price of LNG 
in Japan has risen above $14/MMbtu.\13\ With China's recent 
announcement that it plans to increase natural gas use by 300% in the 
next five years, as well as Japan's increased reliance on LNG following 
the Fukushima nuclear crisis, Asian LNG prices are only expected to 
increase.\14\
---------------------------------------------------------------------------
    \12\ Platts LNG Daily, March 15, 2011.
    \13\ Japanese pre-earthquake LNG prices from January 2011 were 
$11.96/mmbtu13 and as of June 2011 had risen to nearly $ 14 mmbtu. 
Japan's December LNG Import Bill Rises 3.9% on Crude, Bloomberg News By 
Dinakar Sethuraman--Jan 30, 2011 http://www.bloomberg.com/news/2010-12-
29/japan-s-november-lng-import-bill-increases-6-after-crude-oilprices-
gain.html; http://www.asahi.com/english/TKY201106220170.html.
    \14\ http://gulfnews.com/business/markets/china-s-natural-gas-push-
will-affect-energy-prices-1.829199

          3. LNG exports would increase consumer natural gas prices and 
---------------------------------------------------------------------------
        reduce gas supplies

    Currently, the U.S. does not have any LNG export terminals. There 
was an export terminal in Kenai, Alaska, but the plant recently closed 
after facing strong opposition from industrial and residential gas 
users who fought re-licensing of the terminal because it was 
threatening local gas supplies and causing high-gas prices. 
15 16 17 Other than a fairly small volume of pipeline 
exports to Mexico and Canada, U.S. consumers alone determine the price 
for U.S. natural gas. This isolated market for U.S. gas provides U.S. 
consumers some of the world's lowest natural gas prices.
---------------------------------------------------------------------------
    \15\ http://www.adn.com/2008/11/09/583470/utility-petitions-to-
block-gas.html
    \16\ http://www.adn.com/2010/07/08/1359592/give-southcentral-
priority-on.html;http://www.adn.com/2010/08/14/1410315/parnell-backs-
liquefied-natural.html
    \17\ http://www.adn.com/2011/02/09/1692895/ap-newsbreak-alaska-lng-
plant.html
---------------------------------------------------------------------------
    Opening the door to the export of U.S. gas as LNG, however, could 
significantly increase the price of natural gas that residential, 
commercial and industrial customers pay by forcing U.S. consumers to 
compete in the high-priced Asian and European gas market where LNG 
prices are often tied to the price of oil.
    A recent price impact study relied on by the U.S. Department of 
Energy estimated that a proposed LNG export terminal in Sabine Pass, LA 
could increase Henry Hub gas prices (generally used as the U.S. 
benchmark) by as much as 11.6%.\18\ An 11.6% increase in gas prices 
nationally could hit residential consumers already reeling from the 
economic downturn with an additional $10 billion a year in natural gas 
costs,\19\ further reducing discretional spending and job growth. The 
potential for $10 billion in new profits for gas producers if just one 
export terminal is opened highlights the unprecedented new profits for 
gas producers if multiple terminals are opened. Exporting LNG will 
decrease U.S. gas supplies and force U.S. consumers into a bidding war 
with Asian and European buyers.
---------------------------------------------------------------------------
    \18\ U.S. DOE Order approving LNG export from Sabine Pass LNG 
terminal at p. 11, citing Navigant Consulting's Market Analysis for 
Sabine Pass LNG Export Project (NCI Report) at p. 14. See also Natural 
gas prices set to jump with exports--Pittsburgh Tribune-Review http://
www.pittsburghlive.com/x/pittsburghtrib/s_741745.html#ixzz1QOd1TrPm
    \19\ Estimate is based on a U.S. EIA 2010 reported marketed NG 
price of 4.16/ thousand cubic feet and total marketed production of 
22,568,863 million cubic feet. http://www.eia.gov/dnav/ng/
ng_prod_whv_dcu_nus_a.htm
---------------------------------------------------------------------------
    Major energy consumers are waking up to the reality of how LNG 
exports would drive a major increase in U.S. gas prices. The Industrial 
Energy Consumers of America, which represents American manufacturers 
with annual sales of $800 billion and 750,000 employees, is now 
fighting Cheniere's Sabine Pass LNG export plans. The industrial group 
stated that the price impact of exporting LNG would be ``absolutely 
frightening.''\20\ T. Boone Pickens has similarly opposed LNG export 
plans saying, ``We're truly going to go down as the dumbest generation. 
. .. It's bad public policy to export natural gas--a cleaner, cheaper 
domestic resource--and import more expensive, dirtier OPEC oil.''.\21\
---------------------------------------------------------------------------
    \20\ Natural gas prices set to jump with exports--Pittsburgh 
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/s--
741745.html#ixzz1QOd1TrPm
    \21\  Natural gas prices set to jump with exports--Pittsburgh 
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
    It is important to recognize that the 11.6% increased price 
estimate for Cheniere's export proposal was prepared by Cheniere's own 
consultants as the company was seeking permission to export LNG. 
Cheniere likely underestimated the price impact to U.S. gas markets by 
ignoring the cumulative effect of the other LNG export terminals being 
planned.\22\ Despite the potential for LNG export terminals to drive 
major prices increases, neither the U.S. Department of Energy nor the 
Federal Energy Regulatory Commission (FERC) nor any other agency has 
evaluated the cumulative impacts on gas price and lost jobs from 
globalizing the price of natural gas in the United States.
---------------------------------------------------------------------------
    \22\ Market Analysis for Sabine Pass LNG Export Project. Prepared 
by Navigant Consulting. Aug. 23, 2010. On file with author.

          4. LNG export terminals could export a significant portion of 
---------------------------------------------------------------------------
        U.S. gas production

    A modern LNG tanker, called a QMAX (266,000 cubic meters\23\), can 
export more than 8.8 % of total U.S. daily gas production in a single 
tanker shipment.\24\ A recent review by the Pittsburgh Times on the 
potential for LNG export to increase gas prices, found that if the five 
already proposed export terminals were approved they would collectively 
export 13.9% of total U.S. gas production.\25\ This, however, did not 
include either of the potential Oregon terminals or other likely export 
terminals.
---------------------------------------------------------------------------
    \23\ http://gcaptain.com/q-max-lng-tankers?4690
    \24\ Tanker volume: 1 cubic meter of LNG = 20,631 cubic feet of 
natural gas. See http://www.chemlink.com.au/conversions.htm One 266,000 
cubic meter LNG tanker (a QMAX tanker) can carry the equivalent of 
5,487,846,000 cubic feet of natural gas. (266,000 cubic meters x 20,631 
cubic feet/cubic meter = 5,487,846,000 cubic feet of natural gas per 
tanker; equivalent of 5.487 bcf of natural gas. Total U.S. natural gas 
production in 2010. U.S. Energy Information Agency (U.S. EIA) reports 
2010 annual U.S. marketed production at 22,568,863,000,000 cubic feet. 
http://205.254.135.24/dnav/ng/ng_prod_sum_dcu_NUS_a.htm 
22,568,863,000,000 cubic feet per year is the equivalent daily marketed 
production of 61,832,501,370. (22,568,863,000,000 cubic feet per year x 
1 year/365 days= 61,832,501,370 cubic feet/day.) Tanker size compared 
to average daily U.S. marketed production. 5,487,846,000 cubic feet in 
a single LNG tanker is 8.8% of average daily U.S. marketed natural gas 
production in 2010 of 7 61,832,501,370 cubic feet. (5,487,846,000 cubic 
feet per tanker/ average U.S. marketed production 61,832,501,370 = 
0.08875 = 8.8 % of average daily U.S. marketed natural gas production 
in 2010).
    \25\ Natural gas prices set to jump with exports--Pittsburgh 
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
    From a Northwest regional price perspective, a single LNG export 
tanker shipment could export up to 348% more gas than Oregon and 
Washington collectively use in a single day.\26\ The newly opened Ruby 
Pipeline has just started sending gas from the Rockies Opal Hub in 
Wyoming to Malin, OR. This would create a direct connection between the 
proposed Jordan Cove LNG terminal in Coos Bay and the Wyoming gas 
hub.\27\
---------------------------------------------------------------------------
    \26\ Current OR, WA gas usage. Total annual consumption for Oregon: 
248,779 mcf (US EIA, 2009 at http://205.254.135.24/dnav/ng/ng--prod--
sum--dcu--sor--a.htm); Washington: 310,112 mcf (US EIS 2009 http://
205.254.135.24/dnav/ng/ng_cons_sum_dcu_SWA_a.htm). Equivalent average 
consumption Oregon: 248,779 mcf/year x (1 year/365 days)= 681 mcf= 
0.681 bcf; Washington: 310,112 mcf/year x (1 year/365 days)= 849 mcf = 
0.849 bcf. Combined Oregon and Washington average daily gas consumption 
of 1.531 billion cubic feet(bcf) (OR average daily use of 0.681bcf + WA 
average daily use of 0.849 bcf= 1.531 bcf combined OR and WA use. LNG 
tanker volume: 1 cubic meter of LNG = 20,631 cubic feet of natural gas. 
See http://www.chemlink.com.au/conversions.htm One 266,000 cubic meter 
LNG tanker (a QMAX tanker) can carry the equivalent of 5,487,846,000 
cubic feet of natural gas. (266,000 cubic meters x 20,631 cubic feet/
cubic meter = 5,487,846,000 cubic feet of natural gas per tanker; 
equivalent of 5.487 bcf of natural gas. Total U.S. natural gas 
production in 2010.
    \27\ http://www.oregonlive.com/business/index.ssf/2011/09/
el_paso_corp_launches_680-mile.html
---------------------------------------------------------------------------
    The daily capacity of the two proposed Oregon LNG terminals (1.2 
bcf/day for Jordan Cove\28\; 1 bcf/day Oregon LNG)\29\ would exceed 
Oregon's current daily gas use by 293% and combined gas consumption of 
both Oregon and Washington by 130%.\30\ Two additional export terminals 
planned in Kitimat British Columbia, would further add to the Northwest 
price pressure by exporting gas currently supplied to Oregon and 
Washington, into the Asian LNG market.\31\ Because Sempra has also 
acknowledged considering LNG export from its Costa Azul LNG terminal in 
Baja, Mexico, there is a very real potential for five west coast LNG 
export terminals in the near future.\32\
---------------------------------------------------------------------------
    \28\ www.ferc.gov/industries/gas/indus-act/lng/LNG-approved.pdf
    \29\ www.oregonlng.com/pdfs/olng_fercfiling_rls_10-10-08.pdf
    \30\ Current OR, WA gas usage. 2009 US EIA data gas usage: OR 
average daily gas usage of 0.681 bcf/day; WA average daily gas usage of 
0.849 bcf/day, compared to 2 bcf/day of initial export capacity (1 bcf/
day for Jordan Cove approved by FERC; 1 bcf/day Oregon LNG proposed for 
approval.)
    \31\ a100.gov.bc.ca/.../
1226700475492_8e248a8d30d89bba23feaf7f461ca741d9738f8be453.pdf; http://
www.lngworldnews.com/canada-jv-proposes-second-kitimat-lng-terminal/
    \32\ http://www.reuters.com/article/2011/06/07/lng-export-sempra-
idUSN079630320110607
---------------------------------------------------------------------------
    As a result, if even one LNG export terminal were opened in Oregon, 
those purchasing LNG from the terminal would quickly become the 
dominant gas purchasers and price setters in the Northwest. Given the 
high price of the Pacific Rim LNG market, gas suppliers would 
presumably only sell gas to Northwest consumers if they paid a price 
equal to or greater than the Pacific Rim buyers after subtracting the 
costs of export, thus leading to significantly increased domestic 
prices. While this price has not been calculated, there is little 
question that it would be significantly higher than the current prices 
being paid by Northwest consumers.
    Exporting LNG to higher-priced foreign markets may increase natural 
gas fracking in the United States. Gas companies will have incentive to 
drill in more locations using unconventional methods to reach gas that 
is currently uneconomical.

                               CONCLUSION

    Exporting domestic natural gas to foreign nations will raise gas 
prices, harm manufacturers and consumers, and degrade our communities 
by increasing natural gas pipelines and fracking. We respectfully 
request that this Committee call for an investigation on the price 
impact of LNG export to American consumers. The U.S. Department of 
Energy or FERC should not approve any LNG export licenses until a full 
evaluation is complete.
            Sincerely,
                                        Brett VandenHeuvel,
                                              Columbia Riverkeeper,
                                  Hood River, OR, White Salmon, WA.
                                              Lesley Adams,
                                                 Rogue Riverkeeper,
                                                       Ashland, OR.
                                               Gayle Kiser,
                      Landowners and Citizens for a Safe Community,
                                                      Longview, WA.
                                            Bethany Cotton,
                                   Friends of Living Oregon Waters,
                                                   Grants Pass, OR.
                                            Olivia Schmidt,
                                                              Bark,
                                                      Portland, OR.
                                             Monica Vaughn,
                                Klamath Siskiyou Wild Lands Center,
                                                       Ashland, OR.
                                 ______
                                 
  Statement of Kenneth D. McClintock, Secretary, State of Puerto Rico

    The Government of Puerto Rico supports the safe and responsible 
development of natural gas resources in the United States. Development 
of these resources will help create needed jobs, allow regulated 
entities more flexibility in satisfying environmental goals under the 
Clean Air Act and other statutes, and provide energy security for 
future generations. As part of the development of these resources, 
Puerto Rico is embarking on its own program to use natural gas as a 
bridge fuel to generate needed electric power for the Islands.
    Historically, the demand for natural gas in the United States has 
exceeded the available supply. The development of shale gas resources, 
however, is increasing supplies substantially to the point that 
additional uses and markets will be able to benefit from the 
availability of U.S. natural gas.
    Puerto Rico, a territory of the Unites States, presents a unique 
domestic U.S. market for this natural gas and is examining the 
possibility of receiving supplies in the form of liquefied natural gas 
(LNG). The ability of the U.S. natural gas industry to supply natural 
gas as LNG presents a tremendous opportunity for the American citizens 
of Puerto Rico. The government of Puerto Rico is seeking to secure a 
long-term source of natural gas in the form of LNG, and is pursuing the 
possibility of deliveries from the mainland U.S. to Puerto Rico.
    In order to facilitate the interstate supply of natural gas from 
our Nation's Gulf Coast to Puerto Rico's South Coast, last December we 
placed a statement of support in the Department of Energy (DOE) docket 
regarding the request of Cheniere Energy, Inc. for a permit to allow 
its Sabine Pass, Louisiana, terminal not only to receive LNG but also 
to dispatch shipments on an interstate basis to Puerto Rico and on an 
export basis to foreign buyers.
    Puerto Rico currently lags far behind the rest of the United States 
in terms of having an economically efficient electric generation 
system. Puerto Rico produces 68% of its power from imported foreign 
diesel and bunker fuels which makes electricity far more expensive than 
in the rest of the United States. Because of this, the price of 
electricity in Puerto Rico is more than double the average price in the 
United States (10.2 cents) and has reached as high as 29 cents per KWh 
this year. These high energy costs have been economically debilitating 
to Puerto Rico's economy.
    In order to begin addressing these high prices, the Government of 
Puerto Rico and the Puerto Rico Power Electric Authority (PREPA) are 
moving forward on plans to convert much of the Islands' generation from 
foreign oil to natural gas. Converting to natural gas makes good sense 
for Puerto Rico because natural gas is a clean, abundant and less 
expensive fuel source.
    One of the key initiatives in this area is the Via Verde pipeline 
project. This project, which would span approximately 92 miles, will 
transport natural gas from an existing LNG terminal, which is owned by 
EcoElectrica on Puerto Rico's south coast to PREPA's generation plants 
in the north. The pipeline will be built with state of the art 
technology and has been carefully planned to use the rights-of-way of 
existing highways in order to minimize impact on local communities as 
well as sensitive or protected fauna and flora habitats.
    This project has significant economic and environmental benefits. 
Once Via Verde is implemented, it is expected to save energy consumers 
on the Island hundreds of millions of dollars per year. In addition, 
emissions of criteria pollutants are expected to decrease as much as 
79% and greenhouse gases by 30%.
    Puerto Rico's conversion to natural gas has the potential to create 
a large domestic U.S. market in the near future for those U.S. natural 
gas companies with available natural gas supplies. By 2016, PREPA 
estimates that it will be purchasing as much as 1.13 billion cubic feet 
(BCF) of LNG per year. Since Puerto Rico is a territory of the United 
States, our Government has a strong preference to obtain this supply on 
a long-term basis from U.S. companies, rather than foreign sources thus 
helping the Nation's balance-of-payments.
    In closing, the Government of Puerto Rico fully supports the safe 
and responsible development of natural gas resources in the United 
States. We will work with U.S. natural gas suppliers and other 
interested parties to develop supply arrangements that will enable 
Puerto Rico to implement our upcoming conversion of electric generation 
from foreign oil to domestic natural gas.

