<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:94599.wais]
S. Hrg. 108-499
ENVIRONMENTAL IMPACTS OF
NATURAL GAS SUPPLY
=======================================================================
HEARING
before the
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MARCH 24, 2004
__________
Printed for the use of the Committee on Environment and Public Works
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio HARRY REID, Nevada
MICHAEL D. CRAPO, Idaho BOB GRAHAM, Florida
LINCOLN CHAFEE, Rhode Island JOSEPH I. LIEBERMAN, Connecticut
JOHN CORNYN, Texas BARBARA BOXER, California
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
CRAIG THOMAS, Wyoming THOMAS R. CARPER, Delaware
WAYNE ALLARD, Colorado HILLARY RODHAM CLINTON, New York
Andrew Wheeler, Majority Staff Director
Ken Connolly, Minority Staff Director
C O N T E N T S
----------
Page
MARCH 24, 2004
OPENING STATEMENTS
Allard, Hon. Wayne, U.S. Senator from the State of Colorado...... 115
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware.. 10
Chafee, Hon. Lincoln, U.S. Senator from the State of Rhode Island 9
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma... 1
Jeffords, Hon. James M., U.S. Senator from the State of Vermont.. 7
Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska...... 77
Thomas, Hon. Craig, U.S. Senator from the State of Wyoming....... 11
Voinovich, Hon. George V., U.S. Senator from the State of Ohio... 13
WITNESSES
Bailey, Dennis M., director, Energy Purchasing, PPG Industries... 93
Prepared statement........................................... 169
Response to additional question from Senator Jeffords........ 170
Bloch, Stephen H.M., staff attorney, Southern Utah Wilderness
Alliance....................................................... 103
Prepared statement........................................... 183
Responses to additional questions from Senator Inhofe........ 196
Bluestein, Joel, president, Energy and Environmental Analysis,
Inc............................................................ 92
Prepared statement........................................... 156
Responses to additional questions from:
Senator Inhofe........................................... 159
Senator Jeffords......................................... 159
Carcieri, Hon. Donald L., Governor, State of Rhode Island........ 78
Prepared statement........................................... 124
Caskey, Michael C., executive vice president and chief operating
officer, Fidelity Exploration and Production Company........... 101
Prepared statement........................................... 171
Drake, Bob, vice president, Oklahoma Farm Bureau and chairman,
National Grazing Lands Council................................. 89
Prepared statement........................................... 126
Handley, George, Eclipse Exploration Corporation................. 105
Prepared statement........................................... 196
West, Marjorie, Western Organization of Resource Councils........ 90
Prepared statement........................................... 127
ADDITIONAL MATERIAL
Articles:
Anniston Star, Running on Empty.............................. 245
Chattanooga Times Free Press, The Gasoline Price Spiral...... 238
Gainesville Sun, Shock at the Pump........................... 243
Missoulian, Revised Energy Bill Thinner, Not Better.......... 247
News Record:
Canadian Firm Plans Pipeline to Chicago.................. 180
Pipeline Project is Put on Hold.......................... 181
Star-Telegram, Fuel for Thought, Gasoline Prices Have Jumped
Through the Pump in Recent Weeks........................... 246
The Arizona Republic, Mirror, Mirror . . . On the Pump, What
was it Made Those Prices Jump?............................. 241
The Birmingham News, Saving Gas, Congress Should Turn to CAFE
to Lessen Pain at the Pump................................. 237
The Buffalo News, Tied to Mideast Oil........................ 248
The Clarion-Ledger, Gas prices............................... 244
The New York Times, Pinch at the Pump........................ 240
The Wall Street Journal:
Another Power Play....................................... 239
Natural-Gas Costs Hurt U.S. Firms--High Prices are
Prompting Companies to Conserve and Move Work Overseas. 20
The Washington Post:
Chemical Industry in Crisis--Natural Gas Prices are Up,
Factories are Closing, and Jobs are Vanishing.........18, 122
Slicing Up Energy........................................ 242
Charts:
Bureau of Land Management/Forest Service, Leasing and
Permitting Process......................................... 6
Federal Onshore Oil and Gas Leasing and Permitting Process... 6
Indigenous Resources Are Not Fully Utilized.................. 4
Natural Gas Consumption, 1990-2025........................... 17
Natural Gas Consumption versus Production, 2001-2025......... 18
Natural Gas Costs............................................ 170
The Fertilizer Institute....................................161-169
Total Consumer Cost Savings (2005-2014) If BLM Achieves
Permitting Goals........................................... 5
Maps............................................................198-203
News Releases:
Alaska Wilderness League, Dark Anniversary: Exxon Valdez Oil
Spill...................................................... 234
National Environmental Trust (NET):
Editorials Warn Against Using Record Gas Prices as Reason
to Pass the 2004 Version of the Energy Bill............ 235
Energy Bill not the Answer to High Gas Prices............ 249
Union of Concerned Scientists, fact sheet, Renewable Energy
Can Help Ease Natural Gas Crunch........................... 232
U.S. PIRG, Budget-Busting Energy Bill Fails to Reduce Energy
Consumption, Prices or Imports: New EIA Report............. 251
Statements:
American Chemistry Council................................... 223
American Forest & Paper Association.......................... 220
American Gas Association (AGA)............................... 210
Cicio, Paul N., executive director, Industrial Energy
Consumers of America....................................... 204
Greenspan, Alan, Chairman, Board of Governors of the Federal
Reserve System............................................. 120
Kelly, Martin, president and CEO, Moraine Molded Plastics,
Inc........................................................ 116
National Environmental Trust (NET), editorial................ 235
National Petrochemical Refiners Association (NPRA)........... 207
Southern Utah Wilderness Alliance............................ 253
Survey by Lexecon, on behalf of Cinergy Corp., The Link Between
Air Quality Policies, Electric Power and Natural Gas Markets,
and Macroeconomic Impacts: Clear Skies versus The Clean Air
Planning Act, March 2004....................................... 23-76
Text of bill, H.R. 3698.........................................130-150
ENVIRONMENTAL IMPACTS OF
NATURAL GAS SUPPLY
----------
WEDNESDAY, MARCH 24, 2004
U.S. Senate,
Committee on Environment and Public Works,
Washington, DC.
The committee met, pursuant to notice, at 10:02 a.m. in
room 406, Senate Dirksen Building, Hon. James M. Inhofe
(chairman of the committee) presiding.
Present: Senators Inhofe, Jeffords, Chafee, Thomas,
Murkowski, Carper, Voinovich, and Allard.
OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM
THE STATE OF OKLAHOMA
Senator Inhofe. The meeting will come to order.
Welcome, Governor. If you would, take your place at the
table. We appreciate very much your being here. We want to
welcome the witnesses. We are pleased that the Governor is here
to share his views on the environmental impacts of the U.S.
natural gas supply.
Although the United States is a world leader in natural gas
supply, we pay more for it than anywhere on the globe. For the
last several years, natural gas prices have been volatile. They
have caused manufacturing production costs to increase
dramatically. Factories are closing. High paying and
irreplaceable manufacturing jobs are leaving the country.
Consumers are hurting the most. The tragedy, of course, is that
it is completely unnecessary.
Tactics employed to stop exploration in the production of
new natural gas sources under the pretense of environmental
protection are costing this country dearly and will only get
worse if we do not act. There are those who are simply opposed
to drilling anywhere, anytime, and will go to all lengths to
prevent it from occurring. But we can explore and produce while
protecting the environment.
I would like to read a quote,
``The U.S. oil and gas industry has integrated an
environmental ethic into its business culture and operations.
The industry has come to recognize that high environmental
standards and responsible development are good business.''
It may surprise some of my friends that that quote came
from a Clinton administration DEQ report entitled,
``Environmental Benefits of Advance Oil and Gas Exploration
Protection Technology.'' At least someone in the Clinton
administration understood that it did not harm the environment.
Natural gas makes up 24 percent of our energy supply. It is
used to provide 19 percent of the Nation's power generation,
and 40 percent of U.S. industries rely on natural gas for
energy or use it as a necessary feed stock to produce a variety
of products from chemicals to fertilizer to glass.
This morning, I had Senator Larry Craig before the Senate
Prayer Breakfast. I am the chairman of that group. He was there
as a presenter. When he heard that we were having this hearing,
Governor, he said that in his State of Idaho, the cost of
fertilizer has doubled in the last 6 months.
Environmental policies, particularly the Clean Air Act
Amendments of 1990 and the regulatory uncertainty of the new
source review have contributed to a significant increase in
demand for natural gas-based electricity generation. The
increased demand for natural gas without any increase in supply
has translated to high and volatile prices. Because we have
vast natural gas resources, our supply problem is one of our
own making.
In the chart that is being shown, they are showing the
restrictions. The National Petroleum Council's most recent
report stated, there are policies promoting the use of natural
gas as an environmentally attractive fuel that are in conflict
with the laws and regulations that limit access to gas-prone
areas where gas can be explored for and produced in an
efficient and environmentally friendly manner. The brown shaded
areas represent the amount of gas that is effectively off-
limits from exploration and development. Under these policies,
it is as if we had turned our pride-strong Nation into a man
starving to death, complaining about it, and then simply
refusing to eat.
What is astounding is that those who are promoting these
policies that limit our access to natural gas are also pushing
for changes in the Clean Air Act that would dramatically
increase the demand for natural gas, further increasing pricing
and volatility. I am speaking specifically to people who are
trying to regulate carbon dioxide. Experts agree that
traditional domestic gas sources are being depleted and are
insufficient to meet future demands. They point to the Rocky
Mountain area as a premier future gas supply in the lower
States.
Unfortunately, according to the NPC, much of the mountain
areas are effectively off-limits to production because of
regulatory uncertainty. Producers, like any business, require
certainty to operate successfully. They must be able to plan
their investments and have a reasonable certainty of return.
The uncertainty is the result of an obstruction pattern played
out by radical environmental groups who rely on regulatory and
legal challenges to constantly impede and delay until the point
where exploration dies. They work hard to put more laws on the
books with which producers must comply in order to stop
production or delay it indefinitely. Their obstructionist
agenda has been working and the increases result in a
volatility of natural gas pricing, and has cost this country
jobs. It is only going to get worse if it continues.
The NPC report concluded that 69-trillion cubic feet, or 29
percent of the area's technical base, is effectively off-limits
to exploration and development. Further, an additional 56 TCFs
of potential gas faced significant costs in delays to develop.
The next chart takes three to hold it. It shows what a
producer must go through in order to obtain a Federal lease and
permit on BLM or Forest Service areas. You remember on the
previous chart we had that center brown area. That is primarily
what we are talking about here. There are huge reserves and
huge opportunities. This is what they have to go through. They
are not willing to do it. If they do it, it is expensive.
Again, this chart just shows the leasing and permitting
process before any exploration or production. We probably could
not make a big enough chart that would capture the delays in
building new pipelines to get a supply into the area which
needs it the most, such as the Northeast.
Having a clean and safe environment is critical, but
contrary to the opinion of the radical environmentalists and
their supporters, we can have a clean environment without
sacrificing U.S. competitiveness and jobs.
I come from a gas-producing State, the State of Oklahoma.
We are going to have a witness here from the State of Oklahoma,
Bob Drake. We have vast reserves. We have the ability to
explore for gas. But in the areas where the reserves are the
largest, we do not. This is an old thing called supply and
demand. The demand for natural gas is there, but the
environmentalists have stopped us from being able to produce
it.
That is what this hearing is all about. I will recognize
Senator Jeffords for his opening statement.
[The prepared statement of Senator Inhofe follows:]
Statement of Hon. James M. Inhofe, U.S. Senator from
the State of Oklahoma
I want to welcome our witnesses, and I am pleased that Governor
Carcieri of Rhode Island is here to share his views on the
environmental impacts of U.S. natural gas supply.
Although the U.S. is a world leader in natural gas supply, we pay
more for it than anywhere on the globe. For the last several years,
natural gas prices have been volatile--they have caused manufacturing
production costs to increase dramatically; factories are closing, high
paying and irreplaceable manufacturing jobs are leaving the country,
and consumers are hurting the most. The tragedy of course is that it is
completely unnecessary. Tactics employed to stop exploration and
production of new natural gas sources under the pretense of
``environmental protection'' are costing this country dearly and will
only get worse if we don't act. There are those who are simply opposed
to drilling anywhere, anytime and will go to all lengths to prevent it
from occurring. But we can explore and produce while protecting the
environment.
I would like read a quote:
``The U.S. oil and gas industry has integrated an
environmental ethic into its business culture and operations.
The industry has come to recognize that high environmental
standards and responsible development are good business.''
It may surprise some of my friends that the quote is from a Clinton
Administration DOE report titled ``Environmental Benefits of Advanced
Oil & Gas Exploration & Production Technology.'' While the former
President's policies did not encourage oil and gas exploration, at
least someone in his Administration understood that it didn't harm the
environment.
Natural gas makes up 24 percent of our energy supply--it is used to
provide 19 percent of the nation's electric power generation (used in
over 60 million households), and 40 percent of U.S. industries rely on
natural gas for energy or use it as a necessary feedstock to produce a
variety of products from chemicals and fertilizer to glass.
Environmental policies, particularly the Clean Air Act Amendments
of 1990 and the regulatory uncertainty of New Source Review have
contributed to significantly increased demand for natural gas-based
electricity generation. The increased demand for natural gas, without
any increase in supply, has translated to high and volatile prices.
Because we have vast natural gas resources, our supply problem is one
of our own making.
[GRAPHIC] [TIFF OMITTED] T4599.001
The National Petroleum Council's most recent report stated that our
policies promoting the use of natural gas as an environmentally
attractive fuel are in conflict with laws and regulations that ``limit
access to gas-prone areas where gas can be explored for and produced in
an efficient and environmentally friendly manner.'' The shaded areas
represent the amount of gas that is ``effectively'' off limits from
exploration and development. Under these policies, it's as if we have
turned our proud, strong Nation into a man starving to death,
complaining about it, and then simply refusing to eat. What is
astounding is that those who are promoting these policies that limit
our access to natural gas are also pushing for changes in the Clean Air
Act that would dramatically INCREASE our demand for natural gas,
further increasing pricing and volatility, and I am speaking
specifically to people who are trying to regulate carbon dioxide.
Experts agree that traditional domestic gas sources are being
depleted and insufficient to meet future demand. They point to the
Rocky Mountain area as the premier future gas supply in the lower 48
states.
Unfortunately, according to the NPC, much of the mountain areas are
``effectively'' off-limits to production because of regulatory
uncertainty. Producers, like any business, require certainty to operate
successfully. They must be able to plan their investments, and have a
reasonable certainty of a return. The uncertainty is a result of an
obstructionist pattern played out by radical environmental groups who
rely on regulatory and legal challenges to constantly impede and delay
until the point where exploration dies. They work hard to put more laws
on the books with which producers must comply, in order to stop
production or delay it definitely. Their obstructionist agenda has been
working and the resulting increase and volatility of natural gas
pricing has cost this country jobs--and its only going to get worse if
it continues.
[GRAPHIC] [TIFF OMITTED] T4599.002
The NPC report concluded that 69-trillion cubic feet or 29 percent
of the area's technical base is ``effectively'' off-limits to
exploration and development. Further, an additional 56 TCF of potential
gas faced significant costs and delays to development.
[GRAPHIC] [TIFF OMITTED] T4599.003
[GRAPHIC] [TIFF OMITTED] T4599.004
[GRAPHIC] [TIFF OMITTED] T4599.005
This chart shows what a producer must go through in order to obtain
a Federal lease and permit on BLM or Forest Service land. Again, it
depicts the process before any actual disturbance of land occurs. By
the way, the nine red stop signs are opportunities for legal
challenges.
Again, this chart just shows the leasing and permitting process,
BEFORE any exploration or production. We probably couldn't make a big
enough chart that would capture the delays in building new pipelines to
get the supply into areas which need it the most, such as the
Northeast.
Having a clean and safe environment is critical, but contrary to
the opinion of the radical environmentalists and their supporters, we
can have a clean environment without sacrificing U.S. competitiveness
and U.S. jobs. Pursuing environmental policies that force natural gas,
while preventing increased supply through obstructionist tactics is
irresponsible and hurts our workers, our consumers, and our nation.
Senator Inhofe. Senator Jeffords.
OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM
THE STATE OF VERMONT
Senator Jeffords. Thank you, Mr. Chairman. Thank you for
holding this hearing, and a sincere thanks to all of the
witnesses, many of whom have traveled across the country to
provide testimony to this committee.
The committee will be examining several very important
issues today as we take testimony on the environmental effects
of natural gas supplies. The first issue is obtaining a better
understanding of the environmental effects of natural gas use.
Natural gas is the least carbon-intensive fossil fuel. On a
full life-cycle basis, from the time it is produced at the
wellhead to the time that it is burned, natural gas contributes
at least 20 percent fewer greenhouse gas emissions than oil,
and at least 50 percent less than coal to our environment.
In relation to other fossil fuels, natural gas also results
in lower emissions of sulfur, volatile organic compounds, and
particulate matter. All of these reduce the emissions support
efforts to improve our local air quality.
This is important because as the chairman knows I feel that
the country has a long way to go in improving its air quality.
As we do so, and as we seek to address climate change, natural
gas will continue to play a very important role. In combination
with energy conservation, natural gas will help us bridge our
current energy needs with a non-carbon emitted and renewable
energy sources that will become more and more a part of our
generation mix.
I look forward to hearing from witnesses about whether and
how our currently high gas prices are driving renewables and
conservation in the short term. I also want to hear about
whether this committee should be doing more to encourage the
Environmental Protection Agency's Natural Gas Efficiency
Program to step up their efforts and assist the gas industry in
implementing short-term measures to address high prices.
The second issue that we must examine is the effective
environmental laws, if any, on various sectors of the economy,
including energy industries, like the production of natural
gas. Of course, this committee's first and foremost
responsibility is to assure that the Nation's laws are
protective of public health and of the environment. It is also
our job to set performance standards for industries, such as
the gas industry, which are adequately protective and whenever
possible, fuel neutral. These standards should not be skewed to
protect any one industry, but should encourage sustainable
economic development.
Finally, the third issue we must examine are the effects of
the environment of natural gas production and sufficiency of
our country's environmental laws to address any adverse
impacts. We must be mindful that as beneficial as the use of
natural gas has been to generate electricity, heat our homes,
and produce commodities, it has also had real environmental
impacts on our country's public and private lands.
I feel that a good understanding of these issues is
extremely important. I think that even more the case now is
that the energy bill that the Senate has before it, that would
exempt natural gas and oil production sites from Clean Water
Act, Storm Water permits, and would exempt hydraulic fracturing
from the Safe Drinking Water Act. Therefore, I am pleased that
we will hear from witnesses, both from natural gas producers
and individuals, who have examined drilling sites about the
efficiency of these laws and protecting the environment.
Covering the issues, I have outlined will provide a
comprehensive outlook in this particular sector. I look forward
to hearing the witnesses, Mr. Chairman. I thank you for holding
these hearings.
[The prepared statement of Senator Jeffords follows:]
Prepared Statement of Hon. James M. Jeffords, U.S. Senator from
the State of Vermont
Mr. Chairman, thank you for holding this hearing, and a sincere
thanks to all the witnesses, many of whom have traveled across the
country to provide testimony to the Committee.
The Committee will be examining several very important issues
today, as we take testimony on the environmental effects of natural gas
supplies. The first issue is obtaining a better understanding of the
environmental effects of natural gas use.
Natural gas is the least carbon intensive fossil fuel. On a full
lifecycle basis, from the time it is produced at the wellhead to the
time it is burned, natural gas contributes at least 20 percent fewer
greenhouse gas emissions than oil and at least 50 percent less than
coal to our environment.
In relation to other fossil fuels, natural gas also results in
lower emissions of sulphur, volatile organic compounds and particulate
matter. All of these reduced emissions support efforts to improve local
air quality. This is important, because as the Chairman knows, I feel
that the country has a long way to go to improve air quality. As we do
so, and as we seek to address climate change, natural gas will continue
to play an important role.
In combination with energy conservation, natural gas will help to
bridge our current energy needs with the non-carbon emitting and
renewable energy sources that will become more and more a part of our
generation mix.
I look forward to hearing from witnesses about whether and how our
currently high gas prices are driving renewables and conservation in
the short term. I also want to hear about whether this Committee could
be doing more to encourage the Environmental Protection Agency's
natural gas efficiency programs to step up their efforts and assist the
gas industry in implementing short-term measures to address high
prices.
The second issue that we must examine is the effect of
environmental laws, if any, on various sectors of the economy,
including energy industries like the production of natural gas.
Of course, this Committee's first and foremost responsibility is to
assure that the nation's laws are protective of public health and the
environment. It is also our job to set performance standards for
industries, such as the gas industry, which are adequately protective
and wherever possible, fuel neutral. These standards should not be
skewed to protect any one industry, but should encourage sustainable
economic development.
Finally, the third issue we must examine are the effects on the
environment of natural gas production and the sufficiency of our
country's environmental laws to address any adverse impacts.
We must be mindful that, as beneficial as the use of natural gas
has been to generate electricity, heat our homes, and produce
commodities, it has also had real environmental impacts on our
country's public and private lands. I feel that a good understanding of
these issues is extremely important.
I think this is even more the case now that the Senate has before
it an Energy Bill that would exempt natural gas and oil production
sites from Clean Water Act stormwater permits, and would exempt
hydraulic fracturing from the Safe Drinking Water Act .
Therefore, I am pleased that we will hear from witnesses, both
natural gas producers and individuals who have examined drilling sites,
about the sufficiency of these laws in protecting the environment.
Covering the issues I have outlined will provide a comprehensive
look at this particular sector. I look forward to hearing from the
witnesses.
Senator Inhofe. Thank you, Senator Jeffords.
We will take in the order of their arrival our members who
wish to have opening statements. You were the first to arrive,
Senator Chafee. Do you have an opening statement?
After the opening statements, I will recognize you to
introduce Governor Carcieri.
You are recognized.
OPENING STATEMENT OF HON. LINCOLN CHAFEE, U.S. SENATOR FROM THE
STATE OF RHODE ISLAND
Senator Chafee. Thank you, Mr. Chairman. I just have a very
brief opening statement.
First of all, I want to thank you for holding this hearing,
and as you mentioned, to also welcome Governor Carcieri here
this morning, the Governor of my State.
I will say that to some extent natural gas is suffering
from its own success, recognizing the many benefits of natural
gas. Its popularity has caused increased demand which, in turn,
has driven up the price. As we discuss the problems associated
with high natural gas prices, I would like to make sure that we
do not lose sight of diversity and conservation. Ensuring that
the Nation employs a diverse range of fuel supplies, and
ensuring that we do as much as we can to conserve energy can
only make the country and the economy stronger in the long run.
I do believe that the reserves of natural gas, both
domestic in Senator Murkowski's home State and foreign, are
still strong. We must work harder at delivery systems of this
natural gas to the consumer, either by pipeline or by LNG.
I look forward to introducing Governor Carcieri later.
Senator Inhofe. Good. Senator Carper, did you have an
opening statement?
Senator Carper. I do have just a quick statement, if I
could. Governor, what is it like being a Governor these days?
Governor Carcieri. It is a little different than it was a
few years ago.
Senator Carper. Senator Voinovich and I are what we call
``recovering Governors.''
Governor Carcieri. You had the good years. You avoided the
budget problems.
Senator Carper. We did. We were very, very fortunate.
Senator Inhofe. Your time has expired.
[Laughter.]
OPENING STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM
THE STATE OF DELAWARE
Senator Carper. It probably has. Thank you for joining us
today.
I just want to piggyback on the comments of Senator Chafee.
It is important that we find places where we can bring natural
gas where it does exist to our markets and for us to be able to
use, particularly in this country. We are facing these huge
deficits and trade deficits, many of which are related to the
import of oil and the reliance on foreign sources of energy.
This past couple of weeks I have asked some of you to
consider signing onto a letter to the President. A number of
you have, and I just want to thank you for doing that. The
letter focuses on what Senator Chafee was mentioning there, and
that is conservation. In 2000, the Energy Department
promulgated a regulation calling on the adoption of something
called ``SEAR 13'' standards dealing with energy efficiency for
air conditioning systems. A SEAR 13 standard was adopted which
basically said that by 2006 our air conditioners need to be
about 30 percent more energy efficient.
The long and short of that is that what flows from that
higher standard is the emission of about 2.5 million tons less
of carbon dioxide, but maybe more importantly, about 48 to 50
electric power plants will not have to be built between now and
2020. Let me say that again. What flows from simply raising the
air conditioning standards to a SEAR 13 not only means about
2.5 million tons less of CO<INF>-2</INF> that we would generate
in this country, but it also means close to 50 power plants
that we are not going to have to build.
As you all know, most of the power plants being built these
days are powered by natural gas. To the extent that we do not
have to build those power plants, then that is a good thing for
our environment and for the supply of natural gas. As we use
less natural gas, hopefully we will be able to see the prices
moderating.
Many of our colleagues have signed the letter and I thank
you for doing that. The letter is simply a letter to the
President that says, ``Mr. President, we have had a difference
of opinion. We will have 30 percent more efficient air
conditioners by 2006.'' The Administration has sought to
replace that with a more modest standard, a SEAR 12, which is
20 percent more energy efficient.
We fought it out in the courts and the Second District
Court said that the higher standard should stand. The air
conditioning industry said last week that they felt that they
could live with the higher standard. We are delighted with
that. The majority of our colleagues have now signed the
letter.
It says, ``Mr. President, please do not appeal the decision
of the Second District Court. Let it stand.'' If the industry
says they can comply with the higher standard, by golly, we
should support that and applaud that.
So I would just say to my colleagues that we will look for
ways to find extra natural gas. That is important. But let us
also find ways to use less of it, which is also important.
Thank you.
Senator Inhofe. Thank you, Senator Carper.
Senator Thomas.
OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR FROM THE
STATE OF WYOMING
Senator Thomas. Thank you, Mr. Chairman. I think it is
interesting. I am very much involved in the energy policy,
which we have not been able to get passed. We need to move on
that. Actually, interestingly enough, it has been opposed by
some of the folks who are now talking about the needs that we
need to fill. Certainly we do. But you can coordinate energy
and environmental policy. That is part of what we are trying to
do with the bill.
One of the things I disagree a little with, my friends, is
that if you are going to have a policy in the future, coal has
to be part of that. We need to do more research so that it is
clear. But we have more supply of fossil fuel of coal than we
do of gas. Furthermore, gas is much more flexible and can be
used for many things. This idea that we are going to try in the
future to generate electric totally with gas I think is a
mistake in terms of policy. But we need some diversity here.
Certainly we need conservation and efficiency. We need to work
on that. But with respect to what we are talking about here
today, we need to expedite permitting and procedures. Some of
these permits that you talk about, even though they may need to
be there, they do not need to take 6, 8, or 10 months to
accommodate. We found that in many instances. We are trying to
do that on public lands with the BLM permitting. Without
changing the result, you can have a much more efficient system
of doing the permitting and causing those things to happen.
If we can do that, we have to have access to some of the
more economic reserves. They are obviously off limits. I am one
who thinks there ought to be some public land set aside and not
used for that. But for the most part, particularly BLM land
should be available for multiple use. I think it is very good
that we take a look at what impediments there are that could be
changed with respect without reducing the effectiveness of the
environmental protection. I think we can do those things.
I guess that is what we are talking about here today, Mr.
Chairman.
Senator Inhofe. Well, those are the sentiments I tried to
express. I think during the course of this hearing it would not
hurt to put the original chart back up so we can see what areas
he is talking about and where the capacity is.
[The prepared statement of Senator Thomas follows:]
Prepared Statement of Hon. Craig Thomas, U.S. Senator from the
State of Wyoming
Energy demand is on the rise--be it oil, natural gas, nuclear,
coal, or renewable resources. Domestically, predictions show only coal
sector production to increase but even that might cause some to pause
given the uncertainty surrounding environmental regulations. Bottom
line is that the U.S. will be importing more energy than ever before.
What happened to the talk about energy and national security? It's time
to seriously look at our policies.
It is the policies of the past that got us here today. For example,
let's take natural gas. In the 80's and 90's there was a surplus of
supply and weak demand. This kept prices low. The market was influenced
by certain legislative and regulatory measures. Two measures that
impacted gas development included the Powerplant and Industrial Fuel
Use Act of 1978 (PIFUA) and the Natural Gas Policy Act of 1978 (NGPA).
While the PIFUA placed restrictions on industrial and power generation
uses of natural gas, the NGPA set in motion a process that encouraged
gas supply growth. Amendments in 1987 to the PIFUA removed restrictions
on the use of gas in power generation, and the Natural Gas Wellhead
Decontrol Act of 1990 removed wellhead price controls.
Capability of natural gas continues to increase. Growing demand and
limited supply has resulted in tighter markets, higher prices and
greater volatility. This will continue until we can bring additional
supplies to the market. In addition, with the current world oil supply
situation and the flurry of environmental regulations facing refiners,
we can expect to see gasoline prices remain high as well.
We must focus on the policies of today so we can have a plan for
the future. We have to coordinate energy and environmental policies.
For example, the electric industry has made a lot of changes. We no
longer have just the vertically integrated utilities. In fact, close to
40 percent of generation comes from marketers--most of these new
merchant generators are powered by natural gas.
Our government policies particularly, environmental polices,
encourage the use of natural gas but do not address the corresponding
need for additional natural gas supplies. Companies are switching from
coal to natural gas. Why is this? Coal is our most abundant fuel source
and should be used for electric generation and we can do this an
environmentally responsible way. Natural gas is more flexible and can
be used for different things such as heating homes and businesses. If
we are to restore some kind of fuel diversity to our electricity
sector, we need to provide a regulatory environment that will enable
investors to consider coal plants. Right now, with the uncertainty
about new source review, mercury, visibility and a host of other
issues, building a new coal plant is just ``too hard'' even in a State
like mine.
Mr. Chairman, it is my hope that we can pass the energy bill so we
don't continue, willy-nilly, down a path with no plan and pass a law
here, a regulation there with no clear thoughts of coordination or
where these policies lead us into the future.
Senator Inhofe. Senator Voinovich.
OPENING STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR
FROM THE STATE OF OHIO
Senator Voinovich. Thank you, Mr. Chairman, for having this
hearing today. The natural gas crisis that has plagued this
Nation for the last 46 months has caused the hemorrhaging of
thousands of jobs and has severely impacted the way of life for
millions of Americans who struggle each day to pay their
utility costs. These folks are not even on most people's radar
screens, but I am sure that the Governor knows in his large
urban areas that there is the demand for live heap than has
been more than any time in the history of this country.
Alan Greenspan has said ``I am quite surprised at how
little the natural gas problem has been getting because it is a
very serious problem.'' The people of Ohio get it. I welcome
Dennis Bailey from PPG Industries who will testify today on the
effective natural gas crisis on the company's operations in
Ohio and throughout the country.
I also thank Morane Molded Plastics in Ohio for submitting
testimony. I would ask that it be inserted in the record, Mr.
Chairman.
Senator Inhofe. Without objection, so ordered.
Senator Voinovich. Manufacturers are a key ingredient of
our Nation's economy and the backbone of Ohio. They rely on
natural gas heavily for fuel and power as a raw material. It
also plays an important role in another significant part of our
economy that people forget about it, and that is agribusiness.
U.S. natural gas prices are the highest in the developed world.
Since 2000, natural gas has been hovering between $5 and $6 per
thousand cubic feet, roughly twice its historical level.
During this time Ohio has lost about 200,000 manufacturing
jobs. These jobs are simply not migrating to another region.
They are going overseas, or the businesses are just going out
of business.
Let me quote from a Washington Post article that ran last
week. I would ask that the entire article be inserted in the
record.
``Across the country one in every 10 chemical-related jobs
has vanished in the past 5 years, nearly 100,000 workers. The
chemical industry's eight-decade run as a major exporter has
ended with a $19 billion trade surplus in 1997, becoming a $9.6
billion deficit this year.''
That is a dramatic change.
Senator Inhofe. Without objection, so ordered.
Senator Voinovich. According to a February 17th Wall Street
Journal, which I would also ask to be inserted in the record,
``Almost all new production of chemicals and plastics will take
place in the Middle East and Asia. Charles O. Halliday,
chairman and chief executive of the DuPont Company, told
investors in December that `High energy costs will prompt the
company to shift its center of gravity overseas.' '' The DuPont
Company is going to shift its center of gravity overseas.
Senator Inhofe. Without objection, so ordered.
Senator Voinovich. High natural gas prices have resulted in
the permanent closure of almost 20 percent of the United
States' nitrogen fertilizer production capacity and the idling
of an additional 25 percent. In Ohio the chemical company,
Lubrizol, has indicated that they will move operations overseas
because of natural gas price volatility. Last year their gas
price was up $50 million over what it was the year before.
This only tells part of the story. The natural gas crisis
has also caused all consumers over $130 billion over the past
46 months. It is estimated that the increased natural gas
prices in 2004 will cost Ohio households $543 million than in
2002. Think about that. These are just ordinary citizens.
In my own case, my gas bill is up 100 percent over what it
was 2 years ago. Prices are so high because over the last
decade the use of natural gas has risen while domestic supplies
have fallen. The reason for these trends lies in our
environmental policies. Basically what we have done is that we
have limited the supply, and we have exacerbated the demand.
Now the chickens have come home to roost. We are paying for it
dearly because in establishing our environmental policies, we
have not harmonized our environment, and our energy, and our
economy, but we have been very narrow-minded in terms of
putting these policies together.
I have a chart here from the Energy Information
Administration which shows the trend to continue. Natural gas
consumption increases across all sectors, especially for
electric generators. It is going off the chart.
I might make an editorial comment that that presumes that
the economy keeps growing. The disastrous part of this is that
we will not reach this consumption because businesses are going
to go out of business. The demand will not be as much because
the customers are not there for it.
Chart 2 shows what will happen if we do not start
increasing our supply of natural gas. The top line shows the
Energy Information Administration's, which is a part of the
Energy Department, prediction that natural gas consumption will
continue to increase again. We hope they are right.
My concern is that this consumption will not increase
because of the jobs we are losing to other countries. The
bottom line is that predicted production for North America,
Canada, and Mexico, EEI predicts that the shortfall between
consumption and production will be met by a substantial
increase in liquefied natural gas. By the way, do you know
where that is coming from? Qatar, Algeria, Nigeria, Australia,
Indonesia, and the United Arab Emirates.
Here we go again. We have 60 percent of our oil coming from
overseas. Now we are going to do natural gas. Right now, LNG
represents about 1 percent of our use. It will be up by 2025 by
15 percent to meet the demand.
We have a very serious crisis today. We have to do
something about it. I come from a State that sees it every
single day. We have to get with it. We do not have time to go
through 2 or 3 years of debate, as we did last time. Those of
us Republicans and Democrats have to get together and do
something about this problem. It is already too late in some
sectors of our economy.
Thank you, Mr. Chairman. I would ask that the chairman put
my entire statement into the record.
Senator Inhofe. Without objection, so ordered.
[The prepared statement of Senator Voinovich follows:]
Prepared Statement of Hon. George V. Voinovich, U.S. Senator
from the State of Ohio
Mr. Chairman, thank you for calling this hearing on the
environmental impacts of U.S. natural gas supply. High natural gas
prices present a serious challenge for our nation. The natural gas
crisis that has plagued this Nation for the last 46 months has caused
the hemorrhaging of many jobs and the bleeding will not stop until
people start taking notice of the situation and we start doing
something about it. It has also severely impacted the way of life for
millions of Americans who struggle each day to pay their utility costs.
The fact of the matter is that people just don't seem to understand
the severity of the situation. Federal Reserve Chairman Alan Greenspan
testified for Congress several times last year on this matter and
stated: ``I'm quite surprised at how little attention the natural gas
problem has been getting, because it is a very serious problem.''
Unfortunately, it is a very serious problem that the people and
businesses in my State of Ohio know all too well. Mr. Dennis Bailey
from PPG Industries, which is a global manufacturer, will testify today
on the effect natural gas prices are having on the company's operations
in Ohio and throughout the country. I thank him for coming and look
forward to hearing his testimony. I also thank another Ohio
manufacturer--Martin Kelly with Moraine Molded Plastics Inc.--for
submitting testimony on this important matter and ask that it be
inserted into the record.
As I have explained many times before this Committee, manufacturing
is a key ingredient of our nation's economy and is the backbone of
Ohio. Manufacturers rely on natural gas heavily for fuel and power and
as a raw material. In fact, natural gas accounts for more than 40
percent of commercial energy consumption. Additionally, natural gas
plays an important role in another significant part of our nation's and
Ohio's economy--agribusiness.
This reliance on natural gas by the core of our economy means that
increases in natural gas prices have a very pronounced and negative
effect. Since 2000, natural gas has been hovering in the U.S. between
$5 and $6 per thousand cubic feet. This is roughly twice its historical
level!
During this time, Ohio has lost about 200,000 manufacturing jobs.
These jobs are not simply migrating to another region--they are going
overseas and they aren't coming back. This is because other countries
do not have the high costs that we place on our industry, such as
rising health care costs, litigation, regulatory burdens, taxes, unfair
competition from China, and escalating natural gas costs.
The natural gas prices in the United States are the highest in the
developed world. As a result, many companies are becoming less
competitive on a global scale and are being forced to cut costs or move
operations overseas. There are numerous examples of this and I will
name a few.
Just last week, on March 17, the Washington Post ran an article
entitled: ``Chemical Industry in Crisis; Natural Gas Prices are up,
Factories are closing, and Jobs are Vanishing.'' I will read a few
lines but ask that the entire article be submitted into the record:
``Across the country, 1 in every 10 chemical-related jobs has
vanished in the past 5 years--nearly 100,000 workers . . . The
chemical industry's eight-decade run as a major exporter has
ended, with a $19 billion trade surplus in 1997 becoming a $9.6
billion deficit last year . . .''
That is horrifying. The chemical industry is the second largest
consumer of natural gas, and they simply cannot pass these higher costs
on to consumers because they compete in a world marketplace. Instead,
they pick up and move overseas.
Zaclon, Inc. is a chemical manufacturer based in Cleveland, Ohio.
Last year, Zaclon's president testified before this Committee that its
natural gas costs increased 63 percent between 1999 and 2002.
Lubrizol Corp., a chemical company located in Wickliffe, Ohio that
employed 1,778 people in 1999 and now employs 1,522, has indicated that
they may consider moving operations overseas because of natural gas
price volatility.
Due to high natural gas prices, the Dow Chemical Company, which is
head-quartered in Midland, MI, is shutting down several plants and will
eliminate 3 to 4,000 jobs.
High natural gas prices have resulted in the permanent closure of
almost 20 percent of the U.S. nitrogen fertilizer production capacity
and the idling of an additional 25 percent. The Potash Corporation, one
of the world's largest fertilizer producers who spends $2 million per
day on natural gas, has announced layoffs at its Louisiana and
Tennessee plants due to high natural gas prices.
According to a February 17, 2004 Wall Street Journal article
entitled ``Natural Gas Costs Hurt U.S. Firms'', which I also ask be
entered into the record:
``Almost all new production of chemicals and plastics will
take place in the Middle East and Asia . . . Charles O.
Holliday Jr., chairman and chief executive of DuPont Co., told
investors in December that high energy costs will prompt the
company to shift its `center of gravity' overseas.''
Although these businesses are all severely impacted, this only
tells part of the story. The natural gas crisis has cost all
consumers--residential, commercial, and manufacturing--over $130
billion over the past 46 months and this is only direct costs. So while
high prices are causing people to lose their jobs, it is also
increasing the costs of simply living. It is estimated that increased
natural gas prices in 2004 will cost Ohio households $543 million more
than in 2002.
Home heating prices are up dramatically--forcing folks on low and
fixed incomes to choose between heating their homes and paying for
other necessities such as food or medicine.
Donald Mason, a commissioner on the Ohio Public Utilities
Commission testified last year that:
``In real terms, the home heating cost this winter will
increase by at least $220 per household. That might not sound
significant, but during the winter season of 2000-2001, one gas
company in Ohio saw residential nonpayment jump from $10
million a year to $26 million.''
I could go on and on about the devastating impacts of high natural
gas prices, but I will now move on to the very important question for
today's hearing--WHY? Why are natural gas prices so high in this
country?
The answer is pretty simple and anyone who has taken Economics 101
will understand. Over the last decade, use of natural gas has risen,
while domestic supplies have fallen. The reason for these trends lies
in our environmental policies.
In regards to supply, we have greatly restricted our ability to
explore and produce natural gas because of the barriers enacted in our
environmental laws. We must enact an energy policy that knocks down
some of these barriers and opens up some of our public lands and new
frontier areas to development. As I have done often over the past few
years, I implore my colleagues to move past their partisan bickering
and enact an energy policy for the good of this country.
In regards to demand, Congress has enacted environmental policies
over the past few decades that have encouraged increased use of natural
gas for electricity generation. In fact, nearly 88 percent of the new
power plants that have been built since 1992 are natural gas fired. We
must harmonize our energy and environmental policies to make sure that
we maintain a diverse fuel mix for electricity generation and do not
further exacerbate the natural gas problem.
If we do not take action today, the result will be overwhelming to
our nation's economy. [CHART 1] As you can see from this chart, the
Energy Information Administration (EIA) predicts that natural gas use
will continue to increase across all sectors, especially for
electricity generators.
[GRAPHIC] [TIFF OMITTED] T4599.006
Regrettably, some of my colleagues--many of them on this
Committee--have offered legislative proposals that would further
increase the use of natural gas for electricity generation and cause
more fuel switching from coal to natural gas by placing a cap on carbon
dioxide emissions. These proposals would put coal out of business
although it is our most plentiful energy source and the least costly.
We simply cannot and should not place a cap on carbon dioxide
emissions.
[CHART 2] This second chart shows what will happen if we don't
enact an energy policy and start increasing our supply of natural gas.
The top line shows EIA's prediction that natural gas consumption will
continue to increase. My concern is that this consumption won't
increase because all of the jobs will be in other countries.
[GRAPHIC] [TIFF OMITTED] T4599.007
The bottom line is the predicted production from North America
(U.S., Canada, and Mexico). EIA predicts that the shortfall between
consumption and production will be met by a substantial increase in
Liquid Natural Gas (LNG) imports (from Trinidad and Tobago, Qatar,
Algeria, Nigeria, Oman, Australia, Indonesia, and the United Arab
Emirates).
EIA predicts that LNG, which only accounts for 1 percent of current
U.S. natural gas supply, will have to increase to 8 percent by 2010 and
15 percent by 2025 to meet demand. If this is the case, we will soon be
talking not only about our country's dependence on foreign oil but also
foreign natural gas. Further, there have been recent reports that LNG
facilities are receiving stiff resistance from communities on both
coasts from Maine to California.
In conclusion, I think it is important to note that rising energy
prices have preceded every economic downturn during the post-World War
II period. I know firsthand that it has been a significant factor in
Ohio's current economic situation. Unless we stop artificially
increasing demand and decreasing supply for natural gas through
irresponsible environmental policies, our Nation will only continue to
lose jobs.
The past 46 months have been a trying time for businesses and
families alike, and we must act now to harmonize our energy,
environment, and economic needs by passing the energy bill and enacting
common sense environmental laws.
Mr. Chairman, I again thank you for calling this hearing, and I
look forward to hearing from our witnesses.
Thank you.
______
[From the Washington Post, March 17, 2004]
Chemical Industry in Crisis--Natural Gas Prices Are Up, Factories Are
Closing, And Jobs Are Vanishing
(By Greg Schneider)
Washington.--Soon after the Flexsys chemical plant celebrates its
75th anniversary this month, demolition crews will tear it down.
``Nothing over three inches high is going to be left here,'' plant
manager Jon McKinney said.
The former explosives factory gave the town its name, and its
demise will eliminate 205 jobs and yet another piece of the once-
powerful U.S. chemical industry.
Chemicals are an unglamorous part of the manufacturing world, with
products that have unpronounceable names and often hazardous qualities.
But they are essential to a host of industries, from automaking to
textiles to agriculture. Hardeners make tires more durable. Polymers
put the spring in athletic shoes, and nitrogen fertilizers increase
crop yields.
As the nation's manufacturing base seems to shrink daily from
factories closing or relocating overseas, the health of the chemical
sector is a crucial measure of how deep the problem goes. And chemicals
are in crisis, squeezed not only by cheap foreign competition but also
by soaring energy costs.
Across the country, 1 in every 10 chemical-related jobs has
vanished in the past 5 years--nearly 100,000 workers--and that number
would be worse if not for a surge in one segment, pharmaceuticals.
The chemical industry's eight-decade run as a major exporter has
ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion
deficit last year, according to the American Chemistry Council.
Governors and chemical executives have appealed to the White House
and Congress for help. They argue that the chemical problem is making
the nation's broader manufacturing meltdown even worse, pushing
factories to relocate offshore not only for cheap labor but to be near
chemical suppliers.
``It's a very trying time in the nation's manufacturing base,''
said Mark Zandi, chief economist for Economy.com Inc. Ultimately,
little can be done to stop the drain of jobs as companies cut costs and
use technology to improve productivity, he said.
``Workers in the chemical industry are really getting hit hard,
much harder than the companies themselves,'' Zandi said.
The Flexsys plant in Nitro is closing because a sister plant in
Belgium costs less to operate. In nearby South Charleston, Union
Carbide Corp. has cut its workforce in half, to about 1,200 people, in
the past 3 years. Bayer AG is shutting one of its two Charleston-area
plants.
It's the same story in other chemical-heavy regions of the country,
such as the Gulf Coast.
``Right now we've got big operations just shutting down because
they cannot compete on the world market,'' Louisiana Gov. Kathleen
Babineaux Blanco (D) said in a telephone interview. ``We've had
shutdowns before but they've always been temporary. We've not seen
anything like this before.''
Troubles began over a decade ago with the fall of communism, when
countries of the former Soviet Union--as well as China--discovered they
could compete in the world market for chemical products. Cheap labor
and a freewheeling attitude toward safety and the environment helped
them keep prices low.
As the global economy slowed, industries that consume chemical
products came to depend on those lower prices to offset declining sales
and profits. U.S. chemical makers struggled to cut costs and keep up.
Then, around 2000, an unexpected problem hit: Natural gas prices went
up.
Chemical plants are especially sensitive to natural gas prices
because they use it both as a fuel and as a ``feedstock'' or ingredient
in making plastics, resins, fertilizers and more. In the past 5 years,
U.S. natural gas prices have roughly doubled as more and more
electrical plants consume the clean-burning fuel but supplies stay
stagnant. Other parts of the world--including Western Europe--pay far
less.
``We have the highest natural gas prices in the industrialized
world,'' said R. William Jewell, vice president for energy for Dow
Chemical Co. in Houston. In the past 2 years, Dow has closed four major
chemical factories in North America--one in Louisiana, two in Texas and
one in Alberta, Canada--and replaced them with production from Germany,
the Netherlands, Kuwait, Malaysia and Argentina, he said.
``These jobs didn't leave the U.S. because of labor costs, they
left the U.S. because of uncompetitive energy costs,'' Jewell said.
``It's very hard to have vitality in manufacturing and it's very hard
to have strong growth in jobs if you don't have a competitive
infrastructure anymore. . . . You can't just wish these jobs back.''
Chemical jobs tend to be so well-paying--in the $50,000 to $70,000
range--that they're virtually impossible to replace in the communities
that lose them, said David E. Dismukes of the Center for Energy Studies
at Louisiana State University. Every time a factory cuts back or shuts
down, the impact ripples out through the suppliers, restaurants and car
dealerships that surround it.
``For a small State like Louisiana that is so dependent on those
facilities, this really is a tough one for us,'' Dismukes said. ``When
they go away it has a devastating impact on small rural communities up
and down the river where many of these are located.''
The problem is similar to the death of steel mill towns in the
Midwest and Pennsylvania in the 1970's and 1980's, said Michael Hicks
of the Center for Business and Economic Research at Marshall University
in Huntington, W.Va. In 24 months, from January 2001 to December 2002,
West Virginia's chemical workforce declined nearly 17 percent, to
12,000 people, Hicks said.
``It's a story that West Virginia has continued to feel for well
over two decades now, with the decline in coal mining and steel
production now followed by these challenges to the chemical industry,''
he said.
Even plants that stay in operation are providing fewer jobs.
For example, Bayer Polymers LLC operates a plant on an island in
the Kanawha River in South Charleston. Barges bring long cylindrical
tanks of liquid propylene oxide to a pumping station on the north
shore. The material flows under the river to a maze of pipes, valves
and vats on the island--nearly a mile long--where it goes through
chemical reactions to become a polymer used in foam cushions for car
seats, mattresses or athletic shoes.
The entire facility is operated by two people sitting in a control
room watching computer monitors, aided by a team of eight technicians
that handles repairs and maintenance.
In less than 4 years Bayer has increased the plant's output by 20
percent without adding any employees. The plant also has cut energy
consumption by 9 percent since last year. Nonetheless, its costs are up
25 percent over the past 5 years, said site manager Glenn Kraynie.
It's a dangerous cycle. Rising costs cut into profit and make it
harder to continue investing in improvements, which in turn makes it
harder to compete with ever more efficient overseas rivals, said Attila
Molnar, president and chief executive of Bayer Corp., the German
company's U.S. arm.
``It is a very, very serious issue,'' Molnar said. ``You shift
manufacturing or production [to] where you produce the cheapest. . . .
Production in the U.S. is in danger today.''
``There are at least two basic solutions,'' Molnar said. Do
something about energy prices, such as burning more coal or drilling
for more natural gas, and use technology to continue to make chemical
factories more efficient. That means producing more with fewer
employees.
``There's nothing there that says the jobs you have today will be
the same jobs we have 10 years from now. That cannot be,'' he said.
``Be prepared for change. That's the only way we can survive, the only
way I can see we will be successful in the future.''
That's a hard prescription for towns like Nitro, population 6,824,
which stands to lose a chemical plant that once employed 900 people.
The 202-acre riverfront facility started as a World War I explosives
plant for making nitrocellulose, and the town was built to support it.
Monsanto Co. bought the site in 1929 and has been making rubber
additives ever since, today in a joint venture with Akzo Nobel NV
called Flexsys. But with worldwide prices for its products down 42
percent, the company decided last fall to shut Nitro's factory down at
the end of this month.
``I'm 45 years old and I've lived in this Kanawha Valley my whole
life,'' said Dave Hardy, a lawyer and Kanawha County commissioner
representing both Nitro and Charleston. ``This valley was built on the
chemical industry, and now in my adult lifetime . . . the chemical
industry is contracting literally year by year. There is nothing that
is filling the void.''
``Instead, the State is promoting tourism and gambling,'' he said.
But West Virginia hasn't given up on the industry. Its statewide
Chemical Industry Committee, a trade association, has been working to
attract companies by touting the state's long embrace of an industry
scorned in some places as environmentally undesirable.
It doesn't help the cause, though, that the committee's chairman is
McKinney, the Flexsys manager, whose own company couldn't afford to
stay in business there.
______
[From the Wall Street Journal, February 17, 2004]
Natural-Gas Costs Hurt U.S. Firms--High Prices Are Prompting Companies
to Conserve and Move Work Overseas
(By Russell Gold)
High natural-gas prices in the U.S. are taking an increasing toll
on a range of companies, forcing them to change how they operate and
even to shift work to parts of the world where energy prices are lower.
Some companies are updating or retuning older equipment and fixing
minor leaks they used to ignore. Others are switching packing materials
or looking to overseas sources for plastic wraps, fertilizer and other
basic goods that are made from natural gas--moves that ultimately will
mean the loss of U.S. jobs.
For manufacturers already dealing with rising health-care costs for
their workers, high natural-gas prices mean another unavoidable cost
that can't be passed on to customers. Much of what these companies
produce vies for customers in a global market with many lower-cost
overseas rivals. The squeeze between cost and pricing pressures means
less money for capital investment and for hiring new workers--and
potentially a drag on economic recovery. Higher natural-gas prices also
undermine U.S. efforts to reduce the nation's dependence on overseas
sources of energy.
Manufacturing companies say they realize they can't ignore the
problem any longer. ``The high spikes we saw in natural-gas prices were
a wake-up call to management,'' says Jim Pease, corporate energy
manager for Unilever, the Anglo-Dutch food company that has increased
its spending on energy-efficiency measures since 2001. ``The old days
of stable, cheap energy prices are over.''
After decades of being cheap and plentiful, U.S. natural-gas prices
left the range of $2 to $3 per million British thermal units of the
latter 1990's and hit two sharp spikes in the past 4 years before
settling in to an average weekly spot price above $4 per million BTUs,
where they have remained for an unprecedented 15-month run. U.S.
natural gas is the most expensive in the industrialized world,
averaging $5.50 per million BTUs for the past year.
At Amazon.com Inc. of Seattle, higher natural-gas prices have
raised the price of air pillows used to buffer its products while in
transit. Last year, air pillows made up 40 percent of the packaging
cost of each Amazon box, up from 30 percent a year earlier. The plastic
pillow that contains the air is made from natural gas.
The Internet retailer said it is considering using fewer air
pillows or turning to more wraparound cardboard boxes, which it dubs
``ravioli'' wrap. Customers prefer the air pillows, but the rapidly
inflating cost ``affects our ability to keep prices low,'' says
spokesman Chris Bruzzo.
The root of higher natural-gas prices is a Federal policy that
promotes use of the relatively cleaner-burning fuel without providing
incentives or means for natural-gas companies to increase production.
So while demand soared in recent years, especially from a raft of new
gas-fired power plants, producers have struggled with supply. Most
North American gas fields are years past their prime, and environmental
restrictions prevent drilling on many of the most promising areas.
The chemical industry, which uses natural gas as a fuel and as a
raw material, has been hit hardest. The rising cost of U.S. natural gas
began battering these manufacturers at the same time the weak economy
was damping demand for commodity chemicals and foreign producers were
increasing their share of the U.S. market for chemical-based products
such as plastic shopping bags.
U.S. chemical makers have lost an estimated 78,000 jobs since
natural-gas prices began to rise in 2000. Louisiana, a hub of chemical
production, lost 4,400 chemical-related jobs over the same span, or
about 15 percent of that workforce.
Almost all new production of chemicals and plastics will take place
in the Middle East and Asia, where natural gas is more plentiful,
producers say. Charles O. Holliday Jr., chairman and chief executive of
DuPont Co., told investors in December that high energy costs will
prompt the company to shift its ``center of gravity'' overseas.
Last month, Mr. Holliday joined top executives of Dow Chemical Co.,
Eastman Chemical Co., Rohm & Haas Co. and others in a letter asking
President Bush and congressional leaders to lower royalties on some gas
production, to allow more drilling in the U.S. and to reduce the
incentives that promote the use of natural gas for electricity
generation. If nothing is done, they warned, ``investments and jobs
will increasingly go to Asia and the Middle East.''
Owens Corning, which ran ads in the 1970's urging customers to buy
its pink insulation to cut their dependence on foreign oil, now finds
itself scrambling to find new ways to cut its dependence on pricey U.S.
gas. The company is operating under bankruptcy-law protection while it
works out its asbestos liabilities, and high
natural-gas prices are squeezing its margins and eroding profits.
``It's still our energy source of choice, but the big issue is the
economics of natural gas in the U.S. relative to the rest of the
world,'' said Mike Thaman, chairman and chief financial officer.
The company has begun to import more materials from overseas. Last
fall, Owens Corning moved a top executive to Shanghai to find cheaper
sources of polypropylene bags used to package rolls of insulation. By
the end of this year, the company expects to import as much as half of
its packaging material, lowering costs by 20 percent to 25 percent. In
the past, all packaging material came from North American producers.
In a couple of years, the company expects 30 percent of its nearly
$1 billion a year in purchases of minerals, chemicals and packaging to
come from outside North America, up from 10 percent today, company
officials say.
Last year, the Toledo, Ohio, company also began to experiment with
an insulation factory in Waxahachie, Texas, that was burning as much as
$4 million to $5 million in natural gas a year.
The company installed four meters on each of the three enormous
production lines to measure natural-gas usage by the minute.
Consultants figured out settings for the incinerators and meters that
would cut usage without sacrificing product quality. With adjustments,
natural-gas use in the third quarter of 2003 was 18 percent below the
year before, even though production has increased. The plant is now
approaching $1 million in annual energy savings.
Even the smallest adjustments matter. One day last summer, Gary
Chastain, the plant's energy guru, saw that the steam boilers overnight
had begun using more than double the normal level of gas. He dispatched
maintenance workers, who searched for nearly 2 months to find the
culprit: a leaking valve that was costing Owens Corning about $460 a
day.
The Waxahachie experiment has been so successful that the changes
will be replicated in 10 other North American insulation factories and
two composite-fiber factories by the end of this year.
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Senator Inhofe. Thank you.
Senator Murkowski.
OPENING STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM THE
STATE OF ALASKA
Senator Murkowski. Thank you, Mr. Chairman. I appreciate
your calling this hearing this morning and really putting the
focus on the natural gas supply in this country and the
environmental impacts of this supply.
I am glad that I am following Senator Voinovich on this. I
think you have very aptly summed up the impact to this country,
and the fact that it is a crisis in this country, and we
certainly are not doing enough at this point to avert the
crisis. To say that the sustained high prices of natural gas
are a problem, truly underestimates the situation that we are
currently facing. In your State, with the manufacturers, the
petrochemical industry, and the fertilizer production, you know
it all too well.
We have a Federal policy that is encouraging the
consumption but is not doing anything or have not sufficient
activity on the domestic production. I appreciate your
statement again, Senator Voinovich, that we are going in the
same direction that we currently are with our oil. When we are
57 percent or 58 percent dependent on foreign sources of oil, a
resource that we recognize, we have to have, if not for our
vehicles, certainly for those other consumer products, whether
they are Band-aids, or CDs, or cosmetics, we rely on petroleum
products.
To go into this with eyes wide open saying we will allow
ourselves to be again dependent on foreign sources for natural
gas is not a place that I think that this country needs to go.
We need access to a new supply, but we need to encourage the
domestic access.
It is probably not going to be any surprise to you, Mr.
Chairman, or to the members of the committee, but I want to
talk about the availability of Alaska's natural gas supply. We
have 35-trillion cubic feet of known proven reserves and of the
unknown but expected reserves, we are looking at massive
quantities of natural gas.
In the energy bill which we recognize is still stuck, and
not moving, we have provided for regulatory and judicial
streamlining, as well as financial incentives, for the Alaska
Natural Pipeline. We anticipate that we will be able to bring
up to 4.5-billion cubic feet per day of desperately needed
natural gas to the markets in the lower 48.
We recognize that this is a huge project, and for a project
of this size we cannot snap our fingers and get the gas to
market today. It does take years to bring on-line, but what we
will be able to do is stabilize the volatile natural gas market
by the anticipation of the vast new supplies coming down.
Alaska will be able to supplement the supply from the declining
basins in the lower 48 and Western Canada, as well as the
expected imports of LNG from the foreign sources.
The Energy Information Administration predicts that the
United States will import over 4-trillion cubic feet of gas in
2004. By the year 2025, without Alaskan natural gas coming on-
line, imports could total nearly 11-trillion cubic feet. This
worsens our energy and our national security, as well as the
balance of payments deficit.
EIA also predicts that by 2025 without natural gas from
Alaska, the wellhead price in the lower 48 States will be 20
cents higher, costing the economy approximately $6.14 billion.
So not only will the Alaska Natural Gas Pipeline bring needed
natural gas out of America to meet the domestic demand, the
project itself will create thousands of jobs throughout the
United States.
So again, Mr. Chairman, I appreciate your focus here this
morning. I look forward to the testimony from our witnesses as
we pursue this issue, and hopefully are able to work together
to craft a positive direction for this country when it comes to
our natural gas consumption.
Thank you.
Senator Inhofe. Thank you, Senator Murkowski. That is an
excellent statement.
We have a cloture vote at 11:30, which means that we
probably would have to leave here at around 11:45 to do it. It
would be my intention, if we have not started the third panel
at that time, to recess until 2 o'clock and have the third
panel at 2 o'clock. I do not know how else we can arrange this.
Is there objection to that in the event that we are not further
along at that time?
With that, I would recognize Senator Chafee to introduce
our guest. The first panel is Governor Carcieri. We will have
only one round of questioning after he completes his remarks.
Senator Chafee.
Senator Chafee. Thank you, Mr. Chairman. It is a pleasure
to introduce the Governor of Rhode Island, Governor Donald
Carcieri. The Governor is exceptionally qualified to be here
today.
Prior to his election in 2002, the Governor was a highly
successful businessman. In 1983, he joined Cookson America,
rising through the ranks to the position of chief executive
officer and joint managing director of Cookson Group Worldwide.
He was instrumental in developing the company into a major
manufacturer, employing over 12,000 people worldwide. The
company grew from an organization doing $30 million in sales to
over $3 billion at the time he retired from his position.
I am proud to have the Governor here to testify before the
committee. I know we will all benefit from his testimony.
Welcome, Governor.
STATEMENT OF HON. DONALD L. CARCIERI, GOVERNOR, STATE OF RHODE
ISLAND
Governor Carcieri. Thank you, Senator.
Mr. Chairman, and Ranking Member Jeffords, distinguished
members of the committee, especially Senator Chafee from my
home town, I want to thank you for having me here today to
testify about the energy needs of my State, my region, and our
Nation. In my judgment, there is no more important domestic
economic issue today than this issue.
I would like to speak today about the problem my State is
facing with respect to the tightening supply and resulting high
cost of natural gas. As Governor of a Northeastern State, I
understand the importance of plentiful, accessible energy
supplies. New England, as you know, has no natural resources of
fossil fuel. As a result, all of our energy supply must come
from some other region or nation. Meanwhile our cold winters,
elderly population, and highly concentrated urban centers
produce a large and growing demand for energy resources.
Before the people of Rhode Island elected me Governor, I
spent almost two decades, as the Senator indicated, working in
the private manufacturing sector. As CEO of Cookson America, I
managed the energy needs of a thriving manufacturing business.
In fact, I remember, Senator Carper, meeting your wife when she
was at DuPont. If I recall, she worked at DuPont.
Senator Carper. Mr. Chairman, I can tell you my wife works
at DuPont. She has been there 27 years. Over the years, I have
had thousands of guys say to me, ``I know your wife.'' I have
had it.
[Laughter.]
Governor Carcieri. I will only say in reference to a
possible business deal.
Senator Carper. I am glad you got that on the record.
Governor Carcieri. In any case, that experience taught me
that our needs will only increase in the coming years. As
Governor of a New England State, and a former CEO, I have a
good understanding of both the energy needs of the Northeast
region generally, and the particular needs that a competitive
manufacturing base puts on a reliable, cost-efficient, energy
supply.
Federal and State policy, as has been noted, has encouraged
the use of natural gas because it is clean burning and there is
an abundance of known supply. Consequently, it has become the
work horse of the energy sector and is expected to provide 35
percent of the fuel supply for electric generation in New
England this year alone. According to the Federal Energy
Regulatory Commission, in the next 4 years 50 percent of all
electricity will be generated in New England by natural gas.
Unfortunately, natural gas supply has not kept up with this
burgeoning demand. In fact, New England was recently on the
verge of an energy supply crisis. Key-Span, the largest local
distribution company in the Northeast, had record-breaking
send-outs during that cold spell that some of you may have
noticed, and at one point were forced to shut off service to a
number of customers in order to preserve the remaining base.
Had temperatures remained that cold for another few days, we
would have had a real crisis.
One would think that this combination of high demand and
intermittent supply shortages would create an outcry for more
natural gas production. It does not seem to have.
Unfortunately, it may take a disaster before someone in our
Nation gets serious about this problem. As Federal Reserve
Chairman Alan Greenspan pointed out in testimony before a
Senate committee last summer, ``We have embraced the benefits
of natural gas, but at the same time have restricted the
ability to get more supply.'' He pointed to the inconsistency
of our policy.
Soon the Northeast may no longer be able to offer industry
a competitive venue unless the rising cost of energy is
addressed. As Senator Voinovich pointed out, what is happening
in Ohio now, we had faced this actually probably years ago in
the Northeast, but the trend is accelerating. While the costs
remain relatively stable through the mid-1980's at around $2 in
million BTUs, prices have recently spiked at times to upwards
of $10 per million BTUs. These dollar amounts are often much
higher in Rhode Island because we sit at the end of two
pipelines and consumers must pay the costs associated with
transporting gas such long distances.
In my judgment, this is the hidden jobs issue today, beyond
labor-intensive issues that you hear so much about. This is a
little bit of an aside, with all of the jobs that are going to
China and the Asia Pacific of a high-labor content. The hidden
issue today in the jobs is the energy costs issue. I hear it
time-and-time again. These are what is driving business today
in jobs overseas.
Some of Rhode Island's largest employers and oldest
companies are already grappling with the consequences of this
looming energy crisis. Considerations of layoffs and job
relocation are beginning to manifest themselves. Electric Bolt,
which is the producer of the hulls for our Navy's submarines,
switched to natural gas for heating several years ago. Now the
price is skyrocketing, and since the region's electric
generation is increasingly fueled by natural gas, EB can expect
a further rise in their electric bill. This company employs
more than 2,000 people in Rhode Island and many more in
Connecticut.
The story is the same with a company called Arkwright
located in Coventry, RI. Their 300 employees coat and covert
paper and films for specialty imaging devices. Arkwright's
natural gas bills have nearly doubled in the past year,
jeopardizing their profitability and competitiveness. As the
company struggles with this issue, it has lost bids for
contracts. They were already forced to lay off some employees,
and cut out bonuses last year.
Another example is a company called Cranston Print Works,
an old company in the textile business with facilities in Rhode
Island and Massachusetts. The per unit price they pay for
natural gas has already increased 40 percent this year.
Electric costs another 19 percent, and oil another 6 percent.
They will spend several hundred thousand more this year than
last year to keep their plants operating without any increase
in overall energy usage.
Similarly, their neighbor in North Kingstown, a Japanese
company, TORAY plastics, extrudes plastic film for food
wrapping, saw energy costs rise more than $1.6 million last
year. They employ approximately 700 people in our little State
and are absolutely panicked about what they are going to do
with the energy costs and the impact it is having on their
business. It is an energy-intensive business. It is an
extrusion business, which I know many of you are familiar with.
It runs 24 hours a day, 7 days a week. It is critical that they
be able to manufacture products competitively, and they are
having a struggle.
This story can be told over and again with many of the
other manufacturing companies in our little State that employ
tens of thousands of workers and contribute so much to the
quality of life in our State.
Senator Inhofe. Governor, I would like to ask you to wrap
it up. Your entire statement will be made a part of the record.
Governor Carcieri. I would just add to that, Senator, that
with the same issues, the costs today, the competitive impact,
the effect it is having on jobs--which I think is the major
idea--LNG is significant for us. That is an issue that I think
needs to be dealt with. We are dealing with the fact that we
need more of that.
I think from my perspective, as I said earlier, just to sum
it up, this, I believe, is the issue today for the domestic
economy. I would encourage the State that we need a coherent
policy that is consistent and that deals with an energy supply.
I am talking mostly energy production in terms of electric
generation capacity, separating that from automobile. That is
the impact that you see today on businesses.
I want to thank you for allowing me to testify. I will
answer any questions you may have. I would ask that my full
statement be placed in the record in its entirety.
Senator Inhofe. Without objection, so ordered.
We appreciate very much your being here. We will now have
one round of questioning for the Governor, not to exceed 5
minutes. We do have two other panels to get to.
Governor, you spoke about the need for additional supply.
But your State, and the Northeast region in general, also have
inadequate infrastructure. You mentioned Key-Span. I guess Key-
Span is a distributing operation.
Governor Carcieri. That is right.
Senator Inhofe. They had sufficient gas but not sufficient
infrastructure to deliver; is that the problem?
Governor Carcieri. Yes, it is both. Key-Span right now is
the midst of a proposal for an expansion of LNG capacity. Yes,
the most recent problem was an infracture issue and the
sufficiency of the gas line itself. They had reserves in the
form of LNG that could have been fed in.
Senator Inhofe. Would a very large percentage of your gas
be LNG?
Governor Carcieri. It is growing. I do not have that with
me today. I cannot remember, but it is growing dramatically.
There is a large LNG facility in Everett, MA, outside of
Boston. We have what is called a peak breaking facility in
Providence, RI, that is looking at actually becoming a
principal source.
Senator Inhofe. It is expanding nationwide. As Senator
Voinovich pointed out, this is coming from Trinidad/Tobago,
Qatar, and Algeria.
Last week there was a lead editorial in one of your
newspapers, the ``Providence Journal'':
``The region urgently needs a supply of clean fuel in Fall
River, as well as Providence and Somerset, are well suited for
terminals to store it in the form of LNG. These terminals would
be economic boons for southeastern New England in particular,
and the whole six-State region in general.''
Do you agree with the Journal's assessment? What do you say
to those who oppose expanding the LNG terminal capacity in
Southeastern New England?
Governor Carcieri. Yes, I do agree with the Journal's
assessment on that, Senator. Thirty-five percent of the energy
on cold days is LNG. I do agree with that, Senator. I think the
issue right now is with homeland security. People are concerned
about safety. I think that is the biggest issue that I hear
being discussed time-and-time again with it regarding LNG
tankers. It is a question of safety and their movement in and
out of our ports.
I have met with the Key-Span people. I have told them that
I am supportive of this. It is critical to our economy in terms
of the immediacy. It is a supply that we can increase.
Senator Inhofe. Governor, you are a very persuasive person.
You have credibility. I know in your State there are many
people who will form groups and come to you and say that this
is not a problem. What do you say to the groups that are really
creating a problem for you in terms of expanding your capacity?
Governor Carcieri. Well, I think in the short time that I
have been in this business, Senator, I think we put ourselves
into the situation of false choices. We postulate things
against one another. I believe that the environmental concerns
can be handled entirely consistent, and we can develop energy
sources and energy supplies. They somehow are postulated as
opposites and are unable to be integrated. I do not believe
that for a moment. They can be. We have done it successfully. I
have all the confidence we can do it going forward.
The issue for me, as I talk with these people is a
pragmatic one. We build roads and bridges. We build airports.
We build all these things. Yet we do not have an energy supply
that is consistent, accessible, and reasonable in terms of
price. We do not have a policy to generate that. Without that,
everything else is for naught.
My logic, if you will, is this is not a problem that is
going away. It has to be dealt with. I believe it can be dealt
with in the context of assuring those people that are concerned
about the environment. We call it the Ocean State, Rhode
Island. I am very, very environmentally orientated. I think it
is an artificial juxtaposition, if you will, in pitting these
things against each other.
Senator Inhofe. Thank you, Governor.
Senator Jeffords.
Senator Jeffords. Governor, that was excellent testimony.
You mentioned a study by the Federal Energy Regulatory
Commission in your testimony. It is my understanding that the
Pipeline Safety Improvement Act of 2002 required FERC and the
Department of Energy to evaluate the ability of New England's
natural gas infrastructure to meet the demands of the electric
power generation. FERC's report, released in December 2003,
concluded that there was adequate natural gas infrastructure to
meet natural gas demand in New England through 2005, but that
additional infrastructure would likely be needed to meet the
region's demand through 2010.
The development of some of that infrastructure is in
progress. Several entities have announced proposals to
construct new marine import facilities. Included are Key-Span
in Providence whose storage facility now receives liquefied gas
by truck from Everett, MA.
What is the status of these proposals? Will they include
additional storage?
Governor Carcieri. I can only speak to the Key-Span project
in Providence, Senator. Whenever I see a policy statement that
says we are OK through 2005, when we are in 2004, I say we have
a big problem. The idea that if we do some things we will be OK
in 2010, to me is a kind of shortsightedness that is
inexcusable on an issue that is critical.
Senator Jeffords. I agree with you.
Governor Carcieri. This needs to be a policy, if you will,
for the balance of the century, or at least half of that
century.
The Key-Span project is moving. It is moving ahead. As
Senator Inhofe said, there is support for it. There is concern
about the safety of LNG tankers. I believe these can be dealt
with. They are being dealt with currently, but that is an
education issue. People are fearful, particularly in the
aftermath of 9/11. You know that in terms of anything like
this. We need to be practical and deal with that and try to
assure the public that this can be handled.
That facility would become, instead of a peaking facility,
actually a principal supply storage facility. The other
projects I cannot speak to in the Northeast.
Senator Jeffords. Thank you.
Thank you, Mr. Chairman.
Senator Inhofe. Senator Chafee.
Senator Chafee. Thank you, Mr. Chairman. Once again,
Governor, very well said. As we all know, we want to keep our
citizens employed. We all know the difficulties facing the
employers, whether it is health care or labor costs, and now it
is, of course, energy costs. I do believe we are going to hear
later in the testimony that the worldwide resources are still
robust of natural gas. We, of course, all want to have our own
domestic supply for security reasons, but the practical facts
of the matter are we have to depend on the world for these.
Even if we are going to get natural gas from Alaska, it has to
come through Canada. It is always going to be working with our
international partners as we address the shortage of natural
gas here, particularly in the Northeast.
You mentioned the LNG issue. Of course, the delivery of
natural gas is either by pipeline or by truck or by liquefying
it, and then by tanker. A tremendous amount can be delivered by
tanker once it is liquefied and then deliquified to get to the
consumer. That is what we are wrestling with, of course. Mr.
Chairman, you mentioned the editorial and using Narangansett
Bay as a depot in the delivery system for the entire six-State
Northeastern area.
Governor, as you deal with Key-Span, which is the company,
what are the hurdles there as we look at this, if we are going
to look at liquefied natural gas as part of the solution? What
are the hurdles to go forward to get through the permitting
process?
Governor Carcieri. I think as I see it right now, Senator,
I think frankly the economic case is compelling. The need for
these kinds of facilities is compelling, particularly in our
region. Right now we have the facility in Boston that is the
principal source of LNG for the region. I think the case is
pretty compelling. I think the issue for us, as I said earlier,
is the fear right now in the public's mind about LNG and large
tankers. Most people are not aware that we have tanker trucks
going to that facility daily that are replenishing it now. But
somehow a truck or two or three or four is different than a
large tanker. We need help. I met with the Coast Guard. They
assure me that there are protocols in place that will assure
the safety of these. As you all know, the record of LNG tankers
in terms of safety is good as well.
Frankly, I think the biggest issue right now is the public
perception, a fear that somehow we are endangering the public
and we are creating an unnecessary hazard. I think that can be
dealt with. It needs to be dealt with because frankly somebody
has to bring this energy supply in.
The other thing I would comment on is this. As you know, in
the Northeast, we have a get-together with the Eastern Canadian
premiers once a year. We have a good relationship there. Our
last meeting was last summer. This is a big issue for them.
They know that they have reserves and they are anxious to get
those developed and supply us. For those of us in the
Northeast, that can be an important source. We have the summer
meeting coming up this summer in Newfoundland where they tell
me they are convinced they have large reserves. There is the
Sable Island Pipeline to be completed.
I think there is a natural affinity between ourselves and
our Canadian neighbors, obviously as well as Alaska. I listened
to your Dad at the NGA talking about the opportunities there,
Senator. I had a number of conversations with him. I think with
Alaska at one end and the Eastern Canadian provinces at the
other, we could probably be in pretty good shape, from a
natural gas standpoint, let alone what we have domestically.
Senator Jeffords. Thank you, Governor. We are both strong
environmentalists. We come from a strong environmentally
conscious State. Of course, the environmental population does
want this because of the clean air issues and as we look at the
siting, as you mentioned earlier, it does not necessarily have
to be tension and conflict trying to provide energy sources and
doing what is environmentally sound.
Again, I congratulate you on your testimony.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Chafee.
Senator Thomas.
Senator Thomas. Thank you. Welcome, Governor. We are glad
to have you here.
Governor Carcieri. Thank you, Senator.
Senator Thomas. The purpose of this oversight hearing is to
examine the environmental impacts on the U.S. gas supply. What
do you think they are?
Governor Carcieri. Well, again I am new to this business. I
came out of the private sector. I remember back in the 1970's
when the pipeline was being developed in Alaska. There was much
concern at the time about the environmental impact that that
pipeline would have. I have not been back to Fairbanks since
the mid-1970's, but I think we would conclude that we have
successfully tapped an enormous source of energy for us. We
have done it in a fashion that has not had an enormous negative
impact on the environment.
I think sometimes, as I said earlier, these things get
juxtaposed unnecessarily. I believe we can do this from the
technologies, as I understand the technologies available today,
to drill and source, they are improved light years from the
1970's. I am confident that those, including myself, that are
concerned about the environment, will be comforted, if you
will, that this can be done. I think we just need to get on
with it.
As I said earlier, I think we are on the verge of an
enormous problem as a Nation when we are watching our
manufacturing industry decline.
Senator Thomas. Well, we have to deal with this. There is
quite a little bit of difference in view, apparently, from
States like yours that are not in the production business from
States like mine which are. That is part of the problem. If we
had a policy that talked about alternative sources, that talked
about conservation, that talked about more efficiency, and that
talked about more research on using clean coal and domestic
production, do you think people from the Northeast would
support that kind of a policy?
Governor Carcieri. I cannot speak for all the people in the
Northeast.
Senator Thomas. We do not have the support. It sounds like
you were now complaining.
Governor Carcieri. That is a very sensible approach. You
will not hear me complaining about that approach. I think just
as you say you do all of those things. I believe this can be
dealt with. I was at the Department of Energy 2 weeks ago. We
are the recipient, unfortunately, of some bad air quality that
is coming from old coal-fired plants in the Midwest. We are
doing our part in our plants, but we are inheriting atmosphere
from the Midwest.
One of the things I said to the Department of Energy was
that we ought to be looking at some way to assist the financing
for these power companies. Right now they are fragile
themselves. I think there is possibly a role for the Federal
Government to play here in the assisting and in the financing.
They are not opposed to upgrading those plants. I am sure it is
a question of the capital and the cost of the capital and how
they get a return.
Again, we build roads, we build bridges, and we build
airports. It would seem to me that there is an appropriate role
for the Federal Government here to assist somehow in the
financing of these things. It is in our national interest to do
so.
I am supportive of a whole series of things, Senator. I
cannot speak to others, but I will try my best to convince
them.
Senator Thomas. I understand. But my point is, and I think
you will understand that, is that there is somewhat of a
different view between the production areas and the consumption
areas. We are going to have to get a little more clear
understanding of how those two things fit together and be able
to move forward.
Thank you, sir.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Thomas.
Senator Voinovich.
Senator Voinovich. Governor, often the Northeast and the
Midwest seem to be on opposite sides of this whole
environmental issue. You just talked about the air moving into
your area. However, your testimony today expresses many of the
concerns that I stated in my opening statement.
Recently, Lexicon, a Harvard research company, conducted a
study on competing multi-emission proposals.
Mr. Chairman, I would ask that the Lexicon study that was
done at Harvard University be inserted in the record.
Senator Inhofe. Without objection, that will be entered
into the record.
Senator Voinovich. I do not know if you are familiar with
them or not, but for the last couple of years, we have been
talking multi-emission proposals. Senator Carper has one,
Senator Jeffords had one. I have the President's plan on Clear
Skies. We looked at President Bush's Clear Skies Act in 2003,
and Senator Carper's, and the study found that Senator Carper's
bill would cause natural gas prices to be between 5 percent and
6 percent higher on average from 2005 to 2010, or about $117
billion more than our Clear Skies proposal.
The reason I bring this up is that part of the reason why
the demand is exacerbated is that utilities companies in my
part of the country is this. For example, the former president
of AEP, Lynn Draper, said, ``I am not going to build another
coal-fired facility. It is going to be gas.'' So all of the new
facilities have been gas powered. That just drives up the
demand for it.
We have two problems. One of them is to try to lessen the
demand by using other energy sources to get the job done, and
at the same time, increase the supply. The feasibility of
increasing the supply in the next couple of years is going to
be pretty difficult. So we have a real problem.
They are lucky to have you as a Governor because you have a
good perspective on things. I would ask you if you could get
with Raysha Pock and with the Governors Association and really
get into this whole issue of where we are going on a pollution-
control bill that will limit the amount of NO<INF>x</INF> and
SO<INF>x</INF> and mercury. We have a debate over carbon. This
would allow us to come up with some numbers where we can
continue to use clean-coal technology to burn coal, and at the
same time, do a much better job of eliminating your problem of
the stuff coming to your State, but at the same time also help
you in the other direction and that is to not increase the
demand for natural gas as we try to figure out how we can get
more natural gas out on the street.
You have both sides of this. I would be interested in your
comments.
Governor Carcieri. Well, I think you have articulated the
issue extraordinary well, Senator. If I were the head of a
power generating facility today in your State or anywhere that
was coal-fired, and I am under all kinds of pressure for the
emissions, I would be thrilled to clean it up faster. It is a
question of the capital and the investment. This is where I was
going with Senator Thomas.
I think from your perspective, or from an energy policy
standpoint, from the Nation's perspective, there needs to be
help there. As we have deregulated the power utilities, we have
actually made them more fragile, if you stand back and look at
what has happened. We have squeezed a lot out in the process,
but we have created a system that is very fragile from a
capital standpoint and a financing capability.
I think we need to think about how to assist those. If you
or I were the CEO of one of those plants, we do not want all of
that aggravation and all of those problems. We would be happy
to do it. It is a question of what we have to spend to do it.
Senator Voinovich. That is a very good point. AEP has
plants in Ohio and they have them in West Virginia. We
deregulated electricity in Ohio and West Virginia has not. So
where is AEP going to be putting on the pollution control
devices in the State of West Virginia. They can capture their
costs for doing that in Ohio because of the situation that
makes it more difficult. So you have these plants trying to
figure out how we are going to get the job done. At what stage
is it economically feasible for us to do this or to tear them
down and build something new.
Governor Carcieri. I know we are talking about natural gas
right now. We have the same problem with transmission capacity.
Last summer we had the black out in the Northeast. The New
England Governors had a whole session on this in the summer. I
did not realize that we have significant weaknesses,
particularly in the area of western-southern Connecticut in the
transmission lines. They are old lines. We have not upgraded
the capacity there.
Here again, we created a whole grid structure and it
depends on these transmission lines. Again, it is who is going
to spend the money and how can they afford to spend the money.
What you said is absolutely true. They could recover that cost
in the rate structure in the old model. Much of that is gone.
I think there is a real financing issue here that needs to
be looked at as well. I think it would moderate, if you will,
the kind of problem that those of us on the East Coast are
worried about which is the emissions coming our way.
In addition, I think all of these things are good things to
do, but they are a stopgap. They are not the solution for an
energy policy for our Nation for the next 50 years. We cannot
survive that way. I think that this is a multi-headed, and
needs to be dealt with.
Senator Voinovich. I am out of my time, but I would say
this to you, Governor. I would really urge you to sit down with
your colleagues in the Governors Association. We have not been
able to reconcile our differences here at this table. You are
the ones that are suffering in terms of your loss of jobs and
the high cost of energy for your low income and elderly people.
Perhaps maybe your going to the table could help us get
direction so we can get on with this problem because there is
an urgency to it.
Governor Carcieri. I will take up the charge.
Senator Voinovich. Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Voinovich.
Governor, when you mentioned the Alaskan pipeline, I can
recall when they were developing that idea that some of the
alarmists were saying that it would destroy the caribou in that
region. You go up there in the summer time, the only shade that
is available for the caribou is the Alaskan pipeline. They are
all gravitating to that.
With that, I will introduce the Senator from Alaska.
Senator Murkowski.
Senator Murkowski. Thank you for that nice lead-in, Mr.
Chairman.
I would just like to followup a little bit where Senator
Thomas left off. I appreciate your comments, Governor. We
recognize, certainly in Alaska, that technology changes and the
technology advances when it comes to energy exploration and
drilling in Alaska. A natural gas pipeline is going to look
very much like what our 800-mile oil pipeline looks like now.
We figured out 30 years ago how to move this pipe through 800
miles of massive mountain ranges and permafrost and earthquake
zones. We did a pretty good job, given what we had at that
time.
Thirty years later I am extremely confident that that
technology is even further advanced, but even more so than just
the line. It is the technology for the drilling and for the
extraction of this resource. What we have at Prudhoe that we
built 30 years ago is a much larger footprint than we are
finding in our new fields today. With the directional drilling
that we have, we can extract oil and truly have minimal impact
to the environment and to the surrounding areas. We know that
we can do the same with the natural gas.
It goes back to some of the fears or some of the myths that
may surround energy production in this country. Much of it goes
back to the way it used to be. We have some serious issues with
coal, but with the clean coal technology that we now have, we
are able to do it better. We are able to do it in a more clean
manner. We are able to utilize that technology.
But what we are dealing with is still some of the hangover,
the fear factor. It is important as we recognize that we will
continue to be dependent, to a certain extent, on our
fossilized fuel, that we figure out the way that we utilize it
so that we cause no harm and that the environment is protected
to the fullest extent possible.
But part of it is an education effort, educating people
that the technology is changed, that we can do it better, we
will do it better, and we will be responsible for it. This is
more of a statement than a question to you, Governor.
We fight the education issue every day in Alaska. We are
coming up on the anniversary of the Exxon-Valdez. It was a
terrible tragedy, an accident, in our State. That single
accident that was caused by an individual that should not have
been in control of a tanker, has literally set back oil
development in my State for years as a consequence of that. So
we fight the education issue all the time. Anything that you
can do in your State, so far away from Alaska, to educate your
consumers about how we can provide and how we can meet our
energy needs and still provide for the care of the environment
would be most appreciated.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Murkowski.
We appreciate very much your being here, Governor. We are
going to rush things along here because of the voting schedule.
Thank you so much for your leadership. I join Senator Voinovich
in saying that we are depending upon you to help us out here in
this problem.
Governor Carcieri. It has been my pleasure. Thank you.
Senator Inhofe. I would ask the second panel to come up as
quickly as possible. As you are being seated, I would make the
comment that Senator Murkowski makes a good point. I was around
there during the Exxon-Valdez incident. It should never have
had any impact on exploration or production because that was a
transportation problem and not an exploration problem.
Senator Murkowski. That is right.
Senator Inhofe. Senator Jeffords.
Senator Jeffords. Mr. Chairman, I would like to ask
unanimous consent to place two items in the record today. The
first is the Center on Global Climate Change, the summary of
MIT's analysis of the Lieberman-McCain Climate Storage
Proposal. The second item is the MIT analysis itself.
Senator Inhofe. Without objection, so ordered.
We are going to limit your opening remarks to 3 minutes. It
will be particularly difficult for Mr. Drake from Oklahoma, but
he will just have to live with it, like everyone else. Your
entire statements will be made a part of the record.
We appreciate all of you being here today. It is our
intention to get one line of questioning before we have to go
for that vote. Then we will come back at 2 o'clock for the
third panel. I recognize my dear old friend, who one day 5
years ago gave me the tie I am wearing today.
Mr. Drake.
STATEMENT OF BOB DRAKE, VICE PRESIDENT, OKLAHOMA FARM BUREAU,
CHAIRMAN, NATIONAL GRAZING LANDS COUNCIL
Mr. Drake. Thank you, Mr. Chairman. I can hardly say hello
in 3 minutes.
My name is Bob Drake. I raise Angus cattle in Oklahoma. I
am currently vice president of the Oklahoma Farm Bureau and
serve as chairman of the National Grazing Lands Conservation
Initiative. I am also past president of the National
Cattlemen's Beef Association. On behalf of the American Farm
Bureau Federation and the Oklahoma Farm Bureau, thank you for
allowing us to be here.
First, let me say that today's agriculture is more energy
efficient than ever before, producing more economic benefit
with less energy. For example, on corn fields across this
Nation, farmers are producing 30 percent more crop using 30
percent less energy-
related inputs, including fertilizer, than we did a generation
ago. Even though energy efficiencies have been realized in
agriculture, no one should expect a growing U.S. economy and
population to need less energy security in the future.
Natural gas is one of the most important energy feedstocks
to production agriculture and associated manufacturing
industries. In the last year, the United States has experienced
prolonged natural gas price volatility, along with an overall
elevation in price.
One of the industries that has been mentioned already by
the Senator, is the fertilizer industry. Natural gas is the
primary feedstock for this product. According to The Fertilizer
Institute, the 2000 planting season saw ammonia fertilizer at a
cost of around $100 per ton. Last year, when you could get it,
it was $350 a ton. Our domestic fertilizer production, as was
already stated by the Senator, capacity has experienced a
permanent loss of 25 percent over the past 4 years, and an
additional 20 percent is currently shut down due to high
natural gas prices.
The current price volatility threatens the existence of
what remains of our domestic fertilizer industry, and will
exacerbate America's dependence on foreign sources of energy
and fertilizer. I sat down last week with a group of producers
that reported that the cost of running their natural gas-
powered irrigation pumps increased more than 70 percent in
2003.
The current natural gas crisis is a prime example of the
need for a clear and consistent energy policy. On one hand, the
Federal Government has encourage expanding the use of natural
gas as an environmentally friendly alternative for electrical
generation, home heating, and manufacturing. At the same time,
the Federal Government has increased the regulatory burden on
domestic natural gas exploration, drilling and production, and
placed moratoriums on many energy-rich areas such as the Outer
Continental Shelf, the Gulf of Mexico, and Federal lands.
Similar restrictions have been and continue to be
experienced on other traditional energy resources such as oil,
coal, and nuclear. In Oklahoma, oil and gas exploration on
private lands has been severely hampered by the U.S. Fish and
Wildlife Service's habitat rules for the burying beetles. We
have a lot of those little fellows.
The Service has delayed drilling, gathering, and other
activities of oil and gas producers. If left unaddressed, U.S.
energy policy as a whole will certainly result in the loss of
even more of our energy independence tomorrow.
The natural gas instability being experienced today should
not be allowed to grow into a more serious energy crisis in the
future. Nor does America need to become as dependent on foreign
sources of natural gas as we now do with crude oil, one
terrorist away from no telling what is going to happen.
Energy-rich repositories now off limits must be
reconsidered for environmentally safe oil and gas drilling.
Advancements in these technologies have resulted in the most
environmentally sound and responsible capturing of energy
stocks ever conducted.
My time is up. I thank you for inviting me here today. I
would ask that my full statement be placed in the record in its
entirety.
Senator Inhofe. Without objection, so ordered.
Wow. Thank you, Mr. Drake.
[Applause.]
Senator Inhofe. Ms. West.
STATEMENT OF MARJORIE WEST, WESTERN ORGANIZATION OF RESOURCE
COUNCILS
Ms. West. Mr. Chairman, and members of the committee, my
name is Marjorie West. Thank you for the opportunity to address
you regarding the environmental impacts of natural gas
production.
My husband and I own a ranch on Spotted Horse Creek in the
Power River Basin of Wyoming where we grow dry land wheat and
raise cattle. We have lived on this land for 50 years. The
ranch was homesteaded by my husband's father, and expanded by
the family over the generations.
As a landowner, farmer, and rancher, I want to share with
you what is happening on the ground in Wyoming and in other
parts of the West, and to talk about what it will take for the
oil and gas industry to develop natural gas responsibly.
Mr. Chairman, I want you to know that the organizations I
represent here today and landowners support responsible natural
gas development. But our ability to protect the environment, be
good stewards of the land, and earn a living, is threatened by
irresponsible gas development practices.
For several years now, we have been asking industry, State,
and Federal agencies, and Congress, to develop natural gas
responsibly. I wish we could say they are listening. The
experiences my husband and I have had with coal-bed development
are not isolated. There are many landowners who have lost water
wells or have had companies come on their land without an
agreement, building roads and well pads or discharging water
that has killed soil and vegetation. These problems are
becoming widespread.
The last 5 years have been the most difficult and
destructive years my husband and I have ever experienced. We
have been through droughts, grasshopper invasions, and bad
wheat and cattle prices, but nothing holds a candle to
irresponsible coal-bed methane gas development.
We have suffered the deceit of over a dozen land-men. Each
one was able to look us in the eye, shake our hand, and lie
like a trooper. We believed them, but now I realize that we
were naive. Out of six companies, Devon, Marathon-Penaco,
Yates, Williams, CMS, Lance and Redstone, not one has lived up
to their word. The so-called regulators have not only allowed
the damages to occur, but they continue to permit activities
that are in violation of their own regulation.
My husband, Bill, now takes high blood pressure medication,
and I take a prescription medication for severe headaches.
Because of CBM development, we have lost all three of our
artisan wells and our domestic water well due to groundwater
dewatering. This is presently, and will continue to be, a long-
term problem for us. For now we are using some of the coal-bed
methane water that is being pumped out to water our livestock.
But that will be gone in a few years. And then what? Where will
we get our water, and at what expense?
The company, Marathon-Penaco, has told us outright that
they do not intend to leave us with an operating livestock well
when they are finished developing the gas. We had to haul our
household water for 6 or 7 months. The coal-bed methane company
finally drilled us a 1,400-foot domestic well. We could not
drink this water without getting diarrhea, and I could not wash
clothes without having them turn orange.
Senator Inhofe. Ms. West, we will have to stop you here.
Your time has expired, but you will have an opportunity to
respond to questions.
Ms. West. Thank you, Mr. Chairman. I would ask that my full
statement be placed in the record in its entirety.
Senator Inhofe. Without objection, so ordered.
Mr. Bluestein.
STATEMENT OF JOEL BLUESTEIN, PRESIDENT, ENERGY AND
ENVIRONMENTAL ANALYSIS, INC.
Mr. Bluestein. Thank you, Mr. Chairman, and members of the
committee for the opportunity to testify today. My name is Joel
Bluestein. I am the president of Energy and Environmental
Analysis, Incorporated, in Arlington, VA, where we have been
providing energy and environmental consulting services since
1974.
My very quick testimony today will address two areas.
First, our outlook of natural gas prices, and, second, the
effects of current prices and trends related to gas prices in
industrial and power generation markets.
Our quarterly 20-year forecast of North American natural
gas prices currently shows an outlook for gas prices at the
Henry Hub of about $5.75 per million BTU for this year, a
little higher at about $6 per million BTU for 2005, and then
moderating somewhat in the $4.50 to $5 per million BTU range in
the medium to longer term.
Delivered gas prices will be higher in areas of local gas
delivery restraints, like New England. Extreme weather will
also cause temporary price spikes. We do not expect to see
future gas prices returning to pre-2000 levels.
This outlook assumes significant development of new LNG
import terminals in the United States and eventual gas imports
from Arctic Canada and Alaska. It does not assume any changes
in policies regarding where gas can be produced in the United
States Overall, we believe that the market will function and
find ways to bring new gas to the market. If that does not
occur, we would expect gas prices to be roughly 50 percent more
than this forecast.
Regardless of any changes in policy, there is widespread
agreement that it will take a significant amount of time to get
new gas supplies in place and in the interim, the most readily
available option to stabilize gas prices is increased
efficiency and natural gas consumption. This was one of the
primary conclusions of the recent National Petroleum Council's
study which stated that, ``Greater energy efficiency and
conservation are vital near-term and long-term mechanisms for
moderating natural gas price levels and reducing volatility.''
Last year a study by the American Council for an Energy
Efficient Economy looked at the effects on gas prices of
aggressive application of energy efficiency and renewables. To
summarize quickly, they found a range of 1 to 5 percent
reduction possible in the next 1 to 5 years.
More importantly, in our analysis of these changes, we
found 20 percent reductions in gas price resulting from these
changes in demand. This nonlinear result occurs because we are
in a very steep part of the gas supply curve where changes in
demand can result in large changes in price, either up or down.
I would also like to refer to the February 17th article
that Senator Voinovich referenced earlier about the response of
the U.S industry in increasing efficiency. That article talks
about the efforts of the Owens-Corning Company in which they
were able to reduce gas consumption at one of their facilities
by 18 percent last year, saving $1 million per year in gas
costs which they plan to replicate at 12 other North American
facilities.
Finally, there has been concern about the increase in gas-
fired generation in the United States. It is important to point
out that our share of gas generation today is lower than it was
in 1970. Coal still accounts for 70 percent of generation, and
is expected to maintain approximately that level. Moreover,
many of the new gas plans are in areas of the country that are
already heavily gas dependent. These new, more efficient gas
plants, are largely replacing older less-efficient gas plants.
So the net result is that the construction of these new gas
plants is actually reducing gas consumptions in some of the
most gas-intensive markets.
Thank you, Mr. Chairman. I would ask that my full statement
be placed in the record in its entirety.
Senator Inhofe. Without objection, so ordered.
Thank you, Mr. Bluestein.
Mr. Bailey.
STATEMENT OF DENNIS BAILEY, DIRECTOR OF ENERGY PURCHASING, PPG
INDUSTRIES
Mr. Bailey. Thank you, Mr. Chairman. Good morning. I am
Dennis Bailey, director of Energy Purchasing for PPG
Industries. PPG began operations more than 120 years ago in
Pennsylvania, and has been in Senator Voinovich's home State of
Ohio for 105 years.
In all, about 10 percent of PPG's corporate sales is
generated from products made in Ohio. The high cost of natural
gas is clearly affecting PPG's operations in Ohio and across
the Nation. For example, at our Circleville, OH plant, which
makes resins needed in paint manufacturing, natural gas costs
have increased 70 percent over the past several years.
From 2002 until 2003, natural gas costs at our Cleveland
automotive paint plant doubled, and at our Barberton, OH,
chemicals plant increased by 50 percent. High natural gas costs
at our Crestline, OH, automotive glass plant may result in
elimination of more than 10 percent of that site's workforce.
PPG has a well-earned reputation for controlling costs. But
in spite of this, if natural gas prices increase, our
businesses may have to make reductions elsewhere.
On a global scale, if the price of natural gas increases to
$7, and remains there, PPG's chlor-alkali chemicals business
would have additional problems competing in global markets. The
workforce at our Lake Charles, LA, chemical facility is
shrinking by 8 to 10 jobs per month through attrition, and we
do not expect to be rehiring. We believe that other Gulf Coast
producers are similarly affected.
The U.S. chemicals industry is no longer competitive
globally because of the disparity of natural gas prices, as
shown in the exhibit that I have entered into the record. The
U.S. industry has evolved into a net importer of product and
exporter of jobs.
My company strongly believes solutions to the natural gas
crisis are within our country's grasp. In the short-term,
energy conservation must be a major part of the solution.
Education is necessary, as well as increased economic
incentives. For example, if all new residential windows sold in
the United States were energy-efficient, it would eliminate the
need for 20 additional power plants over the next decade and up
to 60 power plants over the next 20 years.
Consumers need an incentive to use energy-efficient glass,
positioning high-performance glass as the construction material
of choice for saving energy. As a start, the Senate needs to
pass the Energy Conference Report which provides consumers an
incentive to use energy-efficient glass. But consumer
conservation alone will not fix the problem.
There is an urgent need for increased access to domestic
supplies, including resources in the Outer Continental Shelf,
the Rocky Mountain region, and Alaska. We feel that all of
these opportunities can and should be accomplished in an
environmentally responsible way.
Construction of an adequate delivery infrastructure,
including for the import of liquefied natural gas, must be part
of the solution. In addition, we need to encourage energy
production from all sources, including coal, oil, nuclear, wind
energy, and other alternatives. PPG strongly supports wind
energy because, among other things, we make fiberglass that
goes into the turbines. Unfortunately, the bill is stalled in
Congress.
On a final note, PPG does not support government
intervention for price controls. Competition and free market
forces should continue to drive prices.
Thanks. I would ask that my full statement be placed in the
record in its entirety.
Senator Inhofe. Without objection, so ordered.
Thank you very much, Mr. Bailey. You will find agreement up
here. We need energy from all of the above sources.
There will be 4-minute series of questioning. Mr. Drake,
you heard my opening statement, talking about my experience
this morning with Larry Craig from Idaho and the cost of
fertilizer. Your testimony showed it was consistent with that.
This ultimately increases cost. Who ultimately pays this
additional cost?
Mr. Drake. I would like to say that the consumer would pay
the additional cost, but it does not always happen that way
because we cannot pass through all of our costs to the consumer
as agricultural producers. But the consumer will pay an
additional cost. When I said $350, that is when you can get it
in certain places.
Senator Inhofe. That is $350 up from $100?
Mr. Drake. From $100 in 2000 to $350 in 2003, when you
could get it. In certain areas, it was very difficult, if not
impossible to get. Now this is in hydrous ammonia.
Senator Inhofe. Mr. Drake, you have lived on your land for
a long time. What kind of stewards are you folks out there in
Oklahoma? You heard Ms. West testify that some of the things
that are allegedly going on in Wyoming. Tell us about Oklahoma.
Mr. Drake. Well in Oklahoma we have always had concerns
when someone comes in and drills on our land. We have land that
has been drilled on. We work those concerns out, though, before
we let them on the place. We have certain agreements. Granted,
there are people who will take advantage of those agreements.
However, when they have taken advantage of the agreements
that I have made, I have taxed them pretty heavily. There is
nothing I would rather have than someone to come in and mess up
my land because I am going to make them pay for it. Now, we are
the environmental stewards of the world. We have the best
environmental stewardship on our land of any other Nation in
the world. All we have to do is have the APA and the
environmental laws that we can do those things.
We want to do it proper. We will do it proper when we have
the opportunity.
Senator Inhofe. All right. I appreciate that very much.
That has been my experience also in working with you folks.
Since we are rushed, is there anything in your opening
statement you did not get to that you would like to use the
remainder of my time in order to get to it?
Mr. Drake. The American Farm Bureau and the Oklahoma Farm
Bureau strongly believe that the current comprehensive energy
legislation will lead to a diversified energy portfolio with
increased emphasis on renewable sources while at the same time
increase our domestic energy supply from traditional sources,
such as natural gas, oil, and coal in a safe and affordable
manner. We urge that Congress complete this important
legislation this session.
Senator Inhofe. I am certainly hoping that that will be the
case.
Senator Jeffords.
Senator Jeffords. Mr. Bluestein, reflecting on the analysis
that you have done, and their reasons, other than environmental
regulations, would a company prefer to build a natural gas-
fired power plant rather than a coal-fired plant?
Mr. Bluestein. Sure. Particularly over the last few years,
what we have seen is a wave of new gas-fired power plant
production. The capital cost of the gas-fired power plant is
one-third to one-half of a coal plant. The footprint is smaller
and requires less land, uses less water, which obviously is a
very important issue in many places. It has a lower visual
profile. Of course, the plants that have been built in the
recent years are the cleanest and most efficient power plants
that have ever been built anywhere in the world, which I think
most people would see as a good thing.
Finally, it just takes less time to build a gas-fired power
plant because of the way that they are built and so on.
Particularly in the last few years, that has been a significant
advantage to be able to get the plant on the ground and running
quickly. So there are a whole variety of reasons that were
behind the wave of gas-fired power plant construction in the
last 5 or so years.
Senator Jeffords. Ms. West, do you support current
proposals to repeal the Clean Water Act and the Safe Drinking
Water Act requirements for coal-bed methane production?
Ms. West. I think the Clean Water Act is fine. However, I
think it needs to address the SAR of the water. The water that
has been pumped down, let down the troughs, up above Spotted
Horse Creek, and has flowed onto our hay meadows and ruined 80
percent of our meadows. This is because it causes the soil to
congeal. It changes the molecular structure of the soil. Last
year we did not raise any hay crop on this 80 acres, but we had
a wonderful crop of fireweed, which cattle will not eat.
I hear people testifying how responsible the industry is.
That has not been the case in my experience. They have come on
to us with no surface agreement. They have discharged water on
us when our lawyer had already told them that this would be
considered trespassing. These are not little fly-by-night
companies. These are companies like Devon, Marathon-Penaco, and
Yates. The thing is we finally got a surface agreement with
Devon who discharged the water that flowed onto our hay
meadows. They were supposed to have rehabilitated our land 2
years ago. They still have done nothing.
So what good is a surface agreement? The only way we can
get this agreement enforced is to take them to court. My
husband told them, ``I guess we will have to take you to
court.'' They said, ``Go right ahead. We have all the money and
time in the world.''
Senator Jeffords. Thank you. That was very helpful.
Thank you, Mr. Chairman.
Senator Inhofe. Your time has expired.
Senator Chafee.
Senator Chafee. Thank you once again, Mr. Chairman.
Mr. Bluestein, in your prepared testimony you said that you
predict gas prices will stabilize at $4.50 to $5.00. How do you
come to that analysis and prediction?
Mr. Bluestein. Well, we have quite a large staff that does
gas price forecasting, and a variety of supply modeling and
analysis, as well as demand and end-use modeling. It is a
pretty big effort. It takes into account many different
factors, again all the way from the supply and certain
assumptions on economic growth, LNG development, and so on. It
is a simple answer.
Senator Chafee. With all the dire predictions of increased
demand that you have predicted, to know that the opposite might
be true that the price will stabilize, how so?
Mr. Bluestein. Well, there are predictions on both sides.
We do see a growing demand in certain sectors. Certainly power
generation is going to be a growing sector.
The industrial sector, we do not see much growth in gas
demand, not that there will not be economic growth, but it
turns out that many of the portions of industry that have been
responsible for most of our economic growth in recent years are
not the most gas-intensive ones. Clearly, there are some that
are gas-intensive, but the real drivers for economic growth in
recent years have not been very gas-intensive. So we see
limited growth on the industrial side.
Again, this forecast is predicated on a certain amount of
new supply which we see much coming from LNG, as well as
eventually some from Canada and Alaska. I think there is an
amazing amount of agreement here that we need a multifaceted
approach, including greater efficiency, a diversity of energy
sources, and some sources of new supply.
When we take all of that into the mix, that is where we
come out.
Senator Chafee. I see. In your analysis, do you have any
factoring in of increased coal use, increased technology, and
how we deal with the emissions issues on coal?
Mr. Bluestein. We do see coal consumption in power
generation continuing to increase, as has been historically.
That is without any major assumptions on new clean coal
technology. Again, I believe there is an amazing amount of
agreement here that we can do much with technology. I agree
that coal is a very important resource. It is a key part of our
power generation today. I would expect that to increase, and to
the extent that we can improve the technology, I think that
will go even better.
Senator Chafee. You are predicting increased coal use even
without any necessary new technology coming on?
Mr. Bluestein. That is right. I think almost all the
forecasts that you look at, see coal continuing to be a growing
part of the power generation sector.
Senator Chafee. Does that take into consideration any of
the Clean Air bills that have been talked about, whether it is
the Jeffords bill or the Carper bill?
Mr. Bluestein. It does not take into account any
legislation that has not passed, but the existing legislation;
that is right.
Senator Chafee. I have a few seconds left. If either of
those two bills--and let us say for the sake of argument, the
Carper bill--would that change your predictions on coal use?
Mr. Bluestein. We have not analyzed that. I can look at
some other comparisons that have been done. I think an
interesting point to be made is that one reason that companies
are reluctant to build coal-fired power plants today is the
regulatory uncertainty, and in the discussions we have had with
large established coal-based utilities, they have said that
that is a big impediment to invest in new coal plants, and in
particular, the lack of certainty about CO<INF>-2</INF>. So in
some realm, resolving that issue would allow more coal
construction to go forward.
Senator Chafee. Thank you, Mr. Chairman.
Senator Inhofe. The time of the gentleman has expired.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Welcome, Ms. West. I have not had a chance to talk with
you. I did not know you were coming until very recently. We
have had problems, and continue to have problems, of course, in
the coal bed methane over time. We have been working on it, and
we will continue to do that. Much of it has to do with the
split estate where the Government owns the minerals and the
private owner owns the surface. Those are the ones that are
troublesome. I presume that you do not own the minerals?
Ms. West. It is correct that we do not own all of the
minerals underlying our land but we do own a percentage.
Whether or not you own the minerals you still experience
problems as a landowner either directly affected by development
on your land or by upstream development when the impacts come
onto your land.
Senator Thomas. We have monitoring that is required. The
Wyoming Department of Environmental Quality monitors. BLM
monitors. The State engineer monitor. The Wyoming Oil and Gas
Conservation Commission monitors. Have they been helpful to
you? Have you called upon them?
Ms. West. We have called upon them. No, they have not been
helpful.
Senator Thomas. Do you have a surface agreement?
Ms. West. We have a surface agreement with Devon.
Senator Thomas. And Yates?
Ms. West. We have a surface agreement with Yates. Marathon-
Penaco came onto some of our land with no surface agreement.
Senator Thomas. Do you have a lawyer?
Ms. West. Yes, we do.
Senator Thomas. Do you have hydrologists?
Ms. West. And a hydrologist. If I were to sit down and add
it up, all our lawyer and hydrologist costs, I would have a
heart attack.
Senator Thomas. One of your neighbors really had an
agreement and has settled for $800,000. So perhaps you have an
opportunity to do something.
Ms. West. Well, you know, we may be forced to do that.
Senator Thomas. What I am saying is that there is an
arrangement. We are working at it. I sympathize with your issue
because there are a number of people in that category. But we
have the Farm Bureau and the Stock Growers on the one hand
working with the producers on the other hand, to come up with
an arrangement to work with split estates so the owner has a
certain period of time to negotiate and to work out an
agreement. Of course, the minerals are a property so the owner
of the minerals has a right there.
Ms. West. Right. He does have a right.
Senator Thomas. But you have a right.
Ms. West. However, in Wyoming the landowner has the least
amount of rights of any State in the Nation.
Senator Thomas. Well, we want to work with you. I
appreciate your being here to do that. I think it is fair to
say that not everybody shares your view on this.
Ms. West. Oh, absolutely not. A lot of people are getting a
lot of money off this industry.
Senator Thomas. We do have now a process, which we should
have, for landowners to have an opportunity to deal with this
before it happens and make it work out. We appreciate your
being here. It is a problem. But I have to tell you that it is
much better than it was when we first started. We are aware of
some of the problems that are there and will continue to work
on that. Surface owners should be entitled to not be damaged.
Ms. West. Exactly.
Senator Thomas. Thank you.
Thank you, Mr. Chairman.
Senator Inhofe. Senator Voinovich.
Senator Voinovich. Mr. Bailey, first of all, I really
appreciate the presence of PPG in our State. When I was
Governor we worked with you. When I was Mayor we worked with
you on your facility over on the west side.
In my opening statement I said that Charles Halliday, who
is chairman and chief executive officer of DuPont told
investors in December that ``High energy costs will prompt the
company to shift its center of gravity overseas.'' The question
I have for you is: Have these natural gas prices, as you are
sitting down with your crystal ball and looking down the road,
caused you to reevaluate your facilities and what you have to
do in order to stay in business and compete?
Mr. Bailey. In the United States or globally?
Senator Voinovich. I know you are global, but the fact is
that you have the United States. You are looking down the road
and you are saying, ``Here are our costs.'' You have to figure
out: ``Can we compete in the environment that we are in?''
Mr. Bailey. Our most energy-intensive businesses are our
chemical business where we use natural gas for generating
electricity, largely. Then we also have our glass and
fiberglass businesses where we are using it to heat the
furnaces. Those businesses are largely based in the United
States with some export. So we really do not have within the
company, for those businesses, the ability without large
capital investments elsewhere to produce elsewhere in the
world. We are based here. This is where the capital is. So, we
do not have as much of an opportunity, as some other companies,
to move offshore. That is not really a big alternative.
Senator Voinovich. The option is not there to move?
Mr. Bailey. That is correct.
Senator Voinovich. Have you calculated, if we do not deal
with this problem, what effect it will have on your competitive
position in the global market?
Mr. Bailey. I am not aware of whether or not we have gone
through that process within the company.
Senator Voinovich. Would you say that the energy costs that
your company is experiencing right now are more significant
than say, labor costs?
Mr. Bailey. Yes, for chemicals, they are. More volatile and
they are higher.
Senator Voinovich. Thank you.
Mr. Bluestein, you were talking about some predictions.
Have you analyzed the effect different environmental policies
will have on your assumptions? You have made some assumptions.
For example, one of the things that I think you mentioned in
your testimony that you anticipate that we are going to have
more liquefied gas operations. You make some assumptions about
the fact that it is going to be available.
Have you taken into consideration the problems that we
might have in citing facilities to take in that liquefied gas?
If that does not happen, what impact will that have on costs?
Mr. Bluestein. Yes, as I said in my testimony, regardless
of whether it is LNG or some other constraint on the supply
assumptions that we have looked at, we see something like a 50
percent higher gas price in our forecast. Obviously it depends
on which specific one, but in that range is the kind of
sensitivity that we have looked at.
Senator Voinovich. That is 50 percent, anticipating
something is going to happen?
Mr. Bluestein. Right; something negative as far as supply.
Senator Voinovich. Have you done any analysis on what
impact that would have on the economy?
Mr. Bluestein. No.
Senator Voinovich. Have you studied any of the bills that
we have been dealing with here in terms of what we call the
emission bills or the pollution bills in terms of utilities?
Have you looked at those?
Mr. Bluestein. Yes.
Senator Voinovich. Do you think there is any area of
compromise so we can move on with some certainty? Right now, I
will tell you, our utilities do not know where they are going.
We have a controversy over new source review. We have more than
126 petitions that are being filed. We are having the new
ambient air standards for particulate and ozone coming on
board. States are being asked in the next couple of years to
come up with new State SIPS. Next week the EPA is going to
announce all areas that are not meeting the current ambient air
standards.
There is so much uncertainty out there. It would be very
nice if we could get some input from you on these bills that we
have pending and perhaps see if we can work something out.
Senator Inhofe. Senator Voinovich, I apologize. The vote is
in progress now, but we do have time for Senator Allard's
questions for 4 minutes.
Senator Allard. Thank you, Mr. Chairman. Very briefly. I am
sorry I was late. I was chairing another committee.
I do have a full statement I would like to make a part of
the record.
Senator Inhofe. Without objection, so ordered.
Senator Allard. Mr. Drake, you mentioned earlier how much
the price of fertilizers increased. How long do you think that
you and other producers like you can sustain that cost? I
realize there are other factors like costs of grains. But maybe
perhaps you can give us some idea.
Mr. Drake. At the present time, we cannot sustain this kind
of cost. We will use a lot less. We will try to make do with
what we can use. We will put the figure that we are normally
spending on fertilizer and that is what we will go up to. We
cannot continue to pay these kinds of costs and stay in
business. We cannot pass it on through. We have no guarantees
for pass-through.
The time is not definite at all. I can tell you that this
season will be very difficult. We are coming into the planting
season.
Senator Allard. I am from Colorado and as you can see from
this chart we are right in the middle of the 125-trillion cubic
feet of natural gas. It is one of the big areas that we rely on
here in the country to meet our natural gas needs. I have
always been an advocate that we need to have multiple sources
of energy. Right now we have come to rely very heavily on
natural gas.
One of the problems that we have in my State of Colorado is
that we have 69-trillion cubic feet. Twenty-nine percent of
that in the Rocky Mountain area is tied up. You cannot have
access to it because of various designations that have been
made on the public lands that are on the surface of that. Some
of these public lands have sage brush. This whole western part
of Colorado where we see so much of the natural gas. This map
perhaps does not reflect that, but particularly in the western
part is where we have sage brush.
Then the other part of it is that we have a lot of rules
and regulations. That has been of some interest because of
environmental concerns. But we are trying to reach a balance in
my State between renewable energy and natural gas and coal, and
how is it that we meet these demands. We also have surface
owner concerns in our State. Mr. Drake, I caught part of your
concerns here. Basically it is a State issue. I hope we can
keep that way and not become a Federal issue. This is a
perplexing problem for all of us.
Do any of you have a suggestion on how we can work through
this? It seems to me ridiculous that we tie up 125-trillion
cubic feet when we have every area being so adversely impacted.
What is the answer? Is it nuclear energy? Is it maybe releasing
some more of these public lands for natural gas? Do any of you
have a suggestion on how we solve our problem? Look at what
happened to the cost of gas in the last 2 years. It is just
phenomenal. I do not see how we can continue to afford it,
frankly. Does anyone want to comment?
Ms. West. Senator, I would like to respond. I think we need
to focus on renewable energy. This natural gas is going to be
gone. Once it is used up, then what do we do? We are going to
be back in the same old boat again. We have to focus on
renewable energy.
Senator Allard. I see my time has expired.
Senator Inhofe. It has. Before you came, we announced that
we are going to reconvene at 2 o'clock for the third panel. We
would invite any of you to come back for that. I appreciate
very much your being here.
We only have 1 minute left on a rollcall vote. We are going
to have to run on down there and do that. Thank you very much
for coming.
We are in recess.
[Whereupon, at 11:50 a.m., the committee was recessed, to
reconvene at 2 p.m.]
Senator Inhofe. We will call our meeting back to order.
Again, I apologize to the three of you, as I have done
individually, for the inconvenience that we have caused you by
having to come back. We deal with uncertainty in this place on
a daily basis, but not too well. We had votes. Again, I
appreciate your coming back.
I have been told that Senator Jeffords is en route. His
staff has said it is all right to go ahead. We will get a
handle. Let us start with your opening statements. Just as a
reward for you coming back, we are going to give you 6 minutes?
How is that?
Mr. Caskey.
STATEMENT OF MIKE CASKEY, EXECUTIVE VICE PRESIDENT AND CHIEF
OPERATING OFFICER, FIDELITY EXPLORATION AND PRODUCTION COMPANY
Mr. Caskey. Thank you, Mr. Chairman, and members of the
committee. My name is Mike Caskey. I am executive vice
president and chief operating officer of Fidelity Exploration
and Production Company, headquartered in Denver, CO.
Fidelity is a subsidiary of MDU Resources Group, which is a
Bismark company. We are an independent oil and natural gas
company, focused on natural gas production, engaged in
acquisition, exploration, and production activities, primarily
in the Rocky Mountain region and in the Gulf of Mexico.
Fidelity produces coal bed natural gas in Wyoming, and we
are currently the only producer of this energy resource in
Montana. I am here to discuss the obstacles we have faced in
our efforts to produce this clean-burning natural gas on
private and public lands. Today in the Rocky Mountains there is
a well-funded coordinated effort underway to obstruct and delay
the development of domestic oil and natural gas.
This effort, orchestrated by aggressive special interest
groups, is employing whatever means necessary, and the
consequences of their activity are significant. The success of
these special interest groups in delaying natural gas
production has contributed to the higher costs that homeowners
and employers have been experiencing for the past 2 years.
These costs have had a negative impact on our economy and have
led to the loss of jobs in our industrial heartland.
Unfortunately the future does not look like it will
improve. The Department of Energy estimates that by 2025 we
will need 40 percent more natural gas to meet our Nation's
demand. Some of this demand is related to our need to improve
the air we breathe.
Senator Inhofe. Give me that date again. By when will we
need 40 percent?
Mr. Caskey. 2025.
Senator Inhofe. All right. Go ahead.
Mr. Caskey. Today 98 percent of our domestic consumption of
clean natural gas comes from North America. With known domestic
natural reserves either in decline or off-limits, we must look
to other areas to meet our needs. The Rocky Mountain region
possesses an estimated 137-trillion cubic feet of natural gas
which is recoverable. This represents enough natural gas to
provide approximately 6 years of total current domestic energy
needs without any other natural gas supply. That means
supplying every American home, running every factory, supplying
every plant that uses natural gas as a feed stock, producing
all electrical power, and heating every American school with
natural gas from only the Rocky Mountain region for 6 years.
Unfortunately, the abuse of our legal system and a novel
use of the National Environmental Policy Act process, have led
to delays and the loss of production in this area. A report
done by Mr. Bluestein's company, EEA, found that if the BLM can
just increase its current drilling permit approval rate from
1,000 permits per year to 3,000 permits per year, that action
alone would have the effect of saving $88 billion over the next
10 years for the consumers of natural gas. That is a savings of
roughly 53 cents per thousand cubic feet of natural gas
consumed. That would come directly off the price of gas for the
consumer.
Here are some examples that highlight the type of activism
that has caused these delays. In 2000, after nearly 3 years of
wrangling over an environmental assessment on coal bed natural
gas production in Montana, the Government recognized the need
for a full environmental impact statement. In addition to the
nearly 3 years already consumed by the environmental analysis
process, the new EIS was expected to take an additional 18 to
20 months to complete. Instead of 18 to 20 months, the EIS took
29 months to complete. In Wyoming a similar study was initiated
at about the same time. This one took a total of 35 months to
complete. Literally hours after the records of decision on the
EIS documents in Montana and Wyoming were released, the special
interest community filed no fewer than four lawsuits.
My company, is the only current coal-bed natural gas
producer in Montana, has been sued repeatedly or has to join
regulatory agencies in defense of lawsuits against the
environmental analysis process. In total, we currently face 12
separate lawsuits challenging our ability to produce this
resource.
Defending our company against these lawsuits has certainly
cost us significant time and money. But this unprecedented
amount of lawsuits has also cost the Federal Government untold
dollars in addition to diverting human resources from more
important tasks.
The Bureau of Land Management offices in Wyoming and
Montana are charged with protecting habitats for threatened and
endangered species, reducing the risk of forest fires, and
controlling noxious weeds, along with many other
responsibilities. As you know, energy regulation is only a
small part of their work load. Yet if they are required to
expend huge financial and human resources in response to each
and every anti-development lawsuit, as frivolous as they may
seem.
One interesting point aside, the Northern Plains Resource
Council recently purchased a new headquarters building in
Billings, MT. In a local news story they complained about the
high cost of natural gas to heat the building as well as the
expense of alternate, non-fossil fuel-based heating technology.
I find it somewhat ironic that they failed to recognize that
their actions have a direct and constant impact relationship on
these costs that they are complaining about.
Members of the committee, my company is held accountable by
a set of State and Federal regulations designed to allow energy
production to proceed while protecting against environmental
degradation. The regulations have been effective, and our
Nation is a shining example to the rest of the world on the
success of environmental regulation. We have the cleanest air
of any Nation on earth.
However, the same systems that protect our ability to
produce energy, while protecting the environment, are being
misused by aggressive special interest groups. The overriding
process of this protection is defined in the National
Environmental Policy Act. Take NEPA back to its roots of
providing this protection while allowing energy development to
proceed. Do not let special interest groups misuse the process
at the expense of the American public and our energy
independence.
Members of the committee, thank you for the opportunity to
present this testimony. If there are any questions, I will be
happy to share any answers I may have. I would ask that my full
statement be placed in the record in its entirety.
Senator Inhofe. Without objection, so ordered.
Thank you, Mr. Caskey.
Mr. Bloch.
STATEMENT OF STEPHEN BLOCH, STAFF ATTORNEY, SOUTHERN UTAH
WILDERNESS ALLIANCE
Mr. Bloch. Thank you for your time this afternoon,
Senators. I am Stephen Bloch, a staff attorney with the
Southern Utah Wilderness Alliance, SUWA, in Salt Lake City, UT.
SUWA is a founding member of the Utah Wilderness Coalition, a
group of 240 national, regional, and local conservation
organizations that advocate for the passage of America's
Redrock Wilderness Act, S. 639, and H.R. 1796. That calls for
the designation of approximately 9 million acres of Utah's
stunning canyon lands as wilderness.
SUWA's mission focuses solely on the preservation of the
public lands in Utah; therefore, my testimony is only
addressing natural gas issues on Utah's public lands and, in
particular, the lands that are managed by the BLM.
There are two points I would like to leave you with. First
of all, the development of Utah's stunning canyon lands is not
going to solve our Nation's crisis in natural gas. Second, SUWA
and other conservation organizations advocate a balanced
approach of the protection of our wild places as well as
allowing natural gas extraction activities to proceed.
First and foremost, an analysis of information from the
Department of Energy, from USGS, and from the State of Utah
shows, as you can see here in Figure No. 3 on the easel, that
in Utah there are seven hot spots in our State. That is where
95 percent of the production of natural gas occurs.
Importantly, none of those lands are proposed for wilderness
designation in America's Redrock Wilderness Act.
The lands highlighted in blue are the lands that are
producing natural gas, and the lands that are crosshatched are
the lands that are proposed for wilderness. An analysis from
USGS shows that the technically recoverable undiscovered
resources in the lands that are crosshatched is less than 4
weeks of natural gas at our current national consumption
levels. Thus, it seems clear that by sacrificing America's
Redrock Wilderness, there is not going to be any alleviation of
the natural gas crisis.
Second, far from advocating a broad no-lease or no-drill
policy, SUWA and other members of the conservation community
are extremely selective about filing administrative or legal
challenges to natural gas exploration or development projects
in Utah and throughout the Intermountain West.
For example, in Utah from January 2000 through March 2004
there were more than 3,200 drill permits approved.
Conservationists challenged five of those. That is less than
one-half of 1 percent. Likewise, in Utah there were 10 seismic
exploration projects proposed from that same time period, from
2000 to 2004. Conservationists challenged four of those, and
those were only ones that crossed into lands that are proposed
for wilderness. Thus, it is not the legal challenges that are
an impediment to natural gas production and development. There
is, however, little question that natural gas exploration and
development leaves significant and lasting scars on our
landscape including the fragmentation of wildlife habitat,
long-term damage to fragile soils, the loss of wilderness
values, and damage to cultural resources.
You can see the type of damage I am talking about here.
These are Exhibit No. 3 and Exhibit No. 4 from my written
testimony Exhibit No. 3 is a sludge pit from the Long Canyon
Well outside Moab, UT. Exhibit No. 4 on the bottom is a seismic
truck that is operating outside of Arches National Park.
Stunning places like Utah's Fisher Towers and the cultural
resources such as those found in Utah's Nine Mile Canyon are at
risk now from natural gas exploration and development. These
are the resources that have now been placed needlessly in the
cross-hairs of development and production. It is clear that
these are not the places to find natural gas.
I appreciate this opportunity today. I look forward to
answering any of your questions. I would ask that my full
statement be placed in the record in its entirety.
Thank you, Mr. Chairman.
Senator Inhofe. Without objection, so ordered.
Thank you, Mr. Bloch.
Mr. Handley.
STATEMENT OF GEORGE HANDLEY, ECLIPSE
EXPLORATION CORPORATION
Mr. Handley. Thank you, Mr. Chairman. My name is George
Handley. I am the president and only employee of Eclipse
Exploration in Denver, CO. I appreciate the opportunity to
speak to you today. I am glad to see the committee's interest
in natural gas supply in America and the environmental policies
affecting its development.
Policies that either limit or encourage energy development
of natural gas resources have very real consequences. Policies
that promote the use of a particular energy source, yet fail to
provide for the necessary and orderly development of that same
resource are predisposed to failure.
I have been the victim of Federal land management policies
that allow groups that are not party to any contract with the
BLM or State to effectively stop a project through protests,
appeals, and litigation. I have been victimized by the
uncertainty that is created by abuses to public involvement
statutes. Even when I follow the laws and regulations and have
the approval of land managers, I found that I was still subject
to the reach of obstructionist groups that sought to halt my
natural gas exploration project and cripple my company.
Legal challenges severely limit oil and natural gas
development on Federal lands. At every stage of development,
obstructionist groups challenge agency decisions and seek to
stop development. For example, in the State of Utah, 57 percent
of all lease parcels offered by the BLM between 2001 and 2003,
were protested by groups opposed to development. I experienced
one of these legal challenges first hand in Grand County, UT,
on a seismic project over a Federal mineral lease. This lease
is located in the Thompson mining district, a former uranium
mining area characterized by dry, sparsely vegetated land. It
is not within view of Arches National Park. It is not
wilderness. These leases were leased during 1997 during the
Clinton administration with the expressed intent and
responsibility to explore for oil and natural gas.
Seismic technology has greatly increased our ability to map
the subsurface geology, thereby allowing exploratory drilling
in the most efficient manner. I have 30 years experience
working on seismic projects and developing petroleum
exploration plays around the world. I have a masters degree in
geophysics from the Colorado School of Mines.
In order to accurately map the subsurface geology of this
prospect, I designed the specific seismic program. Any
deviation from this program would have resulted in useless
data. WesternGeco was hired to conduct the seismic activities
on my lease. One of the employees of WesternGeco, Stuart
Wright, is one of the foremost experts on seismic exploration
and helped me design this program to ensure an accurate map of
the subsurface.
An environmental analysis was prepared following the
guidelines of the BLM. The BLM informed WesternGeco and myself
what was needed to comply with the law. We did what the
Government asked. After the permit was issued, WesternGeco
began operations. More than halfway through the project, a
judge in Washington, DC issued a ruling that stopped the
project based on a challenge by the Southern Utah Wilderness
Alliance.
My company is small and cannot afford to fight well-funded
nonprofit groups in courts. The State of Utah and WesternGeco
helped, but in the end, the SUWA won the court battle and has
all but stopped my project.
Abuse of the process delays the delivery of natural gas to
consumers and destroys the livelihood of businessmen like
myself. The more legal challenges, the more delays. The more
delays, the more consumers are affected. The more consumers are
affected, the more the economy suffers.
I am not here to debate the factual or legal merits of my
case. I use this example to lay blame on a process that allows
nonprofit groups to continually halt mineral development on
public lands. The SUWA may show you pictures and tell you
stories of horrific damage done by the incomplete seismic
project. It is misleading. There is no long-term damage to the
area. It would be hard for anyone to see the path of this
project today.
The State of Utah, the BLM, and the Grand County Council
fully support my project. Grand County is anxious for a wildcat
well to be drilled here, and for the seismic program to be
completed, as it will mean a lot to their economy. The
Intermountain West is blessed with abundant resources of
natural gas, a substantial portion of which is owned by the
Federal Government. These resources cannot be developed when
small businesses like mine face insurmountable litigation.
Abuse of the legal process puts Americans out of work and
sends energy development outside our borders. It costs the
Government, in terms of litigation costs and the potential to
pay the attorneys fees of the groups who bring the suit. I did
what I was told by the Government, but still lost and I have no
recourse. The American public bears the burden of this
litigation against the Government either way.
Thank you for allowing me to testify. I would ask that my
full statement be placed in the record in its entirety.
Senator Inhofe. Without objection, so ordered.
Thank you, Mr. Handley.
We will go ahead and have 5-minute questions.
Mr. Handley, we always hear from some of these groups about
the giants who have been stopped. Are you a giant?
Mr. Handley. You are talking with the whole company.
Senator Inhofe. Are you multinational?
Mr. Handley. No, no. Senator, I do a lot of consulting for
different companies. The last time I did anything for them was
a few years ago for Quintana in Argentina, but I was just
running a seismic crew. I do not do exploration internationally
anymore.
Senator Inhofe. Could you describe just very, very briefly
the damage that you sustained as a result of the challenges?
Mr. Handley. Well, I have provided some displays. I laid
out the seismic program with two specific purposes. We knew
that there was a basement fault feature that sets up an
exploration play that looks a lot like Lisbon Field. I have
enough information to define that fault. I should have had
more, but I was shut down. We also knew that there is a
structural closure over this basement feature. I did not get
enough information to define the structural closure. So I have
been seriously hurt in terms of delay costs, in terms of
anticipated costs for going out there and completing the
seismic program. It has hurt my ability to market this prospect
because all the acres have not been defined.
Senator Inhofe. Mr. Bloch, your website refers to our state
of affairs as ``the fabricated energy crisis.'' What do you
mean by ``fabricated energy crisis.'' Do you think it is not
real.
Mr. Bloch. No, Senator; I think SUWA and the conservation
community is as concerned as everyone you have heard from
already at this hearing. I think our concern is the use of the
so-called ``crisis'' to lift some of the important
environmental protections afforded by statutes, such as NEPA,
to lift the protections of those statutes and to allow for an
expedited process, starting from the leasing stage all the way
to production. That is going to cause significant environmental
damage as a result. So I think that is our concern.
Senator Inhofe. Do you believe there is an energy crisis?
Mr. Bloch. I think I would agree with the other statements
made today that there seems to be shortages of natural gas in
some of the places where it is needed most.
Senator Inhofe. So there is an energy crisis? Yes or no?
Mr. Bloch. It certainly appears that way from what we have
heard.
Senator Inhofe. Why would you characterize it as a
``fabricated energy crisis'' then?
Mr. Bloch. Well, as I said, Senator, our concern is how the
shortages are being used by certain folks to lift, as I said
before, some of the restrictions.
Senator Inhofe. Mr. Caskey, is there an energy crisis?
Mr. Caskey. Yes, sir.
Senator Inhofe. Do you think it is fabricated?
Mr. Caskey. No, sir.
Senator Inhofe. Of all of the obstacles that you have that
you have described in your testimony, special interest groups,
the delays in any number of projects, the relative uncertainty
related to all the delays. What does this do to your production
capability? Are you impaired? I am thinking about the
manufacturer worker in Ohio and maybe the little lady in Rhode
Island trying to heat her home. What do these delays mean in
terms of costs? Have you figured any way to quantify that?
Mr. Caskey. I have not quantified it on a large-scale
basis, but I can give you an example of what one instance can
cost and what that one instance would do for the lady trying to
heat her home in Rhode Island, for instance.
We have been issued 87 permits to drill wells by the BLM in
Montana. We had drilled those wells. One of the special
interest groups decided to protest the drilling of those wells
and the appropriateness of the BML of giving us those permits.
They asked for a State director review of those permits. The
State director decided that he would put a moratorium on until
he could get through the review. Before he could even make a
statement on whether or not the review, or what to do with the
permits, BLM was sued by that group. He later came out and
said, ``We need to send it back. Remand it back to the field
office.'' The new ratification, basically, of those permits
came out and we are back drilling.
The problem with that is that it took 3 months for that
process to happen. Those were 87 wells that were prevented from
producing. The money was already spent on them. They were
drilled to the zone and we were unable to produce. A quick
estimate would show that that probably cost in the realm of
anywhere from $3 million to $8 million for that 90 days for
those 87 wells, which if you want to translate it down to
royalty for the Nation, that is roughly $400,000 in Federal
royalties alone, half of which goes back to the poorest
counties in one of the poorest States in the Nation.
So, it is a dramatic impact, not just for the company, but
for the governments and the people who live and thrive in the
areas that we are trying to produce the resource from.
Senator Inhofe. Thank you.
Senator Jeffords.
Senator Jeffords. Mr. Bloch, there has been conflicting
testimony on the number of leases in Utah challenged by the
environmental community. Can you provide additional detail for
the committee on the number of challenges that took the form of
litigation? In how many cases were violations of Federal
environmental law cited?
Mr. Bloch. Senator, there have been two lawsuits. The first
was filed in the winter of 2001 and that was later dismissed by
SUWA. The second is a lawsuit that we filed in November 2003.
It is for the issuance of the sale of 21 leases in the State of
Utah. There are a series of NEPA violations that SUWA has
alleged, as well as other statutes. These are sales of leases
on lands that the BLM itself acknowledges are wilderness-
quality lands.
Senator Jeffords. Also, Mr. Bloch, to what extent has
changing the Administration's guidance on NEPA fueled
litigation in an effort to clarify the requirements regarding
the content of environmental impact assessments?
Mr. Bloch. I think there has been a substantial change in
this Administration. It seems to be flaunting the very purpose
of the act to think first and then act. Instead of seeing a
through assessment or an analysis of the environmental impacts
of leasing through production, instead there is a hurried
process that simply results in a checklist instead of a through
analysis. That is the crux of some of our concerns; that in the
hurry to sell these leases, for example, that the wilderness
quality lands of Utah are being leased away and scarified, as I
said earlier, with very little result in natural gas
production.
Senator Jeffords. Mr. Caskey, in one of the attachments to
your written testimony, you provide a chart detailing
challenges to environmental documents made by a variety of
environmental conservation and landowner groups. Not all of
these challenges appear to be actual NEPA legislation.
Can you provide an updated version of this chart for the
committee that describes the nature of these challenges and
under which Federal law these leases were challenged?
Mr. Caskey. Yes, sir; I will do that.
Senator Jeffords. I would appreciate that.
Senator Inhofe. Without objection, so ordered.
Senator Jeffords. Mr. Caskey, in your written testimony you
state that it is this NEPA process of evaluating land use in
development plans, and not the law itself, which has become the
principal tool used by obstructionists to delay or halt natural
gas development. As the law requires the development of
environmental impact statements, can you explain in more detail
the distinction that you are drawing between the law and the
EIS process? Are you saying that a change in NEPA law is not
needed to remedy the problems you have experienced, and just a
change in the implementation of the law?
Mr. Caskey. I think the law itself is reasonably sound. I
think there are always definitional issues when you start
applying the law that can be streamlined. I do feel very
strongly that the process, the time guidelines within the NEPA
process, are the crux of the issue for the abuse of the law, as
well as the process.
The law allows for designated timing of input from the
public from special interests groups, and from all citizens of
the United States. That timing is designated in the law. The
abuse comes where special interest groups sue to slow down that
process which, as I testified to earlier, delays the issuance
of the necessary documentation which delays realization of the
investment made. That is the primary issue here.
Senator Jeffords. Thank you.
Mr. Handley, in your testimony you say that 57 percent of
all lease parcels offered by the Bureau of Land Management
between 2001 and 2003 in the State of Utah were protested by
groups opposed to development. What was the nature of these
protests? Did they all involve allegations that Federal
environmental law had been violated?
Mr. Handley. Senator, I do not know. It was just a
statistic that was given to me. I do not know what the nature
of what the protests were.
Senator Jeffords. Were these protests all in the form of
lawsuits?
Mr. Handley. I do not know that either.
Senator Jeffords. Thank you.
Thank you, Mr. Chairman. That is all I have.
Senator Inhofe. Senator Voinovich.
Senator Voinovich. I had the same concern. On your website
you mentioned ``fabricated energy crisis.'' Were you here this
morning for the testimony?
Mr. Bloch. Yes, I was, Senator.
Senator Voinovich. After hearing that testimony, would you
say that there really is an energy crisis?
Mr. Bloch. As I stated earlier, I would agree that all the
speakers indicated that there is a crisis.
Senator Voinovich. The question I have is: How are we going
to deal with the crisis?
Mr. Bloch. I am not sure about the answer to that, Senator,
but I do know the answer is not to sell new leases and allow
activities, such as wildcat wells in areas that are not
predicted by the Federal Government and its figures and its
agencies to produce any meaningful amount of natural gas, and
that there needs to be a balance from production and
preservation of lands.
Senator Voinovich. Do you have any feelings about nuclear
energy or coal-fired power plants? What does your company feel
about nuclear power?
Mr. Bloch. We do not have, to my knowledge, an official
position on either of those, Senator.
Senator Voinovich. How about burning coal?
Mr. Bloch. Well, I think there are several coal-burning
plants in Utah. I think our primary concern is the expansion of
the plants. If you have spent any time in Salt Lake City, or in
the Salt Lake Valley, I think it is among the worst 10 airsheds
in the country. So our concern is the effect on the air.
Senator Voinovich. There seems to be a real problem, then,
does it not, with dealing with this energy crisis that we have,
the natural gas crisis, but also an energy crisis in the
country?
Mr. Bloch. Senator, on the first map that I showed before,
speaking only about the State of Utah, I do not think that
there is this type of a crisis. There are identified locations
for coal-bed methane for natural gas. As I indicated, 95
percent of the production now and the other proven and inferred
reserves are in these seven hot spots. There is not a conflict
between the extraction in those areas and the preservation of
some of our wild lands.
Instead, though, the focus we are seeing from this
Administration is to target those lands that are not predicted
to have any type of meaningful natural gas for leasing and for
extraction.
Senator Voinovich. I would like to have Mr. Caskey and Mr.
Handley's response to that. Do you feel that the Administration
and their policy of opening up some of these areas is
irresponsible and making available areas that ought not to be
drilled?
Mr. Handley. The area where I am doing my exploration is
not a wilderness. It is in Grand County, UT. Grand Country
really has only one economy right now. It is tourism. It is
basically out of the town of Moab and Arches National Park.
There are a couple of parks south of there.
I have been to the area. It is fairly desolate. It was an
old mining district. The town desperately wants my program to
go through. I have been out there to speak with the town and
the management. I have spoken with the Grand County council.
This would be a perfect use for this land. This land is not
pristine. It is an old mining district. It would be a perfect
place to explore and drill for oil and natural gas. It would
mean much to their economy.
Senator Voinovich. Mr. Caskey. The allegation is that the
Administration has opened up a number of areas that ought not
to have been opened up. It is my understanding that the reason
they did it is because we have a crisis. They feel that you can
drill in those areas and it is environmental responsible.
Mr. Caskey. I think if it is done according to the law as
it stands now, it is absolutely environmental responsible. I
think it can be managed very well. We have proven we can do
that. I also find it very interesting that the obstructionist
community feels that 6 days, or 2 weeks, or 3 months, or 6
years of lack of natural gas is not consequential.
I would like to ask that same community which communities,
Los Angeles, the whole country, is going to do without gas for
3 months? That is a difficult question to answer. I think that
is the one that we have to look at.
Like some of the testimony this morning, I feel that the
fellow who was talking about the agricultural use of natural
gas as a basic stock for fertilizer, again what are we going to
do? I am not so much worried about price. What are we going to
do when we cannot get it at any price? That is the question we
have?
Senator Voinovich. Have you looked at the energy bill?
Mr. Caskey. Parts of it. I have not read the whole bill
through.
Senator Voinovich. Have you read the parts that impact on
you?
Mr. Caskey. Absolutely.
Senator Voinovich. In your opinion, are they going to help?
Mr. Caskey. I think they will help. I think it needs to get
done in a hurry to help because I think the hole is getting
deeper and deeper. The supply is declining. The demand is
increasing. The catchup is going to take longer, regardless of
what the legislation does.
Senator Voinovich. Would it do anything about the lawsuits
that Mr. Bloch's group can file or anybody else's?
Mr. Caskey. Actually, fortunately, Mr. Bloch's group has
not filed any lawsuits against my company. The lawsuits are
going to be there. That seems to be a pattern that the groups
are taking these days to obstruct the development of natural
gas and oil.
Senator Voinovich. Mr. Handley, have you looked at the
energy bill?
Mr. Handley. Yes, I have. But just in parts. You have to
remember that I am a very small piece of the picture. I am an
independent. I have looked at the energy bill. I do not think
it goes far enough to try to attempt to solve the problem that
we are having in the United States.
Senator Voinovich. But the fact is that there is more of an
opportunity to open up areas, but it does not do anything about
the remedies that are out there that you are contending with
right now. So I guess the argument I would make, Mr. Bloch, is
that even if these things are opened up, the same avenues are
available to organizations to come in and file lawsuits and
take advantage of the NEPA law and so forth?
Mr. Bloch. Well, Senator, I guess that's right. Those
avenues are still going to be available. I think there are
certainly some efforts that are being made to curtail the
process. I think it is important to come back to some of the
numbers right now, as things stand.
The Assistant Secretary of the Interior testified in front
of the House in 2003, and she talked about how in the Rocky
Mountain West a full 88 percent of the lands are available for
natural gas exploration and for leasing. It is not a situation
where there are too many lands that are off limits. I think it
is important to have some of those facts out there and to make
sure that that is front and center. It is not a situation that
there are too many lands that are off limits. In fact, it is
only the special places that are off limits. There needs to be
that type of a balance, quite frankly.
Senator Voinovich. I guess the problem that we have today
is: Where do you strike the balance? From my perspective, we
have been striking it in a way that we have been neglecting the
reality of some of our policies. I am very interested in
protecting the environment, but at the same time, we have to
balance that with where this country is going. We have some
real severe problems.
I have looked at the energy bill. It helps, but it does not
get at it. We are going to have this around for awhile and
until we get the liquid gas coming here, if they are going to
make that possible, and then hopefully we will open up and get
that natural gas coming out of Alaska. We are in for a rough
road right now. I think that everyone has to be aware of that
situation and take that into consideration when you are
developing the balance that you are trying to reach.
Mr. Bloch, from my perspective of being here for 5 years,
and I used to testify before this committee when I was Governor
of Ohio, it just seems that too often when we are doing our
environmental policies, we just ignore the impact that it has
on the economy and our energy supplies in this Nation. I do not
think we can keep doing that for too much longer. If we do, I
think you are going to see a real diminishment of our overall
quality of life, and in terms of quality of life for people who
live in my cities. My county probably has more people than your
State has.
The point I am making is that there are a lot of people
that live in our inner cities and what we might refer to as
ghettos, that are really up against it. When they are paying
100 percent for their natural gas costs, it is the difference
between buying food or having clothes or maybe paying their
rent. We just keep talking about, ``Well, it is the
environmental issues.'' I sometimes think that probably some of
your members do not know those people are there.
Mr. Bloch. Senator, I am a native from your own home State.
I grew up on the southeast side of your home city. I am from
Chagrin Falls, OH. I think that there can be that kind of a
balance. I think that some of the lands in Utah, my home State
now, can be protected and that there is still an opportunity to
increase the production of natural gas. The concern that I am
here to tell you about is that the wild places that Ohioans
come to visit are at risk from the energy policy of this
Administration that is targeting these lands. It is not for
their natural gas values.
Senator Voinovich. But the point I am making is that even
if I agree that is what it was, and I cannot believe it was a
willy nilly thing, to just forget about it and open the gates
regardless. The same remedies are still available to everyone
in the event that if they move in the areas, you can still do
your thing, right? We have not taken anything away from you;
have we?
Mr. Bloch. Not yet, sir.
Senator Voinovich. Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Voinovich.
In my opening statement I quoted from the Clinton
administration document praising the gas producing industry for
their stewardship, for what they have done. Specifically they
said it is important to tell this remarkable story of
environmental progress and of the greater awareness of the
industry's achievements in environmental protection will
provide the context for an effective policy.
I sense from some of the groups that I hear, perhaps yours
and others, that you do not agree with the previous
Administration, the Clinton administration, as to the
stewardship that is provided by the gas-producing industry;
would that be correct?
Mr. Bloch. Senator, speaking again from the perspective of
Utah, I think it still comes to this question of balance. When
there are projects taking place in some of these seven hot
spots, those are not places where you are seeing any of the
legal fights. As far as I can tell, the stewardship that is
being provided by industry in those places seems to be meeting
environmental standards. If it is not, I am sure that it will
be challenged by somebody else. But the areas that we are
concerned first and foremost about, are these other wildlands
that do not have the resource and yet are still in the cross-
hairs.
Senator Inhofe. Several times you have used the term that
the government has determined that there is not adequate
capability or production to justify it. Each time you said that
I thought: Is this really the role of government? Is this not a
supply and demand thing? These people who go in, and they want
to explore, it is a tremendous investment. They do so based
upon the best knowledge that they have. They are not going to
go into some place unless they feel that there is an
opportunity to get the results; is that not correct?
Mr. Bloch. I think that is correct for an individual such
as a wildcatter, but I think that there needs to be a balancing
in between the hopes of a single individual and the profit that
he is going to make, and the protection it places by the BLM in
a public trust for all Americans.
Senator Inhofe. Well, how about all Americans who cannot
heat their homes and who cannot have jobs because manufacturers
are moving overseas?
Mr. Bloch. That is not where the natural gas is coming
from, Senator. That is not what the figures from the Government
show.
Senator Inhofe. Let me ask you a question. You are
concerned mostly with Utah?
Mr. Bloch. That is correct.
Senator Inhofe. I think we have determined that we all know
that there is a crisis right now. You heard the testimony this
morning. The price of fertilizer has doubled in the last 6
months. That is a crisis; is it not? Who pays the price for
that crisis? It is the public; is it not? They are the ones
that are trying to buy, that is passed on?
Mr. Bloch. I think that is correct.
Senator Inhofe. The cost of heat, the little old ladies
that we talked about up in Rhode Island that the Governor is
concerned about. I hope we are all concerned about that. So I
think the crisis is here.
I think Senator Voinovich brings up a valid point. I was
anxious. I hope I heard you right when he said there are other
forums of producing electricity. There are fossil fuels. There
is burning coal. Do you have a problem with that?
Mr. Bloch. Senator, my organization, to the best of my
knowledge, at this point is not taking a position on a number
of proposed expansions in Utah. I can think of three off the
top of my head. There are expansions of existing coal-burning
plants or new plants.
Senator Inhofe. Well, I think that your organization is
concerned, obviously, about having adequate electricity and the
generating capability. Let us just say that in southern Utah
where there is a plentiful supply of sun and wind, would you
support construction of wind turbines and solar panels in
southern Utah?
Mr. Bloch. I think we are supporting those. Of course, it
is our hope that they would be environmentally sensitive where
they are being sited. But there are some that are being
proposed in northeastern Utah close to the Wyoming border. I
think we are fully on board with that, Senator.
Senator Inhofe. Oh, you are? There are some groups, I know,
that are now opposing some forms of renewables, wind
specifically. I am glad to know that that is your policy. We
will remember that. I have a feeling this may come to surface
in the future. It is nice to know that we have an ally.
Mr. Bloch. Let me be sure that I have explained it
correctly. There are some proposed wind turbines in
northeastern Utah that are close to the Wyoming border that we
are in agreement with. As far as additional ones in Utah's west
desert, or in southern Utah, I think we have to look at it on a
case-by-case basis.
We are concerned about the siting of the turbines, but as
far as in principle, it is something that we are in agreement
with.
Senator Inhofe. Mr. Handley, Mr. Caskey, and Mr. Bloch, you
have come a long way. We are not under the pressure that we
were prior to when we had to recess. Is there anything that you
feel that you should share with this committee that you have
not had a chance to do up to now?
Let us start with you, Mr. Handley.
Mr. Handley. No, I will just give you a short summation. I
am an independent. I took these leases from the Federal
Government and from the State of Utah with the expressed intent
that I was going to evaluate it for its petroleum potential. I
had the responsibility to do that. When the Government gives
you a hydrocarbon mineral lease, you are expected to perform on
that lease.
I went out there and I did everything the Government asked
me to do. It was an arduous process dealing with the BLM. They
were very strict. After I had my permit, I was shut down in
Washington, DC after a judge issued a decision based on an
appeal by SUWA. I had basically no recourse. I did everything I
was supposed to do. It took me by great shock. This is not a
wilderness area. This is in a county that desperately wants
this exploration program to go forward.
Senator Inhofe. Mr. Bloch, I was just handed a note that
you have to catch a plane and that you have to leave in just a
matter of minutes. Is there anything that you would like to say
prior to that, and then, of course, you can be excused?
Mr. Bloch. Thank you, Senator. In response to something
from Senator Voinovich, I think, Senator, you are exactly
right. How do we draw the line for balance? How do we arrive at
that balance? I think that the position of my organization and
of the conservation community that focuses on Utah, our view is
that this Administration is out of balance in how it is
targeting the lands that by all estimates are not predicted or
known to contain natural gas and are, nevertheless, in the
cross-hairs of development.
Senator Voinovich. I would just comment that logic would
tell me that if what you say is true, who is going to go in
there? Why would you bother going into an area where you say
there is nothing there? If I am a businessman, and I have to
borrow money to go ahead and do this, I would have to be insane
to go into an area like that and spend money when the result of
my work would not be productive.
Mr. Bloch. Again, Senator, the answer is, this is not the
major companies. It is either the mid-majors, or the
independents, or wildcatters who are going in for the profit of
a few individuals, again at the price of the loss of a national
landscape.
Senator Voinovich. Thank you.
Senator Inhofe. Mr. Caskey.
Mr. Caskey. Thank you, Senator. I am one of those
independents. I represent one of those small middle-sized
companies. We have 100 people in our company. We produce about
200-million cubic feet of gas per day. That is not a big
producer. That is a medium-size producer. We are being stymied
with respectively large investments. We are being stymied by
the process, like I testified to earlier. This needs to somehow
change. Otherwise, we are not going to have the supply that
everybody is so worried about. And the ``crisis,'' if that is
what we have agreed on, is what is occurring right now, will
perpetuate itself. This is not going to get easier.
The legislation that I have reviewed, or the pieces that I
have reviewed, does not answer all of the questions and does
not put us on the road to recovery. It will help, but as long
as the process is being abused, we are going to stay in this
turmoil and we are going to have the disparities between the
time we can produce the gas and the time it is needed. I hope
that does not happen when it is 40 degrees below zero in the
Northeast. Thank you.
Senator Inhofe. All right. Let me thank all three of you
for coming back and having to be delayed in your testimony. We
appreciate it. You have been very helpful. We thank you for
coming.
We are adjourned.
[Whereupon, at 3 p.m., the committee was adjourned, to
reconvene at the call of the chair.]
[Additional statements submitted for the record follow:]
Statement of Hon. Wayne Allard, U.S. Senator from the State of Colorado
Mr. Chairman, I want to express my appreciation to you for holding
this hearing. As I think we are all aware, increasing amounts of
natural gas are being used strictly by power plants for energy
production. It is also heavily utilized for home heating throughout the
country. Demand for natural gas has increased sharply, this has put
quite a strain on natural gas supplies.
There are any number of reasons that natural gas demand has
increased so dramatically. New guidelines were placed on power
production facilities by amendments made to the Clean Air Act in 1990.
This has resulted in the fact that virtually every power production
facility built since passage of these amendments operates by burning
natural gas for power production. This is one of the major contributors
to the increase in demand for natural gas and consuming otherwise
available gas supplies.
During the same time period, natural gas development levels have
remained basically flat which has driven the wholesale cost of that
commodity up. As a natural result of increased demand and a level
supply, we are seeing some of the highest natural gas prices in recent
memory. Endless lawsuits, onerous ``red tape'' and regulations have
greatly hindered new development and have made it very difficult for
private companies to develop resources on public land--where most
supplies that have been currently documented are located.
These lawsuits and regulations have also made it very difficult to
add transmission capabilities. There is a severe shortage of
transmission throughout the country, but any attempts to site new
pipelines are met with more resistance and additional lawsuits. The
lack of transmission capability restricts the ability to move supplies
even if they can be developed.
I find it very interesting that the same special interest groups
that encourage gas fired generation of electricity, oppose granting
leases and permits to enable facilities to bring more natural gas on-
line. Those who mast strongly argue the need for gas fired generation
are very often those that file the lawsuits that hold up new production
and transmission. We simply can't have it both ways.
The vast majority of gas supplies in the west lie under Federal
land. It is important that we make these supplies available for
production. Government owned, public lands were always intended to be
available for multiple uses. Certainly there are places where one
couldn't imagine production taking place. But land should not be
arbitrarily made unavailable for development. These areas should be
throughly assessed and, if they indeed qualify as areas in which
development would severely impact the land, development can be
restricted accordingly.
While increased development will mean more natural gas on the
market, gas production requires skilled workers, so it will also mean
more jobs are available. Developers also pay local and State taxes on
the gas that they extract. This is very helpful to residents in rural
areas that often have low tax bases.
We must have more production from domestic energy sources including
oil, natural gas, clean coal, nuclear, and renewable resources. The
future of our energy supply must be a diverse one, and natural gas
clearly must be a part of that make-up.
For all of these reasons I am grateful that the Committee is
holding this hearing and I look forward to the testimony that we will
receive here today. Thank you, Mr. Chairman.
______
Statement of Martin Kelly, President and CEO, Moraine Molded
Plastics Inc.
My name is Martin Kelly, President and CEO of Moraine Molded
Plastics Inc., located in the northern suburbs of Cincinnati, Ohio. I
submit this statement for the record to assist the Committee in
proceeding with concrete actions to address the Nation's natural gas
problem. Many of these same concerns have been expressed by Alan
Greenspan to Congress (see Appendix 1). He believes as I do that
solving the natural gas problem is critical to the short term viability
and long term growth of the domestic manufacturing economy.
Plastics is a critical U.S. industry, providing products that make
modern life possible. The industry also is a critical slice of the U.S.
economy, providing $310 billion in annual shipments and employing 1.4
million workers nationwide. In 2002, more than 112,000 of those jobs
were in my home State of Ohio, which created more than $21 billion in
shipments, ranking it second in the Nation for plastics jobs and third
for plastics shipments (see Appendix 2 for the plant and employment
data on the states represented by the EPW members).
My company is a plastics injection molder that employs about 50
workers that mold plastic parts for manufacturers of office equipment,
industrial products, and liquid dispensers. We operate in a very
fragmented market place, with about 4500 competitors worldwide. Moraine
Products focuses on a small market segment that emphasizes product
quality, high volumes, and engineering support in trying to
differentiate our products. Yet, with many competitors offering similar
product attributes and customer support, the bottom line for most of
our customers is price: am I able to provide the products that they
want at the lowest cost to them?
In answering that basic question, surging natural gas costs over
the past few years, with unprecedented volatility in prices, is really
hurting my company and the entire plastics industry in two basic ways,
and is removing my ability to be the low cost provider, a provider of
good jobs and a provider of benefits to my employees and retirees.
<bullet> First, we use a lot of basic resins such as polypropylene,
polystyrene, and polyethylene, all derived from petrochemicals. Even
the more advanced raw material resins that we use have the same origin
from petrochemicals. As the price of natural gas has exploded to almost
2.5 to 3 times in price over the past 2-3 years, the costs of my resin,
my basic raw material, have increased proportionately. The resin
manufacturers--my suppliers--have to pass on some of the natural gas
costs to me in order for them to remain competitive in their U.S.
operations. As a matter of fact, over the past 5 months since December
1, 2003, I have received resin price increases every month--a total
increase in my resin costs of about 36 percent! These increased costs
to me are directly from energy costs imposed on my resin supplier.
<bullet> Second, when these resins are molded into plastic parts,
the molding machines can require temperatures of up to 600 degrees
Fahrenheit, and pressures of up to 4000 pounds per square inch. The
molding machines that do this are significant consumers of energy. It
turns out that the electricity for many plastics processors,
particularly in the southwest and southeast, are supplied by gas-fired
utilities. Thus, as natural gas prices have escalated, local utility
companies--after the regulatory rate-paying authorities approve the
``pass through'' fuel cost increases to all local consumers--send
utility bills, that continue to increase, to the processors.
Consequently, many in the industry have electricity bills that have
almost doubled over the past few years, and with the resin price
increases, we have to try and pass these costs downstream to our
customers in order to stay in business. With my competition abroad
having ample and much lower priced natural gas, this problem of passing
our increasing raw material and energy costs--driven by natural gas--to
my downstream customers, is becoming much more problematic.
I should note that, while my equipment suppliers have made major
increases in energy efficiency of my manufacturing machines over the
past several years that helps lower the amount of electricity used per
product produced, these improvements cannot overcome the almost doubled
electricity costs for the energy required to run these machines. The
market signals have been clear: energy efficiency improvements are here
to stay.
I do not want my company to become one of the manufacturing
casualties reflected in recent Bureau of Labor statistics. As BLS data
reflect, the U.S. has lost over 2.2 million manufacturing jobs since
1998. In fact, the BLS data reflect that since 1999 Ohio has lost
173,100 manufacturing jobs (see Appendix 3). Specifically for plastics,
data from The Society of Plastics Industry, Inc. (SPI), the trade
association that represents the U.S. plastics industry, including my
company, indicates that plastics employment declined more than 9
percent from 2001 to 2002, and shipments declined nearly 7 percent in
that same time period. Energy policy--or the lack thereof--is a
significant reason for this decline.
Some folks are calling much of this loss of manufacturing
``outsourcing'' when it really should be called ``offshoring.'' My
company is not a multi-national company. I don't have the option of
moving production to another facility in another country. I'm a
typical, small plastics manufacturer, of which many such companies are
(and were) located throughout the Midwest, including a major presence
in Ohio.
The simple truth is that the combination of high energy and
feedstock costs, rising health care costs, increased costs from
Federal/State regulations, and major increases in insurance/litigation
costs are driving many of our companies out of business. You just can't
compete if these domestically imposed costs are increasing at a time
when our global competition has significantly lower operating costs
that enable them (and not us) to establish a price level to customers
that many of us cannot meet.
This loss of manufacturing in the U.S. and in Ohio, and the adverse
impact on my small company in Cincinnati, are primarily the result of a
natural gas imbalance in the United States. We need help NOW to lower
my resin feedstock and electricity costs, both of which are increasing
because of demand exceeding the supply of natural gas. Today, as most
analysts have concluded, the United States has the highest priced
natural gas of any country with a supply. How can I compete against
companies making plastic parts using resins and electricity based on
natural gas costs that are in the range of 40-60 percent lower than
mine? As the Washington Post article in the Finance section on March
17, 2004 reported, ``In the past 5 years, U.S. natural gas prices have
roughly doubled as more and more electrical plants consume the clean-
burning fuel but supplies stay stagnant. Other parts of the world--
including Western Europe--pay far less.'' For the record, the entire
Washington Post article is at Appendix 4.
RECOMMENDATIONS OF THE NATIONAL PETROLEUM COUNCIL
What can we do? What are the solutions? To help this Committee
respond to these questions, I refer to the National Petroleum Council
Report, ``Balancing National Gas Policy'' dated September 25, 2003, and
offer the following, selected findings and recommendations from that
report. This report is significant because it included a broad-based
demand panel.
<bullet> First, gas consumption will continue to grow, but such
growth will be moderated as the most price-sensitive industries become
less competitive, causing some industries and associated jobs to
relocate outside North America.
The relocation of industries and jobs is happening now. Homeowners,
utilities, commercial users such as local transportation agencies using
natural gas (e.g., natural gas buses), and the industrial sector are
all feeling the pinch. However, the industrial sector, such as the
plastics industry, is the only one that has to meet a globally imposed
ceiling on costs from natural gas, and the only one that is ``mobile''
in the sense of going out of business or relocating abroad. This is
called ``demand destruction'' and helps explain why job losses are
occurring. This also explains why gas consumption growth in the
outyears will be moderated--gas will be freed from companies going out
of business, and that gas will then be available for the other
consuming sectors to use. The report also makes clear that the U.S. is
a net importer of natural gas and we will never again be self
sufficient in gas supply.
<bullet> Second, a balanced fuel portfolio is essential. This
includes renewables (e.g., wind, solar, fuel cells), oil/distillate,
coal, hydroelectric and nuclear.
A balanced portfolio of energy resources is critical. By
maintaining/expanding nuclear, by increasing the investment in and use
of advanced coal technologies, by emphasizing renewables where
reasonable and economical, we can help alleviate some of the nation's
ever increasing demand on scarce natural gas. If we can provide more
industrial users access to natural gas then we will have a better
chance of maintaining operations in the U.S. and helping stabilize and
perhaps grow the number of manufacturing employees in this country.
<bullet> Third, gas-fired electricity generation buildup has
reshaped natural gas demand.
This is by far the major driver in this country's increased demand
for natural gas. From about 780 gigawatts of electricity demand in
1995, to about 900 gigawatts in 2004, increasing to about 1400
gigawatts in 2025 in order to meet increasing population growth and
needs in the U.S., most of this growth is planned from new, natural
gas-fired utilities. But, where is the growth in natural gas to come
from? Unless this specific driver of demand is ameloriated, the
``demand destruction'' referenced above will be one of the supply
sources to help meet this demand. We should not let this happen. We
cannot let this happen. We must assure that U.S. use of coal grows in
the future.
<bullet> Fourth, increased access to U.S. resources (excluding
designated wilderness areas and national parks) could save consumers
$300 billion in natural gas costs over the next 20 years.
The U.S. is the only developed Nation in the world that is not
developing all of its domestic natural gas energy resources. Instead,
we continue to drill for natural gas in the same old areas that are not
``off limits.'' As the NPC study indicates, traditional North American
producing areas will provide 75 percent of long-term gas needs, but
will be UNABLE to meet projected demand. The supplies by pipeline from
Canada will decline as they face the same problems with declining
production from mature fields as the U.S. Mexico will continue to be a
net importer of gas from the U.S. Future supplies must come from
traditional as well as new sources (including new drilling areas,
liquefied natural gas, and gas from Alaska). From 21-22-trillion cubic
feet of natural gas demand annually in 1990, the demand is gradually,
at an increasing rate primarily from the utility generation sector,
growing to 33-trillion cubic feet by 2025. This is a 50-percent
increase in demand over this period, in the face of only a slightly
increasing supply of natural gas. We need to seriously consider our
natural resources of gas in the Rockies, off the Pacific and Atlantic
Coasts, as well as in the Gulf of Mexico. In the Rockies and Deepwater
Gulf of Mexico, our production absolutely needs to grow now.
<bullet> Fifth, increased access and reduced permitting impediments
to development of lower-48 natural gas resources.
According to the NPC report, increased access could reduce natural
gas costs by up to $0.50 per million BTU in 2002 dollars. Further, as
mentioned above, current areas that are restricted have enough natural
gas to meet our shortfalls now and in the future. The NPC report shows
that, while the number of natural gas drilling rigs has more than
doubled over the past several years, the supply of gas from the same
old wells is basically constant. Thus, the best that can be said is
that production response from increased drilling has been modest at
best.
<bullet> Sixth, LNG imports can lower costs to consumers.
While important, we cannot alleviate our natural gas problem with
just LNG imports. But, as the NPC report states, both Arctic gas and
LNG imports are available and could meet 20-25 percent of natural gas
demand by 2025. But, both are higher-cost, both have longer lead times,
and both face major barriers to development. In fact, as I'm sure the
Committee is aware, just in the past few weeks a planned LNG terminal
in the State of Maine was rejected by the local populace, based on
(unfounded) fears of safety and security.
<bullet> Seventh, Arctic Pipeline projects can deliver important
new supplies.
My company, as well as our industry association SPI, favors
legislation that expedites an Alaskan gas pipeline. We need to access
the natural gas reserves in both the Alaskan North Slope as well as in
other productive regions. But, again, this is long term and will not
help me or others with the natural gas problem in the near to medium
term.
CONCLUSION
In summary, as a small plastics manufacturer in Ohio, I know that
solving the natural gas crisis is not an easy task, for this Committee
as well as others in the Congress. But, I do know that my business
survival is dependent on doing just that. I also know from individuals
on fixed incomes that the increased costs of utility bills, just like
mine, are forcing hardships. Retirees on fixed incomes have to choose
between air conditioning or pharmaceuticals for health. Single parents
on welfare have to choose a balance between food for the children on
the table or at school, or heat for the home. All are difficult
situations.
We can make great strides forward, in my view, by doing the
following:
(1) Ensuring a robust energy policy for this nation. We need a good
balance between clean coal, nuclear, hydro, natural gas, oil, and
renewables for our energy sources. We should not, for example, follow
extremist views that argue for no growth at all in coal, but rather
declines. Coal is our biggest and most available domestic energy
resource. We need to use it.
(2) Reducing demand for natural gas in two basic ways. First, a
program of conservation now across all consuming sectors can yield our
best way in the short-term to avoid further job losses and to free up
natural gas for the industrial sector. Second, we need to look at ways
that the utility sector can use more clean-coal instead of natural gas
as the energy source to meet the rapidly increasing demand for
electricity in this country. We must avoid any proposal that blocks the
growth of coal for electricity.
(3) Rapidly approving and siting LNG terminals in the coastal
areas, including the Pacific, Northeastern Atlantic, and Gulf areas.
While longer-term, this will go a long way toward helping stabilize
natural gas prices and dampening volatility in prices, since the
markets would then be connected on a global basis, rather than the
current regional or local basis.
(4) Opening up the resources available in Alaska, and passing
Federal legislation that would enable a pipeline to the lower-48. This
is a longer-term supplement, but will be needed with all the other
sources to meet the nation's demand through 2025 and beyond.
(5) Finally, and probably the most contentious, is to open up the
very large natural gas resources in this country that are currently
``off limits.'' It is my considered opinion that most of the objections
to these areas are based on ignorance. It just doesn't make any sense
for the U.S. to be the only developed Nation in the world that refuses
to develop its natural resources like this. No sense at all.
In summary, I thank the Committee for allowing my statement to be
inserted in the record at this Hearing. I am just a small company
trying to survive the increased costs wrought by the natural gas
crisis, and do hope that my views have provided some insight as to how
the Nation's leaders must proceed to resolve it.
I will be pleased to respond to any questions the Committee might
submit in writing.
______
APPENDIX 1
Testimony of Chairman Alan Greenspan
[Excerpts--emphasis and notes added]
NATURAL GAS SUPPLY AND DEMAND ISSUES
. . . Canada, our major source of imported natural gas, has had
little room to expand shipments to the United States,
. . . and our limited capacity to import liquefied natural gas
(LNG) effectively restricts our access to the world's abundant supplies
of gas.
Our inability to increase imports to close a modest gap between
North American demand and production (a gap we can almost always close
in oil) is largely responsible for the marked rise in natural gas
prices over the past year. Such price pressures are not evident
elsewhere.
In the United States, rising demand for natural gas, especially as
a clean-burning source of electric power, is pressing against a supply
essentially restricted to North American production.
Given the current infrastructure, the U.S. market for natural gas
is mainly regional, is characterized by relatively longer term
contracts, and is still regulated, but less so than in the past. As a
result, residential and commercial prices of natural gas respond
sluggishly to movements in the spot price. Thus, to the extent that
natural gas consumption must adjust to limited supplies, most of the
reduction must come from the industrial sector and, to a lesser extent,
utilities.
Yesterday the price of gas for delivery in July closed at $6.31 per
million Btu. That contract sold for as low as $2.55 in July 2000 and
for $3.65 a year ago.
Futures markets project further price increases through the summer
cooling season to the peak of the heating season next January. Indeed,
market expectations reflected in option prices imply a 25 percent
probability that the peak price will exceed $7.50 per million Btu.
Today's tight natural gas markets have been a long time in coming,
and futures prices suggest that we are not apt to return to earlier
periods of relative abundance and low prices anytime soon.
Since 1985, natural gas has gradually increased its share of total
energy use and is projected by the Energy Information Administration to
gain share over the next quarter century, owing to its status as a
clean-burning fuel.
Moreover, improving technologies have also increased the depletion
rate of newly discovered gas reservoirs, placing a strain on supply
that has required increasingly larger gross additions from drilling to
maintain any given level of dry gas production. Depletion rates are
estimated to have reached 27 percent last year, compared with 21
percent as recently as 5 years ago.
Canada, which has recently supplied a sixth of our consumption, has
little capacity to significantly expand its exports, in part because of
the role that Canadian gas plays in supporting growing oil production
from tar sands. [Does not mention impact of ratification of Kyoto
Protocol . . . Canadian gas must also be used to displace current coal
use and for electricity growth]
The updrift and volatility of the spot price for gas have put
significant segments of the North American gas-using industry in a
weakened competitive position. Unless this competitive weakness is
addressed, new investment in these technologies will flag.
Increased marginal supplies from abroad, while likely to notably
damp the levels and volatility of American natural gas prices, would
expose us to possibly insecure sources of foreign supply, as it has for
oil.
But natural gas reserves are somewhat more widely dispersed than
those of oil, for which three-fifths of proved world reserves reside in
the Middle East. Nearly two-fifths of world natural gas reserves are in
Russia and its former satellites, and one-third are in the Middle East.
Creating a price-pressure safety valve through larger import
capacity of LNG need not unduly expose us to potentially unstable
sources of imports. There are still numerous unexploited sources of gas
production in the United States. We have been struggling to reach an
agreeable tradeoff between environmental and energy concerns for
decades. I do not doubt we will continue to fine-tune our areas of
consensus.
But it is essential that our policies be consistent. For example,
we cannot, on the one hand, encourage the use of environmentally
desirable natural gas in this country while being conflicted on larger
imports of LNG. Such contradictions are resolved only by debilitating
spikes in price.
In summary, the long-term equilibrium price for natural gas in the
United States has risen persistently during the past 6 years from
approximately $2 per million Btu to more than $4.50. The perceived
tightening of long-term demand-supply balances is beginning to price
some industrial demand out of the market. It is not clear whether these
losses are temporary, pending a fall in price, or permanent.
If North American natural gas markets are to function with the
flexibility exhibited by oil, unlimited access to the vast world
reserves of gas is required. Markets need to be able to effectively
adjust to unexpected shortfalls in domestic supply. Access to world
natural gas supplies will require a major expansion of LNG terminal
import capacity. Without the flexibility such facilities will impart,
imbalances in supply and demand must inevitably engender price
volatility.
______
APPENDIX 2
Plastics Industry: Facilities and Jobs (Environment & Public Works
States)
------------------------------------------------------------------------
Total
State Companies/ Total Jobs
Facilities (Thousand)
------------------------------------------------------------------------
OK............................................ 172 10,500
VA............................................ 219 25,300
MO............................................ 389 27,600
OH............................................ 1327 112,100
ID............................................ 64 2,100
RI............................................ 130 8,500
TX............................................ 1334 94,900
AK............................................ 12 15,800
WY............................................ 10 500
CO............................................ 298 10,700
MT............................................ 25 800
NV............................................ 139 5,400
FL............................................ 870 29,400
CA............................................ 2359 137,800
CT............................................ 306 15,800
OR............................................ 266 11,100
DE............................................ 60 4,600
NY............................................ 944 52,800
VT............................................ 46 3,000
------------------------------------------------------------------------
______
APPENDIX 3
<bullet> Higher natural gas prices in particular severely diminish
the competitiveness of industries using natural gas as an input for
fuel and power and as a raw material. This occurs because natural gas
markets are generally national (or regional) in nature. As a result,
exporting industries in this Nation face higher costs vis-a-vis
competing nations, as the latter do not incur these costs. The same
holds true for the agricultural sector because they consume
fertilizers, which are natural gas-intensive.
<bullet> Diminished competitiveness results in a severe drop in the
output of energy-intensive sectors such as cement, aluminum, steel and
chemicals. This results in job losses or jobs created elsewhere
overseas.
The following table illustrates the loss of manufacturing jobs by
State between 1999 and 2003 as compiled by the Bureau of Labor
Statistics.
Employment in Manufacturing
[Thousands]
----------------------------------------------------------------------------------------------------------------
Change
1999 2000 2001 2002 2003 1999-2003
----------------------------------------------------------------------------------------------------------------
Alabama............................................ 357.5 351.4 325.5 307.3 296.2 -61.3
Alaska............................................. 11.8 11.8 11.7 11.2 11.1 -0.7
Arizona............................................ 207.4 209.9 201.7 183.9 175.4 -32.1
Arkansas........................................... 240.7 240.3 226.9 214.4 208.3 -32.4
California......................................... 1,829.9 1,857.5 1,785.6 1,641.2 1,584.2 -245.7
Colorado........................................... 160.7 191.3 181.9 166.3 154.6 -36.1
Connecticut........................................ 240.2 235.6 226.7 213.0 203.5 -36.7
Delaware........................................... 44.0 41.5 39.4 36.8 34.2 -9.8
District of Columbia............................... 3.8 3.7 3.4 3.0 2.8 -1.0
Florida............................................ 455.5 455.0 432.3 407.8 392.9 -62.7
Georgia............................................ 542.6 530.5 498.3 471.8 452.2 -90.5
Hawaii............................................. 15.9 16.4 16.4 15.2 15.0 -0.9
Idaho.............................................. 68.9 69.9 68.3 64.7 61.5 -7.4
Illinois........................................... 882.1 870.5 815.4 756.2 733.0 -149.1
Indiana............................................ 664.7 663.5 615.4 589.1 577.5 -87.2
Iowa............................................... 252.7 251.4 240.2 227.5 222.1 -30.6
Kansas............................................. 204.0 200.2 194.3 182.8 177.6 -26.4
Kentucky........................................... 309.0 310.4 291.8 275.7 269.6 -39.4
Louisiana.......................................... 181.4 177.4 171.8 160.9 156.9 -24.5
Maine.............................................. 80.5 79.5 74.6 68.0 63.9 -16.6
Maryland........................................... 173.6 173.9 168.2 157.2 153.1 -20.5
Massachusetts...................................... 405.2 407.9 387.7 347.6 333.0 -72.2
Michigan........................................... 898.1 896.7 819.6 759.1 733.8 -164.3
Minnesota.......................................... 395.4 396.5 378.5 355.6 346.4 -49.0
Mississippi........................................ 232.9 222.5 200.8 188.7 179.9 -53.0
Missouri........................................... 371.8 361.8 342.2 322.2 314.2 -57.6
Montana............................................ 22.5 22.5 21.4 19.8 18.8 -3.8
Nebraska........................................... 113.4 114.3 110.8 106.2 104.5 -8.9
Nevada............................................. 41.0 42.7 44.0 42.6 43.0 2.0
New Hampshire...................................... 101.2 102.5 97.4 85.2 81.7 -19.5
New Jersey......................................... 422.4 421.5 401.2 368.8 356.9 -65.5
New Mexico......................................... 41.2 41.7 40.9 38.5 36.9 -4.4
New York........................................... 772.8 750.8 708.2 651.9 618.4 -154.4
North Carolina..................................... 776.5 757.9 704.0 642.2 609.5 -167.0
North Dakota....................................... 22.8 23.9 24.0 23.7 23.4 0.6
Ohio............................................... 1,027.6 1,021.0 953.0 885.1 854.5 -173.1
Oklahoma........................................... 177.3 177.5 169.8 152.0 148.1 -29.2
Oregon............................................. 224.7 225.0 215.7 201.8 196.4 -28.3
Pennsylvania....................................... 863.4 862.3 820.6 762.0 727.5 -136.0
Rhode Island....................................... 72.1 71.1 67.8 62.4 60.1 -12.0
South Carolina..................................... 336.1 336.2 313.6 291.7 276.6 -59.5
South Dakota....................................... 44.2 43.8 40.9 38.4 37.4 -6.8
Tennessee.......................................... 494.7 488.0 454.2 426.6 414.9 -79.8
Texas.............................................. 1,063.3 1,068.0 1,026.2 951.2 916.0 -147.3
Utah............................................... 126.0 125.5 122.0 113.7 111.3 -14.7
Vermont............................................ 45.3 46.3 45.6 40.6 38.5 -6.8
Virginia........................................... 366.8 363.5 341.2 320.3 308.6 -58.2
Washington......................................... 343.4 331.8 316.1 285.7 266.5 -76.9
West Virginia...................................... 76.9 75.9 72.2 68.8 65.7 -11.2
Wisconsin.......................................... 594.8 594.1 560.3 528.7 515.3 -79.5
Wyoming............................................ 10.2 10.4 10.0 9.5 9.2 -1.0
----------------------------------------------------------------------------------------------------------------
Source: US Bureau of Labor Statistics
______
APPENDIX 4.--CHEMICAL INDUSTRY IN CRISIS
[From the Washington Post, March 17, 2004]
Natural Gas Prices Are Up, Factories Are Closing, And Jobs Are
Vanishing
(By Greg Schneider, Staff Writer)
Nitro, W.Va.--Soon after the Flexsys chemical plant celebrates its
75th ``Nothing over three inches high is going to be left here,'' plant
manager Jon McKinney said.
The former explosives factory gave the town its name, and its
demise will eliminate 205 jobs and yet another piece of the once-
powerful U.S. chemical industry.
Chemicals are an unglamorous part of the manufacturing world, with
products that have unpronounceable names and often hazardous qualities.
But they are essential to a host of industries, from automaking to
textiles to agriculture. Hardeners make tires more durable. Polymers
put the spring in athletic shoes, and nitrogen fertilizers increase
crop yields. As the nation's manufacturing base seems to shrink daily
from factories closing or relocating overseas, the health of the
chemical sector is a crucial measure of how deep the problem goes. And
chemicals are in crisis, squeezed not only by cheap foreign competition
but also by soaring energy costs.
Across the country, 1 in every 10 chemical-related jobs has
vanished in the past 5 years--nearly 100,000 workers--and that number
would be worse if not for a surge in one segment, pharmaceuticals.
The chemical industry's eight-decade run as a major exporter has
ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion
deficit last year, according to the American Chemistry Council.
Governors and chemical executives have appealed to the White House
and Congress for help. They argue that the chemical problem is making
the nation's broader manufacturing meltdown even worse, pushing
factories to relocate offshore not only for cheap labor but to be near
chemical suppliers.
``It's a very trying time in the nation's manufacturing base,''
said Mark Zandi, chief economist for Economy.com Inc. ``Ultimately,
little can be done to stop the drain of jobs as companies cut costs and
use technology to improve productivity,'' he said. ``Workers in the
chemical industry are really getting hit hard, much harder than the
companies themselves,'' Zandi said.
The Flexsys plant in Nitro is closing because a sister plant in
Belgium costs less to operate. In nearby South Charleston, Union
Carbide Corp. has cut its workforce in half, to about 1,200 people, in
the past 3 years. Bayer AG is shutting one of its two Charleston-area
plants.
It's the same story in other chemical-heavy regions of the country,
such as the Gulf Coast. ``Right now we've got big operations just
shutting down because they cannot compete on the world market,''
Louisiana Gov. Kathleen Babineaux Blanco (D) said in a telephone
interview. ``We've had shutdowns before but they've always been
temporary. We've not seen anything like this before.''
Troubles began over a decade ago with the fall of communism, when
countries of the former Soviet Union--as well as China--discovered they
could compete in the world market for chemical products. Cheap labor
and a freewheeling attitude toward safety and the environment helped
them keep prices low.
As the global economy slowed, industries that consume chemical
products came to depend on those lower prices to offset declining sales
and profits. U.S. chemical makers struggled to cut costs and keep up.
Then, around 2000, an unexpected problem hit: Natural gas prices went
up.
Chemical plants are especially sensitive to natural gas prices
because they use it both as a fuel and as a ``feedstock'' or ingredient
in making plastics, resins, fertilizers and more. In the past 5 years,
U.S. natural gas prices have roughly doubled as more and more
electrical plants consume the clean-burning fuel but supplies stay
stagnant. Other parts of the world--including Western Europe--pay far
less.
``We have the highest natural gas prices in the industrialized
world,'' said R. William Jewell, vice president for energy for Dow
Chemical Co. in Houston. In the past 2 years, Dow has closed four major
chemical factories in North America--one in Louisiana, two in Texas and
one in Alberta, Canada--and replaced them with production from Germany,
the Netherlands, Kuwait, Malaysia and Argentina, he said.
``These jobs didn't leave the U.S. because of labor costs, they
left the U.S. because of uncompetitive energy costs,'' Jewell said.
``It's very hard to have vitality in manufacturing and it's very hard
to have strong growth in jobs if you don't have a competitive
infrastructure anymore. . . . You can't just wish these jobs back.''
Chemical jobs tend to be so well-paying--in the $50,000 to $70,000
range--that they're virtually impossible to replace in the communities
that lose them, said David E. Dismukes of the Center for Energy Studies
at Louisiana State University. Every time a factory cuts back or shuts
down, the impact ripples out through the suppliers, restaurants and car
dealerships that surround it. ``For a small State like Louisiana that
is so dependent on those facilities, this really is a tough one for
us,'' Dismukes said. ``When they go away it has a devastating impact on
small rural communities up and down the river where many of these are
located.''
The problem is similar to the death of steel mill towns in the
Midwest and Pennsylvania in the 1970's and 1980's, said Michael Hicks
of the Center for Business and Economic Research at Marshall University
in Huntington, W.Va. In 24 months, from January 2001 to December 2002,
West Virginia's chemical workforce declined nearly 17 percent, to
12,000 people, Hicks said.
``It's a story that West Virginia has continued to feel for well
over two decades now, with the decline in coal mining and steel
production now followed by these challenges to the chemical industry,''
he said.
Even plants that stay in operation are providing fewer jobs.
For example, Bayer Polymers LLC operates a plant on an island in
the Kanawha River in South Charleston. Barges bring long cylindrical
tanks of liquid propylene oxide to a pumping station on the north
shore. The material flows under the river to a maze of pipes, valves
and vats on the island--nearly a mile long--where it goes through
chemical reactions to become a polymer used in foam cushions for car
seats, mattresses or athletic shoes.
The entire facility is operated by two people sitting in a control
room watching computer monitors, aided by a team of eight technicians
that handles repairs and maintenance. In less than 4 years Bayer has
increased the plant's output by 20 percent without adding any
employees. The plant also has cut energy consumption by 9 percent since
last year. Nonetheless, its costs are up 25 percent over the past 5
years, said site manager Glenn Kraynie.
It's a dangerous cycle. Rising costs cut into profit and make it
harder to continue investing in improvements, which in turn makes it
harder to compete with ever more efficient overseas rivals, said Attila
Molnar, president and chief executive of Bayer Corp., the German
company's U.S. arm.
``It is a very, very serious issue,'' Molnar said. ``You shift
manufacturing or production [to] where you produce the cheapest. . . .
Production in the U.S. is in danger today.'' ``There are at least two
basic solutions,'' Molnar said. Do something about energy prices, such
as burning more coal or drilling for more natural gas, and use
technology to continue to make chemical factories more efficient. That
means producing more with fewer employees.
``There's nothing there that says the jobs you have today will be
the same jobs we have 10 years from now. That cannot be,'' he said.
``Be prepared for change. That's the only way we can survive, the only
way I can see we will be successful in the future.''
That's a hard prescription for towns like Nitro, population 6,824,
which stands to lose a chemical plant that once employed 900 people.
The 202-acre riverfront facility started as a World War I explosives
plant for making nitrocellulose, and the town was built to support it.
Monsanto Co. bought the site in 1929 and has been making rubber
additives ever since, today in a joint venture with Akzo Nobel NV
called Flexsys. But with worldwide prices for its products down 42
percent, the company decided last fall to shut Nitro's factory down at
the end of this month.
``I'm 45 years old and I've lived in this Kanawha Valley my whole
life,'' said Dave Hardy, a lawyer and Kanawha County commissioner
representing both Nitro and Charleston. ``This valley was built on the
chemical industry, and now in my adult lifetime . . . the chemical
industry is contracting literally year by year. There is nothing that
is filling the void.''
Instead, the State is promoting tourism and gambling, he said. But
West Virginia hasn't given up on the industry. Its statewide Chemical
Industry Committee, a trade association, has been working to attract
companies by touting the state's long embrace of an industry scorned in
some places as environmentally undesirable.
It doesn't help the cause, though, that the committee's chairman is
McKinney, the Flexsys manager, whose own company couldn't afford to
stay in business there.
______
Statement of Hon. Donald L. Carcieri, Governor, State of Rhode Island
Chairman Inhofe, Ranking Member Jeffords, and distinguished members
of the committee, thank you for having me here today to testify about
the energy needs of my State, my region and our Nation.
I would like to speak today about the problem my State is facing
with respect to the tightening supply and resulting high costs of
natural gas.
As Governor of a northeastern State, I understand the importance of
plentiful, accessible energy supplies. New England has no natural
resources of fossil fuel. As a result, all of our energy supply must
come from some other region or nation. Meanwhile, our cold winters,
elderly population, and highly concentrated urban centers produce a
large and growing demand for energy resources.
Before the people of Rhode Island elected me Governor, I spent
almost two decades working in the private manufacturing sector. As CEO
of Cookson America, I managed the energy needs of a thriving
manufacturing business. That experience taught me that our needs will
only increase in the coming years. As Governor of a New England State
and a former CEO, I have a good understanding both of the energy needs
of the Northeast region generally, and the particular demands that a
competitive manufacturing base puts on a reliable, cost-efficient
energy supply.
Federal and State policy has encouraged the use of natural gas,
because it's clean-burning and there is an abundance of known supply.
Consequently, it has become the workhorse of the energy sector, and is
expected to provide 35 percent of the fuel supply for electric
generation in New England this year alone. According to the Federal
Energy Regulatory Commission (FERC), in the next 4 years 50 percent of
all electricity will be generated by natural gas.
Unfortunately, natural gas supply hasn't kept up with this
burgeoning demand. In fact, New England was recently on the verge of an
energy supply crisis. KeySpan, the largest local distribution company
in the Northeast, had record breaking send-outs during the recent cold
spell, and at one point they were forced to shut off service to
approximately 250 customers in order to preserve the remaining
customers. Had temperatures remained that cold for another few days we
would have had a real crisis.
One would think that this combination of high demand and
intermittent supply shortages would create an outcry for more natural
gas production. It hasn't. Unfortunately it may take a disaster before
some in our Nation get serious about this problem. As Federal Reserve
Board Chairman Alan Greenspan pointed out in testimony before a Senate
committee last summer, we have embraced the benefits of natural gas,
but at the same time have restricted the ability to get more supply.
Soon, the Northeast may no longer be able to offer industry a
competitive venue unless the rising cost of energy is addressed. For
example, while the cost has remained relatively steady since the mid-
1980's at around $2 per million BTUs, prices have recently spiked at
times to upwards of $10 per million BTUs. These dollar amounts are
often much higher in Rhode Island, because we sit at the end of two
pipelines and consumers must pay the costs associated with transporting
gas such long distances.
Some of Rhode Island's largest employers and oldest companies are
already grappling with the consequences of this looming energy crisis.
Considerations of layoffs and job relocation are beginning to manifest.
Electric Boat, the producers of the hulls for our Navy's submarines,
switched to natural gas for heating several years ago. Now the price is
skyrocketing, and since the region's electric generation is
increasingly fueled by natural gas, EB can expect a further rise in
their electric bill. This company employs more than 2,000 people in
Rhode Island and many more in Connecticut.
The story is the same with Arkwright Incorporated, located in
Coventry, RI. Their 300 employees coat and convert paper and films for
specialty imaging devices. Arkwright's natural gas bills have nearly
doubled in the past year, jeopardizing their profitability and
competitiveness. As the company struggles with this issue, it has lost
bids for contracts. They were already forced to lay off some employees,
and cut out bonuses last year.
Another example is Cranston Print Works, a textile company with
facilities in Rhode Island and Massachusetts. The per unit price they
pay for natural gas has already increased 40 percent this year,
electric costs another 19 percent and oil costs another 6 percent. They
will spend $200,000 more this year than last year to keep their plants
operating, without any increase in overall energy usage.
Similarly, their neighbor in North Kingstown, Rhode Island, TORAY
Plastics, saw energy costs rise by more than $1.6 million last year.
TORAY employs approximately 700 people in our little State. It's an
energy-intensive business with huge production runs 24 hours a day. It
is critical that they be able to manufacture products competitively.
The same story can be told over and again with many of the other
manufacturing companies in Rhode Island that employ tens-of-thousands
of workers and contribute so much to the quality of life in our State.
The high cost of natural gas is taking a toll on our economy across New
England and the Nation. In today's competitive world manufacturers
cannot raise prices to compensate for rising energy costs.
Liquefied natural gas (LNG) offers a short-term answer for Rhode
Island. But until we are able to site and build LNG receiving terminals
or realize significant new sources of gas, gas prices will likely
remain high and volatile.
The only long-term solution is to increase supply. We must develop
reasonable policies on both State and Federal levels that allow natural
gas to be produced and delivered to homes and businesses across the
country.
The alternative is a Northeast without sufficient energy supplies
and stable prices a Northeast that cannot keep the heat on in thousands
of homes, cannot provide for the industrial capacity of manufacturing
businesses, and cannot remain competitive at home or abroad.
As Governor of Rhode Island, I cannot let that happen, but I fear
that it will unless we take the needed steps now to address this energy
supply crisis.
Thank you for allowing me to testify before you today. I look
forward to answering your questions.
Statement of Bob Drake, Vice President, Oklahoma Farm Bureau and
Chairman, National Grazing Lands Council
Mr. Chairman and members of the committee, my name is Bob Drake. I
farm and raise Angus cattle in Davis, Oklahoma. Like many Oklahomans, I
have been active in the oil and gas industry as well as farming and
ranching for most of my life. I am currently vice-president of the
Oklahoma Farm Bureau and I serve as chairman of the National Grazing
Lands Conservation Initiative. I have also served as President of the
National Cattlemen's Beef Association. This issue concerns me both as
an agricultural consumer and as a producer in the oil and gas industry.
On behalf of the American Farm Bureau Federation and the Oklahoma Farm
Bureau, thank you for the opportunity to express how energy supply, and
energy prices, are adversely impacting American agriculture.
First, let me say that today's agriculture is more energy efficient
than ever before, producing more economic benefit with less energy. For
example, on corn fields across this Nation, farmers are producing 30
percent more crop using 30 percent less energy-related inputs,
including fertilizer, than we did only a generation ago. Even though
energy efficiencies have been realized in agriculture, no one should
expect a growing U.S. economy and population to need less energy
security in the future.
Natural gas is one of the most important energy feedstocks to
production agriculture and associated manufacturing industries. In the
last year, the United States has experienced prolonged natural gas
price volatility, along with an overall elevation in price.
One of the industries highly dependent on natural gas that is
critical to American agriculture is the fertilizer industry. Natural
gas is the primary feedstock in the production of virtually all
commercial nitrogen fertilizers in the United States, accounting for 90
percent of the farmer's total cost of anhydrous fertilizer. According
to The Fertilizer Institute, the 2000 planting season saw ammonia
fertilizer at a cost of around $100 per ton. During the 2003 growing
season, farmers faced ammonia prices of $350 or more per ton. The U.S.
Department of Agriculture estimates that it cost U.S. farmers and
ranchers an extra $2.6 billion to produce the same amount of food and
fiber in 2003 when compared to the 2002 growing season. Our domestic
fertilizer production capacity already has experienced a permanent loss
of 25 percent over the past 4 years and an additional 20 percent is
currently shut down due to high natural gas prices. The current price
volatility threatens the existence of what remains of our domestic
fertilizer industry and will exacerbate America's dependence on foreign
sources of energy and fertilizer.
Last week, I sat down with a group of producers in the Oklahoma
panhandle to discuss this issue. They reported that the cost of running
their natural gas powered irrigation pumps increased more than 70
percent in 2003. One producer, in Beaver County, Oklahoma, stated that
these costs alone resulted in a $26,000 drop in his net income.
The current natural gas crisis is a prime example of the need for a
clear and consistent energy policy. On one hand, the Federal Government
has encouraged expanding the use of natural gas as an environmentally
friendly alternative for electrical generation, home heating and
manufacturing. At the same time, the Federal Government has increased
the regulatory burden on domestic natural gas exploration, drilling and
production and placed moratoriums on many energy-rich areas such as the
Outer Continental Shelf (OCS), the Gulf of Mexico and Federal lands.
Similar restrictions have been and continue to be experienced on other
traditional energy resources such as oil, coal and nuclear, due
primarily to environmental concerns, but adding to the demand pressure
on natural gas as a clean alternative. In Oklahoma, oil and gas
exploration on private lands has been severely hampered by the U.S.
Fish and Wildlife Service's habitat rules for the burying beetle. The
service has delayed drilling, gathering and other activities of oil and
gas producers. If left unaddressed, U.S. energy policy as a whole will
certainly result in the loss of even more of our energy independence
tomorrow.
In addition to higher operating costs due to natural gas, farmers
and ranchers have experienced diesel fuel price increases 40 percent
above historical averages. With thin margins already being experienced
in agriculture and the prospect of high energy prices in the
foreseeable future, this added expense, which cannot be passed on in
the price of agricultural commodities, will erode the financial
positions of many farm and ranch families.
The energy price instabilities being experienced today should not
be allowed to grow into a more serious energy crisis in the future. Nor
does America need to become as dependent on foreign sources of natural
gas as we now are with crude oil. Energy rich repositories now off
limits must be reconsidered for environmentally safe oil and gas
exploration and production immediately. Advancements in oil and gas-
drilling technology have resulted in the most environmentally sound and
responsible capturing of energy stocks ever conducted, and will
continue to improve. Earlier this year, American Farm Bureau Federation
president Bob Stallman was on hand in support of Secretary of Interior
Gale Norton's announcement of royalty relief for deep natural gas
drilling in the shallow waters of the western Gulf of Mexico. These
innovative approaches show promise toward future energy supplies, but
much more can be done.
AFBF and the Oklahoma Farm Bureau strongly believe that the current
comprehensive energy legislation will lead to a diversified energy
portfolio with increased emphasis on renewable sources, while at the
same time increase our domestic energy supply from traditional sources
such as natural gas, oil and coal in a safe and affordable manner. We
urge that Congress complete this important legislation this session.
Thank you for the opportunity to appear before you and for your
consideration of our views.
__________
Statement of Marjorie West, Western Organization of Resource Councils
Mr. Chairman and members of the committee, my name is Marjorie
West. Thank you for the opportunity to address this committee regarding
the environmental impacts of natural gas production. My husband and I
own a ranch on Spotted Horse Creek in the Powder River Basin of
Wyoming, where we grow dry land wheat and raise cattle. We have lived
on this land for 50 years. The ranch was homesteaded by my husband's
father and expanded by the family over the generations. As a landowner,
farmer and rancher, I want to share with you what is happening on the
ground in Wyoming and in other parts of the West, and talk about what
it will take for the oil and gas industry to develop natural gas
responsibly or as we say, ``Do It Right.''
I am here today representing two non-profit organizations that have
fought for responsible energy development in the West for more than 30
years the Powder River Basin Resource Council (PRBRC) and the Western
Organization of Resource Councils (WORC). PRBRC is a grassroots
organization dedicated to good stewardship of Wyoming's natural
resources, and the preservation of the State's agricultural heritage.
WORC is a network of grassroots organizations from seven western States
that include 8,250 members and 48 local community groups. About a third
of WORC's members are family farmers and ranchers, many of whom are
directly impacted by natural gas development.
Mr. Chairman, I want you to know that the organizations I represent
here today support responsible natural gas development. But our ability
to be good stewards of the land and earn a living is threatened by
irresponsible gas development practices. For several years now, we have
been asking industry, State and Federal agencies and Congress to
develop natural gas responsibly and ``Do It Right.'' I wish I could say
they are listening.
The sheer magnitude of the natural gas development being planned
for the West is unprecedented. Over 60,000 new coalbed methane wells
are planned for the Powder River Basin in Montana and Wyoming alone
(compared with approximately 16,000 current wells), with tens of
thousands of additional gas and coalbed methane wells planned for
Colorado, North Dakota, New Mexico and other parts of the West.
My first-hand experience with coalbed methane, and accounts I have
heard from other westerners indicate that the current pace and
direction of natural gas development in this country is resulting in
serious damage to land and water resources and private property rights.
The last 5 years have been the most difficult and destructive years
we've ever experienced. We've been through droughts, grasshopper
invasions and bad wheat and cattle prices on the ranch but nothing
holds a candle to the stress and the damages brought upon us by
irresponsible coalbed methane gas development. Over the last 5 years we
have lost all three of our artesian wells and our domestic water well
due to groundwater dewatering. This is presently and will continue to
be a long term problem for us. For now, we are using some of the
coalbed methane water that is being pumped out to water our livestock,
but that will be gone in a few years and then what? The company has
told us outright that they do not intend to leave us with an operating
livestock well when they are finished developing the gas.
After 6 or 7 months of hauling our household water, the coalbed
methane company finally drilled us a 1300-foot household water well. We
could not drink this water without getting diarrhea, and I could not
wash clothes without having them turn orange from the high iron
content. This is not the good water we had before coalbed methane
drilling destroyed our well. We now have two water treatment systems:
Reverse osmosis for drinking water, and an iron treatment system for
the rest of our household needs. Our electricity costs for pumping the
deep well have doubled, and the first time we had the treatment system
serviced we were charged three hundred dollars. We should not have to
bear these additional costs.
For the past 4 years, another company has been discharging coalbed
methane water upstream of us into Spotted Horse Creek, which is an
ephemeral creek that formerly ran only during spring melt or heavy
summer rain events. This CBM water has a high ``sodium adsorption
ratio'' (a ratio of sodium to calcium and magnesium) which over time
will destroy soils, crops and native vegetation. This water flooded
Spotted Horse Creek the entire winter of 2000/2001, icing over and
flowing out on either side of our hay meadow, and destroying all the
native vegetation in our creek. So much salt was deposited on the soil
and leached out of the clay soils that nothing but weeds will grow.
This past year we had an impressive crop of fireweed which is very salt
tolerant, but cattle will not eat it.
The worst tragedy for us was that it drowned and killed over two
hundred of our beautiful hundred-year-old cottonwood trees that lined
that creek. These were our best hay meadows. Now they grow only weeds.
This stretch of Spotted Horse Creek looks nothing like it did 5 years
ago. The discharge of CBM water into ephemeral creeks all over the
Powder River Basin is destroying soil and vegetation and changing these
streams, probably forever.
We've spent thousands of dollars on legal fees trying to get the
problems addressed. We've made agreements with these companies only to
have the companies fail to live up to their agreements, thus forcing us
to spend more money and time on lawyers. Out of six companies, not one
has lived up to its word or its agreement. These are not just small
operators, several are large well established oil and gas companies.
They are Devon, Marathon-Pennaco, Yates, Williams, CMS, Lance and
Redstone.
The so-called ``regulators'' have not only allowed the damages to
occur without intervention or penalty, but they continue to permit
activities that are in violation of their own regulations. Industry has
been given license to destroy our property, our soil, our grass, our
land, our creek, our solitude.
Our experiences are not isolated and they are becoming more
widespread. There are many other landowners that have lost water wells,
have had companies come on their land without an agreement and cause
numerous damages by building roads and well pads or discharging water
that has killed soil and vegetation. Landowners also experience reduced
property values, lost income, seepage of methane into drinking water
wells and under homes, introduction and spread of noxious weeds, the
death of livestock and noise from compressor stations, generators,
traffic and drilling.
While we may be luckier than some landowners because we do own a
percentage of our minerals, our lives have been turned upside down and
our health has deteriorated. My husband, Bill, now takes high blood
pressure medication and I take a prescription medication for severe
headaches. I cannot prove that the methane industry has caused these
conditions, but it certainly has not helped. We spend our days fighting
with companies to develop coalbed methane in a responsible manner.
Although one company has a successful reinjectionsite for CBM water on
our ranch, another company has come on our land without an agreement
for development, after making many false promises. We no longer have
time for the ranching and farming that we love.
I am here to ask you not to further weaken environmental laws, nor
to further assist industry in rushing carelessly forward to develop
natural gas on our lands. I am asking you to take some decisive
leadership and require oil and gas companies to develop this gas
responsibly.
The energy bill that failed to pass the U.S. Senate in December,
and the new version of that bill that was introduced by Senator
Domenici in February (S. 2095) both take us in the wrong direction by
failing to provide desperately needed new protections and weakening
current environmental and procedural safeguards. For example, S. 2095:
<bullet> Threatens clean water by: (1) exempting hydraulic
fracturing from Federal safe drinking water standards, potentially
resulting contamination of drinking water supplies by diesel fuel and
other hazardous chemicals, and (2) exempting oil and gas construction
activities from the Clean Water Act's pollution controls, resulting in
unregulated discharges of chemicals into rivers, streams and other
water bodies.
<bullet> Requires the U.S. Bureau of Land Management to approve gas
drilling permits within a matter of days, leaving impacted landowners
and communities with limited opportunities to review applications and
offer the benefit of their considerable knowledge and experience and
attempt to protect their property, health and economic well being.
Congress can and should do better. Natural gas development is
important to the Nation, and in appropriate places and under the right
conditions can and should be developed for the benefit of the country.
But it has to be balanced with protections for other resources
especially water and other uses of the land involved. We need laws that
require companies to negotiate agreements with landowners; and then
they must be required to live up to those agreements. Instead of tax
credits to speed development, we need increased bonding to ensure that
our land will not be left a scarred battlefield. Citizens and taxpayers
should not be left with the burden of cleaning up after oil and gas
companies. But at the rate we're going I can assure you that is the
direction we are headed.
PRBRC and WORC have endorsed a responsible ``doing it right''
approach that contains six platforms:
(1) Effective monitoring of coalbed methane or deep gas
development, and active enforcement of existing laws to protect private
property rights and natural resources.
(2) Surface owner consent, and surface use agreements that help
landowners better protect their property rights.
(3) Use of aquifer recharge, clustered development, mufflers for
compressor stations and other low-impact, best available technologies
to minimize impacts on undergroundwater, rivers, streams and surface
resources.
(4) Collection of thorough fish, wildlife and plant inventories
before development proceeds to protect habitat, followed by phased-in
development to diffuse impacts over time.
(5) Meaningful public involvement in the decisionmaking process.
(6) Complete reclamation of all disturbed areas, and bonding that
protects landowners and taxpayers from all cleanup liability costs.
In the House of Representatives, Representatives Mark Udall and Tom
Udall have introduced a bill (H.R. 3698) that would assure that our
precious water resources are safeguarded during the course of oil and
gas development, reduce potential conflicts between oil and gas
operators and surface owners, and provide for appropriate reclamation
of affected lands. This bill provides a necessary balance to the gas
permitting and production rush that is underway, and I am submitting a
copy for the record.
In closing, I invite each and every one of you to visit my ranch
and see for yourselves the damages that have occurred. We are willing
to make the sacrifice of living with responsible coalbed methane
development in order for this country to have natural gas. However, we
are not willing to make a complete and total sacrifice of our land, our
water, our property rights, and our children's future. Nor should we
have to. These companies are making very good profits; they can well
afford to be environmentally responsible.
I never thought this kind of damage could be brought upon citizens
of this country by this government and this industry. I was naive. My
only hope is that lawmakers such as yourselves, the honorable members
of this committee, will realize what is happening to us at the hands of
the powerful oil and gas industry, and change it, to make the system
just, fair and equitable. We require our coal mining industry in
Wyoming and this country to live up to very high standards for
permitting, bonding, landowner consent, water well replacement and many
other things we should expect nothing less of the oil and gas industry.
They must be required to ``Do it Right.'' Thank you very much for your
time and concern.
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Statement of Joel Bluestein, President, Energy and Environmental
Analysis, Inc.
Thank you Mr. Chairman and members of the committee for the
opportunity to testify today. My name is Joel Bluestein and I am the
President of Energy and Environmental Analysis, Inc. EEA is located in
Arlington, Virginia and has been providing energy and environmental
consulting services since 1974. Our major areas of expertise include:
<bullet> Analyzing and forecasting the supply, demand and price of
natural gas; and
<bullet> Analyzing the impacts of energy and regulatory policy on
energy markets.
We have done this work for natural gas producers, pipelines, local
distribution companies, power generators, technology developers, the
U.S. Department of Energy, the U.S. Environmental Protection Agency and
other public, private and institutional clients. I have been at EEA for
15 years and have over 20 years of experience in the energy and
environmental field.
My testimony today addresses two areas: our outlook on natural gas
prices and current effects and trends related to gas prices in
industrial and power generation markets.
GAS PRICE OUTLOOK
EEA quarterly prepares a 20 year month-by-month forecast of North
American natural gas supply, demand and price that we call our Gas
Market Compass. Figure 1 summarizes our current view of the price for
natural gas over that period. Our current outlook for gas prices (in
constant 2003 dollars) at the Henry Hub in South Louisiana is about
$5.75/MMBtu for this year, a little higher at about $6.00/MMBtu for
2005, then moderating somewhat to $4.50 to $5.00/MMBtu in the medium to
longer term. We do not expect to see future gas prices returning to
pre-2000 levels.
This outlook assumes significant development of new LNG import
terminals in the U.S. and eventual gas imports from Arctic Canada and
Alaska. It does not assume any changes in policies regarding where gas
can be produced. Delivered gas prices will be higher in areas with
local gas delivery constraints. Extreme weather also can cause
temporary price spikes. Overall, however, we believe that the market
will function and find ways to bring new gas to market. If that does
not occur, we would expect gas prices to be roughly 50 percent higher
than this forecast.
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EFFECT OF CURRENT PRICES AND TRENDS IN END USE MARKETS
Regardless of any changes in policy, there is widespread agreement
that it will take a significant amount of time to get new gas supplies
in place. In the interim, the most readily available option to
stabilize gas prices is increased efficiency in direct gas consumption
and indirectly through increased efficiency in electricity consumption.
This was one of the primary conclusions of the recent National
Petroleum Council study\1\ on natural gas, which stated that: ``Greater
energy efficiency and conservation are vital near-term and long-term
mechanisms for moderating [natural gas] price levels and reducing
volatility.''
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\1\ ``Balancing Natural Gas Policy: Fueling the Demands of a
Growing Economy'', National Petroleum Council, September 2003.
---------------------------------------------------------------------------
Other studies have found similar results. A December 2003 study\2\
by the American Council for an Energy Efficient Economy (ACEEE) looked
at the effects on gas prices of an aggressive application of energy
efficiency and renewables. The study estimated that efficiency and
renewables could achieve a 1.1 percent reduction in gas consumption
within 1 year and a 5.5 percent reduction within 5 years. More
importantly, EEA projected in this study that this level of demand
reduction would result in a 20 percent reduction in gas prices. This
non-linear result occurs because we are in a very steep part of the gas
supply curve where small changes in demand can result in large changes
in price. This can happen in a negative way during extreme weather or
in a positive way when efficiency reduces demand.
---------------------------------------------------------------------------
\2\ ``Natural Gas Price Effects of Energy Efficiency and Renewable
Energy Practices and Policies'', ACEEE, December 2003.
---------------------------------------------------------------------------
EEA performed another study\3\ last year that looked at the effect
of increased use of combined heat and power (CHP) to reduce gas demand.
CHP, also known as cogeneration, is one of the most readily available
and widely applicable sources of increased efficiency for generation of
electricity and thermal energy for process heat applications. The study
found that widespread application of CHP in regions of the U.S. that
are heavily dependent on natural gas for power generation could achieve
4 to 9 percent reductions in gas consumption through increased
efficiency. This study did not separately assess the effects on gas
price, but based on studies such as the ACEEE study, this level of
demand reduction could result in significant gas price reductions.
---------------------------------------------------------------------------
\3\ ``Natural Gas Impacts of Increased CHP'', U.S. Combined Heat
and Power Association, October 2003.
---------------------------------------------------------------------------
While one can forecast that increased efficiency would be
beneficial, one might question whether these types of efficiency
improvements are practically achievable after 30 years of industrial
efficiency improvements, starting with the energy price shocks of the
early 1970's. Support for this expectation was described in a February
17 article in the Wall Street Journal\4\.
---------------------------------------------------------------------------
\4\ ``Natural Gas Costs Hurt U.S. Firms'', Wall Street Journal,
February 17, 2004.
---------------------------------------------------------------------------
The article describes the efforts of the Owens-Corning company to
respond to high gas prices related to its production of glass and
mineral fibers. While the company is exploring increased imports of
materials as one response, it is also increasing the efficiency of its
operation in the U.S. The article describes Owens-Corning's efforts at
an insulation factory in Waxahachie, Texas, that was burning as much as
$4 million to $5 million of natural gas a year. The company was able to
make operational changes at incinerators and melters that cut gas
consumption without sacrificing product quality. With these
adjustments, natural-gas use in the third quarter of 2003 was 18
percent below the year before, even though production increased. The
plant is reported to be approaching $1 million in annual energy savings
and the company plans to replicate the changes in 10 other North
American insulation factories and two composite-fiber factories by the
end of this year.
While not every facility will be able to achieve such startling
results, this example suggests that there is still a significant amount
of low-cost efficiency improvement to be achieved. We have also heard
reports of companies reinstating or increasing their ability to switch
gas-fired equipment to alternative fuels, primarily oil. The ability to
switch to alternative fuels for short periods of time, while it does
not result in significant reduction in overall gas consumption, can
serve as an important safety valve to reduce gas price volatility
during periods of extreme weather or local supply constraints. Chemical
producers are also emphasizing production from facilities that rely on
petroleum rather than natural gas feedstocks. These examples illustrate
that industry is actively and creatively adjusting to changes in the
U.S. energy markets.
POWER GENERATION TRENDS
Much of the concern over gas prices has focused on the recent wave
of construction of gas-fired power plants. Despite this growth, gas-
fired generation in the U.S. in 2002 accounted for a lower share of
total generation (18 percent) than in 1970 (24 percent). Coal-fired
generation in 2002 was 51 percent of total generation and almost 70
percent of fossil generation. Energy forecasts show coal-based
generation continuing to increase.
Moreover, the effects of new gas power plant construction are more
complicated than they may seem. Of 152 GW of new gas-fired generating
capacity installed in the U.S. between 1999 and 2002, approximately one
third consists of peaking plants that seldom run and use little fuel.
In addition, much of the construction has been in the west and
southwest where the new gas plants are competing with less efficient
older gas plants. Because of the higher efficiency, the new plants have
displaced the older plants and caused them to run less or be
mothballed. The displacement of older gas plants with new gas plants
results in more efficient use of gas. While gas consumption has
increased due to increasing electricity demand, the effect of the more
efficient new plants has been to reduce the amount of gas that would
otherwise have been consumed. In these areas, the construction of new
gas plants is actually reducing gas consumption. Figure 2 shows this
effect in Texas.
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The increase in gas prices has also spurred increased interest in
the use of renewables, biomass and waste fuels, including agricultural
biogases. While some of these fuels are already in use, others are only
starting commercial application and the recent higher gas prices have
made their use more competitive. We have seen reports of increased
interest in use of wind energy, small hydro, landfill and digester gas.
There is also great interest in using agricultural biogas that can be
produced by improved handling and treatment of waste from very large
livestock and poultry operations. This is an area in which we expect to
see quite a bit of growth in the near future.
CONCLUSIONS
Natural gas prices have reached a new price level that is
significantly higher than during the last 20 years. We do not expect to
see a return to those historical lower levels. However, we also do not
expect to see natural gas prices increasing to the extreme levels
predicted by some analysts. Over the last two and a half years, U.S.
gas markets have responded by initiating new LNG import and other
supply projects. With an increase in LNG imports and future imports
from Canada and Alaska, we see a mid-to long-term moderation to Henry
Hub gas prices in the $4.50 to $5.00/MMBtu range (in constant dollars).
If new supply options are not available, the prices could be 50 percent
higher.
On the demand side, gas users are turning to energy efficiency,
fuel-switching and alternative feedstocks to address higher gas prices.
We are also seeing increased interest in renewables, waste and
byproduct fuels. These market responses have helped to stabilize gas
prices in the near-term. However, new sources of gas supply will be
needed to meet future growth in gas demand without creating further
upward pressure on gas prices.
______
Responses by Joel Bluestein to Additional Questions from Senator Inhofe
Question 1. Are you aware that in late 2003, your company also used
the same model you described in making your demand repression argument
to show that a relatively small increase in supply (increasing
production in the Powder River Basin from 1,000 to 3,000 wells) would
save $88 billion to the economy over a 10-year period? Is it your
testimony that incremental increases in supply don't moderate gas
prices?
Response. I am familiar with this study and it is consistent with
my testimony that the current tight supply/demand situation means that
relatively small changes in either supply or demand can have a
significant effect on prices. My testimony specifically states that a
lack of new supply, for example delays in LNG development, will result
in sharply higher prices than in our current forecast.
Question 2. What does fuel switching by industrials back to oil do
to our reliance on oil imports and the quality of our air?
Response. Most fuel switching today is very short term to avoid
peak gas price periods. It can be very important to control of gas
price volatility but amounts to relatively small amounts of gas
consumption. A move to more permanent switching to oil as an
alternative to gas consumption certainly could increase U.S. reliance
on oil imports. While oil combustion could have higher potential air
emissions than gas, I assume that any such switching will be done
within current air quality protection requirements.
Question 3. Mr. Bluestein, in your opinion, do you agree with
September 2003 NPC report's findings that new domestic sources of
natural gas are critical to meet our nation's energy needs?
Response. I agree with the NPC conclusion that the U.S. needs a
balanced mix of energy efficiency, new domestic supply and LNG imports.
Question 4. In your company's November 13, 2003 document, ``The Gas
Price Roller Coaster. The Ride Continues,'' dated November 13, 2003,
you project that gas supply from new frontiers will account for one-
third of total supply in 2010, vs. only 13 percent today. Do you think
we'll meet your projected target?
The NPC report identified policies that increase demand for natural
gas on the one hand, while restricting access to development on the
other. What regulatory constraints or challenges frustrate exploration
and production and must be overcome in order to meet your firm's
projected target identified in ``The Gas Price Roller Coaster; The Ride
Continues?''
Response. The NPC report identifies new policies that could expand
production in a variety of North American producing areas. EEA's
forecast is based only on existing U.S. policies regarding gas
production.
Our forecast indicates that the frontier resources identified will
be economically viable under the forecast price scenario. Whether they
will actually be developed and which specific resources will be
developed over time is difficult for us to say. In aggregate, gas
supply needs to increase over time to keep gas prices within the range
of our current forecast. We have not seen any significant gas
production increases in the last year and some new projects have been
delayed, which is one reason that near-term efficiency improvements are
important.
______
Responses by Joel Bluestein to Additional Questions from Senator
Jeffords
Question 1. In your testimony, you have highlighted that additional
supply and efficiency will assist lowering natural gas prices. Are
there other factors, such as the deployment of renewable generation
through State renewable portfolio standards programs, that will also
contribute to a decrease in price in the absence of new Federal
policies?
Response. Increased use of renewable generation through RPS
programs is another way to reduce gas demand and ease gas prices. My
testimony cited a 2003 study we performed with ACEEE that highlighted
the potential gas price-reducing effect of aggressive development of
renewables.
Question 2. You mentioned that extreme weather can cause temporary
price spikes. It seems to me that although stringent new clean air or
greenhouse controls at coal-fired utilities may lead to some gas
switching, it is also true that unabated or abrupt climate changes
could also have impacts on natural gas supply and pricing. Are you
aware of whether anyone has done such an analysis?
Response. I'm not aware of any such studies.
Question 3. Have you examined the effect that the pending Senate
Energy bill will have on natural gas prices if it is enacted into law?
Response. I have not examined the implications of the Senate Energy
bill on gas prices.
Question 4. Are there other reasons, other than the price of
natural gas, that fertilizer prices have increased?
Response. According to the attached briefing from The Fertilizer
Institute (TFI), domestic ammonia produced at $5.50--$6.00/MMBtu gas
prices should cost about $200/ton. Current ammonia prices are about
$300/ton. According to TFI, this higher price is the result of
increased international ammonia demand and a tight world market for
ammonia. The implication is that domestic ammonia production is
profitable at today's prices.
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Statement of Dennis M. Bailey, Director of Energy Purchasing,
PPG Industries
I am Dennis Bailey, director of energy purchasing for PPG
Industries. Thank you for inviting us to provide testimony on this very
important topic.
PPG is a $9-billion global supplier of paint, glass, fiber glass
and chemicals, with manufacturing assets in 23 States and 22 countries.
We have about 20,000 employees and 14,000 retirees in the United
States and 33,000 employees worldwide.
Affordable energy has played an important role in PPG becoming the
leading global manufacturer that it is today.
PPG began operations more than 120 years ago in Pennsylvania. And
has been in Senator Voinovich's home State of Ohio for 105 years.
In all, about 10 percent of PPG's corporate sales is generated from
products made in Ohio.
The high cost of natural gas is clearly affecting PPG's operations
in Ohio and across the Nation. For example:
<bullet> At our Circleville, Ohio, plant--which makes resins needed
in paint manufacturing--natural gas costs have increased 70 percent
over the past several years.
<bullet> From 2002 to 2003, natural gas costs at our Cleveland
automotive paint plant doubled, and at our Barberton, Ohio, chemicals
plant increased by 50-percent.
<bullet> High natural gas costs at our Crestline, Ohio, automotive
glass plant may result in elimination of more than 10-percent of that
site's workforce.
PPG has a well-earned reputation for controlling costs. But in
spite of this, if natural prices increase, our businesses may have to
make reductions elsewhere.
The average market price during the past 15 months has been about
$5.50--25 percent higher than any year since 1976 and double that of
the 1990's.
On a global scale, if the price of natural gas increases to $7--and
remains there--PPG's chlor-alkali chemicals business would have
additional problems competing in global markets.
The workforce at our Lake Charles, Louisiana, Chemicals facility is
shrinking by 8 to 10 jobs per month through attrition. And we don't
expect to be rehiring.
And we believe other Gulf Coast producers are similarly affected.
The U.S. chemicals industry is no longer competitive globally
because of the disparity of natural gas prices--as shown in the exhibit
I've entered into the record.
The U.S. industry has evolved into a net importer of product and
exporter of jobs.
My company strongly believes solutions to the natural gas crisis
are within our country's grasp.
In the short term, energy conservation must be a major part of the
solution. Education is necessary, as well as increased economic
incentives.
For example, if all new residential windows sold in the United
States were energy-efficient, it would eliminate the need for 20
additional power plants over the next decade and up to 60 power plants
over the next 20 years.
Consumers need an incentive to use energy-efficient glass,
positioning high-performance glass as the construction material of
choice for saving energy in homes and commercial buildings.
As a start, the Senate needs to pass the Energy Conference Report
which provides consumers an incentive to use energy-efficient glass.
But consumer conservation alone will not fix the problem.
There is an urgent need for increased access to domestic supplies,
including resources in the outer continental shelf, the Rocky Mountain
region and Alaska.
We feel that all of these opportunities can and should be
accomplished in an environmentally responsible way.
Construction of an adequate delivery infrastructure, including for
the import of liquefied natural gas, must be part of the solution.
In addition, government should encourage increased energy
production from all sources, including coal, oil, nuclear, wind energy
and other alternatives.
As makers of fiber glass used in wind-powered electricity
generators, we believe tax credits to develop wind energy is a step in
the right direction. Unfortunately, the bill is stalled in Congress.
On a final note, PPG does not support government intervention for
price controls. Competition and free market forces should continue to
drive prices.
Thank you for your leadership in developing solutions to resolve
this growing natural gas crisis that threatens businesses, jobs and our
nation's economy.
[GRAPHIC] [TIFF OMITTED] T4599.106
______
Response by Dennis M. Bailey to Additional Question from
Senator Jeffords
Question 1. Your testimony highlighted the need for conservation in
the short term to reduce natural gas prices, and you described several
economy wide proposals to achieve that objective, such as increased
incentives for the use of energy efficient windows. Has PPG been able
to reduce its natural gas use and improve efficiency in the face of
high prices, and how have you done so?
Response. 2002 is the most recent year for which PPG has compiled a
summary of natural gas consumption at our U.S. manufacturing sites.
Our consumption in 2002 increased by 12% over that for 2001. The
majority of this increase can be attributed to the normal start-up
costs and inefficiencies associated with a new combined heat and power
(CHP) generation facility. RS Cogen, a joint venture combined heat and
power generation facility justified by PPG's management to improve
energy efficiency in light of rising energy prices, became operational
in late 2002 and makes PPG's Lake Charles, Louisiana chemicals plant
completely self-sufficient in terms of electric power generation. CHP,
also known as cogeneration, reduces the amount of energy consumed per
unit of output. Heat that would be wasted in a conventional utility
plant is captured for use in the form of steam. CHP can be twice as
fuel efficient as conventional power plants.
As to energy efficiency (measured in terms of MMBtus of natural gas
per ton of product produced), PPG's efficiency in the U.S. declined
approximately 1% in 2002 when compared to 2001. The decline can be
attributed to the RS Cogen start-up noted above, as well as natural gas
associated with sales of electricity (which are not considered
``product produced''). Without consideration of the natural gas
associated with the sale of electricity, the efficiency actually
improved almost 2%.
As to the start-up of RS Cogen, it is known that the natural gas
efficiency of the Lake Charles, Louisiana chemicals plant improved over
15% in 2003 largely as a result of the joint venture. With the Lake
Charles plant representing over 60% of PPG's annual U.S. consumption,
we feel safe in projecting that our energy efficiency for our U.S.
manufacturing operations will be much improved in 2003.
__________
Statement of Michael C. Caskey, Executive Vice President and Chief
Operating Officer of Fidelity Exploration & Production Company
Mr. Chairman and members of the Committee, my name is Mike Caskey.
I am the Executive Vice President and Chief Operating Officer of
Fidelity Exploration & Production Company (Fidelity) headquartered in
Denver, Colorado. I would like to thank the Senate Environment and
Public Works Committee for the opportunity to testify at this hearing.
Fidelity is a wholly-owned indirect subsidiary of MDU Resources
Group, Inc. We are an independent oil and natural gas producer engaged
in acquisition, exploration and production activities. Our efforts are
primarily focused in the Rocky Mountain region of the United States and
in the Gulf of Mexico. Fidelity produces coalbed natural gas (CBNG) in
Wyoming and Montana. We are currently the only producer of CBNG in
Montana. I am here today to discuss the prospects for finding and
producing clean natural gas in North America and the obstacles Federal,
State and local governments and producing companies face.
You are well aware of our nation's growing demand for clean-burning
natural gas to meet current and future residential, commercial,
industrial and electrical generation needs. Energy Information Agency
(EIA) projections show that natural gas will play an increasingly
important role in meeting our nation's energy needs. The EIA in its
``Annual Energy Outlook 2004 with Projections to 2025'' forecasts that
natural gas used in the industrial sector alone will increase by 41
percent from 2002 to 2025 (Chart 1). The Department of Energy (DOE) has
made similar projections. Current consumption levels of just under 23-
trillion cubic feet (tcf) of natural gas per year are expected to grow
to approximately 32 tcf/year by 2025. Presently 98 percent of our
domestic consumption is supplied by North American production.
Traditional natural gas basins located in Texas and Oklahoma, and in
the Gulf of Mexico are showing dramatic declines in production and
reserves. The only major gas province with increased reserves is the
Rocky Mountain Region (Map 1). Therefore, in order to meet increasing
supply needs, natural gas development in the Rocky Mountain region must
be allowed to progress in an effective, timely manner.
OUR STAKEHOLDERS
As an exploration and production company we are committed to do our
part to discover, develop and produce this valuable, clean-burning
resource. While doing so, Fidelity conducts its operations dedicated to
sound environmental stewardship so as to ensure that our development
protects the environment and ongoing sustainable agricultural
operations. That is the core of our corporate business model. Our
business process includes three principal stakeholders--landowners,
governments (local, State and Federal) and shareholders. In order for
Fidelity to operate in a balanced, stable and functional manner, we
must meet the needs of all three groups. Today, special interest
activism, obstructionism and litigation are threatening the stability
of these three stakeholder groups and the natural gas industry's
ability to provide reliable, affordable supplies of natural gas for our
country's needs. I will relate some examples of our experience in the
Powder River Basin of Montana and Wyoming as I discuss our concerns.
Perhaps the most important stakeholder in our business is the
landowner, the person who owns the surface of the land on which we
operate. That person may or may not own the mineral rights. Because
natural gas production requires a long-term commitment to be on the
land, it is imperative that we develop a ``good neighbor relationship''
with each landowner. We work with these landowners to ensure that our
development activities minimize disruption of the use and enjoyment of
the landowners' property, thereby protecting their ability to maintain
and enhance the profitability of their agricultural operations. It is
important to understand that the time of maximum disturbance occurs
during the initial drilling and construction phase of operations.
Because of that, most landowners we deal with prefer a ``get in--get
out--get back to normal'' approach to development. Special interest
litigation and obstruction, which delay or stop timely development,
especially during the initial development phase, have a detrimental
effect on landowners who have agreed to allow development of the
Federal resources beneath their land.
Governments (local, State and Federal) are the second stakeholder
in our operations. In addition to meeting the needs of our landowners,
we must also comply with the laws and regulations in place at the
local, State and Federal levels. Exploration and development of Federal
lands is subject to many laws; however, the key laws that impact
exploration and development are the National Environmental Policy Act
(NEPA) for which you are the authorizing committee, and the Federal
Land Policy and Management Act (FLPMA).
FLPMA is the law which Federal land managers use to balance the
diverse interests of the multiple uses of Federal lands. NEPA is the
tool by which the managers analyze the effects of their decisions. NEPA
documents--Environmental Impact Statements (EISs) and Environmental
Assessments (EAs)--are the foundation of all decisions involving the
use of Federal lands. It is this NEPA process of evaluating land use
and development plans, not the law itself, which has become the
principal tool used by obstructionists to delay or halt natural gas
development.
Unfortunately, the plethora of litigation and the likelihood of
additional litigation surrounding natural gas development have forced
governmental agencies to make choices on the use of limited budgets.
Like producers, regulatory agencies' resources are being consumed by
defending frivolous, wasteful lawsuits. These lawsuits impact
government at all levels. Typically, the lawsuits are against the
Bureau of Land Management (BLM) or other land use agencies that manage
the use of Federal land for multiple activities. The government must
divert resources, which are forever lost, from important environmental
programs such as noxious weed control, habitat rehabilitation and fire
prevention to defend frivolous lawsuits.
In addition to affecting allocation of limited resources, delays or
restriction of production from Federal leases impacts the revenue
received by the government. Royalties from Federal minerals fall behind
only personal and corporate income taxes as a source of Federal
revenue. The states also have a stake in the revenue generated from
Federal minerals, receiving 50 percent of Federal bonuses, rents and
royalties generated within their boundaries. These states use this much
needed source of revenue for school funding, law enforcement,
infrastructure improvement and other local uses. From 1998 through the
first 5 months of 2003, bonus revenue from leasing in Wyoming was over
$147 million and in Montana for that same period the amount was over $9
million. These are funds paid by energy companies just for the right to
explore for natural gas and oil on Federal leases.
The third stakeholder in this development is our shareholder. As a
subsidiary of a Fortune 1000 corporation we are looking for investment
opportunities that will stimulate corporate growth and provide an
attractive and acceptable return to our shareholders. We constantly
pursue new technologies that can accomplish our mission and improve the
environment where we operate and live. The litigation from heavily
funded, special interest groups that has been so prevalent in the
Powder River Basin's CBNG development, impairs our return to
shareholders in several ways. First, there is the significant direct
legal cost of participating in and defending against the litigation. In
addition, there is an indirect cost associated with dedication of
corporate resources to litigation that could otherwise be invested in
productive, value-building activities. And finally, there is the cost
of delay--not being able to fully employ our significant investments in
a timely manner. Imagine the owner of any other business, who obtains
all the permits necessary to conduct business, sets up an office,
invests in hiring workers and makes a commitment to buy equipment,
supplies and startup needs and isn't allowed to conduct business
because of frivolous litigation that targets the well-established
licensing process. As our corporation, or any other, is impacted by
these impediments to shareholder return, we must begin to look for more
attractive, more predictable opportunities with less capital risk. The
net result is a chilling effect on energy production in the United
States.
I will describe for you some examples of the litigation that has
impacted our operations in Montana and Wyoming thereby impairing our
ability to produce energy from our lease positions. While these
examples are specific to Fidelity's operations, other energy companies
could relate similar examples from their experience.
NEPA LITIGATION
Prior to any surface disturbing activity, oil and gas leasing must
take place. Most of the current Federal leasehold within Montana and
Wyoming was leased during the period from 1997 through 2001. In mid-
2000, the BLM commenced the preparation of the Wyoming ``Powder River
Basin Oil and Gas Environmental Impact Statement'' and the ``Montana
Statewide Oil and Gas Environmental Impact Statement.''
When Fidelity acquired its oil and gas leases and began planning
development of CBNG in the CX Field area of Big Horn County, Montana in
1997, we approached the Bureau of Land Management (BLM) to request that
it prepare an environmental assessment of a 325-well pilot project. As
the agency began that analysis, Fidelity drilled wells on private lands
and initiated limited production testing of those wells in late 1998.
Commercial production from 125 initial wells began in October 1999.
Five months later, in March of 2000, the Northern Plains Resource
Council (NPRC) filed its first CBNG lawsuit, suing the Montana Board of
Oil & Gas Conservation (MBOGC), claiming it failed to conduct adequate
environmental analysis before approving Fidelity's drilling
applications. Montana has a State law--the Montana Environmental Policy
Act (MEPA)--a law that is essentially identical to NEPA that requires
an environmental evaluation of the effects of decisions made by State
regulatory agencies. MBOGC settled the case by agreeing to either
prepare a supplement to its 1989 Oil & Gas Environmental Impact
Statement (EIS) or to cooperate with other agencies in preparation of a
programmatic EIS for CBNG development in the Montana portion of the
Powder River Basin. The agreement allowed Fidelity to continue with its
CX Field pilot project, including the development of up to 250
producing wells, but placed a statewide moratorium on all other CBNG
development.
In December of 2000, the BLM, the MBOGC and the Montana Department
of Environmental Quality (MDEQ) initiated a programmatic EIS (the
Montana Statewide Oil and Gas EIS) to amend the Billings and Powder
River Resource Management Plans for CBNG development in the Montana
portion of the Powder River Basin. This combined document was prepared
to address both MEPA and NEPA issues associated with CBNG development.
Prior to that time, in June of 2000, the Wyoming BLM decided to amend
the Buffalo and Platte River Resource Management plans for CBNG
development in the Wyoming portion of the Powder River Basin by
preparing the Powder River Basin Oil and Gas EIS. The NEPA process for
these EISs, originally estimated to take 18-24 months to complete, was
finally completed on April 30, 2003 (29 months for the Montana
Statewide Oil and Gas EIS, 35 months for the Powder River Basin Oil and
Gas EIS) with the signing of the Records of Decision (RODs). Within 1
day of the issuance of the RODs, lawsuits were filed in Montana
challenging the validity of both Montana's and Wyoming's EISs. In
total, four different lawsuits were filed against the RODs.
In June of 2001, NPRC filed another lawsuit against the BLM and
Federal oil and gas lease owners in the Powder River Basin of Montana,
claiming the BLM should not have issued leases that had the potential
to be developed for CBNG. NPRC claimed that the 1994 Miles City
District Oil and Gas EIS/Plan Amendment to the Billings, Powder River
and South Dakota Resource Management Plans had not analyzed the effects
of full scale CBNG development. The 1994 Plan Amendment did allow for
the drilling of CBNG test wells and initial small-scale development. It
also stated that for full-field development to occur on Federal oil and
gas leases, an additional environmental document would be required.
This lawsuit was filed despite the fact that the Montana Statewide Oil
and Gas EIS was underway and the BLM had allowed no production to occur
from Federal exploratory wells that had been drilled for CBNG. NPRC
lost this case on summary judgment but has appealed the case to the
Ninth Circuit Court of Appeals.
In accordance with the Montana Statewide Oil and Gas EIS, Fidelity
submitted its Badger Hills Plan of Development (POD) covering 178
wells. This POD contains a Surface Use Plan, a Noxious Weed Plan, a
Water Management Plan, and a Wildlife Monitoring and Protection Plan as
required by the EIS. The BLM spent about 90 days conducting the site-
specific environmental review to complete the EA. However, the NPRC,
the Northern Cheyenne Tribe, Native Action, the American Lands
Alliance, George Wuerthner and the Biodiversity Conservation Alliance
protested the EA of the Badger Hills POD to the Montana BLM State
Director. NPRC went so far as to file a lawsuit against the BLM before
the State Director could even make a decision as to the adequacy of the
first EA. The State Director remanded the EA back to the Miles City
Field Office for further analysis. When the revised EA was issued and
Fidelity was allowed to resume its operations, the NPRC lawsuit was
amended to include a laundry list of NEPA objections. Additionally, the
Northern Cheyenne Tribe filed suit against the BLM alleging non-
compliance with the National Historical Preservation Act. This was done
despite the cultural resource inventory that Fidelity submitted with
its Badger Hills POD application.
Fidelity is not the only operator being affected by these appeals
and lawsuits. Similar lawsuits and endless appeals and protests
(Exhibit 1) are delaying production throughout the Rocky Mountain
Region. Unfortunately, these lawsuits are also straining the BLM's
human resources. Fidelity has been advised that the resource
specialists essential to reviewing and processing Plans of Development
are now working on litigation, preventing the BLM from committing to a
timeline for completing environmental reviews and issuing permits. You
can be assured that oil and gas permitting is not the only resource
management activity that will suffer from allocation of resources to
litigation. Programs ranging from fire management to habitat
enhancement will be impacted. This needless special interest litigation
deviates from the honorable goal of protecting the environment to
obstructing responsible resource management by challenging the
completeness of a well-established and time-tested process.
OTHER LAWSUITS
Montana law allows discharge of unaltered groundwater without a
permit if the discharge does not result in a violation of water quality
standards or cause degradation of water quality. Nevertheless, Fidelity
applied to the MDEQ for a Montana Pollution Discharge Elimination
System (MPDES) permit to allow discharge of water produced in
conjunction with CBNG in January 1999. The permit was issued on June
16, 2000. On June 23, 2000 Fidelity initiated outreach to the NPRC by
hosting NPRC representatives on a field trip of our CX Field. Fidelity
granted NPRC the right to tour every aspect of our operations. At the
same time this field tour was in progress, NPRC's attorneys were filing
a lawsuit in Montana Federal District Court against Fidelity for
violating the Clean Water Act by allegedly discharging without a
permit. And 10 months later, in April of 2001, NPRC and the Tongue
River Water Users Association sued the MDEQ in State court for issuing
the permit in June of 2000. You can see the complexity of the problem
here--We were sued for not having a permit even though State law did
not require one, and the agency that issued the permit was also sued.
It is important to note that the water quality data shows that
Fidelity's discharge has not degraded the receiving water quality.
NPRC next sued Fidelity in August of 2001 in Federal court under
Section 404 of the Clean Water Act, alleging that Fidelity failed to
obtain 404 permits for discharge of fill material and for construction
of pipelines and roads in waters of the United States. The lawsuit was
filed despite the fact that the U.S. Army Corps of Engineers had
advised the NPRC that the work they had reviewed in the field was
either covered by nationwide permits or was not located in
jurisdictional waters of the U.S. That case was settled in December
2003.
The attached newspaper articles (Exhibits 2 and 3) describe a
pipeline proposal in June 2003 to ship natural gas from Wyoming to
Chicago and the subsequent decision by the pipeline company to delay
the project due to the unwillingness of producers to commit to the
project. The producers' reluctance is due to ``uncertainty on when
they're going to receive permits, how rapidly they are going to receive
them, and where they can go once they receive them.'' The BLM
reportedly said that the slow permitting was the result of the numerous
still-unsettled lawsuits filed against the Wyoming BLM over the
Environmental Impact Statement.
The attached Exhibit 4 shows all of the active lawsuits and their
current status related to Fidelity's CBNG development program in
Wyoming and Montana. In total, we have been involved in 13 separate
lawsuits brought by environmental obstructionists in connection with
CBNG development in the Powder River Basin. Twelve of these lawsuits
are still active. These lawsuits cover every aspect of resource
development, from lawsuits on Resource Management Plan Amendments,
lawsuits on individual CBNG projects and lawsuits on water discharge
permits. These numerous lawsuits are limiting the ability of natural
gas producers to effectively and efficiently produce energy for the
nation, and one can only conclude that there is an agenda by these
obstructionists to stop natural gas development in the U.S.
ACTION
As we look to the future of energy development in the United
States, trends indicate that demand has and will continue to outstrip
supply. To resolve this imbalance, we need to ensure accountability of
all parties. The energy industry is held accountable by Federal and
State regulation. Those special interest litigants are not being held
to the same standard of accountability.
Take NEPA back to its original roots. Special interest groups are
misusing the NEPA process to obstruct development. The scales of
Justice have to be balanced and not tip to the benefit of one.
Yes, this is America and the obstructionists have every right to
due process--but they need to be accountable to the American people for
their actions just like my company is held accountable. There is no
substitute for honesty and action based upon verifiable science.
Without a greater level of accountability being applied to the
obstructionist community, the United States' ability to be less
dependent upon other energy producing countries and to keep many of the
jobs that are currently going overseas in our homeland will be
impossible.
I wish to again thank the committee for this opportunity and if
there are any questions I will be happy to share any answers I may
have.
[GRAPHIC] [TIFF OMITTED] T4599.107
EXHIBIT 1
Frivolous Environmental Litigation
AN OBSTACLE TO PRODUCTION OF CLEAN NATURAL GAS
In the past several years, the Nation has seen production of
natural gas decline in most of the traditional producing provinces--
shallow waters of the central and western Gulf of Mexico; on-shore
private lands in Texas, Oklahoma, Kansas and Louisiana. Industry has
seen significant restrictions placed on natural gas production in the
Eastern Gulf of Mexico, off the California Coast and off the Eastern
Coast of the U.S.
There remain large supplies of natural gas to meet our nation's
needs for clean burning fuels. Much of it can be found in Wyoming,
Utah, Colorado, Montana and New Mexico. Future supplies of this vital
fuel that heats our homes, operates factories and is the feedstock for
many industrial and commercial products are increasingly found on
public (BLM and Forest Service), non-park lands in the west.
The ability of energy companies to extract this clean fuel from
national, non-park Federal lands has become harder because of
aggressive, frivolous litigation from so-called ``special interest''
groups. Legal challenges have caused delays at every step of the
permitting process--Resource Management Plan Revisions, oil and gas
leasing, Environmental Impact Statements, Environmental Assessments,
Records of Decision, Applications for Permit to Drill, regulatory
permits (i.e. water discharge permits), and many more. The cost in time
to the Federal and State bureaucracies to prepare administrative
records for protests, appeals, and legal challenges is staggering.
Agency budgets are now spent defending these challenges versus
performing their regulatory duties such as conducting environmental
audits, processing permits, and conducting enforcement responsibilities
in Wyoming and Montana. The cost to energy companies is equally
debilitating.
The following chart represents examples of current actions taken by
special interest groups. Should this trend continue, further delays
will continue to reduce supplies of natural gas, increase costs and
affect employment in a number of industries.
------------------------------------------------------------------------
Request for State Director
Reviews or Environmental Who challenged Year Field Office
Document Challenged
------------------------------------------------------------------------
Fidelity's Badger Hills POD.. Northern 2004 Montana--Miles
Cheyenne Tribe. City Field
Office
United States
District Court
Epsilon POD EA............... Powder River 2004 Wyoming--Buffal
Basin Resource o Field Office
Council (PRBRC). State Director
Review (SDR)
Delta POD EA................. PRBRC........... 2004 Wyoming--Buffal
o Field Office
(SDR)
Fogarty Creek Wells #3133 & Defender of 2004 Wyoming--Pineda
#3233. Wildlife and le Field
Wyoming Outdoor Office (SDR)
Council (WOC).
Lower Prairie Dog POD EA..... PRBRC........... 2004 Wyoming--Buffal
o Field Office
(SDR)
Copper Ridge Shallow Gas Unit Biodiversity 2004 Wyoming--Rock
Conservation Springs Field
Alliance (BCA). Office (SDR)
1Anadarko's Beta II Plan of Powder River 2004 Wyoming--Buffal
Development (POD). Basin Resource o Field Office
Council. (SDR)
Fidelity's Badger Hills POD.. Northern Plains 2003 Montana--Miles
Resource City Field
Council, Inc. Office
(NPRC). United States
District Court
Fidelity Tongue River--Badger NPRC, Northern 2003 Montana--Montan
Hills POD. Cheyenne Indian a Miles City
Tribe, Native Field Office
Action, Western (SDR)
Environmental
Law Center.
Brown Cow POD EA............. National 2003 Wyoming--Rawlin
Wildlife s Field Office
Federation, et (SDR)
al.
Beta II Additions POD EA..... PRBRC........... 2003 Wyoming--Buffal
o Field Office
(SDR)
Questar Winter Long Drilling BCA, Wyoming 2003 Wyoming--Pineda
Exception. Outdoor Council le Field
(WOC), Greater Office (SDR)
Yellowstone
Coalition
(GYC), Jackson
Hole
Conservation
Alliance,
Wilderness
Society.
N SA Creek POD EA............ PRBRC........... 2003 Wyoming--Buffal
o Field Office
(SDR)
LX Bar Creek POD EA.......... PRBRC........... 2003 Wyoming--Buffal
o Field Office
(SDR)
NP II POD EA................. PRBRC, Tom and 2003 Wyoming--Buffal
Helen Jones, o Field Office
Mr. & Mrs. (SDR)
Barlow.
Horse Creek POD EA........... PRBRC, Tom and 2003 Wyoming--Buffal
Helen Jones, o Field Office
Mr. & Mrs. (SDR)
Barlow.
Vermillion Basin............. Biodiversity 2003 Wyoming--Rock
Conservation Springs Field
Alliance. Office (SDR)
Lower Bush Creek II.......... Biodiversity 2003 Wyoming--Rock
Conservation Springs Field
Alliance. Office (SDR)
Lower Bush Creek............. Biodiversity 2003 Wyoming--Rock
Conservation Springs Field
Alliance. Office (SDR)
Williams' Pleasantville POD PRBRC........... 2003 Wyoming--Buffal
EA. o Field Office
(SDR)
Pennaco's (Marathon) Horse PRBRC........... 2003 Wyoming--Buffal
Creek 10 POD EA. o Field Office
(SDR)
Powder River Basin Oil and * American Lands 2003 Wyoming--Buffal
Gas Project Environmental Alliance, BCA, o; Montana--
Impact Statement (EIS), George Billings and
Record of Decision (ROD) and Wuerthner. Miles City
Resource Management Plan * Western Field Office
(RMP) amendments*. Organization of
Montana Statewide Oil and Gas Resource
EIS, ROD and RMP for the Councils,
Billings and Powder River Jeanie
Resources Areas. Alderson, Wally
McRae, Wyoming
Outdoor Council
(WOC), Natural
Resources
Defense Council
(NRDC), PRBRC.
Montana Statewide Oil and Gas NPRC, Northern 2003 Montana--Billin
EIS, ROD and RMP for the Cheyenne Tribe gs and Miles
Billings and Powder River and Native City Field
Resources Areas. Action. Office
Montana Statewide Oil & Gas NPRC, Montana 2003 Montana
EIS & ROD. Environmental Environmental
Information Policy Act &
Center, Inc., Constitutional
Tongue and Litigation
Yellowstone against
Irrigation Montana Board
District. of Oil & Gas
Conservation &
Montana
Department of
Environmental
Quality
Application for Permit to WOC, Greater 2003 Wyoming--Pineda
Drill (APD) Environmental Yellowstone le Field
Assessment (EA) for the Coalition Office (SDR)
Questar Stewart Point (GYC),
Wells**. Defenders of
Wildlife,
Wilderness
Society.
Hanna Draw Coalbed Methane WOC, BCA, Sierra 2003 Wyoming--Rawlin
Exploration Project EA, Club, NRDC, s Field Office
Decision Record and Finding Earthjustice.
of No Significant Impact
(FONSI).
Questar Winter Long Drilling WOC............. 2002 Wyoming--Pineda
Exception. le Field
Office
Federal
District Court
Haystacks Geophysical EA, BCA, GYC, Center 2002 Wyoming--Rock
Decision Record and FONSI. for Native Springs Field
Ecosystems, Office (SDR)
Wildlands
Center for
Preventing
Roads.
Big Piney 2-D Geophysical Sierra Club, 2002 Wyoming--Pineda
Project EA, Decision Record BCA, GYC, le Field
and FONSI. Center for Office (SDR)
Native
Ecosystems,
Wildlands,
Center for
Preventing
Roads.
West Pinedale 3-D Geophysical GYC, Sierra 2002 Wyoming--Pineda
Project EA, Decision Record Club, WOC. le Field
(DR) and FONSI. Office (SDR)
Merna 3-D Geophysical Project GYC, Sierra 2002 Wyoming--Pineda
EA, DR, and FONSI. Club, WOC, NRDC. le Field
Office (SDR)
Blue Sky POD EA, DR and FONSI National 2002 Wyoming--Rawlin
Wildlife s Field Office
Federation (SDR)
(NWF), BCA, WOC.
Wyoming Wildlife
Federation
(WWF).
Cow Creek Pod EA, DR and NWF, BCA, WOC, 2002 Wyoming--Rawlin
FONSI. WWF. s Field Office
(SDR)
Leasing under 1994 oil and NPRC............ 2001 Montana--Miles
gas leasing EIS, ROD, City Field
Resource Management Plan Office
Amendment in Billings and
Powder River RMA.
Lower Prairie Dog Creek...... WOC, PRBRC, Mike 2000 Wyoming--Buffal
CBM Project EA, DR and FONSI. Foate. o Field Office
IBLA Appeal
Lower Prairie Dog Creek...... WOC, PRBRC, Mike 2000 Wyoming--Buffal
CBM POD EA, DR, and FONSI.... Foate. o Field Office
IBLA Appeal
------------------------------------------------------------------------
* Powder River Basin Oil and Gas EIS
Pg. S-1 ``within the US the largest number of responses were from
California, New York, and Florida''
14,283 comments from member organizations
4/30/03 Record of Decision signed, 5/1/03 three lawsuits filed by
Earthjustice in Denver as lead council, Western Environmental Law
Center of Boise, and NPRC of Denver. A fourth suit was filed 5/8/03 by
the firm of Ziontz, Chestnut, Varnell, Berley & Slonim of Seattle as
lead counsel. Suits filed in Montana District Court in Billings, Mt.
WATER ISSUES
----------------------------------------------------------------------------------------------------------------
Environmental Document Challenged Who challenged Year Field Office
----------------------------------------------------------------------------------------------------------------
General Permit for off-channel pit PRBRC.................. 2002................... Wyoming
Coal Bed Natural Gas.
National Pollution Discharge WOC; PRBRC............. Continuously........... Wyoming
Elimination System (NPDES) permits.
Corps of Engineers (COE) General WOC, PRBRC............. 2002................... Wyoming
Permit 98-08..
MPDES discharge permit issued by Tongue River Water 2001................... Montana
Montana DEQ. Users' Association,
NPRC, Montana
Environmental
Information Center.
Construction of roads, impoundments, NPRC................... 2001................... Montana
outfall structures and pipelines
without Corp of Engineers 404 Permit
(COE advised permit not necessary).
Montana Water Quality Act, discharge NPRC................... 2000................... Montana
of unaltered groundwater without
permit.
----------------------------------------------------------------------------------------------------------------
FEDERAL OIL AND GAS LEASE SALES
In Wyoming, 23 of 24 lease sales have been protested and/or
appealed by special interest groups since February 2000 to present. The
outcomes of those protests present significant delay in industries'
ability to produce natural gas and do not necessarily conclude with a
better environmental outcome. The following examples are provided:
Wyoming BLM February 2000 Lease Sale
<bullet> The February 2000 lease sale was protested to the BLM
State Director by special interest groups where 49 lease parcels were
offered in the sale that were located within the Buffalo Field Office
Management Area.
<bullet> The State Director Review dismissed the protest and
special interest groups then appealed that decision to the Interior
Board of Land Appeals (IBLA).
<bullet> IBLA dismissed 46 of the 49 parcels for lack of standing
and granted the special interest groups standing on 3 parcels of which
a stay was granted.
<bullet> IBLA ruled on April 2002 remanding the 3 parcels back to
the BLM for further review. IBLA determined that BLM did not take a
``hard look'' at the unique characteristics of coal bed natural gas
development prior to leasing, particularly water and air quality, and
therefore the leases were issued illegally.
<bullet> BLM then placed a moratorium on further leasing in the
Buffalo Field Office Management Area where leases were thought to be
utilized for coal bed natural gas development.
<bullet> Several parties appealed this decision to Federal District
Court in Wyoming and on May 30, 2003 the Federal judge overturned
IBLA's decision and defended BLM's original State Director Review in
that the agency did take a ``hard look'' at the impacts of coal bed
natural gas prior to leasing.
<bullet> The reinstatement of these three leases took place some 3
years after industry invested in developing the Federal mineral estate.
<bullet> Special interest groups are now appealing the Federal
District Court decision to the 10th Circuit Court of Appeals. This
hearing has yet to be scheduled.
Wyoming BLM April 2000 Lease Sale
<bullet> The April 2000 lease sale was protested to the BLM State
Director by special interest groups where 122 lease parcels were
offered in the sale that were located within Bighorn, Campbell, Carbon,
Converse, Johnson, Natrona, Sheridan, Sweetwater, and Uinta Counties in
Wyoming.
<bullet> The State Director Review dismissed the protest and
special interest groups then appealed that decision to IBLA.
<bullet> IBLA initially dismissed 119 parcels for lack of standing
and eventually reconsidered 5 of those parcels that were dismissed;
therefore granting standing on a total of 8 parcels. A stay was granted
on those 8 parcels limited to coal bed natural gas development only.
<bullet> The special interest groups charged that the applicable
environmental documents of which the State Director relied in its
review completely failed to mention coal bed natural gas development or
inadequately addressed the unique and significant impacts associated
with that development.
<bullet> In April of 2003, IBLA affirmed the State Director's
Review in part and reversed and remanded the Review in part. That
decision was never appealed to Federal District Court.
Wyoming BLM June 2000 Lease Sale
<bullet> The June 2000 lease sale was protested to the BLM State
Director by special interest groups where 132 lease parcels were
offered in the sale that were located within Bighorn, Campbell, Carbon,
Converse, Johnson, Natrona, Sheridan, Sweetwater, and Uinta Counties in
Wyoming.
<bullet> The State Director Review dismissed the protest and
special interest groups then appealed that decision to the IBLA.
<bullet> IBLA dismissed 127 parcels for lack of standing and
granted the special interest groups standing on 5 parcels but limited
the stay to only coal bed natural gas activities.
<bullet> IBLA then granted the special interest groups motion for
partial voluntary dismissal of the appeal as to 3 of the 5 parcels for
which it had established standing leaving only 2 parcels in the appeal.
<bullet> The special interest groups charged that the applicable
environmental documents of which the State Director relied on his its
review completely failed to mention coal bed natural gas development or
inadequately addressed the unique and significant impacts associated
with that development.
<bullet> In February of 2004, IBLA affirmed the State Director's
decision on review stating that the BLM supplemented its review with
the submission of supporting information and provided the hard look at
the environmental consequences of leasing including impacts from coal
bed natural gas development.
<bullet> It has not been decided if this decision will be appealed
to Federal District Court.
CONCLUSION
It has become apparent that through the public process NEPA has
become a ``tool'' that is used as the primary impediment to oil and gas
development on Federal lands. Industry supports without qualification
the Act's provisions for public comment, identification of alternatives
to the proposed action, and consideration of impacts and mitigation
measures to be used. However, these same provisions are being used by
some groups as opportunities to stop proposed projects without regard
for cost and delay of impacts on land management agencies, the US
taxpayer, or multiple users of the public lands.
The cost of ``NEPA abuse'' is high. All of these delays put a
tremendous burden on industry's ability to economically develop the
resource for the benefit of the country. It is safe to say that the
cumulative impacts, due to frivolous environmental litigation, is
strangling industry's ability to develop energy resources on Federal
lands and to supply much needed energy to the citizens of this country.
______
EXHIBIT 2
[From the News Record, June 25, 2003]
Canadian Firm Plans Pipeline to Chicago
(By the Staff and Wire Reports)
A Canadian firm has announced plans to build a high-volume natural
gas pipeline from northeastern Wyoming to Chicago.
Calgary, Alberta-based Enbridge, Inc., said Tuesday the plans
include a design that would export up to 1-billion cubic feet of gas
per day from the Powder River Basin.
Industry and government officials say a pipeline with that much
volume would bolster wholesale prices and bring Wyoming closer to
becoming the nation's top natural gas supplier.
``Here we have a time when the whole country is screaming for
natural gas and we have the supply. Clearly this huge for the state,''
said Mark Doelger, chairman of the Wyoming Pipeline Authority.
``We've been talking with Enbridge since February but didn't expect
a decision this early,'' Doelger told The News-Record.
``If ongoing market studies and other reviews are favorable,
Enbridge believes this pipeline could be constructed and in service
within 4 years,'' said Ron Brintnell, director of the company's Gas
Pipeline Development Division.
The proposal was announced at a meeting of the Wyoming Natural Gas
Pipeline Authority in Casper.
Brintnell said Enbridge has been working with the agency to contact
local gas producers and to find out if it can make a deal to ship
royalty-in-kind gas, or gas that is given to the Federal Government in
lieu of conventional royalty payments.
If the government is able to negotiate better pipeline deals for
moving gas, it can earn more money that it would from cash payments.
Wyoming was the first State to make in-kind payments.
The company is looking for producer support and plans to open an
office in Wyoming but ``the location and timing has yet to be
determined,'' Brintnell told The News-Record.
Enbridge and its subsidiaries operate more than 20,000 miles of
natural gas and oil pipelines in Canada and the United States,
including the Vector natural gas pipeline from the Chicago Hub to Dawn,
Ontario.
Enbridge has been working on a $900 million deal to sell half its
interest in the 1,857-mile Alliance Pipeline, which moves natural gas
from western Canada to the Chicago hub, and all its interest in a
Saskatchewan pipeline system.
According to an Enbridge press release issued Monday, the deal
would net the company about $210 million, which it would use to pay
down debt and invest in ``strategic growth opportunities.''
The deals could close at the end of the month.
Last year the State and several gas producers paid PACE Global
Energy Services to study what Wyoming's gas industry needs to become
more competitive nationwide. The answer was a high-volume, single-route
``bullet'' pipeline from northeast Wyoming to the Chicago market.
Enbridge was not among the firms that helped fund the PACE study
but State officials involved in the process said it doesn't matter who
wants to build it.
Earlier this year, the Legislature followed recommendations from
the now-idled Wyoming Energy Commission and from Gov. Dave Freudenthal
to revive the Wyoming Natural Gas Pipeline Authority and charge it with
bolstering interest in expanding Wyoming's pipeline connections to
high-volume markets.
One of the problems noted in the PACE study was how many of the
companies which typically build interstate gas pipelines have suffered
from credit problems related to the recent problems in the energy
trading business.
Brintnell said Enbridge never got into the energy trading business
and its credit is strong enough to finance a project like a Wyoming-to-
Chicago pipeline.
He said the next step will be for the company to discuss with
producers and end-users to see how much interest there is in the
project.
______
EXHIBIT 3
[From the News Record, January 28, 2003]
Pipeline Project is Put on Hold
(By Charlie Homans)
Wyoming.--The Canadian pipeline company Enbridge Inc. has put its
Beacon Pipeline project on the back burner, an Enbridge official told
The News-Record today.
``For the time being, we've stopped further development on it,''
said Ron Brintnell, Enbridge's director for gas pipeline development.
``We didn't see the kind of response from the producing community that
we hoped for.''
But Brintnell says the company is optimistic about the future of
the pipeline, which is slated to eventually carry 2-billion cubic feet
per day of coal-bed methane and conventional natural gas from Cheyenne
to Chicago.
``Right now we're waiting to see what transpires with producers
over the next year or so,'' he said. ``If we see the kind of growth
that we expect, then we will continue.''
Both Brintnell and Wyoming Natural Gas Pipeline Authority officials
pointed to slow coal-bed methane well permitting by the U.S. Bureau of
Land Management's Wyoming field offices as a large part of the problem.
According to BLM Buffalo field office manager Dennis Stenger, the
Buffalo office--where most of the criticism has been targeted--has
permitted 525 wells since April, when the landmark Powder River Basin
Oil & Gas Project environmental impact statement was issued.
Last week Secretary of the Interior Gale Norton said she wanted to
see 3,000 permits issued each year by the BML in the Powder River
Basin.
``Right now there's just a lack of market support for the
project,'' Pipeline Authority Executive Director Bryan Hassler said of
the Beacon Pipeline. ``And most of that's due to producer uncertainty
on when they're going to receive permits, how rapidly they're going to
receive them, and where they can go once they do receive them.''
BLM Buffalo assistant field manager Richard Zander acknowledged
that slowed permitting has been a problem, pointing to the numerous
still-unsettled lawsuits filed against the BLM over the environmental
impact statement.
But he said that permitting was most likely not the only factor
inhibit large projects like Beacon.
``Is there a certainty that (the permitting)'s affecting it? I
don't thinks so,'' Zander said.
Brintnell said that while the scale of the Beacon project could
offer significant economic payoffs to Wyoming, particularly if natural
gas prices in the Midwest remain high, it also made getting the
pipeline off the ground a trickier proposition.
``Given that it is a bigger project economics prevail,'' Brintnell
said. ``We need more commitments to make it work, so it's just a
different set of challenges.'' State Oil & Gas Conservation Commission
Supervisor Don Likwartz said that the commitment problems Beacon faces
are characteristic of the Wyoming pipeline market in general.
``What has happened is that a lot of operators . . . are having
even more difficulty forecasting production for their companies and
their boards and Wall Street, and they're also getting more reluctant
to commit to pipelines,'' Likwartz said.
______
EXHIBIT 4
----------------------------------------------------------------------------------------------------------------
Case Cause Number Court Complaint Allegations
----------------------------------------------------------------------------------------------------------------
NPRC v. Fidelity..................... CV-00-105-BLG-SEH...... US District Court for Citizen suit
No. 02--35836.......... the District of challenging regulated
Montana, Billings discharges.
Division.
Ninth Circuit Court of
Appeals.
NPRC v. BLM, Fidelity, et al......... CV-01-96-BLG-RWA....... US District Court for Lawsuit challenging
No. 04--35002.......... the District of BLM's compliance with
Montana, Billings NEPA process.
Division.
Ninth Circuit Court of
Appeals.
TRWUA, NPRC, and MEIC v. MT DEQ and CDV-2001-258 Montana First Judicial Lawsuit claiming that
Fidelity. consolidated with BDV District Court, Lewis regulated discharges
2001-258. and Clark County. violate environmental
standards.
NPRC v. Fidelity..................... CV 01-137-BLG-RWA...... US District Court for Citizen suit
the District of challenging pond
Montana, Billings construction.
Division.
NPRC v. BLM, Gale Norton, Kathleen CV-03-069-BLG-RWA US District Court for Lawsuit challenging
Clarke, and Martin Ott (Defendants), consolidated with CV- the District of BLM's compliance with
and Fidelity, et al. (Intervenors). 03-078-BLG-RWA. Montana, Billings NEPA process.
Division.
WORC, Jeanie Alderson, Wally McRae, CV-03-70-BLG-RWA US District Court for Lawsuit challenging
WOC, NRDC, and PRBRC v. Kathleen (Montana). the District of BLM's compliance with
Clarke, BLM, Gale Norton, and DOI 04-CV-0018-J (Wyoming). Montana, Billings NEPA process.
(Defendants), and Fidelity, et al. Division.
(Intervenors). US District Court for
the District of
Wyoming.
ALA, BCA, and George Wuerthner v. BLM CV-03-71-BLG-RWA US District Court for Lawsuit challenging
and Gale Norton (Defendants), and (Montana). the District of BLM's compliance with
Fidelity, et al. (Intervenors). 04-CV-0019-J (Wyoming). Montana, Billings NEPA process.
Division.
US District Court for
the District of
Wyoming.
Northern Cheyenne Tribe and Native CV-03-78-BLG-RWA US District Court for Lawsuit challenging
Action v. Gale Norton, Kathleen consolidated with CV- the District of BLM's compliance with
Clarke, and Martin Ott (Defendants), 03-69-BLG-RWA. Montana, Billings NEPA process.
and Fidelity, et al. (Intervenors). Division.
T & Y Irrigation District, NPRC, and BDV-2003-579........... Montana First Judicial Lawsuit claiming that
MEIC v. MT DEQ and MBOGC District Court. agencies' actions
(Defendants) and Fidelity violated State
(Intervenor). constitution and
statutes.
NPRC v. BLM and Martin Ott CV-03-185-BLG-RWA...... US District Court for Lawsuit challenging
(Defendants) and Fidelity the District of adequacy of
(Intervenor). Montana, Billings environmental analysis
Division. for Fidelity's Badger
Hills Project.
Northern Cheyenne Tribe v. BLM, CV-04-17-BLG-RWA....... United States District Lawsuit challenging
Martin C. Ott, and David M. McIlnay Court of Montana, adequacy of
(Defendants) and Fidelity Billings Division. environmental analysis
(Intervenor). for Fidelity's Badger
Hills Project.
----------------------------------------------------------------------------------------------------------------
__________
Statement of Steve H.M. Bloch, Staff Attorney, Southern Utah
Wilderness Alliance
My name is Stephen Bloch and I am a staff attorney for the Southern
Utah Wilderness Alliance (SUWA). SUWA is a non-profit organization with
over 15,000 members in all 50 States. SUWA's mission is the
preservation of the outstanding wilderness at the heart of the Colorado
Plateau, and the management of these lands in their natural state for
the benefit of all Americans. SUWA promotes local and national
recognition of the region's unique character through research and
public education; supports both administrative and legislative
initiatives to permanently protect Utah's wild places within the
National Wilderness Preservation System or by other protective
designations where appropriate; builds support for such initiatives on
both the local and national level; and provides leadership within the
conservation movement through uncompromising advocacy for wilderness
preservation.
SUWA is a founding member of the Utah Wilderness Coalition, a group
of 240 national, regional, and local organizations that advocates for
the passage of America's Redrock Wilderness Act (ARWA) (S. 639/H.R.
1796) and the designation of roughly 9 million acres of Utah's stunning
Bureau of Land Management (BLM) lands as Wilderness.
I appreciate the opportunity to testify today regarding the
environmental impacts of natural gas leasing, exploration, and
development. Because SUWA's mission focuses solely on protecting and
preserving public lands and resources in Utah, my testimony will
address natural gas issues on Utah's public lands, and in particular
the lands managed by the BLM.
A close review of the undiscovered natural gas resources on the BLM
lands in Utah proposed for wilderness designation in America's Redrock
Wilderness Act reveals that drilling these lands will have an
absolutely insignificant impact on the price of natural gas. A balanced
approach of energy conservation, resource extraction, and public land
protections, however, will ensure that our country has both the natural
gas and intact wild places it needs for sustained growth, security, and
sustainability. This is precisely the approach advocated by SUWA and
the conservation community.
DEVELOPING UTAH'S WILD PLACES WOULD PRODUCE ONLY INSIGNIFICANT AMOUNTS
OF NATURAL GAS
According to the Department of Energy (DOE), over 13,500 wells have
been drilled since oil and gas exploration and development first began
in earnest in Utah in the 1940's, and as of October 2003 the total gas
production had been 7.65 TCF (trillion cubic feet). See Mark Lemkin, An
Analysis of Utah Oil and Gas Production, Leasing, and Future Resources
(2003) (Lemkin), at 1 (citing Utah Geologic Survey and DOE sources).
Put in a broader context, the total gas extracted in Utah since the
1940's would supply the country with natural gas for just over 4 months
at current national consumption levels. Id.
A closer look at DOE figures on Utah's recent annual gas production
a level which is consistent with production from the past several years
indicates that the State produced 273 BCF (billion cubic feet) of
natural gas. This is not even enough natural gas to supply the country
for 5 days.
An analysis of information compiled by DOE, the United States
Geological Survey (USGS), and the State of Utah's Division of Oil, Gas,
and Mining (UDOGM) indicates that approximately 95 percent of gas and
oil production in Utah both historically and more recently between
2001-03 has come from seven ``hot spots.'' See Exhibits 1 and 2
(Lemkin, Figure 3, Location of principal areas of oil and gas
production in Utah and Figure 5, Location of principal areas of oil and
gas production in Utah: 2001 to present).\1\ None of these areas are
proposed for wilderness designation in America's Redrock Wilderness
Act. See id. (illustrating areas of production and BLM lands proposed
for wilderness).
---------------------------------------------------------------------------
\1\ See Lemkin, at 2-3 (noting that wells drilled outside these
seven areas are ``six times more likely to be dry, and have an expected
production level less than one-tenth that of wells drilled inside'' of
the seven hot spots).
---------------------------------------------------------------------------
According to DOE, the entire State of Utah has proven gas reserves
of 4.6 TCF (or 2.5 percent of U.S. proven gas reserves). Using the
USGS's own methods for predicting Utah's statewide inferred reserves (a
figure that must be estimated because it is not publicly available),
another 6.1 TCF of gas may be extracted from within or immediately
adjacent to existing fields. Finally, according to USGS, Utah may have
as much as 15,668 BCF of gas that is technically recoverable
undiscovered resources.\2\
---------------------------------------------------------------------------
\2\ The use of ``technically recoverable'' versus ``economically
recoverable'' undiscovered resources has been heavily criticized
because it ignores market (transportation, infrastructure, etc.) and
non-market (wildlife, wilderness values, etc.) costs, and thus
overemphasizes the amount of reserves. See The Wilderness Society,
Energy & Western Wildlands, A GIS Analysis of Economically Recoverable
Oil and Gas (2002). The USGS estimates that less than 20 percent of
technically recoverable gas is economically recoverable in the
intermountain west. Id. at 17.
---------------------------------------------------------------------------
An analysis of the most current USGS data estimates that the
technically recoverable undiscovered natural gas resources within
America's Redrock Wilderness Act amounts to 1495 BCF, or less than 4 4
weeks of natural gas at current consumption levels. Lemkin, at 4.
If the more appropriate economically recoverable screen were
applied, this 1495 BCF figure would no doubt be much less because of
these lands' relatively remote location and lack of infrastructure, as
well as non-market costs, including the loss of wildlife habitat, water
quality, and wilderness values.\3\
---------------------------------------------------------------------------
\3\ According to The Wilderness Society, the amount of economically
recoverable undiscovered natural gas resources in Utah's Forest Service
roadless lands is between 182-295 BCF, or between three to 5 days at
current national consumption levels. The Wilderness Society, Estimates
of Economically Recoverable Gas and Oil on National Forest Roadless
Areas in Utah on the USGS Low and High Price Scenarios. This analysis,
and an analysis of other western States roadless areas is available at
The Wilderness Society's webpage: www.wilderness.org/standbylands/
roadless/.
---------------------------------------------------------------------------
In sum, even if we sacrifice one of America's crown jewels--Utah's
redrock wilderness--we cannot meaningfully reduce the price of natural
gas. Instead, a sound national energy policy that emphasizes
conservation and renewable energy sources, hand-in-hand with
environmentally sensitive natural gas exploration, is a better approach
to stabilizing natural gas prices. See Natural Resources Defense
Council, Managing America's Natural Gas ``Crisis'' (2004), available
on-line at www.nrdc.org/air/energy/fnatgas.asp; Union of Concerned
Scientists, Renewable Energy Can Help Ease Natural Gas Crunch (2004),
available on-line at www.ucusa.org/clean--energy.
SUWA ADVOCATES A BALANCED APPROACH TO THE PROTECTION OF UTAH'S WILD
PLACES AND GAS DEVELOPMENT
The sacrifice of Utah's BLM wilderness quality lands to industrial
development will only provide the country with a few weeks of natural
gas, estimated at 1495 BCF. There is little question, however, that
exploration and development will leave lasting scars on this
magnificent landscape, including: the fragmentation of wildlife
habitat, long term damage fragile desert soils (estimated by USGS at
between 50-300 years),\4\ and the loss of wilderness values (i.e.,
outstanding solitude, including things such as night skies and
irreplaceable quiet). See Exhibits 3 and 4 (Exhibit 3--sludge pit at
Long Canyon well outside Moab, Utah; Exhibit 4--seismic truck in Yellow
Cat seismic project area near Arches National Park).\5\ Quite simply,
once these lands are gone, they are gone forever and thus future
leasing and development of these should be prohibited.\6\
---------------------------------------------------------------------------
\4\ See Biological Soil Crusts: Ecology and Management, U.S.
Department of the Interior, BLM Technical Reference 1730-2 (2001).
\5\ See The Wilderness Society, Fragmenting Out Lands: The
Ecological Footprint from Oil and Gas Development (2002).
\6\ Existing leaseholders, of course, would be allowed to proceed
with development, but only in the most environmentally sensitive
manner.
---------------------------------------------------------------------------
Far from advocating a broad ``no lease/no drill'' policy, SUWA and
the conservation community are extremely selective about filing
administrative or legal challenges to gas exploration or development
projects in Utah, and throughout the intermountain west. An analysis by
the Natural Resources Defense Council (NRDC) revealed that these
figures are representative for the number of legal challenges to gas
and oil related projects throughout the intermountain west. NRDC,
Managing America's Natural Gas ``Crisis,'' at 3. For example,
conservationists appealed or litigated only 0.2 percent of the APDs
approved by the BLM between 2001-2002, and only 5 percent of the leases
issued by BLM from the beginning of fiscal year 2001 to the end of
fiscal year 2003. The conservation community will continue to closely
monitor mineral leasing and development for full compliance with
Federal environmental and preservation laws, and will continue to
challenge BLM decisions that flaunt these laws, and thus put sensitive
resources at risk.
In Utah, the vast majority of these legal challenges have been
brought because the action threatened lands proposed for wilderness
designation (either citizen proposed or existing WSAs). For example,
between January 2000 and March 2004, there were over 3200 APDs approved
in Utah; conservationists challenged fewer than \1/2\ of 1 percent of
these drill projects. Thus, legal challenges are clearly not an
impediment to gas development and production.
Likewise, between 2000-2004, the BLM approved 10 seismic
exploration projects proposed in eastern Utah. SUWA challenged four of
the projects in Federal court and before the Interior Board of Land
Appeals (IBLA) because they threatened to damage wilderness quality
lands. See Map, Seismic Exploration in the Heart of Redrock Country
(2004), attached as Exhibit 5. SUWA prevailed on one of these four
challenges, and is appealing a second.\7\
---------------------------------------------------------------------------
\7\ In Southern Utah Wilderness Alliance v. Norton, 237 F. Supp.2d
48, 52 (D.D.C. 2002), Federal district judge James Robertson admonished
BLM for its hurried decision to approve a seismic exploration project
on the doorstep of Arches National Park: ``What does appear from this
record is a sense that the agency (a) was in hurry to approve the
Yellow Cat Swath [seismic] project and (b) considered the damage that
would be done by the [seismic] trucks relatively insignificant.'' The
BLM did not appeal this decision.
---------------------------------------------------------------------------
The balanced approach advocated by SUWA and others of permitting
gas exploration and development in less sensitive public lands, and in
full compliance with Federal environmental laws, will secure both
continued natural gas production and the protection of our country's
irreplaceable national heritage.
THE BUSH ADMINISTRATION IS CREATING CONFLICT BY FLAUNTING
ENVIRONMENTAL LAWS
Since 2001, this Administration has misled the American public by
focusing the Nation's attention and imagination on drilling and
developing natural gas and oil resources on the country's few remaining
wild places as a means of achieving energy independence. To the
contrary, the development of Utah's wilderness quality and roadless
lands will not produce any meaningful amount of natural gas.
First, President Bush issued Executive Order 13212 in May 2001,
which required Federal land management agencies to expedite their
review of gas and exploration permits and thus accelerate completion of
energy projects. Second, and at about the same time the Administration
released the National Energy Plan (NEP), which required, among other
things, the opening of more western public lands to gas and oil
drilling. Neither of these policies provide for a thoughtful, measured
approach to ensuring a continued supply of natural, while at the same
time protecting and preserving our treasured wild places and resources.
In response to the NEP, the BLM identified 40 tasks to implement
the NEPA, including establishment of a charter team to evaluate
bottlenecks and to streamline methods to expedite the agency's
processing of applications for permit to drill (APDs). See BLM
Information Bulletin 2001-138, Status of Bureau of Land Management's
National Energy Policy Implementation Plan (Aug. 15, 2001). After an
onsite review from the BLM's Washington, DC. headquarters office in the
summer of 2001, Utah BLM staff were told in no uncertain terms that gas
and oil leasing and the issuance of new APDs were their ``No. 1
priority,'' and that compliance with the National Environmental Policy
Act (NEPA), 42 U.S.C. Sec. Sec. 4321 et seq., and wilderness reviews
were the primary reason for unacceptable delays:
The purpose of the subject review is to improve the oil and
gas program in Utah. The review team believes the oil and gas
program should be a high priority program in Utah. Utah
management should work with Washington to acquire whatever
resources are necessary to reduce oil and gas leasing delays
and drilling backlogs.
The leasing delays and APD backlogs are created by the people
responsible for performing the wilderness reviews and NEPA
analysis. Utah needs to ensure that existing staff understand
that when an oil and gas lease parcel or when an APD comes in
the door, that this work is their No. 1 priority.
Information Bulletin UT 2002-008, Oil and Gas Program Review Final
Report (January 4, 2002) (emphasis added).
In addition, the BLM has produced a series of agency Instruction
Memoranda and Information Bulletins that have implemented the
Administration's call for the easing of restrictions on leasing and
development of the public lands. In July 2003, the BLM's Washington
office issued an Instruction Memorandum which revealed that the agency
was abandoning its congressionally mandated multiple use mission for
the promotion of a single resource oil and gas. Instruction Memorandum
2003-233, Integration of the Energy Policy and Conservation Act (EPCA)
Results into the Land Use Planning Process (July 28, 2003). This
internal agency document made clear that the BLM would ``eliminate''
protective special lease stipulations (i.e., timing of operations
stipulations designed to protect critical wildlife winter habitat) that
were deemed ``duplicative'' Id. At the same time, the Instruction
Memorandum directed agency staff to use unenforceable ``lease
notices,'' in lieu of protective special lease stipulations whenever
possible and to use the ``least restrictive'' mitigation necessary to
protect sensitive resources Id. at Attachment 3-3.
Most recently, in February 2004, the BLM's Washington, DC. office
issued guidance making it even more difficult for State Directors to
defer leasing the most sensitive public lands for gas development, even
when the agency has been presented with significant new information
never before considered by BLM about those very same lands. Instruction
Memorandum 2004-110, Fluid Mineral Leasing and Related Planning and
National Environmental Policy Act (NEPA) Processes (Feb. 23, 2004).
It is Bureau policy that a decision not to implement oil and
gas or geothermal leasing decisions, as contained in current
[land use plans] must be made by the State Director with
appropriate input from the affected Field Manager. The State
Director must provide a letter to those who submitted the
expression of interest for the tract, stating the reasons for
not offering the parcel(s), the factors considered in reaching
that decision, and approximate date when analysis of new
information bearing on the leasing decision is anticipated to
be completed and when a decision to lease (or amend the plan)
is expected to be made.
Id. This guidance turns well established caselaw regarding the Interior
Department's broad discretion whether to offer Federal oil and gas
leases on its head, and places the burden on an already overextended
agency to explain to industry why it is not offering lands for lease.
See Marathon Oil Co. v. Babbitt, 966 F. Supp. 1024 (D. Colo. 1997),
aff'd 166 F.3d 1221 (10th Cir. 1999). The Department has imposed no
similar obligation or additional workload requirement regarding any
other type of public resource such as wilderness, wildlife habitat, and
water quality.
Finally, in April 2003, the Administration eased the way for the
leasing and development of the country's wildest BLM lands when
Secretary of the Interior Gale Norton settled a long moribund lawsuit
with then Utah Governor Michael Leavitt (now EPA Administrator), which
asserted, among other things, the novel position that the BLM lacks the
authority to establish new wilderness study areas (WSAs) after 1993.
See State of Utah v. Norton, 2:97CV479, Stipulation and Joint Motion to
Enter Order Approving Settlement and to Dismiss Third Amended and
Supplemented Complaint (April 11, 2003).\8\ In the wake of this
settlement, the BLM has halted consideration of public lands with
wilderness character from becoming WSAs and, tragically, has targeted
these same wilderness quality lands for mineral leasing.\9\ A coalition
of 11 national and regional conservation organizations, including SUWA,
have challenged the settlement order in Federal court.
---------------------------------------------------------------------------
\8\ In 1999, Utah BLM completed its wilderness ``re-inventory'' of
over 3 million acres of public lands and concluded that over 2.6
million acres of those lands had wilderness character. See Utah
Wilderness Inventory, Bureau of Land Management, at xiv-xv (1999).
These lands, identified as ``wilderness inventory areas'' or ``WIAs''
were to have been studied in an environmental impact statement for
designation as wilderness study areas. This analysis never took place.
\9\ The Settlement Agreement also required that the BLM rescind its
Wilderness Inventory Handbook (WIH) a vehicle for the public to bring
new information about undesignated wilderness quality lands to the
BLM's attention--and other guidance which explained that the BLM's work
of protecting currently undesignated wilderness quality lands was not
yet finished. See also Instruction Memorandum 2003-195, Rescission of
National Level Policy Guidance on Wilderness Review and Land Use
Planning (June 23, 2003).
---------------------------------------------------------------------------
As noted above, a review of where the natural gas resources lie in
Utah confirms that the Administration's focus on easing restrictions to
lease and develop the State's BLM wilderness quality lands is unsound.
As USGS and DOE own figures confirm, a continued emphasis on leasing
and producing from established areas of production and their inferred
reserves will produce vastly more gas and oil than will the development
of these wilderness quality lands. Indeed, it is the Administration's
persistent efforts to lease and develop these wild lands that has
created much of the perceived and unnecessary ``conflict'' between
resource extraction and preservation.
For example, in November 2003 and February 2004, Utah BLM under the
direct supervision of BLM's Washington, DC. office, offered and sold 26
oil and gas leases in lands that the BLM itself recognizes as having
wilderness character. According to USGS and DOE data, these leases--if
ever fully developed and brought on-line--would produce absolutely
insignificant amount of natural gas. These wilderness quality lands,
however, would be scarred with drill pads, access roads, pipelines,
sludge pits, and other by-products that development brings with it.
Moreover, in its rush to lease Utah's wilderness quality lands, the
BLM is flaunting NEPA's mandate that the agency ``think first, then
act,'' by refusing to fully analyze the impacts of leasing,
exploration, development, and reclamation before it engages in an
irretrievable commitment of resources the sale of an oil and gas lease.
The BLM is also ignoring NEPA's requirement that the agency take a
``hard look'' at its own new information about the wilderness values of
these lands--information that it has never before considered. SUWA, the
Natural Resources Defense Council, and The Wilderness Society have
challenged Utah BLM's sale of wilderness quality lands at its November
2003 lease sale.
Nevertheless, there is certainly no shortage of public lands
throughout the west that have already been leased and thus are
available for development. According to BLM, there are currently over
42,000,000 acres of onshore Federal lands under lease across the
country. In addition, a 2003 report from BLM indicates that only
11,000,000 acres of Federal leases--less than one-third of the total
acreage of leased lands--were actually in production in 2003. See
Public Rewards from Public Lands, Bureau of Land Management (2003). See
also Exhibit 6 (Lemkin, Figure 7, Current lease and production status
[in Utah]). Finally, the Interior Department itself acknowledges that
roughly 88 percent of Federal gas resources in the Rocky Mountain
region are already available for leasing and development. See Statement
of Rebecca Watson, Assistant Secretary for Lands and Minerals
Management, Oversight Hearing on ``The Energy Policy and Conservation
Act Inventory,'' House Resources Subcommittee on Energy and Mineral
Resources (June 24, 2003).
CONCLUSION
In sum, current high prices for natural gas cannot reasonably be
attributed to ``impediments and restrictions'' to Federal natural gas
resources as alleged by industry advocates and the Administration.
Moreover, data shows that attempts to exploit the minimal gas resources
beneath Utah's wilderness quality BLM lands will damage priceless
wilderness treasures with little corresponding benefit to the public.
Based on my experiences in Utah, I believe that enforcement of existing
environmental laws and regulations have not posed serious impediment to
gas development.
Thank you again for the opportunity to testify on these important
issues.
[GRAPHIC] [TIFF OMITTED] T4599.108
[GRAPHIC] [TIFF OMITTED] T4599.109
Sludge Pit at Long Canyon Well Outside Moab, Utah
[GRAPHIC] [TIFF OMITTED] T4599.110
Seismic Truck in Yellow Cat Seismic Project Area Near Arches National
Park
[GRAPHIC] [TIFF OMITTED] T4599.111
[GRAPHIC] [TIFF OMITTED] T4599.112
[GRAPHIC] [TIFF OMITTED] T4599.113
Fisher Towers
[GRAPHIC] [TIFF OMITTED] T4599.114
Hunting Panel Petroglyphs--Stone Carbin Seismic Project Area
[GRAPHIC] [TIFF OMITTED] T4599.115
Responses by Stephen Bloch to Additional Questions from Senator Inhofe
Question 1. Your organization supports ``Drilling for oil and gas
in fields that are already developed.'' However, fields that are
already developed are being depleted and insufficient to meet demand.
Experts agree that we must find new sources to meet ever-increasing
demand. How could drilling for oil in developed and depleting oil
fields meet that certain demand?
Response. Senator, according to figures compiled by the Energy
Information Administration, Department of Energy, the State of Utah has
proven oil reserves of 271 million barrels (1.2% of U.S. proven oil
reserves) and proven natural gas reserves of 4.6 TCF (2.5% of U.S.
proven natural gas reserves). Utah's ``inferred reserves''
(extrapolated reserve estimates reflecting projected amounts of oil or
gas quantities that will be eventually extracted within or abutting
existing fields) are estimated to be 812 MMBO and 10.68 TCF. These
inferred reserves--which are generally open to further development--
will likely be tapped as technologies improve, different geologic
strata are tested, and reserves become more defined.
Moreover, as I explained earlier, the public lands outside of
Utah's seven ``hot spots'' (places where 95% of all oil and gas
production is currently occurring and where it is predicted to occur in
the future), have very little to offer in the way of meaningful oil and
gas reserves. Drilling these lands, however, will have a definite
cost--the loss of our few remaining wild lands and natural heritage.
Question 2. Your group also ``supports federal policies that
encourage energy efficiency and renewable power, which can meet much of
[the] nation's need for electric power plants over the next 20 years.''
Right now, people are going out of work because of the cost of natural
gas, but our environmental policies continue to spur more natural gas
use. 24% of our nation's energy depends on natural gas and nearly half
our manufacturers. Yet, our country gets only 1% of its power from
renewables.
Gas producers go where the gas is abundant. Similarly, wind and
solar power producers build where the wind are sun are plentiful.
Southern Utah is sunny and windy, just as it may contain significant
gas reserves.
Would you support construction of wind turbines and solar panels in
that same area?
Response. Senator, the Southern Utah Wilderness Alliance (SUWA)
support federal, state, and private efforts to increase energy
efficiency and to spur the development and expansion of renewable power
sources, such as wind power. In fact, SUWA purchases wind-generated
power for its main Salt Lake City office through Utah Power's ``Blue
Sky'' program.
Regarding the placement of either future wind turbines or solar
panels in southern Utah, I believe that each project must be evaluated
on a case-by-case basis to determine if there were other resource
concerns such as wildlife habitat or proposed wilderness lands.
One point of clarification, as I indicated to you earlier, with the
exception of the established fields at Aneth and Lisbon Valley, the
majority of southern Utah's public lands have not been identified by
the Department of Energy, U.S. Geological Survey, or the State of
Utah's Division of Oil, Gas, and Mining as being predicted to contain
meaningful quantities or either oil or gas.
__________
Statement of George Handley, President, Eclipse Exploration Corporation
Thank you Mr. Chairman, my name is George Handley, I am the
President and only employee of Eclipse Exploration Corporation based in
Denver, Colorado. I appreciate the opportunity to speak with you today
and I am glad to see the Committee's interest in natural gas supply in
America and the environmental policies affecting its development.
Policies that either limit or encourage energy development of
natural gas resources have very real consequences. Policies that
promote the use of a particular energy source, yet fail to provide for
the necessary and orderly development of that same resource are
predisposed to failure.
I have been the victim of Federal land management policies that
allow groups that are not party to any contract with the BLM or State
to effectively stop a project through protests, appeals, and
litigation. I have been victimized by the uncertainty that is created
by abuses to public involvement statutes. Even when I followed all the
laws and regulations, and had the approval of land managers, I found
that I was still subject to the reach of obstructionist groups that
sought to halt my natural gas exploration project and my cripple my
company.
Legal challenges severely limit oil and natural gas development on
Federal lands. At every stage of development obstructionist groups
challenge agency decisions and seek to stop development. For example,
in the State of Utah alone, fifty-seven percent (57 percent) of all
lease parcels offered by the Bureau of Land Management between 2001 and
2003 were protested by groups opposed to development.
I experienced one of these legal challenges first hand in Grand
County, Utah on a seismic project over a Federal mineral lease. This
lease is located in the Thompson Mining District, a former uranium
mining area characterized by dry, sparsely vegetated land. It is not
within Arches National Park. It is not within view of Arches National
Park. It is not wilderness. It was leased to me by the Federal and
State government with the expressed intent and responsibility to
explore for oil and natural gas.
Seismic technology has greatly increased our ability to map the
subsurface geology thereby allowing exploratory drilling in the most
efficient manner. I have thirty years of experience working on seismic
projects and developing petroleum exploration plays around the world. I
have a Masters degree in geophysics from the Colorado School of Mines.
In order to accurately map the subsurface geology of this prospect, I
designed a specific seismic program. Any deviation from this program
might result in useless data.
WesternGeco was hired to conduct the seismic activities on my
lease. One of the employees of WesternGeco, Stuart Wright, is one of
the foremost experts on seismic exploration and helped me design this
program to ensure an accurate map of the subsurface. An Environmental
Analysis was prepared following the guidelines of the BLM. The BLM
informed WesternGeco and myself, what was needed to comply with the
law. We did what the government asked. After the permit was issued,
WesternGeco began operations. More than half-way through the project, a
judge in Washington, DC. issued a ruling that stopped the project based
on a challenge by the Southern Utah Wilderness Alliance (SUWA). My
company is small and cannot afford to fight well-funded, non-profit
groups in the courts. The State of Utah and WesternGeco helped, but in
the end the SUWA won the court battle and has all but stopped my
project.
Abuse of the process delays the delivery of natural gas to
consumers and destroys the livelihood of businessmen like myself. The
more legal challenges, the more delays. The more delays, the more that
consumers are affected. The more consumers are affected, the more the
economy suffers.
I am not here to debate the factual or legal merits of my case. I
use this example to lay blame on a process that allows non-profit
groups to continually halt mineral development on public lands. SUWA
may show you pictures and tell you stories of horrific damage done by
the incomplete seismic project. It is misleading. There is no long term
damage to the area and it would be hard for anyone to see the path of
this project today. The State of Utah, the BLM and the Grand County
Council fully support my project. Grand County is anxious for the
wildcat well to be drilled and for the seismic program to be completed,
as it will mean a lot to their economy.
The Intermountain West is blessed with abundant resources of
natural gas, a substantial portion of which is owned by the Federal
Government. These resources cannot be developed when small businesses
like mine face insurmountable litigation. Abusing the legal process
puts Americans out of work and sends energy development outside our
borders. It costs the government in terms of litigation costs and the
potential to pay the attorney fees of the groups who bring the suit. In
my case, I did what I was told by the government, but still lost and I
have no recourse. Either way, the American public bears the burden of
litigation against the government.
Thank you for allowing me to testify before you today.
Display 1: This is a regional map showing the location of the
seismic purchased and recorded for the Yellow Cat prospect. Note the
location of Arches National Park.
[GRAPHIC] [TIFF OMITTED] T4599.116
Display 2: This is a base map showing the location of the seismic
and the acreage now held by Eclipse for the Yellow Cat Prospect.
[GRAPHIC] [TIFF OMITTED] T4599.117
Display 3. On this land map the yellow represents all the acreage
originally leased by Eclipse and Gulf Canada. Note the acreage now held
for Yellow Cat and the location of Arches National Park.
[GRAPHIC] [TIFF OMITTED] T4599.118
Display 4. Shows the Mississippian fault feature and the overlying
Pennsylvanian Structure that is not adequately defined because the
seismic program was halted.
[GRAPHIC] [TIFF OMITTED] T4599.119
Display 5. Shows the sparse vegetation in this old mining district,
the Mississippian Fault Feature and the road access to the Initial
wildcat location.
[GRAPHIC] [TIFF OMITTED] T4599.120
Display 6. Shows Seismic Line YC-6 and the location of the initial
test well. This is only the bottom portion of this seismic line, from
1.2 seconds to 2.6 seconds. The Honaker Trail is the top of the
Pennsylvanian section. The Leadville is the top of the Mississippian
section. At the location the Honaker Trail will be at a depth of 8,400
feet. The Lynch is at a depth of 16,500 feet.
[GRAPHIC] [TIFF OMITTED] T4599.121
Statement of Paul N. Cicio, Executive Director, Industrial Energy
Consumers of America
46-Month Natural Gas Crisis Has Cost U.S. Consumers Over $130 Billion
EXECUTIVE SUMMARY
The U.S. natural gas crisis began 46 months ago in June, 2000 and
has had a staggering direct and indirect economic impact on all
consumers, the U.S. economy and especially on manufacturing.
Residential, commercial and industrial consumers have paid $130 billion
dollars more for natural gas during the 46-month natural gas crisis
when compared to the price paid for the previous 46 month period, an 86
percent increase. Unfortunately, there is no end in sight to these high
and sustained natural gas prices that are the highest in the world.
The increased price of natural gas has cost industrial consumers
$66 billion, residential consumers $39 billion and commercial consumers
$25 billion. Every penny of the $130 billion could have been prevented
and was totally unnecessary. The U.S. is blessed with enormous natural
gas reserves yet we do not lift drilling moratoriums.
Drilling for more natural gas and the recent California forest
fires are a perfect analogy. In the name of protecting forests, certain
groups fought efforts to thin the trees out and to take a balanced
approach to managing the forests. Now, everyone knows that balance is
needed, that forests should be thinned and there is a price to pay for
inaction.
In the case of the forest fires, the people of California became
the victim. In the last 46 months, all consumers, including a lot of
families with fixed income, became the victim of high natural gas
prices. Manufacturing workers, who lost their jobs to overseas
manufacturers with cheaper natural gas, also became the victim. The
jobs lost may never return.
When prices of natural gas rose significantly in June of 2000, it
began to impact manufacturing jobs immediately and still is today.
Manufacturing employment has fallen for 43 consecutive months. Since
July 2000, the number of factory jobs is down by over 2.8 million.
Every U.S. economic recession has been preceded by high-energy
prices and the recent recession was no different. IECA believes the
natural gas crisis started in June 2000. Government officials say the
U.S. recession officially began in March 2001. In our view the US
economy is unlikely to fully recover without globally competitive
energy.
High sustained natural gas prices are a hidden tax on consumers,
depressing disposable personal income and savings, and ultimately
consumer spending which accounts for two-thirds of the economy. High
natural gas prices are a tax on every person and company because
natural gas is used as both a fuel and raw material for the production
of everything from fertilizer to plastics for computers to heating
homes and water. Sustained high natural gas prices impede economic
growth and severely impacts competitiveness of industry.
THE REAL COST IS MUCH MORE
The real cost of the crisis is much more than $130 billion when one
considers other direct and indirect impacts of sustained high prices on
industrial and residential consumers.
The $130 billion cost estimate does not include:
<bullet> Consumption of natural gas by electric utilities and the
ultimate impact high prices have caused by increasing the price of
electricity.
<bullet> Lower demand for natural gas by manufacturing because of
``demand destruction,'' caused by high prices.
<bullet> Reduction of operating rates in the manufacturing sector
and the resultant loss of efficient capacity utilization caused by high
natural gas prices.
<bullet> Impact to downstream customers. For example, farmers have
reduced their consumption of high cost natural gas based fertilizers
resulting in lower agricultural crop yields, which leads to higher food
prices for all Americans.
<bullet> Loss of manufacturing jobs, plant shutdowns, corporate
bankruptcies, loss of capitalization, loss of competitiveness and
profitability.
<bullet> Impact to residential electricity bills, higher food cost
and the difficult choices for fixed income families.
<bullet> Financial loss of corporate related tax income and higher
heating and cooling bills on states, cities, county governments, school
systems and financial pressure on human services.
the impact of high natural gas costs on manufacturing is significant
Manufacturing plays an important role in the economic health of our
country and we must recognize that affordable energy, including natural
gas, is essential. In the past, the affordability of U.S. energy was a
key factor in manufacturing building their factories here. Now, the
non-globally competitive price of natural gas and natural gas feedstock
is forcing manufacturing companies to produce their products elsewhere.
According to the National Association of Manufacturers,
manufacturing accounts for 22 percent of GDP growth, contributes one-
third of the economy's productivity growth, creates more business
activity and jobs in other sectors than any other industry, performs 62
percent of U.S. private sector R&D, pays the highest wages--18 percent
higher than the national average and makes two-thirds of all U.S.
exports.
NATIONAL ENERGY POLICY IMPLICATIONS
The blame for these high prices does not rest on the oil and gas
companies, it rests mostly on Federal and State policymakers. Congress
and states must work together to break the impasse between the
environment and the need to increase supplies of natural gas.
Unfortunately, the end of the crisis is no-where in sight. It is
the belief of the Industrial Energy Consumers of America (IECA) that
the Energy Policy Act of 2003 will not by itself resolve this crisis.
It will neither increase near-term production of natural gas nor
increase the use of Clean Coal-based electricity generation. The
legislation includes many provisions that will help but these will not
be enough to turn this situation around. More is needed.
Resolving the crisis takes a combination of policies. We must
increase production of natural gas and increase use of coal for base-
load electricity generation. The high price of natural gas is due to
the combination of relatively flat natural gas production despite
increasing rig count and the significant increase in demand for natural
gas by the electric utility industry.
Natural gas consumption by the electric utility industry is a major
problem. From 1992 to 2002 natural gas demand by the electric utility
industry increased 60.5 percent and accounted for 93.6 percent of the
nations' increase in natural gas demand.
According to the Energy Information Administration (EIA), US
natural gas consumption from 1992 to 2002 rose 2.227-billion cubic
feet/day, an increase of 11 percent. In that same time period, natural
gas consumption from the electric utility industry increased by 2.085-
billion cubic feet/day or 60.5 percent. The increased electric utility
demand for natural gas accounted for 93.6 percent of the entire US net
increase. The EIA forecasts continued large annual increases in natural
gas use for power generation. This is unacceptable.
This enormous increased demand without an equivalent increase in
supply has increased the price of natural gas on all consumers. The
electric utility industry has alternative energy sources to produce
power while industrial consumers, farmers and homeowners do not. The
current situation puts consumers in competition with the electric
utilities for purchases of natural gas and consumers are losing- paying
both higher natural gas and electricity prices as a result.
Increasing use of coal for power generation solves this problem.
Use of clean coal technology allows use of coal for power generation in
an environmentally acceptable manner. Coal has several hundred years of
supply and power generation using coal is a low cost option. As a power
generation fuel, coal is far more reliable than natural gas because
several months of coal supply can be stored onsite, while natural gas
is only reliable so long as the gas flows.
Increased demand for natural gas has largely been driven by
government air quality regulations. Air quality issues are important
and cannot be ignored and we acknowledge the EPA/utility rulemaking
that is underway. The Interstate Air Quality Rule and the Utility
Mercury Reduction Rule must be ``natural-gas-neutral''. This means the
EPA action on this rule must not directly or indirectly increase the
demand for natural gas.
There must be a way of accommodating progress in clean air quality
while not putting additional pressure on natural gas demand that is
costing Americans billions in higher natural gas and electricity
prices.
For more information on this report or for information on the
Industrial Energy Consumers of America and how you can help increase
the affordability of natural gas, please contact us at 202-223-1661 or
visit us on the web at www.ieca-us.org.
The Industrial Energy Consumers of America is a 501 (C) (6)
nonprofit organization created to promote the interests of
manufacturing companies for which the availability, use and cost of
energy, power or feedstock play a significant role in their ability to
compete in domestic and world markets. IECA supports a diverse, robust
and affordable supply of energy. IECA membership represents a diverse
set of industries including: plastics, cement, paper, food processing,
chemicals, fertilizer, insulation, steel, industrial gases,
pharmaceutical, and brewing. IECA board members are senior energy
procurement managers.
______
PRICE IMPACT CALCULATION METHODOLOGY
The $130 billion price impact calculation uses the monthly average
of the daily published closing price of the Henry Hub spot index price,
considered to be the most widely used cash price index in the United
States. The 46-month average price from June 2000 to March 2004 was
$4.44/MM Btu. The previous 46-month average price from January 1997
through May 2000 was $2.39/MM Btu. This means consumers paid $2.05/MM
Btu more for natural gas during the natural gas crisis, an 86 percent
increase.
REPORT DATA
Average Price Calculation
------------------------------------------------------------------------
Dollars/MM
Btu
------------------------------------------------------------------------
Average price of 46 months prior to June, 2000.............. $2.39
Average price of 46 months starting with June, 2000......... $4.44
Price Difference............................................ $2.05
Percent change.............................................. 85.8%
------------------------------------------------------------------------
Price Impact Calculation on Industrial Consumers
------------------------------------------------------------------------
Annual
Year Months Volume, 46 Month Volume,
TCF TCF
------------------------------------------------------------------------
2000.............................. 7 9.40* 5.483
2001.............................. 12 8.45* 8.45
2002.............................. 12 8.29* 8.29
2003.............................. 12 8.06** 8.06
2004.............................. 3 8.06** 2.015
-------------------------------------
Total Volume...................... 32.30 TCF
Total MMBtu....................... 32,298,333,333
Cost Impact....................... $66,269,002,592
------------------------------------------------------------------------
Price Impact Calculation on Residential Consumers
------------------------------------------------------------------------
Annual
Year Months Volume, 46 Month Volume,
TCF TCF
------------------------------------------------------------------------
2000.............................. 7 4.99* 2.9111
2001.............................. 12 4.78* 4.78
2002.............................. 12 4.92* 4.92
2003.............................. 12 5.07** 5.07
2004.............................. 3 5.07** 1.2675
-------------------------------------
Total Volume...................... 18.95 TCF
Total MMBtu....................... 18,948,333,333
Total............................. $38,877,769,259
------------------------------------------------------------------------
Price Impact Calculation on Commercial Consumers
------------------------------------------------------------------------
Annual
Year Months Volume, 46 Month Volume,
TCF TCF
------------------------------------------------------------------------
2000.............................. 7 3.22* 1.878
2001.............................. 12 3.04* 3.04
2002.............................. 12 3.12* 3.12
2003.............................. 12 3.15** 3.15
2004.............................. 3 3.15** 0.7875
-------------------------------------
Total Volume...................... 11.98 TCF
Total MMBtu....................... 11,975,833,333
Total............................. $22,571,748,703
------------------------------------------------------------------------
Henry Hub Monthly Average of Daily Spot Natural Gas Price
----------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Jan............................ $3.99 $2.25 $1.80 $2.36 $9.91 $2.61 $4.96 $6.15
Feb............................ $2.96 $2.04 $1.81 $2.61 $6.22 $2.03 $5.66 $5.77
Mar............................ $1.78 $2.26 $1.64 $2.61 $5.03 $2.39 $9.11 $5.00
Apr............................ $1.85 $2.32 $1.88 $2.89 $5.35 $3.40 $5.14
May............................ $2.51 $2.27 $2.35 $3.08 $4.87 $3.36 $5.12
Jun............................ $2.31 $2.03 $2.23 $4.37 $3.73 $3.37 $5.95
Jul............................ $2.16 $2.37 $2.28 $4.36 $3.16 $3.26 $5.30
Aug............................ $2.30 $2.19 $1.93 $2.62 $3.83 $3.19 $2.95 $4.69
Sep............................ $1.83 $2.57 $1.63 $2.90 $4.62 $2.34 $3.27 $4.93
Oct............................ $1.85 $3.16 $2.07 $2.55 $5.29 $1.86 $3.72 $4.44
Nov............................ $2.72 $3.30 $2.00 $3.06 $4.50 $3.16 $4.13 $4.45
Dec............................ $3.90 $2.55 $2.12 $2.14 $6.02 $2.28 $4.13 $4.86
----------------------------------------------------------------------------------------------------------------
1 MCF = MM Btu
* Energy Information Agency
* Estimate
March, 2004 price is an estimate.
__________
Statement of the National Petrochemical & Refiners Association (NPRA)
OVERVIEW
NPRA, the National Petrochemical & Refiners Association is a
national trade association with over 450 members, including those who
own or operate virtually all U.S. refining capacity, as well as
petrochemical manufacturers. NPRA members manufacture petroleum and
petrochemical products that are essential to U.S. economic growth and
maintenance of national security. These industries are dependent on
adequate supplies of fuels, including natural gas and natural gas
liquids, at predictable, affordable prices.
NPRA appreciates the interest of the Senate Environment & Public
Works Committee in addressing the impact of environmental regulations
and policies on natural gas supply and demand. We urge you to study and
assess current policy thoroughly and openly. The Nation needs and
deserves a frank and public debate on the future of its natural gas
supplies.
Short natural gas supplies and accompanying high prices threaten
the health of U.S. industries, their significant contributions to
national, State and local economies and the continued existence of
thousands of jobs. Government, industry, and private experts agree that
natural gas demand is expected to rise by the year 2020 by as much as
60 percent over today's levels. It is certain that domestic gas
production can not satisfy this new demand unless current policy is
altered significantly.
In addition, the President's National Energy Policy Task Force
projects that over 1,300 new electric generating plants must be
constructed to fulfill anticipated electric energy needs during the
next 20 years. DOE suggests that over 90 percent of these facilities
will be fueled by natural gas. This increase in gas usage for electric
generation may not be achievable.
The United States has an abundant supply of domestic gas, but
flawed government policies and regulatory red tape prohibit its
development in many areas. In the short term, efforts should be made to
encourage energy efficiency and conservation while also encouraging the
substitution of fuel oil, coal or nuclear power where possible. For the
long term, we must develop policies that promote continued
environmental progress without reducing the supply of natural gas and
other petroleum products.
FLAWED POLICES ENCOURAGE CONSUMPTION, DISCOURAGE SUPPLY
Our Nation currently faces daunting challenges as it strives to
balance ever-increasing energy demands from all consuming sectors,
largely due to contradictory and short-sighted policies that have
limited supply while promoting additional natural gas consumption.
Increasing demand for natural gas because of its environmental benefits
has come up against a North American production base, which has been
artificially restricted due to contradictory policy initiatives. Those
policies promote the use of clean burning gas while at the same time
failing to ensure adequate, affordable supplies of the fuel.
NPRA believes the current ill-advised national policy of limiting
natural gas supply while encouraging gas use because of its
environmental benefits--mostly in the generation of base and peak load
electricity--has created and could exacerbate continuing higher gas
prices and volatility. In fact, EIA reports that demand by electricity
generators is expected to account for 30 percent of total natural gas
consumption in 2025. This equates to a doubling of gas use by the
utility sector over current demand. Under present policies, it is not
clear that adequate supplies will be available to accommodate this
demand figure unless current natural gas users in core industries are
forced to switch fuels or close.
This is really not a resource problem. Flawed government policies
have prohibited the development of gas in many areas. If changes are
not made to existing policies, our predicament will not be short-lived.
This means that policymakers and stakeholders must act or accept
responsibility for the ultimate consequences of short supplies, lost
U.S. jobs, a worsening trade balance and further loss of U.S.
industrial leadership. The U.S. has an abundant supply of domestic gas.
In January 2004, the Department of the Interior issued a rule
providing new incentives to boost domestic natural gas production in
the hard-to-reach, deepwater areas of the Gulf of Mexico. The rule is
expected to save consumers some $570 million a year and create as many
as 26,000 jobs. NPRA believes that the rule is an excellent short-term
step which will go a long way to help sustain a reliable supply of
natural gas. But more is needed. The comprehensive energy legislation
(H.R. 6) is a good start to address longer term needs, but it lacks
adequate incentives to increase natural gas supply in the near term.
NPRA will work with Congress in 2004 to enact separate legislation to
encourage natural gas production.
PETROCHEMICAL AND REFINING INDUSTRIES SEVERELY DISADVANTAGED BY HIGH
ENERGY COSTS
The domestic petrochemical industry, as well as others in the basic
chemical sector, is primarily based upon natural gas and natural gas
liquids. About 70 percent of U.S. petrochemical manufacturers use
natural gas liquids as feedstocks. In contrast, about 70 percent of
petrochemical producers in Western Europe and Asia use naphtha heavy
oil as a feedstock. While oil is a global commodity whose price is set
on the global market, natural gas liquids are generally more locally
traded commodities. Thus, price increases in natural gas have had a
larger impact on competitiveness in North American-produced
petrochemicals.
The U.S. has generally maintained a reasonable-cost feedstock
position relative to its competitors in Europe and Asia. However, that
situation has been eroded as the price of natural gas has increased.
North American natural gas and natural gas liquids prices have risen to
unprecedented levels for a sustained period of time and placed a
significant portion of the domestic petrochemical industry at a
disadvantage to European and Asian producers. The trend toward
increased siting of base petrochemical production and expansion
projects in overseas locations is directly attributable to this growing
disparity in fuel prices. Additional displacements will occur if the
current and prospective gas price and supply situation is not addressed
promptly.
High natural gas prices have created fundamental changes in the U.S
chemical industry, with the petrochemical industry affected more than
other segments of the industry. There have been a series of
bankruptcies, plant closures, and reductions in production levels at
many facilities because they can no longer compete at the current
elevated gas prices.
On March 17th, The Washington Post published an article on the job
losses in the chemical industry resulting from high natural gas prices.
The Post reported that ``Across the country, 1 in every 10 chemical-
related jobs has vanished in the past 5 years--nearly 100,000 workers--
and that number would be worse if not for a surge in one segment,
pharmaceuticals.'' These chemical jobs tend to be well-paid and
``virtually impossible to replace in their communities.'' Louisiana
Governor Kathleen Blanco said, ``Right now we've got big operations
just shutting down because they cannot compete on the world market.
We've had shutdowns before but they have always been temporary. We've
not seen anything like this before.''
U.S. trade receipts from chemical companies have also been
adversely impacted by high natural gas prices. Over 3 years of
extraordinarily high natural gas prices (2001-2004) have resulted in a
depressed chemical export market and a negative trade balance for the
U.S. economy. The U.S. balance of payment for chemicals went from an $8
billion surplus in 1999 to an estimated $9 billion deficit for 2003.
This negative trade balance allows foreign businesses to capture U.S.
market share.
Natural gas prices also impact petroleum product prices because
refineries are significant users of natural gas. Many facilities
switched to natural gas use at the order of environmental authorities
such as the EPA. The result is that natural gas supply and price have
considerable impact on the output of the nation's petroleum products as
well as on refining industry profitability. This is even more critical
as refiners face a tight supply/demand balance for petroleum products
and higher raw material costs for crude oil.
Over the next 6 years and well beyond, there appears to be no
relief for residential consumers, refiners, and petrochemical
manufacturers. In its ``2004 Annual Outlook'', the Energy Information
Administration (EIA) concludes that high natural gas prices are likely
to continue to increase until 2010. EIA predicts ``. . . greater
dependence on more costly alternative supplies of natural gas'' from
LNG imports and remote resources in Alaska and Canada. This is
difficult news for petrochemical manufacturers, refiners, and
consumers. Congress should act to maximize production from the
significant U.S. reserve base. Without urgent action, the United States
will continue to lose thousands of manufacturing jobs and suffer
billions of dollars in economic harm due to inadequate gas supplies.
short-term policy options--conservation, efficiency & fuel switching
In the immediate future, efforts should also be made to help
mitigate the natural gas supply problems through voluntary conservation
and efficiency efforts. NPRA urges both Congress and the Administration
to act to improve energy efficiency and conservation in the use of
natural gas and power, especially as the Nation enters the summer
cooling season. This could be accomplished by offering appropriate
incentives. Any adjustment in electricity consumption would reduce
natural gas consumption by the power sector and have a positive impact
on natural gas availability. This, in turn, could help to moderate
natural gas supply and price concerns. Further, if and when natural gas
supplies become extremely tight, the Federal and local government
should allow electric utilities and other industrial facilities to
switch to alternative fuels in order to conserve natural gas supplies.
Pre-emptive efforts to encourage fuel switching would be even more
helpful.
LONG-TERM OPTIONS MUST FOCUS ON SUPPLY
We must develop policies that promote continued environmental
progress without reducing the supply of natural gas and other petroleum
products needed for a healthy economy and the nation's security. We
need to forge a diversified national energy policy that reduces our
dependence on foreign energy sources while increasing our domestic
production. These policies must include increased access and
development opportunities to onshore public lands as well as those on
the Outer Continental Shelf. We must also bring Alaskan natural gas to
lower 48 markets as soon as possible. New and promising domestic areas
for development must be open for exploration and production. In the
meantime, NPRA would urge caution when Congress and the Administration
consider any policies, environmental or other, that will accelerate the
demand for natural gas when other policy options exist.
Environmental progress and energy supply need not be mutually
exclusive. However, long-standing and recent environmental policies
have significantly limited fuel and energy supply choices. They have
promoted or even required fuel switching while at the same time
discouraging expanded domestic production of natural gas. Anticipated
environmental constraints could aggravate the current situation. This
is a formula guaranteed to make an already bad situation worse.
Recent reports support the need for increased domestic production.
As an example, last fall, the National Petroleum Council (NPC), at the
request of the Secretary of Energy, released its recommendations and
policy options on the long-term future of natural gas. The NPC warned
that the U.S. will pay an additional $1 trillion in natural gas costs
over the next 20 years unless current policy is altered and action is
taken to increase domestic production.
RECOMMENDATIONS
NPRA urges Congress and the Administration to re-think and re-
evaluate current and future policy initiatives. We should focus on all
energy options, including fuel choice mixture and flexibility; gas
supply source diversification; faster permitting for modernization and
expansion of infrastructure, including LNG facilities and pipelines;
development of new technologies; and natural gas market transparency
and efficiency. As a nation, we can not afford to inhibit any options
that are beneficial to increasing supply.
Finally, NPRA believes that there is an urgent need to harmonize
the nation's energy and environmental policies, and that any national
energy plan must include traditional supply and market-oriented
policies for all fossil fuels, including natural gas. The current
energy legislation is deficient, so separate legislation must be
developed and enacted.
CONCLUSION
We urgently need a thorough review of natural gas-related policies
to maintain and retain the U.S. petrochemical, refining, and other
manufacturing industries in the context of a healthy and growing U.S.
economy. It is clear that natural gas will play an increasingly
important role in America's energy future; but we must analyze,
clarify, and correct policies to maximize the available supply of this
key resource. Therefore, we repeat that the principal focus of the gas
policy discussion must be on the need for increased supply of this
critical fuel.
For this reason, NPRA appreciates the Committee's efforts to
investigate the issues surrounding and impacting the supply, demand,
and price volatility of our nation's natural gas resources. We hope to
work with all stakeholders to design a natural gas policy that provides
adequate supply at reasonable and predictable prices while
simultaneously continuing environmental progress.
__________
Statement of the American Gas Association (AGA)
EXECUTIVE SUMMARY
The American Gas Association represents 192 local energy utility
companies that deliver natural gas to more than 53 million homes,
businesses and industries throughout the United States. Natural gas
meets one-fourth of the United States' energy needs and is the fastest
growing major energy source. As a result, adequate supplies of
competitively priced natural gas are of critical importance to AGA and
its member companies. Similarly, ample supplies of reasonably priced
natural gas are of critical importance to the millions of consumers
that AGA members serve. AGA speaks for those consumers as well as its
member companies.
For the past 3 years, the natural gas industry has been at a
critical crossroads. Natural gas prices were relatively low and very
stable for most of the 1980's and 1990's. Wholesale natural gas prices
during this period tended to fluctuate around $2 per million Btus
(MMBtu). But the balance between supply and demand has been extremely
tight since then, and even small changes in weather, economic activity
or world energy trends have resulted in wholesale natural gas price
fluctuations. Market conditions have changed significantly since the
winter of 2000-2001. Supply and demand is now in precarious balance.
Today our industry no longer enjoys prodigious supply; rather, it
treads a supply tightrope, bringing with it unpleasant and undesirable
economic and political consequences--most importantly high prices and
higher price volatility. Both consequences harm natural gas customers--
residential, commercial, and industrial.
Since the beginning of 2003, the circumstances in which our
industry finds itself have become plainly evident through significantly
higher natural gas prices. Natural gas prices have consistently hovered
in the range of $5-6 per thousand cubic feet in most wellhead markets.
In some areas where pipeline transportation constraints exist, prices
have skyrocketed for short periods of time to $70 per thousand cubic
feet. Futures prices for natural gas as far out as 2007 continue to
reflect a wellhead price expectation of greater than $5, as they have
done for more than a year. Simply put, natural gas prices are high, and
the marketplace is predicting that they will stay high. At this point
there is no debate among analysts as to this State of affairs.
Energy is the lifeblood of our economy. More than 50 million
Americans rely upon natural gas to heat their homes, and high prices
are a serious drain on their pocketbooks. High, volatile natural gas
prices also put America at a competitive disadvantage, cause plant
closings, and idle workers. Directly or indirectly, natural gas is
critical to every American.
The consensus of forecasters is that natural gas demand will
increase steadily over the next two decades. This growth will occur
because natural gas is the most environmentally friendly fossil fuel
and is an economic, reliable, and homegrown source of energy. It is in
the national interest that natural gas be available to serve the
demands of the market. The Federal Government must address these issues
and take prompt and appropriate steps to ensure that the Nation has
adequate supplies of natural gas at reasonable prices.
Many of the fields from which natural gas is currently being
produced are mature. Over the last two decades, technological advances
have greatly enhanced the ability to find natural gas as well as to
produce the maximum amount possible from a field. While technology will
undoubtedly continue to progress, technology alone will not be
sufficient to maintain or increase our domestic production.
As Federal Reserve Chairman Greenspan noted before the House Energy
and Commerce Committee, today's tight natural gas markets have been a
long time in coming but there are still numerous unexploited sources of
gas production in the United States. We are not running out of natural
gas; we are not running out of places to look for natural gas; we are
running out of places where we are allowed to look for gas. The truth
that must be confronted now is that, as a matter of policy, this
country has chosen not to develop much of its natural gas resource
base.
Without prudent elimination of some current restrictions on U.S.
natural gas production, producers will likely not be able to continue
providing increased amounts of natural gas from the lower-48 states to
customers for longer than 10 or 15 years. This would likely expose 65
million homes, businesses, industries and electric-power generation
plants that use natural gas to unnecessary levels of price volatility--
thus harming the U.S. economy and threatening Americans' standard of
living.
If America's needs for energy are to be met, there is no choice
other than for exploration and production activity to migrate into new,
undeveloped areas. There is no question that the nation's natural gas
resource base is rich and diverse. It is simply a matter of taking E&P
activity to the many areas where we know natural gas exists.
Regrettably, many of these areas--largely on Federal lands--are either
totally closed to exploration and development or are subject to so many
restrictions that timely and economic development is not possible. As
we contemplate taking these steps, it is important that all understand
that the E&P business is--again as a result of technological
improvements--enormously more environmentally friendly today than it
was 25 years ago. In short, restrictions on land access that have been
in place for many years need to be reevaluated if we are to address the
nation's current and future energy needs.
Both houses of Congress recognized these concerns last year in
passing H.R. 6. This year, like last, the most important next step the
entire Congress can take to address these pressing issues is to enact a
comprehensive energy bill with provisions ensuring that lands where
natural gas is believed to exist are available for environmentally
sound exploration and development. Additionally, it is appropriate to
create incentives to seek and produce this natural gas. These steps are
necessary to help consumers and the economy.
RECOMMENDATIONS
To promote meeting consumer needs, economic vitality, and sound
environmental stewardship, the American Gas Association urges Congress
as follows:
<bullet> Current restrictions on access to new sources of natural
gas supply must be re-evaluated in light of technological improvements
that have made natural gas exploration and production more
environmentally sensitive.
<bullet> Federal and State officials must take the lead in
overcoming the pervasive ``not in my backyard'' attitude toward energy
infrastructure development, including gas production.
<bullet> Interagency activity directed specifically toward
expediting environmental review and permitting of natural gas pipelines
and drilling programs is necessary, and agencies must be held
responsible for not meeting time stipulations on leases, lease review,
and permitting procedures.
<bullet> Federal lands must continue to be leased for multi-purpose
use, including oil and gas extraction and infrastructure construction.
<bullet> Both private and public entities should act to educate the
public regarding energy matters, including energy efficiency and
conservation. Federal and State agencies, with private sector support
and involvement, should strive to educate the public on the
relationship between energy, the environment, and the economy. That is,
energy growth is necessary to support economic growth, and responsible
energy growth is compatible with environmental protection.
<bullet> Economic viability must be considered along with
environmental and technology standards in an effort to develop a
``least impact'' approach to exploration and development but not a
``zero impact''.
<bullet> Existing moratoria for onshore lands should be lifted.
<bullet> The geologic conditions for oil and gas discovery exist in
the US mid-Atlantic area, the Pacific Offshore area, and the eastern
portion of the Gulf of Mexico.
<bullet> Although some prospects have been previously tested,
new evaluations of Atlantic oil and gas potential should be
completed using today's technology--in contrast to that of 20
to 30 years ago.
<bullet> The Federal Government should facilitate this
activity by lifting or modifying the current moratoria
regarding drilling and other activities in the Atlantic
Offshore, in the Pacific Offshore, and in the Gulf of Mexico to
ensure that adequate geological and geophysical evaluations can
be made and that exploratory drilling can proceed.
<bullet> The Destin Dome (181 lease area) of the eastern Gulf
of Mexico should immediately be offered for lease for oil and
gas exploration.
<bullet> The Federal Government must work with the States to
assist--not impede--the process of moving natural gas supplies
to nearby markets should gas resources be discovered in
commercial quantities. Federal agencies and states must work
together to ensure the quality of the environment, but they
must also ensure that infrastructure (such as landing an
offshore pipeline) is permitted and not held up by multi-
jurisdictional roadblocks.
<bullet> The Federal Government should continue to permit royalty
relief where appropriate to change the risk profile for companies
trying to manage the technical and regulatory risks of operations in
deepwater.
<bullet> Tax provisions such as percentage depletion, expensing
geological and geophysical costs in the year incurred, Section 29
credits, and other credits encourage investment in drilling programs,
and such provisions are often necessary, particularly in areas faced
with increasing costs due to environmental and other stipulations.
<bullet> The Coastal Zone Management Act (CZMA) is being used to
threaten or thwart offshore natural gas production and the pipeline
infrastructure necessary to deliver natural gas to markets in ways not
originally intended. Companies face this impediment even though leases
to be developed may be 100 miles offshore. These impediments must be
eliminated or at least managed within a context of making safe, secure
delivery of natural gas to market a reality.
<bullet> The U.S. Government should work closely with Canadian and
Mexican officials to address the challenges of supplying North America
with competitively priced natural gas in an environmentally sound
manner.
<bullet> Renewable forms of energy should play a greater role in
meeting U.S. energy needs, but government officials and customers must
realize that all forms of energy have environmental impacts.
<bullet> Construction of an Alaskan natural gas pipeline must begin
as quickly as possible.
<bullet> Construction of this pipeline is possible with
acceptable levels of environmental impact.
<bullet> The pipeline project would be the largest private
sector investment in history, and it would pose a huge
financial risk to project sponsors. Many believe the project
may not be undertaken without some form of Federal support.
<bullet> The Federal Energy Regulatory Commission (FERC) announced
in December of 2002 that it would not require LNG terminals to be
``open access'' (that is, common carriers) at the point where tankers
offload LNG. This policy will spur LNG development because it reduces
project uncertainty and risk.
<bullet> Other Federal and State agencies should review any
regulations that impede LNG projects and act similarly to
reduce or eliminate these impediments.
<bullet> Efforts should be made to encourage existing LNG
terminals to commence operating at full capacity at the
earliest opportunity.
<bullet> The siting of LNG offloading terminals is generally
the most time-consuming roadblock for new LNG projects. Federal
agencies should take the lead in demonstrating the need for
timely approval of proposed offloading terminals, and State
officials must begin to view such projects as a means to
satisfy supply and price concerns of residential, commercial
and industrial customers.
<bullet> Some new LNG facilities should be sited on Federal
lands so that permitting processes can be expedited.
<bullet> Congress should increase LIHEAP funding. Low-income energy
assistance is currently provided to roughly 4 million households, only
15 percent of those eligible. The financial burden on needy families
will certainly increase this winter, and LIHEAP appropriations should
be increased to $3.4 billion--up from $2.0 billion of total assistance
in 2003.
<bullet> Should gas supplies become extremely tight, the Federal
Government and the States should consider easing environmental
restrictions on a temporary basis so that electric generating
facilities and industrial facilities can switch to alternative fuels.
<bullet> States should be encouraged to authorize local utilities
to enter into fixed-price long-term contracts and/or natural gas
hedging programs as a means of dampening the impact of natural gas
price volatility upon consumers.
WRITTEN STATEMENT
AGA is grateful for the opportunity to share its views on the
critical importance to the Nation of ensuring ample natural gas
supplies at competitive prices. Doing so is necessary for the nation--
both to protect consumers and to address the energy and economic
situations we currently face.
The American Gas Association represents 192 local energy utility
companies that deliver natural gas to more than 53 million homes,
businesses and industries throughout the United States. Natural gas
meets one-fourth of the United States' energy needs and is the fastest
growing major energy source.
AGA members are charged with the responsibility, under local law or
regulation, of acquiring natural gas for the majority of their
customers and delivering it in a safe and reliable manner. Having an
ample supply of natural gas at reasonable prices is a critical issue
for AGA and its members. AGA members and the natural gas consumers they
serve share both an interest and a perspective on this subject.
It is important to understand that the bread and butter business of
AGA members is acquiring and delivering natural gas to residential,
commercial, and, in some cases, industrial consumers across America.
Our members remain economically viable by delivering natural gas to
consumers at the lowest reasonable price, which we do by operating our
systems--over a million miles of distribution lines--as efficiently as
possible. Exploring for and producing natural gas is the business of
our energy-industry colleagues in oil and gas exploration companies,
whether they are super-major, major, independent, or ``Mom and Pop''
operators. We do not speak for them, but their continued success in
providing natural gas to America's consumers is of the utmost
importance to us as well. AGA and its members stand in the shoes of
consumers who want reasonable heating bills and good jobs.
AGA has three objectives in this statement: first, to explain
briefly why natural gas prices have jumped over the last 2 years year;
second, to describe the magnitude of the natural gas supply challenge
facing this country over the next two decades; and third, to recommend
a number of steps that Congress can take to help bring natural gas
prices down in the long term.
AGA remains encouraged that Congress is continuing to address this
critical issue. Over the last year AGA has been privileged to testify
before the Senate Energy and Natural Resources Committee, the House
Energy and Commerce Committee, and the House Resources Committee with
regard to the challenging issue of natural gas supply. AGA is also
gratified that the House of Representatives and the Senate each passed
a version of the Energy Policy Act of 2003. The House and Senate bills
each contained a wide array of provisions designed to bring forth more
of America's prodigious supply of natural gas to benefit consumers.
These bills without question focused more on natural gas supply than
the iterations under consideration in 2001 and 2002. Notwithstanding
the inability for both houses in 2003 to agree upon a comprehensive
energy bill, AGA remains encouraged that Congress will, in 2004,
address the issues surrounding the nation's need for a secure supply of
ample quantities of natural gas at reasonable prices.
Adequate natural gas supply is crucial to all of America for a
number of reasons. It is imperative that the natural gas industry and
the government work together to take significant action in the very
near term to assure the continued economic growth, environmental
protection, and national security of our nation. The tumultuous events
in energy markets over the last several years serve to underscore the
importance of adequate and reliable supplies of reasonably priced
natural gas to consumers, to the economy, and to national security.
There has been a crescendo of public policy discussion with regard
to natural gas supply since the ``Perfect Storm'' winter of 2000-2001,
when tight supplies of natural gas collided with record-cold weather to
yield record natural gas home-heating bills. Nevertheless, over the
course of the last year the volume and the tenor of this discussion
have increased dramatically. Simply put, this issue continues to become
more critical with every passing day.
Over the course of the last year, natural gas has been trading in
wellhead markets throughout the Nation at prices floating between $5
and $6 per thousand cubic feet. This has not been a ``price spike'' of
the sort that has occurred in times past, lasting several days or
weeks. Rather, it has been sustained over a period of more than a year.
Moreover, there is no sign that it will abate in the near future.
Indeed, quotes for futures prices on NYMEX over the next several years
have been consistent with these levels.
Over the last year or more, business consumers of natural gas have
been raising a cry of concern over natural gas prices. This concern has
touched businesses of all stripes. Since natural gas prices began
rising in 2000, an estimated 78,000 jobs have been lost in the U.S.
chemical industry, which is the nation's largest industrial consumer of
natural gas, both for generation of electricity at manufacturing plants
and as a raw material for making medicine, plastics, fertilizer and
other products used each day. Similarly, fertilizer plants, where
natural gas can represent 80 percent of the cost structure, have closed
one facility after another. Glass manufacturers, which also use large
amounts of natural gas, have reported earnings falling by 50 percent as
a result of natural gas prices. In our industrial and commercial
sector, competitiveness in world markets and jobs at home are on the
line.
This winter--like last winter--many families will pay hundreds of
dollars more to heat their homes, which represents hundreds of dollars
less they will have to spend on other things. Many families are forced
to make difficult decisions between paying the gas bill, buying a new
car, or saving for future college educations. There are, of course,
State and Federal programs such as LIHEAP to assist the most needy. But
LIHEAP only provides assistance to about one-quarter of those who are
eligible, and it does not provide assistance to the average working
family. These price increases have affected all families--those on
fixed incomes, the working poor, lower-income groups, those living day
to day, and those living comfortably.
America received its first wake-up call on natural gas supply in
the winter of 2000-2001 when a confluence of events--a cold winter, a
hot summer and a surging economy--created the so-called ``perfect
storm.'' This jump in demand sent natural gas prices soaring. Drilling
boomed, supply grew (slightly), demand fell, and gas prices retreated--
just what one would expect from a competitive, deregulated natural gas
market. Falling natural gas prices predictably led to a slowdown in
drilling. The industry drilled 30 percent fewer gas wells in 2002 than
in 2001. This downturn in drilling in 2002 set the stage for another
run-up in prices in the 2002-2004 timeframe.
This winter natural gas prices are at winter 2001 levels because
demand is up and supply is down. Demand is up in part because we have
had normal winters. (Consumers have been extremely fortunate that we
have not had significantly colder-than-normal winters). Meanwhile,
while demand is up, U.S. natural gas production has been trending
downward. Indeed, U.S. natural gas production today is lower than it
was 5 years ago--despite a big jump in drilling at times in the last
several years.
These natural gas prices have caused considerable discomfort for
the consumers (particularly residential) that have seen their natural
gas bills increase dramatically. Fortunately, the public backlash has
been more muted than many had feared. Both utilities and regulators
learned from the public reaction to the prices of 2000-2001, and, over
the past year, they undertook significant public-awareness campaigns.
As a result, many consumers were not taken by surprise by their
increased utility bills.
Because all energy prices are up, natural gas remains the best
home-heating value this winter, according to the U.S. Energy
Information Administration. Nonetheless, it is harmful to individual
families and to the entire U.S. economy for natural gas price
volatility to persist.
Unless we make the proper public policy choices--and quickly--we
will be facing many more difficult years with regard to natural gas
prices. The natural gas industry is presently at a critical crossroads.
The question before this body today is: What will that crossroads look
like? Will it look like a brand new interstate highway? Or will it look
like a 100-car collision on a Los Angeles freeway? It is important to
remember that at the heart of this intersection are America's
consumers.
For the past 5 years, natural gas production has operated full-tilt
to meet consumer demand. The ``surplus deliverability `` or ``gas
bubble'' of the late 1980's and 1990's is simply gone. No longer is
demand met while unneeded production facilities sit idle. No longer can
new demand be met by simply opening the valve a few turns. The valves
have been, and presently are, wide open.
The supply tightrope has brought with it several inexorable and
unpleasant consequences--prices in wholesale markets have risen
dramatically, and that market has become much more volatile. During the
2000-2001 heating season, for example, gas prices moved from the $2
level to approximately $10 and back again to nearly $2. Such volatility
hurts consumers, puts domestic industry at a competitive disadvantage,
closes plants, and idles workers. The winter of 2000-2001 made it
abundantly clear to natural gas utilities (and to legislators as well)
that consumers dislike these price increases and the market volatility
that has now become an everyday norm. Unless significant actions are
taken on the supply side, gas markets will remain tumultuous, and 63
million gas customers will suffer the consequences. Today's recurrent
$5 price levels appear to represent a regular, level of natural gas
prices for the foreseeable future, although this prospect can be
moderated somewhat with aggressive and enlightened public policy.
Gas utilities have in place a number of programs to insulate
consumers, to some extent, from the full impact of wholesale price
volatility. Nevertheless, consumers must ultimately pay the price that
the market commands. There has been, and will be, considerable economic
and political pushback from natural gas prices stabilizing at the
current $5 level. That pushback can be expected to continue as the
impacts of these price levels trickle through the economy. Energy
prices are undoubtedly a factor in what some have called a ``jobless''
recovery from the last several years of economic malaise.
Some would suggest that current natural gas conditions are not the
result of market fundamentals. Continued high and volatile natural gas
prices have, for example, resulted in charges of market manipulation
and calls for investigation. While AGA has not performed an independent
evaluation regarding these assertions, others--including the CFTC, FERC
and various analysts--have. These evaluations consistently identify
supply and demand as the explanatory variables regarding natural gas
prices. Certainly any substantiated market irregularities should be
dealt with aggressively and with certainty. However, the burden of high
and unpredictable natural gas prices on consumers will not be eased
until we as a Nation address the supply/demand imbalance in the natural
gas market. It would be ill advised to embrace the notion that that
aggressive investigation and law enforcement will remedy the
underlying, fundamental imbalance in supply and demand.
The role of supply and demand in natural gas markets has been
plainly evident over the last 12 months. Very cold weather in January
and February of 2003 resulted in gas consumption that was 18 percent
higher than the previous year. This strong demand resulted in
aggressive natural gas storage withdrawals, and storage inventories
were 50 percent below the 5-year average at the end of the 2002-2003
winter. Despite concern that storage could not be refilled to adequate
levels prior to the 2003-2004 winter, gas utilities injected gas at
record levels in order to ensure winter reliability. In late December
2003, storage levels marginally exceeded the 5-year average, although
much of this gas was purchased in periods of high prices and the need
to refill storage contributed to market tightness. Natural gas prices
fluctuated around $6 per thousand cubic feet for the first half of the
year (with a spike over $9 during the February cold snap) declining to
about $5 late in the year.
Mild weather in December 2003, and a return to comfortable storage
levels produced hope for moderating prices, and prices did fall below
$5 in the second half of the month. However, the first week in January
2004 was 8 percent colder than normal nationally, and 7 to 17 percent
colder than normal in the gas heating-intensive upper Midwest, Middle
Atlantic and New England states. Additionally, the demand for gas to
fuel a rebounding industrial sector that started in late 2003 has
continued in 2004. Further, with cold weather comes an increasing
demand for electric heat and gas-fired electricity generators are now
being pulled into the generating mix. The surge in early winter demand
pushed natural gas prices back to $7 per thousand cubic feet in early
January.
The primary reason for high and volatile natural gas prices is the
tightness in the marketplace. While law enforcement agencies must
continue to be alert for manipulative actions, Federal policy changes
must lead the way in reducing this tightness. Not until we increase
supply, reduce demand and streamline relevant energy regulations will
65 million gas consumers see more reasonably priced and more stable
natural gas prices.
Moreover, the problem that we face today is not simply one of
finding means to meet current demands in the market for natural gas.
Rather, with a growing economy we are in a growing market, and the
demand for natural gas in the U.S. is expected to increase steadily.
Growth seems inevitable because natural gas is a clean, economic, and
domestic source of available energy. It does not face the environmental
hurdles of coal and nuclear energy, the economic and technological
drawbacks of most renewable energy forms, or the national security
problems associated with imported oil.
The U.S. natural gas market may grow by 1-2 percent per year over
the next 20 years. Much of this growth in natural gas demand will occur
in the electricity and industrial markets. In fact, the U.S. now has
several hundred thousand megawatts of new gas-fired power plants on
line that did not exist in the summer of 1999--the equivalent of
several scores of Diablo Canyon nuclear power plants.
If the market were to grow by 2 percent per year, gas supply would
need to increase, in terms of average daily supply, from about 60-
billion cubic feet per day today to about 95-billion cubic feet per day
in 2025--a 35 billion-cubic-foot-per-day increase in deliverability.
(To place this potential increase in perspective, current production
from the entire Gulf of Mexico is only about 14-billion cubic feet per
day, and imports from Canada are about 10-billion cubic feet per day.)
The challenge for both government and industry is quite
straightforward: to ensure that both the current and future needs for
natural gas are met at reasonable and economic prices. There can be no
responsible question that facilitating this result is sound public
policy. Natural gas is abundant domestically and is the environmentally
friendly fuel of choice. Ensuring adequate natural gas supply will lead
to reasonable prices for consumers, will dampen the unacceptable
volatility of wholesale natural gas markets, will help keep the economy
growing, and will help protect the environment.
America has a large and diverse natural gas resource; producing it,
however, can be a challenge. Providing the natural gas that the economy
requires will necessitate: (1) providing incentives to bring the
plentiful reserves of North American natural gas to production and,
hence, to market; (2) making available for exploration and production
the lands--particularly Federal lands--where natural gas is already
known to exist so gas can be produced on an economic and timely basis;
(3) ensuring that the new infrastructure that will be needed to serve
the market is in place in a timely and economic fashion.
Natural gas--our cleanest fossil fuel--is found in abundance
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent
of the natural gas supplied to U.S. consumers originates in the United
States or Canada.
The estimated natural gas resource base in the U.S. has actually
increased over the last several decades. In fact, we now believe that
we have more natural gas resources in the U.S. than we estimated 20
years ago, notwithstanding the production of approximately 300-trillion
cubic feet of gas in the interim. This is true, in part, because new
sources of gas, such as coalbed methane, have become an important part
of the resource base. Nonetheless, having the natural gas resource is
not the same as making natural gas available to consumers. That
requires natural gas production.
Natural gas production is sustained and grows only by drilling in
currently productive areas or by exploring in new areas. Over the past
two decades a number of technological revolutions have swept across the
industry. We are able today to drill for gas with dramatically greater
success and with a significantly reduced environmental impact than we
were able to do 20 years ago. We are also much more efficient in
producing the maximum amount of natural gas from a given area of land.
A host of technological advances allows producers to identify and
extract natural gas deeper, smarter, and more efficiently. For example,
the drilling success rate for wells deeper than 15,000 feet has
improved from 53 percent in 1988 to over 82 percent today. In addition,
gas trapped in coal seams, tight sands, or shale is no longer out of
reach, and today it provides a major source of supply.
While further improvements in this regard can be expected, they
will not be sufficient to meet growing demand unless they are coupled
with other measures. Regrettably, technology alone cannot indefinitely
extend the production life of mature producing areas. New areas and
sources of gas will be necessary.
Notwithstanding the dramatic impact of innovation upon the natural
gas business, the inevitable fact today is that we have reached a point
of rapidly diminishing returns with many existing natural gas fields.
This is almost entirely a product of the laws of petroleum geology. The
first ten wells in a field may ultimately produce 60 percent of the gas
in that field; yet it may take forty more wells to produce the balance.
In many of the natural gas fields in America today, we are long past
those first ten wells and are well into those forty wells in the field.
In other words, the low-hanging fruit have already been picked in the
orchards that are open for business.
Drilling activity in the U.S. has moved over time, from onshore
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then
to the Rocky Mountains. Historically, we have been quite dependent on
fields in the Gulf of Mexico. But recent production declines in the
shallow waters of the Gulf of Mexico have necessitated migration of
activity to deeper waters to offset this decline. These newer, more
expensive, deepwater fields tend to have short lives and significantly
more rapid rates of decline in production than onshore wells.
The sobering reality is that America's producers are drilling more
wells today than they were 5 years ago. Nevertheless, supply is still
down. U.S. gas producers are on an accelerating treadmill, running
harder just trying to stay in place. For reasons that are partly due to
technology, and partly due to the maturing of the accessible natural
gas resource base, a typical well drilled today will decline at a
faster rate than a typical well drilled a decade ago. Moreover, because
up to half of this country's current natural gas supply is coming from
wells that have been drilled in the past 5 years, this decline trend is
likely to continue.
Before we can meet growing gas demand, we must first replace the
perennial decline in production. The U.S. natural gas decline rate will
be in the range of 26-28 percent this year. In practical terms, if all
drilling stopped today, in 12 months U.S. natural gas production would
be 26-28 percent lower than it is today. The accelerating decline rate
helps explain why U.S. gas deliverability has been stuck in the 52-54-
billion cubic feet per day range for the past 8 years, notwithstanding
an increase in gas-directed drilling.
In short, America's natural gas fields are mature--in fact many are
well into their golden years. There is no new technology on the horizon
that will permit us to pull a rabbit out of a hat in these fields.
These simple, and incontrovertible, facts explain why we are today
walking a supply tightrope. High and volatile natural gas prices have
become the norm and will become increasingly accentuated as the economy
returns to its full vigor. There is no question that high and volatile
natural gas prices are putting a brake on the economy, once again
causing lost output, idle productive capacity, and lost jobs.
If we are to continue to meet the energy demands of America and its
citizens and if we are to meet the demands that will they make upon us
in the next two decades, we must change course. It will not be enough
to make a slight adjustment or to wait three or four more years to make
necessary policy changes. Rather, we must change course entirely, and
we must do it in the very near future. Lead times are long in our
business, and meeting demand years down the road requires that we begin
work today.
We have several reasonable and practical options. It is clear that
continuing to do what we have been doing is simply not enough. In the
longer term we have a number of options:
First, and most importantly, we must increase natural gas
production by looking to new frontiers within the United States.
Further growth in production from this resource base is jeopardized by
limitations currently placed on access to it. For example, most of the
gas resource base off the East and West Coasts of the U.S. and the
Eastern Gulf of Mexico is currently closed to any exploration and
production activity. Moreover, access to large portions of the Rocky
Mountains is severely restricted. The potential for increased
production of natural gas is severely constrained so long as these
restrictions remain in place.
To be direct, America is not running out of natural gas, and it is
not running out of places to look for natural gas. America is running
out of places where we are allowed to look for gas. The truth that must
be confronted now is that, as a matter of policy, this country has
chosen not to develop much of its natural gas resource base. We doubt
that that many of the 63 million American households that depend on
natural gas for heat are unaware that this choice has been made on
their behalf.
In this vein, the Rocky Mountain region is expected to be a growing
supplier of natural gas, but only if access to key prospects is not
unduly impeded by stipulations and restrictions. Two separate studies
by the National Petroleum Council and the U.S. Department of the
Interior reached a similar conclusion that nearly 40 percent of the gas
resource base in the Rockies is restricted from development, in some
cases partially and in some cases totally. On this issue, the
Department of the Interior noted that there are nearly 1,000 different
stipulations that can impede resource development on Federal lands.
One of the most significant new gas discoveries in North America in
the past 10 years is located just north of the US/Canada border in
eastern Canadian coastal waters on the Scotian shelf. Natural gas
discoveries have been made at Sable Island and Deep Panuke. Gas
production from Sable Island already serves Canada's Maritimes
Provinces and New England through an offshore and land-based pipeline
system. This has been done with positive economic benefits to the
region and without environmental degradation. This experience provides
an important example for the United States, where we believe that the
offshore Atlantic area has a similar geology.
In some areas we appear to be marching backward. The buy-back of
Federal leases where discoveries had already been made in the Destin
Dome area (offshore Florida) of the eastern Gulf of Mexico was a
serious step back in terms of satisfying consumer gas demand. This
action was contrary to what needs to be done to meet America's energy
needs. With Destin Dome we did not come full about, as we need to do;
rather, we ran from the storm.
Geographic expansion of gas exploration and drilling activity has
for the entirety of the last century been essential to sustaining
growth in natural gas production. Future migration, to new frontiers
and to new fields, in both the U.S. and Canada, will also be critical.
Without production from geographic areas that are currently subject to
access restrictions, it is not at all likely that producers will be
able to continue to provide increased amounts of natural gas from the
lower-48 states to customers for longer than 10 or 15 years. We believe
that the same is true in Canada as well.
Quite simply, we do not believe that there is any way, other than
exploring for natural gas in new geographic areas, to meet America's
anticipated demand for natural gas unless we turn increasingly to
sources located outside North America.
In the middle of the 20th century, when the postwar economy had
begun its half-century climb and when natural gas became the fuel of
choice in America, our colleagues in the producing business opened one
new natural gas field after another in the mid-continent. In this era,
it was not that difficult to produce a triple or a home run virtually
every inning. As those fields developed, producers continued to hit a
regular pattern of singles and doubles, with the occasional triple or
home run in new discovery areas. This same pattern in the mid-continent
was repeated in the Gulf of Mexico. Today, however, it is extremely
difficult to find the new, open areas where the producing community can
continue to hit the ball. As things are today, America has confined
them to a playing field where only bunts are permitted. The Yankees did
not get to the World Series playing that kind of game.
AGA does not advance this thesis lightly. Over the past several
years both the American Gas Association and the American Gas Foundation
have studied this important issue vigorously. We have believed for
several years that it is necessary for policymakers to embrace this
thesis so that natural gas can continue to be--as it has been for
nearly a century--a safe and reliable form of energy that is America's
best energy value and its most environmentally benign fossil fuel. We
think that events in gas market in 2003-2004 underscore that our
concerns have been on the mark.
When the first energy shock transpired in the early 1970's, the
Nation learned, quite painfully, the price of dependence upon foreign
sources of crude oil. We also learned, through long gasoline lines and
shuttered factories, that energy is the lifeblood of our economy.
Nevertheless, thirty years later we are even more dependent upon
foreign oil than we were in 1970. Regrettably, the Nation has since
failed to make the policy choices that would have brought us freedom
from undue dependence on foreign-source energy supplies. We hope that
the Nation can reflect upon that thirty-year experience and today make
the correct policy choices with regard to its future natural gas
supply. We can blame some of the past energy problems on a lack of
foresight, understanding, and experience. We will not be permitted to
do so again.
Meeting our nation's ever-increasing demand for energy has an
impact on the environment, regardless of the energy source. The
challenge, therefore, is to balance these competing policy objectives
realistically. Even with dramatic improvements in the efficient use of
energy, U.S. energy demand has increased more than 25 percent since
1973, and significant continued growth is almost certain. Satisfying
this energy demand will continue to affect air, land, and water. A
great American success story is that, with but 5 percent of the world's
population, we produce nearly one-third of the planet's economic
output. Energy is an essential--indeed critical--input for that success
story both to continue and to grow.
It is imperative that energy needs be balanced with environmental
impacts and that this evaluation be complete and up-to-date. There is
no doubt that growing usage of natural gas harmonizes both objectives.
Finding and producing natural gas is accomplished today through
sophisticated technologies and methodologies that are cleaner, more
efficient, and much more environmentally sound than those used in the
1970's. It is unfortunate that many restrictions on natural gas
production have simply not taken account of the important technological
developments of the preceding thirty years. The result has been
policies that deter and forestall increased usage of natural gas, which
is, after all, the nation's most environmentally benign and cost-
effective energy source.
Natural gas consumers enjoyed stable prices from the mid-1980's to
2000, with prices that actually fell when adjusted for inflation.
Today, however, the balance between supply and demand has become
extremely tight, creating the tightrope effect. Even small changes in
weather, economic activity, or world energy trends result in wholesale
natural gas price fluctuations. We saw this most dramatically in the
winters of 2000-2001, 2002-2003, and 2003-2004. Most analysts believe
that we will continue to see it on a longer-term basis.
In the 1980's and 1990's, when the wholesale (wellhead) price of
traditional natural gas sources was around $2 per million British
thermal units, natural gas from deep waters and Alaska, as well as LNG,
may not have been price competitive. However, most analysts suggest
that these sources are competitive when gas is in a $3.00 to $4.00
price environment. Increased volumes of natural gas from a wider mix of
sources will be vital to meeting consumer demand and to ensuring that
natural gas remains affordable.
Increasing natural gas supplies will boost economic development and
will promote environmental protection, while achieving the critical
goal of ensuring more stable prices for natural gas customers. Most
importantly, increasing natural gas supplies will give customers--ours
and yours--what they seek: reasonable prices, greater price stability,
and fuel for our vibrant economy. On the other hand, without policy
changes with regard to natural gas supply, as well as expansion of
production, pipeline and local delivery infrastructure for natural gas,
the natural gas industry will have difficulty meeting the anticipated
50 percent increase in market demand. Price increases, price
volatility, and a brake on the economy will be inevitable.
Second, we need to increase our focus on non-traditional sources,
such as liquefied natural gas (LNG). Reliance upon LNG has been modest
to date, but it is clear that increases will be necessary to meet
growing market demand. Today, roughly 99 percent of U.S. gas supply
comes from traditional land-based and offshore supply areas in North
America. Despite this fact, during the next two decades, non-
traditional supply sources such as LNG will likely account for a
significantly larger share of the supply mix. LNG has become
increasingly economic. It is a commonly used worldwide technology that
allows natural gas produced in one part of the world to be liquefied
through a chilling process, transported via tanker, and then re-
gasified and injected into the pipeline system of the receiving
country. Although LNG currently supplies less than 1 percent of the gas
consumed in the U.S., it represents 100 percent of the gas consumed in
Japan.
LNG has proven to be safe, economical and consistent with
environmental quality. Due to constraints on other forms of gas supply
and increasingly favorable LNG economics, LNG is likely to be a more
significant contributor to US gas markets in the future. It will
certainly not be as large a contributor as imported oil (nearly 60
percent of US oil consumption), but it could account for 10-15 percent
of domestic gas consumption 15-20 years from now if pursued
aggressively and if impediments are reduced.
It is unlikely that LNG can solve the entirety of our problem. A
score of new LNG import terminals have been proposed, each with
capacities of about 1- billion cubic feet per day. Even if all of these
LNG terminals were built (which is frankly not a likely scenario), LNG
would only supply about 10-15 percent of the expected market in 2025 of
35-trillion cubic feet annually. Given the intense ``not on our beach''
opposition to siting new LNG terminals, a major supply impact from LNG
may be a tall order indeed.
Third, we must tap the huge potential of Alaska. Alaska is
estimated to contain more than 250-trillion cubic feet--enough by
itself to satisfy US natural gas demand for more than a decade.
Authorizations were granted twenty-five years ago to move gas from the
North Slope to the Lower-48, yet no gas is flowing today nor is any
transportation system under construction. Indeed, every day the North
Slope produces approximately 8-billion cubic feet of natural gas that
is re-injected because it has no way to market. Alaskan gas has the
potential to be the single largest source of price and price volatility
relief for US gas consumers. Deliveries from the North Slope would not
only put downward pressure on gas prices, but they would also spur the
development of other gas sources in the State as well as in northern
Canada.
Fourth, we can look to our neighbors to the north. Canadian gas
supply has grown dramatically over the last decade in terms of the
portion of the U.S. market that it has captured. At present, Canada
supplies approximately 15 percent of the United States' needs. We
should continue to rely upon Canadian gas, but it may not be realistic
to expect the U.S. market share for Canadian gas to continue to grow as
it has in the past or to rely upon Canadian new frontier gas to meet
the bulk of the increased demand that lies ahead for the United States.
The pipelines under consideration today from the Prudhoe Bay area
of Alaska and the Mackenzie Delta area of Canada are at least 5 years
from reality. They are certainly facilities that will be necessary to
broaden our national gas supply portfolio. We must recognize, however,
that together they might eventually deliver up to 8-billion cubic feet
per day to the lower 48 States--just 8 percent of the 95-billion cubic
feet per day that is envisioned for the 2025 market.
There is much talk today of the need for LNG, Alaska gas, and
Canadian gas. There is no question that we need to pursue those
supplies to meet both our current and future needs. Nonetheless, it is
equally clear that, in order to meet the needs of the continental
United States, we will need to look principally to the lower 48 States.
__________
Statement of the American Forest & Paper Association
The American Forest & Paper Association (AF&PA) appreciates the
opportunity to submit a statement for the record on the importance of
increased access to natural gas. The high cost of energy is having a
very negative impact on U.S. manufacturers of pulp, paper, paperboard,
and wood products. U.S. environmental policies of the past decade have
encouraged increased consumption of natural gas while reducing access
to natural gas reserves on public lands. This combination of increased
demand and reduced supply has driven prices substantially higher.
The U.S. forest products industry is vital to the nation's economy.
We employ approximately 1.3 million people and rank among the top ten
manufacturing employers in 42 states with an estimated payroll of $50
billion. Sales of the paper and forest products industry top $230
billion annually in the U.S. and export markets. We are the world's
largest producer of forest products.
Energy is the third largest operating cost for the forest products
industry\1\, making up more than 8 percent of total operating costs.
Since 1972, this industry has reduced its average total energy usage by
17 percent through increased efficiencies in the manufacturing and
production process. In addition, it has reduced its fossil fuel and
purchased energy consumption by 38 percent, and increased its energy
self-sufficiency by 46 percent. Although the industry is nearly 60
percent self-sufficient (using biomass), use of natural gas, coal, fuel
oil, and purchased electricity is necessary to meet the balance of our
energy needs.
---------------------------------------------------------------------------
\1\ Pulp, paper, paperboard, recycled paper and paperboard, tissue,
lumber, and wood products mills.
---------------------------------------------------------------------------
Annually, forest products companies purchase about 395-billion
cubic feet of natural gas. The price of natural gas in 2003 was nearly
double the average price for 2002, forcing the industry to spend almost
$1 billion more for the same quantity of fuel. This increased price for
natural gas also significantly increases purchased electricity and the
price of chemicals needed for our manufacturing operations. Higher
natural gas prices have the additional effects of increased
transportation costs.
Five years ago, the American Forest & Paper Association conducted
research to determine the competitive position of U.S. manufacturers of
paper and wood products as compared to our primary international
competitors. Energy was the one area where our cost of production was
slightly better than our competitors. Today, that situation is just the
opposite. While the wellhead price of natural gas hovers between $5 and
$6 per million British thermal units (BTUs) in the U.S., prices in the
rest of the world are noticeably lower. Prices of natural gas our
competitors pay in Western Europe are in the $3 to $4 range. Prices in
Asia are around $1.50, and in Russia the price for natural gas is less
than $1 per million BTU, putting our industry at a significant
competitive disadvantage.
This disadvantage is on top of other competitive disadvantages this
industry faces. Our taxes are higher than those of competing nations,
and there are unfair trade barriers to the export of our products. The
cost of compliance with our nation's environmental laws is higher, and
transportation costs are greater than anywhere else around the globe.
Government restrictions are also limiting our access to fiber--even
though our forestry stock has increased by 39 percent since 1952. If we
cannot successfully address these challenges, the public demand for
forest products will increasingly be filled by other nations who do not
adhere to our high standards.
The forest products industry alone has lost more than 120,000 high
paying manufacturing jobs and closed more than 220 plants since 1997.
These are the direct job losses and do not count the substantial
multiplier effect of additional service jobs that have been lost as a
result of the lost manufacturing activity in these mostly rural
communities in America. Many of these plant closings have been
attributed to high energy costs.
The most important thing that Congress can do to turn around the
recent manufacturing job losses is to address the energy and
environmental policies that are the root cause for the supply and
demand imbalance of natural gas. Congress should enact a new energy
policy that promotes the environmentally responsible development of
domestic oil and gas reserves and it should revise environmental laws
to eliminate the unnecessary bias toward natural gas.
POLICIES TO PROMOTE ADDITIONAL SUPPLY
While the energy bill passed by the Senate in 2003 made some modest
reforms, it fell short of dramatically changing the natural gas supply
picture in the near-term. For example, there are significant reserves
in the Rocky Mountains that can be accessed in a responsible way with
little negative impact on the environment. Congress should enact
legislation to reduce the barriers to this supply. In addition,
expansion of transportation and infrastructure to bring additional
natural gas to consumers from the Rocky Mountains, Alaska, Canada, and
from overseas in the form of Liquefied Natural Gas (LNG) is essential
to help keep gas prices affordable.
Permitting for new transmission and distribution pipelines takes
too long to complete. It can take from two to 5 years to get the
permits necessary for siting and construction of transmission and
distribution pipelines and natural gas storage facilities. Congress and
the Administration should work to minimize the bureaucratic red-tape
and to expedite the permitting process for siting and construction of
pipelines and natural gas storage facilities. The Department of
Interior has recently issued some new regulations that could speed the
permitting process. But, ultimately, Congress must act to ensure that
bureaucratic process does not prevent timely development of natural gas
supply.
Likewise, there are huge reserves in the Arctic National Wildlife
Refuge (ANWR). A small amount of exploration and development in ANWR
could mean substantial new supply available to meet the demand of a
growing economy and provide a rebound for U.S. manufacturing and the
many families and communities that depend on these jobs.
Federal restrictions also limit access to offshore natural gas
resources in the Pacific, Atlantic, and Eastern Gulf of Mexico Outer
Continental Shelf (OCS). Congress should, as a first step, require a
Federal inventory of the gas reserves in the OCS. Environmentally
responsible technologies exist that could allow additional offshore
production without harming the environment; but, first, we must know
the extent of the reserves. In the long term, Congress must relax the
current restrictions and allow for environmentally responsible access
to some of these OCS reserves.
The September 2003 National Petroleum Council study agreed that one
of the biggest potential sources of new natural gas supplies would come
from developing OCS resources. OCS resources can be developed safely
with minimal impacts to the environment using new, safe drilling
technologies. The OCS resources of Maritime Canada are being
successfully and safely developed today, and the Government of Canada
is reviewing the potential to open offshore Western Canada for
exploration and development.
Concepts such as State revenue sharing, increased State authority
in leasing decisions, and expanding and equalizing states' boundaries,
provide an opportunity to overcome resistance to OCS development. By
providing creative incentives to share revenues from developed OCS
natural gas resources, states are encouraged to be part of the
solution. In fact, by increasing states' authority in leasing
decisions, much of the need for the current OCS moratoria could be
eliminated.
Additional Federal research is also important to bring about
potential new longer-term sources of energy and energy-related
technologies. Research and deployment of technologies such as clean
coal, coal gasification, and biomass/black liquor gasification must
continue to be pursued. For decades, many paper and wood products mills
have provided the majority of their own energy production. Many pulp
and paper mills, for example, have run their paper machines using
electricity largely supplied by mill-operated, onsite electric
generators.
The forest products industry has embraced energy diversity by using
both by-product biomass fuels (such as spent pulping liquor, hog fuels,
bark, and wood chips) and purchased fossil fuels to produce steam and
electricity used in its manufacturing processes. Successful development
and full implementation of black liquor and biomass gasification
programs could make our industry a net exporter of renewable
electricity--removing some 35 million tons of carbon emissions from the
air and generating nearly 22 gigawatts of electricity by 2020.
The introduction of gasification would enable far more efficient
power generation via combined cycle or fuel cell prime movers, as well
as the production of additional value added products like
transportation fuels (e.g., Fischer-Tropsch middle distillates or
hydrogen) and chemicals. In fact, the synthetic gas made from black
liquor and biomass gasification could potentially produce 25 million
gallons of liquid fuel per day, thereby reducing U.S. dependence on
imported oil.
These initiatives entail substantial risk for an already capital-
intensive industry. Important R&D remains to be completed to prove the
gasification technologies can work without adversely impacting mill
operations. Continued cooperation with the Federal Government is
crucial to reducing risk to a level that will allow significant
industry participation.
Similar initiatives are underway in the areas of clean coal
technology and coal gasification. These technology development programs
are essential to creating new and diverse sources of clean energy.
Importantly, without guaranteed access to the grid, these new power
sources will not be developed and implemented. For this and other
reasons, it is critical that Congress maintain existing initiatives for
combined heat and power (such as in the Public Utility Regulatory
Policies Act), which can be as much as 80 percent efficient in the
conversion of input fuel to useful energy.
Additionally, research on new technologies is needed to make
inaccessible supplies of natural gas available, and turn projected
resources into proven reserves. Many of the nation's existing supplies
of natural gas are now in harder to reach areas.
POLICIES TO PROTECT THE ENVIRONMENT AND THE ECONOMY
The Congress must re-examine current environmental policies that
promote the exclusive use of natural gas for power generation at the
expense of other fuel sources that can be used in an environmentally
sound manner. Significant technology advancements have occurred in the
past 20 years to make coal a viable fuel source for power generation
that is not damaging to the environment. Environmental rules should be
updated to reflect these technological advancements and to encourage a
more diverse mix of fuels for power generation and other industrial
applications.
Manufacturers are subject to a host of environmental laws that
require control technologies that are natural gas intensive. The recent
bias in regulations toward environmental control technologies that
favor incineration is imposing substantial new demand pressures on
natural gas. For example, the Pulp and Paper Cluster Rule, which was
promulgated in the mid-1990's, requires paper mills to use an
incineration technology to burn small amounts of volatile organic
compounds such as methanol. This chemical is found in mouth breath in
greater quantities than at paper mill fence lines. The technology used
is called a ``regenerative thermal oxidizer'' (RTO), and it runs on a
natural gas system. The end result is higher energy costs, higher
emissions of SO2 and NOx for questionable benefits. For example, in the
last 2 years operating costs to run the technology at one paper mill
increased $1 million per year to $1.5 million. This increase was
directly attributable to natural gas cost increase.
Permitting requirements under the Clean Air Act often prevent fuel-
switching, which could in the short-term alleviate part of the
industrial demand for natural gas. Allowing flexibility in permitting
to accommodate fuel switching under shortage conditions could help in
some limited circumstances. As a result, companies are prevented from
managing energy costs through the use of other environmentally
responsible fuels.
CONCLUSION
High energy costs, and particularly the high cost of natural gas,
threaten the long-term viability of U.S. manufacturing and its
contribution to the American standard of living. Congress can, and
should, take action to increase the supply of natural gas and update
environmental laws to reflect the technological advances that have
occurred in the past decade, and to reduce the bias toward use of
natural gas. Abundant and affordable energy sources are critical to the
competitiveness of U.S. manufacturers, to the communities in which they
operate, and the Americans they employ. Many U.S. businesses have been
crippled by high natural gas prices that are driven in large part by
U.S. energy and environmental restrictions. As the economy begins to
rebound, it is critically important that Congress act quickly to ensure
that government policies promote rather than restrict the responsible
development of our nation's abundant supply of natural gas--both
onshore and offshore.
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Statement of Southern Utah Wilderness Alliance
UTAH'S REDROCK WILDERNESS RICH IN NATURAL BEAUTY--NOT NATURAL GAS
Washington, DC.--Testifying before the Senate Environment and
Public Works Committee, the Southern Utah Wilderness Alliance (SUWA),
presented evidence showing that the sacrifice of Utah's crown jewel--
America's redrock wilderness--would only provide a nominal quantity of
natural gas. With 95 percent of oil and gas resources coming from lands
entirely outside of lands proposed for wilderness designation, SUWA
calls energy development in Utah's last remaining wild places both
short-sighted and ineffective.
``SUWA is pleased that the Committee is holding a hearing on the
environment and natural gas supplies because it allows the Congress and
the American public to understand that wilderness is neither a cause
nor a solution to our nation's energy predicament'', said Stephen
Bloch, SUWA Staff Attorney, who testified at the Committee hearing.
Since 2001, the Administration has distracted the American public
by focusing the Nation's attention and its Federal land management
policies on energy development in the country's few remaining wild
places. Lands that even the Bureau of Land Management recognized as
having wilderness values have been stripped of protection and are now
targeted for energy leasing.
According to an analysis of data produced by the Department of
Energy, the U.S. Geological Survey, and the State of Utah,
approximately 95 percent of the State's gas and oil resources come from
seven energy-rich ``hot spots.'' None of Utah's seven key energy
producing regions are proposed for protection in the America's Redrock
Wilderness Act (S. 639/H.R. 1796). Even if Utah's proposed wilderness
were exploited for its energy resources, the most current USGS data
suggests that the land could yield little more than a few weeks of
natural gas at current consumption levels.
``Our nation's last unprotected wilderness areas are an
irreplaceable treasure, not a cash cow for the energy corporations,''
Bloch explained. ``Moreover, even if we sacrifice Utah's redrock
wilderness we cannot meaningfully reduce the price of natural gas.''
``While the government's own data indicates that there is little
natural gas to be gained from drilling Utah's wilderness quality lands,
one thing is certain--exploration and development will leave lasting
scars on this magnificent redrock landscape,'' said Bloch. ``That, in
my estimation, is truly a high price to pay.''
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