<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:64772.wais]
NATIONAL ENERGY POWER: ENSURING ADEQUATE SUPPLY OF NATURAL GAS AND
CRUDE OIL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MAY 24, 2000
__________
Serial No. 106-147
__________
Printed for the use of the Committee on Commerce
__________
U.S. GOVERNMENT PRINTING OFFICE
64-772 WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RICK BOUCHER, Virginia
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RALPH M. HALL, Texas
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Abbott, Catherine Good, President and CEO, Columbia Gas
Transmission Corporation, on behalf of Interstate Natural
Gas Association of America................................. 98
Cavaney, Red, President and CEO, American Petroleum Institute 83
Cooper, Roger B., Executive Vice President, Policy and
Planning, American Gas Association......................... 103
Hakes, Jay, Administrator, Energy Information Administration. 37
Johnson, Michael L., Vice President, Natural Gas and Gas
Products, Conoco, Incorporated, on behalf of Natural Gas
Supply Association......................................... 94
Kenderdine, Melanie, Acting Director, Office of Policy, U.S.
Department of Energy....................................... 50
Martin, William, Chairman, Washington Policy and Analysis.... 30
Russell, Barry, President, Independent Petroleum Association
of America, on behalf of National Stripper Well Association 109
Sharp, Phil, Harvard Electricity Policy Group, John F.
Kennedy School of Government, Harvard University........... 24
Watkins, James D., President, Consortium for Oceanographic
and Research Education..................................... 11
Yergin, Daniel, Chairman, Cambridge Energy Research
Associates................................................. 18
(iii)
NATIONAL ENERGY POWER: ENSURING ADEQUATE SUPPLY OF NATURAL GAS AND
CRUDE OIL
----------
WEDNESDAY, MAY 24, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:15 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Shimkus,
Wilson, Fossella, Bryant, Boucher, Hall, McCarthy, Pallone,
Rush, and Strickland.
Staff present: Cathy Van Way, majority counsel; Elizabeth
Brennan, legislative clerk; Sue Sheridan, minority counsel; and
Rick Kessler, minority professional staff member.
Mr. Barton. The subcommittee will come to order. We are
having a roll call vote on the floor on the Journal. Today is
the vote on Permanent Normalized Trade Relations for China, so
the leadership on both sides is trying to find out how many
Members are willing to stick their head out of the foxhole
today. As soon as we get a few more members we will start,
probably within the next 5 minutes. I am going to wait for Mr.
Boucher. I am told that he is on his way. So in about 5 minutes
we will start the hearing.
[Brief recess.]
Mr. Barton. The subcommittee will come to order. We are
going to go ahead and start. Congressman Boucher is enroute.
His staff is not sure exactly where on the route he is but he
is enroute, so we are going to start. I want to welcome my
panelists today, the first panel and the second panel. This is
almost like old home week for me. We have got Admiral Watkins,
who I worked with on the Supercollider when he was Secretary of
Energy; the Honorable Phil Sharp, who was subcommittee chairman
of this subcommittee for many years and taught me quite a bit
about the energy policy issues of the day.
And on the second panel we have got Cathy Abbott who I
think is one of the brightest energy experts in the world and
taught me unbelievably important things. And my memory of her
is almost--the last time I saw her she had at that time a baby
on a pallet, over I think at INGAA, and was doing policy work
as her baby was screaming that she needed a diaper change. So
it is good to see Cathy here. So anyway we are going to have a
serious discussion today on what our energy policy should be.
Hopefully it is going to be done in a very positive way and
with a lot of good feedback between the panel and the Congress.
I think we need to take a look at our energy policy. One
could argue the last 7 years we have been adrift in terms of a
comprehensive, coherent, coordinated energy policy. Today's
hearing is the first of three. We are going to focus on the oil
and natural gas industry and some of the issues that face us in
that arena.
This past winter we got a wakeup call that gasoline is not
forever going to stay below $1 a gallon at the pump. OPEC
reemerged as a force to be reckoned with. And we had the
situation where our Secretary of Energy, a former member of
this subcommittee, was running around the world trying to get
OPEC to raise their production quotas, which was not a pretty
picture in my mind.
As bad as the situation was this past winter, several of
our witnesses today will paint a much more dismal picture for
the future. And according to them, and I happen to share their
concerns, unless we do a course correction on our national
energy policy, the EIA representative will predict that by the
year 2020 the United States will be dependent on foreign
suppliers for 64 percent of its petroleum consumption and over
50 percent of that is expected to come from the OPEC countries.
I think that those numbers indicate that it is time for us
to do this course correction sooner rather than later with
respect to domestic oil and gas exploration and production
policies in our Nation. We are a country rich in resources.
There is no reason that we can't minimize that dependence.
Yesterday the Energy Information Administration released a
report that estimated that there are 10.3 billion barrels of
oil that could be recovered from the Arctic National Wildlife
Reserve which we commonly call ANWR. Similarly, vast areas of
the Outer Continental Shelf have been put off limits for
natural gas exploration and production in the last decade. The
Destin Dome near Florida's coast is estimated to contain at
least 2.6 trillion cubic feet of natural gas. If this is true,
it would be one of the largest natural gas fields in the Gulf
of Mexico.
There are things that we could be doing to increase our
national energy security by offering greater support to our oil
and gas sector, especially the independent oil and gas
producers and explorationists of this country. Marginal wells
should be and could be kept operating much longer than most of
them are today. We should look at ways to improve our natural
gas infrastructure in terms of pipeline construction and things
of this sort. This is especially important in the Northeast,
that has to import a great deal of its energy.
As I said at our hearing, many believe that we need an
energy policy. I think we should have an informed energy policy
and we should try to develop an energy policy that assures that
the United States is in charge of its own energy future.
Again, I look forward to hearing our witnesses today. I
want to thank each of you personally for coming. We have made a
really good effort to get two panels of really top-flight folks
and I think we are going to have a very good hearing.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy
and Power
I'd like to welcome everyone to today's hearing on energy policy.
Today is the first of three hearings on energy policy that I hope to
conduct. At each of these hearings I hope the Subcommittee can take a
close look at our national energy policy and decide if we are headed in
the right direction or if we need to do a course correction.
Today's hearing is focused on oil and natural gas policy. This past
winter we got a wake-up call that some aspects of our policy with
respect to oil and natural gas were being neglected. Unfortunately, we
found ourselves in a situation similar to the situation we faced in the
1970's: suddenly rising fuel prices, a marketplace dominated by foreign
players, and too few tools to address consumer's concerns.
As bad as the situation was this past January, several of our
witnesses paint a far more dismal picture for the future. Unless we do
a course correction, the Energy Information Administration predicts
that by 2020 the U.S. will be dependent on foreign suppliers for 64% of
its total petroleum consumption. Over 50% of that petroleum is expected
to come from OPEC countries.
I, for one, believe that those numbers indicate that it is time for
us to do a course correction with respect to domestic oil and gas
exploration and production. The U.S. is a resource rich country. Yet,
our policies deny our citizens the benefit of those resources.
Yesterday, the Energy Information Administration released a report
that estimated that there are 10.3 billion barrels of oil that could be
recovered from the Arctic National Wildlife Reserve (ANWR). Similarly,
vast areas of the outer continental shelf have been made off-limits for
natural gas exploration and production. The Destin Dome near Florida's
coast is estimated to contain at least 2.6 trillion cubic feet of
natural gas, one of the largest gas fields in the Gulf of Mexico.
There are things we can be doing to increase our national energy
security by offering greater support to our independent oil and gas
sector. Marginal wells should be kept operating as long as possible. We
should also look at ways to improve natural gas infrastructure all over
the country, and especially in the Northeast.
As I said at our hearing in March I believe we need and energy
policy that assures that the U.S. is in charge of its own energy
future.
I look forward to hearing the testimony of the witnesses. Thank
you.
Mr. Barton. I don't see the Honorable Mr. Boucher here yet,
so I am going to recognize Mr. Pallone for an opening
statement. Oh, Mr. Boucher just arrived. Do you wish to be
recognized right off the bat or would you like a little time?
Let me welcome my good friend from Virginia, the ranking
member of the subcommittee, Rick Boucher, for an opening
statement.
Mr. Boucher. Thank you, Mr. Chairman, for organizing this
hearing on a subject that is of high interest to the Nation's
economy and general well-being. We are planning a series of
several hearings in this subcommittee focusing on our domestic
energy resources and our national energy policies. You are to
be commended for undertaking this initiative in your initial
term as Chairman of our subcommittee because this committee has
not seriously and comprehensively examined the Nation's energy
policy since the early part of this decade.
In fact, neither the Congress nor the administration have
spent significant time on this subject over the last few years.
I do not intend this statement to be a criticism; it is simply
a fact. And it is somewhat understandable when the economy is
doing well and at a time when energy prices are generally low.
I share the concern regarding our growing dependency on foreign
sources of energy. And this subcommittee is an appropriate
forum to explore the various energy policies which exist today
and to look at proposals that are aimed at promoting a higher
level of energy self-sufficiency.
In 1998, the United States imported approximately 22
percent of the energy that we consumed in that year. And the
Department of Energy predicts that our dependence on foreign
energy sources will continue to grow. In past years the
Congress has taken prudent measures to address these concerns.
For example, in 1980 Congress acted to encourage the domestic
production of oil and natural gas by establishing the section
29 tax credit for companies that sought to produce oil and gas
from unconventional sources such as tight rock formations, coal
beds and from biomass. Congress recognized the benefit to the
Nation of developing oil and natural gas from locations that
are very difficult to reach and not economic from which to
produce using conventional means.
The section 29 tax credit is scheduled to expire on
December 31, 2002. Allowing the credit to expire would result
in the abandonment of many wells that are producing today by
virtue of the section 29 tax credit, and I would encourage, Mr.
Chairman, that we recommend that the section 29 tax credit be
extended, perhaps enduring the balance of this Congress, rather
than waiting until the next Congress at the conclusion of which
the credit is scheduled to expire. Having the credit expire and
not be reauthorized would result in the loss of a substantial
portion of our current oil and natural gas production base.
Mr. Chairman, I think the hearing that we are holding today
is an excellent opportunity to examine a range of proposals
that could lead to a higher level of energy self-sufficiency
through greater utilization of our oil and natural gas
production capabilities, and when tied to the subsequent
hearings that we will be holding on oil and nuclear energy
capabilities, these hearings do in fact provide an excellent
forum for examining our Nation's energy policies and perhaps
recommending ways that we can achieve a higher level of energy
self-sufficiency.
So I commend you for organizing these forums, and along
with you I look forward to the testimony of our witnesses.
Mr. Barton. Thank you, Congressman. I want to let the
panelists know that these microphones are live all the time, so
be careful what you say up here. We would recognize Congressman
Bryant of Tennessee for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman and ranking member, for
this hearing and several others that you have alluded to as we
begin to study this very important issue. We have two very
qualified panels, and in the interest of time what I am going
to simply do is adopt your statement as my statement in the
record because I agree with you, Mr. Chairman, on what you said
and yield back the balance of my time.
Mr. Barton. We thank you, Congressman. I was told that
Congressman Ralph Hall was actually the first member here, even
before the Chairman. So we are going to recognize him, and for
such time as he may consume, for an opening statement.
Mr. Hall. Mr. Chairman, members of the committee, I join
everyone else in thanking you, and I probably ought to just
endorse what the gentleman from Tennessee said and go down the
road, but I think what I have to say is very important as one
that probably knows more about this than anybody on the
committee because I have heard it so doggone many times.
Mr. Barton. I just thought that was a Texas attitude.
Mr. Hall. And your decision to hold hearings on the state
of our national energy policy is once again in vogue again like
it has been so many times. It seems like we go up and down the
system. The development and implementation of a coherent and
flexible energy policy tends to recede into the background when
energy prices are stable but come roaring to the front when
things go up or when the public debates the prices as they
rise, as they have over the last year.
So I don't believe there is a more important element of our
economy on which Federal policy needs to be developed and
carried out more consistently than energy. And inasmuch as I
have to listen to your opening statements day in and day out,
and you have heard me say this a lot of times, it is my opinion
that we do need an energy policy and that energy policy can be
very easy and simple. It simply is incentive to look for it and
reward for finding it. Because the little ones look for it,
they borrow money from the big banks to look for it, and when
the little ones find it, the big ones buy it and redistribute
it, make money and live happily financially ever after, while
little ones go back to looking for a bank that will loan them
some money. Even in high times bank won't loan money because
there is no consistency.
If we could just have 4 or 5 years of consistency, I don't
care if the price is at 16, 17, 20, 30, wherever, it has got to
be consistent for some length of time in order for people who
are the old-timers in the business to look for it. The ones
that kept the energy thrust alive even during World War II,
that filled the big inch pipelines to put in the land-leased
destroyers to keep this country going, those people are true
heroes.
I say this while there are some young people on the group
that are to testify today. I see also much knowledge there in
those of you that have been with us before and have worked with
us. I think I don't believe there is a more important element
in our economy. And I support the railroads, and I have said
that before, because they are a national asset.
Energy is a national asset. People ought to support it
more. But it is a fight between 10 of us that produce it and 40
of them that use it.
I don't like Amtrak. Darn things goes from here to
Philadelphia 38 times a day and goes from here to New York 37
times a day and we subsidize it. It has improved in my
district. They now whistle when they go through my district.
They don't stop. And west of the Mississippi, we get very
little folks west of the Mississippi out of Amtrak. But during
national defense times, this country travels by rail and we
have to have it. It is something you have to have. It is a
national asset. They ought to look at energy like that.
I have got a lot more to say but I will give back my time.
I don't think I have time to say it. That is, unless there is
some insistence that I do. Thank you, Mr. Chairman.
[The prepared statement of Hon. Ralph M. Hall follows:]
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress
from the State of Texas
Mr. Chairman and Members of the Committee: I too, will join the
others in thanking you for convening this hearing today. Your decision
to hold hearings on the state of our National Energy Policy, or as I
believe--the lack thereof--is very timely. The development and
implementation of a coherent and flexible energy policy tends recede
into the background when energy prices are stable, but comes roaring to
the forefront of public debate when prices rise, as they have over the
last year. However, I don't believe there is a more important element
of our economy on which federal policy needs to be developed and
carried out consistently than energy.
I say that not as a representative of a producer state--obviously I
have a vested interest in a strong and robust domestic oil and gas
industry--but as also a representative of a state that has enormous
potential for the development of renewable energy sources. Wind and
solar energy have bright futures in Texas and throughout much of the
Southwest.
We shouldn't find ourselves attempting to choose among sources we
need them all. In fact one of the reasons we have dithered for years on
energy policy is that the U.S. is blessed with the greatest variety of
viable primary energy sources in the world. Other developed nations,
Japan and France come to mind, without indigenous energy sources have
had to be rather single-minded about the need to meet energy demand at
reasonable prices. Our time is coming, if in fact it hasn't arrived
already.
Mr. Chairman, you have put together a pair of all-star panels for
the Subcommittee today. It good to see some old friends back before us,
and I appreciate all of the witnesses' continuing willingness to give
us their time and the benefit of their wisdom. Welcome to you all. I
also look forward to the subsequent days of hearings on coal, nuclear
and the renewables. This is some of the most important business that
will come before the Subcommittee, and I hope that this and the
following hearings will build momentum to seriously address energy
policy issues.
With that, Mr. Chairman, I yield back the balance of my time.
Mr. Barton. We thank the gentleman for the 10-minute
statement on the 3-minute rule. That is appreciated.
We would like now to recognize the gentlelady from New
Mexico, Heather Wilson, who has done tremendous work this year
on many of the issues before the subcommittee.
Mrs. Wilson. Thank you, Mr. Chairman. I am inclined to
yield my time to the gentleman from Texas just because it is
more entertaining. But in the interest of time and wanting to
hear from several of the witnesses, what I will do is insert my
opening remarks into the record and move it along. Thank you.
Mr. Barton. I thank the gentlelady.
I would like to recognize the gentleman from New Jersey,
Mr. Pallone, who has worked long and hard on many of these
issues.
Mr. Pallone. Thank you, Mr. Chairman. Our national energy
policy involves a lot of complex resource economic and national
security issues. And I also look forward to our witnesses'
comments on the various aspects of the Nation's energy policy.
But, Mr. Chairman, I have to take the opportunity today to
somewhat criticize the Republican leadership's failure with
regard to our national energy policy.
Mr. Barton. We would be surprised if you didn't.
Mr. Pallone. I know. I don't mean this as a reflection on
you or the committee; more so in terms of the Republican
leadership in the Congress. But in the 6 years that the
Republicans have been in the majority, they have failed to pass
any significant legislation to protect our energy security and
give consumers, commuters, truck drivers, homeowners, farmers,
any protection against these volatile oil prices that we have
been seeing for the last year or so.
And you know, I can't help but go back to last year when
the leadership put forward the proposal again to abolish the
Department of Energy. In April and May of last year, long after
OPEC's March 23, 1999 announcement and long after oil prices
started to rise, Dick Armey, Tom DeLay, and John Kasich joined
forces with Todd Tiahrt to introduce H.R. 1649, the Department
of Energy Abolishment Act. And this bill would basically get
rid of the Department of Energy, and with it oil conservation
programs and research and renewable energy conservation and
research. That bill basically suggests that we get rid of the
Strategic Petroleum Reserve and sell off outright any other
assets we have to guard against an oil shock.
And that is why, in my opinion, probably why the
Republicans prevented us from filling the Strategic Petroleum
Reserve when gas was cheap. It is probably the reason why the
Republican Congress hasn't reauthorized the law giving the
President the authority to release oil from the Strategic
Petroleum Reserve. We all know that that law, the Energy Policy
and Conservation Act, expires or expired on March 31st. The
Senate passed a bill that is pending before the House Commerce
Committee, but the House leadership has done nothing and is on
the verge of letting that authority slip away. I know we did
it, we passed something in the House, but there is still
nothing on the President's desk.
I have to also point out that the majority leadership's
idea of a national energy policy involves drilling the Arctic
National Wildlife Refuge unfortunately, this is not sound
policy. If we open the Arctic refuge to oil and gas
development, we will only have the equivalent of 6 more months'
worth of oil supply. Yet in the process we would destroy one of
our Nation's greatest natural resources forever. And drilling
the Arctic refuge will do nothing to increase our energy
security or lower prices at the pump. Instead of drilling in
the Arctic refuge, we should be banning exports of Alaskan oil
to other Nations.
Mr. Chairman, sound energy policy entails a comprehensive
approach that includes promoting and funding commonsense
programs to conserve energy and develop alternative energy
sources. Such programs also would reduce our reliance on
polluting fossil fuels and on oil imports from foreign nations.
Regrettably, the Republican leadership has harmed the Nation's
energy security by cutting funding for energy efficiency,
renewable energy, weatherization and alternative fuel programs
during the past several years.
In the first effort after taking control of Congress,
Republicans cut energy efficiency programs by 26 percent. Over
the past 5 years the GOP has slashed funding for solar energy,
renewable energy, and conservation programs by nearly 1.4
billion below the administration's request. Again, I know that
is not this committee; that is the Appropriations Committee.
But we are talking about national energy policy; I have to talk
about the Republican Congress as a whole.
We have to help ensure our Nation's short- and long-term
energy security independence by using mass transit, bicycles,
other fuel-efficient vehicles. There are a lot of things we can
do in terms of conservation measures even here in the House of
Representatives. And I just would like to see a more proactive
effort so that we can go home and tell our residents and our
children that we are working to protect the Nation's energy
security as well as their pocket books as well as our
resources. Thank you, Mr. Chairman.
Mr. Barton. I thank the gentleman from New Jersey. I will
go look in my folder in my office, as Chairman of Energy and
Power Subcommittee, for all the legislative proposals the
Clinton Administration has sent me to introduce, some of those
issues that you just talked about. When I checked it yesterday,
I think it was dusty, with nothing in it, but I will go back
and look because there may be something that I just missed.
Actually some of your points are well taken. That is the
whole reason we are doing these hearings. We appreciate your
comments.
I would now like to turn to the gentleman from Oklahoma,
Mr. Largent, who has always focused on energy issues in his
time in Congress, and is one of our experts. Mr. Largent, for
an opening statement.
Mr. Largent. Thank you, Mr. Chairman. I want to thank you
for holding this very important hearing to examine what the
future steps need to be from a public policy perspective to
ensure an adequate supply of natural gas and crude oil. Last
March this subcommittee held a hearing to look at the cause and
effect of the recent price fluctuations in the world's oil
markets. At that hearing I commented that unfortunately it is
not until we experience sticker shock at the gas pump, or
American families have to pay significantly higher prices to
heat their homes, that oil and natural gas issues enter the
national consciousness.
It would be a stretch to say that energy issues continue to
garner the same amount of national media attention as they did
3 months ago. However, as we enter the summer driving season,
coupled with increase in electricity use as temperatures begin
to rise, Americans will again focus their attention to the
price of gas at the pump and their electricity bills.
Fossil energy, specifically natural gas and crude oil, have
to and will continue to dominate United States energy supply.
According to the Energy Information Administration, petroleum
consumption in the United States is projected to increase at an
annual rate of 1.3 percent. However, also according to the EIA,
our domestic petroleum supply, including natural gas, is
projected to remain nearly flat.
What does that mean? It means that instead of currently
relying on the rest of the world's petroleum for 52 percent of
our domestic oil and gas consumption, in 20 years we will
depend on foreign imports for 64 percent of our domestic
consumption needs. Frankly, I think that estimate is
conservative.
Mr. Chairman, we continually hear that the engine driving
our economic prosperity is the growth of the information
technology sector. But without fuel for that engine, our
economic growth could come to an abrupt halt.
What do we need to do as policymakers to ensure our future
energy security? A good start would be for the Federal
Government to create policies that allow for responsible
domestic exploration and production of our natural resources.
Establish tax incentives such as extending the section 29 tax
credit and eliminating the net income limitation on percentage
depletion for marginal wells to encourage independent producers
back into the oil patch rather than shutting down wells and
creating a reasonable regulatory framework that protects the
environment but does not add unnecessary compliance costs.
These are just a few suggestions.
Mr. Chairman, I look forward to hearing what suggestions
our illustrious witnesses have and I yield back.
Mr. Barton. I thank the gentleman.
Now I would like to turn to the gentlelady from Missouri,
the Honorable Karen McCarthy, for an opening statement.
Ms. McCarthy. Thank you, Mr. Chairman. Thank you for having
this very important hearing and thanks to our distinguished
panel. I look forward to your remarks and wisdom very much. Mr.
Chairman, if I might have the liberty of making a brief comment
on one of the members of the panel I would like to welcome
especially.
Mr. Barton. If it is a positive comment.
Ms. McCarthy. It is very positive. In 1982 I was a fellow
at Harvard's Institute of Politics, teaching a course on the
development or lack thereof of national energy policy. And I
was a State legislator then, chairing the Energy and
Environment Committee. I had come from a teaching background
and obviously environmental issues inspired me to go into
public service. And Dan Yergin came to my class and wowed my
students on what it would take and what we would need to have
in those days a cogent national energy policy. Well, he has
gone on to become, as we know, a Pulitzer prize-winning author
and someone who has shaped national energy policy.
Mr. Barton. He told us the only reason he came is because
you were on the subcommittee.
Ms. McCarthy. I don't think he even knew. But I am
delighted to have him here today to share his wisdom, and also
all of the panelists, and to say to Mr. Hall, my former ranking
member and now an esteemed colleague, that I am very grateful
for our support of Amtrak because it whistles quite a few days
in my district and I was a State legislator who made that
happen. I know how important alternative uses are. And to also
echo my current ranking member, Mr. Boucher, about renewing the
tax credit for section 29 which would extend those tax credits
to alternatives such as natural gas and to biomass.
And that leads me to thank the committee and you, Mr.
Chairman, because when Mr. Shimkus and I began our plea of
extending credits and help to biomass to develop alternative
fuels that would give our buses and our vans and other
transportation systems a cleaner burning alternative for cities
that were trying to meet those clean air standards, I know you
looked at us, somewhat surprised, and wished we would go away.
But thanks to you, it is now law and it is working. I hope as
we explore a national policy that we take into consideration
all the good things that we have accomplished as a Congress and
as a Nation, but also the challenges we continue to face in
order to set that standard for the world.
Thank you, Mr. Chairman.
Mr. Barton. Thank you Congresswoman McCarthy.
Now I would like to recognize Mr. Shimkus for an opening
statement.
Mr. Shimkus. Thank you, Mr. Chairman. I will just add to
what my colleague, Ms. McCarthy, has mentioned in response to
my colleague and friend from New Jersey, that this committee
and Congress and the last Congress really passed, in addition
to the Energy and Policy Conservation Act, on the biodiesel,
the B-20 proposal which is probably the only significant piece
of legislation that helped add price to a commodity of
agricultural farm products but also moved us in the direction
of addressing our reliance on foreign oil. And it also helped
in the environmental aspects, because the B-20 in the biodiesel
proposal cleans the diesel exhaust by 50 percent, a 50 percent
reduction in emissions. It does all the things that we ought to
be concerned with as Americans.
I too, as a Member of Congress in 1996, questioned the role
of the Department of Energy. I have now become convinced that
there is a role and I look forward to working with DOE on
provisions like this.
I would also be remiss not to mention the ethanol aspects
of having another renewable fuel option. The reality is we have
an overreliance on foreign oil. And I do believe that we can
safely go into the Arctic Wildlife Refuge. I think that was
proven with the Alaskan pipeline. My now-deceased father-in-law
worked on that pipeline and it has a tremendous record of the
environmental safety of that program.
I think we also look at the continental shelves and also
the marginal well issue as all part of a national energy
portfolio along with renewable fuels. I am very excited about
this hearing and look forward to continuing to fight this cause
in my remaining years here in Washington. I yield back my time.
Mr. Barton. I thank the gentleman.
No other members present. All members not present will have
the requisite number of days to put a written statement in the
record.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman: I'd like to commend you for holding this hearing on
national energy policy. As members of the 106th Congress, we are at an
historical cross-road. We are charged with putting in place the
policies that will carry our nation into the 21st Century. A
comprehensive, forward-thinking national energy policy is essential to
our continued success.
Our economy demands abundant energy supplies at affordable prices.
I am a strong believer in open, competitive markets. We have nearly
twenty years of experience in letting the market set the price for oil.
For natural gas, total deregulation of wellhead prices was finally
completed in 1993. Soon we'll have competitive prices for electricity.
I hope we'll be able to look back in a few years and say that occurred
in the 106th Congress in the year 2000.
Competition and an open marketplace have resulted in a more than
adequate supply and lower prices. Although in the past two years, we've
seen both record low and high oil prices, when adjusted for inflation,
oil prices today are still lower than they were in 1981. Consumers have
benefitted from competitive oil and gas markets, and they will benefit
from more competitive electricity markets.
However, market pricing for energy is just one many U.S. energy
policies. Overall, I do not believe the U.S. has an energy policy.
Instead we have many, often conflicting, energy policies. I believe we
need to take a close look at these energy policies across sectors, as
well as, look at how they interact with our environmental policies.
Today's hearing is good first step in determining how these various
energy policies can complement each other and where they are currently
at odds. Knowing that I believe, will help us develop a single, unified
national energy policy with many components.
I look forward to hearing from today's distinguished panels of
witnesses. I hope they will help us find the balance between energy
security and competitive global energy markets. Thank you.
Mr. Barton. The Chair would ask unanimous consent that
Congressman Tauzin of Louisiana's statement be included in the
record at this point. He is not a member of the subcommittee
but he is a member of the full committee. Is there objection?
Hearing none, so ordered.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, a Representative in
Congress from the State of Louisiana
Energy security for America requires not only an analysis for
increasing domestic production but also an examination of ways to
ensure the long-term viability of our nation's existing production. In
the latter category, current tax incentives that have resulted in
production from unconventional sources such as shale, tight sands and
coal bed methane are scheduled to expire at the end of 2002.
Part of our plans for protecting energy security in an uncertain
world must include a review of a now uncertain tax code with its
current risk of energy supply loss resulting from abandonment of the
wells qualifying for the tax credits that provided the incentive for
their production. If abandoned, such supply sources cannot be replaced.
Extension of the tax credit system (known as Section 29) should be
considered among the high priority options for strengthening our
domestic resources for continued supply to Americans of low cost and
environmentally efficient energy sources.
Mr. Barton. We now want to welcome our panelists. I want to
give a very warm personal welcome to our first panelist, former
Secretary of Energy, Admiral James Watkins, one of the most
decent people I have ever had the courtesy to know in public
service and someone who helped me tremendously when he was
Secretary of Energy.
We are not going to hold you all real tight to time but we
are going to set the clock at 7 minutes. And if you go a little
bit longer, that will be fine. We want to give each of you
every opportunity to elaborate on your written testimony. I
also want to thank each of you in the second panel also for
having your testimony in on time. Even the Department of
Energy, I think for the first time this year, got their
testimony in on time. That is a record and I am very very proud
of that.
So with that, we welcome former Secretary of Energy,
distinguished military Admiral of the United States, Navy
Admiral James Watkins.
STATEMENTS OF JAMES D. WATKINS, PRESIDENT, CONSORTIUM FOR
OCEANOGRAPHIC AND RESEARCH EDUCATION; DANIEL YERGIN, CHAIRMAN,
CAMBRIDGE ENERGY RESEARCH ASSOCIATES; PHIL SHARP, HARVARD
ELECTRICITY POLICY GROUP, JOHN F. KENNEDY SCHOOL OF GOVERNMENT,
HARVARD UNIVERSITY; WILLIAM F. MARTIN, CHAIRMAN, WASHINGTON
POLICY AND ANALYSIS; JAY HAKES, ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION; AND MELANIE A. KENDERDINE, ACTING
DIRECTOR, OFFICE OF POLICY, U.S. DEPARTMENT OF ENERGY
Mr. Watkins. Thank you, Mr. Chairman, for inviting me to
testify before your Subcommittee on Energy and Power. You asked
that my testimony today address the subject of U.S. energy
policy and security in general and answer the question as to
whether or not the U.S. is headed in the right direction or if
changes are needed. You also asked that particular emphasis be
placed on U.S. energy policy as it relates to ensuring adequate
supplies of oil and natural gas.
As you are well aware on this committee and from my
experience as Secretary of Energy in helping Congress craft the
National Energy Policy Act of 1992, the entire complex of
energy sources, both production and consumption, needs to be
analyzed and integrated in order to address any one of the
individual components, like oil and gas, that aggregate to make
up the whole.
As a consequence, I have prepared and submitted a long
formal statement for the record which goes back nearly 10 years
to the formulation of the National Energy Strategy by the Bush
Administration in 1991. Lessons learned from that process and a
review of all components that made up the energy strategy
indicate interconnectivity and balance between these components
and they are demanded when considering any one of them.
Recall that the 1991 Bush strategy was the culmination of
nearly 2 years of intense efforts, holding hearings around the
country to listen to all interested parties, developing a
strategy which emerged therefrom, and drafting a report for the
Congress. That report was reviewed by various analytically
capable outside entities, including the Office of Technology
Assessment here on the Hill before it was abolished, and was
published and sent to the Hill to inspire the needed
legislation. The strategy also included and complemented a
number of Bush Administration initiatives which I enumerated on
page 3 of my longer statement.
The strategy was then used by both the Congress and the
administration as the template for constructing and passing the
Energy Policy Act. This act, signed into law by President Bush
in October 1992, was among the most comprehensive energy bills
ever enacted. The Energy Policy Act affected every aspect of
the way this Nation produces and uses energy, including
reshaping Federal regulation of the Nation's energy sector to
spur competition and investment in new technologies. It stands
today as landmark legislation, but it must be periodically
reviewed and updated if it is to remain relevant.
For example, an updated energy strategy is badly needed
today to provide the broad framework within which so many other
related pieces of legislation like the Clean Air Act, the
Public Utility Company Holding Act, Public Utility Regulatory
Policy Act, Nuclear Waste Act, and many others find themselves,
and all of these related pieces have to be periodically updated
themselves, but within some kind of overarching umbrella
strategy because of their inherent interconnectivity.
Our strategy in the early 1990's, for example, predicted
about $30 a barrel in crude oil prices by the year 2000,
recognizing cyclic variations enroute. Sure enough, that is
where we are today. Additionally, the act passed by Congress
had the potential to reduce oil imports by about 4.7 million
barrels per day by the year 2010. This represented at the time
a one-third cut in the projected level of petroleum imports.
Not only would this enhance energy security but it would also
positively influence balance of trade, effect considerable
energy cost savings for consumers, and result in significant
reduction in energy demand. Whether we are on track to achieve
this objective I have no idea, but knowing how we are doing
relative to that objective is germane to answering one of your
questions.
In this connection, before leaving office in January 1993,
we had established a complex tracking program called the Energy
Policy Act Information System to comply with provisions of the
1992 act. This system has been used successfully in development
of the National Energy Strategy and had also been reviewed by
the Congressional Office of Technology Assessment and found to
contain reasonable models and predictions.
I prepared my final DOE posture statement in January 1993
and reported the degree of compliance with the act to date. I
also passed information regarding this tracking system to my
successor in the new administration team.
The first required DOE report entitled ``Implementation
Status Report'' was then published in April 1993, shortly after
I left office, based on our tracking system. It is very well
detailed, every single section of the track, to see how we are
doing against the advocacy that was contained in the act. To
the best of my knowledge, results of the detailed tracking
system were not reported out again. Rather, our system was
replaced in July 1995 with what I would call a puff piece,
called the National Energy Policy Plan, allegedly the new
Clinton Administration's energy policy.
The latter's direct relationship with or even reference to
the 1992 Energy Policy Act is not clear. I have no information
which would indicate the degree of congressional satisfaction
in either specificity or quality of this or any of the follow-
on biennial reports required under section 801 of the DOE
Organization Act which demands submission of a national energy
policy plan.
You asked in your letter whether or not the direction was
the right one regarding energy policy and security in general,
and oil and gas in specific. My answer, admittedly rendered
from a distance without detailed data, is a simple no. If we
had a clue as to the direction in which we were actually
headed, we could have predicted the current oil crisis well
ahead of time and may have had a chance to influence our
national attitude toward oil, for this crisis was in part
generated by our own failure to enhance U.S. oil production as
initially recommended in the National Energy Strategy 10 years
ago.
Further, east and west offshore oil and gas moratoria
continue, the Arctic National Wildlife Refuge remains closed.
By the way, I don't agree with Mr. Pallone that we would
destroy one of the great areas of the world. I have been up to
Prudhoe Bay. I have seen large pads that were used for oil
drilling have been taken away and reconstituted into the
tundra, the most beautiful sight you have ever seen. It can be
done. We have the modern technology to do it. We spent the time
to do it. The oil and gas companies up there have been
responsible and we ought to get on with it.
And it won't all be dumped in 6 months. It is a
contribution to the annual thing that will go on for 20 years.
The gas that is available up there can be brought back down
again through Alaska, and we can either sell it or use it at
home.
So I really do believe that is a very important issue but
it has to be placed in the context of everything else. If we go
after the Arctic National Wildlife Refuge by itself, we will
lose today politically. But if we put it in the context of what
else we are doing, we can win it. We ought to get on with it.
We are importing 10 percent more oil now than we were 10
years ago. I just heard the data coming out of the Energy
Information Administration that it is going to be 10 percent
higher than that 10 years from now. We watch while the OPEC oil
cartel manipulates the world marketplace and gains more, not
less, leverage on the rest of us. Our trade deficit soars and
the worst is not over. We are utilizing more and more natural
gas in our utilities and this consumption will continue to grow
exponentially. As a result, without new offshore exploration on
either coast, we are now dusting off our liquid natural gas
depots again.
Ten years from now, I predict we will decrying the fact
that we are being held hostage on an energy security problem to
foreign imports of LNG from states like Libya. Yes, the
potential exists to mitigate spikes in gasoline prices through
enhanced oil production and reduced consumption at home.
However, with no sense of urgency on upgrading our national
energy policy, only sporadic attention being given to the trade
and diplomacy aspects of our dependency on OPEC's whims,
opposition to any increase in U.S. oil or gas production, and
an unwillingness on the part of DOE to track what we are
already supposed to be doing under existing legislation and
make recommendations as to new strategic direction where
needed, there is little hope of avoiding a repetition of
unannounced oil and gasoline spikes in the years ahead.
Sadly, I now think we need to start the process all over
again, similar to the one we put into place 10 years ago, and
establish a new baseline. The new administration should be
tasked by Congress to do this. If we get serious about energy
policy again and follow such a path, we might be able to answer
your question, Mr. Chairman: Are we going in the right
direction or are changes needed?
Thank you, Mr. Chairman.
[The prepared statement of James D. Watkins follows:]
Prepared Statement of James D. Watkins, President, Consortium for
Oceanographic and Research Education
Thank you, Mr. Chairman, for inviting me to testify before your
Subcommittee on Energy and Power. In your letter of invitation, you
stated that the subject of the hearing will be ``National Energy
Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil.'' You
asked that my testimony today address the subject of U.S. energy policy
and security in general and answer the question as to whether or not
the U.S. is headed in the right direction or if changes are needed. You
also asked that particular emphasis be placed on U.S. energy policy as
it relates to ensuring adequate supplies of oil and natural gas.
As you are well aware, and from my experience in helping Congress
craft the National Energy Policy Act of 1992, the entire complex of
energy sources, both production and consumption, needs to be analyzed
and integrated in order to address any one of the individual
components, like oil and gas, that aggregate to make up the whole. As a
consequence, I have prepared and submitted a long formal statement
which goes back nearly ten years to the formulation of the National
Energy Strategy by the Bush Administration in 1991. Lessons learned
from that process and a review of all components that made up the
Energy Strategy indicate the interconnectivity and the balance between
these components demanded when considering any one of them. Recall that
the 1991 Bush Strategy was the culmination of nearly two years of
intense efforts to listen to all interested parties, develop a strategy
which emerged therefrom, and draft a report. That report was reviewed
by various analytically capable outside entities before it was
published and sent to the Hill for incorporation into needed
legislation.
But, let me first review some of the background. In July 1989, the
President directed me as his Secretary of Energy to develop a National
Energy Strategy. The mission was accomplished and announced by the
President at the White House on February 20, 1991. In his press
conference, President Bush proposed a comprehensive and balanced
program to ensure all Americans an energy future that is secure,
efficient, and environmentally sound. The National Energy Strategy was
designed to diversify U.S. sources of energy supplies and offer more
efficiency and flexibility in the way energy is consumed.
The National Energy Strategy was the product of twenty months of
public recommendations and Administration consideration. In developing
this Strategy, the Department of Energy conducted eighteen public
hearings and received thousands of written comments.
With the benefit of this input, the Administration analyzed the
full array of energy options and developed a strategy that supported
continued economic growth, increased energy efficiency, protection for
the environment, and reduction of America's vulnerability to energy
supply disruptions.
The Strategy was consistent with the Administration's policy of
reliance on market forces. Over the next two decades, with well-thought
out and periodic updates, the Strategy would have made the U.S. more
energy efficient and enhance our competitiveness without resorting to
heavy-handed regulations, taxes, or import fees that could hurt
consumers and cost Americans jobs.
The Strategy acknowledged that the U.S. was part of an energy
interdependent world. It recognized that it was not in our interest to
adopt measures that may reduce imports, but inflict severe economic or
environmental damage. Therefore, the National Energy Strategy balanced
economic, environmental and energy security objectives.
Over the next twenty years, we believed that such a balanced
approach to production and conservation would power a larger U.S.
economy while using less energy. At the same time, the U.S. would
produce more of the energy it uses. The National Energy Strategy by the
year 2010 would have, if pursued aggressively:
<bullet> Reduced domestic oil demand by 3.4 million barrels per day,
below projected levels.
<bullet> Increased domestic oil production by 3.8 million barrels per
day above projected levels.
<bullet> Increased the electricity produced from renewable sources,
such as solar, hydropower, and geothermal by 16 percent.
<bullet> Raised the use of alternative transportation fuels, such as
compressed natural gas, ethanol and methanol, thereby reducing
the need for up to 2.5 million barrels of oil per day.
<bullet> Reduced growth in electricity demand by unlocking market
forces through elimination of costly regulation in existing
law, thereby saving consumers approximately $27 billion per
year in electricity costs.
<bullet> With its proposals to increase the use of clean coal
technology, natural gas, and nuclear energy to generate
electricity, as well as to develop new energy efficient
technologies, the Strategy would have also:
--Held U.S. emissions of greenhouse gases by the year 2010 at or
below 1990 levels.
--Improved air quality by reducing emissions of pollutants that
contribute to acid rain and smog.
--Mitigated solid waste problems by reducing coal ash waste 25
million tons per year, and by lowering coal cleaning wastes
by 50 million tons per year.
The Strategy incorporated and complemented a number of Bush
Administration initiatives. These included: (1) the 1990 provisions to
the Clean Air Act; (2) natural gas well-head decontrol legislation: (3)
incentives provided to domestic renewable and fossil energy producers
in fiscal year 1991 budget agreement; (4) the energy research and
development initiatives announced in the President's FY-92 budget; (5)
the Administration's domestic energy supply and demand measures adopted
in response to the Iraqi oil disruption; and (6) the Administration's
science and mathematics education initiatives.
To meet the challenges that lay ahead, the National Energy Strategy
called on Federal, State, and local governments to work together to
encourage energy conservation and new energy production through reduced
regulation and streamlined licensing procedures, particularly in the
natural gas, oil and gas pipeline and hydropower areas. At the Federal
level, the Administration intended to lead by improving the energy
efficiency of Federal buildings, Federal housing and accelerating the
purchase of alternative fuel vehicles for the Federal fleet.
In February 1992, one year after initially promulgating the
National Energy Strategy, the Strategy was adjusted to fit the reality
of the latest and continually-changing data base of knowledge that
drove the first projections in 1991. This updated baseline was then
used by the Congress as the template for constructing and passing the
Energy Policy Act of 1992. This Act, signed into law by President Bush
in October 1992, was among the most comprehensive energy bills ever
enacted. The Energy Policy Act affected every aspect of the way this
nation produces and uses energy, including reshaping Federal regulation
of the nation's energy sector to spur competition and investment in new
technologies. It still stands today as landmark legislation, but it
must be periodically reviewed and updated if it is to remain relevant.
For example, it is badly needed to provide the broad framework within
which so many other related pieces of legislation like Clean Air Act;
The Public Utility Company Holding Act (PUCHA); The Public Utility
Regulatory Policy Act (PURPA); Nuclear Waste Policy Amendments Act; and
the like find themselves. All of these related pieces have to be
periodically updated themselves, but within some overarching umbrella
strategy because of their inherent connectivity thereto.
I present all this background before addressing your question as to
whether or not our oil and gas policies are adequate in view of the
recent shock to the nation on high gasoline prices at the pump. As our
National Energy Strategy clearly articulated, the inter-coupling of all
energy generation and conservation mechanisms must be continuously
melded together into a sensible, comprehensive, integrated, and
balanced relationship. If they are not, we will continue to have
unannounced and unwanted perturbations when we could have better
predicted and mitigated them. Our strategy in the early 1990s, for
example, predicted about $30 per barrel in crude oil prices by the year
2000, recognizing cyclic variations enroute. Sure enough, that is where
we are today. Additionally, the Act passed by Congress had the
potential to reduce oil imports by about 4.7 million barrels per day by
the year 2010. This represented a one-third cut in the projected level
of petroleum imports. Not only would this enhance energy security, but
it would also positively influence balance of trade, considerable
energy cost savings for consumers and significant reduction in energy
demand.
Finally, before leaving office in January 1993, we had established
a complex tracking program called the Energy Policy Act Information
System to comply with provisions of the 1992 Energy Policy Act. This
System had been used successfully in development of the National Energy
Strategy and then reviewed by the Congressional Office of Technical
Assessment (OTA) and found to contain reasonable models and
predictions. I prepared a final Posture Statement in January 1993 and
reported the degree of compliance with the Act to date and passed
information regarding this tracking system to my successor and the new
Administration team. The first required report was then submitted to
the Congress in April 1993, shortly after I left office including an
assessment using the tracking system. To the best of my knowledge, the
detailed tracking system was not used again and was replaced by
issuance of a Strategic Plan in April 1994, followed a year later in
July 1995 by a National Energy Policy Plan which was allegedly the new
Clinton Administration's energy policy. This Plan's direct relationship
with or even reference to the 1992 Energy Policy Act is not clear. I
have no information which would indicate the degree of Congressional
satisfaction in either specificity or quality of the biennial reports
required under Section 801 of the DOE Organization Act which demands
submission of a National Energy Policy Plan every two years.
In my opinion, therefore, it is time to rebuild the National Energy
Strategy as we did ten years ago, using a similar approach--i.e. hold
hearings around the country, listen to all parties with a goal of
making recommended amendments to the 1992 Energy Policy Act so as not
to lose the Act's relevance. Unless this is done, I do not believe the
nation will be well served by a Department of Energy (DOE) that seems
to put out energy ``puff pieces'' that have no associated implementing
strategy for their execution or assessment. I have in mind here the
Administration's ``Sustainable Energy Strategy, Clean and Secure Energy
for a Competitive Economy'' report to the Congress in July 1995 which
was their own first real response to the two-year reporting
requirement. This 73-page document arrived on the Hill, with little
fanfare, and had little impact. This 1995 report pays only lip service
to the importance of energy policy. In reality this so-called
``Sustainable Energy Strategy'' is short on energy policy and long on
wishful thinking. To take just two examples, among the five strategies
set forth for a Sustainable Energy Policy are ``Reinvent Environmental
Protection'' and ``Engage the International Market.'' Then, later,
during his confirmation hearings before the Senate Energy Committee in
1997, Secretary Pena promised that there would be a new National Energy
Policy Plan (NEPP) by the fall of that year to answer growing
Congressional concern about whether this nation has in place a program
that addresses its energy and environmental needs for the next century.
Subsequently, it was announced that this new NEPP would be delayed
another six months, well past the December 1997 meeting in Kyoto at
which commitments constituting a de facto energy policy would be made.
Whether it ever got submitted, I have no idea. But Secretary Pena
departed in the summer of 1998 and I can't imagine his departing shot
at a strategy was very effective. I don't know what the Congress has
received since, but I can't believe there has been much substantive
clarity or direction in whatever the DOE is doing in this area.
Further, you may recall in 1997 that President Clinton casually
remarked to assembled students at American University here that the
U.S. could reduce its emissions of carbon dioxide and other greenhouse
gases by 20 percent immediately at no cost to the economy ``if we just
changed the way we do things.'' This bold assertion was a shock to even
his staff since it was an off-the-cuff remark. No one had a clue, even
the President, what or how he wanted us to change. Certainly, his
remarks had nothing to do with studies emanating from within his own
Executive Branch that would justify such an assertion. His own 1995
Sustainable Energy Strategy said there were no easy ways to reduce
greenhouse gas emissions by 20 percent--immediately or over the next
10-15 years--unless the President had in mind truly profound changes in
the world in which we work and live, induced by carbon taxes, rising
energy prices and slower economic growth. With a realistic National
Energy Strategy, the magnitude of such changes would be clear, along
with their effects on individual states and regions.
Without a well substantiated strategy, then, enforced through
negotiated Congressional adjustments to some logical baseline, like the
existing Energy Policy Act of 1992, we are victims of the rhetoric of
whatever advocacy-only minstrels wander by. Accountability and
responsibility for our proposed actions can only be assured if we
demand responsible analytically--based, and agreed-to frameworks which
can span from one Administration to the next and against which we can
monitor the reality of any plans which claim to ``save the world''
through advocacy only. DOE should, be held accountable to fulfill this
responsibility on a continuing professional basis, using best available
and accepted models. Congress should, in turn, demand an accounting of
DOE's performance in carrying out, implementing and monitoring
provisions of the Energy Policy Act and in making amendment
recommendations to support an updated, well thought-out and analyzed
strategy to justify change. If it cannot or will not do this, then the
only function left to the DOE which has not already been made into an
independent agency will remain unattended, as it seems to be today. If
this situation is allowed to persist, then abolition of non-nuclear-
related segment of the DOE would be one justified outcome.
You asked in your letter whether or not the direction was the right
one regarding energy policy and security in general and oil and gas in
specific. My answer, admittedly rendered from a distance without
detailed data, is a simple no. If we had a clue as to the direction in
which we were actually headed, we could have predicted the current oil
crisis some time ago and may have made a course change in our attitude
toward oil. But this crisis was in part generated by our own failure to
enhance U.S. oil production as initially recommended in the Bush
Strategy ten years ago. East and west off-shore oil and gas moratoria
continue; the Arctic National Wildlife Refuge remains closed; we are
importing ten percent more oil than we were ten years ago; and the
worse is not over. We are utilizing more and more natural gas in our
utilities and this consumption will continue to grow exponentially. As
a result, we are now ``dusting off'' our liquid natural gas (LNG)
depots again. Ten years from now we will be decrying the fact that we
are held hostage to foreign imports of LNG from states like Libya.
Further, we have not even maximized oil recovery from existing U.S. oil
reserves to the extent possible. Yes, the potential still exists to
mitigate spikes in gasoline prices through enhanced oil production at
home. However, with no sense of urgency on upgrading our energy policy;
apathy for any increase in oil or gas production at home; and an
unwillingness on the part of DOE to track what we are already supposed
to be doing, accompanied by recommendations as to new strategic
directions, there is little hope of avoiding an accelerating series of
unannounced oil/gasoline spikes in the years ahead. We need to start
the process all over again that we put into place ten years ago. The
new Administration should be tasked by Congress to do this. If we
follow this path, we might be able to answer your question, ``Are we
going in the right direction?''
Mr. Barton. Thank you Admiral. We appreciate those remarks
and especially the intensity with which you discuss the ANWR.
That is impressive.
We now want to recognize Dr. Daniel Yergin who is Chairman
of the Cambridge Energy Research Associates. I have not had the
pleasure to meet you personally, but I have read many of your
works and books and have great respect for you. And Karen
McCarthy did talk to me about how impressive you were not only
in the public arena but as a person. So we are delighted to
have you. We will recognize you for 7 minutes. Again, that is
not a hard 7 minutes. And we will put your entire statement in
the record.
STATEMENT OF DANIEL YERGIN
Mr. Yergin. Thank you very much. Mr. Chairman, members, I
am very honored to be part of this expert panel today. I
certainly do want to thank Representative McCarthy for her
gracious words. I should say before becoming an outstanding
Member of Congress, she really was a great teacher.
This panel is drawn together today by what we are seeing
happening in the world oil and gas market, and there are plenty
of energy considerations that have come to the fore again. And
I think this series of hearings will be an important
contribution to understanding on these matters.
In my testimony I really want to try and provide a context
by looking at three things; one, a subject that is really
vexing the American people today, which is gasoline prices, and
more generally what is happening in world oil and natural gas
markets.
The discussion on gasoline is drawn from a new study that
we are releasing today at Cambridge Energy called ``Gasoline
and the American People.'' I think we would all agree that
gasoline is the best known price in America. We see it dozens
of times every day. Right now it is also perhaps the most
perplexing price.
There is plenty of reason for the American people to be
perplexed. In 1997, the national average gasoline price which
was $1.23 in inflation-adjusted prices, fell to as low as 95
cents at the beginning of 1999, which is actually lower than
any time since recorded prices were kept; indeed, lower than
the average price during the Great Depression. And now we are
looking at $1.50 a gallon on a national basis, and in some
parts of the country a good deal higher than that.
Well, to make sense of the prices, first we must think in
inflation-adjusted terms. With that it becomes clear that
actually the long-term trend--and I should say the powerful
long-term trend in gasoline prices is actually down. The major
exception, those times of crisis: the oil shock years of the
1970's and the Gulf crisis of 1990 and 1991, indeed even where
prices today are lower in inflation-adjusted terms than they
have been in most of the last 80 years.
As we can see, despite this trend, prices do move up and
down. This can be caused by an awful lot of different things,
from political events, disruptions of refinery operations, new
environmental standards. Right now to just kind of get it into
a framework, the sharp increases in gasoline prices are the
result of the higher crude oil prices that we are seeing, the
very low levels of inventories, and new environmental
regulations that are going into effect right now, because we
are at the beginning of the summer driving season and we have a
strong economy.
Let me turn then to what is the price of crude oil that is
behind gasoline prices. The main reason for the high oil prices
of 2000 has been the low oil prices of 1997, 1998 and early
1999. That is, these low prices resulted from the Asian
financial crisis and created, really, a financial crisis for
the oil-exporting countries, and also really devastated the
domestic U.S. oil and gas industry. And as a result, these
countries came together and we have the prices we have now,
accentuated by the fact that the U.S. economy and other
economies are so strong. South Korea was supposed to have zero
percent economic growth last year. South Korea is the sixth
largest oil market in the world. It had almost 11 percent. So
we have a strong economy driving prices, too.
What we do see is when prices reach around $30 a barrel, it
brings home the fact that oil prices are one of the few prices,
along with the price of labor and the price of money, interest
rates, that can really affect the economy and spook the stock
market.
But also other factors are brought home. One is--and
Admiral Watkins addressed it--we are very highly integrated
into the world oil market and what happens there. But also
things have changed a lot from the 1970's and it is the
relative absence of confrontation that so characterized the
1970's that is striking today. We really do have a dense
interweaving of interests with oil-exporting nations and we
have to look no farther than Mexico to see that.
But keep in mind, the current oil market supply is taut.
These prices could be subject to a great deal of volatility,
which means going up again as well as going down, and they
could be driven in that way by anything from another Iraqi
showdown with the United Nations, political or technical
problems in an exporting country, political tensions among
exporters, to the pace of Eurasia's recovery and the strength
of the U.S. economy. So there are a lot of things out there
that will affect prices in the next few months.
If prices are in the $300plus range for any period of time,
we think that the impact of slowing economies will provide an
inevitable correction on those prices. But this wide band of
prices that we have seen, from 10 to $34 a barrel, in this most
basic commodity over a little more than a year, underlies the
inherent volatility in what is probably still the world's most
important commodity.
Let me in the last couple minutes turn to something that
this subcommittee has considered a lot--and Congressman Sharp
and I were talking about this for a very long time--which is
natural gas prices. In a sense, this subcommittee is the home
of consideration of that. So much of the energy consideration
has been focused on oil recently. But the United States natural
gas supply system right now is characterized by very tight
supplies, and we are going to hear a lot more about that in the
next few months. The spring market and the recent heat waves
have shown how tight.
Natural gas prices right now are 70 percent higher than
they were at this time last year. Demand pressures are
intensifying while there are few signs of growth and supply.
And recognize how important natural gas is to our country for
energy and environmental reasons. It provides 23 percent of our
total energy and, increasingly, it will be the key to our
future electricity supplies.
Indeed, the United States is making a very big bet on the
adequacy of future gas supplies without realizing it. Fifteen
percent of our electricity today is generated with natural gas.
In terms of proposed new capacity, that number goes up to 96
percent. We have seen a slow supply response, partly because of
the oil and gas price collapse the last couple of years.
Greater investment is needed. We do think by the end of the
year we will start to see a supply response. We do believe at
Cambridge Energy that there is the gas supply potential to meet
the challenge of increased demand from power generation at a
price that would not discourage market development.
But a few thoughts. One, it is very important to avoid
short-term intervention, government intervention in the market
that would discourage investment and supply, particularly at a
critical time like this. Moreover, and it has already been
suggested, we need to consider how to facilitate natural gas
development in such a way as to support overall environmental
objectives and not have the two separated.
There are big challenges ahead. No. 1 is to reverse the
decline in supply. We estimate that in round numbers we need
half a trillion dollars' of investment in the upstream natural
gas business to get the kind of supply that we need in 10
years. We need to add 50 percent more reserves in this decade
than in the last decade. We will need to connect new frontiers
of gas development, including, as Admiral Watkins pointed out,
the Arctic, and reduce the pressure on the gas infrastructure
system in our country. We need to recognize the very large
reliance we are making and we are putting on natural gas to
power the growth of our new economy.
Thank you.
[The prepared statement of Daniel Yergin follows:]
Prepared Statement of Daniel Yergin, Chairman, Cambridge Energy
Research Associates
This hearing is very timely, and the Subcommittee is to be
congratulated for its focus on this subject. The tightening world oil
and North American natural gas markets and higher prices at the
gasoline pump have pushed energy policy considerations to the fore
again. Renewed consideration is at hand about the adequacy and security
of supply, and of energy and related foreign policy issues. This
hearing will be an important contribution to the national understanding
on these matters.
In my testimony, I seek to help set the scene for this
consideration by providing a context both for something that is vexing
the American people--gasoline prices--and, more generally, on world oil
and natural gas markets. The discussion on gasoline is drawn from the
new study by Cambridge Energy Research Associates, Gasoline and the
American People, which we are releasing today. This is a new version of
a study we originally did during the Gulf Crisis almost a decade ago.
Gasoline and the American People \1\
---------------------------------------------------------------------------
\1\ Gasoline and the American People, Cambridge Energy Research
Associates, May, 2000
---------------------------------------------------------------------------
The best known price in America is that of gasoline. Americans see
it posted along the road a dozen or two times a day; they pull in to
fill up every week or ten days, if not more. It's also a price that--
perhaps because of that visibility--can generate a lot of heat,
especially when it is going up, as it has in 2000.
This is, in fact, a price that tells a complex story--of global
supply and demand, of technological change and environmental
consciousness, and of shifting consumer tastes and social change.
That's the story we seek to tell in Gasoline and the American People.
We hope that it provides not only the context for understanding what
makes the price what it is at any give time at the pump but a window on
how life in America is changing.
We produced the first edition of Gasoline and the American People
almost a decade ago, during the Gulf Crisis, when major disruption
threatened the security of world oil supplies right down to the retail
market. The timing of this new edition is highlighted by the current
volatility in gasoline prices, the need for a framework, and the
considerable changes in consumer tastes and American society over the
decade since. The American people have plenty of reason to be puzzled.
In 1997, the national average gasoline price was $1.23 per gallon in
current dollars. It fell briefly to a low of 95 cents in early 1999. In
inflation-adjusted terms, that price was lower than at any time since
recorded prices began--lower even than average prices in the Great
Depression. In not much more than a year since, however, gasoline
prices have exceeded $1.50 a gallon on a national basis and, in some
areas, have been over $2.00--the highest they had been since the Gulf
Crisis of 1990-91.
Price: To make sense of price, one must think in inflation-adjusted
terms. Those with longer memories might remember 30 cent a gallon
gasoline from the 1960s; but, in today's prices, that would be the
equivalent of $1.75. More people will remember the $1.25 from 1980. But
today that would equivalent to over $2.50 per gallon. For the purposes
of comparison, let us put all gasoline prices into inflation-adjusted
dollars. We use 1999 real or constant prices (which, owing to low
inflation, are very close to current prices). With that, it becomes
clear that the long-term trend in gasoline prices is down. The major
exceptions are the periods of crisis--the oil shock years of the 1970s
and the Gulf Crisis of 1990-91. Since 1991, gasoline prices (again
inflation-adjusted) have continued to come down, and even at the high
prices of this spring are considerably lower than they were in the
1950s and 1960s in most areas of the United States.
Why the Fluctuations? Despite the long-term trend, prices move up
and down a great deal. These can be caused, among other things, by
political events, shifts in the supply and demand of fuel, weather, the
level of inventories, disruptions in refinery operations, and the
introduction of new environmental standards. The recent sharp increases
in gasoline prices are the result of higher crude oil prices, very low
inventory levels of gasoline, and new environmental regulations. At the
recent level of $1.52 in late May 2000, they are about 25 to 30 cents
per gallon higher than the middle-1990s and about $1 below the peak
years of 1980 and 1981.
How much in the gas tank? In 1999, the average driver used about
690 gallons and paid $780 over the course of the year. That compared--
using 1999 dollars--to $936 in 1990 and $1630 in 1980. If the price of
a gallon goes up 10 cents over the entire year, compared to the
previous year that will cost a motorist an additional $70.
Taxes: One thing has gone up, and that is taxes at the pump. The
price that motorists pay for a gallon is made up of many things--the
price of crude oil, transportation and refining costs, the costs to
operate the filling station--and tax. In 1999, the tax component of the
price was about 40 cents per gallon or 34 percent--just about the same
percentage as the cost of the crude oil. About half that total, 18.4
cents, was Federal tax, and 20 cents was the average state tax. (The
lowest state tax is Georgia, at 7.5 cents; and the highest,
Connecticut, at 32 cents.)
Compared to Other Countries: From an international perspective,
however, what is striking is how much a bargain gasoline is in America.
Currently, the average price in the United States is $1.53 per gallon--
compared to $4.69 in Britain and $3.87 in France. The reason for the
difference is almost entirely one thing--tax. While the tax take by
governments in America is just 34 percent of the retail price, it is 82
percent in Britain and 80 percent in France.
Where? Motorists may still say ``fill'er up,'' but there are a lot
fewer people to respond today than 20 or 30 years ago. Americans have
opted for the lower prices of self-service over the higher prices that
come with full service. Today, about 95 percent of the retail stations
offer self-service. And more and more motorists (and their families)
pull in not only to fill up on gasoline but also on carbohydrates and
caffeine. For fully 45 percent of retail outlets now include
convenience stores. One of the biggest costs of operating a station is
the land, and marketers have found that they can do better by
bolstering the revenue stream from gasoline with a separate revenue
stream from hot dogs and Hostess Twinkies. The next stage is ``co-
branding,'' in which a gasoline station shares the same real estate
with one of the familiar brands of fast food--and maybe a dry cleaning
establishment too. Still unclear is whether the huge gasoline stations
of the European style hypermarket (about half of total gasoline sales,
for instance, in France) are ready to emigrate to the United States.
And to what degree will gasoline, even if still pumped at the station,
be sold over the Internet?
How much? Americans drive more and more. In 1980, the average
licensed driver traveled 9,700 miles. In 1998, 18 years later, they
were driving over 13,000--an increase of 34 percent. The number of
licensed drivers is now over 180 million. But there are still more
registered light duty vehicles--203 million--meaning that, on average,
each licensed driver has 1.1 vehicles. A big source of new drivers--and
more gasoline consumption and miles traveled commuting--has been the
entry of a significant number of women into the labor force. Now that
the rate of women entering the workforce has slowed and vehicle
ownership has exceed saturation, that suggests that the increase in the
number of miles driven will flatten out. Another major new factor is
the astonishing growth in the driver population over age 65, which has
increased from 15.5 million in 1980 to 26.2 million in 1998. Their
numbers are increasing, but the mileage that they put on goes down, not
up.
World Oil
The main reason for the high oil prices of 2000 was the low oil
prices of 1997 and 1998 and early 1999. More than anything else, the
low prices resulted from the Asian financial crisis. Asia was then the
region of strongest growth in oil demand. When Asia went into sharp
decline, the oil industry was perhaps the first major industry to feel
the effects. Asian demand had been expected to grow by a million
barrels per day in 1998; instead, it fell by 600,000 barrels per day.
Worldwide production, however, remained geared to the anticipated
demand levels, and the extra supply went into inventories, which were
soon overflowing. Thus--the price collapse.
The domestic U.S. oil and gas industry was ravaged by the price
collapse, and we continue to see the negative consequences today. The
oil exporting countries were driven to act by the dire reality. Their
own national budgets were being devastated. Mexico has done a
remarkable job since the early 1980s in reorienting its exports away
from dependence upon oil. But petroleum still provides up to 40 percent
of the national budget. The collapse in prices meant cuts in spending
on education, health, and social needs. For most of the major exporting
countries, $10 a barrel oil portended social and economic instability.
All this was enough to get the exporters together. OPEC countries
not only agreed to new production restraint but also demonstrated a
much higher degree of adherence than some anticipated. And non-OPEC
countries, led by Mexico, collaborated.
What the calculations did not do was foresee the rebound in oil
demand, driven by economic growth. Few saw how buoyant the US economy
would be in 1999 and into 2000. A year ago, the consensus view on
economic growth in South Korea (the world's sixth largest oil market)
was for zero economic growth in 1999. At it turned out, economic growth
was almost 11 percent.
The attention on oil when prices reached $30-plus underlines the
fact that oil prices are one of the few prices--along with the price of
labor and the price of money (interest rates)--that can move the
economy and spook the stock market.
One of the major changes from the oil turmoil years of the 1970s is
the relative absence of confrontation that characterized that earlier
period. Nor longer is there a North-South struggle. Instead, we are in
an era of ``emerging markets.'' Countries like Mexico and Saudi
Arabia--recognize how integrated their economies have become with the
United States. Mexico worries about oil prices. But, especially post-
NAFTA it also worries a great deal about the health of the United
States economy. Exporters also have assimilated the great lesson of the
1980s--that customers count and you do not want to risk losing market
share. They could see that prices at recent levels could well damage
their interests in two ways. First, they could lead to a slowing of
economies, reducing demand and thus creating new problems for the
exporters. Secondly, although the oil industry has been cautious in its
spending, persisting high prices could end up stimulating the
development of a lot of new supply. And the exporters have no interest
in seeing oil prices turn into a big campaign issue in the United
States.
The message is similar for the United States. We import about half
of our total oil supplies, and our dependence will grow. We have a
dense web of interdependence with many of the oil-exporting countries,
of which oil is but one, though a most important element.
The current supply picture is taut, which means that the market
could be subject to a great deal of volatility. With low inventories,
prices could be driven up again by everything from another Iraqi
showdown with the United Nations, political or technical problems in a
major exporting country, or political tensions among exporters, to the
pace of Asia's recovery and the strength of the U.S. and European
economies.
Continuing demand recovery in Asia and Latin America combined with
further gains in North America are expected to propel world demand
growth through 2002. We are looking at a 2.2 percent worldwide annual
average increase in demand between 2000 and 2002c long as economies
remain on the track on which they are. If prices are in the $30 or
higher range for any period of time, we think that the impact of
slowing economies will provide the inevitable if unfortunate
corrective. Many of the exporting countries suggest that an
``appropriate'' range for oil prices is $20-25 a barrel--a price that
is often said to be good for consumers and good for producers. But the
much wider band of $10 to $34 a barrel within one year underlines the
inherent volatility in the world's most important commodity market and
the difficulty in getting the price ``right.''
U.S. Natural Gas
Much of the energy attention in recent months has been focused on
oil. But the U.S. natural gas system is also characterized by very
tight supply. The spring market and recent heat wave have shown how
tight: Prices today are 70 percent higher than they were this time last
year. In CERA's view, for the first time in many years, there is real
uncertainty about the ability of North American supply to meet demand
without sharp price rises. Demand pressures are intensifying, while
there are few signs yet of growth in supply. The differences are being
made up by withdrawing supplies from storage, where the levels are very
low. There is a similarity here to the oil market. Pressures on
inventories are driving the market. But there are major differences,
too. In contrast to the oil-exporting nations, there are no suppliers
withholding supplies from the market. And there is no capability to
ramp up production quickly to reduce the pressure in the market. In the
months ahead, we may see prices at new, higher levels that have not
been seen since the emergence of natural gas spot markets in the mid-
1980s. How high will prices go this summer? That depends on how hot the
summer. We could well expect $3.50 to $4.00 levels. With a hot summer,
prices could spike to $5.
In examining the outlook for the industry in our new study, ``The
Future of North American Natural Gas,'' we see major challenges.
Natural gas is a critical fuel for the United States both for energy
and environmental reasons. It currently provides 23 percent of our
total energy. It heats 53 million homes; it is a major feedstock for
industry; and, increasingly, it will be the key to our future
electricity supplies. Electricity will continue to become ever more
central to our economy; the digital economy depends upon a very high
quality electricity supply system. But that system, in turn, will more
and more depend upon natural gas. Indeed, the United States is making a
major bet on future gas supplies--without realizing it. Currently, just
15 percent of our current electric generating capacity is fired by
natural gas. However, 96 percent of proposed new generating capacity is
gas-fired. The reasons are cost, flexibility, technology, and
environmental attractiveness.
Demand for natural gas is currently very strong, owing to the
completion of new gas-fired power generation plants, and as economic
growth stimulates the demand for the power that both new and existing
gas-fired generation units an produce. At the same time, high decline
rates in existing natural gas production require higher levels of
drilling to maintain supply--let alone keep pace with demand.
The supply response--new exploration and development--has been slow
in coming. The reasons are many and varied. One is the continuing
impact of the 1998-99 price collapse, which devastated the cash flows
of the upstream oil and gas industry and continues to leave many
companies cautious and capital-constrained. An industry that has been
hurt by boom-and-bust cycles is leery of setting off another one. The
industry has downsized so much in response to lean times that it faces
a shortage of labor. At least until recently, capital that might
otherwise have flowed into the industry instead went into the
technology sector of the stock market--although that may well be
ending.
The result is that US supply is likely to be down this year, while
western Canadian supplies are only now beginning to grow, and then only
modestly. Reversing the recent declines in US wellhead supply requires
offsetting higher decline rates in existing production and moving
beyond the current plateau of drilling. Greater investment is needed in
exploration as well as in development areas. Nevertheless, CERA expects
supply to begin to show year-over-year increases in the United States
toward the end of 2000, and in Canada supply growth is at last expected
to be evident this spring.
CERA does believe that there is the gas supply potential to meet
the challenges of increased demand from power generation at a price
that would not discourage that market development. It is very important
to avoid short-term government intervention in the market that would
discourage investment in supply. Moreover, we need to consider how to
facilitate natural gas development in such a way as to support overall
environmental objectives. There are big challenges ahead. The number
one is to reverse the decline in supply. To meet the target of 30 TCF
in ten years, compared to the 22 TCF today, will require something on
the order of half a trillion dollars in U.S. upstream development. We
will need to add 300 to 350 TCF of new reserves in this decade, which
is 50 percent more than we added in the 1990s. We will need to connect
to new frontiers of gas development, including the Arctic, and reduce
the pressure on the gas infrastructure system in this country. And we
need to recognize the very large bet that we are making on natural gas
to power the growth of our new economy.
Mr. Barton. Thank you, Doctor. I am a little disappointed;
in the Harvard Man, you have got this new study out, and you
didn't have a copy out to hold up for the cameras.
Mr. Yergin. Thank you. I will learn from my mistakes.
Mr. Barton. We are now going to hear from another Harvard
man, the Honorable Phil Sharp, who is the past chairman of the
subcommittee and is the person that I try to model myself after
as we hold these hearings. Congressman Sharp, when he was the
subcommittee chairman, was always courteous and fair and
thoughtful and comprehensive. And that is a tough act to
follow. But I enjoyed serving with you when you were the
chairman of this subcommittee and I enjoy having you on the
panel today to give us your thoughtful comments on what our
energy policy should be.
STATEMENT OF PHIL SHARP
Mr. Sharp. Thank you, Mr. Chairman, especially for those
flattering remarks. And I am delighted to be back here with the
committee and the members, some of whom know how wrong I have
been on some of these issues over the years and I trust will
not hold me to account at this point. And because of that
battered experience from 1975 until 1995 on this committee, I
do have a few general remarks to make which I hope have some
relevance today, because I hopefully learned some things from
all of us in this country from some of the mistakes that we
made in the 1970's.
Mr. Barton. We are not going to talk a lot about NGPA.
Mr. Sharp. I would have to argue that ultimately that
proved to be successful. It was a very difficult route to a
good end, which I would admit readily to. But, Mr. Chairman,
what I would like to do is just mention a few general
principles, because already I hear the voices in the political
system on both sides of the aisle that might deflect us from
some things that may not be wise for the country, in my view
and many others', because I had to learn an awful lot from
everybody else.
First, our basic energy policy on additives and natural gas
and oil is to rely on the competitive marketplace. And we must
stick with this policy. We had an intense ideological and
political battle in this country for many years. It was very
difficult to resolve and very difficult to finally get a
bipartisan agreement which is effective in this country and
which perennially we are being drawn to undermine in various
ways.
And so I would strongly urge that we keep in mind no price
controls, no efforts to temporarily try to dictate the price
and allocation of energy supplies on this front. Every time we
have turned to that, we have made major mistakes. Now our
policy, as everyone here has been articulating, is certainly
not one just of laissez-faire. There are many supplementary
policies in which we tried by various techniques, from research
and development to tax incentives to regulations, to alter the
forces of the marketplace on both the production and the
consumption size. Many of those are wise and some of them we
find great difficulty making work in any consistent manner. But
the unsettling price swings of this last year have again raised
doubts of this basic policy of sticking with the marketplace.
And my overwhelming advice, I think, from all of us on the
panel, would be just say no to any proposals for controlling
price. Now, nobody is talking about direct price controls, but
there are in fact a number of proposals to indirectly try to
control the price. These are not nearly as Draconian as direct
price controls, but nonetheless they suffer the same disability
because they seek to outguess a very complex and rapidly
changing marketplace: proposals like drawing down the Strategic
Petroleum Reserve, proposals like having a reserve in New
England for fuel oil, proposals like requiring the private
marketplace to maintain a certain level of stocks. And I would
applaud the President and this Congress for not drawing down
the Strategic Petroleum Reserve and not deciding to do that
during this price increase.
Now we all know that the prices in the marketplace are not
fair to everybody equally. So we do need and we do have and we
should aggressively have policies that try to help those people
most severely damaged and least able to cope with price swings,
such as the low income energy assistance program.
Mr. Chairman, let me suggest as a second proposition that
we are interdependent on the world energy markets. We struggled
mightily with the rhetoric in the 1970's of being independent,
and of course it was what most Americans desired and it was a
shock to us in the seventies that we were so involved and so
dependent on the world oil market. But the hard fact and the
reality is we are very much a part of that marketplace and we
make a big mistake when we try to pretend anything otherwise.
There were no sets of policies anybody has ever recommended
that are acceptable economically, particularly in this country,
to guarantee us independence. It is wise, as you and others
have been pointing out, for us to try to reduce our reliance on
oil in this marketplace for a variety of benefits. But we want
to make sure that what choices we make actually make sense
economically and from an environmental point of view.
It also behooves us, obviously, in our international policy
to recognize that we have a major economic and strategic stake
in open markets. That means we don't restrict our imports, we
don't restrict our exports. We have a major, major interest in
the development of alternative other sources of oil outside of
the Middle East, such as in the Caspian Basin. We have a major
interest in the long-term development of cleaner fuels,
renewable fuels here and abroad. We obviously have diplomatic
interest in keeping the peace abroad.
The third big point, which is no surprise to anybody here,
is that if we are going to ensure adequate supplies that means
we need both supply and we need to work on the consumption side
as well. You have heard a number of proposals, and some of them
are very serious and well founded, of ways that we have got to
try to enhance our oil and gas exploration and development in
this country. But at the same time, I would strongly urge you
to take seriously those practical and reasonable proposals to
try to make us more efficient in the ways in which we use
energy in this country. And we have done a great job since the
1970's, partly by government policy, largely by the price in
the marketplace, of improving energy and oil sectors.
The fourth major point is that oil and gas markets and our
energy markets are dramatically shaped by our environmental
policy. Indeed, the reality is that much of our energy policy
is really environmental policy. It has to be. In fact, oil
production and distribution and use have the greatest impact on
our environment--land, air, and water quality--and it is
inevitably tied up together. Therefore, it behooves us to be as
rational and sensible and scientifically driven as we possibly
can.
And there is a great need for Congress and the
administration in the years ahead to see if they can
rationalize the Clean Air Act and the energy environmental laws
in general. This is a Herculean task. It should not mean
backsliding on our environmental commitment, but we do need to,
where we can rely on market mechanisms like in the
NO<INF>X</INF> market, as we did in SO<INF>X</INF>,
SO<INF>2</INF>, under the Clear Air Act of 1990.
The second part of that is more difficult to politically
swallow perhaps today, but that is, we have got to address a
prudent path on carbon dioxide and other greenhouse gases. The
reality is people are pressing scientifically, politically, all
the around the world to do this. Our energy markets must
respond to that. They are indirectly already taken into
account, and we need to get some greater assurance as to what
that path is going to be so the long-term investments that have
to be made on production and consumption will know what the
rules are.
Finally, on the environmental front, it is critical that we
continue, as several members of the committee and both parties
already indicated, support for renewable fuels. But we mustn't
kid ourselves. They are not suddenly going to replace our
fossil fuels and our nuclear fuels, and we have got to consider
ways in which we enhance the clean and efficient use of those
traditional resources. Much of that is a matter of research and
development.
Finally, and I am sorry to run over, Mr. Chairman, but one
of our major priorities here, as you and others have
articulated, is that electricity and the electricity markets,
which, by the way, increase the demand for gas, must be
addressed at the Federal and State levels, because the greatest
potential, in my judgment, of interruption of supply of energy
may be in the electricity markets rather than oil and gas
markets, although I don't mean to diminish at all the intensity
of your interest in oil and gas issues here. The fact is, we
are finding it is more difficult to create competitive markets
with this enormous transformation undertaking.
It is much more difficult than it was in gas or oil for a
variety of important reasons. Part of it relates to the nature
of electricity, part it relates to the fact that the public
policy issues that have to be resolved are bound up in a
hodgepodge of governmental jurisdictions at the Federal and
State level. Our political system is not designed to try to
create a nice smooth interstate market, and it takes a lot of
effort and a lot of cooperation to do that.
As you know, Mr. Chairman, although the task force I
chaired for the Secretary on this recommended, as one of its
many points, the reliability legislation that you have
incorporated in your bill, neither I nor anybody on that task
force believe that alone is enough. In fact, it is one of the
most minor parts of having reliability in the electric utility
industry, because the rules have to be sufficiently in place,
and investment will be attracted into generation, into
distribution, and into the changes in consumption patterns. But
the electricity system itself as we transform it, will become
incredibly, in my view and many others', more efficient at all
levels and that will help us on the environmental front and it
will help us on meeting our energy needs.
I applaud the effort of this subcommittee last fall to pass
an electricity bill. I would personally strongly disagree with
a couple of provisions that I suspect the Chairman would.
Mr. Barton. Did vote for it, though.
Mr. Sharp. I know you did, sir. I probably would have if I
had been in your shoes as well. I think it is critically
important that progress be made forward, and I know one of the
values some Americans forget about the Congress, is that the
multiple steps give it a chance to change and alter and adjust
to what it learns. And the reality is the political system will
never focus on these issues intensely until they start to move.
Once they start to move, boy, you heard from everybody. I am
sure you plainly know that; I don't need to tell you.
But, Mr. Chairman, I appreciate very much your having me
back. I hope that we can move forward. I will answer any
specific questions that you have.
[The prepared statement of Phil Sharp follows:]
Prepared Statement of Phil Sharp, harvard Electricity Policy Group,
John F. Kennedy School of Government, Harvard University
Mr. Chairman, thank you for inviting me to testify. For the record,
my name is Philip R. Sharp. Currently, I am a Lecturer in Public Policy
at the John F. Kennedy School of Government, Harvard University.
Recently, I chaired the Secretary of Energy's Electric System
Reliability Task Force which issued its final report, Maintaining
Reliability in a Competitive Electric Industry, in September, 1998.
From 1975 to 1995, I was a Member of Congress from Indiana and for
eight years had the honor of serving as Chairman of the Energy and
Power Subcommittee.
During those twenty years, I participated in nearly all major
legislative efforts regarding energy policy and clean air policy as
well. During that time I supported policies which proved effective and
others which did not. Fortunately, for me, no one is keeping score.
Chairman Barton, I applaud your efforts in taking on the challenge
of these complex issues. Undoubtedly you and the committee are being
pressed with a plethora of recommendations. You certainly have my
sympathy.
Drawing from my battered experience on this committee, I would like
to make a few general observations and will be happy to respond to
specific questions, if I can.
Our basic energy policy for assuring adequate supplies of oil and
natural gas is reliance on the competitive market. Stick with
it.
That has been the policy for two decades. After years of intense
political and ideological dispute, after several ``energy crises,''
after experimenting with extensive economic regulation, a broad
consensus emerged toward the end of the 1970's that market forces, not
the government, should determine the price and allocation of oil and
gas supplies--that market forces would be the main determinant of how
we produce, distribute, and use oil and gas. It is a bi-partisan
policy. It is an effective policy. It is not well understood.
Our policy has never been, however, simply one of laissez-faire.
For reasons of equity, security, and environmental protection, we have
a host of supplementary policies that seek to shape those market
forces. Some of these supplementary policies have big impacts on the
oil and gas markets and should be periodically re-examined.
The unsettling price swings of this past year naturally raise
doubts about our market policy; and they inevitably give rise to
political calls for short term-policies that will stabilize prices to
avoid short term pain--either for producers or for consumers.
The overriding lesson from the past: ``just say no'' to proposals
for controlling prices--directly or indirectly. Be wary of the siren
song that lures the government to try to smooth the price path in a
turbulent market.
No one yet is calling for direct price controls. Perhaps, we have
truly learned how ineffective, counterproductive and costly oil and gas
controls can be for consumers and the economy. Perhaps, there is also
memory of how politically difficult it was to change or abandon them.
Like many others in Congress, I underwent the metamorphosis from
supporting controls to helping end them.
Today, however, we hear proposals aimed at controlling price
spikes--not directly, but indirectly: release crude oil from the
nation's strategic petroleum reserve; create a regional product reserve
in New England to quell future spikes; require private suppliers of
fuel oil to maintain stocks at levels set by the government.
While not nearly as draconian as direct price controls, these
proposals suffer some of the same disabilities. They assume the
government can regularly out-guess the complex and rapidly changing
market place. They are not likely to produce the desired result. They
seldom can be invoked in a timely fashion.. They often produce
unexpected and undesirable consequences.
Earlier this year, the President was wise not to draw down the
Strategic Petroleum Reserve; and the Congress was wise not to
collectively press for such action.
Like it or not, in our enormously complex economy, it is the change
in prices which stimulates added production, which moves products to
where they are needed (like fuel oil to New England), and which
encourages consumers to take seriously energy efficiency.
Quite naturally it is harder to focus on the positive benefits of
the market when the imperfections are apparent and the pain is real.
But our market policy should not be casually dismissed or changed. Only
if the economy is seriously threatened should the government utilize
the Strategic Petroleum Reserve or adopt other short-term policies
designed to control the price and allocation of supplies.
The pain of price swings and the benefits of the market, of course,
are not evenly distributed. That is why supplementary policies such as
low-income energy assistance and weatherization are the compassionate
courses to pursue, rather than efforts to control the price level.
We are energy ``interdependent''--integrally connected to world oil and
gas markets.
While we Americans today are far more cognizant of
``globalization'' than we were in the 1970's, it is important to remind
ourselves that we live in an energy interdependent world which is very
difficult for most of us to understand. This may explain why some of
our rhetoric about energy policy is so at odds with reality and why so
many policy proposals miss their mark.
One of the major lessons from the 1970's: there is no set of
acceptable import-reduction policies which can achieve anything close
to oil ``independence.''
In nearly every conceivable way, we are a part of the international
market--in terms of products, prices, capital investment, environmental
impact, etc.
There certainly are benefits to us and to the world market if we
can lessen our reliance on oil. But when judging proposals that purport
to cut our imports, it is important to carefully ascertain the real
benefits and carefully weigh them against the real costs--economic and
environmental.
Cutting US imports, for example, by several million barrels--would
diminish our drain on the world export market and diminish the
potential impact on parts of our economy if there were a disruption in
Persian Gulf production. But such a reduction in imports would in no
way end our strategic concern with world oil markets in general and
Persian Gulf supplies in particular. US crude oil prices are largely
set by the world market; the economies of our major trading partners
rely heavily on oil; and nearly 2/3 of the world's proven oil reserves
are located in the volatile Persian Gulf region.
We have major stakes in the promotion of open energy markets, the
diversification of sources of oil (as in the Caspian basin), the long-
term development of cleaner fuels, coordinated diplomatic efforts to
advance peace in the Middle East., etc. etc. The range of international
policy concerns is broad.
``Ensuring adequate supplies of oil and gas'' is a question of demand--
as well as supply.
As the Congress considers proposals to facilitate production and
distribution, it should also consider proposals that advance efficiency
in the use of energy.
In the 1970's, there was much rhetorical fighting over whether we
could ``produce'' our way out of the crisis or ``conserve'' our way
out--as if we had an ``either-or'' choice. In the end, of course, the
market dictated both; and policies were adopted in the name of doing
both.
Efficiency improvements have played and will play a major role in
helping us economically fuel the economy in environmentally acceptable
ways.
Since the 1970's, significant efficiency gains have been made in
nearly every sector of consumption. While market prices and market
forces have been, and should be, the central driver of efficiency,
government policies undoubtedly contributed to those gains--through R &
D, tax incentives, jawboning, and, in a few instances, minimum
efficiency standards.
In the United States, if we are talking oil, we are talking
automobiles--that is, passenger vehicles. It is disturbing that the
projections for fleet fuel economy improvements are so dismal. This
must be a matter of public concern.
One of the chief reasons for moving to competition in the electric
utility industry is to accelerate adoption of efficiency innovations
throughout the system--from the generator to the customer.
Oil and Gas markets--all energy markets--are dramatically shaped by
environmental policies.
This is necessarily so, because energy production, distribution and
use have such significant impacts on the quality of our air, land, and
water.
In the next few years, the Congress would perform a valuable
service if it could rationalize and modernize our environmental laws,
especially the Clean Air Act, so that we can more effectively protect
the environment as economically as possible.
This may be a Herculean task. Where possible, for example, the law
needs to allow more opportunities for market implementation of
federally set requirements, as we did for SO<INF>2</INF> in the 1990
Amendments. Such legislating, however, should not mean backsliding on
scientifically-identified environmental threats
In the next few years, the United States in conjunction with other
nations must come to grips with CO<INF>2</INF> and other green house
emissions and chart a prudent course--the least costly course--for
reducing the potential impact more and more scientists claim these
emissions will have on the global climate. It is increasingly untenable
to engage in political denial on this issue. There will be no quick and
easy policies.
Participants in energy markets regularly make decisions which have
long-term impacts on the way we produce and use energy--decisions which
therefore have environmental consequences for years to come. The
Congress must do the best job it can in shaping the authority of EPA in
order to provide clarity and consistency in the rules that will govern
those market decisions.
It is very important for the government to support the development
of renewable fuels in order to meet our long-term energy and
environmental needs. There is no realistic scenario, however, in which
the United States and much of the world will not be heavily dependent
on fossil and nuclear fuels for the foreseeable future. Therefore, we
must continue efforts to find cleaner, safer, and more efficient ways
to use our main energysupplies.
Electric issues must receive priority attention.
Our electric markets are undergoing a radical transformation.
During this difficult transition to competition, we face increased
risks of supply disruption. That was a major conclusion of the
Secretary of Energy's Electric System Reliability Task Force.
Creating competitive markets in electricity is proving more
difficult than was deregulating oil and gas. The nature of electricity
requires a high degree of physical coordination to keep the system
operational. The market issues are complex. Important public policy
issues fall into a hodge-podge of governmental jurisdictions.
Assuring supply requires a number of public policy decisions in
order to facilitate market development and attract needed investment.
This, of course, is not simply a matter of adopting the ``reliability''
legislative proposal which deals with making and enforcing reliability
standards.
Although I disagree with a couple of the provisions in the bill
passed last fall by this Subcommittee, Mr. Chairman, I certainly
believe you and the subcommittee deserve great credit for getting the
legislative process moving and for trying to resolve exceptionally
thorny issues.
Mr. Barton. Thank you former Congressman.It is amazing to
me--before I recognize Mr. Martin--we ask you all to provide
written testimony; you do that. We ask you to summarize it in 5
minutes. We give you 7 minutes, and you take 10 minutes.
Let me welcome the Honorable Bill Martin. I first met him
when he was in the National Security Council under President
Reagan. He later became Deputy Secretary of Energy, and I
worked with him there. He is one of the truly Renaissance men
that I have had the pleasure to meet since I have been a
Congressman and we are delighted to have you here. We are going
to give you 7 minutes also and see if you can give us back a
little bit of that perhaps, because we still have two
distinguished members from the Clinton Administration that we
want to give a chance have something on the record.
STATEMENT OF WILLIAM F. MARTIN
Mr. Martin. Thanks, Mr. Chairman. It is real tough to
follow two Harvard types and an Admiral. I was thinking what
Ralph Hall said. He has left, of course, but Steve will
appreciate this. I come from Oklahoma. My great grandfather, my
grandfather, my father, were all wildcatters and of course they
went out of business. That is why I had to go into government.
I want to give a bit of a story about natural gas today.
The Admiral and my two Harvard colleagues and dear friends have
told the story about energy security. Yes, we have a problem
with rising imports, absolutely. Yes, we have a problem with
rising CO<INF>2</INF>. Yes, the rest of the world is increasing
their oil demand just like we are. The concentration of Persian
Gulf exports in the next 15, 20 years is going to be
unimaginable. Therefore, we need to take measures in order to
protect ourselves, our environment, and our economy. So thank
you for having these hearings.
I am going to agree with most of what Dan Yergin said about
natural gas. But we prepared a study for the Natural Gas
Foundation using our model which, unfortunately, was developed
at MIT, boys. We think in terms of numbers as opposed to
arguments. But this model has been around for about 25 years
and it has appeared before this committee many times--and the
Senate. We are finally getting it right, I think. But it shows
something very interesting about natural gas.
I think we will all agree natural gas is the fuel of
choice. Whether you are a Democrat or a Republican or producer
or consumer, you like natural gas. But it is interesting, we
found in the model that coal and nuclear power plants are being
extended quite a bit for economic reasons. So the role of
natural gas may not be as rosy in electrical generations.
Certainly it is capacity, but what if new capacity is not
replaced as quickly? So there might be a bit of a problem.
So one of the things we looked at was the direct use of
natural gas. Indeed this is a bit of a technology story on the
demand side. If you look at the recent increase in use of
turbines and fuel cells and the fact that any of us can someday
have something the size of this chair at our house, which will
actually convert natural gas into electricity and be economic
and, by the way, be dependable, it is quite startling. And we
are seeing companies, even on the stock market, that are
investing in fuel cells going right for through the roof. So
there a huge new technological development in natural gas.
We ask ourselves, what role is this technology going to
have in spurring natural gas demand? We had a rather
encouraging result. In fact, we are even more optimistic than
the EIA, we are probably more optimistic than anybody on
natural gas demand. We say that natural gas demand could
increase by 60 percent by the year 2020, roughly go from 22
quads to 35 quads. For my Harvard friends, a quad, as you know,
is about 10 to 15 million BTUs and a quad fuels Cleveland for a
year, roughly--just for the sake of Harvard.
Mr. Barton. We appreciate you for educating our Harvard men
and our Congress.
Mr. Martin. In any event, it is a good story for gas. It is
not going to happen easily, meeting that type of natural gas
demand--I think Dan and the Admiral said it well when they
talked about access and the need for access to gas and oil and
ANWR and the other resource base to stimulate gas production in
this country--because we need to do some things on the supply
side. We also have to make the rules of the game clear on the
demand side.
For example, let's take electrical appliance standards. You
know, we all go to Sears and we see now here is an electric hot
water heater, it is 90 percent efficient or something; you
think gee, I am really doing something for the country if I buy
that hot water unit. However, we have to recognize that
electricity has so many enormous processing losses along the
way that the reality is it is not 90 percent efficient, it is
much less if you figure we lose two-thirds of the energy
getting it to that electric hot water unit. Whereas if it is a
gas or gas cooling, unit we don't have all those processing
losses.
So, for example, on the demand side, when the consumer goes
to the store to make a decision between electric and gas, hey,
you know, let's make it clear to him. And if he is doing
something for the country and for the environment, let's make
sure he is aware of that. So things like appliance labeling--
and there are a host of other things which again levelize the
field for natural gas consumption and use.
Now, let me mention here Dave Parker recently had a meeting
of all the CEOs and heads of the energy associations, and they
were talking about a national energy policy. It is interesting
to me that while during the seventies when I worked with John
Dingell, and in the eighties when I worked with you, Mr. past
Chairman, they had fuel wars. But in reality our numbers
suggest--and they are on page 12 and I commend them to you if
you are numerative--these numbers suggest that if you increase
natural gas demand by about 60 percent, and you could do it,
and if you use this energy more directly you can provide the
same amount of service to the consumer, whether it be
automobiles or households or industry, for 6 percent less
primary energy, again because you don't have these huge
processing losses for electricity.
However, this doesn't do in the coal industry. In fact,
coal use actually increases and nuclear power does quite well.
By the way, I am a firm supporter of nuclear power as well. We
need nuclear power and we need renewables and we need
efficiencies as well. But also this particular scenario which
utilizes all domestic fuels efficiently reduces our
CO<INF>2</INF> by 900 million tons. So we actually make a bit
of a commitment to climate change or acid rain or whatever the
environmental problem is, and our oil imports are 2.5 million
barrels less than they otherwise might be. So, in my view, it
is a rather balanced energy scenario for the future.
I commend the Congress as you look at your policies, look
what the impacts are of the policies and see what they have to
do with oil imports. My scenario, which started out to be a
natural gas scenario, ultimately ended up as a basically
balanced set of energy for all fuels.
So in conclusion, Mr. Chairman, I would like to offer this
for the record, and we also have a longer technological report.
And I also want to again thank you for the chance to appear
before the committee.
Final point: This is a bit of a bipartisan study. Jack
Gibbons, a very close friend of mine, took part in this, the
President's Science Adviser. We had a lot of help from the DOE
and also from distinguished colleagues at the World Resources
Institute who are excited about natural gas not only for the
national security but for the environmental contribution. Thank
you.
[The prepared statement of William F. Martin follows:]
Prepared Statement of William F. Martin, Chairman, Washington Policy
and Analysis
Natural Gas Consumption in the US Can Increase by 60 Percent in the
Next Twenty Years
Washington Policy and Analysis (WPA) has prepared a number of
energy supply and demand scenarios, both domestically and
internationally for more than a decade. The methodology WPA uses is
based on a spreadsheet model developed at MIT in the 1970s and refined
over the years. WPA Global Energy is an international model that
calculates energy supply and demand projections for 16 major countries
and by regional breakdown. The model makes supply and demand
projections for all fuels (coal, oil, gas, nuclear, renewables) across
all end-use sectors (residential, commercial, industrial,
transportation).
In our projections, we take a relatively conservative approach to
efficiency improvements and the real annual economic growth rate,
basing these numbers on historical long-term trends. For a developed
country such as the US, WPA believes that significant declines in
energy intensity can be safely projected because of anticipated
structural changes and rising productivity based on advanced
information system innovations as well as economic and policy-induced
urgings toward greater energy efficiency.
Energy intensive industries tend to shift from mature economies to
developing economies. This well-established trend is all the more
evident today, as we move increasingly toward a service-based economy
or perhaps more aptly, an internet-based economy. As the WPA model is
global, with the US model representing just a segment of the global
energy economy, it is noteworthy that the assumptions in our US
projections are consistent with the global energy forecast. By
maintaining this internal consistency, we avoid double counting that
can occur in some modeling attempts. Overall the US economy is expected
to grow at 2 percent annually in tandem with increasing energy
efficiency.
Within these parameters, how will we meet our energy needs over the
next 20 years? What role will natural gas play? What will happen to oil
imports? What will be the impact on our environment? How will this
impact the US economy?
We have answered these questions in a number of studies for a
variety of academic, professional and government institutions,
including: Council on Foreign Relations, The Trilateral Commission, the
Senate Energy Committee, Los Alamos National Lab.
In 1999, WPA approached the American Gas Foundation for support in
our study of the US energy future. This was, in fact, our third study
of national energy markets focusing on natural gas. WPA's first study
completed in 1988, which was viewed as wildly optimistic in projecting
a 25 quad consumption level by 2010, now seems rather conservative. Our
latest study Fueling the Future: Natural Gas & New Technologies for a
Cleaner 21st Century, reveals that consumption of natural gas could
increase by almost 60 percent over current levels, from 22 quadrillion
Btus (quads) in 1998 to 35 quads by 2020.
The study was completed with the assistance of the following
experts: Dr. William Fisher, Professor of Geological Sciences,
University of Texas; Dr. John H. Gibbons, former Science Advisor to
President Clinton; Dr. Nancy Kete, Director of Climate, Energy &
Pollution Program, World Resources Institute; and Maurice Strong,
Secretary General of the 1992 UN Conference on the Environment and
Development in Rio.
A Business as Usual Scenario for the US Energy Future Emphasizes Coal,
Oil and Natural Gas
Since the first WPA study on natural gas almost twelve years ago,
the prospects for natural gas have improved, due in part to political
and economic support for the natural gas industry and energy sector
deregulation. Our energy economy has improved significantly over the
last twenty years in terms of efficiency and our domestic energy
resources have also expanded--especially coal, nuclear energy and
natural gas.
As we look to the future, we can expect that efficiencies will
continue and that the market will be the primary driver of energy
supply and demand. To analyze the further potential of natural gas two
scenarios were examined by WPA. The ``business as usual'' projection,
called the Current Trajectory in our study, assumes an economic growth
rate of 2 percent per year on average, coupled with a continuation of
present local and federal energy and environmental policies.
This led WPA to the conclusion that both coal and nuclear power
remain important for electricity generation. In fact, we expect nuclear
and coal capacity is unlikely to decline as precipitously by 2020 as
many forecasts predict. Our projections assume that approximately two-
thirds of all nuclear plants scheduled for retirement before 2020
extend their licenses and remain operational. Natural gas consumption
is also seen as growing from 22 quads in 1998 to 29.7 quads by the year
2020, primarily in the electrical sector. We also see a significant
increase in oil imports due in part to higher demand and declining
domestic production.
Under these assumptions, natural gas maintains market share in the
electrical sector, but makes relatively few inroads into growing end-
use demand within the transportation, commercial, residential and
industrial sectors. Foreseeable problems related to supply and demand
constrain the expansion of natural gas usage.
On the supply side, WPA assumes that much of domestic natural gas
reserves, both onshore and offshore, remain restricted or off-limits to
exploration and production. Additionally, we assume that pipeline
growth is constrained by factors including siting problems and
inadequate capital investment based in large part on uncertainties
about future demand in specific areas.
However, this scenario should not be considered a constrained
``business as usual'' case. It postulates substantial increases in
efficiency--along with other advances in technology on both the demand
and the supply side. Yet, this ``conventional wisdom'' scenario
presents a number of problems for our energy future. It indicates a
substantial increase in CO<INF>2</INF> levels, precipitously high oil
import requirements, and an economy operating at less than optimum
energy efficiency.
Natural Gas Can Play a Larger, More Direct and Dynamic Role in Meeting
Our Energy Needs
WPA looked at an alternative case for the US energy future, one
that emphasizes the developments in natural gas end-use technology and
its potential impact on energy efficiency, environmental quality, and
energy security.
This High Gas Use scenario reflects conditions in which consciously
``pro-gas'' policies are adopted on the supply and demand side,
avoiding ``command and control'' strategies, but endeavoring to remove
market barriers of various kinds. In this case demand exceeds 35 quads
by the year 2020.
We see steady penetration of gas into the electrical market, but
the key to the success of this scenario is the penetration of end-use
markets, including vehicles powered in a variety of ways by natural
gas, gas-cooling and increased use by key industrial sectors. This
projection foresees greater use of gas for distributed generation to
site-based power for the industrial and commercial sectors, and by 2020
even the residential sector will see growth in this category. The
increasing share of distributed generation is reflected in WPA's
projections by end-use sector. In the electricity sector, coal and oil
show little or no growth in market share, but grow in absolute terms.
In our Current Trajectory scenario, coal exceeds 61 percent of
generation share, while in the High Gas Use scenario, it remains well
below that at under 56 percent.
Under this scenario natural gas consumption in 2020 is nearly 6
quads above the Current Trajectory. Roughly half of the increase is
attributable to the residential and commercial sectors where more new
customers choose gas and more customers convert from other fuels to
gas. This scenario also exhibits continued expansion in a number of
successful new markets such as residential gas fireplaces and
commercial gas cooling. Additionally, distributed generation in the
form of reciprocating engines, microturbines and fuel cells advances,
accounting for roughly 20 percent of all new electricity generating
capacity and 5 percent of total capacity by 2020.
Industrial gas demand is roughly 2.5 quads higher, continuing the
robust growth of the past 10 to 15 years. Although the cogeneration
market becomes saturated, other forms of distributed generation are
expected to prosper, and highly efficient heating, cooling and process
equipment continues to evolve, enabling gas to remain the dominant
industrial energy source.
Natural gas cars, trucks and buses consume over 1 additional quad.
Although these vehicles account for less than 1 percent of the overall
vehicular market in 2020, they can make significant contributions to
air quality and operational economics, primarily in fleet applications
in congested urban areas.
There are Adequate US Reserves of Natural Gas to Meet a 35 Quad Future
at Reasonable Prices
The decade of the 1990's has demonstrated the vast and diverse
nature of the gas resource base. Further, the resource base continues
to ``expand'' as estimates today are larger than those made in the
early 1990's by the same estimators--despite the fact that we have
produced and consumed over 150 trillion cubic feet in this period. Some
components of today's gas supply were not even acknowledged 10 to 15
years ago. Coalbed methane, for example, which now accounts for 6
percent of domestic gas production, was not included in most resource
base estimates prior to 1988.
There were tremendous technological advances in the past 10 years,
from 3D seismology to horizontal drilling and innumerable computer-
related breakthroughs. Similar advances will be required, and should be
anticipated over the next 20 years, in order to satisfy a 35 quad
demand level. Such advances will enable domestic production to increase
from over 19 quads today to over 29 quads in 2020. Canada will
contribute a slightly greater share in the future, increasing their
exports from 3 quads per year to roughly 5 quads. Abundant worldwide
and Alaskan gas resources offer mid-term insurance, while methane
hydrates and other more exotic sources provide longer-term potential.
The natural gas industry is capital intensive, and to meet the
demand levels of the High Gas Use Scenario will require significant
expansion of the gas production, storage, transmission and distribution
systems. The number of oil and gas wells drilled, for example, may have
to double from today's level to some 50,000 wells per year. However,
this is well below the peak levels experienced in the mid-1980's--
70,000 to 90,000 wells per year. The ramp-up for the production segment
may prove to be more of a challenge than for the transmission and
distribution segments.
Natural gas prices will remain competitive, even at higher
consumption levels. Price regulation of natural gas was eliminated
roughly a decade ago and from 1987 through 1998 the price of gas
delivered to consumers increased by only 3 percent while consumer
prices overall increased by 36 percent. Thus, natural gas prices have
declined significantly in real terms in this deregulated era.
Although the gas levels analyzed in this report will exert somewhat
more price pressure than conventional forecasts, we anticipate only
modest gas price increases. In real terms wellhead prices will remain
in the mid-$2.00 per million Btu (MMBtu) range and consumer prices will
be relatively constant. The gas resource base expansion and
technological advances of the past decade in finding, producing and
delivering gas will continue. The factors that lead to declining real
gas prices in the recent past will continue, creating future price
stability and an increasingly competitive energy market will also
ensure this stability.
A Shift to Greater and More Direct Use of Natural Gas Provides
Substantial National Benefits
There are many reasons why the country should capitalize on this
powerful national asset in order to clean up the environment, spur
economic growth, reduce oil imports and conserve energy. Several key
advantages of the High Gas Use scenario are shown below:
1. Natural gas is inherently cleaner-burning than coal or oil.
Switching from those fuels to gas will reduce greenhouse gas
emissions, acid rain, smog, solid waste and water pollution.
When burned, natural gas emits virtually no sulfur dioxide or
particulate matter and far lower levels of nitrogen oxides,
carbon monoxide, carbon dioxide and reactive hydrocarbons than
either coal or oil. Our projections show that CO<INF>2</INF>
emissions can be reduced by 930 million tons per year by 2020.
2. The efficiency of the natural gas system helps conserve the nation's
energy resources. When the entire energy cycle of producing,
processing and transporting energy is measured, natural gas is
delivered to the consumer with a total energy efficiency of
about 90 percent, compared with 27 percent for electricity. By
2020 overall US energy efficiency could be boosted by 6
percent, thanks in large-part to a shift to direct-use gas
technologies and distributed generation. To put that in
perspective, 6 percent (7.4 quads) is an amount equal to the
energy needed to power Cleveland for almost a decade.
3. Natural gas is a highly reliable North American form of energy.
About 85 percent of the gas consumed each year in the United
States is produced domestically. The balance is imported from
Canada. In comparison, roughly 60 percent of the oil used in
the United States is imported, primarily from the members of
OPEC. We project that oil imports could be reduced by about 2.6
million barrels a day (equivalent to Venezuela's current total
production levels).
4. Billions of dollars could be saved over the next decades as
distributed generation accounts for approximately 20 percent of
new electricity generation capacity, thus avoiding the need to
build approximately one hundred and fifty capital intensive
large-scale power plants
5. GNP and trade balance improvements would occur as global gas demand
spurs US exports of gas-using technologies. The US leads the
world in terms of its natural gas infrastructure, and US
companies are providing their equipment to countries in Latin
America, Europe and the Far East that are just beginning to
develop natural gas systems. As US export of gas-using
technologies accelerates with the global expansion of natural
gas usage, job creation and trade balance effects will have
major positive GDP effects.
Key Technologies Which Will Drive Natural Gas Growth in Residential,
Commercial and Industrial Markets Include Fuel Cells,
Microturbines, and Gas Cooling Equipment
Our study analyzes evolving patterns of demand for energy in key
economic sectors. The report highlights leading gas-using technologies
that are instrumental in improving the utilization of natural gas in
each of these sectors. The following technologies will have major
impacts on the end-use energy consumption. By using natural gas
directly at the source to generate power, they offer significant
efficiency and environmental advantages. In contrast to the production
and delivery of central station electricity that is only 27 percent
efficient, gas is delivered to the consumer with an efficiency of
roughly 90 percent. Gas consuming equipment is highly efficient, as
evidenced by the fact that residential customers are using about 16
percent less gas today than they were in 1980. These new technologies
offer even greater efficiency improvements.
Microturbines: Each microturbine, a small and high-speed power
plant, consists of a generator, compressor, and turbine that share a
single shaft, with a small rotor. Microturbines can be linked to the
power grid or operated independently. Advantages include their small
size, high reliability, low emissions, and quiet operation, with an
ability to produce 25kW to 400kW of power. Microturbines are currently
being tested and used commercially and could become cost-competitive in
the residential sector by 2005.
Gas Cooling Equipment: Natural Gas-powered cooling technology has a
huge role to play in the commercial and eventually the residential
sector. The three basic types of gas cooling are engine driven
chillers, absorption chillers and desiccant dehumidifiers. Gas air
conditioners have been available for decades, but they have not fully
met customer needs in terms of performance, economics, and reliability.
That is now changing. Residential gas absorption units are now
available that use 30 percent less energy than their predecessors, have
an expected 20 year life with low maintenance, are extremely quiet and
produce no polluting CFC's or HCFC's. Gas air conditioning has great
potential, particularly in the West and South. The clean, dry air
produced by gas-based desiccant systems is ideal for use in hospitals,
schools as well as office and retail space.
Natural Gas Fuel Cells: A fuel cell is a self-contained unit that
converts natural gas to electricity and heat through a chemical
reaction as opposed to a combustion process. Fuel cells preclude the
need to construct costly and disruptive transmission lines, and they
protect consumers from power outages. They are energy efficient (40 to
60 percent) and they can reduce a number of pollutants--including
CO<INF>2</INF> by 70 percent relative to coal-based electricity and
NO<INF>X</INF> by 85 percent relative to the ultra-tight Los Angeles
standards--with no discharge. There are a limited number of residential
fuel cells in use today with installed costs currently in the $7,000 to
$10,000 range, although mass production could cut the cost in half
within the timeframe of this study.
The Enhanced Natural Gas Future Described in WPA's Study Incorporates a
Variety of Policy Assumptions
A ``detached approach'' to the role of natural gas in the US energy
mix is likely to fall short of capturing the full benefits of that
fuel's resources and substitutive potential. It takes years to gain
approvals for and to build pipelines, processing facilities, compressor
stations, storage, and even local distribution networks. It could take
the better part of another decade to develop some of the end-use
products that can constitute a sizable part of natural gas demand in
2020. Thus, both supply infrastructure and customer-pull were factors
in WPA's conclusion that the current trajectory is toward consumption
in the range of only 29 quads or so by that time.
It is equally clear that conscious policy changes could boost that
figure. An overarching one happens to be a concentration on total
energy efficiency and a concomitant redirection of regulation and
standards for both energy and environment. Life-cycle considerations
would need to be emphasized, rather than first-costs alone. This is
similar to a policy outlook that favors renewable energy in the longer
run. It calls for thinking and planning for the mid-to long-term
future, rather than a ``quick fix.''
Our study did not spell out specific policy prescriptions, but it
demonstrated that achievement of the High Gas Use scenario it describes
for 2020 is feasible from the standpoint of timing, technology and
economics. Seven policy assumptions were incorporated in the
development of WPA's accelerated gas scenario. It is difficult to
isolate individual assumptions and project the specific gas demand
impact of each, but the overall collection of assumptions fosters an
environment conducive to the realization of the accelerated scenario
and its resulting benefits. These general assumptions are:
<bullet> Energy efficiency and environmental regulations will be
comprehensive, equitable and balanced
<bullet> The federal government, in recognition of increased potential
national benefits, will promote rather than discourage
increased natural gas consumption, and it will step up RD&D
activities
<bullet> The potential of new technologies will be fully recognized in
regulations that govern the natural gas industry
<bullet> Access to the natural gas resource base will not be unduly
restricted
<bullet> The costs of providing gas service to new electricity
generating plants will not be borne by residential, commercial
and industrial customers
<bullet> Energy markets will be free and competitive, and natural gas
utilities will be allowed to compete fairly in these markets
<bullet> Natural gas industry safety and reliability will not be
compromised in a deregulated environment
Our Future Energy Policy Should be Based on Total Energy Efficiency to
Achieve Environmental, Economic and National Security
Objectives
We have discussed a conventional view of the US energy future and
contrasted that with one based on more use of natural gas directly by
consumers. After examining these alternative cases, there is an
appropriate question we must ask. Does the conventional wisdom as
reflected in our Current Trajectory or the EIA Reference Case,
represent a sustainable energy outlook or, does the Higher Gas Use
scenario offer a more sound mixture of our natural resources?
If you look at the coal projection in the High Gas Use scenario, it
is actually very similar to EIA--therefore our gas scenario does not
harm the coal industry, which has long been the backbone of our
electric generation. The estimate for nuclear power in our projection
reveals that we expect less plant retirements than the EIA Reference
case. An enhanced natural gas future does not preclude a strong role
for nuclear power in the coming decades.
One does distinguish that WPA's High Gas Use scenario offers
significantly less dependence on foreign oil. Comparing the WPA High
Gas Case to the EIA Reference Case reveals the energy security
advantages of relying on North American reserves of natural gas. The
differential in oil imports amounts to approximately 4.6 million
barrels/day. At a price of $25/barrel, the net difference is equal to
nearly $43 billion a year. In reality we present a much more
sustainable energy future in the High Gas Use scenario because oil
imports are kept to a more prudent level.
What does make a difference in our scenario is slightly less
dependence on electricity and more emphasis on direct-use of our
natural gas resources--the difference in the amount of primary energy
utilized in our two scenarios is approximately 7 quads in 2020. That
represents a 6 percent improvement in the nation's overall energy
efficiency. This reduced demand for primary energy supply would likely
have a positive effect on energy prices, thus efficiency gains from the
fuller use of natural gas translate into gains for consumers in terms
of lower energy costs.
Therefore, we commend to the Congress a prudent overall national
energy plan--which includes all of the elements of our ``so called''
High Gas Use case. It is a prudent balance of fuels, an efficient and
environmentally friendly scenario, and one that is strongly based on
domestic technology and domestic resources.
But this scenario will not happen by itself. It requires a
concerted national effort to foster the fuller utilization of natural
gas in accord with the principles of total energy efficiency--measuring
efficiency throughout the fuel cycle--and sound economics.
Mr. Barton. Thank you.
And you finished with 7 seconds to spare. I think you have
set the standard. A lot of numbers though, a lot of numbers. I
am not sure we can all remember the numbers.
Mr. Martin. I understand the numbers up here, sir.
Mr. Barton. We want to welcome now the Administrator of the
Energy Information Administration, the Honorable Jay Hakes, who
is soon leaving to go to the Jimmy Carter Library down in
Atlanta. And since this is your kind of swan song before the
subcommittee, I want to say what a pleasure it has been to work
with you in the years that I have been in the majority and you
have been appearing before our subcommittee and the full
committee on some occasions. You have always been fair, your
studies have been well balanced. You have been very cooperative
and responsive when the committee has asked for information.
And I think we need to put on the record that EIA did
predict the gasoline problem that we experienced last winter,
about a year ahead of time, a year to 6 months ahead of time.
So the fact that the Clinton Administration didn't act is not
because they didn't know it was coming.
So we wish you the very best down in Atlanta, and I am sure
in the future you will be invited back to be a distinguished
member or some panelist when you are in the private sector. So
your testimony is in the record. We recognize you for 7 minutes
to elaborate on it.
STATEMENT OF JAY HAKES
Mr. Hakes. Thank you, Mr. Chairman. I am appreciative of
your comments. One of the reasons we do the kind of work we do
is to be of service to policymakers, and we have worked hard at
that, and working with this committee has been a very positive
experience for us.
I would like to, just because the time is limited, go over
a few of the major graphics in my presentation which, of
course, is available in more detail. And this refers to some
comments that have been made earlier, but it sort of puts it in
graphic form, this gap between the supply, which is at the red
line at the bottom over there, and consumption at the top for
the United States.
Mr. Barton. Could we turn the chart so that the TV cameras
at least have a chance to see it? I know all the members can
see it. But thank you.
Mr. Hakes. What one can notice on the supply side is that
we reached the peak of U.S. production for petroleum in 1972,
and since that time have been more or less coming down. There
have been some ups and some stable periods and we find
ourselves now about 25 percent lower in U.S. production than we
were at that peak back in 1972. So there has been a drop,
although it has not been a complete dramatic fall-off.
On the consumption side, you see it looks a little bit more
like a roller coaster, and you got a peak in 1978 of about 19
million barrels a day. And actually we are at about that same
level right now. So we had this deep drop as high prices and
things like CAFE standards brought down consumption, and then
as prices collapsed, consumption started edging back up and has
a lot of momentum in that direction.
Mr. Barton. Mr. Administrator, I don't normally interrupt
the testimony, but that chart shows about 10 million barrels
per day of products of oil and it ends in 1998. Isn't it true
we are about 8.5 million barrels of production a day?
Mr. Hakes. One of the things that is a little confusing
about the testimony is to make this chart work, you have to use
all petroleum, which includes crude oil and natural gas
liquids, refinery gains, and lease condensate. So in my later
charts where I use just crude oil, you would have the number
you are talking about. But to make the imports equal the
difference between supply and demand, you have to include those
other factors. So basically you have got a gap there of about
10 million barrels a day.
Imports rose rapidly in the 1970's, reaching a peak in
1977. Then we had dramatic improvement as consumption dropped
and U.S. production rebounded. And we actually didn't get back
up to that level of imports until 1997. Again, though, there
does seem to be a lot of momentum for more imports.
Now, I wanted to concentrate on history so I left the
projections off. I think, as we all realize, the projection
business is a little bit risky. There are a lot of caveats that
we would certainly put to any of our forecasts, but I think it
is important to have some baselines that we deal with. You have
about 25 million barrels a day of consumption in 2020, about 9
million barrels a day of production, which is roughly what we
have been seeing recently, and then a gap of 16 million barrels
a day for imports.
Now there is another way to look at this that I think is
useful, and that is in figure 4 of my testimony where we look
at who are the world's major oil producers. And if you go back
to 1970, the United States was clearly the world's major oil
producer. Between now and then, the Soviet Union ramped up its
production for a while and for a while was the leading
producer. But today we have fallen to the No. 3 position. This
one is just for crude oil. It doesn't include natural gas
liquids, that I included in the earlier chart. So we are still
one of the world's major oil producers but we are not No. 1
anymore.
There is some encouraging news when you look at who
produces the world oil, because crude oil production has become
much more widely disbursed than it was in 1970. The production
total of the top 6 producers amounted to 68 percent of the
world's crude oil produced in 1970, but in 1999 the top 6
countries produced just 45 percent of the world total, a drop
from 68 to 45. Whereas 4 members of the top 6 in 1970 were
members of OPEC, just 2 of the top 6 were from OPEC in 1999.
Now, I don't want to slight natural gas. I want to refer to
two graphics on gas that make some points that I think are also
relevant to oil but I think can be seen most clearly for gas.
Incidentally, we do have in our projections natural gas
reaching the 30 trillion cubic feet level of consumption in
2015. We had said 2013 back a year ago because of some of the
factors that were mentioned about nuclear plants operating at
higher levels and coal developments. We have moved that back to
2015, but that is still a very substantial amount of gas.
There are two points I would make on gas, and they also
apply to oil. One is that technology matters. We would not be
where we are today for domestic gas production or for domestic
oil production if we had not seen rather incredible advances in
exploration technologies and in drilling technologies that have
enabled the domestic industry to operate with a great amount of
efficiency and an ability to get the oil, frankly, that would
not have been economic with old technology.
So as we are looking to the role that gas may play in the
future, particularly in the electric industry, it is going to
make a big difference what the pace of exploration and
development technology is. And we do assume in our models that
there will be continuing advances in technology beyond what is
being implemented today. If that does not happen, gas will be
in tighter supply and at much higher prices. But technology
does have the ability, in our opinion, to make gas available at
a reasonable and very competitive cost.
The final point I would make with regard to gas, and it
also applies to oil, is that drilling matters. The level of
drilling is not a constant. The ability to drill in many cases
involves the ability to convince the financial community that
they want to finance your drilling, and that is more difficult
when prices are low and it is easier when prices are high,
particularly if there is an expectation that those high prices
will continue. You can see in the historical part of this, to
the left of the line, how drilling can vary a lot. If you are
looking back to why we would have expected high prices to have
occurred recently, one of the reasons would be that those low
price shocks discouraged drilling. And, whereas consumers at
the time may have thought this was really great because they
were getting the low prices, if they had observed what this was
doing to the level of drilling activity, it would have become
clear that they were planting the seeds of higher prices in the
future.
As you can see in our projections, in the future we
predicted there will have to be a lot of drilling. Now we
assume current Federal policy with regard to Federal lands, but
wherever the drilling occurs there is going to have to be a lot
of it. And that will be difficult if the price is jumping all
over the place and sending confusing signals to investors.
So I think I will leave it at that point. This is a big
topic, and look forward to your questions.
[The prepared statement of Jay Hakes follows:]
Prepared Statement of Jay Hakes, Administrator, Energy Information
Administration, Department of Energy
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss the views of the
Energy Information Administration (EIA) on prospects for oil and
natural gas supply and demand.
EIA is an independent statistical and analytical agency within the
Department of Energy. We are charged with providing objective, timely,
and relevant data, analysis, and projections for the use of the Energy
Department, other agencies, the Congress, and the public. We do not
take positions on policy issues, but we do produce data and analysis
reports that are meant to help policy makers decide energy policy.
Because we have an element of statutory independence with respect to
the analyses that we publish, our views are strictly those of EIA. We
do not speak for the Department, nor for any particular point of view
with respect to energy policy, and our views should not be construed as
representing those of the Department or the Administration.
Today's analysis is based on EIA's Annual Energy Outlook, which
provides projections and analysis of domestic energy consumption,
supply, prices, and carbon emissions through 2020. These projections
are not meant to be exact predictions of the future but represent a
likely future, assuming known trends in demographics and technology
improvements, and also assuming no change in current law, regulation,
and policy. EIA does not propose, advocate, or speculate on changes in
laws and regulations. So, one of our key assumptions is that all
current laws and regulations remain as they were on July 1, 1999. That
means, for example, that the Tier 2 vehicle emission and gasoline
sulfur standards are not included in the reference case because the
regulation was not finalized until December 1999.
Oil
Petroleum consumption in the United States increased sharply in the
1970's (Figure 1). From an average of 14.7 million barrels per day in
1970, petroleum consumption rose to 18.9 million barrels per day in
1978, a level that would not be reached again for the next 20 years.
More than half (57 percent) of the increase was in the transportation
sector and nearly 40 percent of the growth was attributable to motor
gasoline. Distillate and residual fuel consumption grew by 0.9 and 0.8
million barrels per day, respectively, between 1970 and 1978.
Domestic oil supply (including crude oil, lease condensate, natural
gas liquids, other liquids and processing gains) peaked in 1972 at 11.9
million barrels per day then declined slowly in part because of price
controls and aging fields in the Lower 48 States. Completion of the
Trans-Alaska Pipeline System brought about a 1.0 million barrel per day
increase in domestic oil production in 1978. The rising consumption
combined with relatively flat supply resulted in a dramatic increase in
net petroleum imports, from 3.1 million barrels per day in 1970 to 8.5
million barrels per day in 1977. Ninety percent of the increase in net
imports from 1970 to 1977 came from OPEC countries, as OPEC's share of
U. S. imports rose from 42 percent to 72 percent.
From 1978 to 1980, world oil prices nearly doubled (Figure 2),
resulting in a sharp decline in consumption. From the 1978 peak of 18.9
million barrels per day, consumption fell to 15.2 million barrels per
day in 1983, a decline of 20 percent. Residual fuel led the decline as
industrial users and electric utilities switched to alternative fuel
sources. Residual fuel use fell 1.6 million barrels per day over the 5-
year period, followed by gasoline (0.8 million barrels per day) and
distillate fuel (0.7 million barrels per day.) By 1983, petroleum
consumption in the United States had returned to the level of 1971.
Domestic supply remained fairly stable from 1978 to 1983, with
rising Alaskan production making up for production declines in the
Lower 48 States. Reduced consumption, along with steady supply levels,
resulted in a decline in net imports from the 1977 peak of 8.5 million
barrels per day to 4.3 million barrels per day in 1983. The decline in
petroleum net imports from OPEC countries fell by slightly more than
the total decrease as non-OPEC net imports increased slightly during
this period. OPEC's share of U. S. petroleum net imports declined to 43
percent in 1983.
The sharp decline in U. S. and world petroleum consumption resulted
in lower demand for OPEC oil, which in turn led to reductions in the
world oil prices. From the 1980 peak of $63.30 per barrel, the average
world oil price fell to $19.57 per barrel in 1986 (measured in 1998
dollars). The lower prices and growing economy stimulated petroleum
consumption growth. With the exception of 1991, petroleum consumption
has remained the same or increased each year since 1983. In 1998,
petroleum consumption reached 18.9 million barrels per day, slightly
exceeding the previous peak in 1978. In contrast to the increase in the
1970's, the rise in consumption from 1983 to 1998 was almost
exclusively among the lighter petroleum products (gasoline, distillate,
jet fuel, etc). Residual fuel consumption continued to decline during
this period.
After remaining stable from 1978 to 1985, domestic supply again
started to decline in 1985 due in part to the much lower oil prices. By
1998, supply had fallen to 9.2 million barrels per day from 11.4
million barrels per day in 1985. Increasing petroleum consumption and
declining supply led to rising net import levels that , in 1996,
surpassed the 1977 peak. By 1998, petroleum net imports reached 9.8
million barrels per day, comprising 52 percent of domestic petroleum
consumption. Net imports from OPEC countries contributed 56 percent of
the rise in total net imports from 1983 to 1998, in contrast to the
1970's when they contributed 90 percent of the increase. Net imports
from Canada and Mexico made up 24 percent of the increase from 1983 to
1998, and in 1998, these two countries provided 26 percent of U. S.
petroleum net imports compared to 50 percent from OPEC countries.
Projected Prices
Just as the historical record shows substantial variability in
world oil prices, there is considerable uncertainty about future
prices. Three AEO2000 cases with different price paths allow an
assessment of alternative views on the course of future oil prices. For
the reference case, prices are projected to rise by about 2.8 percent a
year, reaching $22.04 in 2020 (all prices in 1998 dollars unless
otherwise noted). In nominal dollars, the reference case price exceeds
$36 in 2020. The low price case has prices declining, after the current
price rise, to $14.90 by 2005 and remaining at about that level out to
2020. The high price case has prices reaching $28 by 2015 before
leveling off. The leveling off in the high price case is due to the
market penetration of alternative energy supplies that could become
economically viable at that price, if it is sustained. The AEO2000
price paths do not attempt to predict volatility. Oil prices have been
quite volatile in the past, principally as a result of unforeseen
political and social circumstances. The oil market volatility over the
past 2 years has been the result of oil market fundamentals that are
reasonably well understood but nearly impossible to predict. OPEC and
some other producers responded to the low prices of 1998 by cutting
back on production in the spring of 1999. This occurred just as several
countries in Asia began to recover from their financial crisis and to
increase oil consumption. The combination of lower production and
higher consumption brought inventories down rapidly and, as inventories
got to very low levels, prices rose sharply.
All three price cases reflect considerable optimism about the
potential for worldwide petroleum supply, even in the face of the
substantial expected increase in demand. Production from countries
outside OPEC is expected to show a steady increase, exceeding 45
million barrels per day by the turn of the century and increasing
gradually thereafter to more than 56 million barrels per day by 2020.
Petroleum Consumption Expected to Increase Steadily
Petroleum consumption in the United States is projected to increase
6.2 million barrels per day, from 18.9 million barrels per day in 1998
to 25.1 million barrels per day in 2020, an annual average rate of 1.3
percent (Figure 3). This compares to the average growth rates of 1.5
percent per year from 1983 to 1998 and 3.2 percent per year from 1970
to 1978. Most of the increase in petroleum consumption occurs in the
transportation sector, which accounted for two-thirds of U.S. petroleum
use in 1998. Petroleum use for transportation is projected to increase
by 5.4 million barrels per day in the reference case between 1998 and
2020.
In the industrial sector, which accounts for more than a fifth of
U.S. petroleum use, consumption in 2020 is projected to be higher than
the 1998 level by 1.2 million barrels per day in the reference case.
More than half the growth is expected in the petrochemical,
construction, and refining sectors. Petroleum use is expected to
decline in the residential, commercial, and electricity generator
sectors, where oil gives ground to natural gas. For electricity
generation, our projections show oil-fired steam plants being retired
in favor of natural gas combined-cycle units.
More than 90 percent of the projected growth in petroleum
consumption stems from increased consumption of ``light products,''
including gasoline, diesel, heating oil, jet fuel, and liquefied
petroleum gases, which are more difficult and costly to produce than
heavy products. Although refinery investments and enhancements are
expected to increase the ability of domestic refineries to produce
light products, they are projected to compensate for less than half the
additional demand; the remainder will be imported.
In the forecast, gasoline continues to account for about 45 percent
of all the petroleum used in the United States. Between 1998 and 2020,
U.S. gasoline consumption is projected to rise from 8.3 million barrels
per day to 11.4 million barrels per day. Increased air travel results
in a near doubling of projected jet fuel consumption from 1.6 million
barrels per day in 1998 to 3.0 million barrels per day in 2020.
Consumption of liquefied petroleum gases (LPG's)--primarily in the
industrial sector--also increases in the projections, from 2.0 million
barrels per day in 1998 to 2.5 million barrels per day in 2020.
Consumption of ``other'' petroleum products, mostly petrochemical
feedstocks, still gas used to fuel refineries, and asphalt and road oil
used in road construction, grows from 2.8 million to a projected 3.3
million barrels per day by 2020. Distillate fuel consumption is
projected to grow more slowly than other fuels, because of increasing
fuel efficiency. Residual fuel use, mainly for electricity generation,
is projected to decline by 250,000 barrels per day in the high oil
price case but projected to increase by 530,000 barrels per day in the
low oil price case.
Crude Oil Production Declines then Stabilizes, Total Supplies Remain
Flat
In the reference case, domestic petroleum supply is projected to
decline slightly from its 1998 level of 9.2 million barrels per day to
9.1 million barrels per day in 2020. This is the result of two
offsetting factors. As U.S. crude oil production falls off, refinery
gain and production of natural gas plant liquids increase. In the low
oil price case, domestic supply is projected to drop to 8.3 million
barrels per day in 2020. In the high oil price case, domestic supply is
projected to increase to 9.9 million barrels per day in 2020.
Projected domestic crude oil production continues its historic
decline through 2005. After 2005, technological improvements and rising
prices are projected to arrest the decline, leading to relatively
stable lower 48 production in the remainder of the forecast. In 2020,
the projected domestic production level of 5.3 million barrels per day
is 1 million barrels per day less than the 1998 level. Conventional
onshore production in the lower 48 States, which accounted for 46
percent of total U.S crude oil production in 1998, is projected to
increase to a 49-percent share in 2020 because of declining Alaskan
production.
Crude oil production from Alaska is expected to decline at an
average annual rate of 3.7 percent between 1998 and 2020. The overall
decrease in Alaska's oil production results from a continuing decline
in production from most of its oil fields and, in particular, from
Prudhoe Bay, the largest producing field, which historically has
accounted for more than 60 percent of total Alaskan production.
Offshore production ranges from 1.4 to 1.6 million barrels per day
throughout the forecast. Technological advances and lower costs for
deep exploration and production in the Gulf of Mexico help to offset a
decline in production from shallow waters. Production from enhanced oil
recovery (EOR), which becomes less profitable as oil prices fall, slows
through 2006 and then increases along with projected world oil prices
through the remainder of the forecast. The projected EOR production in
2020 is close to the 1998 level.
Although the number of available drilling rigs has been declining
since 1982, price increases are a powerful incentive for increased
drilling and the purchase of new drilling equipment. The number of
available drilling rigs increased by almost 16 percent annually between
1974 and 1982--from 1,767 to 5,644--as natural gas prices more than
quadrupled in real terms and oil prices more than doubled. This number
dropped off as prices generally declined, and about 1,700 drilling rigs
were available in the United States in 1998. Given the historical
response to rising prices, even a modest increase in prices is likely
to make additional drilling rigs available, and the forecast shows the
number of rigs increasing to 1994 by 2020.
Both exploratory drilling and developmental drilling increase in
the forecast. With rising prices and declining drilling costs,
successful crude oil well completions increase on average by 0.1 and
3.3 percent per year in the low and high oil price cases, respectively,
compared with a 1.7 percent projected increase in annual well
completions in the reference case. For most of the past two decades
lower 48 production of crude oil has exceeded reserve additions and
production is expected to exceed reserve additions over the forecast
period in all cases, meaning that projected U.S. oil reserves in 2020
will be below 1998 levels.
Petroleum Imports Projected to Increase
With consumption rising and production nearly flat, net imports are
expected to continue to rise throughout the forecast period. Petroleum
net imports are projected to increase to 16.0 million barrels per day
in 2020 in the reference case from 9.8 million barrels per day in 1998.
In 1998, net imports of petroleum climbed to 52 percent of domestic
petroleum consumption and are projected to reach 64 percent in 2020 in
the reference case. OPEC's share of the U. S. import market is expected
to increase to 52 percent in 2020 while the North America and Caribbean
share of imports is projected to reach 33 percent. Total annual U.S.
expenditures for petroleum imports, which reached a historical peak of
$133.7 billion (in 1998 dollars) in 1980, were $46.6 billion in 1998.
Although crude oil is expected to continue as the major component
of petroleum imports, refined products represent a growing share. More
imports of refined products will be needed as growth in demand for
refined products exceeds the expansion of domestic refining capacity.
Net refined products make up 28 percent of net imports in 2020 in the
reference case, compared with 12 percent in 1998.
The United States Remains One of the Top Producing Countries
The United States was by far the largest crude oil producing
country in the world in 1970, at 9.6 million barrels per day (Figure
4). The Soviet Union followed with 7.0 million barrels per day followed
by four members of OPEC. By 1999, Saudi Arabia's oil production had
increased to 7.8 million barrels per day, the only one of the top six
producers in 1970 that had a higher production level in 1999. The
Soviet Union had broken apart but Russia remained in second place in
global oil production in 1999. The United States had fallen to third
and Iran fourth. China and Norway replaced Venezuela and Libya as the
fifth and sixth largest oil producers.
The top six countries produced 29.6 million barrels per day of
crude oil in 1999, down 1.7 million barrels per day from the 1970
combined production level. However, crude oil production has become
much more widely dispersed than in 1970. The production total of the
top six producers amounted to 68 percent of the world's crude oil
produced in 1970, but in 1999, the top six countries produced just 45
percent of the world total. Whereas four members of the top six in 1970
were members of OPEC, just two of the top six were from OPEC in 1999.
U.S. production has fallen, because production elsewhere has been
less costly. The United States has remained a major producer, however,
because of a relatively low tax regime and innovative use of advanced
technology.
Strategic Petroleum Reserve
The United States began putting crude oil into the Strategic
Petroleum Reserve (SPR) in 1977 (Figure 5). The SPR is considered the
first line of defense against an interruption in oil supplies and,
therefore, is also considered a deterrent to possible oil import
cutoffs. Between 1980 and 1985, inputs into the SPR averaged more than
200,000 barrels per day. By 1990, the inventory level had reached 586
million barrels. Since then, sales and additions have resulted in
relatively small fluctuations in the total stockpile. The 1999 end-of-
year inventory amounted to 567 million barrels.
Natural Gas
Demand for natural gas, with increases principally from the
electric generation sector, is expected to rise to more than 30
trillion cubic feet (tcf) in 2020. As demand increases, pressure on
natural gas supply will grow. These demand-side pressures will begin to
raise questions like: Is there enough gas to meet demand at affordable
prices? and Can we produce the gas fast enough to keep up with demand?
Last year U.S. natural gas consumption was just over 21tcf and
accounted for 24 percent of domestic energy consumption. Gas
consumption is expected to grow 1.8 percent annually from 1998 to
2020--faster than any other major fuel source, mainly because of the
growth in gas-fired electricity generation. Domestic gas production is
expected to increase a bit more slowly than consumption over the
forecast, rising from 19 Tcf in 1998 to 26 Tcf in 2020. Growing
production reflects rising wellhead prices, relatively abundant natural
gas resources, and improvements in technologies, particularly for
producing offshore and unconventional gas.
Net imports are expected to rise to make up the difference between
domestic production and consumption, because they are generally
expected to be lower priced than competing domestic sources (Figure 6).
Net imports are expected to climb from 3.0 Tcf in 1998 to 5.0 Tcf in
2020--somewhat faster than the growth in overall consumption. Projected
imports continue to be dominated by pipeline imports from Canada over
the forecast period.
Rising Natural Gas Demand
The industrial sector is the largest gas-consuming sector, with
significant amounts of gas used in the bulk chemical, refining, and
metal durables sectors. Industrial gas consumption is expected to
increase by 1.8 Tcf over the forecast--less than 1 percent per year--
particularly in the refining and metal durables sectors, because of
relatively low and stable gas prices. Combined, the residential and
commercial sectors add 1.8 trillion cubic feet from 1998 to 2020. Gas
demand in the residential and commercial sectors is driven by
increasing population and declining consumer prices for delivered gas.
The declines in prices paid by the consumer reflect expected gas
distribution efficiencies in an increasingly competitive market.
Projected gas consumption by electric generators, not including
industrial cogenerators, increases more than two and one half times
during the forecast, from 3.7 trillion cubic feet in 1998 to 9.3
trillion cubic feet in 2020. The significant growth in gas-fired
generation is partly driven by electric industry restructuring, but is
mainly spurred by the addition of new gas turbines and combined-cycle
facilities and increased utilization of existing gas-fired power
plants. Lower capital costs, short lead times, and projected
improvements in gas turbine heat rates give gas an advantage over coal
for new generation in most regions of the United States. In 1998
electricity generators were the third-largest natural gas consuming
sector. By 2020, however, the projected enormous growth in gas-fired
generation makes electricity generators the second largest gas-
consuming sector--rising to within 1 tcf of the industrial sector. Over
the entire forecast, natural gas consumption is projected to grow by
more than 10 tcf, and more than half of the increase comes from the
electric generation sector.
Through 2020, the share of electricity produced with natural gas
rises from 14 percent to 31 percent of the total, while the coal share
declines from 52 percent to 49 percent. Nuclear power declines as a
source of electric power--from 19 percent to 9 percent of electricity
generation as no new nuclear power plants are expected to be brought on
line between 1998 and 2020 and 40 percent of the current stock retires.
Before the advent of natural gas combined-cycle plants, fossil-
fired baseload capacity additions were limited primarily to pulverized-
coal steam units; today, however, combined-cycle plants cost about half
as much and are about 40 percent more efficient than new coal plants.
The lower capital costs and higher efficiencies of combined-cycle
plants offset their higher fuel costs (Figure 7).
To meet the new demand growth, utilities can be expected to use
existing plants more intensively, import power from Canada and Mexico,
and purchase power from cogenerators and wholesale generators. Even so,
300 gigawatts of new capacity will be needed from 1998 to 2020 to meet
projected demand. Of that new capacity, 90 percent is projected to be
combined-cycle or combustion turbine technology fueled primarily by
natural gas. In other words, more than 900 of the 1,000 new power
plants--assuming an average plant capacity of 300 megawatts--that are
expected to be built between now and 2020 are projected to be gas-
fired. New coal plants are not projected to be cost-competitive until
2010, when rising natural gas prices exceed the price of coal by $2 per
million BTU, leading to the projected construction of new coal-steam
power plants in some regions.
Many of the new gas-fired plants built over the next 20 years will
replace nuclear power plants. In AEO2000 about 40 percent of the
existing nuclear capacity is expected to be taken out of service by
2020. No new nuclear units are expected to become operable by 2020,
because natural gas and coal-fired plants are projected to be more
economical.
Growing Natural Gas Supply
Over the forecast period, increased U.S. natural gas production
comes primarily from lower 48 onshore conventional nonassociated
sources. Conventional onshore production accounted for 35 percent of
total U.S. domestic production in 1998 and is expected to increase to
41 percent in 2020. Offshore production, mainly from wells in the Gulf
of Mexico, also rises. Innovative, cost-saving technology and large
finds, particularly in the deep waters of the Gulf, have encouraged
interest in this area. Lower-48 offshore Gulf Coast natural gas
production increased to 5.7 tcf in 1997--the highest yet recorded--and
dropped off slightly in 1998 to 5.6 tcf. Unconventional gas production
increases at the fastest rate of any other source over the forecast
period, largely because of expanded tight sands gas production in the
Rocky Mountain region.
The Rocky Mountain (primarily unconventional sources) and offshore
Gulf of Mexico regions are expected to account for just over half of
the incremental natural gas production between 1998 and 2020, as
improvements in both unconventional and offshore technologies continue.
Increased production from the offshore Gulf Coast and onshore Southwest
regions account for almost one-third of the total increase in the same
period. Alaskan gas is not expected to be transported to the lower 48
States through 2020,because projected natural gas prices are not high
enough to support the required transportation system.
One of the key activities in producing natural gas is drilling.
With rising prices and generally declining drilling costs, drilling in
2020 is expected to reach 22,600 wells in the reference case and result
in 16,900 successful natural gas well completions. This level of
drilling is below the level reached in 1981 of more than 29,000 total
wells drilled (just under 20,000 successful), but represents
approximately a 15-percent increase over current levels. (Figure 8)
Technological Development
Technology improvements have both reduced effective exploration and
development costs, and increased the recoverability of in-place
resources. Major advances in data acquisition, data processing, and the
technology of displaying and integrating seismic data with other
geologic data-combined with lower cost computer power and experience
gained using new techniques-have exerted downward pressure on costs.
Uncertainties about the pace of technological development are one
of the key factors that could affect natural gas production and prices.
Alternative cases were used to assess the sensitivity of the
projections to changes in success rates, exploration and development
costs, and finding rates as a result of technological progress. The
assumed technology improvement rates were increased and decreased by
approximately one-third in the rapid and slow technology cases.
Changes in production in the alternative technology cases reflect
the benefits of lower costs and higher productivity for conventionally
recoverable gas, as well as an array of technological enhancements for
unconventional gas recovery. The changes in supply lead to price
changes that affect new investment in gas-fired technologies,
especially in the industrial and electricity generation sectors. Rapid
technology improvements yield benefits in the form of both lower prices
and increased production to meet higher consumption requirements.
Production from unconventional gas resources (tight sands, shales,
and coalbeds) is particularly responsive to changes in the assumed
levels of technological progress. Whereas the reference case projects
total U.S. natural gas production in 2020 at 26.4 trillion cubic feet,
the rapid technology case projects 28.1 trillion cubic feet of
production in 2020, with the increase coming primarily from offshore
and unconventional sources.
Offshore gas production in the Gulf of Mexico is expected to grow
from 5.5 trillion cubic feet in 1998 to a peak of 6.7 trillion cubic
feet in 2015 in the reference case. In the rapid technology case,
however, offshore Gulf of Mexico production peaks at 7.7 trillion cubic
feet in 2017, and projected cumulative offshore production between 1998
and 2020 is 148.3 trillion cubic feet, compared with 137.1 trillion
cubic feet in the reference case. The rapid technology assumption has a
similar but less dramatic, effect on unconventional gas recovery (UGR).
Cumulative UGR production between 1998 and 2020 is projected to be
132.9 trillion cubic feet in the rapid technology case, compared with
129.5 trillion cubic feet in the reference case. Changes in production
in the alternative technology cases reflect the benefits of lower costs
and higher finding rates for conventionally recoverable gas, as well as
an array of technological enhancements for unconventional gas recovery.
Slowly Rising Natural Gas Wellhead Prices
Wellhead prices for natural gas in the lower 48 States increase on
average by 1.7 percent a year in the reference case to $2.81 per
thousand cubic feet in 1998 dollars (Figure 9). The increase reflects
rising demand for natural gas and the impact of the progression of
discoveries from larger and more profitable fields to smaller, less
economical ones. The natural gas price projections are highly sensitive
to changes in the assumptions about technological progress. Over the
projection period, lower 48 wellhead prices increase at an average
annual rate of 3.0 percent in the slow technology case, rising fairly
steadily to $3.74 (1998 dollars) per thousand cubic feet in 2020. In
the rapid technology case, average natural gas wellhead prices remain
below 1997 level of $2.39 through 2020.
Natural Gas Imports
Net natural gas imports are expected to grow slightly in the
forecast from 14 percent of total gas consumption in 1998 to16 percent
in 2020. Most of the increase is attributable to imports from Canada,
primarily from western Canada, although some new gas is also expected
from Sable Island in the offshore Atlantic. Gas trade with Mexico is
expected to consist primarily of exports. Conversion of power plants
from heavy fuel oil to natural gas, in compliance with Mexico's
environmental regulations, is expected to gain momentum and it is
uncertain whether indigenous production can be increased enough to
satisfy rising demand. LNG provides another source of gas imports, and
gross LNG imports are expected to grow at a rate of 7.2 percent a year,
reaching a level of 390 bcf by 2020.
Summary
In summary, over the next 20 years petroleum consumption in the
United States is expected to be driven primarily by the demand for
``light products'' in the transportation sector. Petroleum consumption
is expected to rise to over 25 million barrels per day in 2020, and
domestic petroleum supply--including refinery gain and natural gas
plant liquids--is projected to decline slightly to just over 9 million
barrels per day in 2020. Net imports are projected to increase to 16
million barrels per day in 2020. Continued dependence on petroleum
imports is projected, reaching 64 percent in 2020. Although imports are
projected to grow, the United States is one of the largest oil
producing countries in the world, and domestic production is expected
to remain a significant source of petroleum supply.
Over the next 20 years the U.S. natural gas market is expected to
be largely driven by the demand for electricity. From now through 2020
gas consumption by electricity generators is expected to increase more
than two and one half times. Total gas consumption is expected to rise
to more than 31 tcf in 2020, and U.S. production is expected to
increase to 26 tcf. Net imports, primarily from Canada, are projected
to increase to 5 tcf by 2020. In spite of this increase, technically-
recoverable natural gas resources are believed to be adequate to
sustain growing production volumes for many years without dramatic
price increases.
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Mr. Barton. We thank you Mr. Administrator.
Our last witness, but certainly not least, on this panel,
the Honorable Melanie Kenderdine, who is the Acting Director of
the Office of Policy, Department of Energy, which is the office
that I was in when I was a White House Fellow. I am used to
seeing Ms. Kenderdine out in the audience as she gives the
right answers to whomever the political appointee happens to be
who is testifying before our subcommittee. So it is good to
have you here. So we are going to get the expert at the table
instead of in the audience. We recognize you for whatever time
you may consume, hoping it is going to be in the neighborhood
of 7 minutes.
STATEMENT OF MELANIE A. KENDERDINE
Ms. Kenderdine. Thank you, Mr. Chairman. On that note,
prior to becoming Secretary Richardson's senior policy advisor
on oil and gas, I was the Deputy Assistant Secretary in DOE's
congressional office. I saw firsthand what happened to many DOE
witnesses when their testimony was late. And it was an
inspiration to me, and I hope to always be on time.
Mr. Chairman and members of the subcommittee, thank you for
the opportunity to discuss the administration's energy policy.
The fundamental importance of energy to the Nation's economic
and environmental health has warranted investments by the
Clinton/Gore Administration in a set of policies in a portfolio
of technologies to encourage energy production to use energy
more efficiently, to reduce its impacts on the environment, and
to develop alternative sources of supplies.
The administration's first principle in energy policy is
reliance on market forces as the best means of informing supply
and demand and getting the most for the American consumer. Our
commitment to this principle has contributed to the longest
period of sustained economic growth in modern times. At the
same time that the econ-
omy and energy consumption have been steadily growing, energy
use has been reduced. And if you look over at Chart 1, that is
what we are demonstrating there.
As you can see, since 1990 the economy has grown by 35
percent. I think you all also have these charts with you. Since
1990, the economy has grown by 35 percent, yet sulfur dioxide
emissions have been reduced by 20 percent. Also the energy
intensity of our economy, the amount of energy used per unit of
economic output, has declined by 40 percent since the mid-
1970's. The point of all this is that we can have a robust
economy, increased energy consumption and a cleaner environment
at the same time.
The administration's policy is supported by two national
energy strategies, two scientific reviews of our energy R&D
portfolios, numerous R&D road maps and two extensive energy
portfolio characterizations and analysis which I will talk
about shortly. We are also in the process of updating our 1998
energy strategy and it will be done shortly.
Our energy policy focuses on these challenges, which I
would like to briefly discuss. Our first challenge, challenge
number 1, is maintaining America's energy security in global
markets. To address this challenge, the administration over the
last 7 years has supported, taken, or proposed measures to do
the following: .
Spur domestic oil and gas production through the support of
tax incentives such as the expensing of geological and
geophysical costs and delay rentals; addressing the generally
high cost of U.S. exploration and production through
technologies--Mr. Hakes just alluded to how important that is
to help lower costs of production and produce mature fields,
which many fields in the United States are; ensure that we are
not overly reliant on imports from a single region of the
world; encourage the world to develop its oil resources and
increase productive capacity; privatize the Elk Hills Naval
Petroleum Reserve in order to put that reserve into the hands
of private industry and extend the life of the field; increase
the size of the petroleum reserve by 28 million barrels;
provide deepwater royalty relief, which has increased oil and
gas production in the last 5 years in deep water by over 250
percent; lift the ban on Alaskan North Slope oil; simplify
royalty collection on public lands; reduce the AMT and
percentage depletion tax relief for small operators; promote
the creation of a guaranty loan program for small domestic oil
and gas producers and the reauthorization of EPCA.
We can also reduce net imports of oil by focusing on the
demand side of the equation. Sixty percent of our oil is used
in the transportation sector. If you look at chart number 2,
you will see that in the last 10 years, vehicle manufacturers
have increased horsepower as opposed to miles per gallon. That
is exactly the opposite of what we saw in the 1970's, which is
the bars on the far right, where you see miles per gallon down;
increased mile per gallon up; horsepower way down. And then you
go over and look at the far right and you see the opposite.
Mr. Barton. Would the gentlelady yield just a second? We
have got a vote on the rule for PNTR. Congressman Shimkus is on
the floor. He is supposed to come right back. So we are going
to try to continue the hearing. If the members present want to
go vote and come back, I will wait until Mr. Shimkus gets here
so we can try to continue. Please continue.
Ms. Kenderdine. Increasing the average fuel efficiency of
America's automobiles by just 3 miles per gallon would save us
almost a million barrels of oil per day. This demonstrates the
value of fuel-efficient vehicles and why we have focused a
great deal of effort on our PNTB program to produce a prototype
80-mile-per-gallon vehicle by 2004.
Our second challenge is harnessing the force of competition
and restructured energy markets. Comprehensive electricity
restructuring legislation is the centerpiece of the
administration's energy policy. The Clinton/Gore Administration
encourages Congress to pass comprehensive electricity
restructuring legislation this summer before the peak
electricity use season.
Our third challenge is mitigating the environmental impacts
of energy use. DOE invests in technologies to reduce the
environmental impacts of energy by producing cleaner fuels,
increasing the efficiency of energy use and developing
alternative sources of energy.
Domestically, our lead challenge is further reducing
environmental impacts of energy use in the transportation and
power generation sectors. Internationally, we believe our
greater environmental challenge today is climate change.
And finally our fourth challenge, ensuring a diverse,
reliable, and affordable set of energy sources for the future.
And again technology development plays a very strong supporting
role in the Department's pursuit of all of its energy policy
objectives.
Chart number 3 summarizes our portfolio effort in which we
matched our energy R&D investments against key energy
objectives. This is a significant document, Mr. Chairman. I
have one here and actually used it liberally when I was
preparing my written testimony and it is very informative. I
think it is a very important document and shows exactly how we
are investing about $2 billion, maybe a little more than $2
billion, in lining those up against our strategic energy goals.
And what you see in that document is our strategic
objectives are reliable and diverse energy supply--we are
spending about $170 million in that area; clean and affordable
power, $542 million; and efficient and productive energy use,
$437 million. And in addition, the Department has a basic
science portfolio of about $1.2 billion. These are our requests
for 2001, by the way, which supplies the foundation for the
applied energy R&D.
At this point in my written testimony, I take direction
well, Mr. Chairman, and limit at the end my oral statement to 5
minutes. But since everyone has taken 7, I will go to my
written testimony here where I did talk a little bit about
natural gas. Other people at the table have also spoken about
natural gas, and I would like to associate myself with their
remarks.
The administration is a very strong supporter of natural
gas and we bear significant supply issues and significant
distribution issues that I think we need to work on in a
bipartisan fashion in the days ahead in order to meet the
demand for natural gas. Jay Hakes and the EIA Office predict
that we are going to need 1,000 new power plants in this
country by 2020, and 900 of them will be powered by natural
gas. And there is a lot of work to do on a whole lot of issues,
and we would like to work with the committee on that.
These policies and investments of the administration have
paid big energy economic and environmental dividends. As Mr.
Yergin pointed out, even with current high prices in today's
dollars, we are paying substantially less for a gallon of
gasoline than in 1980. We have diversified our supplies of
imported oil; three out of four of our top importers are in the
Western Hemisphere. I just looked at a list that I pulled off
Reuters news service today of our top 11 importers of oil. Only
four of them are OPEC nations.
Royalty relief on the OCS, as I mentioned, has increased
deepwater oil and gas production by over 250 percent in the
last 5 years. Significant technology improvements have lowered
oil and gas exploration and production costs and reduced the
environmental footprint of energy production to one-tenth the
size it was 20 years ago.
The rapid development of energy efficiency and renewable
technologies has enabled the United States to dramatically
decrease its energy use per dollar GDP; wind energy, energy
interest in biomass and other renewables, show tremendous
promise for some cost-competitive power generation from
alternative energy sources.
Despite this track record, the potential for increased
savings in energy demand in the U.S. economy remains enormous.
And to meet growing energy demand, it remains essential.
Much remains to be done. Secretary Richardson has called on
the Congress to work with us in a bipartisan fashion to pass
legislation for those energy incentives and programs which
require congressional action; namely, comprehensive electricity
restructuring; tax incentives for oil and gas production;
energy efficiency and alternative fuels; the reauthorization of
EPCA; the creation of a home heating oil reserve in the
Northeast; and the supplemental appropriation to replenish
emergency LIHEAP funds.
The Clinton/Gore Administration is proud of its progress in
achieving the Nation's energy goals. Thank you, Mr. Chairman.
[The prepared statement of Melanie A. Kenderdine follows:]
Prepared Statement of Melanie A. Kenderdine, Acting Director of Policy,
U.S. Department of Energy
the clinton/gore administration's energy policy
The Administration's ``First Principle'': Reliance on Market Forces
Mr. Chairman and members of the Subcommittee, I am pleased to be
here today to discuss the Administration's National Energy Policy with
the Subcommittee.
Sound energy policy is not only important to the day-to-day
functioning of our society, it is essential to the continued
improvement in our standard of living. Energy is a key economic driver
and a strategic global commodity. Energy has significant impacts on the
environment at the same time it offers real market opportunities.
The ``first principle'' of the Administration's energy policy has
been a reliance on free markets as the best means of informing supply
and demand, and getting the most for the American consumer. Our
commitment to this principle has contributed to the longest period of
sustained economic growth in modern times.
The unprecedented economic expansion under this Administration has
pushed the overall unemployment rates to 30-year lows, led to increased
labor productivity, generated extraordinary gains in the nation's stock
markets, given us the first federal budget surpluses in several
decades, and helped to significantly reduce poverty rates, all while
maintaining low levels of inflation.
This does not mean market failure will not occur. When markets are
insufficiently flexible to address critical national challenges . . .
market transformations require market pushes and pulls . . . or groups
of individuals or businesses are threatened by market disruptions or
dislocations . . . this Administration has not hesitated to take
appropriate action. Examples of interventions in the energy arena
include: the release of emergency LIHEAP funds during last winter's
home heating oil crisis; support for a home heating oil reserve in the
Northeastern United States and support for tax incentives for renewable
energy or to increase domestic oil and gas production.
Economic Growth, Energy Use and Environmental Protection are Not
Mutually Exclusive
At the same time that the economy has been steadily growing, many
of the environmental consequences of energy use have been reduced--this
point is clearly made by Chart # 1 which plots growth in GDP against
certain emissions associated with energy use. There is good news:
<bullet> Since 1990, at the same time the US economy has grown by 35
percent, sulfur dioxide emissions have declined by around 20
percent.
<bullet> The energy intensity of our economy--the amount of energy used
per unit of economic output--has declined by 40 percent since
the mid-seventies.
<bullet> In 1974, we consumed 15 barrels of oil for every $10,000 of
gross domestic product--today we consume only eight barrels for
every $10,000.
Energy use, while increasing, has been out-paced by the economic
growth achieved by the Clinton/Gore Administration. Also, increased
energy efficiency--in homes, businesses and manufacturing --has helped
insulate the economy from short-term market fluctuations in energy
prices. Through wise policy choices and informed, targeted investments
of public dollars, we can have an extremely robust economy fueled by
relatively inexpensive energy, and protect the environment and the
health of our citizens.
Policy Framework for our Energy Strategies
The Clinton/Gore Administration has published two statements of its
national energy policy in the last several years: Sustainable Energy
Strategy (July 1995) and The Comprehensive National Energy Strategy
(CNES, April 1998). Both documents provide a guide to energy policies
proposed and implemented by the Administration, and seek to ensure that
energy policy is well integrated into the Nation's economic and
national security policies. We are currently in the process of updating
the CNES and should be releasing this update shortly.
In addition, the President's Committee of Advisors on Science and
Technology has completed two scientific reviews of energy related
technology development, Federal Energy Research and Development for the
Challenges of the 21st Century, in 1997 and, more recently, Powerful
Partnerships in 1999. These two documents provide an analysis of energy
technologies being developed by the Department, and make
recommendations on how to best utilize these technologies both
domestically and internationally.
Finally, the Department over the last several years, has engaged in
numerous roadmapping exercises with industry, government, and academic
stakeholder groups, and two extensive energy portfolio exercises, in
which we matched our energy R&D investments against larger strategic
goals of the CNES. This process, followed by an analysis of the
portfolio, has helped us to identify gaps in our portfolio and
opportunities for additional investments in energy technology.
The Comprehensive National Energy Strategy, which DOE released in
1998, identified five overarching energy goals:
<bullet> Improving the efficiency of the energy system;
<bullet> Ensuring against energy supply disruptions;
<bullet> Promoting energy production and use in ways to protect human
health and the environment;
<bullet> Expanding future energy choices, and;
<bullet> Cooperating internationally on energy issues.
The Nation's Energy Challenges
In addition to identifying five energy goals, the CNES highlighted
three major energy challenges for policy-makers. These are:
<bullet> Maintaining America's energy security in global markets;
<bullet> Harnessing the forces of competition in restructured energy
markets, and;
<bullet> Mitigating the environmental impacts of energy use
While each of these challenges warrants different Government
actions, there is a need to invest in the development of alternatives
and longer-term technologies to meet our future energy needs. We have
added an additional long-term energy responsibility to the three CNES
challenges:
<bullet> Ensuring a diverse set of reliable and affordable energy
sources for America, now and in the future.
I now want to summarize how the Clinton/Gore energy policy utilizes
market forces, policies, and investments in research and development to
address each of these challenges.
Challenge #1: Maintaining America's Energy Security in Global Markets
The United States remains heavily dependent on crude oil. Since
1985, domestic crude oil production has declined by 34 percent, while
domestic oil consumption has increased by more than 22 percent. In
1974, net imports of crude oil and products supplied about 35 percent
of U.S. consumption. In 1999, net imports supplied about 50 percent of
U.S. consumption.
The Administration's response to the important role of oil in our
economy and the increase in net imports recognizes the following:
<bullet> Consumption of oil continues to grow.
<bullet> The cost of oil production in the U.S. is high relative to
other producing nations.
<bullet> The price of oil is a world price. High or low prices of oil
worldwide will mean high or low prices domestically.
<bullet> Reducing volatility in oil prices will spur investment and
match supply to demand.
<bullet> Global capacity must be increased if we are to meet domestic
and international demand for oil.
<bullet> Increasing net imports are not only an indicator of flat or
declining domestic production, but also a reflection of
increased domestic consumption.
<bullet> Almost two-thirds of our oil is used for transportation.
To spur domestic production and lower the costs of doing business--
without imposing quotas on imported oil, which would raise costs to
consumers--the President has proposed tax incentives for 100 percent
expensing of geological and geophysical costs (G&G), and allowing the
expensing of delay rental payments. G&G expensing will encourage
exploration and production. Delayed rental expensing will lower the
cost of doing business on federal lands.
The Administration has also supported and promoted virtually all
significant energy legislation enacted by the Congress over the last
seven years. This includes legislation for: Deepwater Royalty Relief;
lifting the ban on the export of Alaska North Slope Oil; Royalty
Simplification; privatization of the Elk Hills Naval Petroleum Reserve;
the transfer and lease of Naval Oil Shale Reserves One and Three for
production; Alternative Minimum Tax (AMT) and percentage depletion tax
relief for small operators; and creation of a guaranteed loan program
for small domestic oil and gas producers. The Administration has also
proposed legislation to transfer Naval Oil Shale Reserve Two to the Ute
Indian Tribe for production; USGS estimates that there may be as much
as 0.6 tcf of gas on this property.
To address higher US exploration and production costs compared to
other countries, we have invested in a portfolio of technologies
designed to lower the costs of exploration and production, and to
produce hard-to-find oil in more mature fields. In large part because
of the joint R&D efforts of government and industry, the U.S. petroleum
business has transformed itself over the past three decades into a
high-technology industry.
The United States is a mature oil-producing region. While an
estimated two-thirds of all U.S. oil remains in the ground, much of it
is located in deep, complex reservoirs or environmentally-sensitive
areas. Development of advanced oil and gas technologies is essential to
efficiently maximize the production of domestic resources while
preserving the environment.
A single project in DOE's five-year, $118 million government/
industry Oil Reservoir Class Program has already added 2.4 million
barrels of oil from one field and produced an additional $12.7 million
in taxes and royalties. The final outcome of this project is expected
to produce an additional 31 million barrels of oil and $160 million in
federal revenues.
The Department of Energy conducted the initial design of the
polycrystalline drill bit, now used in about 40 percent of drilling
worldwide, with annual industry sales in excess of $200 million.
Innovations such as horizontal drilling have revitalized oil production
from the Austin Chalk region of Texas to the Dundee formation of
Michigan.
New imaging technologies developed by DOE labs are revealing large
hydrocarbon supplies beneath the ocean floor salt formations in the
Gulf of Mexico and 3D seismic is now standard in the industry.
Secondary gas recovery technologies have led to new gas production from
south Texas and the mid-continent. In Alaska, oil is now being produced
from wellpads that are one tenth the size of those 30 years ago.
Industry and the Department of Interior estimate that new discoveries
in the Gulf of Mexico may yield as much as 18 billion barrels of oil--
more than Prudhoe Bay. Technological innovations in subsalt imaging,
reservoir characterization, and drilling technologies will enhance our
ability to economically produce these reserves.
To ensure that we are not overly reliant on imports from a single
region of the world, we have diversified our sources of supply.
Although our oil imports have increased, our sources of these imports
have changed significantly over the last two decades. Last year, we
imported 4.85 million barrels of oil per day from OPEC nations, down 22
percent from the 6.19 million barrels of oil per day in 1977. Our
imports now come from over 40 countries.
During this same period, OPEC's share of the world market has
dropped from 49 to around 41 percent. In 1970, the top six producers in
the world controlled 68 percent of the world's production; this figure
is now down to 45 percent.
I note that just recently, a significant oil find was made in the
Caspian Basin which is thought to have potential reserves equaling or
surpassing the North Sea. The Administration has invested in a
significant diplomatic effort to encourage oil development in this
region, as well as to encourage the investment of U.S. energy firms in
the Caspian.
To help the world develop its oil resources and increase world
capacity, Secretary Richardson has actively promoted investment and
development of the world's energy resources. Most notably, Secretary
Richardson has held two international energy summits--the Western
Hemisphere Energy Ministers Summit in New Orleans and the African
Energy Ministers Summit in Tucson, to discuss energy issues and plot a
course for global energy development and future uses. In addition, the
Secretary has traveled to virtually all the major energy producing
regions of the world--the Caspian, Russia, the Middle East, Nigeria,
Norway, Mexico, and Venezuela--to encourage energy production and
business for U.S. energy companies.
To increase the coverage provided by our ``national energy
insurance policy,'' the Strategic Petroleum Reserve, we are adding 28
million barrels of oil to fill the Reserve back to the 590 million
barrel level, its approximate size prior to the revenue-raising sales
directed by the Congress in 1996 and 1997. The replacement of this oil
in the Reserve was also done through a unique royalty-in-kind payment,
with no outlays for the government. In addition, we have completed
upgrades for the Reserve--to make it safer and to extend the useful
life of the facility. This seven-year project was completed ahead of
schedule and under budget.
To address volatility in world oil markets, we have strengthened
our ties with the world's oil producing nations, worked closely with
oil consuming nations through organizations such as the International
Energy Agency, and launched a campaign to improve the collection,
dissemination and understanding of world oil supply and demand data.
Last January, prominent industry analysts and data experts met at a
DOE-sponsored forum in Houston to discuss how the quality, timeliness
and availability of oil data might be affecting volatility in oil
prices. DOE will be co-hosting an international conference in Spain
this summer as a follow-on to the earlier meeting. There is significant
international interest in this issue and growing consensus that the
world needs better data for producers and consumers to more accurately
gauge oil supply and demand.
We are also investing in reducing net oil imports by focusing on
demand side technologies and policies. More than 60 percent of our oil
consumption is for transportation, making vehicle fuel efficiency a
ripe target for reducing the consumption side of the net import
equation. Specifically, the Department's transportation program is:
<bullet> developing an 80 mile-per-gallon (mpg) prototype sedan by 2004
through our Partnership for Next Generation Vehicles Program;
<bullet> improving light truck fuel efficiency by 35 percent while
meeting newly issued EPA Tier 2 emission standards by 2004;
<bullet> developing technologies to increase fuel economy of the
largest heavy trucks from 7 to 10 mpg (nearly 50 percent) by
2004;
<bullet> increasing domestic ethanol production to 2.2 billion gallons
per year by 2010;
<bullet> develop production prototype vehicles that will double the
fuel-efficiency of tractor trailer truck and triple the
efficiency of heavy-duty pick-ups; and
<bullet> supporting tax credits for hybrid vehicles.
Let me illustrate just how important these investments are. As you
can see on Chart #2, over the past decade, vehicle manufacturers have
focused on increasing horsepower at the expense of miles per gallon,
the exact opposite of what occurred in the 1970's when auto
manufacturers were more focused on fuel-efficient vehicles.
Increasing the average fuel economy for cars and light duty
vehicles by just three miles per gallon would save almost a million
barrels of oil per day. This represents over 15 percent of current U.S.
daily production. Investing in fuels and more fuel-efficient vehicles
could substantially reduce our reliance on imported oil at the same
time it contributes to a cleaner, healthier environment. Without
minimizing the importance of increased oil production, it is clear that
even a small commitment to greater vehicle efficiency will net
significant gains in reducing net oil imports, without compromising
pristine onshore or offshore environmental ecosystems.
Challenge #2: Harnessing the Force of Competition in Restructured
Energy Markets
As I have noted, the Clinton/Gore approach to energy policy is
built around the principle of market-oriented approaches to energy
supply and use. A reliance on markets is not unique to our
Administration--it spans both Republican and Democratic
Administrations.
Natural gas is a clear area of success for market-driven energy
policies for recent Administrations. With deregulation, natural gas has
emerged as a plentiful, national energy resource. In the mid-1970's, a
labyrinth of outdated and counterproductive pricing regulations had
handcuffed America's natural gas industry, stifling exploration and
production and conveying the false impression that America's natural
gas supplies were on the wane.
Today, the onerous natural gas regulations which started in the
1950s, have been replaced by a restructured and highly competitive gas
market, and natural gas is now one of the most plentiful energy
resources available to meet the Nation's future energy and
environmental needs. The decontrol of natural gas prices, the advent of
competition in interstate gas transportation, and the ability of
industrial customers (and increasingly residential consumers) to
contract directly for their own gas supplies has clearly provided major
benefits to both producers and consumers.
Electricity restructuring is the biggest prize of all. Over 40
percent of the nation's energy bill goes for electricity. With over
$200 billion in annual sales, electricity is the lifeblood of our
economy, and the reliable supply of electricity is vital to our economy
and to the health and safety of all Americans. The Clinton/Gore
Administration is seeking, with Congress, to extend the role of markets
and competition into the electricity sector.
At one time, the debate surrounding electricity restructuring
focused on the pros and cons of doing away with the vertically-
integrated monopoly utility that generated, transmitted and distributed
the power consumed in a state-designated monopoly service territory.
That debate is over. As a result of the Energy Policy Act of 1992 and
the efforts of the Federal Energy Regulatory Commission (FERC),
utilities are now buying power from competing generators and marketers
at competitive rates rather than building plants on their own, and
independent power producers are gaining an increasing share of the
generation market.
Restructuring and competition are not, of course, limited to the
wholesale markets. Twenty-five states have now adopted electricity
restructuring proposals that allow for competition at the retail level.
Almost every other state has the matter under active consideration.
These are positive developments--competition, if structured
properly, will be good for consumers, good for the economy and good for
the environment. Companies that had no incentive to offer lower prices,
better service, or new products are now being required to compete for
customers. Consumers will save money on their electric bills. Lower
electric rates will also make businesses more competitive by lowering
their costs of production. By promoting the use of cleaner and more
efficient technologies, competition will lead to reduced emissions of
greenhouse gases and conventional air pollutants.
Securing a Competitive Future Requires Both State and Federal
Action. We believe that the full benefits promised by electricity
competition can be realized only within an appropriate Federal
statutory framework. What we do at the Federal level, and when we do
it, will have a profound impact on the success of wholesale competitive
markets, as well as on state and local retail markets. Federal action
is necessary for state restructuring programs to achieve their maximum
potential. Electrons do not respect state borders. Electricity markets
are becoming increasingly regional and multi-regional. Actions in one
state can and do affect consumers in other states.
States and the Federal government must work together. States alone
can't ensure that regional power and transmission markets are efficient
and competitive. They can't provide for the continued reliability of
the interstate bulk power grid. And states can't remove the Federal
statutory impediments to competition and enable competition to thrive
in the regions served by Federal utilities. Clearly, some states are
considering retail competition proposals at a less rapid pace than
others. Nevertheless, Federal action is equally important to all
states. If wholesale markets, which transcend state boundaries, are not
working efficiently, the impediments to the flow of power between
states will cause rates to go up and reliability to be endangered.
The Clinton/Gore Administration encourages Congress to pass
comprehensive electricity restructuring legislation. In 1998 and again
in 1999, the Administration presented the Congress with a comprehensive
legislative blueprint of changes needed for updating the federal
statutory framework to support the advent of competition in electricity
markets. Indeed, this bill was a featured element of the Comprehensive
National Energy Strategy the Administration sent to Congress in April,
1998.
A well-structured electricity bill is a centerpiece of the
Administration's energy policy, and we look forward to working in a
bipartisan manner with both the House and Senate to pass this or
similar legislation. Mr. Chairman, we recognize the efforts of this
subcommittee, which reported an electricity bill last October. We urge
this Congress to replicate the earlier bipartisan successes with
natural gas and oil deregulation and pass a comprehensive restructuring
bill this summer.
Ensuring the reliability of the energy grid is a growing focus of
the Administration's R&D efforts. While the electricity system powers
other infrastructures, it will also be increasingly dependent on
natural gas as a fuel source for both central power stations and small,
distributed generation. EIA's Annual Energy Outlook, 2000, projects the
annual growth of 4.3 percent for the use of natural gas for electricity
generation through 2020.
In addition, our energy delivery systems are becoming increasingly
reliant on telecommunications and computing systems for fast, efficient
operation. These trends will likely result in increased efficiencies
and a range of new consumer products, but can also potentially increase
physical and cyber threats to our energy infrastructure.
To ensure the reliability and security of the electricity and
natural gas infrastructures, the Administration has proposed a new
Energy Infrastructure Reliability initiative with three components:
<bullet> electric reliability which will focus on regional grid
control, distributed resources and microgrids, information
system analysis, possible offsetting of peak summertime
electric load with distributed generation and natural gas
cooling technologies for example, and high capacity
transmission;
<bullet> natural gas infrastructure reliability to include storage,
pipeline and distribution R&D, and;
<bullet> secure energy infrastructures, vulnerability assessments,
interdependency analysis, risk analysis, and the development of
protection and mitigation technologies.
Challenge #3: Mitigating the Environmental Impacts of Energy Use
The production, transport and conversion of energy is fundamental
to our way of life and continued economic prosperity, but energy has
more significant effects on the environment than any other economic
activity. To reduce these adverse effects, the federal and state
governments have imposed environmental restrictions on energy, from
production to end-use.
These restrictions have, as noted earlier, resulted in reductions
in energy-related pollution and environmental damage, and have been
achieved without substantial increases in energy prices, disruptions in
energy supplies or other adverse economic impacts. This achievement is
due, in part, to the constructive role that the Department of Energy
has played in the development of environment-friendly energy
technologies and the adoption of regulatory policies that have enabled
the energy industry to minimize costs and avoid supply disruptions.
We cannot, however, stop with the successes achieved to date.
Domestically, one of the leading challenges facing us now is further
reducing the environmental impacts of energy use in the transportation
and power generation sectors. We want to minimize the negative effects
of fossil fuel combustion in ways that do not increase prices or price
volatility, or decrease reliability. Other domestic environmental
challenges that will require careful monitoring include: assuring the
continued access of the energy industry to new resource areas, in a
manner that protects our natural heritage; and ensuring that any
further regulation of the energy sector is based on good science and is
cost-effective.
Internationally, responding to the threat of climate change is the
greatest challenge facing the energy sector. To provide the
technologies that reduce greenhouse gas emissions, and to preserve U.S.
competitiveness and economic growth, President Clinton has proposed an
aggressive $4.1 billion FY 2001 climate change package. The package
includes: the International Clean Energy Initiative, Clean Air
Partnerships, Climate Technology Initiative and other programs that
preserve jobs and the climate. This includes R&D and deployment
initiatives for a broad range of technologies including those using
fossil fuel. For example, the President's plan contains a significant
request for Clean Coal technology funding and for carbon sequestration
to offset the carbon emissions from fossil fuels.
We are working with other countries to elaborate rules and
guidelines for the flexibility mechanisms identified in the Kyoto
Protocol--emissions trading, the Clean Development Mechanism and Joint
Implementation. Only through the full use of market-based emissions
trading and related mechanisms, can we substantially slow or halt the
growth in global greenhouse gas emissions without imposing unacceptable
costs on the United States. Many different economic analyses done both
in the private and the public sectors, indicate that the cost savings
from full implementation of the Kyoto Mechanisms could reduce costs in
excess of 50 percent from more regulatory approaches.
We have a historic opportunity to complete the elaboration of an
internationally unprecedented market-based approach to climate
protection that will lower costs and spur U.S. technology exports. The
anticipated use of these mechanisms will also provide the economic
incentive for developing countries to make meaningful commitments to
greenhouse gas emissions reductions.
Sound science is the cornerstone of DOE's work on energy-related
environmental issues. The Department has been a partner with EPA and
other regulatory agencies in developing science-based regulations. This
was seen recently in DOE's work with EPA on coal ash; and last year in
our work with EPA on coal combusters of fossil fuels containing cobalt
or vanadium. These are two examples where it was demonstrated, through
science and interagency cooperation, that regulations of the energy
industry were not needed.
Our work on climate change on the other hand, is part of the
substantial body of scientific evidence that demonstrates the impacts
of carbon emissions on the global environment, supports the
Administration's commitment to mitigating the impacts of greenhouse gas
emissions on the atmosphere and human health, and strongly suggests
that significant and timely action to mitigate climate change is
needed.
Cost is a key consideration. The costs and benefits of alternative
approaches must be weighed. To the extent feasible, the costs of
reducing adverse environmental impacts should be shared fairly among
all of the contributors to an environmental problem, not borne
primarily by a small subset of industries or, in the case of global
climate change, a small subset of countries.
Most recently, the Department of Energy helped develop the economic
analysis for treating small refiners as a separate class of businesses
under the recently released Tier II gasoline sulfur rule. This
treatment for small refiners will give them additional time and
flexibility in meeting the requirements of the rule. We are similarly
engaged with other agencies in the government on proposed low sulfur
rules for diesel fuel and for MTBE.
An important element of the Administration's energy policy is
support for the development of energy technologies to reduce
environmental impacts of energy use by:
<bullet> promoting technologies to produce cleaner conventional fuels;
<bullet> increasing the efficiency in the use of conventional energy
sources, primarily fossil fuels, and;
<bullet> developing alternative sources of energy.
Cleaner Fuels. On the transportation side of fuel use, vehicles
currently account for a large portion of urban pollution, including 77
percent of carbon monoxide, 49 percent of nitrogen oxides, and 37
percent of volatile organic compounds. The transportation sector also
generates one third of U.S. carbon emissions. In coming decades,
increasing public health and environmental concerns will likely lead to
new environmental regulations that may be difficult or impossible to
meet with current fuels.
The President's Bioenergy and Biobased Products Initiative is
intended to address this growing need. Recent scientific advances in
bioenergy and biobased products have created enormous potential to
enhance U.S. energy security, help manage carbon emissions, protect the
environment, and develop new economic opportunities for rural America.
This nation has abundant biomass resources (grasses, trees,
agricultural wastes) that have the potential to provide power, fuels,
chemicals and other biobased products. The President has set a goal of
tripling U.S. use of biobased products and bioenergy by 2010, which
would generate as much as $20 billion a year in new income for farmers
and rural communities, while reducing greenhouse gas emissions by as
much as 100 million tons a year--the equivalent of taking more than 70
million cars off the road.
DOE has also launched a new initiative this year, the Ultra-Clean
Fuels Initiative, to address the need for cleaner fuels within the
context of the current refining infrastructure. The Ultra-Clean Fuels
Initiative will mobilize industry and DOE's national laboratories to
develop and demonstrate new technologies for making large volumes of
clean fuels from our diverse fossil energy resource base. In the nearer
term, ultra-clean transportation fuels can be produced by upgrading
refinery technology, and using new bio-fuel blends. In the mid-to-
longer term, ultra-clean transportation fuels can be developed through
biotechnology, or from natural gas and coal, which enjoy high levels of
compatibility with the existing infrastructures and could provide
environmental benefits due to their suitability for use in advanced,
high-efficiency vehicles.
On the power side, fossil fuel-fired power plants emit about one
third of the nation's carbon dioxide and significant amounts of
NO<INF>X</INF>, SO<INF>X</INF> and particulates. These plants also
account for 70 percent of all U.S. electricity generation and are
projected to dominate power generation for the foreseeable future.
Technologies for coal-fired power plants, developed by DOE, have
resulted in improved performance at a fraction of the original cost.
Coal is used to generate almost 52 percent of the nation's electricity
and scrubbers are now deployed on one-third of U.S. coal plants. Our
partnerships with industry have resulted in rapid development of low
cost NOx technologies to address both near term needs and future
environmental challenges. The near term challenge has been met by the
addition of low-NOx burner technology to virtually all coal-fired
boilers, and even more stringent technologies will be installed on a
substantial portion of coal units. These technologies are 50-90 percent
cheaper than options available just 10 years ago.
To address pollution from coal and natural gas power systems, DOE
has a program--Vision 21--with a goal of near-zero emissions from power
generation and 60 to 70 percent generation efficiencies. The fleet of
large, high-efficiency power systems envisioned by this program would
produce emissions well below New Source Performance Standards for
SO<INF>X</INF>, NO<INF>X</INF>, and particulates, with most advanced
systems achieving near-zero emissions for regulated pollutants.
DOE's Carbon Sequestration Program is designed to develop
technologies and practices to sequester carbon that: are effective and
cost-competitive; provide stable, long-term storage; and are
environmentally benign. Increased carbon emissions are expected unless
energy systems reduce the carbon load to the atmosphere. Accordingly,
carbon sequestration--carbon capture, separation and storage or reuse--
must play a major role if we are to continue to enjoy the economic and
energy security benefits which fossil fuels bring to the nation's
energy mix.
Increasing Efficiency in the Use of Conventional Energy Sources. It
is particularly important to develop and deploy higher efficiency
technology for fossil energy power generation since 85 percent of
America's energy currently derives from oil, gas and coal. In
electricity generation alone, energy efficiency potentially could be
doubled through cogeneration and the application of advanced
technologies.
DOE's advanced turbines--fueled by natural gas or biomass, and
capable of reducing NO<INF>X</INF> emissions and producing steam
together with low-cost electricity--are already approaching
efficiencies of 60 percent. High efficiency electric power systems,
where fuel cells are joined with combined cycle plants, could improve
efficiency to as much as 70 percent. Industrial resource recovery could
be dramatically improved with the development of technologies such as
an integrated gasification combined power technology, which would
convert coal, biomass and municipal solid wastes into power and
products.
The U.S. uses 94 quads of primary energy a year. The nation's 100
million households and 4.6 million commercial buildings consume 36
percent of the total. Buildings also use two thirds of all electricity
generated nationally. Energy consumption in buildings is a major cause
of acid rain, smog and greenhouse gases, representing 35% of carbon
dioxide emissions, 47 percent of sulfur dioxide emissions and 22
percent of nitrogen oxide emissions. Clearly, more efficient buildings
will pay big dividends in reduced energy use and a cleaner environment.
Research and development areas for buildings include: heating,
ventilation, and air conditioning; building materials and envelope;
building design and operation; lighting; appliances, and; on-site
generation. To use energy more efficiently, we are working to develop
``intelligent building'' control systems, more efficient appliances,
and fuel cells to power commercial buildings. Standards to improve the
energy efficiency of flourescent lighting in commercial and industrial
applications, proposed this March, are expected to save between 1.2 and
2.3 quadrillion BTUs of energy over 30 years, enough energy to supply
up to 400,000 homes per year over the same time period. We have
recently proposed an update to the efficiency standards for water
heaters, and expect to issue proposals for clothes washers and central
air conditioners in the near future--each of which are likely to
produce even greater energy and environmental benefits.
The industrial sector consumed almost 35 quads of primary energy in
1997--about 38 percent of all energy used in the United States. The
industrial sector contains extraction industries, as well as materials
processing and product manufacturing industries. Over 80 percent of the
energy consumed in manufacturing (including feedstocks) occurs in only
seven process industries: aluminum; steel, metal casting, forest
products, glass, chemicals, and petroleum. These major process
industries are becoming more capital-intensive. Markets are continuing
to become more competitive globally.
Reducing energy costs and waste, and reducing or eliminating
environmental emissions upstream (closely related to energy use) are
recognized, controllable costs that can increase productivity and
competitiveness of U.S. businesses and decrease costs.
The Department's primary program for industrial efficiency is
Industries of the Future, which focuses on these seven most energy-
intensive and supports collaborative research, development, and
demonstration efforts to accelerate efficiency in U.S. industries.
If the Department's energy efficiency programs were fully funded,
we could likely:
<bullet> reduce industry energy consumption per dollar of output;
<bullet> increase the average fuel efficiency of new cars and light
trucks by 20 percent by 2010;
<bullet> reduce the annual energy consumed by buildings; and
<bullet> by 2010, reduce energy consumption in federal facilities by 35
percent relative to the 1985 consumption level, saving
taxpayers $12 billion from 2000-2010.
These reductions in energy demand will result in comparable
reductions in greenhouse gas emissions, as well as reductions of other
environmental impacts associated with energy use. Of course, none of
this can be achieved without the active support of other agencies,
industry and consumers. DOE looks forward to working with the Congress
to develop and fund programs to increase the efficiency of our
transportation, commercial, manufacturing and building sectors in order
to save energy, increase the competitiveness of U.S. industry, and
reduce our reliance on imported oil.
Investing in Renewable Power Sources. Renewable resources such as
wind, solar, photovoltaics, geothermal, biomass, hydrogen, and
hydroelectric, are abundant. These alternatives are used for power
generation and their primary advantage is that they produce virtually
no emissions or solid wastes. Their primary disadvantages are the cost
of producing power (except hydro) compared to coal and natural gas, and
the need to create an infrastructure required to deliver this power to
market.
To take advantage of the environmental benefits of renewable power,
the Department has focused on decreasing its costs and tackling
infrastructure issues. The most feasible approach to lowering cost and
delivering renewable power appears to be through distributed
generation--alternatives to central power stations, where power is
generated locally or on-site. Distributed generation technologies are a
major R&D focus at DOE.
In addition, the Department is working on improving the performance
of specific kinds of renewable energy. The growth for wind power, for
example, is the highest of all sources of energy in the world. Dramatic
improvements in wind turbine technology has helped spur a 25 percent
increase in wind-generating capacity over the last decade. Costs of
wind generated power have dropped dramatically to between four and six
cents per kilowatt hour. Photovolatic costs are down from one dollar in
1980 to between twenty and thirty cents today. Geothermal costs are
almost competitive with conventional power generation costs, coming
down from fifteen cents to between five and eight cents today.
Last year, the President issued an executive order directing
agencies to expand their use of renewable energy. Meeting the goals of
this order will reduce greenhouse gas emissions by 2. 4 million tons
and save taxpayers over $750 million a year. It will also expand
markets for renewable technologies, reduce air pollution, and serve as
a powerful example to businesses and consumers who can reap substantial
benefits from environmentally-friendly energy sources.
The Government's Commitment: Ensuring a Diverse, Reliable and
Affordable Set of Energy Sources for the Future
The energy options within our portfolio are oil, gas, coal, energy
efficiency, renewables, hydropower, fission, and fusion. We must
strategically manage energy R&D with this understanding about the
energy world as we know it: there is no single silver bullet which will
solve all our energy needs, making science and technology--and a broad-
based energy R&D portfolio--key to meeting our long term energy needs..
Without energy technologies, a ton of coal, a barrel of oil, a
cubic foot of natural gas, a ton of uranium ore, a stiff breeze, or the
sun's warmth cannot directly contribute to the prosperity of modern
society. With the very best technologies, however, society can use
energy resources efficiently and responsibly and with great economic
and environmental gain. While economic and security challenges continue
to demand investment in a robust energy research and development (R&D)
program, environmental challenges provide additional impetus for
increased focus on energy-related science and technology during the
coming years.
Technology development plays a strong supporting role in the
Department's pursuit of all of its energy policy objectives. It
supports improvement in the competitiveness of the energy system; the
development of more efficient transportation, industrial and buildings
technologies as a key objective; our goal of reducing the environmental
impacts of the energy sector, and; the further development of
technologies that reduce the environmental impacts of energy
production.
The requirements for near term returns on investment, limited
resources and the risk averse nature of many industries warrant a
special role for government in the support of technology development,
especially when new technology can help address national concerns not
fully reflected in the marketplace. Consequently, the development of
new energy technologies has been a central mission of the Department of
Energy's since the late 1970's. At DOE, we focus on maintaining a
strong national knowledge base as the foundation for informed energy
decisions, new energy systems, and enabling technologies of the future,
and developing technologies that expand long-term energy options.
Ensuring the success of the Department's research and development
efforts has been a constant challenge, especially during periods of
stable or declining energy prices, when market incentives for
technology development and adoption are at their lowest. In addition,
the unpredictability of technology development process and the
continual changes in scientific knowledge, social priorities and market
demands pose additional challenges to government efforts to effectively
spur technology development.
I have already discussed many of DOE's energy technologies and
technology investments and successes. I would now like to discuss our
energy portfolio more broadly, and then focus specifically on natural
gas as a transition fuel.
DOE's energy resources R&D portfolio is organized in three broad
strategic areas: reliable and diverse energy supply ($170 million, FY01
request); clean and affordable power ($542 million, FY01 request), and;
efficient and productive energy use ($437 million FY01 request). In
addition, the Department has a basic science portfolio ($1.2 billion FY
01 request) which supplies the foundation for much of the applied R&D
in the energy areas.
A number of reviews and studies have been conducted that provide
valuable information on the adequacy and focus of this portfolio.
Overall, these studies have confirmed that our energy portfolio is
generally well-focused on the nation's strategic energy goals. However,
the studies also have identified a number of deficiencies in how fully
these goals are addressed by the portfolio and made a number of
recommendations for important portfolio changes or additions,
including:
<bullet> Significantly enhanced R&D funding
<bullet> Renewed emphasis on electric power systems reliability
<bullet> A Nuclear Energy Research Initiative
<bullet> Carbon management R&D
<bullet> Increased bioenergy R&D
<bullet> Methane hydrate R&D
<bullet> Hydrogen R&D
<bullet> Clean fuels R&D
<bullet> Integration of fuel cell R&D efforts
<bullet> An international RDD&D effort
The Administration strongly supports the increased use of natural
gas. Several of these recommended changes or additions to our portfolio
relate directly or indirectly to natural gas--power systems
reliability, carbon management, methane hydrates, clean fuels, and
fuels cells all involve the development of technologies to increase the
supply, improve the delivery of, or improve the environmental
performance of natural gas.
Also, as I mentioned earlier, because it is abundant and relatively
clean, natural gas will be the fuel of choice to meet the nation's
future power generation needs. Of the 1000 powerplants the Energy
Information Agency (EIA) projects the U.S. will need by 2020, 900 will
probably be natural gas power plants. If we are able to produce the gas
to meet this need, we will need the means to distribute it safely and
efficiently. Right now, there are 85 proposed pipeline projects just
for the years 2000 through 2002, at the same time significant
impediments exist for pipeline and storage siting.
Investments in natural gas R&D are critical to meet future energy
needs. The Clinton/Gore Administration has invested roughly $1.5
billion in natural gas R&D. DOE's joint efforts with industry have
helped produce the fuel cells, microturbines, reciprocating engines,
and other enabling technologies to power the gas industry of the
future. DOE's request for natural gas R&D funding in FY 2001 is around
$215 million and, as I mentioned earlier, includes an initiative for
energy infrastructure reliability. The natural gas portion of this
initiative specifically focuses on methane leakage, aging and corroding
pipelines, and natural gas storage, to improve the safety and
reliability of the natural gas distribution network.
Last December, Secretary Richardson established DOE's newest
national laboratory--the National Energy Technology Laboratory, co-
located at Morgantown, WV, and Pittsburgh, PA. This laboratory is
dedicated to providing the nation with clean and affordable fossil
energy and will house a new Center for Natural Gas Studies, in order to
give added focus and emphasis to natural gas policy and ``bore hole to
burner tip'' research and development.
Presidential Decision Directive 63--Critical Infrastructure
Protection--establishes safety and security of the natural gas
infrastructure as a national security priority. In addition, the
Administration also envisions a substantial role for natural gas as the
transition fuel for a cleaner environment, and in reducing greenhouse
gases. The President's Executive Order on the Greening of the
Government promotes efficiency in federal buildings, acknowledging that
there are substantial efficiency gains to be made by measuring energy
from the source, not just at the site. Natural gas is a winner in this
scenario.
The Administration's Comprehensive Electricity Restructuring bill
will benefit natural gas as well by providing for more rapid market
penetration of innovative technologies on both sides of the customer's
meter. End-use distributed generation technologies, for example, have a
critical role to play in a restructured energy future. Along with new
uses for natural gas, these technologies promise relatively high
efficiencies, low emissions, increased flexibility and reliability, and
cost-effective alternatives to the traditional utility grid
infrastructure.
To further develop natural gas power systems for the 21st century,
DOE will be focusing on advanced combustion science and technology;
interconnect devices and parameters for standard interconnect designs
to enable distributed generation; low temperature catalysts for
emissions control; inexpensive sensors for emissions monitoring, and;
carbon dioxide separation and sequestration technology. For natural gas
storage, we will be investing in developing non-damaging fluids for
drilling, and methods for controlling reservoir damage caused by
drilling and perforating fluids.
We need to encourage increased natural gas supply. The National
Petroleum Council's recent study on natural gas projects increased
consumption for natural gas of 29 trillion cubic feet (TCF) in 2010 and
31 trillion cubic feet (TCF) by 2015. At the same time, EIA estimates
that in 1998, reserve additions of natural gas were only 83 percent of
production. To meet this demand, we will need to ensure that we have an
adequate supply of natural gas.
Several pieces of legislation I described earlier--specifically the
deep water royalty relief and the guaranteed loan program for small oil
and gas producers --will benefit natural gas production, as will the
G&G and delayed rental tax credits supported by the President. In
addition, our energy supply R&D programs, designed to lower the costs
of oil and gas production, will help add to the nation's supplies of
natural gas. These include:
<bullet> a Diagnostics and Imaging Program to cost-effectively locate
and produce oil and gas reserves;
<bullet> the Advanced Drilling, Completion and Stimulation Systems
Program which focuses on the development of sophisticated
drilling technologies and methodologies;
<bullet> the Gas Hydrates Program, a long term R&D effort to help turn
potential methane hydrates into gas reserves, and;
<bullet> the Low Quality Gas Upgrading Program to purify gas reserves
containing high levels of contaminants.
Clearly, much remains to be done if we are to meet significant
increases in demand for natural gas over the next two decades. We look
forward to working with Congress in a bipartisan effort to increase the
nation's supplies of natural gas.
prosperity and security are ``energy dependent''
Energy plays a vital role in our economy. Somewhere between six and
seven percent of our Gross Domestic Product--about $600 billion per
year--is attributable to energy consumption. Over $200 billion per year
is spent on transportation fuels. Approximately $200 billion per year
is spent on electricity--to power our factories, to light, heat, and
cool our homes, offices and schools, and to increasingly power the
electronically-based New Economy. The electric bill for the nation's
industrial sector alone is around $100 billion annually.
Clearly, energy is the engine that drives our economy. At the same
time, it represents a substantial cost to consumers and businesses--its
fundamental importance to the nation's economic and environmental
health has warranted investments by this and previous Administrations
in a set of policies and a portfolio of technologies to produce more
energy, to use it more efficiently, to reduce its impacts on the
environment, and to find alternative sources of supplies.
These policies and investments have paid big dividends. Over the
20-year history of the Department of Energy, we have made a great deal
of ``energy progress.'' In today's dollars, we are paying substantially
less for a gallon of gasoline than in 1980. We have diversified our
suppliers of imported oil--three out of four of our top importers are
in the Western Hemisphere.
We have, by far, the largest strategic petroleum stockpile in the
world. Relatively recent policy changes and technological advances have
spurred oil and gas production on the Outer Continental Shelf and
extended production on Alaska's North Slope. Significant technology
improvements have lowered oil and gas exploration and production costs
dramatically and reduced the environmental footprint of energy
production to one tenth the size it was twenty years ago.
In addition, the rapid development of energy efficient technologies
and practices and the restructuring of our industrial sector has
enabled the United States to decrease its energy use per dollar GDP by
around 40 percent since 1973, representing an annual energy cost
savings of over $400 billion. Between 1970 and 1990, the average fuel
efficiency of automobiles went from 13 miles per gallon to 20 miles per
gallon. The efficiency of combined cycle gas turbines for electric
power generation exceeds 60 percent and wind energy and biomass show
tremendous promise for cost-competitive power generation from
alternative energy sources.
Despite this track record, the potential for increased energy
savings in the U.S. economy remains enormous--and to meet growing
energy demand, it remains essential. In the utility industry for
example, only one third of all thermal energy from coal or gas is
actually transformed into electricity in a typical power plant. In the
transportation sector, which accounts for 60 percent of the nation's
demand for oil, the fuel economy of passenger vehicles has actually
declined in recent years due to the increasing market share of SUVs and
minivans. Net imports of oil continue to increase and domestic oil
production has declined.
The Clinton/Gore Administration is proud of its record on energy
policy and on our progress in achieving the nation's energy goals.
Clearly, however, much remains to be done. Secretary Richardson has
called on the Congress to work with us in a bipartisan fashion to pass
legislation for those energy incentives and programs which require
Congressional action, namely comprehensive electricity restructuring,
tax incentives for oil and gas production, energy efficiency and
alternative fuels, the reauthorization of EPCA, the creation of a home
heating oil reserve in the Northeast, and a supplemental appropriation
to replenish emergency LIHEAP funds before we enter the summer power
season.
We look forward to working with you in the days ahead. If we are
going to meet the nation's energy needs of the 21st century, we have
neither the time--nor the energy--to waste.
Mr. Barton. The Chair will recognize himself for 5 minutes
of questions. Admiral Watkins, I will ask you to elaborate a
little bit on your comments about being able to environmentally
safely produce some of the oil and gas that we think is in the
Arctic National Wildlife Refuge.
Mr. Watkins. We went through this in agonizing depth 10
years ago. Members of Congress, as well as myself, went to
Prudhoe Bay, inspected the pads that were there. They have been
refurbished and returned to the tundra. We went over to the
Arctic National Wildlife Refuge, we looked at the footprints
that were required to do the horizontal drilling, used the
technologies to be able to go from small pads, convert them in,
say, 20 years back to tundra. We felt very comfortable that we
could do this with modern technology, with all the things that
we had learned at Prudhoe Bay, in a sensible way
environmentally. I agree it is a treasured area.
On the other hand, we have a lot of treasured areas like
the Gulf of Mexico. We seem not to put that off limits. We
don't mind exploiting that. What is it about? Is Alaska still a
territory? Eighty-three percent of the Alaskans, including the
legislature, wanted to do this. Is it the wisdom of this
Congress that that State--we like State's rights on other
things--closes it down when in fact we have demonstrated that
we can do it in an environmentally sound way?
The ramp that you see in the decline in supply is adjusted
by just the Arctic National Wildlife Refuge alone. Not a great
deal, but 1 million or 2 barrels a day is a lot. It keeps us
going a little bit longer and has a little bit better
contribution to energy security than not. So we believed both
we could do in an environmentally sound way, that it did make
sense over time as we transitioned out of the oil problem and
demand in this country. And we talked about oil prices and the
fact that it is down in real dollars to its lowest ever.
Tell that to the little people out in the West who have the
car as their only source of enjoyment in life. But we tried to
raise the price of gas 5 cents--remember that in 1982--and the
hue and cry was incredible. And the Congress wouldn't stand for
a nickel.
We raised it 40 cents now. Because of OPEC, there is a
little whimper, but everybody is still driving. It is a
fascinating set of rules. But the Arctic National Wildlife
Refuge and these other offshore for gas places are
environmentally sound, much more so than shipping oil and
importing oil. We have already seen the Exxon Valdez situation
and we know that the contamination generated by oil in these
bottoms moving across the world are far more deleterious to the
environment than drilling offshore and doing so competently.
Mr. Barton. I will ask one more question, then I am going
to have to go. Mr. Martin in his testimony talked about the
efficiency of natural gas being converted directly to
electricity through some of these microgenerators that are
coming online.
Congressman Sharp, you have studied some of these issues. I
remember you were a leading proponent of some of the appliance
efficiency standards that I voted against actually when they
were before your subcommittee. Do you have a comment on what
Mr. Martin said in terms of the overall cycle efficiency of
direct----
Mr. Sharp. I can't speak to the specifics of some of the
problems, but there is no question about the higher efficiency
and environmental soundness if you don't have to go through the
loss in transferring into electricity, and then lost lines,
even though we expect newly improved efficiencies there if we
can get a marketplace working. But I don't think there is any
doubt that there is a great deal of efficiency to be gained by
the use of natural gas.
Mr. Shimkus [presiding]. Thank you, Mr. Chairman. Now I
will recognize myself for such time as I may consume or the
ranking member gets back. And I do that because I like to get
the gavel and I like to get some of these questions. You all
were here on opening statements.
Let me address a question. Part of the price equation right
now a lot of you have referred to is the environmental issues
or the regulatory. Can you--Dr. Yergin, I know that is in your
testimony--can you address what some of those environmental
issues are that are we are projecting as being an increased
portion of the cost?
Mr. Yergin. Over about the past decade and a half, the
refining industry in this country has made about $22 billion of
investment to meet environmental considerations. What is
striking is the degree to which that part of the industry has
continued to push down its other costs so that in effect it has
absorbed a lot of that investment. Right now we are seeing some
switchovers for environmental reasons to new gasoline for
summer driving. And that is one of the factors. It is one of
the four factors that is an element in the higher gasoline
prices we are seeing right now.
Mr. Shimkus. But percentage-wise, I think your initial
response was the cost of producing at the refinery and the
emission requirements is the cost of doing business today. Is
that----
Mr. Yergin. It is a substantial cost.
Mr. Shimkus. Percentage-wise?
Mr. Yergin. I will have to go through my papers here.
Mr. Shimkus. We know there have been accusations about
numerical superiority or lack thereof. Mr. Martin, do you have
a response? I know you are natural gas.
Mr. Martin. They might have a better feel on this.
Mr. Hakes. We have done some detailed studies on what this
cost is for the remaining industry. I can't cite them off the
top of my head but we can make them available to the committee.
[The following was received for the record:]
EIA has done some detailed studies on the expected cost of
Phase 2 reformulated gasoline (RFG). The cost of manufacturing
this new gasoline varies from winter to summer and from North
to South. For many refiners, no additional cost is expected to
produce Phase 2 RFG in the winter months as Phase 1 RFG already
meets the required emissions reductions. Producing summer-grade
Phase 2 RFG, however, will require additional investments and
changes in gasoline blending at refineries that will increase
costs.
As with any analysis, the results of this study are
influenced by the premises and assumptions underlying the
analysis. This analysis of the cost of Phase 2 reformulated
gasoline was released in the spring of 1999 when oil prices
were at much lower levels than today. The added energy costs as
a result of the sharp rise in oil prices over the past year
would increase the cost estimates. (For example, the price of
crude oil has almost doubled and the costs of producing RFG
could be assumed to increase proportionally. In addition, the
spot price of MTBE, a major gasoline blending component, more
than doubled from $0.74 per gallon in May 1999 to $1.55 in June
2000.) In addition, some simplifying assumptions related to
gasoline production and blending were made to facilitate the
cost estimation. For example, in estimating the cost of
reducing Rvp to the lower levels needed for Phase 2 RF6, a
linear extrapolation of the price spread between two types of
gasoline that have higher levels of Rvp was used. However,
costs are likely to rise at an increasing rate as gasoline
specifications become tighter. Furthermore, this study did not
analyze the cost of producing Phase 2 RFG using ethanol as the
oxygenate blendstock rather than MTBE. The estimates presented
are average cost estimates for producing the new gasoline. The
marginal cost of producing the new gasoline (i.e., the cost of
producing the last barrel) may be higher which could affect
prices at the pump.
Given the caveats stated above, EIA estimated that the
increase in cost from Phase 1 to Phase 2 RFG in the summer
months is expected to be approximately 1.0 to 1.5 cents per
gallon. Phase 2 RFG is expected to cost 2.5 to 4.0 cents per
gallon, on average, more than conventional gasoline, depending
on the region of the country and the time of year.
Like RFG Phase 1, the fuel economy (miles per gallon) of
Phase 2 RFG is about 1.5 to 2.0 percent lower than conventional
gasoline. There is no need for new equipment to transport or
distribute Phase 2 RFG, beyond that needed for Phase 1 RFG.
However, in the past, the introduction of new types of fuel has
led to supply problems and attendant price spikes.
For more detailed information, see Tancred Lidderdale and
Aileen Bohn, Demand and Price Outlook for Phase 2 Reformulated
Gasoline, 2000, http://www.eia.doe.gov/emeu/steo/pub/special/
rfg4.html.
Mr. Hakes. I would agree with Dr. Yergin that the refining
industry has done an incredible job to keep these costs from
being passed on much to the consumer because the refining
margins in this country are very, very low. It is rather a
small part of the overall price.
Mr. Yergin. If I could just give you over the last couple
of years the averages. If you look at the gasoline price, 35
percent of it actually reflects crude oil costs. About 35
percent represents tax. And the rest would be the refining, the
marketing costs, including the environmental.
Mr. Shimkus. The reason why I bring this up, I just have an
article here from the Sun Times, to no one's surprise, that I
am a big renewable fuel proponent of ethanol and biodiesel;
because of the high escalation of prices, I think the oil
industry is going to try to attack the oxygen standard, the
clean air positive aspects of that, and say that is one of the
major environmental components for the increase in costs.
In fact, I will quote from the Sun Times today from a
Phillip K. Velleger Jr., an oil expert from a Boston-based
group, which says, ``I wouldn't be surprised if consumers pay
$2.50 this weekend,'' which has seen gas--and then that is his
quote. And then in the analysis, they have seen the gas prices
rise faster than the national average, talking about the
Chicago and Minnesota market, because of the increased use of
ethanol in the blending process.
Would you agree that that is a major component of the
increased prices seen in the price of gasoline across the
Nation, the oxygenate standard and renewable fuel portion?
Mr. Yergin. We are switching over to summer gasolines right
now and there are new specifications. But the bulk of the
increase in gasoline prices, although not all of it, that we
have seen over the last 4 months reflects the rise in crude
prices on the world market.
Mr. Shimkus. That mirrors the testimony pretty much across
the board. I just wanted to put that on the record for our
consumption.
Admiral, I have a question on the SPR. Not just from your
experience in the Department of Energy but from your military
background, which I have a limited one myself, and there is
always an assault on the SPR when the prices are high. We do
use it, as was in the testimony, to jimmy the market and the
supply and demand and try to affect prices. Why do we have a
SPR?
Mr. Watkins. We certainly don't have it to jimmy prices. It
was never designed for that. It was designed for security
purposes, so in the event of a turnoff, something we might have
had during the Gulf War, it was there to use--rather low grade
crude, as a matter of fact--but for a period of time. And we
have tested it and moved it into the pipelines and got it to
refineries to be able to live for a few months supplying our
ships, aircraft, and so forth with refined products and cut
back on the urgency of dealing with the transportation of oil
primarily by sea. So it was designed from a national security
point of view.
And every time we have a gas price increase, somebody
raises the issue, why don't you use the SPR? It is a classic
one. I talked to Secretary Richardson when I was over there
finding the new nuclear czar. He said, we got it again. I said,
don't play around with it. It is not to be used to influence
the market. In the first place, it is not that deep of a
reserve, the pockets are not deep there. That should not be
used.
What we did in the Gulf War to show how important it is to
national security is, in the fall of--and I am going to say it
was 1990, I can't remember now but I think it was the fall of
1990, we tested the SPR. Well, you can imagine the hue and cry
I got from within the administration itself. Just to test the
SPR, you are fiddling with the market.
Well, that was the an extreme position. We were trying this
test just to see if it would work. The fact that we tested it
was extremely important. If you can remember what happened in
the Gulf War, in a very short period of time we spiked to $40 a
barrel and it came right back down. One of the reasons, in my
opinion, is we demonstrated that we were serious about that SPR
for national security purposes and we were not going to allow
the Iraqis to interfere with that process.
That is what it is important for. And it did the job then.
And the preparation before that wasn't to keep quiet and keep
all our data in DOE. We had a whole task group, including the
futures market from New York, come down and participate with
us. We set up special systems to the Saudi Minister of Energy
that I had a private circuit with. I wanted to know what was
going on in the Gulf all the time, whether it was fact or
fiction that was being reported by CNN and other things. We had
everybody connected with us and we knew that we had to do that
so that the market wouldn't be spooked.
But it had nothing to do with using that for those purposes
that many want to use it for and mal-use it. It was never
decided by Congress that we should use that for market
manipulation, nor should it ever be.
Mr. Shimkus. Thank you. Congressman Sharp, I know you have
a point.
Mr. Sharp. I want to very strongly reinforce what Secretary
and Admiral Watkins had to say. While we did have a bit of a
political dust-up at the time, it really is quite irrelevant to
the proposition that we tested at that point. And the President
announced he would use it if he needed to, and it was designed
to deal with the enormous speculation going on in the
marketplace at a time when we thought the Saudi fields could
well be threatened by missiles out of Iraq. So it may have had
some clear justification for use.
That is the only time, the only time it has been used. And
it should not be used just to quell the marketplace.
First of all, you don't know that it will work. Second of
all, you don't know if you are really trying to fight the
cartel. They still might be in a position to totally undermine
what you are doing in terms of prices. And, third, you will
have a disruptive effect within the U.S. market as to where
things flow because you will suddenly glut certain parts of the
U.S. market. It is just not an easy, clean thing to do.
But it is, from a security point of view, as long as we
have got the world oil situation as it is, an important thing
to have. And we have it, by the way, people forget, in
conjunction with international agreements with a number of
other of the consuming nations to also have reserves.
Mr. Shimkus. Let me move to Ms. Kenderdine.
Ms. Kenderdine. I just want to say for the record that the
Clinton Administration has never advocated selling SPR oil to
manipulate prices either. That is not allowed under the statute
that authorizes the Strategic Petroleum Reserve. You are only
allowed if the criteria are anticipated or actual supply
disruption.
In the situation in December Y2K, no one knew what was
going to happen about our imports of oil, and so we were
prepared with the documents to start a process to sell oil if
an actual problem did occur or if we saw something weird, if
Mr. Hakes had seen something early on in December out there
that was going on in the markets because of that, but we have
never advocated using the SPR for to manipulate prices.
Mr. Shimkus. Then let me take this premise what we, the SPR
for national security purposes, shouldn't use it to manipulate
the market. It is limited, though. We all agree that is
limited. And to really supply the fuel for a theater war, it
takes time. And, again, it is limited.
Do you not think that it is in our national interest, our
national security interest, since we have an SPR that is
limited, that we continue to move to prepare for longer
conflicts of duration and continue to operate and work off the
premise of making sure our marginal wells are operating,
address the other fuel locations and also continue to help
develop our renewable fuel opportunities, ethanol and the
biodiesel options? Admiral.
Mr. Watkins. I would only say that I would have to put the
answer to that in the context of what else in the energy
strategy? I don't believe you can decide whether you want to
have an expanded SPR, for example. That has been debated time
and time again. It has never looked economically sound. If you
decide you are going to closeout all new oil exploration and
production, you are going to closeout new technologies being
applied to existing wells or existing fields, if you are going
to do those kinds of things, then I think the answer is
probably yes. But I think you have to balance off do you want
to increase SPR or do you want to increase our production of
oil in this country.
I would do the latter first. I don't think the SPR is a
great investment to go beyond just about what it is today. I
have never seen an argument that is well laid out that says we
have such an enemy out there such as the former evil empire
that would demand that kind of a larger SPR. So I would say no.
The ethanol issue I think, while it is related, is quite
different. And we certainly were proponents of pushing that
component of the energy supply system very hard during the
Energy Policy Act preparation in 1992 and still feel very
strongly about it.
We have helped other nations as well. DOE would go to
Brazil and show them how to better produce the ethanol. They
are 95 percent fueled in their transportation sector by
ethanol. They do it through the various reconstitution of their
crops and so forth. We help them do that.
That is what we should be doing worldwide. That is the kind
of thing that ought to be in AID. That is the kind of thing
that the State Department ought to be worrying more about on
S&T and foreign policy, which they don't do. There are a lot of
things to do on the ethanol front that have not been exploited
well in terms of policy, execution of those policies,
monitoring, getting into the foreign policy issue and so forth.
So I put ethanol aside from SPR. It is hard for me to link
those two.
Mr. Shimkus. Anyone want to venture into----
Mr. Martin. On the SPR, really I think Ronald Reagan got
this started with a lot of help from this committee in the
early eighties. It was not only an SPR for us, it was an SPR
for everybody. To the extent we show leadership other countries
join us, because our SPR is only as good as the SPR in Japan or
Amsterdam or Germany or whatever. Because we coordinate these
through the IEA. We always have to keep our mind on that. It
would have been very bad from a leadership point of view if we
start to use our SPR for market mechanisms.
I agree with the Admiral on the ethanol point. That is
really quite long-term energy policy. That is infrastructure.
That is the need to put in place an adequate distribution
system for the next 10 years so we are less reliant on oil. But
we still need the SPR, and it still has to be part of the IEA.
Mr. Hakes. I would like to make two comments that I think
might be helpful. One is that I think there could be a tendency
to have a false sense of security about the international
situation in the sense that Saudi Arabia has intentionally had
a policy over the years of having excess capacity available
that they could bring online immediately, and under some
circumstance that has, in effect, been almost a petroleum
reserve. I think that has been helpful to the world market in a
couple of instances. But I think there is the question of
whether one would just assume that into perpetuity. So I think
that some of the things like the reserve and other policies
that are kind of insurance policies are important.
I would say, on the ethanol issue, that this is even a
better example of where technology matters. The current state
of distilling ethanol from corn is not terribly competitive,
but if you look at some of the less mature technologies that
can be used on cellulose, there are dramatic changes that could
be made.
And, again, I would refer to another EIA study that I think
is helpful that looks at the long-term potential for ethanol.
And if you had a very crash program with these new techniques
that would use things like switch grass and other forms of
cellulose, you could conceive a situation in which ethanol
might be cost competitive with petroleum.
I know that we are a conservative agency in making those
kind of estimates, but I would commend that argument to you.
But that wouldn't happen with today's technology. It would
require a very strong effort to invest in those technologies.
Mr. Shimkus. I appreciate the comment because you are
mirroring my comments on the ethanol research plant that I have
been diligently fighting for and I hope to have some success
this year.
Ms. Kenderdine. I would just like to say that the Clinton
Administration is a strong supporter of biofuels. And, you
know, when over 60 percent of your oil use is in
transportation, 97 percent of your transportation runs on oil,
looking at alternatives such as ethanol is very, very
important.
The President put out an executive order a couple months
ago to triple our investment in biofuels and biodiesel
technologies--not biodiesel, biomass technologies. And also
with what is happening with MTBE in the marketplace and the
environmental groundwater problems that are associated with
MTBE, we are projecting large increases in demand for ethanol.
We already have delivery problems, infrastructure problems with
that that we need to work on; and that will take time. But it
has a good future.
Mr. Shimkus. The administration is going to have an
opportunity within the next couple months--we do see a
disparity between the DOE and the EPA and working together. Of
course, they are not here, but we are also talking about the
environmental effects of this supply and-demand equation. And
they really should be here.
I have taken much more of my time. But that is what I get
for being diligent and moving rapidly to the vote.
I would like to now turn to the ranking member, Mr.
Boucher, for his questions.
Mr. Boucher. Thank you very much, Mr. Chairman.
Mr. Martin, I was rather taken with your hopeful
projections for the energy circumstance for the year 2020
premised on a 60 percent increase in natural gas consumption
with a corresponding increase in coal consumption and a decline
in petroleum imports. And I wonder if you could tell us a
little bit about where you see the natural gas that would fuel
that 60 percent increase in consumption coming from? Is it
purely domestic sources? Does it anticipate having access to
the Outer Continental Shelf, production from which has been
under moratorium since the 1980's and there is no immediate
sign that that is about to change? Where do we get the natural
gas that would fuel this 60 percent increase in consumption?
Mr. Yergin says we are making quite a bet on relying to
that great extent on natural gas in the future. Is he right
about that? Can we with some comfort assume that the gas will
be there for that significant increase? What will be the
effect, in your opinion, on natural gas prices and what will be
the effect on the price of other fuels?
So it is a fairly comprehensive question about some of the
more general effects of this hopeful future that you predict,
but premised, first of all, on where we are going to get the
gas.
Mr. Martin. That is a good question. Thirty quads of that
come from the United States and five from imports from Canada.
None of this presumes gas from Alaska, although that is
certainly an option. I think perhaps if you ask Senator
Murkowski or some Alaskan they might say the likely market
conditions in Asia may prefer that gas to the lower 48.
Mr. Boucher. And the Outer Continental Shelf?
Mr. Martin. Here I have come here----
Mr. Boucher. I am not asking whether it is a good idea or
not. I am----
Mr. Martin. I think we probably will have to drill to
achieve that level. I say this as an environmentalist. I am on
the board of World Resources Institute, and I am one of the two
Republicans, I guess a couple tokens, on that.
I am always trying to point out to the Board you cannot
achieve a clean future, you cannot achieve, if you want to meet
your Kyoto targets, you cannot achieve lowering SO<INF>2</INF>
and NO<INF>X</INF> without greater use of gas. And yet to do
that you have got to drill in places which are presently off
limits from the environmental community.
You also have to, by the way, have nuclear power, if we are
really serious about national security and keeping those oil
imports low--and I should say my oil import number was, for
2020, around 11 million barrels a day. So part of this
challenge is putting together a mosaic which achieves
nationality security economics and environment.
And there are going to be some tradeoffs. And drilling in
presently restricted areas is going to be one of those areas.
As a guy from an Oklahoma oil and gas family, I can tell
you that there is a lot of gas out there. Nobody wanted gas
originally. They just wanted oil. They kept finding more and
more and more gas. So I guess I come from that Oklahoma
optimism about the supply side.
Also, the cold methane, Alaska, in fact, we are very lucky
in this country that we have so many accessible areas of gas,
including Canada which has enormous gas reserves. If we were in
Japan or Europe we would have to think about long distance
pipeline, we would to think about LNG, which again would
increase the cost.
Final point on price, and at Harvard they are much more
expert in price than I am, because I have learned to be very
humble. It is a very interesting dynamic. Natural gas
consumption has actually been rising quite rapidly in the last
10 years, and natural gas prices have been going down. And if
you couple that with the new technology, as EIA pointed out, I
am not so sure we have to see a significant increase in the
price of gas to achieve that. Yes, it will be difficult, but so
is expanding coal and meeting environmental targets. So is
expanding nuclear power. So is reliance on oil imports. As we
look across the range of things I think the gas perhaps is the
most optimistic part of the energy strategy, as I see it, in
the future.
Mr. Boucher. Mr. Yergin, I would be very interested to hear
your comments on this optimistic scenario.
Mr. Yergin. First of all, I think all these good things
that have happened to natural gas over the last 10 years we
should obviously attribute to the subcommittee and its wisdom.
Mr. Barton. Of course. Mr. Sharp.
Mr. Yergin. As I said, it is a bet that we are making. It
is a good bet that we are making. It is a bet we have to make
in terms of natural gas.
Because if you look at our overall energy picture, there is
so much discussion about the new economy that we are going to
have is very much an electricity-based economy. It depends on
the quality of electricity, and that is going to depend a lot
on gas. But we have, over the last couple of years, had an
industry that produces gas, exploring for it that has been
injured a lot by what has happened to it with very low prices
which most people didn't notice. And so that there is a big
agenda there in terms of investment, in terms of access, in
terms of infrastructure. It does mean look to the north, look
to the frontiers.
To some, a subject that we in our company, Cambridge
Energy, have been very concerned about, and I hope maybe by
September in the work we are doing that we will have some
answers on the future of natural gas supply because it really
is an absolutely critical question for our overall economy. And
September is our target for that.
Mr. Boucher. Thank you.
I have one additional question, Mr. Chairman, if I can
indulge the subcommittee for that.
Mr. Barton. Sure. It is just you and I for that right now.
Mr. Boucher. If I could indulge you for that.
It is not within the jurisdiction of this committee to
legislate with regard to taxes, but I think this discussion
this morning would not be complete if we didn't address the
question of the section 29 tax credit. And I would be very
interested in hearing from this panel of witnesses your opinion
with regard to the affect that the section 29 tax credit has
had in terms of encouraging the production of oil and natural
gas from unconventional sources and the importance of that tax
credit going forward to encourage that very kind of production.
And also any recommendations that you might have for ways in
which the tax credit could be modified to better enhance our
potential for oil and natural gas production from
unconventional resources in the future. The credit expires at
the end of 2002, at the end of the next Congress.
And the final part of this question is, would it be helpful
to have the credit reauthorized earlier, perhaps even this
year? We will have a variety of tax measures, no doubt, to
consider this year and would it be helpful to have it done this
year as a way to give confidence to producers that the credit
will be in place and encourage them to begin oil and gas
production from nonconventional resources in the near term?
Anyone? A mouthful of silence.
Mr. Watkins. I am not an expert in this area, Mr. Boucher.
I would just say this. I think it makes a lot of sense
politically, from a public policy point of view, to let our
great independents that are out there working these problems in
the field know ahead of time that you are not going to let them
down. So I can't tell you how important it is.
Let's don't let it run to the wire and then shock them
either one way or the other. They have got to know now so they
can keep their pitiful investments going, whatever it is. So
give them some hope with this.
I only hope by saying that, however, that that doesn't
become the national energy policy of this Congress. The trouble
is, we come in to simple fixes like that which are wonderful
and absolutely essential. We were on this same issue in the
Energy Policy Act. By the same token, it isn't the answer to
everything. It is very helpful, though. Because, you know, it
is the little mom-and-pop outfits in Oklahoma and Texas and so
forth that really are giving us the oil production in this
country. The big boys have gone overseas. So we really do have
to give them incentives as much as we possibly can to take us
through this transitional period until we get our act together
on oil and gas.
Mr. Barton. The gentlelady from the Clinton Administration.
We hope you will support your ranking member in wanting to do
this.
Ms. Kenderdine. Absolutely, sir. That is just from me, not
from the administration.
Mr. Barton. We will take it.
Ms. Kenderdine. We recognize that section 29 has been a
very successful tax incentive. And from a committee that
doesn't write tax law to an agency that doesn't do tax law
either, I think our tax law would be very different if the
Department of Energy were directly responsible and in control
of it. But we would be happy to examine this further.
I know that Bob Gee, our Assistant Secretary for Fossil
Energy, has met with industry on many occasions on this and
talked to the National Economic Council experts about this and
discussed the impacts and possibilities.
Mr. Boucher. Thank you for that. While we don't legislate
on the subject, we can certainly talk about it----
Ms. Kenderdine. And we do all the time.
Mr. Boucher. [continuing] what, if any, changes might be
helpful. And to the extent that your department can give us
advice on that subject we would welcome it.
Ms. Kenderdine. Absolutely. We have some very good tax
people in our Fossil Energy office. Happy to have them come
talk to you.
Mr. Boucher. Thank you, Mr. Chairman.
Mr. Barton. I only have one final question for this panel.
Then I want to welcome our second panel. I would like the staff
to put up the EIA chart that shows the outyear gap between
production and consumption. It is one of the last charts that
Mr. Hakes referred to. It is right behind that. It is not that
one. It goes out to the year 2020. That is the one.
Now, I am looking at the Energy Information Administration
energy info card, which is really excellent. And it shows on
one side, I guess the backside, that the total primary energy
production is 73 quadrillion btus in the United States and the
total consumption is 97 quadrillion btus. So there is a gap of
about 24 quads. And that is, I guess, in 1998 or 1999 you look
at this chart, and this is really--show how old I am--the $64
question. Does anybody in the audience remember the quiz show
that the big question was the $64 question? That shows.
Ms. Kenderdine. No, sir.
Mr. Barton. So the $64 question of these hearings is, what
do we do in the outyears, which means we need to act as soon as
possible so that that net import gap is minimized?
Now there are a lot of things we can do. If we wanted, I
don't think we would eliminate imports. But if we made a
massive move to nuclear power like France has done, if we made
a massive move to coal, if we really maximized our production
of oil and gas resources in the OCS and up in Alaska, we can do
significant things to minimize that import gap there, that
delta.
So my last question--and you may want to think about it and
submit it in written terms for the record--but this is really
what the whole purpose of these hearings is about: What is a
baseline supply for this Nation? I mean, how much energy are we
capable--within our existing political environmental
regulations capable of producing and what mix should it be?
Should we move massively into nuclear? Should we really make a
major political effort to open ANWR and the OCS? You know, what
should that supply line be in terms of quads and what is the
mix in terms of supply?
[The following was received for the record:]
We believe we need to rely on market forces to be the
primary determinant of our energy future, with government
intervention only to ensure that energy markets are
competitive, energy supply systems are secure and reliable, the
Nation is prepared to respond to energy emergencies, and the
environment is protected.
While government policies can influence energy sector
trends, they cannot, and should not attempt to, determine our
energy future. For this reason, our key long term objective is
not to ensure that the success of any particular energy
resource or technology, but rather to provide diverse energy
technologies for the future. If we can help ensure the
availability of a broad array of competitive energy
technologies, we believe the Nation and the energy sector will
be prepared to meet future energy challenges, whatever they may
be.
Mr. Barton. I will just open that up to the panel. Mr.
Martin.
Mr. Martin. I had a chart on that--let me just mention it--
on page 12. I gave this a lot of thought myself. Because you
need a balance. Not everything is going to be a great solution
here.
I think we can keep our oil imports to 11 million barrels a
day and our gas imports to about 6. Gas primarily from Canada.
And the way you do that, first is you use some energy more
directly. You don't electrify everything in sight. You have
some electrification, but you don't go massively toward an
electric solution. Coal, nuclear power, certainly gas would
fuel most of your electricity. You use a lot of gas directly.
That is how we get to our 35 quad. You need renewables, and you
need energy efficiency.
But I can get us to a scenario which is below the EIA
reference case on energy demand, which I thought was pretty
good for a Republican. On here, they have 121 quads. I can get
us to 115, for example, through energy efficiency.
It is interesting, by enhancing your energy security you
also enhance your environment interestingly enough, because you
are using less fossil fuels, in theory, if you are using less
energy. So you get a nice hit with lowering CO<INF>2</INF>.
But this is exactly the sort of debate this committee
should be involved with. I don't think there is an easy
solution. I think it should be market based. But I do think
there are things the Congress can do to enhance what I call a
low energy import future, and it is really relying on our
domestic import base.
Ms. Kenderdine. Mr. Chairman, the Department of Energy
supports a very diverse portfolio of energy R&D technologies.
But the issue of oil imports is--you are not going to have much
effect on oil imports by increasing nuclear power or increasing
natural gas. Our oil imports go primarily for transportation,
and we can't run our cars on nuclear power. And so the----
Mr. Barton. Isn't it about half?
Ms. Kenderdine. I think it is 66 percent.
But so if you are going to affect the oil import piece of
this equation, you either produce more oil at this point in
time through 2020--I mean, you are talking about our current
fleet of vehicles is essentially what you are talking or even
future until we develop different alternative ways to power our
automobiles. And so if you are--you either have to increase
your production of oil or decrease your consumption.
And as I mentioned to you earlier that you can--if we
increase the efficiency of our automobiles, the average
efficiency of automobiles by just 3 miles per gallon, you would
save a million barrels of oil per day. That is a lot of oil.
And that is why we are working on an 80-mile-per-gallon vehicle
because that I think is the most feasible way at this point in
time to decrease the net imports of oil. I mean, we are also
working, as I mentioned, on increasing production of oil. That
is your tax incentives and lowering the cost of production.
There are some very fruitful areas. And the Outer
Continental Shelf, OCS, and the Gulf is very fruitful and also
diversifying our sources of supply.
There was a huge find in the Caspian. They are estimating
that that might be as large as the North Sea. I think that the
estimates of possible reserves in the deep Gulf are about 18
billion barrels of oil. So there are places to go to increase
our domestic production. But also we--if you want to affect
that equation, we very much need to look at the demand side as
well.
Mr. Barton. Does anybody else before we recognize Mr.
Largent? Mr. Sharp and then Mr. Yergin.
Mr. Sharp. When we look at the import question that is very
important because it gets our attention to a bunch of issues
that probably need to be resolved.
But let me be a little bit of a skunk at a garden party. I
think if we are not careful we get so overfocused on imports we
make a lot of foolish and costly decisions, as we did in the
1970's. Because everything has got to be judged whether it is
economic or not. Remember the fundamental facts of the oil
market are it is cheaper to produce it somewhere else, that the
really cheap stuff is in the Middle East. So you are always
fighting the marketplace hard when you go to high-cost fuel
sources or alternative sources or something of that sort.
The truth is, we can adjust and moderate that through tax
incentives, through various things to get more fuels on the
market, but the reality is that world market will come crashing
in on Republicans and Democrats and everybody else again and
again and again.
So I would be very careful about the concept that our whole
goal is to get down to 4 million barrels a day. Because we can
design a policy. We can also wreck the economy doing it. The
truth is, if we drive up the cost of energy in this country we
can become less dependent. Of course, we won't export a lot of
our products, and our consumers will be angry, and a lot of
things will be inefficient in our country, and will we have
achieved the goal of import? I don't mean to overstate this
except that it really distorts our thinking if we are not
careful.
I think I am in a dilemma because I think you are right to
be focused on this. I think we ought to be examining those
other places to produce in the United States if they are
efficient places to get gas. The moratoria are politically
powerful in both political parties. That is why they are on.
That is why they stay on through Republican and Democratic
presidents. I wish it weren't so. I think it is ridiculous in
Florida and California we can't do more with newer
technologies.
Mr. Barton. Well said by the man from Indiana.
Mr. Sharp. It was easy for us in Indiana. But I think you
have got to work on both ends, and you have to work on the
automobile, too. The truth is, much as we don't like it, and I
came from a district where we manufacture automobiles, that we
are not headed in a very good direction at the moment the way
we are building.
Mr. Barton. I am really asking for the balance point. I
probably didn't do it as efficiently. But I am----
Mr. Sharp. It is very hard to balance that. I think the
Secretary is right, because that was the direction he tried to
take back in the early 1990's, which was to recognize you got
to do multiple things and in order to sell them on Capitol Hill
or anywhere else you have to package those up together. It is
awfully hard to get one or the other kind of proposition. With
this election I suspect in both political parties we are hard
to get that between now and the fall.
Mr. Barton. Let's let Dr. Yergin answer the question.
Mr. Yergin. Really quickly, I think it is a question of
balance and getting the different elements together.
I think, on the foreign policy side, the reality is that
whatever the number is going to be, a large importer and good
relations with the importer is extremely important,
diversification is extremely important, an interweaving of
interests so that the exporters see that their interest is,
among other things, a very healthy economy. We talked about the
needs to facilitate domestic production, and I think that is
part of the answer.
Certainly, listening to the discussion about cars, one of
the things in our study is that we now as American each of us
drives almost 35 percent more than in 1980. We are driving a
lot more. Of course, we are driving different kind of vehicles.
One out of two vehicles now is a sports utility vehicle or
minivan, and they get about 21 miles to the gallon; the car
gets about 27 miles to the gallon. Fixing that is a
contribution.
The emphasis on technology. I think one of the lessons I
came from writing this book, The Prize, was how technology
really does have such a powerful force that you don't see it.
And continuing as the Department does, this subcommittee is
encouraged to continue to push technology different directions,
is ultimately going to when we get out to the year 2020, and
there are lots of surprises there, that technology will deliver
a lot of them.
Mr. Barton. We are going to recognize Congressman Largent
for 10 minutes, because Mr. Boucher and I both took at least 10
minutes. Then we are going to excuse this panel, unless another
member shows up before Mr. Largent leaves, to go to our second
panel. So Mr. Largent is recognized for 10 minutes for
questions.
Mr. Largent. Dr. Yergin, I wanted to talk to you about your
book a little bit. I read this book, and I really commend it to
members of this committee. I felt like it was a very helpful
resource in giving some history of oil. The title--in fact, the
reason I ask for this, is that the title says, The Epic Quest
for Oil, Money and Power. What I find missing from the
discussion, and I think this strikes at the heart of what Mr.
Sharp just said, what I want to take issue with, one of the
things that I found very fascinating in particular was some of
the historical views of World War II and the demise of the
Japanese and the Germans and its relationship to the lack of
supply of petroleum products.
And one of the things that I found missing on this
particular panel is the discussion of our dependence on this
importation of oil as it relates to our national security. And
I would just like you to make some comments about if there are
some parallels that we need to be aware of what occurred to
Japan, of what occurred to Germany to a lesser extent, in terms
of their national security and the lack of a consistent,
reliable energy source.
Mr. Yergin. Thank you. It was for me one of the kind of
amazing revelations, in terms of many years I spent researching
that story, to look at World War II differently and to see the
degree in which oil had been among the triggers of the war. I
mean, why did Hitler invade the Soviet Union? Partly was to get
the oil, of all places, Baku and the Caspian that is so much in
attention now.
And our embargo against the Japanese, embargoing them on
oil prior to the Second Word War, was connected to the Japanese
march toward what became Indonesia. And of course the conduct
of the war and you look at it and you see that ultimately, in
many ways, both the Japanese and the German military machines
were immobilized by lack of fuel. And it was a great strength
that we had that Congressman Hall had the vitality and the
creativity and the energy of the U.S. oil industry in terms of
really supplying the entire Allied effort.
So I think your remarks tie into what Admiral Watkins said.
When we talk about what the SPR is about, it is not a long-term
answer, but it is one that provides very important time in a
moment of crisis. And I think that underlying oil
considerations and imports--and I think this maybe goes back to
Congressman Barton's point, too. There is a continuing
underlying national security consideration that depends----
You know, the security issues, much of the time are not
there. Some of the time, they are there; and they can come as a
surprise. In 1990, 1991 things had tilted a little differently.
If the world oil market had been a little bit tighter we would
have seen a different kind of repercussion in the Gulf crisis.
So I think that the security consideration is not always at
the forefront, but it always has to be part of our thinking
about something that is this vital to our well-being and the
well-being of the countries that are our critical partners
around the world.
Mr. Largent. I guess maybe to focus my question a little
bit better would be to say at what point does the red light on
the dashboard go off in terms of national security issues? As
we see these forecasts going from 52 percent to 64 percent, at
what point does the light go off and say, wait a second; this
is a real problem. What are we going to address this problem?
Where is that line?
Mr. Yergin. That is talked about a lot. Basically, that
line keeps moving up as our imports keep moving up. A lot of it
has to do with how you assess the relationship with the
countries that are major suppliers of oil. If Iraq had not only
kept Kuwait and was dominating the Gulf we would have looked at
any of these numbers as very alarming. So I think it has to be
seen within the context of overall relationships.
I would look at the case of Mexico which gets 40 percent of
its government revenues from oil, very vulnerable to that, but
Mexico is equally or even more aware of how much it depends on
the health of the U.S. economy. So that part of the security
picture is their sense of their interrelationship and
interdependence with us. But I don't know other people might
maybe see where the red light flashes more clearly.
Mr. Largent. I will go to you in just a second.
I had one other question before I leave you, Dr. Yergin.
That was, one of the comments that you made in your open
statement was to caution Congress about making short--or doing
short-term intervention. What kind of things are you talking
about when you say that?
Mr. Yergin. Well, I think, and I think Phil Sharp referred
to it, there is a propensity when prices are up in these market
situations to talk about some kind of direct or indirect price
control interventions in the market. We saw that even this
winter where there was legislation where any time the price got
above $25 a barrel the administration was supposed to report to
the Congress as to why they are not using the SPR to bring down
the price.
I am concerned this summer, because we could see spikes in
natural gas prices, given how tight this market is, that if we
had that kind of intervention that came in even discussions of
price caps of some kind or another that we would see--as
Admirable Watkins said, it would affect the whole investment
environment, and it would work against what we need, which is
to see more investment flowing rather quickly into the natural
gas sector maybe out of the Internet sector so that we do have
the supplies that we need to meet our national needs. So it was
really talking about market intervention of the kind that
recurs whenever prices are in the upper frame.
Mr. Largent. Thank you. I am looking forward to watching
the video series. I haven't gotten to see that yet, but I am
planning to watch that this summer.
Mr. Martin, you had a comment.
Mr. Martin. Very shortly, on the red line. The red line is
an international number I think. I think it involves all of the
countries' dependence on the Persian Gulf. And I think we are
getting very close to that red line. If we just look in
isolation at the U.S., that really doesn't do much. Indeed,
this is an international strategy we are involved with.
That, again, is why the IEA is so important. I spent 4
years in the IEA during the second crisis, the Iranian
revolution. We may have it all right here, but if other
countries are demanding more and more oil then we lose, too.
I note, for example, that it is remarkable how much Asian
demand is increasing on the Persian Gulf, far more than us at
the moment. So what do we do with the Japanese, the Koreans,
even the Chinese? And why are the Chinese sending missiles to
Iran when they are getting oil from the Gulf? These sorts of
questions. It is really a foreign policy point.
And, honestly, the best way we can get our energy agenda
through, which nobody seems to be interested in when you go to
Cabinet meetings or in the public, but if you go with the
national security argument at a Cabinet table, then you have
got some other people fighting for the domestic oil producers
in, for example, in this country. You broaden the base of
support for a rational energy policy based on national
security.
Mr. Largent. Well, I obviously have colloquial interest,
being from the State of Oklahoma and Tulsa, which is the oil
capital, but I still view this from a national security
perspective first, because I think that is the fundamental
responsibility that I hold as a representative in Congress; and
I think that that has to dominate local interests or otherwise.
So I appreciate your comments.
Ms. Kenderdine, I wanted to ask you a question. You talked
about the administration encouraging domestic production. I
want to know what specific proposals has the administration
been promoting and initiating and proposing to increase
domestic production?
Ms. Kenderdine. Well----
Mr. Largent. All the folks back in Oklahoma are really
interested in this answer.
Ms. Kenderdine. I was out in Oklahoma with the Secretary.
We met a lot with your producers.
Mr. Largent. I was there. They are still waiting to hear.
Ms. Kenderdine. The President on I think it was March 18th
announced support for delay rentals expensing. I know that
there are a lot of marginal oil producers in Oklahoma and in
other places; and, as always--I mean, you get into a discussion
on support for marginal wells, as to whether it is cost
effective. And you get into the types of discussions we have
been having here.
Because while the Department of Energy is very much
interested in preserving marginal wells, the domestic base we
are concerned about--we are concerned about shut-ins. We know
what a shut-in means, but then have you other players in the
administration who are very concerned about tax policy and
cost, as they well should be. That is their jobs. And it is not
monolithic. We would like to continue to work with people
within the administration to see what we can do on marginal
well production.
As I mentioned earlier, we have supported and I have
personally--I have been at the Department for 7 years--worked
on a lot of oil and gas issues, lifting the ban on the export
of A&S oil, supporting production and NPRA, the National
Petroleum Reserve in Alaska, royalty relief in the Gulf of
Mexico, and that has been a wildly successful program in the
last 5 years, dramatic increases in oil and gas production in
deepwater Gulf.
And I believe that this is not our area. It is Interior
Department relief for royalty payments for marginal producers
on public lands. So there are a list of things that we have
done. It is----
But, again, the administration is not a monolith, just like
the Congress is not a monolith; and we are working through a
lot of issues. I feel really good about the tax incentives for
G&G and delay rentals and hope that the Congress will pass
those.
Mr. Largent. Let me just say in closing--I am sure I am
approaching my time--that to those who would question the cost
effectiveness of addressing stripper wells and marginal wells
let me say, first of all, it is much less expensive to enhance
production from an existing well than to shut it in. Second of
all, it is much more environmentally friendly to do that.
What I would just say and hope that you will argue for as
well is that we need to see, I think, an increase in research
to enhance production from existing wells which is taking place
and is an environmentally friendly--it is efficient, it is a
less expensive way to go, as opposed to just, you know, turning
off the tap and closing the wells.
Ms. Kenderdine. Most of our oil supply R&D money is
targeted for smaller producers because they are the ones who
cannot afford what is expensive, is R&D. So we have invested a
lot of our R&D money in marginal well production.
Mr. Largent. Unfortunately, R&D budget is shrinking; and we
are trying to address that in this appropriation process that
we are in right now. But particularly targeting that research
would be important. Thank you.
Thank you, Mr. Chairman.
Mr. Barton. I was going to release this panel, but the
Honorable Phil Sharp is dying to have the last word.
Mr. Sharp. I just wanted to respond to Congressman Largent
because I wouldn't want to be misunderstood that I think that
imports are not significant. The question is, it is not the
only measure of our national security.
I was trying to articulate--which Mr. Martin articulated
somewhat better--which, even if we got our imports down we have
major stakes so we must not forget there what happens in this
world oil market. So I am a strong promoter of trying to get
them down.
But we sometimes make huge mistakes to raise the cost.
Throughout the synthetic fuels corporation, which finally the
Reagan Administration and the Democratic Congress repealed, was
all driven by national security arguments, all driven by
production and imports arguments, and it was a big mistake.
Mr. Barton. Now the Honorable Admiral Watkins. Absolutely
the last time.
Mr. Watkins. Everybody went to the right. It was wonderful
when I was in the Navy.
But let me just try something on you here now. I think this
committee could take a look at the DOE Organization Act. It
requires a submission biennially of a national energy policy
plan. Look at that thing, straighten it out, get it harder. The
EIA, Mr. Martin runs a very good quasi-independent agency. They
are great. They have good data.
Mr. Martin. No, I don't.
Mr. Watkins. Mr. Hakes does.
Mr. Barton. Mr. Martin is quasi-independent.
Mr. Watkins. He has already gotten a good track record and
good report cards on his data.
The Congress should demand that models be prepared on the
integration of all these various aspects of energy. Those
should be looked at by the private sector. Everybody else, they
should have access by everyone. We ought to play our advocacy
against those models, and we should demand with each
administration that they come forward with recommended changes
to the existing laws. If they think it is important, come up
with the analytic data to base up those advocacies. They will
either win or lose, but at least we will know what the new
starting point is.
We ought to be doing that with every session of Congress,
in my opinion. I think that is something this committee can
demand is a better system so we go between one administration
and the next without discarding everything and saying that the
Republicans did a lousy job but just listen to our advocacy. We
shouldn't allow that in this business. We ought to get
analytically sound.
And people like Dan Yergin and Phil Sharp that work in this
continuously can be participants in that process and demand it.
Don't let the energy policy atrophy the way it has.
The good things that we hear about DOE doing, who knows
about it? Have they recommended changes up here to the various
acts? Have they fought--are they up here pounding the table,
saying this is best? Here is the analytic data. Look at these
outfits that have assessed this.
The IEA has looked at it in Paris. These are the things
that ought to be demanded in this committee. Then we will get
this thing going. Then the DOE may have some relevance.
Mr. Barton. I appreciate the tongue-lashing that the former
Secretary just gave this subcommittee, and I will try to honor
some of those requests. Because they are well taken.
We are going to release this panel. Before we do, though, I
want to personally tell you how much I appreciate each of you
changing your schedule. The only two we could force to come
would be Mr. Hakes and Ms. Kenderdine, but the rest of you made
a real effort to be here voluntarily.
And this is going to result in something. I can't tell you
what yet, because we still have a hearing on coal, and we have
a hearing on renewable and alternatives. But I think at the end
of the summer as we look back on the hearing record it is going
to be a great record, whatever the administration is next year,
to begin to build a comprehensive and I hope bipartisan energy
strategy for this country. So I want to give each of you my
personal appreciation and release you from purgatory. So you
are released.
Before we start the second panel I will suggest that we
take about a 7-minute personal convenience break because the
second panel has sat in the audience for 3 hours straight, and
I don't want them fidgeting. So about 12:55, I want all my
second panel to be back here. We are in recess until 12:55.
[Brief recess.]
Mr. Barton. If our panelists could take their seats, we
will try to get started with the second panel. I think we have
everybody. The subcommittee will come to order again.
We now want to continue with our hearing. We have a very
distinguished panel of witnesses on the second panel.
We have Mr. Red Cavaney, who is the President and CEO of
the American Petroleum Institute.
We have Mr. Michael Johnson, who is Vice President of
Natural Gas and Gas Products for Conoco. He is here on behalf
the Natural Gas Supply Association.
We have Ms. Cathy Abbot, who is President and CEO of
Colombia Gas Transmission, and she is here on behalf of the
Interstate Natural Gas Association of America.
We have Mr. Roger B. Cooper, who is the Executive Vice
President for Policy and Planning of the American Gas
Association.
And last but certainly not least, Mr. Barry Russell, who is
President of the Independent Petroleum Association of America,
and he is representing, in addition to IPAA, the National
Stripper Well Association.
Lady and gentlemen, we appreciate you being here.
We are going to recognize Mr. Cavaney for 7 minutes. We
want to set the record straight before we do that.
There are some in Texas that are not sure that Tulsa is the
oil capital of the world, but we are not going to get into a
long-winded debate about that in this subcommittee. Your
statement is in the record in its entirety, Mr. Cavaney; and we
would recognize you for 7 minutes to elaborate on it.
STATEMENTS OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN
PETROLEUM INSTITUTE; MICHAEL L. JOHNSON, VICE PRESIDENT,
NATURAL GAS AND GAS PRODUCTS, CONOCO, INCORPORATED, ON BEHALF
OF NATURAL GAS SUPPLY ASSOCIATION; CATHERINE GOOD ABBOTT,
PRESIDENT AND CEO, COLUMBIA GAS TRANSMISSION CORPORATION, ON
BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; ROGER
B. COOPER, EXECUTIVE VICE PRESIDENT, POLICY AND PLANNING,
AMERICAN GAS ASSOCIATION; AND BARRY RUSSELL, PRESIDENT,
INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, ON BEHALF OF
NATIONAL STRIPPER WELL ASSOCIATION
Mr. Cavaney. Thank you, Mr. Chairman.
My name is Red Cavaney. I am president and CEO of the
American Petroleum Institute. I appreciate the opportunity to
offer our assessment on the state of the U.S. oil and natural
gas industry and on how we can work with you to forge an energy
policy that is global in nature and helps ensure that America's
future energy and security needs are successfully met.
I request that the statement of the Alaska Oil and Gas
Association be included as part of my testimony.
Mr. Barton. Without objection.
[The statement follows:]
Prepared Statement of Joseph H. Hegna, ARCO Alaska Inc. on Behalf of
the Alaska Oil and Gas Association
For the record, I am Joe Hegna from ARCO Alaska, Inc. I have spent
over 20 years working in the oil industry--designing, building, and
operating facilities. For the last 12 years I have been involved with
various environmental management functions.
The focus of these written remarks will be on the use of new
technology to minimize environmental impacts for arctic oil and gas
development. In Alaska, we call this ``doing it right''.
Before we get into a discussion of ``doing it right'' using new
technology, I would like to put things into perspective by describing
the North Slope of Alaska. The North Slope is a flat treeless plain, or
tundra, which covers 88,000 square miles, an area slightly larger than
the state of Idaho. It stretches from the Canadian border to the
Chukchi Sea. It is 600 miles north of Anchorage, and about 1200 miles
south of the North Pole. Winter temperatures are typically minus 30 to
minus 40 degrees Fahrenheit with 30 to 40 mile per hour winds. Summers
are generally a balmy 40 degrees.
Prudhoe Bay, the largest oil field in North America, was discovered
in 1968 and went into production in 1977. Currently, there are 12
separate oil producing fields. These fields occupy less than 2% of the
total surface area. Since Prudhoe first went into production, over 12
billion barrels of oil have been produced on the North Slope. These are
some of the best facilities in the world--in design and operation. I
think they are the ``best of the best''.
Extensive research indicates that oil field activities have had no
adverse effect on the North Slope's fish and wildlife populations. For
example, the caribou move freely through the oil fields and have
generally been unaffected by our facilities. In fact, the number of
caribou in the Prudhoe Bay area has grown from 3,000 in 1972 to about
20,000 today.
Air quality is consistently better than required by state and
national standards. Emission sources are closely regulated by state and
federal agencies. The largest quantity of air emissions from North
Slope oil operations comes from turbines that power production
facilities. These turbines are fired by natural gas, one of the
cleanest burning fuels available.
All North Slope operators have a goal of zero spills. In operating
these complex fields, however, some spills will occur. Most are from a
pint to 10 gallons. And the vast majority of spills never reach the
tundra or surface water because they are contained on the gravel pads
on which the facilities are constructed, where they are easily cleaned
up. All spills, no matter how small, are reported and cleaned up
immediately.
These existing facilities are very well designed and operated.
Operating excellence, with regard to the environment, has been
recognized by others including recently the Environmental Protection
Agency (EPA) and the Interstate Oil and Gas Compact Commission (IOGCC).
In 1999, the EPA's Region 10 gave Kuparuk its ``Evergreen Award'' for
pollution prevention. In 2000, the IOGCC gave Kuparuk the Stewardship
Award for large oil and gas facilities.
Let's look at how new technologies and new approaches are making it
possible to find, develop and produce new fields with even less impact
on the environment. In the arctic, we can now explore for oil without
leaving a footprint on the land. And when we do find new fields, we're
able to develop them in ways that have even less impact on the land and
the fish and wildlife that inhabit it.
The acquisition of 3-D seismic data is a key step in the
exploration process. It's how we identify and map the prospects we're
interested in. Onshore seismic acquisition on the North Slope occurs
only during the winter after the federal, state and local governments
issue permits authorizing tundra travel. Tundra travel doesn't begin
until the tundra is frozen and there is six inches of snow cover. We
use specialized low-impact tundra travel vehicles which weigh more than
10 tons. However, the tracks are long and wide, spreading the pressure
over a large area . . . protecting the tundra from damage.
Onshore exploration is conducted only in the winter. We use ice
roads to move drilling rigs, camps, men and material to remote
locations. We build ice roads with water from lakes chosen with the
assistance of the Alaska Department of Fish and Game. The volume taken
from each lake is determined based on water depth and whether a lake
contains fish. Ice roads are generally six inches thick. It's not
unusual for us to build 60 to 70 miles of ice road a year to support
remote drilling operations. In the spring, these ice roads simply melt
away.
The best illustration of how we are ``doing it right'' is by a real
example. I have brought a brochure on the Alpine Field--``Setting The
Standard For The New Millenium''. On the cover is a drilling rig.
A drilling rig weighs several million pounds and is moved to its
location via ice road. The rig is set on an ice pad more than 12 inches
thick. When drilling operations are complete, the rig and support
facilities are removed, and all drilling wastes are transported to
existing facilities for disposal or injected back downhole. The final
step is to take a front end loader and shave the ice pad down to pure
ice. Scraped material is hauled out and disposed of in approved
facilities. Pads melt, leaving no trace.
On the inside page is a photograph of an exploratory well at Alpine
taken the summer after it was drilled. Six months before this picture
was taken, a 160-toot tall, 3 million pound drilling rig stood on an
ice pad where the well was drilled to an 8,000 foot depth. Prior to
drilling we acquired seismic data over this entire area. You can see
how much impact we've had.
The only visible sign of our presence is the well tree. And this
remains on location because we are developing the field and will one
day produce from this well. If the well had been unsuccessful, we'd
have plugged and abandoned it below grade, leaving virtually no trace.
The thing that's amazing about ice-pad technology is that the
vegetation adjacent to this well is completely undisturbed. We can
explore without leaving visible footprints.
Producing oil requires infrastructure and a permanent presence for
the life of a field. Our goal is to design, build and operate fields in
a way that minimizes impact on the land, the water, the air and on the
fish and wildlife that use a given area. To see how, let's look at the
Alpine field which is now being developed and which will begin
production in 2000.
The first step is understanding the environment. We began
environmental studies of the Colville area in 1991, three years before
we discovered the Alpine field.
We mapped 24 different habitat classifications that were developed
with the assistance of the US Fish and Wildlife Service and the Alaska
Department of Fish and Game. Baseline studies were designed with the
help of these and other resource agencies. We used satellite infra-red
photography, ground-truthed by summer field parties to develop the map.
We did regional study first, then focused on the Alpine project area
when the discovery was made. Different kinds of habitat are important
to different kinds of wildlife. Some kinds of habitat are scarce,
others are not. To avoid major impacts, you have to know where the high
value and low value areas are.
Nuiqsut residents, who use this area for subsistence hunting and
fishing, also played a role in this process. We used their input,
agency input and this data to locate our facilities in areas where they
would allow development of the field and minimize impact. At Alpine,
for example, we moved a drill site away from a lake important to
waterfowl and subsistence hunters.
Extended reach drilling allows us to drain oil from a very large
area from a single location. At the Niakuk field near Prudhoe Bay,
where ARCO and BP have developed two offshore oil accumulations from a
single, onshore drill site, we've done it by drilling wells with
departures of more than 20,000 feet--or four miles. Our drilling
targets are 9,000 feet deep and four miles away from our drilling rigs.
To illustrate what this means, I had our engineering department
prepare a drilling scenario for Washington, D.C. With today's
technology, and a 21,000 foot step out well, we could build a drill
site on the front lawn of the White House and produce oil from beneath
most of Washington and a big piece of Arlington, Virginia. The world-
record step out well is longer than 28,000 feet--or 6 miles. With wells
of that length you could produce from beneath the entire District of
Columbia, all of Arlington, Alexandria, and a big piece of the Maryland
suburbs too.
The evolution of production pads--or drill sites--on the North
Slope is a classic example of how we have done it right. A drill site
is a central location from which we drill and operate as many as 50
wells. In the early days, they were generally 65 acres in size. Wells
were spaced 120 feet apart, and the pads included large reserve pits
for storage of drilling wastes. Today wells are 15 feet apart and we've
eliminated the reserve pits. At Tarn, we have space for 50 wells on a
6.7 acre pad. Pads today are one-tenth the size that they used to be.
Traditionally, drilling muds and cuttings have been placed in
surface waste disposal impoundments known as ``reserve pits''. Today,
using grind and inject technology, cuttings are crushed and slurried
with seawater in a ball mill, then combined with the remaining drilling
muds and reinjected into a confining formation 3,000 to 4,000 feet
underground. This permanent and environmentally sound disposal method
isolates the wastes, eliminates subsequent disposal problems and
greatly reduces the spaced required for drilling operations.
The Alpine pipeline river crossing is the first of its kind
completed in the arctic. We proved the technology, by installing 18''
steel pipe in a 4,200 foot bored hole from one side of the river to the
other. The pipe passes 100 feet below the river. A cased oil pipeline
was then installed within the 18'' steel pipe. In short, we will have a
pipeline within a pipeline. This design ensures instant containment in
the unlikely event of a small leak. A state of the art leak detection
system will also let us know if we have a problem.
The Alpine field will be produced from just two drill sites, three
miles apart. Pads will be joined by a gravel road that will also serve
as an airstrip. Surface impact--gravel footprint--will comprise about
97 acres. From this small footprint we will be able to access the
Alpine reservoir, which encompasses some 40,000 acres-more than ten
miles long and four miles wide. Less than 0.2 percent of the field will
be impacted--that's less than one-tenth the percentage at Prudhoe.
Construction is occurring during the winter, using ice roads. The
construction will not disturb wildlife.
The Alpine field will not be connected by a permanent gravel road
to existing infrastructure on the north slope. The operation will be
much like that of an offshore platform. Drilling supplies and major
equipment will be transported in winter using ice roads. Food and
personnel will be transported by air, and the number and frequency of
flights will be limited for a six week period in June and early July to
minimize disturbance of nesting waterfowl.
Our goal is to minimize our impact on the environment and operate
oil fields that are sanctuaries for healthy populations of fish,
waterfowl, and wildlife. Thousands of caribou still return to our
fields to calve and rear their young. The herd is six times larger than
it was in the early 70's. Our waterfowl populations are healthy. We
have turned our gravel mines into deep lakes that provide crucial
winter habitat for fish--a rare commodity because most of the lakes on
the North Slope freeze from top to bottom in winter. We've learned a
lot over the years. We can explore without leaving footprints. And the
footprint required for new developments is a tenth of what it once was.
Alpine--with its new technology--shows you what we mean by ``Doing
It Right.''
Mr. Cavaney. It is particularly appropriate that we discuss
this topic now because of the convergence of two powerful
forces pulling the industry in opposite directions. The first
force is the beginning--this weekend, in fact--of the vacation
driving season, which offers a clear picture of the continued
increase in demand for our products by American consumers.
Gasoline-powered automobiles have been the dominant mode of
transport for the past century and there is no evidence that
consumers are ready to change. The automobile will remain the
consumers' choice for personal transport because the mobility
and independence it affords is so highly valued. While
substitutes for gasoline may some day become prevalent, any
such wholesale change is more than several decades away.
The industry enters the new century with bright prospects
for sustained and significant growth for the foreseeable
future. Most forecasts anticipate an increase in worldwide
demand for our products of 15 to 20 million barrels a day
within the next 2 decades, an increase of between 20 and 25
percent.
The second force I referred to is represented by two
Federal Government actions, one on diesel fuel, the other on
gasoline.
Last week, the EPA proposed to drastically lower the sulfur
content of diesel fuel beyond industry's unprecedented
commitment to reduce sulfur by 90 percent. Adopting EPA's rule
will almost assuredly have negative consequences on our
industry's ability to supply petroleum products to consumers.
Concerning gasoline, on June 1, we must begin selling new
federally mandated cleaner burning gasoline, RFG Phase 2, it is
called, in one-third of the country.
We certainly share government and consumer commitment to
clean air. These latest regulations, however, are too much too
soon. They represent yet additional layers of uncoordinated
government regulatory restrictions being piled on at ever
shorter intervals.
Add to this the increasing tendency by government to deny
our companies access to Federal lands for responsible
exploration and production of oil and natural gas, and the
cumulative effect is ever-increasing constraints on this
country's energy infrastructure.
A steadily increasing demand for our products simply cannot
be sustained over time if government policies are consistently
at odds with the practical operational needs of the industry.
And let me be clear, our industry is committed to meeting the
Nation's energy needs while contributing yet further
significant gains in environmental protections.
We are already seeing evidence of infrastructure stress in
California where stringent specifications on the type of
gasoline sold in the State has led to fewer refineries, all of
which are operating at peak capacity. As the General Accounting
Office pointed out in its recent report, any supply disruption
caused by California refinery outages tends to quickly upset
the State's tight balance between supply and demand. Surely the
attendant volume and price volatility is not the type of future
we want for the rest of the Nation.
Moreover, the current situation in the Midwest, where
summertime reformulated gasoline is in short supply and
significant price differences are developing between
reformulated and conventional gasolines, underscores the need
for regulators to provide refiners the flexibility they need to
continue to meet consumers' needs at affordable prices.
As we enter this new century, it is essential that the
Federal Government revisit energy policy. No change from the
current position is a prescription for more price volatility
and increasing concerns over supply adequacy. We urge Congress
and the White House to adopt an energy policy that recognizes
four very important points: .
First, our industry's flexibility to adapt to the demands
of rapidly changing cycles cannot be further eroded by
uncoordinated new government restrictions without adverse
impacts on consumers.
Second, given our industry's significant technological
advances, a vibrant U.S. oil and natural gas industry can
coexist with a safe and ever cleaner environment.
Third, our industry is highly globalized, and government
actions that damage its efforts to conduct business abroad are
also harmful to the Nation's economy.
And, finally, government must begin an earnest effort to
reconsider its view of the industry with an eye toward forging
an energy partnership to benefit consumers, government, and
industry.
Because of its commitment to its consumers, our industry
has always found ways to meet the challenges placed before it.
Perhaps because of that, some have come to believe that there
is no limit to the burdens they can place on our industry. I am
here to convey what our experts tell us. There are limits to
the stresses that can be endured without resulting impacts on
consumers. As the heating oil situation this winter and the
recent spike in the gasoline market point out, flexibility is
being regulated out, as is the convenience and affordability
our customers, your constituents, have come to expect. It need
not be this way.
We recognize you are faced with increasing demands to
address these matters, and we applaud your efforts to look at
an energy policy. To the extent to which we can help in your
efforts to better understand the policy effects of the many
actions that are under your consideration, we are here to help
you.
Thank you, Mr. Chairman and members of the committee.
[The prepared statement of Red Cavaney follows:]
Prepared Statement of Red Cavaney, President and CEO, American
Petroleum Institute
The American Petroleum Institute (API) is pleased to have the
opportunity to present a statement on the state of the oil and natural
gas industry in the United States. We are also pleased to offer our
thoughts on how industry and government can work together more
effectively in implementing an energy policy that is global in nature
and helps ensure that Americans' future energy and security needs are
met.
API represents nearly 500 companies engaged in all aspects of the
U.S. oil and natural gas industry, including exploration, production,
refining, distribution and marketing.
the state of the industry
It is particularly appropriate that we discuss this topic today
because, as we all know, this weekend is the beginning of what is
traditionally known as America's vacation driving season. Perhaps
nothing better illustrates how the products produced by our industry
serve American consumers, how important those products are to
consumers, and how they affect their everyday lives.
It is important to emphasize that America's oil and natural gas
industry is committed to supplying American consumers with a reliable
and affordable supply of energy for all their needs. Meeting this goal
has not been easy, particularly these last few years that have seen the
industry through countless twists and turns, peaks and valleys. Last
year, for instance, we experienced some of the lowest crude oil prices
in this century, and this year we've seen some of the highest in a
decade. Nevertheless, despite the industry's penchant for rapidly
changing cycles, we have managed to continue fulfilling our mission--
supplying consumers with the petroleum products that they need.
While there have been many cycles in the industry's history, and
surely more in its future, we should not let these temporary booms and
busts obscure some clear long-term trends that are essential to
understanding the industry. In fact, discerning the difference between
these short-term cycles and long-term trends is likely to be one of the
most serious challenges to energy policy in this new century.
oil and natural gas and the country's economy
First, and most important, there is a clear link between the use of
petroleum and economic development. Through all the changes that have
occurred in our industry, one constant has been the growing use of our
products by our customers. Gasoline-powered automobiles have been the
dominant mode of transport for the past century. There is no evidence
that consumers are ready to change that.
Regardless of fuel, the automobile--likely configured far
differently from today--will remain the consumer's choice for personal
transport. The freedom of mobility and the independence it affords are
highly valued. While substitutes for gasoline may someday change this
reality, any such wholesale change is more than several decades away--
the amount of time required to fully retire the existing and still-
growing fleet of automobiles powered by gasoline and to deploy any
replacement fuel source throughout the world.
As a consequence of this, the industry has entered the new century,
not with fading hopes, rather with the bright prospect for sustained
and significant growth in demand for our products for the foreseeable
future. Most forecasts anticipate an increase in demand for our
products worldwide of 15 million to 20 million barrels a day within the
next two decades. That is an increase of between 20 and 25 percent.
It is fair to ask, then, if the industry is up to the daunting
challenge of supplying these products.1The evidence suggests that we
are. The remaining question, then, is whether Congress and the White
House can demonstrate the vision and foresight to adopt an energy
policy that assists in our efforts, or whether we will see a piecemeal
energy strategy that extends encouragement and support with one hand
but creates bureaucratic obstacles with the other.
A successful energy policy must recognize four very important
points:
<bullet> Our flexibility to adapt to the demands of these rapidly
changing cycles cannot be eroded anymore than it already has
been by impractically conceived and uncoordinated new
government restrictions.
<bullet> Given the great technological advances we have made, a vibrant
oil and natural gas industry can coexist with a clean and safe
environment.
<bullet> Our industry is highly globalized and any legislation that
would damage its efforts to conduct business abroad would also
be harmful to our nation's economy.
<bullet> The government must begin an earnest effort to reconsider its
view toward the industry with an eye toward forging an energy
partnership to benefit all stakeholders: consumers, government
and industry.
I am pleased to say we have already seen evidence of this last
point, in the Department of Energy under Secretary Richardson, in some
sectors of the Minerals Management Service of the Department of the
Interior, and in several other areas of the federal government.
Unfortunately, the same cannot be said for all of the federal
government. In all too many places, the oil and natural gas industry is
viewed, not as a partner, but as a force to be controlled and regulated
every step of the way without any full understanding of how such
intervention will affect the industry's ability to meet its
responsibilities to consumers and the nation. In some cases, government
agencies even ignore laws enacted by Congress to ensure that multiple
use (recreation, preservation and development of natural resources) of
government lands is a fundamental consideration in implementing
government land policy.
A failure to move toward this kind of sorely needed reform could
have serious implications. A steadily increasing demand for our
products simply cannot be sustained over time if government policies
are consistently at odds with the practical operational needs of the
industry.
Additionally, government needs to inform consumers of some of the
likely consequences they undertake in dealing with the subject of
energy. For example, in the state of California where stringent
government specifications on the type of gasoline and diesel fuel that
can be sold are in place, this has led to many fewer refineries, all of
which are operating at peak capacity. As the General Accounting Office
(GAO) pointed out in its recent report, any supply disruption caused by
refinery outages tends to quickly upset the state's tight balance
between supply and demand.
Why are there fewer refineries? The economics of meeting the
state's regulatory requirements all but create a situation where
capacity quickly rationalizes to demand levels, eliminating much of the
traditional flexibility which benefits consumers.
I suspect this type of volatility is not what any of us wants for
the rest of the nation. As we enter this new century, it is absolutely
essential that we revisit energy policy in a new light. Circumstances
have changed and will certainly continue changing.1Given all that's at
stake for our nation in the area of energy policy, a closer
collaboration between government and industry needs to be fostered. The
oil and gas industry is not opposed to regulation; we favor smart,
constructive and well-considered regulation, based on sound science and
economics, which will benefit consumers.
Moreover, our industry has repeatedly demonstrated its commitment
to environmental protection. The lion's share of the progress made in
reducing air pollution is attributable to cleaner cars, fuels and
industry facilities and operations. Together, they account for
approximately 70 percent of total emission reductions nationwide since
1970. The U.S. oil and gas industry spent more than $90 billion on
environmental protection during the 1990s. The industry spent $8.5
billion in 1998 alone--and that was more than EPA's total budget and
more than double the net income of the top 200 oil and gas companies.
meeting the country's continued energy needs
Our long-term ability to supply a wide range of products has been
greatly enhanced by continual improvement of processes, technology and
human resources. Indeed, the industry is remarkable in its ability to
respond to adversity and develop ingenious solutions that keep our
products coming to market in ways and at costs that consumers
appreciate.
The intensive use of the latest, most advanced technology is making
the century-old oil and gas industry an innovative, visionary, and
highly efficient new industry. Our industry has been producing, and
intends to keep providing, both the fuels and feedstocks that make life
simpler and safer, more comfortable and more convenient for society.
Our heavy reliance on technology makes us an industry with an exciting
future--a flexible, resilient industry that welcomes change and meets
challenges.
Our industry has embraced technology in many ways, with many
benefits. Daily, the industry explores and operates safely in
increasingly remote locations and in the harshest of conditions.
Technology has driven the costs of exploration and development
dramatically downward: the cost of finding oil has declined by 40
percent over the past 10 years. Moreover, despite sharp increases in
costs due to added regulations, operating costs at U.S. refineries have
fallen by almost 20 percent per barrel, as refining has become more
energy-efficient and new computer hardware and software have improved
the processing of crude oil.
Technology in our industry--and throughout the energy business in
general--knows no boundaries.
recent developments
The recent pricing and supply situation has caused some concerns
about our ability to meet the demand for gasoline and diesel. That is
understandable, but several important points should be understood about
that:
<bullet> First, prices at the gasoline pump are determined by the cost
of crude oil, and crude oil prices are determined by supply and
demand in the international marketplace.
<bullet> Second, high crude oil prices have resulted from a decrease in
foreign oil production and a greater demand for oil from the
recovering Asian economies and a continued growth of Western
economies.
<bullet> Third, although prices rose rapidly, retail prices, after
adjusting for inflation, are generally 40 percent below the
prices of the early 80s, and we have seen those prices
gradually decrease as the supply of crude oil increases.
<bullet> The U.S. oil and natural gas industry is operating its
refineries at record production levels--within safety and
environmental limits--and will continue increasing through the
prime drive season when the demand for gasoline is at its
highest.
<bullet> The requirements for new federally mandated cleaner-burning
gasoline that will be required in about one-third of the
country beginning June 1 is creating uncertainties in the
markets because of fears that refineries might not be able to
supply all the reformulated gasoline necessary. First, this new
gasoline is more difficult to make and has required extensive
investments by refineries. Second, a recent decision by the
U.S. Court of Appeals for the Federal Circuit in a gasoline
patent dispute has potentially significant implications for the
California and federal reformulated gasoline programs. Last
week, the Court denied a petition to rehear this case. If the
decision stands, it will likely impose additional costs on the
manufacture and importation of fuels without providing any
additional air quality benefits to the public. The Federal
Circuit decision could also impact supplies of reformulated
gasoline, as refiners and importers individually evaluate
whether to continue to participate in the reformulated gasoline
programs and either pay patent royalties or incur the costs of
developing formulations that are outside the scope of the
patents. Because of the uncertainty created by the Court's
decision, concerns have also been expressed that importers and
blenders, in particular, may choose to supply less reformulated
gasoline to the market than they would otherwise have done to
avoid potentially infringing on the patents.
<bullet> Finally--and perhaps this is the most important, the decision
by OPEC to increase production in March may have contributed to
a premature and irrational exuberance. The OPEC decision
brought some short-term relief, but the fact remains that the
fundamentals of the world markets still have not changed, and
until this country changes its energy policy, we will continue
to be faced with the fact that we import over 55 percent of our
oil needs.
The price increases we experienced were brought on by short-term
shocks that resulted from sudden changes in supply and demand. Just as
prices were up for a few weeks, they began to turn down when factors
changed.
In a free-market economy, we have seen time and again that price
movements ultimately create balance between supply and demand. Leaving
the marketplace free to continue working is what allows this balance to
be maintained over time.
As has been proven over and over again, the U.S. oil and natural
gas industry can best provide American consumers with a steady and
affordable supply for all their needs when markets are allowed to
function as freely as possible. We are pleased that the federal
government took a balanced approach to the current situation by
encouraging more foreign crude oil production while refraining from
interfering in the marketplace, which is still the best way to get
gasoline to consumers, reliably and at the lowest cost.
The past year and a half has seen us go from a period of extremely
low prices to a peak where crude oil prices have reached levels that
were three times those of the previous year. This dramatic change in
crude oil prices contributed to increases in the prices for petroleum
products. These changes made it difficult for consumers to plan and
budget for expenditures and have absorbed a larger share of family
incomes.
These changes were brought on by increases in world demand for
petroleum due to robust growth in world economies and reductions in
supply by foreign oil producing nations. World petroleum stocks have
been drawn down, and prices have been driven up.
Despite the limitations on world supplies, our companies are
working hard to produce all the gasoline and diesel fuel that our
customers will need during the coming months. Refinery output of
gasoline and distillate oil have set many records this year.
How we got to this point is relatively simple: We have experienced
20 years of more and more overlapping regulations that have left our
nation's petroleum distribution system with minimal flexibility.
Restrictions on producing petroleum in this country have led to
declines in domestic production by one third over the past three
decades. We now import over 55 percent of our petroleum needs. This
large demand on foreign supplies leaves us at the mercy of world supply
and demand conditions and open to the volatility that we have
experienced over the past year.
the enormous cost of volatility
While historically our industry and our nation have been able to
survive the disruptions and nervousness brought on by market
volatility, they have done so at a price. Volatility is in no one's
best interest. Our companies suffer because it is much more difficult
to undertake the types of long-term planning and investment needed for
sustainability. When crude oil prices are rock-bottom, as they were
last year, companies simply do not have the resources needed to invest
in projects that could cost billions of dollars over many years. When
oil prices are higher, as they are today, companies are reluctant to
take the kind of risks necessary for future growth because they have no
guarantee that prices will not plummet again. As one pipeline supply
company executive told us recently, ``Uncertainty leads to paralysis.''
Our suppliers--companies that make pipeline and other equipment
needed for exploration and production--have to put their own interests
first, so when producers quit buying their products because of low
crude oil prices, they have to search elsewhere for customers. By the
time our companies are ready to buy equipment again, those suppliers
may no longer be making those products because they've found more
reliable customers.
Similarly, both producers and their suppliers are too often forced
to lay off many of their employees and those employees get other jobs--
many in other industries--and are thus unavailable when the producers
are once again ready to expand. In the highly specialized area of
petroleum engineering, the number of students entering those programs
at our universities has steadily decreased.
In addition, if the hard times last long enough, many of our
smaller producers and their suppliers will simply close up shop, never
to return.
But there are other casualties as well. The first is the confidence
Americans have always had in our industry to provide them with the
products when they need them at a reasonable cost. Our companies have
strived hard to live up to that trust, and for the most part they have
succeeded. However, there can only be so much of this volatility and
its resulting uncertainty regarding supply and prices before that
confidence is brought into question.
And perhaps even more important are the national security
implications of this volatility. As the world's only remaining super
power, the United States has inherited a tremendous burden, at home and
abroad. The question we must ask is this: how dependent on a reliable
source of the products our companies make are our armed forces and
those of our strategic allies?
The answer, of course, is extremely dependent. Any serious
disruption of any segment of our industry--from production to
transportation to refining to delivery--could place severe strains on
our armed forces' ability to do their jobs. Without a sound energy
policy that encourages greater domestic production and lifts the
stifling effects of over-regulation, we place too much at risk.
It is important to point out that despite the obstacles, our
companies are striving to supply products to consumers:
Refinery processing of crude oil is above average and set a record
in 1999.
Refinery production of gasoline and distillate oil have set many
records for this year.
Refinery utilization is currently above average for this time of
the year, exceeding 93 percent last week.
These measures indicate that our industry is working as hard as
possible to safely deliver the products that consumers need. It is also
important to note that while world supplies are reduced, there are no
shortages today.
How we can meet the challenges: An effective energy policy
Government can and should also take steps to strengthen our
domestic oil and natural gas producing industry. Because the United
States imports over 55 percent of the oil Americans consume, the ebbs
and flows of the world oil market impact the industry's ability to
continuously provide consumers the fuel they need at fully affordable
prices. We can reduce rapid swings in prices by providing greater
diversity in where companies get their supplies of crude oil, both at
home and abroad.
We can reduce our reliance on foreign supplies and also potentially
exert downward pressure on international crude oil prices by opening
our most attractive domestic oil and natural gas prospects to
responsible exploration and development.
One hundred years ago, scientists were predicting the demise of
both coal and oil. Now, they are no longer forecasting the end of our
coal supply, but we still hear the question asked: ``When are we going
to run out of oil?''
The fact is that oil is in plentiful supply--and is likely to
remain so for the foreseeable future. According to the Oil & Gas
Journal, the U.S. Geological Survey's 2000 World Assessment (to be
released at this June's World Petroleum Congress) estimates that,
excluding the United States, the world's undiscovered, conventionally
recoverable reserves amount to 649 billion barrels of oil and 4,669
trillion cubic feet (TCF) of natural gas.
The USGS assessment shows that U.S. undiscovered conventionally
recoverable reserves total 83 billion barrels of oil and 527 TCF of
natural gas.
Looking to the future, technology could well permit the economic
development of the largest known source of hydrocarbons--methane
hydrates--methane frozen in ice. Located in deep water under intense
pressure, methane could provide the world with several more centuries
of available clean energy. The U.S. Geologic Survey has estimated that
the United States has 320,000 TCF of methane in hydrates, which is 200
times the size of conventional gas reserves.
However, our industry cannot draw upon our vast remaining
hydrocarbon reserves unless access is provided for responsible
exploration and development.
Currently, many of these areas have been placed off-limits by the
federal government. Since 1983, access to federal lands in the western
United States--where nearly 67 percent of our onshore oil reserves and
40 percent of our natural gas reserves are located--has declined by 60
percent.
Our search for new domestic offshore oil and natural gas is limited
to the Gulf of Mexico and Alaskan waters because of the congressional
moratoria that have placed off-limits most of the rest of our coastal
waters. Onshore, the President has repeatedly used his executive powers
to limit oil and gas activity on vast regions of government lands.
Congress has refused to authorize exploration on that small section of
the Arctic National Wildlife Refuge that was specifically set aside by
law for possible exploration in 1980. And most recently, the U.S.
Forest Service moved to make it more difficult for our companies to
explore for natural gas and oil on government lands when it announced a
plan to bar road building in virtually all of the large areas in the
forest system, spanning a total of 43 million acres in 39 states.
Our industry supplies the energy to keep America going strong, but
to continue to produce domestic oil and natural gas, we must have
improved access to federal and state lands.
Old arguments about the incompatibility of access and a clean
environment have been disproved. Technology has revolutionized how oil
and natural gas are found and produced. For example, geophysicists use
three-dimensional seismic equipment to locate oil and natural gas with
greater precision so that more oil can be produced with fewer wells.
Fewer wells mean a smaller environmental impact. Improved drilling
techniques allow companies to branch out underground to reach a variety
of oil and gas reservoirs from one location. Offshore wells can now
safely capture oil and gas in ocean depths of thousands of feet in
areas far offshore.
Much has been made recently about the advantages of natural gas,
and indeed they are many. Natural gas is a clean-burning fuel and there
is no shortage of it, domestically. The National Petroleum Council, in
its most recent report on natural gas demand, reported that it expects
that U.S. gas demand will grow from 22 trillion cubic feet (TCF) in
1998 to about 29 TCF in 2010 and could rise beyond 31 TCF in 2015. But
the fact that seems to be lost on some is that natural gas comes from
the same place as oil does, from reservoirs buried deep beneath the
ground. There is no magic fountain spewing natural gas, ready to be
harnessed and delivered to our nation's homes, factories and electrical
generating plants. We must look for it in the same manner we look for
oil, and to do this, we need to be allowed access to the areas where it
is likely to be found.
In addition to denying access for oil and gas development, the
federal government has imposed layer upon layer of regulations on U.S.
refineries without sufficient regard as to how these regulations impact
refiners' ability to meet the full range of needs of American
consumers. In many cases, companies have simply given up attempting to
meet the increasing regulatory demands and shut down their refineries
altogether, to the point that today we have about half the number of
refineries we had just 20 years ago.
Over-regulation reduces the flexibility that refineries need to
respond to the fast-paced changes in today's world. This is
particularly true in the ``balkanized'' distribution system that we
already have in place as a result of federal and state government
mandates for different types of fuels for different sections of the
country as a result of clean air regulations.
In the past, any refinery or distribution system disruption could
easily be overcome by simply switching to another refinery or another
pipeline. Today, with different refineries producing different grades
of gasoline for different regions, such source switching has become
extremely difficult, leaving the system vulnerable to serious supply
problems.
Little effort is made by the government to explain to consumers why
this balkanized distribution system means that people in some states or
regions of the country pay more for their fuel than do people in other
areas. The result is too often unjustified suspicion of and anger
toward our companies and the industry.
The EPA's proposed regulation, announced last week, to drastically
lower the sulfur content of diesel fuel is an example of a government
action that could have significant, negative consequences on our
ability to supply heating oil and diesel fuel. We share the
government's interest in further cleaning the air. But emissions
reductions beyond the 90 percent we have already proposed stand a good
chance of further driving up fuel manufacturing costs unnecessarily,
imposing yet additional burdens on our nation's truckers and farmers.
We do not believe it is unreasonable to ask for a one-year moratorium
on the implementation of these regulations--until sufficient studies of
this extreme policy can be performed. We all share the same goal of
emissions reductions but getting there sensibly without significant
adverse impact on the industry and our nation's consumers is the smart
way to go.
Even with greater access and flexibility, the United States will
continue to need to rely on foreign oil supplies. Thus, it is important
that we maximize the diversity of those supplies to help ensure the
reliability of a continuous flow of oil imports. Unfortunately, U.S.
unilateral trade sanctions and the constant threat of sanctions narrow
our sources of supply, frustrating achievement of this important
objective.
In recent years, unilateral economic sanctions have increasingly
become the policy tool of choice in the conduct of U.S. foreign policy.
One of the favorite targets of these recent sanctions has been major
oil-producing countries. The U.S. currently has sanctions in place
against countries comprising over 10 percent of world oil production
and 16 percent of estimated remaining oil resources. There is little
evidence that unilateral sanctions produce desired outcomes. There is a
better way: working with the governments in which they do business,
some of our companies are adopting their own human rights and
environmental standards.
In short, U.S. policymakers face a dilemma. Growing supplies of
crude oil will be required to sustain world economic prosperity, and
diverse, ample foreign supplies are needed to help ensure our own
country's economic growth. The drive to impose unilateral sanctions is
an obstacle to both of these objectives.
Any effective energy policy cannot ignore the global aspects of the
oil and natural gas industry. Every day we are becoming more and more
integrated into a one-world economy and we cannot seek to isolate the
United States if we want to remain a leading player in this economy. To
that end, we must avoid all policies that make it more difficult for
companies to operate abroad, we must encourage free trade and we must
seek worldwide standards for technical equipment specifications to
avoid duplicity.
Government must also resist the siren song of politically popular
short-term solutions that can have devastating long-term implications.
For instance, the unexpectedly severe cold spell in the Northeast last
winter and the resulting spike in home heating oil prices led to
efforts to create a regional home heating oil reserve for New England.
We are now hearing similar calls for a 1.5 million-barrel oil reserve
for California. In both cases, the motivation behind the proposals is
understandable. Public officials have a sincere interest in seeing that
their constituents are not inconvenienced or harmed by supply
disruptions that could lead to shortages or higher prices. We share
that interest. However, we must caution against the creation of such
reserves because they would have the ultimate effect of the government
becoming a heavy player in the marketplace, something no one wants.
If the federal government is in the marketplace, many operators in
the private sector will choose to take their business elsewhere rather
than compete head-to-head with the government. We need only look to the
1970s to see the nature of adverse impacts when the federal government
plays a direct role in thr daily marketplace.
The premise behind a regional reserve is that the government would
buy oil and release that oil into the marketplace when prices get to be
too high. It may sound like a rational idea, until you stop to look at
the details. Who would be responsible, for instance, for deciding
exactly when prices are too high and how much oil to release? What
guarantees would we have that such a crucial question would not become
embroiled in politics, particularly in an election year?
Equally as important are the economic considerations. With its deep
pockets and no need to turn a profit, government has the freedom to buy
oil at high prices and sell low to keep retail prices artificially low.
Private industry, on the other hand, survives by being able to purchase
large quantities of oil at lower wholesale prices and holding it until
it can sell the oil at higher retail prices. With the government as a
player the hope of making a fair profit evaporates and companies have
no incentives for buying and holding large inventories. The result
would be lower total inventories than we'd have without the government
reserves.
conclusion
In closing, we share your concern for the future of the industry
and the security of our nation. America's oil and natural gas companies
have a long and proud history of providing this country's consumers--
including our armed forces--with a reliable and affordable supply of
energy to make their homes comfortable and take them where they need to
go, when they want to go. Through good and lean years, U.S. suppliers
of natural gas and petroleum products have kept America's armed forces
mobile, its factories running and have provided the fuel to move goods
from manufacturers to retailer and, ultimately, into America's homes
and offices.
To the extent to which we can help in your efforts to better
understand our industry and our government can best work together to
forge a sound and workable energy policy, we are here to assist you.
Mr. Barton. Thank you, Mr. Cavaney.
We would like to hear from Michael Johnson, who is here on
behalf of the Natural Gas Supply Association.
STATEMENT OF MICHAEL L. JOHNSON
Mr. Johnson. Thank you, Mr. Chairman; and greetings from
the great State of Texas where it is hot today. I would like to
thank you for this opportunity to discuss the important role
natural gas can play in strengthening our economy and improving
our environment.
I am Michael Johnson. I am Vice President of Conoco, and I
look after the gas and gas liquids business. As you know,
Conoco is a major domestic and international oil and gas
producer. I also represent the Integrated Independent Producers
of the Natural Gas Supply Association.
I would like to address four topics in my remarks, and then
expand those for the record.
I will discuss, first, the supply of natural gas; second,
the ways that supply meets potential demands; and, third, the
ways our industry is changing to reduce costs and increase
investments in technology. And, last, I would like to discuss
government policies that raise the cost of natural gas and, in
the process, damage our economy and our environment.
First, let me address supply. Producers are highly
optimistic about the long-term supply of natural gas. A recent
National Petroleum Council study estimates the recoverable
natural gas resource space in the lower 48 States is 1,400
trillion cubic feet. That is enough for many decades into the
future. Today's estimate is substantially higher than in 1992.
That is in addition to the large volume of natural gas we
produced between those years.
New technologies are permitting us to increase recoverable
gas resources faster than we are consuming them. One reason for
this increased resource base is an expansion into frontier
areas such the Mackenzie Delta, the Beaufort Sea and the North
Slope. Tapping into these resources is not inexpensive,
however. Climate and terrain are frequently hostile. We must
constantly balance cost, risk, and potential to keep natural
gas prices cost competitive.
Today we are winning the battle to keep natural gas prices
competitive, and the robust supply of natural gas makes us
confident of our ability to meet future market demand, demand
that we all agree will increase substantially in response to
our Nation's need to fuel our economy.
Natural gas producers are also faced with a significant
challenge. That is fueling the majority of new electric power
generators that will be added in the next 20 years. We are
confident that we can meet that challenge and are preparing to
serve that growing demand in addition to the traditional
markets that we have always served.
Producers have to bear much of the responsibility to keep
prices competitive, and we must do so by competing in the
larger energy marketplace that is a global marketplace, and
there are traditionally volatile prices in that marketplace. We
must also cope with massive regulatory and technological
changes that characterize today's international and domestic
wholesale and retail markets.
To meet these challenges our industry is undergoing a major
consolidation. The companies that emerge will be stronger,
better able to compete, better able to invest in new
technologies and better able to control the cost of bringing
natural gas to the marketplace. But the changes we are
undertaking to achieve that end are difficult and quite
painful.
It would be nice to think that these wrenching industry
changes would be enough to ensure continuing gas supplies at
competitive prices to all Americans, but they are only part of
the solution. Just as vital is a policy climate that permits
our companies to produce resources in ways that are cost
effective and efficient. We have the knowledge and the
technologies to do that, we have the resource base, but we do
not have the Federal policies we need to bring natural gas to
the American public long-term at competitive prices.
Mr. Chairman, you have consistently demonstrated your
concern for energy costs and competitive markets.
Unfortunately, not everyone in government shares your sharp eye
for policy consequences.
There are people in positions of power today who are
misleading the American public. They refuse to acknowledge our
industry's proven ability to produce natural gas in ways that
respect and preserve the environment. They refuse to credit our
technological breakthroughs. They refuse to respect the
Nation's need for natural gas. As a consequence, they are
trying to prohibit natural gas exploration and production in
some of our richest resource bases both on shore and offshore
that continue to be locked up.
There are two inevitable consequences to policies that
reduce access to America's rich natural gas resources, and
those consequences are either higher natural gas prices or
increased switching to higher-polluting fuels, which no one
wants. Neither of those consequences would prove beneficial to
the economy or to our environment.
In conclusion, Mr. Chairman, we need your help to inform
the Americans about the facts; and we need your help to change
Federal policies toward natural gas production in ways that
benefit our Nation, our economy, and all of our citizens. Thank
you very much.
[The prepared statement of Michael L. Johnson follows:]
Prepared Statement of Michael L. Johnson, Vice President & General
Manager, Conoco Inc.
Thank-you, Mr. Chairman, for this opportunity to discuss the
important role that natural gas can play in our future energy
portfolio. I am Michael Johnson, vice president and general manager of
Conoco, Inc.
Conoco is an integrated, international energy company headquartered
in Houston, Texas, and is among the top dozen or so U.S. gas producers.
The company had revenues of $27 billion in 1999 and operates in more
than 40 countries. Conoco's natural gas and gas products operations
include the gathering, processing, distribution, and marketing of
natural gas and natural gas liquids in North America, the U.K., Norway
and Trinidad. In 1999, Conoco marketed natural gas volumes in excess of
4.4 billion cubic feet per day in the U.S. and Europe.
This year, Conoco is proud to be celebrating its 125th anniversary.
I am also today representing the producers of the Natural Gas
Supply Association. NGSA represents integrated and independent
companies that produce and market domestic natural gas. Established in
1965, NGSA encourages the use of natural gas and a regulatory climate
that fosters competitive markets.
I would like to address four topics in my remarks today:
<bullet> First, I will talk about the supply of natural gas available
to U.S. consumers, businesses, and industries.
<bullet> Second, I will address the ways supply meets potential demand.
<bullet> Third, I will talk about ways our industry is changing and
evolving to meet America's need for clean, cost-competitive
natural gas.
<bullet> Lastly, I will address the government policies that raise fuel
costs and unreasonably and unfairly limit our citizens' access
to the natural gas they need.
Supply
First, let me address the supply of natural gas.
I want to emphasize producers' optimism about the long-term supply
of natural gas.
<bullet> Today, we supply about 23 percent of the energy America
consumes. That's about 19 quadrillion BTUs (or ``quads'') of
domestic gas, and an additional 3 to 4 quads from independent
and affiliated companies in Canada.
<bullet> There is no doubt that, in the future, the U.S. could--if we
chose to do so--dramatically increase the amount of natural gas
marketed domestically. The resource is there.
There are many estimates of U.S. natural gas supply. All are highly
positive. At the request of the Department of Energy, the National
Petroleum Council (or ``NPC'') undertook a study in 1999 that estimates
the recoverable natural gas resource base in the Lower-48 states at
1466 trillion cubic feet (or ``tcf''). That estimate is significantly
stronger than the estimate the NPC made in 1992. In fact, the new study
finds a strong probability of at least 171 tcf more than it found in
1992. That's in addition to the 124 tcf we produced between 1992 and
1999.
The reasons for this growth are the new technologies and new
methods of locating resources that the industry has developed and
implemented. Our strides in these area are so rapid that, as the NPC
numbers show, we are increasing recoverable resources faster than we
are consuming existing reserves.
Part of this expansion of the resource base involves a re-
exploration and re-assessment of areas that had been assumed to be in
decline, such as California. We are also expanding our reach out of the
Lower-48 states to new frontiers such as offshore eastern Canada, where
experts predict lie upwards of 45 tcf of natural gas. Western Canada,
the Mackenzie Delta and Beaufort Sea, and the North Slope offer
additional possibilities, through reservoirs in traditional formations
and through our greatly increased ability to tap coal-bed methane.
Tapping into the resources in these frontier areas is not
inexpensive. Climate and terrain are frequently hostile. We must
constantly balance cost, risk, and potential in an energy market that
is frequently unpredictable.
Demand
Despite the risk, however, the robust supply of natural gas makes
us confident of our ability to meet market demand. We can, if called on
to do so, increase both the volume of natural gas use and the
percentage of U.S. energy supplied by gas.
Analysts and experts agree. The most recent Annual Energy Outlook
from the Energy Information Administration, for instance, shows natural
gas production in 2020 at slightly more than 27 quads and imports at
about 5.3 quads. On a consumption basis, the EIA sees natural gas as
rising from today's 23 percent to almost 27 percent of our total energy
market.
Such an increase would make natural gas the nation's fastest-
growing fossil fuel. Over the next two decades, as total U.S. energy
consumption grows at a rate of 1.3 percent annually, we see natural gas
growth at about 1.5 percent.
Growth could, of course, exceed that level substantially. Should
the U.S. decide to pursue a strategy of tighter reductions in air
emissions, the amount of natural gas needed is likely to grow
precipitously. Some models show natural gas use rising as high as
approximately 35 percent of the nation's energy supply should the
Congress choose to impose stricter pollution-reduction scenarios on
U.S. business and industry. And finally, our most significant increase
in demand will be in electric generation. The challenge that this poses
our industry is significant--but I am confident in our ability to
develop and supply natural gas in whatever quantity and price is
dictated by the market.
Industry Evolution
At the same time as natural gas demand projections are rising above
previous expectations, the entire energy industry is becoming more
competitive. Restructuring of wholesale and retail markets in natural
gas and electricity is well advanced. New technologies like
distributive power are giving residential and business customers new
options.
The result has been high volatility in energy prices. It has been
difficult for U.S. companies to predict revenue streams accurately and
to plan capital investments. Wall Street has at times been wary of our
industry, making it difficult for some of our companies to raise the
capital required to expand exploration and production. You only need to
look at our stock prices so see that.
At the same time, we're finding that reservoirs in some areas, such
as the Western Gulf of Mexico, deplete more rapidly than originally
projected. That puts additional pressure on our capital budgets.
The volatility of the global oil market has long-term negative
effects on our companies because the vast majority of natural gas
producers also depend on revenue from oil production. Witness the
historically low oil prices in 1998 and 1999. The precipitous drop in
revenue forced us to lay off tens of thousands of employees, shut in
wells, and ratchet back on exploration budgets.
Revenue volatility also brought on a wave of worldwide corporate
consolidations that continues today.
In the long run, these restructuring changes will help our industry
recover from the aftermath of low energy prices, keeping prices
competitive as we rehire employees and redeploy equipment into the
field.
The Policy Climate
Many of the market forces bringing about these changes are beyond
the appropriate scope of U.S. government policy. But there are several
major policy areas that will, in the long run, determine the price
America will pay for the energy on which our economy rests.
Let me put that another way. As I have explained here today, there
is no question that the U.S. has vast natural gas resources and that
our producers can bring these resources to market. That information
does not, however, answer the question: How much will that gas cost?
Will the policies of the U.S. government cause the American people
to pay unreasonably high prices for the clean-burning natural gas they
need?
Mr. Chairman, you have consistently demonstrated your concern for
energy costs and competitive markets. You have supported federal
policies for the natural gas industry that have reduced the
unreasonable regulatory costs that have burdened our industry--and our
customers--in the past. You have moved through your committee a bill on
electricity restructuring that shows a deep concern for the budgets of
American families and for the competitiveness of American industries.
Unfortunately, not everyone in government shares your sharp eye for
policy consequences. There are those in positions of power today who
are misleading the American people. They are endorsing a position that
locks up increasing amounts of land--to prohibit natural gas
exploration and production in our richest resource areas, both on- and
off-shore. And they are misleading our citizens into believing that can
be done without economic ramifications.
America's richest natural gas resources--the resources we can
produce most cost-effectively--lie under onshore and offshore federal
lands. Our industry can produce this gas in ways that are
environmentally sensitive, and we are committed to that goal. Advances
in our industry have reduced the impact of gas production on the
environment. And dozens of environmentally sensitive technologies are
being employed by the industry.
Yet, we hear constantly from a number of highly placed federal
policymakers who oppose domestic natural gas production and transport.
I do not know if they are merely misinformed, or if there is some other
reason for their statements. What I do know is that they are trying to
convince the American people that it is in their best interest to
prohibit natural gas production and transport across much of this
nation.
It is not.
It is in all of our best interests to ensure that Americans have
access to the energy they need at the lowest possible cost--low-cost in
terms of price, and low-cost in terms of environmental impact. Domestic
natural gas production is the ideal way to meet those conditions.
Thus, Mr. Chairman, denying access to public lands can only lead to
two consequences--fuel switching, to the extent that is possible, and
higher costs to future generations. We do not think either of those
choices are good alternatives. The recent rise in gas prices and the
high likelihood of price spikes and supply disruptions this year are
consequences of previous policy decisions, its time to change
directions before damage is done to the U.S. economy.
Conclusion
Let me conclude my remarks today, Mr. Chairman, by asking for your
help in changing federal policies toward natural gas production. We
need your help in getting across the facts about natural gas to the
American public. And we need your help in devising policies that give
Americans responsible access to the clean, cost-effective energy
resources with which our nation abounds. We will work with you and your
staff to develop any of these needed policies.
Thank-you.
Mr. Barton. Thank you, Mr. Johnson.We now want to hear from
Cathy Abbott, who is here representing the Interstate Natural
Gas Association of America.
Again, I just want to say for the record what a pleasure it
was when I was in the White House Fellows program to work you
with in the Department of Energy; and it was really, really an
educational and a personally growing experience for me. And I
want to let the audience know that the young baby that was
needing a diaper change is now 6'5'' and thinking about going
to college at Texas A&M. So times do change.
Your statement is in the record in its entirety, and we
would recognize you for 7 minutes to elaborate on it.
STATEMENT OF CATHERINE GOOD ABBOTT
Ms. Abbott. Thank you, Mr. Chairman. And I think the
education was all the other way. You were my one and only White
House Fellow that I had the chance to work with while I worked
in government.
Mr. Chairman, my name is Cathy Abbott. I am Chief Executive
Officer of Columbia Gas Transmission Corporation and Columbia
Gulf Transmission Corporation, which are the pipeline units of
Columbia Energy Group. I am here to testify on behalf of INGAA,
whose members transport 90 percent of the natural gas consumed
in the United States.
I am submitting to the record two INGAA studies, one on
pipeline and storage infrastructure requirements and the other
one on coordinating environmental agency review of new pipeline
projects.
As I detail in my written statements, the Nation's natural
gas policy has come a long way toward relying on market forces.
In addition, we believe that, in crafting energy policy, we
should acknowledge three key public benefits of increased
natural gas use.
The environment. Natural gas is an environmentally clean
fuel and will play an increasingly significant role in
improving the Nation's air quality.
Reliability and security of supply. The vast majority of
the natural gas used in the United States is produced here in
North America.
Safety. Natural gas is delivered to millions of homes,
voters, businesses, through underground pipelines which are by
far the safest form of energy transportation.
Today, natural gas provides 25 percent of U.S. energy
consumption. My colleagues on the earlier panel from the Energy
Information Administration project that natural gas will
increase from about 22 Tcf today to a little more than 30 Tcf
shortly after 2010. That reflects a 36 percent increase in use.
The largest area of growth, about 60 percent of this total, is
in the electric generation market where natural gas offers an
inexpensive, clean solution to improving air quality.
However, to achieve those public policy benefits and to
grow the gas market, interstate pipelines will have to
construct new facilities. A study conducted for INGAA estimates
that 2,100 miles of new pipeline are needed every year between
now and 2010 to serve this increased demand.
We can only see the need for additional pipeline capacity
from today's market signals. For example, this past winter,
during a normal weather period, New York City, natural gas
prices delivered to the city gate in New York, normally about
$3, jumped to as much as $15 for a short period, indicating a
lack of transportation capacity, not value going to the
producers or the pipelines.
For the coming year, the value of delivering gas to New
York City from the producing area exceeds the actual cost of
transportation by 50 percent, again, a market signal of
insufficient transportation capacity.
Finally, demand in the Northeast is expected to grow
dramatically, largely fueled by gas-fired power plants with a
load factor of 70 to 80 percent, and we believe that current
pipeline capacity is insufficient to serve that load.
Now, with an energy policy that seeks to let markets work
where they can, what solutions do we have to offer? INGAA
believes three criteria must be met to achieve market-driven
growth in gas use:first, an efficient certificate and
construction process to expedite the installation of needed
pipeline infrastructure; second, increased regulatory
flexibility to allow pipelines to serve the needs of a changing
market; and, third, regulated return sufficient to reward
companies for the risk of building new pipelines and sufficient
to attract capital to these projects.
Turning to the first, today the regulatory process for
constructing pipelines is overly complex and time-consuming. A
good example of regulatory delay is the proposed Millennium
Pipeline Project which we are involved in to serve the mid-
Atlantic/New York/Northeast market and has more than 90 percent
of its right-of-ways in existing utility corridors. Millennium
filed its application with the Federal Energy Regulatory
Commission in December 1997. Two and a half years later, the
FERC has yet to take action.
During that time, Millennium has spent $40 million for
project development, mostly to comply with various legitimate
State and Federal environmental regulations and to respond to
almost 400 FERC environmental data requests.
In our experience, much of the delay and associated costs
are driven by the need to harmonize the often inconsistent
requirements by the many State and Federal agencies with a role
in the approval process.
I mention Millennium because its experience is not unique,
yet it is dramatic. While interstate pipelines are committed to
sound environmental practices, we believe the environmental and
regulatory review should and can be streamlined and coordinated
to resolve tradeoffs among parties and to process contracts
much more quickly. We must reduce these excessive delays and
permit the timely construction of important new pipeline
projects if we are to connect growing supplies with growing
markets.
Another critical issue facing pipelines and their customers
is the need for more flexibility in structuring and delivering
services at fair prices. Today, local gas distribution
companies hold about two-thirds of the firm contracts for
pipeline capacity. However, in the future, with unbundling and
choice at the consumer level, a larger share of pipeline
capacity will be held by marketers, producers, power
generators, and other players. Because these new customers use
capacity significantly differently than our traditional
customers, they expect pipelines to respond with new kinds of
services and new kinds of pricing packages.
FERC recently approved a rulemaking that provides
additional tools to meet these challenges, and we recognize and
applaud the progress FERC has made. We urge the Commission to
continue to press ahead with regulatory reform to allow
pipelines to respond quickly and flexibly with these new
services and prices in an increasingly diverse customer base.
Mr. Chairman, while the environmental, economic and energy
policy benefits of increased natural gas use are clear, the
regulatory challenges facing us in meeting that demand are also
clear. I want to thank you and the other members of the
committee for providing me the opportunity to testify today.
Thank you.
[The prepared statement of Catherine Good Abbott follows:]
Prepared Statement of Catherine Good Abbott on Behalf of The Interstate
Natural Gas Association of America
Mr. Chairman, my name is Catherine Good Abbott. I am chief
executive officer of Columbia Gas Transmission Corporation and Columbia
Gulf Transmission Company, wholly owned subsidiaries of Columbia Energy
Group. I am here today to testify on behalf of the Interstate Natural
Gas Association of America (INGAA). INGAA is the trade association that
represents interstate natural gas pipelines in the United States, the
inter-provincial pipelines in Canada and PEMEX in Mexico. These
pipeline systems transport 90 percent of the natural gas consumed in
the United States.
Thank you for providing me this opportunity to testify before you
today.
Natural gas today provides 25 percent of the energy consumed in the
United States. As you know, natural gas does and will increasingly play
a major role in improving our nation's air quality. The chart attached
to my testimony clearly demonstrates the environmental benefits of
natural gas. In addition to the important clean fuel benefits, the vast
majority of the natural gas consumed in the United States is produced
in North America; only a tiny portion of our supply comes from imports.
Finally, transporting reliable natural gas to fuel millions of homes
and businesses by interstate pipelines is by far the safest and most
reliable form of energy transportation. We continuously monitor and
inspect our facilities to ensure they operate safely.
I'd like to discuss today the implications of a 30 trillion cubic
foot (Tcf) market for our nation and for the natural gas pipelines that
will transport that energy to customers across the country.
Specifically, I will elaborate on the public policy benefits of
increased gas use and the challenges facing U.S. pipelines in meeting
this demand.
First, some background on the natural gas industry is helpful in
creating a clear picture of where we are today. The history of wellhead
price regulation in our country is a dismal one. Ten years ago,
Congress took steps to repeal price controls at the wellhead, which led
to the transformation of our industry. In 1992, the historic FERC Order
636 ended the regulation of pipeline natural gas sales, but the
transportation of natural gas remained regulated and was restructured
by FERC.
In the years since Order 636, interstate pipelines operating in a
competitive environment have become more efficient, they have reduced
their operating costs and created and offered new services. In the
period from 1991-1997, volumes flowing on interstate pipelines
increased by 13 percent, while operation and maintenance costs were
reduced by 42 percent across the industry. Today, the cost of
transporting natural gas represents only about 16 percent of the price
paid by the end user, down from 23% in 1986.
The numbers show that competition works in the natural gas
industry. We are moving more natural gas today than at any time in
history. Natural gas pipelines bring the cleanest, most reliable and
most efficient fuel source to our nation's communities, and we stand
ready to take on a larger role in assuring a plentiful and reliable
energy supply for our country in the new millennium.
public policy issues drive demand for a 30 tcf market
The Department of Energy's Energy Information Administration
estimates that natural gas use will increase from about 22 Tcf today to
30 Tcf shortly after 2010, reflecting a 36 percent increase in natural
gas use. The largest area of growth, about 60 percent of this total, is
expected in the electric generation market. In some areas, the
anticipated growth is even more significant. In the Northeast, for
example, demand for natural gas used for power generation is expected
to increase by 250 percent!
The primary reasons for the rapid growth in the power generation
sector relate to the relatively low cost of gas-fired generation, and
the low air emissions that allow these facilities to comply with
stringent clean air standards. Advanced gas-fired combined cycle
turbines result in cleaner and more economically priced power that
provides equivalent or better reliability compared to other fossil
fuels, without the resulting environmental impacts.
Aside from other factors, this would be a positive situation, both
for consumers and our industry. But at the same time we are
anticipating phenomenal growth in natural gas demand, there is growing
concern over weaknesses in the energy delivery system in the Northeast.
These concerns were glaringly evident this past winter during the month
of January. For a period of just a few weeks, temperatures that were
statistically normal led to short-term energy shortages, and
significant spikes in energy prices. On January 18, 2000, natural gas
prices delivered to the city gate of New York City, normally about $3
jumped to as much as $15. Since interstate natural gas pipeline rates
are capped under current regulations, these increases did not impact
pipeline revenues. The shortages of fuel oil, and resulting price
increases, during this same period are also well documented.
This is not just a winter issue. Concerns have also arisen about
the ability of power grids to maintain reliability during the coming
summer months if temperatures remain high for a significant amount of
time. Several areas across the country, including the Northeast, report
that power shortages are likely this summer. For example, the New York
Public Service Commission noted last week that limited electric
generation will have an impact on prices throughout the Northeast. Some
Northeast utilities (for example, Consolidated Edison) are predicting
significant price spikes as much as 25 percent higher this summer.
With this set of issues before us, our challenge is to maximize the
public policy benefits of increased natural gas use in order to respond
to the growing needs of the marketplace. As we see it, the following
three criteria must be met in order to achieve the ambitious objective
of a 30 Tcf market:
<bullet> an efficient certificate and construction process to expedite
the installation of the infrastructure needed for the future;
<bullet> increased regulatory flexibility to serve the needs of a
changing market; and,
<bullet> the availability of capital.
efficient certificate and construction process needed
To meet the demands of a 30 Tcf market, interstate pipelines will
need to construct a significant number of new facilities. A study
called ``Pipeline and Storage Infrastructure Requirements for a 30 Tcf
U.S. Gas Market'' was conducted by Energy and Environmental Analysis,
Inc. for the INGAA Foundation. This study found that approximately
2,100 miles of new pipeline will be needed every year between now and
2010 to have the capacity necessary to serve this increased demand.
The pipeline construction process has become increasingly complex.
As you may be aware, it is simply getting more difficult to build any
type of new facility. In the U.S., we must obtain and coordinate
multiple state and federal environmental permits. We also must consider
the concerns of landowners, who are becoming more interested and
involved in our projects. To keep our projects economic, we must keep
costs under control. And to keep the costs under control, we must
promote more efficient review and approval processes--within our
companies and among the regulatory agencies that ultimately decide the
fate of the project.
Many new pipeline proposals have encountered delays and increased
costs at FERC due to the need to satisfy requirements under various
environmental statutes that are administered by a variety of state and
federal agencies. While interstate pipelines are committed to sound
environmental practices, we believe the environmental and regulatory
review of new pipeline proposals should be streamlined and coordinated
to reduce such costs, reduce the excessive delays that are now
experienced, and permit the timely construction of important new
pipeline projects.
As an industry, we have been working to encourage FERC, CEQ and
other Administration Departments and agencies that participate in the
project review of proposed pipelines, to develop an Interagency
Agreement to coordinate this federal agency review. The INGAA
Foundation sponsored a study to identify those points in the existing
project review process where additional interagency coordination could
improve the process for both applicants and participating agencies. We
have received indications from CEQ, FERC and others that they are going
to go forward with this important effort to seek such an agreement.
increased flexibility required to meet the needs of a changing market
The evolving competitive nature of the natural gas industry
requires mechanisms allowing existing and new customers to gain access
to natural gas pipeline services at fair prices. Currently, gas utility
companies hold approximately two-thirds of the capacity on interstate
pipelines. But we do not expect gas distribution companies to be our
only major customers in the future. Marketers, power generators and
other end-users, including producers, will join them. These customers
use capacity differently than gas utilities. So we will have to
transform the services we sell to meet the needs of these customers.
The challenge of accommodating diverse new customers is both
operational and commercial. The load profiles of gas utilities,
industrials and electric generators are diverse, and the economic
factors that motivate them differ greatly. In order for pipelines to
serve all types of customers, changes are required to many pipeline
tariffs, which are designed to provide high-quality service for
residential customers. Non-utility customers want different services
than the standard utility tariffs provide. In addition, some gas
utilities want the option to buy less or different service from their
pipelines, while others will be looking to non-pipeline sellers of
capacity.
Pipelines will need greater flexibility, both to negotiate
contracts with old and new players in the capacity market as well as to
price services appropriately for different markets. FERC has recently
approved a rulemaking that will provide us with some additional tools
to meet these challenges by committing to expeditiously process
requests to implement new and innovative types of services and to
permit new pricing structures. We recognize that the FERC has taken
important steps in this area, and urge them to continue to provide the
resources and attention necessary to make this a policy priority.
availability of capital critical
As I mentioned earlier, between now and 2010, approximately 2,100
miles of new gas transmission must be added each year to accommodate
market growth to 30 Tcf. To accomplish this, the natural gas pipeline
industry will need to invest upwards of $32 billion for pipeline
transmission and storage facilities.
Pipelines must compete for investment capital in the marketplace
with S&P 500 companies with similar risk profiles for the same capital.
In most cases, pipelines also have to compete for capital within their
own organizations. A fundamental tenet of this decision-making process
is that increasing risk requires a return commensurate with that risk.
If returns on pipeline investments are not commensurate with the risks
inherent in the pipeline business, less capital will be invested in
pipeline projects relative to investments in other businesses that have
a better risk/return profile.
Risks for the pipeline industry have increased substantially in
this decade and will likely continue. These increased risks include:
(1) expiration of long-term gas utility transportation contracts and
the prospect of non-renewal; (2) movement to shorter-term contracts
with new non-gas utility customers; (3) competition from unregulated
marketing firms who can buy capacity at regulated rates and sell it at
unregulated rates; (4) state commission restructuring of gas and
electric services; and (5) federal electric restructuring initiatives
which cause uncertainty in the market that offers our best opportunity
for future growth.
FERC's current methodology for setting return assesses each
pipeline's risk and sets a range of returns commensurate with that
risk. In order for pipelines to compete effectively for capital, this
model, which makes the reward commensurate with risk, is necessary.
conclusion
INGAA supports a strong national energy policy, and we believe it
begins with a strong natural gas industry from the wellhead to the end
user. In today's environment, our ability to meet the anticipated 36
percent market increase is not a given. All segments of the natural gas
industry will have to work cooperatively to develop the 30 Tcf U.S.
market. While the environmental, economic and energy policy benefits of
this market are clear, also clear are the challenges facing those of us
in the natural gas pipeline industry who are being called upon to meet
our nation's energy needs.
Mr. Chairman, I want to thank you and the other Members of the
House Subcommittee on Energy and Power for providing me the opportunity
to provide information on the public policy benefits of increased use
of natural gas. As I have stated, INGAA believes three things are
essential in order for interstate pipelines to help deliver those
benefits: an efficient certificate and construction process, the
regulatory flexibility to respond to a changing market, and capital at
competitive rates.
Comparative Emission Levels From a 300-Megawatt Power Plant
------------------------------------------------------------------------
New Gas-
Existing New Coal Fired
Coal Boiler Combined-
Boiler Cycle
------------------------------------------------------------------------
NO<INF>X</INF> Emissions (lb/MMBtu)............... 0.50 0.18 0.04
SO<INF>2</INF> Emissions (lb/MMBtu)............... 1.20 0.42 0.00058
Particulate Matter (lb/MMBtu).......... 0.11 0.04 0.0029
CO<INF>2</INF> Emissions (lb/MMBtu)............... 205 205 125
------------------------------------------------------------------------
Source: Energy and Environmental Analysis, 1997.
Mr. Barton. Thank you, Mrs. Abbott.
Mr. Barton. We now would like to hear from Mr. Roger
Cooper, who is here on behalf of the American Gas Association.
STATEMENT OF ROGER B. COOPER
Mr. Cooper. Thank you, Mr. Chairman. I appreciate the
opportunity to testify.
I am here on behalf of the American Gas Association. We
represent 189 utilities that serve over 60 million customers in
all 50 States and the District of Columbia.
I am here today to say ``ditto,'' to what much of the other
panelists have said. Natural gas has come of age. It is today
America's cleanest fossil fuel in abundant supply, as Mr.
Johnson discussed.
This is a room where a lot of differences are often aired,
and today I would like to point out some similarities. We are
at a point where there is one area of energy policy where there
is substantial agreement across the board, and that is the use
of natural gas will increase. Cathy Abbott says it will
increase 36 percent by the year 2010. Bill Martin says it will
increase 60 percent by the year 2020. These are essentially
comparable figures.
What will this mean? We have adequate supply. Will we be
able to get it out of the ground? Will we have the capacity to
move it? Will we have the capacity to get it to the ultimate
consumer? Can we do that economically? Can we do that in an
environmentally friendly manner?
This morning I would like to talk about the downstream side
of the business, some of the new technologies, and what is
making gas so valuable to customers. Before doing that, I would
just like to note that a number of our member companies were
involved with the National Petroleum Council gas study; and we
do endorse that study and the views as to what needs to be done
to improve the gas picture at the wellhead.
We are looking at a new energy future, and it is a good
future. It is one that is primarily market driven. It is not
going to need massive government intervention. It is aligned
with the current market trends. It is consumer friendly. It is
environmentally friendly.
As coal was the dominant energy source for the 19th
century, as oil was the prize of the 20th century, so natural
gas will be the fuel of the future, will be the fuel to the
21st century.
It is the only fuel out there today that can bridge the gap
between the environmental demands and the economic realities.
It is the fuel that customers demand today.
Bill Martin talked a little bit about the Fueling the
Future Study which his group did for the American Gas
Foundation, and I am not going to go through all of those
points he made. He gave you a lot of numbers. I will repeat a
couple of them: That gas will increase by 60 percent over 20
years, that under that study we would decrease U.S. Energy
consumption by 6 percent. We would do this in a very
environmentally friendly way, reducing SO<INF>X</INF>,
NO<INF>X</INF>, particulates and CO<INF>2</INF> emissions; and
we could back out 2.6 million barrels of oil a day if we did
it.
Where we differ at AGA somewhat from some of the other
projections, EIA and some of the others, we all look at a
growing gas market. We slice up the pie somewhat differently.
We see probably a doubling of large-scale, gas-fired electric
generation, the big turbines. EIA is probably looking at a
tripling of that number. Where we see the growth is going to be
in other direct uses of natural gas, primarily distributed
generation, cogeneration, fuel cells, microturbines; and these
systems are coming on the market today. I think they will be
incremental.
Sometimes people fear these sort of changes. Are we going
to get rid of all our power plants? No. I think the Fueling the
Future Study talks about a future that relies on coal, relies
on nuclear, and is going to rely on some of these new
technologies.
One of the biggest challenges in energy policy today is the
NIMBY issue, ``not in my backyard.'' And what you have with
distributed generation is the opportunity for YIMBY, ``yes in
my backyard,'' yes, I want those technologies that I can use
that are available to me that will give Americans their own
sense of energy independence.
We have put together a blueprint which we will be handing
out--and I take your cue. Mr. Yergin did not do this. Showing
it for cameras that are not on--a blueprint on fueling the
future and how Congress should act to implement increased gas
use. That would include repeal of the tax on contribution and
native construction, which is essentially a tax on hooking up
new gas customers; further RD&D for natural gas; and a lot of
issues that Cathy and Michael talked about at the wellhead in
streamlining permitting.
With that, I will conclude, and I will be happy to take any
questions.
[The prepared statement of Roger B. Cooper follows:]
Prepared Statement of Roger B. Cooper, Executive Vice President, Policy
and Planning, American Gas Association
Good morning, Chairman Barton and members of the committee. I am
honored to be here today to present the views of the American Gas
Association on natural gas demand in the 21st century.
AGA represents 189 local natural gas distribution companies, which
deliver natural gas to 60 million customers in the United States.
As coal was the dominant fuel of the 19th Century and oil during
the 20th Century, we believe that natural gas will be the fuel of the
21st Century. That is because natural gas is the only energy source
currently available that can bridge the gap between environmental goals
and economic imperatives.
Today you have heard the testimony of the author of the American
Gas Foundation's study Fueling the Future: Natural Gas & New
Technologies for a Cleaner 21st Century. Bill Martin described to you a
scenario for an increase in gas demand from 22 quadrillion Btus (about
21.4 Tcf) today to 35 ``quads'' (almost 34 TcF) in 2020. He told you
about the enormous environmental, energy security and efficiency
benefits that will result. If gas consumption in 2020 is 60 percent
higher than today (35 quads) we can:
--Reduce CO<INF>2</INF> by 930 million tons per year.
--Reduce oil imports by 2.6 million barrels per day.
--Reduce national energy consumption by 6 percent.
Another benefit that may be of particular interest to this
subcommittee has to do with reliability. Not only does the gas industry
have an unparalleled reputation for reliable service, but also natural
gas technologies can be used to support the operations and reliability
of the electric distribution system. The recent report issued by the
U.S. Department of Energy's Power Outage Study Team emphasized the
value of natural gas technologies in easing strain on the electric
power generation grid. The report noted that ``distributed
generation,''--that is, small electric-power generation units that are
installed on or near the customer's premises--can help relieve the
demand on the electric grid, especially during peak demand. Natural gas
fuel cells and microturbines are among these new distributed generation
technologies. Substituting natural gas cooling for electric air-
conditioning can also help to level summer electric peaks. Since
natural gas use typically peaks in the winter months, this is truly a
win-win scenario for both the natural gas and electric industries.
Given the key role this subcommittee has in developing a national
energy policy, I want to emphasize that the Fueling the Future study
projects a balanced energy future. The study does not project high
natural gas demand at the expense of other fuels. All energy sources--
including coal, nuclear and renewables--will continue to play a
critical part in supplying our growing energy demands in the future.
For example, renewable energy use in 2020 will be greater under this
study than the Energy Information Administration's projections.
However, natural gas is the one energy source that has the attributes
to meet our nation's policy goals and our energy needs for the 21st
Century. Using the data from the Fueling the Future study as a
foundation for a coherent national energy policy would be good for the
environment, good for national security, and good for the economy and
our consuming public.
AGA is a strong believer in this energy future because we see every
day that consumers--industrial, commercial and residential--want to use
natural gas. Nationwide, natural gas was the fuel of choice for 70% of
the new single family homes built in 1998--a continuation in a 15-year
trend of natural gas growth. Residential, commercial and industrial
consumers are using gas in a new and innovative ways. Gas fireplaces,
for example, constitute a strong new market due to ease of use and
environmental considerations. An improved generation of gas air
conditioners has great potential in the West and the South.
Technologies for residential scale fuel cells and microturbines are
currently being demonstrated.
Sophisticated and highly efficient combined cooling, heat and power
systems (CHP) are being installed around the country, and are
especially popular at universities and large conference centers, such
as Opryland in Nashville and the huge McCormick Center in Chicago.
Texas is one of the leading states in terms of industrial CHP capacity
and is fourth behind New York, California and Pennsylvania in
commercial capacity.
Let me give you three examples of how natural gas technologies--
which are commercially available--will help meet the nation's energy
goals.
--In 1994, Thomason Hospital in El Paso, which was undergoing a major
renovation/expansion, had to find a way to meet energy needs in
a cost-effective manner, while locked into the highest electric
rates in Texas. Its solution was a combined heat and power
plant that includes gas-fired reciprocating engines, dual
fueled boilers, gas engine driver chillers, and single effect
absorption chillers. This CHP system provides electricity, low
pressure steam (heating and hot water), and cooling for the
hospital complex. Benefits to the hospital include reduced
electric demand (330 kW), a levelized electric load and
$460,000 in annual savings.
--My second example describes a ``save-the-day'' situation at the
Brookfield Zoo in suburban Chicago. During the winter of 1998,
the local electric utility suffered a power failure that could
have resulted in suffering or death of 200 creatures ranging
from a massive Pacific walrus to the jellyfish. But the Zoo had
installed a natural gas cogeneration system that kept the
facility running. There's a financial benefit, as well: by
operating in parallel with the local utility during peak demand
hours, the Brookfield Zoo expects to generate a positive cash
flow in excess of $700,000 during the next decade. That can
feed a lot of walruses.
--Our final example comes from the retail sector. A Walgreen's drug
store in Chesterton, Indiana, became an energy pioneer last
year by installing a natural gas ``microturbine.'' This unit--
about the size of a commercial refrigerator--operates quietly
and efficiently, using natural gas as a fuel to turn a small
turbine that generates electrical power. The unit is also
equipped with a ``desiccant dehumidification'' system that
pulls moisture from the air, keeping customers comfortable
while they shop. The biggest benefit is reliability. Because
this system runs on natural gas it is independent of the
electric grid and therefore is not affected by brownouts or
blackouts caused by weather extremes. Imagine how relieved
you'd feel if you needed to buy medicine during a local power
outage--and the familiar Walgreen's is the only open business
you see in a sea of darkness.
I believe that these examples demonstrate why the market will drive
natural gas demand in the future. But the Fueling the Future study also
makes clear that to provide the adequate supply, build out the needed
infrastructure, and develop and improve the technologies, the
government must play a critical part in assuring that the regulatory
and policy environment is conducive to natural gas use.
To achieve the 35 quad future with all of its societal benefits,
the study says policymakers at all levels must make a commitment to
replace barriers with incentives to increase the production and use of
natural gas. In other words, market forces cannot do it all. Congress,
the administration and state and federal regulators each have
responsibilities.
A number of assumptions must become realities for this growth in
natural gas demand to be realized. But what better time than the start
of a new century to take action so that future generations will inherit
a cleaner environment, improved national security, continued economic
growth and greater conservation of natural resources. The AGA Policy
Blueprint attached to my testimony discusses in detail eight policy
goals and implementation steps that will ensure that the 35 quad
Fueling the Future forecast becomes a reality. Congressional action
will be particularly important in the areas of competitive energy
markets; safety and reliability; environmental regulations; federal
research and development; tax barriers/incentives and access to federal
lands. We are very pleased to see that two of our specific
recommendations were included in the National Energy Security Act (S.
2557) introduced last week by Senator Murkowski. These recommendations
include a provision that would lower the cost for American families to
connect to natural gas and the creation of an Interagency Work Group on
Natural Gas to develop a comprehensive policy for the use of natural
gas. This is an excellent start and we look forward to working with the
subcommittee on other steps to implement the policy goals of Fueling
the Future.
The goals are summarized below:
Goal I--Energy markets will be free and competitive, and natural gas
utilities will be allowed to compete fairly in these markets.
As energy markets are opened to competition, consumers are being
given the freedom to buy their energy and energy-related services from
whichever suppliers they choose. Gas consumers can benefit from choice
and from competition that is open to all competitors, including gas
utilities and their affiliates.
Regulators must recognize that consumers benefit when utilities and
utility affiliates are allowed to compete and to realize economies of
scope and scale, just as other competitors realize efficiencies from
affiliation with a parent company. If regulators act to place utilities
or their affiliates at a disadvantage in the marketplace, they will
thwart the market-expansion potential for natural gas.
Implementation of the following policies will promote fair
competition:
<bullet> State regulation should permit utilities to offer traditional
utility services, allow utility affiliates to participate in
unregulated markets and not bar an affiliate's use of the
parent utility's name or logo.
<bullet> Any uniform business practices adopted by the states to
implement retail competition should be consistent with the
interests of gas utilities.
<bullet> The Public Utility Holding Company Act should be repealed.
Goal II--The historic reputation of the natural gas industry for safety
and reliability will not be compromised.
Even though the U.S. natural gas industry operates one of the
safest and most reliable gas delivery systems in the world, it
continues to look for ways to improve. As a result, safety incidents on
the gas distribution system during the past decade have decreased by 38
percent, while the amount of gas delivered to customers has increased
by nearly 25 percent.
Because gas pipeline safety regulation involves technical issues,
the best way to approach development or amendment of safety standards
is for the government to take advantage of all the expertise available
within the gas industry. It makes sense that regulators and the gas
industry should pool resources to develop the most effective and
reasonable measures to meet their common goal of the safe and reliable
delivery of gas. In addition, this approach promotes increased
knowledge and understanding among all the interested parties--the
regulators, the industry and the public.
While the gas industry's strong commitment has been, and will
continue to be, a significant factor in ensuring safety and
reliability, implementation of the following policies would improve the
effectiveness of safety programs:
<bullet> Performance- and risk-based pipeline safety regulation and
regulatory alternatives should be initiated to enhance delivery
system safety.
<bullet> Stronger regulatory mandates should be put in place to prevent
pipeline damage caused by excavation.
<bullet> Regulatory treatment of unbundling programs should not
compromise safety or reliability.
Goal III--Energy efficiency and environmental regulations will be
comprehensive, equitable and balanced.
Many energy and environmental regulations are flawed and even
counterproductive because they are not comprehensive enough. They are
too narrowly focused and do not take into account the overall effect of
the regulatory decision.
Energy-efficiency regulations that look solely at the efficiency of
the energy-consuming equipment, and not at the efficiency of the entire
process of providing the energy, can push consumers toward equipment
that ultimately wastes energy, emits more pollutants into the air and
costs more to operate.
Similarly, environmental regulations can be counterproductive when
they are not equitable. For example, some regulations are not ``fuel-
neutral'' but, in fact, are more stringent for natural gas than for
dirtier-burning fuels, such as coal and oil. This ends up promoting
consumption of dirtier fuels. In a precedent-setting move, the
Environmental Protection Agency (EPA) in 1998 issued a fuel-neutral
standard for industrial boilers that sets the same emission level for
all new boilers, regardless of which fuel the boiler operates on. This
precedent should be expanded to all applications in which natural gas
is penalized for being cleaner.
Regulations are out of balance when their costs and benefits are
not accurately weighed. It is possible, for instance, to set standards
for indoor air quality that are so stringent they virtually rule out
the use of natural gas. This is foolish because the gains that can be
made in improving outdoor air quality often far outweigh small changes
in indoor air quality.
The following policy recommendations are designed to remedy these
kinds of situations:
<bullet> Energy efficiency standards must not discriminate against
natural gas.
<bullet> Regulations should encourage innovative technologies and
approaches to pollution control.
<bullet> ASHRAE Standard 90.1 should not be endorsed by the Department
of Energy or adopted by the states.
<bullet> Federal and state energy conservation programs should reflect
the ``total energy efficiency'' concept.
Goal IV--The federal government will aggressively promote the use of
natural gas through its research and development program and by
using innovative gas technologies in federal facilities.
Given the significant benefits that natural gas offers the nation
as well as its consumers, the federal government needs to promote
greater use of the fuel by increasing the funding of the Department of
Energy's (DOE) gas research and development program. In addition, the
government should lead by example. Federal facilities should be
showplaces for clean, efficient and economical gas equipment and
technologies.
Adopting the following policies will help ensure that natural gas
is the fuel of the 21st century:
<bullet> Federal spending on gas-related R&D should be increased to
support end-user equipment advances and enhance gas delivery
system safety and reliability.
<bullet> Tax credits should be provided for collaborative R&D.
<bullet> Executive Order 13123 should be fully implemented.
Goal V--The potential of new technologies will be fully recognized in
regulations, codes and standards affecting the natural gas
industry.
The federal government and standard-making bodies are required to
review existing rules and standards periodically, as well as develop
new ones when technological developments merit action. This sometimes
involves evaluating the safety performance of natural gas delivery
systems and equipment. These standards must be developed objectively,
based on technically sound science and credible, accurate performance
data.
Adoption of the following policies will further this goal:
<bullet> Pipeline safety regulations should reflect new, proven
technologies and best practices.
<bullet> Building codes and standards should accurately reflect safety
performance.
<bullet> Regulations that impede promising new technologies, such as
distributed generation, must be modernized.
Goal VI--Access to the natural gas resource base will not be unduly
restricted.
Today, access to significant portions of the U.S. natural gas
resource base is totally or partially restricted. These restrictions
inhibit energy exploration and production activities in the eastern
Gulf of Mexico, most of the offshore West and East coasts and in parts
of the Rocky Mountains.
In general, the restrictions were imposed for environmental reasons
and have been in place for decades. Obviously, exploration and
production technologies and practices have changed dramatically over
these decades. It's time to reexamine these restrictions in light of
today's technologies and practices that are more environmentally
sensitive than those of the past. It's also time to reassess the
restrictions because of the national environmental, economic and
energy-security benefits that would accrue from using more natural gas.
Adoption of the following initiatives is recommended to implement
the policy goal:
<bullet> The federal government should establish an interagency task
force capable of balancing the national benefits and costs
associated with increased natural gas use.
<bullet> The federal government should provide a baseline for
consistent land administration among the numerous national and
state agencies.
<bullet> The federal government should revise its land-use policies to
reflect the positive benefits of new natural gas exploration
and production technologies.
Goal VII--The cost of providing natural gas service to new electricity
generating plants will not be borne by residential, commercial
and industrial customers.
Significant amounts of new pipeline capacity will be needed to
serve electricity generating plants. Providing natural gas service to
power plants requires that gas pipelines and/or gas utilities invest in
facilities and make operational changes, such as adding new line,
contracting for storage capacity and upgrading the ability to serve
severe load swings.
The costs incurred to serve new generating plants must be borne
solely by power plant operators and not by other natural gas customers.
Otherwise, natural gas demand among residential, commercial and
industrial customers will be artificially constrained.
Implementation of the following policies will help ensure that
costs incurred for pipeline capacity expansions are appropriately borne
by the customers being served:
<bullet> FERC's implementation of pipeline rate reforms should not harm
local gas utilities.
<bullet> FERC should protect the gas utilities' pipeline service from
degradation.
Goal VIII--The regulatory environment will facilitate expansion of the
natural gas infrastructure.
To provide gas delivery service for the new uses of natural gas
that will benefit the nation, natural gas distribution utilities will
need to invest almost $100 billion to upgrade and expand their
distribution systems over the next 20 years.
Therefore, regulators should evaluate their policies in light of
the fundamental goal of facilitating critical maintenance and expansion
of the natural gas delivery infrastructure. The public benefits of
increased gas use in terms of economic efficiency, environmental gains
and energy security should be weighed fully in determining appropriate
rates and permissions for facilities.
Implementation of the following policies will facilitate
infrastructure expansion:
<bullet> The lead time for obtaining permission to build new pipeline
and utility facilities should be shortened.
<bullet> The benefits and costs of expanding the natural gas system
should be reasonably and comprehensively assessed.
<bullet> The tax system should promote rather than impede natural gas
system expansion.
Conclusion
Adoption of these recommendations will lead to the greater use of
natural gas to meet a part of our nation's growing energy demand. As a
result, these policies will lead to an energy future that is safe and
reliable, as well as cleaner and more secure than otherwise would be
possible.
Natural gas is economical, abundant, clean and reliable. It is the
energy solution of the here and now. It is the bridge fuel to the new
millennium. It must not be overlooked; to do so would be to ignore what
serves the best interests of our nation. We look forward to working
with this committee to implement the policy recommendations we have
outlined today. These recommendations, if adopted, will serve to ensure
a strong, prosperous America--an America fully capable of continuing
its role as leader of the free world.
On behalf of the American Gas Association, I thank you for the
opportunity to testify today.
Mr. Barton. Thank you, Mr. Cooper.
Mr. Barton. We now want to hear from Mr. Barry Russell, who
is here on behalf of the Independent Petroleum Association of
America and also the National Stripper Well Association.
STATEMENT OF BARRY RUSSELL
Mr. Russell. Thank you, Mr. Chairman.
I am Barry Russell, President of the Independent Petroleum
Association of America. Today I am testifying on behalf of
IPAA, the National Stripper Well Association, and 32
cooperating State and regional associations. I detail a number
of these issues in my written testimony, and I will summarize
them here to save time.
First, natural gas and petroleum dominate energy supply in
the United States. Currently, they account for about 65 percent
of the national energy needs; and they will continue to
dominate in the future.
Second, regardless of the changes in world politics, energy
supply remains a national security issue. Whether we like it or
not, our sources of petroleum come from countries with a
history of instability, and our policies must recognize our
country's vulnerability.
Third, future domestic natural gas and petroleum
exploration and production will increasingly depend on
independent producers. The domestic industry has changed
dramatically since 1986. Major integrated companies now focus
their activities in the deep Gulf of Mexico and overseas.
Today, independents drill 85 percent of the wells in the United
States. Independents need different policies than integrated
companies because their revenues come from one source.
Fourth, domestic natural gas demand is estimated to
increase by about 40 percent by the year 2010. But this
increase in demand can be met, given the right conditions,
through domestic and other North American resources.
In my testimony, I discuss a number of the factors
essential to meeting the future demand for both natural gas and
petroleum, and I want to focus on two of them: access to
capital and access to the natural resource base.
First, the Federal Government needs to take action to
improve the flow of capital to this critical industry. The most
immediate focus should be on tax reforms. There are a number of
specific proposals that have been either endorsed or discussed
by President Clinton or have been introduced or passed by
Congress within the past year. These include expensing of
geological and geophysical costs, expensing delay rental
payments, and a number of reforms related to marginal wells,
such as the marginal well tax credit and other provisions that
would direct more capital to producers.
We are at a rare point in time when both Congress and the
administration are moving in the same direction regarding these
tax reforms, and now is the time to act on them.
Second, we must address the issue of access to the Nation's
resources under government-controlled lands. Recently,
successful laws have addressed access like the Deep Water
Royalty Relief Act. We believe it is crucial to continue to
provide a royalty structure that encourages offshore
development, and we are working with the administration to meet
this objective.
At the same time, it is equally important to recognize that
a larger aspect of access to natural resources involves opening
access to areas now not available and halting the trend to
further embargoes of western lands. Over 200 trillion cubic
feet of natural gas is either off limits or difficult to permit
in these areas. It is important to understand that access
issues differ between these areas. ANWR and offshore activities
are constrained by policy decisions. Access to western land is
now limited by a mosaic of regulations. Some involve lands that
are completely excluded from natural gas and petroleum
exploration production, other involve permitting limitations,
and still others indirect actions by Federal agencies.
Let me conclude with two immediate actions that can be
taken toward the environmentally sound development of these
resources. First, we can determine where the most likely
resources lie. Congress should compel the development of such
an inventory. Second, we need a clear analysis of the
impediments that we are encountering. We need to know which
laws, regulations and conflicting management plans are in play.
On balance, future supply of domestic natural gas and
petroleum will depend on a clear recognition of the value of
these domestic resources. The domestic industry has changed
dramatically and will continue to change to a greater reliance
on independent producers. It will require a clear commitment
from the Federal Government that it is prepared to implement
policies to allow domestic exploration and production in order
to access the capital, the resource base, the technology and
the human resources that are needed to meet the challenges
confronting our country.
Thank you very much for the opportunity to speak.
[The prepared statement of Barry Russell follows:]
Prepared Statement of Barry Russell on Behalf of the Independent
Petroleum Association of America and the National Stripper Well
Association
Mr. Chairman, members of the committee, I am Barry Russell,
President of the Independent Petroleum Association of America. Today, I
am testifying on behalf of the IPAA, the National Stripper Well
Association, and 32 cooperating associations of the IPAA that represent
state and regional interests. These organizations represent independent
petroleum and gas producers, the segment of the industry that is
damaged the most by the lack of a domestic energy policy that
recognizes the importance of our own national resources. NSWA
represents the small business operators in the petroleum and natural
gas industry, producers with ``stripper'' or marginal wells.
Today's hearing addresses a fundamental issue--National Energy
Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil. This
testimony will focus first on several key factors that influence this
issue and second on actions that should be taken to improve the future
domestic supply.
factors in developing a national energy policy
There are many factors that affect the development of a sound
national energy policy. This testimony will focus on several key issues
in crafting a sound policy to address adequate supply of essential
natural gas and petroleum.
1. Fossil energy--particularly natural gas and petroleum based
energy--will continue to dominate energy supply in the United States.
According to the National Petroleum Council's Natural Gas study natural
gas and petroleum account for 64.8 percent of national energy needs.
Future projections show significant growth in the use of these fuels as
domestic energy demand continues to increase. The U.S. economy is
driven by the availability of adequate energy supplies whether consumed
by manufacturing, by transportation to and from jobs, or by the
expanding role of computer use and the Internet. It ignores this
reality to suggest that an equally robust economy can be sustained
without substantial energy growth. And, it ignores this reality to
suggest that natural gas and petroleum will not be the dominant share
of this growth.
2. Regardless of changes in world politics, energy supply remains a
national security issue. A decade ago energy supply from foreign
sources would be viewed as a national security risk in the context of
the Cold War--supply routes at risk and energy sources subject to
control by adversaries. Today's national security issue is different,
but it is nonetheless significant. Currently, we import over 55 percent
of our nation's petroleum. It comes from diverse sources, but diversity
is not security. In 1973 the OPEC oil embargo crippled this country.
Yet, we now import over twice as much petroleum on a percentage basis
from the OPEC countries that embargoed us--and neither Iran or Iraq
participated in that embargo. Whether we like to address it or not, our
sources of petroleum come from countries with a history of instability.
We are currently importing approximately 500,000 barrels per day from
Iraq. Clearly, this is not a reliable source. Saudi Arabia is ruled by
a monarchy in a world without ruling monarchs; it is constantly subject
to subversion by radical religious elements. Even Venezuela is ruled by
a government that has dramatically shifted that country's priorities
over the past two years and continues to be difficult to predict. We
must recognize that shifts in any of these suppliers can dramatically
and adversely affect our nation and our national economic security.
The past three years have demonstrated how susceptible the U.S.
energy supply can be to foreign actions. The precipitous drop in
petroleum prices in late 1997 through early 1999 posed a catastrophic
threat to domestic petroleum production and a substantial threat to
domestic natural gas production. As a result of the extended low
petroleum prices in 199899, capital investment in petroleum production
throughout the world declined. Existing production was lost. In the
U.S., production dropped from 6.5 million B/D to less than 6.0--million
B/D. Natural gas production suffered as well because the two
commodities are linked. This year, the country has seen the inevitable
consequences of lost capital in the exploration and production
industry--as worldwide demand has increased, worldwide supply capacity
has not kept up. This year, petroleum prices have reached levels not
seen since the Persian Gulf war. Different segments of the economy have
been threatened. In each case, the price and supply issues have largely
been defined by the actions of foreign producer nations. Our policies
must recognize this vulnerability.
3. Future domestic natural gas and petroleum exploration and
production will increasingly depend on independent producers. Domestic
exploration and production of natural gas and petroleum have changed
dramatically since 1986--the time of the last petroleum price crisis
and major revisions to the federal tax code. Since that time the role
of independent producers has increased. Generally, for example,
domestic petroleum production is divided roughly 60 percent from the
lower 48 states onshore, 20 percent from the offshore, and 20 percent
from Alaska. Since 1986, the share of onshore lower 48 states
production by independents has increased from about 45 percent to over
60 percent. Independents are also increasingly active in the offshore.
In the aggregate, independents drill over 85 percent of the wells in
the U.S., produce 45 percent of the petroleum, and produce over 65
percent of the natural gas.
This is a trend that will continue. The reasons are
straightforward. Large, integrated petroleum companies are driven by
their need to generate adequate shareholder returns. In the ``Dot Com''
world we are living in, this requires finding and developing large
``elephant'' fields. Mature fields that yield more limited quantities
of natural gas and petroleum characterize most of the U.S. Many of the
U.S. large field prospects such as the Arctic National Wildlife Refuge
(ANWR) are not available for development. In the offshore, moratoriums
limit many options; those that are left are largely in the
``ultradeep'' portions of the Gulf of Mexico. So, compelled to fill
their refineries, major integrated companies focus their development
funds to the deep Gulf of Mexico and overseas. This leaves the brunt of
future domestic resource development to independent producers--large
and small. Independents need different policies than integrated
companies. Independents rely on revenues generated solely in the
upstream and are more susceptible to price swings that strip away
critical financial resources.
4. Natural gas is an increasingly important element of domestic
energy supply. The National Petroleum Council Natural Gas study
concluded that domestic natural gas demand will increase from the
current 22 trillion cubic feet per year (Tcf/yr) to 29 Tcf/yr by 2010.
Most of this increase will be needed to fuel expanding electricity
generation. The study concluded that:
U.S. gas demand will be filled with U.S. production, along
with increasing volumes from Canada and a small, but growing,
contribution from liquefied natural gas (LNG) imports . . . Two
regions--deepwater Gulf of Mexico and the Rockies--will
contribute most significantly to the new supply . . . U.S.
production is projected to increase from 19 TCF in 1998 to 25
TCF in 2010, and could approach 27 TCF in 2015. Deeper wells,
deeper water, and nonconventional sources will be key to future
supply.
Importantly, this study concludes that these future natural
gas needs can be met through domestic resources supplemented by
other North American resources. Equally important, it
identified key issues that had to be addressed to meet these
needs.
actions that must be taken to meet future needs
The NPC Natural Gas study identified a series of needs that serve
to characterize the key factors to meeting future demand. They also
apply to addressing domestic petroleum development. They can be divided
into the following four areas: access to capital, access to the natural
resource base, access to technology, and access to human resources. Of
these, access to capital and access to the natural resource base are
highly dependent on federal policy.
Access To Capital
The federal government needs to take actions to improve capital
flow into this critical industry. Generally, there are two areas for
possible action--tax reforms and federally backed financial
instruments. The most immediate focus should be on tax reforms.
Following his recent radio address, President Clinton released
documents indicating that he intended to propose legislation to allow
expensing of geological and geophysical (G&G) costs and of delay rental
payments. These are sound first steps, but more must be done.
He also indicated that he was evaluating proposals dealing with
marginal wells. Action regarding these wells is essential to preserve
existing production and we believe there are four key elements that
should be enacted immediately:
<bullet> Creating a countercyclical marginal well tax credit.
<bullet> Allowing a 5-year net operating loss carryback for independent
producers;
<bullet> Eliminating the net income limitation on percentage depletion
for marginal wells; and,
<bullet> Eliminating the 65 percent net taxable income limit on
percentage depletion;
All of these have been introduced or passed in some form over the
past two plus years. For example, Senator Kay Bailey Hutchison recently
introduced S. 2265 incorporating the expensing proposals and the
marginal well tax credit in one bill. Several senators introduced
S.2557 last week that includes these provisions.
We are at a rare juncture. Both Congress and the Administration are
moving in the same direction regarding tax reforms for domestic natural
gas and petroleum exploration and production. Both are looking toward
provisions that will encourage exploration. Both are looking at ways to
extend the life of domestic marginal wells--our true strategic
petroleum reserve. Now is the time to act.
Will these steps guarantee that domestic production will rebound?
Nothing is certain, but it will guarantee that more capital will get
into this industry when it is needed. And it will avoid the mistakes of
1986 when Congress enacted Alternative Minimum Tax provisions, just as
the industry needed capital to rebound from low petroleum prices. This
was one of many factors that have resulted in the loss of about 2
million barrels per day of domestic petroleum production from 1986 to
1997.
This is not all that we need to do. We should also look at other
tax reforms that can help bring capital to this industry over the next
decade and beyond. This industry must compete for capital against high
technology and Internet companies that are generating far higher
returns than are likely from this mature but risky industry. Investors
need reasons to put their capital in domestic exploration and
production companies. Other tax reforms that could be addressed include
modification of the AMT, expanding the Enhanced Oil Recovery tax
credit, considering what tax treatment should apply to the
unconventional sources identified in the NPC study like the current
Section 29 tax credit, considering a drilling tax credit, inactive well
recovery, and reevaluating the elements of percentage depletion
including the rate and the number of barrels of production that apply.
Decisions on these reforms should be made based on the importance of
this domestically produced resource. We must begin treating domestic
natural gas and petroleum as a critical element of national economic
security.
And, we should look at federal financial instruments like the
PADDIE MAC concept that would create a FANNIE MAE-like program to help
lower the capital costs to the smaller producers so essential to
maintaining the nation's marginal wells.
Access To The Natural Resource Base
Addressing the issues of access to the nation's resources under
government controlled lands is complicated. Recent successful laws that
have addressed access are the Deepwater Royalty Relief Act, The Royalty
Fairness and Simplification Act, and moratoriums on rules for illegally
assessing new petroleum royalties. We are pleased to announce that in a
recent decision, IPAA v. Armstrong, the District Court ruled that in
fact the government doesn't have the legal right to require producers
to market at no cost to the lessor, a matter at the heart of the
petroleum royalty rulemaking. These actions have enhanced the
development of federally controlled resources.
The legislative requirements of the Deepwater Royalty Relief Act
are expiring. The authority to continue royalty relief will rest in the
hands of the Minerals Management Service. IPAA believes it is critical
to continue to provide a royalty structure that encourages offshore
development. The Deepwater Royalty Relief Act has proven that its
approach works. However, while its benefits have largely flowed to the
major integrated petroleum companies, independents are now moving more
aggressively into the offshore generally and the deepwater more
specifically. Major integrated companies are moving toward the ultra-
deep water where their cutting edge technologies are allowing them to
go. IPAA and other associations, and companies involved in the offshore
have begun working with MMS and the DOE to look at how royalty policies
can enhance domestic offshore production. Hopefully, these efforts will
lead to administrative actions to create a royalty structure throughout
the offshore that will enhance domestic production. However, if this
result does not occur, Congress will need to address offshore royalty
policies.
At the same time it is equally important to recognize that a larger
aspect of access to natural resources involves opening access to that
which is not now available and halting the trend of further embargoes
of western lands. Unfortunately, the Administration avoids dealing with
the clear need to open government lands to exploration and production.
It hides behind an environmental sensitivity argument that is proven
wrong by its own DOE report. It focuses on arguments against opening
ANWR and avoids dealing with access issues offshore and in the Rockies
where its own National Petroleum Council Natural Gas study concludes
that over 200 trillion cubic feet of natural gas is either off limits
or difficult to permit.1t is important to understand that access issues
differ between these areas. ANWR and offshore activity off of
California, the Eastern Gulf of Mexico, and the Atlantic are
constrained by policy decisions, both executive and legislative,
through prohibitions and moratoriums. These are based on outdated
reactions to spills occurring in the past. The Administration's own
study, Our Ocean Future, concluded unequivocally that offshore natural
gas and petroleum production is a success story. We need to move into
the 21st century and make enlightened decisions to use these critical
national resources.
Access in the Rockies won't be resolved by a single act. Here, we
are dealing with a mosaic of limitations. Some involve land that is
completely excluded from natural gas and petroleum exploration and
production.
<bullet> The Antiquities Act of 1906 has been used to declare areas as
national monuments placing land completely off limits.
<bullet> In other areas, the Department of Agriculture is proposing to
expand roadless areas in national forests that will preclude
natural gas and petroleum development.
<bullet> Some national forests, like the Lewis and Clark National
Forest, projected to be a world class natural gas source, have
been administratively closed to natural gas and petroleum
development
<bullet> Wilderness areas have been created without an understanding of
the resources that might be lost.
We must also deal with permitting limitations and other indirect
actions of federal agencies.
<bullet> Because these are government lands, it is necessary that
federal agencies issue permits for the exploration and
production activities. These agencies are charged with the task
of developing environmental management plans for areas under
the National Environmental Policy Act (NEPA). NEPA can be used
to create effective, environmentally sound management plans, or
it can be used to delay and deny access. Frequently, the
results reflect the attitude of the agency and its leaders. For
example, in the Powder River basin the development of coal bed
methane has first been delayed by the inability of the BLM to
process permits. But, as the magnitude of effort was more
clearcut, BLM fell back to the excuse that the EIS for the area
was outdated and required a new plan under NEPA. This has led
to further delay. BLM then argues it needs additional funds,
requiring Congress to act and resulting in further delay. In
the San Juan basin, BLM has tried to argue that its management
plan needs updating and permitting needs to be delayed until
another plan can be developed despite repeated assessments of
the plan that demonstrate its adequacy.
<bullet> NEPA is only one of many laws that are involved in the
planning or permitting processes and BLM is only one of the
agencies that must be dealt with. Others include the Endangered
Species Act and the Fish and Wildlife Service, the Clean Water
Act that can involve both the Environmental Protection Agency
and the Corps of Engineers when wetlands are concerned, and
even the Clean Air Act.
<bullet> For example, many areas in the Rockies are limited during
certain times of the year because of management plans designed
to protect various species. While each plan individually
provides opportunities for resource development, collectively,
they interact to effectively prohibit natural gas and petroleum
extraction.
If we are to provide the country with the domestic energy it
deserves, we need to create national policies that allow
environmentally sound development of these resources. No one can expect
that this mosaic of limitations can be instantly revised, but we need
to start the process.
First, we can determine where the most likely resources lie.
Congress should compel the development of such an inventory. When
actions like this have occurred in the past, they allow the disputes to
be better focused. They allow the issues to be discussed in a real
rather than hypothetical context. And, this can lead to real solutions
for specific areas.
Second, we need a clear understanding of the impediments that we
are encountering. We need to know how many laws, regulations,
conflicting management plans, and whatever else are in play. This
perspective is essential to provide a real sense of how these actions
can result in effectively foreclosing any development. A recent
assessment of one area of the Rockies showed how a mixture of
management plans for various species effectively foreclosed any
petroleum or natural gas development, but no single plan would result
in such denial (a graphical presentation is attached to this
testimony).
Third, we cannot expect to meet our nation's needs for clean
burning natural gas without reasonable access to the resource. The NPC
Natural Gas study and all other analyses conclude that the Rockies
contain significant extractable reserves of natural gas. Yet, in the
Rockies access is being limited. It is either the unanticipated outcome
of laws, regulations, and plans that unintentionally deny access or the
manipulation of these laws to produce that outcome. In either case,
access limitations are not the result of a clear policy decision.
Consequently, we need a commitment from Congress and the Administration
that these types of constraints will be eliminated or restrained and
proper funding will be provided on a continued basis to allow
environmental documents, leases, and drilling permits to be issued in a
timely fashion.
Clearly, there are environmental extremists who will not support
this essential development. But, as the DOE has demonstrated in its
report, it can be done and in an environmentally sound manner. It will
take effort, and it will also take courage.
Other Issues
While these issues dominate the factors that influence future
natural gas and petroleum exploration and production, there are many
others that must be addressed--some that are dominated by factors
largely outside the scope of the federal government, others where the
federal government is a key factor.
For example, the other factors identified in the NPC Natural Gas
study relate to access to technology and to human resources must not be
overlooked. Domestic natural gas and petroleum development have changed
dramatically during the past two decades through the application of new
technologies such as 3D and 4D seismic analysis, horizontal drilling,
and the use of advance offshore technologies. The widespread
availability of these and other technologies will be critical to
meeting future challenges as well. Similarly, the industry has suffered
further declines in employment. During the 1998-99 low petroleum price
crisis, the natural gas and petroleum extraction industry lost 65,000
jobs of which only about 7,000 have returned. Employment has dropped
below 300,000 from levels that exceeded 600,000 in 1984. These are
highly skilled jobs at both the rig operator and engineering level.
Many of the domestic industry workers are Hispanics. But, once people
leave the industry it is hard to attract them back. Attracting new
workers is equally difficult. For example, enrollment in petroleum
engineering has consistently fallen over the past several years. While
these are not issues that are dominated by federal policy decisions,
they are nonetheless essential to meeting future natural gas and
petroleum demand.
At the federal level, we must continue to work with foreign
producer nations to move toward petroleum policies that produce the
stability needed to maintain and enhance our domestic production. And,
as we do, we cannot assume that other countries are willing to
sacrifice their national incomes to meet our expectations that product
prices should be low in the U.S.
The federal government must strive toward sound environmental
regulatory programs that do not burden the industry with regulations
and paperwork that provide little if any environmental benefits. For
example, the Environmental Protection Agency (EPA) is now being sued
again to compel regulation of hydraulic fracturing under the
Underground Injection Program (UIC) of the Safe Drinking Water Act
(SDWA). Study after study has shown that hydraulic fracturing is an
environmentally sound process involving the brief injection and
subsequent removal of fluids to place proppants necessary to open
natural gas and petroleum formations for development. Some analysts
believe that over 60 percent of the natural gas wells that will be
needed to meet the projected 2010 demand will require hydraulic
fracturing. It is exactly this type of poorly targeted regulation that
must be avoided. Similarly, EPA is proposing new reporting requirements
under the federal Superfund and Right-to-Know laws that will add
nothing to the scope of information on emergency releases but burden
natural gas and petroleum producers and other industries with needless
paperwork. In an era when future natural gas and petroleum production
will depend on the amount of capital that must be invested, stripping
this capital away through unneeded regulations is counterproductive and
unwarranted.
conclusion
On balance, future supply of domestic natural gas and petroleum
will depend on a clear recognition--first by the federal government and
more broadly by the nation as a whole--that these commodities provide a
value as a domestic resource. It will require a clear recognition that
the domestic industry has changed dramatically since the 1980s and will
continue to change toward greater reliance on independent producers.
And, it will require a clear commitment from the federal government
that it is prepared to implement policies to allow domestic exploration
and production to access the capital, the resource base, the
technology, and the human resources that are needed to meet the
challenges confronting the country.
[GRAPHIC] [TIFF OMITTED] T4772.006
Mr. Barton. Thank you, Mr. Russell. It is amazing. You are
the last testifier, and you are under 5 minutes. That is
amazing after 13 other people have gone before you, and you are
timely. We commend you for that.
We will recognize the gentleman from New York, Mr. Vito
Fossella--who is not running for the Senate, at least as of
this morning. The day is early yet----
Mr. Fossella. We have time, the way things move in New
York.
Mr. Barton. [continuing] for 10 minutes for questions.
Mr. Fossella. Thank you, Mr. Chairman. And thank you--I am
sorry I am late, but I thank you for holding this hearing.
I have a question for the American Petroleum Institute.
With the impending June 1 implementation of the reformulated
gasoline program in certain areas of the United States,
including my congressional district, there have been some
concerns about the problem in the Midwest as well as refinery
capacity. In your opinion, will existing refineries have the
capacity to meet these new, more stringent requirements and, if
not, what needs to be done to improve this?
Mr. Cavaney. We are facing a significant challenge, which
is implementing this new grade, RFG Phase 2, as of June 1.
There are some things that have developed.
No. 1 among those is a lower court decision upholding an
earlier decision by the court on the Unocal patent. And the
effect of this Unocal patent, Unocal was one of six companies
that worked collaboratively in the State of California to
develop very low-polluting gasoline. They patented essentially
the process or the pathway, the formulation, in order to
produce this gasoline; and, therefore, they are entitled under
the latest court decision to receive a royalty of about 5.7
cents per gallon.
That is an amount far in excess of the profit that you make
on a gallon, so it is really something that refiners are not in
a position to be able to accept at this time.
So the alternative is one of two things, either to try and
build gasoline around that particular patent, which is very
difficult to do, or to import gasoline from abroad. One of the
things that has been done is that many of the people who import
gasoline are not sure whether or not they may ultimately become
a liable party, so there are large questions about whether we
are going to be able to import the traditional volumes, and the
companies are working as rapidly as they can.
But, in general, we are running flat out. We are at record
production levels in our refineries. Our utilization rate is 95
percent. We have most of it in place; and we think, with very
few exceptions, that we are going to be able to be in a
position to continue to handle this phase-in of RFG Phase 2 as
we move through the drive season past June 1.
There is a difference, I might add, between this phase 2
gasoline in your district and in Mr. Shimkus' district, who was
here earlier with us. In the Midwest, a lot of ethanol is used.
And when you make RFG Phase 2 gasoline with ethanol, you need a
different base blend stock than what you will need in your
area. That blend stock that he needs for his area is a very
much more expensive one than yours.
See, the difference in price for making RFG Phase 2 in your
area is going to be about as anticipated, which was somewhere
in the 3 to 5 cents a gallon cost increase. But the difference
in making RFG if you are going to use ethanol is significantly
greater, not unlike the amounts he was talking about.
These were figures that had been known as we have gone
forward. I don't know why those figures were not brought out as
EPA started to set these timetables there, but we have been
working with them as we will continue to work with all of our
customers because we are in the business of making sure that
gasoline is delivered to consumers when and where they want it
and that we are in compliance with the laws.
Mr. Fossella. So you do not anticipate any supply problems
in the Northeast?
Mr. Cavaney. We think that we will be able to serve it
fairly well. We cannot say that every locality will have it at
that time, but we are confident that people will not go without
gasoline if need be.
Mr. Fossella. You mentioned you are working with EPA. Are
you also working with the Department of Energy on this? Or are
the two working together, to your knowledge?
Mr. Cavaney. We are working with both, but this is
essentially a regulatory requirement that was being handled
through EPA.
Mr. Fossella. Thank you. Thanks.
Just a question with the representative from the Interstate
Natural Gas Association, I guess, Ms. Abbott. You discussed the
energy delivery systems in the Northeast and the impact that
has on price spikes both in the winter and the summer. What
improvements are needed, other than what you offer in your
testimony, in the natural gas pipeline as well as our power
industry to prevent these spikes and possible reliability
problems?
Ms. Abbott. Thank you, I think that is a broad spectrum of
things. I think, largely, the broad policy of letting the
market work is the important thing. What people building new
power plants and trying to build new pipelines to alleviate
those supply constraints are trying to address is complying
with all the regulatory requirements and permitting and the
different agencies that you have to deal with.
So, really, the key barrier here is in making more
efficient and getting more timely approvals for the
construction of those projects. And if you can get that, the
private sector will respond to that demand for additional
pipelines and additional power plants. And that is really what
we would like to do is to serve our customers. So it is really
around that regulatory reform within the permitting process and
getting to decision more quickly.
Mr. Fossella. Have you put forward any proposals or
suggestions on how you would reform this process?
Ms. Abbott. Yes, we have an entire study here from INGAA on
the exact steps we think would be needed. And really the key is
getting the lead agencies, which in our case is the Federal
Energy Regulatory Commission--usually, for power plants, it is
a State agency that is the lead agency--to really take the lead
and bring the tradeoffs to resolution in a more timely fashion.
Mr. Fossella. I guess the consequence, as you state in your
testimony, is ultimately higher prices. But is there--in that
study, do you quantify more broadly or more specifically,
depending on your point of view, on what the opportunity loss
is here as a result of the certification process?
Ms. Abbott. Well, a good example would be what prices in
New York for the next year are facing where it is 35 cents,
roughly 50 percent above the actual cost of transportation,
which is about 60 cents right now. So you can see in very
concrete instances if you do not have the mechanisms to allow
the supply response to occur, whether it is in electric
generation or in pipeline infrastructure, that increases prices
to consumers.
Mr. Fossella. I guess, if I heard you correctly, the
capital is there, the folks are waiting to jump in, but, right
now, there is just no incentive or the cost of waiting and the
time waiting just does not make sense?
Ms. Abbott. Well, we all have projects that we have
proposed, and it is to get the regulatory approvals to be able
to go ahead and build those projects.
Mr. Fossella. I have no further questions, Mr. Chairman.
Thank you.
Mr. Barton. I thank the gentleman from New York.
The Chair would recognize himself for such time as he may
consume, seeing no other members present. If other members
show, we will give them a chance to ask some questions.
Mr. Fossella. I am running for Senate. I just gave it some
thought.
Mr. Barton. All right. I am going to start with Mrs.
Abbott. Now, correct me if I am wrong, under Federal policy the
Federal Government, or the FERC as its representative, has the
right of eminent domain in terms of right-of-way for natural
gas pipelines. Isn't that true?
Ms. Abbott. Yes, sir.
Mr. Barton. Has it ever exercised that right?
Ms. Abbott. Typically what happens is, when you get a
certificate to build an interstate pipeline and the Federal
Government has to find that there is a public convenience and
necessity for granting you that right of eminent domain, that
allows then the private company who typically has gone out and
tried to negotiate with the landowners on a voluntary basis, if
there are any remaining landowners that have not voluntarily
negotiated you then have the right of eminent domain with
respect to those parties and they have an ability to get a fair
price.
Mr. Barton. Now, how does the right of eminent domain for
pipeline construction interact with all of the problems and the
permitting or the environmental issues at the State, Federal,
and local level interact that you alluded to in your testimony?
Ms. Abbott. That is a great question. A key part of the
certificate process is coordination among the various State and
Federal agencies over the environmental consequences of that
Federal act of granting a certificate. So it is basically doing
the tradeoffs and looking at the analysis as to what is the
impact on the environment of a particular pipeline route, are
there alternative routings that are necessary, and doing the
studies necessary to do that. And what we are finding is that
there are just inconsistencies among the various agencies that
have a stake in that process and what is needed is a more
timely resolution of those tradeoffs.
Mr. Barton. Now, I want to make sure that the committee
gets this on the record. Eminent domain gives the Federal
Government the right to ultimately, once a route has been
decided, require that that route be made available for
construction. But it does not give the Federal or any other
government the right to override all the environmental and
local zoning restrictions. Isn't that correct?
Ms. Abbott. Yes, yes, and so you basically have all the
State, local, and Federal permitting processes that you must go
through. And just as Mr. Johnson indicated I think on the
production side, it is the web of those regulations and the
lack of coordination to get to resolution that is the key
issue. I will give you a couple of examples from our Millennium
project that are quite notable.
When we filed this project, we filed 51 inches of data
weighing 80 pounds, a moderate-size child in terms of the
volume of data at the front end that we filed.
One of the things we do in this is we cross the Hudson
River. It was a full year of wrangling among the various State
and Federal agencies as to what the best time was to cross the
river with our construction. We did not care when that time
window was. But they couldn't agree for a full year. That is
not timely decisionmaking. It does not do anything to save the
environment when you are trying to decide. You had conflicting
opinions, and there wasn't a mechanism to get to resolution as
to what the best environmental answer was.
Mr. Barton. Now I am going to ask the whole panel this
question, but I want to start with you. In your opinion, is it
possible for the Congress to develop a consensus pipeline
review national legislation that would satisfy the legitimate
requirements of the people that want to construct the pipeline
and also the legitimate requirements of the community that
wants to protect the environment? Can we work together with the
stakeholders to come up with a comprehensive piece of
legislation that would expedite the pipeline construction
process in this country?
Ms. Abbott. I believe it is possible, and the key is in
holding one agency accountable for timely resolutions of
tradeoffs. You saw, in that example, it should not take a year
to resolve when the best time is scientifically to cross a
river.
Mr. Barton. From an industry perspective you are not
advocating to the subcommittee that we lessen or in any way
ease any of the environmental protections. You are simply
saying let's get the Federal agencies and State and local
agencies to have to sit down and resolve those issues in an
expedited fashion?
Ms. Abbott. Exactly correct.
Mr. Barton. Now, any other panelists wish to weigh in on
that pipeline construction question? Anybody? Mr. Cavaney?
Mr. Cavaney. Yes, Mr. Chairman. There is currently the
Pipeline Safety Act is under review for renewal, and that
affects liquid pipelines, not natural gas pipelines, and I
think it would be good to take a look there. Because there are
several issues where parts of the Federal Government are
arguing about having joint jurisdiction, and it is going to
raise exactly the issue that you have just heard here and
industry across the board is trying to argue: You need one
definitive point of reference that can make decisions or you
will end up repeating in the liquid pipelines the same problems
that you have now with the gas pipelines so it can be done.
That is a good model to look at. There are some good parts of
that that have worked well, but there are also some lessons
learned that we and many of the others would be glad to talk to
you and your staff about.
Ms. Abbott. And I think the key theme here is that, as
industries, we are very supportive of matters to protect the
environment and matters to protect public safety, but let's get
to resolution and not engage in infinite dialog about the best
way to get there. And I think it is that getting to resolution
when you have a myriad of regulatory agencies involved, and
legitimately involved, given their accountabilities. But
getting to resolution I think is the key thing.
Mr. Barton. Now, let's assume that we can untie this
Gordian knot of pipeline construction permitting so that we
actually get the pipelines built. That is a big if, but assume
that. What do we need to do at the Federal level in terms of
incentive pricing at the FERC for the transmission and
operation of these pipelines? Because you alluded again to that
in your testimony.
Ms. Abbott. Right. The dramatic changes that we are
effecting in the gas industry is that we have a different set
of customers now. Our traditional customer is the local
distribution companies, are now going through a choice process
at the local level to allow the ultimate consumer to choose
their gas suppliers; and we as an industry and AGA and INGAA
both support that because we think choice is a good thing. It
goes along with that market support. What it means is that
different players now hold the pipeline capacity, and they need
different products and services.
So the kind of model we are suggesting is very much the
model people have taken on the telecommunications side where
your basic service is regulated and is fairly structured but
enhanced services like call waiting and other kinds of things
can be fairly quickly introduced and priced as a market moves.
If you think about the benefits we have seen in the
telephone industry where the option used to be the black phone
and then we unbundled the telephone industry and you see the
myriad of products and service--I don't think cell phones ever
would have developed in the telecommunications business if we
had not unbundled long line. We did not anticipate that coming.
Pagers, all of the things that we cannot function without. And
that is the kind of product innovation and benefits to the
economy you get when you go that kind of a route, and it is the
kind of model that we are suggesting.
Mr. Barton. I am going to show some of my ignorance because
I have not focused on this in a while. Does the FERC regulate
the transmission rate for interstate gas pipelines today?
Ms. Abbott. Yes, sir.
Mr. Barton. So you want FERC to put an incentive mechanism
in place or do you want to deregulate that?
Ms. Abbott. We recognize that we are still considered to be
a natural monopoly by many, so it is the form of regulation
that we are talking about. Right today we basically provide one
vanilla-flavor kind of service at sort of an average rate; and
what we would like is the flexibility to, on top of that, kind
of like call waiting, your basic telephone service is
regulated, your dial tone is regulated on phone, but the
products and services that you add on top of that are subject
to more market forces and more flexible kind of regulations.
Mr. Barton. What is the current FERC's view of your idea?
Ms. Abbott. They have taken some good steps forward in it,
and I think the signal is to continue to move with the market.
Because we think as the market moves forward we are going to
need more flexible pricing options and service options. I think
they are open to it. It is the speed of decisionmaking and the
resources devoted to recognizing there is a need.
Mr. Barton. What stakeholder groups tend to oppose that?
Ms. Abbott. We have had good support from our colleagues on
the distribution side. I think the production segment of the
community is somewhat for skeptical on some forms of that.
Would that be fair?
Mr. Johnson. Yes, that is fair. On the producer side, the
supply side, we recognize in certain instances that it is a
free market; and there is no problem with competition locally.
There are other segments, interstate pipeline market, that are
specifically monopolies. There is only one pipe out of one
place to one other place where you want to sell your gas. And
what we really want to make sure of is that that particular
natural monopoly--and it is an efficient monopoly, it really
is, but it does need to be regulated to a certain extent so
that there is not discrimination which will add to the cost of
things.
Mr. Barton. I would say you would be opposed to what we
would call price gouging, charging an unreasonable amount to
transmit a specific amount of gas. But if you put in some sort
of incentive mechanism that allows additional services, you
would not oppose that.
Mr. Johnson. No, incentive mechanisms would work for us.
And, again, there are certain services that the interstate
pipeline industry offers and wants to offer that, again, we are
not concerned about. Because I think the bright light at the
end of the tunnel on a lot of this is that the Internet is
going to open much of this up.
Mr. Barton. I don't think we can transmit natural gas by
the Internet, though.
Mr. Johnson. No, but what we are concerned about is
transparency of transactions. Now transactions are extremely
cloaked in secrecy; and we do not see everything that goes on
in the market, which leads to suspicion, obviously. And I think
what you need to do with--what the Internet will affect so that
everyone will see the transactions that are going on. And it
will also greatly lower transaction costs, which is a big part
of my business and her business and everybody else's business.
Mr. Barton. I want to switch to Mr. Russell. I did glance
at your testimony last evening, and I have one technical
question and one of personal curiosity.
You have got a huge list of people that are sponsoring your
testimony. But I am puzzled by the fact that the Texas
Independent Producers and Royalty Owners, TIPRO, is not on
there. Is there a reason for that? You have got North Texas and
West Texas, but you do not have TIPRO. And they are normally
telling IPAA what to do, I guess.
Mr. Russell. That was a housekeeping error. They have asked
not to be included unless they have the specific time to go
through it in more detail.
Mr. Barton. As far as you know, they do not oppose anything
you are saying in here?
Mr. Russell. That is right.
Mr. Barton. I want to double-check, because I have a lot of
good friends down in TIPRO.
On the back of your testimony you have a chart, you do not
really allude to it in your testimony, but along one axis, it
says Wildlife Restrictions is the heading and then big game
winter range, sage grouse lek, L-E-K, sage grouse nesting,
mountain plover breeding, mountain plover nesting, raptor
nesting, burrowing owl, prairie dog avoidance. Are these all
local or Federal restrictions in the Rocky Mountains that you
cannot drill during those times?
Mr. Russell. A lot of them are. But it goes to the point
that you were talking about before with the pipelines, which
is, if you take an area of land and look at all the various
environmental restrictions, this is just an example of some of
the endangered species' kinds of restrictions there that block
access during certain periods of time.
Mr. Barton. The prairie dog is not an endangered species,
is it?
Mr. Russell. Yes, in some areas it is.
Mr. Barton. It is?
Mr. Shimkus. Stop running over them.
Mr. Barton. Not in Texas.
Mr. Russell. You would be surprised at the list that we
would show you.
But what I was going to say is it is not only this list but
if you go through and look at not only endangered species but
some aspects of the Clean Air Act--the permitting, the
monitoring, some of the things that you talked about before
which really go to this procedural aspect and the lack of
coordination between State and Federal agencies, that what
happens is that whole areas are essentially taken off the table
for development. That is what we were trying to show there, and
I can give you more supporting detail on that.
Mr. Barton. So this is more----
Mr. Russell. That is really more in some of the Rockies
rather than across the country. That was put together by one of
our Rocky Mountain associations, but we can give you a lot more
detail on that.
But, again, it goes to the point of what you were raising
before, that there is an awful lot of what can be done in terms
of coordination and in terms of not looking at the substantive
requirements but the overall effect of overlaying one
environmental statute over another when there is no sense of
what the implication is going to be for further gas
development, something that you raised this morning.
Mr. Barton. I have two more questions, and then I will
recognize Mr. Shimkus.
Mr. Cavaney, Admiral Watkins earlier was fairly emphatic
and passionate about the ability to drill in ANWR without
harming the environment. What has been the experience in
Prudhoe Bay in terms of environmental damage to the land and
also to the wildlife? Has there been documented any permanent
harm to the wildlife or to the environment in terms of Prudhoe
Bay?
Mr. Cavaney. Well, I think, Mr. Chairman, to the contrary;
and we will be glad to work with the Alaska Oil and Gas
Association to provide you a bunch of the studies and the data
that has been collected.
Just to give some examples, they have monitored the herds;
and the herd development over the time. One of the herds that
was up there was about 3,000 at the time they finished off the
pipeline. It is up to 20,000 now. I could go on and on and on.
Mr. Barton. So they need population control?
Mr. Cavaney. They need population control. But, clearly,
wildlife has done quite well up there. It is well documented.
And a lot of that goes to the site preparation. In the
testimony that Alaska Oil and Gas Association committed, they
point out the most recent field, which is Alpine, they are
going into, that they spent years of prep work in getting the
site ready by looking at all the local indigenous situations so
they could track and keep records of that. What we have found,
that is a special place up there. It has a unique habitat. The
conditions are very harsh at times, and the industry has
brought to bear technology up in that area unlike any place
else in the world, and we have learned a lot from it.
Over the 20 years that the industry has been up there, they
now take a pad size, which is the area where the wellheads go,
and it has been reduced by over 90 percent.
And another thing that has happened is that, over that
period of time, we have learned instead of having to make one
bore hole for each individual well you can now utilize--with
directional drilling one bore hole can go ahead and handle
multiple wells. You can actually go out as deep as 9,000 feet
and as far out as 4 miles with directional drilling to find
what you need and bring it through. So the footprint on the
surface is down to close to de minimis levels.
In terms of the operations up there on the tundra area
where they operate, what we have learned to do is, any of the
muds and the like that are brought out in the drilling process
from down below they are reinjected into the ground, as is the
gas and the others, so that by the time you leave a site
basically, you wouldn't know that people had been there.
So it is possible that people are concerned about looking
at drilling operations 20 or 25 years ago and saying we just do
not want that up there, but it does not look at the reality of
what is going on up there today because technology continues to
advance. We are quite confident that we could be held to the
world's strictest standards, which we are up in Alaska, and we
could go up in ANWR and those other areas and both respect the
environment as well as help develop an energy policy that would
provide more domestic production.
Mr. Barton. Now put this in perspective. Assuming that the
latest EIA estimate on the amount of recoverable oil and gas
are true in ANWR, it is a huge number. It is almost as much as
we have in the lower 48 in terms of proven reserves. It is a
big number.
Mr. Cavaney. Yes.
Mr. Barton. How big would the drilling platform or the
drilling footprint be to actually drill ANWR if everything is
there that EIA says is there? Put it in some sort of way that
we can understand. Bigger than the Capitol? Bigger than the
State of Texas? How big would it be to do all the drilling?
Mr. Cavaney. Let me give you an example of this Alpine
field, which is not in ANWR, it is over in the plain. There you
have an area of 40,000 acres. Now, they have done all the
seismic and the testing, which has not been done in ANWR yet so
you have to do a lot of work before you can get the details
down. But they can take an amount which is less than 1 percent
of the land mass, would be all they would ever have to touch to
be able to access and resource that entire area. So you would
have to go in and, first of all----
Mr. Barton. That would be 400 acres based on 40,000 acres?
Mr. Cavaney. Yes.
Mr. Barton. Four hundred acres?
Mr. Cavaney. And that is a relatively small amount and
could be smaller based on technology.
Mr. Barton. What is a city block? How many acres is in a
city block?
Mr. Cavaney. Gosh, I think a city block is considered to be
10 or 12.
Mr. Barton. We are going to show all of our technical
expertise here. So if a city block is 10 acres, you can drill
this entire area in 40 acres. Four city blocks could drill this
entire field?
Mr. Cavaney. I think it is not fair to extrapolate this,
because we have not had a chance to go in with seismic and
determine whether these reserves would all be in several large
deposits or caverns or whether they are----
Mr. Barton. I am trying to help. This is not an unfriendly
question. But I am told that we could have a drilling platform
on the parking lot of the Capitol; and if there were referable
oil and gas reserves in the District of Columbia, one drilling
platform centrally located could drill all the wells that would
be needed to drain the District of Columbia.
Mr. Cavaney. That is correct. That is correct.
Mr. Barton. So this image of these forests of rigs like you
remember from the 1930's in Kilgore, Texas, in reality in
Alaska, if we are allowed to drill in ANWR, you are going to
have very few platforms; and to the caribou or an animal
walking through, they are probably not even going to notice the
drilling, unless at night they stumble into it.
Mr. Cavaney. They won't. I have stood at a site up in
Alaska and actually had caribou walk within 50 feet of me
undisturbed. It is not the old sepia-toned tintype of all these
rigs and everything those are from the 1920's and 1930's.
What you use today is modern technology. You bring the rig
in, drill the hole, remove the rig, pull it out. You have a
small wellhead that is there, and that is all that is seen, and
then some lines to be able to collect the oil and move it on to
tankers, basically. All about invisible to the eye once the
actual bore hole has been drilled.
Mr. Barton. I have some more questions, but I will
recognize Mr. Shimkus for such time as he may consume, and then
I will finish the hearing.
Mr. Shimkus. Thank you, Mr. Chairman.
I think 400 acres would be classified as a small farm in
Illinois. In fact, it is probably a small family farm that
cannot make it today at today's commodity prices.
Mr. Barton. That would be a backyard in Texas.
Mr. Shimkus. I appreciate the panel's longevity and staying
through. It is a long day, and I know most of you were here for
the previous panel.
I have always been very vigilant on this national energy
policy, and if you went back to the records of other hearings I
have bemoaned the fact that we really do not have a strategy
that takes in these other fields that we could do, the marginal
wells that I have in my district and, obviously, the renewable
portion.
Now we are going to have a hearing on the renewal portion,
but I only wish, Mr. Chairman, that some of that renewable
portion, especially in the fuel blending area, could have been
today because it does fit well in the fuel debate. To separate
it with the wind and hydroelectric and solar I think does a
great disservice to the debate, and next time I will be a
little bit more prompt and involved in seeing that there is
good representation.
So, not to be adversarial but to continue to push the
issue, on a small portion of the national energy strategy which
has to be that renewable portion of our portfolio, I visited
Williams Companies' Pekin energy plant that produces ethanol
and many other products. 100 percent, there is no residue in
the production, and ethanol is just one of the products--feed,
protein, starch, all this other stuff. I was just amazed at the
lack of residue in this refinery, and I would encourage people
to visit it. And DOE mentioned the fact and the first panel
mentioned about science research and development will not only
help us move us further down the line.
I also want to take the chance to ask if anyone on the
panel here disagrees with the EPA's evaluation of the phase 1
RFG areas, which obviously is part of the oxygenate debate.
There EPA says that volatile organic compounds, VOC, reductions
average 27 percent, and the goal was 15 percent. So exceeded
the goal by using the oxygenate standard. Air toxin reductions
averaged 22 percent; the goal was 15 percent. Average
NO<INF>X</INF> reductions for phase 1 is 3 percent. There was
no requirement under the phase 1 program. And ambient benzine
levels decreased by 43 percent of the oxygenate standards.
Now benzine is a carcinogen. Does anyone dispute the fact
that the oxygen standard has been very helpful in the clean air
battle that we have been fighting the last couple years?
Mr. Cavaney. I would like to make a point, because we have
been through much of that. I think in the initial stages the
oxygen mandate may have had some benefit, but I think most of
the people who manufacture gasoline and the regulators who look
at them can now say--how shall we say--the low-hanging fruit
has already been realized. And you can be held to meet the
exact same standards without using oxygen and still get those
results out. What happens to----
Mr. Shimkus. If I might jump in, we have had a hearing on
the oxygen standard, and we did have the doctor from the
Colorado School of Mines that in testimony before the committee
would say that is true, but you then have a rise in aromatics.
So--and the possibility of--so the question is this: Do you
dispute the EPA standards on the reductions of the organic
compounds, the air toxic reductions, the NO<INF>X</INF>
reductions and the benzine reductions?
Mr. Cavaney. All I was trying to say is----
Mr. Shimkus. But, sir, the question is--but the question
is, do you dispute that the oxygen standard has been beneficial
in the Clean Air Act?
Mr. Barton. I think you ought to give him a chance to
answer the question.
Mr. Shimkus. Well, he is not--the debate--the response is--
the question is, has the oxygen standard been helpful and has
met the standards that the EPA has directed? That is the
question.
Mr. Cavaney. In the beginning it did, yes.
Mr. Shimkus. How about currently?
Mr. Cavaney. Currently, you can achieve the same effects
without the oxygenate mandate in there.
Mr. Shimkus. Well, and that is debatable, based upon other
testimony that we have had.
Mr. Barton. Would the gentleman yield? To try to help you
out a little bit, can you achieve the same effect at the same
cost?
Mr. Cavaney. Actually, in some cases we can probably do it
less expensive. We are supporters. We are the largest user of
ethanol. What we object to is the idea of mandating. Because it
gets you, in certain conditions, into very high-expense things
where we have to pass that cost along to the consumer. We don't
disagree that oxygenates have a very valid role. We think
ethanol has a very bright future in our industry. We will be
using significantly more of it, with or without a mandate. What
I am just trying to say is you are asking for a blanket
statement in a condition, that the blanket answer----
Mr. Barton. The gentleman's statement is correct. The
oxygen requirement under the current Clean Air Act has exceeded
the estimates of the cleanliness of the air that would develop
by using those standards. I think that is a true statement. I
think----
Mr. Cavaney. And the industry can blend without an
oxygenate today and maintain those extra gains won't be lost in
the process. The case that has been mentioned by the earlier
panel, technology does change, so what was true 10 years ago
can be done different ways now. We have to acknowledge those
kinds of things. We are not trying to back away.
Mr. Barton. The gentleman from Illinois is an ethanol man,
and the gentleman from Texas is an MTBE man.
Mr. Shimkus. Just reclaiming my time. We know what we have,
and we know what we have works. There is dispute on other
refinery capabilities, and this is how it ties in though--with
the whole energy security issue.
Also, the DOE and our testimony that we had in March, Mr.
Chairman, the question was asked of DOE: If we would eliminate
the oxygen standard, what would that do to the cost of fuel?
And we had a hearing on the high cost of fuel. Their response
was an increase of 3 to 5 cents a gallon.
And if basic supply and demand--you are actually losing
volume and replacing it by refined petroleum product, i.e. A
gasoline, that, obviously, supply and demand is working in
favor of the producers now with high prices. So if we want a
national energy policy, we are in a schizophrenic time--a clean
air benefit and a renewable source of fuel. That is why the
separation of these issues in various panels sometimes is not
very helpful. And I will continue, obviously, to fight for the
interests of Illinois.
Mr. Barton. That is a real news flash.
Mr. Shimkus. Last thing is because--and I mentioned this to
the first panel--because of the biodiesel provision in the
Energy and Policy Conservation Act, soy diesel--demand for soy
diesel has increased 700 percent, and there is a great
reduction in the ability of the exhaust. We look forward to
working with the Petroleum Institute and--working with us so
that we can get cleaner air, but we also address our national
energy security by--hopefully, it never happens, the oil lanes
are closed and we start pumping out of the SPR to meet the
demands of our military forces. In essence, that is a limited
supply. We better have our marginal wells, we better have some
continental United States oil production, and we better have a
renewable portion of that portfolio.
More statements than questions, Mr. Chairman, but that is a
member's prerogative. With that, I will yield back my time.
Mr. Barton. I just have a few more questions. Then we will
close the panel.
This is really to Mr. Cavaney. We have reauthorized the
Energy Policy Conservation Act in both the House and the
Senate. The bills are somewhat different; and there is some
controversy over a provision of the House that if oil prices in
the world market were to go below $15 a barrel we would
authorize the first time for the Secretary of Energy to
purchase oil at $15 a barrel for the Strategic Petroleum
Reserve from the stripper wells.
In the Senate, I don't know if it is in the EPCA
Reauthorization Act, but Senator Hutchinson has a provision
that if oil prices were to go below $15 a barrel a tax credit
of up to $3 per barrel would be made in order for these same
stripper wells.
Obviously, the intent on both the Senate and the House is
to keep the stripper well production producing when world
prices collapse again, if they do. What is API's position? Do
you support both provisions? Do you have a preference for one?
Because at some point in time we are going to go to
conference with the Senate and, obviously showing some personal
bias since I am the author of the discretionary authority by
the Department of Energy, I would hope that we would keep that
in. But if Senator Hutchinson were here I know she would speak
on behalf of the $3 per barrel tax credit.
Mr. Cavaney. We strongly support a strong domestic energy
production capacity, and we would work very closely and do with
IPAA. They are the principal constituents with many of those
people.
Mr. Barton. We have to give Mr. Russell a chance.
Mr. Cavaney. Whatever would work out and be good with them,
I think you would find the API would be very supportive of
that.
Mr. Russell. We support both. But we support those things,
especially the marginal well tax credit that you mentioned.
That is the thing to preserve, the marginal wells in this
country. We were talking before about the strategic petroleum
reserve and we have this, the marginal wells, in this country
that produce about as much oil as what we import from Saudi
Arabia. So it is geared to protect that production when we have
downturns.
Mr. Barton. The House provision in conjunction with the
Markey amendment on the reserve fuel oil refined product
reserve in the Northeast passed the House like 400 to 6. So we
have actually had a vote in the House, and it was overwhelming.
I support Senator Hutchinson's provisions, too. Unless it
has been voted on at committee, I don't believe it has had a
vote in the Senate.
Well, I am going to let this panel go. As I said to the
first panel, I want to give you my personal appreciation for
attending today. This is a very helpful dialog.
I especially think the testimony of INGAA about the need to
reform our pipeline licensing process and try to bring the
permitting process into some sort of conformity and expedite
the procedure is very helpful. I will be working with the
minority. If we can come up with some consensus language to at
least introduce for discussion purposes in this Congress, you
know, I would like to do that.
On the larger issues of oil and gas policy, I can assure
you this is not a hearing just to hear ourselves talk. We are
going to have two more hearings this summer. Next hearing is
going to be on coal and nuclear, and then we are going to hold
a hearing on all the renewable and alternatives, environmental
issues. And we are going to try somewhere to put in some focus
on electricity, which kind of uses all the base sources but is
an end use. People look at electricity as something they use
like natural gas or like gasoline.
So by the end of the summer we hope to have had a
comprehensive set of hearings and have developed a record to
begin to try to develop, again on a bipartisan basis, a
comprehensive national energy strategy for the next
administration, whichever political party is in power.
So, again, I want to thank you. This hearing is adjourned.
[Whereupon, at 2:10 p.m., the subcommittee was adjourned.]
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