<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:88422.wais]
NATURAL GAS SUPPLY AND DEMAND ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 10, 2003
__________
Serial No. 108-26
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
______
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
(ii)
C O N T E N T S
__________
Page
Testimony of:
Caruso, Guy F., Administrator, Energy Information
Administration, U.S. Department of Energy.................. 16
Currie, Jeffrey R., Managing Director, Goldman, Sachs & Co... 65
English, Carl L., President and CEO, Consumers Energy, on
behalf of American Gas Association......................... 30
Greenspan, Alan, Chairman, Board of Governors, Federal
Reserve System............................................. 91
Hoglund, Forrest E., Chairman and CEO, Arctic Resources
Company.................................................... 54
Kvisle, Harold N., President and CEO, TransCanada Pipelines
Limited.................................................... 60
Liuzzi, Robert C., President and CEO, CF Industries, Inc., on
behalf of the Fertilizer Institute......................... 38
Mason, Donald L., Commissioner, Ohio Public Utilities
Commission................................................. 22
Sharples, Richard J., Senior Vice President, Anadarko
Petroleum Corporation, on behalf of Domestic Petroleum
Council, U.S. Oil & Gas Institute, National Ocean
Industries Association, and Independent Petroleum
Association of America..................................... 25
Material submitted for the record by:
Caruso, Guy F., Administrator, Energy Information
Administration, U.S. Department of Energy, response for the
record..................................................... 119
Currie, Jeffrey R., Managing Director, Goldman, Sachs & Co.,
response for the record.................................... 119
Edison Electric Institute, prepared statement of............. 110
English, Carl L., President and CEO, Consumers Energy, on
behalf of American Gas Association, response for the record 120
Greenspan, Alan, Chairman, Board of Governors, Federal
Reserve System, response for the record.................... 117
Interstate Natural Gas Association of America, prepared
statement of............................................... 113
Mason, Donald L., Commissioner, Ohio Public Utilities
Commission, response for the record........................ 118
Sharples, Richard J., Senior Vice President, Marketing &
Minerals, Anadarko Petroleum Corporation, letter dated June
18, 2003................................................... 121
(iii)
NATURAL GAS SUPPLY AND DEMAND ISSUES
----------
TUESDAY, JUNE 10, 2003
House of Representatives,
Committee on Energy and Commerce,
Washington, DC.
The committee met, pursuant to notice, at 10:06 a.m., in
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin (chairman) presiding.
Members present: Representatives Tauzin, Bilirakis, Barton,
Upton, Stearns, Gillmor, Deal, Whitfield, Shimkus, Shadegg,
Buyer, Radanovich, Bass, Bono, Walden, Terry, Rogers, Otter,
Dingell, Markey, Hall, Boucher, Deutsch, Stupak, Wynn, Green,
McCarthy, Strickland, DeGette, Capps, John, Allen, Davis, and
Solis.
Staff present: Bill Cooper, majority counsel; Andy Black,
policy coordinator; Peter Kielty, legislative clerk; Sue
Sheridan, minority counsel; and Bruce Harris, minority
professional staff member.
Chairman Tauzin. The committee will please come to order.
Without objection, the committee will proceed pursuant to
committee rule 4(e). It is so ordered.
The Chair recognizes himself for an opening statement.
Today's hearing is entitled ``Natural Gas Supply and Demand
Issues.'' It sounds like the title of a chapter in an economics
textbook, I am sure, but in an academics setting, that topic
would probably put people to sleep. However, in this real world
of running air conditioners to cool homes in the summer or
running furnaces to heat homes in the winter and running
factories to make products necessary for the 21st century for
our economy to grow and to prosper, natural gas supply and
demand is a hotly debated topic today.
The seriousness of the topic is underscored by the level of
nervousness exhibited by those dealings in the natural gas
industry on a daily basis.
Demand for natural gas is ever-increasing. Nearly 23
percent of the United States' primary energy requirements are
fulfilled by natural gas. Oil accounts for about 39 percent and
coal represents 22 percent. Total natural gas consumption is
expected to increase from the current rate of 21.6 trillion
cubic feet per year to 35 trillion cubic feet by the year 2055.
Natural gas has been advocated for a myriad of uses ranging
from fuel for automobiles to fuel for electric power generators
to fuel for heating homes to fuel for charcoal grills even. And
for years we have all seen and read the advertisements saying
that natural gas is the cleanest fossil fuel--environmentally
friendly, produced domestically, and available in abundant
supplies. But now we are hearing a different story. Natural gas
production is flat and has been flat since the year 1994. As
drilling and production technologies improved, declining rates
for natural gas wells are climbing right now, which means wells
are being depleted at faster rates.
For instance, in 1990, the average decline rate was 17
percent. In 2003, it is estimated that the decline rate is now
28 percent.
Technology plays an important role in the industry's
ability to produce faster and faster. However, the industry is
drilling for smaller and smaller reservoirs, and consequently
huge reservoirs with long life spans are not now being drilled.
Is this a subversive plot by energy companies to deprive
the Nation of much-needed natural gas and to drive up the
price? The answer clearly is ``no.'' Drilling companies are at
work everywhere they are allowed to go. The problem is, huge
areas of potential natural gas reserves are off limits because
the Federal Government prohibits drilling activities on vast
areas of lands that are now owned by the Federal Government.
Less than 50 percent of the undiscovered gas resources on
Federal public lands is now available for leasing; yet one of
the difficult battles we had in passing H.R. 6 was an amendment
to strip out an inventory of oil and gas resources on lands
owned by the Federal Government. So drilling companies are
doing the best they can with what they have to provide natural
gas to a consuming public that desperately needs it.
The Chairman of the Federal Reserve Board, Alan Greenspan,
who will be with us later today, I think at 2 o'clock, hit the
nail on the head when he said that we have a contradictory
Federal policy concerning natural gas. On the one hand, the
Federal Government encourages the use of natural gas for a
whole host of processes. On the other hand, the Federal
Government restricts more and more public land to natural gas
development. So the Federal Government is the not so invisible
hand in the marketplace increasing demand, and all the while
decreasing supply.
Yet, talk about market manipulation. To quote Mr.
Greenspan, and this is his quote, ``And if on the one hand we
have encouraged, as we have, very significant growth and
domestic demand for natural gas, but are very readily
constrained by our ability to increase supply, then something
has got to give.''
And what is giving, of course, is price. Price affects
everybody, from the well hand to the burner chip.
High natural gas prices are having an adverse impact on
this economy. It is bad enough that our industries must battle
foreign products that are unfairly advantaged by foreign
governments such as the Russian nitrogen fertilizer industry.
Our government should not punish industries relying heavily on
natural gas by restricting access to supply.
If a train wreck occurs and natural gas prices skyrocket
and shortages occur, who will be at fault? Will it be the
producer, the consumer, or perhaps the Federal Government?
Well, the bottom line is, the reason we are having this hearing
today is, we see a storm brewing on the horizon, and we need to
prepare for it.
I look forward to hearing the testimony from the witnesses
today, on this topic which is so critically important not only
to industries and economists, but to every single American who
is now struggling to make ends meet, and to all of us who are
hoping that Americans can go back to work and this economy can
recover instead of going through another shock.
And the Chair yields back the balance of his time and seeks
members interested in opening statements.
Mr. Boucher is recognized for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
commend you for convening today's hearing on natural gas supply
and demand concerns. The topic is very timely, given the vital
importance of natural gas to our Nation's energy portfolio and
to our entire national economy.
Currently, 23 percent of the United States primary energy
requirements, including industrial, residential, commercial,
and electric utility sectors, are met through the use of
natural gas. According to the Energy Information
Administration, the Nation's use of natural gas is expected to
increase to 52 percent by the year 2025.
In recent years, natural gas has proven to be the fuel of
choice for electric utilities building new electricity
generating units. This trend is expected to continue, with an
estimated 10.4 trillion cubic feet of gas consumption by
electricity generators predicted by the year 2025. And that is
up from 5.3 trillion cubic feet in the year 2001.
In addition, the Energy Information Administration
estimates that domestic gas production is expected to increase
more slowly than consumption during the same period of time.
Along with the increased usage of natural gas, there has
been an increase in price volatility and cyclical decreases in
storage inventories. In January of 2001, natural gas prices
peaked at nearly $9 per million BTUs. Current prices range
between $5 and $6 per million BTUs, and natural gas inventories
are at the present time below historic averages.
Given the recent and projected increases in natural gas
consumption, the many concerns regarding the availability of
enough natural gas to meet demand, the price volatility which
has been evident in recent years and which, given the current
projections, we can expect to continue over time; in concerns
related to inventory levels, natural gas usage is among the
most critical energy policy questions that face this committee
today.
Natural gas certainly has many benefits, ranging from
environmental compatibility to the comparatively low capital
costs associated with starting a new gas-fired electric
generating facility. However, our Nation has a number of energy
alternatives. I would note, for example, that coal remains the
Nation's largest domestic energy resource with reserves
estimated for an additional 250 years.
In addition, advances in clean-coal technologies, both
recent and on the horizon, are ensuring that future coal-fired
electricity plants will be able to operate with little
environmental effect. Ensuring that fuels other than natural
gas, including coal, play a larger role in meeting future
energy needs will help to keep natural gas prices affordable
for the utilities, for the residential users, and for the
industrial consumers who depend upon natural gas.
I look forward to the witnesses' testimony before us today,
and I want to thank them for preparing remarks and taking time
to join us here. The topic they are addressing, the current
state of natural gas supply and demand, is truly timely. I
welcome their recommendations with respect to policies that
will ensure that this Nation does not reach a natural gas
crisis.
I thank you very much, Mr. Chairman, for holding this
hearing, and I yield back.
Chairman Tauzin. I thank my friend.
And the Chair asks, further requests for opening
statements? The chairman of the Subcommittee on Energy, Mr.
Barton, is recognized for an opening statement.
Mr. Barton. Thank you, Mr. Chairman, for holding this
important hearing today. I appreciate your offer to conduct the
hearing at the full committee level after we learned that
Chairman Alan Greenspan would be willing to testify if it was a
full committee hearing instead of a subcommittee hearing. The
participation with Chairman Greenspan underscores the
significance of the issue that's before the committee.
Our Nation faces both a short-term and a long-term future
of high natural gas prices. It is my understanding that natural
gas prices at the wellhead today are over $6 in MCF. Many
Americans are dependent upon affordable natural gas prices for
their residential heating, the electricity the power companies
sends them, many products that they use, and perhaps even their
job. Today, we call the Nation's attention to the problems of a
steady increase in natural gas demand and a staggering or slow-
growing natural gas supply.
The witnesses before us represent natural gas producers,
consumers, analysts, and infrastructure experts. I expect that
we will hear that little can be done to reduce demand in the
short term. Therefore, we must try to do something to improve
the supply.
The hearing today is timed perfectly for a number of
reasons, Mr. Chairman. First, decisions that are made today by
market participants will determine the amount of natural gas
stored in inventory for the coming winter. If this winter is as
cold as last winter was, many people expect surprisingly high
prices.
Second, the U.S. Senate this week is trying to complete
work on its energy bill. I would encourage all the Members of
the Senate to work together for whatever time agreements are
necessary to get the energy bill done so that we can go to
conference between the House and the Senate. As you well know,
we passed our House energy bill several months ago.
The energy bill is not an inside-the-Beltway bill, because
it does affect real people. As we will hear today, energy
affects all Americans and needs the attention of Congress. The
House has acted, passing legislation that will do its part to
address the problem. I know in the Senate it is often easier to
slow things down than to speed things up, but I would hope that
this hearing today would encourage our Senators on both sides
of the aisle to try to work together for the Nation's energy
business.
The third reason that today's hearing is well-timed is that
proponents of regulating carbon dioxide either as a pollutant
or through some other mechanism needs to consider what added
fuel switching would do to our natural markets and to our
consumers. I strongly believe that our Nation should continue
to have a broad portfolio of fuel choices, that coal should
continue to play a leading role in electric power generation.
The thing to do with coal burning is to improve it, not to
reduce it.
Next week, on June 17, my subcommittee, the Energy and Air
Quality Subcommittee, will hold a hearing on the future options
for generation of electricity from coal. Witnesses will discuss
clean-coal technologies and new applications, like coal
gasification, advanced combustion boilers, the Department of
Energy future program, and other possibilities to have coal
burn more cleanly, yet still play its vital role for Americans.
Today, the focus of the natural gas supply and demand is
before the full committee. Congress needs to hear just what the
problems are and what the possible solutions are. We need to
know about the investment climate that dictates whether someone
does or does not want to invest in natural gas production. We
need to hear what it will take to get private parties to build
the Alaska natural gas pipeline, which will help but not by
itself solve the supply and demand imbalance. And last but not
least, Americans need to know what is facing us down the road
in terms of natural gas.
Mr. Chairman, I want to again thank you for holding today's
hearing at the full committee; and as always, thank you for
your leadership on energy issues.
Chairman Tauzin. I thank the gentleman.
Mr. Green? Does Mr. Green seek recognition for an opening
statement?
I see Mr. Dingell is here. My apologies. Mr. Dingell, the
ranking Democrat of our committee, is recognized for an opening
statement if he wishes to give one.
Mr. Dingell. Mr. Chairman, I do.
Chairman Tauzin. The gentleman is recognized.
Mr. Dingell. And I thank you.
Mr. Chairman, thank you for holding this hearing on natural
gas supply and demand. After years of relatively low natural
gas costs, consumers in Michigan and other parts of the country
have experienced wide price swings in recent years. In January
2001, gas peaked at nearly $9 per million BTU. One year later,
prices are running $3 per BTU. But by January 2003, they
crested again at nearly $8 million per BTU--or rather, nearly
$8 per million BTU.
These fluctuations make budgeting for energy use difficult
for both residential and industrial consumers.
Currently, gas is about $6 per million BTU and predicted to
stay at least at that high level for the foreseeable future.
Chairman Greenspan has noted with concern that these prices
seem out of kilter with moderating prices for oil and gasoline
in recent months. Secretary of Energy Abraham recently noted
that natural gas working storage levels are 42 percent below
the previous 5-year average, and that hot summer weather could
hinder efforts to refill these inventories. In the event the
storage levels remain low into the winter heating season,
consumers could once again face skyrocketing prices.
While Congress has attempted to deal with natural gas
supply issues in the past, the wrinkle that makes this
particularly difficult today is that the Nation has become
highly dependent on natural gas for various uses that higher
prices reverberate even more broadly throughout our economy.
Most of the new electric generating capacity added in recent
years is fueled by natural gas, so that when prices rise, it is
felt not only in the homes that use natural gas directly, but
also those that use electricity made from gas. Moreover,
electric consumers in many parts of the country, particularly
the Western States, have had more than their fair share of
volatility in their utility bills. Since a number of industries
depend also on natural gas directly or indirectly, the Nation's
economic recovery could be jeopardized by a prolonged period of
high prices.
Unfortunately, it is easier to comment on the nature of the
problem than to come up with solutions. If Congress enacts
comprehensive energy legislation, provisions to encourage
greater conservation and energy efficiency may provide some
relief, but not in the short run.
I am interested in suggestions from our witnesses regarding
what can be done to prevent consumer hardship next winter. I
know Secretary Abraham has called on the industry to come up
with ideas along these lines, and perhaps some of those are
gelling. Members of the committee led successful efforts in
1987 to repeal most of the restrictions on natural gas use of
the Power Plant Industrial Fuel Use Act of 1978. I would be
interested if our current committee members have the same or a
different opinion.
With that, I wish to extend a special welcome to Carl
English from Consumers Energy. That is a company that provides
great service to Michigan consumers, and I am glad he will be
with us today and look forward to his testimony.
I also look forward to Chairman Greenspan's testimony and
recommendations.
Mr. Chairman, I thank you and my colleagues for your
attention.
Chairman Tauzin. I thank my friend.
Are there further requests for opening statements on this
side? The gentleman from Florida, Mr. Stearns, seeks
recognition for an opening statement?
Mr. Stearns. Yes. Thank you, Mr. Chairman.
Chairman Tauzin. The gentleman is recognized.
Mr. Stearns. I think we have had many hearings here in
which we have talked about the growing gap between natural gas
supply and demand. This is my 15th year in Congress, and I have
been in many hearings like this.
I applaud the Chairman for having this hearing. It is a
long-term problem. We are not going to expect to solve it today
or in the very near future, but I think one of the things that
is coming across my way of thinking is that the U.S.
Government, the States, and local municipalities own a lot of
land; and I think Congress would help the situation if we went
ahead and sort of deregulated and allowed private industry to
develop the gas that might be in this Federal, State, and local
land. That would be one area where a regulatory framework could
be set up, established, and encouraged so that in a cost-
efficient manner we could explore this opportunity for gas in
these, I think, a lot of resource-rich Federal lands.
So, Mr. Chairman, I think that is one thing that we as a
legislative body could do. And I applaud you for this hearing,
and I hope that the witnesses will confirm some other things
that we can do.
In Florida, it appears that in the foreseeable future our
demand for gas is going to double, and we don't really have any
opportunity to develop gas in the State of Florida, so we get--
all of our gas is imported, so it is extremely important that
even Florida look within its land territory for some type of
way to develop some of this resource-rich Federal land.
So I thank you, Mr. Chairman. I look forward to the
witnesses.
Chairman Tauzin. I thank my friend.
The Chair asks Mr. Green if he seeks recognition. He does.
And the Chair recognizes the gentleman from Texas, Mr. Green,
for an opening statement.
Mr. Green. Thank you, Mr. Chairman. And following my good
friend from Florida, there are some gas resources off the State
of Florida, but our committee has taken them off the production
list.
But I appreciate the opportunity for the chairman to have
this, like my colleague from Florida, because just like
Florida, all of our States are experiencing high natural gas
prices. I feel strongly we must do everything in our power to
raise the awareness of the natural gas crisis in our country,
especially with our fellow colleagues in Congress. Consumers
across the country are hit by high natural gas prices in the
summer and the winter. Gas is a familiar fuel for furnaces in
the northern part of our country, but 40 percent of the new
power generation is being fired by natural gas. Consumers will
increasingly feel the bite of gas prices in their power bills
also.
Over the last two decades, since the deregulation of the
natural gas industry, we have gotten used to fluctuating
prices, typically about $2 per million cubic feet. And those
prices have been over $3 for almost all of the last 2 years and
over $4 since last January. Now, it is close to $6.50 per
million cubic feet.
Experts predict steady U.S. demand growth for natural gas
through the year 2030 and slowing declining domestic
production, and that is a formula for high prices. This issue
is of paramount importance to my constituents in the State of
Texas because the natural gas crisis threatens the lifeblood of
Texas Gulf Coast industry, petrochemical production. This
industry is one of Texas' largest employers, and many of these
jobs are in danger of being lost forever.
Without reliable, affordable natural gas, plastics and
other petrochemical products now made in America will be
produced overseas. And I would point out that the chemical and
petrochemical industry is one field of manufacturing where
America is still a net exporter. As policymakers, we must first
take a serious look at the obstacles to domestic gas
production, restricted public lands onshore and offshore,
irrational pipeline regulation, and politically motivated moves
to open up long-term energy contracts and to cap prices.
Most coastal States and their Washington delegations that
have lots of new gas-fired power plants refuse to allow gas
production offshore. The House energy bill in its current form
does not even allow the Federal Government to study its own
offshore reserves.
Second, we need to ensure that we have a healthy mix of
energy sources. Cleaner coal technology, responsible nuclear
power, both have important roles to play. However, natural gas
will continue to be a popular choice because of the few
negative consequences. It burns clean, improves air quality,
and plants will come to become more efficient. Liquefied
natural gas technology, which allows us to tap abundant global
resources, is also improving. But there is a serious not-in-my-
backyard problem with the location of LNG terminals that will
need to be addressed if we want gas-fired plants. With a break-
even point near $2.50 per MCF, we need to take a hard look at
LNG.
I look forward to hearing some of the solutions from our
panelists this morning. I look forward to Chairman Greenspan's
testimony this afternoon, which hopefully will motivate my
colleagues to take action on this issue.
And again, Mr. Chairman, thank you for calling this
hearing.
Chairman Tauzin. I thank my friend from Texas.
Further requests for opening statements on this side? Mr.
Whitfield, waives? Mr. Rogers, waives?
On this side, the gentlelady from California, Mrs. Capps,
seeks recognition for an opening statement, and is so
recognized.
Mrs. Capps. Thank you for recognizing me, Mr. Chairman, and
for holding this hearing.
Ensuring we have adequate supplies of energy is critically
important to our economy and our Nation's well-being. And some
of the information we will hear today about natural gas
supplies is disturbing, as natural gas has become a critical
part of our energy stream and has allowed us to reduce
polluting emissions. So it is good we are holding this hearing.
Mr. Chairman, attaining energy independence and
predictability of supplies are some of the best reasons to
enact a national energy policy. Our country should explore and
extract oil, gas, and coal wherever it is economically feasible
and environmentally sensitive. But first we should also adopt
strategies for reducing our demand for energy. Simply drilling
for more oil and gas anywhere we can find it is a fool's
errand. We really should start by managing our consumption
better.
In addition, we must have tough regulatory policies in
place to prevent the blatant manipulation of energy markets,
like what happened in California, when trading tricks and faked
shortages drove prices through the roof and stole billions of
dollars from California residents.
Unfortunately, the House energy bill fell woefully short of
achieving these goals and establishing a rational, forward-
looking national energy policy. Comprised mainly of subsidizing
the oil, gas, coal, and nuclear industries, weakening
environmental protections and lacking aggressive actions to
reduce energy consumption, the bill is a classic missed
opportunity.
For example, we should have adopted Representative
Pallone's common-sense proposal to establish a renewable
portfolio standard for power plants, to encourage them to use
more renewable energy. This would lessen our dependence on
fossil fuels; and it is clearly doable, since California
companies are already doing it.
I do, however, want to point to one positive step the House
took, and this has already been mentioned today: the adoption
of a bipartisan amendment that I offered with my colleagues
from Florida, Representative Davis, who is also a member of
this committee, and Representative Jeff Miller. Our amendment
removed from the bill an extremely ill-advised provision added
by the Resources Committee that would inventory the oil and gas
resources off our coast.
Taking inventory sounds pretty innocuous, but this is not
CVS, and the inventory isn't about counting toothbrushes. The
inventory would actually undermine the long-standing national
consensus, and two decades of executive and congressional
action against new oil and gas drilling off some of our
economically valuable and environmentally precious coastlines.
And since we pretty much know where the vast majority of
economically extractable oil and gas is--in the central and
western Gulf, which are open to drilling--the inventory
proposal is a thinly disguised attempt to drill off Florida,
California, Massachusetts, and anywhere else with a beach. I am
pleased that the House acted to check the irresponsible actions
of the Resources Committee.
Clearly, we must have a vibrant energy extraction industry,
but we have to do it in a way that is compatible with our
national goal to protect our environment and coastal economies.
And our energy policy is lacking if we don't first look at how
to reduce our consumption of nonrenewable sources.
So I welcome the testimony of our witnesses, and I hope
that this current difficulty in matching natural gas supply and
demand is not seen as an easy excuse to push for more oil
drilling and gas drilling off our coasts.
I yield back the balance of my time.
Chairman Tauzin. I thank the gentlelady.
Further requests for time on this side? Mr. Stupak seeks
recognition?
Mr. Stupak. I waive.
Chairman Tauzin. Waives.
Anyone else? I see Mr. Davis. Mr. Davis seeks recognition
and is so recognized.
Mr. Davis. Thank you, Mr. Chairman. Thank you for holding
this hearing.
I wish we had had a chance for a more thoughtful discussion
on this issue during the course of the energy bill debate. I
simply wanted to ask your consent to enter into the record a
policy report just recently prepared by Chuck Alston of the
Progressive Policy Institute, which I think represents an
attempt to define how we can balance some of the environmental
sensitivities Representative Capps referred to with legitimate
concerns about supply.
Chairman Tauzin. Without objection, the gentleman's request
is granted, and the record will reflect the document. The
gentleman may proceed. Is that all the gentleman had?
Mr. Davis. That is all.
[The report is available at www.ppionline.org]
Chairman Tauzin. The Chair asks, is there further request
for time?
The gentlelady Ms. Solis requests time. Ms. Solis is
recognized for an opening statement.
Ms. Solis. Thank you, Mr. Chairman.
Good morning. I'm also pleased to be here and very anxious
to hear from our witnesses today. I want to commend you, Mr.
Chairman, and also Ranking Member Dingell for bringing this
important matter to this committee's attention. And I am sure
we will learn quite a bit about this vital natural resource and
its implications for our economy.
There is no doubt that natural gas will play a vital role
in a cleaner energy future. As the least polluting fossil fuel,
natural gas will play a central role when we finally get
serious about reducing our greenhouse gas emissions.
Natural gas can and should play a great role in our
transportation alternatives. In my home State of California,
for example, we desperately need to speed the transition to
cleaner natural gas school buses to protect the health of our
school children in our communities. These new applications will
increase demand for natural gas, and this will have the
potential to drive up prices. Keeping natural gas affordable
will require a renewed commitment to conservation and renewable
fuels as well as seeking new supplies of natural gas.
There are some who would sacrifice environmental
protections in a rush to develop new natural gas resources. I
don't believe that in seeking solutions to one environmental
problem we should create another.
It has been said, for example, that environmental laws
effectively lock up much of our public land from natural gas
exploration. In fact, the administration's own data show that
this claim is simply not true. A study conducted by the
Department of Interior surveyed five Western basins that
contain the bulk of natural gas resources on U.S. public lands,
and show that 12 percent of these lands were restricted for
natural gas development. Even this low number is greatly
inflated by the inclusion of major natural parks and wilderness
areas in the study.
Americans overwhelmingly believe these areas should be off
limits to resource extraction. California's famous Gold Rush
created a contradictory legacy of economic opportunity and
environmental destruction that we are still paying for today.
The natural gas gold rush will also create a potential for
economic prosperity and certainly environmental challenges. We
would be wise to proceed thoughtfully and thoroughly as we
consider our energy future.
In that regard, I hope that future hearings on this matter
will feature analysts who can speak on both the environmental
promise and potential for damage in increasing the use of
natural gas in our energy portfolio.
I yield back the balance of my time.
Chairman Tauzin. The gentlelady yields back.
Are there further requests for opening statements?
The gentleman, Mr. Markey.
Mr. Markey. Do I have to make the motion to waive my
opening statement?
Chairman Tauzin. Actually, let me do this; en bloc, I
think, will help. Under the rule--let me explain to the
audience what we are doing.
Under our new rules, if a member seeks time for an opening
statement, he may give an opening statement. If he waives an
opening statement affirmatively, that member is entitled to a
little bit longer time in questioning. It is kind of an
inducement so we can get to you quicker.
And I will make the en bloc request of all members who have
waived their opening statement that they be permitted under the
rule the benefits of the rule. Is there any objection? Without
objection, so ordered.
The Chair will now welcome our guests, the first panel this
morning. As I pointed out, we will have Alan Greenspan at 2
o'clock, but we have a distinguished panel of individuals who
can indeed tell us a lot about this issue and inform us as to
many of the questions I know that the committee will have.
First of all, Mr. Guy Caruso is Administrator of the Energy
Information Agency.
Excuse me. Before I introduce the panel, do you seek
recognition, sir, for an opening statement?
Mr. Hall. Mr. Chairman, if I can make a very important
opening statement.
Chairman Tauzin. On behalf of Texas, I assume.
Mr. Hall. Right.
Chairman Tauzin. The gentleman is recognized for that
purpose.
Mr. Hall. The Fourth District oil patch in particular.
Chairman Tauzin. The gentleman is recognized.
Mr. Hall. Mr. Chairman, thank you, and members of the
committee. And I am sorry to be late.
We have come almost full circle in my time in Congress and
my time on this committee from a time of natural gas scarcity
to the plentiful supply of natural gas back to a time of
scarcity. The signs have been ominous for several years, yet we
have chosen to ignore them, much like driving a car until the
tank is nearly dry and then starting to look for a service
station. Except, in this case, there is no real active service
station on the block.
Then, as now, we talk about a scarcity when there really
isn't one, only a lack of available supply. What is really
scarce is the easy-to-find-and-produce natural gas. That gas is
rapidly being depleted, but the hard-to-find-and-produce gas is
not being brought on quickly enough to replace what we are
using.
U.S. natural gas production has been virtually flat for the
last decade. The EIA reported that the production declined in
2002. And even though the rig count is rising again, EIA is
very cautious in its predictions of any significant production
increase.
A lot of the resource is still underground, onshore and off
our coasts, but I think we have to be smarter and have better
tools to find and produce this gas. When ANWR fell by the
wayside in Senate the last time, toward the end of the session,
I called Boone Pickens and told him. I said, well, they knocked
ANWAR out. He said, That is okay; it will still be there. It
will always be there.
So we have got a supply, but it is still down in the
ground. And kind of like my preacher at home told us, he had
good news and bad news for us. He said, the good news is, There
is enough in church right now to pay off the entire church
debt; and the bad news is, It is still in you-all's pockets.
That is kind of the way we are on the production of gas.
Much to its credit, several years ago the Department of
Energy identified this problem and produced a road map for
drilling and producing the gas that lies in the ultra-deep
waters in the Gulf of Mexico in water depths in excess of 5,500
feet. According to a University of Texas Bureau of Economic
Geology study completed in 2000, as much as 69 trillion cubic
feet of incremental or additional natural gas can be produced
from the deep waters of the Gulf and from unconventional
onshore gas reserves if advanced technologies are used and
deployed.
The revenues to the Federal Government from production on
Federal waters and onshore Federal lands could be as high as 22
billion between now and the year 2015 at a cost to the Federal
Government of about 3 billion. That is a good deal in anybody's
books. These are incredibly compelling reasons to make a full-
scale assault on developing these technologies on a crash basis
and bringing this gas to our doorsteps sooner rather than
later.
But, Mr. Chairman, let me be clear. We will never be able
to produce as much gas as we have in the past. Peak annual
production occurred in the early 1970's. However, we can slowly
and surely and greatly slow the rate of decline in our domestic
production. We need to take the pressure off of natural gas to
meet some of the incredible demand that is projected by the
Energy Information Administration and others' pressure, I might
add, that is driven largely by Federal policy, namely, clean
air and some other things, forcing people to use natural gas
and not coal.
We need to use our most abundant resource, coal, but we
also need to develop the technology that is necessary to burn
coal with as few emissions as possible. We need to spend more
on renewables--where it works, solar, and geothermal where it
is available. And, of course, there is still much more to do in
conservation, unless we use less of what we have.
I have a bill and a part of a bill that passed the Science
Committee. Well, as a matter of fact, the first bill I passed
in Congress in 1981 or 1982, when I came here, was a
conservation bill that RCS and CACS and, Mr. Chairman and Mr.
Markey, you well remember though.
We simply no longer have the luxury of engaging in fights
over coal versus gas versus renewables. We need all of them,
and we need them now to take some of the demand pressure off of
natural gas.
Last year, I introduced legislation not only to establish
an industry-led offshore program to bring these technologies
into reality, but also to develop the technologies that will
enable us to produce the hard-to-find gas onshore, too. These
provisions were contained in the energy bill and were ready to
be adopted by conferees when the conference collapsed last
year.
The Science Committee included this language in the bill,
H.R. 238, it reported this year. The Energy and Commerce
Committee, Mr. Chairman, your committee had several similar
provisions in its bill, too. So I submit that this ultra-deep
and onshore exploration and production R&D language is really a
production provision masquerading as an R&D provision.
Development of these technologies under this provision will
produce more than one-third of the gas estimated to be needed
between now and the year 2015 at costs considerably less than
importing an equivalent amount of LNG.
The history of natural gas production has proven that big
increases in production occur when technology is applied to
break down production barriers. Coal bed methane is a case in
point. In 1990, coal bed methane production was negligible.
With an investment of 140 million, production began to increase
to the point that today it is about 7 percent of annual gas
production. There are other examples.
So, in closing, Mr. Chairman, there is broad consensus in
this body for this legislation. You, Mr. Markey, and the
majority leader, Mr. DeLay, certainly have been helpful on
keeping these provisions in the conference, but we need you and
the rest of the conferees to stand strong and push hard on our
colleagues in the Senate when the conference convenes.
I don't exclude anyone else, including my friend Mr. Markey
to the right, who is a good strong member of this committee,
and purports and sets forth a desire to solve the energy
problem. He has his ways and his methods, of course; and I
can't sit here and say that he is totally wrong. He is a good
man to work with, and we need to all work together.
The pending energy bill may be our last best opportunity to
make a major breakthrough on production technologies that will
yield huge returns in additional gas supplies. We can't afford
to let this opportunity pass us by. The cost in increased
natural gas prices, if we fail to act, will be truly enormous.
And I thank you, Mr. Chairman. I yield back my time, if I
may.
Chairman Tauzin. The gentleman has no time to yield, but we
appreciate his opening statement.
Mr. Hall. I could go on.
Chairman Tauzin. We all know.
The gentlelady, Ms. DeGette, has arrived. And the Chair
will seek whether or not the gentlelady wishes to give an
opening statement.
Ms. DeGette. Just briefly, Mr. Chairman.
Chairman Tauzin. The gentlelady is recognized.
Ms. DeGette. I will ask unanimous consent to put my full
opening statement in the record. And we have a large panel.
So let me just say that, as a Westerner, I was quite
interested in this so-called EPCA report Ms. Solis was talking
about, which concluded that public land protections are not
holding our Nation's gas supply hostage. And I was a little
dismayed that none of the witnesses talked about that
conclusion in their written testimony. I am hoping someone will
talk about this today. As we make very important land-use
decisions in the West, particularly regarding BLM land, we need
to keep in mind that while we need to develop our natural gas
supplies in the West, that does not necessarily mean 100
percent development in all lands. And, if we have a reasonable
land-use policy, we can still have robust natural gas
development.
With that, I will yield back.
[The prepared statement of Hon. Diana DeGette follows:]
Prepared Statement of Hon. Diana DeGette, a Representative in Congress
from the State of Colorado
I want to thank our chairman, Mr. Tauzin, for holding this hearing
on natural gas supply and demand. Gas rates directly affect my
constituents, just as they affect the constituents of every Member
here. Clearly, we all have an interest in decreasing volatility in
natural gas prices.
I believe that the panels the Chair has assembled well represent
the supply side of the equation. And I look forward to discussing with
our panelists the challenges and solutions of increasing the supply of
natural gas.
But with all due respect to the panelists who are here today, I am
somewhat confounded by what is not included in their testimonies. Not
one mentions the recent survey from the Bush Administration's
Department of Interior and the United States Geological Service. The
so-called EPCA report concluded that public lands' protections are not
holding our nation's gas supply hostage. I hope that the study's
omission from everyone's testimony isn't because the results of the
survey are inconsistent with industry claims that public lands'
protections are the bogeyman. I also hope that the rumors of provisions
in the energy bill to commission another study, maybe one that would be
more to the Administration's liking, are unfounded.
I voted against the comprehensive energy bill that our committee
marked up earlier this year because I felt it wasn't well balanced. The
emphasis was almost entirely on production with little to address the
need to conserve. This hearing is invoking similar flutters of deja vu.
I am pleased that we will be hearing from Mr. Mason, Commissioner
for the Public Utilities Commission of Ohio, who may have similar
concerns to the utility companies in my district. An article from
yesterday's Denver Post, my hometown paper, quotes an official from
Xcel Energy, which supplies most of the power for my constituents'
homes. ``It will be incumbent on us to make sure our customers know
that higher prices are coming, and that we do all we can to encourage
conservation and energy efficiency. Education, conservation and energy
efficiency will be our best weapons against higher prices . . .'' After
reading the testimony from Mr. Mason, it doesn't sound as if Xcel
Energy's situation and approach are unique.
That article also mentions the effect rising prices will have on
low-income residents. It may not be the right time to discuss this, but
I hope that the Republicans will join us in ensuring that Americans who
are the most vulnerable will not have to make the choice between
feeding themselves and heating their homes come next winter. I think we
ought to plan ahead and increase the money available for LIHEAP.
Those concerns aside, I look forward to hearing from the panelists
assembled here today.
Chairman Tauzin. The gentlelady yields back.
The gentlelady has made a request that the written
statement be made a part of the record. Without objection, that
is so ordered. And the chairman will note, generally for all
members who have written statements, to introduce those
statements into the record without objection. That is so
ordered.
Are there further members seeking recognition?
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Paul E. Gillmor, a Representative in
Congress from the State of Ohio
I thank the Chairman for the opportunity to address the issue of
natural gas supply and demand as a major element of our country's
energy debate. I also look forward to learning from a well-balanced
panel of witnesses, as well as the honorable Chairman Greenspan later
this afternoon.
Furthermore, I would like to extend a special welcome to fellow
Buckeye Donald Mason, currently serving the Public Utilities Commission
of Ohio (PUCO). In particular, I look forward to hearing your testimony
regarding the volatility of natural gas prices and their affects on
Ohio residential customers.
Over the last several years, a number of my constituents, many of
which are on a fixed income, have written to convey their concern and
at times, have enclosed copies of exorbitant natural gas bills.
Just as important, I represent a number of growers dependent on
natural gas as the primary component in the production of commercial
fertilizers. Northwest Ohio farmers have consistently communicated the
need to stabilize natural gas markets to not only increase farm income,
but become less dependent on support programs.
At a time when natural gas consumption is nearly four times greater
than it was 50 years ago, and production continues to be limited due to
the unpredictability of natural gas markets, I again applaud the
Chairman for bringing attention to this important matter today.
I yield back the remainder of my time.
______
Prepared Statement of Hon. Ed Whitfield, a Representative in Congress
from the State of Kentucky
Thank you Mr. Chairman. Although this hearing is focused on natural
gas, I wanted to take the opportunity to remind the Committee about the
fundamental role of coal-based generation in supplying our nation's
electricity. Although natural gas will fuel the majority of new
capacity additions in the near future, new technologies could allow
coal-based power to add 40,000 MW in the near term. According to the
National Coal Council, an advisory group for the Secretary of Energy,
this would minimize economic impacts while new generation facilities
are sited, constructed, and brought into service without increasing
emissions at existing facilities and, in some cases, lowering
emissions. Approximately 25% of existing facilities can be targeted for
repowering with much cleaner and more efficient coal-based power
generation. I hope to be able to expand upon this at next week's
hearing. Thank you.
______
Prepared Statement of Hon. C.L. ``Butch'' Otter, a Representative in
Congress from the State of Idaho
Thank you, Mr. Chairman, for holding this hearing today. As our
economy begins to recover, it is more important than ever that the
United States maintain an abundant and reliable energy supply. While
the Energy Policy Act passed earlier this year will go a long way
toward achieving this goal, hearings like the one we're conducting
today will help us to see what additional effort must be taken, if any.
Over the past several years, government policies have seemed to
encourage the use of natural gas for environmental reasons as well as
for energy efficiency. But those policies have not been updated to
reflect new exploration and production technologies, most of which
minimize environmental disruption while maximizing resource recovery. A
consequence of these out-of-date policies has been to constrain the
supply of gas despite growing market demand.
It is my understanding that there are plentiful natural gas
supplies throughout the United States and Canada. However, many of the
existing wells that have provided so much natural gas at reasonable
prices are becoming depleted. Production must migrate to new areas and
we must have the federal policies in place to allow the development of
new sources.
Mr. Chairman, I look forward hearing from our witnesses today, to
gain a better understanding of the outlook for natural gas in the
United States.
Chairman Tauzin. Then the Chair again welcomes our panel
and will begin to introduce them.
First, let us welcome Mr. Guy Caruso, the Administrator of
the Energy Information Agency of our own U.S. Department of
Energy. Welcome, Mr. Caruso.
Mr. Richard Sharples, who is the Senior Vice President of
Anadarko Petroleum Corporation on behalf of the Domestic
Petroleum Council of the Oil & Gas Association. I think you are
third, Mr. Sharples. There you are. We want to welcome you.
Mr. Donald Mason, the Commissioner of the Public Utilities
Commission of the great State of Ohio, from Columbus, Ohio. And
Mr. Mason, we want to recognize and welcome you, sir.
We have Mr. Carl English, President and Chief Executive
Officer of Consumers Energy on behalf of the American Gas
Association. Welcome, Mr. English.
Mr. Robert Liuzzi, President and CEO of CF Industries,
Inc., on behalf of The Fertilizer Institute. Welcome, Mr.
Liuzzi. I understand you have a plant in my district as well,
so, welcome.
Mr. Forrest Hoglund, Chairman and CEO of the Arctic
Resources Company in Houston, Texas. So, welcome, Mr. Hoglund.
Harold Kvisle, President and CEO of TransCanada Pipelines
Limited of Calgary, Alberta, Canada. We want to welcome our
neighbor from across the Big Divide.
And Mr. Jeffrey Currie, who is the Managing Director of
Goldman, Sachs & Company of New York, New York. And, Mr.
Currie, we also want to welcome you.
A distinguished panel indeed.
Our rules provide that we recognize you each for 5 minutes
to summarize your written statements which are made a part of
our record already. And we all have your written statements in
front of us, so we would ask you not to read those statements,
but to use the 5 minutes to summarize the key points of your
statement, at which time we will then open the panel to
discussion with our members, who will be recognized in order of
appearance at the close of the opening statements.
So we will begin with Mr. Guy Caruso of our own Energy
Information Administration, the Administrator of that important
agency within the Department of Energy.
Mr. Caruso, welcome, sir. And we will take your testimony
at this time.
STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; DONALD L. MASON,
COMMISSIONER, OHIO PUBLIC UTILITIES COMMISSION; RICHARD J.
SHARPLES, SENIOR VICE PRESIDENT, ANADARKO PETROLEUM
CORPORATION, ON BEHALF OF DOMESTIC PETROLEUM COUNCIL, U.S. OIL
& GAS INSTITUTE, NATIONAL OCEAN INDUSTRIES ASSOCIATION,
INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA; CARL L. ENGLISH,
PRESIDENT AND CEO, CONSUMERS ENERGY, ON BEHALF OF AMERICAN GAS
ASSOCIATION; ROBERT C. LIUZZI, PRESIDENT AND CEO, CF
INDUSTRIES, INC., ON BEHALF OF THE FERTILIZER INSTITUTE;
FORREST E. HOGLUND, CHAIRMAN AND CEO, ARCTIC RESOURCES COMPANY;
HAROLD N. KVISLE, PRESIDENT AND CEO, TransCANADA PIPELINES
LIMITED; AND JEFFREY R. CURRIE, MANAGING DIRECTOR, GOLDMAN,
SACHS & CO.
Mr. Caruso. Thank you, Mr. Chairman. I appreciate this
opportunity to present the Energy Information Administration's
views on the natural gas market which are contained in the
Short-Term Energy Outlook, which was recently released on June
6 and in our Annual Energy Outlook, which was released in
January of this year.
As you know, the EIA does not take positions on policy
issues, and indeed, we are charged with providing objective,
timely, and relevant data, analysis and projections to the
Department as well as to other Federal agencies, Congress, and
the public so that officials may draw on our information and
analysis to study energy policies.
Our outlooks, both short- and long-term, presented today
represents our best assessment of what the current conditions
are, including macroeconomic assumptions and our assumptions
about things like the weather, which is critical to natural
gas. And indeed, although our long-term energy Outlook takes
policy in existence at the time of its publication as given we
recognize the importance of policy changes that can very much
affect these numbers, such as the President's national energy
plan and the legislation you are currently debating in both
Houses.
So we recognize that although these numbers seem pointed
and stark, they are not fixed in concrete, and things can
change. And I know that is the purpose of this hearing, to see
what can be done.
So, with that in mind, we note that the current natural gas
market is tight, and the potential for significant volatility
is high. As shown in the first chart, natural gas prices are
now above $6 per million BTUs. And we expect the price of
between $5 and $6 per million BTUs for the remainder of this
year. Last winter's unseasonably cold weather drove natural gas
prices higher. It depleted storage, which is holding up that
price today, and we expect that to continue during the spring
and the summer because there will be tremendous demand to
refill the storage that we depleted.
The second chart shows the kind of storage refill that we
face over the coming months. And we are about 29 percent below
the 5-year average for working gas in storage as of the end of
May as released in our latest report. So we have a steep hill
to climb.
We are 2 months into the rebuild season, and we are well
below average storage levels for this time of year.
Storage is expected to build to between 2.8 and 2.9
trillion cubic feet by the end of October, based on our latest
Short-Term Energy Outlook. Under normal weather conditions,
this should be enough to satisfy winter demand and to allow
storage to be near normal if we have a typical winter. However,
because demand to refill working gas in storage will be larger
than average, EIA projects that natural gas prices will average
between $5 and $6 per million BTU for the remainder of this
year, and the potential for volatility is considerable.
On the supply side, natural gas production appears to have
fallen in 2002, although data remains preliminary. Part of this
loss is attributable to the hurricanes that occurred in the
Gulf of Mexico in September and October.
This year, with the higher price of gas and the increased
drilling rates, we do expect an increase in domestic
production, but this is by no means certain because of the need
to drill many more wells to produce enough gas to meet this
resurgence in demand that has already been mentioned in opening
statements. However, this extra effort might result in enough
production to allow an increase of about 2 percent if our
assumptions on productivity are accurate.
The point made about the depletion of the existing gas
wells, by the chairman in his opening remarks, is shown, I
think clearly, in the third chart. More than 50 percent of the
gas that we expect to be produced in the United States this
year is likely to come from wells drilled less than 3 years
ago. This chart shows how high the current depletion rate is
and points to the kind of drilling effort we need to meet
demand. Imports are also expected to increase, but it will be
not enough to meet the kind of refill we need.
Chairman Tauzin. Mr. Caruso, your time has expired, sir.
Can you wrap for us?
Mr. Caruso. Sure.
Let me just finish by saying that we do expect prices to
increase, as I mentioned, staying at the $5 to $6 per million
BTUs range. However, over the longer term, the increase in
drilling will, we do believe, bring forth enough natural gas to
moderate that price, so that although the short term is
volatile, we do have hope in our long term that the increased
production will bring that price back down into the $3 to $4
range.
[The prepared statement of Guy F. Caruso follows:]
Prepared Statement of Guy F. Caruso, 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 EIA's outlook for the
U.S. natural gas market. The source of our short term projections is
the June 2003 release of EIA's monthly Short-Term Energy Outlook; the
long term projections are drawn from the National Energy Modeling
System (NEMS).
The EIA is the statutorily chartered 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 Department of Energy, other Government agencies, the U.S.
Congress, and the public. We do not take positions on policy issues. We
produce data and analysis reports that are meant to help policy makers
determine 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. They should not be construed as representing
those of the Department of Energy or the Administration.
summary
Short-Term Natural Gas Market (Through 2004)
Currently, the natural gas market in the United States is tight,
with gas storage levels lagging well behind normal levels. Spot natural
gas prices reflect this deficit and the expectation that demand, while
not necessarily expected to exceed levels seen in 2002 on an annual
basis, remains at a high level relative to domestic natural gas supply
capability. The high market prices and strong drilling efforts are
expected to ultimately allow gas storage volumes to move closer to
normal by the beginning of the next heating season. This expectation,
however, is predicated on prices continuing at high levels ($5.50-$6.00
per million Btu) through the next winter.
Longer-Term Natural Gas Market (Through 2025)
By 2025 total natural gas consumption is expected to increase to
almost 35 trillion cubic feet (Tcf) or 26 percent of U.S. delivered
energy consumption. Such a demand level represents an increase of about
52 percent from the expected 2003 level. Domestic gas production is
expected to increase more slowly than consumption over the forecast,
rising from 19.5 Tcf in 2001 to 26.4 Tcf in 2025. Growing production
reflects increasing natural gas demand and is supported by rising
wellhead gas prices, relatively abundant gas resources, and
improvements in technologies, particularly for unconventional gas.
Short-Term Gas Market Analysis
Overview of U.S. Natural Gas Markets
The natural gas market is tight. The natural gas spot price at the
Henry Hub (the market location used for pricing the New York Mercantile
Exchange gas futures contracts) is high in historical terms for this
time of the year. Spot natural gas prices have fluctuated around $6 per
million btu (mmbtu) over the last several weeks, and levels of natural
gas in underground storage remain low two months into the injection
season. At the end of May, working gas in storage stood about 38
percent below end-of-May 2002 levels and 28 percent below the previous
5-year average. Spot natural gas prices will likely average $5-$6 per
mmbtu through the rest of this year. The exceptionally low level of
natural gas storage continues to place unusually strong upward pressure
on near-term natural gas prices. In the current environment companies
will need to obtain large amounts of natural gas from other sources to
refill storage for the next heating season. Moreover, if abnormally
warm weather prevails this summer the current market may become highly
sensitive to demand, particularly in the Western and South Central
United States, where natural gas is heavily used for power generation.
Such conditions could cause a mid-year run-up in prices well above
current levels (about $6 per mmbtu). However such price run-ups are
usually short lived.
The projections outlined above are made at the national level, but
it is important to emphasize that regional prices can diverge. Regional
prices can also be highly volatile. For example, the average April spot
price for natural gas traded at New York City was $5.94, down
considerably from the $8.81 seen in March, a result of the usual change
in seasonal demand levels but also of the high margins between the New
York city gate and the Henry Hub that sometimes arise during peak
demand periods.
Natural Gas Supply and Demand
With high natural gas prices, natural gas demand is expected to
remain flat in 2003. Flat demand this year is likely despite sharply
higher weather-related demand during the first quarter of 2003. Natural
gas demand in 2004 is expected to remain flat as high prices discourage
use enough to offset increases that might otherwise have accompanied
industrial growth. Gas-intensive industrial growth (i.e., a composite
index of industrial output, weighted by industry use of natural gas) is
likely to be well below 1 percent this year, if indeed it is positive.
Demand for natural gas this summer is expected to fall by about 1
percent from last summer's level. This is in part due to weaker
industrial demand. Under our assumption of normal weather, cooling
degree-days for the season (Q2 2003 and Q3 2003) would be close to 10
percent below year-ago levels, reducing gas usage for power generation.
In the event of a hotter-than-normal summer this year, natural gas
prices could move higher as cooling-related demand would compete with
the need to build storage inventories. The National Climate Prediction
Center currently indicates that above-average temperatures in the U.S.
Southwest and parts of Texas are likely in June and possibly in the
third quarter as well. Such a development could increase gas demand for
power generation and increase pressure on spot prices.
Working natural gas in storage is estimated to have reached about
1,212 billion cubic feet (bcf) at the end of May, 38 percent below the
year-ago level. This is the second lowest aggregate inventory level for
the end of May recorded by EIA. Eastern and producing regions stocks,
in particular, are at very low levels. Demand for natural gas to refill
working gas storage in 2003 will be higher than average, which means
that prices are likely to remain volatile. Storage is expected to build
to about 2,900 billion cubic feet by the end of October. Under normal
weather conditions, this should be enough to allow storage to be about
1 trillion cubic feet at the end of next winter, near to normal for
that stage of the storage cycle.
Natural gas production declined in 2002. Part of the loss was due
to the effects of hurricane activity in the Gulf of Mexico in September
and October. The last significant disruption in gas supply prior to the
fall of 2002 was September of 1998. (While hurricanes regularly
threaten platforms in the Gulf of Mexico, actual production impacts
that are considered significant are not really very frequent and, when
they do occur they tend to be short-lived.) Production is expected to
increase by 2.2 percent this year. High natural gas prices and sharply
higher oil and natural gas field revenues are expected to drive a
resurgence in natural gas-directed drilling activity this year
following a downturn in 2002. Monthly oil and natural gas field
revenues are expected to continue to average close to $400 million this
year. Domestic production growth should continue in 2004 but, given
recent experience, the extra effort might result in increases of less
than 2 percent from 2003 levels. The prospects for significant
reductions in natural gas wellhead prices over the forecast period from
the current high levels hinges in large measure on the productivity of
the expected upsurge in drilling in terms of expected output.
Net Imports
Prospects for sharp increases in net imports in 2003 are limited
but we do expect to see an overall increase in 2003 of about 2 percent.
Substantial increases in LNG imports are possible and we believe that
they have made a noticeable contribution already this year. Canadian
exports to the United States were up 3-4 percent from year ago in early
2003. Any growth in gross imports is likely to be offset partially by
increased exports to Mexico, which have been rising sharply in recent
years.
Prospects for Price Volatility
In light of the current low storage levels, chances of continued
price volatility are great. Let me raise some factors that could
contribute to volatility and analyze their likely impacts, as
summarized in the Table below. To examine these effects, we ran the
model under alternative assumptions.
Volatility Factors
------------------------------------------------------------------------
Factor Assumption Price Impact
------------------------------------------------------------------------
Weather......................... 10% Hotter Summer/ 50%-60% higher
Colder Winter peak price this
Relative to winter
Normal.
Lower than expected domestic Productive 10%-20% higher
supply. capacity peak price this
continues to winter
weaken, no
production growth
in 2003.
------------------------------------------------------------------------
The table shows that a significant tightening of the U.S. natural
gas market and much higher prices than expected in our base case are
possible under some plausible scenarios. One development that could
generate more difficult market conditions than are already in prospect
is the weather. An abnormally hot summer followed by a cold winter
could push natural gas deliverability to the limit and cause record
average prices this winter. The severe weather case considered here is
an extreme case but one that merits attention given the lack of storage
cushion. It is also apparent that less robust assumptions about natural
gas productive capacity and near-term production could shift average
prices well above our base case. It appears that for every 1 percent
that production falls below our base case assumptions, we can expect 5-
10 percent higher peak prices this winter. These estimated average
impacts mask the potential for much more dramatic spikes in prices for
short periods (a few days to a few weeks). Such spikes are
characteristic of net demand surges in the context of low natural gas
storage. Thus, current and prospective conditions in the U.S. gas
market significantly increase the probability of very sharp short-term
spikes on top of generally high levels of natural gas prices.
There are no detailed estimates concerning the extent to which
industrial output weakness seen since 2000 is attributable to the
recent episodes of natural gas price strength. It is obvious, however,
that many industries dependent upon natural gas for basic processes and
operations have been hurt by high natural gas prices. Part of the
short-term market response to the current imbalance in supplies may be
to let high prices back out industrial activity to insure that higher-
valued demands, such as heating, are met. While the price volatility
described in this section is clearly possible, it is not a foregone
conclusion. Normal weather, improved productivity from newer natural
gas wells and other factors could serve to moderate price increases. It
is also important to note that recent history illustrates that price
volatility is usually short-lived.
Longer-Term Natural Gas Market Analysis
The longer-term natural gas projections provided in this testimony
were produced using the National Energy Modeling System (NEMS), a
computer-based, energy-economy modeling system of U.S. energy markets
through 2025. NEMS projects annual production, imports, consumption,
and prices of energy, subject to assumptions on macroeconomic and
financial factors, world energy markets, resource availability and
costs, behavioral and technological choice criteria, cost and
performance characteristics of energy technologies, and demographics.
Two of the key inputs to NEMS are re world oil prices and macroeconomic
growth.
World oil prices averaged about $23.43 per barrel in 2002 in 2001
dollars. Between now and 2025 they are expected to rise to about $26.60
a barrel in 2001 dollars, as world oil demand increases from 78 million
barrels per day to 119 million barrels per day.<SUP>1</SUP> Real gross
domestic product (GDP) is projected to grow at an annual average rate
of 3.0 percent between 2001 and 2025.
---------------------------------------------------------------------------
\1\ Energy Information Adeministration, International Energy
Outlook 2003, Table A4, page 185.
---------------------------------------------------------------------------
The natural gas projections discussed in this testimony are based
on the most current NEMS configuration, which EIA recently used in
analyzing a 10 percent renewable portfolio standard, as requested by
Senator Bingaman.
Natural Gas Outlook to 2025
y 2025 total natural gas consumption is expected to increase to
almost 35 trillion cubic feet (Tcf) or 26 percent of U.S. delivered
energy consumption.
Domestic gas production is expected to increase more slowly than
consumption over the forecast, rising from 19.5 Tcf in 2001 to 26.4 Tcf
in 2025. Growing production reflects increasing natural gas demand and
is supported by rising wellhead gas prices, relatively abundant gas
resources, and improvements in technologies, particularly for
unconventional gas. In this forecast, economic conditions allow an
Alaskan pipeline to begin moving gas to the lower 48 States in 2020.
The national average wellhead price is projected to reach $3.95 per Mcf
in 2001 dollars by 2025.
The difference between consumption and production is made up by
increasing use of imports throughout the forecast, particularly from
liquefied natural gas (LNG), with a 2.1 Tcf increase expected over 2001
levels. By 2025 we expect expansion at the four existing terminals and
construction of three new LNG terminals.
Consumption. U.S. natural gas consumption is expected to increase
by 1.8 percent annually from 2001 through 2025. Gas consumption by
electric generators is expected to double over the forecast, from 5.3
Tcf in 2001 to 10.4 Tcf in 2025, an average annual growth rate of 2.8
percent. Demand by electricity generators is expected to account for 30
percent of total natural gas consumption in 2025.
Most new electricity generation capacity is expected to be fueled
by natural gas, so natural gas consumption in the electricity
generation sector is projected to grow rapidly throughout the forecast
as electricity consumption increases. Although average coal prices to
electricity generators are projected to fall throughout the forecast,
gas-fired generators are expected to have advantages over coal-fired
generators, including lower capital costs, higher fuel efficiencies,
shorter construction lead times, and lower emissions.
Historically the industrial sector, excluding lease and plant fuel,
is the largest gas-consuming sector, with significant amounts of gas
used in the bulk chemical and refining sectors. Industrial consumption
is expected to increase by 3.4 Tcf over the forecast, driven primarily
by macroeconomic growth. The chemical and metal durables sectors show
the largest growth.
Combined consumption in the residential and commercial sectors is
projected to increase by 2.5 Tcf from 2001 to 2025, driven by
increasing population, healthy economic growth, and gradually rising
prices in real terms. Natural gas remains the overwhelming choice for
home heating throughout the forecast period, with the number of natural
gas furnaces rising nearly 18 million.
Production. The forecast estimate of total technically recoverable
natural gas resources as of January 1, 2002, is 1,289 Tcf. These
resource assessments come primarily from the assessments done by the
U.S. Geological Survey for onshore regions and by the Mineral
Management Service for the offshore.
These resources included 183 Tcf of proved reserves (9 years of
consumption at 20 Tcf per year), 222 Tcf of inferred reserves, and 269
Tcf of undiscovered nonassociated conventional resources. The largest
category was unconventional resources at 445 Tcf, with most of that in
tight sandstones at 71 percent. Other unconventional natural gas
resources include gas shales and coalbed methane. Alaska gas (32 Tcf)
and associated-dissolved natural gas in lower 48 crude oil reservoirs
(137 Tcf) round out the resource.
Increased U.S. natural gas production through 2025 comes primarily
from unconventional sources and from Alaska. Unconventional gas
production increases by 4.2 Tcf over the forecast period--more than any
other source, largely because of expanded tight sands gas production in
the Rocky Mountain region. Annual production from unconventional
sources is expected to account for 36 percent of production in 2025,
more than any other source, compared to 28 percent today.
Conventional onshore non-associated production increases by 500 Bcf
over the forecast, driven by technological improvements and rising
natural gas prices. However, its share of total production declines
from 34 percent in 2001 to 27 percent by 2025. Non-associated offshore
production adds 710 Bcf, with increased drilling activity in deep
waters; however, its share of total U.S. production declines from 22
percent in 2001 to 19 percent by 2025.
Depletion. A key question facing producers and policymakers today
is whether natural gas resources in the mature onshore lower 48 States
have been exploited to a point at which more rapid depletion rates
eliminate the possibility of increasing--or even maintaining--current
production levels at reasonable cost.
Depletion is a natural phenomenon that accompanies the development
of all nonrenewable resources. Physically, depletion is the progressive
reduction of the overall volume of a resource over time as the resource
is produced. In the petroleum industry, depletion may also more
narrowly refer to the decline of production associated with a
particular well, reservoir, or field. As existing wells, reservoirs,
and fields are depleted, new resources must be developed to replace
depleted reservoirs.
Depletion has been counterbalanced historically by improvements in
technology that have allowed gas resources to be discovered more
efficiently, have extended the economic life of existing fields, and
have allowed natural gas to be produced less expensively, making
available resources that previously were too costly to develop. In
these natural gas projections, technological progress for both
conventional and unconventional recovery is expected to continue to
enhance exploration, reduce costs, and improve production technology.
The depletion of conventional and unconventional natural gas
resources is expected to continue over the projection period as the
demand for natural gas increases significantly, continuing the trend
that began in the mid-1990s. Nevertheless, with sustained wellhead
prices generally over $3 per thousand cubic feet (in 2001 dollars) and
continued technological improvements, lower 48 nonassociated gas
production is expected to increase above current levels.
Imports. Net imports of natural gas, primarily from Canada, are
projected to increase from 3.7 trillion cubic feet in 2001 to 7.9
trillion cubic feet in 2025. Imports contributed 16 percent to total
natural gas supply in 2001, compared to an expected 23 percent in 2025.
Just over half of the increase in U.S. imports is expected to come
from LNG. Much of the increase comes from expansion at existing sites,
but three additional facilities are also projected. By 2025, LNG
imports are expected to equal 7 percent of total U.S. gas supply.
Growth in pipeline imports from Canada partly depends on the
completion of the MacKenzie Delta pipeline. The initial full flow rate
into Alberta is assumed to be 1.5 Bcf per day. Additional Canadian
imports will come from the Scotian Shelf in the offshore Atlantic. The
forecast of Canadian imports largely depends on the ability of Canadian
producers to economically produce and market their untapped
unconventional resources, particularly coalbed methane. Net imports
from Canada are projected to provide 15 percent of total U.S. supply in
2025 in the reference case, about the same as in 2001.
Wellhead Prices. In the mid-term, gas prices are projected to move
higher as technology improvements and new supply sources prove unable
to completely offset the effects of resource depletion and increased
demand.
Natural gas prices through 2025 are projected to increase in an
uneven fashion as major new, large-volume supply projects temporarily
depress prices when initially brought online. Examples include deep and
ultra-deep offshore projects in the Gulf of Mexico, unconventional gas
(tight sands, coalbed methane, shale), liquefied natural gas facilities
(both the expansion of existing and development of new facilities), the
MacKenzie Delta pipeline in Canada, and an Alaskan natural gas pipeline
that delivers gas supplies to the lower 48 States.
In the reference case, average wellhead natural gas prices are
expected to be $3.95 per thousand cubic feet (2001 dollars) in 2025.
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. In current dollars, natural gas
prices reach $7.15 in 2025.
End-Use Prices. End-use natural gas prices are expected to increase
gradually starting in about 2005 as a result of increasing wellhead
prices. A portion of the increase in wellhead prices is expected to be
offset by a projected decline in average transmission and distribution
margins as a larger proportion of the natural gas delivery
infrastructure becomes fully depreciated. The average end-use price is
expected to increase by 40 cents per thousand cubic feet between 2005
and 2025 (in constant 2001 dollars), compared with an increase of 72
cents per thousand cubic feet in the average price of domestic and
imported natural gas supplies over the same period. Part of this
difference is attributable to an increasing share of natural gas sold
to electric generators, the sector with the lowest prices.
Chairman Tauzin. Thank you, Mr. Caruso.
The Chair is now pleased to recognize Mr. Mason, the
Commissioner of Public Utilities Commission of the great State
of Ohio. Mr. Mason.
STATEMENT OF DONALD L. MASON
Mr. Mason. Thank you, Mr. Chairman, members of the
committee. I would like to talk more from the residential
consumer's side of the equation. And I appreciate all the
information provided by the DOE, EIA. And I want to comment
that the remarks by Congressmen were all to the point, very
succinct and very factual.
Now, as I had information from the residential consumer
standpoint in Ohio, the average homeowner in the southern part
of the State uses maybe 100 MCF of natural gas and in the
northern portion of the State maybe 110 MCF of gas every year.
Now, what is interesting is, due to high prices 2 years
ago, consumers have already dramatically cut back their home
heating in terms of setting back the temperatures, modernizing
appliances, equipment, things of that nature, so that an issue
becomes, how much more can residential consumers do to curb
demand for natural gas?
Based on my discussions with Ohio utilities, I would say,
on a minimum, today's gas being stored is between $2.50 and $3
more an MCF than it was last year. In real terms, this means
the average residential homeowner this winter is going to pay
about $220 more than the previous winter.
Now, what does $220 mean? I guess, if you think about it,
it means that some people will be able to pay the bill, but it
also means that some people will not. In the past, we have seen
an increase of uncollectibles from one company doing business
in Ohio--by uncollectibles, I mean people who couldn't pay
their bills--jump from $10 million a year to about $26 million
a year. Basically, that also means disconnection from services
increased by about 50 percent for those residential customers.
And what does it mean when a home is disconnected from a
gas source? Well, even in the summertime, it might mean a lack
of hot water. Additionally, as we all know, if it is still in
the colder times of the year--and, quite frankly, in Ohio it is
quite common to run your chimneys or furnaces even through
early June--it means a loss of heat. It also means to some
degree destruction of consumer credit and family stability.
These are things that we worry about.
Now, going back to what we were discussing earlier, yes,
gas is being filled at about $3 an MCF higher than it was ago.
But our grave concern is for the coming winter heating season
with the volatility of the spot market. As indicated earlier,
last year we had about 3.2 TCF of natural gas stored by the
time we began the winter heating season, but unfortunately we
drew that down very low. And so, as a regulator who works to
maintain the fact that local gas companies are storing gas, I
guess my big concern is the fact that our storage levels are
still 40 to 50 percent lower than what we would like to see
them at.
I guess my message for residential consumers--and then
perhaps each of you could take it back to your respective
districts--is, we need to increase and pay attention to the
demand side by encouraging local gas companies and regulatory
authorities to promote budget billing and payments for
residential customers to even out the load of the residential
bill, so it doesn't hit them all at once. Also, we would like
to encourage utilities to use financial and physical hedges to
reduce the volatility of prices to those residential customers,
especially gas bought in spot markets. Obviously, increasing
public awareness of the benefits of home weatherization, and
asking residential customers to once again encourage examining
their own appliances and the settings of their temperatures.
But finally, obviously if there is attention to the demand
side, there must also be attention to the supply side. It has
been discussed earlier, when appropriate--looking at opening up
public lands and offshore to drilling activity when
appropriate; but also, as mentioned earlier, encouraging
technologies that promote a multitude of energy options for
electricity generation so that residential heating customers
are not competing against electricity utilities for gas
consumption.
Finally, something we can all do is work on streamlining
gas pipeline permitting and construction in the Midwest and
Northeast so that those markets have more gas options available
to them; and finally, improving the tax and fiscal policies of
our country to encourage investment of capital in energy
exploration and pipeline transportation.
Once again, I thank you for the opportunity to represent
residential customers.
[The prepared statement of Donald L. Mason follows:]
Prepared Statement of Donald L. Mason, Commissioner, Public Utilities
Commission of Ohio
Mr. Chairman, members of the committee, my name is Don Mason and I
am a Commissioner of the Public Utilities Commission of Ohio. I would
like to thank you for the opportunity to discuss the impact of
potential natural gas supply shortages on consumers. In Ohio, the
average residential natural gas consumption ranges from 100 mcf
annually in the southern part of the state to about 110 mcf in northern
Ohio. It is important to note that this is 5% lower than historic
demand. Residential consumers have already responded to high natural
gas prices by decreasing consumption over the last several years.
Residential consumers have modernized appliances and set back their
thermostats. Therefore, my message to homeowners and renters is the
conservation of energy can only have a marginal impact on their natural
gas bills.
Based on discussions with Ohio companies, I am anticipating that we
will see a minimum of $2.50-$3.00 per mcf increase to residential
natural gas customers, this winter heating season. In real terms, the
home heating cost this winter will increase by at least $220 per
household. That might not sound significant, but during the winter
season of 2000-2001, one gas company in Ohio saw residential nonpayment
jump from $10 million a year to $26 million. As a result, 2002 saw an
increase of 50% of residential customers who were disconnected from gas
service. It is hard to measure the suffering that takes place to a
family that has high heating bills; only to have their hot water and
heating disconnected, which could even occur during the summer months.
Additionally, those families that do manage to make payments,
substitute those payments for other important items, or delay paying
other bills. Either outcome affects consumer credit and family
stability.
The natural gas which is being stored this spring and summer will
provide the base load, or about 50% of Ohio's residential consumers'
winter needs. I have concerns for the upcoming winter heating season.
Natural gas going into storage is about $3.00 higher per mcf than last
year. However, comparatively speaking, that is the good news. There is
no good way of predicting what the cost associated with the spot market
will be if the winter is a long, cold one without relief. This past
year, the nation was fortunate to have about 3.2 tcf of gas in storage,
compared to current storage level of 1.2 tcf. Typically, at this time
we should have at least 1.7 tcf of gas in storage, and as you can see
we are considerably behind. If the summer is hot, and natural gas-fired
electricity generation creates a competitive demand for gas, then the
price of stored gas will be even higher than originally anticipated. It
is possible that we can see spot market gas at $10.00 to $12.00 per
mcf.
Government officials can have the greatest impact on this impending
problem by first increasing public awareness that their gas prices are
going to be higher this coming heating season. We can do this on our
own as well as with the help of the local distribution companies, in
the form of bill inserts for example. The best form of demand
management or conservation is price signal.
Unfortunately, gas is used BEFORE the consumer sees a bill. People
need to know the price is going up BEFORE they use the gas, this will
help them prepare for the ``sticker shock,'' thereby lessening the
``shock.'' It will also help them make their own choices about how best
to manage their energy needs.
After examining the natural gas supply and demand curves, and
recognizing that the prediction for high gas prices is a likely
scenario, I would like to leave you with the following recommendations.
Federal and state government leaders need to encourage energy
conservation and increase the supply of natural gas.
We need to increase attention to the demand side by:
<bullet> Encouraging local natural gas companies and regulatory
authorities to promote budget billing and payments for
residential consumers;
<bullet> Utilize regulatory authorities to encourage local gas
companies to utilize financial and physical hedges to reduce
the impacts of high gas prices, especially spot market gas
purchases;
<bullet> Increasing public awareness on the effectiveness of home
weatherization; and,
<bullet> Encouraging residential consumers to examine the temperature
settings and the age of their existing appliances.
We need to increase attention to the supply side by:
<bullet> Where appropriate, opening public lands and off shore
locations to exploration activity;
<bullet> Encouraging technologies that promote a multitude of energy
options for electricity generation so that residential heating
consumption and gas storage do not compete against electricity
generation;
<bullet> Streamlining gas pipeline siting and construction so that the
Midwest and Northeast markets have more options available to
transport natural gas and product; and,
<bullet> Improving the tax and fiscal policies of our country to
encourage the investment of capital in energy exploration and
pipeline transportation.
I would like to thank the Chairman and the Members of the Committee
for allowing me to present my views today. I would be happy to address
any questions you may have at the appropriate time.
Chairman Tauzin. Thank you, Mr. Mason.
We have heard of the hope of our agency and the problems
consumers are facing. Now we will hear from the industry. Mr.
Sharples is representing the U.S. Oil & Gas Association,
Domestic Petroleum Council.
Welcome, Mr. Sharples.
STATEMENT OF RICHARD J. SHARPLES
Mr. Sharples. Thank you, Mr. Chairman and members of the
committee.
Anadarko is the seventh largest producer of natural gas in
the U.S., and last week we had more rigs drilling for gas than
any other company. I appreciate the opportunity to talk with
you about the current state of the natural gas market, because
gas is such a big part of Anadarko's future and of the members
of each of the associations I am also testifying on behalf of
today.
I think we all agree that we face a serious challenge with
the growing gap between supply and potential demand for natural
gas. I, too, am anxious to hear Chairman Greenspan's comments
this afternoon, because I believe he was right on target last
month when he called our policy toward gas exploration,
``contradictory.''
I would like to make three points today.
First, the situation did not develop overnight, and we
can't solve it overnight. Second, if we maintain the status
quo, we will continue to see high volatility and upward price
pressure. And, third, I believe there are ways to address the
challenge, but only if we have the political will to do so.
There are vast energy resources beneath Federal lands, but
congressional action and administration practices have locked
up that energy. Congress needs to find a way to unlock it.
While the U.S. rig count is up this year, don't expect gas
production to increase significantly, because traditional
producing areas are playing out. New supplies are barely
offsetting the effect of natural declines.
We do have one slide, if we could put it up. This slide
shows trends in the shallow water Gulf of Mexico, and
illustrates how difficult it is to increase production from the
mature producing areas. Industry has drilled here since 1938.
The first 1,000 discoveries made on the shelf added about 40
billion barrels of oil equivalent, most of which was natural
gas. But the next 1,000 discoveries are expected to generate
just 6 billion because the basin is mature. We have drilled it
and drilled it and drilled it.
Even with increased drilling, production is falling, new
wells are coming on at lower rates, and their decline rates are
steeper. Most of the gas we will find onshore in the future
will be unconventional, gas that is higher-cost and lower-
margin. Offshore we will be drilling deeper wells in deeper
water. Unless we are allowed to explore in less mature basins,
price volatility and upper price pressure are a certainty.
The economic effect on Americans will be twofold. First is
on the pocketbook, whether it is residents paying more to heat
or cool their homes, or businesses paying more to fuel their
factories. It could also cost a lot of Americans their jobs. If
we can't find cheaper gas sources, manufacturers that are heavy
users of gas will continue to move plants to countries where it
is cheaper.
Make no mistake, the U.S. isn't running out of natural gas,
but we are running out of places where we are allowed to
explore for gas that can be developed cost effectively. The
traditional producing States of Texas, Alabama, Louisiana,
Mississippi, Oklahoma, and Kansas have all lost gas production
since 1995. What growth we have seen has been primarily in the
Western States.
To increase supply, we have to attack the problem on
several fronts. First, Congress needs to come up with a
solution that will lift the moratorium on certain Federal
acreage where the resource is the greatest. Except for House
language that would open a small portion of the coastal plain
of ANWR for exploration, there is nothing in either House or
Senate bill that would remove the moratorium. We are not asking
that Congress open up every acre of Federal land, but there are
areas where we can explore today and develop without harming
the environment. We have proved that is possible by using
advanced technology that is getting better every day.
Second, Federal land management agencies need to detangle
the bureaucracy and eliminate unnecessary leasing and
permitting delays that are discouraging exploration. In high-
cost areas, delay is denial, whether it is due to regulatory
inefficiency or to lawsuits that can stall projects for months
or even years. This is an area that was not addressed in EPCA
study that was referenced in the opening remarks.
We need more staff at the BLM to review backlogged
applications and a consistent playbook to tell us up front what
we must do to get our projects permitted. The administration
also needs to remove regulatory barriers to pipeline permitting
so we can unlock stranded gas from the West and, 1 day, bring
arctic gas to the Lower 48. And, in the future, we will have to
rely on LNG to help close the supply gap.
So the third thing we need to do is to be able to permit
and build regasification terminals quickly.
A number of exploration incentives were passed in the House
bill and are being considered by the Senate. Some of them would
enhance existing royalty reductions for deep-water and deep-gas
projects offshore, accelerate amortization of geological and
geophysical costs in delay rentals, provide 7-year depreciation
for gathering lines, and renew Section 29 credits for
unconventional gas.
Since most of the remaining resource is unconventional or
in deep water, these incentives are important to developing
more U.S. gas, and we support them.
Ladies and gentlemen, we do face a serious challenge.
Industry is working hard to produce new supplies, but vast
resources that could make a difference are controlled by the
Federal Government, and only the government can unlock them. We
must begin making changes today in land-use policy and in how
we balance environmental concerns with economic considerations
if we want natural gas to be available to Americans at prices
they can afford.
Thank you for the opportunity to address you today, and our
industry looks forward to working with you to provide Americans
with affordable, reliable energy supplies.
[The prepared statement of Richard J. Sharples follows:]
Prepared Statement of Richard J. Sharples, Senior Vice President,
Marketing & Minerals, Anadarko Petroleum Corporation, Also Representing
The American Petroleum Institute, The Domestic Petroleum Council, The
Independent Petroleum Association of America, The National Ocean
Industries Association, The Natural Gas Supply Association, and The US
Oil and Gas Association
Thank you, Mr. Chairman, and members of the committee. I'm Dick
Sharples, senior vice president of marketing and minerals for Houston-
based Anadarko Petroleum.
Anadarko is the seventh-largest producer of natural gas in the
U.S., and last week we had more rigs drilling for gas in the U.S. than
any other company. So, I appreciate the opportunity to talk with you
about the current state of the natural gas market today, because gas is
such a big part of Anadarko's future--and of the members of each of the
associations I am also testifying on behalf of today.
I think we all agree that we face a real challenge with the growing
gap between natural gas supply and demand. I'm anxious to hear Chairman
Greenspan's comments this afternoon, because he was right on target
last month when he called our policy toward gas exploration, quote
``contradictory.''
Three points I'd like to make today:
First--the gas supply/demand gap didn't develop overnight, and we
can't solve it overnight. This is a long-term, structural issue that
requires major changes in our current energy policy.
Second--if we maintain the status quo, we will continue to have
high levels of volatility and upward pressure on price.
And third--there are ways to solve this problem--but only if we
have the political will to do so. There are vast energy resources
beneath federal lands, but congressional actions and administrative
practices have effectively locked up this energy. Congress needs to
find a way to unlock it.
While it's true that the U.S. rig count is up about 25 percent over
a year ago, don't expect gas production to increase. The reason is
simple: traditional producing areas are playing out. New supplies we
bring on will barely offset natural declines.
Three slides I'd like to show you illustrate my point. I've used
the Gulf of Mexico as an example, because it provides about one-quarter
of U.S. gas production, and the trends are pretty startling.
(Slide 1: Exploration Challenge: Basin Maturity)
This curve shows how difficult it is to increase reserves today:
The first 1,000 discoveries on the Shelf in the Gulf of Mexico added 40
billion barrels of oil equivalent of reserves, but the next thousand
will generate a maximum of 6 billion, because the basin is mature.
(Slide 2: Exploration Challenge: Basin Maturity)
Here, you can see that while we've been drilling more wells every
year--with the exception of last year when prices were in a slump--
average daily production has been falling.
(Slide 3: Exploration Challenge: Well Productivity)
This graph shows that over the last few years, new wells are coming
online at lower production rates, and their decline is much steeper.
Western Canada--which provides 18 percent of U.S. gas demand--is
also declining. Canadian gas imports declined almost 3 percent in 2002,
and they're expected to drop another 5 percent this year.
Going forward, most of the gas that we'll find in this country
onshore will be ``unconventional''--tight sands gas, shale, and coal
bed methane--gas that is higher cost and lower margin. Offshore, we'll
be drilling deeper wells in deeper water.
Today, we are literally squeezing the last molecules of energy out
of the basins where we have access. But as someone's wise old grandma
used to say, ``we can't get blood out of a turnip.'' That's what we
face today in the domestic industry.
Unless we are allowed to explore in less mature basins, using
technology that has allowed us to find and produce oil and gas more
cost effectively and with less and less impact on the environment,
price volatility and upward price pressure are a certainty, as the
market struggles to balance.
Another important point: The market is working, despite the
tightening between supply and demand. More rigs are running . . . gas
is getting to customers who need and value it the most . . . and gas is
going into storage.
But in the future, the market will have to balance at higher prices
than we've seen in the past unless we can tap lower-cost resources.
As in any industry, capital chases the highest returns. It makes no
sense for producers to invest in low-margin projects in worn-out U.S.
basins when higher-potential opportunities lay across the ocean.
The economic effect of these higher prices will be two-fold:
The first is on the pocketbook, whether it's residents paying more
to heat or cool their homes, or businesses paying more to fuel their
factories.
The average American paid 20 percent higher prices for natural gas
during the first quarter of this year, compared with the same period in
2002. (Source: Consumer Price Index Data)
It could also cost a lot of Americans their jobs. If we can't find
more cost competitive sources, manufacturers that use large amounts of
gas for fuel or feedstocks will move plants to countries where it is
cheaper.
Take ammonia, for example, which is a major feedstock for
fertilizer. A U.S.G.S. study shows that from 1999 to 2002 alone,
ammonia production decreased 26 percent, employment by this industry
decreased 23 percent, and U.S. reliance on imports increased from 20
percent to 34 percent. (Source: U.S.G.S. Geological Survey's Mineral
Commodity Summaries)
These job losses could become permanent. In fact, industrial
production capacity is already beginning to relocate overseas. For
example, 41 percent of the ammonia production capacity in Trinidad has
been built just since 1996, representing about $700 million of
investment. Last year 56 percent of U.S. ammonia imports were sourced
from Trinidad while 43 percent of U.S. capacity lay idle.
So our inability to grow supply due to misguided energy policies is
a consumer issue, not just an industry issue. In fact, elected
representatives of the consuming states ought to be hollering loudest
for policy change.
The U.S. isn't running out of gas. The U.S.G.S. and the Minerals
Management Service estimate there are about 1,400 trillion cubic feet
of technically recoverable gas resources in the U.S.--including the
Lower 48, offshore and Alaska.
But we are running out of places where we're allowed to explore for
those gas resources that can be developed most cost effectively. Yes,
there is a lot of natural gas left in the basins we've been producing
for the last 60 years, and U.S. producers are actively exploring for
and producing it. But as I explained a moment ago, because of basin
exhaustion, this is mostly high-cost gas. Some of the most cost-
effective gas resources we have left are found on federal lands.
In the Lower 48 alone, there is an estimated 213 trillion cubic
feet of natural gas beneath federal lands or waters where moratoria or
regulation make exploration virtually impossible . . . in the West,
where much of the land is owned by the federal government . . . on the
East and West Coasts, and in the Eastern Gulf of Mexico. That's a 10-
year supply at today's demand rate. And if history is a reliable guide,
as more exploration takes place, these estimates could turn out to be
very conservative.
In the West, there is more than 290 Tcf of technically recoverable
gas located on federal lands, but nearly half is either closed to
exploration or so highly restricted it's not economic to explore.
(Source: National Petroleum Council Natural Gas Study, December 1999)
To increase supply, we have to attack the problem on several
fronts:
First, Congress needs to come up with a solution that will lift the
moratoria on certain federal acreage where the resource base is the
greatest.
We're not asking that Congress open up every acre of federal land.
But there are areas where we can explore and develop a lot of oil and
gas without harming the environment. We've proved that's possible by
using advanced technology that's getting better every day.
(Slide 4: Alpine--A new Approach)
A great example is the Alpine field Anadarko is a partner in on the
North Slope of Alaska--a little over 100 miles west of the coastal
plain of ANWR. We've developed this 430 million barrel field from
gravel pads totaling less than 100 acres using multi-lateral well
completions. Today, Alpine is producing over 100,000 barrels a day.
In Alaska, tools such as ice pads and roads, multilateral well
completions and re-injection of drilling wastes allow us to minimize
the impact on the tundra. We use a variety of different tools to tackle
other complex exploration and development challenges all over the
world--safely and responsibly.
Second, federal land management agencies need to detangle the
administrative bureaucracy and eliminate unnecessary leasing and
permitting delays that discourage exploration. In high-cost areas,
delay is denial, whether it's due to regulatory inefficiency or to
lawsuits that can stall projects for months or even years. If we could
speed up permitting and reduce the threat of litigation, we'd see an
immediate increase in exploration.
(Slide 5: Grass Roots Timeline)
As this slide illustrates, when you consider the fact that wildlife
restrictions and other stipulations prevent us from operating more than
half the year in some areas of the West, and you factor in all the
steps it takes to permit a well, it can take six to seven years just to
reach the development drilling stage. And that makes no sense.
The administration took a good first step by ordering fast-track
updates of resource management plans in the West. But we need more
staff at the BLM to review backlogged applications, and we need a
consistent play book to tell us upfront what we must do to get our
projects permitted.
The administration also needs to remove unnecessary regulatory
barriers to pipeline permitting, so we can unlock stranded gas from the
West . . . and one day bring Arctic gas to the Lower 48.
In the future, we will have to rely on LNG to help close the supply
gap, so the third thing we need is to be able to permit and build
regassification terminals--quickly.
Let me make an important point about LNG: We cannot import our way
out of this supply crunch, either with Canadian gas or LNG, as we have
done with imported oil. Even if we start permitting new import
facilities today, it will take 5 to 10 years to meaningfully increase
our supply of LNG. So this is a long-term solution, albeit an important
one.
Next, let's look at exploration incentives: A number of incentives
were included in legislation passed by the House, and they're being
considered by the Senate. These would enhance existing royalty
reductions for deep water and deep gas projects offshore . . . allow
accelerated amortization of G&G costs and delay rental payments'
provide seven-year depreciation for gas gathering lines . . . and renew
Section 29 production tax credits for unconventional gas.
As I said a moment ago, most of the remaining resource is
unconventional or in deep water, so these incentives will be important
to helping producers develop more of our domestic resources.
We know these incentives work. Passage of Section 29, for example,
led to a tripling in the production of non-conventional gas, and it
resulted in innovation in drilling and completion technology. (Source:
Gas Technology Institute)
We do have the ability to increase domestic supplies--and in doing
so increase U.S. energy security--but only if we have the political
will to do so.
Ladies and gentlemen, as a nation, we face a serious energy
challenge. Industry is working as hard as it can to produce new
supplies. New technology and good management practices allow us to do
so in environmentally acceptable ways, with less and less temporary
surface disturbance. But the vast energy resource potential that could
address this challenge is under the control of the federal government,
and only the government can unlock it.
We must begin to make changes today--changes in federal land use
policy and in how we balance environmental concerns with economic
considerations--if we want this safe, environmentally friendly fuel to
be available to Americans at prices they can afford.
Thank you for the opportunity to address you today. Our industry
looks forward to working with you to provide our country with the
affordable, reliable energy supplies that are critical to a strong,
growing economy.
Chairman Tauzin. Thank you, Mr. Sharples.
Likewise, we want to welcome the President and Chief
Executive Officer of Consumers Energy on behalf of the American
Gas Association, Mr. Carl English.
Mr. English, you are recognized, sir.
STATEMENT OF CARL L. ENGLISH
Mr. English. Thank you, Mr. Chairman. Good morning.
As you indicated I am the President and Chief Executive of
Consumers Energy, a publicly owned gas utility based in
Jackson, Michigan.
I am appearing today also on behalf of the American Gas
Association and its 191 member companies. AGA's membership
includes natural gas distribution companies and utilities
serving more than 53 million of our Nation's homes, businesses
and industries. We appreciate the opportunity to share the
industry's views with you on the urgent need for ample natural
gas supplies to be made available at competitive prices.
Natural gas is the most popular home heating source in
America and for a good reason. More than 50 million households
have chosen natural gas heat because it is comfortable,
efficient and reliable. Natural gas is also the fuel of choice
for America's economic prosperity and is gaining in popularity
as a fuel source for electric generation, as you know.
The current natural gas crunch has exposed millions of
families to a roller coaster ride of prices. Two of the last
three winters have seen abnormal and often record cold
temperatures. Demand spikes saw prices skyrocket, jumping as
much as 70 percent in 1 year. Prices increased because the
extremely tight balance between supply and demand hasn't eased.
Even with the return to summer, the wholesale price of natural
gas is twice as high as it was last year at this time.
In addition to heating the majority of American homes,
natural gas also forms the energy backbone of the manufacturing
sector. More than 50 percent of the natural gas consumed in the
United States is used by factories and other industrial
customers. In a world market, domestic manufacturers cannot
remain competitive with natural gas prices that are two and
three times higher than they were just a few years ago.
The impact upon the residential customer cannot be
minimized. Customers of Consumers Energy system have
experienced the price for natural gas go from $2.84 a thousand
cubic feet in 2000 to currently $5.18 per thousand cubic feet.
The increase of gas prices we are experiencing today could
unleash a fire storm of protest in the fall and winter of this
coming season as many consumers see their natural gas bills
double. Families will again be forced to make active decisions
among paying the gas bill, paying the mortgage, or saving for
future college educations. State regulators will be facing rate
hike requests by utilities that will need to pass these price
increases on to customers.
Fortunately, this Congress has supported programs to assist
the most needy through the LIHEAP program. This program
provides needed financial assistance to pay heating bills,
especially senior citizens on a fixed income and those citizens
caught between living comfortably and living day to day.
Last month, Federal Reserve Board Chairman Alan Greenspan
emphasized the contradictions in Federal policies that have led
to us where we are now, policies that promote increased use of
natural gas particularly for electric power generation while
clamping down on access to supply. We look forward as well to
hearing the Chairman's comments today.
We are in a growing market, and the demand for natural gas
in the United States is expected to increase 50 percent in the
2015 to 2020 timeframe. In Michigan, more than 4,600 megawatts
of new generation that is exclusively gas fired has come on
line just since 2000. This represents a 20 percent increase in
in-State electric generation supply, all fueled by natural gas.
The natural gas industry is definitely at a crossroads. It
is incumbent upon industry and policymakers to make the right
choices.
The House should be commended for taking positive action in
April by passing an energy bill that supports increasing
supply. We also congratulate the House for addressing the
energy tax issues and allowing for accelerated depreciation of
natural gas distribution lines. This legislation will serve as
a down payment on America's energy future.
To wholly secure that future, AGA has developed a list of
prioritized proposed solutions: First and foremost, the smart,
safe, and environmentally responsible exploration of untapped
resources in several areas of the United States. In addition,
we also need an increased focus on nontraditional energy
sources, such as liquefied natural gas.
The complete detailed list of the solutions is in my
written testimony. We have the technology, the ingenuity and
the drive to succeed. I am confident that if we use the
opportunities before us today we will make the right decisions
for the future and for tomorrow. Thank you.
[The prepared statement of Carl L. English follows:]
Prepared Statement of Carl English, President and Chief Executive
Officer, Consumers Energy on Behalf of the American Gas Association
Good morning. I am Carl English, President & Chief Executive
Officer--Gas of Consumers Energy in Jackson, Michigan. I am testifying
today on behalf of the American Gas Association in Washington, D.C.
(``AGA'') and its natural gas utility members. AGA is grateful for the
opportunity to share its views with you on the critical importance to
the nation of ensuring ample natural gas supplies at competitive
prices. Doing so is necessary for the nation--both to protect consumers
and to address the energy and economic situations we currently face.
AGA is composed of 191 natural gas distribution companies, which
deliver gas throughout the United States. Local gas utilities deliver
gas to more than 64 million customers nationwide. AGA members deliver
approximately 83 percent of this natural gas.
Our members are charged with the responsibility, under local law or
regulation, of acquiring natural gas for the majority of their
customers and delivering it in a safe and reliable manner. Last year,
this Committee addressed the safety issue by taking a balanced approach
to the important issue of pipeline safety, and we thank you, Mr.
Chairman and members of the committee, for having done so. Safety is a
critical issue for the industry. Likewise, today having an ample supply
of natural gas at reasonable prices is a critical issue for AGA and its
members. AGA members and the consumers they serve share both an
interest and a perspective on this subject.
It is important for you to understand that the bread and butter
business of AGA members is acquiring and delivering natural gas to
residential, commercial, and industrial consumers across America. Our
members remain economically viable by delivering natural gas to
consumers at the lowest reasonable price, which we do by operating our
systems--over a million miles of distribution lines--as efficiently as
possible. Exploring for and producing natural gas is the business of
our energy-industry colleagues in the oil and gas business, whether
they are major, independent, or ``Mom and Pop'' operators. We are not
here to speak for them today, but their continued success in providing
natural gas to America's consumers is of the utmost importance to us as
well. Today we are here to speak for consumers who want reasonable
heating bills and good jobs.
AGA is encouraged that Congress is addressing this increasingly
critical issue. Earlier this year we were privileged to testify before
both the Senate Energy and Natural Resources Committee and the House
Resources Committee with regard to the challenging issue of natural gas
supply. We also are gratified that H.R. 6, the Energy Policy Act of
2003, which was passed by the House of Representatives in April, 2003,
contains a wide array of provisions designed to bring forth more of
America's prodigious supply of natural gas to benefit consumers. That
bill is without question more focused on natural gas supply than were
the iterations under consideration in 2001 and 2002.
Adequate natural gas supply is crucial to all of America for a
number of reasons. It is imperative that the natural gas industry and
the government work together to take significant action in the very
near term to assure the continued economic growth, environmental
protection, and national security of our nation. The tumultuous events
in energy markets over the last two years serve to underscore the
importance of adequate and reliable supplies of reasonably priced
natural gas to consumers, to the economy, and to national security.
AGA wishes to commend the leadership of the Committee for convening
this important hearing so promptly upon the heels of the passage of
H.R. 6. To be sure, there has been a crescendo of public policy
discussion with regard to natural gas supply since the ``Perfect
Storm'' winter of 2000-2001. Nevertheless, in the several weeks since
AGA last testified on Capitol Hill--in February and March of this
year--the volume and the tenor of this discussion have increased
dramatically. Simply put, this issue becomes more critical with every
passing day.
Since the beginning of this year, natural gas has been trading in
wellhead markets throughout the nation at prices floating between $5
and $6 per thousand cubic feet. This has not been a ``price spike'' of
the sort that we have seen in the past lasting several days or perhaps
several weeks. Rather, it has been sustained over a period of several
months. And there is no sign that it will abate in the near future.
Indeed, quotes for futures prices on NYMEX over the next 24 months have
reached a consistent record level mirroring current cash prices.
In the course of the last several months, business consumers of
natural gas have been raising a cry of concern over natural gas prices.
And this concern has touched businesses of all stripes. In Connecticut,
for example, pizza shops complain that their natural gas bills have
increased $500-700 per month. The chemical and pharmaceutical industry,
which uses 10% or more of the U.S. gas supply annually, has been
reeling from increased natural gas prices. It has been projected that
the chemical industry in Louisiana will lose at least 2,000 jobs as a
result of high gas prices. Similarly, a major chemical company in
Mississippi has declared bankruptcy, citing natural gas prices. That
industry needs gas prices between $2.50 and $3.00 per thousand cubic
feet to remain competitive on the world stage, while prices since the
beginning of the year have been averaging in the range of $5.00 per
thousand cubic feet. Similarly, fertilizer plants, where natural gas
can represent 80% of the cost structure, are closing one facility after
another. Glass manufacturers, which also use large amounts of natural
gas, have reported earnings falling by 50% as a result of natural gas
prices. In our industrial and commercial sector, competitiveness in
world markets and jobs at home are on the line.
Businesses and factories tend to purchase most of their own gas,
and they very quickly feel increases in prices. Residential customers,
in contrast, typically rely upon their local utilities to act as
merchants on their behalf. As a result of the manner in which state-
approved regulatory mechanisms operate, most consumers will not begin
to feel current high gas prices for months.
From the point of view of the residential consumer, some families
will pay hundreds of dollars more to heat their homes this winter,
which will be hundreds less to spend on other things. Families will
again be forced to make difficult decisions between paying the gas
bill, buying a new car, or saving for future college educations. There
are, of course, state and federal programs such as LIHEAP to assist the
most needy. This winter the potential price increases will affect all
families--those on fixed income, the working poor, and the lower-income
group as well as those caught between living comfortably and living day
to day.
The level of gas prices we are experiencing today could unleash a
firestorm of protest in the fall and winter of this year as some
consumers may see their natural gas bills double. The next twelve
months may make the winter of 2000-2001 look tame from the perspective
of consumers, regulators, and legislators. Some forward-looking state
public utility commissions, having learned from the 2000-2001
experience, are beginning to express concern over the possible impact
of the winter of 2003-2004. We are pleased that Ohio Public Utility
Commissioner Donald Mason is here today to express those concerns. The
Secretary of Energy has also called for an extraordinary meeting of the
National Petroleum Council to address the situation.
These are but the first few alarms in what seems likely to become a
very difficult year. Moreover, unless we make the proper public policy
choices--and quickly at that--we will be facing an even more difficult
several years.
The natural gas industry is presently at a critical crossroads. The
question before you today is: What will that crossroads look like? Will
it look like a brand new interstate highway? Or will it look like a
100-car collision on a Los Angeles freeway?
For the past three years, natural gas production has had to operate
full-tilt to meet consumer demand. The ``surplus deliverability '' or
``gas bubble'' of the late 1980's and 1990's is simply gone. No longer
is demand met while unneeded production facilities sit idle. No longer
can new demand be met by simply opening the valve a few turns. The
valves have been, and are today, wide open.
The supply tightrope has brought with it several inexorable and
unpleasant consequences--prices in the wholesale market have gone up
and that market has become much more volatile. During the 2000-2001
heating season, for example, gas prices moved from the $2 level to
approximately $10 and back again to nearly $2. In Michigan the average
price of natural gas on the Consumers Energy system in 2000 was $2.84
per thousand cubic feet. In 2002 the price was $3.80. Today the charge
is $5.18. Such volatility hurts consumers, puts domestic industry at a
competitive disadvantage, closes plants, and idles workers. The winter
of 2000-2001 made it abundantly clear to us (and to you as well) that
consumers do not like these price increases and that they do not like
the market volatility that is now an everyday norm. Unless significant
actions are taken on the supply side, gas markets will remain
tumultuous, and 64 million gas customers will suffer the consequences.
Today's recurrent $5 price levels may represent a new, and regular,
level of natural gas prices for the foreseeable future, although this
prospect can be moderated with aggressive and enlightened public
policy.
As gas utilities, we do have a number of programs in place to
insulate consumers to some extent from the full impact of wholesale
price volatility, but consumers must ultimately still pay the price
that the market commands. We believe that there will be considerable
economic and political pushback should natural gas prices stabilize at
the current $5 level for anything but a brief period of time.
The problem that we face today is not simply one of finding means
to meet current demands in the market for natural gas. Rather, we are
in a growing market, and the demand for natural gas in the U.S. is
expected to increase 50 percent by 2015-2020. Growth seems inevitable
because gas is a clean, economic, domestic source of available energy.
It does not face the environmental hurdles of coal and nuclear energy,
the economic and technological drawbacks of most renewable energy
forms, or the national security problems associated with imported oil.
A significant sector where growth is occurring is electric
generation. Nationwide most new electric generation is expected to be
gas fired. In Michigan more than 4,600 megawatts of new gas-fired
generation has come online since 2000. This represents a 20% increase
in the state's capacity.
The challenge for both government and industry is quite
straightforward: to ensure that the current need for natural gas is met
and that the future need for natural gas will also be met--both at
reasonable and economic prices. There can be no responsible question
that facilitating this result is sound public policy. Natural gas is
abundant domestically, and natural gas is the environmentally friendly
fuel of choice. Ensuring adequate natural gas supply will lead to
reasonable prices for consumers, will dampen the unacceptable
volatility of wholesale natural gas markets, will help keep the economy
growing, and will help protect the environment.
America has a large and diverse natural gas resource; producing it,
however, can be a challenge. Providing the natural gas that the economy
requires will necessitate: (1) providing incentives to bring the
plentiful reserves of North American natural gas to production and,
hence, to market; (2) making available for exploration and production
the lands where natural gas is already known to exist so gas can be
produced on an economic and timely basis; (3) ensuring that the new
infrastructure that will be needed to serve the market is in place in
timely and economic fashion.
Natural gas--our cleanest fossil fuel--is found in abundance
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent
of the natural gas supplied to U.S. consumers originates in the United
States or Canada.
The estimated natural gas resource base in the U.S. has actually
increased over the last several decades. In fact we now believe that we
have more natural gas in the U.S. than we estimated twenty years ago,
notwithstanding the production of between 300 and 400 trillion cubic
feet of gas in the interim. This is true, in part, because new sources
of gas, such as coalbed methane, have become an important part of the
resource base. But having the natural gas is not the same as making
that natural gas available to consumers. That requires natural gas
production.
Natural gas production is sustained and grows only by drilling in
currently productive areas or by exploring in new areas. Over the past
two decades a number of technological revolutions have swept across our
industry. We are able today to drill for gas with dramatically greater
success and with significantly reduced environmental impact than we
were able to do twenty years ago. We are also much more efficient in
producing the maximum amount of natural gas from a given area of land.
A host of technological advances allows producers to identify and
extract natural gas deeper, smarter and more efficiently. For example,
the drilling success rate for wells deeper than 15,000 feet improved
from 53 percent in 1988 to over 82 percent today. In addition, gas
trapped in coal seams, tight sands or shale is no longer out of reach.
While further improvements in this regard can be expected, they
will not be sufficient to meet growing demand unless they are coupled
with other measures. Regrettably, technology alone cannot indefinitely
extend the production life of mature producing areas. New areas and
sources of gas will be necessary.
Notwithstanding the dramatic impact of innovation upon our
business, the inevitable fact today is that we have reached a point of
rapidly diminishing returns with many existing natural gas fields. This
is almost entirely a product of the laws of petroleum geology. The
first ten wells in a field may ultimately produce 60 percent of the gas
in that field, while it may take forty more to produce the balance. In
many of the natural gas fields in America today, we are long past those
first ten wells and are well into those forty wells in the field. In
other words, the low-hanging fruit have already been picked in the
orchards that are open for business.
Drilling activity in the U.S. has moved over time, from onshore
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then
to the Rocky Mountains. Historically, we have been quite dependent on
fields in the Gulf of Mexico. But recent production declines in the
shallow waters of the Gulf of Mexico have necessitated migration of
activity to deeper waters to offset this decline. These newer, more
expensive, deepwater fields also tend to have short lives and
significantly more rapid rates of decline in production than is the
case with onshore wells.
In short, America's natural gas fields are mature--in fact many are
well into their golden years. There is no new technology on the horizon
that will permit us to pull a rabbit out of a hat in these fields.
These simple, and incontrovertible, facts explain why we are today
walking a supply tightrope and why the winter of 2000-2001 may become a
regular occurrence, particularly at the point the economy returns to
its full vigor. Having the winter of 2000-2001 return every year will
undoubtedly put a brake on the economy, once again causing lost output,
idle productive capacity, and lost jobs.
If we are to continue to meet the energy demands of America and its
citizens and if we are to meet the demands that will they make upon us
in the next two decades, we must change course. It will not be enough
to make a slight adjustment of the tiller or to wait three or four more
years to push it over full. Rather, we must come full about, and we
must do it in the very near future. Lead times are long in our
business, and meeting demand years down the road requires that we begin
work today.
We have several reasonable and practical options. And, as I hope
you do understand, continuing to do what we have been doing is simply
not enough. In the longer term we have a number of options:
First, and most importantly, we must increase natural gas
production by looking to new frontiers within the United States.
Further growth in production from this resource base is jeopardized by
limitations currently placed on access to it. For example, most of the
gas resource base off the East and West Coasts of the U.S. and the
Eastern Gulf of Mexico is currently closed to any exploration and
production activity. Moreover, access to large portions of the Rocky
Mountains is severely restricted. The potential for increased
production of natural gas is severely constrained so long as these
restrictions remain in place.
In this vein, the Rocky Mountain region is expected to be a growing
supplier of natural gas, but only if access to key prospects is not
unduly impeded by stipulations and restrictions. Two separate studies
by the National Petroleum Council and the U.S. Department of the
Interior reached a similar conclusion--that nearly 40 percent of the
gas resource base in the Rockies was restricted from development to
some degree, some partially and some totally. On this issue the
Department of the Interior noted that there are nearly 1,000 different
stipulations that can impede resource development on federal lands.
One of the most significant new gas discoveries in North America in
the past ten years is located just north of the US/Canada border in
eastern Canada coastal waters on the Scotian shelf. Natural gas
discoveries have been made at Sable Island and Deep Panuke. Gas
production from Sable Island already serves Canada's Maritimes
Provinces and New England through an offshore and land-based pipeline
system. This has been done with positive economic benefits to the
region and without environmental degradation. This experience provides
an important example for the United States, where we believe the
offshore Atlantic area to have similar geology.
In some areas we appear to be marching backward. The buy-back of
federal leases where discoveries had already been made in the Destin
Dome area (offshore Florida) of the eastern Gulf of Mexico was a
serious step back in terms of satisfying consumer gas demand. This
action was contrary to what needs to be done to meet America's energy
needs. With Destin Dome we did not come full about, as we need to do;
rather, we ran from the storm.
Geographic expansion of gas exploration and drilling activity has
for the entirety of the last century been essential to sustaining
growth in natural gas production. Future migration, to new frontiers,
to new fields, in both the U.S. and Canada will also be critical.
Without production from geographic areas that are currently subject to
access restrictions, it is not at all likely that producers will be
able to continue to provide increased amounts of natural gas from the
lower-48 states to customers for longer than 10 or 15 years. We believe
that the same is true in Canada as well.
Quite simply, we do not believe that there is any way other than
exploring for natural gas in new geographic areas to meet America's
anticipated demand for natural gas unless we turn increasingly to
sources located outside North America.
In the middle of the 20th century, when the postwar economy had
begun its half-century climb and when natural gas became the fuel of
choice in America, our colleagues in the producing business opened one
new natural gas field after another in the mid-continent. In this era,
it was not that difficult to produce a triple or a home run virtually
every inning. As those fields developed, producers continued to hit a
regular diet of singles and doubles, with the occasional triple or home
run in new discovery areas. This same pattern in the mid-continent was
repeated in the Gulf of Mexico. Today, however, it is extremely
difficult to find the new, open areas where the producing community can
continue to hit the ball. As things are today, America has confined
them to a playing field where only bunts are permitted. The Yankees did
not get to the World Series playing that kind of game.
AGA does not advance such a thesis lightly. Over the past two years
both the American Gas Association and the American Gas Foundation have
studied this important issue vigorously. We have believed for several
years that it is necessary that policy makers embrace this thesis so
that natural gas can continue to be--as it has been for nearly a
century--a safe and reliable form of energy that is America's best
energy value and its most environmentally benign fossil fuel. We think
that events in gas market in 2003 underscore that our concerns have
been on the mark.
When the first energy shock transpired in the early 1970s, the
nation learned, quite painfully, the price of dependence upon foreign
sources of crude oil. We also learned, through long gasoline lines and
shuttered factories, that energy is the lifeblood of our economy. Yet
thirty years later we are even more dependent upon foreign oil than we
were in 1970. Regrettably, the nation has since failed to make the
policy choices that would have brought us freedom from undue dependence
on foreign-source energy supplies. We hope that the nation can reflect
upon that thirty-year experience and today make the correct policy
choices with regard to its future natural gas supply. We can blame some
of the past energy problems on a lack of foresight, understanding, and
experience. We will not be permitted to do so again.
Meeting our nation's ever-increasing demand for energy has an
impact on the environment, regardless of the energy source. The
challenge, therefore, is to balance these competing policy objectives
realistically. Even with dramatic improvements in the efficient use of
energy, U.S. energy demand has increased more than 25 percent since
1973, and significant continued growth is almost certain. Satisfying
this energy demand will continue to affect air, land and water. A great
American success story is that, with but five percent of the world's
population, we produce nearly one-third of the planet's economic
output. And energy is an essential--indeed critical--input for that
success story both to continue and to grow.
It is imperative that energy needs be balanced with environmental
impacts and that this evaluation be complete and up-to-date. There is
no doubt that growing usage of natural gas harmonizes both objectives.
Finding and producing natural gas is today accomplished through
sophisticated technologies and methodologies that are cleaner, more
efficient and much more environmentally sound than those used in the
1970s. It is unfortunate that many restrictions on natural gas
production have simply not taken account of the important technological
developments of the preceding thirty years. The result has been
policies that deter and forestall increased usage of natural gas, which
is, after all, the nation's most environmentally benign and cost-
effective energy source.
Natural gas consumers enjoyed stable prices from the mid-1980s to
2000, with prices that actually fell when adjusted for inflation.
Today, however, the balance between supply and demand has become
extremely tight, creating the tightrope effect. Even small changes in
weather, economic activity or world energy trends result in wholesale
natural gas price fluctuations. We saw this most dramatically in the
winter of 2000-2001. We may be seeing it today on a longer-term basis.
In the 1980s and 1990s, when the wholesale (wellhead) price of
traditional natural gas sources was around $2 per million British
thermal units, natural gas from deep waters and Alaska, as well as LNG,
may not have been price competitive. However, most analysts suggest
that these sources are competitive when gas is in a $3.00 to $4.00
price environment. Increased volumes of natural gas from a wider mix of
sources will be vital to meeting consumer demand and to ensuring that
natural gas remains affordable.
Increasing natural gas supplies will boost economic development and
will promote environmental protection, while achieving the critical
goal of ensuring more stable prices for natural gas customers. Most
importantly, increasing natural gas supplies will give customers--ours
and yours--what they seek--reasonable prices, greater price stability,
and fuel for our vibrant economy. However, without policy changes with
regard to natural gas supply, as well as expansion of production,
pipeline and local delivery infrastructure for natural gas, the natural
gas industry will have difficulty meeting the anticipated 50 percent
increase in market demand. Price increases, price volatility, and a
brake on the economy will be inevitable.
Second, we need to increase our focus on non-traditional sources,
such as liquefied natural gas (LNG). Reliance upon LNG has been modest
to date, but it is clear that increases will be necessary to meet
growing market demand. Today, roughly 99 percent of U.S. gas supply
comes from traditional land-based and offshore supply areas in North
America. But, during the next two decades, non-traditional supply
sources such as LNG will likely account for a significantly larger
share of the supply mix. LNG has become increasingly economic. It is a
commonly used worldwide technology that allows natural gas produced in
one part of the world to be liquefied through a chilling process,
transported via tanker and then re-gasified and injected into the
pipeline system of the receiving country. Although LNG currently
supplies less than 1 percent of the gas consumed in the U.S., it
represents 100 percent of the gas consumed in Japan. LNG has proven to
be safe, economical and consistent with environmental quality. Due to
constraints on other forms of gas supply and increasingly favorable LNG
economics, LNG is likely to be a more significant contributor to US gas
markets in the future. It will certainly not be as large a contributor
as imported oil (nearly 60 percent of US oil consumption), but it could
account for 10-15 percent of domestic gas consumption 15-20 years from
now if pursued aggressively and if impediments are reduced.
Third, we must tap the huge potential of Alaska. Alaska is
estimated to contain more than 250 trillion cubic feet--enough by
itself to satisfy US natural gas demand for more than a decade.
Authorizations were granted twenty-five years ago to move gas from the
North Slope to the Lower-48, yet no gas is flowing today nor is any
transportation system yet under construction. Indeed, every day the
North Slope produces approximately 8 billion cubic feet of natural gas
that is re-injected because it has no way to market. Alaskan gas has
the potential to be the single largest source of price and price
volatility relief for US gas consumers. Deliveries from the North Slope
would not only put downward pressure on gas prices, but they would also
spur the development of other gas sources in the state as well as in
northern Canada.
Fourth, we can look to our neighbors to the north. Canadian gas
supply has grown dramatically over the last decade in terms of the
portion of the U.S. market that it has captured. At present, Canada
supplies approximately 15 percent of the United States' needs. We
should continue to rely upon Canadian gas, but it may not be realistic
to expect the U.S. market share for Canadian gas to continue to grow as
it has in the past or to rely upon Canadian new frontier gas to meet
the bulk of the increased demand that lay ahead in the United States.
recommendations
To promote meeting consumer needs, economic vitality, and sound
environmental stewardship, the American Gas Association urges the
Congress as follows:
<bullet> Current restrictions on access to new sources of natural gas
supply must be re-evaluated in light of technological
improvements that have made natural gas exploration and
production more environmentally sensitive.
<bullet> Federal and state officials must take the lead in overcoming
the pervasive ``not in my backyard'' attitude toward energy
infrastructure development, including gas production.
<bullet> Interagency activity directed specifically toward expediting
environmental review and permitting of natural gas pipelines
and drilling programs is necessary, and agencies must be held
responsible for not meeting time stipulations on lease, lease
review, and permitting procedures.
<bullet> Federal lands must continue to be leased for multi-purpose
use, including oil and gas extraction and infrastructure
construction.
<bullet> Both private and public entities should act to educate the
public regarding energy matters, including energy efficiency
and conservation. Federal and state agencies, with private
sector support and involvement, should strive to educate the
public on the relationship between energy, the environment and
the economy. That is, energy growth is necessary to support
economic growth, and responsible energy growth is compatible
with environmental protection.
<bullet> Economic viability must be considered along with environmental
and technology standards in an effort to develop a ``least
impact'' approach to exploration and development but not a
``zero impact''.
<bullet> Existing moratoria for onshore lands should be lifted.
<bullet> The geologic conditions for oil and gas discovery exist in the
US mid-Atlantic area, the Pacific Offshore area, and the
eastern portion of the Gulf of Mexico.
<bullet> Although some prospects have been previously tested, new
evaluations of Atlantic oil and gas potential should be
completed using today's technology--in contrast to that of
20 to 30 years ago.
<bullet> The federal government should facilitate this activity by
lifting or modifying the current moratoria regarding
drilling and other activities in the Atlantic Offshore, in
the Pacific Offshore, and in the Gulf of Mexico to ensure
that adequate geological and geophysical evaluations can be
made and that exploratory drilling can proceed.
<bullet> The Destin Dome (181 lease area) should immediately be
offered for lease for oil and gas exploration.
<bullet> The federal government must work with the states to
assist--not impede--the process of moving natural gas
supplies to nearby markets should gas resources be
discovered in commercial quantities. Federal agencies and
states must work together to ensure the quality of the
environment but they must also ensure that infrastructure
(such as landing an offshore pipeline) is permitted and not
held up by multi-jurisdictional roadblocks.
<bullet> The Federal government should continue to permit royalty
relief where appropriate to change the risk profile for
companies trying to manage the technical and regulatory risks
of operations in deepwater.
<bullet> Tax provisions such as percentage depletion, expensing
geological and geophysical costs in the year incurred, Section
29 credits, and other credits encourage investment in drilling
programs, and such provisions are often necessary, particularly
in areas faced with increasing costs due to environmental and
other stipulations.
<bullet> The Coastal Zone Management Act (CZMA) is being used to
threaten or thwart offshore natural gas production and the
pipeline infrastructure necessary to deliver natural gas to
markets in ways not originally intended. Companies face this
impediment even though leases to be developed may be 100 miles
offshore. These impediments must be eliminated or at least
managed within a context of making safe, secure delivery of
natural gas to market a reality.
<bullet> The U.S. government should work closely with Canadian and
Mexican officials to address the challenges of supplying North
America with competitively priced natural gas in an
environmentally sound manner.
<bullet> Renewable forms of energy should play a greater role in
meeting U.S. energy needs, but government officials and
customers must realize that all forms of energy have
environmental impacts.
<bullet> Construction of an Alaskan natural gas pipeline must begin as
quickly as possible.
<bullet> Construction of this pipeline is possible with acceptable
levels of environmental impact.
<bullet> The pipeline project would be the largest private sector
investment in history, and it would pose a huge financial
risk to project sponsors. Many believe the project may not
be undertaken without some form of federal support.
<bullet> The Federal Energy Regulatory Commission (FERC) announced in
December of 2002 that it would not require LNG terminals to be
``open access'' (that is, common carriers) at the point where
tankers offload LNG. This policy will spur LNG development
because it reduces project uncertainty and risk.
<bullet> Other federal and state agencies should review any regulations
that impede LNG projects and act similarly to reduce or
eliminate these impediments.
<bullet> Efforts should be made to encourage existing LNG terminals to
commence operating at full capacity at the earliest
opportunity.
<bullet> The siting of LNG offloading terminals is generally the most
time consuming roadblock for new LNG projects. Federal agencies
should take the lead in demonstrating the need for timely
approval of proposed offloading terminals, and state officials
must begin to view such projects as a means to satisfy supply
and price concerns of residential, commercial and industrial
customers.
<bullet> Some new LNG facilities should be sited on federal lands so
that permitting processes can be expedited.
<bullet> Congress should increase LIHEAP funding. Low-income energy
assistance is currently provided to roughly 4 million
households, only 15 percent of those eligible. The financial
burden on needy families will certainly increase this winter,
and LIHEAP appropriations should be increased to $3.4 billion--
up from $2.0 billion of total assistance in 2003
<bullet> Should gas supplies become extremely tight, the federal
government and the states should consider easing environmental
restrictions on a temporary basis so that electric generating
facilities and industrial facilities can switch to alternative
fuels.
<bullet> States should be encouraged to authorize local utilities to
enter into fixed-price long-term contracts and to enter into
natural gas hedging programs as a means to dampen the impact of
natural gas price volatility upon consumers.
Chairman Tauzin. Thank you, Mr. English.
The Chair now recognizes Mr. Robert Liuzzi, the President
and CEO of CF Industries, on behalf of the Fertilizer Institute
which for the record uses natural gas as a raw material source,
not just as a power source.
Mr. Liuzzi.
STATEMENT OF ROBERT C. LIUZZI
Mr. Liuzzi. Thank you, Mr. Chairman, members of the
committee.
The situation that the opening remarks addressed, the
volatility in the level of price, has created an extremely bad
situation for the nitrogen fertilizer business. The situation
has resulted in the closure of 20 percent of U.S. nitrogen
capacity and another 25 percent has been idled. I am here to
urge the Congress and this committee to take action on a
comprehensive energy policy to deal with the issue.
CF is a farmer-owned cooperative. We are one of the largest
nitrogen producers in North America. We operate large
facilities in Donaldsonville, Louisiana, and Alberta, Canada.
In Louisiana, we employ over 500 people on a full-time basis,
which accounts for $46 million a year in wages, $8 million in
sales and property taxes. During a normal production year, the
facility converts 78 million BTUs of natural gas into 2.25
million tons of ammonia, 1 and three quarter million tons of
urea and over 2 million tons of nitrogen solution.
CF Industries through its members accounts for one-fourth
of all nitrogen applied to the ground in the United States and
one-third of all the nitrogen used in the Midwest. Through our
owners, our phosphate and nitrogen products reach a million
farms and ranches in 48 States and two Canadian Provinces.
As the chairman mentioned, we are slightly different than
testimony previously. Natural gas is my raw material, my
feedstock. It is--the primary product we make, anhydrous
ammonia and gas, accounts for 90 percent of the total cash cost
of ammonia production. Ammonia is also the basic building block
for dry nitrogen such as urea and nitrogen solutions. It is
also a raw material for ammoniated phosphatic fertilizers.
Because it is the raw material of the feedstock, the
current situation is having a devastating impact on our
business. As you are aware, prices began to steadily increase
in early 2000, rising to almost $10 per million BTUs in January
of 2001. You can imagine what that did to fertilizer production
costs.
Not surprisingly, in response, the industry began to shut
down production. Operating rates by the end of January in 2001
had dropped to a low of 46 percent. That compares to an average
operating rate during the 1990's of about 92 percent. We saw
moderation after that, but then we saw escalation again.
February of this particular year, spot natural gas prices
soared to a record high of almost $20 per million BTUs.
Although they again moderated, they remain well above
historical averages. As I mentioned, we have suffered permanent
closures and protracted idling of facilities.
What does this all mean to fertilizer manufacturers or to
U.S. agriculture? During the 1990's, about three-quarters of
all nitrogen consumed in America was supplied by domestic
production, 15 percent came from Canada, and 10 to 15 percent
was sourced offshore. Plant closures affect rural economies.
Chemical operating jobs are very high-paying jobs. The
continued scenario of high prices for gas undoubtedly will lead
to more closures and abandonment of the infrastructure and the
people that support the fertilizer business.
One of the most disturbing aspects of this particular
situation is that it has created for U.S. farmers an issue of
reliability of supply. Imports cannot come in to fill the gap
that will result from permanent closure of plants in the United
States.
The infrastructure even on the Gulf Coast, Mr. Chairman, is
not sufficient to bring product in from Russia or other places,
move it through the inland waterway system and get it where it
is needed when it is needed, a short planting period that uses
large amounts of fertilizer.
Furthermore, imports will not lower prices to American
farmers. U.S. Plants will run as long as they can cover their
cash cost to production. The U.S. producer is the marginal
supplier to the U.S. market, and consequently imports will be
priced just under that level.
Congress, we believe, has to adopt, as everyone has said
already, a two-pronged approach. We have got to expand supply,
whether that is drilling in areas that are currently prohibited
in various parts of the gulf, and we have got to curtail an
artificially induced demand, particularly for electric power
generation. Going forward, 90 percent of all power plants will
burn natural gas.
I am running over, Mr. Chairman. I thank you for the
opportunity to be here. I will say that all the others have
adequately summarized many aspects of my testimony. It is all
in the record. Thank you, sir.
[The prepared statement of Robert C. Liuzzi follows:]
Prepared Statement of Robert C. Liuzzi, President, CF Industries, Inc.
on Behalf of The Fertilizer Institute
On behalf of The Fertilizer Institute, CF Industries, Inc. is
pleased to have the opportunity to discuss the urgent situation
currently facing the U.S. fertilizer industry. The volatility and level
of U.S. natural gas prices, virtually unprecedented in the history of
our country, has resulted in the permanent closure of almost 20% of
U.S. nitrogen fertilizer capacity and the idling of an additional 25%.
This situation threatens to destroy an efficient U.S. industry and
displace the thousands of workers who support it. Congress must pass a
comprehensive energy policy that addresses both the supply and demand
aspects of the natural gas market. This is crucial to the long-term
survivability of the U.S. fertilizer industry.
The Fertilizer Institute (TFI) represents fertilizer from the
plants where it is produced to the plants where it used--and all points
in between. Producers, retailers, trading firms and equipment
manufacturers, which comprise TFI's membership, are served by a full-
time Washington, D.C., staff in various legislative, educational and
technical areas as well as with information and public outreach
programs.
As a general background, CF Industries is a farmer-owned
cooperative and is one of the largest nitrogen fertilizer producers and
marketers in North America. The Company is headquartered in Long Grove,
Illinois. CF operates world-scale production facilities in
Donaldsonville, Louisiana, and Medicine Hat, Alberta, Canada. In
Louisiana, CF currently employs 507 full-time and contract workers.
This facility accounts for $46 million a year in wages and $8 million
in sales and property taxes. During a normal production year, the
facility converts approximately 78 million MMBtu of natural gas into
2.25 million tons of ammonia, 1.75 million tons of urea, and 2.15
million tons of UAN. The Complex has a daily requirement of over 200
million cubic feet of natural gas as a feedstock and fuel.
CF and its Member cooperatives account for approximately one-fourth
of the nitrogen fertilizers applied in the United States and
approximately one-third of the nitrogen fertilizers applied in the
primary growing areas of the Midwest. The Company also mines and
manufactures phosphate fertilizers in Hardee County and Plant City,
Florida. Through its eight Member-owners, CF's nitrogen and phosphate
fertilizer products reach one million farmers and ranchers in 48 states
and two Canadian provinces.
My purpose today is to discuss the devastating impact that the high
level and unprecedented volatility in natural gas prices is having on
both the fertilizer industry and the American farmer. To fully
understand why increased and volatile natural gas prices are creating
such fundamental difficulties for the nitrogen fertilizer industry, a
basic understanding of our products and manufacturing process is
necessary.
Natural gas is the primary feedstock in the production of virtually
all commercial nitrogen fertilizers in the United States (Figure 1).
And it is important to be very clear about this: natural gas is not
simply an energy source for us; it is the raw material from which
nitrogen fertilizers are made. Our production process involves a
catalytic reaction between elemental nitrogen derived from the air with
hydrogen derived from natural gas. The primary product from this
reaction is anhydrous ammonia (NH3). Anhydrous ammonia is used directly
as a commercial fertilizer or as the basic building block for producing
virtually all other forms of nitrogen fertilizers such as urea,
ammonium nitrate and nitrogen solutions, as well as diammonium
phosphate and mono-ammonium phosphate. Natural gas is also used as a
process gas, an energy source, to generate heat when upgrading
anhydrous ammonia to urea, but this use is minor compared to our use of
natural gas as a raw material.
Natural Gas (CH<INF>4</INF>) + Air (N<INF>2</INF>) <r-arrow>
Anhydrous Ammonia (NH<INF>3</INF>)
Because natural gas is the only economically feasible raw material
used in producing nitrogen fertilizers, it is by far the primary cost
component. Today, in the case of ammonia, natural gas accounts for 90%
of the total cash cost of production (Figure 2).
Given this heavy reliance on natural gas, the volatility of natural
gas prices continues to have a devastating impact on the domestic
fertilizer industry. This can be clearly demonstrated by comparing
natural gas costs, production costs and U.S. nitrogen fertilizer
operating rates. As you are well aware, natural gas prices began to
steadily increase during calendar year 2000, rising from an average of
$2.36 per MMBtu in January to over $6.00 per MMBtu in December, 2000
and to a record $10 per MMBtu in January 2001 (Figure 3). In turn, this
forced fertilizer production costs to unprecedented levels. Ammonia
production costs, for example, spiked up from approximately $100 per
ton to $170 by June 2000, to $220 per ton in December, and to an
average of over $350 per ton in January 2001.
Not surprisingly, the industry began to shut down production in
response (Figure 4). By the end of December 2000, the U.S. nitrogen
operating rate fell to below 70% of capacity. By the end of January
2001, operating rates dropped to an all-time low of only 46%. To put
this into perspective, the average U.S. operating rate during the 1990s
was 92% (Figure 5).
Following this natural gas spike, gas prices began to moderate and
by mid-2001 had fallen back to historic levels. In response, idled
capacity in the U.S. quickly came back on-stream, and the industry
operating rate climbed to just under 90% of capacity.
Unfortunately, the lower natural gas prices and higher operating
rates were short-lived. By mid-year 2002, natural gas prices once again
began to slowly escalate until February 26, 2003, when spot natural gas
prices suddenly spiked to a record high of over $20 per MMBtu. Although
natural gas prices again quickly moderated, they have remained well
above historic averages. Gas prices over the last month, for example,
have been trading in the $5.50-$6.50 range--approximately 150% above
the 1990s historic average of $2.40.
The sharp rise in natural gas prices and the resulting curtailment
of U.S. fertilizer production also has had a dramatic impact on
fertilizer prices throughout the marketing chain and, in particular, at
the farm level. Nitrogen prices at the farm level, for example, jumped
this year to near-record high levels. According to USDA data, the U.S.
average farm-level price for ammonia jumped this spring to $373 per ton
compared to an average spring price last year of $250. Similarly, urea
prices have climbed from $191 to $261 and UAN prices from $127 to $161.
This translates into an increase in cost to a typical Midwest corn
farmer of $10 to $15 per acre (Figure 6).
Unfortunately, there appears to be no end in sight. According to
Department of Energy (DOE) Secretary Abraham, current stocks of natural
gas are low due to a combination of cold weather and declines in both
domestic production and net imports. The 696 billion cubic feet of gas
in storage this spring represented the lowest level since 1976, when
the Energy Information Agency began keeping records. Storage has
increased since that time, but it is still only half the level of a
year ago, and 42% below the previous five-year average. According to
most industry analysts, the current tight inventory situation will
likely keep natural gas prices at extremely high levels throughout the
remainder of this year and into next year.
Absent a substantial long-term reduction in natural gas prices, the
U.S. nitrogen fertilizer industry and, therefore, farm-level supply is
at serious risk. Of the 20 million tons of ammonia capacity that
existed in the U.S. prior to 2000, approximately 3.5 million tons have
already been permanently closed. According to a recent study completed
by Fertecon, (Figure 7) the world's largest fertilizer consulting
company, another four million tons is at risk of closing within the
next two years. In addition, it is anticipated that the remainder of
the industry will likely operate on a ``swing basis.'' That is, plants
will only run when natural gas prices are low enough and/or fertilizer
prices are high enough that producers can, at a minimum, cover their
cash costs of production (Figure 8).
So what does all of this mean to American fertilizer manufacturing
and for U.S. agriculture? To fully answer that question, it is
necessary to provide some additional background information. Since the
1940s, when commercial fertilizers were introduced into the market on a
large-scale basis, farm demand for nitrogen fertilizers was always
supported by a large, efficient, domestic fertilizer industry. During
the 1990s, for example, approximately 70-75% of the nitrogen
fertilizers consumed by American farmers was supplied by domestic
production with another 15% supplied from nearby Canadian plants. The
remaining 10-15% of the volume was sourced from offshore suppliers
(Figure 9).
At the heart of the domestic fertilizer industry are production
facilities designed to manufacture fertilizer products annually at full
capacity. Many of these facilities are located near the source of raw
materials but far from the major consuming regions. Furthermore, it is
important to understand that most U.S. nitrogen fertilizer is consumed
within a very short time frame in the fall and spring application
seasons. As a result, an extensive distribution and storage
infrastructure has been developed over the years to bridge this
geographic and seasonal gap to ensure that American farmers would have
adequate supplies at the right time. This system is specifically
designed to move and handle large volumes of product from domestic
production sites to the major consuming areas. Thus, the distribution
and storage infrastructure is purposely integrated into the domestic
production system to ensure efficiency, economies of scale and
reliability of supply.
Domestic fertilizer manufacturing facilities have historically
provided top-paying jobs and additional employment opportunities in
local communities. According to a recent Baton Rouge Advocate article
<SUP>1</SUP>, jobs in chemical manufacturing are at the top of the pay
scale among Louisiana manufacturers. The average chemical industry wage
in February was $25.23 per hour, with a 44.2-hour workweek producing
$1,115 per worker per week, compared to a general manufacturing wage of
$17.63 per hour or $756 on a 42.9-hour workweek. Chemical industry jobs
also have a high multiplier effect. In East Baton Rouge Parish, for
example, each chemical job is estimated to support another 4.6
positions in the overall job market.
---------------------------------------------------------------------------
\1\ Bongiorni, S. (2003, May 11). Overseas business threatens
Louisiana's chemical industry. The Baton Rouge Advocate.
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A scenario of continued high natural gas prices will undoubtedly
lead to more U.S. plant closures and abandonment of marginally
profitable infrastructure in rural communities. While higher volumes of
imports will fill part of the potential loss in U.S. supply, domestic
production and distribution must remain viable to fully meet farmer
demand. Because the current distribution and storage system within the
U.S. was constructed around a U.S. supply base, there is limited
infrastructure to off-load, store and transport larger and larger
volumes of imports. The lack of infrastructure is particularly apparent
for anhydrous ammonia, which requires refrigerated or pressurized
tanks, pipelines, railcars and barges. Massive new investment and
considerable lead-time will be needed if the existing infrastructure
assets are left permanently stranded. Much like the proposed
improvements to liquefied natural gas infrastructure, restructuring the
domestic fertilizer distribution system to efficiently handle adequate
levels of imports will be on a decennary time scale.
The answer is not simply to say that we will just rely on imported
fertilizer. Increased reliance on imports would also result in a
considerable increase in the potential for supply and price volatility.
The vast majority of the U.S. industry was constructed to meet U.S.
demand. Offshore supply, on the other hand, was largely constructed to
opportunistically compete in a world market. In other words, putting
aside unfairly traded product, cargoes are generally sold and shipped
to those international markets that will yield the highest netback
prices. Imports are also subject to changes in world economic
conditions, fluctuating exchange rates and political and/or policy
changes in other countries.
Moreover, increased U.S. reliance on imports will not result in
lower prices for U.S. farmers. Nitrogen fertilizers are a fungible
commodity product for which prices are set by supply/demand conditions
and, therefore, by the cash costs of the marginal producer. Under a
continued environment of high natural gas costs, the marginal supplier
to the market will be the U.S. producer. Consequently, higher import
volumes will not translate to lower prices to U.S. farmers.
High natural gas prices present the most serious threat to the
fertilizer sector, and to farmers in general, since the energy shocks
of the 1970s. The fertilizer industry believes it is imperative that
the U.S. develop a comprehensive and balanced energy policy--one that
encourages the development of additional supplies and, at the same
time, promotes the efficient use of a variety of energy sources and
technologies.
More specifically, the fertilizer industry stresses that the most
effective measure to deal with high natural gas prices over the short-
term are incentives and other regulatory measures that will reverse
decades of artificially induced demand for natural gas over other fuel
technology for electric power generation. Congress itself is among
those who share in the responsibility for this problem, as the
requirements of the Clean Air Act have made it increasingly difficult
to permit, construct and enlarge the nation's coal-fired plants. Where
the nation once relied on coal for the lion's share of its electric
power, over 90% of all new power plant construction intends to rely on
natural gas. Recent proposals to impose further rules on mercury and
CO2 emissions will only add to the burden of coal-fired generators and
hasten the move to natural gas. This, of course, will cause a
tremendous new demand to be placed on the existing gas supply base,
ensure high prices into the foreseeable future, and threaten the
viability of the domestic nitrogen fertilizer industry--an industry,
unlike the electric power industry, that does not have an alternative
to natural gas. Accordingly, any legislation passed by this Committee
should ensure that all coal, nuclear and hydroelectric plants are able
to operate safely at their full capacity, and that incentives are
provided and obstacles removed to ensure that new coal and nuclear
facilities are constructed.
The fertilizer industry also supports a thorough review of those
policies that severely restrict oil and gas production on multiple-use
federal lands and large portions of the continental shelf. We believe
that access to these reserves can be substantially beneficial towards
meeting the Nation's energy needs without compromising other legitimate
interests.
For those of us in the fertilizer industry, ``the future is now.''
We encourage this Committee, the Congress, and the Bush Administration
to continue to aggressively look for ways to even further expedite
projects which not only increase supplies, but also help get supplies
to the fertilizer industry in the near term. We think bold, creative
initiatives are needed. In fact, we understand that domestic supplies
are being found which cannot get to market because the delivery systems
are just not there. Anything that this Committee, the Congress and the
Administration can do to expedite the creation of new modes of delivery
for untapped domestic natural gas supplies or to facilitate imports can
help our industry in the immediate future. This can take the form of
new pipelines and even more innovative solutions such as encouraging
the development of the maritime transportation of natural gas in the
form of compressed natural gas or CNG.
Specifically, I would like to commend this Committee and the
Congress for its efforts just completed last year to facilitate the
importation of new supplies of natural gas by enacting provisions of
the Maritime Transportation Security Act of 2002 that created deepwater
natural gas ports. This is an important first step in helping to
increase natural gas availability in the United States and help to
bring supply and demand back into better balance.
There is a deep-water port project right off the Louisiana coast
that can come on-stream sooner rather than later because of its unique
history. Freeport-McMoRan Sulphur LLC's permit is to be submitted in
the next few months to the Coast Guard and other agencies for
regulatory approval. Freeport is currently working to convert this
massive offshore complex that once produced sulfur, to a deepwater
natural gas port. The ``Main Pass Energy Hub,'' will offload LNG from
tankers and re-gasify the gas on the platforms formerly used for sulfur
production. Since the facility is located on a giant salt dome--two
miles across in diameter--Freeport envisions providing major storage
facilities for the re-gasified gas in salt caverns created and accessed
by wells drilled from the existing platforms. The Department of the
Interior would regulate the storage, in offshore salt caverns, of
natural gas produced from outside the waters of the Outer Continental
Shelf (OCS); thereby enabling Freeport to store imported gas in salt
caverns underlying OCS waters.
In addition to this unique project and to substantially increase
the supply of natural gas in the market, we urge that Congress
encourage the development and acceptance of the maritime transportation
of natural gas in the form of compressed natural gas or CNG. As opposed
to LNG, where natural gas (methane) is cooled and stored as a liquid,
the CNG gas remains in the gaseous phase and is stored under such
pressure so that it is compressed. This enables the transportation and
storage of a much greater volume of gas.
Although the technology of maritime transport of LNG has become
accepted for use in the waters of the United States, the technology of
maritime transport of CNG is now under review. The potential for the
acceptance of maritime transport of CNG to increase natural gas
supplies is tremendous because it is less expensive and is within
shorter distances than LNG to transport and re-gasify.
Its acceptance will enable the production and delivery to market of
a gas produced in federal waters of the Gulf of Mexico that would
otherwise be uneconomical to produce. Such gas may either be found
underlying the shallow waters of the Gulf of Mexico where it is
economically ``stranded'' due to distance from a pipeline. It may be
associated with oil produced in the deep waters of the Gulf of Mexico,
but is likewise stranded due to distance from a pipeline. As the oil is
produced, the associated gas is pumped back into the geological
formation from which it came due to the uneconomical nature of the
process. The Department of the Interior has informed OCS producers that
they may return this gas to the reservoir as long as they have a plan
for producing it sometime in the future. The delivery of this gas, as
well as gas produced from elsewhere nearby in the Western Hemisphere
will be made economical with the approval of CNG transport in U.S.
waters. We urge the acceleration of efforts to approve the use of this
technology in U.S. waters.
We are in no position to be an expert on Freeport's project or any
other specific project underway. Regardless, we must urge the Congress
and the Administration to take a very close look and consider
expediting permits for any project that can help save our industry and
the jobs that we create. We are very excited about potential projects
that would enhance the supply of gas coming to our Nation on an
expedited basis.
In summary, the fertilizer industry believes that a balanced and
comprehensive energy policy is not only long overdue, but also
essential to the long-term viability of this strategic sector. It is
also crucial to the American farmer, given that almost one-third of
U.S. crop production is derived from nitrogen fertilizer (Figure 10).
Thank you for the opportunity to discuss these issues with you
today. We look forward to working with you over the next few months,
and I would be pleased to answer any questions you may have on the
fertilizer industry and natural gas pricing issues.
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Chairman Tauzin. Thank you very much, Mr. Liuzzi.
We are pleased to welcome Mr. Forrest Hoglund, Chairman and
CEO of Arctic Resources Company of Houston Texas. Mr. Hoglund.
STATEMENT OF FORREST E. HOGLUND
Mr. Hoglund. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to testify today.
The most significant action that can be taken to improve
natural gas supplies is defined as an economic and
environmentally satisfactory way of accessing the 44 trillion
cubic feet of proven reserves in Alaska and Canada and the 160
trillion cubic feet of Arctic gas potential. Let me assure you
high-cost, mandated pipelines are not the answer. In fact,
Congress is in the midst of playing local politics with the
most important energy project in the United States.
The question of tapping Arctic gas has been around for a
long time. Industry studied the situation in the mid-1970's and
almost all companies agreed one northern route picking up
Canadian and Alaskan gas was the way to go. Two longer and more
expensive pipelines was not the answer. Unfortunately, Canada
blocked the one pipeline answer at that time because aboriginal
land claims were not in place.
Now the route question is back again; and our estimates
show that the two-pipeline Alaskan approach is twice as long,
goes through 900 miles of mountains and is twice the cost of
the one-pipeline northern route--$14.6 billion versus $7.8
billion.
Not surprisingly, the major producers who want a subsidy
don't agree. They say that the routes are close in cost, but
that claim should be examined.
First of all, they say it would cost $20 billion to lay
clear to Chicago. It doesn't appear that they need to go beyond
Edmonton, Alberta; and that would save $5 billion.
Second, after they saw they might get subsidies, a $4
billion contingency was added to their northern route
estimates, apparently the ice affecting summertime
construction. We are proposing wintertime construction.
Also, they never mentioned the additional $3 billion needed
for the Canadian pipeline segment.
The point that should be made is that there are regulatory
bodies in the U.S. and Canada to decide these issues. Congress
should not pick winners or losers on questionable one-sided
data.
Who is for the Alaskan approach? The Alaskans, of course,
and two major oil companies who think they can get others to
accept the economic risk. They have convinced Congress to
mandate their line even though the administration is soundly
against it.
Also, Canada is not being included in the discussion when
two-thirds of the Alaskan route goes through Canada. Canada has
expressed strong opposition to subsidized natural gas from
Alaska and lately has called for a bilateral commission to
analyze the situation. They are in a position to block the
projects and have given indications they might.
Why is Alaska so strongly behind the issue? They want the
short-term construction jobs and profits, plus they would get
natural gas to Fairbanks, and that is understandable if the
costs weren't so huge. On the other hand, they would be giving
up an extra $4 to $5 billion in State revenue based on their
own estimates due to higher royalty and severance taxes. They
would get more long-term jobs for additional exploration and a
better assurance of the project being completed.
There are a lot of things conceptually wrong with the
current proposal being considered in the Senate.
First, why the mandate? Obviously, they are trying to
preclude any other alternatives; and when a mandate is pushed
all kinds of alarms ought to go off in everybody's ahead.
Second, the majors want debt guarantees of up to $18
billion to take the gas clear to Chicago, which is a gigantic
overreach. Normal industry practice would be see how other
intersecting pipelines near Edmonton could carry the gas to
market utilizing any spare capacity and low-cost expansions
available.
Third, the majors want a tax credit of up to 52 cents for
MCF if the gas prices drop below $1.35 MCF. This basically
guarantees them an 80 cent price. If they have gigantic cost
overruns, like they did when they built the Alaskan oil
pipeline, the $18 billion loan guarantee might be called, but
the producers would still get their 80 cents. That is a pretty
nice deal.
The proponents say this is similar to a section 29 tax
credit. It is not at all. Section 29 credits are given when you
need that to produce the resource. Here you have a cheaper
alternative that you are trying to mandate out and not even
consider.
The intellectual concept behind this U.S. House and Senate
action is seriously flawed. People who agree include the Bush
Administration, the Democratic Progressive Policy Institute,
Taxpayers for Common Sense, the Wall Street Journal, the
Washington Post, National Environmental Trust, CATO Institute,
National Center for Policy Analysis and a large number of
independent producers and associations.
What should be understood is that Alaska could be the key
in getting this project done right. If they would agree to work
for the most economic and best environmental pipeline, then
industry and government would quickly get behind the right
project. When the energy bill goes to conference I urge you to
reconsider the House-passed route mandate and stay firmly
against the need for tax subsidies for Alaskan gas. Let's pass
an Energy Bill that will truly pave the way for development of
Alaskan and other Arctic gas resources.
Thank you, Mr. Chairman.
[The prepared statement of Forrest E. Hoglund follows:]
Prepared Statement of Forrest E. Hoglund, Chairman & CEO, Arctic
Resources Company
Chairman Tauzin, Congressman Dingell, Members of the Committee:
Thank you for the opportunity to speak here today on the importance of
adequate natural gas supplies to our nation's energy security and
economic vitality. My name is Forrest Hoglund, and I am the CEO of
Arctic Resources Company (ARC), a sole purpose company developed to
facilitate permitting, construction and operation of a natural gas
pipeline from Alaska's North Slope to gas-hungry markets in the lower-
48 states.
Chief among this nation's opportunities to increase our domestic
natural gas supplies and increase our energy security is facilitating
construction of a natural gas pipeline from Alaska's North Slope to
markets in the lower-48 states in the lowest cost, shortest, and most
environmentally sensitive manner available. Without Congressional
impediments currently included in the House and Senate energy bills,
the market will ensure that this line is constructed and operates to
the benefit of all natural gas consumers, gas producers and explorers,
the U.S. government, U.S. taxpayers, Alaskans, Native Peoples and the
Canadian government.
Construction of an Arctic natural gas pipeline is the biggest
impact energy project available and the most important to America
today. The question to Congress is this: Should a pipeline be
constructed in the lowest cost and most environmentally responsible
manner that provides the most benefit for taxpayers and natural gas
consumers, or should Congress mandate that a high cost, economically
risky project be undertaken to appease some Alaskan political interests
and economically benefit the largest oil companies in the world by
shifting the project risk from the companies to the U.S. tax payers? I
submit that if the Congress passes legislation in the form that is
currently being considered, no pipeline will be built.
The construction of an Arctic gas pipeline has an interesting
history. There was a big push by industry, the U.S. and the Canadian
governments for construction of a line 28 years ago. Industry spent
about $750 million and almost all the stakeholders decided that a
Northern Route was preferable both economically and environmentally.
One buried pipeline laid in a good pipeline construction path was much
better than two pipelines, one of which had to run through
approximately 900 miles of mountains. The same remains true today.
Unfortunately in the 70's, due to Aboriginal opposition and Aboriginal
land claims that were not settled at that time, a Canadian Commission
called for a 10 year moratorium on a pipeline through the Mackenzie
Valley, and that ended up blocking the Northern Route. With the
Northern Route ruled out, President Jimmy Carter approved the Southern
route in the Alaskan Natural Gas Transportation Act (ANGTA), but it was
so uneconomic it was never built. Alaskan politicians and labor unions
kept the ANGTA Route as their dream and kept working to find ways to
get someone to subsidize its construction.
Today, Alaska, BP and ConocoPhillips think they have found the way.
Both last year and apparently this year they have convinced Congress to
mandate the uneconomic Southern Route. The U.S. Senate is also
seriously considering some very flawed tax and other economic
incentives in its energy bill that it knows are needed since the
mandated route is uneconomic. The Bush Administration is firmly against
the mandate and these incentives, and considers that approach bad
energy policy as evidenced in their May 8, 2003, Statement of
Administration Policy (attached).
comparing the two options
The Alaskan proposal requires two pipelines--the Alaskan Highway
(or Southern) Route and another to connect Canadian reserves through
the Mackenzie River Valley. Below are maps of the two separate pipeline
routes that would be needed to transport both Alaskan North Slope and
Canadian Mackenzie Valley natural gas to markets.
This Southern Route parallels the oil pipeline right of way to
Fairbanks, and then proceeds down the Alaska Highway to pipeline
interconnects near Edmonton, Alberta. Interestingly, two-thirds of the
Southern Route line must be laid in Canada. The Mackenzie Valley only
line originates in the Mackenzie River Delta and follows the Mackenzie
River Valley south to Edmonton.
The following map shows the proposed Arctic Resources pipeline
route. This proposal is very close to the preferred route proposed 28
years ago.
The Arctic Resources proposed pipeline proceeds offshore from
Prudhoe Bay to the Mackenzie River Delta, connects the Canadian
reserves, and then continues down the Mackenzie River Valley to
Edmonton, Alberta. The offshore segment of the pipeline will be buried
in a 15 foot trench and will be constructed during the winter months.
This route is shorter, faster to construct, and has a lower cost. This
project does not need subsidies or financial incentives. All one needs
to do is look at the maps to decide which answer is best.
As shown in Chart 3, in comparing the competing pipeline proposals,
one must realize that a Southern Route requires two pipelines whose
combined total will be twice as long (3490 miles versus 1665 miles) and
twice the cost ($14.6 Billion versus $7.8 Billion) of a single Northern
Route. Proponents are working to have the Southern Route subsidized.
The Northern Route does not need to be subsidized. In fact, the
Northern Route should create significant tax revenue for both the
United States and Alaska. Pipeline tariffs on the Northern Route are in
the range of 50 to 75 cents per thousand cubic feet (Mcf) lower than a
Southern Route alternative, which means better economics for the
natural gas explorers and therefore more natural gas will be found for
American consumers. In any business where a product is a long way from
the market, the lower-cost transportation system is always more
desirable. When politics get in the way of sound economics, nothing
good happens.
If the economic comparison is so compelling, why are the major
producers not backing the Northern Route? Good question. They did 28
years ago, but now, two of the three North Slope majors--BP and
ConocoPhillips--have fallen in lockstep with the Alaskans. They dispute
the cost differences (not the distances) and their latest answer is
that both routes cost nearly the same. It is interesting that this new
position came after Congress showed a willingness to subsidize the
Southern Route. Several parts of their estimate need to be expanded
upon. First, they added roughly a $4 billion cost contingency for
summertime offshore construction in the Beaufort Sea evidently due to
more ice problems. This does not affect our estimate since we are
talking about winter construction. They also say construction costs are
around $20 billion to get the gas all the way to Chicago when there is
no clear economic evidence to show that a pipeline needs to go beyond
the existing pipeline interconnects near Edmonton, Alberta. These two
producers evidently feel that if the U.S. taxpayers will guarantee the
debt and subsidize a line to Chicago, why not try for it?
They also never mention the cost of the line in Canada. Keep in
mind that they want a mandate so that the projects cannot be compared.
ARC is not seeking a mandate; we are willing to stand on merit,
markets, geometry and statutory regulatory requirements. Buying the
mandate argument is like letting the wolf design how strong the hen
house will be. The real question should be: Why is Congress mandating a
route rather than letting the regulatory process and market forces work
as they were designed? The Bush Administration has recognized this
important question and has asked the Congress not to mandate a route
and not to subsidize the pipeline with tax credits. Such Congressional
action is unnecessary. It could be very expensive for the taxpayers.
And, it will jeopardize the construction of any pipeline by aggravating
our Canadian neighbors.
important interests not represented
Several important parties and issues are being ignored in the
current Congressional debate on construction of this natural gas
pipeline. First of all, Canada is a very important player in this
pipeline debate because the National Energy Board (NEB) of Canada must
approve the pipeline plans for either route. About two-thirds of the
Southern Route goes through Canada (if Edmonton is the terminus), and
about 90% of the Northern Route is in Canada. Applications must be
filed with the NEB and the Board must consider economic, regulatory and
environmental aspects of the line. It will not be in Canada's interest
to approve a subsidized line for Alaskan gas that will disadvantage
Canadian gas in the marketplace.
The Canadian government has been vocal on this issue. The Canadian
alternative is to build a Canadian-only line which is not very economic
either. Two high-priced pipelines will definitely limit the exploration
potential in Alaska and Canada due to higher pipeline tariffs and less
profit on the lines, to the detriment of both countries. Additionally,
there are significant Canadian Aboriginal land claim problems with the
Alaskan route that are being glossed over. The likelihood that Canada
will delay or block the Alaskan plan is high.
As previously mentioned, two high cost pipelines into Alaska and
Canada will limit the exploration efforts in both the North Slope and
Canada's Mackenzie Valley. A subsidized pipeline will be an economic
discouragement to exploration and production interests in all other
North American producing regions. A number of independent companies and
industry associations have protested against the Congressional actions.
One low cost pipeline system, selected through market competition in an
open and transparent regulatory process, with open access features for
new volumes, is what is needed to maximize the exploration potential in
each area. This is the most important energy project in North America;
both countries and other interested parties need to be involved in the
process.
Two high cost pipelines, particularly one that goes all the way to
Chicago from Prudhoe Bay, will be very expensive to U.S. and Canada
taxpayers and natural gas consumers. The subsidies being considered for
the Southern Route are designed to move only the current proved
reserves on the North Slope of Alaska. The Northern Route does not need
subsidies and, in fact, would create significant tax revenues for both
Alaska and the United States government. In mandating an uneconomic
route and forcing taxpayers to subsidize the construction and operation
of the line, Congress seems to not be fairly representing the majority
of its constituents.
Natural gas consumer interests are also not being adequately
represented. The lowest cost system will create the largest gas
supplies and the best economic results. If the U.S., Canada and Alaska
will support the lowest-cost system, it will also be the fastest line
to be built.
The project can also be a definite plus for U.S. and Canadian
businesses if done right. The Southern Route (ANGTA) pipeline plan
involves laying 52-inch high pressure pipeline through approximately
900 miles of mountains and the chances of significant cost overruns are
present. There are no pipe mills in North America that can manufacture
any significant quantity of 52-inch pipe; only German and Japanese
mills can manufacture the steel for a pipeline of this magnitude and
pressure.
Construction of this natural gas pipeline would be the largest
steel order in North American history. It would be a shame to
congressionally mandate a project in which North American pipe mills
could not participate. The Arctic Resources plan for laying two 36''
lines in succession would allow Canadian and U.S. pipe mills to help
fill the orders. In addition, standard construction equipment could be
used to lay the pipeline. There is currently no construction equipment
to lay 52-inch pipe, so contractors would have to build new equipment
for the project. Operating in mountainous terrain is another cost risk.
Limited pipe suppliers and unfamiliar equipment are recipes for cost
overruns. With regard to jobs, there is no great differential between
the routes. Many qualified people will be needed, and either route will
have to employ significant labor from Canada, Alaska, and the lower-48.
the route mandate
There are several flaws in the route mandate and the subsidies
being proposed in the House legislation (H.R. 6) and the Senate version
(S. 14).
First of all, there is a better route than the Southern Route. A
single Northern Route is preferable to two--an expensive Alaskan line,
plus another line through the Mackenzie Valley for the Canadian
reserves. As noted, in ARC's view, the two lines would be twice as long
and cost twice as much as one Northern line. In addition, the footprint
of the pipeline would be 3,400 miles instead of 1700.
A mandate for the more costly option does nobody any good over the
long term and should be fought as hard as the tax and economic subsidy
being proposed.
the tax credit subsidy
This Senate's proposed subsidy package also has several
questionable features. The $.52 per million British thermal units
(MMBtu) tax credit that the Senate Finance Committee has endorsed would
kick in when wellhead prices dip below $1.35 per/Mcf. There are two
objectionable features in that approach.
First, proponents claim that up to 20% of U.S. gas has Section 29
credits, so they should get these credits as well. What the Senate has
proposed is not a Section 29 tax credit. Section 29 credits are
normally given when it has been established that they are needed to
develop the resource. The credits would not be given if there were less
costly ways of developing the resource. Alaska and two major companies'
logic is to first mandate that a high-cost route be built, then a
subsidy would obviously be needed. A much better, free market approach
would be to have no mandate and no subsidy. In the alterative, if
Congress deems that subsidies are necessary, then they should apply to
any route built and be available to any gas that moves through the
pipeline.
Secondly, basing the tax credit on the North Slope wellhead price
is a way of shifting the cost/risk responsibility from the North Slope
gas producers (BP, ConocoPhillips and ExxonMobil) to the pipeline debt
holders or guarantors. If the high-cost approach being taken by the
majors ends up costing considerably more, the multi-national oil
company producers would still be guaranteed at least $.52/Mcf after
taxes (that is more like an $.80 wellhead price), no matter how high
the pipeline tariff goes. The major producers have found a tricky way
to shift the risk away from them. Congress should recall that the last
time the majors built a big pipeline in Alaska, the Alaskan oil
pipeline, the cost estimate of roughly $900 million ended up ballooning
to $9 billion.
other subsidies
In another questionable maneuver, the majors also want to include
the gas conditioning plant in the pipeline tariff before getting to a
wellhead price. The plant is needed to clean out CO<INF>2</INF> and
nitrogen from the gas and, under normal industry practices, that cost
would not be included in a pipeline tariff. For example, if other
producers have clean gas, they would not need a gas conditioning plant
and they would not want to pay for a portion of the majors' plant. By
trying to include the plant in the tariff, the total pipeline tariff is
higher and, therefore, the wellhead price lower, which means the tax
credit is triggered faster.
They also want and the Senate legislation provides for federal debt
guarantees of up to $18 billion for the pipeline. That level of
guarantee is needed to get the pipeline all the way to Chicago so that
the majors can control the gas going to market there. Normally the line
would stop near Edmonton where existing or expanded intersecting
pipelines would move the gas to markets on the West Coast, Midwest, or
wherever else they may be needed.
But, if the Alaskan parties can convince the government to
guarantee the loan, the line can be constructed all the way to Chicago
and the other pipelines will be bypassed. That would limit competition
and further exacerbate the problems of industrial and other consumers
as they struggle with high gas prices. A much better approach would be
to only approve enough in loan guarantees (approximately $8 billion) to
get the gas to Edmonton and to make it applicable to all routes. The
Canadians may also wonder why the U.S. is guaranteeing all the debt for
a pipeline that is two-thirds in Canada, particularly when the
Canadians oppose this treatment.
It is difficult to get the right thing done for taxpayers and
natural gas consumers when the major reserve holders have fallen into
the Alaskan web. They have been convinced that the taxpayers will
backstop any project financial risk due to the Alaskan political
strength. It must be difficult when the major stakeholders spent a lot
of money 28 years ago and decided the Northern Route was lower cost,
shorter to construct and was better environmentally to now try to argue
the other side. Intellectually, many Alaskans, consumers and taxpayers,
natural gas producers and others who have studied the problem are
confounded. The Southern route is 20th century solution of necessity.
Now, 30 years later, the country needs a 21st century solution to bring
Alaskan and other Arctic gas to market.
the right answer
The first thing that has to happen to ensure that the appropriate
pipeline is constructed is to convince Alaska that U.S. taxpayers will
not take all the risks on the project, and the most economic project
and the best environmental project is the one that should ultimately be
built. They also should understand that the Canadian government has a
legitimate role in approving and permitting the pipeline, and should be
involved in the planning phase.
Recently, Canadian Minister Robert Nault called for a Bilateral
Commission to be formed to study this subject with the U.S. and Canada
participating. I believe that this is an excellent approach to solving
the problem. The U.S. also has a lot at stake since a good deal of the
future exploration potential lies on federal lands; it is not all in
Alaska.
alaska's stake
It should be noted that Alaskan long term economic impacts will be
much better with the most economic project being built. Prior studies
in Alaska have shown that with the Northern Route they should make
about $4 billion more from severance taxes and royalties due to the
higher wellhead prices resulting from the lower transportation tariff.
With the lowest-cost system, Alaska also will have more exploration
activity and therefore more future gas reserves will be discovered,
which equates to more long-term jobs in the State. Any short-term
construction jobs gained from building the Alaskan line do not offset
the high project cost to the taxpayer or lower long-term gains for
Alaska.
When once again Congress refuses to provide tax subsidies for a
Southern Alaskan line, Alaska's best option will be to work with the
other states and Canada to get the right project built as quickly as
possible. When Alaska drops its opposition to the Northern Route, a
project will then be able to move forward fast, and will end up being
the best answer for all.
what should congress do now?
The House has passed the route mandate in H.R. 6, and it appears
the Senate is poised to pass the mandate as well as the tax subsidy and
debt guarantee package in its energy bill, S. 14. This is exactly what
happened in the last Congress.
During the energy conference, the House should remain steadfastly
opposed to the tax subsidy and debt guarantee package, and, just like
last session, realize that the mandate without the subsidy is harmful
to all U.S. natural gas consumers. The Bush Administration is
supporting the no mandate or subsidy position and instead is promoting
good energy and financial policy allowing the market to work for the
right decision.
As you join with your Senate colleagues in a conference committee
on your respective energy bills, I would encourage conferees to oppose
the massive subsidy package and route mandate for an Arctic natural gas
pipeline. If the route mandate and subsidies are struck from a final
compromise bill during the Conference Committee, then we can all start
working on the right answer for everyone. Once that happens, then
Alaska and the major producers will be free to pursue the most economic
route available in an expeditious manner and all of the country will
benefit.
It should be noted that there are several provisions in the House
and Senate legislation that would be beneficial to expediting
construction of an appropriate natural gas pipeline to get these
reserves to market. Passage of those provisions would lead to greater
regulatory certainty in pipeline construction, and I would encourage
you to retain these provisions in conference.
Thank you, Mr. Chairman, for the opportunity to present this
testimony before you here today. I appreciate your willingness to
listen to my concerns, and I hope you will take my recommendations
under serious consideration when you go to conference with your Senate
colleagues. I look forward to answering any questions you may have for
me today.
Chairman Tauzin. I have got someone I want you to meet. His
name is Don Young.
Mr. Hoglund. I have met him.
Chairman Tauzin. The gentleman next is the TransCanada
Pipeline Limited President and CEO, Mr. Harold Kvisle.
STATEMENT OF HAROLD N. KVISLE
Mr. Kvisle. Thank you, Mr. Chairman. Thank you to the
committee for allowing me to address you today.
TransCanada, first of all, is one of the largest gas
transmission companies in the world. We transport about 75
percent of western Canada's gas, and much of that goes to U.S.
markets. We move significant volumes to markets in California,
in the U.S. Midwest, and over to New York and New England as
well. One of our subsidiaries is Foothills Pipe Lines, which
holds the certificates to construct the Canadian portion of the
Alaskan natural gas transportation system, the Alaska highway
project.
Over the next decade, we do agree that demand for natural
gas in the United States will grow significantly. We see demand
growing by about 18 BCF, and we see North American conventional
supply growing by only 5 BCF. That leaves a gap of more than 10
BCF that must come either as imported LNG or from frontier
basins.
People have expected that much of this gas will come from
western Canada, but today we see production growth flat-lining
in western Canada, and there is very significant increase in
demand in no small part due to the oil projects that exist at
Fort McMurray and which will supply a very large portion of
North America's future crude oil requirements.
On the supply side, we see production growing from various
parts in the United States. We see one or two BCF a day coming
from the Rockies, the Gulf Coast, and from western Canada. But
that growth represents only 5 BCF a day of incremental gas, as
compared to the 10 BCF a day that I mentioned earlier that we
will need to balance supply and demand.
The most significant increase that is available to us today
I would submit is from the frontier basins in Alaska and
northern Canada. Let me speak specifically about the Alaska gas
project.
In the late 1970's, Canada and the United States signed a
treaty to govern the transportation of Alaska gas to market.
Canada enacted the Northern Pipeline Act, which granted
Foothills the certificates to construct the Canadian portion of
the project.
Sorry about the slides.
We also in Canada established the Northern Pipeline Agency
to oversee construction of the project. Over the past 25 years,
Foothills and the Canadian government have maintained those
certificates and maintained the route entitlements that would
enable us to get that pipeline built quickly. In 1982, we built
the Prebuild portion of that pipeline. This does in fact today
deliver western Canadian gas to markets in California and the
Chicago regions of the Midwest.
Under the existing treaty, we think Canada brings you a
quick and expeditious alternative to get that pipeline built
through the Canadian portion of the project. By using the
Foothills structure, you can ensure utilization and
optimization of existing infrastructure and reduce both capital
costs and the risk of cost overruns for the project. In
addition, we can provide market diversity for Alaska gas,
moving it to markets both east and west of the Rockies, to
California and to the Midwest. We think this is a significant
advantage that should not be overlooked.
With respect to routing, we think that broad stakeholder
interests are served by two pipes, one to move Mackenzie gas
down through Canada and through our systems into our North
American markets and the other to move Alaska gas; and this is
what TransCanada as proposed for several years now.
TransCanada and Foothills have been essential to developing
the transportation infrastructure for northern gas for almost
30 years. This is not a new project for us. This is something
that we are prepared to proceed with and implement in the most
expeditious way. We have never wavered in our belief that both
Alaska and Mackenzie natural gas will be needed by the North
American economy. We have patiently maintained both Alaska and
Canadian transportation projects, and we do intend to play a
central role in developing the most efficient way to move
northern gas to market.
Thank you again for allowing me the opportunity to present
my views this morning.
[The prepared statement of Harold N. Kvisle follows:]
Prepared Statement of Hal Kvisle, President and CEO, TransCanada
Corporation
introduction
Good morning, Chairman Tauzin, Congressman Barton, Members of the
Committee. My name is Hal Kvisle. I am the President and CEO of
TransCanada Corporation (TransCanada). Last month, TransCanada
announced the purchase of the remaining share of Foothills Pipe Lines
Ltd. (Foothills) it did not already own. Once Canadian Government
approvals required for the transaction are in hand, TransCanada will
own 100% of Foothills. TransCanada and Foothills have a longstanding
interest in the development of northern gas and welcome the opportunity
to participate in this proceeding.
Foothills is the owner of the Canadian section of the Alaska
Natural Gas Transportation System (ANGTS or Alaska Highway Pipeline)
and joint owner with TransCanada of the Alaskan segment. Foothills
holds the certificates awarded by the Government of Canada to construct
the Canadian portion of the Alaska Highway natural gas pipeline
project. The Prebuild portion of the ANGTS was constructed in the early
1980's to transport surplus Canadian gas to the United States. The
Prebuild pipeline has been expanded several times over the past 20
years. It currently has assets of US$1 billion, a total capacity of 3.3
Bcf/d and it transports approximately 30% of total Canadian gas exports
to the United States.
Foothills' eastern leg runs from central Alberta eastward to a
point on the Canada/U.S. border where it interconnects with Northern
Border Pipeline Company to serve gas markets in the Midwest. Foothills'
western leg extends from central Alberta to a point on the Canada/U.S.
border where it interconnects with Pacific Gas Transmission to serve
gas markets in California and the Pacific Northwest.
TransCanada is a leading North American energy company. It owns one
of the largest natural gas transmission systems in the world--over
24,000 miles and has operations and facilities extending across Canada
and into the northern United States. TransCanada transports
approximately 75% (5 tcf/year) of western Canada's natural gas
production to markets across North America. TransCanada also manages or
controls more than 4,100 MW of electric generation in Canada and the
United States.
TransCanada is headquartered in Calgary, Alberta, Canada. Its
shares trade on the Toronto and New York Stock Exchanges. TransCanada
has 2,400 employees and total assets of US$14 billion. Our 2002 net
income was approximately US$500 million.
assessment of overall north american supply and demand
TransCanada expects the growth in natural gas demand in North
America to outpace supply from traditional gas sources over the next
decade necessitating new gas supply from frontier basins. We believe
that natural gas from the Mackenzie Delta in Canada's north, Prudhoe
Bay gas from Alaska and liquefied natural gas (LNG) are all required in
the next decade if North America is to have acceptable gas prices.
Natural Gas Demand
TransCanada forecasts total demand in the U.S. and Canada to grow
by 18 Bcf/d in the ten-year period from 2002 to 2012. The adjacent
chart highlights Canadian growth of approximately 3.7 Bcf/d or almost
50% over this timeframe. This dramatic growth in Canadian gas demand
will require new supply sources to permit western Canadian gas to
continue to serve its traditional markets. The three U.S. regions that
are served by Canadian gas exports will increase their gas demand by
7.6 Bcf/d or approximately 25% in this same timeframe. The remaining 7
Bcf/d of demand growth will occur in the southern United States.
The significant growth in Canadian gas demand is focused on western
Canada and is primarily driven by substantial industrial demand growth
in Alberta from oilsands and heavy oil development. This chart
highlights the components of Alberta gas demand over the next decade.
The Alberta oilsands have recoverable reserves of 315 billion
barrels. Oil production from the oilsands is expected to grow
dramatically over the next decade. This increase in oil production will
replace declining conventional oil production in Canada and provide a
secure and growing source of oil for North American markets in the long
term. The oilsands produced 0.8 million barrels per day in 2002. This
production is expected to nearly triple to 2.3 million barrels per day
by 2015.
Achieving this increased oil production, however, is an energy-
intensive process. It will consume approximately 1.5 Bcf/d of
additional natural gas to extract the oil from the oilsands, produce
in-situ heavy oil reserves and provide the necessary electricity
generation for that region. The adjacent map illustrates the current,
or expected new oil sands or heavy oil sites in northeastern Alberta
near Fort McMurray over the next decade. Many of these new projects are
producing or under construction.
There are several critical uncertainties that would affect our
forecast of North American natural gas demand. Long-term growth rates
of the U.S. and Canadian economies, the level of oil prices, and the
relative price of natural gas to other fuels could all have a
significant impact on natural gas demand over the next decade. The
current uncertainties in the power sector, the effect of environmental
policies such as the Kyoto Protocol in Canada and the conventional
natural gas supply response will also affect gas prices and demand.
Supply
Currently, there are some concerns that inadequate natural gas
supply could cause sustained high gas prices and negatively impact the
North American economy over the long term. TransCanada expects that gas
supply from traditional U.S. and Canadian natural gas sources will grow
by approximately 5 Bcf/d from 2002 through 2012, leaving a gap of more
than 13 Bcf/day to be filled by new sources of supply. Without new gas
resources, natural gas prices could be expected to rise high enough to
restrict gas demand, thereby balancing the market. We forecast both
sources of Arctic gas coming on-stream by 2012--Mackenzie Delta gas
from northern Canada in late 2008 and Prudhoe Bay gas from Alaska in
late 2011. Significant new LNG will also be required; beyond the
capacities of the existing four LNG terminals.
The chart above indicates that the Rockies, the Gulf Coast and the
Western Canadian Sedimentary Basin (WCSB) are the only traditional
exploration basins expected to increase their gas supply over the next
decade. The relative growth in the Rockies is significant, with much
more modest growth rates in the Gulf Coast and western Canada. More
than 5 Bcf/d from northern Canada and Alaska is required by 2012, as
well as an additional 7 Bcf/d of LNG to balance the market and bring
gas prices back to US$4.00 per MMbtu and keep them in that range.
Western Canadian gas production increased more than 50% in the
1990's, but has leveled off post-2000 despite a significant increase in
wells drilled and connected. More than 10,000 wells are expected to be
drilled per year going forward to allow western Canada to maintain and
modestly increase its natural gas production. The increasing maturity
of the basin and the annual depletion of approximately 3.5 Bcf/d
necessitates high levels of drilling each year. This same situation
exists in the Lower 48 gas basins.
The modest increase of 1.2 Bcf/d in western Canadian production
from 2002 to 2012 is clearly insufficient to meet the expected growth
in Canadian gas demand of some 3.7 Bcf/d over this period, let alone
provide any additional supply to meet U.S. demand. Natural gas
production from conventional sources in western Canada is at, or is
approaching, its peak and is forecast to begin a significant decline
within a decade.
Unconventional sources, primarily coal bed methane, are projected
to begin to make a contribution to western Canadian gas supply over the
next 10-15 years. Unconventional supply from western Canada should be
approaching 2 Bcf/d by the time that Alaskan gas is in-service. Gas
from Canada's North will be available this decade to partially meet the
growth in demand in western Canada.
Natural gas production from Canada's East Coast near Sable Island
has currently plateaued at approximately 0.5 Bcf/d. Our projections
have this growing to nearly 1 Bcf/d by 2010. Significant uncertainties
in the near term exist with regards to the specific timing of new
production from Canada's East Coast.
Total natural gas supply from traditional sources in Canada and the
United States will be insufficient to meet projected growth in gas
demand, in our view. Natural gas from frontier basins in Alaska and
Canada's north are required within a decade to supplement new LNG
supplies to ensure North America has competitively priced natural gas.
alaska gas project
In the late 1970's, Canada and the United States signed an
Agreement on Principles (a ``treaty'') to govern relations between the
two countries for the transportation of Alaskan gas to market. After a
protracted competitive regulatory process, the Government of Canada
passed into law the Northern Pipeline Act to effect the terms of this
treaty. The Northern Pipeline Act awarded Foothills Pipe Lines Ltd. the
certificate for the construction of the Canadian portion of the Alaska
Natural Gas Transportation System along the Alaska Highway. The
Canadian Government also established the Northern Pipeline Agency as a
single window regulatory body to oversee the construction of the
pipeline in Canada. Changes in the North American natural gas supply/
demand balance postponed actual construction of the pipeline from
Alaska.
Over the past 25 years, the governments of Canada and the United
States have maintained the pipeline treaty. The Government of Canada
and Foothills have maintained Foothills' certificate to construct the
Canadian portion of the pipeline. The Northern Pipeline Agency
continues as the regulatory body to oversee the construction in Canada.
Foothills' certificates to transport Alaskan gas across Canada remain
valid today. Foothills pipeline through Canada can connect to a
pipeline in the State of Alaska constructed under the Alaska Natural
Gas Transportation Act or other U.S. legislation.
In 1981/82, Foothills used its certificate to construct the
Prebuild pipeline to transport available Canadian gas to U.S. markets
in advance of the startup of Alaskan gas. Utilization of the Foothills
system through Canada under the Northern Pipeline Act provides
regulatory structure and certainty for Alaskan gas, as no new
legislation or regulations are needed in Canada. It is the most
expeditious and preferred means to advance the Alaska pipeline project
within and across Canada.
The Foothills Prebuild system is integrated with the existing
western Canadian pipeline grid. Construction of the Alaska project in
Canada under the Northern Pipeline Act will ensure utilization and
optimization of existing infrastructure, and provide market diversity
for Alaskan gas east and west of the Rocky Mountains. The Canadian gas
infrastructure currently has approximately 2 Bcf/d of spare capacity,
and we forecast there will be significant spare pipeline capacity at
the time Alaskan gas is delivered to market. The Alaska project is
expected to initially transport 4.5 Bcf/d. Integration of the project
into the existing infrastructure will reduce the capital costs and cost
overrun risks for a new project, reduce regulatory risks and minimize
environmental and other societal impacts. All of these benefits are
available for Alaskan gas by using the existing Canada/U.S. treaty,
existing Canadian legislation (the Northern Pipeline Act) and
integration via Foothills with the existing North American pipeline
grid.
As is evident from our supply/demand testimony, Foothills and
TransCanada believe that Alaskan gas is needed soon to meet North
American gas demand. We believe that using the Foothills system under
the Northern Pipeline Act in Canada will expedite the Alaska project,
avoid a new round of negotiations between the U.S. and Canada and
provide maximum benefits to both countries.
Routing
With respect to overall northern natural gas development, Foothills
and TransCanada believe that broad stakeholder interests are best
served by a two-pipeline solution to move Mackenzie Delta and Prudhoe
Bay natural gas to market through two separate pipelines. TransCanada
has been actively engaged to make a stand-alone Mackenzie Valley
pipeline a reality. The Mackenzie Valley pipeline proponents are
expected to file a preliminary information package with Canadian
regulators soon, with a formal application to follow late this year.
Based on our own in-depth engineering study, TransCanada's and
Foothills--assessment is that the Alaska Highway route continues to be
the most economic, least risky and most timely route to transport
Alaskan gas to market. An over-the-top route has serious,
uncontrollable weather risks, technology and environmental issues, all
without a cost advantage. The Prudhoe producers also concluded one year
ago that the capital cost for an Alaska Highway route was approximately
the same as an over-the-top route. With the over-the-top risk issues,
the Canadian certification for the Alaska Highway route in hand, and
the State of Alaska opposing an over-the-top route, TransCanada and
Foothills do not consider over-the-top as a viable route option.
The Mackenzie Valley project is proceeding on its own at this time
and is currently on target for an in-service date of late 2008. Gas
from Prudhoe Bay could be delivered to U.S. markets via the Alaska
Highway pipeline by late 2011. The market has chosen the two-pipeline
strategy.
conclusions
Conventional sources of natural gas are not expected to be
sufficient to meet expected growth in natural gas demand in North
America over the next decade. Either new gas sources must be connected,
or alternative fuels at competitive prices must be proven quickly, or
gas prices will rise to mute demand growth. TransCanada and Foothills
believe that the frontier gas sources already discovered in northern
Canada and Alaska can be connected on competitive terms in this
timeframe to meet market demands. Construction of two pipelines from
Alaska and northern Canada will spur additional exploration for natural
gas in those regions. This will provide additional supply for North
American consumers, beyond the already substantial proven Arctic gas
reserves.
Mackenzie Delta gas is expected to be in-service in approximately
five years. This gas will primarily serve growing demand in western
Canada and will therefore permit conventional western Canadian gas to
serve its traditional markets in Canada and the U.S. Alaskan gas can be
in-service by 2011 by moving along the Alaska Highway and across Canada
under the existing Canada/U.S. treaty and the Northern Pipeline Act
using the Foothills system. Significant benefits are available by
integration with the existing North American pipeline grid in Alberta.
TransCanada and Foothills have been engaged in developing the
transportation infrastructure for northern gas for almost thirty years.
We have never wavered in our belief that both Alaskan and Mackenzie
natural gas will be needed by the North American economy. TransCanada
and Foothills have patiently maintained, since the 1970's, both the
Alaskan and Canadian transportation projects and clearly intend to
continue to play a central role in developing the most efficient
transportation system for northern gas.
Thank you for this opportunity to present our views on the North
American supply and demand picture and, particularly, northern gas from
the Canadian Arctic and Alaska.
Chairman Tauzin. Thank you very much, Mr. Kvisle.
Now, finally, Dr. Jeffery Currie, Managing Director of
Goldman, Sachs of New York, New York, to give us the financial
perspective on this looming crisis.
Mr. Currie.
STATEMENT OF JEFFREY R. CURRIE
Mr. Currie. Thank you, Mr. Chairman and members of the
committee, for this opportunity to testify before you today
about the short-term and long-term issues surrounding the U.S.
natural gas market. I am a Managing Director at Goldman, Sachs
where I am the senior energy economist, but I want to emphasize
that the views presented here today are my own and do not
represent the views of Goldman, Sachs.
The core problem with the U.S. natural gas market is
inadequate infrastructure. This makes the current shortage very
different from a normal cyclical shortage and will require much
more dramatic action than simply allowing the markets to
function.
Although the public attention has been focused on the
ability to grow natural supply in the current environment,
however, the underlying shortages in storage and transportation
are the primary constraints on both supply and demand growth.
The infrastructure in natural gas is so depleted that much of
the adjustment has been and will continue to be in demand. The
reason for this is that demand is the quicker and lower cost
margin of adjustment, not supply.
Another way to view this is that destroying demand is much
faster and cheaper than building expensive pipelines with long
lead times. As a result, price spikes typically lead to demand
destruction, not new supply. The demand destruction, in turn,
creates dramatic price declines and, hence, the price
volatility that we currently see today.
However, the much-needed investment in new infrastructure
is ultimately discouraged by the increasing risky price
environment in the core returns on these assets. Demand
destruction is not a long-term solution to the problem.
Shortages will develop again once demand recovers and create
subsequent pricing spikes.
What we have on our hands right here is a vicious cycle
that continues to repeat itself. But not only do these
infrastructure constraints restrict demand growth, they also
restrict the ability to grow supply. What this suggests is that
solving the basic supply problem will not in itself solve the
deliverability problems currently facing the natural gas
market.
The basic supply question of whether to open up areas of
drilling or depend upon LNG is a very important long-term
issue, and I do not want to dismiss it. However, in the current
environment, even if there was significant surplus gas, and
there is surplus gas in the Rocky Mountains, the market doesn't
possess the pipeline capacity to transport it. And even if it
had the pipeline capacity to transport it, the market lacks the
storage capacity to store it.
To demonstrate the critical importance these infrastructure
constraints play, let's review the winter and summer of 2001.
That winter severe shortages developed from a combination of
cold weather and a lack of supply. Once inventories were
exhausted, physical shortages turned critical. This resulted in
a massive price spike to $10 that destroyed price-sensitive
industrial demand to make room for heating demand. The loss to
industrial demand was massive, a 20 percent permanent decline
that resulted in the loss of at least 200,000 manufacturing
jobs.
The price spike also triggered a modest supply response
which then, combined with the sharp drop in industrial demand,
created a very large surplus in gas that took only 6 months to
completely overwhelm the entire U.S. natural gas
infrastructure.
By the end of summer of 2001 surplus gas had nowhere to go.
Gas prices collapsed to under $2, and ultimately production had
to be shut in.
So the broader question really becomes, why is the
infrastructure so inadequate? The answer in its simplest form
is that investing in energy infrastructure is distinctly
unprofitable. A combination of regulation, taxes, and direct
market intervention has made the return on capital in the
energy industry a break-even proposition at best.
In 2001, a period of record high gas prices and record high
equity evaluations, the entire gas industry--supply,
transmission, and distribution--was actually valued at only 73
percent of the total cash invested. It is no wonder the capital
markets have responded by not providing the capital to expand,
and the net result is the capacity constraints that you see
today.
The paradox of all this is that the underinvestment in
infrastructure by the market is the correct economic outcome,
given these poor rates of return. The best use of capital is in
other industries where rates of return are higher. As the
market solution is not concerned with volatility but rather
with the expected rate of return, the market fails to generate
the excess capacity or reserve capacity that is required to
lower the price volatility. What this suggests is that
transportation and storage assets should be viewed as public
goods and treated just like a freeway or toll road.
The key policy aim in this context should be to create
excess capacity that the market fails to generate. Such a
policy would dramatically reduce price volatility, investment
risk and create a more conducive environment for demand and
growth.
That concludes my remarks, and thank you very much for your
time to present my views.
[The prepared statement of Jeffrey R. Currie follows:]
Prepared Statement of Jeffrey R. Currie, Managing Director, Goldman,
Sachs & Co.
Mr. Chairman and Members of the Committee, thank you for the
opportunity to testify before you today about the short-term and long-
term issues surrounding the natural gas market.
My name is Jeffrey Currie. I am a Managing Director of Goldman
Sachs, where I am the Senior Energy Economist. The views presented here
today are my own and do not necessarily reflect the views of Goldman,
Sachs & Co.
The current shortage in the natural gas market is quite different
from a normal cyclical shortage, and more dramatic action than simply
allowing the market to function will be necessary to address the core
problem, which is significant underinvestment in basic infrastructure.
Public attention has been focused on the ability to grow natural gas
supply. However, in this case, the underlying shortages in storage and
transportation are the primary constraint on both supply and demand
growth.
The infrastructure in natural gas is so depleted that much of the
adjustment has been and will continue to be in demand. Since demand is
the quicker and lower-cost margin of adjustment, rather than supply,
price spikes are likely to lead to demand destruction, which will
quickly result in dramatic price declines. The much-needed investment
in new infrastructure, however, has been and continues to be
discouraged by poor returns that are exacerbated by an increasingly
risky price environment. Since demand adjustments are not a long-term
solution to the problem, shortages will develop again once demand
recovers, creating a subsequent spike in prices.
Further, these shortages in basic underlying infrastructure have
prevented efficient use of existing supplies and efficient development
of new supplies, which suggests that solving the basic supply problem
will not, by itself, resolve the deliverability problems currently
facing the natural gas market. The basic supply question of whether to
open up areas to drilling or depend on LNG imports is a very important
long-term issue. However, due to the current infrastructure
constraints, even if there were significant surplus domestic natural
gas (and there is in the Rockies), the market doesn't possess the
pipeline capacity to transport it; and even if there were adequate
pipeline capacity to transport this gas, which there is not, the market
lacks the capacity to store it. Similar operational constraints also
apply to potential LNG imports.
As a case study, the winter and summer of 2001 demonstrate the
economic impact of constraints on storage and pipeline capacity. That
winter, severe shortages developed from a combination of cold weather
and a lack of supply. Once inventories were exhausted, physical
shortages turned critical, resulting in a massive price spike to
$10.00/mmBtu that destroyed price-sensitive industrial demand to make
room for essential heating demand. The loss in industrial demand was
massive: a 20% permanent decline that resulted in the loss of at least
200 thousand manufacturing jobs (see Exhibit 1). Yet, the price spike
also triggered a modest supply response, which when combined with the
sharp drop in industrial demand, created a very large surplus of gas
that took only six months to completely overwhelm the entire US natural
gas infrastructure. By the end of the summer of 2001, surplus gas had
nowhere to go, gas prices collapsed to under $2.00/mmBtu, and
ultimately production had to be shut in (see Exhibit 2).
The reason for this rapid reversal is straightforward economics--
the industry did not possess the infrastructure to store or transport
the surplus gas for a future supply shortage. When another shortage
occurred only a year later in the winter of 2002/2003, the market had
insufficient inventories to handle it. Looking forward from today, even
if the industry filled storage to capacity by the end of this October,
the inventory would still only cover 75% of all potential winter
outcomes, leaving the market with a 25% chance of running into severe
shortages before the end of next winter even under an improved supply
outlook.
lack of storage capacity is the key determinant of natural gas price
volatility
These experiences of the last couple of years show that storage
capacity is the key determinant of natural gas price volatility.
Storage capacity provides the system with a buffer to supply and demand
shocks by allowing it to run surpluses and deficits that smooth the
normal cyclical swings in prices. As storage capacity has failed to
keep pace with growth in demand over the past two decades, this buffer
has shrunk relative to the size of the market, resulting in chronically
higher-than-normal price volatility.
In the 1980s, we had about 1,400 bcf of storage beyond that which
is necessary to operate the system and deal with winter demand swings.
This storage represented about 26 days of forward consumption, a
significant shock absorber that generated relatively stable natural gas
prices. Today, we have only 330 bcf of storage beyond what is necessary
to run the system, which at today's higher demand levels is only 6 days
of forward consumption. In response, price volatility has exploded to
nearly three times the historical average (see Exhibit 3). Thus, fairly
small deficits or surpluses will cause the market to move from full to
empty and from $2 to $10/mmBtu or back in a relatively short amount of
time.
poor rates of returns have resulted in underinvestment in
infrastructure
The broader question is, ``Why has storage capacity and related
infrastructure failed to keep pace with demand?'' The answer in its
simplest form is that a combination of regulation, taxes, and direct
market intervention have made the return on capital in the energy
industry a breakeven proposition at best and have made investing in the
downstream (transportation, storage and other aspects of the
infrastructure) distinctly unprofitable. The market has responded by
not providing the capital to expand, and the net result is the capacity
constraints that you see today.
If you look at the industry as a whole during 2001, a year which
posted the highest annual gas prices on record, and saw historically
high energy equity valuations during the 1H2001, the industry was not
even valued at the cash that had been invested into it, hardly a
compelling return. Worse, if we exclude the super majors, the rest of
the gas supply, transmission, and distribution industry was actually
valued at only 73% of the cash invested (see Exhibit 4). It is hardly
surprising that the market has not supplied sufficient additional
capital to meet current demands.
If we look deeper into the numbers, the lack of investment in basic
core infrastructure (storage and transportation) becomes even clearer.
E&P, the drilling part of the business, has earned a 5.6% return on
assets on average over the last three years, while distribution and
transmission, the infrastructure part of the industry, has earned only
a 2.4% return on assets (see Exhibit 5). This return on assets for
downstream companies is considerably below the 5.0% return on assets
earned by the broader S&P 500 index in the second half of the 1990s.
The reality of modern capital markets is that only industries with
significant positive returns on cash invested above the cost of capital
attract new capital. If you compare return on cash invested across
industries over the last decade for companies in the S&P 500, the
reason for today's energy shortages become quite transparent. Utilities
and energy companies managed to produce slightly less than a 9% return
on cash invested while the rest of the market produced returns on cash
invested of 12.5% and above (see Exhibit 6). It is hardly surprising
that most of the investment activity has occurred elsewhere, stressing
our energy infrastructure to its limits.
controlled ``deregulation'' increases risks on poor returns
Worse, the risks associated with these poor returns have increased
significantly since the mid-1990s due to ``deregulation'' and
``environmental rules.'' Clearly, the introduction of competition over
the last decade has increased the risks associated with investments in
energy infrastructure. In natural gas storage and transmission,
controlled deregulation as opposed to true competition has dramatically
increased risks (primarily volume risks). However, the rates of return
on these assets have not risen over the last decade to compensate for
the higher risks. Rather, the rates of return have fallen, which makes
the situation worse on a risk-adjusted basis. Further, following
``deregulation,'' the rates of return were supported primarily through
cost reduction, as the emphasis in the industry shifted from
reliability to efficiency, i.e. through getting rid of the excess. This
is all too apparent in the drop in transmission and gathering pipeline
capacity that was deemed ``excess'' during the 1990s (see Exhibit 7).
To internalize these risks, the industry in the past has relied
upon long-term forward contracts or some form of vertical integration.
Current regulations, however, discourage both of these forms of risk
management, as the emphasis is placed on the use of spot prices and the
transparency they provide to both consumers and producers. This spot
price transparency is very effective in providing market signals for
efficient drilling and consumption patterns, which are relatively low-
capital intensive activities. However, for more capital intensive and
longer lead-time activities, such as building infrastructure, a spot
market price signal is a lagging indicator of an investment that should
have already been made. Instead, forward contracts of sufficiently long
duration are needed to internalize the risks and induce the needed
investment in advance of shortages. Further, current regulations
require any long-term contracts to build infrastructure to have such a
high subscription rate, near 80%, that excess capacity will rarely be
built, which reinforces the underinvestment problem.
policy needs to create reserve capacity that market forces are failing
to generate
The paradox of the current situation is that the underinvestment in
infrastructure by the market is the correct economic outcome given the
poor rates of return, as the best use of capital is in other industries
where the rates of return are higher. The market solution is not
concerned with volatility, but rather the expected rate of return. This
solution only leads to new infrastructure when it is absolutely needed,
which is usually too late. Just look at the only large infrastructure
projects of the last several years--the Alliance, Kern River, and Gulf
Stream pipelines--projects brought about by extreme pricing.
However, reserve or excess capacity should be viewed as a public
good, just like a road, where markets fail to find a solution. This
inability of the market to provide adequate incentives for investment
in reserve infrastructure is where the market fails and why more
dramatic action is required. Further, the current market and regulatory
structure reinforces this price volatility as it emphasizes efficiency
over reliability. Accordingly, the aim of policy should be to reduce
the price volatility through creating excess capacity without
significantly sacrificing the efficiency and transparency of a market-
based system.
Forcing excess capacity through regulation has not been met with
much success in the past. Before the 1980s, regulatory practices
emphasized reliability by requiring pipeline companies to demonstrate
sufficient capacity to serve additional customers before projects would
be approved. To internalize the risks of such ambitious projects, 30-
year long-term contracts with regulated price caps were often used.
These price caps were fixed and ultimately led to significant market
distortions, as the market could not clear properly. The stranded costs
generated during this regulatory period have been estimated at $80
billion in 2002 dollars.
Interestingly, the costs to consumers due to increased volatility
in the post-``deregulation'' period are not much smaller. Since 1995,
these costs, measured as the cumulative difference between the price
paid and marginal cost of production is near $75 billion in 2002
dollars, nearly the same as stranded costs generated from the
regulatory period, and this does not include the costs of the
California crisis and the long-term loss of manufacturing activity.
Further, with the cost of an arctic pipeline estimated at $10 billion,
these costs would have paid for new infrastructure and then some.
What this suggests is that transportation and storage assets may be
thought of as public goods and could be treated just like a freeway or
toll road. The US energy consumer would have most likely been made
better off had the government taxed natural gas prices and used the
proceeds to build infrastructure, just as it taxes gasoline to build
roads. The key issue is to create excess capacity that market forces
are failing to generate. This would dramatically reduce price
volatility, investment risk, and create a more conducive environment
for demand growth.
the lack of infrastructure is a limiting factor on economic growth.
Energy is rapidly becoming a major limiting factor on economic
growth. If the core energy infrastructure in the United States does not
improve, energy crises are likely to become progressively more
frequent, more severe, and more disruptive of economic activity.
Without significant new investment, each crisis further damages the
system by permanently destroying the price-sensitive demand that serves
as a pressure valve and by giving companies incentives to stress
existing facilities to meet excess demand, leading to accidents and
capacity losses.
The long-term consequences of either allowing infrastructure to
remain inadequate or sacrificing environmental concerns in the name of
economic expediency are unacceptable. Finding a ``workable'' solution
will require imagination and flexibility from both a market and policy
perspective. Economic solutions depend on diversification of risk and
flexibility of response, both of which are lacking under the current
market and regulatory structure.
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Chairman Tauzin. Thank you very much.
The Chair recognizes himself for 5 minutes for the purpose
of questions.
I have in my hand a story by the Reuters news service today
in which it details how the Energy Secretary Spence Abraham is
literally scheduling an emergency meeting on June 26th to
consider ways to conserve in this critical area. So the
Department of Energy is obviously very concerned, Mr. Caruso,
when your boss is scheduling this kind of a deal.
Then, Mr. Mason, I look at your testimony, and I want to
quote from it. It is a pretty strong message. You say,
therefore, my message to home owners and renters is the
conservation of energy can only have a marginal impact on their
natural gas bills. In effect, the residential consumers have
already, at least in your State, done the bulk of the
conservation methods they can achieve. Is that correct?
Mr. Mason. Thank you, Chairman, Members of Congress.
It is my belief, based on the fact there was a serious 5
percent drop over the last 2 years when, on a normal cycle
basis, there would be a half percent efficiency gained. So I
think people took serious steps already. That doesn't mean
other things can't be scrutinized.
Chairman Tauzin. But you are basically saying the bulk of
it has already been done. We are about to have an emergency
conference on what else we can do to conserve. You are telling
us, at least from Ohio, we have done most of that already.
Mr. Mason. Congressman, I am stating from the residential
standpoint, which is only about 25, 26 percent of the total gas
load.
Chairman Tauzin. So then we turn back to Mr. Caruso, and we
note that you give us a hopeful message that you think we can
ride this out. But, in the extreme, if we have abnormally low
temperatures and the economy does begin to pick up and demand
increases, we could have some problems, couldn't we?
Mr. Caruso. Definitely. Mr. Chairman, that is the reason I
mentioned that markets are not only tight but the potential for
volatility remains high with weather or other unusual
circumstances.
Chairman Tauzin. Unforeseen circumstances. You also say in
your statement, in the current environment companies will need
to obtain large amounts of natural gas from other sources to
refill storage for the next heating season. What do you mean
``from other sources?''
Mr. Caruso. Well, on the supply side, although we have
heard from our Canadian colleague that that may be difficult,
we certainly need to increase our imports from both Canada and,
to the extent possible, limited ability for LNG. But the other
side of that is the destruction of the demand which has been
mentioned by several witnesses.
Chairman Tauzin. That is the other side. But if we are
limited to other sources, we also face very limited options
there, don't we? We face limited options in liquid natural gas
imports to this country; we face limited options in terms of
Canadian imports. Is that right, Mr. Kvisle? Right now, until
we have new infrastructure, Mr. Currie, to permit delivery, we
could be in some pretty tight spots, couldn't we?
Mr. Caruso. Yes, sir.
Chairman Tauzin. It is not just the homeowner and the
consumer. Now we are looking at serious concerns for the farm
community.
I want to quote from your testimony, Mr. Liuzzi: High
natural gas prices present the most serious threat to the
fertilizer sector and to farmers in general since the energy
shocks of the 1970's. That is a pretty strong statement. I
remember those energy shocks in the 1970's. In fact, I was
elected to Congress in 1980 to come and hopefully straighten
out the Federal policy that resulted from that.
What resulted from that was the Federal Government trying
to control the price of natural gas through government fiat. We
ended up with the worst disruptions of the natural gas markets
this country has ever seen.
My concern is, are we building another problem like that?
Are we going to face a situation where, because everyone wants
natural gas to make electricity, it is the most environmentally
popular source of fuel for electricity, homeowners will start
seeing their fuel bills go up, shortages could develop
depending upon weather conditions that we can't predict, and
all of a sudden, you know, we can't get it fast enough? We
can't blame Canada this time like the kids from South Park did.
Canada is trying to get gas to us to the extent they can.
So we are left with a situation where even our fertilizer
manufacturers are telling us we might not have the natural gas
critical to the raw material production of essential
fertilizers to the farm community and imports can't satisfy
some of that demand because of critical infrastructure problems
again in ports and distribution systems. Are we building
another case where we are going to be debating Federal price
controls again?
Can anyone give us a better answer, any one of you out
there? Mr. Kvisle.
Mr. Kvisle. I would offer a couple of comments.
First of all, in the near term there is virtually nothing
that can be done to significantly increase the supply of
natural gas. This is a multi-year process. And the big
projects, whether it is LNG importation or natural gas from the
north, will----
Chairman Tauzin. Or gasification of coal, which my friend
from----
Mr. Kvisle. These are all 5, 10 years. So the near-term
market balancing mechanism, as Dr. Currie said, will in fact
demand destruction.
I have great sympathy for people in industries like
fertilizer, but it is the reality of what will balance the
market in the near term. There is not just an infrastructure
problem from Canada. We have supplied 50 percent of your
incremental gas in the past 10 years, and our industry is now
running flat out. There is not much more production increase
available.
Chairman Tauzin. So, to summarize it, short term we got
very limited options. All we can do is press conservation as
tough as we can in many circles. Long term, we need some policy
to get supply back and infrastructure developed to make sure
people can use it. We need to, long term, think about an
alternative sources for natural gas in the marketplace; and so
I yield to my friend from coal country for a discussion of that
subject.
Mr. Boucher. Thank you, Mr. Chairman.
Mr. Caruso, I have several questions of you concerning the
very enlightening testimony you have presented this morning.
Among other things, you are projecting an increase in natural
gas consumption by electricity generators from 5.3 trillion
cubic feet in 2001 to 10.4 trillion cubic feet by 2025. In
preparing that projection, what is your assumption about the
number of new electricity generating plants that will be
constructed between now and 2025 and how many of those new
plants do you anticipate will be fueled with natural gas?
Mr. Caruso. Our Outlook calls for almost 450 gigawatts of
new capacity to be built between now and 2025. Of that, 80
percent is assumed to be natural gas-fired; and the largest of
the remainder would be coal. Then there is a relatively small
amount that would be wind-generation and other sources of
renewable energy. That is on the assumption, of course, that,
as I mentioned in the testimony, that prices for natural gas do
retreat from these high levels we are seeing this year; and we
see them continuing probably for 2 or 3 years. But the
increased availability of gas from our unconventional sources
does bring that price back into the $3 to $4 per million BTU
range, a critical assumption in reaching conclusion that 80
percent of our new electric power plants will be fueled by
natural gas.
Mr. Boucher. Okay. You are also predicting that coal prices
during the course of that period will decline. But you are
saying that, even with falling coal prices, natural gas is
going to continue to enjoy an advantage.
I wonder if you have taken a look at the provisions in the
Senate version of the energy bill that extends a range of tax
credits, production tax credits and investment tax credits, to
electric utilities that use a new generation of clean coal
technology? The information we have had from the utilities is
that the level of tax credit afforded by the Senate bill would
encourage a large number of them to use coal instead of natural
gas in their new generating units. I wonder if you have taken
any independent look at that and, if you have, if you could
share it with us.
Mr. Caruso. We haven't actually looked at that particular
provision, but we certainly would be willing to do that, sir,
if you would so desire.
Mr. Boucher. If we ask for it. Thank you.
Let me ask you also about the statement that you made on
page 17 where you predict that increased U.S. gas production
through 2025 will come from unconventional sources and also
from Alaska. Two basic questions about that.
First of all, what kind of assumptions are you making about
Alaska gas? We have had a lot of testimony concerning it here
this morning. Are you assuming that a new pipeline will be
built? And do you think that that--that this assumption that
you have made is based upon any level of government support
such as a loan guaranty or price floor with respect to natural
gas production?
Mr. Caruso. Yes, Congressman Boucher. The assumptions about
the Alaskan natural gas in our long-term Outlook are that a
pipeline will be built and, based on the outlook for prices
that I mentioned earlier, that approximately $3.50 per million
BTU price in today's dollars would be sufficient to attract
that project. The other assumption we make is that existing
policies are the basis of that judgment. There are no new
subsidies that would be included. It would come on line, based
on our latest Outlook, around the year 2020 using the route
that was mandated by law, the fact that being the State of
Alaska has prohibited the so-called northern route.
Chairman Tauzin. If I can, that was done by statute, was it
not?
Mr. Caruso. Yes.
Mr. Boucher. Let me ask you also about liquefied natural
gas imports. To what extent do you see any growth in those as
you make these projections about gas usage?
Mr. Caruso. We have LNG imports increasing to about 2
trillion cubic feet by 2025.
Mr. Boucher. What is the level today?
Mr. Caruso. It is quite low today, around 200 billion.
Mr. Boucher. So you are projecting a major increase in LNG
increase. Do you think that wise? Do you think that is good
policy?
Mr. Caruso. Well, I am not in the policy business. But to
the extent that more options are available to meet growing
needs, that makes the market more robust and less regional.
Mr. Boucher. One final question and that is, do you see a
role for coal gasification as a possible way of bringing a new
and unconventional means of gas production to the United
States?
Mr. Caruso. Our long-term Outlook has very little of that
in it at this time.
Mr. Boucher. Thank you very much, Mr. Caruso.
Chairman Tauzin. Thank you, Mr. Boucher.
The gentleman, Mr. Whitfield, is recognized I believe for 8
minutes for questions.
Mr. Whitfield. Thank you, Mr. Chairman; and I want to thank
the panel for being with us this morning and for their
testimony on this important issue.
Mr. Caruso, in your testimony you talked about in 2025 the
demand would be 35 trillion cubic feet per year; and the supply
would be in the neighborhood of 26 or so. Now, on the supply,
are you including liquefied natural gas in supply on that
supply side? In the 26 trillion cubic feet, is that including
liquefied natural gas?
Mr. Caruso. No, that would be part of net imports needed to
fill that difference between the 35 trillion cubic feet and the
26.9 of domestic production.
Mr. Whitfield. All right. Now, Mr. Liuzzi in his testimony
referred to artificially induced demand for natural gas; and I
am assuming you are talking about the Clean Air Act and other
regulatory matters, is that correct, Mr. Liuzzi?
Mr. Liuzzi. Yes, sir.
Mr. Whitfield. Do you all agree with him that there has
been an artificially induced demand for the supply of gas
through the policy of the government? Would anybody else like
to address that issue?
Mr. Kvisle. TransCanada is also a power generation company,
including here in the United States. We have used natural gas
as a fuel for power generation, but those decisions were taken
in an era where natural gas was quite inexpensive, in the $2
range. It is a different ball game when natural gas is north of
$5. I don't know that it is so much a policy inducement as just
gas was very cheap and a lot of major investments were
committed. Whether people would commit to that in an era of
higher gas price I am not certain.
Mr. Whitfield. Mr. English, would you agree with that
comment. That there is an artificially induced demand for
natural gas?
Mr. English. I am not sure I would term it ``artificial.''
There certainly is need based upon current regulations to have
an environmentally friendly source of fuel for electric
generation. But I think what we have to continue to keep in
mind is that we do need a balanced portfolio of fuels for
electric generation, and we do have an awful lot of coal in
this country, we have nuclear option that has not been fully
explored recently for a variety of reasons, lots of options out
there, that we need have some balance rather than to think that
we can depend upon just one source of fuel.
Mr. Whitfield. Well, I certainly agree with that. Like Mr.
Boucher, being from a coal area, we have such a tremendous
resource in coal. I, for one, think we need to address and look
in a new way at this environmental standard that we have in
America today.
My friend, Mr. Shimkus, here has a book with him today
which I have called The Skeptical Environmentalist, written by
a Professor Lomborg in Europe, who was Mr. Green in Europe. The
New York Times wrote a large article about his book and another
book, One Moment on the Earth, written by an environmental
writer for the New York Times. In both of those books they
question the models being used in projecting global warming.
When you talk about this issue of global warming and acid
rain, people just automatically accept arguments that are being
made by a lot of environmentalists; and I think that this book
and others are now bringing to the forefront that this is an
area that needs objectivity in analyzing some of the models
being used, particularly when you think of the impact that all
of this has on our economy.
I would also like to ask a question about jobs and
manufacturing. Do any of you feel like that we have lost a lot
of manufacturing jobs in the U.S. over the last number of years
as a direct result of this scarcity and pricing of natural gas?
Mr. Kvisle. Yes.
Mr. Whitfield. Yes.
Mr. English. Certainly we have seen the evidence of the
demand destruction just a couple of years ago has very
definitely pushed jobs out of this country.
Mr. Whitfield. When we hear about loss of manufacturing
jobs, we primarily hear about low wages in China or Mexico or
whatever and their environmental standards are not as demanding
as ours. All of this obviously fits in together. But in opening
statements this morning we heard--and I am not sure which
report was referred to--but I know our friend from Colorado and
also California referred to a recent report from the government
that said that this lack of supply of natural gas, the fact
that it is not being explored in some of our public lands
really has nothing to do with that.
I may be simplifying their comment, and I am sure Ms.
DeGette will get to it later, but there was some comment like
that. And yet you all have been testifying this morning that
you need access to at least part of these public lands. Most of
you agree with that statement, is that correct?
Ms. DeGette. Would the gentleman yield real quick?
Because, actually, they do have access to most of the
public lands. The question really is, do they--in fact, I
intend to ask that when it comes up to me. The question is not
do they need access to public lands, because even I would
agree, yes, they do. The question is, do they need access to
some of the public lands like wilderness areas or national
parks where drilling is not allowed as part of the management
plan? Because in the vast majority of public lands, oil and gas
exploration is allowed and, in fact, encouraged.
Mr. Shimkus [presiding]. Would the gentleman yield for a
second?
We are trying to get a handle on there have been a couple
of reports listed. We would like to ask a UC that these
reports, whatever is being quoted, be submitted for the record
so that we could review whether there is one report or two
reports. If you have the exact report that is being cited, any
member, if would you like to do that.
Ms. DeGette. Mr. Chairman, the report I am referring to is
a study which was prepared at the request of Congress under
provisions of the 2000 Energy Policy and Conservation Act by
the Department of Interior, which was released, I believe, in
December of 2002. I would add to the unanimous consent that
that report be made a part of the record of this proceeding.
Mr. Shimkus. Is there objection? Hearing none, so ordered.
[The report is available at http://www.doi.gov/epca/]
Mr. Shimkus. The gentleman still has a minute.
Mr. Whitfield. Mr. Otter.
Mr. Otter. I thank the gentleman for yielding.
In responding to earlier comments, I think what we need is
access to public lands where the gas is; and I think that is
the report--that is what we want to glean from the report.
Because I think, at this point at least, if I have read the
same report when I was on the Resources Committee, the report
has been grossly misquoted here this morning and way above the
12 percent that was referred to earlier.
I thank the gentleman for yielding.
Mr. Whitfield. Of course, another comment that we can make
about this, and it was referred to in your testimony, was that
even if you have access and you are able to bring on new
supplies of natural gas, being able to transport that and have
the infrastructure in place is a serious issue as well.
So, Mr. Chairman, I see my time has already expired. So
thank you.
Mr. Shimkus. I would like to thank my colleague from
Kentucky.
Now the Chair recognizes the gentleman from Michigan for 8
minutes.
Mr. Stupak. Thank you, Mr. Chairman; and thank you to some
of our witnesses. Sorry I missed some of it. I had to run off
and do a quick meeting there.
On this public lands issue, since we seem to be going back
and forth on it, can you, any of you, give us an estimate how
much natural gas you believe is tied up on Federal lands? Does
anyone have an idea, a guesstimation? Other than a bunch. No
one has an estimation. Yes, sir.
Mr. Sharples. At the risk of misquoting without numbers in
front of me, we run--there is confusion about gas that is
technologically recoverable gas that is economically
recoverable and whether or not gas is available.
As to the last point, while we heard that only 12 percent
of the lands in the West in this EPCA report are technically
off limits, which would be the parks primarily, wilderness
areas, that number goes to 40 percent if you look at areas that
are subject to significant lease restrictions. The number goes
even higher, and the study did not get to this issue, of lands
that are subject to very significant post-leasing restrictions.
Mr. Stupak. I understand all those differentiations, but
are you all saying this is off limits? But if there is not
enough gas there to go after, why worry about it then?
Mr. Sharples. My recollection is that, just looking at the
Western States, there is an excess of 200 trillion cubic feet
that is technologically recoverable.
Mr. Stupak. Two hundred trillion. How long will that take
this country in our gas consumption?
Mr. Sharples. Eight years.
Mr. Stupak. There has been a lot of discussion about new
gas coming in from Canada. It is going to take another
pipeline, I take it, to bring that gas down, correct?
Mr. Kvisle. The issue in Canada is that western Canada
produces about 17 BCF a day, and the decline rates in western
Canada are such that that is about as high as it is going to
get. You are not going to see a lot of increased production out
of western Canada. In fact, there is increased demand in
western Canada in the oil sounds so you should not count on
increased imports from there.
The only Canadian source that will be significant for you
in the near term is the McKenzie Delta, where about 1 BCF a day
will come on stream within the next 5 or 6 years, and that will
in fact flow through to U.S. markets because it is gas on the
margin.
Mr. Stupak. Would you have to build a new pipeline to get
that gas down or could you use existing infrastructure?
Mr. Kvisle. That project was first proposed 30 years ago
when a 3,500 kilometer pipeline to the U.S. was proposed.
Today, only 1,200 kilometers is required to get it to northern
Alberta where our existing systems have enough capacity to----
Mr. Stupak. To pick it up from there.
Mr. Kvisle. Yes.
Mr. Caruso. Congressman Stupak, we participated in this
study with Interior; and our estimate is that if Federal
legislation were enacted to rescind the State moratorium on
outer continental shelf development, that would add about 58
trillion cubic feet of resources. And in the Rocky Mountains,
if, again, legislation were enacted to allow greater access and
standard lease, that would add about 70 TCF to resources
available.
Mr. Stupak. Good.
Mr. Caruso were mentioning about current prices around
$5.50, near $6. You felt that it would stay that way through
this year.
Mr. Caruso. Yes, sir.
Mr. Stupak. In January, will we see a spike like we have
seen in the last couple of years?
Mr. Caruso. This morning's spot price of natural gas at
Henry Hub was $6.25 a million BTU. Our estimate is that the
average price, which, of course, is based on some longer-term
prices as well, would be between $5 and $6 per million BTUs.
However, given possible weather conditions such as a warm
summer adding to natural gas demand for electricity production
or wintertime demand for heating, we could very well see price
spikes that could reach $10 per million BTU in a given
timeframe such as 1 week or so.
The good news is most of the historical experiences with
price spikes are that they are relatively short-lived.
Mr. Stupak. What we saw in January, 2001, with the $9 was--
and it was nearly $8 last January, so you are saying January
this year could get as high as 10 and these spikes are for a
short period of time.
Mr. Caruso. Certainly a possibility.
Mr. Stupak. Is it correct to assume that most of the
natural gas used in this country is used for industrial use as
opposed to home heating use?
Mr. Caruso. The industrial use is about 35 to 40 percent of
our total use of natural gas.
Mr. Stupak. In that industrial use does that include
generating electricity?
Mr. Caruso. No, that is separate.
Mr. Stupak. How much is generation?
Mr. Caruso. Generation of electricity, excluding co-
generation, is about 24 percent.
Mr. Stupak. So, really, about 55 to 60 percent of all the
natural gas is used for industrial use, either for electric
generation or for industrial use.
Mr. Caruso. That is correct, sir.
Mr. Stupak. But about 60 percent of American homes are
heated with natural gas. Back in 1978 to 1987, Congress
restricted the use of natural gas for generation of electricity
under the Fuel Use Act. It required that power plants be
capable of generation with natural gas or coal. That law
obviously expired. Do you think it would be wise to recommend
any kind of policy like that?
It seems like we have big users of natural gas for
generation of electricity--I know we talk about other fuel,
nuclear, or someone mentioned it earlier. Should we look for
other ways to generate electricity as opposed to natural gas if
we are running into this wall of short supply since so many
homes are heated with natural gas?
Mr. Caruso. Well, the EIA is not in the policy business,
but you are correct that the 1990's witnessed an enormous
explosion of demand for natural gas for electricity generation.
We certainly expect that would continue in our long-term
forecasts under existing rules and regulations.
Mr. Stupak. But if that demand continues, there is going to
be a point in time, if you can use the word, the ``bubble'' is
going to burst here pretty quick unless you open up new areas
to drilling, which may or may not happen. And if you did that,
that is going to take time. And even if you do open up new
areas you have to build pipelines to move it and everything
else. Would it seem more practical or logical to say, hey,
let's start prioritizing who is going to be using natural gas
and we have to look at other energy alternatives to produce
electricity?
Just throwing that out if anyone cares to comment.
Mr. Mason.
Mr. Mason. Chairman, Congressman, in my prepared comments
one of the things I commented, it is the residential customer,
as you indicated, who is bound to use natural gas as his energy
source. But, in fact, many new boilers being constructed also
have dual-fuel capability so they can go to heating fuel or
even to coal. I know of two facilities in Ohio alone,
industrial, not burning natural gas because they have already
fuel shifted. You do have that kind of demand destruction when
the price goes up into the $6 range and beyond.
Now, going back to an earlier comment, we can't play down
the effect in the wintertime of peaking or spikes in gas,
because, in fact, that means it has gotten unusually cold; and,
obviously, that is when the residential customers need it for
home heating.
Mr. Stupak. Anyone else care to comment? Yes, sir.
Mr. Kvisle. I don't believe that the U.S. Government would
need to regulate or set out guidelines for how natural gas
needs to be used. I believe the market would take care of that.
But I would support your question that other sources of
electric generation should be examined and should be encouraged
and should be pursued.
I believe you also made the observation that this would
take some time, and that is correct. In the near term we have a
few options, but to use the facilities that are available to
us, a significant portion of it is gas fired.
Mr. Stupak. It seems like some of our energy policy is to
get us through next January and February, then we will worry
about it again next year. But if you are talking about energy,
you almost have to start thinking about it long term, 10 and 15
years out, if you are going to really address it.
Thank you, Mr. Chairman.
Mr. Shimkus. My colleagues will have to give me more time
if he takes more time off the clock.
Mr. Stupak. I received an extra 3 minutes because I didn't
do my opening.
Mr. Shimkus. You ran over already.
Mr. Stupak. Three minutes, not 3 seconds.
Mr. Shimkus. The Chair now recognizes my colleague, Mr.
Shadegg, for 5 minutes.
Mr. Shadegg. Thank you, Mr. Chairman.
I want to try to get further information on this issue of
available resources in the United States and the restriction of
Federal lands. In that regard, I guess, Mr. Sharples, I want to
start with you.
In your testimony, you state flatly that there is a great
deal of natural gas left in basins which we are not producing
from. You specifically referred to in the lower 48 there is an
estimated 213 trillion cubic feet of natural gas behind below
Federal lands or waters where moratoria or regulation make
exploration virtually impossible.
Ms. DeGette has already raised this issue and discussed it.
I think she makes the point that it is unlikely the Congress is
going to open up either natural parks or wilderness areas. Your
testimony does not expand on whether this supply or how much of
this supply is beneath natural parks or wilderness areas. Can
you further elucidate the committee on that point?
Mr. Sharples. I can only extrapolate on a portion of it
right now. We can certainly get you the information.
The EPCA study that has been repeatedly referred to, which
looked at only five basins in the West----
Mr. Shadegg. Is this the study that Ms. DeGette referred to
and put in the record?
Mr. Sharples. Yes, sir. About 12 percent of the lands in
that study were absolutely off limits, which in my estimation
would be parks and wilderness areas. The rest of the lands are
either subject to restrictions on leasing or restrictions on
permitting or other issues but not necessarily off limits.
As I said in my testimony, our industry is not looking for
blanket access. We are looking for a reasonable balance between
economic needs and environmental concerns. We do think, though,
there are areas which can be exploited, and those areas can be
exploited in an environmentally responsible manner. But not a
blanket access, sir.
Mr. Shadegg. But you believe that to be--I am sorry, did
you say less than 12 percent of that total?
Mr. Sharples. No. I am saying that if we just exclude the
12 percent that is parks and wilderness and don't even touch
that, of the remainder, there are certainly areas where the
resource could be exploited on an environmentally responsible
and economic basis.
Mr. Shadegg. In your testimony also, Mr. Sharples, I
believe you make a reference to two studies. You say a National
Petroleum Council study and a U.S. Department of Interior
study, both of which say that there is a tremendous amount of
natural gas available in the Rocky Mountain region that is
available and is not, as I understand it, under either national
parks or wilderness areas. Is that correct?
Mr. Sharples. Yes, sir.
Mr. Shadegg. Is this one of those two studies? This is a
natural gas--meeting the challenges of the Nation's growing
natural gas demand?
Mr. Sharples. I believe so, sir.
Mr. Shadegg. This particular study identifies, I believe,
137 trillion cubic feet in the Rocky Mountain area that is
restricted; and it also references 31 trillion cubic feet off
the east coast of the United States. Could you get for the
committee information on how much of that is in these truly
environmentally sensitive areas where no one is going to agree
to go in and explore a wilderness area or a national park
versus how much of it is restricted for other reasons?
Mr. Sharples. We will work on that for you, sir.
Mr. Shadegg. Mr. English, you testified on the same point.
Are you familiar with the study Ms. DeGette referred to?
Mr. English. No, I am not an expert on that.
Mr. Shadegg. Are you familiar with the Department of
Interior study which reached the conclusion that has these
numbers in it showing substantial resources in the Rocky
Mountains and off the east coast that are restricted?
Mr. English. I am familiar with the report.
Mr. Shadegg. Is it your belief that there are substantial
quantities there that could be obtained without either going
into national parks or going into wilderness areas?
Mr. English. I am not expert enough to answer that, either.
Mr. Shadegg. Okay. Well, if you could get us information on
that, I think it would be tremendous help to the committee. I
think there would be consensus that we are not going to go into
wilderness areas or national parks. But it seems to me if there
are unduly restrictive provisions of our other environmental
laws where the areas are not in fact as sensitive, I think we
could build a consensus around going after them; and the book
that the Chairman, Mr. Shimkus, referred to talked about the
fact that some of these supplies could be accessed.
Yes, sir.
Mr. Sharples. If I may, sir. We referred repeatedly to this
Energy Policy and Conservation Act phase one study about areas
that are----
Mr. Shadegg. EPCA you are referring to that Ms. DeGette
has?
Mr. Sharples. Yes, sir, on these five basins. I think it is
important to go beyond what this study did and look beyond just
what is technically off limits and look at the effect of post-
leasing restrictions, difficulty in acquiring permits, time
during which one is allowed to operate. Things that, because of
the relatively low margins of some of these properties,
effectively deny access and see if there are areas where
improvement is possible in that area as well.
Mr. Shadegg. Would it be your recommendation--my time has
run out. But would it be your recommendation that the Congress
order or direct that a study of all those issues be conducted?
Or are the resource information already available? Is the
information available?
Mr. Sharples. It is my personal opinion that I don't
believe the information is available.
Mr. Shadegg. So we need to take a look at that, given the
price structure and the pieces of these restrictions that cause
the price to go up.
Mr. Shimkus. The gentleman's time has expired.
The Chair recognizes my colleague from Colorado for 5
minutes.
Ms. DeGette. Thank you, Mr. Chairman.
You know, I think we are finding some common ground here.
This is great.
Mr. Sharples, in your written statement you said there were
two things the government needed to do to increase natural gas
development: one, allow greater access to certain resource-rich
Federal lands and waters that are currently closed to
exploration; and, two, create a regulatory framework that
allows and encourages exploration. But when I first read this I
thought maybe you were talking about drilling in wilderness
areas and national parks, but that is not what you are talking
about at all, is it?
Mr. Sharples. That is certainly not the major thrust of
what we are looking at.
Ms. DeGette. But I think you just told Mr. Shadegg you
don't think we should drill in those areas.
Mr. Sharples. I personally don't. If an adequate assessment
of economic benefits versus environmental issues have been
taken into account, no. I think there are a lot of other things
we can do.
Ms. DeGette. Right. And what you are really concerned about
is what you just said, which is laws and regulations and
restrictions on leases that in effect stop exploration because
they make it economically infeasible, right?
Mr. Sharples. That is correct, ma'am.
Ms. DeGette. And do you have some sense or do you know
about a study about what percentage of the public lands we are
looking at where those types of barriers exist to drilling?
Mr. Sharples. I don't believe that has been quantified. In
fact, as I mentioned, I think that a phase two of the EPCA
study that looked beyond just what is available for leasing
would be very, very valuable.
Ms. DeGette. So do we have any other information? And, by
the way, to Mr. Shadegg, the study I was referring to is a
Department of Interior study, okay?
But so what you are saying is, let us do another study
which shows what kinds of regulatory barriers are there to the
development of the other lands that should be available for
development, right?
Mr. Sharples. Yes, ma'am.
Ms. DeGette. Well, I think that is a great idea, too; and I
think, Mr. Shadegg, maybe we can work on that.
What kinds of regulatory barriers exist to development of
natural gas in areas where it would be acceptable?
Mr. Sharples. We could perhaps start--we have already
discussed whether or not you can lease and then what kind of
restrictions on operations are placed in leases. Those are
relatively easy to quantify.
Ms. DeGette. And do we have any sense about those
restrictions that are included in leases, how much development
those are stopping?
Mr. Sharples. Actually, to some extent that is addressed in
phase one of this EPCA study. What is not is extensive delays
in granting leases--excuse me, granting permits to operate,
extensive delays once the permit for an exploration well is
granted, and assuming it is successful in going on to
development.
Ms. DeGette. I hate to interrupt you. They only give us 5
minutes.
Mr. Sharples. But a lot of those kinds of technical issues.
Ms. DeGette. Right. And a lot of those barriers are due to
what Mr. English was talking about, which is insufficient
resources to the regulators who are supposed to be granting
these, right?
Mr. Sharples. Absolutely, ma'am.
Ms. DeGette. So one thing that we could really do on a
bipartisan basis that could help, that Congress could do, is
beef up resources in particular to the BLM to allow regulators
to review more quickly these leasing applications.
Mr. Sharples. We would wholeheartedly support that.
Ms. DeGette. Now, Mr. English also talks and others on the
panel talk about a lack of resources going toward
infrastructure. Let us say you go into some of these areas that
are remote. I have been to many of these areas in the Rocky
Mountains. Let us say you go in and you find a successful well.
Getting the natural gas out is also a problem, correct, Mr.
English?
Mr. English. That is true. It does----
Ms. DeGette. Can you speak up?
Mr. English. It does indeed take infrastructure to move the
natural gas from where it is found to move it to people's homes
and businesses.
Ms. DeGette. And let us say we eliminate some of the
regulatory barriers and the regulatory delays. What can we do
to speed up development of infrastructure so we can actually
remove the resources and get it into people's homes?
Mr. English. Well, certainly what has been discussed is
appropriate, that we speed up the actual regulatory process so
that those particular facilities can be sited. And certainly
the action taken by the House in order to speed up depreciation
of those investments is also a big----
Ms. DeGette. That will help with development of
infrastructure. Great.
Thank you so much, Mr. Chairman.
Mr. Shimkus. I want to thank my colleague, and I will now
recognize myself for 5 minutes. And let me start with Mr.
English.
If natural gas becomes cost prohibitive or physically
unavailable, what will the people use as an alternative?
Mr. English. Well, first of all, I don't think it is going
to become unavailable. Certainly----
Mr. Shimkus. Well, okay. Let us don't use ``unavailable.''
Let us use ``unable to deliver.''
Mr. English. Certainly, we have explored in the discussions
today the fact that, under the right circumstances, there can
indeed be scenarios where there could be shortages. All gas
distribution companies in this country have emergency
procedures that deal with those kinds of situations, because
you can never predict how cold a winter is going to be or just
what kind of problems you may face in terms of supply at any
given point in time.
So the situation is if there is a--if there is not enough
available at any given point in time, then the procedures are
such that we begin to not serve particular customers, which
generally starts out with industry and in many cases with
electric generation. The last thing on the list ends up being
homes and schools and that sort of thing. Those are the kinds
of problems we faced in the 1970's and certainly hoped that we
wouldn't have to face that kind of thing again, which is the
reason that we are here today.
Mr. Shimkus. Let me continue on. I have always spoken on
this committee about a diversified energy portfolio and the
fact that we ought to--the market will be the best means of
distributing the best fuel at the lowest price, if you don't
put external demands or, as Mr. Whitfield said, the cost of
doing business, sometimes a successive government regulation,
whether it is not able to get natural gas off of Federal lands.
Let me make a point just for clarification. Public land is
by definition multi-use. That is an important point to be made.
Public lands is multi-use land versus wilderness areas which
are defined as not being multi-use. So this whole debate about
public lands, the use of those public lands for exploration and
recovery is well within the purview of what we ought to be
doing as good public policy.
I wanted to ask Mr. Caruso. On your report, you mentioned
unconventional recovery. In fact, I lost what--I think it was
on page 17--and you talked about the increase from, I don't
know, 28 to 36 percent by 2025. That is probably not the exact
percentage. In that unconventional recovery, are you talking
about coal, coal bed methane gas?
Mr. Caruso. Yes, sir. It is not only coal bed methane but
also tight sands gas, which is a large part of the
unconventional resources and is the largest single block of new
gas resources that we have in our long-term forecast. That gets
us to the 26.7-26.8 TCF by 2025.
Mr. Shimkus. And I want to just mention that, because of
the line of questions of the ranking member and Mr. Boucher and
also my friend, Mr. Whitfield--because, obviously, in coal
States with untouched locations still available, plus old mines
that have been left, there is an opportunity there in the
extraction of coal bed methane to meet those needs.
I wanted also to go to Mr. Currie on this--just this
debate. I made a comment a few minutes ago about the market,
and I think probably you all look at the market based upon
investments. I had a new natural gas line built in my
congressional district last summer. I think the company was NI
Gas that put it in, and at great expense. Worked probably 5 or
6 months, a lot of equipment, a lot of land, and now it is in
place.
Can we in this debate talk about--when I talk about the
diversified energy portfolio, can we trust the market if we--
trying to make things as equal as possible from the cost of
doing business from the government regulatory end, to be a
better means of distributing economic growth and opportunity
and a return on the investment, should we allow the market to
determine which fuel is the best use for which use, versus what
you will hear here is an attempt for government to manipulate
and micromanage the market based upon our perception of how we
can best determine the best fuel for the best use?
Mr. Currie. I think, in terms of thinking about the market,
it doesn't care about the price volatility. It actually cares
about the expected rate of return off of these assets. And we
look at a competitive marketplace. It is just going to build
assets to just the amount that it needs to keep the system
running, which is what we are currently seeing at this point
right now. It will not build excess capacity beyond what is
required that would actually diminish the volatility. So even
if we saw the supply problem today and found all the supply and
brought it out there, as long as we have the market continuing
building the infrastructure, they are just going to build
enough to get by.
So that question really becomes, how do you incentivize the
market to build the excess or spare capacity that will actually
tame the volatility? Because, ultimately, when we see these
prices--I want to emphasize, prices were $2 or $1.80 18 months
ago, and they were $10 24 months ago. The cycle goes up and
down, but the average price has only creeped up modestly, and
the rates returns have only gone up modestly.
So when we think about the rates return, they don't care
about the volatility. The consumer, the producer cares about
the volatility. So if we want to actually incentivize that
spare capacity to take down the volatility, it is going to take
more dramatic action than simply letting the market function.
Mr. Shimkus. Is there a role for the government in that
aspect?
Mr. Currie. I can see the government playing a role, but
one of market intervention, but rather just build these
pipelines and storage facilities just like they build freeways
or toll roads. Essentially, there are--if you want the spare
capacity. If you are fine with the high level of volatility,
that is what the market will provide you with. If you want to
have the spare capacity to reduce the volatility, it will take
more dramatic action. By not advocating regulation of prices or
regulation of the market in general, it is just like building a
road and letting the market function on its own.
Mr. Shimkus. I am out of time.
I would like to now go to my colleague from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
I have a question for both Mr. Currie and also Mr. Caruso,
although anyone can chime in. What policies could States and
the Federal Government enact to encourage the needed energy
infrastructure investment, including sanctity of a long-term
contract? But if we make changes to pipeline siting policy like
we did in the energy bill for power lines at FERC, are local
obstacles reaching a level that require Federal intervention
for pipelines?
Mr. Kvisle. TransCanada and its partners have worked for 5
or 6 years to build a pipeline into the New York City region
that has been stymied by local opposition. That local
opposition is for whatever reasons, but it has proved to be a
significant barrier to the construction of pipelines like that.
I cite one example, but there are dozens of those in the United
States, and equally they exist in Canada. So I do believe that
some means of addressing this problem needs to be examined.
Mr. Green. Anyone else? I mean, I understand the New York
situation.
Mr. Currie. In general, we would argue that the
restrictions on the development of infrastructure is one of the
forces currently impeding the rates return on these assets.
Freeing up these restrictions would obviously help the matter.
But, again, I want to emphasize, the real question is, you need
to have not just enough capacity to function, but you need to
have spare capacity if you want the volatility reduced, which
is going to be much more difficult than just lifting the
current restrictions on where you can develop pipelines.
Mr. Green. Anyone else?
Thank you, Mr. Chairman.
Mr. Shadegg [presiding]. Does the gentleman yield back his
time?
Mr. Green. I yield back my time.
Mr. Shadegg. Okay. We have been joined by the gentleman
from Massachusetts, Mr. Markey. There being no one on the other
side, the Chair would recognize him for 8 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much.
Mr. Caruso, to what extent does the EIA believe that the
natural gas prices track prices for crude oil? Historically,
isn't there a rough overall correlation between the two?
Mr. Caruso. Yes, sir. There is a certain amount of
competition between natural gas and oil prices to the extent
that certain users can switch to, perhaps, residual fuel oil,
distillate fuel oil. There is a linkage between the two.
Mr. Markey. So when oil prices spiked upwards in the months
leading up to the war in Iraq, that played a significant role,
did it not, in driving the price of natural gas upwards as
well?
Mr. Caruso. It was one of the reasons that led to the
upward pressure.
Mr. Markey. Was it a significant factor, in your mind?
Mr. Caruso. I think it was an important factor, yes. There
were, obviously, the points made earlier about whether the fact
that we had low storage and the fact that, with high oil
prices, the incentive to switch out of gas into residual fuel
oil was less significant. So it was a number of factors, and
that was one of them.
Mr. Markey. So Chairman Greenspan, who is testifying later
this afternoon, noted in a recent speech that, while oil prices
have declined since the end of the war, that natural gas prices
have remained high. Do you agree with that?
Mr. Caruso. That is correct. The low storage of gas
continued to put upward pressure on demand to refill that
storage, which is the main reason for that.
Mr. Markey. You are saying that is the key factor in the
delinkage between the natural gas and crude oil prices?
Mr. Caruso. That has been the key factor since the end of
the winter.
Mr. Markey. And the cause of that is?
Mr. Caruso. That we came out of the winter with such a low
level of working gas in storage, there was unusually high
demand for refilling that storage in April and May, and, as
mentioned in the testimony, we expect that to continue
throughout the summer in order to get us where we need to be by
the winter.
Mr. Markey. Going back to your earlier point, historically,
though, and on a continuing basis, there is an important link
between the price of crude oil and the price of natural gas?
That continues to be very real. It is a factor.
Mr. Caruso. Yes. It is a factor. Yes, sir.
Mr. Markey. And it is more than at the margin. It is a
significant factor. It is an important factor, in your own
words.
Mr. Caruso. And as you know, at the margin it can be
important. It can be important because of the marginal nature
of the pricing of energy. Supply is very inelastic,
particularly when you reach the kind of storage levels that we
are at right now.
Mr. Markey. Now, on the front page of today's New York
Times, Mr. Caruso, there is a report that widespread looting
has left Iraq's oil industry in ruins, and that, as a result,
it could take several months to a year to get Iraqi oil
production back to its pre-war levels. Given this important
linkage between crude oil and the global marketplace and the
price of natural gas, do you think that, as a result of that,
that there is a higher price for natural gas because the price
for crude oil is staying unnaturally high because Iraq is not
coming back on line as quickly as had been projected?
Mr. Caruso. I don't think right now that is a major factor.
Mr. Markey. Is it a factor?
Mr. Caruso. It is a factor. But I would downplay its
importance at this point in time, given the seasonal nature of
where we are. In other words, the winter spikes and pressure on
prices was partly due to the economic disincentive to switch in
many cases. Right now, you don't have that. That circumstance
does not exist.
Mr. Markey. Well, the point I am making is that the Bush
Administration secured the oil fields from being blown up by
Saddam Hussein, but they did not secure the oil fields from
being systematically dismantled by looters, accomplishing the
very same goal. So the Bush Administration touted their great
success in ensuring that the oil fields were secured in the
first 2 weeks of the war, but then they did not secure the oil
fields from being looted and, as a result, we have not secured
the peace, either in terms of the revenues being used to
rebuild Iraq or in terms of that additional oil going on to the
global marketplace and having an impact as a result upon the
competitiveness of natural gas as a substitute and putting
pressure, downward pressure on the price of natural gas. Do you
agree with that?
Mr. Caruso. It is outside of our analysis on the point you
just made. But I think that it is much too soon to give up on
how quickly the Iraqi oil can come back into the marketplace.
Mr. Markey. Well, when will we know that answer, Mr.
Caruso? Because, obviously, the natural gas marketplace is
dependent upon their bet on that issue. If they think going
through the end of this year and into the coming winter that
that additional 2 million barrels of Iraqi oil at the margin is
not going into the marketplace, that obviously is going to make
it more likely that they have got a much better marketplace to
sell their natural gas and to keep prices high, affecting the
consumers of New England and those all across the country. This
is a huge mistake by the Bush Administration if it is not
rectified by the fall.
Mr. Caruso. Our Short-Term Energy Outlook has crude oil
prices trending downward, given the return of Iraq and the fact
that other producers continue to produce.
Mr. Markey. So when do you expect then, Mr. Caruso, for
natural gas prices to trend down, given all of the identical
factors?
Mr. Caruso. I think the main factor is getting natural gas
into storage.
Mr. Markey. Well, when will that occur?
Mr. Caruso. I think----
Mr. Markey. When will the prices trend down?
Mr. Caruso. We should start seeing prices coming down a bit
in 2004. And, as I mentioned earlier, over a longer term we see
them coming back into the $3 to $4 per million BTU range.
Mr. Markey. So if natural gas prices are high and likely to
remain so in the near future, why isn't the profit incentive
sufficient for companies to increase storage and increase
production as well?
Mr. Caruso. I think the incentive is there, and we are now
seeing some refueling going on at a good pace. Our expectations
are that the drilling rig activities that have increased this
year and the additional monies available will bring forth some
additional supplies. But it takes time. It is not
instantaneous.
Mr. Shadegg. The time of the gentleman has expired--well
expired.
Mr. Markey. Thirty-two seconds. For anyone who is watching
C-SPAN. You see, the Republican chairman thinks that 32 seconds
is well expired.
Mr. Shadegg. And I think we gave you ample time.
I don't believe there are any further members. I want to
thank this panel for their testimony. We will recess until 2
o'clock. We very much appreciate each of you for your
testimony.
[Brief recess.]
Chairman Tauzin. The committee will please come to order.
Let me first announce that the Ranking Member Dingell is on his
way, but I think we need to get started to accommodate our
guest today. It is my extreme pleasure to introduce for the
committee Mr. Alan Greenspan, the Chairman of the Board of
Governors of the Federal Reserve System, who has agreed to come
and testify today on this most important topic of natural gas
and its effect upon the U.S. economy.
We certainly want to welcome you, Mr. Greenspan. You have
been a frequent visitor to the committee in the past, and we
want to thank you for all the courtesies and the time you have
spent with us both in public meetings such as this and when we
have called upon you for advice and counsel. So we welcome you
today.
I ask unanimous consent that Mr. Greenspan be allowed 15
minutes to present his statement.
Mr. Greenspan, it is our intention to try to get you out of
here by 3. I understand that is your time schedule, and we will
accommodate that.
Mr. Greenspan.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman. I am very
thankful to be invited before this committee on what I consider
to be a most important subject, one which has not been getting
as much notice as I think it deserves considering the broad
nature of the policies that are related to it.
As you know, Mr. Chairman and members of the committee, in
recent months, in response to very tight supplies, prices of
natural gas have increased sharply. Working gas in storage is
currently at very low levels relative to its seasonal norm
because of a colder-than-average winter and a seeming inability
of increased gas well drilling to significantly augment net
marketed production. Canada, our major source of imported
natural gas, has had little room to expand shipments to the
United States, and our limited capacity to import liquefied
natural gas effectively restricts our access to the world's
abundant supplies of gas.
Our inability to increase imports to close a modest gap
between North American demand and production, a gap,
incidentally, we can almost always close in the case of oil, is
largely responsible for the marked rise in natural gas prices
over the past year. Such price pressures are not evident
elsewhere. Competitive crude oil prices, after wide gyrations
related to the war in Iraq, are now only slightly elevated from
a year ago. And where spot markets for natural gas exist, such
as in Great Britain, prices exhibit little change from a year
ago. In the United States, rising demand for natural gas,
especially as a clean-burning source of electric power, is
pressing against a supply essentially restricted to North
American production.
Given the current infrastructure, the U.S. market for
natural gas is mainly regional, is characterized by relatively
longer-term contracts, and is still regulated, but less so than
in the past. As a result, residential and commercial prices of
natural gas respond sluggishly to movements in the spot price.
Thus, to the extent that natural gas consumption must adjust to
limited supplies, most of the reduction must come from the
industrial sector and, to a lesser extent, utilities.
Yesterday the price of gas for delivery in July closed at
$6.31 per million Btu. That contract sold for as low as $2.55
in July of 2000 and for $3.65 a year ago. Futures markets
project further price increases through the summer cooling
season to the peak of the heating season next January. Indeed,
market expectations reflected in option prices imply a 25
percent probability that the peak price will exceed $7.50 per
million Btu.
Today's tight natural gas markets have been a long time in
coming, and futures prices suggest that we are not apt to
return to earlier periods of relative abundance and low prices
any time soon. It was little more than a half century ago that
drillers seeking valuable crude oil bemoaned the discovery of
natural gas. Given the lack of adequate transportation, wells
had to be capped, or the gas flared. As the economy expanded
after World War II, the development of a vast interstate
transmission system facilitated widespread consumption of
natural gas in our homes and business establishments. On a
heat-equivalent basis, natural gas consumption by 1970 had
risen to three-fourths of that of oil. But natural gas
consumption lagged in the following decade because of
competitive incursions from coal and nuclear power. Since 1985,
natural gas has gradually increased its share of total energy
use and is projected by the Energy Information Administration
to gain share over the next quarter century, owing to its
status as a clean-burning fuel.
Recent years' dramatic changes in technology are making
existing energy reserves stretch further while keeping long-
term energy costs lower than they otherwise would have been.
Seismic techniques and satellite imaging, which are
facilitating the discovery of promising new natural gas
reservoirs, have nearly doubled the success rate of new-field
wildcat wells in the United States during the past decade. New
techniques allow far deeper drilling of promising fields,
especially offshore. The newer recovery innovations reportedly
have raised the average proportion of gas reserves eventually
brought to the surface. Technologies are facilitating Rocky
Mountain production of tight sands gas and coalbed methane.
Marketed production in Wyoming, for example, has risen from 3.4
percent of total U.S. output in 1996 to 7.1 percent last year.
One might expect that the dramatic shift away from hit-or-
miss methods toward more advanced technologies would have
lowered the cost of developing new fields and, hence, the long-
term marginal costs of new gas. Indeed, those costs have
declined, but by less than might have been the case, because
much of the innovation in oil and gas development outside of
OPEC has been directed at overcoming an increasingly
inhospitable and costly exploratory physical environment.
Moreover, improving technologies have increased the
depletion rate of newly discovered gas reservoirs, placing a
strain on supply that has required increasingly larger gross
additions from drilling to maintain any given level of dry gas
production. Depletion rates are estimated to have reached 27
percent last year compared with 21 percent as recently as 5
years ago. The rise has been even more pronounced for
conventionally produced gas because tight sands gas, which
comprises an increasing share of new gas finds, exhibits a
slower depletion rate than conventional wells.
Improved technologies, however, have been unable to prevent
the underlying long-term price of natural gas in the United
States from rising. This is most readily observed in markets
for natural gas where contract delivery is sufficiently distant
to allow new supply to be developed and brought to market. That
price has risen gradually from $2 per million Btu in 1997 for
delivery in 2000 and presumably well beyond to more than $4.50
for delivery in 2009, the crude oil heating equivalent rising
from less than $12 a barrel to $26 a barrel. Over the same
period, the distant futures price of light sweet crude oil has
edged up only $4 per barrel and is selling at a historically
rare discount to comparably dated natural gas.
Because gas is particularly challenging to transport in its
cryogenic form as a liquid, imports of LNG have been
negligible. Environmental and safety concerns and cost have
limited the number of LNG terminals and imports of LNG. In
2001, LNG imports accounted for only 1 percent of U.S. gas
supply. Canada, which has recently supplied a sixth of our
consumption, has little capacity to significantly expand its
exports, in part because of the role that Canadian gas plays in
supporting growing oil production from tar sands.
Given notable cost reductions for both liquefaction and
transportation of LNG, significant global trade is developing,
and high gas prices projected in the American distant futures
market have made us a potential very large importer. Worldwide
imports of natural gas in 2000 were only 26 percent of world
consumption, compared to 50 percent for oil.
Even with markedly less geopolitical instability
confronting world gas than world oil in recent years, spot gas
prices have been far more volatile than those for oil,
doubtless reflecting, in part, less developed global trade. The
updrift and volatility of the spot price for gas have put
significant segments of the North American gas-using industry
in a weakened competitive position. Unless this competitive
weakness is addressed, new investment in these technologies
will flag.
Increased marginal supplies from abroad, while likely to
notably damp the levels and volatility of American natural gas
prices, would expose us to possibly insecure sources of foreign
supply as it has for oil. But natural gas reserves are somewhat
more widely dispersed than those of oil for which three-fifths
of proved world reserves reside in the Middle East. Nearly two-
fifths of world natural gas reserves are in Russia and its
former satellites, and one-third are in the Middle East.
Creating a price-pressure safety valve through larger
import capacity of LNG need not unduly expose us to potentially
unstable sources of imports. There are still numerous
unexploited sources of gas production in the United States. We
have been struggling to reach an agreeable tradeoff between
environmental and energy concerns for decades. I do not doubt
we will continue to fine-tune our areas of consensus, but it is
essential that our policies be consistent. For example, we
cannot, on the one hand, encourage the use of environmentally
desirable natural gas in this country while being conflicted on
larger imports of LNG. Such contradictions are resolved only by
debilitating spikes in price.
In summary, the long-term equilibrium price for natural gas
in the United States has risen persistently during the past 6
years from approximately $2 per million Btu to more than $4.50.
The perceived tightening of long-term demand/supply balances is
beginning to price some industrial demand out of the market. It
is not clear whether these losses are temporary, pending a fall
in price, or permanent.
Such pressures do not arise in the U.S. market for crude
oil. American refiners have unlimited access to world supplies,
as was demonstrated most recently when Venezuelan oil
production shut down. Refiners were able to replace lost oil
with supplies from Europe, Asia, and the Middle East. If North
American natural gas markets are to function with the
flexibility exhibited by oil, unlimited access to the vast
world reserves of gas is required. Markets need to be able to
effectively adjust to unexpected shortfalls in domestic supply.
Access to world natural gas supplies will require a major
expansion of LNG terminal import capacity. Without the
flexibility such facilities will impart, imbalances in supply
and demand must inevitably engender price volatility.
As the technology of LNG liquefaction and shipping has
improved, and as safety considerations have lessened, a major
expansion of U.S. import capability appears to be under way.
These movements bode well for widespread natural gas
availability in North America in the years ahead.
Thank you very much, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Alan Greenspan follows:]
Prepared Statement of Alan Greenspan, Chairman, Board of Governors,
Federal Reserve System
In recent months, in response to very tight supplies, prices of
natural gas have increased sharply. Working gas in storage is currently
at very low levels relative to its seasonal norm because of a colder-
than-average winter and a seeming inability of increased gas well
drilling to significantly augment net marketed production. Canada, our
major source of imported natural gas, has had little room to expand
shipments to the United States, and our limited capacity to import
liquefied natural gas (LNG) effectively restricts our access to the
world's abundant supplies of gas.
Our inability to increase imports to close a modest gap between
North American demand and production (a gap we can almost always close
in oil) is largely responsible for the marked rise in natural gas
prices over the past year. Such price pressures are not evident
elsewhere. Competitive crude oil prices, after wide gyrations related
to the war in Iraq, are now only slightly elevated from a year ago, and
where spot markets for natural gas exist, such as in Great Britain,
prices exhibit little change from a year ago. In the United States,
rising demand for natural gas, especially as a clean-burning source of
electric power, is pressing against a supply essentially restricted to
North American production.
Given the current infrastructure, the U.S. market for natural gas
is mainly regional, is characterized by relatively longer term
contracts, and is still regulated, but less so than in the past. As a
result, residential and commercial prices of natural gas respond
sluggishly to movements in the spot price. Thus, to the extent that
natural gas consumption must adjust to limited supplies, most of the
reduction must come from the industrial sector and, to a lesser extent,
utilities.
Yesterday the price of gas for delivery in July closed at $6.31 per
million Btu. That contract sold for as low as $2.55 in July 2000 and
for $3.65 a year ago. Futures markets project further price increases
through the summer cooling season to the peak of the heating season
next January. Indeed, market expectations reflected in option prices
imply a 25 percent probability that the peak price will exceed $7.50
per million Btu.
Today's tight natural gas markets have been a long time in coming,
and futures prices suggest that we are not apt to return to earlier
periods of relative abundance and low prices anytime soon. It was
little more than a half-century ago that drillers seeking valuable
crude oil bemoaned the discovery of natural gas. Given the lack of
adequate transportation, wells had to be capped or the gas flared. As
the economy expanded after World War II, the development of a vast
interstate transmission system facilitated widespread consumption of
natural gas in our homes and business establishments. On a heat-
equivalent basis, natural gas consumption by 1970 had risen to three-
fourths of that of oil. But natural gas consumption lagged in the
following decade because of competitive incursions from coal and
nuclear power. Since 1985, natural gas has gradually increased its
share of total energy use and is projected by the Energy Information
Administration to gain share over the next quarter century, owing to
its status as a clean-burning fuel.
Recent years' dramatic changes in technology are making existing
energy reserves stretch further while keeping long-term energy costs
lower than they otherwise would have been. Seismic techniques and
satellite imaging, which are facilitating the discovery of promising
new natural gas reservoirs, have nearly doubled the success rate of
new-field wildcat wells in the United States during the past decade.
New techniques allow far deeper drilling of promising fields,
especially offshore. The newer recovery innovations reportedly have
raised the average proportion of gas reserves eventually brought to the
surface. Technologies are facilitating Rocky Mountain production of
tight sands gas and coalbed methane. Marketed production in Wyoming,
for example, has risen from 3.4 percent of total U.S. output in 1996 to
7.1 percent last year.
One might expect that the dramatic shift away from hit-or-miss
methods toward more advanced technologies would have lowered the cost
of developing new fields and, hence, the long-term marginal costs of
new gas. Indeed, those costs have declined, but by less than might have
been the case because much of the innovation in oil and gas development
outside of OPEC has been directed at overcoming an increasingly
inhospitable and costly exploratory physical environment.
Moreover, improving technologies have also increased the depletion
rate of newly discovered gas reservoirs, placing a strain on supply
that has required increasingly larger gross additions from drilling to
maintain any given level of dry gas production. Depletion rates are
estimated to have reached 27 percent last year, compared with 21
percent as recently as five years ago. The rise has been even more
pronounced for conventionally produced gas because tight sands gas,
which comprises an increasing share of new gas finds, exhibits a slower
depletion rate than conventional wells.
Improved technologies, however, have been unable to prevent the
underlying long-term price of natural gas in the United States from
rising. This is most readily observed in markets for natural gas where
contract delivery is sufficiently distant to allow new supply to be
developed and brought to market. That price has risen gradually from $2
per million Btu in 1997 for delivery in 2000, and presumably well
beyond, to more than $4.50 for delivery in 2009, the crude oil heating
equivalent of rising from less than $12 per barrel to $26 per barrel.
Over the same period, the distant futures price of light sweet crude
oil has edged up only $4 per barrel and is selling at a historically
rare discount to comparably dated natural gas.
Because gas is particularly challenging to transport in its
cryogenic form as a liquid, imports of LNG have been negligible.
Environmental and safety concerns and cost have limited the number of
LNG terminals and imports of LNG. In 2001, LNG imports accounted for
only 1 percent of U.S. gas supply. Canada, which has recently supplied
a sixth of our consumption, has little capacity to significantly expand
its exports, in part because of the role that Canadian gas plays in
supporting growing oil production from tar sands.
Given notable cost reductions for both liquefaction and
transportation of LNG, significant global trade is developing. And high
gas prices projected in the American distant futures market have made
us a potential very large importer. Worldwide imports of natural gas in
2000 were only 26 percent of world consumption, compared to 50 percent
for oil.
Even with markedly less geopolitical instability confronting world
gas than world oil in recent years, spot gas prices have been far more
volatile than those for oil, doubtless reflecting, in part, less-
developed global trade. The updrift and volatility of the spot price
for gas have put significant segments of the North American gas-using
industry in a weakened competitive position. Unless this competitive
weakness is addressed, new investment in these technologies will flag.
Increased marginal supplies from abroad, while likely to notably
damp the levels and volatility of American natural gas prices, would
expose us to possibly insecure sources of foreign supply, as it has for
oil. But natural gas reserves are somewhat more widely dispersed than
those of oil, for which three-fifths of proved world reserves reside in
the Middle East. Nearly two-fifths of world natural gas reserves are in
Russia and its former satellites, and one-third are in the Middle East.
Creating a price-pressure safety valve through larger import
capacity of LNG need not unduly expose us to potentially unstable
sources of imports. There are still numerous unexploited sources of gas
production in the United States. We have been struggling to reach an
agreeable tradeoff between environmental and energy concerns for
decades. I do not doubt we will continue to fine-tune our areas of
consensus. But it is essential that our policies be consistent. For
example, we cannot, on the one hand, encourage the use of
environmentally desirable natural gas in this country while being
conflicted on larger imports of LNG. Such contradictions are resolved
only by debilitating spikes in price.
In summary, the long-term equilibrium price for natural gas in the
United States has risen persistently during the past six years from
approximately $2 per million Btu to more than $4.50. The perceived
tightening of long-term demand-supply balances is beginning to price
some industrial demand out of the market. It is not clear whether these
losses are temporary, pending a fall in price, or permanent.
Such pressures do not arise in the U.S. market for crude oil.
American refiners have unlimited access to world supplies, as was
demonstrated most recently when Venezuelan oil production shut down.
Refiners were able to replace lost oil with supplies from Europe, Asia,
and the Middle East. If North American natural gas markets are to
function with the flexibility exhibited by oil, unlimited access to the
vast world reserves of gas is required. Markets need to be able to
effectively adjust to unexpected shortfalls in domestic supply. Access
to world natural gas supplies will require a major expansion of LNG
terminal import capacity. Without the flexibility such facilities will
impart, imbalances in supply and demand must inevitably engender price
volatility.
As the technology of LNG liquefaction and shipping has improved,
and as safety considerations have lessened, a major expansion of U.S.
import capability appears to be under way. These movements bode well
for widespread natural gas availability in North America in the years
ahead.
Chairman Tauzin. Thank you very much, Mr. Chairman.
It is the Chairman's pleasure to recognize Members for
questions in order of their appearance this morning, and I will
advise all Members Mr. Greenspan needs to be out of here at 3,
so we will hold to a strict timetable. The Chair recognizes
himself for--quickly for 5 minutes under the rules.
Mr. Chairman, you obviously talk about the updrift in
volatility of the spot price for gas having put a significant
segment of the North American gas-using industries in a
weakened competitive position. I suppose the first question we
need to know is what is your appraisal of that weakened
competitive position if it maintains? Does that bode any
serious consequences for the overall economy?
Mr. Greenspan. Eventually it has significant impacts. It
has not as yet had impacts which one sees in the macrodata. I
mean, for example, in a number of subtle places like
nonfinancial nonenergy corporations the rise in natural gas
costs has knocked a couple of tenths off profit margins. And
since profit margins are a critical aspect in general of
capital investment and broad economic development, this is one
of many areas where you can begin to see the impact of the big
surge in gas prices. And have no doubt if it continues, and if
we stay at these very elevated prices, we are going to see some
erosion in a number of macroeconomic variables which are not
evident at this stage.
Chairman Tauzin. At the heart of your evaluation of the
problem is this sort of schizophrenic position our country
finds itself in where we are encouraging dramatically the use
of natural gas because of its environmental status, and at the
same time we are obviously operating without encouraging new
supplies--you mentioned liquefied natural gas as an example of
something we might want to encourage dramatic increases to
satisfy some of that new demand. Are there other ways this
country ought to think about satisfying that demand we are
artificially creating?
Mr. Greenspan. Mr. Chairman, I think we are all quite
familiar with a number of different potential sources of supply
which have not as yet be exploited in this country. And here
where the major concerns arise, there are obviously tradeoffs,
as you well know better than I, between environmental concerns
and energy. And it is not as though there is a formula which
suggests a tradeoff. There is no joining of value systems, and
the Congress has got to make some very important judgments with
respect to this. I mean, we obviously know that the tight sands
technology, especially in the Rocky Mountains, is one area
where fairly significant new ``lower 48'' natural gas
capabilities reside. We also know that there are potentially
significant additional reserves. We have got Alaska, we have
the potential of not only an Alaska pipeline bringing down
Alaskan gas, but also the MacKenzie River line bringing
additional reserves down from Canada as well. So we have
innumerable sources.
The reason I put emphasis especially on LNG is that if we
could get that market functioning, it is a vast reserve. I
wouldn't say unlimited, obviously, but it has many of the
characteristics of what our international oil market is. As you
know, the size of the international market in gas relative to
consumption is half that of oil, and it is a crucial safety
valve in maintaining price stability in oil, and it could be in
gas as well.
Chairman Tauzin. Well, again, in analyzing that as the
answer to our demand shortfalls, and to what could happen
economically if we don't address it relatively soon, we turn to
foreign imports. Would that not further exacerbate the problems
we have with foreign trade deficits and the problems that has
on our economy?
Mr. Greenspan. There are innumerable questions that one has
to confront with respect to foreign sources of oil, gas and
everything else, national security being obviously at the top
of the list. This is a whole series of tradeoffs. I think we
can define what the nature of the gas market is or should be
under various different legislative initiatives, and we can
define what we reasonably well know is available with respect
to both proved and nonproved reserves, especially in
nonconventional gas.
Chairman Tauzin. My time has run. How much time do we have
to find an answer before we have serious economic impacts?
Mr. Greenspan. Well, that is extremely difficult to say.
All we can really rest upon is our best judgment of what the
markets are telling us. And we do have 6-year-forward markets
in natural gas as we have in crude oil. Those markets are
telling us that $2 gas is a historic relic, at least for the
time being. And a very significant amount of natural gas using
infrastructure in the American economy was based on $2 gas,
which means a lot of noncompetitive structures are sitting out
there. And if the $4.50 gas which I quoted in my prepared
remarks continues, I think some very important structural
changes are going to hit us.
Chairman Tauzin. Thank you, Mr. Chairman.
The ranking member of our committee Mr. Dingell is
recognized for a round of questions.
Mr. Dingell. Mr. Chairman, thank you.
I would like to welcome you Mr. Greenspan. It is a
privilege to have you here before the committee.
Mr. Greenspan's statement has been an excellent one. I have
no further comment. Thank you. And welcome, Mr. Greenspan.
Thank you, Mr. Chairman.
Chairman Tauzin. Thank you, Mr. Dingell.
The Chair recognizes the gentleman Mr. Upton from Michigan,
who was first at the committee, for a round of questions.
Mr. Upton. Thank you, Mr. Chairman. I actually--at meetings
like this, I like to ask my question is this the right time to
refinance, but I will save that for another day.
Mr. Greenspan. If you have a natural gas well, maybe.
Mr. Upton. I will remind somebody about that in my family.
You know, as I look back at the year 2000 and 2001, coming
from Michigan, I thought that one of the very earliest signs
about our economy slowing down was the spike that we had in the
Midwest with regard to gasoline prices. And it took a number of
months to trickle through, but, in fact, we had some real
problems, and thank goodness things seem to be back in some
balance now. But to me this is another parallel. As you
indicated, there are so many industries and home owners that,
in fact, went out and converted to natural gas, and as we have
seen this price double or triple, there are real problems. As
we look at one of the solutions, as we are debating--as we
debated an energy bill so to try and open up more lands for
domestic production, but I think most people would say that is
much more of a long-term solution rather than a short one. And
I am just wondering as you talk about creating, in your
testimony, a price-pressure safety valve through larger import
capacity of LNG need not unduly expose us to potentially
unstable sources of imports, how quickly do you think we can do
that?
Mr. Greenspan. It is obviously not a matter of months. It
is going to take time.
Mr. Upton. Could be another long winter.
Mr. Greenspan. It could very well be, largely because there
are similarities here to the electric power problems that we
had in the past where there is a long lead time when you have a
commodity which either has no capacity for inventorying, such
as electric power, or limited capacity, which we have for
natural gas. That creates a longer timeframe of adjustment
usually than we see in many other economic areas.
My own view is that if we can get LNG moving reasonably
quickly, and there are an awful lot of potential exporters of
LNG--I mean, Russia is clearly looking to get into that market;
Indonesia, Algeria, Trinidad--they are all very heavy potential
exporters, and there is a potential of this market expanding
fairly quickly.
If we have a safety valve in the import area to absorb any
imbalance in domestic supply, that gives us the capability of
then making other judgments as to what is the tradeoff between
the environment and domestic energy production and the like. If
we do not have that international safety valve, then we
confront some very tight decisions.
And while I acknowledge that there are obvious problems
involved when you expand your overall international exposure,
at least we know as an ultimate fallback, as we have in oil, we
can always get the gas.
Mr. Upton. Do we have the import structure at our ports to
take in imports of that magnitude?
Mr. Greenspan. Not yet. As I am sure you know, Congressman,
we have four major LNG terminals which are projected to expand,
and as I recall, the Energy Information Administration is
projecting several new terminals. My own judgment is that we
ought to be doing more rather than less in this area. Because
the technological advances in LNG have brought the cost down,
safety factors have been markedly improved, and I think it
gives us the best way that we can handle essentially unforeseen
problems in the gas industry. What we do over and above that, I
think, clearly is another set of issues.
Mr. Upton. Thank you.
I yield back, Mr. Chairman.
Chairman Tauzin. The gentleman yields back.
The Chair recognizes the gentleman Mr. Green from Texas for
a round of questions.
Mr. Green. Thank you, Mr. Chairman. And thank you, Chairman
Greenspan, for being here.
In your comments before the Joint Economic Committee last
month and today, you suggested that in the situation that we
are now seeing--this long-term trend rather than just short-
term spikes that we have grown accustomed to--LNG is a
potential, but we also continue to need more exploration both
in the continental United States and offshore that would bring
supply and demand back into balance; is that correct?
Mr. Greenspan. There is no question that from what industry
observers have been able to ferret out, there are significant
unexploited gas reserves in the lower 48 and obviously up in
Alaska as well.
Mr. Green. Our energy bill actually provided for that gas
pipeline, and I think the Senate's will, too, once they finish
their debate. My concern is the consequences, not just the cost
of the gas--the natural gas to our consumers, but I have heard
that these high natural gas prices are having an effect on
possibly shifting our industrial jobs from the United States to
countries where the prices are lower, particularly in the
chemical area, since gas is feed stock, and even certain Middle
Eastern countries. Is this correct? And can you describe that
for me?
Mr. Greenspan. We are not sure exactly how serious the
issue is at the moment because it is unclear at this stage
whether a number of the industries, which, as I mentioned
before, were largely built on $2 gas, are presuming that the
spike or whatever they are looking at now is temporary. And
they are making temporary adjustments on the presumption that
gas prices will recede very significantly.
If they prove wrong, and it looks as though, as the market
is apparently trying to tell us, that there is a far more
persistent higher level of prices out there than we are hoping
for, then you begin to get permanent changes in structure. You
can obviously absorb excess spikes in natural gas prices for a
while, and indeed, many have done that over the last number of
years. You change the capital structure and the competitiveness
of your economy and your production process if a major input
cost becomes permanently higher than that which you
contemplated when the capital investment was made.
And so the answer to the question is we do not see
significant shifts as yet, but it is hard to believe that that
will not happen if prices stay up.
Mr. Green. Okay. From my college economics class, I
remember you have to have access to capital, a work force, and
also energy to produce. So what you are saying is that any of
those three and particularly the cost of energy could make some
long-term shifts.
Mr. Greenspan. Yes, sir.
Mr. Green. Do you know of any actions this Congress or the
President could take to increase production in the short term?
Mr. Greenspan. No.
Mr. Green. Okay. Mr. Chairman, I thank you, and I yield
back my time. I wish we had some solutions on the short term.
Thank you.
Chairman Tauzin. The gentleman yields back.
The Chair is pleased to recognize for a round of questions
Mr. Whitfield.
Mr. Whitfield. Thank you, Mr. Chairman. And like others, I
want to extend a welcome to Chairman Greenspan. You have
indicated in your testimony and in answering questions that you
are uncertain about the impact that the spike in natural gas
prices may have had on our economy. Over the last year or so we
know from economic data that we have lost a large number of
manufacturing jobs in our country. We have had some growth in
service sector jobs. But I would ask you what in your view are
the primary factors contributing to our loss of manufacturing
jobs?
Mr. Greenspan. I am sorry, manufacturing jobs you say?
Mr. Whitfield. Yes.
Mr. Greenspan. The aggregate amount of gross product in
manufacturing has drifted only slightly lower relative to the
total GDP. So the answer is not a major hollowing out of
manufacturing per se, although various measures do suggest that
there has been some decline in aggregate output relative to the
national product.
What is obviously creating significant decline in jobs is a
very dramatic increase in output per hour. The overall
productivity growth in the economy as a whole has been very
impressive, but ``manufacturing'' has been especially so. And
the arithmetic of maintaining no more than just an average
growth rate of aggregate output in manufacturing, coupled with
an above average increase in output per hour must of necessity,
arithmetically, reduce the proportion of manufacturing jobs to
total jobs.
And that is a process which has been going on, as you well
know, for quite a while, and there is no immediate evidence of
that turning around, so that long term we are getting two
things happening: We are getting actually a redefinition of
what we mean by manufacturing. Total output of goods per dollar
for real dollar value has been going down very dramatically.
You know, it was 50 years ago that American manufacturing meant
big assembly plants for cars, huge-style complexes turning out
vast complexes of heavy-weighted goods. Now the most valuable
stuff we turn out of manufacturing is virtually impalpable and
very difficult to find. And surely if you try to weigh it, it
doesn't weigh a fraction of what its counterpart weighed 30 to
50 years ago.
Mr. Whitfield. You were saying that our productivity has
been increasing at such a rate that that has contributed. As I
go around in my district and attend town meetings, this issue
always comes up about loss of manufacturing jobs which may or
may not be real. But many people do have the sense that we are
becoming more of a service-oriented society rather than a
manufacturing society. If you were trying to give assurances to
employees in America, how would you respond to their concern
about that?
Mr. Greenspan. I think this is a very important question,
and I think one that gets raised every 5 or 10 years. And I
think that the best way of answering it is to look at our
history. This country has grown enormously in the last 100
years, and unemployment rates have on occasion gone up pretty
high, but they have always drifted back down to somewhere
around 4 or 5 percent of the total labor force, which
necessarily means that jobs are created year in and year out.
And as those various areas of our economy become obsolescent,
new ones come in. And indeed, what tends to happen is that
people who are in jobs with no real future or running companies
which are in bad shape, they tend to seek different activities
and are re-employed.
So overall, we don't know what the job structure will look
like 20, 30 years from now. What we do know is that we have
every reason to believe that somewhere in the area of 95
percent of our work force is going to be employed as it always
has.
Mr. Whitfield. Thank you.
Chairman Tauzin. The gentleman's time has expired.
The Chair recognizes the gentlelady from California Mrs.
Capps for a round of questions.
Mrs. Capps. Chairman Tauzin, thank you very much. Chairman
Greenspan, thank you for your testimony and for being with us
at this important hearing today.
My question relates to some of the specific points in your
testimony; for example, your statement of a need for increased
availability of imports of natural gas and expansion of
facilities to handle it, specifically liquid natural gas or LNG
facilities. And following along the line of questioning of my
colleague, Mr. Upton, there are some inherent costs with this
proposal, are there not? For example, the basic costs of
liquefaction, transportation, regasification, not to mention
the construction of these facilities. And this will raise the
cost of imported natural gas versus what we could produce
domestically or from Canada. I understand that you have
acknowledged that increase. And in addition, I would think we
would also want to recognize the safety aspects of these
facilities, and especially the security aspects of LNG
facilities. If we set down a number of these places, are we not
adding yet another potential site ripe for terrorist
activities? Lots of questions still remain about how far along
we are in securing existing chemical and nuclear plants, and we
know that terrorists at least had the drawings of some of our
nuclear facilities in mind.
I have a particular concern with these security questions
because there are proposals to put an LNG facility right off my
district near the fairly large city of Oxnard, which is the
gateway to Channel Islands National Park. My concerns are
heightened by provisions contained in the House energy bill
that would weaken the review process for LNG to facility
siting. These provisions essentially give the proponents of LNG
facilities an advantage or a leg up in the process. I am
concerned that these safety and security questions may not
receive the scrutiny they deserve.
Other associated questions such as safety, security,
environmental effects impact on fishing, tourism and
recreation. I am anticipating the site in one proposal to
convert an offshore oil platform into an LNG facility right
there at that gateway and the effect that might have on the
local fishing industry.
So my question is if you could comment on the associated
costs perhaps with this decision whether or not to import
natural gas.
Mr. Greenspan. Yes. Congresswoman, you are raising a lot of
important questions. Let me just say first that we have been
fortunate in that the technological advances that have occurred
in liquefaction and in transportation and degasifying have been
really quite marked, including the storage. This is not a new
technology. Remember, we have got a liquefaction plant sitting
up in Alaska which I believe has been there since 1969 and
indeed is shipping LNG to Japan because that is the only direct
route that they can commercially do it at.
If you take a look at the cost and prices coming out of
imports in a number of the new LNG importing areas in the
Middle East and other areas of the world, prices are not
particularly elevated. There is no question, of course, that
building these plants and terminals and the like cost money,
but the technologies have improved very considerably, and the
cost as a consequence has come down. Also, the technology has
enabled, in many respects, the safety standards to be
significant, we are not dealing with a technology which is
dangerous in any meaningful sense of the word, but having said
that, as I said before the Joint Economic Committee the other
day, there is no way to create energy without any risk. It is a
question of choice.
On the issue of environmental questions, as I said before,
there is no simple algebraic formula which can tradeoff
environment against energy and the economy and other
characteristics. We are looking at two really incompatible
value systems, and both are crucial to human existence. And the
only way to make judgments is for individuals to make those
tradeoffs, and indeed, it is those judgments as reflected in
the Congress which in a sense makes national policy. But you
can't ask an economist, for example, to tradeoff the
environment against economic activity because I don't know what
the language translation is. In fact, there is none.
Mrs. Capps. I know my time is up, but----
Chairman Tauzin. I have to hold to very strictly; otherwise
people are going to miss the chance.
The Chairman of the subcommittee of energy Mr. Barton is
recognized.
Mr. Barton. Thank you, Mr. Chairman.
Chairman Greenspan, you talked about the trends in the
natural gas industry in this country in your testimony. You did
not--or if you did, I didn't catch it--make a policy statement
about whether we should try to be self-sufficient in natural
gas production and consumption. We could do it technically if
we wanted to. Should we?
Mr. Greenspan. I think not. I think we are committed
irrevocably to a global economy and a global environment for a
very good reason. You get all of the advantages of the division
of labor in a global marketplace, and while we don't put much
stress on that in recent years, one of the most important
aspects of the flexibility of the American economy which has
been so important given the shocks that we have had in recent
years, a very considerable part of that flexibility reflects
our global status, our ability to interact around the world in
so many different areas.
My view is that it is the interest of this country not to
endeavor to localize, to be protectionist, to pull in our
horns. At the end of the day, I don't think we will succeed. I
don't think we have a choice but to deal in a global economy
and still have the standards of living that we so much cherish.
Mr. Barton. Are there--notwithstanding that answer, which
is a very good answer, by the way--are there areas in the
United States that you think should be drilled for natural gas
that are currently off limits because of various political
bans?
Mr. Greenspan. Well, I am an economist. My view is if you
are looking for natural gas, you got to know whether it is
there, and the only way to find out ultimately is to drill a
hole. And if that drilling of the hole violates environmental
standards, those are the tradeoffs that the Congress has got to
make.
Mr. Barton. It is a very political answer from a supposedly
nonpolitical appointee.
Mr. Greenspan. When you ask a political question, you get a
political answer.
Mr. Barton. All right. Let me ask another nonpolitical
question. We had testimony this morning from various
individuals who had a preference for a specific pipeline route
for the Alaskan natural gas pipeline. Do you have any
preference, or do you think that should be a market-based
decision, or should it be a political-based decision?
Mr. Greenspan. Congressman, if we have got a problem as I
try to outline it of the significant possibility of gas prices
being higher than we would like, I suggest to you that we allow
the market to make judgments as to whether or not we bring gas
down from either Alaska or through the MacKenzie River or
whatever or whenever.
The reason why I put so much emphasis on LNG is that I
think the timeframe involved in any of these pipeline projects
is far distant in the future. I know, for example, the Energy
Information Administration puts the possibility of the Alaska
pipeline at 2021 or something like that. That is pretty far
out. And conceivably it could be earlier.
But I think the more important issue is up front we have a
far greater capability of significant supplies from LNG than we
have from a number of those sources, and my own judgment is
that the at the end of the day, those pipelines will be built,
and they will be built because the market will be very strongly
pressuring that type of construction.
Mr. Barton. Let me ask my last question in the last 45
seconds. Your testimony has focused, as it was supposed to be
focused, on natural gas, but if the goal of a national energy
policy is the overall economic viability of our economy, would
it not be a positive to enhance the possibility of using other
fuel sources like nuclear power and coal to relieve some of the
prices on natural gas demand?
Mr. Greenspan. I have always testified in favor of
reexamining what I think is a policy which is mistaken, namely
our views toward nuclear power. I do think that the
technologies have improved immensely, and the advantages that
they obviously have, I don't have to go into. I am sure you
know them far better than I. I do think an overall policy of
energy cannot dismiss the issue of nuclear power. You may at
the end of the day decide that the desirability of it, granted
environmental costs, security and other problems, is such that
it is not advisable, but at least look at it rather than
dismiss it out of hand.
Mr. Barton. Thank you, Mr. Chairman.
Mr. Greenspan. I say the same for coal.
Chairman Tauzin. The gentleman Mr. Stupak is recognized for
a round of questions.
Mr. Stupak. Thank you, Mr. Chairman.
Thank you, Mr. Greenspan, for coming here today and
testifying.
You have emphasized and you have testified that increased
natural gas supply for U.S. consumption will have to come at
least in part from increased imports. You have also noted that,
and I am looking at page 6 of your testimony, access to world
natural gas supplies will require major expansion of LNG
terminal import capacity. You go on further to say that as the
technology of LNG liquefaction and shipping has improved, and
as safety considerations have lessened, a major expansion of
U.S. import capability appears to be under way.
In light of the present overall state of the economy, do
you have concerns about the availability of capital for
investment in these new facilities?
Mr. Greenspan. I do not, no.
Mr. Stupak. How will the present economic downturn then
affect this type of investment in the short term, long term? I
don't see anyone investing in these terminals if we are going
to need them to increase the imports of LNG.
Mr. Greenspan. If prices stay anywhere near where they are
in the longer-term futures markets, the potential profitability
of investments of that type will be far in excess of the normal
rate of return on capital investment.
Mr. Stupak. As you know, we had testimony this morning, we
are talking about LNG, and when you take a look at it, we
import about 16 percent of our natural gas, 15 percent from
Canada and 1 percent from outside North America as liquefied
natural gas. So even if we doubled the capacity, that would
only be 2 percent that we would be importing. Is the investment
worth it to go from 1 percent to 2 percent?
Mr. Greenspan. No. I envision a number very significantly
higher than that.
Mr. Stupak. What realistically do you think we could expect
from imports?
Mr. Greenspan. I don't know. I would just let the market
make that determination. I think that as costs go down in the
construction of these terminals, and the whole question of
safety declines as well, I think the markets will open up in a
very significant manner, because remember, it is not only our
import capability, it is the availability of LNG in export
sites, whether Indonesia or Algeria or Trinidad. I mean, it is
the development of a market which is very much smaller than the
international oil market. As a consequence its potential for
expansion is very substantial.
Mr. Stupak. So to develop this market it wouldn't
necessarily require tax breaks and offsets from the U.S.
Government. You feel that the natural gas prices would override
any of those conditions for investment?
Mr. Greenspan. Implicit in my testimony, Congressman, is
that this is not something requiring subsidies. This is
something which requires private capital investment. And unless
the markets are wrong, and they have been wrong on occasion,
and the general view of the long-term equilibrium price for
natural gas is where the markets are saying it is, if that
stays there for a while, there will be significant capital
investment coming specifically in import technologies,
especially LNG.
Mr. Stupak. Well, no matter what industry you look at,
whether it's coal, gas, nuclear or anything, in this country
when it comes to energy, have not taken a long-term look at our
needs. It seems like we try to get through each winter, see
where the spikes are, there is some reaction. But I would think
if you are going to do the LNG terminals, nuclear, even clean
coal technology, whatever it might be, a pipeline even, which
might be 2021 before one gets online, we have to take a longer
view or longer look at these potential problems on the horizon
and not just react every January and February when it spikes.
So--and I don't see anyone out there doing the investment that
is going to take right now. So how do we get these investments
and arrive at a long-term energy policy or goal for this
Nation?
Mr. Greenspan. I think there are two ways of coming at it.
You can subsidize the system, which I think is, one,
unnecessary and, two, undesirable; or two, set up a legal
structure and a regulatory structure which enables people to
invest in a profitable manner, because it is only under those
conditions that markets can effectively function and we can
resolve problems which are rather difficult. And I don't deny
that.
My own view is I trust that what the Congress will do is
try to find ways to facilitate capital investment, but not
subsidize it.
Chairman Tauzin. The Chair thanks the gentleman.
The Chair recognizes the Chairman of the Commerce, Trade,
Consumer Protection Subcommittee Mr. Stearns for a round of
questions.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Greenspan, we certainly welcome your comments. Judging
from your testimony, what other Members have said, I think in
the short term there is probably nothing that Congress could do
with less than adequate storage and inability to import
sufficient LNG combined with an increase in demand for natural
gas. It comes down to almost Mother Nature, I guess, all of us
just praying for a light winter.
But I wanted to follow up on two of your points. One, you
talked about the flexibility of the economy, and the other is
you talked about a mistake in policy, if I heard you correctly,
on nuclear energy. So, I would like to take the latter question
first.
I heard you say that this country has a mistake in policy
with nuclear energy. And if I heard you correctly, I would like
to you elaborate what do you think the United States should do,
because the technologies have changed since we have built
nuclear, and in many ways that would relieve some of the
problem here. So I would appreciate your comments.
Mr. Greenspan. I think the policy which I find less than
impressive is more neglect than anything. I don't know what the
appropriate nuclear policy should be with respect to the whole
energy program. It is a very complex set of issues. But the one
thing I am reasonably certain of is we are spending very little
time relative to the size of the problem in raising the
question and examining the question and all the various
alternatives as to whether we should be doing more nuclear. The
French, for example, have very large nuclear programs and very
little problem that I am aware of exists as a consequence of
that.
A major endeavor to examine this whole program is where I
think we ought to be, and I don't deny at the end of the day
that a judgment of the Congress might be that it is not
desirable to move forward in this area.
But my own suspicion is that is not the way it will come
out, but it is perfectly possible it might.
Mr. Stearns. So what you are saying is we have no policy
now, there is no discussion. You recommend a full-blown
nationwide discussion on nuclear energy and what we should do.
And you are saying the outcome is in doubt? What we would do as
a result of, but you are actually saying that it has been very
poor on the United States to turn and put its head in the
ground and not look at nuclear energy as an alternative and try
to find out what solutions could be done?
Mr. Greenspan. Well, I didn't choose those words, but I
find myself agreeing.
Mr. Stearns. Okay. Well, that is good. I told my staff if I
could get a no or yes partly, I would be very happy.
Let me just follow up on my other thought I had. In your
testimony, you say nearly two-fifths of the world's natural gas
reserves are in Russia and its former satellites, and one-third
are in the Middle East. Does that include Iraq?
Mr. Greenspan. Yes. Although Iraq is not a major natural
gas producer. It has got well over 110 billion barrels of crude
oil, but not all that much natural gas.
Mr. Stearns. Why couldn't we say to the industrial plants
and the power plants, let us just let the market decide and let
the price go up, instead of Congress stepping in? I am just
conjecturing this. And the industrial and the power plants will
start to get diversity and redundancy, which they should have
anyway. And then just take care of the residential, which I
think in the big scheme of things, the residential is a lot
smaller percentage of everything. And that is the only way we
can get this country to innovate and to come up with solutions.
So I guess my question is, maybe as a follow-up, couldn't
we have alternative coal, we mentioned nuclear, hydro for
people other than gas, and try to get them to realize that gas
is just one commodity and maybe we can go other places.
Mr. Greenspan. There is a history of our regulations which
most recently goes back to the 1970's when we tried to manage
every little nook and cranny in our energy system, and we ended
up with long lines at gasoline stations. We have an
extraordinary energy economy in this country. If we let it
function fully, freely, I think we might find that it is
producing a great deal more than it currently is producing.
Mr. Stearns. Thank you, Mr. Chairman.
Chairman Tauzin. I thank the gentleman.
The Chair recognizes the gentleman from Louisiana, Mr.
John, for a round of questions.
Mr. John. Thank you, Mr. Chairman.
And I too want to congratulate you and to thank you for
coming to this very important committee hearing. This issue is
very important to me, being from Louisiana, and from an
economic standpoint of the district that I represent, about 300
miles of the Louisiana coastline where a major portion of the
natural gas in the Gulf of Mexico comes onshore. In fact, Henry
Hub is in my district. So it is an issue that I know a little
bit about, but I have a couple of questions I would like to ask
you. And I guess first, from listening to your answers to some
of my colleague's questions and from your concluding remarks as
it relates to LNG. You feel that the LNG area could be a
possible short and/or long-term solution to some of these
problems that we are dealing with relating to price spikes. You
state that access to world natural gas supplies will require a
major expansion of LNG terminal import capacity--that is in the
last paragraph of your remarks. If you believe that, and if
that is so, what are the consequences, and are you concerned
about America's dependence on another fuel source as it relates
to energy stability/energy security as we find ourselves very
volatile and vulnerable with the importation of oil?
Mr. Greenspan. I think we have to make the choice, Mr.
John. The choice basically is whether we want to maintain a
standard of living which does require access to international
resources both in energy and elsewhere, but carries with it the
insecurity risk and various other problems which a number of
other of your colleagues have mentioned.
My own judgment is that there is probably no real
alternative here but to resort to international sources of
energy, because there is no way we can be self-sufficient. We
certainly cannot be self-sufficient in oil without changing our
lifestyle in ways which I doubt very much whether the American
people would coountenance. And it is not quite the same thing
with gas, but gas, remember, is currently close to two-thirds
the heating value of oil. So it is a rather large industry and
has very large ramifications. And so I would say much the same
thing about gas as I would about oil.
Mr. John. And I would agree, that the increased activity in
the LNG area, with new technology, is certainly a piece of the
puzzle of the portfolio of energy that we must have in this
country. I just don't want to see us get ourselves, especially
in light of the instability in the Middle East, where I have
seen us reliant upon oil imports and where we have been very
vulnerable to OPEC and some other sources because it is so
important to our economy. I can say with a lot of confidence
that home heating and the air conditioning that natural gas
produces through electricity is important. But I also have
major petro chemical plants up and down the Mississippi River
and in Lake Charles, Louisiana that are losing jobs left and
right--most recently Koch Energy--because of the price of
natural gas. So we are talking jobs that are being lost because
of this. Do you think that our domestic natural gas reserves,
that we have not been able to access because of some of the
decisions that are made up here on the Hill, and I understand
they are very political, could meet our demand to prevent the
reliance on supply of natural gas from LNG?
Mr. Greenspan. Well, let me also just point out, which I
tried to do in my prepared remarks, that there is a much
greater dispersion of natural gas reserves throughout the
world, and hence we are not as subject, or shouldn't be as
subject, to the type of problems we have when say three-fifths
of our crude oil reserves currently exist in a very small area
of the world.
So, I don't deny that there are security problems with
natural gas supply, but they are less than for oil, because we
have got fairly significant reserves of natural gas in areas
which are not serious problems with respect to national
security for the United States.
Chairman Tauzin. The gentleman's time has expired. Mr.
Chairman, we are at 3 o'clock. Members are still begging me to
have a chance to ask you a question. Would you permit me to
recognize a few more members for one question each, or do you
have to go?
Mr. Greenspan. I think I can do for about 5 to 7 minutes--
--
Chairman Tauzin. Let me try to do this.
Mr. Greenspan. [continuing] because I have to go to the
airport.
Chairman Tauzin. Mr. Rogers, for one question quickly.
Mr. Rogers. Thank you, Mr. Chairman, for being here. I just
want to follow up in Mr. Whitfield's line of questioning. One
of your responses that caught me a little bit off guard, you
said, we haven't seen a significant shift in manufacturing, at
least offshore. I have to tell you----
Mr. Greenspan. I meant by that, permanent shift.
Mr. Rogers. Well, you said a slight shift, and it was not
something we ought to be concerned of. It may be a slight shift
if you are an economist in Washington, DC, but if you are a
manufacturer in Michigan, this thing is an avalanche. We have
lost over 2 million manufacturing jobs. They are citing energy
as one of their top concerns, unfair trade, regulatory costs,
litigation costs, and tax structure. Not once have they said it
is productivity. So maybe you can help me understand this.
Mr. Greenspan. Well, all I can say to you is that the data
is unequivocal in this regard. I mean, if you look at the
arithmetic, the question is, are manufacturing levels of output
or value-added eroded only marginally, relative to the total
GDP. But the number of jobs have gone down very dramatically,
and it means that you can produce a higher level of output with
fewer people. That is what the numbers tell us, and I have
every reason to believe that they are accurately reported.
Chairman Tauzin. Thank the gentleman.
Mr. Markey, for one short question.
Mr. Markey. Mr. Chairman, most natural gas is used for home
heating, and most houses are purchased with mortgages. And
Freddie Mac and Fannie Mae are the companies that are used to
do most of that mortgaging. My question to you is--that is a
loose nexus, but I am trying----
Mr. Greenspan. I know where you are heading, Congressman.
Mr. Markey. [continuing] There is a wave of accounting
scandals now hitting Freddie Mac, and they are exempt from
having to register their securities with the Securities and
Exchange Commission. In your opinion, is it wise for that
exemption to be allowed to continue, or would we be better to
have both of those companies have to register their securities
at the Securities and Exchange Commission, like every other in
the United States?
Mr. Greenspan. I believe in past questions, I have agreed
with your general point of view on that. In other words, there
is no reason to differentiate Fannie and Freddie from the rest
of the securities industry, as far as I am concerned.
Mr. Markey. Thank you, Mr. Chairman.
Chairman Tauzin. Mr. Otter, for a short question, quickly.
Mr. Otter. Thank you, Mr. Chairman.
I had quite a few questions here, Mr. Chairman, but I am
going to narrow it down to one, and relative to a statement
that you made that markets decide. And it has been my short
experience since I have been in Washington, DC. That it seems
to me like the government decides. We say we want conservation,
yet we go out and we heard testimony this morning from the
gentleman from PUC in Ohio saying we had to have more
government programs that paid people during the winter months
when their heat bill goes up. So when we end up subsidizing
consumption, then there is no market demand. There is no high
price for people to conserve. Yet, we know that the lowest
hanging fruit in the energy orchard is conservation. So, tell
us how we can adjust those two positions of our willingness to
start programs that pay people to consume, yet we also try to
have programs that say please consume.
Mr. Greenspan. I agree with you. There is a contradiction
that has to be resolved.
Mr. Otter. Well, that was quick. Could I have another one?
Chairman Tauzin. No, you had it. Mr. Allen, for a short
question.
Mr. Allen. Mr. Chairman, Chairman Greenspan, thank you for
being here. I will be quick. U.S. oil production peaked
sometime ago, around 1970. I am struck by looking at the
numbers in some of the charts. We have been presented with the
fact that it looks to me like the projections for domestic
natural gas production are very flat. You know, you can add on
Alaska, but otherwise they look flat. And you testified that it
is harder and harder to get natural gas out of certain sources
here. Are you at all concerned that there is the possibility
that the peak production for natural gas in the United States
may come in the next decade or two?
Mr. Greenspan. This is a very big issue amongst geologists.
And the conventional gas probably creates concern. But there is
a general presumption that the nonconventional gas, the tight
sands gas, the coal bed methane and shale all have significant
possibilities for much greater expansion than we currently
contemplate. And the reserves, the so-called nonproved
reserves, expected geological formations and the like, suggest
significant possibilities there. But I do think that we had
this debate, I remember, on oil and it was exactly the same. In
other words, we were sitting there with crude oil production in
the United States continuing to rise, and there were those who
were saying that the peak is near and those who were saying
that it is five decades off. I don't think we really know. But
I do know that there is a big debate going on, and it is an
issue which is obviously crucial. The reason I say that the LNG
is important is it will help either way, if I may put it that
way.
Chairman Tauzin. The last question, Mr. Bilirakis, and then
we will wrap up.
Mr. Bilirakis. Thank you, Mr. Chairman.
Mr. Chairman, in the interest of time. I studied petroleum
engineering, got a degree in it many years ago. We had a thing
in the law at that time called the oil depletion allowance, and
then it went by the wayside. I have been here for 21 years, and
I don't think anybody has ever brought it up. But we can talk
about the problems being this and that, that sort of thing. I
think we are just short in production. We don't have the
incentives, et cetera, et cetera. That is my opinion. But I
would ask you, should we consider bringing back some form of an
oil depletion allowance, something to encourage, if you will,
better, more production?
Mr. Greenspan. Well, I am not sure that we need incentives
in the sense that, at the prices that currently exist,
profitability and exploration and development within the United
States, especially in the Gulf and offshore, are more than
adequate, in my judgment, to maintain levels of production to
the extent that we can. Remember, that we are dealing with 48
States and the Gulf of Mexico which has been plugged full of
holes. And you would know, certainly far better than I. And
there is a law of diminishing returns that we are not getting.
I mean, you can stamp hard in some places of the Middle East
and you get a gusher. Here, it requires some very sophisticated
technology to find new reservoirs of oil.
Chairman Tauzin. Thank you, Mr. Chairman. The committee is
in your debt again for the service you provide the country, and
we appreciate your testimony, sir.
Mr. Greenspan. Thank you very much, Mr. Chairman.
Chairman Tauzin. The committee stands adjourned.
[Whereupon, at 3:10 p.m., the committee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of The Edison Electric Institute
The Edison Electric Institute (EEI) and its Alliance of Energy
Suppliers (Alliance) are pleased to submit this statement for the
record of the Committee's June 10 hearing on ``Natural Gas Supply and
Demand Issues.'' EEI is the trade association of the U.S. shareholder-
owned electric utilities and affiliates and associates worldwide. The
Alliance is a Division of EEI that focuses on the generation business
and related wholesale business issues in the supply of electricity.
Record natural gas prices have gotten everyone's attention, from
the homeowner who uses natural gas for heat to the electricity
generator whose operating costs are substantially influenced by the
cost of natural gas. Because generators of electricity are an important
and increasingly significant end-user of the nation's natural gas
supplies, EEI appreciates the opportunity to submit written testimony,
and to address the concern that this sector has with the current and
foreseeable imbalance between demand and supply.
While we believe there are limited opportunities in the short term
for reducing demand in our sector--primarily by encouraging large
industrial users to switch to off-peak times of consumption--there are
longer term solutions for assuring adequate natural gas supplies in
this country. These include helpful conservation and careful policies
to identify, tap and bring to market available known reserves and new
reserves--both here and abroad. It is the combination of increased
supply and the efficient use of that resource that will--result in
lower--natural gas prices.
But from the perspective of the electric power industry, which is
searching for ways to continue the production of low-cost electricity
essential for the United States to compete in a global economy, one of
the most important long term solutions is for Congress and the
President to make sure that federal policies assure that an adequate
and diverse fuel supply is available for the generation of electricity.
Fuel diversity means that coal, nuclear, hydro, wind, solar, natural
gas--and other fuel sources as they become available--can continue to
be used by generators of electricity to mitigate price or supply risk
in any one source. It also means ``fuel switching'' or maintaining a
``dual fuel capability,'' where natural gas-fired plants are
constructed and permitted to allow a switch between natural gas and oil
products in times of either high prices or limited natural gas
supplies.
Policies advanced by the Congress and the Administration need to
maximize the diversity of fuel sources available for the generation of
electricity while allowing market forces to dictate the choice, in any
given circumstance, of how to assure the low-cost production of
electricity. Fuel diversity needs to include the ability to move large
blocks of power between regions so that diverse electric supplies can
move into various regions. For example, the potential of wind
development throughout The Great Plains is limited by a lack of high-
voltage transmission lines to carry the abundant raw resource to
markets, either East or West. A more robust transmission system would
permit more inter-regional powerflows, which might permit coal,
nuclear, hydroelectric and renewable technologies to penetrate markets
displacing other fuels.
Of course, stimulation of investment in transmission will do little
to help if permitting of new transmission lines continues to take more
than a decade. As to improving transmission siting, EEI compliments the
Committee on its decision to include in H.R. 6 provisions to establish
the Department of Energy (DOE) with lead agency authority to coordinate
the federal authorization process for transmission lines, including
project specific coordination requirements, and to give last-resort
backstop siting authority to FERC. Together with the corridor
designation provisions of the bill, these new provisions will introduce
transparency into the permitting process and facilitate timely
decisions. We strongly urge the Committee to fight for these provisions
when H.R. 6 is conferenced with the Senate energy bill.
As transmission is helpful in distributing electricity, a market
basket of generating technologies (coal, nuclear, hydroelectric and
renewables as well as natural gas) is helpful to fuel diversity and
price stability. The price of converting different fuels to electricity
varies by technology, but generally, the broader the selection of
technologies and fuels available to the generator, the better for all
classes of customer. When hydro generating capacity is reduced by a
non-functional and prolonged hydro licensing process and federal
policies render coal generation less economical, the short fall in
generating capacity must be made up elsewhere. Carefully established
hydro and coal policies that allow these fuel sources to continue to
play a serious role in the nation's fuel mix will help alleviate
pressure on natural gas supply.
The current Clean Air Act's complex and multiple, overlapping
requirements for electric power generators constrain the use of coal
generation. This puts additional pressure on using natural gas to
generate electricity. The Clear Skies Act (H.R. 999) would reduce such
pressures on natural gas by providing certainty to coal generators,
while achieving roughly 70 percent emission reductions in sulfur
dioxide, nitrogen oxides and mercury emissions over a timeframe that
would promote immediate environmental improvements and industry
stability through certain and cost-effective emissions reductions. By
contrast, the Clean Power Act (H.R. 2042) would exacerbate natural gas
cost and supply concerns.
Congress should be concerned that federal energy, environmental and
economic policies do not: (1) inadvertently create an economic climate
wherein one fuel, such as natural gas, becomes the only practical
option for new generation (2) in effect preclude the use of certain
abundant and low-cost fuels or (3) sharply limit the generators
flexibility to select a fuel mix that can optimize the production of
electricity.
Electricity is the backbone of the modern economy. Advancements in
technology have increased U.S. productivity and driven growth, but
technology depends on ever increasing amounts of electricity.
Currently, coal generation provides 50.1% of the nation's electricity
supply, nuclear generation provides 20.3%, natural gas provides 18.1%,
hydropower and other renewables provide 9.1%, and oil generation
provides 2.4%.
In the past 10 years, natural gas-fired generation has been
critical to providing the low-cost electricity that is crucial to
assuring that the United States can compete in the global economy.
Natural gas has become the fuel of choice for new power plants because
plants fueled by natural gas are highly efficient, have predictable and
short construction cycles, and lower emissions. The trend was aided by
the historically low cost of natural gas and the pressures on the costs
of the other traditional sources of fuel for generating electricity.
While natural gas-only-fired power plants account for 18% of the
fuel used by all generation nationwide, 88% of the new electric
capacity built in the last 10 years use natural gas as their primary,
and in many cases only, fuel. Numbers of this magnitude indicate that
the percentage of natural gas used as fuel for electric generation will
most likely increase. There are good reasons for this.
First, power plants fired by natural gas have become very
efficient. Combustion turbines fueled by natural gas (simple cycle)
were originally designed to augment large baseload producers of
electricity (coal, nuclear, and hydroelectricity). They were designed
to run for brief periods of time or a few hours annually to help meet
peaking requirements. By being smaller and specialized, the combustion
turbine minimized capital costs of construction and could be quickly
installed. This was especially desirable when the nation had excess
baseload supply and when cost overruns were common in the construction
of baseload units, particularly for nuclear projects.
The advent of higher efficiency combustion turbines in the 1990's
further accelerated the role played by natural gas-fired power plants
in the nation's generation mix. The ``Heat Recovery Steam Generator,''
where waste heat from a combustion turbine is used to produce steam and
turn a steam turbine--hence the term ``combined cycle''--created
efficiencies greater than 50% per each BTU of energy combusted. This
compares to efficiency rates of 35-40% for coal plants. Highly
efficient combined cycle plants in 2003 now have an efficiency rate
over 55%. Thus, some are now being used for baseload operations, rather
than just for peaking or load-following. Second, the construction lead-
times for natural gas-fired generation are shorter than those for coal
and nuclear. This benefits owners and developers by limiting the
exposure of capital because there is a shorter period when costs are
being incurred but no electricity is being sold.
Third, construction costs for gas-fired generation are easier to
estimate and much less likely to be subject to construction cost over-
runs than other types of power plants. This makes it easier for owners
and investors to take the risk of investing millions of dollars in a
new power plant.
Fourth, it is much easier to get environmental permits for natural
gas power plants because of their lower emissions profile relative to
more traditional coal or oil units.
Fifth, natural gas has traditionally been a relatively cheap fuel
source.
Sixth, natural gas-fired units can often be sited to optimize
location on both the natural gas transmission system and the high-
voltage electric transmission system.
Finally, for the electric system, one crucial advantage of natural
gas technology is its quick start capability and ability to move from
zero output in a combustion turbine, to full power in less than an
hour. A combined cycle takes longer because of the longer time required
to receive power out of the heat recovery steam generator. This ability
to easily load follow is very helpful in an industry which constantly
rebalances between supply and demand for voltage control purposes.
We recognize that this presents challenges, however, to the natural
gas transmission industry and, if un-coordinated with pipeline dispatch
operations, can create operational difficulties. The amount of gas
demanded by a combustion turbine going to full power or shutting down
rapidly because of fall-off in electricity demand can create imbalances
in the pipeline system and natural gas storage and even liquefied
natural gas (LNG) helps in managing operational requirements of gas-
fired generation. Further development of storage facilities throughout
the natural gas market area, including LNG facilities, will be crucial
to the balancing of gas supply and demand, as well as to electric
operations.
In some regions of the country, dependence on natural gas is
pronounced. For example, in the gas-producing Southwest, some utilities
came to rely on natural gas as a boiler fuel for electric production
when other market uses for natural gas were not well developed. Because
they were using boilers to generate electricity, they could switch
fuels from natural gas to various grades of oil for either price or
supply reasons. Some of these units are now being retired, further
reducing the fuel flexibility of the electric industry. Only 24% of the
168,760 MW of gas-fired generation in operation since 1993 have dual
fuel capability, and that percentage is declining. According to the
RDI's PowerDat data base, by 2011, only 7% of the 188,215MW of new
natural gas capacity planned is identified to have dual fuel
capability, which represents 71% of total new electric generation.
While some power plants can burn oil in addition to natural gas, there
are three main impediments to actually making the switch to oil. The
physical impacts on the combustion turbine, such as increased
maintenance requirements and possible warranty limitations from the
turbine manufacturer, discourage switching to oil Additionally,
environmental permits may preclude the use of oil because of increased
NO<INF>X</INF> emissions associated with the use of distillate oil
(FO2). Finally, many local zoning regulations do not allow the
construction of oil storage tanks.
All of these factors associated with the lack of fuel switching
capability contribute to increased inflexible demand by the electric
industry for natural gas for electric production, which, in turn, can
contribute to increased natural gas commodity prices and increased
levels of price volatility.
The nation benefits from robust and diverse natural gas supplies.
The Congress, the Administration and the Federal Energy Regulatory
Commission should publicly encourage the development of new production,
new pipeline capacity and market-area storage to assist in meeting the
demand of the electricity producer and other end users for natural gas.
There may be those who would advocate end-use restraints on natural
gas. EEI firmly believes that these are not an appropriate solution to
resolving natural gas supply and demand problems. The market has the
ability to ration supply, and over time will return to equilibrium. The
market needs to be allowed to send price signals that will stimulate
investment in alternative generating technologies, dual-fuel
opportunities, and development of new gas supplies. End-use restraints,
even if applied prospectively, have the potential to create
considerable economic inefficiency and would be counterproductive.
In conclusion, the use of natural gas to create electricity has
been good for consumers and should remain an accessible fuel source for
electric generators. There are strong economic, efficiency, and
environmental reasons to use natural gas in the generation of
electricity. Even if, as a nation, we transition to greater reliance on
renewable resources, natural gas will continue to be a necessary
backstop. It is therefore essential that we take the steps that are
necessary to assure an adequate supply. It is also crucial, however,
that Congress and the President provide greater regulatory certainty to
the generators of electricity--particularly as to the environmental
standards that new and existing generating sources of all types will
have to meet--and that the permitting and siting processes be
streamlined to reduce the current long-lead times.
______
Prepared Statement of The Interstate Natural Gas Association of America
introduction
The Interstate Natural Gas Association of America (``INGAA'')
represents North America's interstate and interprovincial natural gas
pipeline companies. INGAA's members build and operate natural gas
transmission pipelines and provide pipeline transportation services for
third parties. These activities are regulated by the Federal Energy
Regulatory Commission (``FERC'') in the United States and by the
National Energy Board in Canada.
For over a decade, interstate pipelines have operated purely as
non-discriminatory, open access transporters of natural gas on behalf
of third party shippers and have not been in the business of purchasing
and reselling natural gas. This development followed the wellhead
decontrol of natural gas by the Congress and the competitive
restructuring of the natural gas industry by the FERC (and similar
deregulation and restructuring in Canada). While interstate pipelines,
in some cases, are affiliated with producers, marketers and
distributors of natural gas, the natural gas industry generally is
vertically disaggregated, with separate production, transportation and
distribution segments.
Natural gas consumption in the United States has grown steadily
over the past decade as our nation's economy has grown and as this fuel
has been valued for its reliability, affordability and environmental
attributes. The interstate pipeline industry has added greatly to North
America's transmission pipeline infrastructure to facilitate the
delivery of increased supplies of natural gas from producers to growing
consumer markets. The Energy Information Administration (``EIA'')
projects that natural gas demand will continue increasing dramatically
over the next 15 years. This will occur, however, only if natural gas
supply and pipeline capacity can keep pace with demand, thereby keeping
prices within a reasonable range.
the current situation
Competition and restructuring increased the efficiency of the
natural gas industry and brought close to 20 years of moderate prices
for natural gas delivered to local distribution companies and direct
end-use consumers. Now, however, a confluence of factors has resulted
in a much tighter balance between natural gas supply and demand and, as
an inevitable consequence, higher natural gas prices and greater price
volatility. These factors, which have been documented in greater detail
elsewhere, include: the end of the excess natural gas production
capacity that characterized the industry from the early 1980s through
the late 1990s (the ``gas bubble''); significant growth in the demand
for natural gas, particularly for new electric generators; the decline
in drilling activity following the collapse of natural gas prices in
2002; accelerated decline rates for production from natural gas wells
as a result of the combination of improved technology and the
diminished quality of accessible drilling prospects; and a hot summer
in 2002 followed by, in some parts of the country, a cold winter in
2002-2003, which resulted in significantly depleted natural gas storage
entering the spring and summer of 2003.
It is likely that that the balance between natural gas supply and
demand will remain tight for the next several years before significant
new natural gas resources can be brought to the market. There will be
pressure on elected officials and regulators for action to shield
consumers and industry from the effects of higher natural gas prices
and greater price volatility. While there may be certain constructive
steps that can be taken in this regard, it will be important to resist
government interventions in the marketplace that will be
counterproductive to an efficient, long-term solution to the supply
problem.
Experience demonstrates that markets are superior to government at
allocating resources. Government intervention in the market can lead to
rationing and price regulation. Prices play a critical role in
providing incentives for developing new resources, infrastructure and
technology and in causing consumers to make efficient choices between
fuels and between consumption and energy efficiency. The best energy
policy is one that, first, promotes rational economic decisions about
consumers' choices in fuels and technologies and that, second, removes
artificial barriers to developing energy resources in an
environmentally responsible manner.
With this as background, INGAA offers its comments on several near-
term and long-term issues that have garnered attention in connection
with the focus on natural gas supply and demand:
Natural Gas Storage
The rate at which natural gas storage is being refilled in advance
of the next winter heating season has received great attention
recently. In connection with this, it is useful to review the roles of
the respective industry segments in refilling storage and the
limitations on how quickly storage can be refilled.
As an integral part of their transmission systems, interstate
natural gas pipelines own and operate a majority of the natural gas
storage capacity in the United States. Still, as a result of natural
gas industry restructuring and FERC's open access policies, it is the
pipelines' customers who own the natural gas in storage and who dictate
the injection and withdrawal of natural gas from storage. Such
customers' ability to inject and withdraw gas from storage, however, is
dictated by the availability of sufficient interstate pipeline
capacity. This could be an important factor should this year's storage
refill continue to lag historic rates. That is, unless storage
customers have reserved firm pipeline capacity at levels sufficient to
complete their storage refills, they could find themselves competing
with customers seeking to use pipeline capacity for other purposes,
such as fueling electric generators in response to summer peak demand.
Interstate Pipeline Construction
Interstate natural gas pipelines are not constructed on
speculation. Rather, given the significant market and development risks
for new pipelines, pipeline companies will not invest the huge capital
required for a new pipeline unless the investment is underwritten by
long-term contracts with creditworthy shippers. In recent years,
transportation contracts with natural gas merchants and with electric
generators supported much of the new interstate pipeline construction.
Therefore, it is not surprising that the overall slowdown in the
nation's economy and, in particular, the severe economic distress in
the merchant energy and non-utility generation sectors of the energy
industry has caused a corresponding slowdown in the expansion of
interstate pipeline capacity.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ See: Expansion and Change on the U.S. Natural Gas Pipeline
Network--2002; Energy Information Administration, May 2003.
---------------------------------------------------------------------------
Historically, natural gas producers, and especially small
independent producers, have been reluctant to sign firm contracts and
undertake the long-term financial commitment associated with new
pipeline capacity. Still, there are signs that this is changing. The $1
billion Kern River Gas Transmission Company expansion--which extends
from Opal (in southwest Wyoming) to southern California and southern
Nevada--entered service in May. This project, which is fully
underwritten with firm contracts, doubled the capacity of the Kern
River pipeline and provides a means for additional Rocky Mountain
natural gas production to reach markets. In addition, El Paso Natural
Gas recently announced plans to proceed with its Cheyenne Plains
project which will transport Rocky Mountain production from the
Cheyenne hub in Wyoming to interconnections with pipelines in the
Midwest. This project is supported primarily by contracts with Wyoming
producers.
Even if the expansion of interstate pipeline capacity is retarded
temporarily, the long-term trends point to the need for significant new
pipeline capacity to keep pace with growth and to connect new supply
sources. The INGAA Foundation has estimated that between $60 and $70
billion in new pipeline investment will be required over the next 12 to
15 years in order to meet the demands of the market.<SUP>2</SUP> A
financially sound pipeline industry and a supportive public policy and
regulatory environment will be necessary for such capital formation to
occur efficiently.
---------------------------------------------------------------------------
\2\ Pipeline and Storage Infrastructure for a 30 TCF Market--An
Updated Assessment; The INGAA Foundation, January 2002.
---------------------------------------------------------------------------
Capital formation remains the ``coin of the realm'' for getting new
pipeline projects off the ground, and the current trend is not
encouraging. This is illustrated by the fact that capital investment in
the previously-mentioned Kern River expansion equaled the value in
total of the eight largest transmission expansions completed in 2002.
While part of the answer here lies in commitments from creditworthy
shippers willing to subscribe firm transportation capacity, the ability
to attract capital to the pipeline sector would be improved by removing
the impediment to capital formation created by the Public Utility
Holding Company Act (``PUHCA''). The Act currently serves as a barrier
for some investors who might otherwise be able to provide capital for
the natural gas industry, by potentially making then subject to PUHCA's
restrictive provisions. In the 21st century, the need for this statute
no longer exists, and therefore INGAA strongly advocates PUHCA repeal.
Any purpose served by keeping this anachronistic statute on the books
is overwhelmed by the harm it causes in limiting investment in the
regulated energy sector.
It also is important to understand how pipeline construction
opponents are exploiting conflicts between existing laws and
overlapping jurisdictions to delay and, in some cases, possibly defeat
pipeline projects. For example, the Coastal Zone Management Act
(``CZMA'') has been invoked by two states to block interstate pipeline
projects for which the FERC already has issued a certificate of public
convenience and necessity; and, in one of these cases, this effort has
been abetted by the National Oceanic and Atmospheric Administration
within the Department of Commerce engaging in a protracted review of
the appeal from the state's action. In other words, a federal law is
being used by individual states to block the construction of federally
authorized, interstate projects that are important to meeting the
energy needs of the nation at large.
Also, with the likelihood that we will be increasingly reliant on
natural gas resources developed on federal lands, such as in the Rocky
Mountain States, it is important to address the process for siting and
permitting interstate pipelines on federal land. The FERC needs a clear
mandate for facilitating greater cooperation between government
agencies. While the FERC has the primary responsibility under the
Natural Gas Act for approving interstate pipeline construction, it
defers to federal and state agencies on environmental and land use
permitting. Often these other agencies operate at cross purposes,
resulting in a cumbersome and time consuming process for the applicant
pipeline.
A few months ago, FERC signed a memorandum of understanding with
nine other federal agencies with the goal of making the permitting
process less onerous for pipelines. The signatories to this MOU agreed
to review pipeline construction permits concurrently, rather than
serially. This is a positive step and the various agencies should be
held to their commitment. Avenues for engaging state agencies in such
commitments also should be explored.
Finally, economic regulation should not blunt the price signals
that provide the incentive for customers and the industry to commit to
new pipelines, storage and powerplants. While it is understandable that
elected officials and regulators want to respond forcefully to alleged
misconduct in California and the Western states, it is important that
they not dampen the role that scarcity and price play in signaling the
need for new energy investment that can restore the balance between
supply and demand and thereby produce reasonable prices for consumers.
A shift toward a policy that just and reasonable prices must be the
lower of cost or market would greatly increase the perceived regulatory
risk associated with investment in regulated U.S. natural gas and
electric power markets and would sow the seeds for future shortages and
price volatility.<SUP>3</SUP>
---------------------------------------------------------------------------
\3\ See: Price Revision in Western Energy Markets: What Standard
for Market Intervention; Cambridge Energy Research Associates, Inc.,
May 2003.
---------------------------------------------------------------------------
Gas-Fired Electricity Generation
Some have expressed concerns that the electric power industry is
becoming overly dependent on natural gas and that this fuel should be
preserved for so-called ``high value'' uses, i.e., space heating and
industrial process uses.
This sentiment sounds remarkably like the arguments made during the
artificial shortages of the 1970s that resulted from wellhead price
controls and the bifurcation of the interstate and intrastate natural
gas markets. The mistaken perception that the nation was running out of
natural gas and the resulting policy decision to husband this resource
for ``high value'' uses led to enactment of the Powerplant and
Industrial Fuel Use Act of 1978 and other initiatives to affect fuel
choice through government market intervention. The Fuel Use Act was
repealed by the Congress a decade later to end the distortions it was
causing in energy markets. The legacy of this 1970s energy policy
should teach us a lesson about the adverse consequences of substituting
government intervention for market economics in choosing fuels and
electric generating technologies.
Natural gas has been the fuel of choice for new electric generators
because gas-fired turbines offer advantages over other technologies in
terms of capital cost, siting and environmental permitting, modularity
and speed of installation. If there is a legitimate public policy
concern that the current regulatory and market environment skews the
choice of generating technology to favor natural gas, the appropriate
answer is not to impose artificial limits on the deployment of gas-
fired technologies, but rather to remove unnecessary impediments to
other generating technologies. Does the regulatory process for siting,
permitting and constructing generators create a bias against other
generating technologies? Do the structure and rules governing wholesale
electricity markets create a bias? If so, the most appropriate public
policy would be one that removes such bias. (This would have to be done
carefully, however. Past attempts at overtly favoring particular
generating technologies produced unintended, adverse results.)
In addition, in considering whether there is a looming
overdependence on natural gas for electric generation, it is important
to place the question in its proper perspective. Clearly, most of the
recent additions to power generation are natural-gas-fired. During the
period from 1999 to 2002, about 144 gigawatts of new generation was
added to the grid, of which 138 gigawatts (96 percent) is natural-gas-
fired. Still, natural gas generators are intended primarily to supply
peak and intermediate capacity, not baseload. Coal continues to
dominate baseload generation, and still commands 52 percent of all
electric generation. EIA expects that the total amount of electric
generation from coal only will decrease to 47 percent by 2025, despite
the rise of gas-fired generation.
Natural gas' share of electricity generation now is at 17 percent,
and is expected to grow to 29 percent by 2025, according to EIA.
Nuclear generation is expected to remain flat over the next 20 years,
with the result being an overall decrease in nuclear power's share of
power generation. Natural gas is expected to overtake nuclear power as
the nation's second-largest source of electricity by 2006. In sum,
while dependence on natural gas for electricity generation will grow
over the next two decades, the U.S. electric power industry will
continue to have a diverse and balanced generation portfolio.
The Natural Gas Resource Base
In responding to suggestions that natural gas be conserved for
``high value'' uses, it is important that we not fall into the trap of
addressing this issue with a scarcity mentality. While the balance
between supply and demand in natural gas markets has tightened
considerably, there clearly is a natural gas resource base in North
America that can support expanding natural gas markets.
The National Petroleum Council in its 1999 study estimated that the
natural gas resource base in the lower-48 states is nearly 1500
trillion cubic feet (tcf). In addition, the NPC estimated Canada's
resource base at nearly 700 tcf. To place these numbers in perspective,
the United States will consume approximately 23 tcf of natural gas this
year.
The challenge is whether we can develop this resource base and the
associated infrastructure at the pace needed to keep up with demand. In
responding to this challenge, the natural gas industry is seriously
handicapped by current public policy, which reflects a choice not to
develop much of the country's natural resource base. By some estimates,
30 to 40 percent of our country's potential natural gas resource base
is either off limits or else is open to development under highly
restricted conditions. The question for policy makers is whether we as
a nation can afford policies that leave vast amounts of our domestic
natural gas reserves untested and undeveloped. Until recently, the
long-lived excess of natural gas production capacity masked the true
cost of such policies and permitted elected officials and their
appointees to make politically popular decisions that energy resource
and infrastructure development would not occur ``in my backyard'' or
``off my beach.'' Those days are over, and we now must be assessing and
developing a variety of new natural gas supply options, rather than
hoping that all of our supply needs can be met by incremental additions
to already-developed resources.
There is no silver bullet response to the need to replace current
natural gas production and to add incremental production to meet the
increasing demand for natural gas. It will take the development of
resources and infrastructure from multiple locations, including the
Rocky Mountains, the Deepwater Gulf of Mexico, arctic frontier regions
in Canada, the Alaska North Slope and imported liquefied natural gas
(``LNG''). All of these options are possible, and affordable, if only
policy makers respond favorably on the fundamental, threshold questions
on developing the nation's natural gas resource and infrastructure
base. Furthermore, all of these options are needed collectively for
meeting the demand for natural gas in the coming decades.
One of those critical resource basins is the North Slope of Alaska,
which gives rise to the need for new pipeline infrastructure to deliver
North Slope natural gas to the Lower 48 states. While an Alaska natural
gas pipeline was first authorized by the Congress more than 25 years,
the need for these natural gas resources and the infrastructure for
delivering this gas to American consumers has never been greater. While
the United States cannot pin its hopes solely on Alaska gas, neither
can it realistically hope to meet projected demand without it. INGAA
hopes that comprehensive energy legislation will include the necessary
provisions ensuring that this pipeline becomes a reality.
One Final, Cautionary Note
One of the most important provisions of the Pipeline Safety
Improvement Act of 2002 is the mandate for ``integrity assessments''
for natural gas systems in populated areas. This new law establishes
strict timeframes for baseline integrity assessments and re-assessment
intervals. Beginning this year and continuing throughout the decade,
significant pipeline segments will be removed from service in order to
perform assessments and any resulting repairs. Furthermore, because
this will be occurring in a competitive industry, pipeline operators
may not coordinate the scheduling of their assessment activities, due
to anti-trust concerns.
This unprecedented integrity program will almost certainly affect
natural gas deliverability and delivered natural gas prices. This
effect could be compounded by the fact that, coincidentally, the
integrity assessments will be occurring during a period of tight
natural gas supplies. In view of this, the details of the rulemaking
implementing the pipeline safety legislation that is currently pending
before the Research and Special Programs Administration (``RSPA'') of
the Department of Transportation could have a significant effect on
just how severely compliance with the integrity management program will
affect natural gas deliverability. This is an important factor to bear
in mind as the Congress performs oversight of RSPA's rulemaking.
______
Response for the Record of Hon. Alan Greenspan to Questions of Hon.
Richard Burr
Question 1. In your estimation, what is the best approach for our
nation's energy policy to establish the North Slope pipeline project?
Purely market driven? Subsidization through tax incentives and loan
subsidies? Loan subsidies alone?
Response: If, as I outlined in my statement, our nation has a
problem of the significant possibility that gas prices remain higher
than we would like, I suggest that we allow the market to make
judgments as to whether or not we bring gas to the lower 48 states from
either Alaska, through the MacKenzie River, or by some other means.
Investment in these pipelines is not something requiring subsidies;
construction of these pipelines requires private capital investment
that will be supplied in response to the market's signals of the need
for their construction.
Question 2. Would subsidizing the project through tax incentives as
proposed in the other Chamber's legislation create a tax revenue drain?
Response: The subsidies would lower tax revenues generated from the
operation of the pipelines.
Question 3. What are the factors inhibiting investment in new
baseload coal and nuclear capacity? What policy options are available
to the federal government to stimulate investment in these electric
generation technologies that could relieve the stress on natural gas
markets?
Response: Analysts cite an uncertain regulatory environment as well
as uncertain future environmental standards among the factors
inhibiting additional investment in nuclear energy and coal in the
power sector. In the absence of a resolution of these regulatory
issues, it is difficult for anyone to determine whether the economics
would justify additional investment, at least in increasing nuclear
capacity. It appears to me that we are spending very little time
relative to the size of the problem in raising and examining the
question whether there should be additional investment to create power
generating capacity using more nuclear energy and coal. Congress needs
to make a judgment of the future course of our national policy toward
nuclear energy. If we wish to augment our electric generation
capability through greater use of coal and nuclear energy, we need a
stable legal and regulatory structure which enables people to invest in
a profitable manner, should the economics justify such investment,
rather than attempting to accomplish this goal through various types of
subsidies.
______
Public Utilities Commission of Ohio
July 2, 2003
The Honorable W.J. ``Billy'' Tauzin,
Chairman
U. S. House of Representatives
Committee on Energy and Commerce
Washington, DC 20515-6115
Dear Chairman Tauzin: I am writing in response to questions posed
by Congresswoman Hilda Solis, and would like to thank her for her
interest. Conservation and energy efficiency are key as we strive to
control costs on our heating and cooling bills. Setting back your
thermostats, checking your insulation and having your heating and
cooling systems checked and possibly tuned up are a few ways to lower
your natural gas usage. Attached, you will find a graph which shows the
results of a survey conducted by a local distribution company of
residential customers in Ohio and Maryland, which is a breakdown of
energy efficiencies and conservation measures. Additionally, I have
attached information collected by the Department of Energy/Energy
Information Administration, which shows Natural Gas Consumption by
Sector and Proportion of Natural Gas Consumption in Residential and
Commercial Sectors by State.
I believe that when looking at natural gas consumption it is
important to note that residential customers only account for 25% of
usage. Therefore, a 5% reduction in residential usage only reduces
consumption by about 1%. In conclusion, the only way that prices will
drop is if commercial, industrial and generation demand is reduced.
Electricity generation demand is largely a function of weather, heat in
the west and cold in the east. Furthermore, industrial demand is a
function of economic growth.
Congresswoman Solis also requested information on incentive
programs that exist in Ohio to encourage energy efficiency, and we are
unaware of any such programs that exist, which have contributed to the
reduction of natural gas consumption. The energy efficiency programs
that do exist in Ohio are funded by other means.
I hope this information is helpful and provides a better
understanding of the impacts on natural gas prices. Thank you for
giving me the opportunity to testify and respond to questions of the
Committee.
Sincerely,
Donald L. Mason, Commissioner
Public Utilities Commission of Ohio
______
Response of Jeffrey R. Currie, PhD., Managing Director, Goldman, Sachs
& Co., to Question of Hon. Hilda L. Solis
Your analysis shows that price fluctuations are caused more by lack
of transportation and storage infrastructure, rather than lack of
supply. You further note that profits from drilling for gas are much
greater than profits for creating infrastructure. Doesn't this suggest
that the repeated calls to open up federal lands to drilling is more
profit driven than motivated by interest in stabilizing prices?
Although the upstream or drilling part of the energy industry
generated better returns on assets during the late 1990s than the
downstream or infrastructure part of the industry, what is more
important is that the entire energy sector, including the upstream part
of the industry underperformed the broader market. More specifically,
during the 1990s the upstream part of the industry had an 8.7% cash
return on cash invested versus an average market return on cash
invested of 12.5% for companies in the S&P 500. Further, it is
reasonably assumed by most estimates that the cost of capital during
that same time period was between 10-15%. The reality of modern capital
markets is that only industries with significant positive returns on
cash invested above the cost of capital attract new capital. Over the
last decade, the upstream part of the energy industry did not meet this
requirement. As a result, it is extremely unlikely that excess returns
have motivated the ``repeated calls to open up federal lands to
drilling.''
The paradox of the current situation is that the underinvestment in
the energy industry by the market is the correct economic outcome given
the poor rates of return, as the best use of capital is in other
industries where the rates of return are higher. The market solution is
not concerned with volatility, but rather the expected rate of return.
This inability of the market to provide adequate incentives for
investment in reserve capacity to reduce price volatility is where the
market fails and why more dramatic action is required. Further, the
current market and regulatory structure reinforces this price
volatility as it emphasizes efficiency over reliability. In addition, a
combination of regulation, taxes, and direct market intervention have
further reduced the return on capital in the energy industry. As a
result, the market has responded by not providing the capital to
expand, and the net result is the capacity constraints that you see
today.
______
Response of Guy Caruso, Administrator, Office of Energy Information
Administration to Questions of Hon. Hilda L. Solis
Natural Gas Supply and Demand
Question 1. Mr. Caruso, your testimony focuses on the supply side
of natural gas. I would like to know if, as you find, a 1% drop in
natural gas production leads to 5-10% higher prices, what would a 1%
drop in demand do in terms of lowering prices.
Answer 1. A 1% drop in demand (for whatever reason) would tend to
lower peak winter prices by about 5%-10%, a reaction roughly similar in
absolute magnitude (but opposite in sign) to the impact from production
shifts.
Natural Gas Price Fluctuations
Question 2. Mr. Caruso, your testimony indicates that fluctuations
in weather have major impacts on the price of natural gas. Computer
models of expected climate change due to greenhouse gas emissions
predict that weather fluctuations will become more extreme in the
future, and some evidence suggests that this is already occurring. Have
you analyzed how expected and observed climate changes will affect
natural gas price fluctuations?
Answer 2. EIA has not done an analysis that links global climate
change to increased domestic weather variability to natural gas price
volatility.
______
CMS Energy
Jackson, MI
July 21, 2003
The Honorable Billy Tauzin
Chairman, Energy and Commerce Committee
2125 Rayburn House Office Building
Washingtn, DC 20515
Dear Mr. Chairman: Thank you for the opportunity to appear before
the Energy and Commerce Committee on June 10, 2003, to testify about
natural gas supply and demand issues. It was a great opportunity for
the local distribution industry to get our message out.
I have attached, at your request, answers to questions provided by
Congresswoman Hilda Solis.
Again, thank you for the opportunity to testify before your
committee.
Sincerely,
Carl L. English
President and Chief Executive Office , Consumers Energy
the honorable hilda l. solis
Question 1. Mr. English, your testimony claims that federal
policies have ``locked up'' resources for development. Yet the EPCA
``Scientific Inventory of Onshore Federal Lands' Oil and Gas Resources
and Reserves and the Extent and Nature of Restrictions or Impediments
to their Development'' shows that only 12% of the major western basins
known to contain most of the gas supplies are off limits to drilling.
Would you suggest that more than 88% of public lands be open to
drilling?
Response: At a time when natural gas demand is expected to increase
as much as 50 percent in the next 20 years, up to 59 percent of the gas
resources yet to be discovered are expected to be found on federal
lands or in offshore waters, according to the United States Geological
Survey. In the Rocky Mountains, as much as 40 percent of gas resources
are off-limits to leasing or have highly restrictive lease conditions.
The issue is not necessarily the ``known'' producing gas basins--but is
the opportunity to make new gas discoveries is areas less drilled and
thus add ``new'' supplies for the nation's gas energy requirements.
Ultimately, environmentally sound testing of gas prospects--with the
drill bit--is the only way to know if natural gas can be developed from
an area.
Question 2. Given that the 12% closed to drilling includes major
National Parks and wilderness areas, would you ask to open these areas
to drilling, despite overwhelming public support to protect these areas
from resource extraction?
Response: Clearly not all areas should be opened to drilling or
mining or other surface activities. But the debate must be examined on
the basis of good science and choices be made regarding the impacts of
energy development activities. Citizens should have a voice in these
decisions, as they should regarding the implementation of any
sustainable energy resource, such as wind and solar power generation,
biomass and other options. Unfortunately, no sustainable energy
resource is a zero impact proposition. Therefore, actions should be
measured and carefully examined. However, no action is a poor choice
for our economy and our people.
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