[Senate Hearing 108-113]
[From the U.S. Government Publishing Office]
S. Hrg. 108-113
HIGH PRICE OF NATURAL GAS
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
TO DISCUSS THE REASONS BEHIND THE HIGH PRICE OF NATURAL GAS, ITS EFFECT
ON THE ECONOMY, AND TO CONSIDER POTENTIAL SOLUTIONS
__________
JULY 10, 2003
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Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee RON WYDEN, Oregon
LISA MURKOWSKI, Alaska TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana EVAN BAYH, Indiana
GORDON SMITH, Oregon DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky CHARLES E. SCHUMER, New York
JON KYL, Arizona MARIA CANTWELL, Washington
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Scott O'Malia, Professional Staff Member
Deborah Estes, Democratic Counsel
C O N T E N T S
----------
STATEMENTS
Page
Bunning, Hon. Jim, U.S. Senator from Kentucky.................... 2
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 2
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Feinstein, Hon. Dianne, U.S. Senator from California............. 4
Ferguson, J. Brian, Chairman and CEO, Eastman Chemical Company,
Kingsport, TN.................................................. 44
Garman, David K., Assistant Secretary, Energy Efficiency and
Renewable Energy, Department of Energy......................... 33
Grant, Richard L., President and CEO, Tractebel LNG North America
LLC............................................................ 39
Greenspan, Alan, Chairman, Board of Governors, Federal Reserve
System......................................................... 5
Murkowski, Hon. Lisa, U.S. Senator from Alaska................... 5
Thompson, Bruce, Executive Director, Public and Industry Affairs,
Forest Oil..................................................... 54
APPENDIXES
Appendix I
Responses to additional questions................................ 69
Appendix II
Additional material submitted for the record..................... 73
HIGH PRICE OF NATURAL GAS
----------
THURSDAY, JULY 10, 2003
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:04 a.m. in
room SH-216, Hart Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. The hearing will please come to order. I will
tell you what I would like to do. One of the staffers--I know
we have done the best we can, but I would like you to take that
chart that is over there and sitting on the side and you would
like to sit it up here at the table alongside of Dr. Greenspan
so everybody can see it. Kind of turn it a little bit his way.
There you go, and put it back just slightly, ma'am. There you
go.
I guess, Dr. Greenspan, that is quite obvious: generating
capacity brought on line by fuel type. And you can see that
what is happening--that red line is what is happening the last
few years to natural gas in terms of generating capacity
brought on line by, the red one being natural gas; and you can
see the earlier years, the various mixes that made up America's
energy capacity.
With that, thanks, everyone, for coming. But in particular,
thank you, Dr. Greenspan, for coming and for agreeing to
appear. Your recent statements have brought much attention to,
needed attention, to the issue of this Nation's growing
dependence on natural gas and the resultant price increases
that have occurred in recent years.
Gas-fired powerplants now account for 88 percent of new
electric generation. In the increasingly deregulated
electricity market, gas has become the fuel of choice--that is
for generators--and that is because they seek low emissions,
low capital costs, and until now low fuel cost generating
technology.
But there are troubling signs. New reserves tend to be
smaller than earlier discoveries and total reserves are
depleting faster than ever before. You are quite right, if we
have read your previous statements accurately, we are
increasingly in need of importing gas in the form of liquefied
natural gas. At current prices that is certainly apt to happen.
The additional demand for gas and corresponding price
increases are causing particular concerns among industrial
consumers of natural gas, for whom feedstock price sometimes
represents 60 percent of the total product cost. Those
industries may be permanently affected if long-term prices
remain where they are currently.
Mr. Chairman, I am advised that month-ahead gas prices will
probably remain in the $4.50 to $9.00 range through this
winter, with the deciding factor being how cold this winter is.
I have talked to a variety of experts and I am convinced that
there is not much the Government can do in the near term to
affect that price by more than 25 cents in any direction, a
negligible amount considering the effect the weather will have
all by itself.
I believe there are two long-term answers: we must
diversify our fuel mix by making coal, nuclear, and other fuels
equally attractive for new electricity generation; and we must
expand our capacity and access to domestic production and for
LNG. Having said that, I would very much appreciate your views
as to any changes that should be made to government policy
going forward to address these very weighty issues so integral
and important to our social wellbeing.
With that, we ask you, Mr. Chairman, if you will please
talk with the committee. Your statement will be made a part of
the record and after you have finished we will proceed to ask
questions.
Dr. Greenspan.
[The prepared statements of Senators Bunning, Craig,
Feinstein, and Murkowski follow:]
Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
Thank you Mr. Chairman.
This is a very important hearing that we are having today. I am
pleased to have this opportunity to examine how we can more effectively
deal with the price of natural gas.
Higher prices have placed a strain on the American family's budget
and on manufacturers. Natural gas' high price has affected the bottom
lines of many companies. This means that the jobs of many employees
have also been put at risk.
I have heard from many companies in Kentucky who are upset about
the price of natural gas. The high prices have made it more difficult
for companies to continue their operations with a profit.
We need to act to reduce the economic burden of high natural gas
prices on Americans.
One way to lower the cost of natural gas is to increase domestic
supply. The increased demand for natural gas with little increased
production over the past decade has contributed to the price problem.
Another way to lower the cost of natural gas is to go back to using
other energy sources. With new technology, other sources of energy such
as coal are cleaner burning fuels.
Finally, we must promote conservation of energy and increase the
efficiency of natural gas use.
I look forward to hearing from our witnesses today and thank each
of them for taking the time to come testify before us.
Thank you.
______
Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
Mr. Chairman, thank you for this opportunity to examine the current
high price of natural gas and its impact on our economy.
I especially want to thank you for inviting Chairman Greenspan to
help us work through this growing problem. His recent testimony before
the House Energy and Commerce Committee highlighted some of the
significant pressures that are contributing to the rigidity of natural
gas supply and he offered constructive opinions on how we might avoid a
full blown supply crisis. His suggestion to expand our use of Liquified
Natural Gas is one worthy concept to explore. But I fear that siting
LNG terminals will be exposed to the same opposition arrayed against
other energy developments.
Today, I'm interested in exploring the simple interaction between
demand, supply, and the forces that shape demand and supply. I, for
some time now, have pointed to supply restrictions as the prime cause
of the rigidity of natural gas supply. Indeed, following the
Committee's vote on the energy bill last April, I went to the Floor in
early May and expressed my belief that limitations on drilling on
federal lands by constricting potential exploration options have made
supply more inelastic.
When that factor is combined with the environmental pressures
occurring largely in the 1990s to build power plants that are fueled by
natural gas in order to economically comply with new source review
regulations introduced in the 1970s, it is not hard to see why we are
facing high prices for this increasingly valuable commodity.
Although the new source review compliance is a compelling pressure
on natural gas use--and I note the recent New York State NSR settlement
with the Mirant Corporation requiring more use of natural gas--there
are other pressures complicating the transportation of natural gas that
cannot be ignored, such as the current Millenium Pipeline Project
controversy over New York's application of the Coastal Zone Management
Act.
According to several energy industry analysts--and I am very
interested in Chairman Greenspan's views on this--the focus on natural
gas as the way to achieve environmental improvements without increasing
power generation costs has had an unfortunate, and likely unforeseen
and unintended, consequence of reducing the resiliency of natural gas
markets.
These analysts conclude that:
[R]egulatory mandates have constrained us away from being
able to apply the lessons of portfolio diversification to our
energy choices, and our inability to diversify our fuel input
portfolios makes for markets that do not adapt to unanticipated
and changing conditions.
The recent ratification and current implementation of the Kyoto
Protocol in Canada I fear will compound and exacerbate this costly
balkanization of fuel portfolios. As Chairman Greenspan stated in his
House testimony, Canada is our major source of imported natural gas.
Canada's implementation of Kyoto will require Canadian electricity
generators to substitute natural gas for coal in order to meet carbon
dioxide reduction targets that will be even more stringent by 2025.
Barring a substantial increase in Canadian production, there will
be much less Canadian natural gas available for export to the United
States. The dislocation to our natural gas market could be staggering.
All of these constraints will force us to look once again at our
entire energy portfolio. Assistant Secretary David Garman is here from
the Department of Energy to provide testimony on how near term
increases in efficiency and energy conservation can ease the squeeze on
natural gas supplies. This is a near term, and in my view, no regrets
kind of strategy.
On a much longer term horizon, I hope also that our witnesses will
address the expanded use of nuclear energy--something I am a strong
proponent of. The Senate energy bill contains provisions which support
the expanded use of nuclear energy. Nuclear plants are fueled for a
year or two at a time. Since fuel costs make up a smaller percentage of
the cost of nuclear power, these plants can shield consumers from the
kind of rampant price volatility that we are predicting in natural gas
markets. While these nuclear provisions are a longer term investment in
energy security, they are essential and we must stay focused on their
importance.
Given the growing tightness in natural gas supply and the
intensifying environmental pressures in our country to move away from
coal and oil as a fuel source, what set of criteria or questions should
guide us in determining national energy goals that assist in growing
our economy?
Shouldn't Congress develop those national energy goals for the
purpose of ensuring our nation's global competitiveness and national
security in an ever changing geopolitical world--a world that contains
developing nations such as China and other Asian countries that present
considerable current and future threats to our economic well-being?
A key question that I'm sure will be addressed during consideration
of this Committee's energy bill on the Senate Floor later this month is
whether we can or should substantially reduce coal use in this country
when we have over 250 years of domestic supply? Coal currently accounts
for over 50 percent of our cheapest electricity generation.
Another important question is whether we should now pass energy
legislation that continues the trend to pressure more use of natural
gas and even higher gas prices?
We must have a clear understanding of how the answers to these
questions effect our economy and it is a real pleasure to have Chairman
Greenspan with us today to help us ensure that we do clearly understand
the consequences of our actions.
I look forward to his wise counsel and also to the views of the
other witnesses you have invited to testify today.
Thank you, Chairman Domenici.
______
Prepared Statement of Hon. Dianne Feinstein, U.S. Senator
From California
Mr. Chairman thank you very much for holding this hearing. I am
very concerned about the natural gas situation and in particular I am
interested to discuss how we can reduce our consumption of natural gas
and increase our capacity to import liquified natural gas or LNG.
Mr. Chairman, in March, after a year-long investigation, the
Federal Energy Regulatory Commission released its ``Final Report on
Price Manipulation in Western Markets'' which confirmed widespread and
pervasive fraud and manipulation during the Western Energy Crisis.
One of the key findings by the Commission was that natural gas and
electricity are ``inextricably linked, and that dysfunctions in each
fed off one another during the [Western Energy] crisis.''
The day after the FERC report was issued all three Commissioners
came before this Committee to testify. I agree with Chairman Pat Wood
and Commissioner Bill Massey who both made it very clear that the
Energy bill presents an opportunity for Congress to enact more consumer
protections and provide greater authority to the Commission so that
FERC can be a more effective regulator.
I asked Chairman Wood, ``Doesn't it make sense to establish the
same penalties and refund authority to deter fraud and manipulation in
the natural gas sector since FERC found that markets for natural gas
and electricity are inextricably linked?''
Chairman Wood answered ``YES'' and Commissioner Massey also
testified in support of harmonizing the refund and penalty provisions
in the Natural Gas Act with the Federal Power Act.
As Commissioner Massey said, ``If the Commission is to be the cop
on the beat of competitive markets, we must have the tools needed to
ensure good behavior. Refunds alone are not a sufficient deterrent
against bad behavior. The consequences of engaging in prohibited
behavior must be severe enough to act as a deterrent.''
In January of this year, FERC issued its natural gas market
assessment, which concluded that market manipulation has been occurring
and may be likely to occur in the future. The Commission found that
manipulation is possible in the natural gas markets if companies:
use market power to manipulate prices in physical markets;
and
use information about capacity availability to take
positions in a marketplace more advantageous than their
competitors.
Westerners have seen evidence of this type of manipulation quite
recently and this illegal behavior forced the price of natural gas to
soar in California.
In September, an Administrative Law Judge at FERC issued a landmark
ruling concluding that El Paso Corporation withheld natural gas from
California, illegally exercised market power, and violated its
certificate obligations.
FERC Judge Curtis L. Wagner recommended penalty proceedings against
El Paso because of the following findings:
``El Paso Pipeline withheld extremely large amounts of
capacity that it could have flowed to its California delivery
points . . . which substantially tightened the supply of
natural gas at the California border.''
``El Paso Pipeline had the ability to exercise market power
and that El Paso Pipeline did in fact exercise market power by
withholding substantial volumes of capacity to its California
delivery points, which tightened the supply.''
High natural gas prices played a significant role in the Western
Energy Crisis. Since much of the electricity generated within
California is fueled by natural gas, when natural prices soared, so did
electricity prices. Since El Paso carries most of the natural gas to
Southern California, the company was able to exercise unprecedented
market power to drive up the price of natural gas.
Let me mention some additional specific findings by the FERC
Administrative Law Judge Against El Paso:
``El Paso failed to post and make available at least 345
million cubic feet per day of available capacity at its
California delivery points. Consequently, the record in this
case now demonstrates an exercise of market power by El Paso
Pipeline.''
El Paso Pipeline and El Paso Merchant Energy were guilty of
affiliate self-dealing.
``El Paso Pipeline never requested authority to abandon any
portion of [its] certificated capacity. El Paso Pipeline was
under an obligation to make 3,290 million cubic feet per day
available to its California delivery points. . . . Since the
average flow during the relevant period was only 2,594 million
cubic feet per day, there was a withholding of 696 million
cubic feet per day to the California delivery points. . . . The
Chief Judge finds this failure to operate at or near Maximum
Allowable Operating Pressure constitutes a clear withholding of
available capacity by El Paso Pipeline, and is a clear
violation of its duty to fulfill its certificate obligation.''
______
Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
Thank you, Mr. Chairman, for convening this important hearing to
examine the impact of high natural gas prices on the economy.
This issue is already impacting businesses in many regions of the
country, including in my state of Alaska. Companies that rely on
natural gas as a feedstock for their production are currently facing
very difficult decisions. They are deciding whether they can afford to
continue production or whether they must lay off employees. Agrium,
Inc. a large manufacturer of fertilizer in Kenai, Alaska is facing just
this problem.
Unfortunately, companies like Agrium face serious risks even if
they reduce production for a short period of time in hopes that the
price of natural gas will eventually come down. The customers they
provide fertilizer to will not disappear, at least we hope they won't
disappear. If they continue to buy fertilizer they may be forced to
find other suppliers--most likely outside the U.S. That is bad for U.S.
jobs and our farmers and the overall economy.
At worst, companies like Agrium may lose permanent market share if
prices remain too high for too long. A secure, abundant and reasonably
priced supply of natural gas is critical to our economy.
Indeed, Chairman Greenspan recognized this in his recent
Congressional testimony before the House Commerce Committee in June.
Natural gas currently represents almost a quarter of all energy
consumed in the United States. It heats 50 percent of existing homes
and nearly 70 percent of newly built homes. Consumers who are used to
reasonable natural gas bills may soon find they are unable to pay their
bills, especially as contracts come up for consumers who are on the
budget plans that are based on last year's gas prices.
An additional $300 per month in energy bills is a car payment for
many families. It is bad for the economy when they have to decide
against buying a new car, or against putting that $300 dollars per
month into their retirement accounts or their kids' college savings
account.
Access to more of the resource is key. That is one reason why I am
pushing so hard to build the Alaska Gas Pipeline, because Alaska has
huge amounts of gas that can help the U.S. meet its needs. In addition,
Alaska's gas can be transported to the Lower 48 as LNG. While Chairman
Greespan notes in his testimony that LNG would play a significant
factor in meeting U.S. gas supplies into the future, I want to make
sure people remember Alaska already produces some LNG for export, and
more could be made available for LNG exports to the West Coast if we
can get this project going.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN,
BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Dr. Greenspan. Thank you very much, Mr. Chairman.
Today's tight natural gas markets have been a long time
coming and distant futures prices suggest that we are not apt
to return to earlier periods of relative abundance and low
prices any time soon.
It was little more than a half century ago that drillers
seeking valuable crude oil bemoaned the discovery of natural
gas. Given the lack of adequate transportation, wells had to be
capped or gas flared. As the economy expanded after World War
II, the development of a vast interstate transmission system
facilitated widespread consumption of natural gas in our homes
and business establishments. On a heat-equivalent basis,
natural gas consumption by 1970 had risen to three-fourths that
of oil. But consumption lagged in the following decade because
of competitive incursions from coal and nuclear power.
Since 1985, natural gas has gradually increased its share
of total energy use and is projected by the Energy Information
Administration to gain share over the next quarter century
owing to its status as a clean-burning fuel.
Recent years' dramatic changes in technology are making
existing energy reserves stretch further, while keeping long-
term energy costs lower than they otherwise would have been.
Seismic techniques and satellite imaging, which are
facilitating the discovery of promising new natural gas
reservoirs, have nearly doubled the success rate of new field
wildcat wells in the United States during the past decade. New
techniques allow far deeper drilling of promising fields,
especially offshore.
The newer recovery innovations reportedly have
significantly raised the average proportion of gas reserves
eventually brought to the surface. Technologies are
facilitating Rocky Mountain production of tight sands gas and
coalbed methane. Marketed production in Wyoming, for example,
has risen from 3.4 percent of total U.S. output in 1996 to 7.1
percent last year.
Moreover, improving technologies have also increased the
depletion rate of newly discovered gas reservoirs, placing a
strain on supply that has required increasingly larger gross
additions from drilling to maintain any given level of dry gas
production. Depletion rates are estimated to have reached 27
percent last year, compared with 21 percent as recently as 5
years ago.
The rise has been even more pronounced for conventionally
produced gas because tight sands gas, which comprises an
increasing share of new gas finds, exhibits a slower depletion
rate than conventional wells.
Improved technologies, however, have been unable to prevent
the underlying long-term price of natural gas in the United
States from rising. This is most readily observed in markets
for natural gas where contract delivery is sufficiently distant
to allow new supply to be developed and brought to market. That
price has risen gradually from $2 per million Btu in 1997 for
delivery in the year 2000 and presumably well beyond, to more
than $4.50 for delivery in 2009, the crude oil heating
equivalent of rising from less than $12 per barrel to $26 per
barrel. Those prices, incidentally, are as of the close of
yesterday.
Over the same period, the distant futures price of light
sweet crude oil has edged up only $4 per barrel and is selling
at a historically rare discount to comparable dated natural
gas.
Because gas is particularly challenging to transport in its
cryogenic form as a liquid, imports of liquefied natural gas
have been negligible. Environmental and safety concerns and
cost have limited the number of LNG terminals and imports of
LNG. In 2002 such imports accounted for only 1 percent of total
U.S. gas supply.
Canada, which has recently supplied a sixth of our
consumption, has little capacity to significantly expand its
exports, in part because of the role that Canadian gas plays in
supporting growing oil production from tar sands.
Given notable cost reductions for both liquefaction and
transportation of LNG, significant global trade is developing
and high gas prices projected in the American distant futures
market have made us a potential very large importer. Worldwide
imports of natural gas in 2002 were only 23 percent of world
consumption, compared to 57 percent for oil.
Even with markedly less geopolitical instability
confronting world gas than world oil in recent years, spot gas
prices have been far more volatile than those for oil,
doubtless reflecting in part less developed price-dampening
global trade.
The updrift and volatility of the spot price for gas have
put significant segments of the North American gas-using
industry in a weakened competitive position. Unless this
competitive weakness is addressed, new investment in these
technologies will flag.
Increased marginal supplies from abroad, while likely to
notably damp the levels and volatility of American natural gas
prices, would expose us to possibly insecure sources of foreign
supply, as it has for oil. But natural gas reserves are
somewhat more widely dispersed than those of oil, for which
three-fifths of proven world reserves reside in the Middle
East. Nearly two-fifths of world natural gas reserves are in
Russia and its former satellites and one-third are in the
Middle East. Creating a price pressure safety valve through
larger import capacity of LNG need not unduly expose us to
potentially unstable sources of imports.
There are still numerous unexploited sources of gas
production in the United States. We have been struggling to
reach an agreeable tradeoff between environmental and energy
concerns for decades. I do not doubt we will continue to fine-
tune our areas of consensus, but it is essential that our
policies be consistent. For example, we cannot on the one hand
encourage the use of environmentally desirable natural gas in
this country while being conflicted on larger imports of LNG.
Such contradictions are resolved only by debilitating spikes in
price.
In summary, the long-term equilibrium price for natural gas
in the United States has risen persistently during the past 6
years, from approximately $2 per million Btu to more than $4.50
today. Although futures markets project a near-term modest
price decline from current highly elevated levels, contracts
written for delivery in 2009 are at prices more than double the
levels that had been contemplated when much of our existing
gas-using capital stock was put in place.
The perceived tightening of long-term demand-supply
balances is beginning to price some industrial demand out of
the market. It is not clear whether these losses are temporary,
pending a fall in price, or permanent. Such pressures do not
arise in the U.S. market for crude oil. American refiners have
unlimited access to world supplies, as was demonstrated most
recently when Venezuelan oil production shut down. Refiners
were able to replace lost oil with supplies from Europe, Asia,
and the Middle East.
If North American natural gas markets are to function with
the flexibility exhibited by oil, unlimited access to the vast
world reserves of gas is required. Markets need to be able to
effectively adjust to unexpected shortfalls in domestic supply.
Access to world natural gas supplies will require a major
expansion of LNG terminal import capacity and development of
the newer offshore regasification technologies. Without the
flexibility such facilities will impart, imbalances in supply
and demand must inevitably engender price volatility. As the
technology of LNG liquefaction and shipping has improved and as
safety considerations have lessened, a major expansion of U.S.
import capability appears to be under way. These movements bode
well for widespread natural gas availability in North America
in the years ahead.
Thank you very much, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Dr. Greenspan follows:]
Prepared Statement of Alan Greenspan, Chairman, Board of Governors,
Federal Reserve System
Today's tight natural gas markets have been a long time in coming,
and distant futures prices suggest that we are not apt to return to
earlier periods of relative abundance and low prices anytime soon. It
was little more than a half-century ago that drillers seeking valuable
crude oil bemoaned the discovery of natural gas. Given the lack of
adequate transportation, wells had to be capped or the gas flared. As
the economy expanded after World War II, the development of a vast
interstate transmission system facilitated widespread consumption of
natural gas in our homes and business establishments. On a heat-
equivalent basis, natural gas consumption by 1970 had risen to three-
fourths of that of oil. But consumption lagged in the following decade
because of competitive incursions from coal and nuclear power. Since
1985, natural gas has gradually increased its share of total energy use
and is projected by the Energy Information Administration to gain share
over the next quarter century, owing to its status as a clean-burning
fuel.
Recent years' dramatic changes in technology are making existing
energy reserves stretch further while keeping long-term energy costs
lower than they otherwise would have been. Seismic techniques and
satellite imaging, which are facilitating the discovery of promising
new natural gas reservoirs, have nearly doubled the success rate of
new-field wildcat wells in the United States during the past decade.
New techniques allow far deeper drilling of promising fields,
especially offshore. The newer recovery innovations reportedly have
significantly raised the average proportion of gas reserves eventually
brought to the surface. Technologies are facilitating Rocky Mountain
production of tight sands gas and coalbed methane. Marketed production
in Wyoming, for example, has risen from 3.4 percent of total U.S.
output in 1996 to 7.1 percent last year.
Moreover, improving technologies have also increased the depletion
rate of newly discovered gas reservoirs, placing a strain on supply
that has required increasingly larger gross additions from drilling to
maintain any given level of dry gas production. Depletion rates are
estimated to have reached 27 percent last year, compared with 21
percent as recently as five years ago. The rise has been even more
pronounced for conventionally produced gas because tight sands gas,
which comprises an increasing share of new gas finds, exhibits a slower
depletion rate than conventional wells.
Improved technologies, however, have been unable to prevent the
underlying long-term price of natural gas in the United States from
rising. This is most readily observed in markets for natural gas where
contract delivery is sufficiently distant to allow new supply to be
developed and brought to market. That price has risen gradually from $2
per million Btu in 1997 for delivery in 2000, and presumably well
beyond, to more than $4.50 for delivery in 2009, the crude oil heating
equivalent of rising from less than $12 per barrel to $26 per barrel.
Over the same period, the distant futures price of light sweet crude
oil has edged up only $4 per barrel and is selling at a historically
rare discount to comparably dated natural gas.
Because gas is particularly challenging to transport in its
cryogenic form as a liquid, imports of liquefied natural gas (LNG) have
been negligible. Environmental and safety concerns and cost have
limited the number of LNG terminals and imports of LNG. In 2002, such
imports accounted for only 1 percent of U.S. gas supply. Canada, which
has recently supplied a sixth of our consumption, has little capacity
to significantly expand its exports, in part because of the role that
Canadian gas plays in supporting growing oil production from tar sands.
Given notable cost reductions for both liquefaction and
transportation of LNG, significant global trade is developing. And high
gas prices projected in the American distant futures market have made
us a potential very large importer. Worldwide imports of natural gas in
2002 were only 23 percent of world consumption, compared to 57 percent
for oil.
Even with markedly less geopolitical instability confronting world
gas than world oil in recent years, spot gas prices have been far more
volatile than those for oil, doubtless reflecting, in part, less-
developed, price dampening global trade. The updrift and volatility of
the spot price for gas have put significant segments of the North
American gas-using industry in a weakened competitive position. Unless
this competitive weakness is addressed, new investment in these
technologies will flag.
Increased marginal supplies from abroad, while likely to notably
damp the levels and volatility of American natural gas prices, would
expose us to possibly insecure sources of foreign supply, as it has for
oil. But natural gas reserves are somewhat more widely dispersed than
those of oil, for which three-fifths of proved world reserves reside in
the Middle East. Nearly two-fifths of world natural gas reserves are in
Russia and its former satellites, and one-third are in the Middle East.
Creating a price-pressure safety valve through larger import
capacity of LNG need not unduly expose us to potentially unstable
sources of imports. There are still numerous unexploited sources of gas
production in the United States. We have been struggling to reach an
agreeable tradeoff between environmental and energy concerns for
decades. I do not doubt we will continue to fine-tune our areas of
consensus. But it is essential that our policies be consistent. For
example, we cannot, on the one hand, encourage the use of
environmentally desirable natural gas in this country while being
conflicted on larger imports of LNG. Such contradictions are resolved
only by debilitating spikes in price.
In summary, the long-term equilibrium price for natural gas in the
United States has risen persistently during the past six years from
approximately $2 per million Btu to more than $4.50. Although futures
markets project a near-term modest price decline from current highly
elevated levels, contracts written for delivery in 2009 are more than
double the levels that had been contemplated when much of our existing
gas-using capital stock was put in place. The perceived tightening of
long-term demand-supply balances is beginning to price some industrial
demand out of the market. It is not clear whether these losses are
temporary, pending a fall in price, or permanent.
Such pressures do not arise in the U.S. market for crude oil.
American refiners have unlimited access to world supplies, as was
demonstrated most recently when Venezuelan oil production shut down.
Refiners were able to replace lost oil with supplies from Europe, Asia,
and the Middle East. If North American natural gas markets are to
function with the flexibility exhibited by oil, unlimited access to the
vast world reserves of gas is required. Markets need to be able to
effectively adjust to unexpected shortfalls in domestic supply. Access
to world natural gas supplies will require a major expansion of LNG
terminal import capacity and development of the newer offshore
regasification technologies. Without the flexibility such facilities
will impart, imbalances in supply and demand must inevitably engender
price volatility.
As the technology of LNG liquefaction and shipping has improved,
and as safety considerations have lessened, a major expansion of U.S.
import capability appears to be under way. These movements bode well
for widespread natural gas availability in North America in the years
ahead.
The Chairman. Thank you very much, Mr. Chairman.
We will now follow the 5-minute rule, excepting for Senator
Bingaman, who will be allowed as much time as he desires. All
will then follow with 5 minutes each.
Mr. Secretary, I have three questions. I will try to make
them brief. First, in February the committee held the last
hearing on natural gas when the price spiked to $9 per Mcf and
there were accusations that the market was being manipulated.
Although prices have come down since our last hearing, prices
are more than double where they were last year.
My question is: Do you see any manipulative behavior in the
market or are the sustained high prices the result of
legitimate forces at work in the market?
Dr. Greenspan. Mr. Chairman, as best I can judge the spikes
that we have observed and indeed the levels of natural gas
prices we are now finding in our markets can be fully explained
by the relative balances of supply and demand as they have
developed over the last several years. Manipulation is a very
difficult thing to ferret out. I can say this, that you do not
need to advert to manipulation to understand what is going on,
and I would suspect that a vast amount of people who try to
manipulate these markets indeed fail.
The Chairman. My second question has to do with another
matter I noted in my opening remarks. I believe that there is
very little that can be done in the short term to relieve the
high prices of natural gas. At best, new production will take 3
to 6 months to get to market, demand management is likely to
provide modest savings, and fuel-switching is severely limited.
I believe our policy options should focus, however, on
diversifying our fuel mix, expanding our access to domestic
productions, and LNG.
Do you agree with this assessment or are there other
specific short-term policy alternatives that have not been
considered? If there are, what might they be?
Dr. Greenspan. Mr. Chairman, I agree with your assessment.
I am not aware of any short-term expedients that can be
employed at this stage to significantly alter the path that
will occur in prices over the next 6 to 9 months or a year.
Weather will be the major factor, frankly, which will determine
the price patterns that occur.
The Chairman. I do want to comment just as an observation,
something you are fully aware of. I had a visit within the last
week by a major American manufacturer of chemical products, I
guess the world's largest. I was absolutely shocked to hear the
president and CEO say that the price of natural gas is so high
here that they are moving production to Germany--I could hardly
believe it--for the production of chemical products that
require natural gas as a base.
I conclude that he has to be right or he would not be
saying it, which means that, in addition to our domestic prices
at our households, where we are seeing these bills go up, which
people are very upset about, this is a huge potential jobs
issue for the United States if we cannot rectify it as soon as
possible. Is that correct?
Dr. Greenspan. Well, it is certainly the case that natural
gas, as differentiated from oil, can have major regional price
differences. You cannot have them in oil because we can
transport oil and arbitrage markets around the world and do. So
when you get major price increases in crude oil, you do not get
differential international competitive pressure because
everyone is looking at the same price.
But today we are looking at price levels--for example, the
spot price is now somewhat over $5 per million--Mcf--or Btu's,
which is roughly the same. It is half that or just a little
more than half in Europe, even in the spot markets of the
United Kingdom. So it is not that we are looking at a world
shortage of natural gas. We are looking at a domestic problem
and one which is undoubtedly the basis for the type of comments
you heard from your friend.
The Chairman. Have you analyzed the overall impact to the
economy of our country and quantified in any way--and I can
understand it if you have not--the number of jobs that will be
lost if gas prices do not decline or stabilize, and what do you
foresee for the future?
Dr. Greenspan. It is very difficult to make that judgment.
I mean, we do see the obvious loss of jobs that will go with
the inevitable movement of gas-using productive capacity to
foreign shores because it has made us largely uncompetitive in
a number of industries in which gas is a very critical input.
It has not happened yet. In other words, we do see
significant reductions in production in certain very specific
high gas-using areas, but aside from the switches that we have
seen from gas to residual fuel oil or coal where those
exchanges are possible, you do not see all that much direct
economic impact except in households. We are going to clearly
see significantly higher bills if the futures markets in fact
are correct forecasts of the spot market as we go into the
winter.
The Chairman. Thank you very much.
Senator Bingaman.
Senator Bingaman. Thank you very much for being here and
thank you for speaking out on this issue. I do think it is very
important that the country focus on it and the Congress focus
on it.
There is an interesting article in the morning Washington
Post which, while recognizing that supply and demand
considerations are largely responsible for the relatively high
price of natural gas, the article tries to make the point that
a secondary factor contributing to the high price of natural
gas may be the lack of liquidity and lack of confidence in the
markets for natural gas as a result of Enron, the collapse of
Enron, and other traders exiting that market.
There is a quotation from Christine Teezak, who is an
energy analyst with Schwab Capital Markets, saying that:
``Having fewer traders in the market means there are fewer
offers to buy and sell. Instead of rising in small steps,
natural gas prices are jumping by bigger increments.''
I wondered if you had any thoughts as to whether this lack
of liquidity and the pulling back of a lot of companies from
the trading in this area has been a factor in the current
prices.
Dr. Greenspan. It has likely been a factor, but it is
unquestionably quite small because, as I mentioned to the
chairman a minute ago, there is very little in the price
patterns that we are recently seeing which is just not fully
explained by the balance of aggregate supply and demand.
Remember, what happens in markets which are illiquid is
that you have a number of quasi-monopolistic positions where
individuals can get somewhat higher prices than they would
otherwise get in a market in which there was fully competitive
movement of product. You do not have that, for example, in the
Chicago wheat markets. You have it in areas where inventories
are rather difficult to create or are virtually nonexistent.
Electric power has no inventory capability to speak of,
with the rare exception of backing up in some hydroelectric
reservoirs for short periods. Natural gas has got inventories,
but they are very difficult to manage because we are dealing
with an ephemeral product. As a consequence of that, inventory
management is more difficult than it is, for example, with
wheat or copper or anything else, and unless you get liquidity
in those markets you do have the capacity for local monopoly
niches which can eke out a slightly higher price.
But my guess over the long run is that effect is really
quite de minimis.
Senator Bingaman. Let me ask--this was sort of dealt with,
I think, in your statement, but I can remember about 15 years
ago I started getting concerned about the rising current
account deficit and imbalance in trade between ourselves and
the rest of the world. Of course, it has continued to grow or
is certainly at a very high level now.
But I remember asking someone from the Commerce Department,
I think, to come over and brief me on what the administration
was doing about that. This was back in the mid-eighties. The
response I got was interesting. He said: ``You know, a lot of
that, that trade imbalance that you are looking at, is
structural and we cannot do anything about it.''
I said: ``Well, what do you mean, structural''? And he
said: ``It is oil and we are dependent on foreign oil in a very
big way and that is a permanent part of our trade imbalance.''
It sounds to me like what you are suggesting is that as we
become a larger and larger importer of LNG we will be building
into our trade relationship with the rest of the world another
so-called structural trade imbalance that could have adverse
consequences for us going forward, and I would be interested in
your thoughts as to whether or not we are essentially adopting
policies that will, by encouraging more use of natural gas, and
encouraging more importation of LNG and we are setting
ourselves up for another long-term structural deficit.
Dr. Greenspan. Senator, I do not know who the economist or
official was or what his reasons were. But just remember, at
the same time, or even now, the Japanese have had, and have
very large surpluses and they import all their oil. So that
cannot be the explanation.
It is true there are structural problems with respect to
American trade in the sense that our propensity to import goods
and services relative to our income is higher than our trading
partners' and that if you consider what the world economy would
look like if everyone were growing at the same rate, we would
have a progressively increasing trade deficit. So that there
are structural problems involved.
I cannot say that you can argue that energy is specific to
that, because you go around the world and we are in somewhat
better shape than most of our trading partners who have
surpluses.
The size of what we are talking about with respect to
increasing imports of natural gas is not all that large. I
would say that I would prefer that we not increase imports of
natural gas. I would like to see a facility available to have
the flexibility to use it when we need it. But I would much
prefer that we met domestic consumption with effectively North
American production.
But I regret to say that the problems that are emerging in
endeavoring to do that suggest that we may be using LNG for
more than just price stability. We may be using it for base
supply of natural gas in the years ahead, unless we can find
means to create a domestic, and that would mean a U.S. source,
because the Canadians are increasingly less likely to be able
to fill in our growing need for gas, especially in the context
of that chart, if you extended it, it would continue the red
lines for quite a while.
Senator Bingaman. Let me just ask one other question that
relates to this provision that we have in the energy bill this
year, that we are considering in the Senate floor, and in
provisions we have reported out of the Finance Committee to try
to encourage the construction of a pipeline to bring natural
gas from the North Slope of Alaska.
Have you looked at the question of to what extent that
might alleviate some of the price pressures that we are
anticipating in the future? I know it would be many years after
a decision was made to construct that pipeline before we would
actually see any guess coming from the North Slope down to the
Lower 48. But long term, I have thought that that would be a
partial solution to the anticipated high price of natural gas.
Do you agree with that or not?
Dr. Greenspan. Unquestionably, the more gas we get down
into the lower 48 the better. I think that we are going to find
significant amounts of Alaskan gas coming down, either through
a pipeline or, as your Senate colleague from Alaska mentioned,
through LNG exports from, if you want to put it the way, from
Alaska to the lower 48.
I do not believe that one needs to encourage that. I mean,
with long-term $4.50 gas, the profitability in doing that is
quite adequate by any measure, and indeed the MacKenzie Delta
project that is the development of a pipeline from the Canadian
MacKenzie Delta into the lower 48, is going forward as best I
understand it with minimal to no subsidies at all. It is a
fully commercial project.
Senator Bingaman. Thank you.
The Chairman. Thank you very much, Senator Bingaman.
I did want to ask. If it is all right with the committee,
what I have chosen to do is to follow the format of calling on
Senators as of time of arrival. Is that satisfactory?
[No response.]
The Chairman. If that is the case, I will proceed on that
basis.
I will make one comment before I proceed to the next
Senator, which is Senator Murkowski. The Senate is now on
record that we will take up the energy bill on the last week of
this session before we go out for recess. We will start on
Monday and the Leader has announced, for at least the fifth
time to my recollection this morning, that we will stay until
we complete it.
So if we plan recesses, we better make sure that we
understand that we have got an energy bill to finish before we
take those recesses. I believe the testimony we have heard
today does not do much other than to add to the importance that
we do that.
Having said that, Dr. Greenspan, there are people certainly
in this crowd who are LNG advocates, owners, proprietors, and
they may not agree with your testimony. They may perceive that
LNG should become an integral ongoing part of America's
solution. I would like to comment as chairman. My own feeling
is that your observations are correct, but the market will have
something to do with that, I am sure, as will the environment.
Having said that, I would now call on--this is the list:
Senators Murkowski, Campbell, Craig, Thomas, Burns, Alexander,
Bayh, Bunning, Dorgan, and Landrieu. Please proceed, 5 minutes
each.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Chairman, welcome and thank you for your comments. I
particularly appreciate your remarks regarding Alaskan natural
gas and our ability, I believe, to help address the shortages
that we are facing as a Nation.
I want to talk a little bit about energy security
initially. I agree with your comments, when we are talking
about LNG and imports, that world gas supplies are different
than the world oil supplies. They are more spread out, and a
recognition that, I think to use your terms, they are more
dispersed and I think your comment was that as an energy
security issue it is not as--it is not the same situation as
with oil.
But I think we need to recognize that those situations can
change, and as we use our gas for feedstocks and electricity
and heating that the international dynamics of some of our gas-
rich nations can change. Those countries that we might have
good relationships with today might not necessarily maintain
those good relationships 25, 30 years from now and we may place
ourselves in a situation where we are reliant on these
countries who could be construed then as unsecure sources, but
we have placed ourselves in a situation of reliance for our gas
supplies, as we have currently with oil.
I get concerned that as a country we are moving towards a
policy that could make us more dependent on foreign sources of
gas, as we currently are with foreign sources of oil. So my
question to you is why, other than as a source of cheap gas,
should we pursue a policy that will make us more dependent on
foreign gas now when we do have the resources within our
country to at least delay some of our dependence on foreign
sources?
Dr. Greenspan. Senator, for two reasons. First, I certainly
agree with you that any commodity which we import is subject to
insecure sources of supply and indeed over the years we have
run into difficult problems. I remember when we had platinum
and palladium problems because they were very heavily Soviet
Union types of commodities and we were in some difficulty.
But the problem rests with the question of an overall
policy. If we choose to emphasize environmentally efficient
energy sources, which necessitates by merely the physics and
chemistry of what we are dealing with that we employ very
significant amounts and growing amounts of natural gas, then
the question is we have to be prepared, if we do not wish to be
dependent on any foreign natural gas, to find ways of producing
it internally.
We did not have a problem with crude oil in this country up
until about 1970, because we had shut-in capacity in the Texas
Gulf, and indeed the Texas Railroad Commission rationed the
production of U.S. crude oil and as a consequence of that we
found that we had far more capacity domestically than we
needed.
That changed, obviously, in 1970 and beyond. But we have
got that same sort of problem confronting us today in natural
gas. If we can find a means to assure that we will have a
surplus of gas and capped wells because of the excess supply
versus demand or facilities of, say, very significant amounts
of LNG storage, for example, we can function in this market
with non-volatile or stable prices, low internationally viable
prices, competitive prices I should say, and a less volatile
pattern of prices.
But unless we can assure that, the fallback position is in
my judgment only LNG. That does not mean that we need to have a
significant base, as I indicated earlier, of LNG as a
fundamental source of supply, but it does mean that unless we
create adequate domestic sources of supply.
The way I look at it is, first of all, the degree of price
volatility and spikes I would consider unacceptable,
unacceptable in that you cannot invest in that type of
environment for gas-using facilities, and it makes internal
corporate planning exceptionally difficult. The only way to
eliminate is to make sure that you have a safety valve in
markets where inventories are very difficult to hold, and if
you have that safety valve then you will get smooth, non-
volatile pricing and a risk structure which enables competitive
capital investment in gas-using establishments.
However, if we cannot be sure we have got that, LNG is the
ultimate safety valve, even if we do not use it. So my argument
is that we have not exhibited in this country an obvious
success in resolving a lot of these problems and, rather than
say we shall do so, I think it would be far more sensible to
assure ourselves at a minimum a backup facility which will
provide us in the event of need and hope that that need is de
minimis.
Senator Murkowski. Mr. Chairman----
The Chairman. The Senator's time has expired.
Senator Murkowski. Okay. I just wanted you to comment on
the Alaska LNG and whether or not that was factored into, when
you discuss LNG imports, how Alaska LNG is being factored into
the equation.
Dr. Greenspan. Well, I think, Senator, as you know, there
is a facility that produces LNG in Alaska, with a big chunk of
it being shipped to Japan. I would say to the extent that one
can bring Alaska gas down through LNG to the lower 48, I would
say that may very well turn out to be a highly profitable
activity. And I would suspect that if you do not have
regulations which inhibit the flow of capital that is what is
going to happen.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Senator Campbell.
Senator Campbell. Thank you, Mr. Chairman.
Dr. Greenspan, you did say you prefer, as many of us do,
that we increase domestic production of natural gas. I
certainly agree with that. But one of the big problems we have,
of course, is that we all know that government does not produce
gas any more than it does oil. Private industry does that, and
they only do it if there is some kind of an incentive.
Usually the incentive is going to be the profit margin. I
am sure they are all very patriotic, but they have got
stockholders that they have to satisfy. If there is no profit
margin or no reason for doing it, they will not.
Much of the gas, like oil, is done on public lands and what
I think the gas companies are facing is basically when they try
to increase the domestic production, it mirrors what the
domestic oil companies face and that is environmental
opposition through lawsuits. In fact, in January of this year
Peter Morton of the Wilderness Society declared: ``If you bid a
lease on public land, you can expect environmental
litigation.''
Well, a good deal of our natural gas is on public lands. So
I do not know if you are really prepared to have an answer for
this, but maybe you could give us a suggestion on how, what we
ought to be doing in Congress to make it easier to increase
that domestic production when we obviously are going to face
environmental opposition at every turn?
Dr. Greenspan. Senator, we are confronted with a very
unusual situation here, in the sense that there are two value
systems, the economic value system and the environmental value
system, and there is no tradeoff. There is a tradeoff in that
part where they merge on issues of health, where you can really
determine what type of effluent creates various difficult
problems with the Nation's health.
But there is a very fundamental value which all human
beings I think are attracted to, the pristine nature of a
wilderness. When I go out West into your area, Senator, Jackson
Hole, it is a very impressive sight. And there is no question
that there are deep-seated human values that are involved in
maintaining that type of environment the best we can.
But there are other human values on the economic side, and
there is only one human being. In other words, we have got to
make those tradeoffs. They are very difficult and if there was
a ratio of one to the other or some form of mechanistic
tradeoff that you could make to find an optimum balance, it
would be easy. But on the issue of pristine wilderness versus
economics there is no tradeoff. The only tradeoff is in human
beings making that value judgment of what it is they want, and
essentially it is up to the Congress to try to reflect that.
I mean, I have my own personal views, but other people have
other views, and I think it is a very difficult but necessary
tradeoff. What the tradeoff is, is to the extent that there is
adequate gas and one need not worry about it, which has been
the case in a good deal of our recent history, then there is no
concern about the issue of the environmental tradeoff against
the economics and the issue never came up. It has come up now
and there is no simple alternative to recognize.
But no one is going to give you a mathematical equation
which is going to say, putting these variables in, you will
find that the optimum balance between pristine environmental
issues and natural gas exploration and development is X. You
will not get that.
Senator Campbell. Thank you. I believe what have said is we
in Congress are in for some intensive debates and difficult
decisions. Thank you.
Thank you, Mr. Chairman.
The Chairman. Are you finished, Senator?
Senator Campbell. Yes.
The Chairman. Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Thank you, sir, for a very thoughtful presentation. I guess
we are now on the verge of going back to talking about an
energy policy. It seems to me that that is kind of what we
lack, and I would be interested in knowing about that.
First of all, when you ask about access to public lands,
remember it is not all wilderness. There is a great deal there
that is not wilderness. There are various categories. So in
order to do some of the things--you mentioned Wyoming as being
a possibility--why, permitting is a problem. We have got to
have transportation to get it out of there. Yes, there is gas
there. We just have not been able to get it out for a number of
reasons.
But more importantly, for instance coal. We have 250 years
of coal available. It is far less expensive per Btu than is
gas. What has happened is over the last number of years, why,
practically all of the generation plants have been gas, largely
because you can build gas plants smaller, put them closer to
the market, and you do no have the transportation problem.
There is concern about the environment part of coal, of course,
but we can work on that.
Do you not think that one of the Government
responsibilities is to have a policy as to where we ought to be
in terms of what, for instance, maybe how we use these
resources, and then have incentives to cause that policy to be
implemented?
Dr. Greenspan. I certainly do, Senator. The issue of what
one does with, say, Rocky Mountain gas reserves, which, as you
know far better than I, are really quite extensive and would be
a major contribution to the available domestic supply of gas,
and there is no doubt that if we advert to coal for a good deal
of our utility operation, or nuclear for that matter, it will
take a good deal of pressure off the gas market.
It is difficult for an economist such as myself not to be
more attracted to the economics than the wilderness issue,
because that is my profession. But I would be mistaken to
believe that that is the general view which everybody holds. I
do say this: I say that it is essential that one recognizes
what the cost in energy policy is if you restrict the access to
certain areas where preliminary seismic analysis has indicated
very significant capabilities in gas.
There are clearly improving coal technologies, coal
gasification, coalbed methane, which so far as health concerns,
which is another part of the environmental structure--I think
people tend to lump what I would call pristine environmentalism
and health environmentalism as though they are the same. They
are not. They in themselves are two different sets of values.
On the issue of health, all I will say is that our history
does suggest that as our wealth increased over the generations
so did our health. The biggest increases in life expectancy in
the United States occur when our economy is developing the
capability of creating clean water and the ability to actually
create an environment in which the atmosphere is breathable.
So you cannot really argue that it is a tradeoff. In one
respect I would argue over the long run a viable economy may
well be the most effective way to maintain the Nation's health.
But that does not mean that you do not have very significant
and subtle tradeoffs which have got to be made, and there is no
other vehicle in a democratic society to make those tradeoffs
except the Congress.
Senator Thomas. Thank you, and I hope that we can in our
policy develop a better balance between protecting the economy
and producing a product. I think that we can and I guess all
that I am saying to you is I believe that one of our failures
has been the lack of a policy to direct us to do those things.
So thank you, sir.
The Chairman. Thank you very much, Senator.
Senator Burns.
Senator Burns. Thank you, Mr. Chairman, and I will be very
brief because you have covered most of the areas of interest,
Chairman Greenspan.
I was interested in your comment today comparing all
commodities, especially that of wheat in Chicago. There is one
element that is left out of our ability to be competitive on
the world market in exports and everything else in our
production. There is another element that goes with natural gas
that is very concerning in the agricultural community and that
is the production of fertilizer.
Since agriculture is still our largest contributor to our
GDP in this country, I think it goes without saying that it has
to be a part of the economic makeup whenever we make our
decisions in energy policy and how that affects our
competitiveness in agricultural production. So I know I am not
telling you anything new, but we very seldom hear it heard here
in this 17 square miles of logic-free environment of what goes
on in the rest of the country in the production of food and
fiber, and I wanted to make that point and bring it to the
attention of the committee and to the attention of the American
consumer, because not only does it impair us to produce more
efficiently, but also the ability to market and to keep our
commodity within the range of everybody that is hungry.
Going on the other--you may want to comment on that.
Dr. Greenspan. No, no. I agree with you fully, Senator. I
think that fertilizer happens to be one of the most gas-
intensive products we produce, and I think that if you double
the price on a fairly large acreage and that is a lot of cash.
Senator Burns. It is tremendous.
Then the rules and regulations of getting coalbed methane
on line and making it a part of the energy mix as far as
natural gas is concerned, because they are of the same
qualities environmentally and everything else. So we are very
disappointed in my State after, 70 days after issuing a record
of decision on the EIS in the Powder River Basin and the Tongue
River Basin, this administration still has not issued one
permit of Federal leases as far as drilling to start down
there.
So those are the delays we encounter. They are not only
expensive delays, but they are also--in the gas market, but
also expensive to those people who are charged with the ability
of lifting that resource.
Dr. Greenspan. Senator, the most expensive part of that is
the rise in risk premiums that occur as a consequence of the
uncertainty of the supervisory regulatory process that we go
through. So that whatever we can do to bring the level of
uncertainty down, the more we are apt to lower the cost of
capital on gas-using types of facilities.
Senator Burns. I thank the chairman, and I thank the
chairman for appearing today.
The Chairman. Thank you very much.
Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
Thank you, Mr. Greenspan, for being here. Your two
paragraphs of comment before the Joint Economic Committee a few
weeks ago on an emerging crisis on natural gas helped focus the
country's attention on this problem in an important way and I
thank you for that. We talked during that hearing, and I would
like to continue that line of discussion now, on putting this
in the focus of one word, which is ``jobs.''
The morning paper in Nashville said that the Nashville Gas
Company has advised everyone who buys gas, business or
residential, that gas prices this winter will be up at least 30
percent. There will be a witness from another company before us
in a while where the management and the workers have taken a
pay cut a few weeks ago, a few months ago, because of the
higher price of natural gas.
It seems, at a time when our greatest challenge for our
country longer term is how do we keep our manufacturing jobs
from moving overseas, and we know that a big part of that is to
try to keep unexpected costs low for those manufacturers so
they will not move to Mexico or China or somewhere, these
energy policies that we fail to adopt here are having a direct
impact on everyday jobs.
Now, one kind others have talked about, which is we have
restricted access to our own supply of natural gas. That has
raised its price and that sends the jobs to Mexico and China.
There may be another kind of regulatory policy which you might
be able to help me understand better. I would like to go
specifically to coal gasification, which is an obvious possible
option for an alternative fuel to natural gas. It seems to
work. That has been proven. The technology works. There is
plenty of coal. The price of gas is now up, which ought to help
an alternative fuel like coal gasification.
My question would be: Are there any regulatory barriers
that we can fix that would make it easier for coal gasification
to become an alternative fuel and help keep energy prices down
and jobs--and keep jobs from moving overseas?
Dr. Greenspan. Incidentally, before I respond to that
question let me correct a statement I made to Senator Burns. I
said that the reduction in uncertainty would create improved
investment for gas-using industries and I meant to say gas
producers, obviously.
With respect to coal gasification, the technology has been
around for quite a while, as you know. I am not familiar with
the structure of regulation which is inhibiting it at this
stage, but I am, obviously, aware of the essential negative
aspect in all of our regulations, both current and pending, to
the use of coal, use in any of its variations, because it is
true, coal is carbon. I mean, that is what it is when you
employ it.
So I am not sure exactly either what the state of the
technology is or what the specific regulations are. But I would
certainly agree with you that if there is a way to bring it
forth, granted the extraordinary amount of coal reserves that
we have, that is something we should seek to do.
Senator Alexander. One other question there. Many of the
older powerplants have backup ability to produce fuel. Most of
those older powerplants which are producing electricity by
natural gas, if they were to switch to a backup fuel, would be
producing electricity in a much dirtier way, a much more
environmentally unacceptable way than they are today.
Have you studied that or taken into account the attitude we
might take on that or the consequences of that?
Dr. Greenspan. Well, Senator, that gets back to the whole
question of how we regulate the utilities. The problem with
utilities, as I mentioned before, which is unique to electric
power is that there is no capacity to have inventories, which
enables one to effectively move production to the most
efficient and the most environmentally appropriate forms of
production.
So that gets back to the very complex structure of problems
that everybody has been having with so-called electric power
deregulation, which some say is misnamed and others say does
not work. But you cannot, I believe, come to grips with the
particular problem which you point to, which I think is a
serious problem and one which the way you described it I think
is quite accurate, until we come to grips with how we are going
to create a viable competitive electric power system. And at
the moment I think we have taken a few false steps and have not
made very much progress or, to put it more exactly, have made
far less progress than we should have made at this stage. There
are areas of the country which are doing rather well in that
regard.
Senator Alexander. Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator.
Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman, and thank you, Mr.
Chairman. It is good to be with you again.
I hope I am not being unduly irreverent when I comment that
a congressional hearing on the subject of natural gas may be
the perfect meeting of venue and subject matter. It occurred to
me that that may very well be the case.
You have touched upon most of my concerns. I would like to
follow up on something that Senator Alexander was saying. As I
understand the import of your testimony, it is your belief that
the use of domestic coal reserves and possibly the further
utilization of nuclear power could contribute substantially to
the stability of energy production in the country and
moderation of price increases in the country, but it involves
the reconciliation of differing values: health concerns,
environmental concerns on the one hand, economic growth
concerns on the other hand.
He was asking you about coal and the production of
electricity and that sort of thing. As we ramp up our ability
to import LNG, does it make sense also to continue our
investments or perhaps to expand them in such things as clean
coal technology, which might allow us to reconcile the use of
some carbon-based supplies that we have with environmental and
health concerns?
Dr. Greenspan. Well, Senator, I believe we are doing that.
There are innumerable endeavors to find a much better way of
taking particulates and a number of its less desirable gaseous
products out of coal. I think that will continue.
I believe that we have got the potential of a very
effective energy industry in this country and a very effective
interface with the international energy system. We have got a
number of bottlenecks, a number of things which we do poorly,
and I would think that if we could allow competition far more
sway in our markets I think we would find far quicker, cheaper,
and more productive solutions.
It is remarkable what happens when you deregulate things. I
remember, for example, when we took off all controls on
petroleum in the early 1980's everyone was terribly concerned
that prices would go out of hand, the system would collapse.
And within a very short period of time the system was in
balance.
I think we do too little of that in our energy policy these
days, and what we find is we have a regulation X which cures
problem X, but also creates problem Y, and we find ourselves
running around in circles trying to make a system balance, when
that is what Adam Smith taught us back in 1776 works very
effectively with the so-called invisible hand. He was right
back then and I think he would be right today.
Senator Bayh. You had mentioned that there had been some
barriers heretofore to expanding our LNG importation capacity.
I think you mentioned security concerns, environmental
concerns. Could you expand upon that just a bit? What has been
the historic reluctance to expand this capacity?
Dr. Greenspan. It is the ``not in my back yard'' syndrome.
These are big facilities and these are not the types of things
you want in your back yard. Indeed, what is happening as a
consequence of that is there is a very significant effort in
LNG technology to move the whole process of import offshore.
There are technologies which are now developing in which you
are getting LNG carriers which can regasify on the ship and
connect 20, 30, 40, 50 miles out into a regular natural gas
pipeline which could interconnect with our basic system.
So we may find that the newer technologies will be less LNG
terminals that are fixed and a good deal more of this flexible
technology which enables ships parked out over the horizon to
regasify LNG into standard gas and just pipe it into the
system. I think that that is likely to happen more and more,
but if we just let the market determine where the capital is
put I think we will be quite satisfied with how that comes out.
Senator Bayh. A combination of market forces and
technological advances may be our best allies here.
I see my time has expired, Mr. Chairman. I just have one
final comment. You testified that two-fifths of proven gas
reserves are in Russia?
Dr. Greenspan. No, in the former Soviet----
Senator Bayh. The former Soviet Union.
Dr. Greenspan. It is about 30 percent in Russia itself.
Senator Bayh. It struck me that this has some obvious
implications for the importance of that relationship going
forward.
Dr. Greenspan. Yes, sir.
Senator Bayh. Thank you, Mr. Chairman.
The Chairman. Senator Landrieu.
Senator Landrieu. Thank you, Mr. Chairman.
Mr. Greenspan, thank you for your comments and for helping
us focus attention on this very, very important issue.
The Chairman. Senator Landrieu, might you permit me to
comment on a visit that I recently took to your State?
Senator Landrieu. Please, Mr. Chairman.
The Chairman. I think it has something to do with the
testimony that the distinguished witness has had here regarding
values.
Mr. Chairman, I was privileged to fly out on a helicopter
about 5 miles out into the Gulf of Mexico and land in a
helicopter on a bed out there, a great big configuration that
looked much like, when you look at it from the inside, like the
size of a nuclear powerplant. 156 people live there day and
night.
There are ten wells down into the ocean bed that bring
forth large quantities of oil and gas. They did not drill until
they knew it was there using modern techniques. They were very
proud to tell us that in all their efforts from the beginning
to that date they had spilled into the waters of the Gulf
three-quarters of a cup of oil. That was the extent of the
environmental damage that they contributed to that particular
water.
I recall, as do you better than I, the arguments against
doing what is being done there, most of which were based upon
non-objective arguments that had to do with spoilation and
environmental degradation. The other most interesting thing was
you could see from the place where you sat and watched, you
could see that there were more fish of large sizes and, believe
it or not, more fishing boats by large amounts out there near
that platform than there were anywhere else around.
I merely cite that because this Senator has been a staunch
advocate, obviously, of what you have spoken about today in the
market, and I cite it because truly the issue on balance is not
always just balance. One of the big issues is how do you try to
make sure the American people get the facts, not the
contentions of those from each side of the equation.
Senator Landrieu.
Senator Landrieu. Well, I thank the chair. It was a quite
wonderful trip for us to be able to share the bounties of south
Louisiana and the coast and for the chairman to fly out and
land on a rig. He was lucky we got him out a day before the
storm, but we made sure of that. The last thing I wanted to do
as a rookie member of this committee was to lose a chairman out
in the Gulf of Mexico. So we, Mr. Greenspan, ushered him out
rather safely before the storm.
But seriously, I wanted to ask a few questions, but comment
that Steven Brown, who is the Director of Energy Economics at
the Dallas Federal Reserve Bank, stated recently that ``Nine of
the ten last recessions have been preceded by high energy
prices.'' He went on to add that: ``If high gas prices
continue, the Nation's gross domestic production could fall
anywhere between .6 percent to 2.1 percent short of where it
would otherwise have been. Some estimate this could translate
into a loss of between 770,000 jobs and 2.7 million jobs.''
The reason I raise this and will ask you just to comment if
those figures seem within reason is because a lot of these jobs
are in Louisiana. We are a huge, not only producer of natural
gas, as the chairman has indicated, but we consume a lot of
natural gas, which produces the fertilizer that grows the crops
in the Senator from Montana's State, ammonia being the main
component of fertilizer.
We had nine fertilizer chemical plants in Louisiana 3 years
ago. We are now down to three. More than 3,500 employees; it is
now down to 1,000. There are plants that the chairman has
commented have come to his office indicating they are either
closing, consolidating, or moving.
I want to say that, while this is an energy bill, I
perceive it as a jobs bill. And while this is a hearing on
natural gas, it really is a hearing on jobs in America. So
would you comment, please, about this information from Mr.
Brown? Do you agree or disagree? Do you think that is a
reasonable estimation that we could lose millions of jobs more
if we do not try to redirect some short and intermediate
efforts to change this trend?
Dr. Greenspan. Well, Senator, I would have to see the
actual calculations. My initial response is I am a little
surprised at the size of the numbers he has gotten, largely
because natural gas, unlike oil, is, as you know, about 83
percent domestically produced. When you get a rise in domestic
prices for natural gas, it is not the same thing as if you were
importing crude oil, which is essentially a tax. All of the
difference goes to the producer of crude oil.
Here, the price rise is a transfer between a consumer and a
producer, both in the United States. The general view is that
the propensity to spend by the consumer is higher than that of
the producer and therefore higher gas prices do in general
lower the GDP. They certainly make considerable difficulties
for households and for selected industries, and clearly ammonia
and fertilizer are crucial industries and just as importantly
in your State, Senator, the whole issue of petrochemical
feedstocks and the petrochemical industry is involved.
So that there are significant economic effects. I would be
a little surprised at the size of the numbers that my colleague
came up with. But without looking at his assumptions and the
details of his calculations, I really cannot make a judgment on
the quality of the estimates.
Senator Landrieu. I appreciate your comments.
Let me ask you on a subject the chairman raised, which is
the inventory, either proven or unproven inventory, of domestic
reserves, proven or unproven domestic reserves in our country
as well as on the continental, Outer Continental Shelf. When
you comment about proven reserves in Russia, can you comment
about the possibilities of there being more reserves in the
United States than perhaps we have even estimated domestically
because there are certain regulations currently that prevent us
from actually inventorying what our complete assets are?
It is one of the things the chairman feels strongly about,
getting an accurate inventory. Could you comment, in that you
are advocating for more reasonable domestic production, which I
tend to agree with?
Dr. Greenspan. Well, the notion of proved and unproved
reserves is more of an art than a science, regrettably. There
is no question that unless and until you drill a hole you are
really not certain you have got anything. Therefore, the
inability to drill in areas where seismic and satellite
technologies suggest the very high probability of oil or gas
tends to make it difficult to judge whether or not you really
have got those reserves.
I think it is everyone's general view that the so-called
unproved reserves, the potential reserves in the United States
that are economically potentially competitive, are really quite
substantial. Unfortunately, we will not know that unless and
until we go in and take a look.
Senator Landrieu. Finally, last question. We have been
fairly, very generous actually, with tax credits for all sorts
of items in the last several years here. Would it be of your
mind that perhaps we could either look or relook at some
potential tax credit or tax relief to give some relief to the
users of natural gas, even as a temporary measure until our
regulatory and policy issues can catch up with the
extraordinary demand that is going to occur in this country?
Some estimate a doubling or a tripling of the demand in the
next 10 to 15 years.
Dr. Greenspan. Well, Senator, that is a judgment that the
Congress has to make. You may recall when a similar situation
arose with home heating oil the issue did create action on the
part of the Congress. You have to be a little careful, however,
to make sure if you do that you do not eliminate the normal
rationing that occurs from higher prices in households. So that
you have to be sure that what it is that one pays out in a
government transfer payment is not tied to the price of gas
directly, because if it is what you will find is that it could
be counterproductive in a sense, because there is no question
that when the price of natural gas goes up householders do cut
back on consumption, as they should, and accordingly they
assist the balancing of overall supply and demand.
So you do not want to abort that particular process by any
form of subsidy. So I would merely suggest that if you do it
make certain that it is not a function of how high the price
is.
Senator Landrieu. Thank you.
The Chairman. Thank you very much, Senator.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
Thank you, Chairman Greenspan, for being here. I think we
have a real conflict in the United States of America. We have--
on the one hand we have a policy of the Federal Government over
the past 15 years pushing and encouraging the use of natural
gas to produce electricity, and on the other hand we have this
supposed shortage or limited supply of natural gas, and
therefore we have a direct conflict.
The conflict is between what we use to make electricity
with and what we use for natural gas on the other hand. There
are many other uses for natural gas. So that has been a big
conflict and that is the reason we have spikes up to $9 and
that is the reason we have a cost, Btu cost, of about $4.50
from a $2.25 just in the recent past.
Let me ask you the question, have you had a chance at all
to read the new energy policy bill that we are about to take up
at the end of this month?
Dr. Greenspan. Senator, I have glanced through it, but I
cannot say that I am fully familiar with it in detail.
Senator Bunning. Okay. We address many of these conflicts
in this new energy bill that we are going to address on the
last week in July. One is how we look at coal. One is how we
look at natural gas. One is how we overall supply and where we
can environmentally soundly produce from coal and from natural
gas, the conflict that you talked about, where we can resolve
part of that.
I believe unless we look at all alternative fuels and the
use of what we have now in direct relationship to natural gas,
we will never solve that problem that you talked about, whether
it is pristine wilderness, whether it is wilderness that is, as
some of our colleagues on this committee say, it is not
pristine.
We have to have the ability somehow to produce domestically
a larger supply of our own natural gas, and we have to also be
able to use coal and other fuels to produce better results
environmentally and economically for the market. I would agree
100 percent with you that the market should dictate the cost of
these production and these fuels.
My question is, do you think the Government's shift to the
use of natural gas in the production of electricity has had a
dramatic effect on the cost of natural gas over the past few
years?
Dr. Greenspan. It certainly has, Senator, and one need only
look at the price of natural gas in other countries, which is
significantly below where we are. And even though many of them
have similar policies, they do not have it to the extent that
we do relevant to our supply-demand balance. Had we not had
this type of situation, there is no question that the domestic
price of natural gas would be lower than it is today.
Senator Bunning. I happen to agree with you 100 percent.
You have indicated you think that liquified natural gas
coming into this country would be a big help or could help
alleviate some of the problems we are having.
Dr. Greenspan. Senator, our experience with crude oil tells
us that we do have the capability, when confronted with a
production shortfall or a crisis, to bring in crude or products
from any place in the world fairly quickly and prices never get
out of hand. In fact, as I mentioned in my prepared remarks,
the Venezuelan situation was one that could have been a real
serious problem, and it was not.
But we have got a 62-year supply in the world of natural
gas and only 43 years of supply in crude oil. So there is this
vast amount of gas that is out there, which if it comes into
this country at competitive prices will essentially solve the
price problem or, I should say, the price volatility problem.
It will not solve the security problem because clearly it will
make it worse.
So I think we as a minimum ought to at least have a standby
LNG system, even with the capital cost that that implies.
Senator Bunning. The storage areas, you are talking about?
Dr. Greenspan. The storage areas, the capacity in an
emergency to bring in either spot or short-term cargoes of
natural gas--an ability to address any price problems which are
strictly temporary imbalances of supply and demand. But
recognize that longer term, while we do have that backup, we
should work to try to eliminate it as a backup in producing far
more domestic supply.
Senator Bunning. My last question. I know my time has run
out. Liquefied natural gas can be brought to this country and,
as you suggested, with the right facility and right storage
facility, can be converted immediately into natural gas and
therefore put right into the supply system. If we can do that
in a reasonable and rational fashion over the next year or
two--and I think we can do that; it is just a question of
whether we want and have the will to do it--if we pass the bill
that we have before the Congress at the end of this month, we
will have solved an awful lot of these problems. And I hope
that you take a little better look or you have a little more
time to look at it.
Thank you.
Dr. Greenspan. I shall.
The Chairman. Thank you very much.
Senator Talent and then, Senator Craig, will you wrap this
up. We are going to have votes. You close it down and I will be
back and open the next session.
Senator Talent. Thank you, Mr. Chairman.
Chairman Greenspan, I am grateful to you for spotlighting
this issue. I think you have done a real effective job of doing
that. I know you are here because, at bottom, because you are
concerned about the impact of rising natural gas prices on the
economy, on economic growth and our ability to recover from the
recession. I mean, that is really what it comes down to, is it
not?
Dr. Greenspan. Exactly.
Senator Talent. Now, have you or has the Fed quantified
that at all? I mean, are you able to give us any estimates
about what this doubling in natural gas prices has done to GDP
or unemployment or any of the other economic indicators?
Dr. Greenspan. We have looked at it to date. To date the
damage is still quite minimal, with the obvious exclusion of
the chemical industry, very specifically ammonia, fertilizer,
and a number of petrochemical feedstock operations. We do not
find at this particular stage that aggregate manufacturing
production has been significantly affected, but we do find that
the profit margins of non-energy, non-financial corporations
have been squeezed, and clearly over the longer run that has
got to have a negative effect overall. We have not yet had the
impact which, if the market follows the futures market pattern
into the winter, we are going to have with respect to
households.
So as yet the effect has been containable. But if you
project it out over the longer run it has clearly quite
negative effects.
Senator Talent. Okay. So what you are telling us is that
maybe you cannot quantify it, give us a percentage of GDP, but
there is no question that the economy has been hurt to some
degree already by this and will be hurt more unless we do
something; is that your testimony, then?
Dr. Greenspan. Yes, sir.
Senator Talent. I wanted to get that right on the record.
Now, the only other line I wanted to explore, Mr.
Chairman--I know we are short on time--is your statement about
the value choices we have to make and the tradeoff between the
pristine environment and economic--and a supply of energy and
therefore economic growth in this case. I want to explore that
a little bit, because I am wondering if this is not a case of
what my old professor, Murray Weidenbaum, who I know you know
very well, used to call a false conflict, one that looks like a
conflict, but when you actually get into it isn't much of a
conflict.
I mean, for example, you testified that economic growth not
only does not hurt environmental health, but it helps. In other
words, the more the economy grows the healthier the environment
is just in terms of human health.
Dr. Greenspan. That is correct. I try to distinguish,
however, Senator, between two different aspects of so-called
environmentalism which I think are really quite distinct. One
is the values that one achieves from viewing pristine
wilderness. I do not know a human being who is not struck by
some of those sights that we see in our West, for example. That
is not the same thing as the issue of particulates in the
atmosphere and unclean water or pollution, toxic chemicals, and
a variety of other things. Those do clearly over the long run
become a function of economic growth, not the more growth the
more pollution, but the other way around.
In the short run it is correct that you rev up industry, as
we did for example in Britain with the beginning of the
Industrial Revolution, and there was just a huge amount of
pollution in that environment. Yet the population was higher
than it would otherwise have been. So it tells you that
underneath the general growth of an economy are the mechanisms
by which you tend to improve health, and, as I mentioned
before, we do not recognize how critical clean water was in
this country to creating a very significant increase between,
say, 1900 and 1920, 1925, in life expectancy.
Senator Talent. What I wonder and my final really inquiry
is whether you have studied, the Fed has studied, the
connection between economic growth for an economy at our
level--you see, I think we are a mature first world economy,
obviously--and the pristine aesthetic quality of the
environment. Because you see, common sense tells me that it is
the poorer countries around the world that not only have an
environment that is less healthy, but also have an environment
that is less pristine, precisely because in order to produce,
they do not have the affluence, they do not have the
technological innovations to do it in a way that protects the
pristine quality of the environment.
I am wondering if at the stage we reached as an economy,
whether continued economic growth at a robust quality is not
essential to preserving the pristine quality of the
environment. I will let you comment and then thank the chair
for letting me.
Dr. Greenspan. I would agree with that and I would merely
stipulate that if you go back to the United States in the
1890's you will find that you had very heavy effluents and very
poor environment in the areas where factories were. We do not
have that today, and I fully agree that the evidence does
suggest that the higher the standard of living the--I do not
know whether it is the pristine environment issue, because
people tend to think of the pristine environment as one
untouched by human activity. It is a very subtle, very tricky
valuation issue, but it is something we have to at least
recognize and identify if there is going to be an appropriate
judgment on the part of the Congress.
Senator Talent. I agree. I just think when we do that we
will find that about 90 percent of this conflict is what
Professor Weidenbaum used to call a false conflict.
Dr. Greenspan. It may well be.
Senator Talent. Thank you.
Dr. Greenspan. He has been right more often than not on
such issues.
Senator Talent. I thank you. And thank you, Mr. Chairman.
Senator Craig [presiding]. Senator, thank you.
We have been joined by our colleague from New York, Senator
Schumer. Do you have a question of the chairman?
Senator Schumer. Thank you, Mr. Chairman. I again
appreciate your erudition here.
The first question I would like to ask is this. There are--
I know Senator Burns while I was out--we had another hearing--
had touched on this, but I wanted to ask a little further.
There are certain industries that are very dependent on natural
gas, the chemical industry for instance. And with the high
costs of natural gas right now, even if we were to alleviate
them 5 years from now, from what I understand large parts of
the chemical business will go offshore, never to return,
because it is a capital-intensive business.
What can we do about that? Would you think that a certain
set-aside of natural gas at a certain price for that industry
would be worthwhile? I understand that is non-economic, but
having this industry leave and come back--you know, we do have
externalities. We do have transaction costs that make certain
non-economic things worthwhile.
Could you talk about that for a little bit, because it is
something I worry about.
Dr. Greenspan. Yes, and it is something if you do it I
worry about, and I will tell you why. I have observed these
types of solutions year after year and they seem to work for
one industry and then you find that you are creating more
problems for other industries. I am not certain if you put
aside say some LNG storage selected strictly for the chemical
industry that that would make all that much difference, because
they are thinking longer term and unless they knew that there
was a long-term solution here which brought the price of
natural gas down to world competitive levels, the mere
existence of a short-term fix is not going to keep them here.
Senator Schumer. Well, let me modify the question. If we
were to come up with a long-term solution, would this short-
term solution also be a worthwhile thing to pursue?
Dr. Greenspan. I frankly doubt it, but----
Senator Schumer. I did not think you would change your
mind.
Dr. Greenspan. I am open to evidence on that question.
Senator Schumer. From what I am told, for instance, it is a
very small percentage of total natural gas use that has huge
effects on an industry, a capital-intensive industry that
cannot go back and forth very much. So I think you need both. I
could not agree with you more, no one is going to--no one is
going to be able to stay here if there is not a long-term
solution.
But if it were half of one percent of total domestic
natural gas production and created a huge multiplier effect of
things staying here, it is something I think worth considering.
Dr. Greenspan. Senator, I would suggest that if your long-
term solution was credible that you do not need the short-term
solution.
Senator Schumer. We will see if we can come up with a long-
term solution.
Next question I have is about conservation. We have talked
mostly in this committee about new production, as have you, and
I have not been averse to new production. I am not an ideologue
on these things. I think we need some of each. But I do think
that probably if you gave a--if you did a bird's eye view of
our immediate problem, that some forms of conservation and
efficiency might help alleviate the problem as quickly and as
economically efficiently as new production.
Do you disagree with that?
Dr. Greenspan. No. If demand exceeds supply, you bring the
gap down either by increasing supply or by decreasing demand.
Senator Schumer. And do you have any adverse--I mean, you
may, knowing you as much as I do and respect--knowing you as
well as I do and respecting you as much as I do. But certain
governmental measures to increase that efficiency, would you
necessarily rule those out, or would you just wait for the
market to produce them?
Dr. Greenspan. No, I think most of the action that probably
would be helpful in this area is unwinding previous government
regulations. But I do not deny that certain standards which you
can set up could actually be effective in that regard.
Senator Schumer. Glad to hear that.
The next question is a little bit about the Rocky Mountain
gas area, where I am open to looking at it. I was one of the
Democrats who voted to explore in the east coast, in the east
Gulf, much to the chagrin of my Florida colleagues. But I asked
the environmentalists what was the problem with oil in the west
Gulf, give me the environmental problems? There were virtually
none. So I said, well, then we should be open--you know, we had
a vote on opening some tract or other.
Senator Landrieu. You did a great job.
Senator Schumer. Yes, you would know better than me.
Well, the same thing, the same thing with the Rocky
Mountains. There are some areas that we would not want to see
touched. They are beautiful, they are pristine areas, national
parks, national monuments. Then there are some areas which
already are open to complete exploration.
The rub occurs in the level two areas, where there are some
restrictions right now, but not prohibitions. What would be
your view of this? Here is the basic argument. The people--some
people come in to me and say: The best thing we can do, we do
not need to change those level two areas; it is the level three
areas where you have production; you can make it more efficient
and that can happen on its own and that can most increase the
production of natural gas, which we all agree we need.
I mean, I just have to tell you, New York State--is my time
up? I am sorry, Mr. Chairman.
The Chairman [presiding]. It is.
Senator Schumer. I apologize.
Do you think there is a greater chance of looking at
existing places in the Rockies and just increasing the
efficiency there or changing the regulations, removing some of
the regulations, and going into the level two areas, just in
terms, not making the environmental way--that is our job, as
you say--but in terms of bringing more gas quickly to the fore?
Dr. Greenspan. I think that if you took a look at level two
and you made the whole structure of regulation much easier and
not as prolonged, you would bring down the risk premiums
involved in new investment in those areas, which probably would
create more than anything else you can do. I merely say that
because, looking at the various different requirements that are
involved to get permits, the risk premiums with the
uncertainties and the arbitrariness of some of the things that
go on--the elimination of that has got more possibilities of
getting effective production.
Senator Schumer. Thank you, Mr. Chairman and Mr. Chairman.
The Chairman. Thank you very much, and I was very pleased
to hear your comments, Senator. I did not mean--I rattled by
mistake. I was not trying to stop you.
Senator Schumer. You were applauding me, one of the rare
moments.
The Chairman. That is exactly it.
Thank you so much.
Senator Schumer. I am finished.
The Chairman. And he happens to be right, without being
from out in the West, too. The problem is not the wilderness
with a capital ``W''; the problem is how long it is taking for
the non-wilderness areas. It is equivalent to being closed
because it takes so long. Those people who take risks equate
that with being closed and therefore give up. That is what he
is referring to.
Senator Craig.
Senator Craig. Thank you, Mr. Chairman.
Let me comment to my colleague from New York, Senator
Schumer. About 5 or 6 years ago I was out on the Rocky Mountain
Front looking at potential production sites and looking at
rehabilitated exploratory sites. I think Chairman Greenspan
would appreciate this. We were landing in a helicopter and as
we dropped into this mountain valley Jackson Hole, Wyoming,
which is one of the favorite recreational spots in the western
world today, disappeared from the skyline as we settled into
this valley to look at a well drilling site.
We could not find this rehabilitated site. It was not
visible, the grass was so robust, the reclamation had been so
thorough. And as we landed where they thought it had been, an
elk cow and her calf jumped up out of the grass and took off.
She was resting on the old drilling site, and the reason she
was was because the rehabilitation had been so effective that
there was better grazing there for her and her calf. And we
were in eyeshot of Jackson Hole, Wyoming.
That just tells you what can happen when we do it right.
But what is the conflict and what we try to address in our new
legislation is allowing them to get to that site to drill in
the first place. Once they get there, and if production is
found, fine; if not, they rehabilitate it and move on. There
lies our greater conflict.
Mr. Chairman, over the 4th of July I was in north Idaho and
in north Idaho a marvelous new gas-fired electric turbine,
electrical generating turbine, had been in operation for about
2 years, straddled one of Williams' pipelines coming down out
of Canada. That turbine is now off, shut off; the price of gas
too high. And yet that was, of course, the answer to the energy
crisis that had bled up into the Pacific Northwest out of
California a couple of years ago. So the marketplace is
working, obviously. That price--that facility came off line
some months ago.
My question or my thoughts for you to respond to are in
that nature, because according to several energy industry
analysts the focus on natural gas as a way to achieve
environmental improvements without increasing power generating
costs has had an unfortunate and a likely unforeseen and
unintended consequence of reducing the resilience of the
natural gas market. That is now what you have spoken to, the
inability to have elasticity in it.
The analysts go on to say regulatory mandates have
constrained us away from being able to apply the lessons of
portfolio diversification to our energy choices and our
inability to diversify our fuel input portfolios makes for
markets that do not adapt to unanticipated and changing
conditions--less flexibility.
I would appreciate hearing your thoughts and your
conclusions as it relates to your views on how Congress might
compound--might avoid, if you will, compounding the
exacerbating, costly balkanization of our fuel portfolio,
because that is really what has happened, it appears, at this
moment. That is what we are trying to address in the bill. You
have spoken to the fact that you have not looked at it in
detail per se, but additional thoughts you might have that
bring us back to that kind of flexible portfolio.
Dr. Greenspan. My own impression, Senator, is that we have
a lack of appreciation of how important competition is in the
area of energy, as it is everywhere else. It is important,
however, to recognize that, unlike other areas of industry
which produce tangible goods, we have got two major aspects of
our energy system in which the output is either wholly
ephemeral or close to that in electric power and in natural
gas, which means that the normal competitive mechanisms which
largely work through inventories have to be looked at
differently.
In other words, if you are dealing with an electric power
system what you really ultimately try to do is, before you
build a plant, is to lock in a series of contracts which
effectively over the lifetime of the plant creates adequate
revenues so that the cost of capital is met or exceeded. Unlike
something in which you can inventory anything, you need
something which gives you long-term contracts, and long-term
contracts are one of the very few ways you can get around a
system where no inventories are possible.
Similarly, we have something close to that in natural gas.
We for example even in LNG do not have pure spot markets. What
we have is short-term markets where there is a period over
which LNG will be brought in, but the substantial part of LNG,
at least in its original form, was long-term contracts. In
effect, you built the liquefaction plant and you built the
shipping and you financed it essentially by long-term
contracts, as indeed an office building builder would do in
making sure he got long-term leases.
So I think it is in that context of trying to understand
where competition is most effectively placed that I think most
of the improvement can be made in this country with respect to
our energy structure.
Senator Craig. Mr. Chairman, thank you very much.
Thank you, Mr. Chairman.
The Chairman. We are going to call our next witnesses even
though we are suffering under the possibility of a vote, in
which event we will just take turns. I would rather get them
finished than make them wait and come back after lunch. We will
just have more scheduling problems.
Having said that, Dr. Greenspan, thank you once again for
your help. I consider it not testimony, but help. We are going
to try to do something for our country with reference to a
policy. You will not like it in every respect because there are
some things we are going to try to promote, and sometimes our
way of promoting things is a little different than pure, at
least pure as you so adequately state, which your word for pure
is ``competition,'' I would assume, and we cannot do that in
every respect.
As a matter of fact, we have concluded that something
happened to nuclear power that is not just a market issue and
as a consequence I have convinced this committee and the Senate
that we should do something a little bit different and see if
we cannot get a couple of them built. I am not sure I could
ever sell you on that, but it would be a very interesting
subject matter for discussion.
When you look at that chart, not only do you see where we
were when we had coal and nuclear powerplants and when we had
natural gas--of course, natural gas there is in such small
quantities in the earlier years, because you and I both
remember we had made a terrible mistake and regulated natural
gas.
When I first started working on it it was regulated at 7
cents. You might recall those days. Seven cents was the
regulatory price. As a consequence, we were told we had none,
we had no natural gas. You are now telling us that if you look
at the world it is probably, of the great energy sources,
probably the most abundant and most available worldwide of all
of them, and we were told there were none.
Now here we are, we have just about abandoned everything
for one reason or another, and this bill is going to make an
effort to say in 10 years the line should not be quite such a
totally red spike; it should have some other things in it. We
hope we can succeed as well as you have put the problem to us
with some solutions.
With that, we thank you again and we excuse you and call
our next panel. Thank you, Dr. Greenspan.
Dr. Greenspan. Thank you very much, Mr. Chairman.
The Chairman. Thank you.
The next panel, please: Honorable David Garman, Assistant
Secretary of Energy Efficiency and Renewable Energy from the
Department. Would you please take your seat. Richard Grant,
president and CEO of Tractebel LNG North America of Boston;
Brian Ferguson, chairman and CEO of Eastman Chemical,
Kingsport, Tennessee; and Bruce Thompson, executive director of
Industry and Public Affairs for Forest Oil of Denver.
I think what we will do, fellow Senators, is just start as
they were called up, with David Garman first.
Would you please just understand now, the statements, if
you have them prepared, they are part of the record as of now.
You do not have to ask that and that is done. Would you please
limit your remarks to about 5 minutes and then we will try to
question you thereafter.
We will start with you, please. We will state it again: You
are the U.S. Government's manager of our energy efficiency and
renewable energy in the Department. And it is interesting to
note, I believe, that if you look at that last line there, that
little yellow on the top, while that is not all within your
portfolio, that is beginning to show the effects of renewables
on that, on the top end of that, beginning to show some
significance.
Please proceed.
STATEMENT OF DAVID K. GARMAN, ASSISTANT SECRETARY, ENERGY
EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY
Mr. Garman. Thank you and thanks for the opportunity to
appear today. As the committee well knows, current stocks of
natural gas in storage are at unusually low levels due to a
combination of cold winters in the Northeast and Mid-Atlantic
regions this past winter and declines in both domestic
production and net imports. As a consequence, gas in storage as
of July 4th was 15 percent below the previous 5-year average.
Average wellhead prices for natural gas this year are now
expected to average $2 per thousand cubic feet higher than last
year, a 68 percent increase. If we are to get 3 trillion cubic
feet or more into working storage by the start of the winter
heating season, we need to inject an average of roughly 75
billion cubic feet each week between now and November. In
normal years we have injected an average of 53 billion cubic
feet per week during the weeks remaining in the refill season.
So it is encouraging that this year's weekly reinjection rate
has averaged about 84 billion cubic feet per week. Today's
number, which was just announced at 10:30 this morning, is that
in the week ending July 4th we were able to store 111 billion
cubic feet, which is very encouraging.
But we cannot take too much comfort in these numbers as we
are mindful that the highest electricity demand of the summer
is likely ahead of us and that some of our capability to place
this much gas in storage may be coming as a consequence of
demand disruption among industrial gas users, and that is not
the way we want to address the problem.
Unfortunately, no single course of action will address this
challenge either in the long term or the short term and no
single entity or group--the Congress, the administration,
industry or consumers--can meet this challenge working alone.
Back in the spring of 2002 Secretary Abraham requested the
National Petroleum Council to conduct a comprehensive study of
natural gas in North America, including supply, demand, and
infrastructure issues through 2025. The results of this study
will be delivered in September of this year and we believe it
will be helpful as we work toward long-term solutions.
But we also need to act in the short term. On June 26,
Secretary Abraham and the National Petroleum Council hosted a
natural gas summit in Washington, D.C., to identify those
actions that can be taken immediately to address short-term
supply constraints. The summit brought together a variety of
representatives from consumer groups, industry, State and local
governments, along with experts in energy efficiency and
conservation.
One of the suggestions coming out of the summit was to
undertake an immediate public awareness campaign to promote
energy efficiency and conservation as one of the primary short-
term tools available in meeting the gas supply challenge.
Yesterday Secretary Abraham launched our ``Energy Smart''
public awareness campaign designed to inform consumers of the
steps they can take now to save money, save energy, and help
alleviate energy price and supply issues before they become
more acute.
This is a multifaceted campaign and has many elements. Our
new EnergySavers web site is now up and running at
www.energysavers.gov. We are increasing our efforts with
retailers and other Energy Star partners to promote energy
efficient products. We are collaborating with public and
investor-owned utilities on bill inserts, public service
announcements, and other methods to reach consumers. We are
working with States on ways we can speed and improve
communications with Governors and State energy offices and
leverage existing State energy emergency plans in light of the
current situation, and we are doing many other things as well.
Yesterday, the Secretary and I were in New York in support
of this campaign. Today, the Secretary is in Philadelphia,
Columbus, Ohio, and Milwaukee. Next week we expect to be in
Atlanta. And we will continue this campaign with a series of
regional summits and events across the Nation in the weeks
ahead.
Since the Federal Government is the largest single user of
energy in the Nation, with 500,000 buildings that consume
electricity or natural gas or both, we believe we have a
continuing responsibility to lead by example. On June 12, the
Office of Management and Budget directed the Federal agencies
to redouble their efforts to reduce energy consumption in light
of the current natural gas situation. Additional efforts are
under way.
Promoting energy efficiency as a foundation for action in
the near and long term is important, but it is not enough.
Congress should complete action on comprehensive energy
legislation that is mindful of supply as well as demand.
Congress should pass the President's Clear Skies Act. This
legislation will provide some badly needed regulatory certainty
for coal-fired generators while lowering emissions of
SOX, NOX, and mercury by 70 percent from
today's levels with greater speed and at a lower cost to
consumers than existing law.
We must encourage liquefied natural gas supplies in the
future. On Tuesday Secretary Abraham announced that he would
bring together energy ministers and industry officials in an
LNG summit in the United States later this year.
We must encourage responsible--environmentally
responsible--domestic production in Alaska, the Outer
Continental Shelf, and on our public lands whenever it can be
balanced with responsible environmental protections.
We must maintain a diversity of supply by maintaining
nuclear power and continuing the development of our renewable
energy resources, including hydropower, wind, solar, and
biomass. In those regards and many others, we appreciate the
leadership, support, and encouragement that the members of this
committee have provided in the past and we look forward to
working with you as we move ahead to address this challenge.
With that, I will be happy to answer any questions you may
have either now or in the future.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Garman follows:]
Prepared Statement of David K. Garman, Assistant Secretary,
Energy Efficiency and Renewable Energy, Department of Energy
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear today to discuss the Department of Energy
programs for energy efficiency and renewable energy and how our
technologies will make a difference in conserving electricity and
natural gas.
Our current stocks of natural gas in underground storage are
unusually low due to a combination of cold weather in the Northeast and
Mid-Atlantic regions this past winter, and declines in both domestic
production and net imports. As of June 27, gas in storage was 17
percent below the previous five-year average, although there was a
record storage build for the month of June. Nevertheless, a hot summer
could increase natural gas demand, causing price volatility and
hampering economic growth. Wellhead prices for natural gas in 2003 are
now projected to average $2 per thousand cubic feet higher than in
2002, a 68 percent increase.
promoting energy efficiency and conservation
A balanced energy policy must address issues of supply and demand.
More than half the 105 recommendations in the President's National
Energy Policy (NEP) address efforts to improve our energy efficiency
and to improve the performance and lower the cost of alternative forms
of energy.
The NEP also included a variety of recommendations for increasing
the availability and affordability of our Nation's natural gas
supplies. These include:
enacting comprehensive energy legislation;
expediting the building of an Alaska natural gas pipeline;
examining the potential for greater electricity generation
from sources other than natural gas;
streamlining the permitting of energy infrastructure;
increasing energy conservation and efficiency;
providing funding for advanced technologies.
One of the specific recommendations in the NEP is to improve the
energy efficiency of appliances by supporting the appliance standards
program, and setting higher standards where technologically feasible
and economically justified. Moreover, the NEP recommends an expansion
of the program to new appliances when technologically and economically
justified.
In keeping with this recommendation, the Department has identified
residential furnaces and boilers as one of its ``high'' priority energy
efficiency standards and is currently drafting the rulemaking. Such a
rulemaking has the potential to save both electricity and natural gas.
In addition, the Department has identified as ``high priority
rulemakings'' the efficiency standards for distribution transformers,
and commercial air conditioners and heat pumps and is currently
drafting these rulemakings. Furthermore, the Department plans to add to
the program new covered products such as torchieres, ceiling fans and
commercial refrigeration equipment.
As important as they are for driving market transformation to more
efficient appliances over the long term, new appliance standards cannot
be brought to bear in time to address our near term challenge.
near-term actions
Completing the National Petroleum Council (NPC) Natural Gas Study
In the spring of 2002, Secretary of Energy Spencer Abraham
requested that the NPC conduct a comprehensive study of natural gas in
North America, including supply, demand, and infrastructure issues
through 2025. The results of this study will be delivered in September
of this year.
The study will examine new supplies, new technologies, and new
perceptions of risk that may affect supplies and consumption in the mid
and long-term. It will provide insights on market dynamics, including
price volatility and future fuel choice, and sustainability of natural
gas supplies. The study will provide the most comprehensive analysis
available of the issues affecting natural gas supply, demand, and
transmission and distribution through 2025. Then NPC has collaborated
with the Canadian and Mexican governments to ensure that the whole
North American natural gas picture is considered.
Natural Gas Summit
Secretary Abraham also called on the NPC to host a Natural Gas
Summit on June 26, 2003, in Washington, D.C. to discuss problems and
solutions, and identify those actions that can be taken immediately to
ease short-term supply constraints. The Natural Gas Summit brought
together representatives from consumer groups, industry, environmental
groups and federal, state and local governments, along with experts in
energy efficiency and conservation, all of whom offered their ideas on
these issues. At the Summit, Secretary Abraham announced a Natural Gas
Data Initiative and a series of regional conferences.
There was a consensus among the participants that promoting public
awareness of the natural gas supply situation and promoting energy
efficiency and conservation are the primary short-term tools available
to us.
Secretary Abraham Unveils ``Energy Smart'' Public Awareness Campaign
Yesterday, Secretary Abraham launched our ``Energy Smart'' public
awareness campaign designed to inform consumers of the steps they can
take today to save money, save energy, and help alleviate energy price
and supply issues before they become more acute. Our new ``Energy
Savers'' website is up and running at www.energysavers.gov; we are
collaborating with public and investor-owned utilities on bill inserts,
public service announcements and other methods to reach consumers; and
the Secretary is on the road today in Philadelphia and Columbus in
support of this public awareness campaign. We expect to continue this
campaign with a series of regional summits and events across the nation
in the weeks ahead.
Working With States
We also recognize the importance of working with States to promote
energy efficiency and renewable energy technologies in the short term.
The Department's State Energy Program (SEP) provides funding to states
to design and carry out their own energy efficiency and renewable
energy programs, and we are exploring new ways we can speed and improve
communications with Governors and State Energy Offices, and leverage
existing State energy emergency plans in light of the current
situation.
Leading by Example
The Federal Government, the largest single user of energy in the
nation, has 500,000 buildings that consume electricity, natural gas, or
both. Thus, we have an obligation to lead by example.
As a consequence of the energy savings targets in both statute and
executive order, the Federal Government is on target to reduce its
energy use 30 percent by 2005 compared with a 1985 baseline. We have
already achieved a 23 percent improvement overall, and many agencies
such as the Department of Energy has done even better. On June 12,
2003, OMB directed the federal agencies to redouble efforts to reduce
energy consumption in light of the current natural gas situation.
Additional efforts are under consideration.
Leveraging the Power of Consumer Action and Choice
Collectively, the nation has a tremendous capacity to use energy
more efficiently, although it is a challenge to get consumers to act
prior to feeling the full brunt of a price spike. There are things that
we can all do in our homes to help conserve natural gas and save on our
utility bills:
Check the insulation in your attic and basement. We've found
that only 20 percent of the homes built before 1980 had
adequate insulation.
Consider investing in a programmable thermostat. You can
save as much as 10 percent a year on your heating and cooling
bills by simply turning your thermostat back 10 to 15 percent
for 8 hours.
Replace your home lighting using compact florescent lamps
(CFLs). The lamps are much more efficient than regular light
bulbs and last 6 to 10 times longer. If every household in the
United States replaced one incandescent light bulb with an
ENERGY STAR qualifying compact fluorescent light bulb, the
energy saved would be enough to avoid the need for more than 16
new power plants.
If you're ready to replace an appliance, look for one that
has the ENERGY STAR label. This identifies the appliance as
among the most energy-efficient on the market.
Maintain your existing appliances properly, including
changing the filter frequently in your heating, ventilation and
air conditioning systems.
Mr. Chairman, while these ideas may seem intuitive, we've found
that implementing these simple tips does make a difference in consumer
energy bills, and can make a difference in overall energy demand,
including natural gas and electricity--some of which is generated using
natural gas.
Secretary Abraham recently provided these tips, and other energy
saving ideas, to all Members of Congress, and we urge you to do
everything in your power to share these energy saving tips with your
constituents. You are welcome and encouraged to provide links to the
``energysavers.gov'' website through your own Senate websites.
mid- to long-term solutions: eere programs
Pursuing greater energy efficiency is not simply a short-term
undertaking. Many of the programs in our office are developing
technologies to reduce energy usage in the mid- to long-term.
For example, our Industrial Technologies Program works in
partnership with energy-intensive U.S. industries to increase their
energy efficiency both now and in the future. While the Program
addresses all industrial energy use, natural gas accounts for about
one-third (7.5 quadrillion Btu annually) of all energy used by American
industry.
Over the past decade, DOE and industry have co-funded the
development of many energy efficient gas-based technologies that are
already making an impact on natural gas conservation. Here are some
examples:
The High-Luminosity Burner replaces air with oxygen to
increase the efficiency of gas use and boost production rates
in glass-melting furnaces.
The Forced Internal Recirculation Burner operates at high
efficiency throughout its firing range in various boiler
systems, while also reducing NOX emissions to less
than 10 parts per million.
Methane de-NOX technology injects small amounts
of natural gas into coal- and biomass-fired boilers to increase
efficiency and reduce emissions. This allows boiler operators
to meet environmental regulations cost-effectively while
continuing to burn biomass and coal rather than straight
natural gas.
The Department and its industry partners are continuing to develop
several other high-efficiency natural gas technologies that can further
stabilize gas demand. We have recently announced a joint project with
the glass industry and the gas industry to develop a Next-Generation
Glass Melter, which could save as much as 25 to 30 Bcf of natural gas
per year. The following three ongoing natural gas-based technology
developments could collectively save more than 500 Bcf of gas per year
when fully deployed (which is equivalent to about 10 days of U.S. gas
consumption):
The Super Boiler, designed to produce steam at 10 percent
higher efficiency in thousands of industrial and commercial
applications.
Oscillating Combustion technology, to increase energy
efficiency in a wide range of industrial gas furnaces while
also reducing 50 percent NOX emissions.
A Self-Optimizing Combustion System for metal melting and
processing that precisely delivers heat where needed while also
minimizing metal oxidation losses during the energy-intensive
production process.
Overall energy use may account for 10 percent or more of an
industry's total operating costs. Our plant-wide energy assessments
activity works with industrial facilities to investigate their energy
use and highlight opportunities for best energy management practices
including the adoption of new, efficient technologies. For example, a
plant assessment at a metal heat-treating facility in Pennsylvania
reduced natural gas use by over 50 billion Btu annually.
Industry is very price sensitive and deploys the technologies
developed under these DOE-Industry R&D partnerships as they become
available and conditions are favorable. Increasingly, DOE is now
encouraging industry to undertake such near- to mid-term R&D itself
while reserving DOE's funds for longer term research partnerships in
breakthrough technologies. These have the potential to dramatically
reduce energy use, including direct natural gas consumption and
electricity generated by natural gas, in the longer term.
Electric power generation is becoming increasingly dependent on
natural gas, as gas combustion turbines are comparatively inexpensive
to install and can begin operating quickly. An electric power sector
heavily reliant on natural gas for combustion engines could lead to
higher electricity prices for industry and consumers if natural gas
prices increase substantially.
As industry deploys the renewable energy technologies developed in
partnership with EERE, the demand for electricity generated by fossil
fuels, including natural gas, will be offset. New renewables, such as
wind energy, biopower, solar energy, and geothermal energy, are all
currently making contributions to U.S. electricity supplies and have
the potential to dramatically increase their role. Wind energy has been
the fastest growing source of electricity in the United States in
recent years with 2100 MW added in the past two years, nearly doubling
the total U.S. installed wind capacity to about 4700 MW.
Traditionally, natural gas has been the clean fossil fuel used for
mid-range and peak electric power generation, as well as for space and
water heating, and process heating at the building or industrial site.
EERE's Combined Heat and Power (CHP) research and development
program helps provide highly-efficient on-site power generation and
thermal energy, such as for steam or hot water, at the same time.
The CHP systems recycle the waste heat from the electricity
generation process that is normally vented to the atmosphere
and instead productively use it for drying, heating, cooling
(through absorption technology), and humidity control,
effectively raising the fuel use efficiency from 25 - 50
percent, to 60 - 88 percent.
CHP systems on customer premises also save the energy that
otherwise would be lost in transmission lines.
In contrast to traditional generators, which produce electricity
only and do not recapture waste heat, increased deployment of CHP
systems could reduce natural gas consumption compared to providing
electricity from a central station natural gas turbine and separate on-
site use of natural gas for thermal energy. We believe that combined
heat and power systems are one solution that can help mitigate the
effects of natural gas price and supply problems on the electric
industry and consumers as the nation's economy grows and the demand for
electricity, particularly from natural gas, increases.
federal promotion of combined heat and power
The Federal government has the potential to be a significant end-
user of CHP systems--more than 1500 megawatts of potential capacity.
CHP offers flexibility in power systems and can help meet Federal
energy-efficiency and emissions-reduction goals. It also lays the
foundation for the integration of sustainable fuels and future
technologies, such as fuel cells. And, as natural gas prices rise, CHP
economics improve. The Federal Energy Management Program is working
with Federal facility managers and industry, trade associations, energy
service companies, and utilities to address regulatory and policy
barriers to CHP deployment in Federal facilities.
One example of CHP systems is right here in our own back yard. Last
year, the General Services Administration installed a CHP system at its
Central Heating and Refrigerating Plant in Washington, DC, which serves
several buildings, including the Department of Agriculture, the
Department of Energy, and the Smithsonian Institute museums. The system
provides 10 megawatts of electricity and 17,000 tons of refrigeration.
conclusion
Mr. Chairman, as we move forward to increase energy efficiency and
the use of renewable energy to conserve our natural gas resources, it
is important to realize that the Federal government can only do this in
partnership with other public and private organizations. States and
regional governing bodies play a critical role in eliminating barriers
to and developing markets for these advanced energy technologies.
Industrial and commercial users, equipment manufacturers, energy
service providers, and National Laboratories need to work together and
with all levels of government to achieve performance targets, develop
reliable and high-quality systems, and integrate them into our existing
energy infrastructure.
We at the Department look forward to continuing to work with the
Congress to promote energy efficiency in the short and long term. We
also look forward to working with the Congress in passing energy
legislation that includes provisions ensuring our Nation a plentiful
supply while promoting the efficient use of natural gas.
This completes my prepared statement. I would be happy to answer
any questions you may have, either now or in the future.
The Chairman. Thank you very much. Thank you very much.
The president and CEO of Tractebel LNG North America. Nice
to have you with us, Mr. Grant.
STATEMENT OF RICHARD L. GRANT, PRESIDENT AND CEO,
TRACTEBEL LNG NORTH AMERICA LLC
Mr. Grant. Thank you, Mr. Chairman and members of the
committee, for inviting me to present testimony regarding LNG's
role in the energy marketplace. I want to start off by noting
two features of the current energy market. I think this has
been referred to by a number of people. First, in the natural
gas industry, supply growth is tightening; and second, demand
growth continues essentially unabated.
As a result, many are concluding that LNG will be one of
the long-term features of energy markets. Why are people
looking carefully at LNG? I think the advantages are clear, but
let me take a moment to note some of the most important ones.
LNG helps us access ample supplies of natural gas around
the world. I think that has been referred to many times today.
Estimates of the total world supply of natural gas hover around
6 quadrillion cubic feet. Much of this is stranded a long way
from the U.S. market. Liquefying natural gas and shipping it is
more economical than transporting it by pipelines for distances
of more than about 700 miles offshore and 2,200 miles onshore.
LNG can contribute substantially to a region's energy
supply. Our Everett, Massachusetts, terminal meets 15 to 20
percent of New England's natural gas demand, with LNG through
other facilities throughout the region meeting 35 to 40 percent
of the region's demand on peak days. In addition, we are
supplying the fuel for a new 1,550 megawatt powerplant which is
adjacent to our facility, which can generate enough electricity
for approximately 1.5 million homes per year. If LNG resources
were not available in New England, supplies would be far
tighter and consumers would suffer.
LNG's technology is improving. The overall cost of LNG
delivery has been reduced by almost 30 percent over the last 20
years.
LNG also keeps downward pressure on prices by helping to
diversify a region's energy supply, again something that has
been mentioned a number of times today. By competing openly and
fairly with gas delivered via pipeline, LNG helps ensure that
consumers get the best possible deal.
The industry receives and desires no preferential tax or
regulatory treatment relative to other competitors in the
natural gas industry.
LNG is a very flexible energy source. LNG import facilities
can be upgraded quickly and substantially to meet increases in
demand and, more importantly, once in operation can increase or
decrease their output very rapidly.
LNG is as safe, if not safer, to transport and store than
most other fuels. It is not explosive, it does not pollute land
or water resources, it is not transported or stored under
pressure. Further, even when LNG revaporizes as natural gas it
is not as flammable as other common fuels, such as gasoline.
I would like to make three important points before I
conclude: First, LNG needs to be thought of as complementary to
our current resource base rather than a substitute for it. LNG
should be considered an and, not an or, proposition to our
other North American natural gas supplies in helping to meet
our Nation's energy needs. Policymakers cannot and should not
allow our very sensible and successful approach to LNG to
obscure the fundamental reality that we as a country need to
better access and develop our Nation's natural resource base.
Second, LNG will continue to grow as a resource for the
United States. In our ongoing effort to diversify our supply of
energy, LNG's exceptional and exclusive ability to bring to
market what was once stranded natural gas from various sources
around the world can only help. In short, increased global
access to energy reserves helps us reduce our dependence on any
one source.
Third, LNG can and must be an important participant in
long-term markets. Our company both buys and sells much of its
LNG under long-term contracts. Doing so helps provide
certainty. An earlier comment about a safety valve and using
LNG facilities there, the one caveat or the one thing that I
would add to that is that I think that you do not want
investments that basically have no returns on them. A stranded
investment waiting there, which is what happened in the LNG
business for a number of years, does not create investment
opportunities or bring investors in.
But you could have it both, because in effect you could
have baseload LNG coming in and the ability to ramp up on a
daily basis, an annual basis, to meet increased energy needs
can happen very quickly, and in fact that is what is happening
in the United States today.
Again, Mr. Chairman, thank you and the members of the
committee for inviting me to present our thoughts. I look
forward to answering any questions you might have and working
with the committee on these very important issues.
[The prepared statement of Mr. Grant follows:]
Prepared Statement of Richard L. Grant, President and CEO,
Tractebel LNG North America LLC
Thank you, Mr. Chairman and members of the Committee for inviting
me to present testimony regarding possible approaches to help moderate
natural gas prices and, more specifically, the role of liquefied
natural gas (LNG) in the larger marketplace.
Before discussing LNG's place in the market today--and I'd like to
emphasize that I view LNG as an important energy source in addition to
other North American natural gas supplies, not a substitute for them--I
think it might be helpful to put into the record important facts about
the technology and fuel itself. These include:
LNG is the same natural gas used by millions of Americans
for heating and cooking, only in a different form.
LNG is natural gas that has been cooled to -260 degrees
Fahrenheit, at which point it condenses into a liquid.
Liquefaction reduces the volume of the gas by approximately 600
times.
Liquefaction of natural gas provides us with enormous
flexibility because it allows us to store and transport the
resource--the energy residing in the natural gas--to places
that are not or cannot be fully served by natural gas
pipelines.
Liquefaction allows natural gas to be transported and stored
efficiently and economically. It can be re-vaporized and sent
to customers via pipeline or remain in liquid form for
transport by truck to customers with their own storage tanks.
Currently there are 113 active LNG facilities in the U.S.,
including marine terminals, storage facilities, and operations
involved in niche markets. Worldwide there are 17 LNG export
terminals, 40 LNG import terminals and 136 specially-designed
LNG ships.
the marketplace
I think it might be helpful to examine some of the history of the
technology and the fuel, as well as some of the history of the
marketplace in general.
During the oil embargoes of the 1970s, entire countries (including
the United States), as well as regions within the United States
(including New England), discovered the wisdom of diversifying fuel
sources. At the same time, gas-rich countries without the need for
additional energy resources began thinking about ways to leverage
stranded gas reserves. For example, today LNG development is especially
important for countries like Trinidad, Angola, and Nigeria. In these
countries, most of the natural gas that is produced with crude oil is
flared because there are few alternatives for usage or disposal of the
excess gas.
Four marine LNG import terminals were built in the United States
between 1971 and 1982. They are in Everett, Massachusetts, Cove Point,
Maryland, Elba Island, Georgia, and Lake Charles, Louisiana. After
reaching a peak in 1979 (253 Bcf), LNG imports declined over time for a
variety of reasons. By 1995 imports had dropped to 18 Bcf. However, LNG
imports are now on an upswing, with about 240 Bcf imported in 2001.
Import operations are now poised to achieve new peak levels through the
re-activation and expansion of the existing facilities. Within this
year, Cove Point will re-open its LNG import operation. In 2001, the
Elba Island import facility was reactivated. All existing import
facilities are undertaking expansions. Beyond the activities of
existing facilities, several new LNG projects are now pending before
the Federal Energy Regulatory Commission, and there are numerous other
LNG projects proposed to serve the U.S. market that have been
announced.
Currently, in the gas industry more generally, many fields in the
United States are getting more difficult to develop since most of the
easy-to-access, highly productive reserves already seem to be accounted
for. In Canada, key fields are also maturing while the country is
experiencing its own increase in natural gas demand.
At the same time, natural gas demand is growing both overall in the
U.S. and in the Everett Terminal's New England home base. There is a
significant increase in new natural gas-fired electric power plants,
which use less fuel than older, more polluting gas and oil power
plants. In addition, there is steady growth in demand for natural gas
from residential, industrial, and commercial customers. More
specifically, according to the Energy Information Administration (EIA),
natural gas production in the U.S. is predicted to grow from 19.5 Tcf
in 2001 to about 26.4 Tcf in 2025. At the same time, total natural gas
consumption is expected to increase to about 35 Tcf in 2025.
As a result of these factors, many are concluding that LNG
represents an important part of the long-term natural gas supply
solution.
Currently, anticipated expansions on LNG facilities are expected to
raise the United States' import capacity from 1 Bcf per day to 4 Bcf
per day by the end of 2004. Applications pending could raise that to 9
Bcf per day by 2007, and other projects under consideration could more
than double that by 2009.
The advantages of LNG are clear, but let me take a moment to note
the most important ones.
LNG helps us access the ample supplies of natural gas around
the world. Estimates of the total world supply of natural gas
hover around 6 quadrillion cubic feet, and more reserves of
natural gas continue to be discovered. Much of this natural gas
is stranded a long way from market, in countries that do not
need large quantities of additional energy. For purposes of
perspective, the U.S. natural gas reserves increased by 3.4%,
to 183 Tcf, between 2000 and 2001.
Liquefying natural gas and shipping it is more economical
than transporting it in pipelines for distances of more than
about 700 miles offshore or more than 2200 miles onshore.
LNG can contribute substantially a region's energy supply.
In the northeastern United States for example, Tractebel
provides a substantial portion of the energy used in
residential heating and electric generation. For example, our
Everett Terminal, which began operation in 1971, is the
longest-operating LNG facility in the U.S. It meets 15-20% of
New England's natural gas demand, and LNG from our terminal and
that from a network of local storage tanks, which for the most
part receive their LNG via truck from our facility, is capable
of meeting 35-40% of region's demand on peak days.
During the winter of 2002/2003, the terminal achieved its top 10
days of gas deliveries in company history. In addition to heating and
other uses, Tractebel is very important to New England's electricity
supply. The Everett terminal will supply the fuel for a new 1,550 MW
power plant, also in Everett, which can generate enough electricity for
approximately 1.5 million homes each year in Greater Boston. In short,
if LNG resources were not available in New England, energy supplies
would be far tighter and consumers would suffer.
LNG's technology is improving. Processing and shipping costs
have decreased and the technology has improved. The result of
all these improvements is that the overall cost of LNG delivery
has been reduced by almost 30% over the last 20 years.
LNG keeps downward pressure on prices by helping to
diversify a region's energy supply. By competing openly and
fairly with gas delivered via pipeline, LNG helps ensure that
consumers get the best deal possible. The industry receives--
and desires--no preferential tax or regulatory treatment
relative to other competitors in the natural gas industry.
LNG is a very flexible energy source. LNG import facilities
can be upgraded quickly and substantially to meet increases in
demand, and more importantly, once in operation can increase or
decrease their output very rapidly.
In our specific instance, the Everett LNG Terminal is a major
supplier that helps to keep supply relatively stable, particularly on
peak days. For example, the Maritimes and Northeast Pipeline from
eastern Canada (which is the main Canadian supplier to New England)
experienced a delivery problem in January 2000. The company also
experienced a production problem in January 2003, which further
tightened supplies. Absence of LNG during these periods would have
resulted in gas utilities' not being able to serve residential
customers.
next steps
Having talked a bit about the technology of LNG, and the larger
marketplace in which we find ourselves, I think it might be helpful for
me to give you an idea of what we think about the future of the energy
industry in general, and the LNG industry specifically. Those thoughts
fall into a few broad categories.
First, LNG needs to be thought of as complementary to our current
resource base, rather than a substitute for it. This is a very
important point. Policymakers cannot and should not allow our very
sensible and successful approach to LNG to obscure the fundamental
reality that we need to better access and develop our Nation's natural
resource base.
We agree with the American Chemistry Council, which wrote the
following to Chairman Domenici in January 2003: ``The U.S. must
increase its domestic production of natural gas. Recent legislative,
regulatory and market trends have placed greater demands on our gas
supply without taking commensurate steps to increase production.
Congress needs to ensure adequate supplies, produced in an
environmentally protective manner. . . . Access to new reserves is
necessary not only to meet new demands, but simply to sustain current
production levels.''
Second, precisely because it provides unique flexibility, LNG will
continue to grow as a resource for the United States. In our ongoing
effort to diversify our supply of energy, LNG's exceptional and
exclusive ability to transport what was once stranded natural gas from
various sources can only help. In short, increased access to global
reserves of energy helps us reduce our dependence on any one source.
Additionally, as response to demand becomes more important, our
ability to move natural gas to where it is needed, freed in part from
the constraints of pipelines, will ensure that LNG is an increasingly
important element in our Nation's energy supply portfolio. Simply put,
LNG offers greater trade flexibility than pipeline transport, allowing
cargoes of natural gas to be delivered where the need is greatest and
the commercial terms are most competitive.
This trend can already be seen. As the Energy Information
Administration has noted, LNG imports have increased by more than 13
times--from 18 Bcf in 1995 to nearly 240 Bcf in 2001. Factors ranging
from additional sources of supply to lowered costs for liquefaction and
shipping have contributed to the increase. Recent proposals for new LNG
facilities include at least five terminals to serve the California
markets, three terminals to be built in the Bahamas (to serve the
Florida market via undersea pipelines) and a floating semi-mobile
offshore facility.
Third, LNG can and must be an important participant in long-term
markets. Currently, there seems to be a misapprehension that LNG is
solely a spot-market phenomenon. The reality is that it is an important
component in the long-term energy markets. Our company both buys and
sells much of its LNG under long-term contracts; doing so helps provide
certainty, both for us and our customers.
safety
Finally, let me address--and hopefully put to rest--the very
important issues of safety and security.
First off, I want to note that LNG is as safe, if not safer, to
transport and store than most other fuels. It is not explosive,
corrosive, carcinogenic, or toxic. It does not pollute land or water
resources. It is not transported or stored under pressure.
Like other fuels, LNG has risks associated with its improper
handling; however, LNG has certain characteristics which minimize some
of the dangers that may result from mishandling. For example, compared
to other fuels, LNG is less likely to ignite in a well ventilated area.
With respect to the transportation, LNG ships, with their double-
hull construction, are among the best-built, most sophisticated, most
robust in the world. According to shipping expert Lloyd's Register,
there has never been a recorded incident of collision, grounding, fire,
explosion, or hull failure that has caused a breach to a cargo tank of
an LNG ship. In fact, over the last 40 years there have been 33,000 LNG
carrier voyages, covering more than 60 million miles without major
accidents or safety problems either in port or on the high seas.
It is also important to note that in the extremely unlikely event
that an LNG vessel were involved in an incident that ruptured a cargo
tank, and the LNG vapor released met with an ignition source, the
likely consequence would be a localized fire, and not an explosion as
is often feared.
With respect to the storage of LNG, there has never been a report
of any off-site injury to persons or damage to property resulting from
an incident at any of the LNG import terminals currently in operation
worldwide, including our Distrigas terminal in Everett, Massachusetts.
This is due to excellent equipment and facility design, excellent
safety procedures employed in the industry, stringent design and safety
codes governing design, construction, and operation of storage
facilities, and a well-trained, highly experienced workforce.
Our company has always had a deep commitment to safety and
security, but after September 11th, we developed an even greater
commitment, increasing our already substantial investments in
personnel, equipment, and varied services. These investments include:
Private security personnel
Enhancements to the perimeter of the Everett Terminal
Municipal police and fire details
State Police details
Investment in two high-powered tugboats. These tugs include
state-of-the-art fire control equipment to offer unprecedented
marine towing and firefighting capabilities to the Port of
Boston.
Development of detailed security plans with deployment based
on Homeland Security and USCG threat levels
In short, Tractebel is a pacesetter in public-private partnerships.
The LNG carrier Berge Boston, which is under a long-term charter to us,
is the first vessel in the world to meet the new International Code for
the Security of Ships and of Port Facilities certification. Other ships
in the company's portfolio will soon follow that lead. In addition, our
work with the U.S. Coast Guard to bring LNG ships into the Port of
Boston became the model for the Coast Guard's Operation Safe Commerce
Project, a nationwide effort initiated after September 11th to enhance
transportation safety and security while facilitating commerce.
Thank you again, Mr. Chairman and Members of the Committee for
inviting me to present our thoughts on possible approaches to help
moderate natural gas prices and, more specifically, the role of
liquefied natural gas in the larger marketplace. I look forward to
answering any questions you might have and working with the Committee
on these very important issues.
The Chairman. We are going to have to run. You see, the
lights say we are. But we will be back, Mr. Ferguson, Mr.
Thompson.
Mr. Grant, I think your testimony, for the restraints,
constraints we put on you of being brief, was excellent. I
appreciate it very much and enjoyed it.
Mr. Grant. Thank you.
The Chairman. We will be back shortly to hear from the
remaining two witnesses. We are in recess.
[Recess from 12:08 p.m. to 12:45 p.m.]
Senator Craig [presiding]. The full committee will be back
in order and let us turn to Brian Ferguson, chairman and CEO of
Eastman Chemical, Kingsport, Tennessee.
Mr. Ferguson, welcome to the committee. Please proceed.
STATEMENT OF J. BRIAN FERGUSON, CHAIRMAN
AND CEO, EASTMAN CHEMICAL COMPANY, KINGSPORT, TN
Mr. Ferguson. Thank you, Mr. Chairman. I very much
appreciate this opportunity to appear before you to discuss the
impact of soaring natural gas prices and possible solutions.
Today I want to share with you Eastman's enthusiasm for one
solution in particular, the production of electricity through
coal gasification. As has been mentioned by others, the prices
for natural gas in the United States are now the highest in the
world, largely as a result of what you saw on this chart
earlier. Chemical companies like Eastman depend on natural gas
not only as an energy supply, but also as a raw material. This
is contrary to our European competitors, who derive most of
their raw materials from globally traded oil feedstocks. As a
result, the current situation threatens the entire U.S.
chemical industry as we try to compete with this now-
disadvantaged feedstock.
Short to medium term, solutions include reducing natural
gas demand and increasing natural gas production, as was
discussed in the first panel. Long term, however, Federal
environmental, energy, and economic policies must achieve
better alignment. It is economically unsustainable to continue
policies that drive natural gas demand while simultaneously
limiting access to natural gas supplies and without providing a
balancing energy alternative.
One of the long-term alternatives to help alleviate this
natural gas crisis is by tapping into America's vast coal
reserves through the use of competitive coal gasification
technology to reduce natural gas demand. Eastman is a pioneer
in the commercial use of coal gasification to produce
chemicals. In the early 1980's we installed two large Chevron-
Texaco gasifiers at our Kingsport, Tennessee, chemical
manufacturing complex. The original plant was completed in 1983
and we have made continuous process improvements since then.
Now, as we celebrate our 20-year milestone, Eastman is
widely recognized as the leading coal gasification operator in
the United States. To leverage our leadership position, Eastman
has recently formed a subsidiary to help other gasification
project owners to achieve faster startup, to maximize their
plant value, and to improve the long-term performance of their
plants.
As Eastman has marketed our gasification expertise, we have
repeatedly encountered three questions about coal gasification-
based electrical powerplants: One, how expensive are they to
build and operate? Two, are they reliable? Three, what are the
environmental benefits? These three questions are pertinent to
this morning--this afternoon's hearing, so I will try to answer
each in turn.
Question one: How expensive are coal gasification
powerplants to build and operate? Mr. Chairman, based on our
20-plus years of operating experience, we believe that coal
gasification can be competitive right now and is becoming more
cost competitive with each passing day. Let me cite some
specifics.
According to data compiled by Eastman, Chevron-Texaco, GE,
and others, the capital costs of coal gasification powerplants
are currently projected to run between $1,200 and $1,400 per
kilowatt of capacity and are trending downward. This compares
favorably with the newest generation of pulverized coal plants,
which have projected capital costs in the same range, but are
trending upward as a result of new environmental control
restrictions.
Although operation and maintenance costs are somewhat
higher for coal gasification plants, these costs are offset by
lower fuel costs from higher efficiency and by lower
environmental treatment costs and waste disposal costs. In
addition, the coal gasification process produces saleable
byproducts by removing over 99 percent of the sulphur.
As additional commercial coal gasification plants are
built, the cost competitiveness of this environmentally
superior technology should become more evident.
Number two, how reliable are coal gasification powerplants?
Mr. Chairman, this is a question that Eastman is uniquely
qualified to answer. Our system, with its dual gasifiers, has
achieved an average on-stream availability of 98 percent since
1984 and an estimated single gasifier availability of 90
percent. Perhaps most remarkable, our forced outage rate is
only about 1 percent. Further, Eastman has continuously
improved the performance of our gasification processes. The
time between gasifier switches, for example, is now about once
every 2 months, which is a six or sevenfold improvement since
20 years ago.
Another useful measure of performance is maintenance costs.
In the last 6 years alone, our maintenance costs have declined
by more than 40 percent.
Now, importantly, question number three, brought up earlier
by one of the other Senators: What are the environmental
benefits of coal gasification? Let me answer that directly. The
principal environmental benefits associated with coal
gasification as compared with coal combustion processes are: In
the short term, you remove over 99 percent of the elemental
sulphur, nearly all of the mercury, and you also have lower
NOX. In the long term, it can be a more cost
efficient way of sequestering carbon dioxide because it is
collected in very concentrated streams.
There are many more environmental benefits of gasification,
but the take-away from this is one simple fact: Coal
gasification is the cleanest of the clean coal technologies.
Before concluding, let me express Eastman's support for
both FutureGen and the Clean Coal Power Initiative. Like any
business, the electric power industry must understand new
technologies before they implement them. Thus, even though
Eastman believes that coal gasification is ready for
commercialization right now, some additional market incentives
such as the CCPI and the proposed clean coal tax credits are
useful and necessary inducements to those industries. We thank
the members of this committee for your leadership on these
specific issues and on advancing coal gasification in general.
Mr. Chairman, let me summarize my testimony. First, the
natural gas crisis you heard about today is real. It is
severely impacting U.S. industry in general and the chemical
industry specifically. Secondly, short- to mid-term solutions
include energy conservation and increasing natural gas and LNG
supplies, as you heard. Third, long-term solutions must include
more reliance on clean coal, our most abundant fossil fuel, and
that will in turn reduce our natural gas demand. Eastman
believes that this is economically competitive with other clean
coal processes now.
Finally, as Eastman has proven through 20 years of
experience, coal gasification plants can be operated at maximum
efficiency with a high degree of reliability.
Mr. Chairman, speaking on behalf of my company, on behalf
of my industry, and as a citizen, we are all very concerned
that we are walking down the same road with natural gas that we
have already walked with oil. The technology I am testifying on
today is not a theoretical future thing that has not happened.
For us it is just another day at the office, and it is an
economic, reliable, environmentally friendly, practical
technology that really does give us choices right now.
Thank you very much for this opportunity and I will await
your questions.
[The prepared statement of Mr. Ferguson follows:]
Prepared Statement of J. Brian Ferguson, Chairman and CEO,
Eastman Chemical Company, Kingsport, TN
summary
Eastman Chemical Company is a globally competitive chemical company
that manufactures intermediate chemicals from natural gas, coal,
petroleum-based, and wood-based feedstocks. Like the chemical industry
in general, Eastman also uses natural gas and coal for making steam
heat and electricity used in its manufacturing processes. Unlike others
in the chemical industry, Eastman is a pioneer in using coal
gasification to produce chemicals. Coal gasification is among the major
rational responses to present and foreseeable natural gas shortages and
price increases. Other responses include conservation, increased access
for exploration and drilling, and imports of LNG.
The present natural gas shortage and the foreseeable natural gas
crisis adversely affect American chemical manufacturers including
Eastman, and the wider U.S. manufacturing sector. Natural gas supply
shortages and price increases have resulted from conflicting and long-
standing environmental policies that have limited access for
exploration and production, while simultaneously driving electric power
generation and other demand for natural gas. Natural gas is a regional
fuel and chemical feedstock with little global trade.
Electricity demand is relatively inelastic with regard to price.
The economically regulated domestic electric utility sector is able to
pass through natural gas costs to ratepayers with little resistance.
Electricity demand growth drives relentless increases in natural gas
consumption and prices, while domestic industrial natural gas consumers
are rendered uncompetitive in a world market and chemical production is
shifted to foreign sources with lower feedstock costs. Since industry
is the marginal consumer, ``demand destruction'' will result, without
new natural gas supplies or fuel substitutions for electricity. As a
consequence, job losses and economic downturn could be substantial.
Immediate action is necessary to mitigate damages of demand
destruction. These immediate actions include conservation through
reduction in peak consumption of electricity, utility fuel switching to
distillates, and reconsideration of environmental requirements to allow
fuel substitutions. Medium-term actions include increasing access for
exploration and drilling of natural gas and increasing LNG port
facilities and capacities.
Finally, in the absence of substantial nuclear power or renewables
growth, medium and long-term actions will require reversal of the
decline in the proportion of coal-based electricity generation, and
improvement in coal-fleet productivity not seen since before the early
1960s. Coal is the most abundant and price-stable fossil energy
resource in the United States. Chemical industry history strongly
suggests that abundant and low cost feedstocks, market competition, and
stable geopolitics are major factors in technological innovation and
economic sustainability. Coal gasification is the coal technology that
offers the best opportunity to support environmentally responsible and
competitively sustainable basic manufacturing and electricity
generation in the United States. Coal gasification is also the coal
technology bridge to the Hydrogen Economy because it is the only
technology that can directly convert coal to hydrogen.
In the absence of market structure that resembles global
competition and absent environmental policy that rewards the superior
performance of coal gasification, federal funding of RD&D (research,
development, and demonstration) and tax credits for commercialization
of coal gasification technology in the electric utility market will be
necessary. Federal funding is necessary to overcome long-standing risk
averse behavior and achieve initial technology transfer with
foreseeable follow-on technology improvements (e.g., Clean Coal Power
Initiative, and FutureGen, carbon sequestration and a hydrogen
economy). Electric utility market restructuring would likely drive
economic benefits of coal gasification technology faster, deeper, and
wider. As broad basic industry, gasification facilities can be
configured for ``polygeneration;'' i.e., operational flexibility to
make chemicals, liquid fuels, fertilizer, hydrogen, and generate
electricity (including via fuel cells), as open and competitive market
conditions dictate.
eastman and general chemical industry background
Beginning in the middle of the 19th century in Europe, chemistry
became the first science-based, high technology industry. The chemicals
industry has since generated technological innovations for other
industries, such as automobiles, rubber, textiles, construction,
publishing, entertainment, and metals. The industry illustrates the
general tendency for internationally competitive industries to
spillover, spin-on, and spin-off other industries. Until now, with
cheap, abundant natural gas, the American chemical industry has been a
success story and is one of the few major high-technology industries in
which the United States has maintained its competitive lead in
international trade. The chemical industry growth rate has exceeded
that of the overall economy since World War II.
Eastman is a prime example of the evolution of the U.S. chemical
industry out of German chemical import shortages that developed during
World War I. In 1920, George Eastman founded Eastman to provide a
stable source of chemicals for Eastman Kodak Company's photographic
business. In addition to the effects of geopolitical conflict, anti-
trust law shaped a focus by George Eastman on R&D as a means to achieve
continued growth.\1\ These two longstanding Eastman performance
characteristics of globally competitive and stable supplies and
continuous internal innovation have shaped Eastman's present leadership
in coal-gasification technology.
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\1\ Paths of Innovation: Technological Change in 20th Century
America, David C. Mowery and Nathan Rosenberg, Cambridge University
Press, 1998, pp. 14-15.
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Eastman became independent from Kodak in 1994. Today Eastman is the
largest producer of polyethylene terephthalate (``PET'') polymers for
packaging, based on capacity share, and is a leading supplier of raw
materials for paints and coatings, inks and graphic arts, adhesives,
textile sizes and other formulated products, and of cellulose acetate
fibers and acetyl chemicals. Eastman has 41 manufacturing sites in 17
countries that supply major chemicals, fibers, and plastics products to
customers throughout the world. Revenues in 2002 were $5.3 billion.
feedstocks, technology, and geopolitical stability: major factors that
shape the globally competitive chemical industry
For Eastman, as for the U.S. chemical industry in general, natural
gas is an essential fuel and raw material. Between 1920 and 1930,
automotive demand, petroleum resources, and a large American market
stimulated the rise of the domestic petrochemical industry and the
development of continuous-process technologies. With process technology
cost improvements, during the interwar years the U.S. chemical industry
shifted from coal to petroleum and natural gas feedstocks.\2\
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\2\ U.S. Industry In 2000, Studies In Comparative Performance,
David Mowery, Editor; ``The Dynamics of Long-term Growth: Gaining and
Losing Advantage in the Chemical Industry,'' Ralph Landau, and Ashish
Arora, National Research Council, National Academy Press, Washington
D.C., 1999, at 24-26.
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In contrast, the German chemical industry, throughout the period of
1890 to 1945, focused on development of synthetic products from coal
such as synthetic ammonia and gasoline. One of the most important
developments of the 20th Century was the Haber-Bosch process for
nitrogen fixation (critical to agriculture and the military) developed
and commercialized by BASF in 1913. Despite governmental expropriation
of U.S. patents of BASF technology in 1918 and a wartime program at
Muscle Shoals, Alabama, American experts could not replicate the Haber-
Bosch process. Only after WWII were the catalytic technology and the
construction information for high-pressure equipment mastered, along
with a prolonged learning experience in scaling-up from the laboratory
to commercial operations.\3\ Natural gas displaced coal as preferred
feedstock for ammonia manufacture.
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\3\ Paths of Innovation, pp. 74-76.
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World War II also transformed the rubber industry. Synthetic rubber
was the first synthetic polymer to be produced in major quantities from
petroleum-based feedstocks. The program for this transformation was
second only to the Manhattan Project in the mobilization of human
resources. However, the federal government invested $700 million to
construct 51 plants to produce the necessary chemical intermediates for
synthetic rubber manufacture. These plants were sold to private firms
by the mid-1950s.\4\
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\4\ Paths of Innovation, pp. 89-92.
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World War II effectively reduced technology and patent-based
barriers to entry resulting in a rapid growth in firms to make
plastics. Between 1945 and 1971 production of plastic materials grew at
an average annual rate of more than 13 percent. Polyethylene expansion
was among the most important results of WWII on U.S. industry. Product
development in synthetic fibers began before WWII, but like other post-
war synthetics, abundant domestic petroleum and natural gas reserves
were key.\5\
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\5\ Paths of Innovation, pp. 87-88, 92-94.
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By 1950 half of total U.S. production of organic chemicals was
based on natural gas and oil. By 1960 the proportion was nearly 90
percent. After WWII German and British chemical production was rebuilt
and shifted from coal to petrochemical production. The development of a
worldwide market in oil reduced the comparative advantage of
petrochemical production in the United States. By the end of the 1960s,
Europe and Japan had closed the competitive gap. Since then, relative
shares of world output from the U.S., Europe, and Japan have largely
remained constant.
Thus, European-based chemical manufacturers are based primarily on
globally traded oil feedstocks, while U.S.-based chemical manufacturers
are based primarily on a regional feedstock, i.e., natural gas. Federal
government policy may explain this fundamental and important
difference. Beginning in the late 1930s, the domestic oil industry was
regulated to prop up the domestic price of oil. After WWII the
regulations extended to restrict oil imports. This created prices for
U.S. refineries that were 60-80 percent higher than landed prices in
Europe throughout the 1950s and 1960s. This helps to explain the fact
that post-war U.S. chemical feedstock reliance is predominantly natural
gas, while European reliance is petroleum.\6\ Now, in the face of
present and foreseeable natural gas shortages, European producers hold
a clear competitive advantage.
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\6\ U.S. Industry In 2000, Studies In Comparative Performance,
David Mowery, Editor, ``Chemicals,'' Ashish Arora, and Alfonso
Cambardella, National Research Council, National Academy Press, pp.,
46-47.
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eastman's coal gasification experience
Many of the chemicals that Eastman produces at our large (8,000-
employee) Kingsport, Tennessee, complex are created through chemical
reactions involving, at the front-end of the process, simple molecules
such as hydrogen (H2) and carbon monoxide (CO). To produce
these molecular building blocks in the large volumes required in
subsequent steps of the manufacturing process, our facility has always
required great quantities of hydrocarbon raw materials.
However, a 1970 Eastman study predicted that coal would become a
more attractive energy source than petroleum and an important chemical
feedstock for acetic anhydride (a strategic product for plastics,
fibers, coatings, photographic films and pharmaceuticals) in the long
term. The location of abundant coal supplies in proximity to its main
facility influenced Eastman to act on this prediction. New technology
developed by Monsanto in 1970 made existing ethylene-based processes
obsolete for production of acetic anhydride. With the oil embargo of
1973 and the natural gas crisis of the late 1970s, Eastman acted to
replace natural gas with locally available coal, as the feedstock for
stable competitive production of acetic anhydride.\7\
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\7\ From Coal to Acetic Anhydride, Victor H. Agreda, David M. Pond,
and Joseph R. Zoeller, Chemtech, March 1992, 174-175.
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In the early 1980s, Eastman obtained a license from Texaco (now
ChevronTexaco) and installed two large coal gasification units using
the Texaco technology. The installation was completed in 1983 and
continuous improvements have been made. Eastman's coal gasification
investment was wholly private.
Twenty years of continuous improvement, driven by global market
competition, made the Eastman gasification investment perform at levels
of environmental efficiency and reliability unmatched by coal-fired
electric utility boilers. Total gasification life-cycle costs are now
head-to-head with pulverized coal (PC) technology and trending
downward. PC costs are trending upward.
Today a key business objective, particularly in light of the
present natural gas crisis, is for Eastman is to use its two decades of
coal gasification experience to help other companies design, build, and
operate similar facilities for the production of electricity,
chemicals, or other end-products, such as hydrogen.
Many experts consider Eastman to be the world's leading
gasification operator for the following reasons:
First Commercial Facility in the United States. The
Kingsport, Tennessee facility was the first commercial coal
gasification project built in the United States. It was built
wholly with private funds. Our facility just celebrated twenty
years of successful operation.
Operating Performance and Availability. Tennessee Eastman
coal gasification has the world's best operating performance.
For the last 19 years, Eastman has achieved an average on-
stream rate of 98 percent (91 percent in the initial startup
year). The annual forced outage rate is now less than one
percent. This performance rivals the best PC boiler
performance.
Safety. The Kingsport gasification site has achieved an OSHA
recordable rate of 1.0 and no lost time accidents in the last
11 years.
Environmental Performance. Eastman's coal gasification
facility removes more than 99.9 percent of the sulfur in the
synthesis gas (syngas created from coal) and removes nearly all
of the volatile mercury present in the syngas stream. Eastman
also has a patented sulfur-free gasifier start-up process.
Operating Costs. Continuous process improvements have
resulted in a 40+ percent reduction in annual maintenance costs
over the last six years.
Eastman is confident that gasification technology is a competitive
alternative and has formed a subsidiary--Eastman Gasification Services
Company--to help other gasification project owners achieve faster
start-up, maximize plant value, and improve long-term performance.
Eastman has a cooperative agreement with ChevronTexaco, which allows
Eastman to provide operation, maintenance, management, and technical
services to other ChevronTexaco gasification licensees.
natural gas: use, price, production, demand, crisis solutions
Use. Natural gas is used by the chemical industry to generate
electricity and steam using highly efficient and environmentally sound
cogeneration or combined heat and power (CHP) technology. Components of
natural gas, including ethane, propane, butane, pentane and natural
gasoline are major raw material feedstocks. These components are used
to make the ``building blocks'' of organic chemistry, the backbone of a
high technology materials society. The dual role of natural gas makes
use efficiency a high priority across the chemical industry. Chemical
companies, including Eastman, set public goals to reduce energy needed
per pound of product. Market drivers motivate efficiency improvements.
Price. Prices for natural gas in the United States are now the
highest in the world. US consumers will now pay $70 billion more for
gas in 2003 than in 2002. Record withdrawals from inventories resulted
in record low natural gas storage levels in spring 2003. Only record
injection rates and mild summer weather will assure adequate supply
into the winter. The run-up in natural gas prices beginning in early
2001 was a major contributor to a drop in industrial production after a
sustained 10-year rise. The same effect can be expected for 2003, and
in the years ahead.
Production. In the past, price increases resulted in some increased
production. The January 2001 price of over $10.00 per Kcf resulted in a
peak drilling rig count of over 1,000. But they operated in mature
fields and achieved poor results. With price increases in the summer of
2002, producers did not dispatch rigs to old fields. United States
production peaked in 1971; production declines have been experienced
over the past 15 years even as the number of rigs and wells tripled.
Demand. Demand for natural gas by industrial, commercial, and
residential consumers has grown little in the last 30 years. But demand
growth in the electric power sector has been very high, up 40 percent
in the past 5 years. Further, demand growth in the electric power
sector is expected to double by 2025 and account for 33 percent of end
use.\8\
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\8\ EIA Annual Energy Outlook 2003 at 77.
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Crisis Solutions. Short-term options to reduce natural gas demand
and avert a winter crisis include conservation of electricity
consumption during summer peaks. Another suggestion is to encourage
power generators to switch to distillate fuels. Medium-term options
include efforts to increase domestic natural gas production by opening
productive on- and offshore areas. In the long-term, federal
environmental, energy and economic policy must achieve better
alignment. It is economically unsustainable to establish policy that
drives natural gas demand and simultaneously establish policy to limit
access to natural gas supplies. Coal-based generation is declining as a
percentage of all generation. Policy must encourage greater diversity
of renewable energy, nuclear, LNG, domestic production of natural gas,
and coal gasification.
the problem of innovation in electric power
In the 50 year period between 1907 and 1957, innovation in electric
power was most impressive, resulting in significant efficiency
improvements in coal mining, coal transportation, conversion to
electric energy, delivery of electric energy, and conversion to end
use. Household consumption aside, whole industries depended upon the
new infrastructure: including steel and aluminum. No doubt, the
cumulative effect of the end-to-end electricity system was responsible
for the highest rate of total factor productivity of the U.S. economy
in the first half of the 20th Century.
But ``during the 1960s . . . the long trajectory of productivity
improvement came to an abrupt end. . . . Although the causes of the end
of this productivity-growth trajectory are by no means fully
understood, it is clear that it contained a large technological
component.''. . . The ``productivity-enhancing possibilities in further
expansion in the scale of coal-fired generation were exhausted by the
mid-1960s.'' \9\
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\9\ Paths of Innovation, Electric Power, at 116.
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Thermal efficiency of power plants failed to improve above levels
achieved in the early 1960s. Efficiencies had increased on average from
21.8% in 1948 to 32.2% in 1965; by 1980 it was nearly the same (32.8%).
Attempts to raise the performance to ``supercritical'' generating units
(1,200 degrees F, and over 4,000 pounds pressure) and larger scale,
failed. Beginning in 1970, new environmental requirements began to
impose an energy penalty on coal-fired units. Relative prices of
electricity began to rise starting in the late 1960s and continuing
into the mid-1980s.\10\
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\10\ Paths of Innovation, Electric Power, at 120-121.
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In the mid-80s, the opportunity for driving thermal efficiencies
presented itself in coal gasification combined cycle technology (CGCC)
with demonstration of the Cool Water project.\11\ But the technology
was dropped by the electric power sector soon thereafter as it turned
to natural gas. Ten years later, two DOE funded CGCC demonstration
projects (each approximately 260 MW) were built that operate today.
After four decades of stagnant thermal efficiency, and nearly twenty
years since Cool Water, the improvement opportunity is still coal
gasification combined cycle technology. This technology is currently
approximately 40 percent efficient, with the promise of 50 percent
efficiency in the near future (i.e., 10 years) and perhaps 60 percent
efficiency with hydrogen fuel cell technology.
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\11\ Cool Water (USA), 100 MW, ChevronTexaco, 1984-1985.
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But except for two 50 percent federally-funded coal gasification
projects in the late 90's, the coal-fired, risk averse, largely
economically regulated, electric utility sector took no risks to
exploit the benefits of gasification technology. Regulated market
structure, combined with environmental policy, precluded coal
technology risk-taking and narrowed generation capacity growth options
to natural gas and its consequential natural gas ``demand
destruction.''
Against the dead-end of CGCC in the electric power sector,
Eastman's contemporaneous investment and continuous operation of Texaco
gasifier technology, and its stunning success, is an irony explained in
part, by the basic market differences between the chemical and electric
utility sectors.
one solution to the natural gas crisis: coal gasification
combined cycle technology
Coal gasification combined cycle technology now offers a serious
alternative to PC technology and thereby a chance to reverse the
decline in the coal based market share of domestic electricity
generation. There are primarily three reasons for this. First, the
costs of CGCC are now roughly at parity with PC units and declining,
while PC costs are rising. Second, CGCC, based on Eastman experience,
can be every bit as reliable and available as any PC unit. Third, the
environmental benefits of CGCC technology are far greater than any
other coal technology. Additionally, the potential for yet greater cost
reduction, efficiency, and environmental performance gains are
unrivaled by any other coal technology.
costs
Capital Expenses. According to data compiled by Eastman,
ChevronTexaco, GE, and others, the capital costs of coal gasification
power plants are currently projected to run between $1,200 and $1,400
per kilowatt of capacity and are trending downward. This compares
favorably with the newest generation of pulverized coal power plants,
which have projected capital costs in the same range.
Pulverized coal capital costs have risen in recent years as the
result of ever-tightening federal air pollution and other environmental
regulations. Coal gasification, on the other hand, has fewer potential
environmental side-effects, and the capital costs of such plants are
decreasing as accumulated learnings are incorporated into new designs
and as the electric power industry gains more familiarity with the
technology. [See Figure 1]
Operational Costs. Although operation and maintenance costs are
somewhat higher for coal gasification plants, these costs are offset by
lower fuel costs (from higher efficiency and reduced total fuel costs)
and by lower environmental treatment costs and subsequent waste product
disposal costs. In addition, the coal gasification process produces
saleable by-products, such as elemental sulfur.
Total variable costs--O&M, fuel, waste product disposal, and by-
product credits--are currently lower for coal gasification than any
other fossil fuel-based electric power generation technology, including
natural gas. Moreover, the costs associated with the removal of
volatile mercury and with carbon dioxide capture and sequestration (if
and when such removals are required) are much less for gasification
than for competing technologies. [See Figure 2]
Fuel Costs. In general, coal gasification is competitive with
natural gas when natural gas prices are in the range of $3.50-4.00/
million Btu. Many energy experts now predict that natural gas prices
will remain above $5.00/million Btu through most of this decade.
Sustained natural gas prices at that level would continue to harm
America's chemical industry.
In summary, when comparing capital costs, operational costs, and
fuel costs, the generation of electricity from coal gasification can be
competitive now. As additional commercial-sized coal gasification
plants are built, the cost-competitiveness of this environmentally
superior technology should become more evident, especially if the best
practices Eastman has developed over the years are incorporated into
future designs and operations.
availability and reliability eastman has successfully operated a major
coal gasification system for the last 20 years, longer than any other
company in the united states.
Operating a coal-to-chemicals facility is considerably more
complicated than a coal-to-electricity power plant. But the basic coal
gasification process is the same regardless of whether the ultimate
end-product is chemicals or electricity. [See Figure 3]
Availability. Eastman's gasification system has achieved an average
on-stream availability of 98 percent since 1984. Even during the
initial startup year, on-stream availability was 91 percent. Perhaps
most remarkably, the forced outage rate is now only about one percent.
While this extraordinary performance is due in part to that fact that
there are two gasifiers, with one unit always serving as a ``hot
standby,'' even the single unit availability rate is estimated to be 90
percent. [See Figure 4]
The extraordinary Eastman availability rates are due in part to the
global competitive standards of the industry and the time-honored
standards of the company. The potential costs of an unplanned shutdown
are incredibly high.
Performance. Eastman has continuously improved the performance of
the gasification system during the last two decades. In 1983, for
example, gasifiers were switched weekly. In 2002, the average time
between switches was 62 days. Another useful measure of performance is
maintenance costs. In the last six years alone, annual maintenance
costs for the gasification system have decreased by over 40 percent.
[See Figures 5 and 6]
environmental benefits
The principal environmental benefits associated with coal
gasification are: (1) significantly lower air pollution emissions in
the short-term; and (2) more cost-efficient carbon dioxide
(CO2) capture and sequestration in the long-term.
In the future, America's electricity requirements may be met
primarily by renewable energy sources such as wind and solar or perhaps
even by nuclear fusion. It is prudent for America to explore those
options. However, it is obvious to anyone who has studied our nation's
energy situation in depth that coal can and must continue to play a
leading role over the next several decades (at a minimum).
Unfortunately, there are two major environmental issues the public
associates with traditional coal combustion processes and even with
much newer (and cleaner) coal combustion technologies: criteria
pollutants and mercury; and carbon dioxide. When coal is burned it
produces certain air pollutants, most notably sulfur dioxide
(SO2), nitrogen oxides (NOX), particulate matter
(PM), and mercury (Hg). In coal-fired power plants these pollutants
must be removed from the exhaust (stack) gases using expensive and
often relatively inefficient processes.
The combustion of coal also produces substantial quantities of
CO2. If and when CO2 capture and sequestration is
eventually required, it will be difficult and prohibitively expensive
for coal-fired power plants to meet such requirements.
By contrast, coal gasification is a chemical process. As such, it
is possible to remove the sources of SO2 and Hg and the
CO2 from the synthesis gas before combustion, when it is
much easier and thus less expensive to remove. Also, because the syngas
is much cleaner than the raw coal itself, lower quantities of
NOX and PM are produced during the combustion process. [See
Figure 7]
There are many more environmental benefits of gasification such as
minimal solid waste generation, nominal water consumption, and the
generally pleasing aesthetics of facilities and operations. Coal
gasification is by far the cleanest of the clean coal technologies.
gasification market barriers
Until recently, the usual market barriers to CGCC technology or
polygeneration (facilities that make multiple products from coal
gasification) have been low cost natural gas, high capital costs, and
regulatory and management resistance to technology transfer.
Today natural gas costs appear to have increased and will remain
high for the rest of the decade. Capital costs for CGCC have declined
substantially, and unless efficiency requirements are added to protect
competing technology, capital costs will remain competitive and decline
with a few generations of construction and operation of base-load
commercial scale facilities. Greater efficiencies will be realized by
RD&D and commercialization. But here at least, a domestic, economically
regulated market does not have the incentives comparable to global
competition that would take RD&D, and commercialization risks, to adopt
gasification technology and then achieve higher performance
efficiencies.
The superior environmental benefits of coal gasification compared
to either existing coal plants or to other new clean coal technologies
have largely been unrewarded by regulators. Coal gasification is by far
the cleanest of the clean coal technologies, with potential to remove
almost all volatile mercury and to reduce the criteria pollutants to
levels that are a fraction of the levels achieved by other coal
processes. Capture and sequestration of carbon dioxide from coal
gasification can also be readily done, but at a current cost and
efficiency penalty.
However, the penalty is only a fraction of that for other coal
technologies. Failure to reward the benefits of gasification's enhanced
environmental performance and capability through either regulation or
incentives has been, and continues to be, a market barrier to
commercialization of this superior but emerging technology. So long as
carbon constraints are uncertain, any coal-based technology, including
gasification, faces barriers.
However, the most perplexing barrier may be the fact that this
technology has been, and continues to be largely foreign to the
electric utility sector. Familiarity could come through more robust
competition, as in the global chemical industry. However the prospects
for more competitive electricity generation markets do not appear
great. The traditional and ritualized nature of utility ratemaking
simply appears unable to simulate the effects of global markets,
particularly the risks and rewards of innovation.
Regulatory commissions long ago opted to accept low capital cost
natural gas based generation and their potential for high variable fuel
costs. CGCC has high capital costs, but low variable costs, and
environmental benefits that go beyond compliance. Reliability, surely a
function of human resources, has been affirmatively proven outside the
utility sector, but not persuasively within the sector.
The opportunity costs of the regulatory barriers are many. Coal
reserves are exhausted sooner for lack of application of the more
efficient technology. Environmental loadings are unnecessarily high.
Natural gas remains the fuel of choice to meet new electricity demand
growth. Natural gas demand destruction in the domestic industrial
sector continues unabated. The innovation of a creative, globally
competitive and critical infrastructure sector of the U.S. economy is
simply consumed and production is driven overseas. Jobs are lost.
In the absence of market restructuring, the next best alternative
is to engage in federal funding of RD&D and commercialization through
investment and production tax credits. Thus Eastman supports this
federal role for two reasons. First, industry generally views the role
of government in the national technology enterprise as reducing risk on
large-scale research projects, and providing a level playing field for
U.S. industry. A federal role here will reduce risks, and the playing
field needs to be made more level between the utility and industry
sectors to maintain global competitiveness, particularly in the U.S.
chemical sector. Second, when it comes to clean, sustainable energy
domestically and world-wide, there are very few actionable ideas, i.e.,
there is little long-term vision about what technologies might become
available to meet significant need.\12\ Coal gasification technology
offers a long-term vision that meets multiple objectives: economic,
energy, environment, materials, and manufacturing competitiveness.
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\12\ New Forces At Work: Industry Views Critical Technologies,
Steven Popper, Caroline Wagner, Eric Larson, RAND, Critical
Technologies Institute, funded by Office of Science and Technology
Policy, 1998, at 61-62, 92.
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futuregen and the clean coal power initiative
Eastman supports FutureGen and the Clean Coal Power Initiative
(CCPI), two research, development, and demonstration programs initiated
by the Bush administration.
FutureGen. Eastman supports this program. Current market
circumstances strongly suggest that government must lead the way in
demonstrating both the feasibility of large-scale hydrogen production
from coal and the sequestration of carbon dioxide from coal-based power
plants. If properly conceived and executed, FutureGen could help
achieve these two purposes while accelerating the commercialization of
coal gasification. However, Eastman is concerned that budget
constraints in future years will make the 80 percent federal funding
commitment to FutureGen difficult to sustain.
If forced to choose between funding for FutureGen and the Clean
Coal Power Initiative, Eastman would choose the latter. The CCPI
program--with its biennial competitive solicitations provides a long-
term source of support for a diverse array of technologically promising
but commercially risky coal gasification process improvements. While
the goals of FutureGen are laudable, the CCPI is more important for
incremental improvements in coal gasification.
Also, if the FutureGen project does go forward, Eastman agrees with
our colleagues on the Gasification Technologies Council (GTC) that this
project ought to be designed and executed in close collaboration with
the gasification industry.
Attached to this statement, for inclusion in the record, is a copy
of the comments submitted by the GTC to the Department of Energy on the
FutureGen proposal. The position of the gasification industry on the
FutureGen project is set out in detail in this document.
Clean Coal Power Initiative. Eastman supports the Senate version of
the CCPI program. H.R.6 includes a requirement that at least 60 percent
of the CCPI funds ``shall be used only for projects on coal-based
gasification technologies, including gasification combined cycle,
gasification fuel cells, gasification co-production, and hybrid
gasification/combustion.'' Eastman supports an 80 percent level as
presently pending before the Senate. (This position was recently
supported by a report from the National Research Council.)
The electric power industry is highly regulated and hence
conservative when it comes to embracing new technologies. Thus, even
though Eastman believes that coal gasification is ready for further
commercialization right now, some additional market incentives such as
the CCPI and the proposed clean coal tax credits are useful and
necessary inducements.
concluding thoughts
The gasification services team at Eastman Chemical Company has
spent a lot of time contemplating the barriers-both real and
perceived--to widespread acceptance of coal gasification by the
electric power industry. Many of the perceived barriers have been
addressed above. To summarize Eastman's position--
The natural gas crisis is real and the near, mid- and long-
term solutions include:
--new supplies (increased access and production, LNG
imports);
--conservation, efficiency, fuel switching to distillates;
--meeting new and existing electricity demand by substituting
natural gas based generation with coal-based generation,
particularly coal gasification; and
--leveling the competitive playing field between the chemical
and electric utility sectors;
Gasification is economically competitive with other clean
coal processes and offers cross-sector benefits: electricity,
chemicals, general manufacturing, and agriculture. Barriers
exist that can be removed to fully realize these benefits.
Gasification is the environmentally superior coal-based
technology and holds great promise for transition to a Hydrogen
Economy.
And, as Eastman has proven through 20 years of experience,
coal gasification plants can be operated at maximum efficiency
with a high-degree of reliability.
[The following attachments have been retained in committee files.]
Fig. 1. Gasification Capital Cost Trends
Fig. 2. Cost of Electricity Comparison
Fig. 3. The Flexibility of Coal Gasification
Fig. 4. Forced Outage Rate of Eastman's Gasification Plant
Fig. 5. Days Between Gasifier Switches for Eastman's Gasification
Plant
Fig. 6. Maintenance Costs for Eastman's Gasification Plant
Fig. 7. Syngas Contaminants Removed Prior to Combustion
Letter from the Gasification Technologies Council regarding the
FutureGen project
The Chairman [presiding]. Thank you very much.
Could you tell me, how big is Eastman Chemical sizewise?
Mr. Ferguson. We have worldwide revenues of approximately
$6 billion. We employ 16,000 people and we are in nearly every
country of any size in the world.
The Chairman. Your principal business today is?
Mr. Ferguson. Petrochemicals and fibers and plastics.
The Chairman. Thank you very much.
Bruce Thompson, would you please testify now.
STATEMENT OF BRUCE THOMPSON, EXECUTIVE DIRECTOR,
PUBLIC AND INDUSTRY AFFAIRS, FOREST OIL
Mr. Thompson. Yes, Mr. Chairman. Thank you. It is a
pleasure to be here today. I appreciate this opportunity----
The Chairman. I am sorry for the delay.
Mr. Thompson. Oh, no problem at all. I understand.
There are three points that I would like to make at today's
hearing. The first is that the current natural gas situation
was foreseeable and was in fact forewarned. Second, that there
are no short-term solutions; however, we must learn from the
situation we find ourselves in and use it as a basis to make
better policy choices going forward. And third, there will be
some who advocate failed policies of the past, such as fuel use
allocation or restrictions on gas use or controlling prices,
and we think we are strongly in favor of avoiding these
choices.
Taking my last point first, some have proposed that new
natural gas electricity generation capacity be prohibited or
restricted. This would be a serious mistake. Natural gas
generation capacity is a source of clean power, it is very
efficient, and these new and efficient facilities are much
better than what is currently on stream and we should encourage
this type of capacity rather than discourage it.
It is essential to recognize that the current gas situation
is the consequence of past decisions. We have had a number of
reports over the years, both private and government-funded,
that told us we had an adequate resource base, but that we were
going to have to develop policies to access the resource base
appropriately. We ignored these clear signals for appropriate
policy development.
In terms of solutions, the current challenge we have is to
simultaneously address short-term needs and to alter policies
to produce better results in the future. There are four options
that we see as important:
First, of course, as we have discussed, is demand
limitation or conservation. That is an important piece. The use
of LNG is also important; development of Arctic natural gas
sources; and the improvements in the lower 48 and offshore. In
the short term, demand alterations are really the only
realistic option to do anything today. The IPAA and the
Domestic Petroleum Council both believe that the attention
should be directed toward conservation measures that can be
implemented in the short term.
However, we must be careful not to generate--let this slip
into demand destruction rather than demand reduction. We do not
want a negative impact on the economy.
LNG is a critical component, as we have heard today, and I
would support Chairman Greenspan's remarks along those lines,
as my other colleagues here at the table. Additionally there is
Arctic gas, Canadian gas, and Alaskan gas that will be
available, but it is a long ways out. It is 4 years to 10 years
depending on the estimate you look at.
The responsible solution for the expansion of supply is to
develop our lower 48 resources and we need an improved approach
to do that. Much of these resources are on Federal lands. A
perfect example in the way we have done this responsibly over
the years is, as the chairman has noted and the other Senators
have, the western and central Gulf of Mexico have been a source
of natural gas supply for over 25 years and it has done very,
very well.
A number of other offshore areas are under moratoria today.
These policies are predicated on events that occurred long ago
and on technology that has long since been outdated. We need to
reexamine these policies in light of current technology.
In addition, we must not overlook the importance of public
education, as we have talked about here today.
A lot of today's lower 48 gas resources are concentrated in
the Intermountain West and these are resources that we need to
have greater access to and be able to go at these resources in
a responsible manner, which we have proven we can do over time.
There is also a strategy that some of the opponents of
development have evolved over the years and that is one of
litigation to starve our development efforts. A classic example
of this is what has happened in the Powder River Basin, and
that is really highlighted more in my written testimony and I
will not spend time on that here. But that is one that has been
a long delay for the industry and has caused a shortage of
capital coming in.
Like any industry, ours requires capital. The historical
extreme price volatility generates uncertainty and it
discourages inflows of necessary capital which are required to
sustain supply at affordable prices. The current policies that
we have have pushed us to this point.
Going forward, the ideal policy would be one which
encourages and permits reasonable and responsible access to the
resource base, resulting in a smoother price cycle, fewer and
less extreme price spikes and plunges, less uncertainty, and a
sustainable, affordable, secure supply of natural gas.
I thank the committee for this opportunity and I appreciate
this chance to testify and I look forward to your questions.
[The prepared statement of Mr. Thompson follows:]
Prepared Statement of Bruce Thompson, Executive Director,
Public and Industry Affairs, Forest Oil Corporation
Mister Chairman, members of the committee, I am Bruce Thompson,
Executive Director Public and Industry Affairs, Forest Oil Corporation.
This testimony is submitted on behalf of the Independent Petroleum
Association of America (IPAA), the National Stripper Well Association
(NSWA), the Petroleum Equipment Suppliers Association (PESA), the
Association of Energy Service Companies, and 34 cooperating state and
regional oil and gas associations. These organizations represent
petroleum and natural gas producers, the segment of the industry that
is affected the most when national energy policy does not recognize the
importance of our own domestic resources.
The purpose of the hearing is to discuss the reasons behind the
high price of natural gas, its effect on the economy and to consider
potential solutions. While this testimony will address these issues in
more detail, there are three key points that it will emphasize.
First, the natural gas price situation that is now being addressed
was foreseeable and, in fact, was forewarned.
Second, there are no simple, short-term solutions. However, what
has happened can be the basis for making better policy choices in the
future and those choices need to be made.
Third, there will be some who will advocate the failed policies of
the past policies like limiting the use of natural gas or controlling
its price. These choices must be avoided. Their past failures alone
demonstrate that they will not result in the development of the natural
gas supply that is needed to meet demand.
avoiding bad choices
Taking this last point first, the use of natural gas to generate
electricity is drawing a significant amount of current attention. Some
question whether natural gas should be the fuel of choice in most of
the new electrical generation capacity. Some have proposed that new
natural gas electricity generation capacity be prohibited. Few seem to
recognize that the driving force behind these investments are the
national environmental policies that value the clean burning benefits
of natural gas. Fewer still suggest what alternative energy sources
would provide the new electricity that is needed while maintaining
these environmental standards. And unfortunately, only a tiny number
recognize that the new gas fired electricity generating facilities are
40 to 50 percent more efficient than existing gas fired capacity which
allows the same amount of electricity to be generated with roughly half
the volume of natural gas.
Policymakers need to clearly understand the nature of the natural
gas industry before rushing to judgments on limiting its use. Far
better solutions are available through encouragement of conservation
and sound expansion of supply.
the supply challenge--it was foreseeable; it was forewarned
Initially, it is important to put the current supply and demand
situation in some perspective. The United States will remain
principally dependent on oil and natural gas for the foreseeable future
to meet its energy demands. Recent projections by the Energy
Information Administration (EIA) show the oil and natural gas will
provide for about 65 percent of domestic energy over the next several
decades.
Second, it is essential to recognize that current natural gas
prices and supply constraints are the consequences of past decisions.
More importantly, they are the result of failures to respond to clear
forewarnings that action needed to be taken.
Back in 1999, when the National Petroleum Council (NPC) transmitted
its Natural Gas study, it concluded:
The estimated natural gas resource base is adequate to meet
this increasing demand for many decades . . . However,
realizing the full potential for natural gas use in the United
States will require focus and action on certain critical
factors.
It was a clear signal that action needed to be taken. Moreover, it
was a call that was echoed by those in the industry that have sought
greater access to the national resource base. IPAA was one of those
many voices. Looking back at testimony IPAA has presented both before
and after the NPC study, there has been a clear and increasingly urgent
call for changes to national policies.
For example, in January 1999, Steve Layton testifying before this
Committee about the damage being done to the domestic oil and natural
gas industry from the low oil prices of 1998-99 described the
consequences to domestic natural gas production as follows:
Without this infrastructure it is not only the nation's oil
industry at risk but its future natural gas use as well. This
country has a vision of building a future on expanded use of
clean burning natural gas. The industry has been challenged to
increase natural gas production by about 40 percent--that is a
net increase of 40 percent. It will require production not only
for that increase but to replace supplies that are depleted
during the same timeframe. It cannot happen without a healthy
oil industry. Oil and gas are found together. They rely on the
same tools, the same science, the same skills, the same
financial resources.
In June 2000, Jerry Jordan testifying before this Committee
described the increasing importance of natural gas in domestic energy
supply:
1. Natural gas is an increasingly important element of
domestic energy supply. The National Petroleum Council Natural
Gas study concluded that domestic natural gas demand will
increase from the current 22 trillion cubic feet per year (Tcf/
yr) to 29 Tcf/yr by 2010. Most of this increase will be needed
to fuel expanding electricity generation. The study concluded
that:
U.S. gas demand will be filled with U.S. production,
along with increasing volumes from Canada and a small,
but growing, contribution from liquefied natural gas
(LNG) imports. . . . Two regions deepwater Gulf of
Mexico and the Rockies will contribute most
significantly to the new supply. . . . U.S. production
is projected to increase from 19 TCF in 1998 to 25 TCF
in 2010, and could approach 27 TCF in 2015. Deeper
wells, deeper water, and nonconventional sources will
be key to future supply.
Importantly, this study concludes that these future natural
gas needs can be met through domestic resources supplemented by
other North American resources, but only if conditions are met.
He then described the critical need to address access to the
national resource base:
For example, we cannot expect to meet our nation's needs for
clean burning natural gas without reasonable access to the
resource. The NPC Natural Gas study and all other analyses
conclude that the Rockies contain significant extractable
reserves of natural gas. Yet, in the Rockies access is being
limited. It is either the unanticipated outcome of laws,
regulations, and plans that unintentionally deny access or the
manipulation of these laws to produce that outcome. In either
case, access limitations are not the result of a clear policy
decision. Consequently, we need a commitment from Congress and
the Administration that these types of constraints will be
eliminated or restrained and proper funding will be provided on
a continued basis to allow environmental documents, leases, and
drilling permits to be issued in a timely fashion.
Earlier this year, Diemer True testifying before the House
Committee on Resources summarized the dynamics of the past several
years on natural gas supply in 2003:
Going back to year-end 2000, we briefly saw the results of
natural gas supply shortages. As storage dwindled, prices
soared and consumers had to deal with the consequences. The
initial phase of that supply-demand imbalance reflected the
effects of low gas prices and unusually low oil prices in 1998-
99 on capital availability to develop domestic natural gas
supply. These historically low petroleum prices resulted in
capital expenditure budget cuts for domestic producers
exceeding 30 percent in 1999. The natural gas drilling rig
count dropped by over 40 percent at its lowest point. In 1999,
new wells failed to replace existing reserves.
The petroleum price recovery and the industry's recognition
that future natural gas demand would increase led by more and
more electricity generated by gas powered turbines triggered a
robust rebound in drilling for natural gas. Rig counts went to
record levels. But, the lag in new production caused by the low
petroleum prices left a tight market by the end of 2000. Higher
prices resulted in more drilling rigs searching for natural
gas, but production still declined. U.S. natural gas production
today is lower than it was five years ago.
The higher prices also reduced short-term demand. In reality,
the abatement of high natural gas prices resulted from
significant demand decreases not from supply increases.
In the latter months of the 2001, prices had fallen to levels
comparable to the first part of 1999 and rig counts began to
fall as well. By year-end 2001 rig counts had fallen to April
2000 levels. While rig counts rose to around 700, they were
well below the 1000 rate that was achieved in the fall of 2001.
The implication of these lower rig counts was clear--supply
levels would not be sustainable.
Now, in early 2003, the implication has become reality.
Natural gas supplies have been stressed by a cold winter and
natural gas prices are in the range of $6.00 per thousand cubic
feet. Natural gas drilling rig counts are in the range of 750.
Estimates suggest that domestic natural gas production fell by
around 2.8 percent in 2002. Clearly, the challenge facing
natural gas producers is twofold--maintaining existing natural
gas supply and increasing that supply to meet future demand.
Access to federal resources play a significant role in meeting
this challenge as well as barriers to development, which also
adversely affects production. This remains complicated and new
events suggest a worsening situation.
Since that testimony, prices have continued at high levels as
winter demand drew down natural gas storage levels. Storage is now
being replenished with an expectation that it might reach normal levels
before next winter depending on summer demand. However, the continuing
high prices have put pressure on demand, particularly in the process
gas user component of the industry. Meanwhile, producers are responding
with increased drilling activity. Drilling rig counts are 25 percent
higher than they were at the beginning of 2003. Nevertheless, natural
gas that is found today can take from 3 to 18 months to reach the
market depending on where it is found and what infrastructure exists to
get it to the market.
managing the short-term; learning from the past
Over the long-term, meeting domestic natural gas demand will
require a diversity of supply sources. The current challenge is to
determine what options make the most sense to meet short-term needs and
how to alter policies to produce better results in the future. Most
frequently, there are four options that draw the greatest attention:
Demand reduction;
Increased use of Liquefied Natural Gas (LNG);
Development of Arctic natural gas;
Improvements in the development of lower-48 and offshore
natural gas.
It is appropriate, then, to examine each of these.
In the short-term, demand alterations will be the only realistic
option if the market remains as tight as it has been. IPAA believes
that attention should be directed toward conservation measures that can
be implemented in the short-term to reduce the pressure that has
occurred in the market and has probably had its greatest effect on the
process gas users. This component of the natural gas marketplace is an
important element of the nation's manufacturing infrastructure. Because
it largely competes in the international marketplace, it is more
susceptible to price shifts and has shown in the past that it can exit
the United States if forced to that choice. In the 2000 2001 period of
high natural gas prices, shifts in demand--particularly in the
fertilizer industry were significant factors in the market that
ultimately led to lower prices. Unfortunately, the dramatic shift that
occurred also had the effect of reducing investment in new supply.
While LNG must grow to be a larger component of the natural gas
supply mix, it is not the panacea that some analysts have seemed to
consider it. First, it will take several years for the necessary
investments to be made and for permitting of facilities to take place
before significant growth in its share of the market will occur.
Second, these investments will only occur if the natural gas price
justifies them. A precipitous drop in price like that of 2001 would
chill interest in LNG. Regardless, a major impact in supply from
imported LNG is years away. Moreover, the experience of stumbling into
the current structure of crude oil imports--with all the reliance on
unstable sources that it entails--should trigger wariness in
policymakers about how reliance on foreign sources of natural gas
should be handled.
Although there has been significant interest in the development of
Arctic natural gas, both Alaskan and Canadian, and the pipeline options
to deliver it to the lower-48 states, all the estimates of its
development predict that additional Canadian natural gas will not be
available for another 4 to 5 years and Alaskan natural gas will not be
a factor until the next decade.
Consequently, expanding domestic supplies inevitably requires
better development of the resources in the lower-48 states and the
federal offshore.
While analyses like the 1999 National Petroleum Council Natural Gas
study and the newly released EPCA study by the Bureau of Land
Management have focused on the resources that need to be developed to
meet future demand--particularly with regard to federal lands--the
challenge of maintaining existing supply has not received the attention
it deserves.
The first and perhaps most compelling challenge to maintaining
existing supply is coping with increasing rates of depletion.
Conventional natural gas wells begin to deplete as soon as they begin
to produce. But over the past decade, producers have seen average
depletion rates climb from 16 percent per year to 28 percent per year.
In somewhat simplified terms, this means that producers must initiate
new production essentially equivalent to the current annual production
from the Western and Central Gulf of Mexico each year just to stay
even. New technologies like 3-D seismic enable explorationists to find
smaller reservoirs. Enhanced production technologies like horizontal
drilling are allowing better and more environmentally effective
development of reserves. But finding smaller reserves and producing
them more effectively makes the challenge of maintaining existing
natural gas supply more difficult.
Second, it is important to understand the extent of development of
the existing resource base. Some opponents of accessing additional
federal lands suggest that the current resource base should be the
first focus. In reality, it already is. Developing the current resource
base for both conventional and unconventional natural gas is the source
of existing supply. When the rig count grew to 1000, this is where it
had to grow. But this resource base has supplied natural gas for the
past 50 plus years. These mature reserves are harder and more costly to
develop. New reserves in these areas are smaller and deplete faster or
are deeper and more costly to develop. But, there is no doubt that
these resources will continue to be developed as quickly as access is
provided, natural gas prices justify development and capital is
available to do so.
Policymakers need to understand these implications clearly. These
are the conditions that are defining the current supply and demand
balance. Not only must they be addressed, but the industry must also be
capable of increasing natural gas supply to meet future increased
demand.
Natural gas consumption is expected to grow by almost 50 percent by
2025. While recent events may have slowed the pace of this growth--an
issue that is being assessed again by the National Petroleum Council--
future natural gas consumption will likely grow at a pace that will
require an energy policy that allows the full potential of natural gas
to be developed. This cannot be done without more access to, and
development of, government-controlled resources. However, development
of these resources remains a substantial challenge.
offshore--western and central gulf of mexico
These portions of the Gulf of Mexico have proven to be a world-
class area for natural gas as well as petroleum production, accounting
for over 25 percent of domestic natural gas production. Production
comes from the continental shelf, the deepwater, and the emerging
ultra-deepwater. The NPC study projects that future production
increases in these areas is essential to meet projected demand.
However, future production increases will hinge on federal offshore
policies. The most significant of these in the Western and Central Gulf
of Mexico relate to royalty policies. However, improvements to coastal
zone management review policies could also help avoid costly delays in
developing new supplies.
Legislation reported by this committee includes a number of
provisions designed to enhance exploration and production in this
offshore region. These include:
Provisions for royalty incentives in the Western and Central
Gulf of Mexico. It should parallel and extend the relief now
being provided administratively in recent lease sales--those
occurring after the House passed its bill.
Provisions to address deep drilling for natural gas on
existing leases.
Provisions to create additional authority to develop RIK
programs that will allow for more effective use of the highly
desirable approach. RIK eliminates the complexities of
determining the royalty value thereby saving both the
government and the producer from the convoluted determinations
that are now necessary and are frequently questioned--sometimes
years after the sales occur. Offshore production is
particularly suited for royalty-in-kind (RIK)--paying the
royalty with production instead of dollars. It is a more
economical and fairer approach. Recent actions to fill the
Strategic Petroleum Reserve could utilize 80 percent of this
offshore royalty oil. RIK should be encouraged for natural gas.
Provisions for royalty relief for marginal wells on both
federal onshore and offshore properties for both oil and
natural gas. This relief encourages the continued production of
these wells in times of low oil and/or natural gas prices.
Retaining production from these wells is in the national
interest and the provision should be included in the final
bill.
offshore--eastern gulf of mexico, atlantic ocean, and california
Developing the substantial domestic natural gas resources in most
of these three areas is prohibited by moratoria. President Clinton
extended these moratoria for another ten years in 1998 saying, ``First,
it is clear we must save these shores from oil drilling.'' This is a
flawed argument ignoring the state of current technology; it results in
these moratoria preventing natural gas development as well as oil. In
fact, both the Eastern Gulf and the Atlantic resources are viewed as
gas resource areas, not oil--those coasts are not at environmental
risk. Too often, these policies are predicated on the events that
occurred 30 years ago. For example, no Eastern Gulf of Mexico sale
occurred from 1988 to 2001. The recent sale took place only under
greatly reduced conditions.
However, this year another ominous step was taken when the federal
government decided to purchase leases that have not been developed,
primarily due to regulatory limitations, in the Eastern Gulf of Mexico.
This action led to calls for similar purchases off the coast of
California and on other government controlled land. While the merits of
each case should be reviewed, following such a course also serves to
limit the available resource base at a time when it needs to be
expanded.
Federal policy needs to be reconsidered. It needs to be based on a
sound understanding of today's technology. When the NPC analyzed
natural gas resources that were being inhibited by regulation of these
areas, it concluded that over 70 trillion cubic feet of natural gas in
these areas are precluded from development. Unfortunately, as soon as
any discussion of offshore development begins, a barrage of reaction
occurs claiming that any such discussion threatens the resort based
economies of those coastal states--a consequence that has failed to
occur in those states where offshore development exists and resort
economies also thrive. IPAA commends the Senate for rejecting a recent
amendment that would have eliminated a provision in the current Senate
bill that authorizes an inventory of offshore energy resources.
onshore restrictions--a mosaic of regulations and prohibitions
Much of the onshore natural gas resource base is located in the
Intermountain West. Yet, much of this resource base is constrained.
And, it is clear that this area is a critical battleground between
those who seek to develop domestic natural gas and those who seek to
prevent development. Not only must energy producers navigate through a
mosaic of regulatory constraints, producers must now deal with a series
of strategic efforts to delay and prevent the necessary use of these
national resources.
The regulatory framework to obtain permits to develop energy
resources on federal lands is layered with complex and sometimes
conflicting requirements. Federal Land Managers must operate through
Resource Management Plans (RMPs) that require extensive Environmental
Impact Statements (EISs). These address a wide variety of impacts
regarding the use of the land. Formulating these RMPs and EISs requires
consultation and, in some cases, concurrence with other federal
agencies and the states. These agencies, such as the U.S. Fish and
Wildlife Service, are tasked with implementing laws, like the
Endangered Species Act (ESA), that do not consider the balance needed
between their wildlife management objectives and national energy needs.
Yet, the Federal Land Manager is developing a plan in most cases for
multiple use federal lands.
This process creates delay, confusion, and conflict. It produces a
series of access and development limitations. Collectively, the effects
are significant. The NPC's Natural Gas study estimated that access to
137 trillion cubic feet of natural gas in the Intermountain West was
limited by regulation. Taking a different approach, the Bureau of Land
Management (BLM) released its EPCA access report and reached a
conclusion that roughly 40 percent of the natural gas resources in the
federal lands it studied was restricted. Moreover, these studies were
largely focused on constraints that exist at the leasing phase of the
process. Even in those areas where the EPCA study suggests that there
are no stipulations, that assessment applies only at the leasing level.
When Applications for Permits to Drill (APDs) are sought, stipulations
can still be required. Such stipulations can be extensive. For example,
at one southwestern Wyoming site that was analyzed, stipulations
effectively limit operations to only about six weeks per year.
There are no simple answers to this issue or a single solution that
will address the problems. What is required is a commitment to develop
these access policies with a full recognition of the importance of
developing the natural gas resource. The National Energy Policy
recognized the magnitude of these limitations. Executive Orders to
consider energy supply implications in federal decision making and to
convene a task force to improve permitting are important first steps in
developing a response. These early efforts have resulted in specific
tasks within various Executive Branch departments that should improve
the permitting process.
Adequate agency funding and staffing is needed at the key field
offices responsible for permitting and it needs to be directed toward
the permitting process. Lack of funding has limited the ability of the
agencies to permit, to monitor permits, and to enforce permit
requirements leading to consequences that encourage conflicts between
the different users of federal land. It has resulting in shifting the
federal responsibility for developing EISs and other National
Environmental Policy Act (NEPA) requirements to private parties where
it was never intended to reside.
But the direct permitting aspect of addressing these access issues
is only one part of a much larger debate. Besides these issues, energy
producers are also confronting broad and aggressive efforts to
otherwise delay or prevent access--strategies of misdirection, of
litigation, and of division. Congress needs to recognize these efforts
for what they are and react accordingly.
Prior to the EPCA study, development opponents consistently used a
strategy of misdirection. They alternated between suggesting that the
issues of federal land access were related to opening national
monuments or that 95 percent of the federal lands were open to
permitting and there was no issue. The EPCA study has helped focus the
debate on the real areas of concern federal lands available for
multiple use and the restrictive lease stipulations that inhibit their
use. But, even with this new information, it is likely that development
opponents will try to minimize the very significant issues associated
with land use stipulations.
It is equally clear that development opponents are undertaking an
aggressive strategy of litigation to thwart access in the Intermountain
West. When the EPCA study was released, the reaction was quick and
certain:
``If you bid on a lease on public land, you can expect
(environmental litigation).''--Peter Morton, The Wilderness
Society, Dow-Jones Newswires, January 21, 2003
The federal government is now confronted with litigation threats
and actions at every step in its process. Litigation has been filed to
prevent exploration activities designed to identify possible resources.
Litigation is filed over granting permits, challenging existing RMPs
and opposing revisions to EISs. The primary result of this litigation
is delay and more delay--and no new energy supplies. Delay is a key
component of the strategy. Energy producers must invest capital, must
replace and expand their production. If opponents to development can
forestall access, it forces producers to shift their investment
elsewhere. The longer producers are delayed, the higher the likelihood
that they will give up on an area. This is the ultimate objective of
this strategy of litigation, but it is ultimately a strategy that costs
the nation domestic natural gas and impacts our energy security.
The circumstances surrounding efforts to develop resources--
particularly coal bed natural gas--in the Powder River Basin of Wyoming
and Montana demonstrate the type and magnitude of these challenges. The
events in this area have unfolded over the past two decades and present
a characteristic pattern of the problems confronting natural gas
development in the Intermountain West. The following is a rough
chronological review of the events in the Powder River Basin.
timeline for powder river basin (prb) oil and gas environmental impact
statement (eis)
1985 & 1986--Buffalo & Platte River Resource Management Plans (RMPs)
are approved. Neither of the plans specifically addresses coal bed
natural gas drilling.
1992--1997 Buffalo RMP is revisited and evaluated. The evaluation
results in determining that the RMP planning and management decisions
are still valid.
Throughout 1990's--Environmental analyses are conducted on a variety of
coal bed natural gas project proposals in compliance with NEPA. Each of
the analyses covered the effects of the proposed actions and
alternatives, including the cumulative effects of the projects combined
with other development and actions within the area. Based on these
analyses, it was determined that amendments to the Buffalo RMP were not
necessary.
March 1998--BLM begins an EIS to analyze the development of 3,000 to
5,000 coal bed natural gas wells in the Wyodak project area of the
Powder River Basin. During development of the EIS, coal bed natural gas
drilling on state and private lands increases dramatically in the PRB.
May & June 2000--BLM announces its intent to conduct an environmental
impact analysis of oil and gas development in the PRB. Notice of Intent
to prepare an EIS published in the Federal Register on June 21, 2000.
August 2000--BLM determines that levels of development approved in the
Record of Decision, analyzed in the Wyodak EIS, have been reached. BLM
will no longer approve Applications for Permits to Drill (APDs) for
coal bed natural gas wells on federal lands and/or minerals within the
PRB. BLM essentially places an embargo on new coal bed natural gas
development on federal lands in the PRB. Coal bed natural gas projects
on state and private lands are allowed to proceed.
January 2002--Draft EISs (DEIS) issued for coal bed natural gas
development in the PRB in Wyoming and in the entire State of Montana.
May 2002--Public comment period on the DEIS closed. Over 17,000 comment
letters were received on the two documents. US EPA Region 8 Office
questions the validity of the DEIS.
January 2003--Final EISs issued for coal bed natural gas development in
the PRB and the State of Montana. One month protest period announced
for both documents.
April 30, 2003--Record of Decision (ROD) regarding oil and natural gas
development in the PRB and Montana issued by the BLM. The ROD will
allow up to 51,000 coal bed natural gas wells to be drilled in the
entire region.
May 1, 2003--Coalition of environmental groups and landowners file suit
in Montana to block implementation of the ROD.
Present--Suit attempting to block implementation of ROD pending in the
courts. No stay preventing approval of APDs has been granted.
The history of the Powder River Basin EIS process presents two
particularly perplexing issues. The first occurred when the EPA Region
8 Office raised objections to the DEIS after it had been under
development for several years. This raises serious questions regarding
the procedures used by the federal government in addressing energy
permitting. The second issue is now unfolding. Clearly, there is a
strategy of litigation being pursued to prevent development of the
federal resource base in the Powder River Basin. However, while the
tactic is clear, the courts have not succumbed to the strategy by
issuing a stay of permitting. Nevertheless, a large backlog of APDs
exists at the BLM and there appears to be no movement to expedite
approval of these APDs. It appears that the BLM is self-imposing a stay
on permitting.
The pending Senate legislation includes provisions to address the
first of these issues. A pilot program is included that would enhance
the coordination between the various federal agencies in the most
active field offices. The intent of these provisions is to avoid future
situations where one federal agency prevents another federal agency
from carrying out its energy leasing and permitting activities because
it was not involved in the EIS process early in its development. This
approach offers the potential for improved federal agency interactions.
Similar efforts are being developed by the administration's energy
permit streamlining task force.
However, these efforts only address the leasing and permitting
process from the federal agency perspective. The larger question that
the Congress and the administration must consider is whether more
direct efforts are necessary to either compel or allow action in the
face of the strategies that are being used to prevent development of
the federal resource base. Other proposals have been suggested to force
timely agency action. In the past proposals have been developed based
on peril points where conditions are so critical that the President
would be authorized to alter procedural requirements while maintaining
substantive environmental protections.
Congress has an opportunity to address these other limitations. It
can provide an improved process to assure that environmentally sound
natural gas development can occur. If Congress believes that the
current natural gas market situation--high prices, concerns over
adequate natural gas supply--warrants more aggressive approaches to the
leasing and permitting processes on federal lands, it has the power to
create such processes.
Thank you for the opportunity to provide this perspective on the
challenges facing natural gas production in the United States.
The Chairman. Thank you very much.
Senator Akaka, do you have any questions or observations?
Senator Akaka. Yes, thank you very much, Mr. Chairman. I
appreciate you holding this hearing on natural gas prices,
production, and its challenges in the future. My questions
concern liquefied natural gas as a fuel for the future, the
long-term perspective. I would like to ask just two questions,
Mr. Chairman.
The Chairman. Please.
Senator Akaka. Mr. Grant, the challenges for increasing the
use of natural gas and LNG are very, very important for the
Nation and particularly for Hawaii. During my years in Congress
I have continued to focus on energy sources for the future and
opportunities for Hawaii to reduce dependence on petroleum.
Just as in agriculture, depending on only one crop, or one
source of energy, is a recipe for price spikes or economic
disaster, or both.
As you probably know, in Hawaii we depend on petroleum for
over 90 percent of our energy needs. We are a relatively small
market with relatively high delivery costs and we are isolated
from other States on the continent.
LNG provides the advantage of mobility without pipelines.
LNG, however, requires an extensive infrastructure that Hawaii
does not have. I am concerned about how Hawaii will participate
in the opportunity to move toward LNG. Under what conditions
will Hawaii attract the capital for investments in the
necessary infrastructure for LNG?
Mr. Grant. Thank you for the question. I think it comes
down to, if you look at the recent expansion that we did in our
plant in Everett near Boston, Massachusetts, you look for an
anchor tenant. In this case it was a powerplant, and it allowed
us to expand our facility. It gave that powerplant the
flexibility that LNG facilities have, which is to go from zero
to 100 almost instantaneously; the ability for, as the
powerplants go up and down we can match those type of things.
There is also some potential savings between hot and cold
exchange type of things.
But that was the anchor tenant, and I think for Hawaii,
particularly on the power side, our company is looking at
expanding its LNG operations within the United States to a
terminal in the Bahamas that would serve southern Florida.
Again, it is based upon power growth similar to what the chart
is there. Generally, LNG--and I think people have talked about
it--has been a long-term supply and so you have both supply--
you have got a supplier that likes that market and the
infrastructure starts with something like a powerplant and then
can expand from there.
Senator Akaka. Thank you.
My final question is to my friend, David. As usual, it is
good to see you here. I am pleased to see the Department's
investment in energy efficiency and renewable resources are in
good hands.
Mr. Garman. Thank you, Senator.
Senator Akaka. As Chairman Greenspan has noted, significant
global trade in LNG is developing. But Hawaii may find it
difficult to attract capital investment in LNG. When the market
does not work, I believe there is a role for the Federal
Government to create a more level playing field by providing
opportunities to reduce the Nation's dependence on foreign oil.
There are precedents for Federal financial assistance to
States to overcome their unique difficulties, and the Nation's
challenges in building infrastructure for the development of
new technologies, and it may be necessary to provide economic
incentives to attract the infrastructure necessary to
participate in the conversion to natural gas.
Are there models of public-private partnerships that you
can suggest which could include the role of the Department of
Energy to assist States to meet this goal?
Mr. Garman. I am not aware of any program that we have at
the Department or elsewhere that would provide assistance with
direct capital contributions to infrastructure development in
Hawaii. We do of course have a State energy program run in my
office, around $40 million a year, where we provide grants to
States to help them understand how they can employ new
technologies that fit the needs of those States. We work very
closely with Maurice Kaya, of Hawaii of the State energy
office. I will be happy to engage Maurice and others in the
Department to see if there is something I might not be aware of
beyond the State energy program.
Senator Akaka. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator, I have one question, then I will yield to you. I
have just this question. It is my understanding that the
Department--this is for Bruce, Mr. Thompson--that on April 30
the Department of the Interior completed all the appropriate
environmental reviews to allow new coalbed methane production
in the Powder River Basin. However, there are over 2,000
drilling applications awaiting departmental approval.
Can you explain to me why, in the midst of this natural gas
crisis, the Department has waited nearly 3 months and still has
not approved a single permit?
The follow-on would be something that you should not be
surprised to find in the bill as an amendment: Would you
support legislation that would require that the Federal land
managers respond to permits within 45 days time period in order
to prevent unnecessary and bureaucratic delays? Would this help
improve the investment climate and the ability to raise capital
for that area of exploration and development?
Mr. Thompson. Senator, it would clearly, something like
that would clearly help raise capital. Anything that reduces
uncertainty increases the ability to bring capital to an
industry.
To answer the first part of your question, I have no idea
why there are 2,000 permits still pending when the EIS, the
record of decision is done and we should be up and moving. It
is a function, I think--there is a lack of funding in some of
these offices, that is part of it. There is also the tendency
not to move when there is a threat of litigation hanging over
people's heads. People do not want to make decisions that are
second-guessed. That is a problem.
It is critical for our industry that we access this
resource base. We need to be able to deal with things like
this. This is a critical situation we find ourselves in and a
speedier permitting process, however it is mandated, is one
that we would be in favor of.
The Chairman. We are going to do our share.
Senator Craig, what always happens is we find these areas
and then the answers generally are: Well, we ran out of money,
or OMB did not give us enough last year. Well, we have got to
start picking some of these where it is quite obvious that
there is no excuse of that type.
Mr. Thompson. We have some information we would be able to
provide and help out on that.
Senator Craig [presiding]. Well, let me thank all of you. I
have got a couple of questions and then I think we will have
this hearing concluded.
Secretary Garman, you have heard, I think Mr. Ferguson
talked about increased efficiencies and efforts that have gone
under way in the gasification of coal. Mr. Thompson mentioned a
priority list of things that can be done in the immediate
sense, and the top of that was conservation. There is certainly
no disagreement that movements in the area of efficiencies and
conservation are a no-regrets kind of policy in the near term
that all of us agree to.
The question is, how much low-hanging fruit is left out
there that is going to affect in any way the bottom line of
that spike or the top line of that spike, if you will? Could
you speak to that? Has the Department looked at that? I know
that high-priced markets oftentimes bring efficiencies that
otherwise some did not think were there, although capital
markets today and competition has brought a great deal of that.
How much is left?
Mr. Garman. We think that in certain areas there is a
significant amount of low-hanging fruit still available. I
think your point is well taken, though. If memory serves,
residential consumers of natural gas over the last decade or so
have become more efficient by 22 percent as a consequence of
new appliances, new windows, tighter building envelopes, and a
variety of things that builders are putting into homes.
That does not mean that tremendous other opportunities do
not exist. They do come at a cost. For example, all of us have
things we can do to our homes, ranging from low-cost items like
compact fluorescent light bulbs to high-cost items such as new
windows or new cladding for the home, that could produce
tremendous energy savings. The question is: is it cost
efficient to do so and will that consumer do that based on the
capital cost of the improvements that need to be made?
We in the Federal Government, owners as we are of 500,000
buildings, are learning this. In the Department of Energy, I
believe we have lowered our energy use in the Department
against the 1985 baseline by over 40 percent. But you are
correct, it is getting harder and harder to find new
opportunities to achieve additional savings, and that is the
nature of the beast.
Senator Craig. Well, I know that we have been at this for
some time and I am sure there are others out there. But I do
not think any of us can anticipate in an ever-increasing demand
curve in our markets that conservation gets us there. It is
nice to see that ``other'' margin on that chart over there
growing, but the reality is--and I think this committee has
recognized it, as most of you do or all of you do, and our work
product that will be on the floor the last of July demonstrates
it. It is a very balanced approach. We have incentivized more
conservation. We have incentivized renewable technologies. But
we have recognized the raw and clearly understandable need to
produce in all segments of the portfolio.
Mr. Grant, there is one thing that has been brought up
consistently about LNG facilities since September 11, and that
is of course their safety, the ability to site them. We have
seen a considerable desire to shut down or expression of a
desire to shut down an LNG facility in Maryland because of its
proximities and all of that.
Could you comment on the issue of safety, target hardening
if you will--or maybe I should not use that phrase--facility
hardening, as it relates to the security of the operation of
these so that they would be less inclined to be a potential
target?
Mr. Grant. Thank you for the question. Actually, it has
been referred to in our area as ``target hardening.''
Senator Craig. It really has? Well, all right. Well then,
we will use that.
Mr. Grant. I have addressed a little bit of that in my
testimony. But it is one of those things where you do not have
to take my word or our company's word for it. The history
safety and security-wise of the LNG industry is almost
unprecedented. These ships are very sturdily built. As a
company we have taken safety and security very, very seriously,
when you look at the things the Department of Energy has done,
Department of Transportation has done around these things.
I think the biggest issue that we have is an education
issue. When you look at Japan and Korea, who are almost 100
percent dependent on LNG for their natural gas usage, when you
look at Spain, who takes over half of their gas in the form of
LNG into that country, it is a very normal part of their
infrastructure.
Except for New England, LNG is seen as something very kind
of unique here.
Senator Craig. Yes.
Mr. Grant. They forget that it is basically just another
way to bring natural gas here. The ship is a surrogate for the
pipeline. I think when you get past that--the way that these
things are constructed, the ships are all double-hulled. You
have seen a lot of things in oil about everything should be
double-hulled. They have always been. The ships are--it is not
under pressure.
We have done a number of things over the years working with
the Coast Guard, working with the Department of Energy,
Department of Transportation, that preceded 9-11, just to make
sure that the security and the safety of these ships--the
standards have always been there, and the industry believes
very strongly in safety and security.
But I think the number one thing is education, getting the
record out there, getting the experts like Lloyd's to talk
about it. The Department of Energy has got a number of experts
as well, in addition to industry officials. But it is something
we take as an industry very, very seriously. But again, we
believe it is an educational issue around the product because
of how unique it is perceived in the United States.
Senator Craig. So I think I am understanding from you that
if you look at all energy sources as a potential target, this
is no more or less dangerous than any other that is out there?
Mr. Grant. Yes, and we would believe--yes is the first
answer. We also believe, because of the construction both of
the tanks and of the ships, and also the security measures--I
mean, our company has spent $3.5 million more on security post-
9/11 to make sure that we do harden the target. We have got--
you probably know that Boston is considered a model port right
now--the cooperation that we have done with the Coast Guard and
the people in those areas.
We think that is a very important part of doing business
and it is something we are committed to, to working with the
government and local people to do.
Senator Craig. How realistic--Chairman Greenspan spoke
briefly about offshore locating these kinds of facilities. How
reasonable is that and is that technology being looked at?
Mr. Grant. The technology is being pursued right now. I
think that there are opportunities both onshore and offshore.
One of the issues with offshore, if you are talking about--and
I think the chairman mentioned regasification ships is you
literally have to have the ship parked there while it is
vaporizing the gas, which means you have got an infrastructure
that is out there. Logistics are a very big part of our
business. The production drives the shipping, which drives the
market. They do not like to shut down a billion dollar
liquefaction plant because the market will not absorb the
product, and that is the way it is built.
Can that be a supplement? Yes. Is that the answer by
itself? No, because I think as a country if we said that there
is a technology available to move every oil import terminal
offshore, every chemical plant offshore, every hazardous cargo
of any kind offshore, of course we would like that. But it
comes with a cost and it comes with a cost to the
infrastructure.
Senator Craig. Well, gentlemen, thank you very much for
your patience and your testimony before the committee. We are
moving into a critical time frame here in the Senate, in which
we have a window of opportunity to pass what I think and I
think most committee members believe to be a significant piece
of energy policy for our country.
If we can pass it in the Senate, we will have it on the
President's desk for his signature by late year. I believe that
can happen. Let me ask all of you to take time in your busy
lives to visit with your industry and your industry CEO's--I do
not often do this from the dais--to make the phone call to my
colleagues here in the Senate, to encourage them to get with
the business of passing this critical policy.
I really believe it is that important for our country and
our country's future. We have done something that is
bipartisan, that is balanced, that has as much conservation in
it, it has phenomenal incentives, $17 billion worth of
incentives in it, and it has production in it. You can help all
of us in the next month by working this issue as hard as some
of us will. And if you do and we do, it will become a reality,
I do believe, and that chart will level out over there in time.
Gentlemen, thank you very much. The committee will stand
adjourned.
[Pause.]
Senator Craig. Oh, yes, I am supposed to wrap up here. You
are free to go.
I will reconvene the committee and I will remind members
and staff that we will require members' statements and
questions to be submitted for the record by the close of
business today.
We are re-readjourned.
[Whereupon, at 1:17 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
[Note: Responses to the following questions were not
received at the time this hearing went to press.]
Responses of David K. Garman to Questions From Senator Bingaman
Question 1. Yesterday the Department kicked off a ``Smart Energy
Use'' Education Campaign. I understand that it involves a new website
and several regional meetings. Can you describe this strategy in more
detail? How much money has been dedicated to this effort? Do you have
specific goals in mind for saving energy? How will the states
participate in this effort?
Question 2. I am concerned that the DOE outreach programs that can
have the most impact on natural gas and electricity demand may be
underfunded in light of this emerging crisis and your plans to deal
with it.
For example, your testimony highlights the programs under the
Office of Industrial Technology and their success in reducing gas
demand. At the Natural Gas Summit your industrial ``best practices''
program was highly praised. Can you explain why the President's request
for FY 2004 decreased the Industrial program from $91.4 million to
$64.4 million or a 32% cut?
Similarly, you have reduced what you call ``Gateway Deployment''
programs by 33%. These are the outreach and technical assistance
programs like Energy Star, building codes training and energy
efficiency information. Are you planning to reprogram additional funds
in order to support the Smart Energy Campaign? Will DOE seek
supplemental appropriations, or reallocate funds internally, to support
a national campaign and boost support for key deployment programs such
as Energy Star and industrial programs?
Question 3. What is the Department doing to accelerate energy
efficiency standards that can save natural gas, including residential
heating equipment and commercial air conditioning?
Question 4. Are you focusing on electric efficiency to save gas,
starting this summer, since so much of our summer peak electricity
generation comes from natural gas? What can be done to encourage
utilities to dispatch their most efficient units rather than older
inefficient gas plants?
Question 5. For longer term gas savings in the power sector,
combined heat and power systems are at least twice as efficient as
average powerplants. What is DOE doing to significantly expand its CHP
Challenge program?
Responses of Brian Ferguson to Questions From Senator Bingaman
Question 1. In addition to coal gasification technology, do you
support increasing the amount of electricity that is produced by wind,
solar and other renewable forms of energy in order to reduce the
pressure on gas supplies?
Question 2. In addition to supporting coal gasification technology,
is there anything the Department of Energy could be doing in the near
term to assist industrial gas consumers to improve the efficiency of
their operations and reduce or find alternatives to natural gas use?
Question 3. Has the Combined Heat & Power potential within the
chemical industry been fully exploited? What are the barriers to
increasing the use of CHP?
Responses of Richard L. Grant to Questions From Senator Bingaman
Question 1. In your testimony, you note that ``. . . today LNG
development is especially important for countries like Trinidad,
Angola, and Nigeria. In these countries, most of the natural gas that
is produced with crude oil is flared because there are few alternatives
for usage or disposal of the excess gas.''
The flaring of excess natural gas is a terrible waste of valuable
energy resources. There are many places around the globe where the
venting and flaring of natural gas continues but needs to be curtailed.
What can we do to get the necessary attention devoted to these areas,
to stop this wasteful practice? As you note, LNG projects in places
like Nigeria seek to harness this resource. What were the keys to
successful projects that you have worked on in these areas?
Question 2. Do you agree with EIA's projections for the expansion
of LNG import capacity in the U.S. (about 11% increase per year)? What
are the major challenges from a project development perspective--
including all of the required investment--production, liquefaction,
shipping, and regasification?
Question 3. Does the LNG industry have any coordinated public
education programs on LNG operations and safety?
Question 4. We have heard from the DOE that there are more than 30
applications active for LNG-based projects in the U.S., most beyond the
permitting process. Some of these are facilities on offshore platforms.
What do you think the future landscape for LNG terminals will look
like? Are most of them going to by based offshore? What does this mean
for the building of additional infrastructure and necessary
environmental and safety precautions?
Question 5. In your testimony you mention that LNG technology is
improving. What are you improving, and what does this mean for LNG
economics, or essentially the cost to the consumer?
Question 6. Some have raised the issue that our growing dependence
on imported LNG could be the beginning of a situation that could
quickly resemble our dependence on OPEC for oil import. How do you view
this? What nations do your cargoes come from? What does this mean to
you as a terminal operator?
Question 7. In your testimony, you note Tractebel's pacesetter
actions on public-private partnerships and safety. Specific reference
is made to the Berge Boston, the first vessel in the world to meet the
International Code for the security of ships. How long will it be
before most LNG ships meet this code? Can they be retrofit? Are there
deadlines in place?
Responses to Questions From Senator Bunning
Question 1. Our nation has become extremely dependent on natural
gas and with low levels of natural gas inventories its high prices are
affecting our economy. This situation was foreseeable and will only get
worse if we do not change the demand and supply ratio. Do you think
that this country should begin relying more on other sources of energy
such as cleaner burning coal to meet our energy needs rather than just
on natural gas?
Question 2. Demand for natural gas should be reduced and promotion
of conservation of energy is one good way to do this. What is the
Department of Energy doing to encourage manufacturers to increase
efficiency in their use of natural gas?
Question 3. We have not even begun to tap into all the natural gas
supply that this country has. Much of our natural gas supply is off
limits for production or development is severely restricted. Do you
think that we should develop more areas in the United States to
increase our natural gas supply?
Response of Alan Greenspan to Question From Senator Kyl
Question. If Congress enacts multi-pollutant legislation or carbon
dioxide regulation legislation that forces utilities to switch from
coal to natural gas for electricity generation, what effect would it
have on natural gas supply and markets?
Responses of Alan Greenspan to Questions From Senator Feinstein
Question 1. Your testimony did not mention the fraud and
manipulation that has pervaded our energy markets over the last few
years. As I said before, the recent FERC report on Price Manipulation
in the Western Markets states, ``markets for natural gas and
electricity in California are inextricably linked.'' Do you believe our
regulators should have the ability to issue the same penalties and
refunds in both sectors so that natural gas consumers are protected in
a manner consistent with electric consumers?
Question 2. Let me take you through some other examples of fraud
and manipulation in the natural gas sector and ask you about some
specifics of the Energy bill now pending in the Senate.
On January 27, 2003, Michelle Marie Valencia, a 32-year-old former
senior energy trader for Dynegy was arrested on charges that she
reported fictitious natural gas transactions to an industry
publication.
On December 5, 2002, Todd Geiger, a former vice president on the
Canadian natural gas trading desk for El Paso Merchant Energy, was
charged with wire fraud and filing a false report after allegedly
telling a trade publication about the prices for 48 natural gas trades
that he never made in an effort to boost prices and company profit.
CMS Energy, Williams, American Electric Power Company, and Dynegy
have each acknowledged that its employees gave inaccurate price data to
industry participants.
Fraud and manipulation extended beyond just false reporting.
Dynegy, Duke Energy, El Paso, Reliant Resources Inc., CMS Energy
Corp., and Williams Cos. all admitted engaging in false ``round-trip''
or ``wash trades.''
Section 1172 of the Energy bill now pending in the Senate prohibits
the filing of false information and prohibits round trip or wash
trading in electricity markets. Shouldn't the Senate expand this
provision to ban false reporting and wash trades in the natural gas
markets?
Question 3. You mention that the long-term price for natural gas
has risen persistently during the past six years from approximately $2
per million BTU to more than $4.50. How much of that increase do you
attribute to market manipulation, especially when you consider that no
transparency and no audit trail is required in off-exchange energy
markets--where an overwhelming amount of natural gas trading takes
place?
Question 4. This morning's Washington Post Business Section had an
article describing how companies are pulling back from trading and a
lack of liquidity is causing prices to increase in our natural gas
markets. In the article, one analyst said having fewer traders in the
market means there are fewer offers to buy and sell. Instead of rising
in small steps, natural gas prices are jumping by bigger increments,
according to analysts.
You signed a letter of June 11, 2003 to oppose the Energy Market
Oversight Amendment I offered to the Energy Bill. I fail to understand
your continued opposition to my legislation which, by the way, does not
at all impact financial derivatives. In light of this recent pullback
from trading, wouldn't increased oversight and transparency boost
consumer and investor confidence in our troubled energy markets?
Question 5. By increasing energy efficiency quickly and
dramatically in 2001, California prevented the severe electricity
shortages that dogged the state throughout the previous summer from
becoming worse. Savings were achieved through a combination of rules,
incentives, and public education. Do you support similar efforts on the
federal level and do you support new efficiency standards for gas
furnaces, air conditioners, electrical transformers and other equipment
that by some estimates could save nearly 10 trillion cubic feet (tcf)
of natural gas over the next 20 years?
Question 6. In your testimony, you mention that industrial users
are the leading consumers of natural gas. In addition to the chemical,
aluminum, and fertilizer industries--the ethanol industry is also
dependent on natural gas. Since most ethanol plants rely solely on
natural gas, is this the time to mandate billions of gallons of ethanol
into our fuel supply and force many more ethanol plants using natural
gas to be built?
Responses of Richard K. Garman to Questions From Senator Feinstein
Question 1. Mr. Garman, by increasing energy efficiency quickly and
dramatically in 2001, California prevented the severe electricity
shortages that harmed the state throughout the previous summer from
becoming worse. Savings were achieved through a combination of rules,
incentives, and public education. What is the Department of Energy
doing to enlist State and Local governments, as well as the industry,
in conservation and efficiency efforts? What does Congress need to do?
Question 2. Mr. Garman, does the Bush Administration support new
efficiency standards for gas furnaces, air conditioners, electrical
transformers and other equipment that by some estimates could save
nearly 10 trillion cubic feet (tcf) of natural gas over the next 20
years?
Question 3. Mr. Garman, what is the potential for increasing
imports of LNG? What are the realistic expectations? And in what time
frame? There are several projects under consideration in California and
in Baja California south of the border. Are there any LNG projects in
particular that you see more likely to come online than others?
Appendix II
Additional Material Submitted for the Record
----------
Statement of the National Petrochemical & Refiners Association
NPRA, the National Petrochemical & Refiners Association, is a
national trade association whose members include virtually all U.S.
refiners and petrochemical manufacturers. NPRA appreciates the interest
of the Senate Energy and Natural Resources Committee in the vital issue
of ensuring adequate supplies of natural gas to industrial consumers.
NPRA believes that diverse, ample and affordable supplies of fossil
fuels are essential to maintain U.S. national security, economic
growth, and the viability of the domestic refining and petrochemical
industries.
America's standard of living and overall economic health are
closely linked to the need for an adequate supply of energy at
reasonable prices. Our nation currently faces severe challenges as it
strives to balance ever-increasing energy demands from all consuming
sectors, largely due to contradictory and short-sighted policies that
have limited supply while promoting additional natural gas consumption.
These conflicting policies, either in the short or long term, are
simply incompatible with continued U.S. economic growth.
NPRA also believes that there is an urgent need to harmonize the
nation's energy and environmental policies, and that any national
energy plan must include traditional supply and market-oriented
policies for all fossil fuels, including natural gas.
background
Energy is a strategic commodity. Without it, either through
insufficient supply, unreasonable cost (or both), any modern economy is
at risk. The threat of shortages can cause significant price
escalations and disruptions in the marketplace. In recent years,
domestic demand for natural gas has substantially increased, while
production has recently decreased. Our experience with high natural gas
prices and short supplies last winter was a reality check for the
nation's flawed policies, and we must act now to correct that
situation. Government, industry, and private experts agree that natural
gas demand is expected to rise by the year 2020 by as much as 60% over
today's levels. It is still unclear whether domestic gas production can
increase to satisfy this new demand.
This is really not a resource problem that we face. But, if changes
are not made to existing policies, our predicament will not be short-
lived. This means that policymakers and gas issue stakeholders must act
or accept responsibility for the ultimate consequences of short
supplies, lost U.S. jobs, a worsening trade balance and further loss of
U.S. industrial leadership. There is no OPEC to blame for this natural
gas supply crisis; the United States has an abundant supply of domestic
gas. Flawed government policies have prohibited its development in many
areas. Thus, the blame for insufficient U.S. natural gas supplies rests
on our nation alone. NPRA believes the current ill-advised national
policy of limiting natural gas supply while encouraging gas use because
of its environmental benefits--mostly in the generation of base and
peak load electricity--has created and could exacerbate continuing
higher gas prices and volatility. In fact, EIA reports that demand by
electricity generators is expected to account for 30% of total natural
gas consumption in 2025. This equates to a doubling of gas use by the
utility sector over current demand. Under present policies, it is not
clear that adequate supplies will be available to accommodate this
demand figure unless current natural gas users in core industries are
forced to switch fuels or close.
The domestic petrochemical industry, as well as others in the basic
chemical sector, is primarily based upon natural gas and natural gas
liquids. About 70% of U.S. petrochemical manufacturers use natural gas
liquids as feedstocks. In contrast, about 70% of petrochemical
producers in Western Europe and Asia use naphtha (a heavy oil) as a
feedstock. While oil is a global commodity whose price is set on the
global market, natural gas liquids are generally more locally traded
commodities. Thus, price increases in natural gas have had a larger
impact on competitiveness in North American-produced petrochemicals.
The U.S. has generally maintained a reasonable-cost feedstock
position relative to its competitors in Europe and Asia. However, that
situation has been eroded as the price of natural gas has increased.
North American natural gas and natural gas liquids prices have recently
risen to unprecedented levels and placed a significant portion of the
domestic petrochemical industry at a disadvantage to European and Asian
producers. The trend towards increased siting of base petrochemical
production and expansion projects in overseas locations is directly
attributable to this growing disparity in fuel prices. Additional
displacements will occur if the current and prospective gas price and
supply situation is not addressed promptly.
Chemical exports are usually significant contributors to U.S. trade
receipts. Unfortunately, two years of extraordinarily high natural gas
prices (2001-2002) have resulted in a depressed chemical export market
and a negative trade balance for the U.S. economy. This negative trade
balance allows foreign businesses to capture U.S. market share, in part
because European and Asian producers are not experiencing similarly
increased feedstock prices.
short-term outlook: encourage conservation and efficiency, but increase
supply wherever possible
Industry analysts report that domestic natural gas production has
declined by 6% over the last six quarters. In turn, utilization of
natural gas by the electric utility industry has caused unprecedented
demand, especially in the summer season where natural gas provides
``peaking'' power to many industrial and residential users.
Historically, the summer months have been periods to re-supply
natural gas storage facilities in preparation for increased winter
demand for gas for commercial use and residential home heating. The
increased demand for natural gas during the past summers has placed
additional constraints on storage, and the U.S. is now experiencing low
levels of storage volumes--624 Bcf less than last year at this time and
348 Bcf below the 5-year average volumes for the end of June, according
to the EIA. This is roughly 17 percent below the 5-year average for the
report week, and more than 27 percent below the level last year for the
same week. Under current conditions, it will take daily storage volumes
of record proportions for the remainder of the summer season to return
to storage levels entering the previous winter of 2002-2003. Although
recent data indicate a larger than normal storage rate over the past
few weeks, we should not be lulled into complacency because favorable
weather patterns have led to what may be only a temporary increase in
these daily gas storage levels.
In addition, gas injection rates are only one facet of the natural
gas supply dilemma. Industry must deal with the manifold implications
of a generally higher price level for natural gas, also accompanied by
more price volatility. Both factors mean trouble for all consumers--
industrial, commercial, residential--regardless of gas storage volumes.
Unfortunately, much must be accomplished on the supply side of this
equation in what is a short, but nevertheless critical, time period. In
essence, our nation's natural gas supply for the next 8-10 months may
largely depend upon good weather and good luck this summer and next
winter. We must try to improve things, but real possibilities of doing
so are limited in the short term. In order to address this shortfall in
supply meaningfully, we must hope that Congress and the Administration
will act to provide greater supply and price certainty to natural gas
markets in the mid and long-term. And this requires a change in current
policy to put greater emphasis on supply.
In the immediate future, efforts should also be made to help
mitigate the supply problem through voluntary conservation and
efficiency efforts. NPRA urges both Congress and the Administration to
act to improve energy efficiency and conservation in the use of natural
gas and power, especially as the nation enters the summer cooling
season. This could be accomplished by offering appropriate incentives.
Any adjustment in electricity consumption would reduce natural gas
consumption by the power sector and have a positive impact on natural
gas availability. This, in turn, could help to moderate natural gas
supply and price concerns. Further, if and when natural gas supplies
become extremely tight this summer or early fall, the federal and local
government should allow electric utilities and other industrial
facilities to switch to alternative fuels in order to conserve natural
gas supplies. Pre-emptive efforts to encourage fuel switching would be
even more helpful.
longer-term options: avoid distractions; focus on supply
For all these excellent reasons, NPRA welcomes the Committee's
review of the natural gas situation. We urge you to study and assess
current policy thoroughly and openly. The nation needs a frank and
public debate on the future of its gas supplies. As we earlier stated,
natural gas demand is projected to increase by 60% by 2020. The
President's National Energy Policy Task Force projects that over 1,300
new electric generating plants must be constructed to fulfill
anticipated electric energy needs during the next 20 years. DOE
suggests that over 90% of these facilities will be fueled by natural
gas. This increase in gas usage for electric generation may not be
achievable, and should be one subject of the Committee's investigation.
We must also develop policies that promote continued environmental
progress without reducing the supply of natural gas and other petroleum
products needed for a healthy economy and the nation's security. We
need to forge a diversified national energy policy that reduces our
dependence on foreign energy sources while increasing our domestic
production. These policies must include increased access and
development opportunities to onshore public lands as well as those on
the Outer Continental Shelf. We must also bring Alaskan natural gas to
lower 48 markets as soon as possible. New and promising domestic areas
for development must be open for exploration and production. In the
meantime, NPRA would urge caution when Congress and the Administration
consider any policies, environmental or other, that will accelerate the
demand for natural gas when other policy options exist.
Environmental progress and energy supply need not be mutually
exclusive. However, long-standing and recent environmental policies
have significantly limited fuel and energy supply choices. They have
promoted or even required fuel switching while at the same time
discouraging expanded domestic production of natural gas. Anticipated
environmental constraints could aggravate the current situation. This
is a formula guaranteed to make an already bad situation worse.
The National Petroleum Council (NPC), at the request of the
Secretary of Energy, is currently developing recommendations and policy
options on the long-term future of natural gas as one of the key
elements of our nation's energy menu. NPRA is an active participant in
this study and urges Congress to seriously consider any and all of the
NPC's specific findings and recommended policy options.
recommendations
NPRA urges Congress and the Administration to re-think and re-
evaluate current and future policy initiatives. We should focus on all
energy options, including fuel choice mixture and flexibility; gas
supply source diversity; modernization, expansion and permitting of
infrastructure, including LNG facilities and pipelines; development of
new technologies; and natural gas market transparency and efficiency.
As a nation, we can not afford to inhibit options that are beneficial
to supply.
conclusion
Natural gas and natural gas liquids function as primary feedstocks
in domestic petrochemical plants and other industries. Their
availability at a reasonable cost is essential to keep the U.S.
petrochemical industry competitive in a worldwide marketplace. We hope
that the Congress will recognize that increased demand for natural gas
supplies will result in even tighter supplies, and that the cost of gas
as a feedstock will continue to rise. Policymakers should also
recognize that since natural gas is used as a fuel and an industrial
feedstock, negative impacts to core U.S. businesses will result if
natural gas demand increases but supplies remain tight.
Refineries are also significant users of natural gas to run their
facilities. Many switched to natural gas use for this purpose at the
urging of environmental authorities such as the EPA. The result is that
natural gas supply and price have considerable impact on the output of
the nation's petroleum products as well as on refining industry
profitability. Remember that refiners face a tight supply/demand
balance for petroleum products and limited profitability under normal
circumstances.
Thus, any analysis of the current and projected natural gas supply
and demand makes one thing very clear: we urgently need a thorough
review of natural gas-related policies to maintain and retain the U.S.
petrochemical and other manufacturing industries in the context of a
healthy and growing U.S. economy. It is clear that natural gas will
play an increasingly important role in America's energy future; but we
must analyze, clarify, and correct policies to maximize the available
supply of this key resource. Therefore, we repeat that the principal
focus of the gas policy discussion must be on the need for increased
supply.
For this reason, NPRA appreciates the Committee's efforts to
investigate the issues surrounding and impacting the supply, demand,
and price volatility of our nation's natural gas resources. We hope to
work with all stakeholders to design a natural gas policy that provides
adequate supply at reasonable and predictable prices to fuel the U.S.
economy and maintain growth.
______
Statement of M. John Kennedy, President, Kennedy Oil, Gillette, WY
Mr. Chairman and Members of the Committee, thank you for the
opportunity to submit this testimony. I am grateful you are holding
this hearing on this important national issue and look forward to
working with you and other Members of Congress to determine the best
method to access our natural gas resources in an environmentally sound
manner.
Kennedy Oil is a small, independent oil and gas producer located in
Gillette, Wyoming. I am the owner of Kennedy Oil and employ 35 people
in Wyoming. We currently operate 581 wells and produce approximately 12
bcf of natural gas annually.
As everyone on this Committee is aware, the United States will soon
face a natural gas shortage that could result in dramatically higher
prices for natural gas, negatively impacting consumers and the economy.
U.S. gas production is decreasing at approximately 10% annually,
existing wells are producing less gas, and fewer reserves are found per
well. Although we currently import significant amounts of natural gas
from Canada, Canadian production is decreasing as well.
The area of the country known as the Rocky Mountain region, holds
nearly one third of U.S. proven gas reserves and is an easily
accessible, proven way to supply the natural gas needed to fuel our
economic growth. In fact, the Rockies is the only region that has shown
an increase in production over the last three decades and is the only
significant onshore supply growth area in the United States.
In Wyoming alone, with new technologies now available to produce
gas from coal and from tight gas sands and shales, there is enough
recoverable gas to contribute up to 25% of the natural gas our Nation
needs. With natural gas consumption projected to be 30 tcf per day by
2010, Wyoming's recoverable reserves will supply the nation for the
next 40-50 years.
However, these reserves are not being developed. The Powder River
Basin, which contains Coal Bed Natural Gas (CBNG) recoverable reserves
projected at 30 tcf, suffers from lack of pipeline take-away capacity.
Producers are unable to commit to additional pipe out of Wyoming to
areas in need of new gas supplies because of an inability to forecast
with any degree of certainty when Federal drilling permits will be
issued. This lack of take-away capacity has depressed the value of
Wyoming gas. In the past 12 months the State of Wyoming received $280
million dollars less for its gas than the value it should have
received, based on normal index pricing.
At the same time, the Federal government suffered a $90 million
dollar shortfall in its royalty income from Wyoming gas, for the same
reason. The Environmental Impact Statement (EIS) for the Powder River
Basin was delayed two years longer than anticipated and permits are
still not being issued due to various lawsuits objecting to the Record
of Decision (ROD).
President Bush and Congress have given the order to move forward
with the development of the enormous known natural gas reserves located
on Federal rangelands in Wyoming and other parts of the Rockies. This
natural gas is clean burning, easily developed, and is the centrally
located fuel of choice. The development of these gas reserves will
create wealth within this country, will create tens of thousands of new
jobs, hold down consumer prices and save industrial jobs.
Unfortunately, significant hurdles exist to accessing this natural gas.
Kennedy Oil is prepared to drill 250 new CBNG wells in the center
of the Powder River Basin--we are only waiting for Federal drilling
permits. At the same time, we have submitted Federal permit
applications for a 20 well project in southwest Wyoming--which is the
lead in for over 200 CBNG wells in the area. Kennedy Oil has been
waiting for 22 months now for these 20 permits and we are still
waiting. Winter is around the corner. High gas prices and low storage
numbers are inevitable. Jobs will be lost and people will be
unnecessarily penalized.
These lengthy delays and uncertainties create a difficult business
environment. As you are aware, the Bureau of Land Management (BLM) is
the agency responsible for administering the permits necessary to
drill. Some field offices can be more responsive than others, and in
some cases, it would appear that personal agendas can play a role in
delaying particular projects. In addition, it appears that because of
the great disparity in how permit applications are treated, some
offices have significant resource problems.
For example, last week we called the BLM-Rock Springs Field Office
(RSFO) (Wyoming) inquiring about a Right-of-Way (ROW) Application we
had submitted in June 2002, 13 months ago. The ROW grant is needed to
access a drillsite for a shallow gas well. The ROW applied for is for
use of an existing, upgraded, gravel road on Federal surface. RSFO
informed us that the ROW grant is held up for archaeological review.
After talking to the BLM archaeologist in charge of doing cultural
clearance on this ROW application we were told that he has 600+ like
projects on his desk and to ``get in line''.
I believe that permitting could be expedited in a fair and
environmentally sound manner if the State Offices had the authority to
implement standard procedures and time lines to be implemented by each
field office. Currently, the time limits keep shifting and requirements
differ for every permit for which we apply.
The American economy and the American consumer continues to suffer
the consequences of volatile gas prices and supplies. Industry is
prepared to make the investment in exploration and development. Our
nation needs the natural gas. Kennedy Oil believes congressional
intervention is necessary to help alleviate the permit back log and
avert the energy crisis that threatens this nation.
Thank you for the opportunity to submit this testimony and I look
forward to working with Congress and the agencies to promote
responsible, timely resource use policies.
______
Statement of the Edison Electric Institute
The Edison Electric Institute (EEI) and its Alliance of Energy
Suppliers (Alliance) are pleased to submit this statement for the
record of the Committee's July 10 oversight hearing on natural gas. EEI
is the trade association of the U.S. shareholder-owned electric
utilities and affiliates and associates worldwide. The Alliance is a
division of EEI that focuses on the generation business and related
wholesale issues in the supply of electricity.
EEI will address three main issues in this statement. First,
generators use natural gas because it is a relatively clean, efficient,
and cost-effective fuel, and gas-fired generators are easier and faster
to build than other types. Second, federal policies should facilitate
increasing the supply of natural gas and must provide greater certainty
for the use of other fuels. These include provisions related to
transmission siting and Clear Skies legislation. Congress should also
fully fund LIHEAP to assist low income consumers with their energy
usage. Third, there should not be arbitrary restrictions on the use of
natural gas to provide electricity to consumers.
Throughout America, people are paying attention to the price of
natural gas. Whether it is the homeowner who uses natural gas for heat,
the fertilizer manufacturer who uses natural gas as a feedstock, or the
electricity generator whose operating costs are substantially
influenced by the cost of natural gas, all are paying careful attention
to the current cash and forward prices of natural gas. EEl appreciates
the opportunity to submit written testimony and to address the concern
that generators have with the current and foreseeable imbalance between
natural gas demand and supply.
short term recommendations improve energy efficiency
There are some useful short term actions the federal government can
take to address end-use efficiency of natural gas. For example, through
the Energy Star program, the government can promote the purchase of
high-efficiency gas furnaces and boilers for those homeowners and
businesses with old systems that need to be replaced. For homeowners
with gas water heaters, the government can educate consumers about the
new efficiency standards that will take effect in January 2004, and
help consumers find units that exceed those standards. For consumers
and businesses with newer equipment, there should be promotion of tune-
ups before the winter season or the lowering of thermostats where
possible (e.g., down to 120 F or lower on gas water heaters and below
68 F for gas furnace/boiler systems).
For homeowners with gas water heaters and older water using
appliances, the Energy Star program can be used to promote Energy Star
dishwashers and clothes washers, which significantly reduce the usage
of hot water. In addition, the government could encourage people not to
purchase cooking equipment with continuously burning standing pilot
lights.
The government can also ``lead by example'' by making sure that
gas-fired equipment at its facilities are well-maintained, that new
equipment purchased exceeds Energy Star standards, and that all
thermostats and setback controls function properly.
long term recommendation: increase supply
While we believe there are limited opportunities regionally for
reducing short term demand for gas in our sector--primarily by
encouraging large industrial users to shift some of their use to off-
peak times of consumption--there are longer term solutions for assuring
adequate natural gas supplies in this country. These include efforts to
encourage the wise use of energy and careful policies to identify, tap
and bring to market available known reserves and new sources--both here
and abroad. It is the combination of increased supply and the efficient
use of that resource that will result in lower natural gas prices. EEI
recognizes that the current natural gas situation did not develop
overnight, nor will it be resolved overnight. We recommend that the
Nation embark on a program to augment natural gas supply through the
following:
(1) prompt passage of enabling legislation to allow
certification of pipeline capacity for Arctic natural gas. This
will enable market signals to determine when and how Arctic gas
will make it to markets in the lower-48;
(2) increased domestic production of natural gas where there
are proven gas reserves, including, where appropriate, onshore
and offshore federal lands that are currently off limits. We
recognize that this step will be politically difficult, but as
Federal Reserve Board Chairman Alan Greenspan pointed out in
his testimony before the House Energy Committee on June 10,
Congress must find the appropriate balance in energy and
environmental policy that will assure to the American economy
and the American people low-cost, competitive energy while
protecting the environment;
(3) rapid approval by the Department of Energy of Liquified
Natural Gas (LNG) import applications, coupled with streamlined
certification of infrastructure projects (LNG terminals and
requisite pipeline facilities) by the Federal Energy Regulatory
Commission (FERC) and the U.S. Coast Guard and, as important,
timely approvals by states under the Coastal Zone Management
Act and the Clean Water Act;
(4) development of deepwater resources throughout the Gulf of
Mexico; and
(5) advocacy of vigorous conservation programs for
residential, commercial, and industrial users of natural gas
through federal, state, and utility-delivered programs designed
to utilize natural gas more efficiently. For example, well-
maintained and tuned-up furnaces and boilers can help reduce
natural gas demand by more efficient applications, thereby
having a positive impact on supply.
long term recommendation: enhance fuel diversity and infrastructure
The electric power industry is searching for ways to continue the
production of low-cost electricity essential for the United States to
compete in a global economy. From our perspective, one of the most
important steps Congress and the President can take is to advance
federal policies that will assure the availability of an adequate and
diverse fuel supply for the generation of electricity. Fuel diversity
means that coal, nuclear, hydro, wind, solar, natural gas--and other
fuel sources as they become available--can be used by generators of
electricity to mitigate price or supply risk in any one source. It also
means ``fuel switching'' or maintaining a ``dual fuel capability,''
where natural gas-fired plants are constructed. Permit conditions
should be developed that allow for switching between natural gas and
oil products in times of either high prices or limited natural gas
supplies.
Policies advanced by the Congress and the Administration need to
maximize the diversity of fuel sources available for the generation of
electricity while allowing market forces to dictate the choice, in any
given circumstance, of how to assure the low-cost production of
electricity. Fuel diversity needs to include the ability to move large
blocks of power between regions so that diverse electric supplies can
move into various regions. For example, the potential of wind
development throughout The Great Plains is limited by a lack of high-
voltage transmission lines to carry the abundant raw resource to
markets, either East or West. A more robust transmission system would
expand inter-regional powerflows, providing a more diverse generation
mix to regions that now have limited fuel options.
Stimulation of investment in transmission will do little to help if
permitting and siting of new transmission lines continues to take more
than a decade. EEI acknowledges the positive language contained in S.
14 on permitting and recommends to the Senate the more specific
provisions in H.R. 6, the House Energy bill. These provisions give the
Department of Energy (DOE) lead agency authority to coordinate the
federal authorization process for transmission lines and establishes
project specific coordination requirements. Another provision gives
last-resort backstop siting authority to FERC. Together with the
corridor designation provisions H.R. 6, such new provisions will do a
great deal to introduce transparency into the permitting process and
facilitate timely siting decisions.
As transmission is helpful in distributing electricity, a market
basket of generating technologies (coal, nuclear, hydroelectric and
renewables as well as natural gas) is helpful to fuel diversity and
price stability. The price of converting different fuels to electricity
varies by technology, but generally, the broader the selection of
technologies and fuels available to the generator, the better for all
classes of customers. When hydro generating capacity is reduced by a
non-functional and prolonged hydro licensing process and federal
policies unnecessarily hinder the appropriate use of coal, the short
fall in generating capacity must be made up elsewhere. Carefully
established hydro and coal policies that allow these fuel sources to
continue to play a serious role in the nation's fuel mix will help
alleviate pressure on natural gas supply. EEI vigorously supports the
licensing provisions of Title III of the Senate Energy bill because
they will improve the functionality of the hydroelectric licensing
process.
The current Clean Air Act's complex and multiple, overlapping
requirements for electric power generators constrain the use of coal
generation. This puts additional regulatory pressure on using natural
gas to generate electricity. The Clear Skies Act (S. 485) would reduce
such pressures on natural gas by providing certainty to coal
generators, while achieving roughly 70 percent emission reductions in
sulfur dioxide, nitrogen oxides and mercury emissions over a timeframe
that would promote immediate environmental improvements and industry
stability through certain and cost-effective emissions reductions. In
contrast, both the Clean Power Act (S. 366) and the Clean Air Planning
Act (S. 843) would severely exacerbate natural gas cost and supply
concerns. In addition, current Clean Air Act New Source Review (NSR)
policy and guidelines exacerbate the natural gas challenge because NSR
creates great uncertainty for coal-based power generators.
Congress should be certain that federal energy, environmental and
economic policies do not: (1) inadvertently create a policy climate
wherein one fuel, such as natural gas, becomes the only practical
option for new generation; (2) effectively preclude the use of certain
abundant and low-cost fuels; or (3) sharply limiting the generators'
flexibility to select a fuel mix that can optimize the production of
electricity, thereby providing low cost power to consumers. In
addition, EEI supports Congressional efforts to reauthorize and extend
the production tax credits for renewable energy sources as the best
means of incentivizing renewable technologies.
the value of natural gas as a fuel for generating electricity
Electricity is the backbone of the modern economy. Advancements in
technology have increased U.S. productivity and driven growth, but
technology depends on ever increasing amounts of electricity.
Currently, coal generation provides 50.1% of the nation's electricity
supply, nuclear generation provides 20.3%, natural gas provides 18.1%,
hydropower and other renewables provide 9.1%, and oil generation
provides 2.4%.
In the past 10 years, natural gas-fired generation has been
critical to providing the low-cost electricity that is crucial to
assuring that the United States can compete in the global economy.
Natural gas has become the default fuel for new power plants because
plants fueled by natural gas are highly efficient, have predictable and
short construction cycles, and produce lower emissions. The trend was
aided by the historically low cost of natural gas and the pressures on
the costs of the other traditional sources of fuel for generating
electricity.
While natural gas-only-fired power plants account for 18% of the
fuel used by all generation nationwide, 88% of the new electric
capacity built in the last 10 years use natural gas as their primary,
and in many cases only, fuel. The percentage of natural gas used as
fuel for electric generation will most likely increase in the future.
There are good reasons for this.
First, power plants fired by natural gas have become very
efficient. Combustion turbines fueled by natural gas (simple cycle)
were originally designed to augment large baseload producers of
electricity (coal, nuclear, and hydroelectricity). They run for brief
periods of time or a few hours annually to help meet peaking
requirements. By being smaller and specialized, the combustion turbine
minimized the capital costs of construction and could be quickly
installed. Simple cycle power plants became especially desirable when
the nation had excess baseload supply and when cost overruns were
common in the construction of baseload units, particularly for nuclear
projects.
During the 1990's, the emergence of higher efficiency combustion
turbines accelerated the role played by natural gas-fired power plants
in the nation's generation mix. The ``Heat Recovery Steam Generator,''
where waste heat from a combustion turbine is used to produce steam and
turn a steam turbine--hence the term ``combined cycle''--created
efficiencies greater than 50% per each BTU of energy combusted. This
compares to efficiency rates of 35-40% for coal plants. Highly
efficient combined cycle plants in 2003 now have an efficiency rate
over 55%. Thus, some are now being used for baseload operations, rather
than just for peaking or load-following.
Second, the construction lead-times for natural gas-fired
generation are shorter than those for coal and nuclear plants. This
benefits owners and developers by limiting the exposure of capital
because there is a shorter period when costs are being incurred but no
electricity is being sold.
Third, construction costs for gas-fared generation are easier to
estimate and much less likely to be subject to construction cost over-
runs than other types of power plants. This also makes it easier for
owners and investors to take the risk of investing millions of dollars
in a new power plant.
Fourth, it is much easier to get environmental permits for natural
gas power plants because of their lower emissions profile relative to
more traditional coal or oil units. There is also a belief in the
financial community that gas-fired plants have less regulatory risk.
They have, therefore, been easier to finance than other more capital-
intensive types of generating plants.
Fifth, natural gas has traditionally been a relatively cheap fuel
source.
Sixth, natural gas-fired units can often be sited to optimize
location on both the natural gas transmission system and the high-
voltage electric transmission system.
Finally, for the electric system, one crucial advantage of natural
gas technology is its quick start capability and ability to move from
zero output in a combustion turbine, to full power in less than an
hour. A combined cycle takes longer than the combustion turbine because
of the longer time required to receive power out of the heat recovery
steam generator. This ability to easily ``load follow'' is very helpful
in an industry that constantly rebalances supply to serve customers
instantaneously (for voltage control purposes).
We recognize that load following presents challenges to the natural
gas transmission industry that, if not coordinated with pipeline
dispatch operations, can create operational difficulties. The amount of
gas demanded by a combustion turbine going to full power or shutting
down rapidly because of fall-off in electricity demand can create
imbalances in the pipeline system. Natural gas storage and even
liquefied natural gas (LNG) helps in managing operational requirements
of gas-fired generation. Further development of storage facilities
throughout the natural gas market area, including LNG facilities, will
be crucial to the balancing of gas supply and demand, and to electric
operations.
In some regions of the country, dependence on natural gas is
pronounced. For example, in the gas-producing Southwest, some utilities
came to rely on natural gas as a boiler fuel for electric production
when other market uses for natural gas were not well developed. Because
utilities were using boilers to generate electricity, they could switch
fuels from natural gas to various grades of oil for either price or
supply reasons. Some of these units are now being retired, further
reducing the fuel flexibility of the electric industry. Only 24% of the
168,760 MW of gas-fired generation in operation since 1993 have dual
fuel capability, and that percentage is declining. RDI's PowerDat data
base predicts that by 2011, only 7% of the 188,215 MW of new natural
gas capacity planned is identified to have dual fuel capability. The
figure of 188,215 MW represents 71% of total new electric generation
under construction until 2011. While some new gas-fired power plants
can burn oil, there are three main impediments to actually making the
switch to oil. The physical requirements of the combustion turbine,
such as increased maintenance needs and possible warranty limitations
from the turbine manufacturer, discourage switching to oil.
Environmental permits may preclude the use of oil because of increased
NOX emissions associated with the use of distillate oil
(1702). Finally, many local zoning regulations do not allow the
construction of oil storage tanks.
All of these factors associated with the loss of dual fuel
capability at gas-fired power plants add inflexibility to the increased
demand for natural gas in generating electricity. The increased demand,
along with weather conditions, economic growth, and increased end use
demand for natural gas--such as the 70% of new homes that are built
each year with natural gas heating systems, can contribute to higher
natural gas commodity prices and greater price volatility.
The United States benefits from robust and diverse natural gas
supplies. Congress, the Administration and the FERC should publicly
encourage the development of new production, new pipeline capacity, and
market-area storage to assist in meeting the demand of the electricity
producer and other end users of natural gas. EEI supports the oil and
natural gas production incentive provisions in the Senate and House
energy bills and, as previously mentioned, believes Congress can do
more to assure low-cost, competitive energy, while protecting the
environment.
There are those who advocate end-use restraints on natural gas.
These are not appropriate solutions for addressing natural gas supply
and demand problems. The market has the ability to manage supply, and
over time will return to equilibrium. The market needs to be allowed to
send price signals that will stimulate investment in alternative
generating technologies, dual-fuel opportunities, and development of
capital intensive new gas supplies. End-use restraints, even if applied
prospectively, have the potential to create considerable economic
inefficiency and would be counterproductive.
For those concerned about impacts of high natural gas prices on
residential gas users directly, and electricity customers indirectly,
we urge Congress to fully fund LIHEAP and other consumer related
organizations assisting those who have a difficult time paying monthly
utility bills. EEI strongly recommends that the Congress appropriate
the full $3.4 billion authorized for LIHEAP funding for FY '04.
Weatherization program expenditures can assist those in need by
reducing their demand for space heating or cooling.
conclusion
In conclusion, the use of natural gas to create electricity has
been good for consumers and should remain an accessible fuel source for
electric generators. There are strong economic, efficiency, and
environmental reasons to use natural gas in the generation of
electricity. Even if, as a nation, we transition to greater reliance on
other diverse fuel sources and generation technologies, natural gas
will continue to be a necessary backstop. It is therefore essential
that we take the steps that are necessary to assure an adequate
supply,. It is also crucial, however, that Congress and the president
provide greater regulatory certainty to the generators of electricity--
particularly as to the environmental standards which new and existing
generating sources of all types will have to meet--and that the
permitting and siting processes be streamlined to reduce the current
long-lead times.
______
Statement of David N. Parker, President & Chief Executive Officer,
American Gas Association, Washington, DC
executive summary
The American Gas Association represents America's local natural gas
utilities. AGA member companies acquire natural gas supply for, and
distribute it to, 53 million homes and businesses. As a result,
adequate supplies of competitively priced natural gas are of critical
importance to AGA and its member companies. Similarly, ample supplies
of reasonably priced natural gas are of critical importance to the
millions of consumers that AGA members serve. We are here today to
speak for those consumers.
The natural gas industry is currently at a critical crossroads. The
``gas bubble'' of the 1980s and 1990s disappeared prior to the winter
of 2000-2001. Supply and demand is now in precarious balance. The
industry today no longer basks in prodigious supply; rather, it treads
a supply tightrope, bringing with it unpleasant and undesirable
economic and political consequences--most importantly high prices and
higher price volatility. Both consequences harm natural gas consumers--
residential, commercial, and industrial.
Since the beginning of this year, the circumstances in which our
industry finds itself have become plainly evident through significantly
higher natural gas prices. Natural gas prices have consistently hovered
around or above $5 per thousand cubic feet in most wellhead markets.
Similarly, the forward price curve in recent months for natural gas
traded in futures markets has reached an all-time high. Simply put,
natural gas prices are high, and the marketplace is predicting that
they will stay high.
Energy is the lifeblood of our economy. Millions of Americans rely
upon natural gas to heat their homes, and high prices are a serious
drain on their pocketbooks. High, volatile natural gas prices also put
America at a competitive disadvantage, cause plant closings, and idle
workers. Directly or indirectly, natural gas is critical to every
American.
It is expected that natural gas demand will increase by
approximately 50 percent over the next two decades. This growth will
occur because natural gas is the most environmentally friendly fossil
fuel and is an economic, reliable, and homegrown source of energy. It
is in the national interest that natural gas be available to serve the
demands of the market. The federal government must address these issues
and take prompt and appropriate steps to ensure that the nation has
adequate supplies of natural gas at reasonable prices.
Many of the fields from which natural gas is currently being
produced are mature. Over the last two decades, technological advances
have greatly enhanced the ability to find natural gas as well as to
produce the maximum amount possible from a field. While technology will
undoubtedly continue to progress, technology alone will not be
sufficient to maintain or increase our domestic production.
As Federal Reserve Chairman Greenspan noted in his testimony,
today's tight natural gas markets have been a long time in coming but
there are still numerous unexploited sources of gas production in the
United States. Today, we are not running out of natural gas and we are
not running out of places to look for natural gas. Nevertheless, we are
running out of places where we are allowed to look for gas. The truth
that must be confronted now is that, as a matter of policy, this
country has chosen not to develop much of its natural gas resource
base.
If America's needs for energy are to be met, there is no choice
other than for exploration and production activity to migrate into new,
undeveloped areas. There is no question that the nation's natural gas
resource base is rich and diverse. It is simply a matter of taking E&P
activity to the many areas where we know natural gas exists.
Regrettably, many of these areas--largely on federal lands--are either
totally closed to exploration and development or are subject to so many
restrictions that timely and economic development is not possible. As
we contemplate taking these steps, it is important that all understand
that the E&P business is--again as a result of technological
improvements--enormously more environmentally benign today than it was
25 years ago. In short, restrictions on land access that have been in
place for many years need to be reevaluated if we are to address the
nation's current and future energy needs.
The House of Representatives has recognized these concerns, which
are plainly evident in H.R. 6. We are also gratified that this
committee recognized them in passing S. 14. The most important next
step the entire Congress can take to address these pressing issues is
to enact a comprehensive energy bill with provisions ensuring that
lands where natural gas is believed to exist are available for
environmentally sound exploration and development. Additionally, it is
appropriate to create incentives to seek and produce this natural gas.
These steps are necessary to help consumers and the economy.
written testimony
I am David N. Parker, President & Chief Executive Officer of the
American Gas Association (``AGA''). AGA is grateful for the opportunity
to share its views with you on the critical importance to the nation of
ensuring ample natural gas supplies at competitive prices. Doing so is
necessary for the nation--both to protect consumers and to address the
energy and economic situations we currently face.
AGA is composed of 191 natural gas distribution companies, which
deliver gas throughout the United States. Local gas utilities deliver
gas to more than 64 million customers nationwide. AGA members deliver
approximately 83 percent of this natural gas.
AGA members are charged with the responsibility, under local law or
regulation, of acquiring natural gas for the majority of their
customers and delivering it in a safe and reliable manner. Having an
ample supply of natural gas at reasonable prices is a critical issue
for AGA and its members. AGA members and the consumers they serve share
both an interest and a perspective on this subject.
It is important to understand that the bread and butter business of
AGA members is acquiring and delivering natural gas to residential,
commercial, and industrial consumers across America. Our members remain
economically viable by delivering natural gas to consumers at the
lowest reasonable price, which we do by operating our systems--over a
million miles of distribution lines--as efficiently as possible.
Exploring for and producing natural gas is the business of our energy-
industry colleagues in the oil and gas business, whether they are
major, independent, or ``Mom and Pop'' operators. We are not here to
speak for them today, but their continued success in providing natural
gas to America's consumers is of the utmost importance to us as well.
Today, we are here to speak for consumers who want reasonable heating
bills and good jobs.
I have three objectives today. First, I will briefly explain why
natural gas prices have jumped this year. Second, I will describe the
magnitude of the natural gas supply challenge facing this country over
the next two decades. Third, I will recommend a number of steps that
Congress can take to help bring natural gas prices down in the long
term.
AGA is encouraged that Congress is addressing this increasingly
critical issue. This year we have been privileged to testify before
this Committee, the House Resources Committee, and the House Energy and
Commerce Committee with regard to the challenging issue of natural gas
supply. We also are gratified that H.R. 6, the Energy Policy Act of
2003, which was passed by the House of Representatives in April 2003,
contains a wide array of provisions designed to bring forth more of
America's prodigious supply of natural gas to benefit consumers. That
bill is without question more focused on natural gas supply than were
the iterations under consideration in 2001 and 2002. Similarly, we are
gratified by the efforts of this Committee in approving S. 14 and the
efforts of the Senate Finance Committee in approving S. 1149. Both
bills contain important, substantial provisions aimed at solving our
natural gas supply situation.
Adequate natural gas supply is crucial to all of America for a
number of reasons. It is imperative that the natural gas industry and
the government work together to take significant action in the very
near term to assure the continued economic growth, environmental
protection, and national security of our nation. The tumultuous events
in energy markets over the last two years serve to underscore the
importance of adequate and reliable supplies of reasonably priced
natural gas to consumers, to the economy, and to national security.
AGA wishes to commend the leadership of the Committee for convening
this important hearing so promptly after considering S. 14. To be sure,
there has been a crescendo of public policy discussion with regard to
natural gas supply since the ``Perfect Storm'' winter of 2000-2001.
Nevertheless, in the time since AGA first testified on Capitol Hill in
February and March of this year, the volume and the tenor of this
discussion have increased dramatically. Simply put, this issue becomes
more critical with every passing day.
Since the beginning of this year, natural gas has been trading in
wellhead markets throughout the nation at prices floating between $5
and $6 per thousand cubic feet. This has not been a ``price spike'' of
the sort that we have seen in the past, lasting several days or perhaps
several weeks. Rather, it has been sustained over a period of several
months. And there is no sign that it will substantially abate in the
near future. Indeed, quotes for futures prices on NYMEX over the next
24 months have recently reached a consistent record level mirroring
cash prices.
In the course of the last several months, business consumers of
natural gas have been raising a cry of concern over natural gas prices.
And this concern has touched businesses of all stripes. In Connecticut,
for example, pizza shops complain that their natural gas bills have
increased $500-700 per month. The chemical and pharmaceutical industry,
which uses 10% or more of the U.S. gas supply annually, has been
reeling from increased natural gas prices. It has been projected that
the chemical industry in Louisiana will lose at least 2,000 jobs as a
result of high gas prices. Similarly, a major chemical company in
Mississippi has declared bankruptcy, citing natural gas prices. That
industry needs gas prices between $2.50 and $3.00 per thousand cubic
feet to remain competitive on the world stage, while prices since the
beginning of the year have been averaging in the range of $5.00 per
thousand cubic feet. Similarly, fertilizer plants, where natural gas
can represent 80% of the cost structure, are closing one facility after
another. Glass manufacturers, which also use large amounts of natural
gas, have reported earnings falling by 50% as a result of natural gas
prices. In our industrial and commercial sector, competitiveness in
world markets and jobs at home are on the line.
Businesses and factories tend to purchase most of their own gas,
and they quickly feel increases in prices. Residential customers, in
contrast, typically rely upon their local utilities to act as merchants
on their behalf. As a result of the manner in which state approved
regulatory mechanisms operate, most consumers will not begin to feel
current high gas prices for months.
This winter, some families will pay hundreds of dollars more to
heat their homes, which will be hundreds of dollars less they will have
to spend on other things. Families will again be forced to make
difficult decisions between paying the gas bill, buying a new car, or
saving for future college educations. There are, of course, state and
federal programs such as LIHEAP to assist the most needy. This winter
the potential price increases will affect all families--those on fixed
income, the working poor, and the lower-income group, as well as those
caught between living comfortably and living day to day.
America received its first wake-up call on natural gas supply two
years ago when a confluence of events--a cold winter, a hot summer and
a surging economy--created the so-called ``perfect storm.'' This jump
in demand sent natural gas prices soaring. Drilling boomed, supply grew
(slightly), demand fell, and gas prices retreated--just what one would
expect from a competitive, deregulated natural gas market. Falling
natural gas prices predictably led to a slowdown in drilling. The
industry drilled 30% fewer gas wells in 2002 than in 2001. This
downturn in drilling in 2002 set the stage for another run-up in prices
this year.
Today, natural gas prices are back at winter 2001 levels because
demand is up and supply is down. Demand is up in part because we had a
normal winter. Frankly, consumers are fortunate we did not have a
colder-than-normal winter. Moreover, high oil prices this year are
propping up natural gas prices. In certain markets, notably the U.S.
Northeast, gas competes with oil products. Unlike in 2001, when high
gas prices led to the substitution of oil for gas, substitution has not
kicked in as quickly this year as it did two years ago. Meanwhile,
while demand is up, U.S. natural gas production in the fourth quarter
of 2002 was down about 4% from the fourth quarter of 2001. Indeed, U.S.
natural gas production today is lower than it was five years ago--
despite a big jump in drilling in recent years.
The level of gas prices we are experiencing today could unleash a
firestorm of protest in the fall and winter of this year as some
consumers may see their natural gas bills double. The next twelve
months may make the winter of 2000-2001 look tame from the perspective
of consumers, regulators, and legislators. If history is any guide,
angry consumers will soon be calling on Congress to ``do something''
about high natural gas prices. Some forward-looking state public
utility commissions, having learned from the 2000-2001 experience, are
beginning to express concern over the possible impact of the winter of
2003-2004. Last month, the Secretary of Energy held a Natural Gas
Summit with the National Petroleum Council to address the situation.
These are only the first few alarms in what seems likely to become
a very difficult year. Unless we make the proper public policy
choices--quickly--we will be facing many more difficult years.
The natural gas industry is presently at a critical crossroads. The
question before you today is: What will that crossroads look like? Will
it look like a brand new interstate highway? Or will it look like a
100-car collision on a Los Angeles freeway? It is important to remember
that at the heart of this intersection are America's consumers.
For the past three years, natural gas production has operated full-
tilt to meet consumer demand. The ``surplus deliverability'' or ``gas
bubble'' of the late 1980's and 1990's is simply gone. No longer is
demand met while unneeded production facilities sit idle. No longer can
new demand be met by simply opening the valve a few turns. The valves
have been, and presently are, wide open.
The supply tightrope has brought with it several inexorable and
unpleasant consequences--prices in the wholesale market have gone up,
and that market has become much more volatile. During the 2000-2001
heating season, for example, gas prices moved from the $2 level to
approximately $10 and back again to nearly $2. Such volatility hurts
consumers, puts domestic industry at a competitive disadvantage, closes
plants, and idles workers. The winter of 2000-2001 made it abundantly
clear to us (and to you as well) that consumers dislike these price
increases and the market volatility that is now an everyday norm.
Unless significant actions are taken on the supply side, gas markets
will remain tumultuous, and 63 million gas customers will suffer the
consequences. Today's recurrent $5 price levels may represent a new,
and regular, level of natural gas prices for the foreseeable future,
although this prospect can be moderated with aggressive and enlightened
public policy.
As gas utilities, we have a number of programs in place to insulate
consumers to some extent from the full impact of wholesale price
volatility, but consumers must ultimately pay the price that the market
commands. We believe that there will be considerable economic and
political pushback should natural gas prices stabilize at the current
$5 level for anything but a brief period of time.
The problem that we face today is not simply one of finding means
to meet current demands in the market for natural gas. Rather, we are
in a growing market, and the demand for natural gas in the U.S. is
expected to increase 50 percent by 2015-2020. Growth seems inevitable
because natural gas is a clean, economic, and domestic source of
available energy. It does not face the environmental hurdles of coal
and nuclear energy, the economic and technological drawbacks of most
renewable energy forms, or the national security problems associated
with imported oil.
In its recent Annual Energy Outlook 2003, the Energy Information
Administration predicts that U.S. natural gas consumption will increase
at an average rate of 1.8% per year to about 35 trillion cubic feet per
year in 2025, from 22.7 trillion cubic feet in 2001. Much of this
growth in natural gas demand will occur in the electricity market. In
fact, the U.S. now has over 150,000 megawatts of new gas-fired power
plants on line that did not exist in the summer of 1999--the equivalent
of about 70 Diablo Canyon nuclear power plants.
A 35 trillion cubic foot market implies an increase in average
daily gas supply from about 60 billion cubic feet per day today to
about 95 billion cubic feet per day in 2025--a 35 billion-cubic-foot-
per-day increase in deliverability. (To give you some perspective on
this potential increase, current production from the entire Gulf of
Mexico is only about 14 billion cubic feet per day, and imports from
Canada are about 10 billion cubic feet per day.)
The challenge for both government and industry is quite
straightforward: to ensure that both the current and future needs for
natural gas are met at reasonable and economic prices. There can be no
responsible question that facilitating this result is sound public
policy. Natural gas is abundant domestically and is the environmentally
friendly fuel of choice. Ensuring adequate natural gas supply will lead
to reasonable prices for consumers, will dampen the unacceptable
volatility of wholesale natural gas markets, will help keep the economy
growing, and will help protect the environment.
America has a large and diverse natural gas resource; producing it,
however, can be a challenge. Providing the natural gas that the economy
requires will necessitate: (1) providing incentives to bring the
plentiful reserves of North American natural gas to production and,
hence, to market; (2) making available for exploration and production
the lands--particularly federal lands--where natural gas is already
known to exist so gas can be produced on an economic and timely basis;
(3) ensuring that the new infrastructure that will be needed to serve
the market is in place in a timely and economic fashion.
Natural gas--our cleanest fossil fuel--is found in abundance
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent
of the natural gas supplied to U.S. consumers originates in the United
States or Canada.
The estimated natural gas resource base in the U.S. has actually
increased over the last several decades. In fact, we now believe that
we have more natural gas in the U.S. than we estimated twenty years
ago, notwithstanding the production of more than 300 trillion cubic
feet of gas in the interim. This is true, in part, because new sources
of gas, such as coalbed methane, have become an important part of the
resource base. Nonetheless, having the natural gas is not the same as
making that natural gas available to consumers. That requires natural
gas production.
Natural gas production is sustained and grows only by drilling in
currently productive areas--or by exploring in new areas. Over the past
two decades a number of technological revolutions have swept across our
industry. We are able today to drill for gas with dramatically greater
success and with a significantly reduced environmental impact than we
were able to do twenty years ago. We are also much more efficient in
producing the maximum amount of natural gas from a given area of land.
A host of technological advances allows producers to identify and
extract natural gas deeper, smarter, and more efficiently. For example,
the drilling success rate for wells deeper than 15,000 feet has
improved from 53 percent in 1988 to over 82 percent today. In addition,
gas trapped in coal seams, tight sands, or shale is no longer out of
reach.
While further improvements in this regard can be expected, they
will not be sufficient to meet growing demand unless they are coupled
with other measures. Regrettably, technology alone cannot indefinitely
extend the production life of mature producing areas. New areas and
sources of gas will be necessary.
Notwithstanding the dramatic impact of innovation upon our
business, the inevitable fact today is that we have reached a point of
rapidly diminishing returns with many existing natural gas fields. This
is almost entirely a product of the laws of petroleum geology. The
first ten wells in a field may ultimately produce 60 percent of the gas
in that field; yet it may take forty more wells to produce the balance.
In many of the natural gas fields in America today, we are long past
those first ten wells and are well into those forty wells in the field.
In other words, the low-hanging fruit have already been picked in the
orchards that are open for business.
Drilling activity in the U.S. has moved over time, from onshore
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then
to the Rocky Mountains. Historically, we have been quite dependent on
fields in the Gulf of Mexico. But recent production declines in the
shallow waters of the Gulf of Mexico have necessitated migration of
activity to deeper waters to offset this decline. These newer, more
expensive, deepwater fields tend to have short lives and significantly
more rapid rates of decline in production than is the case with onshore
wells.
The sobering reality is that America's producers are drilling a lot
more wells today than they were five years ago. Nevertheless, supply is
still down. U.S. gas producers are on an accelerating treadmill,
running harder just trying to stay in place. For reasons that are
partly due to technology, and partly due to the maturing of the
accessible natural gas resource base, a typical well drilled today will
decline at a faster rate than a typical well drilled a decade ago.
Moreover, because up to half of this country's current natural gas
supply is coming from wells that have been drilled in the past five
years, this decline trend is likely to continue.
Before we can meet growing gas demand, we must first replace the
perennial decline in production. The U.S. natural gas decline rate will
be in the range of 26-28 this year. In practical terms, if all drilling
stopped today, in twelve months U.S. natural gas production would be
26-28% lower than it is today. The accelerating decline rate helps
explain why U.S. gas deliverability has been stuck in the 52-54 billion
cubic feet per day range for the past eight years, notwithstanding an
increase in gas-directed drilling.
In short, America's natural gas fields are mature--in fact, many
are well into their golden years. There is no new technology on the
horizon that will permit us to pull a rabbit out of a hat in these
fields. These simple, and incontrovertible, facts explain why we are
today walking a supply tightrope and why the winter of 2000-2001 may
become a regular occurrence, particularly at the point the economy
returns to its full vigor. Having the winter of 2000-2001 return every
year will undoubtedly put a brake on the economy, once again causing
lost output, idle productive capacity, and lost jobs.
If we are to continue to meet the energy demands of America and its
citizens and if we are to meet the demands that will they make upon us
in the next two decades, we must change course. It will not be enough
to make a slight adjustment of the tiller or to wait three or four more
years to push it over full. Rather, we must come full about, and we
must do it in the very near future. Lead times are long in our
business, and meeting demand years down the road requires that we begin
work today.
We have several reasonable and practical options. It is clear that
continuing to do what we have been doing is simply not enough. In the
longer term we have a number of options:
First, and most importantly, we must increase natural gas
production by looking to new frontiers within the United States.
Further growth in production from this resource base is jeopardized by
limitations currently placed on access to it. For example, most of the
gas resource base off the East and West Coasts of the U.S. and the
Eastern Gulf of Mexico is currently closed to any exploration and
production activity. Moreover, access to large portions of the Rocky
Mountains is severely restricted. The potential for increased
production of natural gas is severely constrained so long as these
restrictions remain in place.
To be direct, America is not running out of natural gas, and it is
not running out of places to look for natural gas. America is running
out of places where we are allowed to look for gas. The truth that must
be confronted now is that, as a matter of policy, this country has
chosen not to develop much of its natural gas resource base. We doubt
that that many of the 63 million American households that depend on
natural gas for heat are unaware that this choice has been made on
their behalf.
In this vein, the Rocky Mountain region is expected to be a growing
supplier of natural gas, but only if access to key prospects is not
unduly impeded by stipulations and restrictions. Two separate studies
by the National Petroleum Council and the U.S. Department of the
Interior reached a similar conclusion--that nearly 40 percent of the
gas resource base in the Rockies was restricted from development to
some degree, some partially and some totally. On this issue, the
Department of the Interior noted that there are nearly 1,000 different
stipulations that can impede resource development on federal lands.
One of the most significant new gas discoveries in North America in
the past ten years is located just north of the U.S./Canada border in
eastern Canadian coastal waters on the Scotian shelf. Natural gas
discoveries have been made at Sable Island and Deep Panuke. Gas
production from Sable Island already serves Canada's Maritimes
Provinces and New England through an offshore and land-based pipeline
system. This has been done with positive economic benefits to the
region and without environmental degradation. This experience provides
an important example for the United States, where we believe that the
offshore Atlantic area has a similar geology.
In some areas we appear to be marching backward. The buy-back of
federal leases where discoveries had already been made in the Destin
Dome area (offshore Florida) of the eastern Gulf of Mexico was a
serious step back in terms of satisfying consumer gas demand. This
action was contrary to what needs to be done to meet America's energy
needs. With Destin Dome we did not come full about, as we need to do;
rather, we ran from the storm.
Geographic expansion of gas exploration and drilling activity has
for the entirety of the last century been essential to sustaining
growth in natural gas production. Future migration, to new frontiers,
to new fields, in both the U.S. and Canada, will also be critical.
Without production from geographic areas that are currently subject to
access restrictions, it is not at all likely that producers will be
able to continue to provide increased amounts of natural gas from the
lower-48 states to customers for longer than 10 or 15 years. We believe
that the same is true in Canada as well.
Quite simply, we do not believe that there is any way, other than
exploring for natural gas in new geographic areas, to meet America's
anticipated demand for natural gas unless we turn increasingly to
sources located outside North America.
In the middle of the 20th century, when the postwar economy had
begun its half-century climb and when natural gas became the fuel of
choice in America, our colleagues in the producing business opened one
new natural gas field after another in the mid-continent. In this era,
it was not that difficult to produce a triple or a home run virtually
every inning. As those fields developed, producers continued to hit a
regular pattern of singles and doubles, with the occasional triple or
home run in new discovery areas. This same pattern in the mid-continent
was repeated in the Gulf of Mexico. Today, however, it is extremely
difficult to find the new, open areas where the producing community can
continue to hit the ball. As things are today, America has confined
them to a playing field where only bunts are permitted. The Yankees did
not get to the World Series playing that kind of game.
AGA does not advance this thesis lightly. Over the past two years
both the American Gas Association and the American Gas Foundation have
studied this important issue vigorously. We have believed for several
years that it is necessary for policy makers to embrace this thesis so
that natural gas can continue to be--as it has been for nearly a
century--a safe and reliable form of energy that is America's best
energy value and its most environmentally benign fossil fuel. We think
that events in gas market in 2003 underscore that our concerns have
been on the mark.
When the first energy shock transpired in the early 1970s, the
nation learned, quite painfully, the price of dependence upon foreign
sources of crude oil. We also learned, through long gasoline lines and
shuttered factories, that energy is the lifeblood of our economy.
Nevertheless, thirty years later, we are even more dependent upon
foreign oil than we were in 1970. Regrettably, the nation has since
failed to make the policy choices that would have brought us freedom
from undue dependence on foreign-source energy supplies. We hope that
the nation can reflect upon that thirty-year experience and today make
the correct policy choices with regard to its future natural gas
supply. We can blame some of the past energy problems on a lack of
foresight, understanding, and experience. We will not be permitted to
do so again.
Meeting our nation's ever-increasing demand for energy has an
impact on the environment, regardless of the energy source. The
challenge, therefore, is to balance these competing policy objectives
realistically. Even with dramatic improvements in the efficient use of
energy, U.S. energy demand has increased more than 25 percent since
1973, and significant continued growth is almost certain. Satisfying
this energy demand will continue to affect air, land, and water. A
great American success story is that, with but five percent of the
world's population, we produce nearly one-third of the planet's
economic output. Energy is an essential--indeed critical--input for
that success story both to continue and to grow.
It is imperative that energy needs be balanced with environmental
impacts and that this evaluation be complete and up-to-date. There is
no doubt that growing usage of natural gas harmonizes both objectives.
Finding and producing natural gas is accomplished today through
sophisticated technologies and methodologies that are cleaner, more
efficient, and much more environmentally sound than those used in the
1970s. It is unfortunate that many restrictions on natural gas
production have simply not taken account of the important technological
developments of the preceding thirty years. The result has been
policies that deter and forestall increased usage of natural gas, which
is, after all, the nation's most environmentally benign and cost-
effective energy source.
Natural gas consumers enjoyed stable prices from the mid-1980s to
2000, with prices that actually fell when adjusted for inflation.
Today, however, the balance between supply and demand has become
extremely tight, creating the tightrope effect. Even small changes in
weather, economic activity, or world energy trends result in wholesale
natural gas price fluctuations. We saw this most dramatically in the
winter of 2000-2001. We may be seeing it today on a longer-term basis.
In the 1980s and `90s, when the wholesale (wellhead) price of
traditional natural gas sources was around $2 per million British
thermal units, natural gas from deep waters and Alaska, as well as LNG,
may not have been price competitive. However, most analysts suggest
that these sources are competitive when gas is in a $3.00 to $4.00
price environment. Increased volumes of natural gas from a wider mix of
sources will be vital to meeting consumer demand and to ensuring that
natural gas remains affordable.
Increasing natural gas supplies will boost economic development and
will promote environmental protection, while achieving the critical
goal of ensuring more stable prices for natural gas customers. Most
importantly, increasing natural gas supplies will give customers--ours
and yours--what they seek: reasonable prices, greater price stability,
and fuel for our vibrant economy. On the other hand, without policy
changes with regard to natural gas supply, as well as expansion of
production, pipeline and local delivery infrastructure for natural gas,
the natural gas industry will have difficulty meeting the anticipated
50 percent increase in market demand. Price increases, price
volatility, and a brake on the economy will be inevitable.
Second, we need to increase our focus on non-traditional sources,
such as liquefied natural gas (LNG). Reliance upon LNG has been modest
to date, but it is clear that increases will be necessary to meet
growing market demand. Today, roughly 99 percent of U.S. gas supply
comes from traditional land-based and offshore supply areas in North
America. Despite this fact, during the next two decades, non-
traditional supply sources such as LNG will likely account for a
significantly larger share of the supply mix. LNG has become
increasingly economic. It is a commonly used worldwide technology that
allows natural gas produced in one part of the world to be liquefied
through a chilling process, transported via tanker, and then re-
gasified and injected into the pipeline system of the receiving
country. Although LNG currently supplies less than 1 percent of the gas
consumed in the U.S., it represents 100 percent of the gas consumed in
Japan.
LNG has proven to be safe, economical and consistent with
environmental quality. Due to constraints on other forms of gas supply
and increasingly favorable LNG economics, LNG is likely to be a more
significant contributor to U.S. gas markets in the future. It will
certainly not be as large a contributor as imported oil (nearly 60
percent of U.S. oil consumption), but it could account for 10-15
percent of domestic gas consumption 15-20 years from now if pursued
aggressively and if impediments are reduced.
It is unlikely that LNG can solve the entirety of our problem.
About ten new LNG import terminals have been proposed, each with
capacities of about 1 billion cubic feet per day. Even if all of these
LNG terminals were built (which is frankly not a likely scenario), LNG
would only supply about 10-15% of the expected market in 2025 of 35
trillion cubic feet. Given the intense ``not on our beach'' opposition
to siting new LNG terminals, a major supply impact from LNG may be a
tall order indeed.
Third, we must tap the huge potential of Alaska. Alaska is
estimated to contain more than 250 trillion cubic feet--enough by
itself to satisfy U.S. natural gas demand for more than a decade.
Authorizations were granted twenty-five years ago to move gas from the
North Slope to the Lower-48, yet no gas is flowing today nor is any
transportation system under construction. Indeed, every day the North
Slope produces approximately 8 billion cubic feet of natural gas that
is re-injected because it has no way to market. Alaskan gas has the
potential to be the single largest source of price and price volatility
relief for U.S. gas consumers. Deliveries from the North Slope would
not only put downward pressure on gas prices, but they would also spur
the development of other gas sources in the state as well as in
northern Canada.
Fourth, we can look to our neighbors to the north. Canadian gas
supply has grown dramatically over the last decade in terms of the
portion of the U.S. market that it has captured. At present, Canada
supplies approximately 15 percent of the United States' needs. We
should continue to rely upon Canadian gas, but it may not be realistic
to expect the U.S. market share for Canadian gas to continue to grow as
it has in the past or to rely upon Canadian new frontier gas to meet
the bulk of the increased demand that lies ahead for the United States.
The pipelines under consideration today from the Prudhoe Bay area
of Alaska and the Mackenzie Delta area of Canada are at least five
years from reality. They are certainly facilities that will be
necessary to broaden our national gas supply portfolio. We must
recognize, however, that together they might eventually deliver up to 8
billion cubic feet per day to the lower 48 States, just 8% of the 95
billion cubic feet per day that is envisioned for the 2025 market.
I would like to return to my first point above. There is much talk
today of the need for LNG, Alaska gas, and Canadian gas. There is no
question that we need to pursue those supplies to meet both our current
and future needs. Nonetheless, it is equally clear that, in order to
meet the needs of the continental United States, we will need to look
principally to the lower 48 States.
recommendations
To promote meeting consumer needs, economic vitality, and sound
environmental stewardship, the American Gas Association urges Congress
as follows:
Current restrictions on access to new sources of natural gas
supply must be reevaluated in light of technological
improvements that have made natural gas exploration and
production more environmentally sensitive.
Federal and state officials must take the lead in overcoming
the pervasive ``not in my backyard'' attitude toward energy
infrastructure development, including gas production.
Interagency activity directed specifically toward expediting
environmental review and permitting of natural gas pipelines
and drilling programs is necessary, and agencies must be held
responsible for not meeting time stipulations on leases, lease
review, and permitting procedures.
Federal lands must continue to be leased for multi-purpose
use, including oil and gas extraction and infrastructure
construction.
Both private and public entities should act to educate the
public regarding energy matters, including energy efficiency
and conservation. Federal and state agencies, with private
sector support and involvement, should strive to educate the
public on the relationship between energy, the environment, and
the economy. That is, energy growth is necessary to support
economic growth, and responsible energy growth is compatible
with environmental protection.
Economic viability must be considered along with
environmental and technology standards in an effort to develop
a ``least impact'' approach to exploration and development but
not a ``zero impact''.
Existing moratoria for onshore lands should be lifted.
The geologic conditions for oil and gas discovery exist in
the U.S. mid-Atlantic area, the Pacific Offshore area, and the
eastern portion of the Gulf of Mexico.
Although some prospects have been previously tested, new
evaluations of Atlantic oil and gas potential should be
completed using today's technology--in contrast to that of 20
to 30 years ago.
The federal government should facilitate this activity by
lifting or modifying the current moratoria regarding drilling
and other activities in the Atlantic Offshore, in the Pacific
Offshore, and in the Gulf of Mexico to ensure that adequate
geological and geophysical evaluations can be made and that
exploratory drilling can proceed.
The Destin Dome (181 lease area) should immediately be
offered for lease for oil and gas exploration.
The federal government must work with the States to assist--
not impede--the process of moving natural gas supplies to
nearby markets should gas resources be discovered in commercial
quantities. Federal agencies and states must work together to
ensure the quality of the environment, but they must also
ensure that infrastructure (such as landing an offshore
pipeline) is permitted and not held up by multi-jurisdictional
roadblocks.
The Federal government should continue to permit royalty relief
where appropriate to change the risk profile for companies trying to
manage the technical and regulatory risks of operations in deepwater.
Tax provisions such as percentage depletion, expensing geological
and geophysical costs in the year incurred, Section 29 credits, and
other credits encourage investment in drilling programs, and such
provisions are often necessary, particularly in areas faced with
increasing costs due to environmental and other stipulations.
The Coastal Zone Management Act (CZMA) is being used to threaten or
thwart offshore natural gas production and the pipeline infrastructure
necessary to deliver natural gas to markets in ways not originally
intended. Companies face this impediment even though leases to be
developed may be 100 miles offshore. These impediments must be
eliminated or at least managed within a context of making safe, secure
delivery of natural gas to market a reality.
The U.S. government should work closely with Canadian and Mexican
officials to address the challenges of supplying North America with
competitively priced natural gas in an environmentally sound manner.
Renewable forms of energy should play a greater role in meeting
U.S. energy needs, but government officials and customers must realize
that all forms of energy have environmental impacts.
Construction of an Alaskan natural gas pipeline must begin as
quickly as possible.
Construction of this pipeline is possible with acceptable levels of
environmental impact.
The pipeline project would be the largest private sector investment
in history, and it would pose a huge financial risk to project
sponsors. Many believe the project may not be undertaken without some
form of federal support.
The Federal Energy Regulatory Commission (FERC) announced in
December 2002 that it would not require LNG terminals to be ``open
access'' (that is, common carriers) at the point where tankers offload
LNG. This policy will spur LNG development because it reduces project
uncertainty and risk.
Other federal and state agencies should review any regulations that
impede LNG projects and act similarly to reduce or eliminate these
impediments.
Efforts should be made to encourage existing LNG terminals to
commence operating at full capacity at the earliest opportunity.
The siting of LNG offloading terminals is generally the most time-
consuming roadblock for new LNG projects. Federal agencies should take
the lead in demonstrating the need for timely approval of proposed
offloading terminals, and state officials must begin to view such
projects as a means to satisfy supply and price concerns of
residential, commercial and industrial customers.
Some new LNG facilities should be sited on federal lands so that
permitting processes can be expedited.
Congress should increase LIHEAP funding. Low-income energy
assistance is currently provided to roughly 4 million households, only
15 percent of those eligible. The financial burden on needy families
will certainly increase this winter, and LIHEAP appropriations should
be increased to $3.4 billion--up from $2.0 billion of total assistance
in 2003.
Should gas supplies become extremely tight, the federal government
and the States should consider easing environmental restrictions on a
temporary basis so that electric generating facilities and industrial
facilities can switch to alternative fuels.
States should be encouraged to authorize local utilities to enter
into fixed-price long-term contracts and/or natural gas hedging
programs as a means of dampening the impact of natural gas price
volatility upon consumers.