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97-866 PDF 2005

S. HRG. 108–773

THE LONG-RUN ECONOMICS OF NATURAL GAS

HEARING

BEFORE THE

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

OCTOBER 7, 2004

Printed for the use of the Joint Economic Committee

(

(II)

JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE

ROBERT F. BENNETT, Utah, Chairman

SAM BROWNBACK, Kansas

JEFF SESSIONS, Alabama

JOHN SUNUNU, New Hampshire

LAMAR ALEXANDER, Tennessee

SUSAN COLLINS, Maine

JACK REED, Rhode Island

EDWARD M. KENNEDY, Massachusetts

PAUL S. SARBANES, Maryland

JEFF BINGAMAN, New Mexico

HOUSE OF REPRESENTATIVES

JIM SAXTON, New Jersey, Vice Chairman

PAUL RYAN, Wisconsin

JENNIFER DUNN, Washington

PHIL ENGLISH, Pennsylvania

RON PAUL, Texas

PETE STARK, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

BARON P. HILL, Indiana

PAUL A. YOST, Executive Director

WENDELL PRIMUS, Minority Staff Director

(III)

C O N T E N T S

OPENING STATEMENT OF MEMBERS

Senator Robert F. Bennett, Chairman, U.S. Senator from Utah ........................ 1

Senator Jack Reed, U.S. Senator from Rhode Island ........................................... 3

WITNESSES

Statement of Daniel Yergin, Ph.D., Chairman, Cambridge Energy Research

Associates, Cambridge, Massachusetts .............................................................. 5

Statement of Paul Sankey, Senior Energy Analyst, Deutsche Bank, New

York, NY ............................................................................................................... 8

Statement of Logan Magruder, President, Independent Petroleum Association

of Mountain States (IPAMS), Denver, Colorado ................................................ 10

Statement of William R. Prindle, Deputy Director, American Council for

an Energy-Efficient Economy (ACEEE), Washington, DC ............................... 12

SUBMISSIONS FOR THE RECORD

Prepared statement of Senator Robert F. Bennett, Chairman ............................ 29

Along with a study entitled ‘‘The Pressures of Natural Gas Prices’’ ........... 31

Prepared statement of Senator Jack Reed ............................................................ 35

Prepared statement of Dr. Daniel Yergin, Chairman, Cambridge Energy Research Associates .................................................................................................. 36

Prepared statement of Paul Sankey, Senior Energy Analyst, Deutsche Bank .. 47

Prepared statement of Logan Magruder on behalf of the Independent Petroleum Association of Mountain States (IPAMS) ................................................. 95

Prepared statement of William R. Prindle, Deputy Director, American Council

for an Energy-Efficient Economy (ACEEE) ....................................................... 101

(1)

THE LONG-RUN ECONOMICS OF

NATURAL GAS

THURSDAY, OCTOBER 7, 2004

CONGRESS OF THE UNITED STATES,

JOINT ECONOMIC COMMITTEE,

Washington, DC

The committee met at 10 a.m., in room SD–628 of the Dirksen

Senate Office Building, the Honorable Robert Bennett, Chairman of

the Joint Economic Committee, presiding.

Senators present: Senators Bennett, Reed, and Bingaman.

Staff Present: James Brannon, Reed Garfield, Mike Ashton,

Colleen I. Healy, Nancy Marano, Chad Stone, and Nan Gibson.

OPENING STATEMENT OF SENATOR ROBERT F. BENNETT,

CHAIRMAN, U.S. SENATOR FROM UTAH

Chairman Bennett. The Committee will come to order. I want

to welcome everyone to today’s hearing.

It’s on a very important subject, and I have an opening statement, which I will read, but as I prepared for this, I had a thought

come to me out of my previous experience in education. I was something of a student of the Communist revolution in Russia, and I remember that Mr. Lenin had a very strong view about the middleman, the hated middleman, that he thought was a fixture of the

decadent capitalist world.

Wheat would cost X-amount at the farm, a loaf of bread would

cost so much more in the store. The middleman was making profits

that were obscene, and he was going to get rid of that. He had a

very simple solution: He shot them.

As a consequence, the Soviet Union never, ever developed a distribution system for its goods and services. I have a little of the

feeling, coming into today’s hearings on natural gas, that we’re

faced with the same problem.

Now, we’re not shooting anybody, but we have an inadequate distribution system to get ample quantities of natural gas, both in this

country and the world, to the people who need it, and that strikes

me as one of the major issues that we will discuss here this morning.

With that, I’ll get back to the prepared text, but I couldn’t resist

that particular comment that came to me as I was looking over the

testimony that we’re going to get today.

As we enter the fourth year of our current economic expansion,

and all of the signs look good for the future, there is one black

cloud that’s threatening to rain on our parade, and that’s the specVerDate 03-FEB-2003 11:09 Mar 03, 2005 Jkt 097866 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\JEC\97866.TXT SSC2 PsN: SSC2
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ter of high energy prices. The modern economy runs on energy

more, perhaps, than any other single thing.

Most people have taken note of the high oil prices of late, since

they eventually trickle down to the consumer in the form of high

gasoline prices, and we see them every day as we fill our cars.

But just as worrisome are the high natural gas prices that have

beset our economy in the past few years. After a protracted period

of low and stable prices, the cost of natural gas has skyrocketed.

What’s more, natural gas prices now display almost unprecedented volatility, wrecking havoc on the ability of utilities and

other companies to use gas to plan for the future. It’s important

that we address the problem of high natural gas prices, as soon as

possible, and that’s the impetus behind this hearing.

The high prices act like a brake on the American economy. They

impact every business and household in America, but certain industries have suffered particularly hard.

For instance, the chemical and plastic industries use natural gas

as a feedstock, and, therefore, have been particularly hammered by

high prices. The Manufacturers Alliance estimates that 90,000 jobs

have been lost in the chemical industry alone, since the year 2000.

Also, it’s important to remember that there’s not a single integrated market for natural gas in this country. We simply do not

have the infrastructure to ship gas easily from one region to another, should there develop a localized shortage. That’s the thing

I was referring to in my comment earlier.

The lack of infrastructure shows no signs of being alleviated in

the near future. According to a recently released Energy Administration report, they state that new investment in pipelines actually

fell in 2002, the last year for which we have any reliable data.

We don’t have to look too far to remember natural gas prices on the East Coast tripling to $20 per million cubic feet, while topping

out at $7 in Cheyenne.

We know the proximate causes for the run-up in the cost of natural gas. A few years after prices were deregulated in the 1980’s,

the Congress passed laws that, in effect, encouraged its use to

produce electricity, and that sharply increased demand.

Today, it’s the fuel of choice in almost every electric generating

plant, but, at the same time, the production from extant wells

began to decline, and environmental restrictions made the exploration and drilling of new wells, more difficult. It doesn’t take an

economist to see that policies that increase demand and decrease

supply will sharply increase prices.

Let me make clear: There does exist enough natural gas in the

world to meet our needs in the foreseeable future. We’re not running out of natural gas, by any stretch of the imagination.

Here in the United States, we have significant reserves in the

lower 48 states, as well as Alaska, and there are vast amounts of

natural gas reserves all over the world. As I indicated in my opening comment about Mr. Lenin, companies and countries have just

begun to contemplate the massive investments needed for a distribution system that will get these reserves to the marketplace,

thus creating a truly global market in natural gas.

The pipelines, cooling plants, tankers, and the regasification

plants that are necessary, will ultimately cost hundreds of billions

3

of dollars, and the central question for those of us who are policymakers is, what can we do to facilitate these investments and

cause them to happen sooner, rather than later?

Diagnosing the causes of high prices is easy. Forecasting future

prices and prescribing policies to alleviate the high prices, is not.

The standard response would be that high prices alone will attract new investment in production, and more conservation by the

users of natural gas, and the forces of supply and demand will

eventually produce balance.

We have witnessed some of this. The rise in natural gas consumption has tapered off in the last year or two, and the current

rig count in the United States is at an all-time high.

However, major new investments to increase supply or conservation will not take place in an environment of major price and policy

uncertainty. The latter is only, in part, our fault, and although

we’ve tried to remedy this, the current Congress will most likely

get out of town tomorrow without doing anything to ameliorate the

situation.

We’ve also contributed to the former, that is, the lack of new investments by passing laws that stimulate a natural gas demand,

without fully thinking through their long-term consequences and

dealing with them when they were more knowledgeable.

I will leave the question of what do we do now to our esteemed

panel of experts who are assembled here today. The Committee is

honored to have you with us. We anxiously await your thoughts on

the natural gas market of today and in the future.

Senator Reed.

[The prepared statement of Senator Bennett appears in the Submissions for the Record on page 29.]

OPENING STATEMENT OF SENATOR JACK REED,

U.S. SENATOR FROM RHODE ISLAND

Senator Reed. Thank you very much, Mr. Chairman. I want to

thank the witnesses for what I know will be very interesting and

insightful testimony.

You’ve been very adept at picking the timing for this hearing,

Mr. Chairman, with the reports yesterday of a cold winter and increased energy costs.

As you pointed out, natural gas, because of its environmental

qualities and its relative cheapness, has become the fuel of choice.

It continues to be such a fuel.

What we’re looking at now is high and volatile natural gas prices

as a problem, not only for industry, but for American households.

Families face higher home heating costs, factories face higher costs

that deter plans for expansion and encourage the search for cheaper production opportunities outside of the United States, and farmers are finding it more expensive to fertilize and irrigate crops.

I suspect that we’ll learn at this hearing that the conditions that

have produced high, volatile natural gas prices are going to be with

us for some time. Once a real and sustainable economic recovery

takes hold, demand for natural gas will increase even further.

We are likely to find it harder and harder to expand supply from

our traditional sources: domestic production and imports from CanVerDate 03-FEB-2003 11:09 Mar 03, 2005 Jkt 097866 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 D:\JEC\97866.TXT SSC2 PsN: SSC2
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ada. Rising demand and a limited supply are a recipe for higher

prices.

These are also conditions in which unexpected events can

produce sharp price fluctuations. I believe very strongly that the

best strategy that we have for dealing with these conditions in the

natural gas market is to put a much greater emphasis on energy

efficiency and conservation.

The National Petroleum Council, in its report, ‘‘Balancing Natural Gas Policy,’’ finds that such an approach is vital to the nearterm and long-term strategy for moderating price levels and reducing volatility. I know that Mr. Prindle will be testifying that the

American Council for an Energy-Efficient Economy has reached

similar conclusions.

I do recognize that supply-oriented policies can also have an important role to play in a balanced strategy. These policies include

increased domestic production, taking due care, of course, to be environmentally responsible; investments in production research and

development; and increased liquefied natural gas imports.

I will be especially interested in what our witnesses have to say

about the prospects for LNG. This is an important issue for my

State and my region, and I have been urging the Federal Energy

Regulatory Commission to develop a regional strategic plan for the

siting of new terminals, and to improve their process of addressing

safety and security concerns.

While I recognize that environmentally responsible policies

aimed at increasing the supply of natural gas may yield benefits,

especially in the long run, I come back to my main point: All indications are that energy conservation and increased efficiency appear to be the best solutions, especially in the next few years.

Given the problems we face in the natural gas market, I and a

number of other legislators in the Northeast and Midwest, were

dismayed to learn that the Bush Administration has decided to discontinue the Interagency Working Group on Natural Gas.

Perhaps this hearing can provide some additional impetus for the

Administration and Congress to make a concerted effort to address

natural gas and other energy policy issues in a constructive manner.

Again, let me thank the Chairman and the witnesses for what

I think will be an interesting and informative hearing. Thank you,

Mr. Chairman.

[[The prepared statement of Senator Reed appears in the Submissions for the Record on page 35.]

Chairman Bennett. Thank you.

Our normal procedure is that the Ranking Member and the

Chairman, only, make opening statements, but we’re joined by Senator Bingaman, and I think we will stretch the precedent to the

Senator, if you’d like to make an opening statement. Then anybody

who shows up further, we tell them they’re too late, but we’d be

happy to hear from you.

Senator Bingaman. Mr. Chairman, I don’t want you to stretch

any precedents on my behalf. Let me just thank you for having the

hearing. It’s a very important issue, and one that we need to better

understand as we head into this winter season.

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I appreciate the witnesses being here very much. You have a

very distinguished group of witnesses, and I’m anxious to hear

them. Thank you.

Chairman Bennett. Very good. We appreciate you being here.

We will start with Dr. Daniel Yergin. He’s Chairman of the Cambridge Energy Research Associates in Boston, and has testified a

number of times.

Then we’ll go to Paul Sankey, who is a Senior Energy Analyst

for Deutsche Bank in New York, and then we’ll go to Logan

Magruder, who is the Vice President of Berry Petroleum and President of IPAMS, the Independent Petroleum Association of the

Mountain States in Denver.

Finally we’ll come back to Washington, DC with Bill Prindle, who

is the Deputy Director of the American Council for an Energy-Efficient Economy.

Gentlemen, again, thank you for being here, and we will hear

from you in that order.

Dr. Yergin.

STATEMENT OF DANIEL YERGIN, PH.D., CHAIRMAN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES; CAMBRIDGE,

MASSACHUSETTS

Dr. Yergin. Thank you, Mr. Chairman, Senator Reed, and Senator Bingaman. It’s a pleasure to be here.

Mr. Chairman, I wasn’t sure where you were going with your

analogy, at first, about the Russian Revolution, but I’m relieved

that the Leninist principles will not be applied to witnesses testifying today.

[Laughter.]

Dr. Yergin. I want to congratulate the Committee on holding

this hearing. Senator Bennett, I think you’ve provided a very effective framework for the discussions, and I think that Senator Reed

pointed to the importance of conservation.

A central point that I would like to make is that at CERA we

work a lot of conservation and efficiency into our projections for the

future, and with that, we still see very major supply issues before

us. I think, as Senator Bennett identified in the hearing, perhaps

the biggest risk to the economic expansion now is energy prices.

This past week, the IMF raised their forecast for world economic

growth to 5 percent this year, the best in a generation, in almost

three decades, in fact, I believe they said, and pointed to energy

prices as indeed the biggest risk.

We tend to focus on oil because it’s so much more visible, but as

the Chairman pointed out, natural gas prices are very important.

Natural gas is almost a quarter of our total energy supply in the

United States, and it’s very dramatic to see what’s happening right

now.

Today, the future prices are three times the average prices in the

1990’s. We’re seeing dramatic changes throughout the energy markets. They’re very tight, and natural gas is a very important part

of it.

There is a shift from looking to natural gas as a fuel of choice,

to ‘‘is it a fuel of risk?’’ Yet this is a time when we’re counting on

natural gas to be a clean, competitive fuel to meet both economic

6

and environmental challenges. That is very much embodied in the

large number of new power plants that are based upon gas.

The high prices we’re seeing are not a failure of markets. It’s basically geology that has driven this, a maturity in terms of geology,

and yet it’s imposing many burdens on our economy.

The term that is applied is a ‘‘maturity of supply.’’ Productive capacity in the United States peaked in 1994, and it’s lower than

that today.

The United States has looked to Canada to be our source of surge

supply. Canada meets 16 percent of consumption, but it appears

that Canada is flattening out, and we haven’t seen large major discoveries in the last few years.

This time, it appears that the drilling rig, by itself, will not solve

the problem, as it has in previous decades. This new era of natural

gas was really inaugurated with the turn of the new century.

Prices went up, and as in the past, the drilling rigs went to work,

but in that period of 2000 to 2001, they did not—and this was a

surprise for the industry—they did not provide the upturn in supply that would normally have been expected.

We will continue to see a very high degree of spending and effort

by the industry, and that’s very important, because it’s going to be

a very major challenge, basically to keep things where they are and

not have them slide too much.

The problem, as Senator Bennett pointed out, is that we are on

a course of rising demand. That graphic up there shows what’s

happening, which is an enormous shift to natural gas for electric

power generation.

Over the last few years, this country has added something like

200,000 megawatts of electric power capacity. This is a huge number. That is equivalent to a quarter of the entire installed capacity

we had in the year 2000.

Almost all of that is based upon natural gas, and so we’ve built

in a rising demand. Gas was selected because it appeared to be an

inexpensive fuel and also a very environmentally attractive fuel.

We’re facing a maturity in our supply on a continental basis, and

at the same time, rising demand.

We’re going to see a growing gap between supply and demand.

How do we fill it? We fill it with additional supplies, which means

LNG coming from across the waters, and, over a longer term, Arctic and Alaskan gas.

The challenge is, how do we get there? The United States only

has around 3 percent of the world’s natural gas reserves; the rest

of the world is awash in natural gas supplies.

Natural gas reserves, on a global basis, are as large as oil reserves, yet they’re far less utilized. What do we need to do?

First, we need more conservation. Second, we need to keep production from sliding further; we need a stronger effort, and we’ll

hear about that, I think, from the panel. And, third, we do need

to be looking to alternative sources.

Today, LNG provides just 3 percent of our supplies. When we do

our numbers at CERA, working in conservation and efficiency,

working in the kind of the effort that will be necessary in North

American supplies, we see that LNG could be, in order for us to

7

have a healthy economy, upwards of 25 percent or even 30 percent

of our supply by the year 2020—not so far away!

We have to think in continental terms. It’s not only the United

States; it’s a flattening in Canada, an increasing gas demand in

Canada, and Mexico now imports 20 percent of its natural gas from

the United States.

There is a near-term problem. What happens in the next few

years? In a sense, we’re confronting that question right now when

we could see natural gas in much higher prices, $8 and we could

have $10. Look at the prices. The futures markets today are $7 or

$8, when we were accustomed to $2 or $2.50. That shows how tight

the market is and how susceptible it is, not only to economic

growth, but to specific events, in this case, Hurricane Ivan, which

has still incapacitated a substantial part of the natural gas from

the Gulf of Mexico.

As Senator Bennett said, with higher prices, the impact may be

felt in the economy through lost jobs, it will be felt in gas-intensive

industries, it will be felt in the export of whole industries.

The term that’s used is ‘‘demand destruction.’’ Industrial consumers, in order to be competitive in a global economy, have to

look to go outside the United States.

We see the additional LNG supplies starting to be available, assuming that permits and construction proceed, in 2008 and 2009.

In between is a period of higher prices and a period of risk for the

economy, for important segments of the economy.

What do we do in the next few years? In our study, ‘‘Charting

the Path: Options for a Challenged North American Natural Gas

Market,’’ we tried to point to some of the measures that can help

to manage natural gas demand and exposure to price volatility during this bridge period of 2004 to 2009.

It begins, certainly, with effective customer education——

Chairman Bennett. Are you about to—could you cut some out?

Dr. Yergin. I’m done in 30 seconds.

Chairman Bennett. Good, we’ll give you 30 seconds.

Dr. Yergin. Effective consumer education, flexible gas procurement mechanisms by utilities. Fuel flexibility for new and existing

electric power capacity is very important. Resolution of the mismatch in contracting in the natural gas industry, and acceleration

of gas production in the near term by streamlining opportunities

and permitting processes for activities.

To sum it all up, it’s a difficult market environment for the next

few years. It’s a challenge for the industry, for the public, for regulators, policymakers, and consumers, but there are measures and

things that we can do that will provide real relief for consumers in

the coming few years, and ensure natural gas’s deserved place as

a fuel for economic growth and environmental quality. Thank you.

[[The prepared statement of Daniel Yergin appears in the Submissions for the Record on page 36.]

Chairman Bennett. Thank you very much. For those that can’t

read the chart which was prepared by our staff here, the total line

is the generating capacity brought online by fuel type, and it’s 30

years or more than 30 years. It goes back to 1970.

8

[The chart entitled ‘‘Generating Capacity Brought Online By

Fuel Type 1970–2002’’ appears in the Submissions for the Record

on page 46.]

The yellow at the bottom, is coal. Each new production capacity

that came online was coal. Natural gas is the dark blue, which is

there, and then the other categories are nuclear, petroleum, and

then other.

The petroleum is the orange, and then nuclear is purple. So, you

see, as we get into the 1980’s, nuclear plays a bigger role as coal

starts to shrink.

But look at what happens at the end of the 1990’s, the dark blue,

which is natural gas, dominates. Coal disappears, absolutely and

nuclear tapers off. There’s just a little bit of orange in the petroleum there, but there’s no question that the new production capability, No. 1, the total line goes up very dramatically, and No. 2,

most of that entire total is natural gas.

Dr. Yergin was referring to that chart, and for those that don’t

have a copy of it, that’s what the colors mean, and that’s what the

bars mean.

Thank you very much.

Mr. Sankey.

STATEMENT OF PAUL SANKEY, SENIOR ENERGY ANALYST,

DEUTSCHE BANK, NEW YORK, NEW YORK

Mr. Sankey. Mr. Chairman and members of the Committee,

Senator Reed and Senator Bingaman, it’s an honor to be invited to

address you here in this most august of institutions. I am a former

global gas industry consultant and now I’m an equity analyst working on Wall Street, covering the major U.S. oil corporations like

ExxonMobil, Chevron, and so on. We’ll be happy to answer questions on the policies and strategies of those particular companies

regarding the natural gas industry.

The primary reason I’m here, I believe, to address you, is because

of a research report that I wrote in the middle of this year, entitled

‘‘Global LNG: Exploding Myths,’’ which addressed, as implied, some

of the myths surrounding the potential and issues of the global

LNG industry, going forward.

If I could start by just supporting the comments of Dr. Yergin,

there’s no material disagreement at all between any of the members here, I believe, having seen their testimony, on the future of

the gas industry, and I will attempt not to cover the same issues

that he has already covered so comprehensively.

Just to be clear on LNG, it’s the liquid natural gas. It is essentially pure methane. It’s a relatively simple process. There’s no

great technological breakthrough in this area, really, in the last 30

years.

The key improvements in economies that we’ve seen, regard

scale. The LNG plants, from a supply perspective, are getting larger and larger. The ships are getting bigger and bigger, and the regasification terminals are getting larger and larger, which is improving the economics, but the technology is relatively simple.

Basically you have a giant fridge in the gas country with large

gas reserves. The fridge makes super-chilled gas, which turns to a

liquid, and you then put it in the giant thermos flask, which is esVerDate 03-FEB-2003 11:09 Mar 03, 2005 Jkt 097866 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 D:\JEC\97866.TXT SSC2 PsN: SSC2
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sentially the ship, and then attach it to a nozzle here in the United

States and you have methane, almost pure methane delivered.

As we have highlighted in the testimony that I delivered to you,

looking at the economics of this trade, what I’ve done there is listed

the various countries in the world that have major gas reserves

available, and I will illustrate a few, the price of delivered gas

available from those countries.

[The chart appears in the Submissions for the Record on page

66.]

To explain the chart somewhat, Trinidad II and III refer to the

expansion trends at Trinidad, as an example. You have a breakdown there of the cost of production, of liquefaction, that is, taking

the gas out of the ground and then turning it into a liquid, the cost

of shipping, and the cost of regasification. You will see that gas is

available from Trinidad at around $2 per MMBtu.

I’m sure you’re aware that the current U.S. gas price is around $6 per MMBtu, and essentially there’s a major profit opportunity

here for companies that can develop these projects, and that is, indeed, what they intend to do.

There is a huge amount of gas available. We’ve covered that, I

think, in enough detail, but here, alone, you could probably see a

thousand Tcf of gas that’s available at these prices, where the U.S.

economy now consumes 22 Tcf of gas per year, so you have plenty

of gas, really, for the next century.

Conceptually, I want you to think of a 20th Century that was

driven by U.S. oil, cheap U.S. oil, cheap U.S. gas, and now a 21st

Century that will be driven by international gas, and you have to

recognize that while the $2 from Trinidad looks relatively cheap,

the reality is that that’s more expensive than you’ve paid in the

past, and you’re going to have to come to terms with that.

The key issue here is the disconnect between the potential of

supply here in these countries, and the reality of the current supply, which is short.

The issue of short supply is related to the arguments that I made

about exploding myths. The common view is that there’s a problem

with regasification capacity in the United States. The reality is

that it’s not utilized.

The other is lack of international energy available right now. I

think there are two primary reasons for that: One, a shortage, globally, of energy that we’re all aware of. An interesting subtlety is

a major Japanese nuclear crisis, which for the first time began to

drag LNG cargoes that were available for delivery into the U.S.

market, toward Asia.

There’s an important industry point beneath this, which is that

the U.S. market historically has been dependent on spot supply of

LNG, which is to say, non-long-term contracted volumes that become available through the seasonal pattern of the year, and the

fact that as we have now a tight energy supply complex, not least

for natural gas, contracted customers in Europe and in Japan, are

exercising all their rights to LNG, leaving very little LNG available

for delivering into the United States.

As an illustration of the shortage of LNG available globally, this

year so far, we’ve had LNG delivered into the U.S. market from

Australia and from Malaysia, which you can imagine is an illogical

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trade, frankly. It’s a long way and you drive across almost all the

gas in the world and it’s not a good job driving the ship, because

it’s so far.

We have under-utilized regasification capacity. As Dr. Yergin

highlighted, supply is relatively a short-term problem, and that’s

really the problem that you face here.

In terms of industry planning, industry planning assumptions

are only just moving toward the aggressive developments of LNG.

If we take the example of ExxonMobil, they have only just moved

their planning assumption for U.S. natural gas, up from previously

$2.50 per MMBtu to $3.50 per MMBtu, and as a result, are now

approving major investments in LNG.

Another problem is that the scale of the investment requirements

in LNG makes this a relatively long-term process. The fastest LNG

plant developed, essentially took 6 years from discovery of gas to

first delivery. That will be basically Egypt, which will commence

delivery next year, and it’s illustrative, again, of the issues surrounding global LNG, that that plant will, in fact, deliver into Europe and not into the United States.

As I’ve said, there is something of a myth that there’s a shortage

of regasification. I think that, over time, there may be the development of an issue here, but ultimately we’ve looked at the oil market as the leader. I refer to the conceptual idea of the history being

one of U.S. oil, the future being one of international gas.

The oil market is highly dependent on imports through the Gulf

of Mexico. It only takes about 10 major import ports to meet 75

percent of the U.S. import requirement. Our ultimate conclusion

here is that regasification is not the issue, but that the issue will

be the development of supply over time.

As we’ve highlighted in the testimony, the requirements are huge

and they are in difficult countries, from a geopolitical and technical

point of view, which is to say, you need a lot more supply here from

Nigeria, from Angola, from Algeria, the other countries around the

world with major gas supply to provide an investment challenge,

and you have to be aware of that, going forward.

I think I will leave it there. I have covered the main issues from

my perspective. We would applaud FERC for the work that they’ve

done in accelerating the regasification permitting process. I think

you should be aware that there are at least two permitted projects

now which are not being developed, because of a lack of LNG supply.

Further, I would just highlight that there are excess ships available for LNG, to underline my primary point, which is that the development of a global LNG supply will be a multi-year process, and

essentially there’s, in all likelihood, a shortage for the next 2 to 3

years, at the least.

The final point would be that ultimately Dr. Lee Raymond of

ExxonMobil expects the U.S. gas market to become as gas-importdependent as it is now oil-import-dependent, so, clearly, the future

is here, and, again, to support Dr. Yergin, you have a 5-year or 6-

year interim period where you have a bit of an issue, quite frankly.

[[The prepared statement of Paul Sankey appears in the Submissions for the Record on page 47.]

Chairman Bennett. Thank you very much.

11

Mr. Magruder.

STATEMENT OF LOGAN MAGRUDER, PRESIDENT, INDEPENDENT PETROLEUM ASSOCIATION OF MOUNTAIN STATES

(IPAMS), DENVER, COLORADO

Mr. Magruder. Mr. Chairman and Committee Members, thank

you very much for the opportunity to join you today. My name is

Logan Magruder, and I’m Senior Vice President of Berry Petroleum’s Rocky Mountain and Mid-Continent Regions, and my end of

the business is on the production side. We drill wells and we

produce, so just to put it into perspective, I’m also President of

IPAMS, the Independent Petroleum Association of Mountain

States. We have 300 member companies, covering about 13 states

in the Rockies, so our focus is the Rocky Mountains.

What I’d like to tell you today is that the Rocky Mountains is a

warehouse of natural gas resource that’s idle right now, and with

Congress’s help and policymakers’ help, we can probably unleash

that resource into the marketplace. We talked about the 4- or 5-

year interim period, and the Rockies could play a vital role in that

process over the next 5 years.

I’d like to just paint a little picture for you. I’m not going to recite my testimony that I submitted, but we consume about 23 to

24 trillion cubic feet of gas per year in the United States.

We only produce about 19 trillion cubic feet, so, as Mr. Yergin

mentioned, the deficit or the deficiency is imported primarily from

Canada. There’s a tremendous resource in the Rockies right now.

Pipeline take-away was perceived to be an issue. The take-away

term, for the layman, that’s the ability to get natural gas into a

pipeline at known quantity out of the Rockies. Currently, the Rockies is not curtailed by limited pipeline capacity. The Rockies has

about 4.6 billion cubic feet. I’m switching from trillion cubic feet to

billion cubic feet, because we tend to use that in daily quantities.

The Rockies can move around 4.6 billion cubic feet of gas out of

the region right now. We’re scheduled to increase that to about——

Chairman Bennett. In what period? Is that 4.6 billion a year?

A month? A day?

Mr. Magruder. Per day, OK? The industry is scheduled to increase that to around 6.5 billion cubic feet per day within the next

24 months.

The thing that’s hindering our ability to get more natural gas

into the pipeline system or into the market is a regulatory constraint right now, and a lot of other issues. There’s been a tremendous breakthrough in the Rockies over the past 10 years, from the

standpoint of technology and understanding gas-bearing reservoirs

in the Rockies.

As a result of that, we’re drilling more wells per given area of

land. If you take a section of land, 640 acres, typically, 10 years

ago or more, maybe we only drilled one or two wells per section of

land. Today, we’re able to more efficiently complete wells, extract

the natural gas, and, as a result of that, we’re commercially or economically able to develop the resource on a much tighter spacing,

more wells per given section of land.

In a lot of cases, we drill 16 to 32 wells per section, where we

were only drilling one or two previously. That’s created a tremenVerDate 03-FEB-2003 11:09 Mar 03, 2005 Jkt 097866 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 D:\JEC\97866.TXT SSC2 PsN: SSC2
12

dous demand on the permitting process for the BLM, the Bureau

of Land Management, so that’s really where the angst is now, and

everybody is certainly trying to make breakthroughs in accessing

the Federal lands to be able to drill more and to supply more natural gas.

The Rockies has about 26 percent of the known resource in the

United States. There’s about 1300 Tcf, trillion cubic feet of gas

known, and the Rockies has about 26 percent. We’re a large stakeholder.

In the Rockies, we’re unique, because 50 percent of the lands are

regulated by the Federal Government. BLM is the landlord there.

Twenty-six percent of that 1300-trillion cubic feet is about 338-

trillion cubic feet. I think someone mentioned before the hearing,

that we have about 160 or so trillion cubic feet of proven reserves.

The Rockies alone has probably about two or three times that

amount of potential resource available to us right now.

The pipeline capacity is there. We need access to drill wells, basically.

The Rockies is unique. A lot of companies are migrating to the

Rockies. It’s a long-term supply. It’s not a real high decline ratetype production, so it’s very attractive to companies.

The industry has the financial capabilities to develop this resource, and we’re poised and ready to act, so over this next 4- to

5-year period, I think you can see a tremendous output of natural

gas available from the Rockies, and the infrastructure is there, we

just need the ability to access and drill.

[[The prepared statement of Logan Magruder appears in the Submissions for the Record on page 95.]

Chairman Bennett. Thank you very much.

Mr. Prindle.

STATEMENT OF WILLIAM R. PRINDLE, DEPUTY DIRECTOR,

AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY

(ACEEE), WASHINGTON, DC

Mr. Prindle. Thank you, Mr. Chairman, Senator Reed, and Senator Bingaman, for inviting me here today.

My colleagues on the panel have painted, I think, a very expert

and comprehensive picture of the gas market situation, and particularly on the supply side, and I’d like to turn the Committee’s

attention for a moment to the demand side of the equation, because, after all, markets are composed of supply and demand.

Our research shows that over the next 5 years—and I think

we’ve heard that the next 5 years between now and 2010, are really the crucial challenge for natural gas markets—we estimate that

energy efficiency can provide more relief to gas markets and more

support to the economy than any single resource policy strategy.

Certainly we’re going to need new supply, but for the next 5 years,

we think energy efficiency can be a key swing producer, if you will,

a first responder kind of resource.

Based on our analysis, we’ve developed a four-point policy response for Federal and State governments to consider, that can

bring a lot of benefits to the economic recovery, as well as to the

gas markets.

13

We’re talking about a $7 billion, 5-year initiative that would gen- erate about $23 billion in private investment in efficiency, and,

more importantly, it would create more than $100 billion in direct

economic benefits.

Some have estimated that the effective tax that high gas prices

have exacted on the economy over the last 4 years or so is already

exceeding $100 billion. We think we can get that back in the next

5 years. We think it’s worth doing.

By way of background, energy efficiency, of course, has been a

key part of the economic growth picture of the United States for

the last 30 years. For the last 30 years, we’ve kept per capita energy use in this country virtually flat, while GDP per capita has

gone up 75 percent, so efficiency is really the little engine that

could, when it comes to supporting economic growth.

We’ve done this by reducing the energy intensity in the economy,

the number of BTUs it takes to produce a dollar’s worth of economic output. If we hadn’t done that, we’d have to be producing another 25 percent more on the resource side than we currently

produce.

If that were the case, just imagine the predicament we’d be in

here today in terms of gas market prices.

Given all the gains we’ve made in the last 30 years, you might

think, well, we’ve kind of squeezed that barrel dry; there’s not

much energy efficient potential left. Well, I’m happy to report that

that’s actually not the case.

We’ve done analysis, five of the National Laboratories have done

major studies in the last 4 years, and several states have done

their own analyses, and the general convergence of the analysis on

this is that we can reduce energy demand in gas and electricity

markets by 20 to 25 percent over the next 20 years. That’s below

the reference case forecast that EIA produces.

That’s why the National Petroleum Council felt confident in calling for a similar level of energy efficiency in their balanced future

scenario, and it’s also why the Western Governors Association, led

by Governors Schwarzenegger and Richardson, have called for a 20

percent reduction in energy use below the baseline forecast by

2020.

Why does efficiency potential stay high when we’ve made all

these gains? Well, first, there are persistent barriers that keep the

markets from working perfectly.

Certainly, markets work, but they don’t work well enough. Second, technology continues to be on the march.

We have refrigerators today that use one-third the energy of

those made 20 years ago. As of 2006, home air conditioners will be

roughly double the efficiency they were 20 years ago. Heating systems, water heaters, home appliances, lighting technology, windows, electric motors, industrial processes, and a whole litany of

venues has continued to improve their technological efficiency.

This advance in the technological side not only keeps the efficiency potential growing, but it keeps the economy growing through

new investment and expanded markets for these products.

Let me focus in a little bit on the research that we’ve done in

this area over the last year or two: Our work started last year as

Secretary Abraham was preparing for his Natural Gas Summit in

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June, and as the National Petroleum Council, under the Secretary’s

direction, was preparing its major report entitled ‘‘Balancing Natural Gas Policy.’’ We consulted with the Department of Energy and

the National Petroleum Council staff during this period, and it became apparent to us that their plate was very full. There were a

lot of issues they were looking at, and demand was only one of

them.

We decided it would be useful to take a closer look at the demand side of the market to get a more exact idea of what kind of

contributions efficiency could make. So we developed a moderate

set of projections for the potential contribution that we could get

from energy efficiency, and also from renewable energy over this

next key 5-year period.

What we found was that we estimate we can realistically drop

natural gas demand by about 4 percent below the baseline forecast

by 2010. That’s not a wild or unattainable number by any stretch.

We also estimate, based on a range of expert opinion and analysis,

that renewable energy could contribute another 3.6 percent of electricity generation in that period.

What we did was, we worked with the same model that the National Petroleum Council used, which is owned and operated by Energy and Environmental Analysis. We ran this scenario through

the same model that National Petroleum Council operated and we

found, as you might guess in a tight market situation, that small

changes in demand had very large price impacts.

Our analysis showed that wholesale gas prices at Henry Hub

would fall about 20 percent in 2009 through this scenario. That

was in 2003. We’re doing an update in 2004, and we’re finding that

markets are even tighter and that the price impact would be closer

to 26 percent in 2010.

Incidentally, while this forecast was made last summer when gas

prices looked soft, we’re seeing the markets today confirm what

that prediction was. Today’s NYMEX spot price is over $7, and it

took us to mid-December to get to that price last year. The frontmonth prices for December through March are now over $9.

This is the highest sustained futures price trend we’ve ever seen

in this country, so it’s going to be a rough winter.

As I mentioned, we’re talking about a $100-billion net economic

benefit from this efficiency and renewables scenario, and this is

very consistent with what the National Petroleum Council found.

If you read their report, you’ll see those numbers correspond

rather well. We found, interestingly, that the majority of the savings come not from direct natural gas savings, but from electricity

savings.

You ask why is that. Well, electricity, as Dr. Yergin and others

have pointed out, has been the fastest growing source for natural

gas consumption.

Chairman Bennett. Can you wrap it up?

Mr. Prindle. I’ll try and wrap it up.

Chairman Bennett. Yes, if you would.

Mr. Prindle. Electricity is a key part of the solution, as well. By

saving electricity, we actually save more gas, and I can speak more

to that in the Q&A, if you’d like.

15

Why don’t we see the markets taking care of this, if there is so

much energy efficiency out there? Well, the bottom line is that

while free markets are working, they are not working well enough

and they’re not working fast enough.

We need a policy, a modest policy boost to get the kind of demand-side response that we need to re-balance markets in the next

5 years. We have a four-point recommendation:

The first is to increase funding for Federal programs. The Appropriations Committee could do that in the next 3 to 4 months.

Second, we’d like to see the states expand their public benefits

programs for energy efficiency. Rhode Island and Utah are both active in this area.

Third, we’d like to see tax incentives. We almost got there in the

bill that the Conferees passed last night, but we didn’t quite get

there. Hopefully, that will get done in the next year or so.

Last but not least, we need a bully pulpit response. We need people at the highest level of governments to call this out as an important priority for every American.

I’ll stop there now, and I’ll be happy to answer your questions

as they come up. Thank you.

[The prepared statement of Bill Prindle appears in the Submissions for the Record on page 101.]

Chairman Bennett. Thank you very much. Thank you to all of

you.

Mr. Magruder, you talked about the permitting process at the

BLM. Senator Bingaman and I are both very much involved with

the BLM in our various Committee assignments.

One of the things that disturbs me the most about the BLM currently is that by various estimates, as much as 50 percent of the

BLM’s total budget goes for litigation or for defensive actions so

that they can be better prepared for litigation.

Virtually everything they try to do with respect to encouraging

development is challenged in the courts by a variety of groups.

What is your experience with the permitting process? Is it substantially slower than it could be? Is there a great barrier there,

or are you escaping the kind of litigation attack that has occurred

in other parts of the BLM?

Mr. Magruder. Good case in point on the litigation, my company just participated in the Utah lease sale, which was a record

sale for the BLM in Utah this past September. It raised $22 to $28

million.

My company accounted for about $8 million of that in anticipation of leases, so it’s very important to us.

197 of the 250, plus or minus, parcels that were let in the entire

lease sale, were protested or contested immediately, with the Internet and the ability to have just form letters, I mean, the protests

were almost instantaneous and simultaneous to the lease.

Our company is obligated to, within 10 days, to pay, in our case,

$8 million, for those leases, I think, by law, or just typically, the

BLM should issue those leases in 60 days, but it will probably take

us at least a year to get those leases. Our money has been parked

with the BLM. If they knew there were going to be protests, we

probably should have just put a down payment or something like

that, but we’ve taken a lot of the resource, taken it away from the

16

actual drilling of wells, in that case, and with there is the anticipation that we’ll get it through the litigation, but the protests are almost instantaneous.

A good success story is occurring in the Buffalo, Wyoming area,

Powder River Basin, which is a huge resource of natural gas. The

Appropriations Committee made money available for the Buffalo office.

The Buffalo, Wyoming BLM field office area was handling about

1,000 to 1,500 wells per year. That was their capability. The State

of Wyoming Oil ans Gas Conservation Commission can handle

about 12,000 permits a year and within a much shorter timeframe.

The same type of well on private or state property next door to

Federal property is close enough to take a pitching iron and hit a

golf ball from one well to the next. That well looks no different and

is drilled and completed using the same technique as a well on

Federal property. The difference, however, is in the permitting requirements for the Federal well versus the State well.

But through Kathleen Clark’s efforts and many people of the

leadership in Buffalo, they were able to work with the industry and

compromise and come up with a permitting process that has been

very successful. They have increased their output from 1,500 wells

a year and they are approaching 3,000. That’s their goal, and

they’re almost at that point now.

There are many other cases. Glenwood Springs, Colorado on the

Western Slope is a very critical source of natural gas. It has a very

efficient process working right now.

But, you go into areas like Jonah, Southwest Wyoming, it’s very

difficult to get permits. The industry is just poised and ready to go

there. The only question is why is there this backlog of permits?

As I mentioned earlier, the technology has improved for drilling

more wells per given area. It’s triggering the NEPA process and everything that goes along with the obligations of the BLM to manage and steward those lands, and it’s just creating a long regulatory process to get a well drilled.

In my experience, sir, I really have not seen a great deal of impact as a result of my proposal, the APD, the application to drill

the well, and the outcome. Just timing is the big issue.

Chairman Bennett. Well, I’m very concerned about it. We call

it the 37-cent appeal. For the price of a postage stamp, something

can be held up for a full year.

The BLM or Forest Service are subject to the same kind of appeal in a variety of environmental issues and inevitably win in

court, once it finally gets to court, but people don’t file on the basis

of merit; they simply file on an attempt to hold things up.

Mr. Magruder. Exactly.

Chairman Bennett. If I hear what you’re saying, things that

should take place in 60 days, you routinely expect they will take

a year?

Mr. Magruder. Yes, sir.

Chairman Bennett. Just to work through that, that’s very distressing.

Mr. Magruder. I wish there was some kind of cause and effect.

I mean, if there was a valid concern, then certainly it will stand

17

on its own merits, but if it’s just a frivolous lawsuit, then we really

need some recourse against those situations.

Chairman Bennett. All right. I will observe the 5-minute rule,

and we will look to multiple rounds among those that are here.

Senator Reed.

Senator Reed. Thank you very much, Mr. Chairman. Thank

you, gentlemen, for your testimony.

Dr. Yergin, you indicated that you assume energy efficiency in

your modeling. Are those energy efficiencies things like Mr. Prindle

has talked about, that we’d have to undertake legislatively?

Dr. Yergin. I don’t know what, in detail, is in his proposal. As

he points out—something, in particular, that critics outside the

United States have not necessarily recognized, is that we were a

lot more efficient than we are today. The United States has had a

steady progression of it, and we’re assuming future efficiency. A

great deal of it is embodied in new technology, and as you turn

over your capital stock, you get more efficient.

Senator Reed. Essentially, the question here for us, particularly, is what do we have to do to encourage efficiency? Do you

think there’s a role for us to play, as Mr. Prindle pointed out, in

terms of accelerating the use of new technology, providing tax incentives and credits? Is that something that is necessary?

Dr. Yergin. Well, I think that certainly has a role. How do you

get efficiency, greater efficiency? You get it by jawboning, the bully

pulpit; you get it by turning over your capital stock; you get it, as

we’ve seen, through regulation; you get it through price.

Of course, that last one is maybe the least popular way to go

about it. I think a lot of it is actually in research and development.

Several years ago, I chaired a task force for the Department of

Energy on energy R&D, and it continues to be that the impact of

technology is usually underestimated. The question is, how do you

promote that technological innovation and the adaptation of it?

Senator Reed. Thank you. Mr. Sankey, I was very interested in

your comments on LNG, and particularly the notion that there’s

excess capacity for regasification and also ships, and that the constraint is the supply.

As you are aware, there is a renewed energy—no pun intended—

to develop these LNG facilities in the United States, regasification

facilities.

With this over-capacity, are those developments necessary, or

what’s your view?

Mr. Sankey. No, they are certainly necessary, going forward. I

think, in fact, ironically, some of them are just too big to be filled

at the moment and that’s the problem.

If we’re going to see, let’s say, LNG accounting for 10 percent of

U.S. gas supply by the end of the decade, you’re clearly going to

need at least one, if not up to probably four more terminals to

bring the gas in.

My comment would just simply be that FERC, the Federal Energy Regulatory Commission, has done well here to accelerate the

process, and you actually have two permitted terminals, potentially

available to begin construction, that actually are not beginning construction because you don’t have the supply.

18

Therefore, I wouldn’t, from my perspective, worry so much about

the permitting process any longer. I think we’ve overcome that one.

It is difficult to build in the Northeast; it is difficult to add in Boston, but in the Gulf of Mexico, I think, in Louisiana, you can expect

to see more.

Senator Reed. Given the national nature of the energy markets

here, in fact, the international nature, is it necessary to have terminals in certain places in the country? Or is it simply that three

more terminals with adequate capacity, anyplace in the country,

could serve the market?

Mr. Sankey. Well, that becomes a question of price. The best

place to put a terminal would be where it’s most needed, at the extreme ends of the infrastructure, which would be in the Northeast,

but, of course, they say that’s the hardest place to put them.

Whereas, in the Gulf, where you have tremendous amounts of

gas infrastructure and the potential to move gas right across the

United States, you’re most likely to see the new infrastructure. I

think, again, that my view on that would be it would tend to be

a market issue. The most efficient, biggest plants will be in the

Gulf area where you have the most infrastructure to move the gas,

and you’ll have niche players with continued attempts to build regasification right at the extreme ends of infrastructure, because

you’ll get the highest price there, and so, right now, the highest

price in the United States is probably in the Boston area. It’s a

much lower price down at Henry Hub, and you have to keep that

in mind.

I would add that there’s a seasonal element here, as well, to keep

in mind, which is one of the problems you face with LNG in that

everyone, globally, consumes gas during winter, and doesn’t during

summer, and that’s simply another challenge.

Senator Reed. You commented on the FERC permitting process. One of the issues that we’ve seen and observed, is the disconnect between the FERC process and other agencies that have a

role to play, for instance, with marine terminals, the Coast Guard,

for security, transportation, and access. Do you have any comments

on that disconnect?

Mr. Sankey. Well as far as we can make out, the Coast Guard

is also approving terminals, and there is the potential for off-shore

terminals. The only comment there would be that they are extremely expensive; technologically perhaps slightly untested. There

is not one in the world yet.

The net result of this tends to be that they are extremely large

in order to justify their expense. From a permitting point of view,

they are preferable insofar as they are what are called ‘‘over the

horizon’’ so you do not have this so-called NMBI issue with them,

but you have the attendant additional expense.

Senator Reed. You also indicated in your testimony that one of

the problems with the prices we are paying in the United States

is that we rely on the spot market more than long-term contracts.

That would seem to me to be something that could be addressed

by the industry immediately.

Mr. Sankey. Yes. I mean you are in a situation where Dow

Chemical now has provisionally signed up to take long-term LNG—

and it is symptomatic of where we are going here that a chemical

19

company in the United States will now switch to LNG supply on

a term, what we call a ‘‘term basis.’’ Again the disconnect right

here, right now, is that there are not contracts in place; and you

will, if you like, rival buyers of gas globally who do have contracts.

Again I would say this winter you may actually see, and I think

you are seeing now, declining LNG delivery into the United States

into a rising price, and that is simply because the other contractual

payers—who may be paying less, in fact,—are taking precedence.

Senator Reed. Thank you.

Thank you, Mr. Chairman.

Chairman Bennett. Senator Bingaman.

Senator Bingaman. Thank you very much.

I think I have identified a difference of opinion among those of

you here. Let me just ask a question about that.

Mr. Prindle’s testimony states that, ‘‘if we rely on LNG as a marginal source for gas, it will tie U.S. markets to a permanent higher

cost baseline.’’ Mr. Sankey, I thought I understood you to say that

over the long term there is an enormous amount of cheap gas out

there, and once the infrastructure has been developed to bring it

to market that we were going to see the price of gas substantially

lower than current future prices and current prices would reflect.

Am I interpreting your testimony correctly?

Mr. Sankey. No. I specifically made the point that, whilst potential supply of LNG is lower than current future prices, it is also

higher than historic prices in the United States. So that your deep

history of gas prices being around $1, maybe $2 per MMBtu, you

have to recognize that the lowest cost gas from LNG is $2 to $3

per MMBtu. I think actually we are agreeing.

If I could take the liberty of adding on efficiency, I think the single biggest issue that is faced here is actually efficiency in the vehicle fleet, and cars and SUVs and so on becoming less efficient over

time, which is obviously a contrary trend to everything else we

have seen in energy demand here in the United States, and that

would be the focus of where I would make my efforts if I was trying

to improve efficiency in the United States.

The point being that very clearly oil prices and gas prices are

linked here and you do have a $52 oil price right now that is certainly supporting a very high United States gas price because there

is a degree of interchangeability between the use of oil and the use

of gas at the margin. As I said, it would help gas prices lower—

and I mean natural gas prices—if you could get gasoline prices

maybe a little bit higher, or get efficiency of use a bit better.

Dr. Yergin. Senator.

Senator Bingaman. Dr. Yergin.

Dr. Yergin. The picture that I would like to suggest is that we

are on a much higher plane for natural gas prices than we have

ever been accustomed to in the United States, and that will last

until perhaps 2008, 2009, perhaps the year is 2010, until we start

to see supplies, new supplies coming in, principally LNG.

The picture in mind is that we will see that prices, given the cost

of LNG, of maybe $3.25 or $3.50 will be the platform, or the base,

or the plateau for natural gas prices that is higher than what we

have had historically but a good deal lower than what we are looking at over the next few years.

20

Senator Bingaman. We currently have in place OPEC that has

a substantial impact on the world price of oil. Is there currently,

or in the relatively near future, expected to be something comparable to OPEC in gas producing countries that will essentially

dictate to us what we pay for natural gas to heat our homes?

Dr. Yergin, go ahead.

Dr. Yergin. I will give it a try because we have tried to do some

thinking and research on that. I think you are holding out the

question—and it is an inevitable question—will OPEC be joined by

a sibling called OGEC, Organization of Gas Exporting Countries.

Probably there will be associations of gas exporters.

The way we look at it, the bigger, the more diversified, the more

global, the more flexible LNG markets are in the world, the better

off we will be and so will exporters. The countries involved do not

overlay completely by any means with OPEC. Trinidad, Australia,

others, will be important exporters. Moreover even if you have a

larger, more flexible global energy market—this notion of a new

global gas market different from what we have today—there is still

an inter-dependence between the suppliers and the consumers.

They have a pretty strong interest, the suppliers, in a stable relationship with their consumers.

There is a risk there of it. It seems to us that diversification, the

scale of the market, and the fact that you still have a great deal

of pipelined gas—more LNG—would offset that risk. The bigger

risk is this perpetuation of a very tight North American gas market.

Senator Bingaman. Does anybody else have a comment on

that?

Mr. Sankey. I would concur with that idea. At the moment,

there is essentially a shortage of gas, and that does not tend to encourage or require a cartel to be formed in order to support prices.

Equally I think that the history of OPEC whereby essentially it

related to the behavior of foreign companies within now OPECmember countries has essentially—it is a process that has occurred

in terms of the exits of those companies from those countries and

a change in the fiscal regimes within those countries which applies

both to gas and to oil.

I think the sense of injustice, I would again have to defer to Dr.

Yergin on this, but the sense of injustice that caused the formation

of OPEC is not necessarily there in terms of the way the gas market operates, and I would equally support all he said about the liquidity of the market and the diversification of supply, again which

makes it a difficult proposition.

Senator Bingaman. Thank you, Mr. Chairman.

Chairman Bennett. Let me go back to my opening observation

about the importance of an infrastructure and the importance of a

distribution system, and see if I have it right or if I overreacted to

some of the information that I went through in preparation for the

hearing.

In order for a market to be efficient, goods and services—in this

case natural gas—has to be able to move freely throughout the

market. We try to make markets efficient by lowering tariff barriers. We try to make markets efficient by lowering regulatory barriers.

21

Let’s say LNG shows up in New Orleans and the shortage is in

Providence, Rhode Island. Do we have the distribution system that

can get the LNG from New Orleans to Providence, Rhode Island,

easily?

Suppose there is a sudden cold snap in Montana? How easily can

we, in the United States, move supplies around? Mr. Prindle is

pushing energy efficiency, and the nice thing about that is that

there are no barriers. If you develop a better window that keeps

more of the cold out in the form of a thermal barrier, it is available

everywhere and you do not have to move it around. You develop

a better air conditioner, and everybody sells the better air conditioner, and so on.

To try to attack this problem from the supply side, as opposed

to the conservation side, we have to have an efficient distribution

system. My sense is that that is not there, and it probably means

a fairly significant capital investment on which we hope to get a

return later on down the road.

Am I missing something? You who are in this business, Mr.

Magruder or Mr. Sankey? How good is our distribution system

right now?

Mr. Sankey. Well I would begin, but I would defer to Mr.

Magruder on the specifics of the infrastructure. I would say what

you do have is a very good pricing system here. You have a very

liquid market with very visible pricing that ultimately will solve

any short-term dislocations in supply and demand. You should rely

on that.

Chairman Bennett. Yes, but do we need—my fundamental

question, to try to correct my own ignorance—do we need a significant infrastructure capital investment in this country to get where

we want to go to the point where Dr. Yergin is talking about where

we can see the price come back down to $3.50 or $4 as opposed to

where it is now?

Mr. Magruder, do you have——

Mr. Sankey. Again I will defer to Mr. Magruder, but my primary point, stated in my testimony, was that the infrastructure requirement is abroad. You know, the regasification problem is overstated as the problem here, and the reality is where you need infrastructure is in Angola, and in Nigeria, and in Algeria, not so much

in the United States.

Mr. Magruder. I would agree that most of the capital is going

to be focused on the liquification end or the point of the source. It

has been awhile since I have worked in the Gulf of Mexico, so I

am not the correct person to ask to recite current statistics, but you

do have those main pipeline systems that were built back in the

1940’s after the War that serviced the Northeast, and those major

systems are still in there: Texas Eastern, the Texas Gas System,

TransCo, all those old main pipelines are in place. The shelf, the

central part of the Gulf of Mexico, is on decline.

You have the deep water Gulf of Mexico providing a new source

of natural gas, but it just seems logical that the Gulf of Mexico

could satisfy the little bit of natural gas that is going to be associated with LNG.

It will be a situation where you are going to utilize the storage

capacities you have in the East—the old Consolidated Natural Gas

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Systems—and all those old storage fields will probably come in

handy to store this product and make it readily available for the

winter time during peak demand periods.

I think that is the key to storage, to make sure that you get out

of the volatility of a supply and demand situation and make sure

you just have enough resource here to go through the winter

months and eliminate the volatility.

Chairman Bennett. You smooth the volatility by storage?

Mr. Magruder. Sure.

Chairman Bennett. If you get what you want in the Rockies,

you can put that in a distribution system and virtually sell it anywhere in the United States?

Mr. Magruder. Yes. I was about to say, the Rockies is unique

in that it is a net exporter of natural gas that distributes to the

East, the Central, the Midwest, the East Coast, and the West

Coast. We are kind of unique from that standpoint because it

is——

Chairman Bennett. The pipeline network as it currently exists

is efficient enough that your natural gas could physically go virtually anywhere in the United States?

Mr. Magruder. Yes. We can go, especially with the Kern River

Expansion that occurred last year, which had a tremendous impact

on the ability to get natural gas out of the Rockies. That was a Bcf

alone per day.

Chairman Bennett. My understanding was incorrect. We probably do not need that massive capital infusion in infrastructure in

the United States. Whether natural gas comes from the Rockies or

whether it comes from LNG in New Orleans, it can physically move

rapidly in the United States?

Mr. Magruder. Well, the basic infrastructure is there. The

Rocky Mountains, as an example, is putting major capital in place

right now with the anticipation of more supply being available out

of the Rockies.

As I mentioned earlier in my testimony to you, our current capacity out of the Rockies is 4.6 billion cubic feet per day moving

toward 6.5. That is incremental, too. That is a lot, you know, for

just one small region.

I am not personally familiar with any new pipeline systems

scheduled from the Gulf Coast to the Northeast, but I know that

those were some major systems that were installed years ago and

they’re still there and operational.

Chairman Bennett. Well not to belabor the problem, but I go

back to the comment I made where the price can be $20 in one part

of the country and $7 in another part of the country. That is a factor of availability.

Mr. Sankey. It is also a tremendous incentive to build infrastructure.

Chairman Bennett. Yes. That is why I am saying, should we

not have, or are we not looking at as a Nation additional infrastructure so that the price becomes $7 nationwide?

Mr. Sankey. Well I think Mr. Magruder is saying that where

the price dislocations occur, the infrastructure is added. I do not

really see an issue there. Remember, the market as highlighted

isn’t growing.

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Dr. Yergin. Last winter in the Northeast we saw with very cold

weather and utilities, residential, with everybody pulling on the

pipe at the same time, we hit the limits; and we saw prices really

reflect the fact that we were at or exceeding capacity.

You look at some regions, and you look at Long Island, whom I

think only has one pipe supplying it, and you say from a diversification point of view that is not good; it should have a second

one. Then you get into the same morass of regulatory and permitting questions.

I think also from a sort of security diversification point of view,

from a national point of view, it probably would make sense to

have at least one new LNG facility on the East Coast, and also

have one on the West Coast, going to the point, Senator, that you

are making of having supply closer to the demand centers.

Chairman Bennett. OK. Thank you.

Senator Reed.

Senator Reed. Mr. Sankey, you indicated that at the present

time where the capital should flow is to places like Angola, Nigeria,

and Algeria to develop their fields and get supply. What is inhibiting that?

Mr. Sankey. Nothing. It is going now.

Senator Reed. It is going on?

Mr. Sankey. Yes.

Senator Reed. So that is——

Mr. Sankey. Primarily, as I mentioned, there is an issue with

planning assumptions of the oil companies where they use a longterm view, and we still have the memory in fact here of 1998–1999

when you saw a $12 oil price still somewhat feeding through into

assumptions. Assumptions are only gradually rising about what is

a safe future forecast for prices. When you are putting $5 to $10

billion into Angola, you have to have a huge degree of comfort that

the price you are going to achieve is going to make a good return

for you. The companies find, broadly speaking, that it is better to

be conservative than to be over-aggressive.

The global picture here is that in the 1980’s you had spare U.S.

regasification capacity. OPEC had 15 million barrels a day of spare

oil production capacity. Too many refineries in the United States.

We have gone from an over-invested energy infrastructure to an

under-invested energy infrastructure. Really we are in the fulcrum

period that I mentioned that will see very high prices encouraging

more investment, but we are right at that point now.

Dr. Yergin. Senator, the scale of the investment in the upstream

has greatly grown. A typical project 10 or 15 years ago might have

been $300 million. It is $3 to $5 billion. When it comes to writing

a check for a $5 or even a $10 billion project, you do take a deep

breath before you do it.

I think that one issue is of course the efficiency of governments.

I am not talking about our government, but other governments in

terms of their understanding that it is a competitive market; that

the price cannot be taken for granted. It is interesting to see a

country like Qatar which has emerged as perhaps the fulcrum of

LNG because its government has been more efficient in working

with international companies and mobilizing the investment in resources that is necessary to be competitive.

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Senator Reed. Just a follow-on question that I think is implicit

in what you have said; that this growing demand for LNG is not

restricted to the United States and North America, that it is worldwide?

Mr. Sankey. Correct.

Dr. Yergin. Yes. If you go to China, they have some growing

numbers. Those numbers are going to obviously end up being a lot

higher as they get ready for the 2008 Olympics. They want natural

gas for environmental reasons. The world is waking up to China

as a market for all commodities, and it will be a major market for

LNG as well. Europe is going to need LNG supplies as the North

Sea declines.

Senator Reed. Thank you.

Thank you very much, Mr. Chairman.

Chairman Bennett. Senator Bingaman.

Senator Bingaman. Thank you, again.

Dr. Yergin, you talked about a built-in rising demand for natural

gas over the next several years, as I understood your testimony,

and I also thought I heard—perhaps you said this, or Mr. Sankey,

or one of you—that 26 percent of the demand for natural gas, or

the utilization of natural gas, is by utilities to produce electricity.

We have got a circumstance where several years ago we had a

lot of utilities rushing out to build more gas-fired generating capacity because the thought was the price of gas was cheap, and these

plants were relatively cheap to construct.

Then the price started going up, and the economy flagged, and

people started shutting down some of those plants.

I guess once you have built one of these plants you have an investment there, and there is an incentive to go ahead and use it

even when the price of gas is relatively high? I assume that is the

case.

Are there policies that we should be adopting that would discourage utilities from going out and further increasing demand for natural gas by further constructing natural gas-fired generation capacity when there are cheaper ways to produce electricity that we are

all aware of?

I mean, if we in fact have agreement that we are going into a

period here of high natural gas prices and we are looking for ways

to take pressure off that price, Dr. Yergin?

Dr. Yergin. You have gone right to a question we are looking

at now. The United States are still working out of the over-capacity, as you describe, that it built up when we had that great boom

and many thought the so called ‘‘new economy’’—internet, computers, and everything—meant that we were going to have this

great need for electricity.

Lo and behold, you look out toward 2010, 2011, you start to see

we are going to need new capacity again. You see people struggling

with exactly the question that you have described. What are your

alternatives?

Nuclear? It is hard to see any utility committing to new nuclear

capacity in the United States in the years immediately ahead. Conservation obviously is an element in it, but it comes down now to

the question of the tradeoff between how much gas do you build in

25

new capacity and how much coal? There is going to be a real interaction.

We think that in the next major wave of electric generation capacity, coal will play a much larger role than people would anticipate right now.

Senator Bingaman. I had a gentleman in my office just 2 days

ago who is in the business of building wind generation, generating

capacity, and he said that he goes to utilities and says ‘‘I can turn

this plant over to you, or this production over to you, at 2 cents

per kilowatt hour from wind generation,’’ and they turn him down

because they already have so much generating capacity of their

own, presumably natural gas capacity and other types of capacity,

that they have no interest in purchasing wind power at that price.

Dr. Yergin. Actually your State is one of the leaders in terms

of wind power. I think that we have seen the cost of wind power—

I don’t know about 2 cents, but wind power costs have come down.

Obviously there are some incentives for that, but it can be competitive.

There are issues about if you get a certain scale of wind power.

Wind is intermittent. What do you do about it? Wind is a competitor, but it still seems likely to be a niche competitor rather than

base load on a large scale.

Senator Bingaman. He was acknowledging that you had to

supplement it with generating capacity from natural gas or something for the time when you can’t produce power from wind, but

it does seem as though we are into a situation where we are captive of the decisions that have earlier been made about where we

are going to have the generating capacity and what kind of generating capacity we are going to, or each utility is going to construct.

The more they decide to construct gas-fired generating capacity,

the more we are locked into a growing demand for gas and a high

price of gas it seems to me, going forward.

Dr. Yergin. That’s right. It was really quite a natural gas band

wagon. I think now you are going to see a drive for diversification,

and renewables will be part of that.

The numbers in terms of what we use in electricity and growth,

even with conservation, are big numbers to be met in the years

ahead.

Mr. Prindle. Senator, could I respond to that as well? Ten years

ago, most states in the United States conducted what we used to

call Integrated Resource Planning. If a utility wanted to construct

a new power plant, they basically had to look at all the resource

options that were available to them, including energy efficiency, renewable energy, and conventional generation.

With restructuring we have today, we have largely lost that capability. I think that is why you see an increasing mismatch between supply and demand in wholesale markets. There is no rational framework today in which a State or FERC can say, ‘‘Well,

it looks like we are going to need some new resources, what is the

least-cost way to do it?’’

I think that is a mistake. Some states have retained that capability, and in fact California, which some could say has seen the

most damaging potential fruits of unconstrained restructuring, has

actually gone back to a policy where they are requiring utilities to

26

look first to the demand side and to spend whatever is cost-effective to make sure the demand growth rate is reasonable before

they commit to new generation.

Several states are starting to look at that again. We think that

is a trend that needs correction; that the restructuring situation in

this country has probably swung a little bit too far and there needs

to be some kind of resource planning process by which we get the

mix right.

Certainly we are going to need new supply, but we need the right

mix of demand, renewables, and conventional supply. Thank you.

Senator Bingaman. Thank you very much, Mr. Chairman.

Chairman Bennett. Thank you.

You talked about LNG and the impact it would have. What

would be the impact if the Alaskan Pipeline were to finally come

about? We import now from Canada. Presumably Alaska could

compete with Canada in terms of supply.

If the Alaskan Pipeline were built, what impact would that have?

Mr. Sankey. I would just highlight that in my testimony actually I have included the Alaskan Gas Pipeline in terms of its price,

which indicates that it would deliver gas at about $4 per MMBtu.

It is actually more expensive gas than the majority of LNG that

could come in.

I think that from our perspective regarding U.S. gas you need all

you can get. You need Rockies. You need LNG. You need efficiency.

You name it. Alaskan Gas Pipeline will be part of that.

I have mentioned planning assumptions several times. ExxonMobil as an example raised its view of gas prices, as I mentioned,

from $2.50 in the United States to $3.50 in the United States. The

key driver of that decision was a view that the Alaskan Pipeline

will not occur in the next decade essentially, and that was the primary reason they gave for that move.

I think that the issues surrounding the difficulties which we

have referred to of actual construction, the very high price which

to me seems surprisingly high but nevertheless a very high price

that is quoted for the pipeline, are all issues that make those companies basically now prioritize LNG over Alaska with a view that

Alaska will happen eventually.

Chairman Bennett. Help me out here. You are saying that the

prices will come down to $3.50. Your people are saying they have

a built-in long-term assumption of $3.50, and Alaska is at $4? If

Alaska is at $4, it will never, ever be built.

Dr. Yergin. Alaska is a great resource in terms of natural gas.

It has been on the agenda now it seems for, hard to believe, three

decades of discussion.

Chairman Bennett. Yes.

Dr. Yergin. You are driven, as we are, as we look at the future,

to develop a set of scenarios for the future because there is so much

that of course we do not know about the future, by definition.

When we look out and we see the Alaska Pipeline would be completed maybe sometime in the middle of the next decade, the impact on prices in our scenarios would not be massive by that point

because the supplies would be needed and they could be absorbed.

The risk obviously for the private developers is the downside

risk. $50-plus a barrel for oil was not in any company’s forecast 2

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years ago, nor was $12 in an earlier period, and their fear is what

Paul described of what happens if say there is a huge overbuild of

LNG, prices crash, and meanwhile you are building, inching along

mile by mile with this pipeline.

We should assume that eventually that resource, that very valuable strategic resource to the United States, will eventually reach

our markets.

Chairman Bennett. Well if the Alaska Pipeline is approved immediately, let’s say in this Congress or in the early months of the

next Congress, what impact would that have on people’s planning?

I am assuming from what you are saying they are planning?

Eventually means a long time away?

Dr. Yergin. It would have some impact. We can see what Paul

thinks about this, the tradeoffs, in terms of how aggressively and

what number of regasification facilities people would push in the

United States.

There will be an effort to balance it. It is also a question of where

people apply that limited resource called ‘‘capital.’’

Paul.

Mr. Sankey. Yes, I mean I think it goes to the heart of the problem essentially, which is that the companies continue to plan on

low prices and therefore prices are high. If eventually they begin

to plan on high prices, prices will go low. When you are playing

with $15 billion, which is what they are talking about here, it is

better to be conservative and say, ‘‘Look, we will wait on that.’’ The only observation I would make is that the $15 billion price

tag seems very high on a very simple per kilometer basis, and I

have never fully understood why that is. That would be my other

observation, that possibly the $4 price that we are using, which we

are deriving from a $15 billion cost, may be too high. Certainly at

the moment, even if it was approved within let’s say the next year,

legally it would take at least 4 to 5 years before you would see the

first gas.

Chairman Bennett. Yes, that is true.

Well while I have you, I will take advantage of your being here

and go to another totally different subject but one on which you

have hinted, the $50 oil.

If $50 becomes the new benchmark instead of turning out to be

a spike, and people in Mr. Sankey’s world start saying $50 oil is

where we are going to live, at $50 a barrel there is more oil in

Utah and Colorado through oil shale and tar sands than there is

in Saudi Arabia or Iraq. We can efficiently—we can economically

get it out under the umbrella of $50 oil, that is, if the environmental groups will allow that to happen, and that is a political decision rather than an economic decision—but let’s just assume for

the moment that it could happen. Talk about that future.

Dr. Yergin. First some of the people who come in front of your

Committee periodically to report on the economy would change

their outlook for economic growth in the United States, and those

numbers would be lower.

It is remarkable to think that just a little over a half a decade

ago the price of oil was $10 a barrel and it was supposed to go to

$5, and somehow there is an extra zero in there now and it is $50.

Chairman Bennett. Yes.

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Dr. Yergin. I think it will be cyclical.

Right now this is an incredibly tight oil market. The oil market

is tighter now than it was on the eve of the 1973 oil crisis. The only

time it has been tighter was in those months immediately after

Saddam Hussein invaded Kuwait and Kuwait and Iraq were out of

the market. That means the market is very vulnerable to anything

until we start to see more supply.

I do think what you are pointing to is that there is a lot of pessimism in some circles now about the future of oil. I think that that

view is under-estimating again the impact of technology. I think

that as we look out, at least over the next 10 or 15 years, we are

going to see a widening of the definition of what oil is to include

unconventional oil.

You certainly see that Canadian oil sands, which were sort of

way over on the side, are now going to be a major source of growth

of supply for the United States in a way that had not been anticipated.

I think oil shale is still in another category. The oil price does not have to be $50. It can be $30 and a lot of things become economic that are not at $10.

Chairman Bennett. There are folks at the University of Utah who insist they can get the oil out of the oil shale at $13 a barrel.

Unfortunately they have been insisting that for about 30 years.

[Laughter.]

Dr. Yergin. Do they adjust for inflation?

[Laughter.]

Chairman Bennett. No, it stays at $13 somehow. It hangs in

there all the way through.

Well I know that is not the subject of the hearing, but I wanted

to take advantage of your expertise because we appreciate your

being here.

Thank you so much for your testimony. Thank you for the work

that went into the formal statements that you have filed with the

Committee, which will of course be printed in their entirety in the

record, and we appreciate your sharing your expertise with us here

today.

The Committee is adjourned.

[Whereupon, at 11:30 a.m., Thursday, October 7, 2004, the Committee hearing was adjourned.)

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Submissions for the Record

PREPARED STATEMENT OF SENATOR ROBERT F. BENNETT, CHAIRMAN

Good morning and welcome to today’s hearing. As we enter the 4th year of the

economic expansion there is one black cloud threatening to rain on our parade, and

that is the specter of high energy prices. Most people have taken notice of the high

oil prices of late, since they eventually trickle down to the consumer in the form

of high gasoline prices. However, just as worrisome are the high natural gas prices

that have beset our economy over the past few years. After a protracted period of

low and stable prices, the cost of natural gas has skyrocketed in recent years to unprecedented heights. What’s more, natural gas prices now display almost unprecedented volatility, wreaking havoc on the ability of utilities and other companies that

use gas to plan for the future.

It is important that we address the problem of high natural gas prices as soon

as possible. The high prices act like a brake on the American economy, impacting

every business and household in America. However, certain industries have suffered

especially hard. For instance, the chemical and plastics industries, which use natural gas as a feedstock, have been hammered by the high prices. The Manufacturers’ Alliance estimates that 90,000 jobs have been lost in the chemical industry

since the year 2000.

Also, it is important to remember that there is not a single integrated market for

natural gas in this country. We simply do not have the infrastructure to easily ship

gas from one region to another should there develop a localized shortage, and as

a result prices across the country often differ greatly. The lack of infrastructure

shows no signs of being alleviated in the near future, according to a recently released Energy Information Administration report stating that new investment in

pipelines actually fell in 2002, the last year for which we have reliable data. We

do not have to hearken too far to remember gas prices on the east coast tripling

to over $20 per mcf (million cubic foot) while topping out at $7 in Cheyenne.

We know the proximate causes for the run up in the cost of natural gas. A few

years after prices were deregulated in the 1980’s the Congress passed laws that in

effect encouraged its use to produce electricity, sharply increasing demand. At the

same time, the production from extant wells began to decline and environmental restrictions made the exploration and drilling of new wells more difficult. It doesn’t

take an economist to see that policies that increase demand and decrease supply

will sharply increase prices.

Let’s be clear about one thing: there exists enough natural gas in the world to

meet our needs for the foreseeable future. We are not running out of natural gas

by any stretch of the imagination. Here in the U.S. we still have significant reserves

in the lower 48 states and Alaska. More significantly, vast amounts of natural gas

reserves are available all over the world.

However, companies and countries have just begun to contemplate the massive investments needed to get to these reserves and create a truly global market in natural gas. The pipelines, cooling plants, tankers, and regasification plants necessary

will ultimately cost hundreds of billion dollars. A central question for policymakers

is ‘‘what can we do to facilitate these investments?’’

Diagnosing the causes of high prices is easy; forecasting future prices and prescribing policies to all high prices is not. The standard response would be that high

prices alone will attract new investment in production, more conservation by the

users of natural gas, and the forces of supply and demand will eventually balance.

To be sure, we have witnessed some of this—the rise in natural gas consumption

has tapered off in the last year or two, and the current rig count in the U.S. is at

an all time high. However, major new investments to increase supply or conservation will not take place in an environment of major price and policy uncertainty.

The latter is only in part our fault, and although we’ve tried to remedy this, the

30

current Congress will most likely escape tomorrow without ameliorating the situation. We’ve also contributed to the former as well by passing laws that stimulated

natural gas demand without fully thinking through their long run consequences and

dealing with them when they were more manageable.

I will leave the question of ‘‘what do we do now?’’ to our esteemed panel of experts

that we have assembled today. The Committee is honored to have you with us today

and we anxiously await to hear your thoughts on the natural gas market of today

and the future.

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PREPARED STATEMENT OF SENATOR JACK REED, U.S. SENATOR FROM RHODE ISLAND

Thank you, Chairman Bennett. I want to thank you for holding this hearing on

a very important and timely topic. Natural gas is the most environmentally friendly

fossil fuel, and it used to be thought of as relatively abundant and relatively

cheap—a fuel of choice in many sectors of the economy. Natural gas instill an attractive, relatively clean-burning fuel, but prices have skyrocketed in the past few

years.

High and volatile natural gas prices are a problem right now for America’s households and for industrial users. Families face higher home heating costs; factories

face higher costs that deter plans for expansion and encourage the search for cheaper production opportunities outside the United States; and farmers are finding it

more expensive to fertilize and irrigate crops.

I suspect we will learn in this hearing that the conditions that have produced

high and volatile natural gas prices are going to be with us for some time. Once

a real and sustainable economic recovery takes hold, demand for natural gas will

increase. But we are likely to find it harder and harder to expand supply from our

traditional sources—domestic production and imports from Canada. Rising demand

and a limited supply are a recipe for higher prices. These are also conditions in

which unexpected events can produce sharp price fluctuations.

I myself believe very strongly that the best strategy we have for dealing with

these conditions in the natural gas market is to put a much greater emphasis on

energy efficiency and conservation. The National Petroleum Council, in its report,

Balancing Natural Gas Policy, finds that such an approach is vital to the near-term

and long-term strategy for moderating price levels and reducing volatility. I know

Mr. Prindle will be testifying that the American Council for an Energy-Efficient

Economy has reached similar conclusions.

I do recognize that supply-oriented policies can also have an important role to

play in a balanced strategy. Those policies include increased domestic production,

taking due care to be environmentally responsible; investments in production research and development; and increased liquefied natural gas (LNG) imports.

I will be especially interested in what our witnesses have to say about the prospects for LNG. This is an important issue for my State and my region and I have

been urging the Federal Energy Regulatory Commission to develop a regional strategic plan for the siting of new terminals and to improve their process for addressing safety and security concerns.

While I recognize that environmentally responsible policies aimed at increasing

the supply of natural gas may yield benefits, especially in the longer run, I come

back to my main point. All indications are that energy conservation and increased

efficiency appear to be the best solutions, especially in the next few years.

Given the problems we face in the natural gas market, I and a number of other

legislators in the Northeast and Midwest were dismayed to learn that the Bush Administration has decided to discontinue the Interagency Working Group on natural

gas. Perhaps this hearing can provide some additional impetus for the Administration and the Congress to make a concerted effort to address natural gas and other

energy policy issues in a constructive manner.

I thank the Chairman and look forward to hearing from the witnesses.

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