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[Senate Hearing 109-2]
[From the U.S. Government Publishing Office]

                                                          S. Hrg. 109-2
 
                         NATURAL GAS SYMPOSIUM

=======================================================================

                               SYMPOSIUM

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                              NATURAL GAS

                               __________

                            JANUARY 24, 2005

                       Printed for the use of the
               Committee on Energy and Natural Resources

                                 ______

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD BURR, North Carolina,        TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky

                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
                  Bob Simon, Democratic Staff Director
                  Sam Fowler, Democratic Chief Counsel
                         Lisa Epifani, PCounsel
                   Deborah Estes, Democratic Counsel

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Alberswerth, David, Program Director, The Wilderness Society.....    49
Anderson, Bob, Executive Director, Committee of Chief Risk 
  Officers.......................................................    77
Angelle, Scott, Secretary, Louisiana Department of Natural 
  Resources......................................................    36
Barlow, Eric, Western Organization of Resource Councils..........     7
Barnett, Keith, Vice President, Fundamental Analysis for American 
  Electric Power.................................................    78
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     5
Buccino, Sharon, Senior Attorney, Public Lands Program, Natural 
  Resources Defense Council......................................    48
Campbell, Elizabeth, Director, Natural Gas Division, Energy 
  Information Administration.....................................    81
Chapman, Gary, Senior Commercial Manager, Dow Chemical...........    79
Connelly, Jeanne, Vice President, Federal Relations, Calpine 
  Corporation....................................................    64
Cooper, Mark, Director of Research, Consumer Federation of 
  America........................................................    38
Cooper, Roger, Executive Vice President, American Gas Association    63
Cruickshank, Walter, Deputy Director, Minerals Management Service    17
Davies, Philip, Vice President and General Counsel, EnCana Gas 
  Storage, Inc...................................................    41
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Downes, Larry, Chairman, Natural Gas Council and the American Gas 
  Association....................................................     5
Fuller, Lee, Vice President of Government Relations, Independent 
  Petroleum Association of America...............................    47
Gallagher, Bob, President, New Mexico Oil and Gas Association....     9
Gerard, Associate Administrator for Pipeline Safety, Department 
  of Transportation..............................................    27
Grumet, Jason, Executive Director, National Commission on Energy 
  Policy.........................................................    48
Hansen, Christine, Executive Director, Interstate Oil and Gas 
  Compact Commission.............................................    37
Harvey, Steve, Deputy Director, Market Oversight and Assessment, 
  Federal Energy Regulatory Commission...........................    80
Horvath, Skip, President and CEO, Natural Gas Supply Association.    83
Houseknecht, Dave, Research Geologist, U.S. Geological Survey....    17
Kalisch, Bert, President and CEO, American Public Gas Association     8
Kane, John, Senior Vice President of Governmental Affairs, 
  Nuclear Energy Institute.......................................    65
Kuuskraa, Vello, President, Advanced Resources International, 
  Inc............................................................     6
Levin, Robert, Senior Vice President, New York Mercantile 
  Exchange (NYMEX)...............................................    81
Lonnie, Thomas, Assistant Director for Minerals Realty and 
  Resource Protection, Bureau of Land Management, Department of 
  the Interior...................................................    17
Myers, Dr. Mark D., Director, Alaska Division of Oil and Gas, 
  State of Alaska................................................    11
Nadel, Steve, Executive Director, American Council for Energy 
  Efficiency Economy.............................................    62
Rattie, Keith, Chairman, CEO, and President, Questar Corporation.    39
Richardson, Hon. Bill, Governor, State of New Mexico.............     3
Robinson, Mark, Director, Office of Energy Projects, Federal 
  Energy Regulatory Commission...................................    28
Rosenberg, William, Senior Fellow, Kennedy School of Government, 
  Harvard University.............................................    67
Scott, Captain David, Chief, Office of Operating and 
  Environmental Standards, U.S. Coast Guard......................    29
Sharples, Richard J., Executive Director, Center for Liquified 
  Natural Gas....................................................    25
Shilts, Richard A., Director, Division of Market Oversight, 
  Commodity Futures Trading Commission...........................    84
Showalter, Marilyn, President, National Association of Regulatory 
  Utility Commissioners..........................................    27
Stuntz, Linda, Member, National Commission of Energy Policy......    26
Sypolt, Gary, President, Dominion Transmission...................    26
Theriot, Nolty, Director, Congressional Affairs, National Ocean 
  Industries Association.........................................     8
Van Alderwerelt, Senior Vice President, PPM Energy, Portland, OR.    66
Whitsitt, William, President, Domestic Petroleum Council.........    50
Yamagata, Ben, Executive Director, Coal Utilization Research 
  Council (CURC).................................................    68

                         NATURAL GAS SYMPOSIUM

                              ----------                              

                        MONDAY, JANUARY 24, 2005

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 1:05 p.m., in 
room SH-216, Hart Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. Hello, everyone. This is not a formal 
hearing, so I do not think we will be using the gavel very 
much.
    But before I have a couple of remarks and yield to Senator 
Bingaman for a few remarks, it is obvious from the crowd that 
an awful lot of people want to speak and they all cannot. So we 
have done our best to put people here at the table with us in 
different panels that we have selected that we think will, in 
total, represent most of the issues on the topic. But we will 
not get that done unless we follow the rule, which is even a 
little stricter than the house rule, and Senators cannot do it, 
but we expect you to, and that is going to be 2 minutes each. I 
do not know what we will do if you exceed it, but even though 
it is nice and warm in here, a cold pitcher of water on your 
head would not feel very good.
    [Laughter.]
    The Chairman. In any event, you are all welcome to the 
conference. It is pretty obvious that by your attendance and by 
what we have read in advance of it that natural gas, in all of 
its aspects and ramifications, is terrifically important to our 
country and to many institutions, entities, users, consumers in 
the United States.
    I want to thank all the different groups and individuals 
that have submitted proposals. It is most interesting. I cannot 
say we have read them all, but summaries of many of them would 
indicate that these summaries that you have given us and 
submissions are very, very important. By using them all, it 
should give us sufficient information to move ahead with what 
we ought to be doing.
    Thank you again to those of you who are going to 
participate, and all of you here in the audience that are 
interested in the discussion, we thank you for being here.
    Now, there was a gentleman from the U.S. House of 
Representatives, Michael Wu, who for a long time was a terrific 
staff man with reference to putting together energy policy. 
Linda Stuntz, who is here, knew him because of their work 
together in behalf of all of us, and I think that we would like 
her, if she would, to say a few words in recognition of Michael 
so that we would all know about him and spend a moment or so 
thinking about him. Linda.
    Ms. Stuntz. Thank you very much, Mr. Chairman.
    Many of us in this room, between the years of 1977 and 
1994, had the opportunity and the privilege to work on matters 
relating to natural gas, as well as other energy matters, with 
Michael Wu who was Mr. Dingell's chief counsel on energy during 
all that time.
    Michael died last Tuesday after a terrible car accident on 
Christmas eve. I asked and appreciate the chairman granting me 
a moment to remember him with all of you here, so many of his 
friends, and I would simply ask we could have just a moment of 
silence in honor of Michael and in support of his family. Thank 
you so much.
    The Chairman. Thank you very much. We will do that.
    [A moment of silence.]
    The Chairman. Thank you, Linda, and thank you, everyone.
    I think for staff members--and there are many--who work for 
all of us, I think what has just transpired here would indicate 
that there are people working for us, Democrat or Republican, 
that can truly rise above partisanship and do marvelous things 
for our country and he was one of them.
    The high level of response indicates that we have a shared 
concern about the natural gas challenges that we face as a 
Nation. The chart on my left illustrates the core problem. Our 
consumption is outstripping production at an increasing rate. 
You can see that as those lines diverge. In 2004, we imported 
15 percent of our natural gas. These charts and the information 
come from the Energy Information Agency. Their estimates are 
that in 2025 we will have to import or find a substitute for 
natural gas in the quantity of 25 percent, as compared with the 
15 that we do now, almost double.
    The chart on my right demonstrates in their opinion, where 
most of the imported natural gas is expected to come from, LNG, 
liquified natural gas. According to the EIA, in 2004, we 
imported 6 million cubic feet of LNG. In 2025, they think the 
importing will be 6.4 trillion cubic feet. Now, I am not saying 
these are the reality. I am saying this is what they put down 
as the ways to meet the demand versus the current expectations 
of supply.
    So progress so far on siting these LNG's has been 
nonexistent, almost impossible to get done.
    These two charts summarize why there is a natural gas 
crisis, in terms of demand and supply, under current 
situations. The natural gas crisis affects residential, 
commercial, industrial consumers and it has cost the consumers 
many billions of dollars. That is obvious purely and simply 
because of the price increase.
    So we begin this session, those of us in the Senate and 
those in the House, I hope--I believe that is the case--with 
renewed efforts to pass a comprehensive energy bill. It is 
right and I think that it is appropriate that our initial steps 
would be to assess the natural gas situation and, working 
together, to attempt to develop solutions.
    Now, we have the rules. We are going to try to follow them 
with a clear understanding that we know you are contributing to 
our knowledge base. We will use it in due course, but we cannot 
hear everything each of you wants to say. We are going to hear 
2 minutes of what you want to say, and the rest will be made a 
part of the record and we will read it in due course.
    [A prepared statement of Governor Bill Richardson of New 
Mexico follows:]*
---------------------------------------------------------------------------
    * All proposals submitted for the record can be found in the 
Comittee records.
---------------------------------------------------------------------------
                               State of New Mexico,
                                    Office of the Governor,
                             Santa Fe, New Mexico, January 7, 2005.
The Honorable Pete Domenici,
Chair, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.

The Honorable Jeff Bingaman,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Senator Domenici and Senator Bingaman: I am writing in 
response to your request for comments regarding the nation's natural 
gas supply. Although I am not able to speak at your January meeting 
because of the legislative session in New Mexico, I would appreciate 
your consideration of my comments.
    Natural gas is an important part of New Mexico's economy and of a 
sound energy policy for the Nation. It is a relatively clean-burning 
fuel that should be an important bridge fuel as we work together to 
develop a diversified, economically resilient energy economy more 
dependent on renewables and new storage technologies such as hydrogen.
    The Nation's growing reliance on natural gas has created a supply/
demand imbalance and significant price vulnerability affecting American 
businesses and consumers. The Industrial Energy Consumers of America 
estimates that the price spike since June of 2000 has cost U.S. 
consumers and businesses an extra $I50 billion or more. Federal Reserve 
Chairman Alan Greenspan has noted that the sustained increase in 
natural gas prices could have structural effects in our Nation's 
economy. Although it is critical to increase supply, we must also take 
serious steps that will reduce demand, encourage fuel-switching, and 
stabilize demand growth. Otherwise we will continue to make ourselves 
subject to future price increases like the one affecting our Nation so 
negatively today.

                        DOMESTIC GAS PRODUCTION

    I agree with the Committee's recent emphasis on encouraging the 
construction of the Alaska gasline, which can introduce a vast amount 
of natural gas into North American markets. On the other hand, as 
Governor of the second-leading onshore gas-producing state, I have been 
deeply concerned by the Administration's emphasis on opening and 
developing everything available on western public lands. In my state 
alone, there are two major, immediate examples of the wrong approach to 
developing our public lands:

   the Interior Department is putting tremendous effort into 
        opening virtually all of Otero Mesa, a Chihuahuan Desert 
        grassland of international ecological significance, to oil and 
        gas leasing--despite the fact that I have offered a sensible 
        and balanced alternative proposal in accordance with the 
        agency's planning rules; and
   the Agriculture Department is moving toward oil and gas 
        leasing in the Valle Vidal, a pristine wildlife and recreation 
        area much valued by local residents (and adjacent to the 
        internationally known Philmont Boy Scout Ranch)--despite the 
        fact that this area was donated to the Carson National Forest 
        by Pennzoil for perpetual conservation.

    Access to natural gas resources in the West is not a problem that 
needs Congressional attention. According to Bush Administration 
numbers, 88% of the technically recoverable federal gas resources in 
the five major Western basins are open to exploration and development. 
These available federal reserves are in addition to significant natural 
gas available on state and private lands. I would discourage the 
Committee from streamlining environmental laws and taking other 
measures to expedite gas production from federal lands. Such an 
approach would wrongly affect hunters, ranchers, local residents, 
landowners, and conservationists throughout the West, regardless of 
party affiliation.

                   ENERGY EFFICIENCY: REDUCING DEMAND

    Energy efficiency and conservation represent the fastest way to 
reduce demand pressures and to create conditions for long-term natural 
gas affordability. The July 2004 joint statement of the American Gas 
Association and Natural Resources Defense Council showed how 
collaborative, effective, and sensible the concept of natural gas 
conservation and efficiency is for our country. This statement was 
endorsed by the Alliance to Save Energy and the American Council for an 
Energy Efficient Economy.
    Energy efficiency is critical across all sectors of the economy. 
Fast-growing natural gas demand for space heating and electrical 
generation can be met in part by various measures that are affordable 
and will pay off for consumers and businesses. The energy efficiency 
tax incentives in H.R. 4206 (Cunningham and Markey) and S. 2311 
(Feinstein and Snowe) from the past Congress are a good basis for the 
Committee's consideration. The Congress must act on efficiency 
immediately, because it is in this area that the greatest gains can be 
most quickly achieved. Passage of tax incentives will assure that 
affordable conservation and efficiency measures enter the marketplace 
quickly.

                 FUEL-SWITCHING TO CLEAN ENERGY SOURCES

    The second step that the Committee should explore and emphasize is 
how to encourage the clean new technologies that will help meet the 
demands now being increasingly placed on natural gas. This nation is 
overreliant on a few fuels, such as oil for transportation and coal for 
electric generation, and will benefit economically and environmentally 
from diversifying its energy portfolio by investing in clean energy 
that can come to market today. In some cases, such as wind and solar, 
the resources are not always in the same place as the demand, so this 
also implies a need for new national transmission planning that will 
allow these valuable resources to be brought to market affordably and 
soon.
    Based on bipartisan support for a resolution co-sponsored by 
California Governor Arnold Schwarzenegger and myself last June, the 
Western Governors' Association is now producing a blueprint for 30,000 
MW of clean energy development in the West by 2015.
    This is achievable--but we need federal help. By producing this 
amount of renewable energy, the West can help displace and prevent 
growing demand for natural gas in the electrical sector. The Congress 
should immediately:

   extend the wind, biomass and solar tax credits for ten 
        years, to remove the stopand-start dynamic of these current 
        federal tax incentives;
   initiate research and investment tax credits for energy 
        storage projects that will help make wind and solar energy more 
        dispatchable;
   adopt a national renewable energy requirement, which will 
        prevent or dampen future price spikes, create thousands or 
        millions of jobs, save vast amounts of natural gas, and 
        strengthen the Nation's economic resilience; and
   embrace a program of advanced clean coal development in the 
        American West, where the gasification of coal promises huge, 
        long-term potential for clean fossil fuel combustion and carbon 
        sequestration.

    These steps, taken together, will create a new energy development 
dynamic that will reduce pressure on natural gas supplies, and assure 
that this important but finite resource is not overused for our 
immediate needs.

                         LIQUEFIED NATURAL GAS

    Although I support increasing imports of liquefied natural gas 
(LNG), I believe that the Nation must look at LNG as a partial solution 
to its energy challenges.
    First, natural gas markets are becoming more global, which implies 
potential supply and price disruption, as well as price competition, at 
a scale we have not previously experienced in gas markets. Becoming 
heavily reliant on imported natural gas can give other nations the 
opportunity to constrain supply at strategic times, as has happened to 
the United States in international oil markets with terrible economic 
effects. Protecting ourselves by limiting our reliance on imported gas 
is in the national interest.
    Second, as recently recognized in a report released by the Sandia 
National Laboratory, LNG tankers and facilities-are terroristtar gets. 
This is less true of some of the distributed clean energy facilities 
that I recommend above, and certainly energy efficiency and 
conservation constitute no attraction to terrorists.
    As past Secretary of the U.S. Department of Energy, I commend you 
and the members of the Committee for attempting to address the Nation's 
energy policies. Strong, comprehensive, and balanced energy policy is 
needed, and you are in position to provide the leadership our Nation 
needs. Please work toward resolution of our natural gas challenges in a 
way that helps address the issues I have put before you today.
            Sincerely,
                                           Bill Richardson,
                                                          Governor.

    The Chairman. With that, Senator Bingaman, you are not 
limited by any rule.
    [Laughter.]
    The Chairman. Do you have anything to say?

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Well, Mr. Chairman, I want to set a good 
example and be very brief in my comments. I want to 
congratulate you on convening this conference and I think it is 
extremely important that we try to better understand this set 
of issues. Obviously, a lot has changed with regard to our 
natural gas supply and usage in recent years, and we have a 
room full of very knowledgeable people here who are anxious to 
tell us about it and I think it is a very constructive step 
that you have taken. So I look forward to hearing the testimony 
and statements and I hope we get a chance to ask some 
questions. Thank you very much.
    The Chairman. Thank you very much, Senator Bingaman.
    So we are going to proceed now. This will be the order we 
will use each time. The question now, with reference to panel 
number one, is increasing the supply of natural gas. Now, we 
understand many of these issues work in harmony and there may 
be overlapping. We have selected you on the basis of your 
talking to us about your ideas on natural gas supply.
    We are going to start now on our left with Larry Downes 
from the Natural Gas Council. Is that correct?
    Mr. Downes. Yes, it is, Mr. Chairman.
    The Chairman. Now, in each case I am not going to be naming 
you. You will each tell us who you are as you move around the 
table. Larry.

 STATEMENT OF LARRY DOWNES, CHAIRMAN, NATURAL GAS COUNCIL AND 
                  THE AMERICAN GAS ASSOCIATION

    Mr. Downes. Yes, Mr. Chairman, Senators, thank you. My name 
is Larry Downes. I am chairman of the Natural Gas Council and 
the American Gas Association. I am also CEO of New Jersey 
Resources. We are a local natural gas distribution company.
    I first want to say thank you for your leadership in 
addressing this important issue. Ensuring reasonably priced 
natural gas for America's customers is among the most important 
things we can do.
    I think you know from our perspective natural gas is 
America's preferred fuel for homes and businesses. My company 
is at the front door of many of those homes and businesses, and 
from that perspective, I want to tell you what I think they 
would be sharing with you if they were here today.
    The facts are we know that demand for natural gas is 
growing. We know that supply is struggling to keep up. We also 
know that customers are bearing the burden of record-high 
prices and that we must take action promptly. But what should 
we do?
    First of all, we need to make an objective, dispassionate 
reassessment of restricted Federal lands. There are large 
tracts of Federal lands that are restricted for resource 
activity. These limitations were appropriate when they were put 
in place decades ago, but in the interim, significant 
technological advances have been made in developing our 
Nation's resources in an environmentally friendly fashion. And 
as a result, I think it is time that we need to take a fresh 
look to determine which limitations remain necessary to 
protecting our environment and really identifying those which 
do not.
    Secondly, we must streamline and expedite the Federal 
permitting processes and ensure adequate funding. Today 
permitting processes seriously delay our ability to draw upon 
our Nation's ample reserve base of natural gas. Given our 
Nation's needs, we need to expedite these procedures while 
still observing our core environmental values, and we need to 
make sure that the Government has the fiscal resources to do 
so.
    Third and very importantly from our perspective, we do not 
ask that environmental values be relaxed or loosened. It is 
sometimes suggested that our industry seeks a relaxation or a 
loosening of our Nation's environmental values. This is simply 
not true.
    Rather, what we are looking for is a reasoned and 
dispassionate reconsideration of decades-old land limitations, 
undertaken through the prism of the experience and 
technological advances that have been gained in those years, to 
put in place a permitting mechanism that assures proper 
environmental review while eliminating abuse and delay.
    In summary, the time is short. The issues are clear. We 
need to act.
    Thank you for having me.
    The Chairman. Thank you very much.

            STATEMENT OF VELLO KUUSKRAA, PRESIDENT, 
             ADVANCED RESOURCES INTERNATIONAL, INC.

    Mr. Kuuskraa. Good afternoon. I am Vello Kuuskraa, 
president of Advanced Resources.
    The Chairman. Of what?
    Mr. Kuuskraa. Of Advanced Resources International.
    Many view that domestic natural gas supplies have peaked 
and are in terminal decline. We do not have to accept this 
view. Yes, we are running low on easy-to-find and cheap-to-
produce conventional gas. Yet, massive volumes of 
unconventional gas remain locked in tight gas sands, gas 
shales, and coalbed methane. Also, our deep gas resources and 
methane hydrates await technological breakthroughs.
    We are in a race between resource depletion and technology 
progress. The public-private partnerships and research 
investments of the past enabled technology progress to stay in 
the lead. Today, with severe reductions in such investments, 
the iron grip of depletion has moved to the forefront. To 
correct this problem I would like to propose three actions.
    First, create a new set of private-public partnerships with 
$100 million per year of funding for applied research and 
technology development and demonstrations of advanced natural 
gas supply technology.
    Second, provide targeted investment tax credits for 
unconventional gas development.
    Third, ensure improved access to natural gas resources on 
Federal lands.
    This three-part strategy will enable domestic onshore 
natural gas production to be 2 tcf per year higher, equal to 
six LNG plants, and natural gas prices to be significantly 
lower in the near term. This is not intended to argue that we 
can do without increased imports of LNG or without the Alaska 
natural gas pipeline. Rather, with supportive legislation and 
policies, we can keep from becoming overly reliant on imports.
    Thank you for this opportunity.
    The Chairman. Thank you very much.

            STATEMENT OF ERIC BARLOW, ON BEHALF OF 
         THE WESTERN ORGANIZATION OF RESOURCE COUNCILS

    Mr. Barlow. Greetings, Mr. Chairman, Senator Thomas, 
members of the committee. My name is Eric Barlow. I am with the 
Western Organization of Resource Councils. I live on a family 
ranch in northeast Wyoming in the Powder River Basin. Living on 
a ranch that is experiencing coalbed methane development 
affords me with a different perspective than some of the 
perspectives you may hear today.
    The West is making a contribution to increasing natural gas 
supply. The significant rise in permitting, active wells, and 
production are evidence that a boom is occurring the West. 
However, this is coming at a cost. It is a cost to our water, 
our air, our land. It is also coming with the associated 
conflicts and controversies which are a cost to our families, 
our communities, the industry, and ultimately the consumer.
    I come here with a simple message: let's do it right.
    Mr. Chairman, there are ample opportunities to go down a 
road, a flawed path to reducing, weakening protections, to 
limiting meaningful participation, to further erosions and 
accountability. This course can only lead to greater conflict. 
It can only lead to more impacts and less certainty.
    It can be done right. Our proposal is for more 
opportunities for input, stronger values in our resources, all 
of our resources, greater accountability, not less.
    An example of doing it right might be taken from SMCRA, the 
Surface Mining Control and Reclamation Act. It requires very 
distinct things. It requires surface owner consent, water 
remediation and replacement. It requires public input. For 28 
years that law has been in effect and the coal mining industry 
is an integral part, a prosperous part of our energy situation 
today. I believe following this type of an example, we can go 
forward and come to a better place for the industry and a 
better place for all us.
    Thank you for your time.
    The Chairman. Thank you very much.

 STATEMENT OF NOLTY THERIOT, DIRECTOR, CONGRESSIONAL AFFAIRS, 
             NATIONAL OCEAN INDUSTRIES ASSOCIATION

    Mr. Theriot. Good afternoon, Mr. Chairman and Senators. My 
name is Nolty Theriot and I am representing the National Ocean 
Industries Association, the only trade association comprised of 
all segments of the offshore energy industry. I am delighted to 
have the opportunity to discuss some of the possible solutions 
available to increase our domestic natural gas supply, 
specifically the important choices involving offshore energy 
exploration and production from the submerged public lands of 
the Federal Outer Continental Shelf.
    At present, over 80 percent of the offshore areas are off 
limits to oil and gas development. In addition, these areas 
under drilling moratoria are estimated to hold at least 79 
trillion cubic feet of natural gas. This is enough energy to 
meet current residential needs for more than 15 years.
    We understand not all areas are suitable for development. 
However, before we can have an informed discussion, it is 
important that we carefully examine all areas likely to contain 
natural gas and determine which can be harvested using our 
Nation's highest environmental standards.
    We recommend that Congress allow all Federal OCS areas to 
be assessed for their resource potential, and decisions as to 
which areas should be off limits and which may be appropriate 
for energy development be made based on the information 
gathered.
    Another issue affecting the stability of our domestic 
energy supply is the Coastal Zone Management Act of 1972. 
Overall, this is valuable legislation, but some interest groups 
have used the law to stall or hold offshore development in a 
never-ending loop of permit approvals and appeals. In order to 
improve the cesium A planning and consistency review process 
and ensure that it is not inappropriately used as a delaying 
tactic, we recommend that Congress establish clear information 
requirements for State and Federal decision-making, ensure 
timely action by the Secretary of Commerce on State appeals by 
setting a deadline of 120 days from the date of filing, with 
limited opportunity for extension, and provide a single 
consistency certification covering all Federal license and 
permitted activities.
    In closing, I would like reiterate that the ability to meet 
the Nation's natural gas needs will continue to be in question 
until promising areas are open for responsible exploration and 
production and barriers to development are removed.
    Thank you very much for your time and attention.
    The Chairman. Thank you.

 STATEMENT OF BERT KALISCH, PRESIDENT AND CEO, AMERICAN PUBLIC 
                        GAS ASSOCIATION

    Mr. Kalisch. Good afternoon, Mr. Chairman, Senator Bingaman 
and other members present today. My name is Bert Kalisch. I am 
the president and CEO of the American Public Gas Association. 
About 950 public gas utilities serve 5 million homes and 
businesses across America, including 15 communities in New 
Mexico. We are very pleased to participate.
    APGA's number one priority is to bring natural gas prices 
back to an affordable level. As the voice on this panel closest 
to the consumer, APGA is keenly aware of the hardships and 
burdens high natural gas prices have had and continue to have 
on the customers we serve.
    We believe many important steps must be taken to bring 
natural gas prices back to an affordable level. But one 
critical step is to increase access to domestic gas supplies, 
including offshore resources. A big step in this direction is a 
proposal called SEACOR, State Enhanced Authority for Coastal 
and Offshore Resources. SEACOR alone could provide access to 
more than 145 trillion cubic feet of natural gas for potential 
development.
    SEACOR finally makes a distinction between oil and gas 
production. It requires that current moratoria be set aside. It 
provides coastal States with greater authority and financial 
incentives to bear the risks and impacts of offshore drilling 
activities.
    Greater State authority is realized by: extending a State's 
offshore boundaries from the current 3 miles out to 12 miles; 
having veto authority on drilling activities out to 40 miles 
for natural gas, 60 miles for oil.
    Greater financial incentives are realized, for example, in 
California, which received $3 million last year, under SEACOR, 
it would have been closer to $82 million. Louisiana received 
$35 million last year. Under SEACOR, it would have been closer 
to $200 million.
    Mr. Chairman, APGA applauds your untiring efforts to try to 
pass comprehensive energy legislation. Whether the approach 
taken in this Congress is comprehensive energy legislation or a 
stand-alone natural gas bill, APGA looks forward to working 
with you and your staff to pass a bill that restores natural 
gas prices to an affordable level.
    Thank you.
    The Chairman. Thank you very much.
    Now we proceed right here. Bob.

            STATEMENT OF BOB GALLAGHER, PRESIDENT, 
               NEW MEXICO OIL AND GAS ASSOCIATION

    Mr. Gallagher. Mr. Chairman, Senator Bingaman, I appreciate 
very much the opportunity to be with you today and applaud your 
efforts. You make us proud back in New Mexico, and I appreciate 
the opportunity.
    I think the answer to affordable natural gas is easy: 
available natural gas makes natural gas affordable. I think you 
can sum it up in three words: ``access, access, and access.'' 
If our industry does not have access to Federal lands and 
waters, our country does not have affordable natural gas, nor 
will we be able to meet the growing demand. I believe it is 
that simple.
    Several areas. The National Environmental Policy Act. We 
would like Congress to have a strategy to limit the opportunity 
to abuse the Federal decision-making and delay decisions.
    The Endangered Species Act is broken and needs to be fixed. 
It is used now as a tool to hinder land management planning and 
project permitting. We would like Congress to move to require 
that listing petitions be based on the best available 
scientific and commercial information and developing specific 
criteria for what constitutes best available data. Also, avoid 
having land use agencies treat a species petitioned for listing 
as a basis for managing the species as sensitive or special 
status.
    In the areas of land use, land use planning is required of 
Federal land use agencies. We believe that the agencies should 
use a reasonable, foreseeable development scenario as a 
planning tool and refrain from using it to suspend development 
once the well count is reached. Instead, total surface 
disturbance over time that accounts for reclaimed acreage 
should be used.
    Mr. Chairman, restrictions to drilling in the Potash 
Enclave came about when potash was considered essential to 
national security. Through the years, the uses and the values 
have changed. There are close to 1 million acres of land in 
southeast New Mexico that are off limits because of potash 
requirements.
    Applications for permit to drill. We believe that we ought 
to use categorical exclusions for wells and right-of-ways that 
require minimal surface disturbance and, more importantly, a 
45-day permit processing period, after which the permit is 
approved if it has not been denied with reason.
    We would encourage research and development.
    We would also encourage having some help, Mr. Chairman, on 
transportation. Pipeline companies presently have no 
combination authority on Indian lands, and as such, we have 
trouble with right-of-ways both before and with----
    The Chairman. Thank you very much.
    Mr. Gallagher. I hear the buzzer. Thank you, Mr. Chairman. 
I appreciate the opportunity.
    [A prepared statement of Mr. Gallagher follows:]

            Prepared Statement of Bob Gallagher, President, 
                   New Mexico Oil and Gas Association

 INCREASING DOMESTIC NATURAL GAS SUPPLY AND INFRASTRUCTURE: AN INDIAN 
                             COUNTRY FOCUS

Executive Summary
    Over the last half century natural gas companies have built 
hundreds of miles of gas pipelines that transport New Mexico gas over 
the land of Indian Nations. This infrastructure has created numerous 
on-going, steady, high paying jobs for Indian people and has resulted 
in millions of dollars of tax and other revenue to state and local 
governmental entities. The success of the New Mexico natural gas 
industry is reliant upon the cost effective transportation of natural 
gas supplies across Indian Country.
    The financial position of today's natural gas companies serving New 
Mexico and transporting gas across Indian Country has changed 
dramatically due to rapidly growing competition in the western gas 
market and the ever increasing land costs associated with transporting 
gas across Indian land.
    Given the economic realities of the natural gas industry, the 
companies operating in and serving New Mexico are at a crossroads: 
either control cost of service, of which right-of-way costs are a 
component, or face the prospect of losing significant market share, 
threatening the viability of the companies, and thereby limiting the 
resources available for investment in New Mexico and Indian Country. 
The industry's preference is to work with the Indian Nations to develop 
an even stronger long-term natural gas infrastructure that balances the 
interests of industry, Indian Country and New Mexico. To achieve this 
objective, help is needed in controlling the exponential growth of 
right-of-way costs in Indian Country.
    The New Mexico Oil and Gas Association respectfully seeks your 
assistance in developing win-win investment strategies that build on 
the value of the current natural gas infrastructure and that multiply 
that value for the benefit of the natural gas industry and consumers in 
the West.

 STATEMENT OF DR. MARK D. MYERS, DIRECTOR, ALASKA DIVISION OF 
                  OIL AND GAS, STATE OF ALASKA

    Dr. Myers. Good afternoon, Mr. Chairman and members of the 
committee.
    On behalf of Governor Murkowski, I would like to thank you 
for the opportunity for the State of Alaska to address the 
critical issue of increasing domestic energy supply 
particularly for natural gas. I am presenting as a petroleum 
geologist and director of the State Division of Oil and Gas.
    Importantly, the State proposal is jointly sponsored by the 
administration and our legislature. Today I have Representative 
Ralph Samuels and Senator Gene Therriault with me. Both are key 
policy makers and subject matter experts on the issue of 
Alaska's natural gas potential and proposed pipeline projects.
    The proposal asks that natural gas pipeline projects have 
been designed to carry 4.5 to 5.6 billion cubic feet per day of 
gas to the North American market as early as 2012. At these 
rates, the proven reserves in the North Slope will last between 
16 and 23 years. The remaining gas for a 35-plus-year project 
will need to come from either conventionally yet-to-be-
discovered gas or unconventional gas that is proven in the 
ground but not proven yet to be commercial. In particular of 
that category is natural gas hydrates.
    The in-place gas hydrates from the North Slope and 
surrounding offshore areas is an astounding 32,000 trillion 
cubic feet, and importantly, about 100 trillion cubic feet of 
that in-place hydrate resource underlies the existing producing 
oil fields in the Prudhoe Bay area. If these hydrates can be 
produced economically, as initial research modeling suggests, 
it would have a huge, positive impact on efforts to bring large 
quantities of natural gas to the domestic market.
    To date, North Slope hydrate research has been funded under 
the Methane Hydrate Research and Development Act of 2000, which 
expires this year. This research has produced very encouraging 
results, including detailed mapping of existing well and 
seismic data and detailed reservoir modeling, along with 
computer simulation. However, in order to verify these models 
and convert this resource into reserves, these simulations must 
be verified by a long-term program.
    Our request is for $70 million over the next 5 years to 
perform this critically needed, long-term production tests and 
other important information gathering.
    In conclusion, successful long-term production and testing 
of Alaska's methane hydrate resource could dramatically 
increase our domestic reserves, could significantly reduce the 
reserve risk on the Alaska North Slope natural gas pipeline, 
lead to early expansion of that line to its maximum capacity, 
and that would benefit producers, explorers, the pipeline 
project, and the domestic market.
    Thank you very much, Mr. Chairman.
    [A prepared statement of Dr. Myers, Senator Therriault and 
Representative Samuels follows:]

 Prepared Statement of Dr. Mark D. Myers, Director, Alaska Division of 
   Oil and Gas; Senator Gene Therriault, Chair, Alaska Legislature, 
   Legislative budget and Audit Committee; and Representative Ralph 
 Samuels, Vice Chair, Alaska Legislature, Legislative Budget and Audit 
                               Committee
 State of Alaska Briefing Document on Proposal to Reauthorize Methane 
              Hydrate Research and Development Act of 2000

                           EXECUTIVE SUMMARY

    Currently, 59 bcfd of natural gas is consumed daily in the United 
States. The Energy Information Administration estimates that domestic 
demand for natural gas will increase to 77 bcfd by 2015, and to 84 bcfd 
by 2025. If the Alaska natural gas pipeline currently envisioned is 
built, the 35 tcf of known Alaska reserves could satisfy 4.5 bcfd of 
the total domestic demand for a period of two decades. Alaska's vast 
gas resources are estimated to also include 250 tcf of undiscovered 
conventional resources, 590 tcf of onshore (100 tcf within or near 
existing North Slope infrastructure), and more than 32,000 tcf of 
offshore gas hydrates, which could supply a much greater percentage of 
domestic demand for generations to come, particularly if two conditions 
are met: 1) gas hydrates can be commercialized; and 2) the rules for 
access to and expansion of an Alaska natural gas pipeline encourage 
competition in the exploration for and development of Alaska natural 
gas. The latter condition is currently the subject of rule-making by 
the Federal Energy Regulatory Commission. However, the former--
commercialization of gas hydrates--is at risk absent Congressional 
action in 2005. Congressional action is needed to reauthorize Pub. L. 
106-193, 114 Stat. 234 (2000), the Methane Hydrate Research and 
Development Act, and to fund research and field testing under that Act. 
It is proposed that the Act be reauthorized for a period of five years, 
with appropriations of no less than $10 million/year in years 1-3 and 
$20 million/year in years 4-5.
    The large quantity of hydrates that underlie the existing Kuparuk 
River, Milne Point, and Prudhoe Bay Fields could in itself remove all 
potential reserve risk from year 20-35 and beyond for an Alaska natural 
gas pipeline producing at 4.5 bcfd. Reducing reserve risk will have a 
positive effect on project financing and potentially result in a lower 
tariff, which in turn could lead to increased exploration and early 
expansion of the pipeline.

                              INTRODUCTION

    Sharply rising U.S. consumption of natural gas coupled with 
increasing worldwide gas demand intensify the need to find additional 
sources of natural gas. An increasingly global LNG market is developing 
based on these growing international energy demands, and upon the 
enormous natural gas reserves in the Middle East and other areas of the 
world. Reliance on these supplies worsens the U.S. trade deficit, 
places the U.S. natural gas market increasingly in direct competition 
with other regional natural gas markets (many of which are 
mushrooming), exacerbates public environmental and security concerns 
with proposed tanker traffic and plant sitings, and increases U.S. 
reliance on foreign sources for energy supplies.
    Undeveloped Alaska natural gas resources, both conventional and 
unconventional, are capable of delivering a vitally important share of 
U.S. gas needs. The recent rise in energy costs to what many consider 
to be a new long-term level has led to negotiations for building an 
Alaska North Slope (ANS) natural gas pipeline to ship these domestic 
supplies to distribution hubs serving the lower 48 states. The 
currently envisioned pipeline would deliver 35 tcf of proven Alaskan 
gas reserves from existing oil fields at a rate of 4.5 bcfd for more 
than two decades, supplying about 6% of the 77 bcfd of U.S. demand 
forecast by the EIA for 2015.
    Furthermore, numerous assessments recognize that the total North 
Slope gas resource far exceeds just these proven reserves. Mean 
estimates by USGS, MMS, and the State of Alaska place at least 242 tcf 
of undiscovered, technically recoverable conventional gas under federal 
onshore and offshore areas (Table 1, AK Division of Oil and Gas, 2005) 
plus 590 tcf in-place of gas hydrates onshore in permafrost areas, and 
more than 32,000 tcf in-place of gas hydrates offshore in the Beaufort 
Sea (Sherwood and Craig, 2001 after Collett, 1995). Alaska's total gas 
hydrate endowment, including the surrounding federal waters, is 
estimated at over 169,000 tcf of in-place gas hydrate (Sherwood and 
Craig, 2001 after Collett, 1995). USGS assessments estimate 40 to 100 
tcf of gas in-place in shallow permafrost-associated gas hydrate 
reservoirs in the infrastructure-served central ANS onshore area alone 
(Figure 1). The Alaska North Slope is one of the most promising places 
in North America to determine the resource potential of gas hydrates 
because of existing infrastructure, which will prove vital in 
supporting the emerging technologies required (Johnson, 2003).
    Given that all reasonable estimates of the total ANS gas resource 
are much larger than the 35 tcf basis for the currently envisioned 
Alaska to Lower 48 gas pipeline, including the vast potential in the 
form of methane hydrates, it is essential that the federal government 
take steps to ensure that two conditions be fulfilled: 1) current 
progress in gas hydrate research and development must continue at full 
momentum to determine as quickly as possible whether these resources 
are commercially viable, and 2) the rules for access to and expansion 
of an Alaska North Slope gas pipeline must encourage industry 
competition to develop much needed additional gas, both from potential 
gas hydrate reservoirs and from revitalized exploration for 
conventional gas reserves. The Federal Energy Regulatory Commission is 
aware of the second condition, and is actively working to establish 
rules that will safeguard its ability to require capacity expansion as 
new reserves become available.
    The economic return and risk associated with building the ANS gas 
pipeline depends largely on its useful lifespan, a function of both 
available reserves and pipeline capacity. Table 2 summarizes the 
relationship between project lifespan and reserves for two capacity 
scenarios, the 4.5 bcfd base case and a 5.6 bcfd expansion case, 
respectively. In the base case, project life increases from about 2 
decades to more than 3\1/2\ decades when the available reserves 
increase from the 30-35 tcf of known conventional gas associated with 
current oil fields to 60 tcf due to the discovery of new conventional 
reserves or commercialization of hydrates in place beneath existing 
infrastructure.
    The remainder of this proposal addresses meeting the former 
condition--federal funding in support of gas hydrate resource 
commercialization.

                      CALL FOR LEGISLATIVE ACTION

    The Methane Hydrate Research and Development Act of 2000 (Public 
Law 103-193, 114 Stat. 234) was created to determine whether or not gas 
hydrates could become a significant source of natural gas in the 
future. Because this Act expires at the end of the 2005 fiscal year, 
immediate congressional action is needed to replace it. Governor 
Murkowski's proposal urges new legislation to cover the five year 
period 2006-2010, with total appropriations of no less than $70 
million. Beginning with annual funding of $10 million to continue and 
expand ongoing research in 2006-2008, appropriations would increase to 
$20 million annually in 2009-2010 as the emphasis shifts from 
laboratory research and computer simulations to field testing and 
development pilot projects.
    As stated in the proposal, the goals of the reauthorization and 
appropriations are threefold: 1) determine conclusively whether major 
gas hydrate accumulations can become a commercially producible 
resource, 2) grow the body of publicly available data, knowledge, and 
technology relevant to detailed resource assessment, exploration, and 
production of gas hydrates, and 3) fund a field testing program at a 
level adequate to remove commercial hurdles that would impede or 
prevent private industry from pursuing gas hydrate pilot projects. 
Specific steps will enable achieving each of these objectives and a 
careful review of the previous legislation may be required to ensure 
language in the reauthorization that is consistent with this 
legislative intent.

                   CONCEPTUAL STEPS AND JUSTIFICATION

    The suggestions that follow are not intended to replace careful 
planning by those managing gas hydrate research and development 
programs and should not be used in constructing legislative language 
without broad support of those program managers. At this point, we 
recommend using language in the reauthorization that will ensure clear 
legislative intent without specifying detailed procedures for reaching 
these goals. In the broadest sense, activities fall into two 
categories: 1) developing improved assessments of both the total 
resource potential associated with gas hydrates and the volume of 
hydrate-related gas likely to become commercial over time given that 
pipeline capacity exists to ship it to market, and 2) developing gas 
hydrate production technologies, including field tests to prove up and 
compare alternative techniques. Both goals should be pursued beginning 
in year 1 with expanded desktop research and maintaining current 
research programs, leading to a greater emphasis on testing operations 
in years 4 and 5. Participation in ``wells of opportunity'' (i.e., 
industry wells targeting deeper horizons providing opportunity for data 
acquisition during penetration of shallow gas hydrate-bearing horizons) 
during years 1 through 4 merits federal funding to share or offset the 
costs of reservoir evaluation.

Continue technical and commercial assessments of onshore North Slope 
        sub permafrost gas hydrates and their associated free gas 
        resources
    Ongoing office, laboratory, and field research projects will feed 
directly into activities under a renewed gas hydrates act. The most 
successful research is likely to come from collaborative 
interdisciplinary teams of geologists, geophysicists, reservoir 
engineers, petroleum engineers, and commercial analysts representing a 
cross section of federal and state resource management agencies, 
industry, consultants, and universities. As stated in the proposal, the 
Alaska Department of Natural Resources, Division of Oil and Gas is also 
discussing with the Alaska State Legislature obtaining funding for an 
additional geologist dedicated to gas hydrate issues. This would 
facilitate the pairing of state and federal expertise and data sets, 
allowing for faster and more accurate collaborative resource 
assessments. In order for this structure to be effective, early 
administrative attention will be required from the participating 
organizations to establish the ground rules and data confidentiality 
requirements. Some of these ground rules and requirements which must be 
agreed upon early are likely to include issues such as the extent of 
data sharing, assessment methodologies, conditions for using 
proprietary data in making public resource interpretations, and 
specific data types and interpretive results that can be released to 
the public and/or shared with participating industry to support the 
conclusions.
    Once these resource evaluation and development planning teams are 
in place, they should be authorized to integrate and expand upon 
current regional-level assessments of in-place permafrost-related gas 
hydrate and associated free gas resources. Some of these current 
assessments include the collaborative efforts underway involving the 
BLM, USGS, and State of Alaska. Future assessments funded by this 
legislation should expand upon this coordination, using consistent 
methodologies across federal and state lands of North Alaska. 
Assessment provinces should include the known hydrates in and near 
existing infrastructure on state lands of the central North Slope 
Colville-to-Canning corridor as well as more remote areas. The first 
remote provinces to be assessed should include state-lands foothills, 
the NPRA in the west, and the ANWR 1002 area in the east.
    The proliferation of 3D seismic data across large areas of the 
North Slope over the last decade provides these research teams the 
opportunity to create much more reliable assessments than has ever been 
possible before. Access to these privately-acquired seismic surveys is 
restricted, but includes the state or federal agency that manages the 
lands in question. By assigning appropriate technical personnel in 
accordance with their agency's data access privileges, the research 
teams should be able to obtain, use, and integrate all available 3D 
seismic data coverage to develop a comprehensive portfolio of specific 
gas hydrate and associated free gas prospects. In some cases, it may be 
appropriate to license new or existing seismic surveys for assessment 
work, or even purchase the rights to release certain seismic data to 
the public. The portfolio should quantify the geologic risk profile and 
probabilistic distribution of in-place resource for each prospect using 
a standard petroleum systems approach. This work has been pioneered 
with tremendous success in the Milne Point Unit through the BPXA--DOE 
cooperative research study (e.g., Inks and others, 2004), where it is 
the basis for highly detailed gas hydrate resource estimates and 
production profile modeling.
    Dedicated logging and/or coring of gas hydrate and sub-hydrate free 
gas intervals in several key wells per year should be considered 
beginning in year 1. The additional data obtained will improve 
assessments of hydrate resource beneath existing infrastructure. Office 
and laboratory studies should continue into years 4 and 5, when they 
will begin to benefit from incorporation of the results of more field-
based production testing. Subsequent iterations of reservoir 
performance models will thus be better calibrated and will more 
reliably forecast production rates and ultimate recovery of untested 
gas hydrate reservoirs. Better production forecasting will mean better 
ability to convert assessments of in-place resource to estimates of 
technically and economically recoverable gas reserves. Ultimately, the 
research will develop regional depletion plans and realistic potential 
development programs using reserves and rate profiles to assess 
regional development economics. The work will extrapolate reservoir 
models into regionally verified resource potential, construct 
production rate profiles within a range of expectations, and calculate 
potential regional gas reserves.
    A final step in the office-based research process will be to 
develop commercial filters to apply to in-place or technically 
recoverable assessment figures to screen out resources located in 
accumulations too small to develop profitably. Estimates of the 
magnitude of reserves that may eventually be shipped would be far more 
useful than the technically recoverable reserves figures so often cited 
in resource assessments.

Design and conduct field production tests and pilot development of 
        North Slope hydrates to assess viability of producing free gas 
        and associated methane hydrate by depressurization of the free 
        gas leg
    The dearth of factual production data is one of the most critical 
gaps in commercializing much needed gas hydrate resources. Many in 
private industry acknowledge the enormous scale of the in-place 
resource, but without proven production potential, are unwilling to 
risk large-scale investments in testing and developing these 
reservoirs. Given the gas supply shortage facing the nation and the 
likelihood that construction of a gas pipeline will begin in the near 
future, the national interest is best served by funding public projects 
to close the gap in collaboration with, but without relying exclusively 
upon industry.
    Beginning in year 1, and working in parallel with the assessment 
teams, engineers and geologists will be tasked with designing testing 
operations to begin during year 2 and continuing with the increased 
funding in subsequent years. Research to date has identified gas 
hydrate accumulations within the footprint of existing North Slope 
infrastructure that include a gas hydrate cap in communication with an 
underlying free gas column (Figures 2 and 3) as viable candidates for 
initial production testing. Accumulations of this description have been 
termed Type 1 hydrates (Moridis and Collett, 2003). Conventional 
completion and production of the free gas column eventually lowers 
reservoir pressure below the stability limit of the overlying gas 
hydrate zone, causing it to dissociate and release additional free gas 
across a broad regional contact. Because hydrates store 164 to 180 
times as much methane as the same volume of free gas, their 
dissociation contributes large volumes of producible gas. The 
Messoyakha gas field in the West Siberian Basin is often cited as a 
producing example of a permafrost-associated gas hydrate accumulation, 
due to the difference between expected and actual declines in both 
reservoir pressure and production rate.
    Feasibility studies carried out under a cooperative project between 
BP Exploration (Alaska) and the DOE (Howe and others, 2004) have 
adapted commercially available reservoir simulation software to model 
schematic and actual hydrate-bearing reservoirs, with more detailed 
versions in progress (Figure 3).
    The following discussion provides an overview of the current 
understanding in some of the more significant modeling. Cases 1-3 of 
Figure 4 depict simulated production profiles of a Type 1 gas hydrate 
representing 15 years of production from the same 300 mD permeability 
reservoir, but with variations in the type and number of producing 
wells. The initial plateau flow rates of these three cases are 
operationally constrained at levels ranging from 25 to 50 million cubic 
feet per day (mmcfd) per well. A 50 mmcfd plateau rate can be 
maintained significantly longer using a single horizontal producer than 
with two vertical producers constrained to 25 mmcfd each. After 15 
years, the simulated total flow rates are nearly the same at about 18 
mmcfd, regardless of whether one, two, or three producers are involved. 
Additional models indicate that after the steep decline that initially 
follows the plateau, the very slow decline rate of later years is due 
to steady supply of free gas from hydrate dissociation (Figure 5). This 
modeling is highly encouraging, but requires validation by field 
testing.
    Details of design activities would be determined by the actual 
team, but a logical workflow would presumably begin with selection of 
candidate prospects for field testing within areas supported by 
existing North Slope infrastructure. Potential locations are already 
available in the Milne Point Unit where collaborative studies have 
integrated well data and 3D seismic data to quantify both Type 1 and 
Type 2 (hydrate only) prospects.
    Numerous questions will be addressed at the outset of the design 
phase, including whether to drill a dedicated research well or share 
one intended for deeper production. Decisions will be required 
regarding optimal borehole angle, the duration of test production, and 
facility limitations. Depending on the type of wellbore selected for 
the testing and pilot program, drilling or work-over and completion 
operations will be necessary to expose the production zone in the free 
gas leg. This stage, including formation evaluation, should be complete 
within the first month, followed by an initial well testing phase that 
may last several weeks or months.
    At this point, it is recommended that the well be placed on long-
term production test for meaningful comparison to modeled production 
profiles. Depending on free gas volumetrics, the difference between 
original reservoir pressure and the hydrate stability limit, and 
operational constraints on the test producer's plateau flow rate, a 
pilot production plan lasting more than two years may be required to 
monitor the effects of depressurization and consequent hydrate 
dissociation. Because long term production testing may yield 
substantial quantities of methane, it will be advantageous to plan for 
local use of the gas. Possibilities include fuel for testing operations 
or field utilities, or reinjection for pressure maintenance of other 
reservoirs.

Design and conduct field production tests and pilot development of 
        North Slope hydrates to assess viability of producing directly 
        from hydrates without free gas depressurization
    A second test should be designed to assess the viability of 
producing directly from hydrates that have no free gas leg available 
for conventional completion and depressurization. A major share of 
potential ANS gas hydrate resources appear to be trapped within these 
hydrate-only areas. Potentially, such a test could be conducted in the 
hydrate cap of a Type 1 reservoir, in Type 2 hydrates, which are 
accompanied by an underlying zone of movable water in the reservoir, or 
in Type 3 hydrates, which fill the entire formation (Moridis and 
Collett, 2003). The project team will face many of the same decisions 
as for the free gas/hydrate dissociation test, including site 
selection, type of wellbore, and duration.
    The critical difference between this and a free gas production test 
is that steps must be taken to prevent further cooling of the reservoir 
around the producer that would lead to reformation of the hydrates and 
shut off the flow of gas. The three ways of dissociating the hydrate 
structure to release gas are by lowering pressure, increasing 
temperature, or altering reservoir chemistry. However, dissociation is 
an endothermic (heat consuming) reaction that lowers the temperature of 
the surrounding formation. So, while it may be possible initially to 
liberate some free gas simply by lowering reservoir pressure adjacent 
to the well bore, it can freeze solid again unless heat and/or chemical 
inhibitors are added to the formation. The optimum test for producing 
directly from hydrates would provide the capability of experimenting 
with and comparing various thermal and chemical stimulation 
technologies. Several processes have been proposed that warrant 
consideration in the design phase:

   thermal stimulation with steam huff and puff
   thermal stimulation by closed-system circulation of warm 
        water from the surface (either artificially heated on-site or 
        still-warm formation water separated out of production stream 
        from deeper reservoir)
   thermal stimulation by closed-system circulation of hot 
        waters brought directly to the reservoir from a deeper aquifer 
        zone in the same well
   thermal stimulation by in-situ catalytic combustion, 
        electromagnetic, or microwave sources
   inhibitor injection (e.g., methanol)
   Carbon dioxide replacement of methane in hydrate structure 
        (McGrail and others, 2004). If this process becomes viable, it 
        may provide synergistic carbon sequestration benefits, in 
        addition to liberating methane.

    It will be up to the test design team to identify and select the 
most promising of these methods for direct field comparison.

           HYPOTHETICAL R&D ACTIVITY AND EXPENDITURE TIMELINE

    Table 3 represents a broad framework for executing the suggestions 
outlined above. This legislative proposal is submitted in recognition 
of the need for funding rapid and material advances toward unlocking 
the potential of our gas hydrate resources. Details of research and 
development tasks and the proposed expenditure timeline are subject to 
revision by project teams.

                             RECOMMENDATION

    An urgent need exists for the reauthorization of federal 
legislation appropriating funds to support gas hydrate research and 
development. In the face of escalating demand and uncertain supply from 
overseas imports, it is critical that the United States increase 
domestic supply and diversify its sources of natural gas to include the 
development of unconventional resources. Known gas hydrates overlying 
the already-developed oil fields of Alaska's North Slope afford a 
unique opportunity to meet both objectives provided they can be 
produced and brought to market economically. The need to better 
understand hydrate commerciality is all the more pressing given the 
inter-relationship to planning for the construction, operation, and 
regulation of an Alaska gas pipeline. The steps suggested here are 
offered as a conceptual basis for more detailed planning that will be 
needed to realize the intended goals of the proposed legislation.
    [Figures 1-5, tables 1-3, and references have been retained in 
committee files.]

    The Chairman. Thank you very much.
    Dave.

    STATEMENT OF DAVE HOUSEKNECHT, RESEARCH GEOLOGIST, U.S. 
                       GEOLOGICAL SURVEY

    Mr. Houseknecht. Thank you, Mr. Chairman, members of the 
committee.
    My name is Dave Houseknecht. I am a research geologist with 
the U.S. Geological Survey. As you know, we do assessments of 
undiscovered oil and natural gas which provides estimates of 
the quantity, quality, and location of undiscovered gas 
resources nationwide. I am here primarily as a resource for 
answering questions.
    I will just summarize by saying that the USGS estimates 
that onshore and beneath State waters of the United States, 
there are about 600 trillion cubic feet of natural gas 
undiscovered, roughly half of that conventional and the other 
half in tight gas sands, shale gas, and coalbed gas.
    Our colleagues from the Minerals Management Service do 
similar assessments of the OCS and they estimate an additional 
400 trillion cubic feet offshore.
    So we would stand ready to answer any questions you might 
have about the natural gas resource base nationwide. Thank you, 
sir.
    The Chairman. Thank you.
    Proceed, please.

       STATEMENT OF WALTER CRUICKSHANK, DEPUTY DIRECTOR, 
                  MINERALS MANAGEMENT SERVICE

    Mr. Cruickshank. I am Walter Cruickshank with the Minerals 
Management Service. Our role here is also to be a resource to 
help answer questions. I do not have a prepared statement. MMS 
is responsible for oversight of offshore oil and gas 
activities, and I would be happy to answer any questions that 
anyone may have.
    The Chairman. Very good.

  STATEMENT OF THOMAS LONNIE, ASSISTANT DIRECTOR FOR MINERALS 
  REALTY AND RESOURCE PROTECTION, BUREAU OF LAND MANAGEMENT, 
                   DEPARTMENT OF THE INTERIOR

    Mr. Lonnie. Good afternoon, Mr. Chairman. My name is Tom 
Lonnie. I am with the Bureau of Land Management. I am the 
Assistant Director for Minerals Realty and Resource Protection 
here in Washington. I do not have a prepared statement. The 
Bureau of Land Management, as you well know, issues leases 
onshore, as well as issues drilling permits and monitors oil 
and gas production. But I am here also, as Walter, to try and 
respond to any questions that you may have. Thank you.
    The Chairman. Thank you very much.
    Now, we are a little behind. My staff is kind of suggesting 
that we not have the discussion that we planned, but I am going 
to have a discussion anyway. That means we are probably going 
to be a little late at the end. Instead of finishing on time, 
we might finish 15 or 20 minutes late, but I think there are 
too many things people would like clarify.
    So let us go with Senator Bingaman. Do you have anything 
you want to move with? Any of you who are prompted by a 
question to tell us something else, just put up your hand and 
we will let you.
    Senator Bingaman. Thank you very much, Mr. Chairman. Let me 
just ask a question of Mr. Barlow.
    In New Mexico, the Oil and Gas Association has adopted what 
they entitle their ``good neighbor initiatives'' which are a 
series of positions that all 300 of their companies are 
agreeing to try to comply with. I did not know if you had had a 
chance to look at that, and if you had any reaction to whether 
that solves some of the potential conflict problems that you 
were discussing in your testimony.
    Mr. Barlow. Thank you, Senator, for the opportunity.
    I have not looked, point by point, through their proposal. 
Wyoming had a similar type, conflict resolution type of 
approach that was taken, and it was maybe not quite as point-
by-point as that.
    That is great that they are acknowledging there is an 
issue, and if there is acknowledgement there is an issue, then 
there ought to be a process or an effort to resolve those 
issues beyond the handshake across the fence. I have neighbors 
all around me, and I can assure you some of my neighbors take 
care of the fence better than others. Some do not take care of 
it all, and some I do not take care of it next to them. So when 
it is a good neighbor policy, that is fine if you are a good 
neighbor and if you are dealing with good neighbors. But we 
have to go beyond that I think we have to go to a place where 
we not only have good neighborly attitudes, but we have real 
responsibilities to follow through.
    Senator Bingaman. Mr. Chairman, I have one other question I 
was going to ask Mr. Cruickshank. The figure of 400 tcf was 
mentioned, I think, offshore. Is that your estimate?
    Mr. Cruickshank. Yes. It is about 400 trillion cubic feet.
    Senator Bingaman. Where do you estimate that is? Can you 
tell us how much of it is in the Gulf and where in the Gulf, 
how much of it is on the east coast or the west coast, or do 
you not know?
    Mr. Cruickshank. Yes. I can give you our mean estimates for 
each of those regions. In the Gulf of Mexico, about 232 
trillion cubic feet of natural gas, most of that in the central 
and western Gulf, about 32 trillion cubic feet in the eastern 
Gulf of Mexico. In the Atlantic, we have about 33 trillion 
cubic feet of undiscovered natural gas. In the Pacific, about 
18, and in Alaska, about 122 trillion cubic feet of 
undiscovered natural gas.
    Senator Bingaman. Thank you.
    The Chairman. Let us see. We have got time for a couple 
more Senators before I get a chance. Anybody on our side? Yes, 
Senator Murkowski.
    Senator Murkowski. I am following up on a question from 
Senator Bingaman. Mr. Myers, you had indicated that we have got 
the potential in Alaska for some 32,000 tcf overall. Now, Mr. 
Cruickshank, you have just indicated the breakdown offshore is 
about 400 tcf; onshore, 600 tcf. Are Alaska's numbers included 
in what Minerals Management is including? I understand that 
this is all undiscovered at this point in time, and one of the 
purposes of this hearing is to find out what the potential is 
and how we can access it. But I am confused with the numbers. 
If you can help me out.
    Dr. Myers. Senator Murkowski, we are looking kind of at two 
different things. The 32,000 is unconventional resources 
related to hydrates. On a conventional scale, we would concur 
with the Minerals Management Service offshore. If we look at 
the North Slope onshore and offshore areas, we come up with 
about 250 trillion cubic feet under mean undiscovered, 
technically recoverable estimates. That is for conventional 
gas. For unconventional gas, the numbers are much larger. Of 
course you have to demonstrate commerciality with the 
production techniques. So certainly in Alaska we believe we 
have as much potential onshore as we do offshore.
    David Houseknecht is also an expert in that subject matter.
    Senator Murkowski. Thanks for clearing that up. Thank you.
    The Chairman. Thank you, Senator.
    Senator Thomas from Wyoming.
    Senator Thomas. Thank you, Mr. Chairman.
    Let me ask the gentleman, Dr. Myers. In this pipeline, 
would it be subsidized to the extent that it would be 
noncompetitive with the continental producers?
    Dr. Myers. Senator Thomas, we have looked extensively at 
the domestic market, and of course, there have been studies 
that show an Alaska gas, coming in at 4.5 to 5.6, is basically 
needed in baseline gas to North America. We believe that we 
will use largely existing, available pipeline capacity, and 
therefore it will not have a material price effect on the 
market. Some folks have modeled maybe a 50 cent reduction in 
cost for a short period of time, followed by market 
equilibrium. So Alaska gas has to be competitive in the market 
at the prices, and our analysis shows that it can be.
    Senator Thomas. It would be a little unfair if these people 
paid to get you to come in at below the market price. That is 
my point.
    The BLM. Could you say briefly why do we have as much 
confusion as we have about the length of time to issue permits?
    Mr. Lonnie. Processing drilling permits is related to are 
we getting complete applications, compliance with the National 
Environmental Policy Act, Cultural Resources Act, Endangered 
Species Act. We have got to go through all of those steps 
associated with processing a drilling permit and then apply 
conditions of approval and stipulations. Sometimes permits are 
not submitted completely. We have got to go back to operators 
and request additional information in the application. So that 
does add to the confusion as to what is the real length of time 
it takes to process a permit because sometimes the day it comes 
in the door, it is not complete. Other times it is and we wind 
up getting it appealed or protested prior to its completion.
    Senator Thomas. Some people think it might be useful if BLM 
thought a little more about how to make it work more quickly 
rather than simply explaining why it is.
    Mr. Lonnie. We have tried to develop and we have developed 
procedures over the last 2 years associated with expediting 
cultural resources clearances. We are working with the SHPO's 
office in your State of Wyoming, Senator, in terms of how we 
can more quickly process applications. In addition, we have 
established workshops to train the cultural resource 
consultants.
    Senator Thomas. The Powder River thing in Buffalo has made 
some progress. I hope you can apply that to other locations. 
Thank you.
    Mr. Lonnie. Thank you.
    The Chairman. Before I yield, I want to just ask one of the 
land managers. You speak of part of the process being impact 
statements or impact assessments. I understand those are done 
on a well-by-well basis. Is it for a well?
    Mr. Lonnie. It depends on the situation. We also do full-
field development type permits, and as Senator Thomas has just 
mentioned, in Buffalo, as an example, we review what we call 
POD's, plans of development, which could include up to 60 or 70 
individual applications for drilling permits. In other areas 
where we have got a wild cat well, we may only process one 
application at a time and do NEPA analysis.
    The Chairman. I would just ask, is there anything we should 
do to encourage the inclusion of more than one well in an 
application? Is there anything inhibiting that that we have on 
the books?
    Mr. Lonnie. No. As a matter of fact, we do encourage 
operators, once they know what their drilling plan is, to 
submit an application for full-field development so we can 
review the entire package at once and take into account 
cumulative impacts so we do not have to go back and reanalyze.
    The Chairman. My second question has to do with any of the 
three of you. You all give assessments or evaluations of what 
exists in a certain field, in a certain area, offshore or the 
like. With modern technology being what it is, are you coming 
close to what the private sector comes out with in terms of 
reserves? Do you exchange information? You tell us this has got 
this much reserves, and the companies come in and develop it. 
Do you end up being pretty close?
    Mr. Houseknecht. Mr. Chairman, the information available 
from industry tends to be of a proprietary nature, and so they 
are hesitant to share with us. However, history has shown that 
because industry lives on a different part of the probability 
curve than the Federal Government, they are willing to look at 
the up-side potential when considering an area for exploration, 
whereas we tend to deal with the median or mean, the expected 
outcome. So in many cases, industry has a more robust 
perspective of an unexplored area than we tend to have.
    Thank you.
    Mr. Cruickshank. If I may add to that answer. For offshore, 
we do have access to all of the raw exploration data that is 
generated under any of our permits. So we are able to see that 
data and make our own assessment of the amount of resources.
    The Chairman. Senator Bingaman.
    Senator Bingaman. I just wanted to ask the gentleman from 
BLM. The figures I got were that in 2003 BLM issued about 3,600 
well drilling permits, and that that number was 6,100 in 2004, 
which is a very substantial increase. Are those reasonably 
accurate figures, or do you have different figures to give us?
    Mr. Lonnie. Those are reasonably accurate, and if you 
include Indian, those figures increase slightly but 
consistently across both 2003 and 2004. We actually approved 
approximately 6,400 permits in 2004 and about 3,600 permits in 
2003.
    The Chairman. Senator Bingaman, I think that is a good 
question, but also, if we had time, we should explore--and 
maybe we will by questions--what were the policies in 2003 
versus 2004. It could very well be that there were very 
different policies which would have caused that to appear to be 
much bigger than it is. But we are not going to do that now.
    Please, Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Mr. Cruickshank, maybe you know the answer to this. We 
often compare supplies of energy because if there is more of 
one kind, maybe the price of natural gas comes down.
    Taking an offshore rig, how much gas does it produce? How 
many plants would a typical offshore rig produce? What 
megawatt? Give me a range of about how many gas plants. How 
many gas plants would one rig supply?
    Mr. Cruickshank. Senator, I cannot, off the top of my head, 
convert to megawatts, but the amount of gas a single rig can 
produce really depends on the resource.
    Senator Alexander. Maybe someone can perhaps. If there is a 
rig in the Gulf of Mexico, will it operate three gas plants at 
400 megawatts or 20 or 15 or 10 or 1? Does anyone know?
    Mr. Cruickshank. It can be producing anywhere a few hundred 
thousand cubic feet a day to over 100,000 cubic feet a day. So 
there is an incredible range.
    Senator Alexander. Let me ask it another way then. Can you 
give me a basis for a comparison? I believe the rig the 
chairman visited might be 50 miles offshore, very difficult to 
see. Can anyone give me any comparison basis for how many wind 
turbines it would take, spread across the ocean, to equal one 
gas rig that no one could see? Does anyone have an example of 
that?
    Mr. Kuuskraa. I could just take a quick stab, Senator, to 
tell you we had a 500-megawatt power plant, which might be 
equal to 500 1-megawatt windmills. One rig producing about 150 
million cubic feet a day, which would be kind of average, would 
be equal to that.
    Senator Alexander. It would about a 500-megawatt.
    Mr. Kuuskraa. 500 megawatts, which could be 500 1-megawatt 
windmills.
    Senator Alexander. Are the wind turbines typically 1 
megawatt?
    Mr. Kuuskraa. The new large ones are. The older ones were 
smaller, Senator.
    Senator Alexander. And how tall are these wind turbines?
    Senator Craig. 320 feet tip to tip on the blade.
    [Laughter.]
    Senator Alexander. I just wanted to get a visual picture of 
that, for those who worry about being able to see a gas rig. It 
might take 500 320-foot wind turbines in the ocean to equal 
that.
    Mr. Kuuskraa. That is correct, Senator.
    The Chairman. I think you wanted one, Senator. Senator 
Craig.
    Senator Craig. Of our known reserves of gas--and I do not 
know who to ask this to, and I apologize for coming late--and 
while we have attempted to expedite access--my colleague from 
New Mexico referenced that word at least three times. How much 
of the known reserves do we have that under any circumstance 
are still inaccessible, that would take an act of Congress or a 
direct change of policy to gain access to, of the figures that 
you all have given us?
    The Chairman. That is a good point.
    Senator Craig. Do we have that? We can stack up a lot of 
figures. How much of it is accessible at today's costs? More 
importantly, how much of it is not at all accessible still?
    Mr. Cruickshank. Speaking for offshore, of the 400 or so 
trillion cubic feet of undiscovered, technically recoverable 
resource, a little over 80 trillion cubic feet of that is 
currently subject to presidential withdrawal or congressional 
moratoria.
    The Chairman. How much?
    Mr. Cruickshank. Over 80 trillion cubic feet.
    The Chairman. Out of how many?
    Mr. Cruickshank. Out of 400.
    The Chairman. So the 320 is available within current 
allowable?
    Mr. Cruickshank. In the central and western Gulf of Mexico 
and Alaska. That is correct.
    The Chairman. Are they offshore that we are now talking 
about?
    Mr. Cruickshank. This is offshore.
    Senator Craig. What about onshore?
    Mr. Lonnie. I do not have a figure for onshore. The EPCA 
study indicated that at least in the Rocky Mountain area, 
approximately 85 to 88 percent of the resource is available. 
Now, what the total figure is I do not have that now, Senator, 
but I can get that for you.
    Mr. Kalisch. Senator, when it comes to some of the 
restricted natural gas, the potential, the resources, the 
latest numbers from MMS, I believe that came out in December, 
there are about 50 tcf off the east coast, 38 off the west 
coast, and 40 in the eastern Gulf of Mexico where moratoria are 
in place.
    Mr. Gallagher. Senator, Mr. Chairman, I think in the 
Mountain West, I think it is a fair statement to say between 55 
and 60 percent of the known reserves of natural gas are under 
some sort of moratorium, stipulation, or restrictions and would 
have to take action by the land use agencies or Congress in 
order to free that up.
    Senator Craig. And the following thought is if they are 
under those conditions now, nobody is considering exploration 
there or permit to explore.
    Mr. Gallagher. That is correct, Senator.
    Senator Craig. Thank you. Thank you, Mr. Chairman.
    The Chairman. On offshore, I just want to ask one question 
and make one point. Do any of you have information on this? Are 
there any other developed countries that restrict the 
development of their offshore resources to the extent that the 
United States does? Does anybody know?
    Mr. Kalisch. I am unaware of that, and that includes 
Canada.
    The Chairman. Please?
    Mr. Kalisch. No other country that I am aware of, and that 
includes Canada which is drilling off their coast just north of 
our borders.
    Mr. Cruickshank. Senator, Canada does have a moratorium on 
their west coast but not on the east coast.
    The Chairman. And are you aware of other countries that 
have offshore capabilities that have limitations as strict as 
the United States?
    Mr. Cruickshank. Beyond that, I do not think any country 
has anything as broad based.
    Mr. Kuuskraa. Senator, we do work overseas and we do not 
see the kind of restrictions, and even on the west coast of 
Canada, British Columbia is looking to lift their restrictions.
    The Chairman. I have just one last question. I think there 
was a discussion of this new approach to offshore drilling that 
would involve the States sharing in the resource more and 
deciding more. Did you give us that discussion, Bert?
    Mr. Kalisch. Yes.
    The Chairman. Let me ask you a question about that. That is 
just a proposal at this point. Right?
    Mr. Kalisch. Correct. It is just a proposal that APGA has 
become aware of and we are supportive of.
    The Chairman. Has it been discussed with Governors or State 
authorities, to your knowledge?
    Mr. Kalisch. To my knowledge, yes, it has, and there seems 
to be a groundswell of support, especially along the coastal 
States in the Gulf of Mexico where right now the States have 
all of the mineral rights out to 3 miles and then they share in 
just 27 percent of the mineral rights out to 6 miles, and then 
it is 0 beyond that. Under this proposal, all the way out to 12 
miles--well, beyond the 3 miles, they would share 50 percent of 
the revenue. This proposal actually has an impact sharing for 
the coastal States and for the adjacent coastal States, and the 
money is shared also with the local governments that are 
impacted in those local States.
    The Chairman. Let me ask Eric one. You talk about 
essentially the surface owners who are concerned about a 
failure to recognize their surface rights as we develop. If I 
understand, that is one of the concerns you have.
    Mr. Barlow. It is certainly a component of concern I would 
have, yes, sir.
    The Chairman. Obviously, that gets more severe as more 
drilling occurs. Right? Because there are more roads. You 
talked about the abuses. Can I ask you from your side, from the 
surface rights owners, do you sense that there is a willingness 
to recognize that the resource has got to be used on the part 
of the surface owners and that some accommodation has to be 
made on their part too? Or are the drillers the ones that have 
to solve this by themselves? I understand some landowners have 
changed their views dramatically since the prices have gone up 
in the last 5 or 6 years.
    Mr. Barlow. Thank you for the opportunity to respond to 
that.
    I think that the word you use ``accommodation'' is very 
important. There is no way to take someone else's right without 
them feeling damaged in some way. The situation now is we 
basically have a supremacy or a majority and a minority in this 
in the way mineral rights on surface--I do not know anything 
about offshore, but on the land--are handled. Actually Senator, 
my family owns mineral rights. We have chosen not to lease our 
mineral rights for development because we feel so strongly that 
it is being done in a manner that is not respectful to the 
other resources, including our land, but also the water, et 
cetera.
    So I believe there are companies out there and there are 
landowners out there that come to mutual understanding and come 
to maybe some kind of an accommodation, but there are also 
companies--I can tell you the court date is coming up in the 
next 2 months where my neighbors are going to court trying to 
come to some understanding with the producers that there is not 
an understanding.
    The Chairman. Senator, you wanted to say something.
    Senator Thomas. These are actually comments.
    I should not do this in a gas meeting I suppose. I think we 
have to make some priorities, and in terms of use of resources, 
a lot of them probably ought to be made differently. All the 
electric plants that have been built in the last 15 years have 
been gas-fired, where coal is the resource that is most 
available. I think we need to make some distinctions there 
because gas is so much more flexible for other uses.
    Secondly, access. Certainly I am one who likes to have 
access and common use, but there are some areas in which we do 
not want to have drilling. I think for the producers to get 
along well, they have to understand there are some places that 
need to be set aside.
    Finally, Eric, you have already touched on it, but as we 
speak, the Wyoming legislature is dealing with this split 
estate situation again and I hope they can do it on the State 
level as opposed to the Federal because I think they are more 
aware of how it can be handled. Thank you.
    The Chairman. Thank you, Senator.
    Now we are going to proceed.
    Senator Murkowski. Mr. Chairman?
    The Chairman. Yes.
    Senator Murkowski. Just one quick comment. I have been 
sitting here trying to figure out if the biggest problem is the 
restriction on access to the land. But in listening to the 
panelists here, it is not just the restriction on the land 
caused by the Federal Government or whatever policies we have. 
We also have restrictions to access because the technology has 
not advanced far enough. I go back to my colleague here from 
Alaska. We do not know how much is out there. We believe that 
there are huge quantities, but we are strapped because we do 
not have access to the technology yet.
    So I think it was you, Mr. Kuuskraa, that mentioned we have 
got a race between resource depletion and the technology 
progress. We might not be depleting to the level that others 
would have us believe if we can advance the technology in very 
sound ways to accommodate the interests of everybody here. That 
is not a question but just a comment about access that way.
    The Chairman. Thank you very much. That is a very good 
observation.
    However we do this, we are going to have the next panel. I 
assume you all are going to leave and another one is going to 
come on. Thank you all very, very much.
    [Pause.]
    The Chairman. All right, we are not on schedule, but we 
have at least proved it will work.
    Panel two is going to discuss LNG. So let us start right on 
our left here with you, Mr. Sharples, the Center for LNG. Would 
you please tell us who you are and then give your 2 minutes, as 
best you can?

 STATEMENT OF RICHARD J. SHARPLES, EXECUTIVE DIRECTOR, CENTER 
                     FOR LIQUID NATURAL GAS

    Mr. Sharples. Mr. Chairman, thank you very much. My name is 
Dick Sharples. I am the executive director for the newly formed 
Center for LNG. We represent actually 65 companies and 
associations interested in the safe and secure development of a 
North American, particularly the United States, LNG business.
    As you mentioned in your introductory remarks, the U.S. 
Energy Information Administration recently predicted that the 
demand for natural gas was expected to grow about 25 percent in 
the next 10 years. Both the EIA and the National Petroleum 
Council have recognized that LNG, along with the development of 
other domestic resources, will be necessary to meet future 
demand.
    One of the greatest benefits of LNG is that new supplies of 
natural gas could enter the market here in the United States 
within the next few years, well ahead of many other 
opportunities, and begin to offer relief to American consumers.
    It must also be recognized that LNG is being delivered 
safely to America and around the world today. The LNG shipping 
industry has a safety record spanning more than 45 years. LNG 
has been delivered across oceans without any major accidents or 
safety problems either in port or on the high seas. During this 
time, DOE has referenced in a recent Sandia study that there 
have been more than 80,000 LNG cargo deliveries, covering more 
than 100 million miles, without incident. Today more than 150 
LNG ocean tankers safely transport more than 110 million metric 
tons of LNG annually to more than 40 ports around the world.
    The LNG industry is already subject to strong and 
successful Federal oversight, and we as an industry support the 
continuation of both the Federal oversight role and the 
extensive coordination that exists among local, State, and 
Federal agencies to facilitate and streamline regasification 
terminal permitting. The center supports an open, inclusive, 
and thorough regulatory process, but we also support an 
efficient process that recognizes the urgency associated with 
bringing new supplies of energy to this country.
    As for the risks associated with energy deliveries, we as a 
Nation need to keep those risks in perspective. As the Sandia 
report points out, when examining risks associated with LNG 
delivery, the Nation must not focus solely on the consequences 
of an event, but more importantly, there needs to be a thorough 
assessment of the probability of an event occurring. We can 
then concentrate our efforts on continuing to reduce those 
probabilities.
    The robust worldwide trade of LNG that takes place every 
day is proof that LNG can be handled safely and securely, and 
we as an industry, as regulators, the executive branch, and 
Congress must play a leadership role in communicating with the 
public so that they can make informed decisions about 
constructing much needed energy infrastructure.
    In summary, our natural gas challenges will not be solved 
solely by expanding production in the Rocky Mountains or the 
Outer Continental Shelf or solely by building an Alaskan 
natural gas pipeline. We must also import LNG.
    Thank you very much for the opportunity, sir.
    The Chairman. Thank you very much.
    Linda.

              STATEMENT OF LINDA STUNTZ, MEMBER, 
              NATIONAL COMMISSION ON ENERGY POLICY

    Ms. Stuntz. Good afternoon. My name is Linda Stuntz and I 
am grateful to appear before you today on behalf of the 
National Commission on Energy Policy, of which I am a member, 
along with 15 other people of divergent backgrounds and 
political stripes, ranging I would say from a representative of 
the NRDC to the chairman emeritus of Conoco.
    We addressed energy policy in a wide-ranging study issued 
in December. Among the topics we addressed was liquified 
natural gas and natural gas supply generally. I would highlight 
today two of the recommendations.
    One on safety. With respect to safety, the commission 
prepared a paper which was peer reviewed and which we would be 
happy to make available to the Congress and the committee. 
Essentially what we concluded is that LNG does not appear to 
pose greater public safety hazards than other widely used 
sources of energy, such as petroleum and its byproducts, at 
this time.
    Secondly, we looked at the regulatory process. While we 
support a strong Federal role in the siting of LNG facilities, 
we do believe that cooperative federalism, which is a term some 
you may recall from electricity, is necessary for effective 
implementation of LNG proposals. While the commission believes 
FERC's authority for siting and regulating onshore LNG 
terminals is clear, we would support FERC's recommendation for 
legislation confirming this to reduce litigation and any 
uncertainty. We do, however, point out that there are many 
other matters in which State concurrence and cooperation is 
essential, air, water. FERC does not have eminent domain to 
site LNG terminals. So if there is ever going to be one, there 
has to be some collaboration and cooperation. We think this can 
happen.
    Education is necessary and getting the real story out about 
what the real safety risks are and are not. Thank you very 
much.
    The Chairman. Thank you.
    Please proceed.

             STATEMENT OF GARY SYPOLT, PRESIDENT, 
                     DOMINION TRANSMISSION

    Mr. Sypolt. Good afternoon, Mr. Chairman and other 
distinguished members of the committee. I am Gary Sypolt, 
president of Dominion Transmission, the subsidiary of Dominion 
Resources that owns and operates the Cove Point LNG import 
terminal in southern Maryland.
    Since Dominion reactivated the Cove Point terminal in the 
summer of 2003, we have received over 100 ships of LNG and 
delivered over 287 bcf of gas into the mid-Atlantic market. 
Cove Point's maximum send-out rate is about 1 bcf per day, 
enough to heat about 3.4 million homes. And we are now seeking 
FERC approval to almost double that capacity to 1.8 bcf a day.
    While FERC has been aggressively working to advance LNG 
development, there are steps Congress should take to help.
    First, jurisdictional disputes cannot be allowed to place 
worthy projects in limbo. Congress should reiterate that FERC, 
after thoroughly considering input from other Federal agencies, 
State and local governments, and affected citizens, has the 
final say in siting onshore terminals. These facilities are 
national in scope and importance and a clearly defined 
regulatory path, including enforceable time frames, will 
benefit all parties involved.
    Congress should also codify FERC's Hackberry policy, which 
allows new import facilities to be built without open access 
requirements and unnecessary economic regulation. And in doing 
so, the expansion of existing facilities, such as Cove Point, 
must be included as such projects are the most direct and least 
environmentally intrusive way to quickly expand import 
capacity.
    LNG is not a cure-all fix for our supply needs. The 
pipeline from Alaska and improved access to both onshore and 
offshore gas reserves are the other critically important pieces 
of the puzzle.
    I commend the committee for focusing its attention on this 
issue and hope your deliberations will be successful. And I 
will be happy to answer any questions later.
    The Chairman. Thank you very much. I am sorry we do not 
have your nameplate there, but would you tell us who you are?

STATEMENT OF STACY GERARD, ASSOCIATE ADMINISTRATOR FOR PIPELINE 
              SAFETY, DEPARTMENT OF TRANSPORTATION

    Ms. Gerard. Yes, Mr. Chairman. I am Stacy Gerard. I am the 
Associate Administrator for Pipeline Safety, U.S. DOT. We set 
the safety standards for LNG facilities and inspect those 
facilities for compliance with those standards. We work 
cooperatively with the FERC and the Coast Guard to consider the 
need to improve those standards long term and to look at the 
need for investing in technology for risk assessment and 
mitigation controls that might be appropriate. We consult with 
FERC prior to their siting facilities, and we are cooperatively 
involved today in an educational program with the National 
Association of State Fire Marshals to undertake important 
community education about the risks and controls that we impose 
and to get people to understand how LNG is safely monitored.
    Thank you.
    The Chairman. Thank you very much.
    Marilyn, would you proceed?

          STATEMENT OF MARILYN SHOWALTER, PRESIDENT, 
    NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

    Ms. Showalter. Yes. I am Marilyn Showalter. I am the 
president of the National Association of Regulatory Utility 
Commissioners. I am also the chair of the Washington State 
Utilities and Transportation Commission.
    The State regulators are the ones who deal directly with 
businesses and citizens, who are the ones who are paying the 
rates. And we also deal, of course, with the utilities that we 
regulate. We are the ones who have to raise the rates for 
natural gas and also electricity. We are very keenly aware of 
the relationship between natural gas and electricity prices and 
the demand that electricity places on natural gas prices.
    Our general approach to natural gas I think is reflected by 
your conference here. It is three-pronged. We think you need to 
look at diversification, conservation and efficiency, and 
supply. So with respect to liquid natural gas, that is a way to 
increase supply.
    Ms. Stuntz alluded to the role of State and local 
governments in liquid natural gas issues. She mentioned air and 
water. I would also add public safety, emergency preparedness 
in siting of facilities connected to LNG facilities. So all of 
that means, I think, that State, Federal, and local governments 
need to cooperate and coordinate.
    In that respect, NARUC and DOE have a partnership, with the 
help of ICF Consulting, in which we are going to release two 
reports this February, next month. One is a white paper on 
issues, such as the ones I just mentioned, that State 
commissions, legislatures, and environmental agencies need to 
face. The other is a communications model for dealing with 
communications issues that citizens need to know. We look 
forward to sharing that with you next month.
    Thank you.
    The Chairman. Thank you very much.
    The FERC representative, Mr. Robinson.

        STATEMENT OF MARK ROBINSON, DIRECTOR, OFFICE OF 
     ENERGY PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Robinson. Senators, my name is Mark Robinson. I am the 
director of the Office of Energy Projects at the commission. We 
are the office that is charged with creating the record from 
which the commission makes decisions on hydropower projects, 
interstate natural gas pipelines and storage facilities, as 
well LNG facilities.
    First, I should identify my bias. I have been involved with 
siting energy infrastructure for 27 years, from hydropower and 
the associated electric transmission lines to gas pipelines, 
storage facilities, and now LNG. I, therefore, tend to see 
energy from the ground up. A lot of folks at FERC see it from 
the consumer back, and we have a chairman who is very capable 
of looking in both directions and seeing it both ways. I have 
the luxury of showing you my bias today and speaking from the 
ground up.
    There are a couple of things about LNG that I think I want 
to make clear to the committee as they are contemplating 
legislation.
    One is that there is a risk associated with LNG that is 
developing in this country that I have termed an irrational 
risk standard. There is the potential for the public to get to 
a point on infrastructure where they want you to be able to 
answer, as a policy maker or as a legislator, that they are not 
at risk, that there is no risk associated with whatever 
infrastructure it is that you may have to have to accommodate 
our economy. I cannot do that and I do not think anyone can. 
But there is a demand for that type of risk assurance that I 
think we have to be careful about, especially if you are 
contemplating legislation, that we do not somehow get into the 
posture where we, through legislation, develop a standard that 
cannot be met.
    The other point that I want to make on LNG--and eventually 
I will talk about siting, but since I am on the next panel, I 
will do siting there and it covers LNG and everything else that 
we deal with.
    But the other issue I wanted to mention to you is the 
jurisdictional eminent domain aspect of this. It would be very 
helpful if, in any legislation, it was made clear that the FERC 
is the jurisdictional entity for siting, which is as we 
understand it now, but it needs to be codified, and with that, 
if we acquired, under section 3 of the Natural Gas Act, the 
right to allow for eminent domain where necessary. Right now, 
an LNG facility that would be in the public interest and would 
have the permits from the State, the permits from all the 
Federal agencies and the authorization from the commission 
could be stopped by a single homeowner if that homeowner was in 
an exclusion zone that we had determined needed to be under the 
control of the LNG plant operator, and they would be unable to 
acquire that property.
    So it is something that we have for pipelines, we have for 
hydroelectric projects. It makes sense, I think, to also allow 
it for LNG facilities.
    The Chairman. Thank you very much.
    Mr. Cruickshank. Walter Cruickshank, Deputy Director of 
Minerals Management Service. We work in cooperation with the 
Coast Guard in looking at offshore LNG terminals. Again, I am 
here just to help with any questions anybody may have. Thank 
you.
    The Chairman. Let us hear from the Coast Guard. Captain, 
thank you for coming.

      STATEMENT OF CAPTAIN DAVID SCOTT, CHIEF, OFFICE OF 
    OPERATING AND ENVIRONMENTAL STANDARDS, U.S. COAST GUARD

    Captain Scott. Thank you for inviting me, Mr. Chairman. 
Good afternoon, Senators.
    My name is Captain Dave Scott. I am the Chief of the Office 
of Operating and Environmental Standards here at the Coast 
Guard headquarters in Washington. I am principally involved in 
LNG in three main areas, and my office is the one at 
headquarters responsible for processing the applications for 
LNG deepwater ports, which we currently are working on eight of 
them. Two of them have been permitted and six are now 
undergoing environmental review. We are expecting probably 
several more applications for offshore terminals here in the 
next couple of months.
    The second main responsibility that my office has deals 
with the security policy for siting of shore-side LNG terminals 
from the waterways management and vessel safety and security 
navigation point of view. In that regard, I work very closely 
with my colleagues at DOT, Office of Pipeline Safety, Minerals 
Management obviously on the offshore stuff, and over the past 
18 months, I have been kind of a regular fixture over at FERC 
as well.
    The third major responsibility of my shop is developing the 
safety standards for LNG vessels themselves. Right now the 
worldwide fleet is about 160 LNG vessels. About 40 of them are 
regular callers in the United States. Unfortunately, we no 
longer have any U.S.-flagged LNG carriers. We did have eight at 
one time. They were reflagged to the Marshall Islands in 1999. 
So they are all foreign flagged, subject to rigorous 
international standards, as well as many detailed domestic U.S. 
standards, and through our process of the inspection and the 
issuance of what we call a certificate of compliance, we ensure 
that the vessels that do call on the United States are in 
compliance with the international standards, as well as 
applicable U.S. regulations.
    So I am here today to provide any kind of technical advice 
on matters pertaining to the Coast Guard and LNG vessel safety 
and security. Again, it is a pleasure for me to be here. Thanks 
for inviting me.
    The Chairman. Thank you.
    Senator Bingaman.
    Senator Bingaman. Thank you very much, Mr. Chairman. I 
thank all the witnesses.
    Let me just ask Mr. Robinson and any of the other witnesses 
that want to comment on it. I am just a little unclear as to 
how the Federal jurisdiction in this area is separated out from 
State and local jurisdiction in the siting of LNG and the 
permitting of LNG facilities. I saw the executive summary that 
FERC gave us of their testimony here today, and they indicate 
that they want to have exclusive jurisdiction over the siting 
of onshore LNG import facilities in State waters and, of 
course, as you mentioned, authorizing eminent domain for such 
facilities.
    What would the States' authority be in those circumstances 
if you have exclusive jurisdiction for the siting of these 
facilities?
    Mr. Robinson. The State's role would be unchanged from what 
it is right now and what it has been for years. The State has 
authority, through the Coastal Zone Management Act, to not 
authorize an LNG facility. The State also has authority, 
through the Clean Water Act, section 401, to not authorize, and 
therefore an LNG facility cannot be constructed.
    What the commission is requesting is that for purposes of 
the siting process, in determining where a project should be 
located and it is in the public interest, that that be the 
exclusive jurisdiction of the commission. The State and other 
Federal agencies would all have their continuing authorities 
under other statutes to decide whether they should or should 
not be constructed.
    Senator Bingaman. So existing State authority to object or 
to block the siting of one of these facilities--you are not 
suggesting they be disturbed or changed?
    Mr. Robinson. We are not suggesting that that authority be 
touched in any way, shape, or form.
    Senator Bingaman. All right.
    Let me ask Marilyn if you have any disagreement with that 
statement of what is being proposed.
    Ms. Showalter. Well, there is a court case going on now 
between FERC and the State of California. NARUC has not taken a 
position in that case. But it could be that the court would 
find in that case that current law already gives FERC that kind 
of authority. On the other hand, what California is asserting 
is that because this particular LNG plant deals only, it 
asserts, with in-State services, that in that situation 
California has jurisdiction.
    Now, I should say that that fact pattern of an LNG facility 
that assertedly deals only with in-State pipelines is probably 
not typical and may not happen again, as far as I know. So in a 
case where there clearly is an interstate aspect, you do not 
have the question.
    But I do think that the law at this point is somewhat 
unsettled and it could be settled clearly or it could be, if it 
is settled in California's--well, if it is settled in FERC's 
favor, that is it. If it is settled in California's favor, it 
does not really answer the question of other fact patterns.
    But I do think the issue is who actually gets to decide 
this question and is it FERC or is it a State in whatever 
circumstances may apply.
    The Chairman. Is that in a Federal court, ma'am?
    Ms. Showalter. Yes, it is.
    The Chairman. So if it is decided there, it will not be 
determinative for the land. Circuits do not determine law of 
the land.
    Ms. Showalter. Not unless it went all the way up to the 
U.S. Supreme Court.
    The Chairman. So there would be some reason, in terms of 
delay, for us to decide which we prefer or not prefer, but 
which we think is the best policy.
    Ms. Showalter. Yes, and you may be aware that Congress put 
some intent language but that is not quite the same as changing 
the law.
    The Chairman. Yes, that was my language.
    [Laughter.]
    The Chairman. I could not put it in the statute, so I just 
put it in hortatory language.
    But anyway, how about the remaining Senators here? Senator 
Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Several of you have mentioned the education component and 
making sure that the communities are accepting. Siting is a 
very, very, very difficult issue. I think it is probably the 
most difficult thing that we are dealing with right now.
    We have heard the panelists just before you talk about the 
supply, and I am convinced that there is supply out there. We 
are entering long-term contracts with folks overseas, and now 
we have got to figure out how we get the LNG into the country. 
The number of LNG terminals has not been increasing.
    And it seems that since September 11th everybody is shying 
away from any kind of a facility that might be viewed as an 
opportunity, whether it is an LNG facility or whether it is the 
oil terminal that we have in Alaska at Valdez. People are 
saying, no, if it is going to come my way, I do not want it.
    How do we work the education? How do we get beyond this 
mind set that if we put it in my back yard, my family and I are 
at risk? What do we do?
    Ms. Showalter. Well, I would like to give an example in 
another arena which is closely related, and that is in 
hazardous liquid pipeline safety. A few years ago, you may 
know, we had an accident in the State of Washington and it 
created great fear and trepidation of pipelines. Stacy Gerard 
over there, head of Office of Pipeline Safety, initiated with, 
I should say, $800,000 from Senator Gorton----
    Ms. Gerard and Senator Murray.
    Ms. Showalter. And Senator Murray. It essentially was a 
program whereby OPS and our agency, the UTC, and local 
government, mayors and emergency preparedness officials all got 
together, in essence, a network, and a great deal of education 
went on. Interestingly, when we had subsequent incidents, which 
will happen with pipelines, the network really was in place to 
deal with it. Also the citizenry became far more educated about 
what was dangerous and what was not and where they could lend 
their voices. I think it really is a success story, and I think 
that kind of thing is possible with LNG as well. It takes a lot 
of work.
    Mr. Sharples. Senator, if I may add to that because I agree 
completely. The partnerships are developing. They are 
developing amongst the agencies, between the States and the 
Federal agencies and with industry. In fact, one of the driving 
forces to start the Center of LNG was to provide a resource to 
provide technical material, educational material that then the 
individual companies or anyone else could, frankly, use when 
they go out and have discussions in the local communities. It 
needs to continue but I think we all recognize the need for the 
educational tools.
    But what I think we also need to realize, though, is there 
is a need for strong leadership. There are local communities 
around here who are very strongly advocating the construction 
of an LNG plant, and usually, if you look at them, the common 
denominator is one or two or several strong local leaders that 
have been willing to come out and say I understand the risk. It 
is a good thing to do. I think that we need to marry those two 
things: the educational material and strong leadership.
    Senator Murkowski. I want to ask the captain here a 
question about the number of LNG vessels. I heard you say there 
are 160 LNG vessels, 40 of which are coming into U.S. waters, 
no U.S.-flagged vessels currently. Now, recognizing what our 
demand picture is going to look like in just a few years, we 
are at 59 billion cubic feet a day. By 2015, we are up to 77 
and by 2025, we are up to 84. Now, we are going to try to get 
some of it domestically, but we know we are going to have to 
bring some, obviously, to meet this demand, imported LNG. Are 
there enough vessels out there as we ramp up our consumption 
here?
    Captain Scott. There has just been a tremendous growth in 
new builds of LNG vessels worldwide. To construct LNG vessels, 
they are rather unique. So there are only about, I think, nine 
shipyards worldwide, three in Korea, a couple in Japan, and the 
rest in Europe, that really specialize in LNG due to the highly 
technical nature of it, the kind of materials you have to 
acquire, the skill sets that the shipyard people have to have.
    Right now, I think I said there is between 150 and 160 in 
service right now. I think the order books indicate for the 
next several years, there are probably about another 25 or 30 
on order at the shipyards. We are seeing China enter the LNG 
shipbuilding market as well. So I think in the near term, 
probably in the next 3 to 4 years, we see adequate 
international shipyard capacity, but beyond that, it remains to 
be seen.
    With regard to the offshore terminals that we see here, as 
I said, we have eight proposals we are working. We are 
expecting a couple more. Probably as an economic matter, I do 
not think you would really see more than probably realistically 
half a dozen of those actually coming to fruition. I know FERC 
has quite a number, around 30 or so, shore-side facility 
applications in process. How many of them might actually 
eventually come into operation, I do not know.
    But I do see adequate shipbuilding capability in the next 3 
to 4 years. Unfortunately, though, I do not see it occurring in 
the United States.
    Senator Murkowski. Well, that is the problem. Of course, in 
Alaska, if they are not U.S.-flagged vessels, we cannot bring 
the LNG out of State and into the rest of the States.
    Captain Scott. Right. There is also that pipeline option as 
well. But that may be something for you to look at the Jones 
Act perhaps for LNG.
    Senator Murkowski. Thank you.
    The Chairman. Senator Craig.
    Senator Craig. With current costs of construction of LNG 
port facilities, looking long term, the blended need of both 
domestic onshore/offshore production in LNG--and none of us 
disputes the reality of both supplies. Without divulging 
proprietary information, what is a break even to delivery? In 
other words, what keeps an LNG plant's lights on? Does anybody 
have that figure or are willing to talk about it? I know you 
have the figure.
    [Laughter.]
    Mr. Sypolt. I will clarify that Dominion is not the 
supplier of LNG. We are the terminal operator. We receive the 
ships. We store it in tanks. We revaporize it and take it to 
the market.
    Senator Craig. You have escaped. You are going to double 
your operating facility. Doubling it at location should cause 
less regulatory problem and therefore speed up the process, 
should it not?
    Mr. Sypolt. We believe that it should, sir.
    Senator Craig. And you are now supplying 3 million 
households. You could go to 6 million with that capacity?
    Mr. Sypolt. Yes, we could.
    Senator Craig. Who can answer the first question? In other 
words, what are we flooring the price of gas at with the 
construction of LNG facilities?
    Mr. Sharples. If I may take a stab at your first question, 
Senator, and I do not have the exact details, but we can get it 
for you. If you will allow me a band, around the $4 range is 
what I think most studies have talked about. But I would point 
out that even by 2025, if you take the National Petroleum 
Council estimates, which are not far off EIA numbers, you are 
looking at only 15 percent of the natural gas in the United 
States coming--I think it is between 14 and 17 percent of the 
natural gas in the United States is coming from LNG.
    Senator Craig. No. I appreciate that.
    Mr. Sharples. So I think the question is, on the margin, 
what is the most expensive gas? I think that we can very 
clearly have some more costly domestic supplies than that.
    Senator Craig. I concur.
    Mr. Sharples. And we may knock a few of those out and 
replace them with some of this gas, but I do not believe it is 
going to set the price for gas.
    Senator Craig. Thank you.
    The Chairman. Well, it might be that small percentage you 
are speaking of, but in terms of terminals and the like, it is 
only 13 times the capacity that we have now. So whatever we 
have got, that is a pretty big chunk. I do not know that we can 
do it.
    Let me ask Ms. Stuntz. In terms of the economics of energy 
dependence, what is the difference between becoming more and 
more dependent upon crude oil for our existence and becoming 
more and more dependent upon LNG for our existence?
    Ms. Stuntz. That is a very difficult question, Mr. 
Chairman.
    The Chairman. It seems to me it is simple. There is no 
difference.
    Ms. Stuntz. Well, the only difference is natural gas is 
interesting. It is not located in exactly the same places that 
oil is, and in fact our largest supplier right now is Trinidad 
and Tobago. That is not going to last indefinitely. The 
commission looked at this. There are substantial western 
hemisphere supplies of gas, Latin America, Colombia, Venezuela. 
Will the reserves ultimately be located in the places where we 
are worried about oil reserves now? At the end of the day, yes. 
So I think, as you know better than anyone, we have to do what 
we can to boost domestic supplies and to place our bets in as 
many places as we can so that we reduce our vulnerability. That 
is the best we can do.
    The Chairman. Well, I agree with that, but from the 
standpoint of a balance of trade, it is the same.
    Ms. Stuntz. Yes.
    The Chairman. And we dramatically increase the balance of 
trade either way.
    Ms. Stuntz. Yes, sir.
    The Chairman. I do not know to whom this applies, but 
probably industry as much as the Government. There is no doubt 
in my mind that LNG has some of the characteristics of nuclear 
power in the sense that people are so frightened of it and I 
would say without hesitation that in both instances they are 
frightened about things that are non-facts, but people could 
argue about that. But I have heard people that oppose LNG 
equate the explosive range of LNG by equating it with a 
Hiroshima bomb to a 500-meter hazard zone. Some of you might 
have heard that. One of you talked about risks. Well, it 
obvious that neither of those are right at all with reference 
to LNG.
    I would suggest if we are going to grow independence and 
use, somebody has to do a real educational piece for the 
American people and for a lot of leadership in the country or 
we will be so slow in getting there that we will become 
drastically dependent and unable to supply products that are 
like natural gas for America's future. Is that the industry? 
Who is that? Does anybody have any ideas? Yes, ma'am.
    Ms. Gerard. I think we are convinced that it has to be a 
partnership effort that we were alluding to earlier, and we 
have asked the National Association of State Fire Marshals to 
play a role in this as their Governors' senior risk managers at 
the State level. They are producing a product that is 
comparable I think to the product that Marilyn mentioned that 
NARUC is working on. I think through a collegial approach, 
involving Federal, State, local government and industry and 
with local emergency response representatives, we have a hope. 
The fire service of the country is still its hero, especially 
since 9-11, and with the State fire marshals agreeing to play a 
lead role in this, I think we have a real opportunity. They can 
host the rollout of these educational programs with local 
officials that they have a relationship with. Gary Powell from 
the State of Alaska is involved in the project.
    The Chairman. Senator Craig.
    Senator Craig. Mr. Chairman, it still remains a siting 
issue, and putting them in the right locations and then 
disallowing people to build up next to them. It was not my 
friend's feed lot that caused the problem in the beginning. It 
was the folks who decided to move in next to it and disliked 
the odor after they got there and tried to shut it down. The 
same problem is here. Let us site them appropriately in those 
distances that create the margins of safety and get smart about 
it and be willing to be tough enough to put the prohibitions 
for urbanization in place to disallow it from happening.
    Ms. Stuntz. Senator, if I might just add. In this case 
there is one hopeful development and that is the development of 
these offshore unloading and regasification facilities. There 
are a number of applications now that Captain Scott could speak 
with you about. But that technology--and there are varying, 
different kinds--if it proves out, could make this simpler, at 
least in some places. But I remain concerned that folks in the 
Northeast and California who probably need this the most are 
still having difficulty dealing with it.
    The Chairman. Yes. What is new?
    [Laughter.]
    Mr. Sharples. If I may add. First of all, I think the last 
point is very critical, and that is the reason that we have 
isolated pockets that need this energy is because there are 
infrastructure bottlenecks getting energy to them. So we have 
to find solutions in terms of how do we site things where we 
need them, in addition to where we would like them to be.
    The other thing I would like to say is that while we as an 
industry are very hopeful on the offshore technologies--and 
there are a large number of applications pending, as Captain 
Scott mentioned--there are technological issues and there are 
economic issues. It is not a panacea. There may be places. 
There may be individual facilities that make economic sense, 
but as of today, it is not a panacea to answer all the 
questions. They do not make sense in some cases.
    The Chairman. Very good. Thank you. I thank all of you for 
the excellent testimony.
    We are going to get to the next panel. Senator Bingaman, 
will you start this next session for me please?
    Senator Bingaman. Why do we not go ahead and get started? 
All right. This panel is dealing with natural gas 
infrastructure, what legislative and regulatory policies should 
be implemented to encourage needed additional safe and adequate 
infrastructure for natural gas transmission, distribution, and 
storage.
    So we will start with the State of Louisiana. Scott 
Angelle. Is that the correct pronunciation?
    Mr. Angelle. Yes, sir.
    Senator Bingaman. Please go right ahead.

STATEMENT OF SCOTT ANGELLE, SECRETARY, LOUISIANA DEPARTMENT OF 
                       NATURAL RESOURCES

    Mr. Angelle. Good afternoon. My name is Scott Angelle. I am 
the secretary of the Louisiana Department of Natural Resources, 
and I bring to you today a real Louisiana accent----
    [Laughter.]
    Mr. Angelle [continuing]. And a real passion to continue 
helping America meet her energy needs.
    Louisiana has a long and distinguished history of oil and 
gas production. Currently 34 percent of the Nation's natural 
gas supply and almost 30 percent of the Nation's crude oil 
supply is either produced offshore Louisiana or moves through 
the State's coastal wetlands. This production is connected to 
nearly one-half of the total refining capacity in the United 
States.
    Governor Blanco has asked me to convey the State's desire 
to not only continue this production, but to seek additional 
ways to increase it and to continue to ensure that the supply 
is provided to the rest of the Nation.
    We understand just how vital these energy resources are to 
the Nation's economy, but Louisiana, like other coastal 
producing States, sustains impacts and bears the cost of 
onshore support infrastructure. In my State, some of this 
infrastructure contributes to the loss of more than 24 square 
miles of our coastal land each year, a rate of land loss 
believed to be the fastest on the planet Earth. In fact, during 
the time of this afternoon's meeting alone, Louisiana will lose 
a football field-wide area from the Capitol Building to the 
Washington Monument. If what is happening in Louisiana today 
were happening in this city, the steps of this building would 
be washing away today, the White House tomorrow, and perhaps 
the Pentagon soon thereafter.
    When States like yours, Senator Bingaman, holds drilling on 
Federal lands onshore, they receive 50 percent of those 
revenues in direct payments, which is appropriate. In contrast, 
Louisiana produces an average of 5 billion--that is billion 
with a B--off its shores and gets only a fraction of a percent 
back. We believe this inequity is profound. It is critical we 
receive our Federal share of revenues to build and maintain 
onshore infrastructure to continue to support this production 
activity. We believe it makes sense to take care of the energy-
producing States that produce the energy for the benefit of the 
rest of the Nation.
    Today, 4 months after Hurricane Ivan, a significant amount 
of oil and gas production has yet to be fully restored. 
According to analysts, oil prices would realistically be $75 a 
barrel had Ivan made a direct hit on the infrastructure of 
Louisiana.
    Like a good bank account, one must make a few deposits to 
make a few withdrawals. Relative to America's energy industry, 
Louisiana has made her share of deposits and we need to make a 
withdrawal on the Federal Treasury to protect the 
infrastructure.
    Help us to allow us to continue helping America. What else 
must Louisiana do to get the attention? Just last month, the 
Federal Government sited the newest LNG facility in America in 
Cameron Parish, Louisiana. We are doing our share but we do 
need some help to protect our infrastructure.
    Thank you very much.
    The Chairman. Thank you very much.
    Mr. Secretary, I did not leave because you were coming up. 
I know you very well, and I guess it is fair to tell you I knew 
what you were going to say.
    [Laughter.]
    The Chairman. Let us proceed. Go ahead, ma'am.

 STATEMENT OF CHRISTINE HANSEN, EXECUTIVE DIRECTOR, INTERSTATE 
                 OIL AND GAS COMPACT COMMISSION

    Ms. Hansen. Mr. Chairman, Senator Bingaman, thank you for 
the opportunity to testify. I am Christine Hansen, the 
executive director of the Interstate Oil and Gas Compact 
Commission, a compact representing 30 oil and natural gas 
producing States. Our current chairman is a former chairman of 
this committee, Governor Frank Murkowski of Alaska. The IOGCC 
is the Nation's leading advocate for conservation and wise 
development of our domestic resources.
    Increasing domestic supplies of natural gas has a myriad of 
components, including the infrastructure component. In the year 
2000, the IOGCC and the National Association of Regulatory 
Utility Commissioners, in response to a 1999 report by the NPC 
on natural gas, formed a regulatory work group to look at 
impediments to infrastructure development because the NPC 
identified regulatory impediments as being something important 
to look at. We have given the committee copies of that final 
report, so you have all of our recommendations in front of you.
    Specific recommendations contained in that report which 
also, by the way, praises FERC--FERC was a member of that 
committee, and oftentimes the States forget to mention when 
they think the Federal Government is doing something well. In 
that report we praised FERC's streamlining efforts on pipeline 
siting.
    We focused on the need to streamline State and local 
permitting and called for consideration of things like pre-
approval of utility corridors. Louisiana then was a pilot 
project, and I have distributed copies of that pilot project 
report, proving that our recommendations do work.
    I want to comment just on the INGAA recommendation on 
property tax. We have not looked at the impact of that on the 
States, and I think that a study would be appropriate before 
the Congress did anything to change the property tax.
    I also would endorse the need for education. There are some 
overriding issues that complicate infrastructure needs and at 
their base is the lack of education of the public but also of 
the State and local government leaders.
    Thank you, sir.
    The Chairman. Thank you very much.
    Mr. Cooper.

   STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Mark Cooper. Mr. Chairman, thank you. My name is Mark 
Cooper. I am director of research at the Consumer Federation of 
America.
    The first time I testified on this issue was 25 years ago 
before this committee almost to the day. In the past 25 years, 
we have failed to adopt a coherent, balanced policy. We are 
paying the price today, but if we fail in the next 25 years, 
the price will be much greater. So I commend the committee for 
starting fast, for pitching a big tent, and hopefully we can 
get a policy that balances consumer and producer interests.
    I have been asked to talk about infrastructure. Natural gas 
transportation, distribution, and storage infrastructure 
exhibit characteristics of natural monopoly and public goods. 
They are a natural monopoly in the sense that there are not 
likely to be redundant facilities in a given area because of 
high fixed and sunk costs. They are a public good in the sense 
that the benefits of reliability and market disciplining that 
inhere in these facilities are non-excludable. All of the 
consumers in an area receive those benefits whether or not they 
bear the costs. These are classic economic characteristics.
    As a result, the occurrence of market failures of 
commission, the manipulation of markets, or omission, socially 
irresponsible under-supply, is likely to occur unless there is 
public policy.
    We believe a critical first step in building the consensus 
that we have failed to build in the past 25 years is to restore 
confidence in the transparency and fairness of these markets. 
And that means starting with an infrastructure, including an 
information infrastructure, that people believe in and 
therefore will be willing to make the hard choices that we 
firmly believe must be made.
    Four suggestions to start with.
    First, evaluate alternatives including infrastructure 
savings as a critical component. If we do something that saves 
on an LNG plant or a pipeline, that is a benefit to society we 
should not miss.
    Second of all, stop deregulating where markets are too weak 
to protect consumers. That will first diminish abuse, but even 
more importantly, it will restore the utility finance model to 
build these infrastructure facilities. The merchant builders of 
infrastructure are having difficulty. We need to restore faith 
in the utility finance model.
    Third, adopt requirements to expand storage. We have 
inadequate storage. Every price shock we hear, stocks were low. 
Well, we need policies to guarantee storage is there.
    And finally, we need a reporting system of prices and 
stocks and balance in supplies that is honest, audited, and 
instills confidence in the public.
    Thank you.
    The Chairman. Thank you very much.
    You are on this one also.
    Ms. Gerard. Stacy Gerard, Pipeline Safety, Associate 
Administrator, DOT. It is our job to be the safety regulator to 
make sure that the natural gas pipelines are safe and that 
people can be confident that they are safe.
    In the last couple years, we have raised those safety 
standards in a very significant way to a higher level than they 
have been in the past 30 years. These are risk-based 
regulations. We took a scientific approach. Concentrate the 
protection on places where people can be affected. The industry 
supported this approach and we are moving into full 
implementation. And from a consumer standpoint, that is an 
important thing.
    We are pleased that the gas industry has stood with the 
Federal Government and State government here to support more 
transparency, but from a safety side so that we have much more 
public reporting on how the pipelines are managing the testing 
and repair. So from a consumer standpoint, it is a really good 
thing that people will be able to see how it is working from a 
safety standpoint.
    The Chairman. INGAA.

   STATEMENT OF KEITH RATTIE, CHAIRMAN, CEO, AND PRESIDENT, 
                      QUESTAR CORPORATION

    Mr. Rattie. Senator Domenici, Senators Bingaman, Murkowski, 
and Craig, thank you for inviting us here today. My name is 
Keith Rattie. I am chairman, CEO, and president of Questar 
Corporation. We are one of the fastest growing natural gas 
producers in the United States. We are also in the interstate 
pipeline business, and we own a natural gas utility.
    But I am here today on behalf of the Interstate Natural Gas 
Association of America, INGAA. I am the current INGAA chairman.
    The bottom line is that America will need all the natural 
gas the market can deliver over the next couple of decades. We 
cannot conserve our way out of the supply problem except at an 
unacceptable cost to our economy and our standard of living. We 
do not have the luxury of choosing to just say no to new 
pipelines or to new natural gas development or to LNG terminals 
required to access the massive amounts of natural gas that have 
been found in this country and around the globe. In short, we 
need new supply from new areas and new pipelines to move more 
gas.
    INGAA joins with the many others who urge Congress to act 
to remove government-imposed barriers to domestic natural gas 
supply, but new gas supply will not solve the problem without 
new pipelines to transport it. And if you remember just one 
thing from my statement today, I would like you to remember 
this number. $200 billion. That is how much more consumers will 
pay for natural gas between now and 2020 if we do not fix the 
government-imposed barriers to new pipeline and LNG import 
terminal construction.
    Now, Congress gave FERC authority to approve interstate 
pipelines in 1942. FERC has done much to improve its processes 
and expedite permits in recent years. I will give you some 
current examples on that in Q&A if you are interested. But 
other Federal and State agencies frequently challenge FERC's 
role as lead agency. They do so by exploiting conflicts in 
Federal statutes, notably NEPA, the Coastal Zone Management 
Act, and the Clean Water Act. Now, we are not asking you to 
remove the authority granted to other agencies under these 
statutes, but what we are asking for is a little adult 
supervision. Congress should do these six things.
    One, affirm FERC's role as lead agency for pipeline and LNG 
terminal permitting and construction under the Natural gas Act.
    Two, task FERC with coordinating all environmental reviews 
under Federal law, including NEPA.
    Three, affirm that FERC has siting authority for LNG 
terminals.
    Four, codify FERC's Hackberry decision. This, by the way, 
is one excellent example of how common sense and a commitment 
to process improvement can make a difference.
    Five, require other Federal and State agencies to use the 
FERC administrative record as sole record for all reviews and 
appeals. This will prevent other agencies from sitting out the 
FERC review process and then subsequently conducting their own 
duplicate proceedings with a duplicate record.
    And finally, number six, require expedited judicial review 
by the U.S. Court of Appeals for the D.C. Circuit when disputes 
do arise over FERC-approved projects.
    And I will be glad to explain all of this in Q&A. Thank 
you.
    The Chairman. Thank you very much.
    Mr. Robinson.
    Mr. Robinson. Senators, we need help. We need help with 
siting, and we need help with siting basically because it is 
not good enough to site infrastructure where people want it, 
where people can accept it. I will use LNG as an example. We 
have 13 pending LNG applications at the commission right now. 
Probably two-thirds of those have no real opposition 
whatsoever. We have also authorized three new LNG facilities in 
this country. Those LNG facilities that are not opposed and 
those LNG facilities that have been authorized are all in the 
Gulf. It is not enough to put LNG in the Gulf. We will probably 
never see or I would be hard-pressed to imagine that we will 
ever get another pipeline across the Hudson River. You can put 
all the LNG that you want to in the Gulf of Mexico and you will 
not do one thing for New England in terms of their gas 
supplies. So we need a siting policy which is rational and 
allows for everybody's input and decisions to be made that are 
in the regional interests, not governed by parochial 
restraints.
    Three points to have a rational siting process.
    First, you have to have clear jurisdiction for a lead 
agency, an agency that people look to to make that decision.
    Second, you need the development of one Federal record. All 
agencies that operate under Federal statute or State agencies 
that operate under delegated actions from the Federal statutes 
need to cooperate with the commission and develop one record 
from which all those actions can be taken in a time frame 
established by that lead agency. That is just good government, 
to have everybody do it at one time and use one record.
    There needs to be some teeth in it, however. If an agency 
does not take that action within the time frame required by 
that Federal agency, it should be assumed waived, that their 
authority is assumed waived if they do not take that action in 
a reasonable time frame.
    The third element that you need, beyond the clear 
jurisdiction and one Federal record, is you need to have a 
direct appeal of all of those actions to the Federal Court of 
Appeals, not a series of sequential administrative and State 
court and Federal court appeals that can kill a project with a 
death by a thousand cuts just in terms of the time frames 
associated with going through all those appeal processes.
    If we have those three elements in a siting process that 
only you can provide to us, we can rationalize the siting for 
not only natural gas, but I offer it as a model for any 
infrastructure development that people are interested in seeing 
move forward in this country.
    The Chairman. Thank you very much.
    Mr. Davies.

STATEMENT OF PHILIP DAVIES, VICE PRESIDENT AND GENERAL COUNSEL, 
                    ENCANA GAS STORAGE, INC.

    Mr. Davies. Thank you, sir. My name is Phil Davies. I am 
Vice president and general counsel of EnCana Gas Storage, Inc. 
However, today I am here to speak on behalf of my company and 
two others, Pine Prairie Energy, a Sempra company, and eCORP, 
LLC. Together those companies represent amongst the largest 
independent storage developers operating in North America 
today.
    I would like to talk very quickly about the changing nature 
of gas demand. We are all aware that demand is increasing, but 
its nature is changing as well and it is changing in a radical 
way. It has become increasingly weather-dependent and it has 
become much more variable. Stable industrial load is being 
displaced by more variable residential and commercial demand 
and by gas-fired generation, the latter being the largest 
single contributor to increasing gas demand spikes.
    Now, the extreme price volatility that we have seen during 
periods of peak gas demand demonstrates that the current 
delivery infrastructure can no longer consistently satisfy the 
demand spikes that frequently challenge its capacity. And 
failing to identify and respond to this dynamic by increasing 
investment in our gas delivery grid will only perpetrate the 
extreme price volatility that we have witnessed over recent 
winters.
    Mr. Rattie and others have spoken about the need for 
additional transmission capacity. Our focus is on the need for 
more storage and on looking for vehicles or ways in which 
policies can be adopted to encourage incremental investment in 
storage. Storage is unusual because it requires a substantial 
up-front investment in the form of cushion gas and cushion gas 
at today's prices can easily equal 50 percent of the capital 
costs of the storage facility if it is a reservoir facility. 
With salt it is somewhat less. By contrast, cushion gas would 
have represented less than 10 percent of capacity invested in a 
similar project were it built in 1975 and less than 25 percent 
were that project sited in 1995.
    At prevailing gas prices, simply put, new gas storage 
development is becoming cost prohibitive. We would recommend 
reforms to tax depreciation rules which recognize this reality 
and we have outlined some of the suggestions we have in our 
more detailed proposal.
    I would like one more word to express a comment about 
leadership. I think these are uncertain times and those are the 
times for leaders to emerge. I compliment you and your 
committee members for convening this conference.
    I also want to compliment the FERC for focusing on storage. 
It has been a subject which has had a lot of staff time. They 
have issued a storage report and made storage the feature the 
piece for this year's natural gas state of the industry 
conference. They have also shown regulatory flexibility in 
relaxing some of the more onerous regulations that apply to 
independent storage, and we congratulate them for that as well.
    The Chairman. Thank you very much.
    Please.
    Mr. Cruickshank. Good afternoon once again, Mr. Chairman.
    The Chairman. Yes, indeed.
    Mr. Cruickshank. Walter Cruickshank with Minerals 
Management Service, and we oversee the infrastructure for 
development of resources on the OCS. I would be happy to answer 
any questions the committee may have.
    The Chairman. All right.
    BLM.
    Mr. Lonnie. Good afternoon, Mr. Chairman. Tom Lonnie, 
Assistant Director for Minerals Realty and Resource Protection 
with the BLM. We process right-of-way applications and 
applications for gathering systems on public lands.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Thank you very much.
    Again, I will ask Mr. Robinson, since this is obviously an 
area you spend a lot of time on, and then Mr. Rattie if he has 
a different perspective.
    INGAA's recommendations and I think what you have said as 
well are that FERC be given clear authority to establish an 
administrative schedule for the NEPA review and associated 
permitting decisions for all relevant Federal and State 
authorities. Are the respective State agencies in agreement 
with this, or is there substantial push-back from them on this 
idea?
    Mr. Robinson. Well, it is actually an idea that we have 
implemented administratively at the commission through what is 
called a pre-filing process where we try to gather all the 
agencies, State, Federal, local, and have them, from the very 
beginning, identify issues and work them out with us. The 
problem with that process is that it is administrative, and as 
long as the project is well received and going well, then 
everybody plays nice. As soon as you come to a project where 
there is an agency that does not necessarily think it is a good 
idea, that has a tendency to break down. That is why we would 
ask that legislatively we have this one Federal record concept 
in place. Again, it does not remove anyone's authority, but 
requires them to play in one game and not try to kill a project 
with a death by a thousand cuts.
    Senator Bingaman. So how does this work then? States do 
have authority under the Coastal Zone Management Act and under 
the Safe Drinking Water Act. And you say their authority would 
not be overridden or diminished. But you would give them a 
schedule for carrying out that authority or exercising it, or 
how would that work?
    Mr. Robinson. Again, that is exactly the way we try to work 
it now, and in most instances it works quite well. The States 
will develop their record with us, use our NEPA document in 
many instances, and then take their action in a time frame 
which is consistent with the commission's time frame. What we 
would like to see is that be a legislative requirement so that 
the agencies have to perform in that fashion as opposed to 
picking and choosing.
    Senator Bingaman. Mr. Rattie, you are in agreement with 
what he has just described as the right way to proceed?
    Mr. Rattie. I certainly endorse what Mark has just said. 
Let me give you an example. I think we are seeing great 
progress in this area. We have got a long ways to go. If 
someone had told me 2 years ago that we were going to file an 
application with the FERC for a significant pipeline expansion 
in the Rockies and get the certificate 90 days later, I would 
have told you you were absolutely nuts. But we did just exactly 
that. We received a FERC certificate for an expansion of a 
pipeline in central Utah in 90 days. We used the pre-filing 
process. FERC, I believe, has shown a serious commitment to try 
to expedite and streamline the permitting process.
    Now, this was in an area where there were not a lot of 
issues to resolve, but it shows you what can be done if we use 
a single process. The situation we have today is everyone deems 
themselves responsible which means no one is accountable. We 
have got to fix that.
    Senator Bingaman. I would just ask one other question, this 
to the representative from the Department of Transportation. We 
passed that legislation to give additional authority to you 
folks with regard to pipeline safety. Are you persuaded that 
that has given you the wherewithal or what you needed in order 
to solve some of these obvious problems that existed with 
pipeline safety?
    We had a terrible tragedy in our State a few years ago, as 
you will remember, near Carlsbad, New Mexico, where several 
people were killed because of a rupture in a pipeline that had 
not been tested maybe since it was constructed. Are you 
confident that the testing is occurring on a regular basis and 
that those kinds of problem do not continue to plague us?
    Ms. Gerard. Well, it is a 10-year process. We put the 
regulations in place in accordance with the schedule. In that 
law, we are a year past that point where the companies are 
required to have identified the sites where the protection is 
required. I believe that the community that you are speaking 
about would be protected under that risk-based scheme that I 
spoke about before. A lot of emphasis has been put on 
protecting people who are unsheltered in outdoor areas where 
they are known to congregate. We have, again, enlisted the 
support of local officials in identifying those places.
    So the process is well underway, but it will take a 10-year 
period to get all the testing and repair done. That testing and 
repair could lead to some capacity issues because until the 
repairs can be made, there may be pressure reductions that are 
necessary. But the testing is underway that you are referring 
to.
    The Chairman. Thank you, Senator Bingaman.
    Senator Craig.
    Senator Craig. Thank you very much, Mr. Chairman.
    Mark, let me ask you this question. Do you know if the 404 
permit for the Islander East pipeline has been let?
    Mr. Robinson. No, it has not.
    Senator Craig. Well then, Mr. Rattie, do not get your hopes 
up.
    [Laughter.]
    Senator Craig. The reason I say that and the need for what 
Mark has just told us, Mr. Chairman and our ranking member, 
Senator Bingaman--I think we are 27 months now or better?
    Mr. Robinson. Over 2 years.
    Senator Craig. Over 2 years since FERC said go.
    The Chairman. What is this on, Senator?
    Senator Craig. This is on the Islander East pipeline in the 
State of New York.
    Mr. Robinson. It goes from Connecticut to New York.
    Senator Craig. Does it feed New York City?
    Mr. Robinson. Long Island, yes.
    Senator Craig. It feeds Long Island.
    Twenty-seven months later, the Army Corps of Engineers has 
not yet agreed that FERC is right in what they did. Here is an 
example of duplicative process, waste of resource, and the 
right hand questioning the left hand's actions.
    Now, it is a very cold winter. New York City is 
experiencing record temperatures and this morning the national 
news suggested that the consumer of New York would pay a higher 
energy bill this year than ever before. Shame on us.
    Thank you for holding this hearing.
    Mr. Rattie, until we get those bottlenecks out of the way, 
do not bet your company's bank on 90-month--what did you say?
    Mr. Rattie. Day.
    Senator Craig. 90-day permit issuances.
    Mr. Rattie. Well, let me just help underscore your point. 
The price of gas on the spot market today is about $6 in 
Chicago. It is about $20 in Transco zone 6. High prices convey 
a very simple message.
    Senator Craig. Where is Transco zone 6?
    Mr. Rattie. That is the New York area. We do not have 
enough pipeline capacity to move the gas into where the market 
needs the gas. So, Senator Craig, you are spot on.
    I was only offering a hopeful vision of what might be 
achievable if we could get all parties to agree to let FERC 
take the role as lead agency and let their record stand.
    Senator Craig. Well, the reality is that the consumers of 
New York City today are, in fact, paying a phenomenally high 
price for a scarce supply because we cannot get it to them 
because we let our agencies fall over each other.
    The Chairman. Well, I was going to ask the question a 
different way, but I was going to say New York residents ought 
to look at Chicago and say what happened, because the bill in 
Chicago did not go up. New York's went up because they did not 
have enough gas because of no pipelines. But if you woke up in 
Chicago, even if you had the same weather, the same thing did 
not happen. That is what we understand, and I was going to ask 
why but you just told us, I assume. Is that correct?
    Mr. Davies. I have an additional comment, if I may. Chicago 
is representative of a market that is well balanced with both 
incremental pipeline capacity. There has been a number of new 
lines sited there. It also well balanced in terms of its access 
to storage capacity.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Mr. Chairman, it seems to me we ought to 
be telling the Secretary of Defense to get the Army Corps of 
Engineers off the dime here. I mean, he has got a few other 
things to worry about, but this is obviously in his 
jurisdiction.
    Senator Craig. Senator Bingaman, it is the New England 
district office of the COE, and if you need the name of the 
player up there, who I have been corresponding with for well 
over 2 years who cannot give me an answer yet, I will be happy 
to supply it.
    The Chairman. Well, the Secretary of Defense may have 
direct authority but my subcommittee appropriates its money.
    [Laughter.]
    The Chairman. So I guarantee you you have taught me 
something today, and they will probably react much, much more 
adroitly when we call them in and talk about it. I hate to say 
that but that is the reality of it. You might find that works 
here. We will see since my staff will remind me about this.
    Let us see. I had one other question. You have already 
supported the idea about one central FERC line of authority. 
Does everybody agree with that or do you not agree with it? 
Anybody on this side? Do you agree with that, Mr. Cooper?
    Mr. Cooper. Let me make a point about process because the 
important point and the political point--and we have emphasized 
this in our comments--is that at the end of the day, the point 
here is to make sure that the parties affected feel that they 
have had the opportunity to be represented in the process. I 
agree emphatically that one fair chance to speak is all you 
ought to get, all you need to get, and if you organize the 
process carefully and make that record a part of it, the Army 
Corps of Engineers ought to be able to challenge the FERC's 
judgment at some point and that ought to be part of the record. 
If it gets litigated, it is a little bit peculiar but the Army 
Corps of Engineers might sue the FERC if they really think they 
have made a mistake. But that does not have to slow the process 
down beyond one set of approaches.
    And the same thing would be true of the State of 
Washington. They ought to have a fair chance to be part of that 
record, to insert documents in that record so one record versus 
two records is not the issue. A complete record is the issue.
    So in that sense, I think that is the right way to approach 
it, and I do not object to a single process, as long as we 
develop ways for everybody to get their point in, to have their 
right to object and move it along.
    Mr. Robinson. If I could just make one quick point to that. 
In terms of the public having the right to be involved, this 
morning with our chairman and Commissioner Suedeen Kelly we met 
with two of your colleagues, Senators Kennedy and Kerry and the 
mayor of Fall River where there is a proposal to build an LNG 
plant. Prior to that meeting, I went back and looked at the 
number of opportunities. We had 12 different meetings in their 
area by FERC staff to take comments and discuss with the people 
that would be affected, and we had six different meetings 
directly with the mayor himself about that project. We have the 
most public process that I am aware of in the Federal 
Government for taking comments and concerns and making sure 
that they are in the record.
    One other point, using Islander East as an example. Even 
there where the Corps of Engineers has not acted in over 2 
years, all we are really talking about is having the Corps 
develop their record as we develop ours, at that same time, and 
then take their action. Failure to take the action can be as 
damning as saying no when it comes to energy infrastructure 
because pretty soon we will get to the point where the first 
dollar will not be invested. People will not come to you and 
ask to develop infrastructure because they do not know what the 
process is going to be like and how long it is going to take. 
It is just not a transparent process. You are stopped at 
different points along the way. What I have proposed, as far as 
a rational siting process, would respond to those types of 
first-dollar concerns.
    The Chairman. Well, I guess I would just close these 
comments by saying it is so obvious, I guess, to everybody in 
this room listening to the discussion, including the comments 
that Mr. Cooper had from the Consumer Federation standpoint, 
that we ought to fix this. But I would bet that it has not been 
fixed because it is not easy to fix. I mean here. But maybe we 
will give it a try and see if perhaps we can.
    I want to thank all of you. It is good to see you again, 
Scott. It is a pleasure. I hope I can get down there again to 
visit with you.
    Let us get the next panel please.
    I understand that this is a place where we all could take a 
break even though we are a little bit behind. So let us take 15 
minutes and come back and start.
    [Recess.]
    The Chairman. If you all would take your seats, we would 
appreciate it. Okay, is everybody in place?
    I was looking out there and telling Senator Bingaman what a 
wonderful crowd you are and that you all stayed for the whole 
afternoon. I will not tell you what he said, but in any event, 
I assume you are all here because it is your job. That is good. 
That is all right with me. If you stay here and learn something 
because you are getting paid to, that is okay.
    In any event, we are going to proceed, and we thank you for 
what we have done so far. The participation I think has been 
good. Certainly we could have taken any panel and taken a half-
day. We just do not have that much time, so we are going to 
pick and choose. On the last panel, on liquified natural gas, 
the one before that, we are going to have another full hearing 
on it because of some of the very significant ramifications for 
the future.
    So we are going to proceed on the environmental side. We 
will hold ourselves to the 2-minute rule and have some 
questions that will follow. IPAA, Lee Fuller, will you start?

     STATEMENT OF LEE FULLER, VICE PRESIDENT OF GOVERNMENT 
    RELATIONS, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA

    Mr. Fuller. Thank you very much, Mr. Chairman, and Senator 
Bingaman. I am Lee Fuller. I am here on behalf of the 
Independent Petroleum Association of America.
    Let me state at the outset that independent producers 
understand that energy must be developed with environmentally 
sound practices. No one questions the need to manage the 
environmental consequences of energy development. However, no 
regulatory system will ensure perfect compliance with its 
standards. Nevertheless, the regulatory process must be 
fashioned to provide essential protection without becoming a 
barrier to action.
    Producers operate in a dual regulatory world, generally 
coping with both State and Federal requirements. Most Federal 
regulatory laws are written to delegate their implementation to 
the States. This structure is essential and should be enhanced.
    Equally important, States have long been the primary 
regulators of the natural gas production process. Congress 
needs to avoid yielding to the false arguments that only 
Federal regulations, only the Federal process can effectively 
regulate.
    Managing Federal resources presents a different challenge. 
A portion of the onshore Federal reserve base is off limits and 
underlies national parks or wilderness areas, but the remainder 
of these Federal reserves principally underlies multiple use 
lands, lands where energy development should be treated equally 
with the other uses of the land. 36 years ago, Congress enacted 
the National Environmental Policy Act, NEPA, creating a 
mechanism to ensure that the Federal Government fully considers 
the environmental consequences of its actions when it makes 
decisions. Significantly when NEPA was enacted, Congress sought 
to create and maintain conditions under which man and nature 
can exist in productive harmony.
    Times have changed. Opponents of development move their 
agenda first to a philosophy of preservation and now, 
apparently, to one of prohibition. NEPA and other Federal land 
management processes have become tools to prevent Federal 
decisions through delay and litigation rather than assure 
effective environmental management. Congress needs to assure 
that the Federal decision-making is just that, a decision-
making process, not a tool to prevent decisions.
    Thirty-six years ago, man also landed on the moon and a 
terrible offshore oil spill occurred near Santa Barbara. Today 
we are sending remote satellites to the moons of Saturn and we 
are using similarly advanced technologies to develop our 
offshore oil and natural gas resources. Yet, today we are 
arbitrarily foreclosing the development of critical national 
resources at a time when there can be no question that those 
resources are crucial to meeting key energy needs, key to the 
retention of thousands of important domestic jobs and essential 
manufacturing industries. Congress can no longer ignore the 
consequences of its failure to address this critical issue.
    Independent producers remain the principal player in 
developing America's natural gas resources, drilling 90 percent 
of the domestic wells and producing about 85 percent of 
domestic natural gas. Federal environmental regulatory policies 
and procedures can determine their success or failure. 
Providing a balanced, predictable, and well-reasoned Federal 
framework is essential.
    Thank you.
    The Chairman. Thank you very much.
    We will proceed now with the NRDC representative. Thank you 
for coming, ma'am.

         STATEMENT OF SHARON BUCCINO, SENIOR ATTORNEY, 
    PUBLIC LANDS PROGRAM, NATURAL RESOURCES DEFENSE COUNCIL

    Ms. Buccino. Good afternoon. My name is Sharon Buccino and 
I am a senior attorney in the Public Lands Program of the 
Natural Resources Defense Council.
    I would like to emphasize two points this afternoon.
    The first is we can increase domestic gas production 
without relaxing environmental protections. There are 
significant untapped gas resources open to development today. 
As Senator Thomas recognized earlier, there are some places 
that are too sensitive to drill, and these should remain off 
limits, including the moratoria areas of the Outer Continental 
Shelf.
    Second, environmental review and public participation are 
critical to ensuring that energy development moves forward in a 
way that minimizes impacts and reduces controversy. Despite 
advances in technology, exploration and development have 
lasting impacts. I did bring with me a picture of the 
development in Wyoming's Powder River Basin. As you can see, 
energy development has a lasting impact. It is changing the 
landscape of the West. It is depleting scarce water resources 
and destroying trout streams and farmers' fields.
    The key to accelerating energy development is to identify 
these impacts and address them. NRDC supports the National 
Commission on Energy Policy's recommendation to increase the 
funding for BLM and the Forest Service to manage our public 
resources wisely and efficiently.
    In conclusion, we should act now on what is certain. We 
know that renewables and energy efficiency are the fastest, 
cheapest, and most reliable way to solve our Nation's natural 
gas shortage. We should act on these measures and give them a 
chance to work before accepting irreversible damage to our 
treasured landscapes in the West and our coastal resources. 
These are based on uncertain estimates of dramatic new supply 
needs. We should remember that it was just a few years ago that 
the National Petroleum Council concluded--and I am quoting--
``sufficient resources exist to meet growing demand well into 
the 21st century.''
    Thank you.
    The Chairman. Obviously they were wrong.

    STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, NATIONAL 
                  COMMISSION ON ENERGY POLICY

    Mr. Grumet. Mr. Chairman, you have probably figured out 
that I am not Linda Stuntz. I am, however, Jason Grumet. I am 
the executive director of the National Commission on Energy 
Policy, of which Linda was one of our finest commissioners.
    Natural gas, of course, was a----
    The Chairman. You are here because she cannot be here.
    Mr. Grumet. I am here because she cannot be.
    The Chairman. Very fine.
    Mr. Grumet. Thank you.
    As was said on the first panel, I think our commission 
agrees that the key to balancing the precious balance between 
our energy needs and our natural resource needs is access. I 
think that we believe many good decisions are being made to 
balance that access, but we, of course, recognize that there is 
inefficiency, there are situations where over-restrictive or 
under-protective decisions are made. And our commission, in 
studying the problem, came to the conclusion that it is really 
the inadequacy of information that often leads to these 
decisions. So we are proposing in our report two, I think, 
modest but important efforts to increase the quality of 
information.
    The first, as Sharon just pointed out, is a targeted 
increase for BLM resources. Now, the BLM budget, with many good 
offices here, was increased significantly in 2001, but we 
believe not enough of those resources are going into the land 
use management. Still 162 plans are in process. Many of them 
are delayed. We did a study with the Teddy Roosevelt 
Conservation Partnership, and everyone agreed from hunters to 
developers to environmentalists that good information, good 
data gives you good decisions and less litigation.
    Secondly, we also propose that on a national basis, we 
should have a better understanding of our overall energy 
resources. And our commission is proposing to synthesize and 
augment the collection of data so that we have a comprehensive 
national inventory every 5 years of our fossil, of our 
renewable, and our efficiency resources. We are not proposing 
to do inventories in national parks or wilderness areas, but we 
are proposing that the Outer Continental Shelf requires a 
better understanding and that the natural gas resources there 
on the Outer Continental Shelf can, in fact, be understood in 
ways that do not damage the environment or marine life.
    Thank you.
    The Chairman. Thank you very much.
    We are going to go here. The Wilderness Society.

     STATEMENT OF DAVID ALBERSWERTH, PROGRAM DIRECTOR, THE 
                       WILDERNESS SOCIETY

    Mr. Alberswerth. Thank you, Mr. Chairman. We appreciate 
very much being invited to this very interesting forum this 
afternoon.
    The Wilderness Society supports the idea of developing 
natural gas on our public lands. We believe that that is a 
legitimate use of the public lands, but not everywhere.
    We question the presumption that current environmental 
statutory and regulatory safeguards represent severe 
impediments and restrictions to the oil and gas industry's 
ability to obtain sufficient access to that resource. An 
examination of the pertinent facts regarding the BLM's onshore 
program reveals that, as we heard from Mr. Lonnie this morning, 
that 88 percent of the natural gas occurring in the overthrust 
belt on public lands is currently available for leasing and 
development. The BLM issued over 6,400 drilling permits last 
year. That is more than we had originally thought they had from 
earlier data we received from them. The BLM has under lease 
right now about 42 million acres of public lands, with 
approximately 12 million acres in production.
    And we have found, in looking at some of the data made 
available by the BLM, that protected lease stipulations--these 
are special stipulations often criticized by the industry--are 
frequently waived at the request of the operator by the BLM.
    Moreover, review of the annual reports of various 
production companies that operate on the public lands reflects 
large profit increases during the past few years and also 
indications of increased gas production and additions to 
reserve estimates.
    The fact of the matter is that current public land 
management policies favor the extraction of oil and gas 
resources at the expense of environmental integrity of our 
western public landscapes. Proposals from some industry 
representatives that Congress act to weaken these environmental 
and decision-making processes as a means of increasing gas 
supply and thus lowering prices will, instead, only weaken 
existing protection for the environment and lead to no more 
supply.
    We have a couple of recommendations, but in view of the 
time here, you can ask me about those.
    Thank you.
    The Chairman. Just two?
    Mr. Alberswerth. We have five.
    The Chairman. We will ask you about them.
    Mr. Alberswerth. Thank you.

           STATEMENT OF WILLIAM WHITSITT, PRESIDENT, 
                   DOMESTIC PETROLEUM COUNCIL

    Dr. Whitsitt. Mr. Chairman, I am Bill Whitsitt, president 
of the Domestic Petroleum Council. I represent the large 
independent exploration and production companies. We have made 
a number of recommendations, but I have been asked to focus a 
few comments on technology at this session.
    Let me read you one sentence. ``From coast to coast, 
innovative E&P,'' exploration and production, ``approaches are 
making a difference to the environment. With advanced 
technologies, the oil and gas industry can pinpoint resources 
more accurately, extract them more efficiently and with less 
surface disturbance, minimize associated wastes, and, 
ultimately, restore sites to original or better condition.'' 
That sentence is from a DOE report under the Clinton 
administration and it as true today as it was then.
    Failure to recognize that our technology has advanced and 
continues to do so runs the risk of leaving us in a perception 
and policy time warp that may preclude us from adopting good 
energy policy as we take another shot at it. Failure to 
recognize how exploration and production has improved and 
technologies have improved may lead us to not consider the 
ability to access certain areas that were put off limits 
decades ago.
    I want to just highlight two elements today. There are two 
charts here. One talks about our ability now to drill multiple 
wells from single pads, to drill and complete multiple wells 
from a single well bore, to extended reach drilling and other 
technologies that allow us to access places we could not even 
several decades ago.
    The other on the other side is just a schematic of one 
offshore project that is state-of-the-art today where the well 
completions are actually subsea, allowing us to gather oil and 
gas through central facilities, far fewer facilities, that can 
be as far away as from here to Baltimore, maybe even further, 
and certainly well over the horizon.
    Thank you very much.
    The Chairman. Just a question. How long is that? The scope 
of one of those horizontal--what is the furthest you can go?
    Dr. Whitsitt. Well, the extended reach well there--I just 
got a note this morning, in fact, from one of our producers 
that they are in the process of drilling one they expect to be 
4 miles. Now, an extended reach well like that, of course, 
cannot be used everywhere because it is going to be limited by 
geology, going through sand versus rock and so forth. But 
again, it gives us an option that we did not have maybe several 
decades ago.
    The Chairman. Is 2 miles becoming ordinary?
    Dr. Whitsitt. It is certainly more frequent now than not, 
and that will continue to increase.
    The Chairman. Thank you.
    Mr. Lonnie. I am Tom Lonnie with the BLM. I am the 
assistant director for Minerals Realty and Resource Protection 
here in Washington.
    The Chairman. Thank you.
    Senator Bingaman.
    Senator Bingaman. Let me just be sure and just give anyone 
a chance to speak up if they want to. My strong impression from 
the testimony and the written statements here is that there is 
a virtual consensus that the BLM and the Forest Service both 
should be given additional resources with which both to act on 
applications but also to monitor compliance with various 
conditions that they put on leases. Is that what everyone 
agrees? Mr. Fuller, do you agree with that or not?
    Mr. Fuller. I definitely agree with that, but I would 
probably go a bit beyond that in that I think there are other 
agencies like, for example, the Fish and Wildlife Service who 
have to consult in these processes. We also need to be certain 
that they have adequate funding to participate in it. That can 
include EPA in some cases as well.
    Senator Bingaman. You say the funding for those three 
agencies--are those the main ones that need to have better 
funding in order that we avoid these conflicts, to the extent 
possible? Mr. Grumet?
    Mr. Grumet. Senator, I think that is the right list. I 
would just add that I think we are not talking about impossible 
amounts of resources in the scale of things. We proposed a 10 
to 20 percent increase in the BLM budget, on the order of $9 
million to $18 million, which is of course significant for the 
BLM but something that I think would go a long way toward 
making the process more efficient.
    Ms. Buccino. I would just like to emphasize the importance 
of the monitoring side of things and gathering the information 
and not just processing the permits. One specific example, a 
lot of times what we are seeing is in doing the environmental 
analysis, you may end up with a finding of no significant 
impact that is based on measures that are taken to mitigate the 
impacts that may occur. It is absolutely critical to have the 
monitoring to assure that that mitigation is actually 
happening, and that monitoring and the mitigation is not 
happening now because the resources are not there.
    Senator Bingaman. Bill.
    Dr. Whitsitt. Senator, let me just add a couple of quick 
points here. We have actually visited with some of the OMB 
budget examiners and I am not confident that they are on the 
same page as we are at this point. We really are going to need 
help on this funding. Forest Service, BLM, of course, are top 
priorities for us.
    In New Mexico, for example, in the Farmington field office 
that I know both of you are very familiar with, a poll of the 
producers and their drilling plans for next year shows a 
substantial increase in the number of permits that will be 
sought compared with the fine improvement that that office has 
had over the last 3 years in doing more permits, but they are 
still going to be asked for more there than they have been able 
to produce to date.
    Mr. Alberswerth. Senator Bingaman, if I may. We agree with 
that as well.
    We would suggest that the committee might want to examine, 
though, whether or not one means of getting that resource to 
the agency is through cost recovery efforts. I know that there 
has been criticism of OMB's attempts to have the BLM ask the 
industry to cover some of their increased administrative costs 
through cost recovery initiatives, and we think that this might 
be an opportunity that you might want to look at in view of 
limitations on appropriations for BLM programs.
    The Chairman. Well, I do not know whether I agree with that 
or not. But Senator Bingaman, if we can work on this and make 
sure that when we give the BLM and the Forest Service and the 
Fish and Wildlife more money, that they are going to use it for 
what we are talking about. I am going to lead the show and you 
and I can do it together even though it is appropriations 
because it is not right for us to keep saying they have to do 
it if they cannot do it.
    Now, it used to be we were not sure they were trying to do 
it, at least to this Senator. But I think they are trying. I do 
not think anybody is trying to really tell them they should 
not. It is just that the resources are very limited, and it may 
they cannot find help either.
    Let me ask the BLM Director. What do you think about this? 
Do you need more resources to get more done? Some are saying 
that there is a surplus of leases and approved drilling permits 
and that there is no need for any increase in access. How do 
you feel about that versus resource availability?
    Mr. Lonnie. Well, I support the President's budget, 
Senator.
    [Laughter.]
    The Chairman. We do not even know what it is.
    Mr. Lonnie. But there is no question that if we had 
additional resources, then we would put them towards whatever 
activities that were identified.
    The Chairman. I should not have asked you that.
    [Laughter.]
    Mr. Lonnie. Thank you.
    The Chairman. But anyway, we accept your answer with tongue 
in cheek.
    How about this? The argument is that there is a surplus of 
leases and approved drilling permits and we do not need to 
increase it. Now, I am not talking about money. I am talking 
about that set of facts. Is that true or not?
    Mr. Lonnie. Well, there are a number of reasons why leases 
may not be drilled that are in existence, and I am sure some of 
the industry people could speak to that. But usually it takes a 
while to develop a prospect, to actually pick up all the leases 
in a certain area. Before drilling commences, maybe the seismic 
work has been done. There has been limited exploration. There 
are a number of drilling permits that have been approved where 
wells have not been spudded, but normally our statistics show 
that over a 4- or 5-year period, about 80 percent of the 
permits are drilled.
    The Chairman. Do you have any comments about that?
    Mr. Fuller. I would be happy to and I think Bill has some 
as well.
    I think what is important to understand is that we are not 
a just-in-time business. We have to be well ahead of time when 
we are going out for leases and getting all the leases that we 
need to be able to find a prospect that makes sense to drill. 
We have to get the drilling permit after that. We have to 
comply with whatever stipulations exist on the leases or on the 
drilling permit that may define when we can do things and under 
what conditions we can do things. It is difficult to look at 
any snapshot in time and judge where we stand.
    We are also an industry that lost 65,000 employees in the 
1998-99 downturn. We also lost a lot of rigs during that period 
of time. So there is a build-back that is taking place, and it 
is taking place slowly because it is hard to attract people 
into that kind of a cyclical industry.
    So what we have seen, what we have appreciated is the 
effort that has been underway to try to get through the backlog 
of permit applications and get through the leasing process.
    Not all leases will ever be drilled. I think that is 
another factor. I looked at a document that we had from one of 
our 1985 publications where Senator Simpson had written an 
article and made the point that only 1 in 10 leases got drilled 
at that point in time. So I think we are much better now, but 
we have to build to it.
    Bill may have some other things he wants to add.
    Dr. Whitsitt. Let me just say that, Senator, your staff has 
a copy of our 10 reasons why it is necessary and normal to have 
an inventory of leases and permits.
    The Chairman. Let me ask if you would put that one up that 
NRDC put up, please. Did you have a comment?
    Ms. Buccino. Yes. I just wanted to comment on what I think 
those numbers also show, which is we have been able to increase 
the leases and the number of applications for permits to drill 
without relaxing the environmental standards. At least in some 
of the testimony that was submitted by some of the industry 
representatives on this question, there were frequent 
suggestions that there needed to be exemptions from the Safe 
Drinking Water requirements, the Clean Water requirements, the 
Clean Air requirements. We have industry saying we can drill 
and protect the environment at the same time. So we should not 
need to create exemptions from the environmental statutes.
    The Chairman. I wanted to just ask a question and I do not 
know the answer to this, but I will ask the Wilderness Society 
and the NRDC. You have got a photograph of this. Is that 
methane bed gas?
    Ms. Buccino. Right.
    The Chairman. Are either of you aware of the huge ranch in 
northern New Mexico that is called the Vermejo Ranch? Are you 
aware of it?
    Mr. Alberswerth. I have heard of it but I am not familiar 
with it, Senator.
    The Chairman. Are you aware of it? It is owned by Ted 
Turner.
    Ms. Buccino. Right. Yes, I am aware of it. My understanding 
is that there have been some things done there in terms of best 
management practices and doing things right, and I think it is 
worth emphasizing that a number of the environmental groups, 
the Wilderness Society stated explicitly we are not opposed to 
natural gas production. The important thing is to do it right. 
Some of these permitting processes like the storm water 
permitting requirement that has been an issue is the process 
that allows those best management practices to be put in place 
and to be enforced.
    The Chairman. Well, the point I was going to make is--it is 
interesting because I did not hear from any of those who were 
worried about great landscapes and wilderness type areas to 
even comment on the fact that Mr. Turner, a friend of mine, 
drilled 1,500 gas wells on the Vermejo Ranch. He did not ask 
your permission. He did not ask yours. He did not ask ours. He 
did not follow the national environmental impact law. He 
drilled them and nobody is talking about it even to this day, 
about whether they should have been drilled.
    But I would venture that if that were public lands, there 
would be no chance that there would have been 1,500 wells on 
that property. That is just an observation.
    Mr. Alberswerth. Senator Domenici, I think that is because 
we all in this room feel that we have a stake in those public 
lands and we do not have a say about what Mr. Turner does on 
his land.
    Senator Thomas. If you own the surface and the mineral, you 
have a lot more freedom to do what you want to do.
    The Chairman. No, but the point is Mr. Turner does not feel 
like that.
    Mr. Alberswerth. I see what you mean.
    The Chairman. You understand. All of you have praised him 
because he is not a landlord that is supposed to be any less 
concerned about environmental issues on his land as we are on 
ours. I just make the point because it would be nice to go up 
and look at his with some of you all and say what happened 
here. And maybe we will invite you and maybe we can do that.
    Mr. Alberswerth. I would like to do that.
    The Chairman. Maybe the people down there so you do not 
have to come from Washington.
    Any of the rest of you, Senators?
    Senator Thomas. I would like to.
    This picture here I think you mentioned, Sharon, that you 
can refurbish this and put it back in the original state. Was 
that not you?
    Ms. Buccino. No. My comment actually was the lasting impact 
it has in changing the landscape.
    Senator Thomas. I thought somebody said----
    Dr. Whitsitt. Senator, first of all, that is our goal, is 
to put the land back in the shape that we find it and even 
better. In fact, in our prepared statement that was filed, we 
have an example again from New Mexico where the Forest Service 
thought they were going to prevent us from going into an area 
because it was undisturbed, and our companies, with aerial 
photography, proved that it was actually an old gas field that 
you could not even tell had been disturbed. That is our goal.
    Now, I do not know what that picture shows. Clearly there 
is going to be an impact where we have oil and gas activity. 
The question is are we doing it the right way, are we managing, 
are we reclaiming those drill sites, and today are we using the 
new technologies that I mentioned to drill more wells from a 
single pad. We just saw in Wyoming, for example, the Pinedale 
office that I think some have criticized for granting 
exceptions. They have got an application pending, one pad, 16 
wells from one drilling location, probably using some of those 
very technologies that are shown there.
    Senator Thomas. The Jonah Field there, right.
    Well, these are fairly short-lasting. These wells do not 
last forever. They are fairly short. But you have to take care 
of the roads. You have to take care of the water in the 
meantime, which has been difficult because the gas is there in 
the water, the power lines that are in and so on. But they can 
be.
    I was going to ask about the horizontal drilling. If you go 
down to the big reserves at 18,000 feet, can you do these 
things economically?
    Dr. Whitsitt. I think you are testing me at the limit of my 
knowledge here. Horizontal drilling--I am not familiar with how 
deep you can do it in a situation where you have got the 
geology that you are describing. I know that some of our 
companies are producing wells from very deep formations in 
Wyoming. I doubt that there is horizontal drilling there.
    Senator Thomas. No, I am not suggesting that but I am 
saying these unconventional techniques--can you do it at a 
reasonable cost whether it is 18,000 feet or whether it is 4 
miles horizontally?
    Dr. Whitsitt. If we are talking about some of those 
completion technologies, this is the type formation--this is a 
tight sand, gas trapped in the rock. Clearly the fracture 
stimulation technology and the things that are necessary to 
produce this can be done at fairly deep levels. The extended 
reach drilling, as I said, is limited by the geology and that 
kind of thing and the horizontal is as well.
    Senator Thomas. This Jonah Field you talk about, instead of 
being able to drill a hole and the gas moves in there, the gas 
is in pockets, so you have to have a well every here and there 
in order to get to the gas. So they are all quite different.
    Maybe we ought to have a royalty going to the BLM. If they 
get some production, they ought to get a little piece of the 
action to be able to fund their work.
    The Chairman. That was suggested.
    Dr. Whitsitt. Actually they get a lot of royalties when we 
get production.
    Senator Thomas. But it has to go around through guys like 
this--oh, excuse me--on Appropriations.
    [Laughter.]
    The Chairman. He means direct.
    Ms. Buccino. I just wanted to comment. We do support these 
advanced technologies, and I think what is important is that 
the environmental standards and the process is in place to 
ensure that they happen and that they produce the results.
    Senator Thomas. But if they are not noneconomic, it is not 
going to happen.
    Ms. Buccino. That is right.
    You mentioned the water. That is a real problem in terms of 
produced water from coalbed methane. And there are technologies 
that are being developed. They are not being used everywhere.
    Senator Thomas. There are technologies and it can be done 
and there is good evidence that it is being done, and I think 
we ought continue to improve that.
    The Chairman. I would say--Senator Bingaman, maybe you 
would agree--that our staff on the issue of horizontal 
drilling--we hear a lot about it and I go to the floor and show 
this map when we have ANWR and show how many we can drill from 
one pad. But I think we ought to get information about what it 
really is, where can you use it, how deep can you use it, what 
formations. It does not do us much good to have the theory if 
they cannot use it. I do not like to talk about ANWR if they 
cannot use it in ANWR. So we could get that from some source I 
assume.
    My last one has to do with there is a contention--and I 
will ask the IPAA. I think the Wilderness Society maintains 
that the protective lease stipulations are frequently or maybe 
even usually waived by BLM. What is your response to that? 
Maybe we would ask you also.
    Mr. Fuller. Well, our experience with the process has been 
that there is an opportunity to go in and seek a waiver of a 
lease stipulation. I think that each of those decisions that 
are made are made on the basis of the conditions in place at 
the time, and the fact that a number of lease stipulations are 
waived does not mean they are being waived improperly. It is 
part of the process. I do not have data on how many have been 
done. I do not have data on the details of it. Maybe Bill has 
some information on that.
    Dr. Whitsitt. Senator, one of the things that I was struck 
by with some of the testimony about, for example, sage grouse 
waivers--I actually went back and talked to the folks in 
Pinedale and said how does that happen. They are saying 90 
percent of these are granted. They said, well, of course, 
because we have consultation with the producers and if we go 
out in this permitting process and we do not find any sage 
grouse, we will say there are not any sage grouse here. And if 
you file an application, we will probably accept it to waive 
that one stipulation. But I have got a list here somewhere. 
There are 73 other conditions of approval or stipulations, and 
the BLM has to take all of them into account, and this is in 
the Pinedale area.
    So if you say that because they granted a number of these 
and people who were not going to get them did not file for 
them, somehow that leaves you with the notion that the BLM just 
grants most exceptions, I think that is just not accurate.
    The Chairman. BLM, do you want to comment?
    Mr. Lonnie. Yes, I would like to. About this time last 
year, I was out in Pinedale and visited the Pinedale anticline 
and took a look at the pilot project that Questar has going on 
where they are drilling numerous wells off of one well pad. As 
part of that, BLM worked with State game and fish to allow an 
exception, which is really a one-time granting of moving 
forward with winter drilling in big game habitat. It was 
primarily deer habitat. What I did find out was that these were 
not even stipulations associated on this existing lease. They 
had been added later as conditions of approval associated with 
the full-field development EA.
    I mention that because this was a situation where both the 
operator and the BLM had issued a lease with valid existing 
rights, but the operator was still willing to allow no drilling 
in the winter period.
    The other reason to grant these exceptions is the condition 
may not exist, as Mr. Whitsitt has just pointed out, but in 
addition, it could be an open winter and the animals are not 
there, so there is no reason why not to allow the operator to 
move in.
    But I think the other part of this is many times our 
offices will get a call requesting an exception and they will 
say no. So those statistics again never show up.
    Mr. Alberswerth. Mr. Chairman?
    The Chairman. Yes, please.
    Mr. Alberswerth. The reason that I brought that issue up is 
because there is an issue where many folks in the industry 
point to what they characterize as restrictive stipulations 
that effectively put off limits a large proportion of the 
Federal natural gas. So we looked at some of the data in 
Pinedale, and they do a very good job in Pinedale of publishing 
this data. And it showed clearly that in 85-90 percent of the 
time when the operator came in to ask for exemptions--they are 
called exceptions--they were granted, so the point being that 
that resource is, in fact, not off limits and those conditions 
are frequently amended at the industry's request.
    Senator Thomas. One of the things I think that you see 
where you are talking about Pinedale is there is sort of a 
broader plan for the whole area. So you can have pretty 
intensive--Alcan has the Jonah Field over here, but then they 
have also made arrangements over time for wildlife migration 
through another part. So they took a broader look at the whole 
area, as they did this, rather than taking each block at a 
time. So I think that works very well, to see what you are 
going to do with the whole area and how it is going to look as 
you move along.
    The Chairman. I would say that your contention that you 
found how many of the restrictions had been waived and 
therefore concluded they got to drill or they got their 
permits, I do not think that is consistent with what has been 
talked about here because waivers do not mean that the permit 
has been cleared of restrictions. You can get many, many 
waivers, but if there are multiple restrictions, you could 
still be left with an inoperative process. Say there were 80 
and you show up that they got 78 waived. That might not be a 
terribly relevant statistic with reference to whether we are 
getting something done. At least as to the numbers. It may be 
relevant as to restrictions.
    Mr. Alberswerth. Mr. Chairman, my impression is, though, 
that the reason that those were asked to be waived was because 
that waiver would allow that operator to go in there and 
operate. You should ask Mr. Lonnie about that.
    The Chairman. So he is saying that is different.
    Mr. Lonnie. Well, I am not familiar specifically with what 
he is pointing out, but the cases that I am familiar with in 
Pinedale deal with agreement from State game and fish, 
monitoring that was done by the operator to see what impact was 
on big game, and that was being reviewed for more of a long-
term study because there are significant impacts of moving all 
this activity into these short windows of opportunity in the 
summer or early or late fall because of the socioeconomic 
impacts, rig availability, and availability of crews. There are 
a lot of factors to take into account and this is something 
that is being looked at in that portion of Wyoming and other 
places right now.
    Dr. Whitsitt. Mr. Chairman, can I give you an example of 
the same thing? Again, in the Farmington field office, there is 
a consultative mechanism with the environmental organizations 
and others on under what conditions might there be an exception 
granted to one of these stipulations. The Farmington field 
office manager tells us that that information then is shared 
with the industry. If they believe they can meet the criteria, 
then they will apply for an exception and they will be granted. 
So he expects 100 percent to be granted. The people who cannot 
meet the criteria are not going to apply. So to say that 
because they granted 100 percent, it does not make any 
difference. It does not make any sense.
    The Chairman. I have two more quick ones, if you do not 
mind. Could I ask the NRDC? You are a chief counsel, so I would 
think maybe you would have a feeling for this. Do you see the 
court system as increasingly becoming the forum for policy 
making decisions on environmental issues?
    Ms. Buccino. I can give you some numbers in terms of the 
role of appeals and litigation by conservation groups. In fact, 
there was a GAO report that just came out recently, and one of 
the things they looked at was the MMS numbers offshore. The 
period of time they looked at was from the fiscal years 1999 to 
2003, and MMS reported no lawsuits challenging the 5-year 
offshore management plan or the parcels that were included in 
the 13 lease sales during that period. They also reported no 
challenges to the over 2,800 drilling permits at issue.
    We did attempt to get a sense of some of the litigation 
that has been happening onshore, looking at applications for 
permits to drill, for example. Between 2001 and 2002, there 
were 7,158 APD's issued and only 15 were appealed through the 
Interior Board of Land Appeals process or litigated in Federal 
court. That is .2 percent, so two-tenths of a percent.
    So in my view that is not where the decisions are being 
made. They are being made in the halls of Congress and the 
agencies that are managing the lands.
    The Chairman. If you have no opinion on this, fine, but why 
do we constantly hear--or maybe I do--that courts are the 
stumbling block, that too many cases are being decided in 
courts and too much policy is being made there? Am I not 
hearing that?
    Dr. Whitsitt. Senator, we also hear about challenges, both 
court and administrative challenges. The problem that I think 
Mr. Lonnie and others in the Department might be able to 
comment on is that apparently there is not a national 
clearinghouse to even know how many challenges there are of 
what form, particularly court challenges. So we do not know 
what the aggregate is. We hear from an individual company or 
members of ours, but I am not sure that the data is compiled 
anywhere to know. I think that is one of the findings the GAO 
made in its recent report.
    Senator Thomas. Court challenges are generally at a higher 
level of decision-making, not at the permit level. Do you not 
think that is where the challenge is normally?
    Dr. Whitsitt. Undoubtedly, it is part of it.
    Mr. Fuller. I think we have sensed that there have been 
challenges to the resource management plan process, which, if 
it is successful, forces the entire plan to be revisited and an 
entire set of environmental documents be put together, all of 
which are susceptible to challenges. There have been 
environmental impact statements that have been challenged on 
some of the larger areas and have delayed for those for some 
period of time.
    I agree with Bill. We are having a difficult time getting 
the precise details. We had hoped the GAO report was going to 
provide a better measure of that, but it found that essentially 
there was not a good tracking measure and we are continuing to 
look into it.
    The Chairman. Ms. Buccino, did you say filed or did you say 
finalized?
    Ms. Buccino. I was talking about the number of cases that 
had been filed. I do think it comes back to the issue of having 
adequate information and having the resources to do the 
analysis and do the land use planning right in the first place 
because if you can get all the issues on the table and all the 
players to the table and resolve those before going to court, 
that is clearly the beneficial solution for everyone.
    The Chairman. Yes.
    Mr. Lonnie. In some States right now--Utah would be one 
example--almost every one of our oil and gas lease sales has 
been protested over the last 2 years. The last protest that was 
resolved was a November 2003 protest. So we have got numerous 
cases where bidders have bid on parcels and we are withholding 
issuance until we have an opportunity to resolve those 
protests.
    In other areas, in Montana and Wyoming, those lease sale 
cases have gone to IBLA, district court, and the Tenth Circuit, 
and recently three parcels in Wyoming were withheld and we are 
currently under litigation in two different areas in Montana.
    Ms. Buccino. There is an important distinction to make. He 
referred to protests, which is very different from an appeal to 
the Interior Board of Land Appeals, an administrative appeal, 
or litigation in Federal court. GAO specifically chose not to 
look at the protest numbers and the reason was because that is 
simply asking the agency to look at the decision before they 
have made it. So it is giving a chance to look at it again, as 
opposed to the distinction between an appeal, a formal 
administrative appeal, and litigation. So I would argue that 
those are the relevant numbers to look at and they are very 
small, even in Utah.
    The Chairman. Well, we are not going to have enough time to 
get into what this all means. Are protests really being used as 
a means of delay or are they all very legitimate? We do not 
have time for that, but it is good to talk about it here.
    Thank you very much. The next panel will please come. Oh, 
excuse me. Senator Alexander had a question.
    Senator Alexander. Well, it takes us to the next panel, but 
I want to ask it of the two witnesses here who will not be with 
the next panel from the Wilderness Society and NRDC, if I may.
    There are different ways to bring the cost of gas down, and 
supply is one, and we are about to talk about another, which is 
very important, and that is conservation. The question I have 
is about diversification. I would ask each of the two of you. 
It seems to me we have limited options in diversification.
    In thinking of coal and nuclear in particular, in either 
case does your organization see a real option in terms of clean 
coal or in terms of nuclear power as a way of creating more 
energy in a way that permits the air to be clean but also 
increases our supply of that source of energy as a way of 
bringing down the cost of natural gas?
    Ms. Buccino. NRDC has been very active--our staff member, 
David Hawkins--on the issue of coal gasification. I should 
mention there was a specific proposal submitted by Bill 
Rosenberg which, while we support the concept, while NRDC 
supports coal gasification and has worked very hard on it, the 
critical element in there is for recapture of the carbon 
dioxide, and that is not built into the proposal that was 
submitted. So while the Rosenberg proposal addresses the 
criteria pollutants, it does not address and could cause 
significant increases in carbon dioxide, which we strongly 
oppose.
    Senator Alexander. And on nuclear?
    Ms. Buccino. The nuclear issue is more difficult for us, 
and I am not an expert in that area, so I guess I really do not 
have an answer for you on that.
    Senator Alexander. But you see more promise in the clean 
coal technology.
    Ms. Buccino. Yes. It needs to be done correctly, but 
absolutely.
    Senator Alexander. Mr. Alberswerth.
    Mr. Alberswerth. Senator, our interest as an organization 
really is the management of Federal public lands and we have 
not been involved in the debates on coal gasification and 
nukes.
    Senator Alexander. And one quick question. We were talking 
about the visual impact of what can happen. I remember down in 
Tennessee what we used to call strip mining, surface mining. 
That was a big visual problem. What is the attitude of each of 
your organizations on the prospect, say, of a picture of 500 1-
megawatt wind turbines 320 feet high as opposed to a single gas 
rig?
    Ms. Buccino. I heard your questioning earlier. I mean, 
those are very important and difficult issues. NRDC does feel 
that the solution to bringing gas prices down is to focus on 
the demand side, to promote more aggressively renewables and 
energy efficiency. We are strong advocates of wind power. We 
believe, as in dealing with any issue--the siting issues were 
addressed in the last panel. Those are critical issues and 
again you come back to the importance of the process, having 
meaningful environmental review and public participation to 
make sure that the impacts are identified and addressed.
    Mr. Alberswerth. We do support the development of more wind 
power. We think there are opportunities, especially on private 
agricultural lands in the Great Plains, for instance, where, 
for the past 20 years, rural communities' economies have been 
suffering, and it might be a good opportunity for some 
additional economic development in those communities. So we do 
not think it is the full answer to our future energy needs in 
this country, but it certainly should be part of the mix in the 
appropriate places.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you very much. I heard the last part. I 
will have to read the record for the first part of your 
question. Very interesting.
    I think we are finished with this panel and we are back on 
track. I want to thank each one of you for coming and spending 
so much time.
    This is the second-to-the-last panel. This one has to do 
with diversification and conservation. Remember our 2-minute 
rule, although we are doing very well. We appreciate that. It 
looks some faces are reappearing from before, and that is good. 
We will start with you please. You have been here before, but 
you are wearing a different hat now and we look forward to 
hearing from you.
    Ms. Showalter. I am Marilyn Showalter, president of the 
National Association of Regulatory Utility Commissioners. As I 
mentioned earlier this afternoon, our approach is that 
sustainable policies should include supply and conservation and 
diversification. They are all important.
    With respect to diverse supply, in the recent past, most of 
the Nation's electric generation capacity that has been added 
since 2000 uses natural gas, and this has caused a strong 
pressure on natural gas, as well as price pressure in 
electricity, which we now realize the risk of putting too many 
electricity eggs in the natural gas basket.
    NARUC supports resource planning with an eye towards 
diversity, but we do believe that what makes the most sense for 
any particular utility or particular State is going to vary. If 
I could give you an example. In my State of Washington, the 
largest utility, Puget, needed to meet additional demand, and I 
am speaking of electricity now. It found that the lowest 
hanging fruit was conservation, then a natural gas plant at 
that time, and then the next two acquisitions it is going after 
was wind. But that may vary a lot in different parts of the 
country.
    NARUC does support looking at renewables. I mentioned wind 
already, but as well as the others. And we also are a partner 
with DOE in examining clean coal technologies.
    But with respect to conservation, we like to think of it as 
conservation and efficiency. Sometimes conservation connotes 
that you are doing without, and that can be important, but 
efficiency, which is getting the same service for less gas or 
electricity, is equally important. I would just like to point 
out there that that too varies with region and locale, and I 
will give just one example. Again, Puget Power, our largest 
utility, has 300,000 smart meters for its residential users, 
and there is a great deal of information that can be produced 
from them. On the other hand, little Nespelem electric coop 
still reads its meters by people calling on the telephone in to 
the electric office, and that is the most efficient for them.
    So we think all of these are very important, but you do 
need to allow each locale to arrive at the best solution.
    Thank you.
    The Chairman. Thank you.
    You are next, sir.

STATEMENT OF STEVE NADEL, EXECUTIVE DIRECTOR, AMERICAN COUNCIL 
                FOR AN ENERGY EFFICIENT ECONOMY

    Mr. Nadel. Thank you, Mr. Chairman. My name is Steve Nadel. 
I am the executive director of the American Council for an 
Energy Efficient Economy. We are a nonprofit research 
organization that has worked on policies for promoting energy 
efficiency for the past 25 years. I wanted to make two points 
here today.
    First is that energy efficiency policy action is the best 
way to bring down natural gas prices over the next 5 years. 
Demand and supply are in very tight balance, and just a small 
reduction in energy demand could have a very significant impact 
on prices over the next few years before other resources start 
coming into play.
    We did a recent study using the same computer models 
employed by the National Petroleum Council and found that 
reducing natural gas and electricity use by 4 to 5 percent over 
the next 5 years, nothing that dramatic, could reduce gas 
prices by about 25 percent between now and 2010. After then, 
the price increase goes down a little bit because other gas 
supplies come in. Overall, we are saying over these next 5 
years, we could save over $100 billion for American consumers 
and businesses. So we think this is a very important, quick and 
first step that should be taken.
    Second, there is a foundation already. The Senate Energy 
bill, S. 2095 from the last Congress, had solid building blocks 
for such an effort, but we think it needs to be significantly 
expanded. Let me just mention a few of those now.
    The S. 2095 included a number of consensus minimum 
efficiency standards on different products. We have been 
working with industry. We have five more ready to be added and 
we hope to have a couple of other consensus agreements before 
legislation moves.
    Second, we recommend that an energy efficiency resource 
standard be established. This would be to set energy savings 
goals for the energy suppliers, the gas and electric utilities. 
It should be legislation that passed in Texas. It has been 
enacted for several years now. Then Governor Bush signed it 
into law, and it sets savings targets that the utilities need 
to meet each year. I think it has been quite successful and 
should be brought nationally.
    Third, the pending legislation included a number of tax 
incentives. We recommend a couple of refinements to them while 
trying to keep the costs very modest. We understand that the 
budget deficit is quite dire. Particularly we recommend adding 
air conditioners to it because air conditioners often use power 
from peaking plants that are fired with natural gas, and we 
also improve the furnace standards because those were not quite 
adequate.
    Finally, we recommend an energy efficiency and conservation 
campaign to encourage consumers to reduce their use of natural 
gas and electricity. In particular, we think expanded funding 
for the Energy Star program would be a good place to start.
    Thank you.
    The Chairman. Thank you very much.
    Mr. Cooper.

 STATEMENT OF ROGER COOPER, EXECUTIVE VICE PRESIDENT, AMERICAN 
                        GAS ASSOCIATION

    Mr. Roger Cooper. Mr. Chairman, thank you for having this 
conference today.
    I am Roger Cooper from the American Gas Association. AGA 
has two recommendations on improving energy efficiency.
    First, we need to change how we measure energy efficiency 
to avoid ignoring huge energy losses. What are these energy 
losses? It is the loss of energy when we extract a raw 
material, turn it into electricity, and deliver it to a 
customer. Typically about two-thirds of the energy is lost in 
that process, but currently we tend to ignore in our energy 
efficiency measurements looking at that side of the equation.
    So AGA requests that existing Federal energy efficiency 
legislation be amended so that we measure not only the energy 
efficiency of the appliance, as we do today, but we also look 
at the energy efficiency in a full-fuel cycle, so from wellhead 
to burner tip, from mine mouth to electric appliance.
    Our second point suggests how to align the interests of gas 
distribution utilities and the customers for greater 
conservation. In the past quarter century, the average 
residential household has reduced their natural gas consumption 
by 25 percent, about 1 percent a year on average. Pretty 
dramatic. But that is not enough. Today most natural gas 
distribution utilities can earn their fair, State-approved 
returns, approved by the public utility commissions, only by 
getting their customers to use more, not less, natural gas. 
Now, that is often the case with many businesses, but the good 
news is that it need not be the case.
    The solution lies in changing utility rate designs. 
Properly done, using so-called conservation tariffs that are 
approved by State public utility commissions we can reduce 
natural gas consumption, we can lower bills to consumers over 
time, we can increase energy efficiency and provide a 
reasonable return to shareholders. This concept has been 
endorsed by NARUC, by the Natural Resources Defense Council, by 
the ACEEE, and other organizations and put in place by 
Northwest Natural in Portland, Oregon.
    Thank you.
    The Chairman. Thank you very much.

 STATEMENT JEANNE CONNELLY, VICE PRESIDENT, FEDERAL RELATIONS, 
                      CALPINE CORPORATION

    Ms. Connelly. I am Jeanne Connelly with Calpine 
Corporation. Calpine owns about 100 power plants in 21 States.
    A lot of attention has been paid to improving efficiencies 
on the demand or the customer side, but we believe that it is 
also possible to improve efficiency on the supply side in the 
production of electricity. We have heard from many people that 
the majority of new power plants that have been built in the 
last decade have been gas-fired. But something interesting 
happened in the late 1990's. While the amount of electricity 
produced from gas continued to grow, the amount of gas used to 
produce that electricity did not grow concomitantly. And the 
answer is improved efficiencies because at that same time in 
the late 1990's, a lot of the new, very efficient, combined-
cycle natural gas plants started to come on line. They use 
somewhere between 30 and 40 percent less natural gas to produce 
the same amount of electricity as the older, inefficient gas 
plants.
    So from 1999 to 2003, the amount of electricity produced 
from gas increased 11.5 percent, but the amount of gas used to 
produce that electricity increased only 1 percent. So you had a 
savings of 650 billion cubic feet of gas.
    What has driven this improvement in efficiency has been 
competition. If you take the two neighboring States of Texas 
and Louisiana, both very dependent on natural gas for 
electricity production and their industrial processes, but 
Texas which has a competitive market for energy improved the 
efficiency of its gas-fired generation by over 10 percent from 
1999 to 2003, while Louisiana, which still operates as a 
regulated monopoly system, improved their efficiency by only 1 
percent. And the difference is that in a competitive market, 
the most efficient units get called on first. They are 
dispatched first.
    So our proposal for reducing the use of natural gas is to 
encourage all public utilities to use a system of efficient 
dispatch, whereby the most efficient units are dispatched 
first, whether they are owned by the utility or the power is 
generated from a non-utility owner, as long as it is available 
in the same region. And then the oldest, most inefficient units 
might never be called on or they would only be called on at 
times of peak usage.
    If all gas-fired generation were from the new, combined- 
cycle plants with an average heat rate of 7,500, in 2003 the 
country could have saved another 650 billion cubic feet of gas, 
just in 2003. And this translates into millions of dollars of 
savings to ratepayers where the cost of gas is passed right 
through to the ratepayer. And the environmental benefits are 
tremendous as well since you have quite a reduction in 
emissions of NOx and carbons.
    Since some regions of the country that have old and new gas 
also have an over-capacity of power right now, you could do 
this without having to have capital expenditures.
    Thank you.
    The Chairman. Well, you offer a pretty easy solution.
    Ms. Connelly. Well, it is not a panacea. It is just one 
small solution.
    The Chairman. We are moving over here.
    John.

 STATEMENT OF JOHN KANE, SENIOR VICE PRESIDENT OF GOVERNMENTAL 
               AFFAIRS, NUCLEAR ENERGY INSTITUTE

    Mr. Kane. Mr. Chairman, members of the committee, thank you 
very much for the opportunity to come before you today. I 
appreciate that. My name is John Kane. I am with the Nuclear 
Energy Institute.
    I wanted to make three key points and then just cover a 
little background.
    First, energy diversity we believe is essential to our 
national security and our economic security.
    Second, the course we are on now does not get us here. The 
chart you used, Mr. Chairman, earlier to show the growth in 
production of gas as an electricity source in the last 10 years 
makes that point.
    And thirdly, we believe one of the best ways to take the 
pressure off the unsustainable demand for natural gas is to 
build new nuclear power plants in the United States. We did it 
before and we can do it again in the nuclear industry.
    In the 1973 Arab oil embargo, we found that about 20 
percent of our electricity supply was coming from oil, about 3 
percent from nuclear. Building new nuclear plants for the rest 
of that decade and through the 1980's and 1990's, we reversed 
those numbers. We now have 3 percent of our electricity supply 
from oil and about 20 from nuclear.
    High prices for natural gas and the intense price 
volatility we have seen over the last few years are caused by 
this unsustainable demand. The situation is complicated during 
the winter months when limited supplies of natural gas are 
needed for home heating and industrial purposes. New nuclear 
baseload power plants can relieve that pressure on the natural 
gas supply and set us back on a path towards a diverse national 
energy policy that protects us from supply and price shocks in 
any one fuel sector.
    This country faces a critical need for investment in 
emission-free, next-generation nuclear power plants to relieve 
this pressure, to help preserve the fuel and technology 
diversity, to make our air cleaner, and to strengthen the U.S. 
national security.
    The Federal Government plays a key role in encouraging 
investment in the first generation of new plants, and this 
committee, we are very pleased, has led the way in that regard. 
Construction of new plants in this country requires a public-
private partnership between the Federal Government and industry 
to mitigate first-time costs. After new plant development kicks 
in, this kick-start process that has been proposed before 
should be dropped and let market forces take over.
    We are very pleased that you have chosen to hold this 
conference today, especially to focus on the diversity of fuel 
supply. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.

STATEMENT OF PETER VAN ALDERWERELT, SENIOR VICE PRESIDENT, PPM 
                      ENERGY, PORTLAND, OR

    Mr. van Alderwerelt. Mr. Chairman, members of the 
committee, I am Peter van Alderwerelt, senior vice president at 
PPM Energy in Portland, Oregon. Thank you for inviting me to 
participate today.
    The Chairman. You are welcome.
    Mr. van Alderwerelt. PPM Energy is a wholesale supplier 
primarily involved in the development of wind projects and 
marketing wind energy to the electric utilities. In fact, we 
are the second-leading marketer of wind power in the country.
    We are also engaged in gas-fired generation and gas storage 
facilities. The assets allow PPM to deliver products and 
services that help our customers manage risks and uncertainties 
in their power and natural gas businesses.
    If we do not do something to promote a more diverse 
generation portfolio, the electricity sector is going to become 
even more dependent on natural gas, leading to higher 
electricity and natural gas prices, greater imports of LNG, and 
a less secure energy future.
    There is no one magic-bullet solution. There are a variety 
of technologies that can and should be employed to ensure our 
new generating capacity is sufficiently diverse. PPM Energy 
believes that with appropriate government policies, renewable 
energy, in particular wind power, can help significantly reduce 
the demand for natural gas in the electricity sector.
    The U.S. Department of Energy has estimated we can feasibly 
install an additional 100,000 megawatts of wind capacity by 
2020. This additional generation would reduce natural gas 
demand by about 6 bcf a day, or 10 percent of total domestic 
gas consumption. We would save $12 billion to $15 billion per 
year by reducing LNG imports and would save untold billions of 
dollars by taking demand pressure off of gas and reducing its 
price.
    PPM believes Congress and the FERC can take several steps 
to enable wind power to meet its full potential and 
dramatically reduce natural gas price and supply volatility.
    First, Congress should extend the renewable production tax 
credit scheduled to expire December 31, 2005. The PTC is needed 
to help address the cost burden associated with integrating 
wind facilities into the transmission grid.
    Second, Congress should adapt a national renewable 
portfolio standard that establishes a renewable energy target 
for each retail electricity supplier. Unlike the PTC, the RPS 
provides stability by establishing short- and medium-term goals 
to enable investors to make decisions on more than a 1-year 
basis. PPM envisions the PTC being phased out as the RPS kicks 
in.
    Finally, Congress and FERC should both seek to implement 
policies that eliminate penalties associated with integrating 
wind into the electric grid. For instance, we applaud the 
recent decision by Southern California Edison to seek FERC 
approval for a plan to roll in the costs associated with new 
transmission that will enable the addition of wind power in the 
Tehachapi Mountains in California. Forcing wind energy 
developers to raise enormous capital to pay for transmission 
construction is a deterrent. Neither Congress nor FERC should 
prohibit utilities from engaging in creative approaches to 
encourage the additional development of wind power.
    Mr. Chairman, thank you again for inviting me.
    The Chairman. Thank you very much.
    Mr. Rosenberg, delighted to have you here.

 STATEMENT WILLIAM ROSENBERG, SENIOR FELLOW, KENNEDY SCHOOL OF 
                 GOVERNMENT, HARVARD UNIVERSITY

    Mr. Rosenberg. Thank you. I think I have been introduced 
already. I am a senior fellow at the Kennedy School of 
Government at Harvard. I last testified before this committee 
as the Assistant Air Administrator in the first Bush 
administration during the Clean Air Act debates of 1990.
    I would like to, respectfully, offer a proposal for a 
national gasification strategy to gasify domestic coal, biomass 
and pet coke resources that we have in ample supply to produce 
a major new gas supply comparable in energy content to the 1.5 
tcf expected throughput of the Alaskan gas pipeline. This could 
be accomplished by constructing 50 gasifiers over a 10-year 
period, approximately five a year, that produces on site 
synthesis gas that would be sold under long-term contracts to 
major industrial and electric generator customers. The 
synthesis gas could be substituted for large demand of natural 
gas, and when that substitution occurs, if it is of large 
enough scale, it would reduce overall natural gas demand, 
thereby reducing overall natural gas prices, and it would free 
up pipeline capacity because this gas would be produced on site 
and would not have to be moving through the infrastructure.
    In a sense a national gasification strategy is a supply 
option, a demand-reduction option, and an infrastructure 
stretching option. It certainly diversifies our natural gas 
resources and in the future, if it were large enough, there 
would be a point on that chart we saw in the beginning for gas 
produced from domestic gasification.
    I would like to bring to the attention of the committee a 
letter that was sent to the committee last Friday by leaders in 
the chemical, glass, forest products and paper and fertilizer 
industries supporting the development of a national 
gasification strategy, which would offer the same type of 
financial incentives to construct the gasifiers that this 
committee offered to the developers of the Alaskan gas 
pipeline, essentially loan guarantees and accelerated 
depreciation.
    We have done calculations that say with the availability of 
low-cost financing, the synthesis gas could be delivered to the 
industrial and electric customers at a price of $4 to $4.5 per 
million Btu in a current market of $6 to $7, or as we heard in 
the New York market of $6 to $20.
    There are two significant environmental advantages for 
gasification. The first is that compared to a PC plant, an IGCC 
plant, which is a gasifier producing synthetic gas to be used 
in a turbine, emits much less air pollution regulated by the 
EPA, including mercury emissions.
    And secondly, new gasifiers can be designed and we would 
suggest they would be required to be designed to be carbon-
capture-ready that could accommodate equipment needed to 
capture and sequester CO2 when that becomes economic 
under Government policy. We also support the funding of 
demonstrations of commercial gasifiers operating with CO2 
capture and sequestration in this decade.
    In summary, Mr. Chairman, the national gasification 
strategy is feasible as a new gas supply option. We have the 
domestic resources. We have the technology and we have the 
financial model to make this happen in the short term.
    Thank you.
    The Chairman. Thank you very much.

        STATEMENT OF BEN YAMAGATA, EXECUTIVE DIRECTOR, 
            COAL UTILIZATION RESEARCH COUNCIL (CURC)

    Mr. Yamagata. Mr. Chairman, members of the committee, CURC 
is a national organization of major coal producers, major 
utility users, equipment and vendors. I am last on the panel, 
so let me be brief and make two points to you, if I may.
    The Chairman. No. You have an important role.
    Mr. Yamagata. Thank you.
    First of all, on behalf of the organization, we are about 
ready to suggest to the committee and to the Congress a 
proposal for utilization of advanced coal-based technologies, 
which I hope will be forthcoming in a matter of days.
    And secondly, I want to try and address the question of 
whether our proposal is really realistic, that is, in the 
context of the budget constraints of this committee and others 
in Congress.
    The underlying premise of the proposal is that coal, 
through the use of advanced clean coal technologies, can be and 
is a substitute for natural gas. But it is not a panacea. We 
need the diversity of energy resources and we need the use of 
energy efficiency in order to meet our energy supply and demand 
requirements in this country.
    Our proposal in the near term would be to ask the committee 
to consider a program to refuel existing natural gas combined-
cycle units by producing coal-derived synthesis gas. We know 
how to do this technically. The challenges here are one of 
cost, infrastructure availability, and optimization of putting 
the two technologies together.
    The second near-term or medium-term proposal is to have the 
committee cause to have constructed a series of pioneer plants, 
that is, a limited number of plants for the advanced use of 
clean coal technologies, both IGCC and other types of advanced 
systems. What we need to do is put plants in the ground.
    And then finally and in the longer term, as this committee 
and you, in particular, Mr. Chairman, have supported for 
decades now, is the targeted use of funds for research, 
development, and demonstration of new technologies.
    Let me address the second point and that is how realistic 
is this. There are 200 gigawatts or thereabouts of natural gas 
combined-cycle units that have been permitted in the last 12 or 
so years. 12 gigawatts of that, we understand, are within 10 
miles of coal transportation, answering one of the 
infrastructure issues.
    Secondly, as all of you know, we have 250 years of coal 
supply in this country.
    And finally and most important, last year as part of H.R. 
6, this committee and this Congress, or at least this Senate, 
tried to enact incentives that totaled $2 billion in loan 
guarantees and loans for advanced coal-based systems, as well 
as $1.6 billion in tax incentives for those same systems.
    Thank you.
    The Chairman. Thank you very much. You refreshed our 
recollection.
    I have one. Mr. Rosenberg, why did you think you had to 
bring us this big plan? Could we not do it a little bit at a 
time? In that regard, I want to ask you how much you expect 
your proposal will cost and the total capital and maybe some 
idea about the operating costs over a sustained period of 5 or 
10 years.
    Mr. Rosenberg. Mr. Chairman, this is a 10-year goal. 
Obviously, it would be done in bite-size pieces. We do think 
that 1.5 tcf of gas as an alternative supply is something worth 
moving towards. How fast the committee goes would be a function 
of appropriation capability.
    But since we rely mostly on loan guarantees, we have built 
into the proposal a security to the Federal risk through what 
we call a three-party covenant with respect to electric plants. 
The public utility commission would have to agree, before the 
Federal loan went into effect, to establish rates to pay the 
mortgage so there would be no default. And we, therefore, 
estimate that the scoring costs for the program would be 10 
percent of the capital. If this were a 1.5 tcf program, the 
loan guarantees would be in the range of $30 billion and the 
cost to the budget would be about $3 billion. If this were a 
portion of that, say, 5 or 10 plants to begin with, that would 
be reduced substantially.
    We think that loan guarantees are the least-cost way of 
stimulating the investments. They would require 20 percent 
equity contributions, and essentially that is the model that 
you used for the Alaskan gas pipeline.
    So the scale of the program would be up to the committee. 
The goal would be to develop a source of domestic supply 
comparable to the domestic supply we expect to get from Alaska, 
and together that would be a very substantial domestic 
initiative.
    The Chairman. Other questions, Senators?
    Senator Thomas. Yes, sir. I have a couple.
    John, on the nuclear thing, one of the reasons I believe 
that the recent generation plants have been gas is they are 
smaller and they are closer to the market. You do nuclear 
plants, they are larger. Do we have the kind of electric 
distribution and transmission system to get it to the market?
    Mr. Kane. Yes, sir, we believe we do. We are looking at 
putting new nuclear plants in the United States, and we have a 
process underway now called the early site permitting where we 
are working with the Nuclear Regulatory Commission to get these 
sites qualified to put new nuclear plants in at a future date. 
It would involve making sure that the site had adequate 
infrastructure, including transmission, to be able to meet 
those new power distribution requirements.
    Senator Thomas. That has been a little difficult, as you 
know. Some of it is the electric power distribution systems do 
not want somebody else messing around in their area and so on. 
So it is a problem.
    Mr. Kane. We think it is not insurmountable, sir.
    Senator Thomas. Good.
    On the wind energy, what are the chances of making those 
more efficient so that you do not have to have so many of those 
on every hill and in the valley.
    Mr. van Alderwerelt. Right. Actually progress in that 
regard has been quite impressive over the last 30 years. The 
production cost of wind has come down about 80 percent. There 
are continuous strides being made. Today's standard size wind 
turbine is 1.5 megawatts and General Electric has plans to take 
that to 2 or 2.5 megawatts.
    Senator Thomas. Yes, but most power plants in our area are 
2,000 megawatts.
    Mr. van Alderwerelt. Well, you still need a lot of 
generating units.
    Senator Thomas. You sure do.
    Mr. van Alderwerelt. But all in all, the technology still 
has the lowest environmental impact considering there is no 
air, water, or hazardous waste.
    Senator Thomas. Sure. No, that is true. Just the visual 
part of it is going to be a problem.
    Mr. van Alderwerelt. I think they look pretty good.
    [Laughter.]
    Senator Thomas. It depends a little on your point, I 
suspect.
    Mr. Rosenberg, you talked about using coal to develop gas. 
Wyoming is the largest coal producer. The market is a long ways 
away. You said you do not need any more facilities to get it 
there. I do not understand that.
    Mr. Rosenberg. Well, you would have to ship the coal like 
we already ship Wyoming coal to the various parts of the 
country.
    Senator Thomas. It is not very efficient, as you know. It 
costs $5 to dig the coal and $15 to get it to St. Louis.
    Mr. Rosenberg. One of the advantages of gasification is you 
can use high-sulfur coal because you take out the sulfur before 
you combust the coal.
    Senator Thomas. My point is coal is generally located one 
or two places. The market is all over, so you are going to have 
to have a distribution system for gas if you do that.
    Mr. Rosenberg. Well, the distribution system for gas is on 
site. It is a dedicated plant. So there would have to be a 
distribution system for coal, but all the coals would be 
relevant for this.
    I might make one other point to the chairman on the scale. 
If it is done on a large-scale basis, it will have the same 
impact as the Alaskan gas pipeline on all demand for natural 
gas and all supply. So a large domestic supply of synthetic 
gas, according to our calculations, would reduce the cost of 
gas for everyone because the demand would have been reduced and 
therefore the pressure on the prices would have been reduced.
    One of the biggest problems we face today is that we built 
so many of these natural gas combined-cycle plants, they ran 
the price up for everyone else. So to the extent that that 
demand is taken off line, by using those natural gas plants for 
the generation of an IGCC plant, you would have less pressure 
on gas prices, and so the overall prices would be reduced. And 
we would recommend that a major study be undertaken to----
    Senator Thomas. One of the major ideas that is going around 
from the President and the administration is to use hydrogen 
for car use not gas.
    Mr. Rosenberg. Well, this would produce that. Basically you 
need to gasify the coal first and then separate the carbon and 
the hydrogen second. So to the extent you have demonstrated how 
to separate the CO2 and that becomes economic, then 
you are left with hydrogen. This could be an excellent source 
of that hydrogen in the long run.
    Senator Thomas. Good.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Let me ask you about the analogy that you 
have made several times here to the Alaska pipeline. You 
indicated that Congress weighed in to provide loan guarantees 
and accelerated depreciation in the case of the pipeline, and I 
strongly supported doing that, but much of the justification 
there was that this was an enormous project. This was a $10 
billion project, the construction of this pipeline, and it was 
not reasonable to expect one or a few private companies to just 
underwrite that without some backstop by the Government.
    What you are suggesting here, as you said, is something 
that can be done in bite-size pieces. Each utility that has one 
of these plants that needs to have this gasification technology 
built in can go ahead and do this. The justification to me of 
the Federal Government coming in and underwriting it or 
providing a backstop is less compelling when you have got a 
whole bunch of utilities, each one of which has responsibility 
for solving a piece of this problem.
    So what is your reaction to that?
    Mr. Rosenberg. Senator, these are bite-size $500 million 
pieces that would be developed by much smaller companies 
potentially for the use of a particular chemical plant or a 
paper plant or a glass manufacturer or a combined-cycle gas 
plant. Most of the combined-cycle plants, particularly the ones 
that are in the most trouble, are not owned by integrated 
utilities. They are owned by smaller companies who would not 
have the capability of raising this kind of money.
    There is also a technology risk that the financial 
community has indicated to us that even though the technology 
is proven, there is not a lot of experience with it. So it 
would be very difficult to finance without the support of a 
Federal loan guarantee or a State public utility commission 
essential guarantee of the credit.
    So in the regulated utilities, that may be the case, but in 
the unregulated areas and for the people who own these plants 
that are selling it into the open market and particularly for 
the industrial customers, putting up $500 million or $300 
million for one of these plants is a very major undertaking and 
would be done at high capital cost. So this is a way to have 
access to the credit if the Congress believes it is important 
to develop this gas supply.
    Senator Bingaman. Clearly I would agree with you. To the 
extent that an effort is needed to demonstrate the technology, 
then clearly that is something that is appropriate for Congress 
to step in and say, ``Look, the taxpayer ought to help 
demonstrate the technology and make it clear to everybody that 
this works and that this can be done in a cost effective way.''
    When you start saying we should underwrite or we should 
provide a subsidy for the construction of 50 plants, which was 
your proposal, as I understood it, I think there I have some 
doubts as to whether the justification is as strong as it was 
in the case of the underwriting or backstopping of the costs of 
constructing the Alaska pipeline.
    Mr. Rosenberg. If this is not done, we will end up with 
many more pulverized coal plants that will be higher-polluting. 
We will continue to operate pulverized coal plants, and we will 
be importing more liquified natural gas because, to the extent 
we can find a genuine domestic option, that will reduce that 
amount of liquified natural gas.
    So there are really two goals here. One is the goal that 
Ben Yamagata talked about and you just mentioned, which is 
demonstrating the technology as a commercial vehicle. That is a 
very important goal. If the committee, however, wants another 
goal, which is to find a source of domestic gas to add to the 
limited supply we have in lieu of importing more LNG, then you 
get into the scale issue. How much do we want to develop and 
how fast do we want to put it on line so that we do not have to 
import that much LNG.
    Mr. Yamagata. Mr. Chairman, if I may, just to add to the 
point that Bill Rosenberg has made, I consider myself to be the 
hors d'oeuvre of the small bite-size pieces he is talking 
about.
    [Laughter.]
    Mr. Yamagata. We are looking at a deployment program that 
is really geared towards putting some plants in the ground. We 
need to do that because of cost issues and risk issues. Our 
analysis also shows at this time that loan guarantees are one 
of several preferred options, including other types of tax 
incentives, ergo my reason for suggesting to you that you 
traveled some of this terrain before in H.R. 6 with both the 
authorization of loans and loans guarantees and the tax 
incentives you provided in last year's bill. And that is the 
platform that we would like to use to consider this new program 
we are talking about.
    The Chairman. Thank you very much.
    Senator Bingaman.
    Senator Bingaman. I just wanted to ask to be sure that I am 
clear on what you are proposing. Your suggestion was that we 
provide some level of tax incentive or tax support to take the 
existing coal plants and equip them with this gasification 
technology so that they can produce gas. And you are also 
suggesting that separate from that, we use tax incentives and 
Federal support to assist those natural gas-fired plants so 
that they can become users of coal as their fuel, so that we 
would be providing a subsidy for both ends so that each of 
these two would have the capability to operate, to take coal 
and turn it into gas basically.
    Mr. Yamagata. They have to have the option, Senator, of 
using it as advanced technology. Coal-based either to refuel 
existing natural gas combined-cycle units, or alternatively, 
new green field applications or to repower existing coal units, 
yes, that you have those kind of incentives to allow industry 
to look at that menu and decide which makes the most sense. But 
the endpoint here is to develop the new technologies.
    The Chairman. Senator Alexander.
    Senator Alexander. Thanks to all of you for your comments, 
and I thank Senator Bingaman for his.
    I understand and fully support the nuclear option and look 
for ways to expand that.
    The coal option is extremely intriguing to me as a 
solution. As I look around the table, if Mr. Rosenberg can 
persuade the Natural Resources Defense Council, who was here 
earlier, to support your program and Calpine to build a plant 
with it, then we have not got a clear air problem in the United 
States and gas prices would be lower. I have overstated it a 
little bit, but not by very much.
    If I am not mistaken Calpine is only building natural gas 
power plants. Right? That is all you are going to build.
    Ms. Connelly. That is right.
    Senator Alexander. And you are not going to build one of 
his because your investors right now would not tolerate it 
because there is too much risk. Is that right?
    Ms. Connelly. We actually are very interested using syn gas 
in the natural gas combined-cycle plants.
    Senator Alexander. You are.
    Ms. Connelly. We are.
    But the big expense comes in building the gasifier.
    Senator Alexander. And you believe the technology is to the 
point where it is a proven technology, but as he said, the 
experience with the technology is not enough yet.
    Ms. Connelly. Absolutely. We are actually looking at pet 
coke as opposed to coal just because it is a byproduct of the 
refinery process, and there are a lot of our gas plants that 
are very near the refineries where the pet coke exists. It is a 
low-value byproduct that we ship to Latin America at the moment 
for the most part, but it could be gasified. You could do a 50/
50 mix of natural gas and gasified pet coke, and for one 
gasifier of pet coke, we could run 10 or 11 natural gas plants 
on a 50/50 volumetric mix.
    But I think we need the loan guarantee because it would be 
$2 billion to build the pet coke gasifier. So if you had the 
loan guarantee for the gasifier, then I think the rest of the 
economics would work.
    Senator Alexander. I think Senator Bingaman's point is 
worth listening to. I understand the Alaska gas pipeline 
proposal. That is one way to do it.
    But there is one other very powerful argument for this sort 
of combination that has not been mentioned today and that is 
the worldwide impact of the success of it, which is what, as I 
understand it, brings the Natural Resources Defense Council to 
consider this, which is if we do not find some new technology 
for making electricity from coal, India and China and countries 
all over the world are going to build coal plants with the old 
technology and they are going to throw so much junk into the 
air that it will not matter what we do here. So there is a 
powerful national interest in our seeing if we can find a 
sensible way to encourage coal gasification if it is 
commercially possible, not just for our own energy independence 
and clean air but because we are affected by what goes on 
around the world as the wind blows. I hope you will pursue 
that.
    I would like to ask just one question. Tell me what you can 
about carbon recapture because, as I understand it, there is no 
way to do that quite yet.
    Mr. Rosenberg. Well, that is the point.
    Senator Alexander. But what we are talking about here is 
coal gasification takes the sulfur and the nitrogen and the 
mercury out of the air. It only leaves the carbon. If you 
recapture the carbon, you have something that is almost too 
good to be true if it is commercially viable.
    Mr. Rosenberg. And that is why we think there needs to be a 
two-tier strategy, Senator, and that is what was approved by 
the energy commission. One tier is to deploy the technology not 
only for the electric sector, but also to reduce the cost for 
the industrial sectors that are closing their plants, laying 
off people, and shifting production abroad.
    Senator Alexander. Like chemical plants.
    Mr. Rosenberg. Like chemical plants. There was the old 
Union Carbide plant in West Virginia. It was closed down and 
the production was moved to Germany, and 7,000 people lost 
their jobs. I am told by the chemical industry there have been 
90,000 layoffs because of the price of gas and there has been 
similar experience in the fertilizer industry.
    So we would agree with much of what CURC said but would 
extend these incentives to the gasification of coal to be used 
as an alternative gas supply for industry as well.
    In terms of what to do with the carbon, that is the big 
question. So we think the committee should examine the 
demonstration programs that are being thought through at the 
Department of Energy to, as soon as possible, demonstrate the 
operation of a gasifier that in fact captures and sequesters 
the CO2 in all the oil and gas wells or other 
geological sequestrations. That will be pretty expensive to do. 
It is much more expensive to capture the CO2 than 
not capture it. We estimate that would cost an extra penny and 
a half a kilowatt hour. On a base of 4 cents, that is a big 
number.
    So a few of those plants should go forward, and I think 
there is a great role for this committee, and in your prior 
legislation you talked about that. But there is also a logic 
for putting in place a fleet of plants that could use that 
technology as an add-on after it is developed if the policies 
are such where that is economic. So moving forward with 
gasification lays a technological foundation to build upon for 
capturing the CO2 later on.
    The Chairman. Senator, did you have anything?
    Senator Burr. Mr. Chairman, I am just so delighted to be 
here and be part of this.
    Let me just say as a new member of the Senate but one who 
is on the third session of Congress writing an energy bill, you 
are all right. There is nobody that I have heard from today 
that was wrong.
    The challenging thing is that at the pace we are going at, 
we are going to do very little unless we can actually get a 
bill written, signed into law, and get everybody at the table 
in agreement that it is a blueprint for the next decade or two 
decades to proceed forward. We can talk about new technologies. 
We can talk about windmills, but as long as there is somebody 
at the table that does not like to see them, then that is an 
option that will fall short of its capabilities.
    I will have questions of all of you as this period goes on.
    At the end of the day, somebody has to ask the question, if 
the government were not here, if we were not the backstop, if 
we were not the seed money, what would the marketplace do. If 
in fact your technology--and I am not assessing it--were the 
panacea--and it would if it captured the carbon, as Lamar 
said--where is Wall Street? Where is the capital? Why is it not 
chasing it? Maybe it will.
    I understand that the Federal role is a very, very 
important one in getting new technologies and new thoughts 
started. We are at a point now where we need to make sure that 
we get something in the law that sends us forward. If not, 
everybody at the table has a problem.
    Thank you, Mr. Chairman.
    The Chairman. Senator, thank you very much for your 
observations and I am very glad that I kind of twisted your arm 
to make a few comments. We welcome you on the committee. While 
you are new, you will not be one who is lacking in information.
    Senator, did you care to say anything?
    Senator Murkowski. I will just follow up on the comments 
from Senator Burr because I have been chewing on this whole 
discussion about the loan guarantees. And I am kind of in a 
difficult spot here because the Alaska gas line got the 
benefits, and I cannot say, well, good for us and you guys are 
all on your own. But I do recognize that that was a unique 
project. Senator Bingaman, you mentioned we were talking about 
a $10 billion project. In actuality, we are looking at an $18 
billion project, $20 billion project.
    So I appreciate that $500 million is big and it is a tough 
thing for investors, but I think you do have to go back to the 
question that Senator Burr has raised, and that is, what would 
the marketplace be doing if the Government were not here? Do we 
get to the point where we establish some kind of a bank or 
institution here to provide that backstop for these loan 
guarantees that are that incentive, if you will? It is a tough, 
tough question.
    Being a big energy proponent, I want to do all that we can 
to do that encouragement, but we have got to recognize the 
slippery slope. Do you put a price tag associated with the 
project or do you look to the longer-run potential? Some big 
questions but no easy answers.
    Mr. Rosenberg. Can I try to answer that?
    The Chairman. Well, let us be brief, Mr. Rosenberg.
    Senator Murkowski. I would love it if you could answer it.
    Mr. Rosenberg. I think if we did not provide this, we would 
build more pulverized coal power plants and we would import 
more LNG. That is the status quo.
    Senator Murkowski. Which is not where we want to go.
    Mr. Rosenberg. That is correct.
    Senator Murkowski. If we are talking about energy security, 
we do not want to be encouraging that.
    The Chairman. Let me say I think the discussion and the 
technology and doing something so we can use more coal is 
probably as vital as anything we can do just because we have so 
much of it. Currently it is pretty obvious we are not going to 
use it to substantially solve the crisis of the next 25 years 
without some breakthroughs, some changes, and that is very, 
very important.
    I would say I am the only one here I think who had 
experience with a major effort on the part of the Federal 
Government to create synthetic fuel oil, both crude oil and 
natural gas. We created a very big operation called the 
Synthetic Fuels Corporation, a creature of then-Governor 
Rockefeller, subsequently Vice President Rockefeller's task 
force. You know it did not get very far. It was about as 
grandiose--maybe three times as grandiose as your plan for 50 
plants. It does not sound like much to you, but a big, big 
thing for us to undertake up here.
    It turned out that once you put it in place, it was--what 
is it--the donkey that you throw the arrows at. That is what it 
was for everybody that wanted smaller government. Whether it 
was spending real money or borrowed money, everybody took a 
shot at it in their campaigns. I am going to get rid of it. 
Finally, after one little start, a number of people climbed up 
the pole and put up the American flag and claimed great success 
for capitalism, free enterprise. We killed it. So we did 
nothing.
    I would want us to proceed. I hate to say it, but I am a 
sucker for big science and big technologies. So you do not have 
a hard job convincing me. But we have to do something that we 
can get done. You mentioned an energy bill must be done. Yes, 
we have to. But we have to make sure it has enough 
diversification in it that we can get it done, but more 
important, that it will work. We do not want to do one that 
says it is a great bill. We have got to make sure it will work.
    But I do not think any of the current sources of energy 
ought to be worried about the other source of energy. So I do 
not think natural gas current producers ought to worry about 
coal gasification. I do not think the proponents of nuclear 
power--and I am one of them--ought to worry about coal 
gasification and other things. The truth of the matter is we 
are going to need much of all of those, or at least the 
perfection of most of those, to get through.
    And at the same time we have to do renewables. I would say 
to you, the proponent of wind energy here, we are all with you. 
What we really would hope you would do is to be realistic about 
what it can do. You cannot come up here and say renewables will 
do the job. It just will not unless you include nuclear, 
hydropower, and a number of other things in the definition of 
renewables. You just cannot do it. And you cannot say wait 
until we have done renewables to do others. That would be an 
invitation for an abdication of what we ought to do. So if we 
would be realistic, we ought to get moving.
    I am interested in analyzing further with our staff and you 
what do we have to do to prove this up and what can be done 
that does that the best way the soonest. And we will do that if 
we can.
    Now, did somebody ask to speak? You did, sir.
    Mr. Nadel. Yes, I just wanted to add one point. I agree 
with you we need a diverse set of resources. We have been 
talking a lot about coal gasification, and if I understood 
correctly, the hope is it can maybe come in at $4 to $5 per 
mcf, not counting the subsidies. A lot of people on this side 
of the table are also talking about energy efficiency, which is 
typically half the cost. So let us not forget the cheaper stuff 
while we are trying to develop some more expensive but longer-
term options.
    The Chairman. Sir, we are all for it. In fact, we hope you 
will give us your list and we will try to do every single thing 
that is practical about efficiency. We promise you. We just are 
not sure that that will do it either.
    Mr. Nadel. I agree we need a mix.
    The Chairman. Just like I said to our friend from the 
renewables side.
    Now, having said that, is it all right now to proceed, 
everybody? Thank you, panel. We will move to the last one.
    This panel is FERC and the EIA market data. So let us 
begin. These are chief risk officers. So let us take our 2 
minutes each and have a discussion, and we will be finished 
today unless something very important is raised from the floor. 
We will start with you, Mr. Anderson.

  STATEMENT OF BOB ANDERSON, EXECUTIVE DIRECTOR, COMMITTEE OF 
                      CHIEF RISK OFFICERS

    Mr. Anderson. Thank you, Mr. Chairman and members of the 
committee, for this opportunity to speak.
    I am Bob Anderson, executive director of the Committee of 
Chief Risk Officers. We are a professional association of more 
than 30 major energy companies. What we do is develop and 
publish risk-related best practices for companies and markets.
    While we have recognized some improvements in market 
information, we believe the current quality of readily 
available market information is merely adequate for the short 
term. At the CCRO, we focus on promoting solutions, and we work 
to advance the financial health for both companies and markets.
    We are now leading a project we call the Energy Data Hub. 
The data hub is or would be an independently operated 
repository for transaction data coming from all market 
participants. As nonprofit organization dedicated to this role, 
the energy data hub we envision would be free from commercial 
conflicts of interest and would be a leap forward for energy 
markets. Easily accessed data from the hub would offer a much 
more complete and detailed picture of the energy markets than 
are currently available. Wholesale gas and power market 
participants of all sizes, including buyers, sellers, and 
brokers, may voluntarily submit daily gas and power 
transactions and perhaps storage information as well. The 
resulting unbiased data would be readily accessible to all 
market participants, including prospective energy buyers, 
sellers, and intermediaries, market observers, such as 
regulators, rating agencies, and the investment community, 
accounting firms and index publishers. The benefits from the 
energy data hub would be undeniable.
    Most importantly, we believe this data hub can be 
established without significant regulatory burden or cost to 
the taxpayers. We are not advocating any mandate or any new 
regulatory body.
    With the encouragement and support from this committee, the 
CCRO can help our industry to come together to create this 
energy data hub resource we all need to strengthen confidence 
in energy markets and improve transparency.
    I encourage this Senate committee to work with the CFTC and 
with the FERC to encourage development of this important 
resource. We at the CCRO stand ready to help you do that.
    The CCRO is currently working through the demonstration 
phase of the data hub and we would welcome you or one of your 
staff to join us and observe our progress or make suggestions. 
I look forward to answering any questions you have.
    The Chairman. Thank you very much.
    AEP, thank you for coming.

    STATEMENT OF KEITH BARNETT, VICE PRESIDENT, FUNDAMENTAL 
              ANALYSIS FOR AMERICAN ELECTRIC POWER

    Mr. Barnett. Good afternoon, Senators. Thank you for having 
me here today. I am Keith Barnett, vice president of 
fundamental analysis for American Electric Power.
    For the past 7 years, I have been involved for my company 
in trying to predict the natural gas inventory number that 
comes out every week. We pay attention to this number because 
it is one of the key drivers to the natural gas market prices 
and indirectly, therefore, power prices.
    This is the single most important piece of information that 
comes out and creates volatility in the market. We see it every 
week. The daily weather number is the second most important 
thing that drives market volatility. Now, market volatility is 
an okay thing. It is a good thing because it sends price 
signals when it is related to supply and demand, and my 
responsibility is supply/demand inventory and infrastructure. 
So you do have hurricanes and you have other things that can 
create price volatility, but week in and week out, this number 
is critical.
    Enhancing the quality of this number should reduce 
unnecessary volatility and keep the volatility that is there 
focused on true supply and demand forces. So that is why we 
have made some common sense recommendations.
    First, that EIA should expand their weekly survey to match 
their monthly survey, to survey all the storage fills that they 
already do monthly.
    Secondly, EIA should have an analyst that does the same 
thing as somebody that works for me. Every week they look at 
the weather data and a whole host of other things, and they try 
to predict the number before the number comes out. Then this 
analyst could check the submittal before it is released to the 
public and say this does not really look right, and then they 
could do data verification if necessary.
    And third--as you well know, FERC has done some great work 
in this area to look at daily storage. We do not advocate that 
EIA get involved in that. But a number of interstate pipelines 
already report weekday storage inventory numbers. We use those. 
But we would recommend to FERC to expand that on the electronic 
bulletin boards that already provide operational data to 
provide weekday-only, interstate pipeline-only storage 
inventories. That would be sufficient to give the market a good 
indicator in those instances where maybe the data quality does 
not work at EIA and a bad number gets out, which we recently 
saw.
    Now, EIA has done a good job and they have really improved 
the process. Partially because they have improved it so much, 
this number has become ever much more important to the 
industry. That is why they can and should do more.
    Thank you.
    The Chairman. Thank you very much.
    Mr. Chapman.

   STATEMENT OF GARY CHAPMAN, SENIOR COMMERCIAL MANAGER, DOW 
                            CHEMICAL

    Mr. Chapman. Chairman Domenici, distinguished members of 
the committee, my name is Gary Chapman and I am a senior 
commercial manager at Dow Chemical. In that capacity, I buy and 
sell natural gas for Dow, the Nation's largest industrial 
consumer of natural gas.
    I represent today the Consumers Alliance for Affordable 
Natural Gas, a broad coalition of natural gas consumers.
    The U.S. gas market is badly out of balance. Demand is 
rapidly growing and domestic supply is falling. As a result, 
the U.S. natural gas prices are the highest in the world and 
are driving U.S. jobs offshore as energy-intensive industries 
struggle to compete.
    No single policy can, by itself, close the current supply-
demand imbalance. There is no single silver bullet. We believe 
that the solution is a balanced portfolio of initiatives that 
reduce demand and expand supply, including efficiency, 
conservation, fuel diversity, including nuclear and clean coal 
technologies, supply expansion, including more environmentally 
sound U.S. gas production, and infrastructure improvement.
    While we believe there are serious flaws in the reporting 
and trading systems, make no mistake. The root cause is a 
fundamental imbalance between supply and demand.
    We recommend the following key actions to address the 
committee's question on natural gas market data.
    First, the EIA should be directed to implement daily 
inventory reporting and improve the accuracy and reliability of 
the information.
    Second, CFTC should be directed to examine the 
effectiveness of the current daily trading limit standards in 
reducing the unnecessary price volatility. Why are natural gas 
daily limits double that of any other energy commodity and four 
times that of agricultural commodities?
    The Chairman. Would you state that again? Why are?
    Mr. Chapman. Why are natural gas daily limits on the NYMEX 
futures exchange double that of any other energy commodity, 
crude, heating oil, gasoline, and four times that of 
agricultural commodities, corn, wheat, soybeans?
    Third, CFTC should be authorized and directed to study the 
potential negative influence of hedge funds and other 
noncommercial players on price volatility and recommend to 
Congress any statutory changes that are needed to enable 
appropriate oversight of market players.
    Thank you for the opportunity to speak.
    The Chairman. Thank you very much.
    Mr. Harvey.

 STATEMENT OF STEVE HARVEY, DEPUTY DIRECTOR, MARKET OVERSIGHT 
      AND ASSESSMENT, FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Harvey. Thank you. My name is Steve Harvey. I am Deputy 
Director of Market Oversight and Assessment with the Federal 
Energy Regulatory Commission. My group's job is to oversee 
physical electric and natural gas markets, and consequently we 
are very focused on access to market information and the 
validity of market information in natural gas.
    First, with regard to price reporting, we entered the fray, 
the commission did, about 2 years under the leadership of our 
chairman related to concerns at the time about truthfulness in 
reporting prices. What I have seen I believe over the last 2 
years have been enormous and concrete improvements in that 
process that has literally made it a good deal more reliable. 
But more importantly than what I have seen, we have, in fact, 
documented and reviewed what appears to be increasing 
confidence on the part of the industry, on the part of 
customers, and on the part of producers in that process.
    Now, having said that, price discovery is not a static 
process. As industry needs changes, that kind of process is 
likely to change. We have heard a couple of ideas already on 
this panel. So as those change over time, we see our job as 
making sure that we do not reduce the quality and the value of 
that information as it gets to people who are active in the 
marketplace.
    Switching to storage reporting, right now the markets are 
clearly characterized--and we have heard many discussions of 
this today--by concerns about balance between consumption and 
production. As a result, the reporting of storage numbers 
becomes the key short-term price driver over and over again.
    Last September, the commission held a technical conference 
where we raised some questions about the timing and about the 
quality of the process for reporting. Though we heard many 
concerns, we also heard a great deal of confidence in that 
process at the time. However, the late November EIA storage 
report I think raised those questions again when that came 
through and created a bit of anomaly in the marketplace.
    We presented in late December our interim report on our 
understanding of what had happened in that process. That was a 
result of extremely good cooperation with the EIA and with the 
company that was involved. Short term, I am pleased to say that 
in both cases, EIA and the company involved, we are in the 
process of actively reviewing their processes short-term and 
moving to strengthen those, which I think was important at the 
time for confidence overall.
    We hope to complete our review here very quickly and get 
the information available to people to continue this 
discussion. I have spoken, I know, personally with many 
customers who felt strongly affected by that late November 
number, and we think that this will remain an active issue.
    Thanks.
    The Chairman. Thank you very much.
    Mr. Levin, glad to have you here.

  STATEMENT OF ROBERT LEVIN, SENIOR VICE PRESIDENT, NEW YORK 
                  MERCANTILE EXCHANGE (NYMEX)

    Mr. Levin. Thank you very much, Mr. Chairman and Senators. 
On behalf of NYMEX, we thank you for inviting us to be here 
today.
    Fundamental, reliable, timely information on supply and 
demand is very valuable for the market, for market participants 
and the marketplace. The timely release of inventory data, such 
as currently takes place on a weekly basis, we think satisfies 
that and it is very helpful to the industry.
    By way of history, natural gas did not experience that for 
many years while the crude oil and petroleum products markets 
did, and we think that was something lacking in natural gas. So 
we are glad to see it is in there now.
    Currently the EIA releases the information weekly. In 
general, we think there is a high degree of integrity with what 
they do and reliability and quality. It may not be perfect but, 
on the other hand, I do not know that I could tell you what 
perfect is. So I am going to let that one alone.
    In general, we think the Government administering the 
release of data is beneficial. It does not prevent private 
efforts at that, and at the same time, government does have the 
force of law and many other benefits behind it and no incentive 
to do anything but provide the best data.
    As for the views on the release of the inventory data, 
there was a time when NYMEX preferred that it not be released 
during the most active trading periods, and over time, we 
shifted our views from that because energy markets are 7 by 24, 
and because of that, the major participants in those markets 
are active at all times, but not everybody else is. First of 
all, entities that do not focus solely on trading are certainly 
not focused on trading 7 by 24, and medium and smaller sized 
trading entities are not either. So we are big advocates of 
having that data released during the most active trading 
periods of, in this case, natural gas.
    If somebody finds that the potential impact from that 
release--a temporary impact--is something they are concerned 
about, they can, of course, not participate and they do not 
need to be affected, but it does not force anyone that does 
want to participate when things are most active from being able 
to do so. And it also protects those smaller entities from the 
disadvantage they have with the large ones because if they want 
to participate and react to information in lower active trading 
periods of the market, say, the late afternoons or the 
weekends, they have go to those big entities, and they pay a 
premium for that service.
    Thank you.

    STATEMENT OF ELIZABETH CAMPBELL, DIRECTOR, NATURAL GAS 
          DIVISION, ENERGY INFORMATION ADMINISTRATION

    Ms. Campbell. My name is Beth Campbell, Elizabeth Campbell, 
and I am the director of the natural gas division, which is the 
data collection survey arm of the Energy Information 
Administration related to the natural gas data.
    We operate a number of annual, monthly, and now for the 
last 2\1/2\ years, weekly surveys. In particular, we operate 
the weekly natural gas storage report, which is the basis of 
the usually every Thursday release of inventory data. We 
operate this survey since May of 2002. It is a highly followed 
survey and its operation is extremely important to us. We have 
tried very hard to operate it effectively.
    We have had a number of issues in its operation and 
development. We addressed one of the most important, which is 
the issue of revisions and posting of revisions through a 
public comment period in the summer of 2002. As a result of 
that process, we posted in the Federal Register in 2002 our 
policy for addressing revisions to data. That is the policy 
which we have been following since that period of time, and it 
was the policy we used in late November when a revision was 
necessary.
    This policy is now up for review. We have released a 
Federal Register comment request which closes February 7 to ask 
whether or not there might be an alternative to that policy.
    I would be happy to answer any other questions.
    The Chairman. Thank you very much. For a while, we did not 
think you were coming, and we needed you, so we are very glad 
you came.
    Please proceed.
    Ms. Hansen. I am Christine Hansen again, executive director 
of the Interstate Oil and Gas Compact Commission, and glad to 
have an opportunity to talk about this issue.
    The IOGCC really has no comments on the storage side of the 
data issue, but on the supply side, on the production side, the 
States would offer that they have a great deal of information. 
Because the States tax production, the States are uniquely 
qualified to assist with accurate supply data because we do tax 
and we tax based on production.
    It is also important for the companies who are responding 
to this tax to report to the States accurately because they do 
not seem to want to overpay that tax to the States.
    So the States have what I believe is extremely accurate 
supply information, and the Senators all know that 85 percent 
of the natural gas consumed in this country is produced by one 
country, the United States of America, and we import most of 
the rest from Canada, with a small amount coming in from LNG. 
So we have got 85 percent of the production in my member States 
and, of course, the offshore production.
    The data hub that is suggested was something that I thought 
might be an interesting way to use this State information. It 
is in the revenue departments or the treasury offices of the 
States, depending on the State. But the data hub, with the 
ability of technology to go out and reach out and take 
information from a computer and put it somewhere else would 
have the advantage of not requiring the State to do anything 
differently. We would not have to add employees or go to any 
expense. We just have to find a way to cooperate with such a 
data hub.
    Those are my comments.
    The Chairman. Thank you very much. I appreciate it.

   STATEMENT OF SKIP HORVATH, PRESIDENT AND CEO, NATURAL GAS 
                       SUPPLY ASSOCIATION

    Mr. Horvath. Mr. Chairman, I am Skip Horvath, president and 
CEO of the Natural Gas Supply Association, here today also 
representing the Domestic Petroleum Council, the U.S. Oil and 
Gas Association, and the Natural Gas Council, which consists of 
all the major sectors of the natural gas industry, producers, 
pipelines, and distributors, all the major trade associations.
    We reached a broad consensus agreement in answer to your 
question, is the natural gas price reporting, the storage 
reporting adequate for a well-functioning gas market? Our short 
answer is yes, it is. And that is a considered answer.
    Let us take price reporting first. Mr. Harvey referred to a 
survey FERC did last year. Let me draw two facts from that 
survey that are telling.
    First, 90 percent of the respondents use natural gas price 
indices in their commercial contracts. That indicates a 
reliance on this. They have choices. They can go to NYMEX. They 
can do a physical trade themselves. They do not have to do 
that, but they did.
    Secondly, they also asked the question, what is your 
confidence level on natural gas price indices? It came out a 7 
on a scale of 1 to 10, and that is pretty good.
    So we are pretty pleased that the industry, post Enron, 
came to FERC with ideas of how to discipline ourselves. FERC 
did more than we asked but we accepted it, and it seems to have 
worked.
    On the storage, we concur. EIA has done a responsible job 
and a good job with the storage. There was an incident last 
year in November, referred to already by other panelists, 
unfortunate, and it resulted in the whole industry saying with 
EIA let us take another look at this, at the protocols. They 
have issued a public notice where industry is responding. And 
let me tell you EIA has been extraordinarily responsive and 
responsible--and I am not just saying that because they joined 
us just now. I would have said it even with them not being here 
on the panel--in this regard and listening to the industry. We 
are sure they are going to do the right thing when they get all 
the input in. What we do not need right now is Congress 
legislating anything in this regard. This is not something that 
is broken right now. It needs tweaking.
    Finally, let me point out that the oversight that FERC does 
of the industry has really managed to discipline us lately. No 
one likes to be investigated, but we think that those 
investigations need to continue because they make us look down 
at the line every time we hear about an investigation or an 
audit and make sure we are on the proper side of it, and we do 
that.
    Thank you very much.
    The Chairman. Thank you. We do not have a name tag for you, 
but would you tell us who you are?

 STATEMENT OF RICHARD A. SHILTS, DIRECTOR, DIVISION OF MARKET 
             OVERSIGHT, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Shilts. Yes. I am Rick Shilts. I am the director of our 
division of market oversight at the Commodity Futures Trading 
Commission. I do not have a prepared statement, but I am here 
to serve as a resource for any questions about the CFTC's 
oversight of the futures market.
    The Chairman. People say you are very important, so we are 
glad you came.
    [Laughter.]
    The Chairman. Senator Bingaman, do you have any questions?
    Senator Bingaman. Let me just ask about this proposal that 
we heard from Mr. Anderson for establishing an energy data hub. 
Did any of you who have not commented on that wish to comment? 
It seems to me that you have got EIA doing a rulemaking now to 
see how it can improve its reporting of this data, and yet, Mr. 
Anderson, your view is that something more is required. There 
ought to be a not-for-profit corporation established which 
would be this energy data hub which would function outside the 
Government and would collect all this information and make it 
available to everyone who wants to see it. Frankly, I am 
agnostic as to which way works best, but I am just wondering 
whether there is a need that is going unfilled that would 
justify establishing this.
    Mr. Horvath, do you have a point of view or Ms. Campbell?
    Mr. Horvath. Yes. I will start. If an energy hub has merit, 
the market will produce it. It is as simple as that.
    Senator Bingaman. Mr. Anderson is saying that is what is 
happening. You are trying to produce it. You are trying to 
establish this.
    Mr. Anderson. Right, yes.
    Senator Bingaman. And you think that the interest is going 
to be there to get that done?
    I agree with your point, Mr. Horvath, that this is not 
something Congress should legislate. But I am just wondering, 
is it something that there is a need for?
    Ms. Campbell.
    Ms. Campbell. I just wanted to note that EIA does not have 
any transaction-based data, and that is a distinction in the 
kind of data----
    Senator Bingaman. I see. So the transaction-based data is 
the one thing that you do not have and you are not planning to 
have and this energy data hub would have.
    Mr. Anderson. That is right. The concept is that there is a 
lot of information, as Skip mentioned correctly. There is 
better information today than we had a few years ago. What we 
are trying to do is to look towards the future and where do we 
need to be, rather than staying where we are now. What the data 
hub would do is bring to bear lots of information that is not 
available anywhere right now.
    So we are trying to bring some new transparencies to the 
markets that does not exist today. Whether or not other 
information would eventually find its way into the hub, that is 
entirely up to the market, to EIA itself, and others. But the 
initial intent and the driving force behind the interest in the 
hub today is transaction information. It helps us all 
understand where and why the gas market is behaving the way it 
is.
    The Chairman. Senator, would you yield?
    Senator Bingaman. Sure.
    The Chairman. Is there not a proprietary interest aspect to 
the accumulation of this data?
    Mr. Anderson. Yes, sir, absolutely and that is one of the 
reasons we are doing this demonstration within the CCRO. We 
have 11 members today contributing daily data into our demo. 
Much of it that we want to look into has to do with just that 
issue. Can you generate these transactions anonymous and still 
provide the information at a level that is extremely useful to 
everybody. We are really enthused at where we are right now. We 
think that can be overcome.
    The Chairman. Thank you.
    Senator Bingaman.
    Senator Bingaman. That is all I had, Mr. Chairman. I think 
it is an interesting idea and maybe it will help.
    The Chairman. Before I yield to Senator Alexander, let me 
ask Mr. Anderson. In your testimony, you suggested some other 
things that you thought EIA could do that they are not doing. 
Could you talk about those again and see if she would respond?
    Mr. Anderson. That EIA could do?
    The Chairman. You talked about the American Electric Power 
recommendations.
    Mr. Barnett. That was me.
    The Chairman. Excuse me, Mr. Barnett.
    Mr. Barnett. Beth, it is actually nice to put a face to the 
voice. I have talked to her on the phone over the years a few 
times.
    First, EIA has substantially improved from when they first 
started out. I want to make sure that you understand they have 
got credit. We are not really asking you, but in this forum you 
asked what could happen. We are not asking you to legislate 
something.
    The Chairman. No, I understand.
    Mr. Barnett. Frankly, the notice that they have sent out in 
the Federal Register--I do not know that we are even going to 
respond to it because it is really more focused on how should 
we talk about the revisions after they happen. What I would 
like to see is a better protocol to avoid having them in the 
first place.
    As it stands right now--and I could pull out the data--but 
they survey something like 56 respondents and 200-and-something 
storage fills which cover statistically a very high percentage 
of working gas, something in the neighborhood of 89 to 92 
percent of the working gas in the three different regions.
    However, whenever there is a discrepancy in the number--and 
people look at this number very closely, and if it is not in a 
fairly tight band, prices move a lot. They look at it and they 
say we do not know if it is a statistical problem, a reporting 
problem, or if supply and demand is doing something that we are 
not smart enough to figure out. So they always choose the worst 
case scenario and they assume that something bad is happening 
in supply and demand and prices take off.
    So what we are really advocating is to go ahead--and maybe 
they have to go back through the process that is set up in the 
Government associated with getting permission to survey 
additional respondents on a weekly basis. But let us just get 
the survey aligned monthly and weekly so that piece of 
uncertainty is gone. We no longer have to worry about that.
    And then secondly, EIA has some very capable analysts. I 
have talked to many of them over the years. They are all real 
busy is the problem. But find one and say, look, talk to people 
in the industry, find out what process and procedures they use 
to predict this number because by Monday every week, we have 
already decided what we think the number is and so has the 
industry. So by Monday, the same information could be available 
to this analyst, and I think, generally speaking, they are 
reviewing their numbers on Tuesday. The analyst could come in 
and say here is my projection. If you are off by more than X, 
maybe you better check your data.
    We think those are common sense things to do. They have 
hurdles. I understand why they have some issues.
    Ms. Campbell. Do you want me to respond to that?
    The Chairman. That is why I wanted you to be here because 
he had said that.
    Ms. Campbell. We do have a sample survey in which we have 
56 responding units of the approximately 120 responding units 
that we have for the monthly survey. It is operated as a sample 
survey, and it achieves approximately 91 to 96 percent coverage 
of the inventory that we are sampling for, which means that 
there are approximately 64 reporting units that are not 
included in the sample each week that are reporting to us each 
month. But we are, nonetheless, in spite of that difference, 
getting 91 to 96 coverage, which is an excellent coverage rate.
    Now, when you are operating a sample survey, you have 
essentially two types of error that you describe. One is called 
sampling error, which means you did not design your sample well 
enough or completely enough. And the other is something called 
non-sampling error, which says that the people that are 
reporting to you make some kind of mistake.
    What frequently happens when you expand the size of the 
numbers of people who are reporting to you is you have more 
people who have a chance to make a mistake. And given that we 
have 64 additional respondents to pick up for somewhere between 
1 to 4 percent coverage for each region, we think that what we 
have picked up there, in terms of reporter burden, which we are 
measured for under the Paperwork Reduction Act, which is why we 
have to go to the Office of Management and Budget to receive--
we can make small changes in the number of our sample if 
someone buys or sells or whatever, but we cannot do that, which 
would be more than a doubling of the reporting burden that is 
involved here, without going back through OMB for a clearance.
    So we feel that the sample that we have selected is 
efficient and effective. That, we think, is going to be the 
most cost effective way for us to operate the survey and also 
to provide quality coverage.
    We do not believe that what the problem was recently was 
related to the size of the sample. It was related to what 
happened within the sample reports. We do believe that if we 
were to add those additional 64 respondents, we would have a 
sizable non-response problem and that we would end up having to 
estimate for them, which is essentially what we are doing in 
the estimation methodology that we have now. So we do believe 
that this is both cost effective for the Government and 
responsible in terms of the reporter burden for respondents.
    Now, with respect to the other issue, which is we do 
believe that we should have reviewed and we have reviewed the 
quality review proceedings within our agency as to what we are 
doing each week to try to assure the best quality estimate. We 
do track the same materials that you do track. We do track the 
weather. We do track the 5-year and the 1-year averages. We do 
track what is available in terms of trade press on other 
people's estimates, ICAP and others. So we are fully aware of 
those and they are involved in our procedures. Mistakes do 
happen.
    The Chairman. Thank you very much.
    Did you want to comment, Mr. Horvath?
    Mr. Horvath. Yes. I just want to add one more to Mr. 
Barnett's suggestions and your own. We noticed that in looking 
at the glitches that occurred over the years, we saw two big 
ones. One was July 3. One was day before Thanksgiving, so 
suggesting a pattern. Taking a look at internal procedures not 
just at EIA but even within companies, who is on vacation, who 
has the authority, who is signing off on it, is something 
appropriate.
    And the second thing, of course, is this one in November 
happen to occur when we were setting up price for the following 
month, so it affected the whole month's worth of prices for 
consumers, anywhere between I think FERC estimated $200 million 
to $1 billion to consumers. It is a lot of money. It warrants 
looking at whether or not we want to have a storage report 
coming out during that settlement period. Another quick fix. 
That is with my NGSA hat on, not the whole industry's.
    The Chairman. I had a question of NYMEX, but we will submit 
that and let you answer it, if you do not mind.
    Yes, sir.
    Mr. Chapman. Can I make a comment about the EIA?
    The Chairman. Please do.
    Senator Alexander. I would like to hear NYMEX' response to 
your question about trading limits before we leave. Please go 
ahead and ask whatever you wanted to, but you asked a question 
about whether having narrower trading limits would make a 
difference. You are not the only chemical company who has asked 
that question.
    Mr. Chapman. I am in a dilemma. Do I ask this question or 
go back to the first?
    The Chairman. Go ahead. I was going to ask it and that is 
what I was going to submit, but go ahead. That is fine. Let us 
do it right now.
    Senator Alexander. Ask the one you want to ask.
    Mr. Chapman. One of the other suggestions that we have 
talked about--and we did it at the end of September with the 
other conference--was relative to reporting storage information 
daily. One of our big focuses is to reduce unnecessary price 
volatility. The day the storage report comes out is the most 
volatile day of trading. It just so happens that there is 
currently a parimutuel, over-the-counter financial product that 
pays off in terms of dollars per bcf change in inventory versus 
an expectation. And this parimutuel derivative adds 
significantly to what I think is an unnecessary price 
volatility on Thursdays.
    We have talked a little bit about the amount of extra 
resources that it would take for the EIA to provide that. That 
is true. Perhaps the marketplace through CCRO or others might 
look to do something along those lines. A number of individual 
pipelines are voluntarily posting their information. However, 
without the information being aggregated in some fashion or 
another, independent like EIA or another way, the marketplace 
has a difficult time figuring out what to do with it.
    The Chairman. Do you want to comment on that?
    Ms. Campbell. I need to defer to the Federal Energy 
Regulatory Commission in this area because they are the ones 
who are considering the issue of requiring daily reporting. 
There is no daily commodity reporting run by any statistical 
agency.
    Mr. Harvey. We did discuss this last September in a 
technical conference. We did suggest some ideas like going 
towards more of a daily reporting, but never in the context of 
reporting to EIA, making that information public through some 
kind of standardized, probably Internet interface. There are, 
at least in the cases of interstate pipelines, systematic ways 
of doing that. Because of the history here, they are not done 
as systematically as they might be. So that is one of the 
issues that we wanted to have discussed at that time and it 
came up, but it was never in the context of going to the EIA. 
That would have been doing it in a way that was more accessible 
so that more people could commercially go in and handle that.
    The Chairman. Senator Alexander.
    Senator Alexander. My question is the question Mr. Chapman 
asked earlier which is basically, as I understand it--your 
question is not the Government doing this, but if NYMEX 
narrowed the trading limits for gas to reduce the volatility of 
the price, what would be the effect of that. You wondered why 
the trading limits were broader for gas than it is for?
    Mr. Chapman. Than it is for any other commodities that we 
could find. The current trading limits on natural gas are $3 
per MM Btu, ball park, around 50 percent of the current value 
of gas. In the last 5 years, from 2000 to 2004, the prices 
exceeded 50 cents 40 times and 75 cents 20 times and never hit 
the price limit as compared to these other commodities that I 
mentioned.
    Mr. Levin. That last statement actually is not accurate but 
it is also not relevant.
    The first thing I would answer is very straightforwardly 
there is an easy way to eliminate price volatility and it is 
called hedging. And it is as sample as that. That is why 
markets such as NYMEX exist. There are also a lot of ways to 
compete with what NYMEX does to accomplish the same end, and 
lots of companies do it and they get price certainty and they 
eliminate price volatility.
    Over the years, NYMEX has had a variety of different 
policies on its price limits. We at one point had very narrow 
ones compared to what we currently have. They existed as no 
limits on the front month, but 10 cent limits in subsequent 
months. Over time, the reason that we changed them was that we 
found that our price limits were artificial, not most of the 
time, but when they are hit or when they stop a party from 
achieving the price that is going on in the cash market while 
we stop trading, it has a number of effects.
    But first let me emphasize the cash market goes on whether 
we do or not. It just does not happen to be as transparent. It 
does not happen to be as level. It does not happen to be as 
fair. So that is the first implication of us trying to get out 
of sync with the cash market. And there are market participants 
who enjoyed it when we were not there, enjoyed it when our 
market stopped and they kept on trading and would enjoy it 
again.
    Continuing in that vein though, that meant that parties 
that were in our market that were using us to manage price risk 
because the cash market was moving either higher or lower than 
where we artificially constrained them were no longer 
benefiting from risk management or price management because we 
trapped them. We were like a roach motel. And that is not the 
purpose of a commodities exchange either. We are trying to be a 
public marketplace where everybody can come to to lay off risk, 
not force them so they are incurring more risk.
    The last thing that we did is we found that in some of the 
ways that we had our price limits, that though there were the 
best of intentions, each time we had them, we caused even 
distortions in our own market going back to when we had the 
very narrow range, probably similar to what goes on in the 
other markets. And I think they have just the policies that we 
had, front month, many of them if not all, unlimited movement, 
the back months much smaller movements. What you find is that 
when the back month price limit is reached, then parties start 
running to the front month not because they want to use the 
front month, but that is the best thing----
    Senator Alexander. So you have no limits?
    Mr. Levin. Well, we did not at that time. Now we do. And 
over time we increased them----
    Senator Alexander. I was assuming you have now no limits.
    Mr. Levin. No. We have limits. We have $3 per million Btu 
limits.
    Senator Alexander. What is your theory of limits based on 
what you said for the last 5 minutes?
    Mr. Levin. What I was explaining was where we were and why 
we changed it and opened it up.
    Senator Alexander. You gave 5 minutes of reasons why limits 
were bad and interfered----
    Mr. Levin. That is right and now we have a very wide limit. 
But no, our limit is actually up, Senator, to the point of we 
give the market 5 minutes to digest it and then we go on 
trading after it. That is what we found to be the best policy. 
So that is how we currently operate. What we are trying to do 
is just give everybody a sense and once you hit a limit, that 
they have to time to digest, make sure that they have got their 
customers, their brokers, their customers' orders are right, to 
talk with their customers. We at one point had an hour.
    Senator Alexander. When you hit the limit, you stop for 5 
minutes, digest it, and go on.
    Mr. Levin. That is right. At one point it used to be an 
hour and we found that was too long and people complained that 
the cash market was going on and you were not. So I appreciate 
your question because I left that unclear. It helped me 
clarify. Thank you.
    The Chairman. Everybody here understood it all. Right?
    [Laughter.]
    Senator Bingaman. The part that I am not clear on is why 
there is such a disparity. You have much narrower limits in 
these other commodities, as I understood Mr. Chapman's comment. 
Why do you have much narrower limits in the other commodities 
than you have in natural gas?
    Mr. Levin. I cannot speak for all the other commodities. I 
can speak for when we have had narrower limits and in the 
markets where we seemed to, percentage-wise, have it ourselves, 
it is because in those markets, they do not have the same level 
of volatility.
    Mr. Chapman's interpretation is somehow that because NYMEX 
lets it happen, that causes it. We think, frankly--and we 
cannot be very respectful of him--we think that is a flat earth 
mentality. I cannot put it any other way. We reflect what is 
going on in the market. That market goes on whether we are 
there or not and there are a lot of big entities. The fact of 
the matter is, when it was still around, Enron Online was our 
biggest competitor, and does anybody doubt for a second that 
when they were competing with us, they would not have been very 
happy for us to artificially have constrained ourselves with 
price limits or to close our market altogether. They would not 
and they did not, and they operated when we did not. That is 
the way the natural gas market is today.
    I do not mean to just use them. There are other companies 
that are out there and do it. It is less transparent. It is not 
designed to be a public marketplace and have all the 
protections we have, that have the competition we have. It is 
designed to be a dealer market outside of NYMEX. So that is the 
choice. People can make it.
    But once again, to eliminate price volatility, hedge. it is 
as simple as that.
    The Chairman. You had something.
    Mr. Shilts. Yes. Just to address your question, the CFTC 
itself does not require exchanges to have price limits, and 
essentially it is a business decision of each exchange. So each 
exchange and the Chicago Board of Trade may view their grain 
markets differently and decide to impose narrower limits 
because they are less volatile than some of the other markets. 
The NYMEX has their own views as to how they want to impose 
limits looking at volatility in those markets.
    The CFTC's view--we have looked at this many times over the 
years, and I cannot express as colorfully as Bob, but in 
general, price limits, while they may stop trading for a while 
to give people an opportunity to assess what is going on in the 
market, but there are these very real costs involved where the 
activity in the cash market is going on, traders that want to 
get out of their positions or that want to establish new 
positions are not able to do that. That is the fundamental 
purpose of a futures market, the ability to lay off risk and to 
trade, and also the price discovery process has ceased when 
trading cannot occur.
    The Chairman. We are going to finish, but Mr. Chapman, you 
seem like that right hand of yours really wants--your body 
wants to react to it. Right?
    Mr. Chapman. My organization, Dow Chemical, is a very large 
hedger on the NYMEX and the over-the-counter exchange markets. 
We do a lot of that.
    My comments were very focused on reducing unnecessary price 
volatility. I cannot quantify that for you because we do not 
have the information on how much of this is caused by 
unnecessary--but when the markets are running hard, even a 
large player like Dow cannot catch up to some of the other 
guys.
    Thank you.
    The Chairman. A very good point.
    Well, I hope everybody enjoyed it. We stand in recess.
    [Whereupon, at 5:50 p.m., the conference was adjourned.]

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