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ENVIRONMENTAL IMPACTS OF

NATURAL GAS SUPPLY

HEARING

BEFORE THE

COMMITTEE ON ENVIRONMENT AND

PUBLIC WORKS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 24, 2004

Printed for the use of the Committee on Environment and Public Works

(
(II)

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JAMES M. INHOFE, Oklahoma, Chairman

JOHN W. WARNER, Virginia

CHRISTOPHER S. BOND, Missouri

GEORGE V. VOINOVICH, Ohio

MICHAEL D. CRAPO, Idaho

LINCOLN CHAFEE, Rhode Island

JOHN CORNYN, Texas

LISA MURKOWSKI, Alaska

CRAIG THOMAS, Wyoming

WAYNE ALLARD, Colorado

JAMES M. JEFFORDS, Vermont

MAX BAUCUS, Montana

HARRY REID, Nevada

BOB GRAHAM, Florida

JOSEPH I. LIEBERMAN, Connecticut

BARBARA BOXER, California

RON WYDEN, Oregon

THOMAS R. CARPER, Delaware

HILLARY RODHAM CLINTON, New York

ANDREW WHEELER, Majority Staff Director

KEN CONNOLLY, Minority Staff Director
(III)

CONTENTS

Page

MARCH 24, 2004

OPENING STATEMENTS

Allard, Hon. Wayne, U.S. Senator from the State of Colorado ............................ 115

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................... 10

Chafee, Hon. Lincoln, U.S. Senator from the State of Rhode Island .................. 9

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 1

Jeffords, Hon. James M., U.S. Senator from the State of Vermont .................... 7

Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska ........................... 77

Thomas, Hon. Craig, U.S. Senator from the State of Wyoming .......................... 11

Voinovich, Hon. George V., U.S. Senator from the State of Ohio ........................ 13

WITNESSES

Bailey, Dennis M., director, Energy Purchasing, PPG Industries ....................... 93

Prepared statement .......................................................................................... 169

Response to additional question from Senator Jeffords ................................ 170

Bloch, Stephen H.M., staff attorney, Southern Utah Wilderness Alliance ......... 103

Prepared statement .......................................................................................... 183

Responses to additional questions from Senator Inhofe ............................... 196

Bluestein, Joel, president, Energy and Environmental Analysis, Inc. ................ 92

Prepared statement .......................................................................................... 156

Responses to additional questions from:

Senator Inhofe ........................................................................................... 159

Senator Jeffords ......................................................................................... 159

Carcieri, Hon. Donald L., Governor, State of Rhode Island ................................. 78

Prepared statement .......................................................................................... 124

Caskey, Michael C., executive vice president and chief operating officer, Fidelity Exploration and Production Company .......................................................... 101

Prepared statement .......................................................................................... 171

Drake, Bob, vice president, Oklahoma Farm Bureau and chairman, National

Grazing Lands Council ........................................................................................ 89

Prepared statement .......................................................................................... 126

Handley, George, Eclipse Exploration Corporation .............................................. 105

Prepared statement .......................................................................................... 196

West, Marjorie, Western Organization of Resource Councils .............................. 90

Prepared statement .......................................................................................... 127

ADDITIONAL MATERIAL

Articles:

Anniston Star, Running on Empty ................................................................. 245

Chattanooga Times Free Press, The Gasoline Price Spiral .......................... 238

Gainesville Sun, Shock at the Pump .............................................................. 243

Missoulian, Revised Energy Bill Thinner, Not Better ................................... 247

News Record:

Canadian Firm Plans Pipeline to Chicago .............................................. 180

Pipeline Project is Put on Hold ................................................................ 181

Star-Telegram, Fuel for Thought, Gasoline Prices Have Jumped Through

the Pump in Recent Weeks .......................................................................... 246

The Arizona Republic, Mirror, Mirror . . . On the Pump, What was

it Made Those Prices Jump? ........................................................................ 241
Page

IV

—Continued

The Birmingham News, Saving Gas, Congress Should Turn to CAFE

to Lessen Pain at the Pump ......................................................................... 237

The Buffalo News, Tied to Mideast Oil .......................................................... 248

The Clarion-Ledger, Gas prices ....................................................................... 244

The New York Times, Pinch at the Pump ...................................................... 240

The Wall Street Journal:

Another Power Play .................................................................................. 239

Natural-Gas Costs Hurt U.S. Firms—High Prices are Prompting

Companies to Conserve and Move Work Overseas ............................. 20

The Washington Post:

Chemical Industry in Crisis—Natural Gas Prices are Up, Factories

are Closing, and Jobs are Vanishing .................................................. 18, 122

Slicing Up Energy ..................................................................................... 242

Charts:

Bureau of Land Management/Forest Service, Leasing and Permitting

Process ........................................................................................................... 6

Federal Onshore Oil and Gas Leasing and Permitting Process ................... 6

Indigenous Resources Are Not Fully Utilized ................................................ 4

Natural Gas Consumption, 1990–2025 ........................................................... 17

Natural Gas Consumption versus Production, 2001–2025 ........................... 18

Natural Gas Costs ............................................................................................ 170

The Fertilizer Institute................................................................................. 161–169

Total Consumer Cost Savings (2005–2014) If BLM Achieves Permitting

Goals .............................................................................................................. 5

Maps ...................................................................................................................... 198–203

News Releases:

Alaska Wilderness League, Dark Anniversary: Exxon Valdez Oil Spill ...... 234

National Environmental Trust (NET):

Editorials Warn Against Using Record Gas Prices as Reason to Pass

the 2004 Version of the Energy Bill ..................................................... 235

Energy Bill not the Answer to High Gas Prices ..................................... 249

Union of Concerned Scientists, fact sheet, Renewable Energy Can Help

Ease Natural Gas Crunch ............................................................................ 232

U.S. PIRG, Budget-Busting Energy Bill Fails to Reduce Energy Consumption, Prices or Imports: New EIA Report ........................................... 251

Statements:

American Chemistry Council ........................................................................... 223

American Forest & Paper Association ............................................................ 220

American Gas Association (AGA) .................................................................... 210

Cicio, Paul N., executive director, Industrial Energy Consumers of America ................................................................................................................... 204

Greenspan, Alan, Chairman, Board of Governors of the Federal Reserve

System ........................................................................................................... 120

Kelly, Martin, president and CEO, Moraine Molded Plastics, Inc. .............. 116

National Environmental Trust (NET), editorial ............................................ 235

National Petrochemical Refiners Association (NPRA) .................................. 207

Southern Utah Wilderness Alliance ................................................................ 253

Survey by Lexecon, on behalf of Cinergy Corp., The Link Between Air Quality

Policies, Electric Power and Natural Gas Markets, and Macroeconomic

Impacts: Clear Skies versus The Clean Air Planning Act, March

2004........................................................................................................................ 23–76

Text of bill, H.R. 3698 .......................................................................................... 130–150
(1)

ENVIRONMENTAL IMPACTS OF

NATURAL GAS SUPPLY

WEDNESDAY, MARCH 24, 2004

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC.

The committee met, pursuant to notice, at 10:02 a.m. in room

406, Senate Dirksen Building, Hon. James M. Inhofe (chairman of

the committee) presiding.

Present: Senators Inhofe, Jeffords, Chafee, Thomas, Murkowski,

Carper, Voinovich, and Allard.

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. The meeting will come to order.

Welcome, Governor. If you would, take your place at the table.

We appreciate very much your being here. We want to welcome the

witnesses. We are pleased that the Governor is here to share his

views on the environmental impacts of the U.S. natural gas supply.

Although the United States is a world leader in natural gas supply, we pay more for it than anywhere on the globe. For the last

several years, natural gas prices have been volatile. They have

caused manufacturing production costs to increase dramatically.

Factories are closing. High paying and irreplaceable manufacturing

jobs are leaving the country. Consumers are hurting the most. The

tragedy, of course, is that it is completely unnecessary.

Tactics employed to stop exploration in the production of new

natural gas sources under the pretense of environmental protection

are costing this country dearly and will only get worse if we do not

act. There are those who are simply opposed to drilling anywhere,

anytime, and will go to all lengths to prevent it from occurring. But

we can explore and produce while protecting the environment.

I would like to read a quote,

‘‘The U.S. oil and gas industry has integrated an environmental ethic into its

business culture and operations. The industry has come to recognize that high

environmental standards and responsible development are good business.’’

It may surprise some of my friends that that quote came from

a Clinton administration DEQ report entitled, ‘‘Environmental

Benefits of Advance Oil and Gas Exploration Protection Technology.’’ At least someone in the Clinton administration understood

that it did not harm the environment.

Natural gas makes up 24 percent of our energy supply. It is used

to provide 19 percent of the Nation’s power generation, and 40 percent of U.S. industries rely on natural gas for energy or use it as
2

a necessary feed stock to produce a variety of products from chemicals to fertilizer to glass.

This morning, I had Senator Larry Craig before the Senate Prayer Breakfast. I am the chairman of that group. He was there as a

presenter. When he heard that we were having this hearing, Governor, he said that in his State of Idaho, the cost of fertilizer has

doubled in the last 6 months.

Environmental policies, particularly the Clean Air Act Amendments of 1990 and the regulatory uncertainty of the new source review have contributed to a significant increase in demand for natural gas-based electricity generation. The increased demand for

natural gas without any increase in supply has translated to high

and volatile prices. Because we have vast natural gas resources,

our supply problem is one of our own making.

In the chart that is being shown, they are showing the restrictions. The National Petroleum Council’s most recent report stated,

there are policies promoting the use of natural gas as an environmentally attractive fuel that are in conflict with the laws and regulations that limit access to gas-prone areas where gas can be explored for and produced in an efficient and environmentally friendly manner. The brown shaded areas represent the amount of gas

that is effectively off-limits from exploration and development.

Under these policies, it is as if we had turned our pride-strong Nation into a man starving to death, complaining about it, and then

simply refusing to eat.

What is astounding is that those who are promoting these policies that limit our access to natural gas are also pushing for

changes in the Clean Air Act that would dramatically increase the

demand for natural gas, further increasing pricing and volatility.

I am speaking specifically to people who are trying to regulate carbon dioxide. Experts agree that traditional domestic gas sources

are being depleted and are insufficient to meet future demands.

They point to the Rocky Mountain area as a premier future gas

supply in the lower States.

Unfortunately, according to the NPC, much of the mountain

areas are effectively off-limits to production because of regulatory

uncertainty. Producers, like any business, require certainty to operate successfully. They must be able to plan their investments and

have a reasonable certainty of return. The uncertainty is the result

of an obstruction pattern played out by radical environmental

groups who rely on regulatory and legal challenges to constantly

impede and delay until the point where exploration dies. They

work hard to put more laws on the books with which producers

must comply in order to stop production or delay it indefinitely.

Their obstructionist agenda has been working and the increases result in a volatility of natural gas pricing, and has cost this country

jobs. It is only going to get worse if it continues.

The NPC report concluded that 69-trillion cubic feet, or 29 percent of the area’s technical base, is effectively off-limits to exploration and development. Further, an additional 56 TCFs of potential gas faced significant costs in delays to develop.

The next chart takes three to hold it. It shows what a producer

must go through in order to obtain a Federal lease and permit on

BLM or Forest Service areas. You remember on the previous chart
3

we had that center brown area. That is primarily what we are talking about here. There are huge reserves and huge opportunities.

This is what they have to go through. They are not willing to do

it. If they do it, it is expensive.

Again, this chart just shows the leasing and permitting process

before any exploration or production. We probably could not make

a big enough chart that would capture the delays in building new

pipelines to get a supply into the area which needs it the most,

such as the Northeast.

Having a clean and safe environment is critical, but contrary to

the opinion of the radical environmentalists and their supporters,

we can have a clean environment without sacrificing U.S. competitiveness and jobs.

I come from a gas-producing State, the State of Oklahoma. We

are going to have a witness here from the State of Oklahoma, Bob

Drake. We have vast reserves. We have the ability to explore for

gas. But in the areas where the reserves are the largest, we do not.

This is an old thing called supply and demand. The demand for

natural gas is there, but the environmentalists have stopped us

from being able to produce it.

That is what this hearing is all about. I will recognize Senator

Jeffords for his opening statement.

[The prepared statement of Senator Inhofe follows:]

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM

THE STATE OF OKLAHOMA

I want to welcome our witnesses, and I am pleased that Governor Carcieri of

Rhode Island is here to share his views on the environmental impacts of U.S. natural gas supply.

Although the U.S. is a world leader in natural gas supply, we pay more for it than

anywhere on the globe. For the last several years, natural gas prices have been

volatile—they have caused manufacturing production costs to increase dramatically;

factories are closing, high paying and irreplaceable manufacturing jobs are leaving

the country, and consumers are hurting the most. The tragedy of course is that it

is completely unnecessary. Tactics employed to stop exploration and production of

new natural gas sources under the pretense of ‘‘environmental protection’’ are costing this country dearly and will only get worse if we don’t act. There are those who

are simply opposed to drilling anywhere, anytime and will go to all lengths to prevent it from occurring. But we can explore and produce while protecting the environment.

I would like read a quote:

‘‘The U.S. oil and gas industry has integrated an environmental ethic into its

business culture and operations. The industry has come to recognize that high

environmental standards and responsible development are good business.’’

It may surprise some of my friends that the quote is from a Clinton Administration DOE report titled ‘‘Environmental Benefits of Advanced Oil & Gas Exploration

& Production Technology.’’ While the former President’s policies did not encourage

oil and gas exploration, at least someone in his Administration understood that it

didn’t harm the environment.

Natural gas makes up 24 percent of our energy supply—it is used to provide 19

percent of the nation’s electric power generation (used in over 60 million households), and 40 percent of U.S. industries rely on natural gas for energy or use it

as a necessary feedstock to produce a variety of products from chemicals and fertilizer to glass.

Environmental policies, particularly the Clean Air Act Amendments of 1990 and

the regulatory uncertainty of New Source Review have contributed to significantly

increased demand for natural gas-based electricity generation. The increased demand for natural gas, without any increase in supply, has translated to high and

volatile prices. Because we have vast natural gas resources, our supply problem is

one of our own making.
4

The National Petroleum Council’s most recent report stated that our policies promoting the use of natural gas as an environmentally attractive fuel are in conflict

with laws and regulations that ‘‘limit access to gas-prone areas where gas can be

explored for and produced in an efficient and environmentally friendly manner.’’ The

shaded areas represent the amount of gas that is ‘‘effectively’’ off limits from exploration and development. Under these policies, it’s as if we have turned our proud,

strong Nation into a man starving to death, complaining about it, and then simply

refusing to eat. What is astounding is that those who are promoting these policies

that limit our access to natural gas are also pushing for changes in the Clean Air

Act that would dramatically INCREASE our demand for natural gas, further increasing pricing and volatility, and I am speaking specifically to people who are trying to regulate carbon dioxide.

Experts agree that traditional domestic gas sources are being depleted and insufficient to meet future demand. They point to the Rocky Mountain area as the premier

future gas supply in the lower 48 states.

Unfortunately, according to the NPC, much of the mountain areas are ‘‘effectively’’

off-limits to production because of regulatory uncertainty. Producers, like any business, require certainty to operate successfully. They must be able to plan their investments, and have a reasonable certainty of a return. The uncertainty is a result

of an obstructionist pattern played out by radical environmental groups who rely on

regulatory and legal challenges to constantly impede and delay until the point

where exploration dies. They work hard to put more laws on the books with which

producers must comply, in order to stop production or delay it definitely. Their obstructionist agenda has been working and the resulting increase and volatility of

natural gas pricing has cost this country jobs—and its only going to get worse if

it continues.
5

The NPC report concluded that 69-trillion cubic feet or 29 percent of the area’s

technical base is ‘‘effectively’’ off-limits to exploration and development. Further, an

additional 56 TCF of potential gas faced significant costs and delays to development.
6
7

This chart shows what a producer must go through in order to obtain a Federal

lease and permit on BLM or Forest Service land. Again, it depicts the process before

any actual disturbance of land occurs. By the way, the nine red stop signs are opportunities for legal challenges.

Again, this chart just shows the leasing and permitting process, BEFORE any exploration or production. We probably couldn’t make a big enough chart that would

capture the delays in building new pipelines to get the supply into areas which need

it the most, such as the Northeast.

Having a clean and safe environment is critical, but contrary to the opinion of the

radical environmentalists and their supporters, we can have a clean environment

without sacrificing U.S. competitiveness and U.S. jobs. Pursuing environmental policies that force natural gas, while preventing increased supply through obstructionist

tactics is irresponsible and hurts our workers, our consumers, and our nation.

Senator INHOFE. Senator Jeffords.

OPENING STATEMENT OF HON. JAMES M. JEFFORDS,

U.S. SENATOR FROM THE STATE OF VERMONT

Senator JEFFORDS. Thank you, Mr. Chairman. Thank you for

holding this hearing, and a sincere thanks to all of the witnesses,

many of whom have traveled across the country to provide testimony to this committee.

The committee will be examining several very important issues

today as we take testimony on the environmental effects of natural

gas supplies. The first issue is obtaining a better understanding of

the environmental effects of natural gas use. Natural gas is the

least carbon-intensive fossil fuel. On a full life-cycle basis, from the

time it is produced at the wellhead to the time that it is burned,

natural gas contributes at least 20 percent fewer greenhouse gas
8

emissions than oil, and at least 50 percent less than coal to our environment.

In relation to other fossil fuels, natural gas also results in lower

emissions of sulfur, volatile organic compounds, and particulate

matter. All of these reduce the emissions support efforts to improve

our local air quality.

This is important because as the chairman knows I feel that the

country has a long way to go in improving its air quality. As we

do so, and as we seek to address climate change, natural gas will

continue to play a very important role. In combination with energy

conservation, natural gas will help us bridge our current energy

needs with a non-carbon emitted and renewable energy sources

that will become more and more a part of our generation mix.

I look forward to hearing from witnesses about whether and how

our currently high gas prices are driving renewables and conservation in the short term. I also want to hear about whether this committee should be doing more to encourage the Environmental Protection Agency’s Natural Gas Efficiency Program to step up their

efforts and assist the gas industry in implementing short-term

measures to address high prices.

The second issue that we must examine is the effective environmental laws, if any, on various sectors of the economy, including

energy industries, like the production of natural gas. Of course,

this committee’s first and foremost responsibility is to assure that

the Nation’s laws are protective of public health and of the environment. It is also our job to set performance standards for industries,

such as the gas industry, which are adequately protective and

whenever possible, fuel neutral. These standards should not be

skewed to protect any one industry, but should encourage sustainable economic development.

Finally, the third issue we must examine are the effects of the

environment of natural gas production and sufficiency of our country’s environmental laws to address any adverse impacts. We must

be mindful that as beneficial as the use of natural gas has been to

generate electricity, heat our homes, and produce commodities, it

has also had real environmental impacts on our country’s public

and private lands.

I feel that a good understanding of these issues is extremely important. I think that even more the case now is that the energy bill

that the Senate has before it, that would exempt natural gas and

oil production sites from Clean Water Act, Storm Water permits,

and would exempt hydraulic fracturing from the Safe Drinking

Water Act. Therefore, I am pleased that we will hear from witnesses, both from natural gas producers and individuals, who have

examined drilling sites about the efficiency of these laws and protecting the environment.

Covering the issues, I have outlined will provide a comprehensive

outlook in this particular sector. I look forward to hearing the witnesses, Mr. Chairman. I thank you for holding these hearings.

[The prepared statement of Senator Jeffords follows:]
9

PREPARED STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM

THE STATE OF VERMONT

Mr. Chairman, thank you for holding this hearing, and a sincere thanks to all the

witnesses, many of whom have traveled across the country to provide testimony to

the Committee.

The Committee will be examining several very important issues today, as we take

testimony on the environmental effects of natural gas supplies. The first issue is obtaining a better understanding of the environmental effects of natural gas use.

Natural gas is the least carbon intensive fossil fuel. On a full lifecycle basis, from

the time it is produced at the wellhead to the time it is burned, natural gas contributes at least 20 percent fewer greenhouse gas emissions than oil and at least 50

percent less than coal to our environment.

In relation to other fossil fuels, natural gas also results in lower emissions of sulphur, volatile organic compounds and particulate matter. All of these reduced emissions support efforts to improve local air quality. This is important, because as the

Chairman knows, I feel that the country has a long way to go to improve air quality.

As we do so, and as we seek to address climate change, natural gas will continue

to play an important role.

In combination with energy conservation, natural gas will help to bridge our current energy needs with the non-carbon emitting and renewable energy sources that

will become more and more a part of our generation mix.

I look forward to hearing from witnesses about whether and how our currently

high gas prices are driving renewables and conservation in the short term. I also

want to hear about whether this Committee could be doing more to encourage the

Environmental Protection Agency’s natural gas efficiency programs to step up their

efforts and assist the gas industry in implementing short-term measures to address

high prices.

The second issue that we must examine is the effect of environmental laws, if any,

on various sectors of the economy, including energy industries like the production

of natural gas.

Of course, this Committee’s first and foremost responsibility is to assure that the

nation’s laws are protective of public health and the environment. It is also our job

to set performance standards for industries, such as the gas industry, which are

adequately protective and wherever possible, fuel neutral. These standards should

not be skewed to protect any one industry, but should encourage sustainable economic development.

Finally, the third issue we must examine are the effects on the environment of

natural gas production and the sufficiency of our country’s environmental laws to

address any adverse impacts.

We must be mindful that, as beneficial as the use of natural gas has been to generate electricity, heat our homes, and produce commodities, it has also had real environmental impacts on our country’s public and private lands. I feel that a good

understanding of these issues is extremely important.

I think this is even more the case now that the Senate has before it an Energy

Bill that would exempt natural gas and oil production sites from Clean Water Act

stormwater permits, and would exempt hydraulic fracturing from the Safe Drinking

Water Act .

Therefore, I am pleased that we will hear from witnesses, both natural gas producers and individuals who have examined drilling sites, about the sufficiency of

these laws in protecting the environment.

Covering the issues I have outlined will provide a comprehensive look at this particular sector. I look forward to hearing from the witnesses.

Senator INHOFE. Thank you, Senator Jeffords.

We will take in the order of their arrival our members who wish

to have opening statements. You were the first to arrive, Senator

Chafee. Do you have an opening statement?

After the opening statements, I will recognize you to introduce

Governor Carcieri.

You are recognized.

OPENING STATEMENT OF HON. LINCOLN CHAFEE,

U.S. SENATOR FROM THE STATE OF RHODE ISLAND

Senator CHAFEE. Thank you, Mr. Chairman. I just have a very

brief opening statement.
10

First of all, I want to thank you for holding this hearing, and as

you mentioned, to also welcome Governor Carcieri here this morning, the Governor of my State.

I will say that to some extent natural gas is suffering from its

own success, recognizing the many benefits of natural gas. Its popularity has caused increased demand which, in turn, has driven up

the price. As we discuss the problems associated with high natural

gas prices, I would like to make sure that we do not lose sight of

diversity and conservation. Ensuring that the Nation employs a diverse range of fuel supplies, and ensuring that we do as much as

we can to conserve energy can only make the country and the economy stronger in the long run.

I do believe that the reserves of natural gas, both domestic in

Senator Murkowski’s home State and foreign, are still strong. We

must work harder at delivery systems of this natural gas to the

consumer, either by pipeline or by LNG.

I look forward to introducing Governor Carcieri later.

Senator INHOFE. Good. Senator Carper, did you have an opening

statement?

Senator CARPER. I do have just a quick statement, if I could.

Governor, what is it like being a Governor these days?

Governor CARCIERI. It is a little different than it was a few years

ago.

Senator CARPER. Senator Voinovich and I are what we call ‘‘recovering Governors.’’

Governor CARCIERI. You had the good years. You avoided the

budget problems.

Senator CARPER. We did. We were very, very fortunate.

Senator INHOFE. Your time has expired.

[Laughter.]

OPENING STATEMENT OF HON. THOMAS R. CARPER,

U.S. SENATOR FROM THE STATE OF DELAWARE

Senator CARPER. It probably has. Thank you for joining us today.

I just want to piggyback on the comments of Senator Chafee. It

is important that we find places where we can bring natural gas

where it does exist to our markets and for us to be able to use, particularly in this country. We are facing these huge deficits and

trade deficits, many of which are related to the import of oil and

the reliance on foreign sources of energy.

This past couple of weeks I have asked some of you to consider

signing onto a letter to the President. A number of you have, and

I just want to thank you for doing that. The letter focuses on what

Senator Chafee was mentioning there, and that is conservation. In

2000, the Energy Department promulgated a regulation calling on

the adoption of something called ‘‘SEAR 13’’ standards dealing with

energy efficiency for air conditioning systems. A SEAR 13 standard

was adopted which basically said that by 2006 our air conditioners

need to be about 30 percent more energy efficient.

The long and short of that is that what flows from that higher

standard is the emission of about 2.5 million tons less of carbon dioxide, but maybe more importantly, about 48 to 50 electric power

plants will not have to be built between now and 2020. Let me say

that again. What flows from simply raising the air conditioning
11

standards to a SEAR 13 not only means about 2.5 million tons less

of CO¥2 that we would generate in this country, but it also means

close to 50 power plants that we are not going to have to build.

As you all know, most of the power plants being built these days

are powered by natural gas. To the extent that we do not have to

build those power plants, then that is a good thing for our environment and for the supply of natural gas. As we use less natural gas,

hopefully we will be able to see the prices moderating.

Many of our colleagues have signed the letter and I thank you

for doing that. The letter is simply a letter to the President that

says, ‘‘Mr. President, we have had a difference of opinion. We will

have 30 percent more efficient air conditioners by 2006.’’ The Administration has sought to replace that with a more modest standard, a SEAR 12, which is 20 percent more energy efficient.

We fought it out in the courts and the Second District Court said

that the higher standard should stand. The air conditioning industry said last week that they felt that they could live with the higher standard. We are delighted with that. The majority of our colleagues have now signed the letter.

It says, ‘‘Mr. President, please do not appeal the decision of the

Second District Court. Let it stand.’’ If the industry says they can

comply with the higher standard, by golly, we should support that

and applaud that.

So I would just say to my colleagues that we will look for ways

to find extra natural gas. That is important. But let us also find

ways to use less of it, which is also important.

Thank you.

Senator INHOFE. Thank you, Senator Carper.

Senator Thomas.

OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM THE STATE OF WYOMING

Senator THOMAS. Thank you, Mr. Chairman. I think it is interesting. I am very much involved in the energy policy, which we

have not been able to get passed. We need to move on that. Actually, interestingly enough, it has been opposed by some of the folks

who are now talking about the needs that we need to fill. Certainly

we do. But you can coordinate energy and environmental policy.

That is part of what we are trying to do with the bill.

One of the things I disagree a little with, my friends, is that if

you are going to have a policy in the future, coal has to be part

of that. We need to do more research so that it is clear. But we

have more supply of fossil fuel of coal than we do of gas. Furthermore, gas is much more flexible and can be used for many things.

This idea that we are going to try in the future to generate electric

totally with gas I think is a mistake in terms of policy. But we

need some diversity here. Certainly we need conservation and efficiency. We need to work on that. But with respect to what we are

talking about here today, we need to expedite permitting and procedures. Some of these permits that you talk about, even though

they may need to be there, they do not need to take 6, 8, or 10

months to accommodate. We found that in many instances. We are

trying to do that on public lands with the BLM permitting. Without
12

changing the result, you can have a much more efficient system of

doing the permitting and causing those things to happen.

If we can do that, we have to have access to some of the more

economic reserves. They are obviously off limits. I am one who

thinks there ought to be some public land set aside and not used

for that. But for the most part, particularly BLM land should be

available for multiple use. I think it is very good that we take a

look at what impediments there are that could be changed with respect without reducing the effectiveness of the environmental protection. I think we can do those things.

I guess that is what we are talking about here today, Mr. Chairman.

Senator INHOFE. Well, those are the sentiments I tried to express. I think during the course of this hearing it would not hurt

to put the original chart back up so we can see what areas he is

talking about and where the capacity is.

[The prepared statement of Senator Thomas follows:]

PREPARED STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR FROM THE

STATE OF WYOMING

Energy demand is on the rise—be it oil, natural gas, nuclear, coal, or renewable

resources. Domestically, predictions show only coal sector production to increase but

even that might cause some to pause given the uncertainty surrounding environmental regulations. Bottom line is that the U.S. will be importing more energy than

ever before. What happened to the talk about energy and national security? It’s time

to seriously look at our policies.

It is the policies of the past that got us here today. For example, let’s take natural

gas. In the 80’s and 90’s there was a surplus of supply and weak demand. This kept

prices low. The market was influenced by certain legislative and regulatory measures. Two measures that impacted gas development included the Powerplant and

Industrial Fuel Use Act of 1978 (PIFUA) and the Natural Gas Policy Act of 1978

(NGPA). While the PIFUA placed restrictions on industrial and power generation

uses of natural gas, the NGPA set in motion a process that encouraged gas supply

growth. Amendments in 1987 to the PIFUA removed restrictions on the use of gas

in power generation, and the Natural Gas Wellhead Decontrol Act of 1990 removed

wellhead price controls.

Capability of natural gas continues to increase. Growing demand and limited supply has resulted in tighter markets, higher prices and greater volatility. This will

continue until we can bring additional supplies to the market. In addition, with the

current world oil supply situation and the flurry of environmental regulations facing

refiners, we can expect to see gasoline prices remain high as well.

We must focus on the policies of today so we can have a plan for the future. We

have to coordinate energy and environmental policies. For example, the electric industry has made a lot of changes. We no longer have just the vertically integrated

utilities. In fact, close to 40 percent of generation comes from marketers—most of

these new merchant generators are powered by natural gas.

Our government policies particularly, environmental polices, encourage the use of

natural gas but do not address the corresponding need for additional natural gas

supplies. Companies are switching from coal to natural gas. Why is this? Coal is

our most abundant fuel source and should be used for electric generation and we

can do this an environmentally responsible way. Natural gas is more flexible and

can be used for different things such as heating homes and businesses. If we are

to restore some kind of fuel diversity to our electricity sector, we need to provide

a regulatory environment that will enable investors to consider coal plants. Right

now, with the uncertainty about new source review, mercury, visibility and a host

of other issues, building a new coal plant is just ‘‘too hard’’ even in a State like

mine.

Mr. Chairman, it is my hope that we can pass the energy bill so we don’t continue, willy-nilly, down a path with no plan and pass a law here, a regulation there

with no clear thoughts of coordination or where these policies lead us into the future.

Senator INHOFE. Senator Voinovich.
13

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH,

U.S. SENATOR FROM THE STATE OF OHIO

Senator VOINOVICH. Thank you, Mr. Chairman, for having this

hearing today. The natural gas crisis that has plagued this Nation

for the last 46 months has caused the hemorrhaging of thousands

of jobs and has severely impacted the way of life for millions of

Americans who struggle each day to pay their utility costs. These

folks are not even on most people’s radar screens, but I am sure

that the Governor knows in his large urban areas that there is the

demand for live heap than has been more than any time in the history of this country.

Alan Greenspan has said ‘‘I am quite surprised at how little the

natural gas problem has been getting because it is a very serious

problem.’’ The people of Ohio get it. I welcome Dennis Bailey from

PPG Industries who will testify today on the effective natural gas

crisis on the company’s operations in Ohio and throughout the

country.

I also thank Morane Molded Plastics in Ohio for submitting testimony. I would ask that it be inserted in the record, Mr. Chairman.

Senator INHOFE. Without objection, so ordered.

Senator VOINOVICH. Manufacturers are a key ingredient of our

Nation’s economy and the backbone of Ohio. They rely on natural

gas heavily for fuel and power as a raw material. It also plays an

important role in another significant part of our economy that people forget about it, and that is agribusiness. U.S. natural gas prices

are the highest in the developed world. Since 2000, natural gas has

been hovering between $5 and $6 per thousand cubic feet, roughly

twice its historical level.

During this time Ohio has lost about 200,000 manufacturing

jobs. These jobs are simply not migrating to another region. They

are going overseas, or the businesses are just going out of business.

Let me quote from a Washington Post article that ran last week.

I would ask that the entire article be inserted in the record.

‘‘Across the country one in every 10 chemical-related jobs has vanished in the

past 5 years, nearly 100,000 workers. The chemical industry’s eight-decade run

as a major exporter has ended with a $19 billion trade surplus in 1997, becoming a $9.6 billion deficit this year.’’

That is a dramatic change.

Senator INHOFE. Without objection, so ordered.

Senator VOINOVICH. According to a February 17th Wall Street

Journal, which I would also ask to be inserted in the record, ‘‘Almost all new production of chemicals and plastics will take place

in the Middle East and Asia. Charles O. Halliday, chairman and

chief executive of the DuPont Company, told investors in December

that ‘High energy costs will prompt the company to shift its center

of gravity overseas.’ ’’ The DuPont Company is going to shift its

center of gravity overseas.

Senator INHOFE. Without objection, so ordered.

Senator VOINOVICH. High natural gas prices have resulted in the

permanent closure of almost 20 percent of the United States’ nitrogen fertilizer production capacity and the idling of an additional 25

percent. In Ohio the chemical company, Lubrizol, has indicated

that they will move operations overseas because of natural gas
14

price volatility. Last year their gas price was up $50 million over

what it was the year before.

This only tells part of the story. The natural gas crisis has also

caused all consumers over $130 billion over the past 46 months. It

is estimated that the increased natural gas prices in 2004 will cost

Ohio households $543 million than in 2002. Think about that.

These are just ordinary citizens.

In my own case, my gas bill is up 100 percent over what it was

2 years ago. Prices are so high because over the last decade the use

of natural gas has risen while domestic supplies have fallen. The

reason for these trends lies in our environmental policies. Basically

what we have done is that we have limited the supply, and we

have exacerbated the demand. Now the chickens have come home

to roost. We are paying for it dearly because in establishing our environmental policies, we have not harmonized our environment,

and our energy, and our economy, but we have been very narrowminded in terms of putting these policies together.

I have a chart here from the Energy Information Administration

which shows the trend to continue. Natural gas consumption increases across all sectors, especially for electric generators. It is

going off the chart.

I might make an editorial comment that that presumes that the

economy keeps growing. The disastrous part of this is that we will

not reach this consumption because businesses are going to go out

of business. The demand will not be as much because the customers are not there for it.

Chart 2 shows what will happen if we do not start increasing our

supply of natural gas. The top line shows the Energy Information

Administration’s, which is a part of the Energy Department, prediction that natural gas consumption will continue to increase

again. We hope they are right.

My concern is that this consumption will not increase because of

the jobs we are losing to other countries. The bottom line is that

predicted production for North America, Canada, and Mexico, EEI

predicts that the shortfall between consumption and production

will be met by a substantial increase in liquefied natural gas. By

the way, do you know where that is coming from? Qatar, Algeria,

Nigeria, Australia, Indonesia, and the United Arab Emirates.

Here we go again. We have 60 percent of our oil coming from

overseas. Now we are going to do natural gas. Right now, LNG represents about 1 percent of our use. It will be up by 2025 by 15 percent to meet the demand.

We have a very serious crisis today. We have to do something

about it. I come from a State that sees it every single day. We have

to get with it. We do not have time to go through 2 or 3 years of

debate, as we did last time. Those of us Republicans and Democrats have to get together and do something about this problem. It

is already too late in some sectors of our economy.

Thank you, Mr. Chairman. I would ask that the chairman put

my entire statement into the record.

Senator INHOFE. Without objection, so ordered.

[The prepared statement of Senator Voinovich follows:]
15

PREPARED STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR

FROM THE STATE OF OHIO

Mr. Chairman, thank you for calling this hearing on the environmental impacts

of U.S. natural gas supply. High natural gas prices present a serious challenge for

our nation. The natural gas crisis that has plagued this Nation for the last 46

months has caused the hemorrhaging of many jobs and the bleeding will not stop

until people start taking notice of the situation and we start doing something about

it. It has also severely impacted the way of life for millions of Americans who struggle each day to pay their utility costs.

The fact of the matter is that people just don’t seem to understand the severity

of the situation. Federal Reserve Chairman Alan Greenspan testified for Congress

several times last year on this matter and stated: ‘‘I’m quite surprised at how little

attention the natural gas problem has been getting, because it is a very serious

problem.’’

Unfortunately, it is a very serious problem that the people and businesses in my

State of Ohio know all too well. Mr. Dennis Bailey from PPG Industries, which is

a global manufacturer, will testify today on the effect natural gas prices are having

on the company’s operations in Ohio and throughout the country. I thank him for

coming and look forward to hearing his testimony. I also thank another Ohio manufacturer—Martin Kelly with Moraine Molded Plastics Inc.—for submitting testimony

on this important matter and ask that it be inserted into the record.

As I have explained many times before this Committee, manufacturing is a key

ingredient of our nation’s economy and is the backbone of Ohio. Manufacturers rely

on natural gas heavily for fuel and power and as a raw material. In fact, natural

gas accounts for more than 40 percent of commercial energy consumption. Additionally, natural gas plays an important role in another significant part of our nation’s

and Ohio’s economy—agribusiness.

This reliance on natural gas by the core of our economy means that increases in

natural gas prices have a very pronounced and negative effect. Since 2000, natural

gas has been hovering in the U.S. between $5 and $6 per thousand cubic feet. This

is roughly twice its historical level!

During this time, Ohio has lost about 200,000 manufacturing jobs. These jobs are

not simply migrating to another region—they are going overseas and they aren’t

coming back. This is because other countries do not have the high costs that we

place on our industry, such as rising health care costs, litigation, regulatory burdens, taxes, unfair competition from China, and escalating natural gas costs.

The natural gas prices in the United States are the highest in the developed

world. As a result, many companies are becoming less competitive on a global scale

and are being forced to cut costs or move operations overseas. There are numerous

examples of this and I will name a few.

Just last week, on March 17, the Washington Post ran an article entitled: ‘‘Chemical Industry in Crisis; Natural Gas Prices are up, Factories are closing, and Jobs

are Vanishing.’’ I will read a few lines but ask that the entire article be submitted

into the record:

‘‘Across the country, 1 in every 10 chemical-related jobs has vanished in the

past 5 years—nearly 100,000 workers . . . The chemical industry’s eight-decade

run as a major exporter has ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion deficit last year . . .’’

That is horrifying. The chemical industry is the second largest consumer of natural gas, and they simply cannot pass these higher costs on to consumers because

they compete in a world marketplace. Instead, they pick up and move overseas.

Zaclon, Inc. is a chemical manufacturer based in Cleveland, Ohio. Last year,

Zaclon’s president testified before this Committee that its natural gas costs increased 63 percent between 1999 and 2002.

Lubrizol Corp., a chemical company located in Wickliffe, Ohio that employed 1,778

people in 1999 and now employs 1,522, has indicated that they may consider moving

operations overseas because of natural gas price volatility.

Due to high natural gas prices, the Dow Chemical Company, which is headquartered in Midland, MI, is shutting down several plants and will eliminate 3 to

4,000 jobs.

High natural gas prices have resulted in the permanent closure of almost 20 percent of the U.S. nitrogen fertilizer production capacity and the idling of an additional 25 percent. The Potash Corporation, one of the world’s largest fertilizer producers who spends $2 million per day on natural gas, has announced layoffs at its

Louisiana and Tennessee plants due to high natural gas prices.

According to a February 17, 2004 Wall Street Journal article entitled ‘‘Natural

Gas Costs Hurt U.S. Firms’’, which I also ask be entered into the record:
16

‘‘Almost all new production of chemicals and plastics will take place in the

Middle East and Asia . . . Charles O. Holliday Jr., chairman and chief executive of DuPont Co., told investors in December that high energy costs will

prompt the company to shift its ‘center of gravity’ overseas.’’

Although these businesses are all severely impacted, this only tells part of the

story. The natural gas crisis has cost all consumers—residential, commercial, and

manufacturing—over $130 billion over the past 46 months and this is only direct

costs. So while high prices are causing people to lose their jobs, it is also increasing

the costs of simply living. It is estimated that increased natural gas prices in 2004

will cost Ohio households $543 million more than in 2002.

Home heating prices are up dramatically—forcing folks on low and fixed incomes

to choose between heating their homes and paying for other necessities such as food

or medicine.

Donald Mason, a commissioner on the Ohio Public Utilities Commission testified

last year that:

‘‘In real terms, the home heating cost this winter will increase by at least

$220 per household. That might not sound significant, but during the winter

season of 2000–2001, one gas company in Ohio saw residential nonpayment

jump from $10 million a year to $26 million.’’

I could go on and on about the devastating impacts of high natural gas prices,

but I will now move on to the very important question for today’s hearing—WHY?

Why are natural gas prices so high in this country?

The answer is pretty simple and anyone who has taken Economics 101 will understand. Over the last decade, use of natural gas has risen, while domestic supplies

have fallen. The reason for these trends lies in our environmental policies.

In regards to supply, we have greatly restricted our ability to explore and produce

natural gas because of the barriers enacted in our environmental laws. We must

enact an energy policy that knocks down some of these barriers and opens up some

of our public lands and new frontier areas to development. As I have done often over

the past few years, I implore my colleagues to move past their partisan bickering

and enact an energy policy for the good of this country.

In regards to demand, Congress has enacted environmental policies over the past

few decades that have encouraged increased use of natural gas for electricity generation. In fact, nearly 88 percent of the new power plants that have been built

since 1992 are natural gas fired. We must harmonize our energy and environmental

policies to make sure that we maintain a diverse fuel mix for electricity generation

and do not further exacerbate the natural gas problem.

If we do not take action today, the result will be overwhelming to our nation’s

economy. [CHART 1] As you can see from this chart, the Energy Information Administration (EIA) predicts that natural gas use will continue to increase across all

sectors, especially for electricity generators.
17

Regrettably, some of my colleagues—many of them on this Committee—have offered legislative proposals that would further increase the use of natural gas for

electricity generation and cause more fuel switching from coal to natural gas by

placing a cap on carbon dioxide emissions. These proposals would put coal out of

business although it is our most plentiful energy source and the least costly. We

simply cannot and should not place a cap on carbon dioxide emissions.

[CHART 2] This second chart shows what will happen if we don’t enact an energy

policy and start increasing our supply of natural gas. The top line shows EIA’s prediction that natural gas consumption will continue to increase. My concern is that

this consumption won’t increase because all of the jobs will be in other countries.
18

The bottom line is the predicted production from North America (U.S., Canada,

and Mexico). EIA predicts that the shortfall between consumption and production

will be met by a substantial increase in Liquid Natural Gas (LNG) imports (from

Trinidad and Tobago, Qatar, Algeria, Nigeria, Oman, Australia, Indonesia, and the

United Arab Emirates).

EIA predicts that LNG, which only accounts for 1 percent of current U.S. natural

gas supply, will have to increase to 8 percent by 2010 and 15 percent by 2025 to

meet demand. If this is the case, we will soon be talking not only about our country’s dependence on foreign oil but also foreign natural gas. Further, there have

been recent reports that LNG facilities are receiving stiff resistance from communities on both coasts from Maine to California.

In conclusion, I think it is important to note that rising energy prices have preceded every economic downturn during the post-World War II period. I know firsthand that it has been a significant factor in Ohio’s current economic situation. Unless we stop artificially increasing demand and decreasing supply for natural gas

through irresponsible environmental policies, our Nation will only continue to lose

jobs.

The past 46 months have been a trying time for businesses and families alike,

and we must act now to harmonize our energy, environment, and economic needs

by passing the energy bill and enacting common sense environmental laws.

Mr. Chairman, I again thank you for calling this hearing, and I look forward to

hearing from our witnesses.

Thank you.

[From the Washington Post, March 17, 2004]

CHEMICAL INDUSTRY IN CRISIS—NATURAL GAS PRICES ARE UP, FACTORIES ARE

CLOSING, AND JOBS ARE VANISHING

(By Greg Schneider)

WASHINGTON.—Soon after the Flexsys chemical plant celebrates its 75th anniversary this month, demolition crews will tear it down.

‘‘Nothing over three inches high is going to be left here,’’ plant manager Jon

McKinney said.

The former explosives factory gave the town its name, and its demise will eliminate 205 jobs and yet another piece of the once-powerful U.S. chemical industry.
19

Chemicals are an unglamorous part of the manufacturing world, with products

that have unpronounceable names and often hazardous qualities. But they are essential to a host of industries, from automaking to textiles to agriculture. Hardeners

make tires more durable. Polymers put the spring in athletic shoes, and nitrogen

fertilizers increase crop yields.

As the nation’s manufacturing base seems to shrink daily from factories closing

or relocating overseas, the health of the chemical sector is a crucial measure of how

deep the problem goes. And chemicals are in crisis, squeezed not only by cheap foreign competition but also by soaring energy costs.

Across the country, 1 in every 10 chemical-related jobs has vanished in the past

5 years—nearly 100,000 workers—and that number would be worse if not for a

surge in one segment, pharmaceuticals.

The chemical industry’s eight-decade run as a major exporter has ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion deficit last year, according

to the American Chemistry Council.

Governors and chemical executives have appealed to the White House and Congress for help. They argue that the chemical problem is making the nation’s broader

manufacturing meltdown even worse, pushing factories to relocate offshore not only

for cheap labor but to be near chemical suppliers.

‘‘It’s a very trying time in the nation’s manufacturing base,’’ said Mark Zandi,

chief economist for Economy.com Inc. Ultimately, little can be done to stop the drain

of jobs as companies cut costs and use technology to improve productivity, he said.

‘‘Workers in the chemical industry are really getting hit hard, much harder than

the companies themselves,’’ Zandi said.

The Flexsys plant in Nitro is closing because a sister plant in Belgium costs less

to operate. In nearby South Charleston, Union Carbide Corp. has cut its workforce

in half, to about 1,200 people, in the past 3 years. Bayer AG is shutting one of its

two Charleston-area plants.

It’s the same story in other chemical-heavy regions of the country, such as the

Gulf Coast.

‘‘Right now we’ve got big operations just shutting down because they cannot compete on the world market,’’ Louisiana Gov. Kathleen Babineaux Blanco (D) said in

a telephone interview. ‘‘We’ve had shutdowns before but they’ve always been temporary. We’ve not seen anything like this before.’’

Troubles began over a decade ago with the fall of communism, when countries of

the former Soviet Union—as well as China—discovered they could compete in the

world market for chemical products. Cheap labor and a freewheeling attitude toward safety and the environment helped them keep prices low.

As the global economy slowed, industries that consume chemical products came

to depend on those lower prices to offset declining sales and profits. U.S. chemical

makers struggled to cut costs and keep up. Then, around 2000, an unexpected problem hit: Natural gas prices went up.

Chemical plants are especially sensitive to natural gas prices because they use it

both as a fuel and as a ‘‘feedstock’’ or ingredient in making plastics, resins, fertilizers and more. In the past 5 years, U.S. natural gas prices have roughly doubled

as more and more electrical plants consume the clean-burning fuel but supplies stay

stagnant. Other parts of the world—including Western Europe—pay far less.

‘‘We have the highest natural gas prices in the industrialized world,’’ said R. William Jewell, vice president for energy for Dow Chemical Co. in Houston. In the past

2 years, Dow has closed four major chemical factories in North America—one in

Louisiana, two in Texas and one in Alberta, Canada—and replaced them with production from Germany, the Netherlands, Kuwait, Malaysia and Argentina, he said.

‘‘These jobs didn’t leave the U.S. because of labor costs, they left the U.S. because

of uncompetitive energy costs,’’ Jewell said. ‘‘It’s very hard to have vitality in manufacturing and it’s very hard to have strong growth in jobs if you don’t have a competitive infrastructure anymore. . . . You can’t just wish these jobs back.’’

Chemical jobs tend to be so well-paying—in the $50,000 to $70,000 range—that

they’re virtually impossible to replace in the communities that lose them, said David

E. Dismukes of the Center for Energy Studies at Louisiana State University. Every

time a factory cuts back or shuts down, the impact ripples out through the suppliers, restaurants and car dealerships that surround it.

‘‘For a small State like Louisiana that is so dependent on those facilities, this really is a tough one for us,’’ Dismukes said. ‘‘When they go away it has a devastating

impact on small rural communities up and down the river where many of these are

located.’’

The problem is similar to the death of steel mill towns in the Midwest and Pennsylvania in the 1970’s and 1980’s, said Michael Hicks of the Center for Business and

Economic Research at Marshall University in Huntington, W.Va. In 24 months,
20

from January 2001 to December 2002, West Virginia’s chemical workforce declined

nearly 17 percent, to 12,000 people, Hicks said.

‘‘It’s a story that West Virginia has continued to feel for well over two decades

now, with the decline in coal mining and steel production now followed by these

challenges to the chemical industry,’’ he said.

Even plants that stay in operation are providing fewer jobs.

For example, Bayer Polymers LLC operates a plant on an island in the Kanawha

River in South Charleston. Barges bring long cylindrical tanks of liquid propylene

oxide to a pumping station on the north shore. The material flows under the river

to a maze of pipes, valves and vats on the island—nearly a mile long—where it goes

through chemical reactions to become a polymer used in foam cushions for car seats,

mattresses or athletic shoes.

The entire facility is operated by two people sitting in a control room watching

computer monitors, aided by a team of eight technicians that handles repairs and

maintenance.

In less than 4 years Bayer has increased the plant’s output by 20 percent without

adding any employees. The plant also has cut energy consumption by 9 percent

since last year. Nonetheless, its costs are up 25 percent over the past 5 years, said

site manager Glenn Kraynie.

It’s a dangerous cycle. Rising costs cut into profit and make it harder to continue

investing in improvements, which in turn makes it harder to compete with ever

more efficient overseas rivals, said Attila Molnar, president and chief executive of

Bayer Corp., the German company’s U.S. arm.

‘‘It is a very, very serious issue,’’ Molnar said. ‘‘You shift manufacturing or production [to] where you produce the cheapest. . . . Production in the U.S. is in danger

today.’’

‘‘There are at least two basic solutions,’’ Molnar said. Do something about energy

prices, such as burning more coal or drilling for more natural gas, and use technology to continue to make chemical factories more efficient. That means producing

more with fewer employees.

‘‘There’s nothing there that says the jobs you have today will be the same jobs

we have 10 years from now. That cannot be,’’ he said. ‘‘Be prepared for change.

That’s the only way we can survive, the only way I can see we will be successful

in the future.’’

That’s a hard prescription for towns like Nitro, population 6,824, which stands to

lose a chemical plant that once employed 900 people. The 202-acre riverfront facility

started as a World War I explosives plant for making nitrocellulose, and the town

was built to support it. Monsanto Co. bought the site in 1929 and has been making

rubber additives ever since, today in a joint venture with Akzo Nobel NV called

Flexsys. But with worldwide prices for its products down 42 percent, the company

decided last fall to shut Nitro’s factory down at the end of this month.

‘‘I’m 45 years old and I’ve lived in this Kanawha Valley my whole life,’’ said Dave

Hardy, a lawyer and Kanawha County commissioner representing both Nitro and

Charleston. ‘‘This valley was built on the chemical industry, and now in my adult

lifetime . . . the chemical industry is contracting literally year by year. There is

nothing that is filling the void.’’

‘‘Instead, the State is promoting tourism and gambling,’’ he said. But West Virginia hasn’t given up on the industry. Its statewide Chemical Industry Committee,

a trade association, has been working to attract companies by touting the state’s

long embrace of an industry scorned in some places as environmentally undesirable.

It doesn’t help the cause, though, that the committee’s chairman is McKinney, the

Flexsys manager, whose own company couldn’t afford to stay in business there.

[From the Wall Street Journal, February 17, 2004]

NATURAL-GAS COSTS HURT U.S. FIRMS—HIGH PRICES ARE PROMPTING COMPANIES

TO CONSERVE AND MOVE WORK OVERSEAS

(By Russell Gold)

High natural-gas prices in the U.S. are taking an increasing toll on a range of

companies, forcing them to change how they operate and even to shift work to parts

of the world where energy prices are lower.

Some companies are updating or retuning older equipment and fixing minor leaks

they used to ignore. Others are switching packing materials or looking to overseas

sources for plastic wraps, fertilizer and other basic goods that are made from natural gas—moves that ultimately will mean the loss of U.S. jobs.
21

For manufacturers already dealing with rising health-care costs for their workers,

high natural-gas prices mean another unavoidable cost that can’t be passed on to

customers. Much of what these companies produce vies for customers in a global

market with many lower-cost overseas rivals. The squeeze between cost and pricing

pressures means less money for capital investment and for hiring new workers—

and potentially a drag on economic recovery. Higher natural-gas prices also undermine U.S. efforts to reduce the nation’s dependence on overseas sources of energy.

Manufacturing companies say they realize they can’t ignore the problem any

longer. ‘‘The high spikes we saw in natural-gas prices were a wake-up call to management,’’ says Jim Pease, corporate energy manager for Unilever, the Anglo-Dutch

food company that has increased its spending on energy-efficiency measures since

2001. ‘‘The old days of stable, cheap energy prices are over.’’

After decades of being cheap and plentiful, U.S. natural-gas prices left the range of $2 to $3 per million British thermal units of the latter 1990’s and hit two sharp

spikes in the past 4 years before settling in to an average weekly spot price above

$4 per million BTUs, where they have remained for an unprecedented 15-month

run. U.S. natural gas is the most expensive in the industrialized world, averaging

$5.50 per million BTUs for the past year.

At Amazon.com Inc. of Seattle, higher natural-gas prices have raised the price of

air pillows used to buffer its products while in transit. Last year, air pillows made

up 40 percent of the packaging cost of each Amazon box, up from 30 percent a year

earlier. The plastic pillow that contains the air is made from natural gas.

The Internet retailer said it is considering using fewer air pillows or turning to

more wraparound cardboard boxes, which it dubs ‘‘ravioli’’ wrap. Customers prefer

the air pillows, but the rapidly inflating cost ‘‘affects our ability to keep prices low,’’

says spokesman Chris Bruzzo.

The root of higher natural-gas prices is a Federal policy that promotes use of the

relatively cleaner-burning fuel without providing incentives or means for naturalgas companies to increase production. So while demand soared in recent years, especially from a raft of new gas-fired power plants, producers have struggled with supply. Most North American gas fields are years past their prime, and environmental

restrictions prevent drilling on many of the most promising areas.

The chemical industry, which uses natural gas as a fuel and as a raw material,

has been hit hardest. The rising cost of U.S. natural gas began battering these manufacturers at the same time the weak economy was damping demand for commodity

chemicals and foreign producers were increasing their share of the U.S. market for

chemical-based products such as plastic shopping bags.

U.S. chemical makers have lost an estimated 78,000 jobs since natural-gas prices

began to rise in 2000. Louisiana, a hub of chemical production, lost 4,400 chemicalrelated jobs over the same span, or about 15 percent of that workforce.

Almost all new production of chemicals and plastics will take place in the Middle

East and Asia, where natural gas is more plentiful, producers say. Charles O.

Holliday Jr., chairman and chief executive of DuPont Co., told investors in December that high energy costs will prompt the company to shift its ‘‘center of gravity’’

overseas.

Last month, Mr. Holliday joined top executives of Dow Chemical Co., Eastman

Chemical Co., Rohm & Haas Co. and others in a letter asking President Bush and

congressional leaders to lower royalties on some gas production, to allow more drilling in the U.S. and to reduce the incentives that promote the use of natural gas

for electricity generation. If nothing is done, they warned, ‘‘investments and jobs will

increasingly go to Asia and the Middle East.’’

Owens Corning, which ran ads in the 1970’s urging customers to buy its pink insulation to cut their dependence on foreign oil, now finds itself scrambling to find

new ways to cut its dependence on pricey U.S. gas. The company is operating under

bankruptcy-law protection while it works out its asbestos liabilities, and high

natural-gas prices are squeezing its margins and eroding profits.

‘‘It’s still our energy source of choice, but the big issue is the economics of natural

gas in the U.S. relative to the rest of the world,’’ said Mike Thaman, chairman and

chief financial officer.

The company has begun to import more materials from overseas. Last fall, Owens

Corning moved a top executive to Shanghai to find cheaper sources of polypropylene

bags used to package rolls of insulation. By the end of this year, the company expects to import as much as half of its packaging material, lowering costs by 20 percent to 25 percent. In the past, all packaging material came from North American

producers.

In a couple of years, the company expects 30 percent of its nearly $1 billion a year

in purchases of minerals, chemicals and packaging to come from outside North

America, up from 10 percent today, company officials say.
22

Last year, the Toledo, Ohio, company also began to experiment with an insulation

factory in Waxahachie, Texas, that was burning as much as $4 million to $5 million

in natural gas a year.

The company installed four meters on each of the three enormous production lines

to measure natural-gas usage by the minute. Consultants figured out settings for

the incinerators and meters that would cut usage without sacrificing product quality. With adjustments, natural-gas use in the third quarter of 2003 was 18 percent

below the year before, even though production has increased. The plant is now approaching $1 million in annual energy savings.

Even the smallest adjustments matter. One day last summer, Gary Chastain, the

plant’s energy guru, saw that the steam boilers overnight had begun using more

than double the normal level of gas. He dispatched maintenance workers, who

searched for nearly 2 months to find the culprit: a leaking valve that was costing

Owens Corning about $460 a day.

The Waxahachie experiment has been so successful that the changes will be replicated in 10 other North American insulation factories and two composite-fiber factories by the end of this year.
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Senator INHOFE. Thank you.

Senator Murkowski.

OPENING STATEMENT OF HON. LISA MURKOWSKI,

U.S. SENATOR FROM THE STATE OF ALASKA

Senator MURKOWSKI. Thank you, Mr. Chairman. I appreciate

your calling this hearing this morning and really putting the focus

on the natural gas supply in this country and the environmental

impacts of this supply.

I am glad that I am following Senator Voinovich on this. I think

you have very aptly summed up the impact to this country, and the

fact that it is a crisis in this country, and we certainly are not

doing enough at this point to avert the crisis. To say that the sustained high prices of natural gas are a problem, truly underestimates the situation that we are currently facing. In your State,

with the manufacturers, the petrochemical industry, and the fertilizer production, you know it all too well.

We have a Federal policy that is encouraging the consumption

but is not doing anything or have not sufficient activity on the domestic production. I appreciate your statement again, Senator

Voinovich, that we are going in the same direction that we currently are with our oil. When we are 57 percent or 58 percent dependent on foreign sources of oil, a resource that we recognize, we

have to have, if not for our vehicles, certainly for those other consumer products, whether they are Band-aids, or CDs, or cosmetics,

we rely on petroleum products.

To go into this with eyes wide open saying we will allow ourselves to be again dependent on foreign sources for natural gas is

not a place that I think that this country needs to go. We need access to a new supply, but we need to encourage the domestic access.

It is probably not going to be any surprise to you, Mr. Chairman,

or to the members of the committee, but I want to talk about the

availability of Alaska’s natural gas supply. We have 35-trillion

cubic feet of known proven reserves and of the unknown but expected reserves, we are looking at massive quantities of natural

gas.

In the energy bill which we recognize is still stuck, and not moving, we have provided for regulatory and judicial streamlining, as

well as financial incentives, for the Alaska Natural Pipeline. We

anticipate that we will be able to bring up to 4.5-billion cubic feet

per day of desperately needed natural gas to the markets in the

lower 48.

We recognize that this is a huge project, and for a project of this

size we cannot snap our fingers and get the gas to market today.

It does take years to bring on-line, but what we will be able to do

is stabilize the volatile natural gas market by the anticipation of

the vast new supplies coming down. Alaska will be able to supplement the supply from the declining basins in the lower 48 and

Western Canada, as well as the expected imports of LNG from the

foreign sources.

The Energy Information Administration predicts that the United

States will import over 4-trillion cubic feet of gas in 2004. By the

year 2025, without Alaskan natural gas coming on-line, imports
78

could total nearly 11-trillion cubic feet. This worsens our energy

and our national security, as well as the balance of payments deficit.

EIA also predicts that by 2025 without natural gas from Alaska,

the wellhead price in the lower 48 States will be 20 cents higher,

costing the economy approximately $6.14 billion. So not only will

the Alaska Natural Gas Pipeline bring needed natural gas out of

America to meet the domestic demand, the project itself will create

thousands of jobs throughout the United States.

So again, Mr. Chairman, I appreciate your focus here this morning. I look forward to the testimony from our witnesses as we pursue this issue, and hopefully are able to work together to craft a

positive direction for this country when it comes to our natural gas

consumption.

Thank you.

Senator INHOFE. Thank you, Senator Murkowski. That is an excellent statement.

We have a cloture vote at 11:30, which means that we probably

would have to leave here at around 11:45 to do it. It would be my

intention, if we have not started the third panel at that time, to

recess until 2 o’clock and have the third panel at 2 o’clock. I do not

know how else we can arrange this. Is there objection to that in

the event that we are not further along at that time?

With that, I would recognize Senator Chafee to introduce our

guest. The first panel is Governor Carcieri. We will have only one

round of questioning after he completes his remarks.

Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman. It is a pleasure to

introduce the Governor of Rhode Island, Governor Donald Carcieri.

The Governor is exceptionally qualified to be here today.

Prior to his election in 2002, the Governor was a highly successful businessman. In 1983, he joined Cookson America, rising

through the ranks to the position of chief executive officer and joint

managing director of Cookson Group Worldwide. He was instrumental in developing the company into a major manufacturer, employing over 12,000 people worldwide. The company grew from an

organization doing $30 million in sales to over $3 billion at the

time he retired from his position.

I am proud to have the Governor here to testify before the committee. I know we will all benefit from his testimony.

Welcome, Governor.

STATEMENT OF HON. DONALD L. CARCIERI, GOVERNOR,

STATE OF RHODE ISLAND

Governor CARCIERI. Thank you, Senator.

Mr. Chairman, and Ranking Member Jeffords, distinguished

members of the committee, especially Senator Chafee from my

home town, I want to thank you for having me here today to testify

about the energy needs of my State, my region, and our Nation. In

my judgment, there is no more important domestic economic issue

today than this issue.

I would like to speak today about the problem my State is facing

with respect to the tightening supply and resulting high cost of

natural gas. As Governor of a Northeastern State, I understand the
79

importance of plentiful, accessible energy supplies. New England,

as you know, has no natural resources of fossil fuel. As a result,

all of our energy supply must come from some other region or nation. Meanwhile our cold winters, elderly population, and highly

concentrated urban centers produce a large and growing demand

for energy resources.

Before the people of Rhode Island elected me Governor, I spent

almost two decades, as the Senator indicated, working in the private manufacturing sector. As CEO of Cookson America, I managed

the energy needs of a thriving manufacturing business. In fact, I

remember, Senator Carper, meeting your wife when she was at DuPont. If I recall, she worked at DuPont.

Senator CARPER. Mr. Chairman, I can tell you my wife works at

DuPont. She has been there 27 years. Over the years, I have had

thousands of guys say to me, ‘‘I know your wife.’’ I have had it.

[Laughter.]

Governor CARCIERI. I will only say in reference to a possible business deal.

Senator CARPER. I am glad you got that on the record.

Governor CARCIERI. In any case, that experience taught me that

our needs will only increase in the coming years. As Governor of

a New England State, and a former CEO, I have a good understanding of both the energy needs of the Northeast region generally, and the particular needs that a competitive manufacturing

base puts on a reliable, cost-efficient, energy supply.

Federal and State policy, as has been noted, has encouraged the

use of natural gas because it is clean burning and there is an abundance of known supply. Consequently, it has become the work

horse of the energy sector and is expected to provide 35 percent of

the fuel supply for electric generation in New England this year

alone. According to the Federal Energy Regulatory Commission, in

the next 4 years 50 percent of all electricity will be generated in

New England by natural gas.

Unfortunately, natural gas supply has not kept up with this burgeoning demand. In fact, New England was recently on the verge

of an energy supply crisis. Key-Span, the largest local distribution

company in the Northeast, had record-breaking send-outs during

that cold spell that some of you may have noticed, and at one point

were forced to shut off service to a number of customers in order

to preserve the remaining base. Had temperatures remained that

cold for another few days, we would have had a real crisis.

One would think that this combination of high demand and

intermittent supply shortages would create an outcry for more natural gas production. It does not seem to have. Unfortunately, it

may take a disaster before someone in our Nation gets serious

about this problem. As Federal Reserve Chairman Alan Greenspan

pointed out in testimony before a Senate committee last summer,

‘‘We have embraced the benefits of natural gas, but at the same

time have restricted the ability to get more supply.’’ He pointed to

the inconsistency of our policy.

Soon the Northeast may no longer be able to offer industry a

competitive venue unless the rising cost of energy is addressed. As

Senator Voinovich pointed out, what is happening in Ohio now, we

had faced this actually probably years ago in the Northeast, but
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the trend is accelerating. While the costs remain relatively stable

through the mid-1980’s at around $2 in million BTUs, prices have

recently spiked at times to upwards of $10 per million BTUs. These

dollar amounts are often much higher in Rhode Island because we

sit at the end of two pipelines and consumers must pay the costs

associated with transporting gas such long distances.

In my judgment, this is the hidden jobs issue today, beyond

labor-intensive issues that you hear so much about. This is a little

bit of an aside, with all of the jobs that are going to China and the

Asia Pacific of a high-labor content. The hidden issue today in the

jobs is the energy costs issue. I hear it time-and-time again. These

are what is driving business today in jobs overseas.

Some of Rhode Island’s largest employers and oldest companies

are already grappling with the consequences of this looming energy

crisis. Considerations of layoffs and job relocation are beginning to

manifest themselves. Electric Bolt, which is the producer of the

hulls for our Navy’s submarines, switched to natural gas for heating several years ago. Now the price is skyrocketing, and since the

region’s electric generation is increasingly fueled by natural gas,

EB can expect a further rise in their electric bill. This company employs more than 2,000 people in Rhode Island and many more in

Connecticut.

The story is the same with a company called Arkwright located

in Coventry, RI. Their 300 employees coat and covert paper and

films for specialty imaging devices. Arkwright’s natural gas bills

have nearly doubled in the past year, jeopardizing their profitability and competitiveness. As the company struggles with this

issue, it has lost bids for contracts. They were already forced to lay

off some employees, and cut out bonuses last year.

Another example is a company called Cranston Print Works, an

old company in the textile business with facilities in Rhode Island

and Massachusetts. The per unit price they pay for natural gas has

already increased 40 percent this year. Electric costs another 19

percent, and oil another 6 percent. They will spend several hundred thousand more this year than last year to keep their plants

operating without any increase in overall energy usage.

Similarly, their neighbor in North Kingstown, a Japanese company, TORAY plastics, extrudes plastic film for food wrapping, saw

energy costs rise more than $1.6 million last year. They employ approximately 700 people in our little State and are absolutely panicked about what they are going to do with the energy costs and

the impact it is having on their business. It is an energy-intensive

business. It is an extrusion business, which I know many of you

are familiar with. It runs 24 hours a day, 7 days a week. It is critical that they be able to manufacture products competitively, and

they are having a struggle.

This story can be told over and again with many of the other

manufacturing companies in our little State that employ tens of

thousands of workers and contribute so much to the quality of life

in our State.

Senator INHOFE. Governor, I would like to ask you to wrap it up.

Your entire statement will be made a part of the record.

Governor CARCIERI. I would just add to that, Senator, that with

the same issues, the costs today, the competitive impact, the effect
81

it is having on jobs—which I think is the major idea—LNG is significant for us. That is an issue that I think needs to be dealt with.

We are dealing with the fact that we need more of that.

I think from my perspective, as I said earlier, just to sum it up,

this, I believe, is the issue today for the domestic economy. I would

encourage the State that we need a coherent policy that is consistent and that deals with an energy supply. I am talking mostly

energy production in terms of electric generation capacity, separating that from automobile. That is the impact that you see today

on businesses.

I want to thank you for allowing me to testify. I will answer any

questions you may have. I would ask that my full statement be

placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

We appreciate very much your being here. We will now have one

round of questioning for the Governor, not to exceed 5 minutes. We

do have two other panels to get to.

Governor, you spoke about the need for additional supply. But

your State, and the Northeast region in general, also have inadequate infrastructure. You mentioned Key-Span. I guess Key-Span

is a distributing operation.

Governor CARCIERI. That is right.

Senator INHOFE. They had sufficient gas but not sufficient infrastructure to deliver; is that the problem?

Governor CARCIERI. Yes, it is both. Key-Span right now is the

midst of a proposal for an expansion of LNG capacity. Yes, the

most recent problem was an infracture issue and the sufficiency of

the gas line itself. They had reserves in the form of LNG that could

have been fed in.

Senator INHOFE. Would a very large percentage of your gas be

LNG?

Governor CARCIERI. It is growing. I do not have that with me

today. I cannot remember, but it is growing dramatically. There is

a large LNG facility in Everett, MA, outside of Boston. We have

what is called a peak breaking facility in Providence, RI, that is

looking at actually becoming a principal source.

Senator INHOFE. It is expanding nationwide. As Senator

Voinovich pointed out, this is coming from Trinidad/Tobago, Qatar,

and Algeria.

Last week there was a lead editorial in one of your newspapers,

the ‘‘Providence Journal’’:

‘‘The region urgently needs a supply of clean fuel in Fall River, as well as

Providence and Somerset, are well suited for terminals to store it in the form

of LNG. These terminals would be economic boons for southeastern New England in particular, and the whole six-State region in general.’’

Do you agree with the Journal’s assessment? What do you say

to those who oppose expanding the LNG terminal capacity in

Southeastern New England?

Governor CARCIERI. Yes, I do agree with the Journal’s assessment on that, Senator. Thirty-five percent of the energy on cold

days is LNG. I do agree with that, Senator. I think the issue right

now is with homeland security. People are concerned about safety.

I think that is the biggest issue that I hear being discussed time-
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and-time again with it regarding LNG tankers. It is a question of

safety and their movement in and out of our ports.

I have met with the Key-Span people. I have told them that I am

supportive of this. It is critical to our economy in terms of the immediacy. It is a supply that we can increase.

Senator INHOFE. Governor, you are a very persuasive person. You

have credibility. I know in your State there are many people who

will form groups and come to you and say that this is not a problem. What do you say to the groups that are really creating a problem for you in terms of expanding your capacity?

Governor CARCIERI. Well, I think in the short time that I have

been in this business, Senator, I think we put ourselves into the

situation of false choices. We postulate things against one another.

I believe that the environmental concerns can be handled entirely

consistent, and we can develop energy sources and energy supplies.

They somehow are postulated as opposites and are unable to be integrated. I do not believe that for a moment. They can be. We have

done it successfully. I have all the confidence we can do it going

forward.

The issue for me, as I talk with these people is a pragmatic one.

We build roads and bridges. We build airports. We build all these

things. Yet we do not have an energy supply that is consistent, accessible, and reasonable in terms of price. We do not have a policy

to generate that. Without that, everything else is for naught.

My logic, if you will, is this is not a problem that is going away.

It has to be dealt with. I believe it can be dealt with in the context

of assuring those people that are concerned about the environment.

We call it the Ocean State, Rhode Island. I am very, very environmentally orientated. I think it is an artificial juxtaposition, if you

will, in pitting these things against each other.

Senator INHOFE. Thank you, Governor.

Senator Jeffords.

Senator JEFFORDS. Governor, that was excellent testimony. You

mentioned a study by the Federal Energy Regulatory Commission

in your testimony. It is my understanding that the Pipeline Safety

Improvement Act of 2002 required FERC and the Department of

Energy to evaluate the ability of New England’s natural gas infrastructure to meet the demands of the electric power generation.

FERC’s report, released in December 2003, concluded that there

was adequate natural gas infrastructure to meet natural gas demand in New England through 2005, but that additional infrastructure would likely be needed to meet the region’s demand

through 2010.

The development of some of that infrastructure is in progress.

Several entities have announced proposals to construct new marine

import facilities. Included are Key-Span in Providence whose storage facility now receives liquefied gas by truck from Everett, MA.

What is the status of these proposals? Will they include additional storage?

Governor CARCIERI. I can only speak to the Key-Span project in

Providence, Senator. Whenever I see a policy statement that says

we are OK through 2005, when we are in 2004, I say we have a

big problem. The idea that if we do some things we will be OK in
83

2010, to me is a kind of shortsightedness that is inexcusable on an

issue that is critical.

Senator JEFFORDS. I agree with you.

Governor CARCIERI. This needs to be a policy, if you will, for the

balance of the century, or at least half of that century.

The Key-Span project is moving. It is moving ahead. As Senator

Inhofe said, there is support for it. There is concern about the safety of LNG tankers. I believe these can be dealt with. They are

being dealt with currently, but that is an education issue. People

are fearful, particularly in the aftermath of 9/11. You know that in

terms of anything like this. We need to be practical and deal with

that and try to assure the public that this can be handled.

That facility would become, instead of a peaking facility, actually

a principal supply storage facility. The other projects I cannot

speak to in the Northeast.

Senator JEFFORDS. Thank you.

Thank you, Mr. Chairman.

Senator INHOFE. Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman. Once again, Governor, very well said. As we all know, we want to keep our citizens

employed. We all know the difficulties facing the employers, whether it is health care or labor costs, and now it is, of course, energy

costs. I do believe we are going to hear later in the testimony that

the worldwide resources are still robust of natural gas. We, of

course, all want to have our own domestic supply for security reasons, but the practical facts of the matter are we have to depend

on the world for these. Even if we are going to get natural gas from

Alaska, it has to come through Canada. It is always going to be

working with our international partners as we address the shortage of natural gas here, particularly in the Northeast.

You mentioned the LNG issue. Of course, the delivery of natural

gas is either by pipeline or by truck or by liquefying it, and then

by tanker. A tremendous amount can be delivered by tanker once

it is liquefied and then deliquified to get to the consumer. That is

what we are wrestling with, of course. Mr. Chairman, you mentioned the editorial and using Narangansett Bay as a depot in the

delivery system for the entire six-State Northeastern area.

Governor, as you deal with Key-Span, which is the company,

what are the hurdles there as we look at this, if we are going to

look at liquefied natural gas as part of the solution? What are the

hurdles to go forward to get through the permitting process?

Governor CARCIERI. I think as I see it right now, Senator, I think

frankly the economic case is compelling. The need for these kinds

of facilities is compelling, particularly in our region. Right now we

have the facility in Boston that is the principal source of LNG for

the region. I think the case is pretty compelling. I think the issue

for us, as I said earlier, is the fear right now in the public’s mind

about LNG and large tankers. Most people are not aware that we

have tanker trucks going to that facility daily that are replenishing

it now. But somehow a truck or two or three or four is different

than a large tanker. We need help. I met with the Coast Guard.

They assure me that there are protocols in place that will assure

the safety of these. As you all know, the record of LNG tankers in

terms of safety is good as well.
84

Frankly, I think the biggest issue right now is the public perception, a fear that somehow we are endangering the public and we

are creating an unnecessary hazard. I think that can be dealt with.

It needs to be dealt with because frankly somebody has to bring

this energy supply in.

The other thing I would comment on is this. As you know, in the

Northeast, we have a get-together with the Eastern Canadian premiers once a year. We have a good relationship there. Our last

meeting was last summer. This is a big issue for them. They know

that they have reserves and they are anxious to get those developed and supply us. For those of us in the Northeast, that can be

an important source. We have the summer meeting coming up this

summer in Newfoundland where they tell me they are convinced

they have large reserves. There is the Sable Island Pipeline to be

completed.

I think there is a natural affinity between ourselves and our Canadian neighbors, obviously as well as Alaska. I listened to your

Dad at the NGA talking about the opportunities there, Senator. I

had a number of conversations with him. I think with Alaska at

one end and the Eastern Canadian provinces at the other, we could

probably be in pretty good shape, from a natural gas standpoint,

let alone what we have domestically.

Senator JEFFORDS. Thank you, Governor. We are both strong environmentalists. We come from a strong environmentally conscious

State. Of course, the environmental population does want this because of the clean air issues and as we look at the siting, as you

mentioned earlier, it does not necessarily have to be tension and

conflict trying to provide energy sources and doing what is environmentally sound.

Again, I congratulate you on your testimony.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Chafee.

Senator Thomas.

Senator THOMAS. Thank you. Welcome, Governor. We are glad to

have you here.

Governor CARCIERI. Thank you, Senator.

Senator THOMAS. The purpose of this oversight hearing is to examine the environmental impacts on the U.S. gas supply. What do

you think they are?

Governor CARCIERI. Well, again I am new to this business. I

came out of the private sector. I remember back in the 1970’s when

the pipeline was being developed in Alaska. There was much concern at the time about the environmental impact that that pipeline

would have. I have not been back to Fairbanks since the mid1970’s, but I think we would conclude that we have successfully

tapped an enormous source of energy for us. We have done it in

a fashion that has not had an enormous negative impact on the environment.

I think sometimes, as I said earlier, these things get juxtaposed

unnecessarily. I believe we can do this from the technologies, as I

understand the technologies available today, to drill and source,

they are improved light years from the 1970’s. I am confident that

those, including myself, that are concerned about the environment,
85

will be comforted, if you will, that this can be done. I think we just

need to get on with it.

As I said earlier, I think we are on the verge of an enormous

problem as a Nation when we are watching our manufacturing industry decline.

Senator THOMAS. Well, we have to deal with this. There is quite

a little bit of difference in view, apparently, from States like yours

that are not in the production business from States like mine

which are. That is part of the problem. If we had a policy that

talked about alternative sources, that talked about conservation,

that talked about more efficiency, and that talked about more research on using clean coal and domestic production, do you think

people from the Northeast would support that kind of a policy?

Governor CARCIERI. I cannot speak for all the people in the

Northeast.

Senator THOMAS. We do not have the support. It sounds like you

were now complaining.

Governor CARCIERI. That is a very sensible approach. You will

not hear me complaining about that approach. I think just as you

say you do all of those things. I believe this can be dealt with. I

was at the Department of Energy 2 weeks ago. We are the recipient, unfortunately, of some bad air quality that is coming from old

coal-fired plants in the Midwest. We are doing our part in our

plants, but we are inheriting atmosphere from the Midwest.

One of the things I said to the Department of Energy was that

we ought to be looking at some way to assist the financing for

these power companies. Right now they are fragile themselves. I

think there is possibly a role for the Federal Government to play

here in the assisting and in the financing. They are not opposed

to upgrading those plants. I am sure it is a question of the capital

and the cost of the capital and how they get a return.

Again, we build roads, we build bridges, and we build airports.

It would seem to me that there is an appropriate role for the Federal Government here to assist somehow in the financing of these

things. It is in our national interest to do so.

I am supportive of a whole series of things, Senator. I cannot

speak to others, but I will try my best to convince them.

Senator THOMAS. I understand. But my point is, and I think you

will understand that, is that there is somewhat of a different view

between the production areas and the consumption areas. We are

going to have to get a little more clear understanding of how those

two things fit together and be able to move forward.

Thank you, sir.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Thomas.

Senator Voinovich.

Senator VOINOVICH. Governor, often the Northeast and the Midwest seem to be on opposite sides of this whole environmental

issue. You just talked about the air moving into your area. However, your testimony today expresses many of the concerns that I

stated in my opening statement.

Recently, Lexicon, a Harvard research company, conducted a

study on competing multi-emission proposals.
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Mr. Chairman, I would ask that the Lexicon study that was done

at Harvard University be inserted in the record.

Senator INHOFE. Without objection, that will be entered into the

record.

Senator VOINOVICH. I do not know if you are familiar with them

or not, but for the last couple of years, we have been talking multiemission proposals. Senator Carper has one, Senator Jeffords had

one. I have the President’s plan on Clear Skies. We looked at President Bush’s Clear Skies Act in 2003, and Senator Carper’s, and the

study found that Senator Carper’s bill would cause natural gas

prices to be between 5 percent and 6 percent higher on average

from 2005 to 2010, or about $117 billion more than our Clear Skies

proposal.

The reason I bring this up is that part of the reason why the demand is exacerbated is that utilities companies in my part of the

country is this. For example, the former president of AEP, Lynn

Draper, said, ‘‘I am not going to build another coal-fired facility. It

is going to be gas.’’ So all of the new facilities have been gas powered. That just drives up the demand for it.

We have two problems. One of them is to try to lessen the demand by using other energy sources to get the job done, and at the

same time, increase the supply. The feasibility of increasing the

supply in the next couple of years is going to be pretty difficult. So

we have a real problem.

They are lucky to have you as a Governor because you have a

good perspective on things. I would ask you if you could get with

Raysha Pock and with the Governors Association and really get

into this whole issue of where we are going on a pollution-control

bill that will limit the amount of NOx and SOx and mercury. We

have a debate over carbon. This would allow us to come up with

some numbers where we can continue to use clean-coal technology

to burn coal, and at the same time, do a much better job of eliminating your problem of the stuff coming to your State, but at the

same time also help you in the other direction and that is to not

increase the demand for natural gas as we try to figure out how

we can get more natural gas out on the street.

You have both sides of this. I would be interested in your comments.

Governor CARCIERI. Well, I think you have articulated the issue

extraordinary well, Senator. If I were the head of a power generating facility today in your State or anywhere that was coal-fired,

and I am under all kinds of pressure for the emissions, I would be

thrilled to clean it up faster. It is a question of the capital and the

investment. This is where I was going with Senator Thomas.

I think from your perspective, or from an energy policy standpoint, from the Nation’s perspective, there needs to be help there.

As we have deregulated the power utilities, we have actually made

them more fragile, if you stand back and look at what has happened. We have squeezed a lot out in the process, but we have created a system that is very fragile from a capital standpoint and a

financing capability.

I think we need to think about how to assist those. If you or I

were the CEO of one of those plants, we do not want all of that
87

aggravation and all of those problems. We would be happy to do

it. It is a question of what we have to spend to do it.

Senator VOINOVICH. That is a very good point. AEP has plants

in Ohio and they have them in West Virginia. We deregulated electricity in Ohio and West Virginia has not. So where is AEP going

to be putting on the pollution control devices in the State of West

Virginia. They can capture their costs for doing that in Ohio because of the situation that makes it more difficult. So you have

these plants trying to figure out how we are going to get the job

done. At what stage is it economically feasible for us to do this or

to tear them down and build something new.

Governor CARCIERI. I know we are talking about natural gas

right now. We have the same problem with transmission capacity.

Last summer we had the black out in the Northeast. The New England Governors had a whole session on this in the summer. I did

not realize that we have significant weaknesses, particularly in the

area of western-southern Connecticut in the transmission lines.

They are old lines. We have not upgraded the capacity there.

Here again, we created a whole grid structure and it depends on

these transmission lines. Again, it is who is going to spend the

money and how can they afford to spend the money. What you said

is absolutely true. They could recover that cost in the rate structure in the old model. Much of that is gone.

I think there is a real financing issue here that needs to be

looked at as well. I think it would moderate, if you will, the kind

of problem that those of us on the East Coast are worried about

which is the emissions coming our way.

In addition, I think all of these things are good things to do, but

they are a stopgap. They are not the solution for an energy policy

for our Nation for the next 50 years. We cannot survive that way.

I think that this is a multi-headed, and needs to be dealt with.

Senator VOINOVICH. I am out of my time, but I would say this

to you, Governor. I would really urge you to sit down with your colleagues in the Governors Association. We have not been able to reconcile our differences here at this table. You are the ones that are

suffering in terms of your loss of jobs and the high cost of energy

for your low income and elderly people. Perhaps maybe your going

to the table could help us get direction so we can get on with this

problem because there is an urgency to it.

Governor CARCIERI. I will take up the charge.

Senator VOINOVICH. Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Voinovich.

Governor, when you mentioned the Alaskan pipeline, I can recall

when they were developing that idea that some of the alarmists

were saying that it would destroy the caribou in that region. You

go up there in the summer time, the only shade that is available

for the caribou is the Alaskan pipeline. They are all gravitating to

that.

With that, I will introduce the Senator from Alaska.

Senator Murkowski.

Senator MURKOWSKI. Thank you for that nice lead-in, Mr. Chairman.

I would just like to followup a little bit where Senator Thomas

left off. I appreciate your comments, Governor. We recognize, cer-
88

tainly in Alaska, that technology changes and the technology advances when it comes to energy exploration and drilling in Alaska.

A natural gas pipeline is going to look very much like what our

800-mile oil pipeline looks like now. We figured out 30 years ago

how to move this pipe through 800 miles of massive mountain

ranges and permafrost and earthquake zones. We did a pretty good

job, given what we had at that time.

Thirty years later I am extremely confident that that technology

is even further advanced, but even more so than just the line. It

is the technology for the drilling and for the extraction of this resource. What we have at Prudhoe that we built 30 years ago is a

much larger footprint than we are finding in our new fields today.

With the directional drilling that we have, we can extract oil and

truly have minimal impact to the environment and to the surrounding areas. We know that we can do the same with the natural gas.

It goes back to some of the fears or some of the myths that may

surround energy production in this country. Much of it goes back

to the way it used to be. We have some serious issues with coal,

but with the clean coal technology that we now have, we are able

to do it better. We are able to do it in a more clean manner. We

are able to utilize that technology.

But what we are dealing with is still some of the hangover, the

fear factor. It is important as we recognize that we will continue

to be dependent, to a certain extent, on our fossilized fuel, that we

figure out the way that we utilize it so that we cause no harm and

that the environment is protected to the fullest extent possible.

But part of it is an education effort, educating people that the

technology is changed, that we can do it better, we will do it better,

and we will be responsible for it. This is more of a statement than

a question to you, Governor.

We fight the education issue every day in Alaska. We are coming

up on the anniversary of the Exxon-Valdez. It was a terrible tragedy, an accident, in our State. That single accident that was caused

by an individual that should not have been in control of a tanker,

has literally set back oil development in my State for years as a

consequence of that. So we fight the education issue all the time.

Anything that you can do in your State, so far away from Alaska,

to educate your consumers about how we can provide and how we

can meet our energy needs and still provide for the care of the environment would be most appreciated.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Murkowski.

We appreciate very much your being here, Governor. We are

going to rush things along here because of the voting schedule.

Thank you so much for your leadership. I join Senator Voinovich

in saying that we are depending upon you to help us out here in

this problem.

Governor CARCIERI. It has been my pleasure. Thank you.

Senator INHOFE. I would ask the second panel to come up as

quickly as possible. As you are being seated, I would make the

comment that Senator Murkowski makes a good point. I was

around there during the Exxon-Valdez incident. It should never
89

have had any impact on exploration or production because that was

a transportation problem and not an exploration problem.

Senator MURKOWSKI. That is right.

Senator INHOFE. Senator Jeffords.

Senator JEFFORDS. Mr. Chairman, I would like to ask unanimous

consent to place two items in the record today. The first is the Center on Global Climate Change, the summary of MIT’s analysis of

the Lieberman-McCain Climate Storage Proposal. The second item

is the MIT analysis itself.

Senator INHOFE. Without objection, so ordered.

We are going to limit your opening remarks to 3 minutes. It will

be particularly difficult for Mr. Drake from Oklahoma, but he will

just have to live with it, like everyone else. Your entire statements

will be made a part of the record.

We appreciate all of you being here today. It is our intention to

get one line of questioning before we have to go for that vote. Then

we will come back at 2 o’clock for the third panel. I recognize my

dear old friend, who one day 5 years ago gave me the tie I am

wearing today.

Mr. Drake.

STATEMENT OF BOB DRAKE, VICE PRESIDENT, OKLAHOMA

FARM BUREAU, CHAIRMAN, NATIONAL GRAZING LANDS

COUNCIL

Mr. DRAKE. Thank you, Mr. Chairman. I can hardly say hello in

3 minutes.

My name is Bob Drake. I raise Angus cattle in Oklahoma. I am

currently vice president of the Oklahoma Farm Bureau and serve

as chairman of the National Grazing Lands Conservation Initiative. I am also past president of the National Cattlemen’s Beef Association. On behalf of the American Farm Bureau Federation and

the Oklahoma Farm Bureau, thank you for allowing us to be here.

First, let me say that today’s agriculture is more energy efficient

than ever before, producing more economic benefit with less energy. For example, on corn fields across this Nation, farmers are

producing 30 percent more crop using 30 percent less energyrelated inputs, including fertilizer, than we did a generation ago.

Even though energy efficiencies have been realized in agriculture,

no one should expect a growing U.S. economy and population to

need less energy security in the future.

Natural gas is one of the most important energy feedstocks to

production agriculture and associated manufacturing industries. In

the last year, the United States has experienced prolonged natural

gas price volatility, along with an overall elevation in price.

One of the industries that has been mentioned already by the

Senator, is the fertilizer industry. Natural gas is the primary feedstock for this product. According to The Fertilizer Institute, the

2000 planting season saw ammonia fertilizer at a cost of around

$100 per ton. Last year, when you could get it, it was $350 a ton.

Our domestic fertilizer production, as was already stated by the

Senator, capacity has experienced a permanent loss of 25 percent

over the past 4 years, and an additional 20 percent is currently

shut down due to high natural gas prices.
90

The current price volatility threatens the existence of what remains of our domestic fertilizer industry, and will exacerbate

America’s dependence on foreign sources of energy and fertilizer. I

sat down last week with a group of producers that reported that

the cost of running their natural gas-powered irrigation pumps increased more than 70 percent in 2003.

The current natural gas crisis is a prime example of the need for

a clear and consistent energy policy. On one hand, the Federal Government has encourage expanding the use of natural gas as an environmentally friendly alternative for electrical generation, home

heating, and manufacturing. At the same time, the Federal Government has increased the regulatory burden on domestic natural

gas exploration, drilling and production, and placed moratoriums

on many energy-rich areas such as the Outer Continental Shelf,

the Gulf of Mexico, and Federal lands.

Similar restrictions have been and continue to be experienced on

other traditional energy resources such as oil, coal, and nuclear. In

Oklahoma, oil and gas exploration on private lands has been severely hampered by the U.S. Fish and Wildlife Service’s habitat

rules for the burying beetles. We have a lot of those little fellows.

The Service has delayed drilling, gathering, and other activities

of oil and gas producers. If left unaddressed, U.S. energy policy as

a whole will certainly result in the loss of even more of our energy

independence tomorrow.

The natural gas instability being experienced today should not be

allowed to grow into a more serious energy crisis in the future. Nor

does America need to become as dependent on foreign sources of

natural gas as we now do with crude oil, one terrorist away from

no telling what is going to happen.

Energy-rich repositories now off limits must be reconsidered for

environmentally safe oil and gas drilling. Advancements in these

technologies have resulted in the most environmentally sound and

responsible capturing of energy stocks ever conducted.

My time is up. I thank you for inviting me here today. I would

ask that my full statement be placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

Wow. Thank you, Mr. Drake.

[Applause.]

Senator INHOFE. Ms. West.

STATEMENT OF MARJORIE WEST, WESTERN ORGANIZATION

OF RESOURCE COUNCILS

Ms. WEST. Mr. Chairman, and members of the committee, my

name is Marjorie West. Thank you for the opportunity to address

you regarding the environmental impacts of natural gas production.

My husband and I own a ranch on Spotted Horse Creek in the

Power River Basin of Wyoming where we grow dry land wheat and

raise cattle. We have lived on this land for 50 years. The ranch was

homesteaded by my husband’s father, and expanded by the family

over the generations.

As a landowner, farmer, and rancher, I want to share with you

what is happening on the ground in Wyoming and in other parts
91

of the West, and to talk about what it will take for the oil and gas

industry to develop natural gas responsibly.

Mr. Chairman, I want you to know that the organizations I represent here today and landowners support responsible natural gas

development. But our ability to protect the environment, be good

stewards of the land, and earn a living, is threatened by irresponsible gas development practices.

For several years now, we have been asking industry, State, and

Federal agencies, and Congress, to develop natural gas responsibly.

I wish we could say they are listening. The experiences my husband and I have had with coal-bed development are not isolated.

There are many landowners who have lost water wells or have had

companies come on their land without an agreement, building

roads and well pads or discharging water that has killed soil and

vegetation. These problems are becoming widespread.

The last 5 years have been the most difficult and destructive

years my husband and I have ever experienced. We have been

through droughts, grasshopper invasions, and bad wheat and cattle

prices, but nothing holds a candle to irresponsible coal-bed methane gas development.

We have suffered the deceit of over a dozen land-men. Each one

was able to look us in the eye, shake our hand, and lie like a trooper. We believed them, but now I realize that we were naive. Out

of six companies, Devon, Marathon-Penaco, Yates, Williams, CMS,

Lance and Redstone, not one has lived up to their word. The socalled regulators have not only allowed the damages to occur, but

they continue to permit activities that are in violation of their own

regulation.

My husband, Bill, now takes high blood pressure medication, and

I take a prescription medication for severe headaches. Because of

CBM development, we have lost all three of our artisan wells and

our domestic water well due to groundwater dewatering. This is

presently, and will continue to be, a long-term problem for us. For

now we are using some of the coal-bed methane water that is being

pumped out to water our livestock. But that will be gone in a few

years. And then what? Where will we get our water, and at what

expense?

The company, Marathon-Penaco, has told us outright that they

do not intend to leave us with an operating livestock well when

they are finished developing the gas. We had to haul our household

water for 6 or 7 months. The coal-bed methane company finally

drilled us a 1,400-foot domestic well. We could not drink this water

without getting diarrhea, and I could not wash clothes without having them turn orange.

Senator INHOFE. Ms. West, we will have to stop you here. Your

time has expired, but you will have an opportunity to respond to

questions.

Ms. WEST. Thank you, Mr. Chairman. I would ask that my full

statement be placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

Mr. Bluestein.
92

STATEMENT OF JOEL BLUESTEIN, PRESIDENT, ENERGY AND

ENVIRONMENTAL ANALYSIS, INC.

Mr. BLUESTEIN. Thank you, Mr. Chairman, and members of the

committee for the opportunity to testify today. My name is Joel

Bluestein. I am the president of Energy and Environmental Analysis, Incorporated, in Arlington, VA, where we have been providing

energy and environmental consulting services since 1974.

My very quick testimony today will address two areas. First, our

outlook of natural gas prices, and, second, the effects of current

prices and trends related to gas prices in industrial and power generation markets.

Our quarterly 20-year forecast of North American natural gas

prices currently shows an outlook for gas prices at the Henry Hub

of about $5.75 per million BTU for this year, a little higher at

about $6 per million BTU for 2005, and then moderating somewhat

in the $4.50 to $5 per million BTU range in the medium to longer

term.

Delivered gas prices will be higher in areas of local gas delivery

restraints, like New England. Extreme weather will also cause

temporary price spikes. We do not expect to see future gas prices

returning to pre-2000 levels.

This outlook assumes significant development of new LNG import terminals in the United States and eventual gas imports from

Arctic Canada and Alaska. It does not assume any changes in policies regarding where gas can be produced in the United States

Overall, we believe that the market will function and find ways to

bring new gas to the market. If that does not occur, we would expect gas prices to be roughly 50 percent more than this forecast.

Regardless of any changes in policy, there is widespread agreement that it will take a significant amount of time to get new gas

supplies in place and in the interim, the most readily available option to stabilize gas prices is increased efficiency and natural gas

consumption. This was one of the primary conclusions of the recent

National Petroleum Council’s study which stated that, ‘‘Greater energy efficiency and conservation are vital near-term and long-term

mechanisms for moderating natural gas price levels and reducing

volatility.’’

Last year a study by the American Council for an Energy Efficient Economy looked at the effects on gas prices of aggressive application of energy efficiency and renewables. To summarize quickly, they found a range of 1 to 5 percent reduction possible in the

next 1 to 5 years.

More importantly, in our analysis of these changes, we found 20

percent reductions in gas price resulting from these changes in demand. This nonlinear result occurs because we are in a very steep

part of the gas supply curve where changes in demand can result

in large changes in price, either up or down.

I would also like to refer to the February 17th article that Senator Voinovich referenced earlier about the response of the U.S industry in increasing efficiency. That article talks about the efforts

of the Owens-Corning Company in which they were able to reduce

gas consumption at one of their facilities by 18 percent last year,

saving $1 million per year in gas costs which they plan to replicate

at 12 other North American facilities.
93

Finally, there has been concern about the increase in gas-fired

generation in the United States. It is important to point out that

our share of gas generation today is lower than it was in 1970.

Coal still accounts for 70 percent of generation, and is expected to

maintain approximately that level. Moreover, many of the new gas

plans are in areas of the country that are already heavily gas dependent. These new, more efficient gas plants, are largely replacing

older less-efficient gas plants. So the net result is that the construction of these new gas plants is actually reducing gas consumptions in some of the most gas-intensive markets.

Thank you, Mr. Chairman. I would ask that my full statement

be placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

Thank you, Mr. Bluestein.

Mr. Bailey.

STATEMENT OF DENNIS BAILEY, DIRECTOR OF ENERGY

PURCHASING, PPG INDUSTRIES

Mr. BAILEY. Thank you, Mr. Chairman. Good morning. I am Dennis Bailey, director of Energy Purchasing for PPG Industries. PPG

began operations more than 120 years ago in Pennsylvania, and

has been in Senator Voinovich’s home State of Ohio for 105 years.

In all, about 10 percent of PPG’s corporate sales is generated

from products made in Ohio. The high cost of natural gas is clearly

affecting PPG’s operations in Ohio and across the Nation. For example, at our Circleville, OH plant, which makes resins needed in

paint manufacturing, natural gas costs have increased 70 percent

over the past several years.

From 2002 until 2003, natural gas costs at our Cleveland automotive paint plant doubled, and at our Barberton, OH, chemicals

plant increased by 50 percent. High natural gas costs at our

Crestline, OH, automotive glass plant may result in elimination of

more than 10 percent of that site’s workforce.

PPG has a well-earned reputation for controlling costs. But in

spite of this, if natural gas prices increase, our businesses may

have to make reductions elsewhere.

On a global scale, if the price of natural gas increases to $7, and

remains there, PPG’s chlor-alkali chemicals business would have

additional problems competing in global markets. The workforce at

our Lake Charles, LA, chemical facility is shrinking by 8 to 10 jobs

per month through attrition, and we do not expect to be rehiring.

We believe that other Gulf Coast producers are similarly affected.

The U.S. chemicals industry is no longer competitive globally because of the disparity of natural gas prices, as shown in the exhibit

that I have entered into the record. The U.S. industry has evolved

into a net importer of product and exporter of jobs.

My company strongly believes solutions to the natural gas crisis

are within our country’s grasp. In the short-term, energy conservation must be a major part of the solution. Education is necessary,

as well as increased economic incentives. For example, if all new

residential windows sold in the United States were energy-efficient,

it would eliminate the need for 20 additional power plants over the

next decade and up to 60 power plants over the next 20 years.
94

Consumers need an incentive to use energy-efficient glass, positioning high-performance glass as the construction material of

choice for saving energy. As a start, the Senate needs to pass the

Energy Conference Report which provides consumers an incentive

to use energy-efficient glass. But consumer conservation alone will

not fix the problem.

There is an urgent need for increased access to domestic supplies, including resources in the Outer Continental Shelf, the Rocky

Mountain region, and Alaska. We feel that all of these opportunities can and should be accomplished in an environmentally responsible way.

Construction of an adequate delivery infrastructure, including for

the import of liquefied natural gas, must be part of the solution.

In addition, we need to encourage energy production from all

sources, including coal, oil, nuclear, wind energy, and other alternatives. PPG strongly supports wind energy because, among other

things, we make fiberglass that goes into the turbines. Unfortunately, the bill is stalled in Congress.

On a final note, PPG does not support government intervention

for price controls. Competition and free market forces should continue to drive prices.

Thanks. I would ask that my full statement be placed in the

record in its entirety.

Senator INHOFE. Without objection, so ordered.

Thank you very much, Mr. Bailey. You will find agreement up

here. We need energy from all of the above sources.

There will be 4-minute series of questioning. Mr. Drake, you

heard my opening statement, talking about my experience this

morning with Larry Craig from Idaho and the cost of fertilizer.

Your testimony showed it was consistent with that. This ultimately

increases cost. Who ultimately pays this additional cost?

Mr. DRAKE. I would like to say that the consumer would pay the

additional cost, but it does not always happen that way because we

cannot pass through all of our costs to the consumer as agricultural

producers. But the consumer will pay an additional cost. When I

said $350, that is when you can get it in certain places.

Senator INHOFE. That is $350 up from $100?

Mr. DRAKE. From $100 in 2000 to $350 in 2003, when you could

get it. In certain areas, it was very difficult, if not impossible to

get. Now this is in hydrous ammonia.

Senator INHOFE. Mr. Drake, you have lived on your land for a

long time. What kind of stewards are you folks out there in Oklahoma? You heard Ms. West testify that some of the things that are

allegedly going on in Wyoming. Tell us about Oklahoma.

Mr. DRAKE. Well in Oklahoma we have always had concerns

when someone comes in and drills on our land. We have land that

has been drilled on. We work those concerns out, though, before we

let them on the place. We have certain agreements. Granted, there

are people who will take advantage of those agreements.

However, when they have taken advantage of the agreements

that I have made, I have taxed them pretty heavily. There is nothing I would rather have than someone to come in and mess up my

land because I am going to make them pay for it. Now, we are the

environmental stewards of the world. We have the best environ-
95

mental stewardship on our land of any other Nation in the world.

All we have to do is have the APA and the environmental laws that

we can do those things.

We want to do it proper. We will do it proper when we have the

opportunity.

Senator INHOFE. All right. I appreciate that very much. That has

been my experience also in working with you folks.

Since we are rushed, is there anything in your opening statement

you did not get to that you would like to use the remainder of my

time in order to get to it?

Mr. DRAKE. The American Farm Bureau and the Oklahoma

Farm Bureau strongly believe that the current comprehensive energy legislation will lead to a diversified energy portfolio with increased emphasis on renewable sources while at the same time increase our domestic energy supply from traditional sources, such as

natural gas, oil, and coal in a safe and affordable manner. We urge

that Congress complete this important legislation this session.

Senator INHOFE. I am certainly hoping that that will be the case.

Senator Jeffords.

Senator JEFFORDS. Mr. Bluestein, reflecting on the analysis that

you have done, and their reasons, other than environmental regulations, would a company prefer to build a natural gas-fired power

plant rather than a coal-fired plant?

Mr. BLUESTEIN. Sure. Particularly over the last few years, what

we have seen is a wave of new gas-fired power plant production.

The capital cost of the gas-fired power plant is one-third to one-half

of a coal plant. The footprint is smaller and requires less land, uses

less water, which obviously is a very important issue in many

places. It has a lower visual profile. Of course, the plants that have

been built in the recent years are the cleanest and most efficient

power plants that have ever been built anywhere in the world,

which I think most people would see as a good thing.

Finally, it just takes less time to build a gas-fired power plant

because of the way that they are built and so on. Particularly in

the last few years, that has been a significant advantage to be able

to get the plant on the ground and running quickly. So there are

a whole variety of reasons that were behind the wave of gas-fired

power plant construction in the last 5 or so years.

Senator JEFFORDS. Ms. West, do you support current proposals to

repeal the Clean Water Act and the Safe Drinking Water Act requirements for coal-bed methane production?

Ms. WEST. I think the Clean Water Act is fine. However, I think

it needs to address the SAR of the water. The water that has been

pumped down, let down the troughs, up above Spotted Horse

Creek, and has flowed onto our hay meadows and ruined 80 percent of our meadows. This is because it causes the soil to congeal.

It changes the molecular structure of the soil. Last year we did not

raise any hay crop on this 80 acres, but we had a wonderful crop

of fireweed, which cattle will not eat.

I hear people testifying how responsible the industry is. That has

not been the case in my experience. They have come on to us with

no surface agreement. They have discharged water on us when our

lawyer had already told them that this would be considered trespassing. These are not little fly-by-night companies. These are com-
96

panies like Devon, Marathon-Penaco, and Yates. The thing is we

finally got a surface agreement with Devon who discharged the

water that flowed onto our hay meadows. They were supposed to

have rehabilitated our land 2 years ago. They still have done nothing.

So what good is a surface agreement? The only way we can get

this agreement enforced is to take them to court. My husband told

them, ‘‘I guess we will have to take you to court.’’ They said, ‘‘Go

right ahead. We have all the money and time in the world.’’

Senator JEFFORDS. Thank you. That was very helpful.

Thank you, Mr. Chairman.

Senator INHOFE. Your time has expired.

Senator Chafee.

Senator CHAFEE. Thank you once again, Mr. Chairman.

Mr. Bluestein, in your prepared testimony you said that you predict gas prices will stabilize at $4.50 to $5.00. How do you come

to that analysis and prediction?

Mr. BLUESTEIN. Well, we have quite a large staff that does gas

price forecasting, and a variety of supply modeling and analysis, as

well as demand and end-use modeling. It is a pretty big effort. It

takes into account many different factors, again all the way from

the supply and certain assumptions on economic growth, LNG development, and so on. It is a simple answer.

Senator CHAFEE. With all the dire predictions of increased demand that you have predicted, to know that the opposite might be

true that the price will stabilize, how so?

Mr. BLUESTEIN. Well, there are predictions on both sides. We do

see a growing demand in certain sectors. Certainly power generation is going to be a growing sector.

The industrial sector, we do not see much growth in gas demand,

not that there will not be economic growth, but it turns out that

many of the portions of industry that have been responsible for

most of our economic growth in recent years are not the most gasintensive ones. Clearly, there are some that are gas-intensive, but

the real drivers for economic growth in recent years have not been

very gas-intensive. So we see limited growth on the industrial side.

Again, this forecast is predicated on a certain amount of new

supply which we see much coming from LNG, as well as eventually

some from Canada and Alaska. I think there is an amazing amount

of agreement here that we need a multifaceted approach, including

greater efficiency, a diversity of energy sources, and some sources

of new supply.

When we take all of that into the mix, that is where we come

out.

Senator CHAFEE. I see. In your analysis, do you have any factoring in of increased coal use, increased technology, and how we

deal with the emissions issues on coal?

Mr. BLUESTEIN. We do see coal consumption in power generation

continuing to increase, as has been historically. That is without

any major assumptions on new clean coal technology. Again, I believe there is an amazing amount of agreement here that we can

do much with technology. I agree that coal is a very important resource. It is a key part of our power generation today. I would ex-
97

pect that to increase, and to the extent that we can improve the

technology, I think that will go even better.

Senator CHAFEE. You are predicting increased coal use even

without any necessary new technology coming on?

Mr. BLUESTEIN. That is right. I think almost all the forecasts

that you look at, see coal continuing to be a growing part of the

power generation sector.

Senator CHAFEE. Does that take into consideration any of the

Clean Air bills that have been talked about, whether it is the Jeffords bill or the Carper bill?

Mr. BLUESTEIN. It does not take into account any legislation that

has not passed, but the existing legislation; that is right.

Senator CHAFEE. I have a few seconds left. If either of those two

bills—and let us say for the sake of argument, the Carper bill—

would that change your predictions on coal use?

Mr. BLUESTEIN. We have not analyzed that. I can look at some

other comparisons that have been done. I think an interesting

point to be made is that one reason that companies are reluctant

to build coal-fired power plants today is the regulatory uncertainty,

and in the discussions we have had with large established coalbased utilities, they have said that that is a big impediment to invest in new coal plants, and in particular, the lack of certainty

about CO¥2. So in some realm, resolving that issue would allow

more coal construction to go forward.

Senator CHAFEE. Thank you, Mr. Chairman.

Senator INHOFE. The time of the gentleman has expired.

Senator Thomas.

Senator THOMAS. Thank you, Mr. Chairman.

Welcome, Ms. West. I have not had a chance to talk with you.

I did not know you were coming until very recently. We have had

problems, and continue to have problems, of course, in the coal bed

methane over time. We have been working on it, and we will continue to do that. Much of it has to do with the split estate where

the Government owns the minerals and the private owner owns the

surface. Those are the ones that are troublesome. I presume that

you do not own the minerals?

Ms. WEST. It is correct that we do not own all of the minerals

underlying our land but we do own a percentage. Whether or not

you own the minerals you still experience problems as a landowner

either directly affected by development on your land or by upstream development when the impacts come onto your land.

Senator THOMAS. We have monitoring that is required. The Wyoming Department of Environmental Quality monitors. BLM monitors. The State engineer monitor. The Wyoming Oil and Gas Conservation Commission monitors. Have they been helpful to you?

Have you called upon them?

Ms. WEST. We have called upon them. No, they have not been

helpful.

Senator THOMAS. Do you have a surface agreement?

Ms. WEST. We have a surface agreement with Devon.

Senator THOMAS. And Yates?

Ms. WEST. We have a surface agreement with Yates. MarathonPenaco came onto some of our land with no surface agreement.

Senator THOMAS. Do you have a lawyer?
98

Ms. WEST. Yes, we do.

Senator THOMAS. Do you have hydrologists?

Ms. WEST. And a hydrologist. If I were to sit down and add it

up, all our lawyer and hydrologist costs, I would have a heart attack.

Senator THOMAS. One of your neighbors really had an agreement and has settled for $800,000. So perhaps you have an opportunity

to do something.

Ms. WEST. Well, you know, we may be forced to do that.

Senator THOMAS. What I am saying is that there is an arrangement. We are working at it. I sympathize with your issue because

there are a number of people in that category. But we have the

Farm Bureau and the Stock Growers on the one hand working with

the producers on the other hand, to come up with an arrangement

to work with split estates so the owner has a certain period of time

to negotiate and to work out an agreement. Of course, the minerals

are a property so the owner of the minerals has a right there.

Ms. WEST. Right. He does have a right.

Senator THOMAS. But you have a right.

Ms. WEST. However, in Wyoming the landowner has the least

amount of rights of any State in the Nation.

Senator THOMAS. Well, we want to work with you. I appreciate

your being here to do that. I think it is fair to say that not everybody shares your view on this.

Ms. WEST. Oh, absolutely not. A lot of people are getting a lot

of money off this industry.

Senator THOMAS. We do have now a process, which we should

have, for landowners to have an opportunity to deal with this before it happens and make it work out. We appreciate your being

here. It is a problem. But I have to tell you that it is much better

than it was when we first started. We are aware of some of the

problems that are there and will continue to work on that. Surface

owners should be entitled to not be damaged.

Ms. WEST. Exactly.

Senator THOMAS. Thank you.

Thank you, Mr. Chairman.

Senator INHOFE. Senator Voinovich.

Senator VOINOVICH. Mr. Bailey, first of all, I really appreciate

the presence of PPG in our State. When I was Governor we worked

with you. When I was Mayor we worked with you on your facility

over on the west side.

In my opening statement I said that Charles Halliday, who is

chairman and chief executive officer of DuPont told investors in December that ‘‘High energy costs will prompt the company to shift

its center of gravity overseas.’’ The question I have for you is: Have

these natural gas prices, as you are sitting down with your crystal

ball and looking down the road, caused you to reevaluate your facilities and what you have to do in order to stay in business and

compete?

Mr. BAILEY. In the United States or globally?

Senator VOINOVICH. I know you are global, but the fact is that

you have the United States. You are looking down the road and

you are saying, ‘‘Here are our costs.’’ You have to figure out: ‘‘Can

we compete in the environment that we are in?’’
99

Mr. BAILEY. Our most energy-intensive businesses are our chemical business where we use natural gas for generating electricity,

largely. Then we also have our glass and fiberglass businesses

where we are using it to heat the furnaces. Those businesses are

largely based in the United States with some export. So we really

do not have within the company, for those businesses, the ability

without large capital investments elsewhere to produce elsewhere

in the world. We are based here. This is where the capital is. So,

we do not have as much of an opportunity, as some other companies, to move offshore. That is not really a big alternative.

Senator VOINOVICH. The option is not there to move?

Mr. BAILEY. That is correct.

Senator VOINOVICH. Have you calculated, if we do not deal with

this problem, what effect it will have on your competitive position

in the global market?

Mr. BAILEY. I am not aware of whether or not we have gone

through that process within the company.

Senator VOINOVICH. Would you say that the energy costs that

your company is experiencing right now are more significant than

say, labor costs?

Mr. BAILEY. Yes, for chemicals, they are. More volatile and they

are higher.

Senator VOINOVICH. Thank you.

Mr. Bluestein, you were talking about some predictions. Have

you analyzed the effect different environmental policies will have

on your assumptions? You have made some assumptions. For example, one of the things that I think you mentioned in your testimony that you anticipate that we are going to have more liquefied

gas operations. You make some assumptions about the fact that it

is going to be available.

Have you taken into consideration the problems that we might

have in citing facilities to take in that liquefied gas? If that does

not happen, what impact will that have on costs?

Mr. BLUESTEIN. Yes, as I said in my testimony, regardless of

whether it is LNG or some other constraint on the supply assumptions that we have looked at, we see something like a 50 percent

higher gas price in our forecast. Obviously it depends on which specific one, but in that range is the kind of sensitivity that we have

looked at.

Senator VOINOVICH. That is 50 percent, anticipating something is

going to happen?

Mr. BLUESTEIN. Right; something negative as far as supply.

Senator VOINOVICH. Have you done any analysis on what impact

that would have on the economy?

Mr. BLUESTEIN. No.

Senator VOINOVICH. Have you studied any of the bills that we

have been dealing with here in terms of what we call the emission

bills or the pollution bills in terms of utilities? Have you looked at

those?

Mr. BLUESTEIN. Yes.

Senator VOINOVICH. Do you think there is any area of compromise so we can move on with some certainty? Right now, I will

tell you, our utilities do not know where they are going. We have

a controversy over new source review. We have more than 126 peti-
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tions that are being filed. We are having the new ambient air

standards for particulate and ozone coming on board. States are

being asked in the next couple of years to come up with new State

SIPS. Next week the EPA is going to announce all areas that are

not meeting the current ambient air standards.

There is so much uncertainty out there. It would be very nice if

we could get some input from you on these bills that we have pending and perhaps see if we can work something out.

Senator INHOFE. Senator Voinovich, I apologize. The vote is in

progress now, but we do have time for Senator Allard’s questions

for 4 minutes.

Senator ALLARD. Thank you, Mr. Chairman. Very briefly. I am

sorry I was late. I was chairing another committee.

I do have a full statement I would like to make a part of the

record.

Senator INHOFE. Without objection, so ordered.

Senator ALLARD. Mr. Drake, you mentioned earlier how much

the price of fertilizers increased. How long do you think that you

and other producers like you can sustain that cost? I realize there

are other factors like costs of grains. But maybe perhaps you can

give us some idea.

Mr. DRAKE. At the present time, we cannot sustain this kind of

cost. We will use a lot less. We will try to make do with what we

can use. We will put the figure that we are normally spending on

fertilizer and that is what we will go up to. We cannot continue to

pay these kinds of costs and stay in business. We cannot pass it

on through. We have no guarantees for pass-through.

The time is not definite at all. I can tell you that this season will

be very difficult. We are coming into the planting season.

Senator ALLARD. I am from Colorado and as you can see from

this chart we are right in the middle of the 125-trillion cubic feet

of natural gas. It is one of the big areas that we rely on here in

the country to meet our natural gas needs. I have always been an

advocate that we need to have multiple sources of energy. Right

now we have come to rely very heavily on natural gas.

One of the problems that we have in my State of Colorado is that

we have 69-trillion cubic feet. Twenty-nine percent of that in the

Rocky Mountain area is tied up. You cannot have access to it because of various designations that have been made on the public

lands that are on the surface of that. Some of these public lands

have sage brush. This whole western part of Colorado where we see

so much of the natural gas. This map perhaps does not reflect that,

but particularly in the western part is where we have sage brush.

Then the other part of it is that we have a lot of rules and regulations. That has been of some interest because of environmental

concerns. But we are trying to reach a balance in my State between

renewable energy and natural gas and coal, and how is it that we

meet these demands. We also have surface owner concerns in our

State. Mr. Drake, I caught part of your concerns here. Basically it

is a State issue. I hope we can keep that way and not become a

Federal issue. This is a perplexing problem for all of us.

Do any of you have a suggestion on how we can work through

this? It seems to me ridiculous that we tie up 125-trillion cubic feet

when we have every area being so adversely impacted. What is the
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answer? Is it nuclear energy? Is it maybe releasing some more of

these public lands for natural gas? Do any of you have a suggestion

on how we solve our problem? Look at what happened to the cost

of gas in the last 2 years. It is just phenomenal. I do not see how

we can continue to afford it, frankly. Does anyone want to comment?

Ms. WEST. Senator, I would like to respond. I think we need to

focus on renewable energy. This natural gas is going to be gone.

Once it is used up, then what do we do? We are going to be back

in the same old boat again. We have to focus on renewable energy.

Senator ALLARD. I see my time has expired.

Senator INHOFE. It has. Before you came, we announced that we

are going to reconvene at 2 o’clock for the third panel. We would

invite any of you to come back for that. I appreciate very much

your being here.

We only have 1 minute left on a rollcall vote. We are going to

have to run on down there and do that. Thank you very much for

coming.

We are in recess.

[Whereupon, at 11:50 a.m., the committee was recessed, to reconvene at 2 p.m.]

Senator INHOFE. We will call our meeting back to order. Again,

I apologize to the three of you, as I have done individually, for the

inconvenience that we have caused you by having to come back. We

deal with uncertainty in this place on a daily basis, but not too

well. We had votes. Again, I appreciate your coming back.

I have been told that Senator Jeffords is en route. His staff has

said it is all right to go ahead. We will get a handle. Let us start

with your opening statements. Just as a reward for you coming

back, we are going to give you 6 minutes? How is that?

Mr. Caskey.

STATEMENT OF MIKE CASKEY, EXECUTIVE VICE PRESIDENT

AND CHIEF OPERATING OFFICER, FIDELITY EXPLORATION

AND PRODUCTION COMPANY

Mr. CASKEY. Thank you, Mr. Chairman, and members of the

committee. My name is Mike Caskey. I am executive vice president

and chief operating officer of Fidelity Exploration and Production

Company, headquartered in Denver, CO.

Fidelity is a subsidiary of MDU Resources Group, which is a

Bismark company. We are an independent oil and natural gas company, focused on natural gas production, engaged in acquisition, exploration, and production activities, primarily in the Rocky Mountain region and in the Gulf of Mexico.

Fidelity produces coal bed natural gas in Wyoming, and we are

currently the only producer of this energy resource in Montana. I

am here to discuss the obstacles we have faced in our efforts to

produce this clean-burning natural gas on private and public lands.

Today in the Rocky Mountains there is a well-funded coordinated

effort underway to obstruct and delay the development of domestic

oil and natural gas.

This effort, orchestrated by aggressive special interest groups, is

employing whatever means necessary, and the consequences of

their activity are significant. The success of these special interest
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groups in delaying natural gas production has contributed to the

higher costs that homeowners and employers have been experiencing for the past 2 years. These costs have had a negative impact

on our economy and have led to the loss of jobs in our industrial

heartland.

Unfortunately the future does not look like it will improve. The

Department of Energy estimates that by 2025 we will need 40 percent more natural gas to meet our Nation’s demand. Some of this

demand is related to our need to improve the air we breathe.

Senator INHOFE. Give me that date again. By when will we need

40 percent?

Mr. CASKEY. 2025.

Senator INHOFE. All right. Go ahead.

Mr. CASKEY. Today 98 percent of our domestic consumption of

clean natural gas comes from North America. With known domestic

natural reserves either in decline or off-limits, we must look to

other areas to meet our needs. The Rocky Mountain region possesses an estimated 137-trillion cubic feet of natural gas which is

recoverable. This represents enough natural gas to provide approximately 6 years of total current domestic energy needs without any

other natural gas supply. That means supplying every American

home, running every factory, supplying every plant that uses natural gas as a feed stock, producing all electrical power, and heating

every American school with natural gas from only the Rocky Mountain region for 6 years.

Unfortunately, the abuse of our legal system and a novel use of

the National Environmental Policy Act process, have led to delays

and the loss of production in this area. A report done by Mr.

Bluestein’s company, EEA, found that if the BLM can just increase

its current drilling permit approval rate from 1,000 permits per

year to 3,000 permits per year, that action alone would have the

effect of saving $88 billion over the next 10 years for the consumers

of natural gas. That is a savings of roughly 53 cents per thousand

cubic feet of natural gas consumed. That would come directly off

the price of gas for the consumer.

Here are some examples that highlight the type of activism that

has caused these delays. In 2000, after nearly 3 years of wrangling

over an environmental assessment on coal bed natural gas production in Montana, the Government recognized the need for a full environmental impact statement. In addition to the nearly 3 years already consumed by the environmental analysis process, the new

EIS was expected to take an additional 18 to 20 months to complete. Instead of 18 to 20 months, the EIS took 29 months to complete. In Wyoming a similar study was initiated at about the same

time. This one took a total of 35 months to complete. Literally

hours after the records of decision on the EIS documents in Montana and Wyoming were released, the special interest community

filed no fewer than four lawsuits.

My company, is the only current coal-bed natural gas producer

in Montana, has been sued repeatedly or has to join regulatory

agencies in defense of lawsuits against the environmental analysis

process. In total, we currently face 12 separate lawsuits challenging our ability to produce this resource.
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Defending our company against these lawsuits has certainly cost

us significant time and money. But this unprecedented amount of

lawsuits has also cost the Federal Government untold dollars in

addition to diverting human resources from more important tasks.

The Bureau of Land Management offices in Wyoming and Montana are charged with protecting habitats for threatened and endangered species, reducing the risk of forest fires, and controlling

noxious weeds, along with many other responsibilities. As you

know, energy regulation is only a small part of their work load. Yet

if they are required to expend huge financial and human resources

in response to each and every anti-development lawsuit, as frivolous as they may seem.

One interesting point aside, the Northern Plains Resource Council recently purchased a new headquarters building in Billings, MT.

In a local news story they complained about the high cost of natural gas to heat the building as well as the expense of alternate,

non-fossil fuel-based heating technology. I find it somewhat ironic

that they failed to recognize that their actions have a direct and

constant impact relationship on these costs that they are complaining about.

Members of the committee, my company is held accountable by

a set of State and Federal regulations designed to allow energy production to proceed while protecting against environmental degradation. The regulations have been effective, and our Nation is a shining example to the rest of the world on the success of environmental regulation. We have the cleanest air of any Nation on

earth.

However, the same systems that protect our ability to produce

energy, while protecting the environment, are being misused by aggressive special interest groups. The overriding process of this protection is defined in the National Environmental Policy Act. Take

NEPA back to its roots of providing this protection while allowing

energy development to proceed. Do not let special interest groups

misuse the process at the expense of the American public and our

energy independence.

Members of the committee, thank you for the opportunity to

present this testimony. If there are any questions, I will be happy

to share any answers I may have. I would ask that my full statement be placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

Thank you, Mr. Caskey.

Mr. Bloch.

STATEMENT OF STEPHEN BLOCH, STAFF ATTORNEY,

SOUTHERN UTAH WILDERNESS ALLIANCE

Mr. BLOCH. Thank you for your time this afternoon, Senators. I

am Stephen Bloch, a staff attorney with the Southern Utah Wilderness Alliance, SUWA, in Salt Lake City, UT. SUWA is a founding

member of the Utah Wilderness Coalition, a group of 240 national,

regional, and local conservation organizations that advocate for the

passage of America’s Redrock Wilderness Act, S. 639, and

H.R. 1796. That calls for the designation of approximately 9 million

acres of Utah’s stunning canyon lands as wilderness.
104

SUWA’s mission focuses solely on the preservation of the public

lands in Utah; therefore, my testimony is only addressing natural

gas issues on Utah’s public lands and, in particular, the lands that

are managed by the BLM.

There are two points I would like to leave you with. First of all,

the development of Utah’s stunning canyon lands is not going to

solve our Nation’s crisis in natural gas. Second, SUWA and other

conservation organizations advocate a balanced approach of the

protection of our wild places as well as allowing natural gas extraction activities to proceed.

First and foremost, an analysis of information from the Department of Energy, from USGS, and from the State of Utah shows, as

you can see here in Figure No. 3 on the easel, that in Utah there

are seven hot spots in our State. That is where 95 percent of the

production of natural gas occurs. Importantly, none of those lands

are proposed for wilderness designation in America’s Redrock Wilderness Act.

The lands highlighted in blue are the lands that are producing

natural gas, and the lands that are crosshatched are the lands that

are proposed for wilderness. An analysis from USGS shows that

the technically recoverable undiscovered resources in the lands that

are crosshatched is less than 4 weeks of natural gas at our current

national consumption levels. Thus, it seems clear that by sacrificing America’s Redrock Wilderness, there is not going to be any

alleviation of the natural gas crisis.

Second, far from advocating a broad no-lease or no-drill policy,

SUWA and other members of the conservation community are extremely selective about filing administrative or legal challenges to

natural gas exploration or development projects in Utah and

throughout the Intermountain West.

For example, in Utah from January 2000 through March 2004

there were more than 3,200 drill permits approved. Conservationists challenged five of those. That is less than one-half of 1 percent.

Likewise, in Utah there were 10 seismic exploration projects proposed from that same time period, from 2000 to 2004. Conservationists challenged four of those, and those were only ones that

crossed into lands that are proposed for wilderness. Thus, it is not

the legal challenges that are an impediment to natural gas production and development. There is, however, little question that natural gas exploration and development leaves significant and lasting

scars on our landscape including the fragmentation of wildlife habitat, long-term damage to fragile soils, the loss of wilderness values,

and damage to cultural resources.

You can see the type of damage I am talking about here. These

are Exhibit No. 3 and Exhibit No. 4 from my written testimony Exhibit No. 3 is a sludge pit from the Long Canyon Well outside

Moab, UT. Exhibit No. 4 on the bottom is a seismic truck that is

operating outside of Arches National Park.

Stunning places like Utah’s Fisher Towers and the cultural resources such as those found in Utah’s Nine Mile Canyon are at risk

now from natural gas exploration and development. These are the

resources that have now been placed needlessly in the cross-hairs

of development and production. It is clear that these are not the

places to find natural gas.
105

I appreciate this opportunity today. I look forward to answering

any of your questions. I would ask that my full statement be placed

in the record in its entirety.

Thank you, Mr. Chairman.

Senator INHOFE. Without objection, so ordered.

Thank you, Mr. Bloch.

Mr. Handley.

STATEMENT OF GEORGE HANDLEY, ECLIPSE

EXPLORATION CORPORATION

Mr. HANDLEY. Thank you, Mr. Chairman. My name is George

Handley. I am the president and only employee of Eclipse Exploration in Denver, CO. I appreciate the opportunity to speak to you

today. I am glad to see the committee’s interest in natural gas supply in America and the environmental policies affecting its development.

Policies that either limit or encourage energy development of natural gas resources have very real consequences. Policies that promote the use of a particular energy source, yet fail to provide for

the necessary and orderly development of that same resource are

predisposed to failure.

I have been the victim of Federal land management policies that

allow groups that are not party to any contract with the BLM or

State to effectively stop a project through protests, appeals, and

litigation. I have been victimized by the uncertainty that is created

by abuses to public involvement statutes. Even when I follow the

laws and regulations and have the approval of land managers, I

found that I was still subject to the reach of obstructionist groups

that sought to halt my natural gas exploration project and cripple

my company.

Legal challenges severely limit oil and natural gas development

on Federal lands. At every stage of development, obstructionist

groups challenge agency decisions and seek to stop development.

For example, in the State of Utah, 57 percent of all lease parcels

offered by the BLM between 2001 and 2003, were protested by

groups opposed to development. I experienced one of these legal

challenges first hand in Grand County, UT, on a seismic project

over a Federal mineral lease. This lease is located in the Thompson

mining district, a former uranium mining area characterized by

dry, sparsely vegetated land. It is not within view of Arches National Park. It is not wilderness. These leases were leased during

1997 during the Clinton administration with the expressed intent

and responsibility to explore for oil and natural gas.

Seismic technology has greatly increased our ability to map the

subsurface geology, thereby allowing exploratory drilling in the

most efficient manner. I have 30 years experience working on seismic projects and developing petroleum exploration plays around

the world. I have a masters degree in geophysics from the Colorado

School of Mines.

In order to accurately map the subsurface geology of this prospect, I designed the specific seismic program. Any deviation from

this program would have resulted in useless data. WesternGeco

was hired to conduct the seismic activities on my lease. One of the

employees of WesternGeco, Stuart Wright, is one of the foremost
106

experts on seismic exploration and helped me design this program

to ensure an accurate map of the subsurface.

An environmental analysis was prepared following the guidelines

of the BLM. The BLM informed WesternGeco and myself what was

needed to comply with the law. We did what the Government

asked. After the permit was issued, WesternGeco began operations.

More than halfway through the project, a judge in Washington, DC

issued a ruling that stopped the project based on a challenge by the

Southern Utah Wilderness Alliance.

My company is small and cannot afford to fight well-funded nonprofit groups in courts. The State of Utah and WesternGeco helped,

but in the end, the SUWA won the court battle and has all but

stopped my project.

Abuse of the process delays the delivery of natural gas to consumers and destroys the livelihood of businessmen like myself. The

more legal challenges, the more delays. The more delays, the more

consumers are affected. The more consumers are affected, the more

the economy suffers.

I am not here to debate the factual or legal merits of my case.

I use this example to lay blame on a process that allows nonprofit

groups to continually halt mineral development on public lands.

The SUWA may show you pictures and tell you stories of horrific

damage done by the incomplete seismic project. It is misleading.

There is no long-term damage to the area. It would be hard for

anyone to see the path of this project today.

The State of Utah, the BLM, and the Grand County Council fully

support my project. Grand County is anxious for a wildcat well to

be drilled here, and for the seismic program to be completed, as it

will mean a lot to their economy. The Intermountain West is

blessed with abundant resources of natural gas, a substantial portion of which is owned by the Federal Government. These resources

cannot be developed when small businesses like mine face insurmountable litigation.

Abuse of the legal process puts Americans out of work and sends

energy development outside our borders. It costs the Government,

in terms of litigation costs and the potential to pay the attorneys

fees of the groups who bring the suit. I did what I was told by the

Government, but still lost and I have no recourse. The American

public bears the burden of this litigation against the Government

either way.

Thank you for allowing me to testify. I would ask that my full

statement be placed in the record in its entirety.

Senator INHOFE. Without objection, so ordered.

Thank you, Mr. Handley.

We will go ahead and have 5-minute questions.

Mr. Handley, we always hear from some of these groups about

the giants who have been stopped. Are you a giant?

Mr. HANDLEY. You are talking with the whole company.

Senator INHOFE. Are you multinational?

Mr. HANDLEY. No, no. Senator, I do a lot of consulting for different companies. The last time I did anything for them was a few

years ago for Quintana in Argentina, but I was just running a seismic crew. I do not do exploration internationally anymore.
107

Senator INHOFE. Could you describe just very, very briefly the

damage that you sustained as a result of the challenges?

Mr. HANDLEY. Well, I have provided some displays. I laid out the

seismic program with two specific purposes. We knew that there

was a basement fault feature that sets up an exploration play that

looks a lot like Lisbon Field. I have enough information to define

that fault. I should have had more, but I was shut down. We also

knew that there is a structural closure over this basement feature.

I did not get enough information to define the structural closure.

So I have been seriously hurt in terms of delay costs, in terms of

anticipated costs for going out there and completing the seismic

program. It has hurt my ability to market this prospect because all

the acres have not been defined.

Senator INHOFE. Mr. Bloch, your website refers to our state of affairs as ‘‘the fabricated energy crisis.’’ What do you mean by ‘‘fabricated energy crisis.’’ Do you think it is not real.

Mr. BLOCH. No, Senator; I think SUWA and the conservation

community is as concerned as everyone you have heard from already at this hearing. I think our concern is the use of the so-called

‘‘crisis’’ to lift some of the important environmental protections afforded by statutes, such as NEPA, to lift the protections of those

statutes and to allow for an expedited process, starting from the

leasing stage all the way to production. That is going to cause significant environmental damage as a result. So I think that is our

concern.

Senator INHOFE. Do you believe there is an energy crisis?

Mr. BLOCH. I think I would agree with the other statements

made today that there seems to be shortages of natural gas in some

of the places where it is needed most.

Senator INHOFE. So there is an energy crisis? Yes or no?

Mr. BLOCH. It certainly appears that way from what we have

heard.

Senator INHOFE. Why would you characterize it as a ‘‘fabricated

energy crisis’’ then?

Mr. BLOCH. Well, as I said, Senator, our concern is how the

shortages are being used by certain folks to lift, as I said before,

some of the restrictions.

Senator INHOFE. Mr. Caskey, is there an energy crisis?

Mr. CASKEY. Yes, sir.

Senator INHOFE. Do you think it is fabricated?

Mr. CASKEY. No, sir.

Senator INHOFE. Of all of the obstacles that you have that you

have described in your testimony, special interest groups, the

delays in any number of projects, the relative uncertainty related

to all the delays. What does this do to your production capability?

Are you impaired? I am thinking about the manufacturer worker

in Ohio and maybe the little lady in Rhode Island trying to heat

her home. What do these delays mean in terms of costs? Have you

figured any way to quantify that?

Mr. CASKEY. I have not quantified it on a large-scale basis, but

I can give you an example of what one instance can cost and what

that one instance would do for the lady trying to heat her home

in Rhode Island, for instance.
108

We have been issued 87 permits to drill wells by the BLM in

Montana. We had drilled those wells. One of the special interest

groups decided to protest the drilling of those wells and the appropriateness of the BML of giving us those permits. They asked for

a State director review of those permits. The State director decided

that he would put a moratorium on until he could get through the

review. Before he could even make a statement on whether or not

the review, or what to do with the permits, BLM was sued by that

group. He later came out and said, ‘‘We need to send it back. Remand it back to the field office.’’ The new ratification, basically, of

those permits came out and we are back drilling.

The problem with that is that it took 3 months for that process

to happen. Those were 87 wells that were prevented from producing. The money was already spent on them. They were drilled

to the zone and we were unable to produce. A quick estimate would

show that that probably cost in the realm of anywhere from $3 million to $8 million for that 90 days for those 87 wells, which if you

want to translate it down to royalty for the Nation, that is roughly

$400,000 in Federal royalties alone, half of which goes back to the

poorest counties in one of the poorest States in the Nation.

So, it is a dramatic impact, not just for the company, but for the

governments and the people who live and thrive in the areas that

we are trying to produce the resource from.

Senator INHOFE. Thank you.

Senator Jeffords.

Senator JEFFORDS. Mr. Bloch, there has been conflicting testimony on the number of leases in Utah challenged by the environmental community. Can you provide additional detail for the committee on the number of challenges that took the form of litigation?

In how many cases were violations of Federal environmental law

cited?

Mr. BLOCH. Senator, there have been two lawsuits. The first was

filed in the winter of 2001 and that was later dismissed by SUWA.

The second is a lawsuit that we filed in November 2003. It is for

the issuance of the sale of 21 leases in the State of Utah. There

are a series of NEPA violations that SUWA has alleged, as well as

other statutes. These are sales of leases on lands that the BLM

itself acknowledges are wilderness-quality lands.

Senator JEFFORDS. Also, Mr. Bloch, to what extent has changing

the Administration’s guidance on NEPA fueled litigation in an effort to clarify the requirements regarding the content of environmental impact assessments?

Mr. BLOCH. I think there has been a substantial change in this

Administration. It seems to be flaunting the very purpose of the act

to think first and then act. Instead of seeing a through assessment

or an analysis of the environmental impacts of leasing through production, instead there is a hurried process that simply results in

a checklist instead of a through analysis. That is the crux of some

of our concerns; that in the hurry to sell these leases, for example,

that the wilderness quality lands of Utah are being leased away

and scarified, as I said earlier, with very little result in natural gas

production.

Senator JEFFORDS. Mr. Caskey, in one of the attachments to your

written testimony, you provide a chart detailing challenges to envi-
109

ronmental documents made by a variety of environmental conservation and landowner groups. Not all of these challenges appear

to be actual NEPA legislation.

Can you provide an updated version of this chart for the committee that describes the nature of these challenges and under

which Federal law these leases were challenged?

Mr. CASKEY. Yes, sir; I will do that.

Senator JEFFORDS. I would appreciate that.

Senator INHOFE. Without objection, so ordered.

Senator JEFFORDS. Mr. Caskey, in your written testimony you

state that it is this NEPA process of evaluating land use in development plans, and not the law itself, which has become the principal tool used by obstructionists to delay or halt natural gas development. As the law requires the development of environmental impact statements, can you explain in more detail the distinction that

you are drawing between the law and the EIS process? Are you

saying that a change in NEPA law is not needed to remedy the

problems you have experienced, and just a change in the implementation of the law?

Mr. CASKEY. I think the law itself is reasonably sound. I think

there are always definitional issues when you start applying the

law that can be streamlined. I do feel very strongly that the process, the time guidelines within the NEPA process, are the crux of

the issue for the abuse of the law, as well as the process.

The law allows for designated timing of input from the public

from special interests groups, and from all citizens of the United

States. That timing is designated in the law. The abuse comes

where special interest groups sue to slow down that process which,

as I testified to earlier, delays the issuance of the necessary documentation which delays realization of the investment made. That

is the primary issue here.

Senator JEFFORDS. Thank you.

Mr. Handley, in your testimony you say that 57 percent of all

lease parcels offered by the Bureau of Land Management between

2001 and 2003 in the State of Utah were protested by groups opposed to development. What was the nature of these protests? Did

they all involve allegations that Federal environmental law had

been violated?

Mr. HANDLEY. Senator, I do not know. It was just a statistic that

was given to me. I do not know what the nature of what the protests were.

Senator JEFFORDS. Were these protests all in the form of lawsuits?

Mr. HANDLEY. I do not know that either.

Senator JEFFORDS. Thank you.

Thank you, Mr. Chairman. That is all I have.

Senator INHOFE. Senator Voinovich.

Senator VOINOVICH. I had the same concern. On your website

you mentioned ‘‘fabricated energy crisis.’’ Were you here this morning for the testimony?

Mr. BLOCH. Yes, I was, Senator.

Senator VOINOVICH. After hearing that testimony, would you say

that there really is an energy crisis?
110

Mr. BLOCH. As I stated earlier, I would agree that all the speakers indicated that there is a crisis.

Senator VOINOVICH. The question I have is: How are we going to

deal with the crisis?

Mr. BLOCH. I am not sure about the answer to that, Senator, but

I do know the answer is not to sell new leases and allow activities,

such as wildcat wells in areas that are not predicted by the Federal

Government and its figures and its agencies to produce any meaningful amount of natural gas, and that there needs to be a balance

from production and preservation of lands.

Senator VOINOVICH. Do you have any feelings about nuclear energy or coal-fired power plants? What does your company feel about

nuclear power?

Mr. BLOCH. We do not have, to my knowledge, an official position

on either of those, Senator.

Senator VOINOVICH. How about burning coal?

Mr. BLOCH. Well, I think there are several coal-burning plants

in Utah. I think our primary concern is the expansion of the plants.

If you have spent any time in Salt Lake City, or in the Salt Lake

Valley, I think it is among the worst 10 airsheds in the country.

So our concern is the effect on the air.

Senator VOINOVICH. There seems to be a real problem, then, does

it not, with dealing with this energy crisis that we have, the natural gas crisis, but also an energy crisis in the country?

Mr. BLOCH. Senator, on the first map that I showed before,

speaking only about the State of Utah, I do not think that there

is this type of a crisis. There are identified locations for coal-bed

methane for natural gas. As I indicated, 95 percent of the production now and the other proven and inferred reserves are in these

seven hot spots. There is not a conflict between the extraction in

those areas and the preservation of some of our wild lands.

Instead, though, the focus we are seeing from this Administration is to target those lands that are not predicted to have any type

of meaningful natural gas for leasing and for extraction.

Senator VOINOVICH. I would like to have Mr. Caskey and Mr.

Handley’s response to that. Do you feel that the Administration

and their policy of opening up some of these areas is irresponsible

and making available areas that ought not to be drilled?

Mr. HANDLEY. The area where I am doing my exploration is not

a wilderness. It is in Grand County, UT. Grand Country really has

only one economy right now. It is tourism. It is basically out of the

town of Moab and Arches National Park. There are a couple of

parks south of there.

I have been to the area. It is fairly desolate. It was an old mining

district. The town desperately wants my program to go through. I

have been out there to speak with the town and the management.

I have spoken with the Grand County council. This would be a perfect use for this land. This land is not pristine. It is an old mining

district. It would be a perfect place to explore and drill for oil and

natural gas. It would mean much to their economy.

Senator VOINOVICH. Mr. Caskey. The allegation is that the Administration has opened up a number of areas that ought not to

have been opened up. It is my understanding that the reason they
111

did it is because we have a crisis. They feel that you can drill in

those areas and it is environmental responsible.

Mr. CASKEY. I think if it is done according to the law as it stands

now, it is absolutely environmental responsible. I think it can be

managed very well. We have proven we can do that. I also find it

very interesting that the obstructionist community feels that 6

days, or 2 weeks, or 3 months, or 6 years of lack of natural gas is

not consequential.

I would like to ask that same community which communities,

Los Angeles, the whole country, is going to do without gas for 3

months? That is a difficult question to answer. I think that is the

one that we have to look at.

Like some of the testimony this morning, I feel that the fellow

who was talking about the agricultural use of natural gas as a

basic stock for fertilizer, again what are we going to do? I am not

so much worried about price. What are we going to do when we

cannot get it at any price? That is the question we have?

Senator VOINOVICH. Have you looked at the energy bill?

Mr. CASKEY. Parts of it. I have not read the whole bill through.

Senator VOINOVICH. Have you read the parts that impact on you?

Mr. CASKEY. Absolutely.

Senator VOINOVICH. In your opinion, are they going to help?

Mr. CASKEY. I think they will help. I think it needs to get done

in a hurry to help because I think the hole is getting deeper and

deeper. The supply is declining. The demand is increasing. The

catchup is going to take longer, regardless of what the legislation

does.

Senator VOINOVICH. Would it do anything about the lawsuits

that Mr. Bloch’s group can file or anybody else’s?

Mr. CASKEY. Actually, fortunately, Mr. Bloch’s group has not

filed any lawsuits against my company. The lawsuits are going to

be there. That seems to be a pattern that the groups are taking

these days to obstruct the development of natural gas and oil.

Senator VOINOVICH. Mr. Handley, have you looked at the energy

bill?

Mr. HANDLEY. Yes, I have. But just in parts. You have to remember that I am a very small piece of the picture. I am an independent. I have looked at the energy bill. I do not think it goes far

enough to try to attempt to solve the problem that we are having

in the United States.

Senator VOINOVICH. But the fact is that there is more of an opportunity to open up areas, but it does not do anything about the

remedies that are out there that you are contending with right

now. So I guess the argument I would make, Mr. Bloch, is that

even if these things are opened up, the same avenues are available

to organizations to come in and file lawsuits and take advantage

of the NEPA law and so forth?

Mr. BLOCH. Well, Senator, I guess that’s right. Those avenues

are still going to be available. I think there are certainly some efforts that are being made to curtail the process. I think it is important to come back to some of the numbers right now, as things

stand.

The Assistant Secretary of the Interior testified in front of the

House in 2003, and she talked about how in the Rocky Mountain
112

West a full 88 percent of the lands are available for natural gas

exploration and for leasing. It is not a situation where there are

too many lands that are off limits. I think it is important to have

some of those facts out there and to make sure that that is front

and center. It is not a situation that there are too many lands that

are off limits. In fact, it is only the special places that are off limits. There needs to be that type of a balance, quite frankly.

Senator VOINOVICH. I guess the problem that we have today is:

Where do you strike the balance? From my perspective, we have

been striking it in a way that we have been neglecting the reality

of some of our policies. I am very interested in protecting the environment, but at the same time, we have to balance that with where

this country is going. We have some real severe problems.

I have looked at the energy bill. It helps, but it does not get at

it. We are going to have this around for awhile and until we get

the liquid gas coming here, if they are going to make that possible,

and then hopefully we will open up and get that natural gas coming out of Alaska. We are in for a rough road right now. I think

that everyone has to be aware of that situation and take that into

consideration when you are developing the balance that you are

trying to reach.

Mr. Bloch, from my perspective of being here for 5 years, and I

used to testify before this committee when I was Governor of Ohio,

it just seems that too often when we are doing our environmental

policies, we just ignore the impact that it has on the economy and

our energy supplies in this Nation. I do not think we can keep

doing that for too much longer. If we do, I think you are going to

see a real diminishment of our overall quality of life, and in terms

of quality of life for people who live in my cities. My county probably has more people than your State has.

The point I am making is that there are a lot of people that live

in our inner cities and what we might refer to as ghettos, that are

really up against it. When they are paying 100 percent for their

natural gas costs, it is the difference between buying food or having

clothes or maybe paying their rent. We just keep talking about,

‘‘Well, it is the environmental issues.’’ I sometimes think that probably some of your members do not know those people are there.

Mr. BLOCH. Senator, I am a native from your own home State.

I grew up on the southeast side of your home city. I am from Chagrin Falls, OH. I think that there can be that kind of a balance.

I think that some of the lands in Utah, my home State now, can

be protected and that there is still an opportunity to increase the

production of natural gas. The concern that I am here to tell you

about is that the wild places that Ohioans come to visit are at risk

from the energy policy of this Administration that is targeting

these lands. It is not for their natural gas values.

Senator VOINOVICH. But the point I am making is that even if

I agree that is what it was, and I cannot believe it was a willy nilly

thing, to just forget about it and open the gates regardless. The

same remedies are still available to everyone in the event that if

they move in the areas, you can still do your thing, right? We have

not taken anything away from you; have we?

Mr. BLOCH. Not yet, sir.

Senator VOINOVICH. Thank you, Mr. Chairman.
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Senator INHOFE. Thank you, Senator Voinovich.

In my opening statement I quoted from the Clinton administration document praising the gas producing industry for their stewardship, for what they have done. Specifically they said it is important to tell this remarkable story of environmental progress and of

the greater awareness of the industry’s achievements in environmental protection will provide the context for an effective policy.

I sense from some of the groups that I hear, perhaps yours and

others, that you do not agree with the previous Administration, the

Clinton administration, as to the stewardship that is provided by

the gas-producing industry; would that be correct?

Mr. BLOCH. Senator, speaking again from the perspective of

Utah, I think it still comes to this question of balance. When there

are projects taking place in some of these seven hot spots, those are

not places where you are seeing any of the legal fights. As far as

I can tell, the stewardship that is being provided by industry in

those places seems to be meeting environmental standards. If it is

not, I am sure that it will be challenged by somebody else. But the

areas that we are concerned first and foremost about, are these

other wildlands that do not have the resource and yet are still in

the cross-hairs.

Senator INHOFE. Several times you have used the term that the

government has determined that there is not adequate capability

or production to justify it. Each time you said that I thought: Is

this really the role of government? Is this not a supply and demand

thing? These people who go in, and they want to explore, it is a

tremendous investment. They do so based upon the best knowledge

that they have. They are not going to go into some place unless

they feel that there is an opportunity to get the results; is that not

correct?

Mr. BLOCH. I think that is correct for an individual such as a

wildcatter, but I think that there needs to be a balancing in between the hopes of a single individual and the profit that he is

going to make, and the protection it places by the BLM in a public

trust for all Americans.

Senator INHOFE. Well, how about all Americans who cannot heat

their homes and who cannot have jobs because manufacturers are

moving overseas?

Mr. BLOCH. That is not where the natural gas is coming from,

Senator. That is not what the figures from the Government show.

Senator INHOFE. Let me ask you a question. You are concerned

mostly with Utah?

Mr. BLOCH. That is correct.

Senator INHOFE. I think we have determined that we all know

that there is a crisis right now. You heard the testimony this morning. The price of fertilizer has doubled in the last 6 months. That

is a crisis; is it not? Who pays the price for that crisis? It is the

public; is it not? They are the ones that are trying to buy, that is

passed on?

Mr. BLOCH. I think that is correct.

Senator INHOFE. The cost of heat, the little old ladies that we

talked about up in Rhode Island that the Governor is concerned

about. I hope we are all concerned about that. So I think the crisis

is here.
114

I think Senator Voinovich brings up a valid point. I was anxious.

I hope I heard you right when he said there are other forums of

producing electricity. There are fossil fuels. There is burning coal.

Do you have a problem with that?

Mr. BLOCH. Senator, my organization, to the best of my knowledge, at this point is not taking a position on a number of proposed

expansions in Utah. I can think of three off the top of my head.

There are expansions of existing coal-burning plants or new plants.

Senator INHOFE. Well, I think that your organization is concerned, obviously, about having adequate electricity and the generating capability. Let us just say that in southern Utah where there

is a plentiful supply of sun and wind, would you support construction of wind turbines and solar panels in southern Utah?

Mr. BLOCH. I think we are supporting those. Of course, it is our

hope that they would be environmentally sensitive where they are

being sited. But there are some that are being proposed in northeastern Utah close to the Wyoming border. I think we are fully on

board with that, Senator.

Senator INHOFE. Oh, you are? There are some groups, I know,

that are now opposing some forms of renewables, wind specifically.

I am glad to know that that is your policy. We will remember that.

I have a feeling this may come to surface in the future. It is nice

to know that we have an ally.

Mr. BLOCH. Let me be sure that I have explained it correctly.

There are some proposed wind turbines in northeastern Utah that

are close to the Wyoming border that we are in agreement with.

As far as additional ones in Utah’s west desert, or in southern

Utah, I think we have to look at it on a case-by-case basis.

We are concerned about the siting of the turbines, but as far as

in principle, it is something that we are in agreement with.

Senator INHOFE. Mr. Handley, Mr. Caskey, and Mr. Bloch, you

have come a long way. We are not under the pressure that we were

prior to when we had to recess. Is there anything that you feel that

you should share with this committee that you have not had a

chance to do up to now?

Let us start with you, Mr. Handley.

Mr. HANDLEY. No, I will just give you a short summation. I am

an independent. I took these leases from the Federal Government

and from the State of Utah with the expressed intent that I was

going to evaluate it for its petroleum potential. I had the responsibility to do that. When the Government gives you a hydrocarbon

mineral lease, you are expected to perform on that lease.

I went out there and I did everything the Government asked me

to do. It was an arduous process dealing with the BLM. They were

very strict. After I had my permit, I was shut down in Washington,

DC after a judge issued a decision based on an appeal by SUWA.

I had basically no recourse. I did everything I was supposed to do.

It took me by great shock. This is not a wilderness area. This is

in a county that desperately wants this exploration program to go

forward.

Senator INHOFE. Mr. Bloch, I was just handed a note that you

have to catch a plane and that you have to leave in just a matter

of minutes. Is there anything that you would like to say prior to

that, and then, of course, you can be excused?
115

Mr. BLOCH. Thank you, Senator. In response to something from

Senator Voinovich, I think, Senator, you are exactly right. How do

we draw the line for balance? How do we arrive at that balance?

I think that the position of my organization and of the conservation

community that focuses on Utah, our view is that this Administration is out of balance in how it is targeting the lands that by all

estimates are not predicted or known to contain natural gas and

are, nevertheless, in the cross-hairs of development.

Senator VOINOVICH. I would just comment that logic would tell

me that if what you say is true, who is going to go in there? Why

would you bother going into an area where you say there is nothing

there? If I am a businessman, and I have to borrow money to go

ahead and do this, I would have to be insane to go into an area

like that and spend money when the result of my work would not

be productive.

Mr. BLOCH. Again, Senator, the answer is, this is not the major

companies. It is either the mid-majors, or the independents, or

wildcatters who are going in for the profit of a few individuals,

again at the price of the loss of a national landscape.

Senator VOINOVICH. Thank you.

Senator INHOFE. Mr. Caskey.

Mr. CASKEY. Thank you, Senator. I am one of those independents. I represent one of those small middle-sized companies. We

have 100 people in our company. We produce about 200-million

cubic feet of gas per day. That is not a big producer. That is a medium-size producer. We are being stymied with respectively large

investments. We are being stymied by the process, like I testified

to earlier. This needs to somehow change. Otherwise, we are not

going to have the supply that everybody is so worried about. And

the ‘‘crisis,’’ if that is what we have agreed on, is what is occurring

right now, will perpetuate itself. This is not going to get easier.

The legislation that I have reviewed, or the pieces that I have

reviewed, does not answer all of the questions and does not put us

on the road to recovery. It will help, but as long as the process is

being abused, we are going to stay in this turmoil and we are going

to have the disparities between the time we can produce the gas

and the time it is needed. I hope that does not happen when it is

40 degrees below zero in the Northeast. Thank you.

Senator INHOFE. All right. Let me thank all three of you for coming back and having to be delayed in your testimony. We appreciate it. You have been very helpful. We thank you for coming.

We are adjourned.

[Whereupon, at 3 p.m., the committee was adjourned, to reconvene at the call of the chair.]

[Additional statements submitted for the record follow:]

STATEMENT OF HON. WAYNE ALLARD, U.S. SENATOR FROM THE STATE OF COLORADO

Mr. Chairman, I want to express my appreciation to you for holding this hearing.

As I think we are all aware, increasing amounts of natural gas are being used

strictly by power plants for energy production. It is also heavily utilized for home

heating throughout the country. Demand for natural gas has increased sharply, this

has put quite a strain on natural gas supplies.

There are any number of reasons that natural gas demand has increased so dramatically. New guidelines were placed on power production facilities by amendments made to the Clean Air Act in 1990. This has resulted in the fact that virtually every power production facility built since passage of these amendments oper-
116

ates by burning natural gas for power production. This is one of the major contributors to the increase in demand for natural gas and consuming otherwise available

gas supplies.

During the same time period, natural gas development levels have remained basically flat which has driven the wholesale cost of that commodity up. As a natural

result of increased demand and a level supply, we are seeing some of the highest

natural gas prices in recent memory. Endless lawsuits, onerous ‘‘red tape’’ and regulations have greatly hindered new development and have made it very difficult for

private companies to develop resources on public land—where most supplies that

have been currently documented are located.

These lawsuits and regulations have also made it very difficult to add transmission capabilities. There is a severe shortage of transmission throughout the

country, but any attempts to site new pipelines are met with more resistance and

additional lawsuits. The lack of transmission capability restricts the ability to move

supplies even if they can be developed.

I find it very interesting that the same special interest groups that encourage gas

fired generation of electricity, oppose granting leases and permits to enable facilities

to bring more natural gas on-line. Those who mast strongly argue the need for gas

fired generation are very often those that file the lawsuits that hold up new production and transmission. We simply can’t have it both ways.

The vast majority of gas supplies in the west lie under Federal land. It is important that we make these supplies available for production. Government owned, public lands were always intended to be available for multiple uses. Certainly there are

places where one couldn’t imagine production taking place. But land should not be

arbitrarily made unavailable for development. These areas should be throughly assessed and, if they indeed qualify as areas in which development would severely impact the land, development can be restricted accordingly.

While increased development will mean more natural gas on the market, gas production requires skilled workers, so it will also mean more jobs are available. Developers also pay local and State taxes on the gas that they extract. This is very helpful to residents in rural areas that often have low tax bases.

We must have more production from domestic energy sources including oil, natural gas, clean coal, nuclear, and renewable resources. The future of our energy supply must be a diverse one, and natural gas clearly must be a part of that makeup.

For all of these reasons I am grateful that the Committee is holding this hearing

and I look forward to the testimony that we will receive here today. Thank you, Mr.

Chairman.

STATEMENT OF MARTIN KELLY, PRESIDENT AND CEO, MORAINE MOLDED

PLASTICS INC.

My name is Martin Kelly, President and CEO of Moraine Molded Plastics Inc.,

located in the northern suburbs of Cincinnati, Ohio. I submit this statement for the

record to assist the Committee in proceeding with concrete actions to address the

Nation’s natural gas problem. Many of these same concerns have been expressed by

Alan Greenspan to Congress (see Appendix 1). He believes as I do that solving the

natural gas problem is critical to the short term viability and long term growth of

the domestic manufacturing economy.

Plastics is a critical U.S. industry, providing products that make modern life possible. The industry also is a critical slice of the U.S. economy, providing $310 billion

in annual shipments and employing 1.4 million workers nationwide. In 2002, more

than 112,000 of those jobs were in my home State of Ohio, which created more than

$21 billion in shipments, ranking it second in the Nation for plastics jobs and third

for plastics shipments (see Appendix 2 for the plant and employment data on the

states represented by the EPW members).

My company is a plastics injection molder that employs about 50 workers that

mold plastic parts for manufacturers of office equipment, industrial products, and

liquid dispensers. We operate in a very fragmented market place, with about 4500

competitors worldwide. Moraine Products focuses on a small market segment that

emphasizes product quality, high volumes, and engineering support in trying to differentiate our products. Yet, with many competitors offering similar product attributes and customer support, the bottom line for most of our customers is price:

am I able to provide the products that they want at the lowest cost to them?

In answering that basic question, surging natural gas costs over the past few

years, with unprecedented volatility in prices, is really hurting my company and the

entire plastics industry in two basic ways, and is removing my ability to be the low
117

cost provider, a provider of good jobs and a provider of benefits to my employees

and retirees.

• First, we use a lot of basic resins such as polypropylene, polystyrene, and polyethylene, all derived from petrochemicals. Even the more advanced raw material

resins that we use have the same origin from petrochemicals. As the price of natural

gas has exploded to almost 2.5 to 3 times in price over the past 2–3 years, the costs

of my resin, my basic raw material, have increased proportionately. The resin manufacturers—my suppliers—have to pass on some of the natural gas costs to me in

order for them to remain competitive in their U.S. operations. As a matter of fact,

over the past 5 months since December 1, 2003, I have received resin price increases

every month—a total increase in my resin costs of about 36 percent! These increased

costs to me are directly from energy costs imposed on my resin supplier.

• Second, when these resins are molded into plastic parts, the molding machines

can require temperatures of up to 600 degrees Fahrenheit, and pressures of up to

4000 pounds per square inch. The molding machines that do this are significant consumers of energy. It turns out that the electricity for many plastics processors, particularly in the southwest and southeast, are supplied by gas-fired utilities. Thus,

as natural gas prices have escalated, local utility companies—after the regulatory

rate-paying authorities approve the ‘‘pass through’’ fuel cost increases to all local

consumers—send utility bills, that continue to increase, to the processors. Consequently, many in the industry have electricity bills that have almost doubled over

the past few years, and with the resin price increases, we have to try and pass these

costs downstream to our customers in order to stay in business. With my competition abroad having ample and much lower priced natural gas, this problem of passing our increasing raw material and energy costs—driven by natural gas—to my

downstream customers, is becoming much more problematic.

I should note that, while my equipment suppliers have made major increases in

energy efficiency of my manufacturing machines over the past several years that

helps lower the amount of electricity used per product produced, these improvements cannot overcome the almost doubled electricity costs for the energy required

to run these machines. The market signals have been clear: energy efficiency improvements are here to stay.

I do not want my company to become one of the manufacturing casualties reflected in recent Bureau of Labor statistics. As BLS data reflect, the U.S. has lost

over 2.2 million manufacturing jobs since 1998. In fact, the BLS data reflect that

since 1999 Ohio has lost 173,100 manufacturing jobs (see Appendix 3). Specifically

for plastics, data from The Society of Plastics Industry, Inc. (SPI), the trade association that represents the U.S. plastics industry, including my company, indicates

that plastics employment declined more than 9 percent from 2001 to 2002, and shipments declined nearly 7 percent in that same time period. Energy policy—or the

lack thereof—is a significant reason for this decline.

Some folks are calling much of this loss of manufacturing ‘‘outsourcing’’ when it

really should be called ‘‘offshoring.’’ My company is not a multi-national company.

I don’t have the option of moving production to another facility in another country.

I’m a typical, small plastics manufacturer, of which many such companies are (and

were) located throughout the Midwest, including a major presence in Ohio.

The simple truth is that the combination of high energy and feedstock costs, rising health care costs, increased costs from Federal/State regulations, and major increases in insurance/litigation costs are driving many of our companies out of business. You just can’t compete if these domestically imposed costs are increasing at

a time when our global competition has significantly lower operating costs that enable them (and not us) to establish a price level to customers that many of us cannot meet.

This loss of manufacturing in the U.S. and in Ohio, and the adverse impact on

my small company in Cincinnati, are primarily the result of a natural gas imbalance

in the United States. We need help NOW to lower my resin feedstock and electricity

costs, both of which are increasing because of demand exceeding the supply of natural gas. Today, as most analysts have concluded, the United States has the highest

priced natural gas of any country with a supply. How can I compete against companies making plastic parts using resins and electricity based on natural gas costs

that are in the range of 40–60 percent lower than mine? As the Washington Post

article in the Finance section on March 17, 2004 reported, ‘‘In the past 5 years, U.S.

natural gas prices have roughly doubled as more and more electrical plants consume

the clean-burning fuel but supplies stay stagnant. Other parts of the world—including Western Europe—pay far less.’’ For the record, the entire Washington Post article is at Appendix 4.
118

RECOMMENDATIONS OF THE NATIONAL PETROLEUM COUNCIL

What can we do? What are the solutions? To help this Committee respond to

these questions, I refer to the National Petroleum Council Report, ‘‘Balancing National Gas Policy’’ dated September 25, 2003, and offer the following, selected findings and recommendations from that report. This report is significant because it included a broad-based demand panel.

• First, gas consumption will continue to grow, but such growth will be moderated as the most price-sensitive industries become less competitive, causing some

industries and associated jobs to relocate outside North America.

The relocation of industries and jobs is happening now. Homeowners, utilities,

commercial users such as local transportation agencies using natural gas (e.g., natural gas buses), and the industrial sector are all feeling the pinch. However, the industrial sector, such as the plastics industry, is the only one that has to meet a globally imposed ceiling on costs from natural gas, and the only one that is ‘‘mobile’’

in the sense of going out of business or relocating abroad. This is called ‘‘demand

destruction’’ and helps explain why job losses are occurring. This also explains why

gas consumption growth in the outyears will be moderated—gas will be freed from

companies going out of business, and that gas will then be available for the other

consuming sectors to use. The report also makes clear that the U.S. is a net importer of natural gas and we will never again be self sufficient in gas supply.

• Second, a balanced fuel portfolio is essential. This includes renewables (e.g.,

wind, solar, fuel cells), oil/distillate, coal, hydroelectric and nuclear.

A balanced portfolio of energy resources is critical. By maintaining/expanding nuclear, by increasing the investment in and use of advanced coal technologies, by emphasizing renewables where reasonable and economical, we can help alleviate some

of the nation’s ever increasing demand on scarce natural gas. If we can provide

more industrial users access to natural gas then we will have a better chance of

maintaining operations in the U.S. and helping stabilize and perhaps grow the number of manufacturing employees in this country.

• Third, gas-fired electricity generation buildup has reshaped natural gas demand.

This is by far the major driver in this country’s increased demand for natural gas.

From about 780 gigawatts of electricity demand in 1995, to about 900 gigawatts in

2004, increasing to about 1400 gigawatts in 2025 in order to meet increasing population growth and needs in the U.S., most of this growth is planned from new, natural gas-fired utilities. But, where is the growth in natural gas to come from? Unless this specific driver of demand is ameloriated, the ‘‘demand destruction’’ referenced above will be one of the supply sources to help meet this demand. We

should not let this happen. We cannot let this happen. We must assure that U.S.

use of coal grows in the future.

• Fourth, increased access to U.S. resources (excluding designated wilderness

areas and national parks) could save consumers $300 billion in natural gas costs

over the next 20 years.

The U.S. is the only developed Nation in the world that is not developing all of

its domestic natural gas energy resources. Instead, we continue to drill for natural

gas in the same old areas that are not ‘‘off limits.’’ As the NPC study indicates, traditional North American producing areas will provide 75 percent of long-term gas

needs, but will be UNABLE to meet projected demand. The supplies by pipeline

from Canada will decline as they face the same problems with declining production

from mature fields as the U.S. Mexico will continue to be a net importer of gas from

the U.S. Future supplies must come from traditional as well as new sources (including new drilling areas, liquefied natural gas, and gas from Alaska). From 21–22-trillion cubic feet of natural gas demand annually in 1990, the demand is gradually,

at an increasing rate primarily from the utility generation sector, growing to 33-trillion cubic feet by 2025. This is a 50-percent increase in demand over this period,

in the face of only a slightly increasing supply of natural gas. We need to seriously

consider our natural resources of gas in the Rockies, off the Pacific and Atlantic

Coasts, as well as in the Gulf of Mexico. In the Rockies and Deepwater Gulf of Mexico, our production absolutely needs to grow now.

• Fifth, increased access and reduced permitting impediments to development of

lower-48 natural gas resources.

According to the NPC report, increased access could reduce natural gas costs by

up to $0.50 per million BTU in 2002 dollars. Further, as mentioned above, current

areas that are restricted have enough natural gas to meet our shortfalls now and

in the future. The NPC report shows that, while the number of natural gas drilling

rigs has more than doubled over the past several years, the supply of gas from the
119

same old wells is basically constant. Thus, the best that can be said is that production response from increased drilling has been modest at best.

• Sixth, LNG imports can lower costs to consumers.

While important, we cannot alleviate our natural gas problem with just LNG imports. But, as the NPC report states, both Arctic gas and LNG imports are available

and could meet 20–25 percent of natural gas demand by 2025. But, both are highercost, both have longer lead times, and both face major barriers to development. In

fact, as I’m sure the Committee is aware, just in the past few weeks a planned LNG

terminal in the State of Maine was rejected by the local populace, based on (unfounded) fears of safety and security.

• Seventh, Arctic Pipeline projects can deliver important new supplies.

My company, as well as our industry association SPI, favors legislation that expedites an Alaskan gas pipeline. We need to access the natural gas reserves in both

the Alaskan North Slope as well as in other productive regions. But, again, this is

long term and will not help me or others with the natural gas problem in the near

to medium term.

CONCLUSION

In summary, as a small plastics manufacturer in Ohio, I know that solving the

natural gas crisis is not an easy task, for this Committee as well as others in the

Congress. But, I do know that my business survival is dependent on doing just that.

I also know from individuals on fixed incomes that the increased costs of utility

bills, just like mine, are forcing hardships. Retirees on fixed incomes have to choose

between air conditioning or pharmaceuticals for health. Single parents on welfare

have to choose a balance between food for the children on the table or at school,

or heat for the home. All are difficult situations.

We can make great strides forward, in my view, by doing the following:

(1) Ensuring a robust energy policy for this nation. We need a good balance between clean coal, nuclear, hydro, natural gas, oil, and renewables for our energy

sources. We should not, for example, follow extremist views that argue for no growth

at all in coal, but rather declines. Coal is our biggest and most available domestic

energy resource. We need to use it.

(2) Reducing demand for natural gas in two basic ways. First, a program of conservation now across all consuming sectors can yield our best way in the short-term

to avoid further job losses and to free up natural gas for the industrial sector. Second, we need to look at ways that the utility sector can use more clean-coal instead

of natural gas as the energy source to meet the rapidly increasing demand for electricity in this country. We must avoid any proposal that blocks the growth of coal

for electricity.

(3) Rapidly approving and siting LNG terminals in the coastal areas, including

the Pacific, Northeastern Atlantic, and Gulf areas. While longer-term, this will go

a long way toward helping stabilize natural gas prices and dampening volatility in

prices, since the markets would then be connected on a global basis, rather than

the current regional or local basis.

(4) Opening up the resources available in Alaska, and passing Federal legislation

that would enable a pipeline to the lower-48. This is a longer-term supplement, but

will be needed with all the other sources to meet the nation’s demand through 2025

and beyond.

(5) Finally, and probably the most contentious, is to open up the very large natural

gas resources in this country that are currently ‘‘off limits.’’ It is my considered opinion that most of the objections to these areas are based on ignorance. It just doesn’t

make any sense for the U.S. to be the only developed Nation in the world that refuses to develop its natural resources like this. No sense at all.

In summary, I thank the Committee for allowing my statement to be inserted in

the record at this Hearing. I am just a small company trying to survive the increased costs wrought by the natural gas crisis, and do hope that my views have

provided some insight as to how the Nation’s leaders must proceed to resolve it.

I will be pleased to respond to any questions the Committee might submit in writing.
120

APPENDIX 1

TESTIMONY OF CHAIRMAN ALAN GREENSPAN

[Excerpts—emphasis and notes added]

NATURAL GAS SUPPLY AND DEMAND ISSUES

. . . Canada, our major source of imported natural gas, has had little

room to expand shipments to the United States,

. . . and our limited capacity to import liquefied natural gas (LNG) effectively restricts our access to the world’s abundant supplies of gas.

Our inability to increase imports to close a modest gap between North American

demand and production (a gap we can almost always close in oil) is largely responsible for the marked rise in natural gas prices over the past year. Such price pressures are not evident elsewhere.

In the United States, rising demand for natural gas, especially as a clean-burning

source of electric power, is pressing against a supply essentially restricted to North

American production.

Given the current infrastructure, the U.S. market for natural gas is mainly regional, is characterized by relatively longer term contracts, and is still regulated,

but less so than in the past. As a result, residential and commercial prices of natural gas respond sluggishly to movements in the spot price. Thus, to the extent

that natural gas consumption must adjust to limited supplies, most of the

reduction must come from the industrial sector and, to a lesser extent, utilities.

Yesterday the price of gas for delivery in July closed at $6.31 per million Btu. That contract sold for as low as $2.55 in July 2000 and for $3.65 a year ago.

Futures markets project further price increases through the summer cooling season to the peak of the heating season next January. Indeed, market expectations

reflected in option prices imply a 25 percent probability that the peak price will exceed $7.50 per million Btu.

Today’s tight natural gas markets have been a long time in coming, and futures

prices suggest that we are not apt to return to earlier periods of relative abundance

and low prices anytime soon.

Since 1985, natural gas has gradually increased its share of total energy use and

is projected by the Energy Information Administration to gain share over the next

quarter century, owing to its status as a clean-burning fuel.

Moreover, improving technologies have also increased the depletion rate of newly

discovered gas reservoirs, placing a strain on supply that has required increasingly

larger gross additions from drilling to maintain any given level of dry gas production. Depletion rates are estimated to have reached 27 percent last year,

compared with 21 percent as recently as 5 years ago.

Canada, which has recently supplied a sixth of our consumption, has little capacity to significantly expand its exports, in part because of the role

that Canadian gas plays in supporting growing oil production from tar

sands. [Does not mention impact of ratification of Kyoto Protocol . . . Canadian gas

must also be used to displace current coal use and for electricity growth]

The updrift and volatility of the spot price for gas have put significant segments

of the North American gas-using industry in a weakened competitive position. Unless this competitive weakness is addressed, new investment in these technologies

will flag.

Increased marginal supplies from abroad, while likely to notably damp

the levels and volatility of American natural gas prices, would expose us

to possibly insecure sources of foreign supply, as it has for oil.

But natural gas reserves are somewhat more widely dispersed than those of oil,

for which three-fifths of proved world reserves reside in the Middle East. Nearly

two-fifths of world natural gas reserves are in Russia and its former satellites, and

one-third are in the Middle East.

Creating a price-pressure safety valve through larger import capacity of LNG

need not unduly expose us to potentially unstable sources of imports. There are

still numerous unexploited sources of gas production in the United States.

We have been struggling to reach an agreeable tradeoff between environmental and

energy concerns for decades. I do not doubt we will continue to fine-tune our areas

of consensus.

But it is essential that our policies be consistent. For example, we cannot,

on the one hand, encourage the use of environmentally desirable natural

gas in this country while being conflicted on larger imports of LNG. Such

contradictions are resolved only by debilitating spikes in price.
121

In summary, the long-term equilibrium price for natural gas in the United States

has risen persistently during the past 6 years from approximately $2 per million

Btu to more than $4.50. The perceived tightening of long-term demand-supply balances is beginning to price some industrial demand out of the market. It is not clear

whether these losses are temporary, pending a fall in price, or permanent.

If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required. Markets

need to be able to effectively adjust to unexpected shortfalls in domestic supply. Access to world natural gas supplies will require a major expansion of LNG terminal

import capacity. Without the flexibility such facilities will impart, imbalances in

supply and demand must inevitably engender price volatility.

APPENDIX 2

Plastics Industry: Facilities and Jobs (Environment & Public Works States)

State Total Companies/Facilities

Total Jobs

(Thousand)

OK .................................................................................................................................................... 172 10,500

VA .................................................................................................................................................... 219 25,300

MO ................................................................................................................................................... 389 27,600

OH .................................................................................................................................................... 1327 112,100

ID ..................................................................................................................................................... 64 2,100

RI ..................................................................................................................................................... 130 8,500

TX .................................................................................................................................................... 1334 94,900

AK .................................................................................................................................................... 12 15,800

WY ................................................................................................................................................... 10 500

CO .................................................................................................................................................... 298 10,700

MT .................................................................................................................................................... 25 800

NV .................................................................................................................................................... 139 5,400

FL ..................................................................................................................................................... 870 29,400

CA .................................................................................................................................................... 2359 137,800

CT .................................................................................................................................................... 306 15,800

OR .................................................................................................................................................... 266 11,100

DE .................................................................................................................................................... 60 4,600

NY .................................................................................................................................................... 944 52,800

VT .................................................................................................................................................... 46 3,000

APPENDIX 3

• Higher natural gas prices in particular severely diminish the competitiveness

of industries using natural gas as an input for fuel and power and as a raw material. This occurs because natural gas markets are generally national (or regional)

in nature. As a result, exporting industries in this Nation face higher costs vis-a ́-

vis competing nations, as the latter do not incur these costs. The same holds true

for the agricultural sector because they consume fertilizers, which are natural gasintensive.

• Diminished competitiveness results in a severe drop in the output of energy-intensive sectors such as cement, aluminum, steel and chemicals. This results in job

losses or jobs created elsewhere overseas.

The following table illustrates the loss of manufacturing jobs by State between

1999 and 2003 as compiled by the Bureau of Labor Statistics.

Employment in Manufacturing

[Thousands]

1999 2000 2001 2002 2003

Change

1999–

2003

Alabama ......................................................................... 357.5 351.4 325.5 307.3 296.2 ¥61.3

Alaska ............................................................................. 11.8 11.8 11.7 11.2 11.1 ¥0.7

Arizona ............................................................................ 207.4 209.9 201.7 183.9 175.4 ¥32.1

Arkansas ......................................................................... 240.7 240.3 226.9 214.4 208.3 ¥32.4

California ........................................................................ 1,829.9 1,857.5 1,785.6 1,641.2 1,584.2 ¥245.7
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Employment in Manufacturing—Continued

[Thousands]

1999 2000 2001 2002 2003

Change

1999–

2003

Colorado .......................................................................... 160.7 191.3 181.9 166.3 154.6 ¥36.1

Connecticut ..................................................................... 240.2 235.6 226.7 213.0 203.5 ¥36.7

Delaware ......................................................................... 44.0 41.5 39.4 36.8 34.2 ¥9.8

District of Columbia ....................................................... 3.8 3.7 3.4 3.0 2.8 ¥1.0

Florida ............................................................................. 455.5 455.0 432.3 407.8 392.9 ¥62.7

Georgia ........................................................................... 542.6 530.5 498.3 471.8 452.2 ¥90.5

Hawaii ............................................................................. 15.9 16.4 16.4 15.2 15.0 ¥0.9

Idaho ............................................................................... 68.9 69.9 68.3 64.7 61.5 ¥7.4

Illinois ............................................................................. 882.1 870.5 815.4 756.2 733.0 ¥149.1

Indiana ........................................................................... 664.7 663.5 615.4 589.1 577.5 ¥87.2

Iowa ................................................................................ 252.7 251.4 240.2 227.5 222.1 ¥30.6

Kansas ............................................................................ 204.0 200.2 194.3 182.8 177.6 ¥26.4

Kentucky ......................................................................... 309.0 310.4 291.8 275.7 269.6 ¥39.4

Louisiana ........................................................................ 181.4 177.4 171.8 160.9 156.9 ¥24.5

Maine .............................................................................. 80.5 79.5 74.6 68.0 63.9 ¥16.6

Maryland ......................................................................... 173.6 173.9 168.2 157.2 153.1 ¥20.5

Massachusetts ................................................................ 405.2 407.9 387.7 347.6 333.0 ¥72.2

Michigan ......................................................................... 898.1 896.7 819.6 759.1 733.8 ¥164.3

Minnesota ....................................................................... 395.4 396.5 378.5 355.6 346.4 ¥49.0

Mississippi ...................................................................... 232.9 222.5 200.8 188.7 179.9 ¥53.0

Missouri .......................................................................... 371.8 361.8 342.2 322.2 314.2 ¥57.6

Montana .......................................................................... 22.5 22.5 21.4 19.8 18.8 ¥3.8

Nebraska ......................................................................... 113.4 114.3 110.8 106.2 104.5 ¥8.9

Nevada ............................................................................ 41.0 42.7 44.0 42.6 43.0 2.0

New Hampshire .............................................................. 101.2 102.5 97.4 85.2 81.7 ¥19.5

New Jersey ...................................................................... 422.4 421.5 401.2 368.8 356.9 ¥65.5

New Mexico ..................................................................... 41.2 41.7 40.9 38.5 36.9 ¥4.4

New York ......................................................................... 772.8 750.8 708.2 651.9 618.4 ¥154.4

North Carolina ................................................................ 776.5 757.9 704.0 642.2 609.5 ¥167.0

North Dakota .................................................................. 22.8 23.9 24.0 23.7 23.4 0.6

Ohio ................................................................................ 1,027.6 1,021.0 953.0 885.1 854.5 ¥173.1

Oklahoma ........................................................................ 177.3 177.5 169.8 152.0 148.1 ¥29.2

Oregon ............................................................................ 224.7 225.0 215.7 201.8 196.4 ¥28.3

Pennsylvania ................................................................... 863.4 862.3 820.6 762.0 727.5 ¥136.0

Rhode Island .................................................................. 72.1 71.1 67.8 62.4 60.1 ¥12.0

South Carolina ................................................................ 336.1 336.2 313.6 291.7 276.6 ¥59.5

South Dakota .................................................................. 44.2 43.8 40.9 38.4 37.4 ¥6.8

Tennessee ....................................................................... 494.7 488.0 454.2 426.6 414.9 ¥79.8

Texas ............................................................................... 1,063.3 1,068.0 1,026.2 951.2 916.0 ¥147.3

Utah ................................................................................ 126.0 125.5 122.0 113.7 111.3 ¥14.7

Vermont .......................................................................... 45.3 46.3 45.6 40.6 38.5 ¥6.8

Virginia ........................................................................... 366.8 363.5 341.2 320.3 308.6 ¥58.2

Washington ..................................................................... 343.4 331.8 316.1 285.7 266.5 ¥76.9

West Virginia .................................................................. 76.9 75.9 72.2 68.8 65.7 ¥11.2

Wisconsin ........................................................................ 594.8 594.1 560.3 528.7 515.3 ¥79.5

Wyoming ......................................................................... 10.2 10.4 10.0 9.5 9.2 ¥1.0

Source: US Bureau of Labor Statistics

APPENDIX 4.—CHEMICAL INDUSTRY IN CRISIS

[From the Washington Post, March 17, 2004]

NATURAL GAS PRICES ARE UP, FACTORIES ARE CLOSING, AND JOBS ARE VANISHING

(By Greg Schneider, Staff Writer)

NITRO, W.VA.—Soon after the Flexsys chemical plant celebrates its 75th ‘‘Nothing

over three inches high is going to be left here,’’ plant manager Jon McKinney said.

The former explosives factory gave the town its name, and its demise will eliminate 205 jobs and yet another piece of the once-powerful U.S. chemical industry.

Chemicals are an unglamorous part of the manufacturing world, with products

that have unpronounceable names and often hazardous qualities. But they are es-
123

sential to a host of industries, from automaking to textiles to agriculture. Hardeners

make tires more durable. Polymers put the spring in athletic shoes, and nitrogen

fertilizers increase crop yields. As the nation’s manufacturing base seems to shrink

daily from factories closing or relocating overseas, the health of the chemical sector

is a crucial measure of how deep the problem goes. And chemicals are in crisis,

squeezed not only by cheap foreign competition but also by soaring energy costs.

Across the country, 1 in every 10 chemical-related jobs has vanished in the past

5 years—nearly 100,000 workers—and that number would be worse if not for a

surge in one segment, pharmaceuticals.

The chemical industry’s eight-decade run as a major exporter has ended, with a $19 billion trade surplus in 1997 becoming a $9.6 billion deficit last year, according

to the American Chemistry Council.

Governors and chemical executives have appealed to the White House and Congress for help. They argue that the chemical problem is making the nation’s broader

manufacturing meltdown even worse, pushing factories to relocate offshore not only

for cheap labor but to be near chemical suppliers.

‘‘It’s a very trying time in the nation’s manufacturing base,’’ said Mark Zandi,

chief economist for Economy.com Inc. ‘‘Ultimately, little can be done to stop the

drain of jobs as companies cut costs and use technology to improve productivity,’’

he said. ‘‘Workers in the chemical industry are really getting hit hard, much harder

than the companies themselves,’’ Zandi said.

The Flexsys plant in Nitro is closing because a sister plant in Belgium costs less

to operate. In nearby South Charleston, Union Carbide Corp. has cut its workforce

in half, to about 1,200 people, in the past 3 years. Bayer AG is shutting one of its

two Charleston-area plants.

It’s the same story in other chemical-heavy regions of the country, such as the

Gulf Coast. ‘‘Right now we’ve got big operations just shutting down because they

cannot compete on the world market,’’ Louisiana Gov. Kathleen Babineaux Blanco

(D) said in a telephone interview. ‘‘We’ve had shutdowns before but they’ve always

been temporary. We’ve not seen anything like this before.’’

Troubles began over a decade ago with the fall of communism, when countries of

the former Soviet Union—as well as China—discovered they could compete in the

world market for chemical products. Cheap labor and a freewheeling attitude toward safety and the environment helped them keep prices low.

As the global economy slowed, industries that consume chemical products came

to depend on those lower prices to offset declining sales and profits. U.S. chemical

makers struggled to cut costs and keep up. Then, around 2000, an unexpected problem hit: Natural gas prices went up.

Chemical plants are especially sensitive to natural gas prices because they use it

both as a fuel and as a ‘‘feedstock’’ or ingredient in making plastics, resins, fertilizers and more. In the past 5 years, U.S. natural gas prices have roughly doubled

as more and more electrical plants consume the clean-burning fuel but supplies stay

stagnant. Other parts of the world—including Western Europe—pay far less.

‘‘We have the highest natural gas prices in the industrialized world,’’ said R. William Jewell, vice president for energy for Dow Chemical Co. in Houston. In the past

2 years, Dow has closed four major chemical factories in North America—one in

Louisiana, two in Texas and one in Alberta, Canada—and replaced them with production from Germany, the Netherlands, Kuwait, Malaysia and Argentina, he said.

‘‘These jobs didn’t leave the U.S. because of labor costs, they left the U.S. because

of uncompetitive energy costs,’’ Jewell said. ‘‘It’s very hard to have vitality in manufacturing and it’s very hard to have strong growth in jobs if you don’t have a competitive infrastructure anymore. . . . You can’t just wish these jobs back.’’

Chemical jobs tend to be so well-paying—in the $50,000 to $70,000 range—that

they’re virtually impossible to replace in the communities that lose them, said David

E. Dismukes of the Center for Energy Studies at Louisiana State University. Every

time a factory cuts back or shuts down, the impact ripples out through the suppliers, restaurants and car dealerships that surround it. ‘‘For a small State like Louisiana that is so dependent on those facilities, this really is a tough one for us,’’

Dismukes said. ‘‘When they go away it has a devastating impact on small rural communities up and down the river where many of these are located.’’

The problem is similar to the death of steel mill towns in the Midwest and Pennsylvania in the 1970’s and 1980’s, said Michael Hicks of the Center for Business and

Economic Research at Marshall University in Huntington, W.Va. In 24 months,

from January 2001 to December 2002, West Virginia’s chemical workforce declined

nearly 17 percent, to 12,000 people, Hicks said.

‘‘It’s a story that West Virginia has continued to feel for well over two decades

now, with the decline in coal mining and steel production now followed by these

challenges to the chemical industry,’’ he said.
124

Even plants that stay in operation are providing fewer jobs.

For example, Bayer Polymers LLC operates a plant on an island in the Kanawha

River in South Charleston. Barges bring long cylindrical tanks of liquid propylene

oxide to a pumping station on the north shore. The material flows under the river

to a maze of pipes, valves and vats on the island—nearly a mile long—where it goes

through chemical reactions to become a polymer used in foam cushions for car seats,

mattresses or athletic shoes.

The entire facility is operated by two people sitting in a control room watching

computer monitors, aided by a team of eight technicians that handles repairs and

maintenance. In less than 4 years Bayer has increased the plant’s output by 20 percent without adding any employees. The plant also has cut energy consumption by

9 percent since last year. Nonetheless, its costs are up 25 percent over the past 5

years, said site manager Glenn Kraynie.

It’s a dangerous cycle. Rising costs cut into profit and make it harder to continue

investing in improvements, which in turn makes it harder to compete with ever

more efficient overseas rivals, said Attila Molnar, president and chief executive of

Bayer Corp., the German company’s U.S. arm.

‘‘It is a very, very serious issue,’’ Molnar said. ‘‘You shift manufacturing or production [to] where you produce the cheapest. . . . Production in the U.S. is in danger

today.’’ ‘‘There are at least two basic solutions,’’ Molnar said. Do something about

energy prices, such as burning more coal or drilling for more natural gas, and use

technology to continue to make chemical factories more efficient. That means producing more with fewer employees.

‘‘There’s nothing there that says the jobs you have today will be the same jobs

we have 10 years from now. That cannot be,’’ he said. ‘‘Be prepared for change.

That’s the only way we can survive, the only way I can see we will be successful

in the future.’’

That’s a hard prescription for towns like Nitro, population 6,824, which stands to

lose a chemical plant that once employed 900 people. The 202-acre riverfront facility

started as a World War I explosives plant for making nitrocellulose, and the town

was built to support it. Monsanto Co. bought the site in 1929 and has been making

rubber additives ever since, today in a joint venture with Akzo Nobel NV called

Flexsys. But with worldwide prices for its products down 42 percent, the company

decided last fall to shut Nitro’s factory down at the end of this month.

‘‘I’m 45 years old and I’ve lived in this Kanawha Valley my whole life,’’ said Dave

Hardy, a lawyer and Kanawha County commissioner representing both Nitro and

Charleston. ‘‘This valley was built on the chemical industry, and now in my adult

lifetime . . . the chemical industry is contracting literally year by year. There is

nothing that is filling the void.’’

Instead, the State is promoting tourism and gambling, he said. But West Virginia

hasn’t given up on the industry. Its statewide Chemical Industry Committee, a

trade association, has been working to attract companies by touting the state’s long

embrace of an industry scorned in some places as environmentally undesirable.

It doesn’t help the cause, though, that the committee’s chairman is McKinney, the

Flexsys manager, whose own company couldn’t afford to stay in business there.

STATEMENT OF HON. DONALD L. CARCIERI, GOVERNOR, STATE OF RHODE ISLAND

Chairman Inhofe, Ranking Member Jeffords, and distinguished members of the

committee, thank you for having me here today to testify about the energy needs

of my State, my region and our Nation.

I would like to speak today about the problem my State is facing with respect to

the tightening supply and resulting high costs of natural gas.

As Governor of a northeastern State, I understand the importance of plentiful, accessible energy supplies. New England has no natural resources of fossil fuel. As

a result, all of our energy supply must come from some other region or nation.

Meanwhile, our cold winters, elderly population, and highly concentrated urban centers produce a large and growing demand for energy resources.

Before the people of Rhode Island elected me Governor, I spent almost two decades working in the private manufacturing sector. As CEO of Cookson America, I

managed the energy needs of a thriving manufacturing business. That experience

taught me that our needs will only increase in the coming years. As Governor of

a New England State and a former CEO, I have a good understanding both of the

energy needs of the Northeast region generally, and the particular demands that a

competitive manufacturing base puts on a reliable, cost-efficient energy supply.

Federal and State policy has encouraged the use of natural gas, because it’s cleanburning and there is an abundance of known supply. Consequently, it has become
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the workhorse of the energy sector, and is expected to provide 35 percent of the fuel

supply for electric generation in New England this year alone. According to the Federal Energy Regulatory Commission (FERC), in the next 4 years 50 percent of all

electricity will be generated by natural gas.

Unfortunately, natural gas supply hasn’t kept up with this burgeoning demand.

In fact, New England was recently on the verge of an energy supply crisis. KeySpan,

the largest local distribution company in the Northeast, had record breaking sendouts during the recent cold spell, and at one point they were forced to shut off service to approximately 250 customers in order to preserve the remaining customers.

Had temperatures remained that cold for another few days we would have had a

real crisis.

One would think that this combination of high demand and intermittent supply

shortages would create an outcry for more natural gas production. It hasn’t. Unfortunately it may take a disaster before some in our Nation get serious about this

problem. As Federal Reserve Board Chairman Alan Greenspan pointed out in testimony before a Senate committee last summer, we have embraced the benefits of

natural gas, but at the same time have restricted the ability to get more supply.

Soon, the Northeast may no longer be able to offer industry a competitive venue

unless the rising cost of energy is addressed. For example, while the cost has remained relatively steady since the mid-1980’s at around $2 per million BTUs, prices

have recently spiked at times to upwards of $10 per million BTUs. These dollar

amounts are often much higher in Rhode Island, because we sit at the end of two

pipelines and consumers must pay the costs associated with transporting gas such

long distances.

Some of Rhode Island’s largest employers and oldest companies are already grappling with the consequences of this looming energy crisis. Considerations of layoffs

and job relocation are beginning to manifest. Electric Boat, the producers of the

hulls for our Navy’s submarines, switched to natural gas for heating several years

ago. Now the price is skyrocketing, and since the region’s electric generation is increasingly fueled by natural gas, EB can expect a further rise in their electric bill.

This company employs more than 2,000 people in Rhode Island and many more in

Connecticut.

The story is the same with Arkwright Incorporated, located in Coventry, RI. Their

300 employees coat and convert paper and films for specialty imaging devices.

Arkwright’s natural gas bills have nearly doubled in the past year, jeopardizing

their profitability and competitiveness. As the company struggles with this issue, it

has lost bids for contracts. They were already forced to lay off some employees, and

cut out bonuses last year.

Another example is Cranston Print Works, a textile company with facilities in

Rhode Island and Massachusetts. The per unit price they pay for natural gas has

already increased 40 percent this year, electric costs another 19 percent and oil

costs another 6 percent. They will spend $200,000 more this year than last year to

keep their plants operating, without any increase in overall energy usage.

Similarly, their neighbor in North Kingstown, Rhode Island, TORAY Plastics, saw

energy costs rise by more than $1.6 million last year. TORAY employs approximately 700 people in our little State. It’s an energy-intensive business with huge

production runs 24 hours a day. It is critical that they be able to manufacture products competitively.

The same story can be told over and again with many of the other manufacturing

companies in Rhode Island that employ tens-of-thousands of workers and contribute

so much to the quality of life in our State. The high cost of natural gas is taking

a toll on our economy across New England and the Nation. In today’s competitive

world manufacturers cannot raise prices to compensate for rising energy costs.

Liquefied natural gas (LNG) offers a short-term answer for Rhode Island. But

until we are able to site and build LNG receiving terminals or realize significant

new sources of gas, gas prices will likely remain high and volatile.

The only long-term solution is to increase supply. We must develop reasonable

policies on both State and Federal levels that allow natural gas to be produced and

delivered to homes and businesses across the country.

The alternative is a Northeast without sufficient energy supplies and stable prices

a Northeast that cannot keep the heat on in thousands of homes, cannot provide

for the industrial capacity of manufacturing businesses, and cannot remain competitive at home or abroad.

As Governor of Rhode Island, I cannot let that happen, but I fear that it will unless we take the needed steps now to address this energy supply crisis.

Thank you for allowing me to testify before you today. I look forward to answering

your questions.
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STATEMENT OF BOB DRAKE, VICE PRESIDENT, OKLAHOMA FARM BUREAU AND

CHAIRMAN, NATIONAL GRAZING LANDS COUNCIL

Mr. Chairman and members of the committee, my name is Bob Drake. I farm and

raise Angus cattle in Davis, Oklahoma. Like many Oklahomans, I have been active

in the oil and gas industry as well as farming and ranching for most of my life. I

am currently vice-president of the Oklahoma Farm Bureau and I serve as chairman

of the National Grazing Lands Conservation Initiative. I have also served as President of the National Cattlemen’s Beef Association. This issue concerns me both as

an agricultural consumer and as a producer in the oil and gas industry. On behalf

of the American Farm Bureau Federation and the Oklahoma Farm Bureau, thank

you for the opportunity to express how energy supply, and energy prices, are adversely impacting American agriculture.

First, let me say that today’s agriculture is more energy efficient than ever before,

producing more economic benefit with less energy. For example, on corn fields

across this Nation, farmers are producing 30 percent more crop using 30 percent

less energy-related inputs, including fertilizer, than we did only a generation ago.

Even though energy efficiencies have been realized in agriculture, no one should expect a growing U.S. economy and population to need less energy security in the future.

Natural gas is one of the most important energy feedstocks to production agriculture and associated manufacturing industries. In the last year, the United States

has experienced prolonged natural gas price volatility, along with an overall elevation in price.

One of the industries highly dependent on natural gas that is critical to American

agriculture is the fertilizer industry. Natural gas is the primary feedstock in the

production of virtually all commercial nitrogen fertilizers in the United States, accounting for 90 percent of the farmer’s total cost of anhydrous fertilizer. According

to The Fertilizer Institute, the 2000 planting season saw ammonia fertilizer at a

cost of around $100 per ton. During the 2003 growing season, farmers faced ammonia prices of $350 or more per ton. The U.S. Department of Agriculture estimates

that it cost U.S. farmers and ranchers an extra $2.6 billion to produce the same

amount of food and fiber in 2003 when compared to the 2002 growing season. Our

domestic fertilizer production capacity already has experienced a permanent loss of

25 percent over the past 4 years and an additional 20 percent is currently shut

down due to high natural gas prices. The current price volatility threatens the existence of what remains of our domestic fertilizer industry and will exacerbate America’s dependence on foreign sources of energy and fertilizer.

Last week, I sat down with a group of producers in the Oklahoma panhandle to

discuss this issue. They reported that the cost of running their natural gas powered

irrigation pumps increased more than 70 percent in 2003. One producer, in Beaver

County, Oklahoma, stated that these costs alone resulted in a $26,000 drop in his

net income.

The current natural gas crisis is a prime example of the need for a clear and consistent energy policy. On one hand, the Federal Government has encouraged expanding the use of natural gas as an environmentally friendly alternative for electrical generation, home heating and manufacturing. At the same time, the Federal

Government has increased the regulatory burden on domestic natural gas exploration, drilling and production and placed moratoriums on many energy-rich areas

such as the Outer Continental Shelf (OCS), the Gulf of Mexico and Federal lands.

Similar restrictions have been and continue to be experienced on other traditional

energy resources such as oil, coal and nuclear, due primarily to environmental concerns, but adding to the demand pressure on natural gas as a clean alternative. In

Oklahoma, oil and gas exploration on private lands has been severely hampered by

the U.S. Fish and Wildlife Service’s habitat rules for the burying beetle. The service

has delayed drilling, gathering and other activities of oil and gas producers. If left

unaddressed, U.S. energy policy as a whole will certainly result in the loss of even

more of our energy independence tomorrow.

In addition to higher operating costs due to natural gas, farmers and ranchers

have experienced diesel fuel price increases 40 percent above historical averages.

With thin margins already being experienced in agriculture and the prospect of high

energy prices in the foreseeable future, this added expense, which cannot be passed

on in the price of agricultural commodities, will erode the financial positions of

many farm and ranch families.

The energy price instabilities being experienced today should not be allowed to

grow into a more serious energy crisis in the future. Nor does America need to become as dependent on foreign sources of natural gas as we now are with crude oil.

Energy rich repositories now off limits must be reconsidered for environmentally
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safe oil and gas exploration and production immediately. Advancements in oil and

gas-drilling technology have resulted in the most environmentally sound and responsible capturing of energy stocks ever conducted, and will continue to improve.

Earlier this year, American Farm Bureau Federation president Bob Stallman was

on hand in support of Secretary of Interior Gale Norton’s announcement of royalty

relief for deep natural gas drilling in the shallow waters of the western Gulf of Mexico. These innovative approaches show promise toward future energy supplies, but

much more can be done.

AFBF and the Oklahoma Farm Bureau strongly believe that the current comprehensive energy legislation will lead to a diversified energy portfolio with increased emphasis on renewable sources, while at the same time increase our domestic energy supply from traditional sources such as natural gas, oil and coal in a safe

and affordable manner. We urge that Congress complete this important legislation

this session. Thank you for the opportunity to appear before you and for your consideration of our views.

STATEMENT OF MARJORIE WEST, WESTERN ORGANIZATION OF RESOURCE COUNCILS

Mr. Chairman and members of the committee, my name is Marjorie West. Thank

you for the opportunity to address this committee regarding the environmental impacts of natural gas production. My husband and I own a ranch on Spotted Horse

Creek in the Powder River Basin of Wyoming, where we grow dry land wheat and

raise cattle. We have lived on this land for 50 years. The ranch was homesteaded

by my husband’s father and expanded by the family over the generations. As a landowner, farmer and rancher, I want to share with you what is happening on the

ground in Wyoming and in other parts of the West, and talk about what it will take

for the oil and gas industry to develop natural gas responsibly or as we say, ‘‘Do

It Right.’’

I am here today representing two non-profit organizations that have fought for responsible energy development in the West for more than 30 years the Powder River

Basin Resource Council (PRBRC) and the Western Organization of Resource Councils (WORC). PRBRC is a grassroots organization dedicated to good stewardship of

Wyoming’s natural resources, and the preservation of the State’s agricultural heritage. WORC is a network of grassroots organizations from seven western States that

include 8,250 members and 48 local community groups. About a third of WORC’s

members are family farmers and ranchers, many of whom are directly impacted by

natural gas development.

Mr. Chairman, I want you to know that the organizations I represent here today

support responsible natural gas development. But our ability to be good stewards

of the land and earn a living is threatened by irresponsible gas development practices. For several years now, we have been asking industry, State and Federal agencies and Congress to develop natural gas responsibly and ‘‘Do It Right.’’ I wish I

could say they are listening.

The sheer magnitude of the natural gas development being planned for the West

is unprecedented. Over 60,000 new coalbed methane wells are planned for the Powder River Basin in Montana and Wyoming alone (compared with approximately

16,000 current wells), with tens of thousands of additional gas and coalbed methane

wells planned for Colorado, North Dakota, New Mexico and other parts of the West.

My first-hand experience with coalbed methane, and accounts I have heard from

other westerners indicate that the current pace and direction of natural gas development in this country is resulting in serious damage to land and water resources and

private property rights.

The last 5 years have been the most difficult and destructive years we’ve ever experienced. We’ve been through droughts, grasshopper invasions and bad wheat and

cattle prices on the ranch but nothing holds a candle to the stress and the damages

brought upon us by irresponsible coalbed methane gas development. Over the last

5 years we have lost all three of our artesian wells and our domestic water well

due to groundwater dewatering. This is presently and will continue to be a long

term problem for us. For now, we are using some of the coalbed methane water that

is being pumped out to water our livestock, but that will be gone in a few years

and then what? The company has told us outright that they do not intend to leave

us with an operating livestock well when they are finished developing the gas.

After 6 or 7 months of hauling our household water, the coalbed methane company finally drilled us a 1300-foot household water well. We could not drink this

water without getting diarrhea, and I could not wash clothes without having them

turn orange from the high iron content. This is not the good water we had before

coalbed methane drilling destroyed our well. We now have two water treatment sys-
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tems: Reverse osmosis for drinking water, and an iron treatment system for the rest

of our household needs. Our electricity costs for pumping the deep well have doubled, and the first time we had the treatment system serviced we were charged

three hundred dollars. We should not have to bear these additional costs.

For the past 4 years, another company has been discharging coalbed methane

water upstream of us into Spotted Horse Creek, which is an ephemeral creek that

formerly ran only during spring melt or heavy summer rain events. This CBM water

has a high ‘‘sodium adsorption ratio’’ (a ratio of sodium to calcium and magnesium)

which over time will destroy soils, crops and native vegetation. This water flooded

Spotted Horse Creek the entire winter of 2000/2001, icing over and flowing out on

either side of our hay meadow, and destroying all the native vegetation in our creek.

So much salt was deposited on the soil and leached out of the clay soils that nothing

but weeds will grow. This past year we had an impressive crop of fireweed which

is very salt tolerant, but cattle will not eat it.

The worst tragedy for us was that it drowned and killed over two hundred of our

beautiful hundred-year-old cottonwood trees that lined that creek. These were our

best hay meadows. Now they grow only weeds. This stretch of Spotted Horse Creek

looks nothing like it did 5 years ago. The discharge of CBM water into ephemeral

creeks all over the Powder River Basin is destroying soil and vegetation and changing these streams, probably forever.

We’ve spent thousands of dollars on legal fees trying to get the problems addressed. We’ve made agreements with these companies only to have the companies

fail to live up to their agreements, thus forcing us to spend more money and time

on lawyers. Out of six companies, not one has lived up to its word or its agreement.

These are not just small operators, several are large well established oil and gas

companies. They are Devon, Marathon-Pennaco, Yates, Williams, CMS, Lance and

Redstone.

The so-called ‘‘regulators’’ have not only allowed the damages to occur without

intervention or penalty, but they continue to permit activities that are in violation

of their own regulations. Industry has been given license to destroy our property,

our soil, our grass, our land, our creek, our solitude.

Our experiences are not isolated and they are becoming more widespread. There

are many other landowners that have lost water wells, have had companies come

on their land without an agreement and cause numerous damages by building roads

and well pads or discharging water that has killed soil and vegetation. Landowners

also experience reduced property values, lost income, seepage of methane into drinking water wells and under homes, introduction and spread of noxious weeds, the

death of livestock and noise from compressor stations, generators, traffic and drilling.

While we may be luckier than some landowners because we do own a percentage

of our minerals, our lives have been turned upside down and our health has deteriorated. My husband, Bill, now takes high blood pressure medication and I take a prescription medication for severe headaches. I cannot prove that the methane industry

has caused these conditions, but it certainly has not helped. We spend our days

fighting with companies to develop coalbed methane in a responsible manner. Although one company has a successful reinjectionsite for CBM water on our ranch,

another company has come on our land without an agreement for development, after

making many false promises. We no longer have time for the ranching and farming

that we love.

I am here to ask you not to further weaken environmental laws, nor to further

assist industry in rushing carelessly forward to develop natural gas on our lands.

I am asking you to take some decisive leadership and require oil and gas companies

to develop this gas responsibly.

The energy bill that failed to pass the U.S. Senate in December, and the new

version of that bill that was introduced by Senator Domenici in February (S. 2095)

both take us in the wrong direction by failing to provide desperately needed new

protections and weakening current environmental and procedural safeguards. For

example, S. 2095:

• Threatens clean water by: (1) exempting hydraulic fracturing from Federal safe

drinking water standards, potentially resulting contamination of drinking water

supplies by diesel fuel and other hazardous chemicals, and (2) exempting oil and gas

construction activities from the Clean Water Act’s pollution controls, resulting in

unregulated discharges of chemicals into rivers, streams and other water bodies.

• Requires the U.S. Bureau of Land Management to approve gas drilling permits

within a matter of days, leaving impacted landowners and communities with limited

opportunities to review applications and offer the benefit of their considerable

knowledge and experience and attempt to protect their property, health and economic well being.
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Congress can and should do better. Natural gas development is important to the

Nation, and in appropriate places and under the right conditions can and should

be developed for the benefit of the country. But it has to be balanced with protections for other resources especially water and other uses of the land involved. We

need laws that require companies to negotiate agreements with landowners; and

then they must be required to live up to those agreements. Instead of tax credits

to speed development, we need increased bonding to ensure that our land will not

be left a scarred battlefield. Citizens and taxpayers should not be left with the burden of cleaning up after oil and gas companies. But at the rate we’re going I can

assure you that is the direction we are headed.

PRBRC and WORC have endorsed a responsible ‘‘doing it right’’ approach that

contains six platforms:

(1) Effective monitoring of coalbed methane or deep gas development, and active

enforcement of existing laws to protect private property rights and natural resources.

(2) Surface owner consent, and surface use agreements that help landowners better protect their property rights.

(3) Use of aquifer recharge, clustered development, mufflers for compressor stations and other low-impact, best available technologies to minimize impacts on

undergroundwater, rivers, streams and surface resources.

(4) Collection of thorough fish, wildlife and plant inventories before development

proceeds to protect habitat, followed by phased-in development to diffuse impacts

over time.

(5) Meaningful public involvement in the decisionmaking process.

(6) Complete reclamation of all disturbed areas, and bonding that protects landowners and taxpayers from all cleanup liability costs.

In the House of Representatives, Representatives Mark Udall and Tom Udall

have introduced a bill (H.R. 3698) that would assure that our precious water resources are safeguarded during the course of oil and gas development, reduce potential conflicts between oil and gas operators and surface owners, and provide for appropriate reclamation of affected lands. This bill provides a necessary balance to the

gas permitting and production rush that is underway, and I am submitting a copy

for the record.

In closing, I invite each and every one of you to visit my ranch and see for yourselves the damages that have occurred. We are willing to make the sacrifice of living

with responsible coalbed methane development in order for this country to have natural gas. However, we are not willing to make a complete and total sacrifice of our

land, our water, our property rights, and our children’s future. Nor should we have

to. These companies are making very good profits; they can well afford to be environmentally responsible.

I never thought this kind of damage could be brought upon citizens of this country

by this government and this industry. I was naive. My only hope is that lawmakers

such as yourselves, the honorable members of this committee, will realize what is

happening to us at the hands of the powerful oil and gas industry, and change it,

to make the system just, fair and equitable. We require our coal mining industry

in Wyoming and this country to live up to very high standards for permitting, bonding, landowner consent, water well replacement and many other things we should

expect nothing less of the oil and gas industry. They must be required to ‘‘Do it

Right.’’ Thank you very much for your time and concern.
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STATEMENT OF JOEL BLUESTEIN, PRESIDENT, ENERGY AND ENVIRONMENTAL

ANALYSIS, INC.

Thank you Mr. Chairman and members of the committee for the opportunity to

testify today. My name is Joel Bluestein and I am the President of Energy and Environmental Analysis, Inc. EEA is located in Arlington, Virginia and has been providing energy and environmental consulting services since 1974. Our major areas

of expertise include:

• Analyzing and forecasting the supply, demand and price of natural gas; and

• Analyzing the impacts of energy and regulatory policy on energy markets.

We have done this work for natural gas producers, pipelines, local distribution

companies, power generators, technology developers, the U.S. Department of Energy, the U.S. Environmental Protection Agency and other public, private and institutional clients. I have been at EEA for 15 years and have over 20 years of experience in the energy and environmental field.

My testimony today addresses two areas: our outlook on natural gas prices and

current effects and trends related to gas prices in industrial and power generation

markets.

GAS PRICE OUTLOOK

EEA quarterly prepares a 20 year month-by-month forecast of North American

natural gas supply, demand and price that we call our Gas Market Compass. Figure

1 summarizes our current view of the price for natural gas over that period. Our

current outlook for gas prices (in constant 2003 dollars) at the Henry Hub in South

Louisiana is about $5.75/MMBtu for this year, a little higher at about $6.00/MMBtu

for 2005, then moderating somewhat to $4.50 to $5.00/MMBtu in the medium to

longer term. We do not expect to see future gas prices returning to pre-2000 levels.

This outlook assumes significant development of new LNG import terminals in

the U.S. and eventual gas imports from Arctic Canada and Alaska. It does not assume any changes in policies regarding where gas can be produced. Delivered gas

prices will be higher in areas with local gas delivery constraints. Extreme weather

also can cause temporary price spikes. Overall, however, we believe that the market

will function and find ways to bring new gas to market. If that does not occur, we

would expect gas prices to be roughly 50 percent higher than this forecast.

EFFECT OF CURRENT PRICES AND TRENDS IN END USE MARKETS

Regardless of any changes in policy, there is widespread agreement that it will

take a significant amount of time to get new gas supplies in place. In the interim,

the most readily available option to stabilize gas prices is increased efficiency in direct gas consumption and indirectly through increased efficiency in electricity consumption. This was one of the primary conclusions of the recent National Petroleum
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1 ‘‘Balancing Natural Gas Policy: Fueling the Demands of a Growing Economy’’, National Petroleum Council, September 2003. 2 ‘‘Natural Gas Price Effects of Energy Efficiency and Renewable Energy Practices and Policies’’, ACEEE, December 2003. 3 ‘‘Natural Gas Impacts of Increased CHP’’, U.S. Combined Heat and Power Association, October 2003. 4 ‘‘Natural Gas Costs Hurt U.S. Firms’’, Wall Street Journal, February 17, 2004.

Council study1 on natural gas, which stated that: ‘‘Greater energy efficiency and

conservation are vital near-term and long-term mechanisms for moderating [natural

gas] price levels and reducing volatility.’’

Other studies have found similar results. A December 2003 study2 by the American Council for an Energy Efficient Economy (ACEEE) looked at the effects on gas

prices of an aggressive application of energy efficiency and renewables. The study

estimated that efficiency and renewables could achieve a 1.1 percent reduction in

gas consumption within 1 year and a 5.5 percent reduction within 5 years. More

importantly, EEA projected in this study that this level of demand reduction would

result in a 20 percent reduction in gas prices. This non-linear result occurs because

we are in a very steep part of the gas supply curve where small changes in demand

can result in large changes in price. This can happen in a negative way during extreme weather or in a positive way when efficiency reduces demand.

EEA performed another study3 last year that looked at the effect of increased use

of combined heat and power (CHP) to reduce gas demand. CHP, also known as cogeneration, is one of the most readily available and widely applicable sources of increased efficiency for generation of electricity and thermal energy for process heat

applications. The study found that widespread application of CHP in regions of the

U.S. that are heavily dependent on natural gas for power generation could achieve

4 to 9 percent reductions in gas consumption through increased efficiency. This

study did not separately assess the effects on gas price, but based on studies such

as the ACEEE study, this level of demand reduction could result in significant gas

price reductions.

While one can forecast that increased efficiency would be beneficial, one might

question whether these types of efficiency improvements are practically achievable

after 30 years of industrial efficiency improvements, starting with the energy price

shocks of the early 1970’s. Support for this expectation was described in a February

17 article in the Wall Street Journal4.

The article describes the efforts of the Owens-Corning company to respond to high

gas prices related to its production of glass and mineral fibers. While the company

is exploring increased imports of materials as one response, it is also increasing the

efficiency of its operation in the U.S. The article describes Owens-Corning’s efforts

at an insulation factory in Waxahachie, Texas, that was burning as much as $4 million to $5 million of natural gas a year. The company was able to make operational

changes at incinerators and melters that cut gas consumption without sacrificing

product quality. With these adjustments, natural-gas use in the third quarter of

2003 was 18 percent below the year before, even though production increased. The

plant is reported to be approaching $1 million in annual energy savings and the

company plans to replicate the changes in 10 other North American insulation factories and two composite-fiber factories by the end of this year.

While not every facility will be able to achieve such startling results, this example

suggests that there is still a significant amount of low-cost efficiency improvement

to be achieved. We have also heard reports of companies reinstating or increasing

their ability to switch gas-fired equipment to alternative fuels, primarily oil. The

ability to switch to alternative fuels for short periods of time, while it does not result in significant reduction in overall gas consumption, can serve as an important

safety valve to reduce gas price volatility during periods of extreme weather or local

supply constraints. Chemical producers are also emphasizing production from facilities that rely on petroleum rather than natural gas feedstocks. These examples illustrate that industry is actively and creatively adjusting to changes in the U.S. energy markets.

POWER GENERATION TRENDS

Much of the concern over gas prices has focused on the recent wave of construction of gas-fired power plants. Despite this growth, gas-fired generation in the U.S.

in 2002 accounted for a lower share of total generation (18 percent) than in 1970

(24 percent). Coal-fired generation in 2002 was 51 percent of total generation and

almost 70 percent of fossil generation. Energy forecasts show coal-based generation

continuing to increase.
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Moreover, the effects of new gas power plant construction are more complicated

than they may seem. Of 152 GW of new gas-fired generating capacity installed in

the U.S. between 1999 and 2002, approximately one third consists of peaking plants

that seldom run and use little fuel. In addition, much of the construction has been

in the west and southwest where the new gas plants are competing with less efficient older gas plants. Because of the higher efficiency, the new plants have displaced the older plants and caused them to run less or be mothballed. The displacement of older gas plants with new gas plants results in more efficient use of gas.

While gas consumption has increased due to increasing electricity demand, the effect of the more efficient new plants has been to reduce the amount of gas that

would otherwise have been consumed. In these areas, the construction of new gas

plants is actually reducing gas consumption. Figure 2 shows this effect in Texas.

The increase in gas prices has also spurred increased interest in the use of renewables, biomass and waste fuels, including agricultural biogases. While some of these

fuels are already in use, others are only starting commercial application and the recent higher gas prices have made their use more competitive. We have seen reports

of increased interest in use of wind energy, small hydro, landfill and digester gas.

There is also great interest in using agricultural biogas that can be produced by improved handling and treatment of waste from very large livestock and poultry operations. This is an area in which we expect to see quite a bit of growth in the near

future.

CONCLUSIONS

Natural gas prices have reached a new price level that is significantly higher than

during the last 20 years. We do not expect to see a return to those historical lower

levels. However, we also do not expect to see natural gas prices increasing to the

extreme levels predicted by some analysts. Over the last two and a half years, U.S.

gas markets have responded by initiating new LNG import and other supply

projects. With an increase in LNG imports and future imports from Canada and

Alaska, we see a mid-to long-term moderation to Henry Hub gas prices in the $4.50

to $5.00/MMBtu range (in constant dollars). If new supply options are not available,

the prices could be 50 percent higher.

On the demand side, gas users are turning to energy efficiency, fuel-switching and

alternative feedstocks to address higher gas prices. We are also seeing increased interest in renewables, waste and byproduct fuels. These market responses have
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helped to stabilize gas prices in the near-term. However, new sources of gas supply

will be needed to meet future growth in gas demand without creating further upward pressure on gas prices.

RESPONSES BY JOEL BLUESTEIN TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. Are you aware that in late 2003, your company also used the same

model you described in making your demand repression argument to show that a

relatively small increase in supply (increasing production in the Powder River Basin

from 1,000 to 3,000 wells) would save $88 billion to the economy over a 10-year period? Is it your testimony that incremental increases in supply don’t moderate gas

prices?

Response. I am familiar with this study and it is consistent with my testimony

that the current tight supply/demand situation means that relatively small changes

in either supply or demand can have a significant effect on prices. My testimony

specifically states that a lack of new supply, for example delays in LNG development, will result in sharply higher prices than in our current forecast.

Question 2. What does fuel switching by industrials back to oil do to our reliance

on oil imports and the quality of our air?

Response. Most fuel switching today is very short term to avoid peak gas price

periods. It can be very important to control of gas price volatility but amounts to

relatively small amounts of gas consumption. A move to more permanent switching

to oil as an alternative to gas consumption certainly could increase U.S. reliance on

oil imports. While oil combustion could have higher potential air emissions than gas,

I assume that any such switching will be done within current air quality protection

requirements.

Question 3. Mr. Bluestein, in your opinion, do you agree with September 2003

NPC report’s findings that new domestic sources of natural gas are critical to meet

our nation’s energy needs?

Response. I agree with the NPC conclusion that the U.S. needs a balanced mix

of energy efficiency, new domestic supply and LNG imports.

Question 4. In your company’s November 13, 2003 document, ‘‘The Gas Price Roller Coaster. The Ride Continues,’’ dated November 13, 2003, you project that gas

supply from new frontiers will account for one-third of total supply in 2010, vs. only

13 percent today. Do you think we’ll meet your projected target?

The NPC report identified policies that increase demand for natural gas on the

one hand, while restricting access to development on the other. What regulatory

constraints or challenges frustrate exploration and production and must be overcome in order to meet your firm’s projected target identified in ‘‘The Gas Price Roller Coaster; The Ride Continues?’’

Response. The NPC report identifies new policies that could expand production in

a variety of North American producing areas. EEA’s forecast is based only on existing U.S. policies regarding gas production.

Our forecast indicates that the frontier resources identified will be economically

viable under the forecast price scenario. Whether they will actually be developed

and which specific resources will be developed over time is difficult for us to say.

In aggregate, gas supply needs to increase over time to keep gas prices within the

range of our current forecast. We have not seen any significant gas production increases in the last year and some new projects have been delayed, which is one reason that near-term efficiency improvements are important.

RESPONSES BY JOEL BLUESTEIN TO ADDITIONAL QUESTIONS FROM SENATOR JEFFORDS

Question 1. In your testimony, you have highlighted that additional supply and

efficiency will assist lowering natural gas prices. Are there other factors, such as

the deployment of renewable generation through State renewable portfolio standards programs, that will also contribute to a decrease in price in the absence of new

Federal policies?

Response. Increased use of renewable generation through RPS programs is another way to reduce gas demand and ease gas prices. My testimony cited a 2003

study we performed with ACEEE that highlighted the potential gas price-reducing

effect of aggressive development of renewables.

Question 2. You mentioned that extreme weather can cause temporary price

spikes. It seems to me that although stringent new clean air or greenhouse controls

at coal-fired utilities may lead to some gas switching, it is also true that unabated
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or abrupt climate changes could also have impacts on natural gas supply and pricing. Are you aware of whether anyone has done such an analysis?

Response. I’m not aware of any such studies.

Question 3. Have you examined the effect that the pending Senate Energy bill will

have on natural gas prices if it is enacted into law?

Response. I have not examined the implications of the Senate Energy bill on gas

prices.

Question 4. Are there other reasons, other than the price of natural gas, that fertilizer prices have increased?

Response. According to the attached briefing from The Fertilizer Institute (TFI),

domestic ammonia produced at $5.50—$6.00/MMBtu gas prices should cost about

$200/ton. Current ammonia prices are about $300/ton. According to TFI, this higher

price is the result of increased international ammonia demand and a tight world

market for ammonia. The implication is that domestic ammonia production is profitable at today’s prices.
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STATEMENT OF DENNIS M. BAILEY, DIRECTOR OF ENERGY PURCHASING,

PPG INDUSTRIES

I am Dennis Bailey, director of energy purchasing for PPG Industries. Thank you

for inviting us to provide testimony on this very important topic.

PPG is a $9-billion global supplier of paint, glass, fiber glass and chemicals, with

manufacturing assets in 23 States and 22 countries.

We have about 20,000 employees and 14,000 retirees in the United States and

33,000 employees worldwide.

Affordable energy has played an important role in PPG becoming the leading global manufacturer that it is today.

PPG began operations more than 120 years ago in Pennsylvania. And has been

in Senator Voinovich’s home State of Ohio for 105 years.

In all, about 10 percent of PPG’s corporate sales is generated from products made

in Ohio.

The high cost of natural gas is clearly affecting PPG’s operations in Ohio and

across the Nation. For example:

• At our Circleville, Ohio, plant—which makes resins needed in paint manufacturing—natural gas costs have increased 70 percent over the past several years.

• From 2002 to 2003, natural gas costs at our Cleveland automotive paint plant

doubled, and at our Barberton, Ohio, chemicals plant increased by 50-percent.

• High natural gas costs at our Crestline, Ohio, automotive glass plant may result

in elimination of more than 10-percent of that site’s workforce.

PPG has a well-earned reputation for controlling costs. But in spite of this, if natural prices increase, our businesses may have to make reductions elsewhere.

The average market price during the past 15 months has been about $5.50—25

percent higher than any year since 1976 and double that of the 1990’s.

On a global scale, if the price of natural gas increases to $7—and remains there—

PPG’s chlor-alkali chemicals business would have additional problems competing in

global markets.

The workforce at our Lake Charles, Louisiana, Chemicals facility is shrinking by

8 to 10 jobs per month through attrition. And we don’t expect to be rehiring.

And we believe other Gulf Coast producers are similarly affected.

The U.S. chemicals industry is no longer competitive globally because of the disparity of natural gas prices—as shown in the exhibit I’ve entered into the record.

The U.S. industry has evolved into a net importer of product and exporter of jobs.
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My company strongly believes solutions to the natural gas crisis are within our

country’s grasp.

In the short term, energy conservation must be a major part of the solution. Education is necessary, as well as increased economic incentives.

For example, if all new residential windows sold in the United States were energy-efficient, it would eliminate the need for 20 additional power plants over the

next decade and up to 60 power plants over the next 20 years.

Consumers need an incentive to use energy-efficient glass, positioning high-performance glass as the construction material of choice for saving energy in homes

and commercial buildings.

As a start, the Senate needs to pass the Energy Conference Report which provides

consumers an incentive to use energy-efficient glass.

But consumer conservation alone will not fix the problem.

There is an urgent need for increased access to domestic supplies, including resources in the outer continental shelf, the Rocky Mountain region and Alaska.

We feel that all of these opportunities can and should be accomplished in an environmentally responsible way.

Construction of an adequate delivery infrastructure, including for the import of

liquefied natural gas, must be part of the solution.

In addition, government should encourage increased energy production from all

sources, including coal, oil, nuclear, wind energy and other alternatives.

As makers of fiber glass used in wind-powered electricity generators, we believe

tax credits to develop wind energy is a step in the right direction. Unfortunately,

the bill is stalled in Congress.

On a final note, PPG does not support government intervention for price controls.

Competition and free market forces should continue to drive prices.

Thank you for your leadership in developing solutions to resolve this growing natural gas crisis that threatens businesses, jobs and our nation’s economy.

RESPONSE BY DENNIS M. BAILEY TO ADDITIONAL QUESTION FROM

SENATOR JEFFORDS

Question 1. Your testimony highlighted the need for conservation in the short

term to reduce natural gas prices, and you described several economy wide proposals to achieve that objective, such as increased incentives for the use of energy
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efficient windows. Has PPG been able to reduce its natural gas use and improve

efficiency in the face of high prices, and how have you done so?

Response. 2002 is the most recent year for which PPG has compiled a summary

of natural gas consumption at our U.S. manufacturing sites.

Our consumption in 2002 increased by 12% over that for 2001. The majority of

this increase can be attributed to the normal start-up costs and inefficiencies associated with a new combined heat and power (CHP) generation facility. RS Cogen, a

joint venture combined heat and power generation facility justified by PPG’s management to improve energy efficiency in light of rising energy prices, became operational in late 2002 and makes PPG’s Lake Charles, Louisiana chemicals plant completely self-sufficient in terms of electric power generation. CHP, also known as cogeneration, reduces the amount of energy consumed per unit of output. Heat that

would be wasted in a conventional utility plant is captured for use in the form of

steam. CHP can be twice as fuel efficient as conventional power plants.

As to energy efficiency (measured in terms of MMBtus of natural gas per ton of

product produced), PPG’s efficiency in the U.S. declined approximately 1% in 2002

when compared to 2001. The decline can be attributed to the RS Cogen start-up

noted above, as well as natural gas associated with sales of electricity (which are

not considered ‘‘product produced’’). Without consideration of the natural gas associated with the sale of electricity, the efficiency actually improved almost 2%.

As to the start-up of RS Cogen, it is known that the natural gas efficiency of the

Lake Charles, Louisiana chemicals plant improved over 15% in 2003 largely as a

result of the joint venture. With the Lake Charles plant representing over 60% of

PPG’s annual U.S. consumption, we feel safe in projecting that our energy efficiency

for our U.S. manufacturing operations will be much improved in 2003.

STATEMENT OF MICHAEL C. CASKEY, EXECUTIVE VICE PRESIDENT AND CHIEF

OPERATING OFFICER OF FIDELITY EXPLORATION & PRODUCTION COMPANY

Mr. Chairman and members of the Committee, my name is Mike Caskey. I am

the Executive Vice President and Chief Operating Officer of Fidelity Exploration &

Production Company (Fidelity) headquartered in Denver, Colorado. I would like to

thank the Senate Environment and Public Works Committee for the opportunity to

testify at this hearing.

Fidelity is a wholly-owned indirect subsidiary of MDU Resources Group, Inc. We

are an independent oil and natural gas producer engaged in acquisition, exploration

and production activities. Our efforts are primarily focused in the Rocky Mountain

region of the United States and in the Gulf of Mexico. Fidelity produces coalbed natural gas (CBNG) in Wyoming and Montana. We are currently the only producer of

CBNG in Montana. I am here today to discuss the prospects for finding and producing clean natural gas in North America and the obstacles Federal, State and

local governments and producing companies face.

You are well aware of our nation’s growing demand for clean-burning natural gas

to meet current and future residential, commercial, industrial and electrical generation needs. Energy Information Agency (EIA) projections show that natural gas will

play an increasingly important role in meeting our nation’s energy needs. The EIA

in its ‘‘Annual Energy Outlook 2004 with Projections to 2025’’ forecasts that natural

gas used in the industrial sector alone will increase by 41 percent from 2002 to 2025

(Chart 1). The Department of Energy (DOE) has made similar projections. Current

consumption levels of just under 23-trillion cubic feet (tcf) of natural gas per year

are expected to grow to approximately 32 tcf/year by 2025. Presently 98 percent of

our domestic consumption is supplied by North American production. Traditional

natural gas basins located in Texas and Oklahoma, and in the Gulf of Mexico are

showing dramatic declines in production and reserves. The only major gas province

with increased reserves is the Rocky Mountain Region (Map 1). Therefore, in order

to meet increasing supply needs, natural gas development in the Rocky Mountain

region must be allowed to progress in an effective, timely manner.

OUR STAKEHOLDERS

As an exploration and production company we are committed to do our part to

discover, develop and produce this valuable, clean-burning resource. While doing so,

Fidelity conducts its operations dedicated to sound environmental stewardship so as

to ensure that our development protects the environment and ongoing sustainable

agricultural operations. That is the core of our corporate business model. Our business process includes three principal stakeholders—landowners, governments (local,

State and Federal) and shareholders. In order for Fidelity to operate in a balanced,

stable and functional manner, we must meet the needs of all three groups. Today,
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special interest activism, obstructionism and litigation are threatening the stability

of these three stakeholder groups and the natural gas industry’s ability to provide

reliable, affordable supplies of natural gas for our country’s needs. I will relate some

examples of our experience in the Powder River Basin of Montana and Wyoming

as I discuss our concerns.

Perhaps the most important stakeholder in our business is the landowner, the

person who owns the surface of the land on which we operate. That person may or

may not own the mineral rights. Because natural gas production requires a longterm commitment to be on the land, it is imperative that we develop a ‘‘good neighbor relationship’’ with each landowner. We work with these landowners to ensure

that our development activities minimize disruption of the use and enjoyment of the

landowners’ property, thereby protecting their ability to maintain and enhance the

profitability of their agricultural operations. It is important to understand that the

time of maximum disturbance occurs during the initial drilling and construction

phase of operations. Because of that, most landowners we deal with prefer a ‘‘get

in—get out—get back to normal’’ approach to development. Special interest litigation and obstruction, which delay or stop timely development, especially during the

initial development phase, have a detrimental effect on landowners who have agreed

to allow development of the Federal resources beneath their land.

Governments (local, State and Federal) are the second stakeholder in our operations. In addition to meeting the needs of our landowners, we must also comply

with the laws and regulations in place at the local, State and Federal levels. Exploration and development of Federal lands is subject to many laws; however, the key

laws that impact exploration and development are the National Environmental Policy Act (NEPA) for which you are the authorizing committee, and the Federal Land

Policy and Management Act (FLPMA).

FLPMA is the law which Federal land managers use to balance the diverse interests of the multiple uses of Federal lands. NEPA is the tool by which the managers

analyze the effects of their decisions. NEPA documents—Environmental Impact

Statements (EISs) and Environmental Assessments (EAs)—are the foundation of all

decisions involving the use of Federal lands. It is this NEPA process of evaluating

land use and development plans, not the law itself, which has become the principal

tool used by obstructionists to delay or halt natural gas development.

Unfortunately, the plethora of litigation and the likelihood of additional litigation

surrounding natural gas development have forced governmental agencies to make

choices on the use of limited budgets. Like producers, regulatory agencies’ resources

are being consumed by defending frivolous, wasteful lawsuits. These lawsuits impact government at all levels. Typically, the lawsuits are against the Bureau of

Land Management (BLM) or other land use agencies that manage the use of Federal land for multiple activities. The government must divert resources, which are

forever lost, from important environmental programs such as noxious weed control,

habitat rehabilitation and fire prevention to defend frivolous lawsuits.

In addition to affecting allocation of limited resources, delays or restriction of production from Federal leases impacts the revenue received by the government. Royalties from Federal minerals fall behind only personal and corporate income taxes as

a source of Federal revenue. The states also have a stake in the revenue generated

from Federal minerals, receiving 50 percent of Federal bonuses, rents and royalties

generated within their boundaries. These states use this much needed source of revenue for school funding, law enforcement, infrastructure improvement and other

local uses. From 1998 through the first 5 months of 2003, bonus revenue from leasing in Wyoming was over $147 million and in Montana for that same period the

amount was over $9 million. These are funds paid by energy companies just for the

right to explore for natural gas and oil on Federal leases.

The third stakeholder in this development is our shareholder. As a subsidiary of

a Fortune 1000 corporation we are looking for investment opportunities that will

stimulate corporate growth and provide an attractive and acceptable return to our

shareholders. We constantly pursue new technologies that can accomplish our mission and improve the environment where we operate and live. The litigation from

heavily funded, special interest groups that has been so prevalent in the Powder

River Basin’s CBNG development, impairs our return to shareholders in several

ways. First, there is the significant direct legal cost of participating in and defending against the litigation. In addition, there is an indirect cost associated with dedication of corporate resources to litigation that could otherwise be invested in productive, value-building activities. And finally, there is the cost of delay—not being able

to fully employ our significant investments in a timely manner. Imagine the owner

of any other business, who obtains all the permits necessary to conduct business,

sets up an office, invests in hiring workers and makes a commitment to buy equipment, supplies and startup needs and isn’t allowed to conduct business because of
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frivolous litigation that targets the well-established licensing process. As our corporation, or any other, is impacted by these impediments to shareholder return, we

must begin to look for more attractive, more predictable opportunities with less capital risk. The net result is a chilling effect on energy production in the United

States.

I will describe for you some examples of the litigation that has impacted our operations in Montana and Wyoming thereby impairing our ability to produce energy

from our lease positions. While these examples are specific to Fidelity’s operations,

other energy companies could relate similar examples from their experience.

NEPA LITIGATION

Prior to any surface disturbing activity, oil and gas leasing must take place. Most

of the current Federal leasehold within Montana and Wyoming was leased during

the period from 1997 through 2001. In mid–2000, the BLM commenced the preparation of the Wyoming ‘‘Powder River Basin Oil and Gas Environmental Impact Statement’’ and the ‘‘Montana Statewide Oil and Gas Environmental Impact Statement.’’

When Fidelity acquired its oil and gas leases and began planning development of

CBNG in the CX Field area of Big Horn County, Montana in 1997, we approached

the Bureau of Land Management (BLM) to request that it prepare an environmental assessment of a 325-well pilot project. As the agency began that analysis,

Fidelity drilled wells on private lands and initiated limited production testing of

those wells in late 1998. Commercial production from 125 initial wells began in October 1999. Five months later, in March of 2000, the Northern Plains Resource

Council (NPRC) filed its first CBNG lawsuit, suing the Montana Board of Oil & Gas

Conservation (MBOGC), claiming it failed to conduct adequate environmental analysis before approving Fidelity’s drilling applications. Montana has a State law—the

Montana Environmental Policy Act (MEPA)—a law that is essentially identical to

NEPA that requires an environmental evaluation of the effects of decisions made

by State regulatory agencies. MBOGC settled the case by agreeing to either prepare

a supplement to its 1989 Oil & Gas Environmental Impact Statement (EIS) or to

cooperate with other agencies in preparation of a programmatic EIS for CBNG development in the Montana portion of the Powder River Basin. The agreement allowed Fidelity to continue with its CX Field pilot project, including the development

of up to 250 producing wells, but placed a statewide moratorium on all other CBNG

development.

In December of 2000, the BLM, the MBOGC and the Montana Department of Environmental Quality (MDEQ) initiated a programmatic EIS (the Montana Statewide

Oil and Gas EIS) to amend the Billings and Powder River Resource Management

Plans for CBNG development in the Montana portion of the Powder River Basin.

This combined document was prepared to address both MEPA and NEPA issues associated with CBNG development. Prior to that time, in June of 2000, the Wyoming

BLM decided to amend the Buffalo and Platte River Resource Management plans

for CBNG development in the Wyoming portion of the Powder River Basin by preparing the Powder River Basin Oil and Gas EIS. The NEPA process for these EISs,

originally estimated to take 18–24 months to complete, was finally completed on

April 30, 2003 (29 months for the Montana Statewide Oil and Gas EIS, 35 months

for the Powder River Basin Oil and Gas EIS) with the signing of the Records of Decision (RODs). Within 1 day of the issuance of the RODs, lawsuits were filed in

Montana challenging the validity of both Montana’s and Wyoming’s EISs. In total,

four different lawsuits were filed against the RODs.

In June of 2001, NPRC filed another lawsuit against the BLM and Federal oil and

gas lease owners in the Powder River Basin of Montana, claiming the BLM should

not have issued leases that had the potential to be developed for CBNG. NPRC

claimed that the 1994 Miles City District Oil and Gas EIS/Plan Amendment to the

Billings, Powder River and South Dakota Resource Management Plans had not analyzed the effects of full scale CBNG development. The 1994 Plan Amendment did

allow for the drilling of CBNG test wells and initial small-scale development. It also

stated that for full-field development to occur on Federal oil and gas leases, an additional environmental document would be required. This lawsuit was filed despite

the fact that the Montana Statewide Oil and Gas EIS was underway and the BLM

had allowed no production to occur from Federal exploratory wells that had been

drilled for CBNG. NPRC lost this case on summary judgment but has appealed the

case to the Ninth Circuit Court of Appeals.

In accordance with the Montana Statewide Oil and Gas EIS, Fidelity submitted

its Badger Hills Plan of Development (POD) covering 178 wells. This POD contains

a Surface Use Plan, a Noxious Weed Plan, a Water Management Plan, and a Wildlife Monitoring and Protection Plan as required by the EIS. The BLM spent about
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90 days conducting the site-specific environmental review to complete the EA. However, the NPRC, the Northern Cheyenne Tribe, Native Action, the American Lands

Alliance, George Wuerthner and the Biodiversity Conservation Alliance protested

the EA of the Badger Hills POD to the Montana BLM State Director. NPRC went

so far as to file a lawsuit against the BLM before the State Director could even

make a decision as to the adequacy of the first EA. The State Director remanded

the EA back to the Miles City Field Office for further analysis. When the revised

EA was issued and Fidelity was allowed to resume its operations, the NPRC lawsuit

was amended to include a laundry list of NEPA objections. Additionally, the Northern Cheyenne Tribe filed suit against the BLM alleging non-compliance with the

National Historical Preservation Act. This was done despite the cultural resource

inventory that Fidelity submitted with its Badger Hills POD application.

Fidelity is not the only operator being affected by these appeals and lawsuits.

Similar lawsuits and endless appeals and protests (Exhibit 1) are delaying production throughout the Rocky Mountain Region. Unfortunately, these lawsuits are also

straining the BLM’s human resources. Fidelity has been advised that the resource

specialists essential to reviewing and processing Plans of Development are now

working on litigation, preventing the BLM from committing to a timeline for completing environmental reviews and issuing permits. You can be assured that oil and

gas permitting is not the only resource management activity that will suffer from

allocation of resources to litigation. Programs ranging from fire management to

habitat enhancement will be impacted. This needless special interest litigation deviates from the honorable goal of protecting the environment to obstructing responsible resource management by challenging the completeness of a well-established

and time-tested process.

OTHER LAWSUITS

Montana law allows discharge of unaltered groundwater without a permit if the

discharge does not result in a violation of water quality standards or cause degradation of water quality. Nevertheless, Fidelity applied to the MDEQ for a Montana

Pollution Discharge Elimination System (MPDES) permit to allow discharge of

water produced in conjunction with CBNG in January 1999. The permit was issued

on June 16, 2000. On June 23, 2000 Fidelity initiated outreach to the NPRC by

hosting NPRC representatives on a field trip of our CX Field. Fidelity granted

NPRC the right to tour every aspect of our operations. At the same time this field

tour was in progress, NPRC’s attorneys were filing a lawsuit in Montana Federal

District Court against Fidelity for violating the Clean Water Act by allegedly discharging without a permit. And 10 months later, in April of 2001, NPRC and the

Tongue River Water Users Association sued the MDEQ in State court for issuing

the permit in June of 2000. You can see the complexity of the problem here—We

were sued for not having a permit even though State law did not require one, and

the agency that issued the permit was also sued. It is important to note that the

water quality data shows that Fidelity’s discharge has not degraded the receiving

water quality.

NPRC next sued Fidelity in August of 2001 in Federal court under Section 404

of the Clean Water Act, alleging that Fidelity failed to obtain 404 permits for discharge of fill material and for construction of pipelines and roads in waters of the

United States. The lawsuit was filed despite the fact that the U.S. Army Corps of

Engineers had advised the NPRC that the work they had reviewed in the field was

either covered by nationwide permits or was not located in jurisdictional waters of

the U.S. That case was settled in December 2003.

The attached newspaper articles (Exhibits 2 and 3) describe a pipeline proposal

in June 2003 to ship natural gas from Wyoming to Chicago and the subsequent decision by the pipeline company to delay the project due to the unwillingness of producers to commit to the project. The producers’ reluctance is due to ‘‘uncertainty on

when they’re going to receive permits, how rapidly they are going to receive them,

and where they can go once they receive them.’’ The BLM reportedly said that the

slow permitting was the result of the numerous still-unsettled lawsuits filed against

the Wyoming BLM over the Environmental Impact Statement.

The attached Exhibit 4 shows all of the active lawsuits and their current status

related to Fidelity’s CBNG development program in Wyoming and Montana. In

total, we have been involved in 13 separate lawsuits brought by environmental obstructionists in connection with CBNG development in the Powder River Basin.

Twelve of these lawsuits are still active. These lawsuits cover every aspect of resource development, from lawsuits on Resource Management Plan Amendments,

lawsuits on individual CBNG projects and lawsuits on water discharge permits.

These numerous lawsuits are limiting the ability of natural gas producers to effec-
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tively and efficiently produce energy for the nation, and one can only conclude that

there is an agenda by these obstructionists to stop natural gas development in the

U.S.

ACTION

As we look to the future of energy development in the United States, trends indicate that demand has and will continue to outstrip supply. To resolve this imbalance, we need to ensure accountability of all parties. The energy industry is held

accountable by Federal and State regulation. Those special interest litigants are not

being held to the same standard of accountability.

Take NEPA back to its original roots. Special interest groups are misusing the

NEPA process to obstruct development. The scales of Justice have to be balanced

and not tip to the benefit of one.

Yes, this is America and the obstructionists have every right to due process—but

they need to be accountable to the American people for their actions just like my

company is held accountable. There is no substitute for honesty and action based

upon verifiable science. Without a greater level of accountability being applied to the

obstructionist community, the United States’ ability to be less dependent upon other

energy producing countries and to keep many of the jobs that are currently going

overseas in our homeland will be impossible.

I wish to again thank the committee for this opportunity and if there are any

questions I will be happy to share any answers I may have.
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EXHIBIT 1

FRIVOLOUS ENVIRONMENTAL LITIGATION

AN OBSTACLE TO PRODUCTION OF CLEAN NATURAL GAS

In the past several years, the Nation has seen production of natural gas decline

in most of the traditional producing provinces—shallow waters of the central and

western Gulf of Mexico; on-shore private lands in Texas, Oklahoma, Kansas and

Louisiana. Industry has seen significant restrictions placed on natural gas production in the Eastern Gulf of Mexico, off the California Coast and off the Eastern

Coast of the U.S.

There remain large supplies of natural gas to meet our nation’s needs for clean

burning fuels. Much of it can be found in Wyoming, Utah, Colorado, Montana and

New Mexico. Future supplies of this vital fuel that heats our homes, operates factories and is the feedstock for many industrial and commercial products are increasingly found on public (BLM and Forest Service), non-park lands in the west.

The ability of energy companies to extract this clean fuel from national, non-park

Federal lands has become harder because of aggressive, frivolous litigation from socalled ‘‘special interest’’ groups. Legal challenges have caused delays at every step

of the permitting process—Resource Management Plan Revisions, oil and gas leasing, Environmental Impact Statements, Environmental Assessments, Records of Decision, Applications for Permit to Drill, regulatory permits (i.e. water discharge permits), and many more. The cost in time to the Federal and State bureaucracies to

prepare administrative records for protests, appeals, and legal challenges is staggering. Agency budgets are now spent defending these challenges versus performing

their regulatory duties such as conducting environmental audits, processing permits, and conducting enforcement responsibilities in Wyoming and Montana. The

cost to energy companies is equally debilitating.

The following chart represents examples of current actions taken by special interest groups. Should this trend continue, further delays will continue to reduce supplies of natural gas, increase costs and affect employment in a number of industries.

Request for State Director Reviews or Environmental Document Challenged Who challenged Year Field Office

Fidelity’s Badger Hills POD ............... Northern Cheyenne Tribe .................. 2004 Montana—Miles City Field Office

United States District Court

Epsilon POD EA ................................. Powder River Basin Resource Council (PRBRC).2004 Wyoming—Buffalo Field Office

State Director Review (SDR)

Delta POD EA .................................... PRBRC ............................................... 2004 Wyoming—Buffalo Field Office

(SDR)

Fogarty Creek Wells #3133 & #3233 Defender of Wildlife and Wyoming

Outdoor Council (WOC).

2004 Wyoming—Pinedale Field Office

(SDR)

Lower Prairie Dog POD EA ................ PRBRC ............................................... 2004 Wyoming—Buffalo Field Office

(SDR)

Copper Ridge Shallow Gas Unit ....... Biodiversity Conservation Alliance

(BCA).

2004 Wyoming—Rock Springs Field Office

(SDR)

1Anadarko’s Beta II Plan of Development (POD).Powder River Basin Resource Council.2004 Wyoming—Buffalo Field Office

(SDR)

Fidelity’s Badger Hills POD ............... Northern Plains Resource Council,

Inc. (NPRC).

2003 Montana—Miles City Field Office

United States District Court

Fidelity Tongue River—Badger Hills

POD.

NPRC, Northern Cheyenne Indian

Tribe, Native Action, Western Environmental Law Center.

2003 Montana—Montana Miles City Field

Office (SDR)

Brown Cow POD EA ........................... National Wildlife Federation, et al ... 2003 Wyoming—Rawlins Field Office

(SDR)

Beta II Additions POD EA ................. PRBRC ............................................... 2003 Wyoming—Buffalo Field Office

(SDR)

Questar Winter Long Drilling Exception.BCA, Wyoming Outdoor Council

(WOC), Greater Yellowstone Coalition (GYC), Jackson Hole Conservation Alliance, Wilderness Society.

2003 Wyoming—Pinedale Field Office

(SDR)

N SA Creek POD EA .......................... PRBRC ............................................... 2003 Wyoming—Buffalo Field Office

(SDR)
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Request for State Director Reviews or Environmental Document Challenged Who challenged Year Field Office

LX Bar Creek POD EA ....................... PRBRC ............................................... 2003 Wyoming—Buffalo Field Office

(SDR)

NP II POD EA ..................................... PRBRC, Tom and Helen Jones, Mr. &

Mrs. Barlow.

2003 Wyoming—Buffalo Field Office

(SDR)

Horse Creek POD EA ......................... PRBRC, Tom and Helen Jones, Mr. &

Mrs. Barlow.

2003 Wyoming—Buffalo Field Office

(SDR)

Vermillion Basin ................................ Biodiversity Conservation Alliance ... 2003 Wyoming—Rock Springs Field Office

(SDR)

Lower Bush Creek II .......................... Biodiversity Conservation Alliance ... 2003 Wyoming—Rock Springs Field Office

(SDR)

Lower Bush Creek ............................. Biodiversity Conservation Alliance ... 2003 Wyoming—Rock Springs Field Office

(SDR)

Williams’ Pleasantville POD EA ........ PRBRC ............................................... 2003 Wyoming—Buffalo Field Office

(SDR)

Pennaco’s (Marathon) Horse Creek

10 POD EA.

PRBRC ............................................... 2003 Wyoming—Buffalo Field Office

(SDR)

Powder River Basin Oil and Gas

Project Environmental Impact

Statement (EIS), Record of Decision (ROD) and Resource Management Plan (RMP)

amendments*.

Montana Statewide Oil and Gas EIS,

ROD and RMP for the Billings

and Powder River Resources

Areas.

* American Lands Alliance, BCA,

George Wuerthner.

* Western Organization of Resource

Councils, Jeanie Alderson, Wally

McRae, Wyoming Outdoor Council

(WOC), Natural Resources Defense Council (NRDC), PRBRC.

2003 Wyoming—Buffalo; Montana—Billings and Miles City Field Office

Montana Statewide Oil and Gas EIS,

ROD and RMP for the Billings

and Powder River Resources

Areas.

NPRC, Northern Cheyenne Tribe and

Native Action.

2003 Montana—Billings and Miles City

Field Office

Montana Statewide Oil & Gas EIS &

ROD.

NPRC, Montana Environmental Information Center, Inc., Tongue and

Yellowstone Irrigation District.

2003 Montana Environmental Policy Act &

Constitutional Litigation against

Montana Board of Oil & Gas Conservation & Montana Department

of Environmental Quality

Application for Permit to Drill (APD)

Environmental Assessment (EA)

for the Questar Stewart Point

Wells**.

WOC, Greater Yellowstone Coalition

(GYC), Defenders of Wildlife, Wilderness Society.

2003 Wyoming—Pinedale Field Office

(SDR)

Hanna Draw Coalbed Methane Exploration Project EA, Decision

Record and Finding of No Significant Impact (FONSI).

WOC, BCA, Sierra Club, NRDC,

Earthjustice.

2003 Wyoming—Rawlins Field Office

Questar Winter Long Drilling Exception.WOC ................................................... 2002 Wyoming—Pinedale Field Office

Federal District Court

Haystacks Geophysical EA, Decision

Record and FONSI.

BCA, GYC, Center for Native Ecosystems, Wildlands Center for

Preventing Roads.

2002 Wyoming—Rock Springs Field Office

(SDR)

Big Piney 2-D Geophysical Project

EA, Decision Record and FONSI.

Sierra Club, BCA, GYC, Center for

Native Ecosystems, Wildlands,

Center for Preventing Roads.

2002 Wyoming—Pinedale Field Office

(SDR)

West Pinedale 3-D Geophysical

Project EA, Decision Record (DR)

and FONSI.

GYC, Sierra Club, WOC ..................... 2002 Wyoming—Pinedale Field Office

(SDR)

Merna 3-D Geophysical Project EA,

DR, and FONSI.

GYC, Sierra Club, WOC, NRDC ......... 2002 Wyoming—Pinedale Field Office

(SDR)

Blue Sky POD EA, DR and FONSI ..... National Wildlife Federation (NWF),

BCA, WOC.

Wyoming Wildlife Federation (WWF)

2002 Wyoming—Rawlins Field Office

(SDR)

Cow Creek Pod EA, DR and FONSI ... NWF, BCA, WOC, WWF ...................... 2002 Wyoming—Rawlins Field Office

(SDR)
179

Request for State Director Reviews or Environmental Document Challenged Who challenged Year Field Office

Leasing under 1994 oil and gas

leasing EIS, ROD, Resource Management Plan Amendment in Billings and Powder River RMA.

NPRC ................................................. 2001 Montana—Miles City Field Office

Lower Prairie Dog Creek ...................

CBM Project EA, DR and FONSI ........

WOC, PRBRC, Mike Foate ................. 2000 Wyoming—Buffalo Field Office

IBLA Appeal

Lower Prairie Dog Creek ...................

CBM POD EA, DR, and FONSI ...........

WOC, PRBRC, Mike Foate ................. 2000 Wyoming—Buffalo Field Office

IBLA Appeal

* Powder River Basin Oil and Gas EIS

Pg. S–1 ‘‘within the US the largest number of responses were from California, New York, and Florida’’

14,283 comments from member organizations

4/30/03 Record of Decision signed, 5/1/03 three lawsuits filed by Earthjustice in Denver as lead council, Western Environmental Law Center of Boise, and NPRC of Denver. A fourth suit was filed 5/8/03 by the firm of Ziontz, Chestnut, Varnell, Berley & Slonim of Seattle as lead counsel. Suits filed in Montana District Court in Billings, Mt.

WATER ISSUES

Environmental Document Challenged Who challenged Year Field Office

General Permit for off-channel pit Coal Bed Natural Gas PRBRC ........................................... 2002 ............ Wyoming

National Pollution Discharge Elimination System (NPDES)

permits.

WOC; PRBRC ................................. Continuously Wyoming

Corps of Engineers (COE) General Permit 98–08. ............ WOC, PRBRC ................................. 2002 ............ Wyoming

MPDES discharge permit issued by Montana DEQ ........... Tongue River Water Users’ Association, NPRC, Montana Environmental Information Center.

2001 ............ Montana

Construction of roads, impoundments, outfall structures

and pipelines without Corp of Engineers 404 Permit

(COE advised permit not necessary).

NPRC ............................................. 2001 ............ Montana

Montana Water Quality Act, discharge of unaltered

groundwater without permit.

NPRC ............................................. 2000 ............ Montana

FEDERAL OIL AND GAS LEASE SALES

In Wyoming, 23 of 24 lease sales have been protested and/or appealed by special

interest groups since February 2000 to present. The outcomes of those protests

present significant delay in industries’ ability to produce natural gas and do not necessarily conclude with a better environmental outcome. The following examples are

provided:

Wyoming BLM February 2000 Lease Sale

• The February 2000 lease sale was protested to the BLM State Director by special interest groups where 49 lease parcels were offered in the sale that were located

within the Buffalo Field Office Management Area.

• The State Director Review dismissed the protest and special interest groups

then appealed that decision to the Interior Board of Land Appeals (IBLA).

• IBLA dismissed 46 of the 49 parcels for lack of standing and granted the special

interest groups standing on 3 parcels of which a stay was granted.

• IBLA ruled on April 2002 remanding the 3 parcels back to the BLM for further

review. IBLA determined that BLM did not take a ‘‘hard look’’ at the unique characteristics of coal bed natural gas development prior to leasing, particularly water and

air quality, and therefore the leases were issued illegally.

• BLM then placed a moratorium on further leasing in the Buffalo Field Office

Management Area where leases were thought to be utilized for coal bed natural gas

development.

• Several parties appealed this decision to Federal District Court in Wyoming and

on May 30, 2003 the Federal judge overturned IBLA’s decision and defended BLM’s

original State Director Review in that the agency did take a ‘‘hard look’’ at the impacts of coal bed natural gas prior to leasing.

• The reinstatement of these three leases took place some 3 years after industry

invested in developing the Federal mineral estate.

• Special interest groups are now appealing the Federal District Court decision

to the 10th Circuit Court of Appeals. This hearing has yet to be scheduled.
180

Wyoming BLM April 2000 Lease Sale

• The April 2000 lease sale was protested to the BLM State Director by special

interest groups where 122 lease parcels were offered in the sale that were located

within Bighorn, Campbell, Carbon, Converse, Johnson, Natrona, Sheridan, Sweetwater, and Uinta Counties in Wyoming. • The State Director Review dismissed the protest and special interest groups

then appealed that decision to IBLA. • IBLA initially dismissed 119 parcels for lack of standing and eventually reconsidered 5 of those parcels that were dismissed; therefore granting standing on a

total of 8 parcels. A stay was granted on those 8 parcels limited to coal bed natural

gas development only. • The special interest groups charged that the applicable environmental documents of which the State Director relied in its review completely failed to mention

coal bed natural gas development or inadequately addressed the unique and significant impacts associated with that development. • In April of 2003, IBLA affirmed the State Director’s Review in part and reversed and remanded the Review in part. That decision was never appealed to Federal District Court.

Wyoming BLM June 2000 Lease Sale

• The June 2000 lease sale was protested to the BLM State Director by special

interest groups where 132 lease parcels were offered in the sale that were located

within Bighorn, Campbell, Carbon, Converse, Johnson, Natrona, Sheridan, Sweetwater, and Uinta Counties in Wyoming. • The State Director Review dismissed the protest and special interest groups

then appealed that decision to the IBLA. • IBLA dismissed 127 parcels for lack of standing and granted the special interest

groups standing on 5 parcels but limited the stay to only coal bed natural gas activities.

• IBLA then granted the special interest groups motion for partial voluntary dismissal of the appeal as to 3 of the 5 parcels for which it had established standing

leaving only 2 parcels in the appeal.

• The special interest groups charged that the applicable environmental documents of which the State Director relied on his its review completely failed to mention coal bed natural gas development or inadequately addressed the unique and

significant impacts associated with that development.

• In February of 2004, IBLA affirmed the State Director’s decision on review stating that the BLM supplemented its review with the submission of supporting information and provided the hard look at the environmental consequences of leasing including impacts from coal bed natural gas development.

• It has not been decided if this decision will be appealed to Federal District

Court.

CONCLUSION

It has become apparent that through the public process NEPA has become a ‘‘tool’’

that is used as the primary impediment to oil and gas development on Federal

lands. Industry supports without qualification the Act’s provisions for public comment, identification of alternatives to the proposed action, and consideration of impacts and mitigation measures to be used. However, these same provisions are being

used by some groups as opportunities to stop proposed projects without regard for

cost and delay of impacts on land management agencies, the US taxpayer, or multiple users of the public lands.

The cost of ‘‘NEPA abuse’’ is high. All of these delays put a tremendous burden

on industry’s ability to economically develop the resource for the benefit of the country. It is safe to say that the cumulative impacts, due to frivolous environmental

litigation, is strangling industry’s ability to develop energy resources on Federal

lands and to supply much needed energy to the citizens of this country.

EXHIBIT 2

[From the News Record, June 25, 2003]

CANADIAN FIRM PLANS PIPELINE TO CHICAGO

(By the Staff and Wire Reports)

A Canadian firm has announced plans to build a high-volume natural gas pipeline

from northeastern Wyoming to Chicago.
181

Calgary, Alberta-based Enbridge, Inc., said Tuesday the plans include a design

that would export up to 1-billion cubic feet of gas per day from the Powder River

Basin.

Industry and government officials say a pipeline with that much volume would

bolster wholesale prices and bring Wyoming closer to becoming the nation’s top natural gas supplier.

‘‘Here we have a time when the whole country is screaming for natural gas and

we have the supply. Clearly this huge for the state,’’ said Mark Doelger, chairman

of the Wyoming Pipeline Authority.

‘‘We’ve been talking with Enbridge since February but didn’t expect a decision

this early,’’ Doelger told The News-Record.

‘‘If ongoing market studies and other reviews are favorable, Enbridge believes this

pipeline could be constructed and in service within 4 years,’’ said Ron Brintnell, director of the company’s Gas Pipeline Development Division.

The proposal was announced at a meeting of the Wyoming Natural Gas Pipeline

Authority in Casper.

Brintnell said Enbridge has been working with the agency to contact local gas

producers and to find out if it can make a deal to ship royalty-in-kind gas, or gas

that is given to the Federal Government in lieu of conventional royalty payments.

If the government is able to negotiate better pipeline deals for moving gas, it can

earn more money that it would from cash payments. Wyoming was the first State

to make in-kind payments.

The company is looking for producer support and plans to open an office in Wyoming but ‘‘the location and timing has yet to be determined,’’ Brintnell told The

News-Record.

Enbridge and its subsidiaries operate more than 20,000 miles of natural gas and

oil pipelines in Canada and the United States, including the Vector natural gas

pipeline from the Chicago Hub to Dawn, Ontario.

Enbridge has been working on a $900 million deal to sell half its interest in the

1,857-mile Alliance Pipeline, which moves natural gas from western Canada to the

Chicago hub, and all its interest in a Saskatchewan pipeline system.

According to an Enbridge press release issued Monday, the deal would net the

company about $210 million, which it would use to pay down debt and invest in

‘‘strategic growth opportunities.’’

The deals could close at the end of the month.

Last year the State and several gas producers paid PACE Global Energy Services

to study what Wyoming’s gas industry needs to become more competitive nationwide. The answer was a high-volume, single-route ‘‘bullet’’ pipeline from northeast

Wyoming to the Chicago market.

Enbridge was not among the firms that helped fund the PACE study but State

officials involved in the process said it doesn’t matter who wants to build it.

Earlier this year, the Legislature followed recommendations from the now-idled

Wyoming Energy Commission and from Gov. Dave Freudenthal to revive the Wyoming Natural Gas Pipeline Authority and charge it with bolstering interest in expanding Wyoming’s pipeline connections to high-volume markets.

One of the problems noted in the PACE study was how many of the companies

which typically build interstate gas pipelines have suffered from credit problems related to the recent problems in the energy trading business.

Brintnell said Enbridge never got into the energy trading business and its credit

is strong enough to finance a project like a Wyoming-to-Chicago pipeline.

He said the next step will be for the company to discuss with producers and endusers to see how much interest there is in the project.

EXHIBIT 3

[From the News Record, January 28, 2003]

PIPELINE PROJECT IS PUT ON HOLD

(By Charlie Homans)

WYOMING.—The Canadian pipeline company Enbridge Inc. has put its Beacon

Pipeline project on the back burner, an Enbridge official told The News-Record

today.

‘‘For the time being, we’ve stopped further development on it,’’ said Ron Brintnell,

Enbridge’s director for gas pipeline development. ‘‘We didn’t see the kind of response

from the producing community that we hoped for.’’
182

But Brintnell says the company is optimistic about the future of the pipeline,

which is slated to eventually carry 2-billion cubic feet per day of coal-bed methane

and conventional natural gas from Cheyenne to Chicago.

‘‘Right now we’re waiting to see what transpires with producers over the next year

or so,’’ he said. ‘‘If we see the kind of growth that we expect, then we will continue.’’

Both Brintnell and Wyoming Natural Gas Pipeline Authority officials pointed to

slow coal-bed methane well permitting by the U.S. Bureau of Land Management’s

Wyoming field offices as a large part of the problem.

According to BLM Buffalo field office manager Dennis Stenger, the Buffalo office—where most of the criticism has been targeted—has permitted 525 wells since

April, when the landmark Powder River Basin Oil & Gas Project environmental impact statement was issued.

Last week Secretary of the Interior Gale Norton said she wanted to see 3,000 permits issued each year by the BML in the Powder River Basin.

‘‘Right now there’s just a lack of market support for the project,’’ Pipeline Authority Executive Director Bryan Hassler said of the Beacon Pipeline. ‘‘And most of

that’s due to producer uncertainty on when they’re going to receive permits, how

rapidly they’re going to receive them, and where they can go once they do receive

them.’’

BLM Buffalo assistant field manager Richard Zander acknowledged that slowed

permitting has been a problem, pointing to the numerous still-unsettled lawsuits

filed against the BLM over the environmental impact statement.

But he said that permitting was most likely not the only factor inhibit large

projects like Beacon.

‘‘Is there a certainty that (the permitting)’s affecting it? I don’t thinks so,’’ Zander

said.

Brintnell said that while the scale of the Beacon project could offer significant economic payoffs to Wyoming, particularly if natural gas prices in the Midwest remain

high, it also made getting the pipeline off the ground a trickier proposition.

‘‘Given that it is a bigger project economics prevail,’’ Brintnell said. ‘‘We need

more commitments to make it work, so it’s just a different set of challenges.’’ State

Oil & Gas Conservation Commission Supervisor Don Likwartz said that the commitment problems Beacon faces are characteristic of the Wyoming pipeline market in

general.

‘‘What has happened is that a lot of operators . . . are having even more difficulty

forecasting production for their companies and their boards and Wall Street, and

they’re also getting more reluctant to commit to pipelines,’’ Likwartz said.

EXHIBIT 4

Case Cause Number Court Complaint Allegations

NPRC v. FIDELITY .......... CV–00–105-BLG-SEH .....

No. 02—35836 ..............

US District Court for the District of Montana, Billings

Division.

Ninth Circuit Court of Appeals

Citizen suit challenging regulated discharges.

NPRC v. BLM, FIDELITY, ET AL.

CV–01–96-BLG-RWA ......

No. 04—35002 ..............

US District Court for the District of Montana, Billings

Division.

Ninth Circuit Court of Appeals

Lawsuit challenging BLM’s

compliance with NEPA

process.

TRWUA, NPRC, AND

MEIC v. MT DEQ

AND FIDELITY.

CDV–2001–258 CONSOLIDATED WITH

BDV 2001–258.

Montana First Judicial District

Court, Lewis and Clark

County.

Lawsuit claiming that regulated discharges violate

environmental standards.

NPRC v. FIDELITY .......... CV 01–137-BLG-RWA ..... US District Court for the District of Montana, Billings

Division.

Citizen suit challenging pond

construction.

NPRC v. BLM, Gale Norton, Kathleen Clarke, and

Martin Ott (Defendants),

AND FIDELITY, ET AL.

(Intervenors).

CV–03–069-BLG-RWA

CONSOLIDATED

WITH CV–03–078-

BLG-RWA.

US District Court for the District of Montana, Billings

Division.

Lawsuit challenging BLM’s

compliance with NEPA

process.
183

Case Cause Number Court Complaint Allegations

WORC, JEANIE

ALDERSON, WALLY

MCRAE, WOC,

NRDC, AND PRBRC

v. KATHLEEN CLARKE,

BLM, GALE NORTON,

AND DOI (Defendants),

AND FIDELITY, ET AL.

(Intervenors).

CV–03–70-BLG-RWA

(Montana).

04-CV–0018-J (Wyoming)

US District Court for the District of Montana, Billings

Division.

US District Court for the District of Wyoming.

Lawsuit challenging BLM’s

compliance with NEPA

process.

ALA, BCA, AND

GEORGE WUERTHNER

v. BLM AND GALE

NORTON (Defendants),

AND FIDELITY, ET AL.

(Intervenors).

CV–03–71-BLG-RWA

(Montana).

04-CV–0019-J (Wyoming)

US District Court for the District of Montana, Billings

Division.

US District Court for the District of Wyoming.

Lawsuit challenging BLM’s

compliance with NEPA

process.

NORTHERN CHEYENNE

TRIBE AND NATIVE

ACTION v. GALE NORTON, KATHLEEN

CLARKE, AND MARTIN

OTT (Defendants), AND

FIDELITY, ET AL. (Intervenors).

CV–03–78-BLG-RWA

CONSOLIDATED

WITH CV–03–69-

BLG-RWA.

US District Court for the District of Montana, Billings

Division.

Lawsuit challenging BLM’s

compliance with NEPA

process.

T & Y IRRIGATION DISTRICT, NPRC, AND

MEIC v. MT DEQ

AND MBOGC (Defendants) AND FIDELITY (Intervenor).

BDV–2003–579 .............. Montana First Judicial District

Court.

Lawsuit claiming that agencies’ actions violated State

constitution and statutes.

NPRC v. BLM AND

MARTIN OTT (Defendants) AND FIDELITY (Intervenor).

CV–03–185-BLG-RWA .... US District Court for the District of Montana, Billings

Division.

Lawsuit challenging adequacy

of environmental analysis

for Fidelity’s Badger Hills

Project.

NORTHERN CHEYENNE

TRIBE v. BLM, MARTIN C. OTT, AND

DAVID M. MCILNAY

(Defendants) AND FIDELITY (Intervenor).

CV–04–17-BLG-RWA ...... United States District Court of

Montana, Billings Division.

Lawsuit challenging adequacy

of environmental analysis

for Fidelity’s Badger Hills

Project.

STATEMENT OF STEVE H.M. BLOCH, STAFF ATTORNEY, SOUTHERN UTAH

WILDERNESS ALLIANCE

My name is Stephen Bloch and I am a staff attorney for the Southern Utah Wilderness Alliance (SUWA). SUWA is a non-profit organization with over 15,000 members in all 50 States. SUWA’s mission is the preservation of the outstanding wilderness at the heart of the Colorado Plateau, and the management of these lands in

their natural state for the benefit of all Americans. SUWA promotes local and national recognition of the region’s unique character through research and public education; supports both administrative and legislative initiatives to permanently protect Utah’s wild places within the National Wilderness Preservation System or by

other protective designations where appropriate; builds support for such initiatives

on both the local and national level; and provides leadership within the conservation

movement through uncompromising advocacy for wilderness preservation.

SUWA is a founding member of the Utah Wilderness Coalition, a group of 240

national, regional, and local organizations that advocates for the passage of America’s Redrock Wilderness Act (ARWA) (S. 639/H.R. 1796) and the designation of

roughly 9 million acres of Utah’s stunning Bureau of Land Management (BLM)

lands as Wilderness.

I appreciate the opportunity to testify today regarding the environmental impacts

of natural gas leasing, exploration, and development. Because SUWA’s mission focuses solely on protecting and preserving public lands and resources in Utah, my

testimony will address natural gas issues on Utah’s public lands, and in particular

the lands managed by the BLM.
184

1See Lemkin, at 2–3 (noting that wells drilled outside these seven areas are ‘‘six times more

likely to be dry, and have an expected production level less than one-tenth that of wells drilled

inside’’ of the seven hot spots). 2The use of ‘‘technically recoverable’’ versus ‘‘economically recoverable’’ undiscovered resources

has been heavily criticized because it ignores market (transportation, infrastructure, etc.) and

non-market (wildlife, wilderness values, etc.) costs, and thus overemphasizes the amount of reserves. See The Wilderness Society, Energy & Western Wildlands, A GIS Analysis of Economically Recoverable Oil and Gas (2002). The USGS estimates that less than 20 percent of technically recoverable gas is economically recoverable in the intermountain west. Id. at 17. 3 According to The Wilderness Society, the amount of economically recoverable undiscovered

natural gas resources in Utah’s Forest Service roadless lands is between 182–295 BCF, or between three to 5 days at current national consumption levels. The Wilderness Society, Estimates

of Economically Recoverable Gas and Oil on National Forest Roadless Areas in Utah on the

USGS Low and High Price Scenarios. This analysis, and an analysis of other western States

roadless areas is available at The Wilderness Society’s webpage: www.wilderness.org/

standbylands/roadless/.

A close review of the undiscovered natural gas resources on the BLM lands in

Utah proposed for wilderness designation in America’s Redrock Wilderness Act reveals that drilling these lands will have an absolutely insignificant impact on the

price of natural gas. A balanced approach of energy conservation, resource extraction,

and public land protections, however, will ensure that our country has both the natural gas and intact wild places it needs for sustained growth, security, and sustainability. This is precisely the approach advocated by SUWA and the conservation

community.

DEVELOPING UTAH’S WILD PLACES WOULD PRODUCE ONLY INSIGNIFICANT AMOUNTS OF

NATURAL GAS

According to the Department of Energy (DOE), over 13,500 wells have been

drilled since oil and gas exploration and development first began in earnest in Utah

in the 1940’s, and as of October 2003 the total gas production had been 7.65 TCF

(trillion cubic feet). See Mark Lemkin, An Analysis of Utah Oil and Gas Production,

Leasing, and Future Resources (2003) (Lemkin), at 1 (citing Utah Geologic Survey

and DOE sources). Put in a broader context, the total gas extracted in Utah since

the 1940’s would supply the country with natural gas for just over 4 months at current national consumption levels. Id.

A closer look at DOE figures on Utah’s recent annual gas production a level which

is consistent with production from the past several years indicates that the State

produced 273 BCF (billion cubic feet) of natural gas. This is not even enough natural gas to supply the country for 5 days.

An analysis of information compiled by DOE, the United States Geological Survey

(USGS), and the State of Utah’s Division of Oil, Gas, and Mining (UDOGM) indicates that approximately 95 percent of gas and oil production in Utah both historically and more recently between 2001–03 has come from seven ‘‘hot spots.’’ See Exhibits 1 and 2 (Lemkin, Figure 3, Location of principal areas of oil and gas production in Utah and Figure 5, Location of principal areas of oil and gas production in

Utah: 2001 to present).1 None of these areas are proposed for wilderness designation

in America’s Redrock Wilderness Act. See id. (illustrating areas of production and

BLM lands proposed for wilderness).

According to DOE, the entire State of Utah has proven gas reserves of 4.6 TCF

(or 2.5 percent of U.S. proven gas reserves). Using the USGS’s own methods for predicting Utah’s statewide inferred reserves (a figure that must be estimated because

it is not publicly available), another 6.1 TCF of gas may be extracted from within

or immediately adjacent to existing fields. Finally, according to USGS, Utah may

have as much as 15,668 BCF of gas that is technically recoverable undiscovered resources.2

An analysis of the most current USGS data estimates that the technically recoverable undiscovered natural gas resources within America’s Redrock Wilderness Act

amounts to 1495 BCF, or less than 4 4 weeks of natural gas at current consumption

levels. Lemkin, at 4.

If the more appropriate economically recoverable screen were applied, this 1495

BCF figure would no doubt be much less because of these lands’ relatively remote

location and lack of infrastructure, as well as non-market costs, including the loss

of wildlife habitat, water quality, and wilderness values.3

In sum, even if we sacrifice one of America’s crown jewels—Utah’s redrock wilderness—we cannot meaningfully reduce the price of natural gas. Instead, a sound national energy policy that emphasizes conservation and renewable energy sources,

hand-in-hand with environmentally sensitive natural gas exploration, is a better approach to stabilizing natural gas prices. See Natural Resources Defense Council,
185

4See Biological Soil Crusts: Ecology and Management, U.S. Department of the Interior, BLM

Technical Reference 1730–2 (2001). 5See The Wilderness Society, Fragmenting Out Lands: The Ecological Footprint from Oil and

Gas Development (2002). 6 Existing leaseholders, of course, would be allowed to proceed with development, but only in

the most environmentally sensitive manner. 7 In Southern Utah Wilderness Alliance v. Norton, 237 F. Supp.2d 48, 52 (D.D.C. 2002), Federal district judge James Robertson admonished BLM for its hurried decision to approve a seismic exploration project on the doorstep of Arches National Park: ‘‘What does appear from this

record is a sense that the agency (a) was in hurry to approve the Yellow Cat Swath [seismic]

project and (b) considered the damage that would be done by the [seismic] trucks relatively insignificant.’’ The BLM did not appeal this decision.

Managing America’s Natural Gas ‘‘Crisis’’ (2004), available on-line at www.nrdc.org/

air/energy/fnatgas.asp; Union of Concerned Scientists, Renewable Energy Can Help

Ease Natural Gas Crunch (2004), available on-line at www.ucusa.org/clean—energy.

SUWA ADVOCATES A BALANCED APPROACH TO THE PROTECTION OF UTAH’S WILD PLACES

AND GAS DEVELOPMENT

The sacrifice of Utah’s BLM wilderness quality lands to industrial development

will only provide the country with a few weeks of natural gas, estimated at 1495

BCF. There is little question, however, that exploration and development will leave

lasting scars on this magnificent landscape, including: the fragmentation of wildlife

habitat, long term damage fragile desert soils (estimated by USGS at between 50–

300 years),4 and the loss of wilderness values (i.e., outstanding solitude, including

things such as night skies and irreplaceable quiet). See Exhibits 3 and 4 (Exhibit

3—sludge pit at Long Canyon well outside Moab, Utah; Exhibit 4—seismic truck in

Yellow Cat seismic project area near Arches National Park).5 Quite simply, once

these lands are gone, they are gone forever and thus future leasing and development of these should be prohibited.6

Far from advocating a broad ‘‘no lease/no drill’’ policy, SUWA and the conservation community are extremely selective about filing administrative or legal challenges

to gas exploration or development projects in Utah, and throughout the intermountain west. An analysis by the Natural Resources Defense Council (NRDC) revealed that these figures are representative for the number of legal challenges to

gas and oil related projects throughout the intermountain west. NRDC, Managing

America’s Natural Gas ‘‘Crisis,’’ at 3. For example, conservationists appealed or litigated only 0.2 percent of the APDs approved by the BLM between 2001–2002, and

only 5 percent of the leases issued by BLM from the beginning of fiscal year 2001

to the end of fiscal year 2003. The conservation community will continue to closely

monitor mineral leasing and development for full compliance with Federal environmental and preservation laws, and will continue to challenge BLM decisions that

flaunt these laws, and thus put sensitive resources at risk.

In Utah, the vast majority of these legal challenges have been brought because

the action threatened lands proposed for wilderness designation (either citizen proposed or existing WSAs). For example, between January 2000 and March 2004,

there were over 3200 APDs approved in Utah; conservationists challenged fewer

than 1⁄2 of 1 percent of these drill projects. Thus, legal challenges are clearly not an

impediment to gas development and production.

Likewise, between 2000–2004, the BLM approved 10 seismic exploration projects

proposed in eastern Utah. SUWA challenged four of the projects in Federal court

and before the Interior Board of Land Appeals (IBLA) because they threatened to

damage wilderness quality lands. See Map, Seismic Exploration in the Heart of

Redrock Country (2004), attached as Exhibit 5. SUWA prevailed on one of these four

challenges, and is appealing a second.7

The balanced approach advocated by SUWA and others of permitting gas exploration and development in less sensitive public lands, and in full compliance with

Federal environmental laws, will secure both continued natural gas production and

the protection of our country’s irreplaceable national heritage.

THE BUSH ADMINISTRATION IS CREATING CONFLICT BY FLAUNTING

ENVIRONMENTAL LAWS

Since 2001, this Administration has misled the American public by focusing the

Nation’s attention and imagination on drilling and developing natural gas and oil

resources on the country’s few remaining wild places as a means of achieving energy

independence. To the contrary, the development of Utah’s wilderness quality and

roadless lands will not produce any meaningful amount of natural gas.
186

First, President Bush issued Executive Order 13212 in May 2001, which required

Federal land management agencies to expedite their review of gas and exploration

permits and thus accelerate completion of energy projects. Second, and at about the

same time the Administration released the National Energy Plan (NEP), which required, among other things, the opening of more western public lands to gas and

oil drilling. Neither of these policies provide for a thoughtful, measured approach

to ensuring a continued supply of natural, while at the same time protecting and

preserving our treasured wild places and resources.

In response to the NEP, the BLM identified 40 tasks to implement the NEPA,

including establishment of a charter team to evaluate bottlenecks and to streamline

methods to expedite the agency’s processing of applications for permit to drill

(APDs). See BLM Information Bulletin 2001–138, Status of Bureau of Land Management’s National Energy Policy Implementation Plan (Aug. 15, 2001). After an onsite review from the BLM’s Washington, DC. headquarters office in the summer of

2001, Utah BLM staff were told in no uncertain terms that gas and oil leasing and

the issuance of new APDs were their ‘‘No. 1 priority,’’ and that compliance with the

National Environmental Policy Act (NEPA), 42 U.S.C. §§ 4321 et seq., and wilderness reviews were the primary reason for unacceptable delays:

The purpose of the subject review is to improve the oil and gas program in

Utah. The review team believes the oil and gas program should be a high priority program in Utah. Utah management should work with Washington to acquire whatever resources are necessary to reduce oil and gas leasing delays and

drilling backlogs.

The leasing delays and APD backlogs are created by the people responsible

for performing the wilderness reviews and NEPA analysis. Utah needs to ensure

that existing staff understand that when an oil and gas lease parcel or when an

APD comes in the door, that this work is their No. 1 priority.

Information Bulletin UT 2002–008, Oil and Gas Program Review Final Report (January 4, 2002) (emphasis added).

In addition, the BLM has produced a series of agency Instruction Memoranda and

Information Bulletins that have implemented the Administration’s call for the easing of restrictions on leasing and development of the public lands. In July 2003, the

BLM’s Washington office issued an Instruction Memorandum which revealed that

the agency was abandoning its congressionally mandated multiple use mission for

the promotion of a single resource oil and gas. Instruction Memorandum 2003–233,

Integration of the Energy Policy and Conservation Act (EPCA) Results into the Land

Use Planning Process (July 28, 2003). This internal agency document made clear

that the BLM would ‘‘eliminate’’ protective special lease stipulations (i.e., timing of

operations stipulations designed to protect critical wildlife winter habitat) that were

deemed ‘‘duplicative’’ Id. At the same time, the Instruction Memorandum directed

agency staff to use unenforceable ‘‘lease notices,’’ in lieu of protective special lease

stipulations whenever possible and to use the ‘‘least restrictive’’ mitigation necessary to protect sensitive resources Id. at Attachment 3–3.

Most recently, in February 2004, the BLM’s Washington, DC. office issued guidance making it even more difficult for State Directors to defer leasing the most sensitive public lands for gas development, even when the agency has been presented

with significant new information never before considered by BLM about those very

same lands. Instruction Memorandum 2004–110, Fluid Mineral Leasing and Related

Planning and National Environmental Policy Act (NEPA) Processes (Feb. 23, 2004).

It is Bureau policy that a decision not to implement oil and gas or geothermal

leasing decisions, as contained in current [land use plans] must be made by the

State Director with appropriate input from the affected Field Manager. The

State Director must provide a letter to those who submitted the expression of

interest for the tract, stating the reasons for not offering the parcel(s), the factors considered in reaching that decision, and approximate date when analysis

of new information bearing on the leasing decision is anticipated to be completed and when a decision to lease (or amend the plan) is expected to be made.

Id. This guidance turns well established caselaw regarding the Interior Department’s broad discretion whether to offer Federal oil and gas leases on its head, and

places the burden on an already overextended agency to explain to industry why it

is not offering lands for lease. See Marathon Oil Co. v. Babbitt, 966 F. Supp. 1024

(D. Colo. 1997), aff’d 166 F.3d 1221 (10th Cir. 1999). The Department has imposed

no similar obligation or additional workload requirement regarding any other type

of public resource such as wilderness, wildlife habitat, and water quality.

Finally, in April 2003, the Administration eased the way for the leasing and development of the country’s wildest BLM lands when Secretary of the Interior Gale

Norton settled a long moribund lawsuit with then Utah Governor Michael Leavitt
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8 In 1999, Utah BLM completed its wilderness ‘‘re-inventory’’ of over 3 million acres of public

lands and concluded that over 2.6 million acres of those lands had wilderness character. See

Utah Wilderness Inventory, Bureau of Land Management, at xiv-xv (1999). These lands, identified as ‘‘wilderness inventory areas’’ or ‘‘WIAs’’ were to have been studied in an environmental

impact statement for designation as wilderness study areas. This analysis never took place. 9The Settlement Agreement also required that the BLM rescind its Wilderness Inventory

Handbook (WIH) a vehicle for the public to bring new information about undesignated wilderness quality lands to the BLM’s attention—and other guidance which explained that the BLM’s

work of protecting currently undesignated wilderness quality lands was not yet finished. See

also Instruction Memorandum 2003–195, Rescission of National Level Policy Guidance on Wilderness Review and Land Use Planning (June 23, 2003).

(now EPA Administrator), which asserted, among other things, the novel position

that the BLM lacks the authority to establish new wilderness study areas (WSAs)

after 1993. See State of Utah v. Norton, 2:97CV479, Stipulation and Joint Motion

to Enter Order Approving Settlement and to Dismiss Third Amended and Supplemented Complaint (April 11, 2003).8 In the wake of this settlement, the BLM has

halted consideration of public lands with wilderness character from becoming WSAs

and, tragically, has targeted these same wilderness quality lands for mineral leasing.9 A coalition of 11 national and regional conservation organizations, including

SUWA, have challenged the settlement order in Federal court.

As noted above, a review of where the natural gas resources lie in Utah confirms

that the Administration’s focus on easing restrictions to lease and develop the

State’s BLM wilderness quality lands is unsound. As USGS and DOE own figures

confirm, a continued emphasis on leasing and producing from established areas of

production and their inferred reserves will produce vastly more gas and oil than will

the development of these wilderness quality lands. Indeed, it is the Administration’s

persistent efforts to lease and develop these wild lands that has created much of the

perceived and unnecessary ‘‘conflict’’ between resource extraction and preservation.

For example, in November 2003 and February 2004, Utah BLM under the direct

supervision of BLM’s Washington, DC. office, offered and sold 26 oil and gas leases

in lands that the BLM itself recognizes as having wilderness character. According

to USGS and DOE data, these leases—if ever fully developed and brought on-line—

would produce absolutely insignificant amount of natural gas. These wilderness

quality lands, however, would be scarred with drill pads, access roads, pipelines,

sludge pits, and other by-products that development brings with it.

Moreover, in its rush to lease Utah’s wilderness quality lands, the BLM is flaunting NEPA’s mandate that the agency ‘‘think first, then act,’’ by refusing to fully analyze the impacts of leasing, exploration, development, and reclamation before it engages in an irretrievable commitment of resources the sale of an oil and gas lease.

The BLM is also ignoring NEPA’s requirement that the agency take a ‘‘hard look’’

at its own new information about the wilderness values of these lands—information

that it has never before considered. SUWA, the Natural Resources Defense Council,

and The Wilderness Society have challenged Utah BLM’s sale of wilderness quality

lands at its November 2003 lease sale.

Nevertheless, there is certainly no shortage of public lands throughout the west

that have already been leased and thus are available for development. According to

BLM, there are currently over 42,000,000 acres of onshore Federal lands under

lease across the country. In addition, a 2003 report from BLM indicates that only

11,000,000 acres of Federal leases—less than one-third of the total acreage of leased

lands—were actually in production in 2003. See Public Rewards from Public Lands,

Bureau of Land Management (2003). See also Exhibit 6 (Lemkin, Figure 7, Current

lease and production status [in Utah]). Finally, the Interior Department itself acknowledges that roughly 88 percent of Federal gas resources in the Rocky Mountain

region are already available for leasing and development. See Statement of Rebecca

Watson, Assistant Secretary for Lands and Minerals Management, Oversight Hearing on ‘‘The Energy Policy and Conservation Act Inventory,’’ House Resources Subcommittee on Energy and Mineral Resources (June 24, 2003).

CONCLUSION

In sum, current high prices for natural gas cannot reasonably be attributed to

‘‘impediments and restrictions’’ to Federal natural gas resources as alleged by industry advocates and the Administration. Moreover, data shows that attempts to exploit the minimal gas resources beneath Utah’s wilderness quality BLM lands will

damage priceless wilderness treasures with little corresponding benefit to the public. Based on my experiences in Utah, I believe that enforcement of existing environmental laws and regulations have not posed serious impediment to gas development.

Thank you again for the opportunity to testify on these important issues.
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189
190

Sludge Pit at Long Canyon Well Outside Moab, Utah
191

Seismic Truck in Yellow Cat Seismic Project Area Near Arches National Park
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193
194

Fisher Towers
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Hunting Panel Petroglyphs—Stone Carbin Seismic Project Area
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RESPONSES BY STEPHEN BLOCH TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. Your organization supports ‘‘Drilling for oil and gas in fields that are

already developed.’’ However, fields that are already developed are being depleted

and insufficient to meet demand. Experts agree that we must find new sources to

meet ever-increasing demand. How could drilling for oil in developed and depleting

oil fields meet that certain demand?

Response. Senator, according to figures compiled by the Energy Information Administration, Department of Energy, the State of Utah has proven oil reserves of

271 million barrels (1.2% of U.S. proven oil reserves) and proven natural gas reserves of 4.6 TCF (2.5% of U.S. proven natural gas reserves). Utah’s ‘‘inferred reserves’’ (extrapolated reserve estimates reflecting projected amounts of oil or gas

quantities that will be eventually extracted within or abutting existing fields) are

estimated to be 812 MMBO and 10.68 TCF. These inferred reserves—which are generally open to further development—will likely be tapped as technologies improve,

different geologic strata are tested, and reserves become more defined.

Moreover, as I explained earlier, the public lands outside of Utah’s seven ‘‘hot

spots’’ (places where 95% of all oil and gas production is currently occurring and

where it is predicted to occur in the future), have very little to offer in the way of

meaningful oil and gas reserves. Drilling these lands, however, will have a definite

cost—the loss of our few remaining wild lands and natural heritage.

Question 2. Your group also ‘‘supports federal policies that encourage energy efficiency and renewable power, which can meet much of [the] nation’s need for electric

power plants over the next 20 years.’’ Right now, people are going out of work because of the cost of natural gas, but our environmental policies continue to spur

more natural gas use. 24% of our nation’s energy depends on natural gas and nearly

half our manufacturers. Yet, our country gets only 1% of its power from renewables.

Gas producers go where the gas is abundant. Similarly, wind and solar power producers build where the wind are sun are plentiful. Southern Utah is sunny and

windy, just as it may contain significant gas reserves.

Would you support construction of wind turbines and solar panels in that same

area?

Response. Senator, the Southern Utah Wilderness Alliance (SUWA) support federal, state, and private efforts to increase energy efficiency and to spur the development and expansion of renewable power sources, such as wind power. In fact,

SUWA purchases wind-generated power for its main Salt Lake City office through

Utah Power’s ‘‘Blue Sky’’ program.

Regarding the placement of either future wind turbines or solar panels in southern Utah, I believe that each project must be evaluated on a case-by-case basis to

determine if there were other resource concerns such as wildlife habitat or proposed

wilderness lands.

One point of clarification, as I indicated to you earlier, with the exception of the

established fields at Aneth and Lisbon Valley, the majority of southern Utah’s public lands have not been identified by the Department of Energy, U.S. Geological Survey, or the State of Utah’s Division of Oil, Gas, and Mining as being predicted to

contain meaningful quantities or either oil or gas.

STATEMENT OF GEORGE HANDLEY, PRESIDENT, ECLIPSE EXPLORATION CORPORATION

Thank you Mr. Chairman, my name is George Handley, I am the President and

only employee of Eclipse Exploration Corporation based in Denver, Colorado. I appreciate the opportunity to speak with you today and I am glad to see the Committee’s interest in natural gas supply in America and the environmental policies affecting its development.

Policies that either limit or encourage energy development of natural gas resources have very real consequences. Policies that promote the use of a particular

energy source, yet fail to provide for the necessary and orderly development of that

same resource are predisposed to failure.

I have been the victim of Federal land management policies that allow groups

that are not party to any contract with the BLM or State to effectively stop a project

through protests, appeals, and litigation. I have been victimized by the uncertainty

that is created by abuses to public involvement statutes. Even when I followed all

the laws and regulations, and had the approval of land managers, I found that I

was still subject to the reach of obstructionist groups that sought to halt my natural

gas exploration project and my cripple my company.

Legal challenges severely limit oil and natural gas development on Federal lands.

At every stage of development obstructionist groups challenge agency decisions and
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seek to stop development. For example, in the State of Utah alone, fifty-seven percent (57 percent) of all lease parcels offered by the Bureau of Land Management

between 2001 and 2003 were protested by groups opposed to development.

I experienced one of these legal challenges first hand in Grand County, Utah on

a seismic project over a Federal mineral lease. This lease is located in the Thompson

Mining District, a former uranium mining area characterized by dry, sparsely vegetated land. It is not within Arches National Park. It is not within view of Arches

National Park. It is not wilderness. It was leased to me by the Federal and State

government with the expressed intent and responsibility to explore for oil and natural gas.

Seismic technology has greatly increased our ability to map the subsurface geology thereby allowing exploratory drilling in the most efficient manner. I have thirty

years of experience working on seismic projects and developing petroleum exploration plays around the world. I have a Masters degree in geophysics from the Colorado School of Mines. In order to accurately map the subsurface geology of this prospect, I designed a specific seismic program. Any deviation from this program might

result in useless data.

WesternGeco was hired to conduct the seismic activities on my lease. One of the

employees of WesternGeco, Stuart Wright, is one of the foremost experts on seismic

exploration and helped me design this program to ensure an accurate map of the

subsurface. An Environmental Analysis was prepared following the guidelines of the

BLM. The BLM informed WesternGeco and myself, what was needed to comply with

the law. We did what the government asked. After the permit was issued,

WesternGeco began operations. More than half-way through the project, a judge in

Washington, DC. issued a ruling that stopped the project based on a challenge by

the Southern Utah Wilderness Alliance (SUWA). My company is small and cannot

afford to fight well-funded, non-profit groups in the courts. The State of Utah and

WesternGeco helped, but in the end the SUWA won the court battle and has all but

stopped my project.

Abuse of the process delays the delivery of natural gas to consumers and destroys

the livelihood of businessmen like myself. The more legal challenges, the more

delays. The more delays, the more that consumers are affected. The more consumers

are affected, the more the economy suffers.

I am not here to debate the factual or legal merits of my case. I use this example

to lay blame on a process that allows non-profit groups to continually halt mineral

development on public lands. SUWA may show you pictures and tell you stories of

horrific damage done by the incomplete seismic project. It is misleading. There is

no long term damage to the area and it would be hard for anyone to see the path

of this project today. The State of Utah, the BLM and the Grand County Council

fully support my project. Grand County is anxious for the wildcat well to be drilled

and for the seismic program to be completed, as it will mean a lot to their economy.

The Intermountain West is blessed with abundant resources of natural gas, a substantial portion of which is owned by the Federal Government. These resources cannot be developed when small businesses like mine face insurmountable litigation.

Abusing the legal process puts Americans out of work and sends energy development outside our borders. It costs the government in terms of litigation costs and

the potential to pay the attorney fees of the groups who bring the suit. In my case,

I did what I was told by the government, but still lost and I have no recourse. Either way, the American public bears the burden of litigation against the government.

Thank you for allowing me to testify before you today.
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Display 1: This is a regional map showing the location of the seismic purchased

and recorded for the Yellow Cat prospect. Note the location of Arches National Park.
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Display 2: This is a base map showing the location of the seismic and the acreage

now held by Eclipse for the Yellow Cat Prospect.
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Display 3. On this land map the yellow represents all the acreage originally

leased by Eclipse and Gulf Canada. Note the acreage now held for Yellow Cat and

the location of Arches National Park.
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Display 4. Shows the Mississippian fault feature and the overlying Pennsylvanian

Structure that is not adequately defined because the seismic program was halted.
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Display 5. Shows the sparse vegetation in this old mining district, the Mississippian Fault Feature and the road access to the Initial wildcat location.
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Display 6. Shows Seismic Line YC–6 and the location of the initial test well. This

is only the bottom portion of this seismic line, from 1.2 seconds to 2.6 seconds. The

Honaker Trail is the top of the Pennsylvanian section. The Leadville is the top of

the Mississippian section. At the location the Honaker Trail will be at a depth of

8,400 feet. The Lynch is at a depth of 16,500 feet.
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STATEMENT OF PAUL N. CICIO, EXECUTIVE DIRECTOR, INDUSTRIAL ENERGY

CONSUMERS OF AMERICA

46-MONTH NATURAL GAS CRISIS HAS COST U.S. CONSUMERS OVER $130 BILLION

EXECUTIVE SUMMARY

The U.S. natural gas crisis began 46 months ago in June, 2000 and has had a

staggering direct and indirect economic impact on all consumers, the U.S. economy

and especially on manufacturing. Residential, commercial and industrial consumers

have paid $130 billion dollars more for natural gas during the 46-month natural gas

crisis when compared to the price paid for the previous 46 month period, an 86 percent increase. Unfortunately, there is no end in sight to these high and sustained

natural gas prices that are the highest in the world.

The increased price of natural gas has cost industrial consumers $66 billion, residential consumers $39 billion and commercial consumers $25 billion. Every penny

of the $130 billion could have been prevented and was totally unnecessary. The U.S.

is blessed with enormous natural gas reserves yet we do not lift drilling moratoriums.

Drilling for more natural gas and the recent California forest fires are a perfect

analogy. In the name of protecting forests, certain groups fought efforts to thin the

trees out and to take a balanced approach to managing the forests. Now, everyone

knows that balance is needed, that forests should be thinned and there is a price

to pay for inaction.

In the case of the forest fires, the people of California became the victim. In the

last 46 months, all consumers, including a lot of families with fixed income, became

the victim of high natural gas prices. Manufacturing workers, who lost their jobs

to overseas manufacturers with cheaper natural gas, also became the victim. The

jobs lost may never return.

When prices of natural gas rose significantly in June of 2000, it began to impact

manufacturing jobs immediately and still is today. Manufacturing employment has

fallen for 43 consecutive months. Since July 2000, the number of factory jobs is

down by over 2.8 million.

Every U.S. economic recession has been preceded by high-energy prices and the

recent recession was no different. IECA believes the natural gas crisis started in

June 2000. Government officials say the U.S. recession officially began in March

2001. In our view the US economy is unlikely to fully recover without globally competitive energy.

High sustained natural gas prices are a hidden tax on consumers, depressing disposable personal income and savings, and ultimately consumer spending which accounts for two-thirds of the economy. High natural gas prices are a tax on every

person and company because natural gas is used as both a fuel and raw material

for the production of everything from fertilizer to plastics for computers to heating

homes and water. Sustained high natural gas prices impede economic growth and

severely impacts competitiveness of industry.

THE REAL COST IS MUCH MORE

The real cost of the crisis is much more than $130 billion when one considers

other direct and indirect impacts of sustained high prices on industrial and residential consumers.

The $130 billion cost estimate does not include:

• Consumption of natural gas by electric utilities and the ultimate impact high

prices have caused by increasing the price of electricity.

• Lower demand for natural gas by manufacturing because of ‘‘demand destruction,’’ caused by high prices.

• Reduction of operating rates in the manufacturing sector and the resultant loss

of efficient capacity utilization caused by high natural gas prices.

• Impact to downstream customers. For example, farmers have reduced their consumption of high cost natural gas based fertilizers resulting in lower agricultural

crop yields, which leads to higher food prices for all Americans.

• Loss of manufacturing jobs, plant shutdowns, corporate bankruptcies, loss of

capitalization, loss of competitiveness and profitability.

• Impact to residential electricity bills, higher food cost and the difficult choices

for fixed income families.

• Financial loss of corporate related tax income and higher heating and cooling

bills on states, cities, county governments, school systems and financial pressure on

human services.
205

THE IMPACT OF HIGH NATURAL GAS COSTS ON MANUFACTURING IS SIGNIFICANT

Manufacturing plays an important role in the economic health of our country and

we must recognize that affordable energy, including natural gas, is essential. In the

past, the affordability of U.S. energy was a key factor in manufacturing building

their factories here. Now, the non-globally competitive price of natural gas and natural gas feedstock is forcing manufacturing companies to produce their products

elsewhere.

According to the National Association of Manufacturers, manufacturing accounts

for 22 percent of GDP growth, contributes one-third of the economy’s productivity

growth, creates more business activity and jobs in other sectors than any other industry, performs 62 percent of U.S. private sector R&D, pays the highest wages—

18 percent higher than the national average and makes two-thirds of all U.S. exports.

NATIONAL ENERGY POLICY IMPLICATIONS

The blame for these high prices does not rest on the oil and gas companies, it

rests mostly on Federal and State policymakers. Congress and states must work together to break the impasse between the environment and the need to increase supplies of natural gas.

Unfortunately, the end of the crisis is no-where in sight. It is the belief of the

Industrial Energy Consumers of America (IECA) that the Energy Policy Act of 2003

will not by itself resolve this crisis. It will neither increase near-term production of

natural gas nor increase the use of Clean Coal-based electricity generation. The legislation includes many provisions that will help but these will not be enough to turn

this situation around. More is needed.

Resolving the crisis takes a combination of policies. We must increase production

of natural gas and increase use of coal for base-load electricity generation. The high

price of natural gas is due to the combination of relatively flat natural gas production despite increasing rig count and the significant increase in demand for natural

gas by the electric utility industry.

Natural gas consumption by the electric utility industry is a major problem. From

1992 to 2002 natural gas demand by the electric utility industry increased 60.5 percent and accounted for 93.6 percent of the nations’ increase in natural gas demand.

According to the Energy Information Administration (EIA), US natural gas consumption from 1992 to 2002 rose 2.227-billion cubic feet/day, an increase of 11 percent. In that same time period, natural gas consumption from the electric utility industry increased by 2.085-billion cubic feet/day or 60.5 percent. The increased electric utility demand for natural gas accounted for 93.6 percent of the entire US net

increase. The EIA forecasts continued large annual increases in natural gas use for

power generation. This is unacceptable.

This enormous increased demand without an equivalent increase in supply has increased the price of natural gas on all consumers. The electric utility industry has

alternative energy sources to produce power while industrial consumers, farmers

and homeowners do not. The current situation puts consumers in competition with

the electric utilities for purchases of natural gas and consumers are losing- paying

both higher natural gas and electricity prices as a result.

Increasing use of coal for power generation solves this problem. Use of clean coal

technology allows use of coal for power generation in an environmentally acceptable

manner. Coal has several hundred years of supply and power generation using coal

is a low cost option. As a power generation fuel, coal is far more reliable than natural gas because several months of coal supply can be stored onsite, while natural

gas is only reliable so long as the gas flows.

Increased demand for natural gas has largely been driven by government air quality regulations. Air quality issues are important and cannot be ignored and we acknowledge the EPA/utility rulemaking that is underway. The Interstate Air Quality

Rule and the Utility Mercury Reduction Rule must be ‘‘natural-gas-neutral’’. This

means the EPA action on this rule must not directly or indirectly increase the demand for natural gas.

There must be a way of accommodating progress in clean air quality while not

putting additional pressure on natural gas demand that is costing Americans billions in higher natural gas and electricity prices.

For more information on this report or for information on the Industrial Energy

Consumers of America and how you can help increase the affordability of natural

gas, please contact us at 202–223–1661 or visit us on the web at www.ieca-us.org.

The Industrial Energy Consumers of America is a 501 (C) (6) nonprofit organization created to promote the interests of manufacturing companies for which the

availability, use and cost of energy, power or feedstock play a significant role in
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their ability to compete in domestic and world markets. IECA supports a diverse,

robust and affordable supply of energy. IECA membership represents a diverse set

of industries including: plastics, cement, paper, food processing, chemicals, fertilizer,

insulation, steel, industrial gases, pharmaceutical, and brewing. IECA board members are senior energy procurement managers.

PRICE IMPACT CALCULATION METHODOLOGY

The $130 billion price impact calculation uses the monthly average of the daily

published closing price of the Henry Hub spot index price, considered to be the most

widely used cash price index in the United States. The 46-month average price from

June 2000 to March 2004 was $4.44/MM Btu. The previous 46-month average price

from January 1997 through May 2000 was $2.39/MM Btu. This means consumers

paid $2.05/MM Btu more for natural gas during the natural gas crisis, an 86 percent

increase.

REPORT DATA

Average Price Calculation

Dollars/MM Btu

Average price of 46 months prior to June, 2000 ...................................................................................................... $2.39

Average price of 46 months starting with June, 2000 ............................................................................................. $4.44

Price Difference .......................................................................................................................................................... $2.05

Percent change .......................................................................................................................................................... 85.8%

Price Impact Calculation on Industrial Consumers

Year Months Annual Volume, TCF

46 Month Volume, TCF

2000 ........................................................................................................................... 7 9.40* 5.483

2001 ........................................................................................................................... 12 8.45* 8.45

2002 ........................................................................................................................... 12 8.29* 8.29

2003 ........................................................................................................................... 12 8.06** 8.06

2004 ........................................................................................................................... 3 8.06** 2.015

Total Volume .............................................................................................................. 32.30 TCF

Total MMBtu ............................................................................................................... 32,298,333,333

Cost Impact ............................................................................................................... $66,269,002,592

Price Impact Calculation on Residential Consumers

Year Months Annual Volume, TCF

46 Month Volume,

TCF

2000 ........................................................................................................................... 7 4.99* 2.9111

2001 ........................................................................................................................... 12 4.78* 4.78

2002 ........................................................................................................................... 12 4.92* 4.92

2003 ........................................................................................................................... 12 5.07** 5.07

2004 ........................................................................................................................... 3 5.07** 1.2675

Total Volume .............................................................................................................. 18.95 TCF

Total MMBtu ............................................................................................................... 18,948,333,333

Total ........................................................................................................................... $38,877,769,259
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Price Impact Calculation on Commercial Consumers

Year Months Annual Volume, TCF

46 Month Volume,

TCF

2000 ........................................................................................................................... 7 3.22* 1.878

2001 ........................................................................................................................... 12 3.04* 3.04

2002 ........................................................................................................................... 12 3.12* 3.12

2003 ........................................................................................................................... 12 3.15** 3.15

2004 ........................................................................................................................... 3 3.15** 0.7875

Total Volume .............................................................................................................. 11.98 TCF

Total MMBtu ............................................................................................................... 11,975,833,333

Total ........................................................................................................................... $22,571,748,703

Henry Hub Monthly Average of Daily Spot Natural Gas Price

1996 1997 1998 1999 2000 2001 2002 2003 2004

Jan ........................................... $3.99 $2.25 $1.80 $2.36 $9.91 $2.61 $4.96 $6.15

Feb ........................................... $2.96 $2.04 $1.81 $2.61 $6.22 $2.03 $5.66 $5.77

Mar .......................................... $1.78 $2.26 $1.64 $2.61 $5.03 $2.39 $9.11 $5.00

Apr ........................................... $1.85 $2.32 $1.88 $2.89 $5.35 $3.40 $5.14

May .......................................... $2.51 $2.27 $2.35 $3.08 $4.87 $3.36 $5.12

Jun ........................................... $2.31 $2.03 $2.23 $4.37 $3.73 $3.37 $5.95

Jul ............................................ $2.16 $2.37 $2.28 $4.36 $3.16 $3.26 $5.30

Aug .......................................... $2.30 $2.19 $1.93 $2.62 $3.83 $3.19 $2.95 $4.69

Sep .......................................... $1.83 $2.57 $1.63 $2.90 $4.62 $2.34 $3.27 $4.93

Oct ........................................... $1.85 $3.16 $2.07 $2.55 $5.29 $1.86 $3.72 $4.44

Nov .......................................... $2.72 $3.30 $2.00 $3.06 $4.50 $3.16 $4.13 $4.45

Dec .......................................... $3.90 $2.55 $2.12 $2.14 $6.02 $2.28 $4.13 $4.86

1 MCF = MM Btu

* Energy Information Agency

* Estimate

March, 2004 price is an estimate.

STATEMENT OF THE NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION (NPRA)

OVERVIEW

NPRA, the National Petrochemical & Refiners Association is a national trade association with over 450 members, including those who own or operate virtually all

U.S. refining capacity, as well as petrochemical manufacturers. NPRA members

manufacture petroleum and petrochemical products that are essential to U.S. economic growth and maintenance of national security. These industries are dependent

on adequate supplies of fuels, including natural gas and natural gas liquids, at predictable, affordable prices.

NPRA appreciates the interest of the Senate Environment & Public Works Committee in addressing the impact of environmental regulations and policies on natural gas supply and demand. We urge you to study and assess current policy thoroughly and openly. The Nation needs and deserves a frank and public debate on

the future of its natural gas supplies.

Short natural gas supplies and accompanying high prices threaten the health of

U.S. industries, their significant contributions to national, State and local economies

and the continued existence of thousands of jobs. Government, industry, and private

experts agree that natural gas demand is expected to rise by the year 2020 by as

much as 60 percent over today’s levels. It is certain that domestic gas production

can not satisfy this new demand unless current policy is altered significantly.

In addition, the President’s National Energy Policy Task Force projects that over

1,300 new electric generating plants must be constructed to fulfill anticipated electric energy needs during the next 20 years. DOE suggests that over 90 percent of

these facilities will be fueled by natural gas. This increase in gas usage for electric

generation may not be achievable.

The United States has an abundant supply of domestic gas, but flawed government policies and regulatory red tape prohibit its development in many areas. In

the short term, efforts should be made to encourage energy efficiency and conservation while also encouraging the substitution of fuel oil, coal or nuclear power where

possible. For the long term, we must develop policies that promote continued envi-
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ronmental progress without reducing the supply of natural gas and other petroleum

products.

FLAWED POLICES ENCOURAGE CONSUMPTION, DISCOURAGE SUPPLY

Our Nation currently faces daunting challenges as it strives to balance ever-increasing energy demands from all consuming sectors, largely due to contradictory

and short-sighted policies that have limited supply while promoting additional natural gas consumption. Increasing demand for natural gas because of its environmental benefits has come up against a North American production base, which has

been artificially restricted due to contradictory policy initiatives. Those policies promote the use of clean burning gas while at the same time failing to ensure adequate, affordable supplies of the fuel.

NPRA believes the current ill-advised national policy of limiting natural gas supply while encouraging gas use because of its environmental benefits—mostly in the

generation of base and peak load electricity—has created and could exacerbate continuing higher gas prices and volatility. In fact, EIA reports that demand by electricity generators is expected to account for 30 percent of total natural gas consumption in 2025. This equates to a doubling of gas use by the utility sector over current

demand. Under present policies, it is not clear that adequate supplies will be available to accommodate this demand figure unless current natural gas users in core

industries are forced to switch fuels or close.

This is really not a resource problem. Flawed government policies have prohibited

the development of gas in many areas. If changes are not made to existing policies,

our predicament will not be short-lived. This means that policymakers and stakeholders must act or accept responsibility for the ultimate consequences of short supplies, lost U.S. jobs, a worsening trade balance and further loss of U.S. industrial

leadership. The U.S. has an abundant supply of domestic gas.

In January 2004, the Department of the Interior issued a rule providing new incentives to boost domestic natural gas production in the hard-to-reach, deepwater

areas of the Gulf of Mexico. The rule is expected to save consumers some $570 million a year and create as many as 26,000 jobs. NPRA believes that the rule is an

excellent short-term step which will go a long way to help sustain a reliable supply

of natural gas. But more is needed. The comprehensive energy legislation (H.R. 6)

is a good start to address longer term needs, but it lacks adequate incentives to increase natural gas supply in the near term. NPRA will work with Congress in 2004

to enact separate legislation to encourage natural gas production.

PETROCHEMICAL AND REFINING INDUSTRIES SEVERELY DISADVANTAGED BY HIGH

ENERGY COSTS

The domestic petrochemical industry, as well as others in the basic chemical sector, is primarily based upon natural gas and natural gas liquids. About 70 percent

of U.S. petrochemical manufacturers use natural gas liquids as feedstocks. In contrast, about 70 percent of petrochemical producers in Western Europe and Asia use

naphtha heavy oil as a feedstock. While oil is a global commodity whose price is

set on the global market, natural gas liquids are generally more locally traded commodities. Thus, price increases in natural gas have had a larger impact on competitiveness in North American-produced petrochemicals.

The U.S. has generally maintained a reasonable-cost feedstock position relative to

its competitors in Europe and Asia. However, that situation has been eroded as the

price of natural gas has increased. North American natural gas and natural gas liquids prices have risen to unprecedented levels for a sustained period of time and

placed a significant portion of the domestic petrochemical industry at a disadvantage to European and Asian producers. The trend toward increased siting of base

petrochemical production and expansion projects in overseas locations is directly attributable to this growing disparity in fuel prices. Additional displacements will

occur if the current and prospective gas price and supply situation is not addressed

promptly.

High natural gas prices have created fundamental changes in the U.S chemical

industry, with the petrochemical industry affected more than other segments of the

industry. There have been a series of bankruptcies, plant closures, and reductions

in production levels at many facilities because they can no longer compete at the

current elevated gas prices.

On March 17th, The Washington Post published an article on the job losses in the

chemical industry resulting from high natural gas prices. The Post reported that

‘‘Across the country, 1 in every 10 chemical-related jobs has vanished in the past

5 years—nearly 100,000 workers—and that number would be worse if not for a

surge in one segment, pharmaceuticals.’’ These chemical jobs tend to be well-paid
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and ‘‘virtually impossible to replace in their communities.’’ Louisiana Governor

Kathleen Blanco said, ‘‘Right now we’ve got big operations just shutting down because they cannot compete on the world market. We’ve had shutdowns before but

they have always been temporary. We’ve not seen anything like this before.’’

U.S. trade receipts from chemical companies have also been adversely impacted

by high natural gas prices. Over 3 years of extraordinarily high natural gas prices

(2001–2004) have resulted in a depressed chemical export market and a negative

trade balance for the U.S. economy. The U.S. balance of payment for chemicals went

from an $8 billion surplus in 1999 to an estimated $9 billion deficit for 2003. This

negative trade balance allows foreign businesses to capture U.S. market share.

Natural gas prices also impact petroleum product prices because refineries are

significant users of natural gas. Many facilities switched to natural gas use at the

order of environmental authorities such as the EPA. The result is that natural gas

supply and price have considerable impact on the output of the nation’s petroleum

products as well as on refining industry profitability. This is even more critical as

refiners face a tight supply/demand balance for petroleum products and higher raw

material costs for crude oil.

Over the next 6 years and well beyond, there appears to be no relief for residential consumers, refiners, and petrochemical manufacturers. In its ‘‘2004 Annual Outlook’’, the Energy Information Administration (EIA) concludes that high natural gas

prices are likely to continue to increase until 2010. EIA predicts ‘‘. . . greater dependence on more costly alternative supplies of natural gas’’ from LNG imports and

remote resources in Alaska and Canada. This is difficult news for petrochemical

manufacturers, refiners, and consumers. Congress should act to maximize production from the significant U.S. reserve base. Without urgent action, the United States

will continue to lose thousands of manufacturing jobs and suffer billions of dollars

in economic harm due to inadequate gas supplies.

SHORT-TERM POLICY OPTIONS—CONSERVATION, EFFICIENCY & FUEL SWITCHING

In the immediate future, efforts should also be made to help mitigate the natural

gas supply problems through voluntary conservation and efficiency efforts. NPRA

urges both Congress and the Administration to act to improve energy efficiency and

conservation in the use of natural gas and power, especially as the Nation enters

the summer cooling season. This could be accomplished by offering appropriate incentives. Any adjustment in electricity consumption would reduce natural gas consumption by the power sector and have a positive impact on natural gas availability.

This, in turn, could help to moderate natural gas supply and price concerns. Further, if and when natural gas supplies become extremely tight, the Federal and local

government should allow electric utilities and other industrial facilities to switch to

alternative fuels in order to conserve natural gas supplies. Pre-emptive efforts to encourage fuel switching would be even more helpful.

LONG-TERM OPTIONS MUST FOCUS ON SUPPLY

We must develop policies that promote continued environmental progress without

reducing the supply of natural gas and other petroleum products needed for a

healthy economy and the nation’s security. We need to forge a diversified national

energy policy that reduces our dependence on foreign energy sources while increasing our domestic production. These policies must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf. We must also bring Alaskan natural gas to lower 48 markets as soon

as possible. New and promising domestic areas for development must be open for

exploration and production. In the meantime, NPRA would urge caution when Congress and the Administration consider any policies, environmental or other, that will

accelerate the demand for natural gas when other policy options exist.

Environmental progress and energy supply need not be mutually exclusive. However, long-standing and recent environmental policies have significantly limited fuel

and energy supply choices. They have promoted or even required fuel switching

while at the same time discouraging expanded domestic production of natural gas.

Anticipated environmental constraints could aggravate the current situation. This

is a formula guaranteed to make an already bad situation worse.

Recent reports support the need for increased domestic production. As an example, last fall, the National Petroleum Council (NPC), at the request of the Secretary

of Energy, released its recommendations and policy options on the long-term future

of natural gas. The NPC warned that the U.S. will pay an additional $1 trillion in

natural gas costs over the next 20 years unless current policy is altered and action

is taken to increase domestic production.
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RECOMMENDATIONS

NPRA urges Congress and the Administration to re-think and re-evaluate current

and future policy initiatives. We should focus on all energy options, including fuel

choice mixture and flexibility; gas supply source diversification; faster permitting for

modernization and expansion of infrastructure, including LNG facilities and pipelines; development of new technologies; and natural gas market transparency and efficiency. As a nation, we can not afford to inhibit any options that are beneficial to

increasing supply.

Finally, NPRA believes that there is an urgent need to harmonize the nation’s energy and environmental policies, and that any national energy plan must include traditional supply and market-oriented policies for all fossil fuels, including natural

gas. The current energy legislation is deficient, so separate legislation must be developed and enacted.

CONCLUSION

We urgently need a thorough review of natural gas-related policies to maintain

and retain the U.S. petrochemical, refining, and other manufacturing industries in

the context of a healthy and growing U.S. economy. It is clear that natural gas will

play an increasingly important role in America’s energy future; but we must analyze, clarify, and correct policies to maximize the available supply of this key resource. Therefore, we repeat that the principal focus of the gas policy discussion

must be on the need for increased supply of this critical fuel.

For this reason, NPRA appreciates the Committee’s efforts to investigate the

issues surrounding and impacting the supply, demand, and price volatility of our

nation’s natural gas resources. We hope to work with all stakeholders to design a

natural gas policy that provides adequate supply at reasonable and predictable

prices while simultaneously continuing environmental progress.

STATEMENT OF THE AMERICAN GAS ASSOCIATION (AGA)

EXECUTIVE SUMMARY

The American Gas Association represents 192 local energy utility companies that

deliver natural gas to more than 53 million homes, businesses and industries

throughout the United States. Natural gas meets one-fourth of the United States’

energy needs and is the fastest growing major energy source. As a result, adequate

supplies of competitively priced natural gas are of critical importance to AGA and

its member companies. Similarly, ample supplies of reasonably priced natural gas

are of critical importance to the millions of consumers that AGA members serve.

AGA speaks for those consumers as well as its member companies.

For the past 3 years, the natural gas industry has been at a critical crossroads.

Natural gas prices were relatively low and very stable for most of the 1980’s and

1990’s. Wholesale natural gas prices during this period tended to fluctuate around

$2 per million Btus (MMBtu). But the balance between supply and demand has

been extremely tight since then, and even small changes in weather, economic activity or world energy trends have resulted in wholesale natural gas price fluctuations.

Market conditions have changed significantly since the winter of 2000–2001. Supply

and demand is now in precarious balance. Today our industry no longer enjoys prodigious supply; rather, it treads a supply tightrope, bringing with it unpleasant and

undesirable economic and political consequences—most importantly high prices and

higher price volatility. Both consequences harm natural gas customers—residential,

commercial, and industrial.

Since the beginning of 2003, the circumstances in which our industry finds itself

have become plainly evident through significantly higher natural gas prices. Natural

gas prices have consistently hovered in the range of $5–6 per thousand cubic feet

in most wellhead markets. In some areas where pipeline transportation constraints

exist, prices have skyrocketed for short periods of time to $70 per thousand cubic

feet. Futures prices for natural gas as far out as 2007 continue to reflect a wellhead

price expectation of greater than $5, as they have done for more than a year. Simply

put, natural gas prices are high, and the marketplace is predicting that they will

stay high. At this point there is no debate among analysts as to this State of affairs.

Energy is the lifeblood of our economy. More than 50 million Americans rely upon

natural gas to heat their homes, and high prices are a serious drain on their pocketbooks. High, volatile natural gas prices also put America at a competitive disadvantage, cause plant closings, and idle workers. Directly or indirectly, natural gas is

critical to every American.
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The consensus of forecasters is that natural gas demand will increase steadily

over the next two decades. This growth will occur because natural gas is the most

environmentally friendly fossil fuel and is an economic, reliable, and homegrown

source of energy. It is in the national interest that natural gas be available to serve

the demands of the market. The Federal Government must address these issues and

take prompt and appropriate steps to ensure that the Nation has adequate supplies

of natural gas at reasonable prices.

Many of the fields from which natural gas is currently being produced are mature.

Over the last two decades, technological advances have greatly enhanced the ability

to find natural gas as well as to produce the maximum amount possible from a field.

While technology will undoubtedly continue to progress, technology alone will not

be sufficient to maintain or increase our domestic production.

As Federal Reserve Chairman Greenspan noted before the House Energy and

Commerce Committee, today’s tight natural gas markets have been a long time in

coming but there are still numerous unexploited sources of gas production in the

United States. We are not running out of natural gas; we are not running out of

places to look for natural gas; we are running out of places where we are allowed

to look for gas. The truth that must be confronted now is that, as a matter of policy,

this country has chosen not to develop much of its natural gas resource base.

Without prudent elimination of some current restrictions on U.S. natural gas production, producers will likely not be able to continue providing increased amounts

of natural gas from the lower–48 states to customers for longer than 10 or 15 years.

This would likely expose 65 million homes, businesses, industries and electric-power

generation plants that use natural gas to unnecessary levels of price volatility—thus

harming the U.S. economy and threatening Americans’ standard of living.

If America’s needs for energy are to be met, there is no choice other than for exploration and production activity to migrate into new, undeveloped areas. There is

no question that the nation’s natural gas resource base is rich and diverse. It is simply a matter of taking E&P activity to the many areas where we know natural gas

exists. Regrettably, many of these areas—largely on Federal lands—are either totally closed to exploration and development or are subject to so many restrictions

that timely and economic development is not possible. As we contemplate taking

these steps, it is important that all understand that the E&P business is—again as

a result of technological improvements—enormously more environmentally friendly

today than it was 25 years ago. In short, restrictions on land access that have been

in place for many years need to be reevaluated if we are to address the nation’s current and future energy needs.

Both houses of Congress recognized these concerns last year in passing H.R. 6.

This year, like last, the most important next step the entire Congress can take to

address these pressing issues is to enact a comprehensive energy bill with provisions ensuring that lands where natural gas is believed to exist are available for

environmentally sound exploration and development. Additionally, it is appropriate

to create incentives to seek and produce this natural gas. These steps are necessary

to help consumers and the economy.

RECOMMENDATIONS

To promote meeting consumer needs, economic vitality, and sound environmental

stewardship, the American Gas Association urges Congress as follows:

• Current restrictions on access to new sources of natural gas supply must be reevaluated in light of technological improvements that have made natural gas exploration and production more environmentally sensitive.

• Federal and State officials must take the lead in overcoming the pervasive ‘‘not

in my backyard’’ attitude toward energy infrastructure development, including gas

production.

• Interagency activity directed specifically toward expediting environmental review and permitting of natural gas pipelines and drilling programs is necessary, and

agencies must be held responsible for not meeting time stipulations on leases, lease

review, and permitting procedures.

• Federal lands must continue to be leased for multi-purpose use, including oil

and gas extraction and infrastructure construction.

• Both private and public entities should act to educate the public regarding energy matters, including energy efficiency and conservation. Federal and State agencies, with private sector support and involvement, should strive to educate the public on the relationship between energy, the environment, and the economy. That is,

energy growth is necessary to support economic growth, and responsible energy

growth is compatible with environmental protection.
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• Economic viability must be considered along with environmental and technology

standards in an effort to develop a ‘‘least impact’’ approach to exploration and development but not a ‘‘zero impact’’.

• Existing moratoria for onshore lands should be lifted.

• The geologic conditions for oil and gas discovery exist in the US mid-Atlantic

area, the Pacific Offshore area, and the eastern portion of the Gulf of Mexico.

• Although some prospects have been previously tested, new evaluations of Atlantic oil and gas potential should be completed using today’s technology—in

contrast to that of 20 to 30 years ago.

• The Federal Government should facilitate this activity by lifting or modifying

the current moratoria regarding drilling and other activities in the Atlantic

Offshore, in the Pacific Offshore, and in the Gulf of Mexico to ensure that

adequate geological and geophysical evaluations can be made and that exploratory drilling can proceed.

• The Destin Dome (181 lease area) of the eastern Gulf of Mexico should immediately be offered for lease for oil and gas exploration.

• The Federal Government must work with the States to assist—not impede—

the process of moving natural gas supplies to nearby markets should gas resources be discovered in commercial quantities. Federal agencies and states

must work together to ensure the quality of the environment, but they must

also ensure that infrastructure (such as landing an offshore pipeline) is permitted and not held up by multi-jurisdictional roadblocks.

• The Federal Government should continue to permit royalty relief where appropriate to change the risk profile for companies trying to manage the technical and

regulatory risks of operations in deepwater.

• Tax provisions such as percentage depletion, expensing geological and geophysical costs in the year incurred, Section 29 credits, and other credits encourage

investment in drilling programs, and such provisions are often necessary, particularly in areas faced with increasing costs due to environmental and other stipulations.

• The Coastal Zone Management Act (CZMA) is being used to threaten or thwart

offshore natural gas production and the pipeline infrastructure necessary to deliver

natural gas to markets in ways not originally intended. Companies face this impediment even though leases to be developed may be 100 miles offshore. These impediments must be eliminated or at least managed within a context of making safe, secure delivery of natural gas to market a reality.

• The U.S. Government should work closely with Canadian and Mexican officials

to address the challenges of supplying North America with competitively priced natural gas in an environmentally sound manner.

• Renewable forms of energy should play a greater role in meeting U.S. energy

needs, but government officials and customers must realize that all forms of energy

have environmental impacts.

• Construction of an Alaskan natural gas pipeline must begin as quickly as possible.

• Construction of this pipeline is possible with acceptable levels of environmental impact.

• The pipeline project would be the largest private sector investment in history,

and it would pose a huge financial risk to project sponsors. Many believe the

project may not be undertaken without some form of Federal support.

• The Federal Energy Regulatory Commission (FERC) announced in December of

2002 that it would not require LNG terminals to be ‘‘open access’’ (that is, common

carriers) at the point where tankers offload LNG. This policy will spur LNG development because it reduces project uncertainty and risk.

• Other Federal and State agencies should review any regulations that impede

LNG projects and act similarly to reduce or eliminate these impediments.

• Efforts should be made to encourage existing LNG terminals to commence operating at full capacity at the earliest opportunity.

• The siting of LNG offloading terminals is generally the most time-consuming

roadblock for new LNG projects. Federal agencies should take the lead in

demonstrating the need for timely approval of proposed offloading terminals,

and State officials must begin to view such projects as a means to satisfy supply and price concerns of residential, commercial and industrial customers.

• Some new LNG facilities should be sited on Federal lands so that permitting

processes can be expedited.

• Congress should increase LIHEAP funding. Low-income energy assistance is

currently provided to roughly 4 million households, only 15 percent of those eligible.

The financial burden on needy families will certainly increase this winter, and
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LIHEAP appropriations should be increased to $3.4 billion—up from $2.0 billion of

total assistance in 2003.

• Should gas supplies become extremely tight, the Federal Government and the

States should consider easing environmental restrictions on a temporary basis so

that electric generating facilities and industrial facilities can switch to alternative

fuels.

• States should be encouraged to authorize local utilities to enter into fixed-price

long-term contracts and/or natural gas hedging programs as a means of dampening

the impact of natural gas price volatility upon consumers.

WRITTEN STATEMENT

AGA is grateful for the opportunity to share its views on the critical importance

to the Nation of ensuring ample natural gas supplies at competitive prices. Doing

so is necessary for the nation—both to protect consumers and to address the energy

and economic situations we currently face.

The American Gas Association represents 192 local energy utility companies that

deliver natural gas to more than 53 million homes, businesses and industries

throughout the United States. Natural gas meets one-fourth of the United States’

energy needs and is the fastest growing major energy source.

AGA members are charged with the responsibility, under local law or regulation,

of acquiring natural gas for the majority of their customers and delivering it in a

safe and reliable manner. Having an ample supply of natural gas at reasonable

prices is a critical issue for AGA and its members. AGA members and the natural

gas consumers they serve share both an interest and a perspective on this subject.

It is important to understand that the bread and butter business of AGA members

is acquiring and delivering natural gas to residential, commercial, and, in some

cases, industrial consumers across America. Our members remain economically viable by delivering natural gas to consumers at the lowest reasonable price, which we

do by operating our systems—over a million miles of distribution lines—as efficiently as possible. Exploring for and producing natural gas is the business of our

energy-industry colleagues in oil and gas exploration companies, whether they are

super-major, major, independent, or ‘‘Mom and Pop’’ operators. We do not speak for

them, but their continued success in providing natural gas to America’s consumers

is of the utmost importance to us as well. AGA and its members stand in the shoes

of consumers who want reasonable heating bills and good jobs.

AGA has three objectives in this statement: first, to explain briefly why natural

gas prices have jumped over the last 2 years year; second, to describe the magnitude

of the natural gas supply challenge facing this country over the next two decades;

and third, to recommend a number of steps that Congress can take to help bring

natural gas prices down in the long term.

AGA remains encouraged that Congress is continuing to address this critical

issue. Over the last year AGA has been privileged to testify before the Senate Energy and Natural Resources Committee, the House Energy and Commerce Committee, and the House Resources Committee with regard to the challenging issue

of natural gas supply. AGA is also gratified that the House of Representatives and

the Senate each passed a version of the Energy Policy Act of 2003. The House and

Senate bills each contained a wide array of provisions designed to bring forth more

of America’s prodigious supply of natural gas to benefit consumers. These bills without question focused more on natural gas supply than the iterations under consideration in 2001 and 2002. Notwithstanding the inability for both houses in 2003 to

agree upon a comprehensive energy bill, AGA remains encouraged that Congress

will, in 2004, address the issues surrounding the nation’s need for a secure supply

of ample quantities of natural gas at reasonable prices.

Adequate natural gas supply is crucial to all of America for a number of reasons.

It is imperative that the natural gas industry and the government work together

to take significant action in the very near term to assure the continued economic

growth, environmental protection, and national security of our nation. The tumultuous events in energy markets over the last several years serve to underscore the

importance of adequate and reliable supplies of reasonably priced natural gas to

consumers, to the economy, and to national security.

There has been a crescendo of public policy discussion with regard to natural gas

supply since the ‘‘Perfect Storm’’ winter of 2000–2001, when tight supplies of natural gas collided with record-cold weather to yield record natural gas home-heating

bills. Nevertheless, over the course of the last year the volume and the tenor of this

discussion have increased dramatically. Simply put, this issue continues to become

more critical with every passing day.
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Over the course of the last year, natural gas has been trading in wellhead mar- kets throughout the Nation at prices floating between $5 and $6 per thousand cubic

feet. This has not been a ‘‘price spike’’ of the sort that has occurred in times past,

lasting several days or weeks. Rather, it has been sustained over a period of more

than a year. Moreover, there is no sign that it will abate in the near future. Indeed,

quotes for futures prices on NYMEX over the next several years have been consistent with these levels.

Over the last year or more, business consumers of natural gas have been raising

a cry of concern over natural gas prices. This concern has touched businesses of all

stripes. Since natural gas prices began rising in 2000, an estimated 78,000 jobs have

been lost in the U.S. chemical industry, which is the nation’s largest industrial consumer of natural gas, both for generation of electricity at manufacturing plants and

as a raw material for making medicine, plastics, fertilizer and other products used

each day. Similarly, fertilizer plants, where natural gas can represent 80 percent

of the cost structure, have closed one facility after another. Glass manufacturers,

which also use large amounts of natural gas, have reported earnings falling by 50

percent as a result of natural gas prices. In our industrial and commercial sector,

competitiveness in world markets and jobs at home are on the line.

This winter—like last winter—many families will pay hundreds of dollars more

to heat their homes, which represents hundreds of dollars less they will have to

spend on other things. Many families are forced to make difficult decisions between

paying the gas bill, buying a new car, or saving for future college educations. There

are, of course, State and Federal programs such as LIHEAP to assist the most

needy. But LIHEAP only provides assistance to about one-quarter of those who are

eligible, and it does not provide assistance to the average working family. These

price increases have affected all families—those on fixed incomes, the working poor,

lower-income groups, those living day to day, and those living comfortably.

America received its first wake-up call on natural gas supply in the winter of

2000–2001 when a confluence of events—a cold winter, a hot summer and a surging

economy—created the so-called ‘‘perfect storm.’’ This jump in demand sent natural

gas prices soaring. Drilling boomed, supply grew (slightly), demand fell, and gas

prices retreated—just what one would expect from a competitive, deregulated natural gas market. Falling natural gas prices predictably led to a slowdown in drilling.

The industry drilled 30 percent fewer gas wells in 2002 than in 2001. This downturn

in drilling in 2002 set the stage for another run-up in prices in the 2002–2004 timeframe.

This winter natural gas prices are at winter 2001 levels because demand is up

and supply is down. Demand is up in part because we have had normal winters.

(Consumers have been extremely fortunate that we have not had significantly colder-than-normal winters). Meanwhile, while demand is up, U.S. natural gas production has been trending downward. Indeed, U.S. natural gas production today is

lower than it was 5 years ago—despite a big jump in drilling at times in the last

several years.

These natural gas prices have caused considerable discomfort for the consumers

(particularly residential) that have seen their natural gas bills increase dramatically. Fortunately, the public backlash has been more muted than many had feared.

Both utilities and regulators learned from the public reaction to the prices of 2000–

2001, and, over the past year, they undertook significant public-awareness campaigns. As a result, many consumers were not taken by surprise by their increased

utility bills.

Because all energy prices are up, natural gas remains the best home-heating

value this winter, according to the U.S. Energy Information Administration. Nonetheless, it is harmful to individual families and to the entire U.S. economy for natural gas price volatility to persist.

Unless we make the proper public policy choices—and quickly—we will be facing

many more difficult years with regard to natural gas prices. The natural gas industry is presently at a critical crossroads. The question before this body today is: What

will that crossroads look like? Will it look like a brand new interstate highway? Or

will it look like a 100-car collision on a Los Angeles freeway? It is important to remember that at the heart of this intersection are America’s consumers.

For the past 5 years, natural gas production has operated full-tilt to meet consumer demand. The ‘‘surplus deliverability ‘‘ or ‘‘gas bubble’’ of the late 1980’s and

1990’s is simply gone. No longer is demand met while unneeded production facilities

sit idle. No longer can new demand be met by simply opening the valve a few turns.

The valves have been, and presently are, wide open.

The supply tightrope has brought with it several inexorable and unpleasant consequences—prices in wholesale markets have risen dramatically, and that market

has become much more volatile. During the 2000–2001 heating season, for example,
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gas prices moved from the $2 level to approximately $10 and back again to nearly

$2. Such volatility hurts consumers, puts domestic industry at a competitive disadvantage, closes plants, and idles workers. The winter of 2000–2001 made it abundantly clear to natural gas utilities (and to legislators as well) that consumers dislike these price increases and the market volatility that has now become an everyday norm. Unless significant actions are taken on the supply side, gas markets will

remain tumultuous, and 63 million gas customers will suffer the consequences. Today’s recurrent $5 price levels appear to represent a regular, level of natural gas

prices for the foreseeable future, although this prospect can be moderated somewhat

with aggressive and enlightened public policy.

Gas utilities have in place a number of programs to insulate consumers, to some

extent, from the full impact of wholesale price volatility. Nevertheless, consumers

must ultimately pay the price that the market commands. There has been, and will

be, considerable economic and political pushback from natural gas prices stabilizing

at the current $5 level. That pushback can be expected to continue as the impacts

of these price levels trickle through the economy. Energy prices are undoubtedly a

factor in what some have called a ‘‘jobless’’ recovery from the last several years of

economic malaise.

Some would suggest that current natural gas conditions are not the result of market fundamentals. Continued high and volatile natural gas prices have, for example,

resulted in charges of market manipulation and calls for investigation. While AGA

has not performed an independent evaluation regarding these assertions, others—

including the CFTC, FERC and various analysts—have. These evaluations consistently identify supply and demand as the explanatory variables regarding natural

gas prices. Certainly any substantiated market irregularities should be dealt with

aggressively and with certainty. However, the burden of high and unpredictable natural gas prices on consumers will not be eased until we as a Nation address the

supply/demand imbalance in the natural gas market. It would be ill advised to embrace the notion that that aggressive investigation and law enforcement will remedy

the underlying, fundamental imbalance in supply and demand.

The role of supply and demand in natural gas markets has been plainly evident

over the last 12 months. Very cold weather in January and February of 2003 resulted in gas consumption that was 18 percent higher than the previous year. This

strong demand resulted in aggressive natural gas storage withdrawals, and storage

inventories were 50 percent below the 5-year average at the end of the 2002–2003

winter. Despite concern that storage could not be refilled to adequate levels prior

to the 2003–2004 winter, gas utilities injected gas at record levels in order to ensure

winter reliability. In late December 2003, storage levels marginally exceeded the 5-

year average, although much of this gas was purchased in periods of high prices and

the need to refill storage contributed to market tightness. Natural gas prices fluctuated around $6 per thousand cubic feet for the first half of the year (with a spike

over $9 during the February cold snap) declining to about $5 late in the year.

Mild weather in December 2003, and a return to comfortable storage levels produced hope for moderating prices, and prices did fall below $5 in the second half

of the month. However, the first week in January 2004 was 8 percent colder than

normal nationally, and 7 to 17 percent colder than normal in the gas heating-intensive upper Midwest, Middle Atlantic and New England states. Additionally, the demand for gas to fuel a rebounding industrial sector that started in late 2003 has

continued in 2004. Further, with cold weather comes an increasing demand for electric heat and gas-fired electricity generators are now being pulled into the generating mix. The surge in early winter demand pushed natural gas prices back to $7

per thousand cubic feet in early January.

The primary reason for high and volatile natural gas prices is the tightness in

the marketplace. While law enforcement agencies must continue to be alert for manipulative actions, Federal policy changes must lead the way in reducing this tightness. Not until we increase supply, reduce demand and streamline relevant energy

regulations will 65 million gas consumers see more reasonably priced and more stable natural gas prices.

Moreover, the problem that we face today is not simply one of finding means to

meet current demands in the market for natural gas. Rather, with a growing economy we are in a growing market, and the demand for natural gas in the U.S. is

expected to increase steadily. Growth seems inevitable because natural gas is a

clean, economic, and domestic source of available energy. It does not face the environmental hurdles of coal and nuclear energy, the economic and technological drawbacks of most renewable energy forms, or the national security problems associated

with imported oil.

The U.S. natural gas market may grow by 1–2 percent per year over the next 20

years. Much of this growth in natural gas demand will occur in the electricity and
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industrial markets. In fact, the U.S. now has several hundred thousand megawatts

of new gas-fired power plants on line that did not exist in the summer of 1999—

the equivalent of several scores of Diablo Canyon nuclear power plants.

If the market were to grow by 2 percent per year, gas supply would need to increase, in terms of average daily supply, from about 60-billion cubic feet per day

today to about 95-billion cubic feet per day in 2025—a 35 billion-cubic-foot-per-day

increase in deliverability. (To place this potential increase in perspective, current

production from the entire Gulf of Mexico is only about 14-billion cubic feet per day,

and imports from Canada are about 10-billion cubic feet per day.)

The challenge for both government and industry is quite straightforward: to ensure that both the current and future needs for natural gas are met at reasonable

and economic prices. There can be no responsible question that facilitating this result is sound public policy. Natural gas is abundant domestically and is the environmentally friendly fuel of choice. Ensuring adequate natural gas supply will lead to

reasonable prices for consumers, will dampen the unacceptable volatility of wholesale natural gas markets, will help keep the economy growing, and will help protect

the environment.

America has a large and diverse natural gas resource; producing it, however, can

be a challenge. Providing the natural gas that the economy requires will necessitate:

(1) providing incentives to bring the plentiful reserves of North American natural

gas to production and, hence, to market; (2) making available for exploration and

production the lands—particularly Federal lands—where natural gas is already

known to exist so gas can be produced on an economic and timely basis; (3) ensuring

that the new infrastructure that will be needed to serve the market is in place in

a timely and economic fashion.

Natural gas—our cleanest fossil fuel—is found in abundance throughout both

North America and the world. It currently meets one-fourth of the United States’

energy needs. Unlike oil, about 99 percent of the natural gas supplied to U.S. consumers originates in the United States or Canada.

The estimated natural gas resource base in the U.S. has actually increased over

the last several decades. In fact, we now believe that we have more natural gas resources in the U.S. than we estimated 20 years ago, notwithstanding the production

of approximately 300-trillion cubic feet of gas in the interim. This is true, in part,

because new sources of gas, such as coalbed methane, have become an important

part of the resource base. Nonetheless, having the natural gas resource is not the

same as making natural gas available to consumers. That requires natural gas production.

Natural gas production is sustained and grows only by drilling in currently productive areas or by exploring in new areas. Over the past two decades a number

of technological revolutions have swept across the industry. We are able today to

drill for gas with dramatically greater success and with a significantly reduced environmental impact than we were able to do 20 years ago. We are also much more

efficient in producing the maximum amount of natural gas from a given area of

land. A host of technological advances allows producers to identify and extract natural gas deeper, smarter, and more efficiently. For example, the drilling success rate

for wells deeper than 15,000 feet has improved from 53 percent in 1988 to over 82

percent today. In addition, gas trapped in coal seams, tight sands, or shale is no

longer out of reach, and today it provides a major source of supply.

While further improvements in this regard can be expected, they will not be sufficient to meet growing demand unless they are coupled with other measures. Regrettably, technology alone cannot indefinitely extend the production life of mature producing areas. New areas and sources of gas will be necessary.

Notwithstanding the dramatic impact of innovation upon the natural gas business, the inevitable fact today is that we have reached a point of rapidly diminishing returns with many existing natural gas fields. This is almost entirely a product of the laws of petroleum geology. The first ten wells in a field may ultimately

produce 60 percent of the gas in that field; yet it may take forty more wells to

produce the balance. In many of the natural gas fields in America today, we are

long past those first ten wells and are well into those forty wells in the field. In

other words, the low-hanging fruit have already been picked in the orchards that

are open for business.

Drilling activity in the U.S. has moved over time, from onshore Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then to the Rocky Mountains. Historically, we have been quite dependent on fields in the Gulf of Mexico.

But recent production declines in the shallow waters of the Gulf of Mexico have necessitated migration of activity to deeper waters to offset this decline. These newer,

more expensive, deepwater fields tend to have short lives and significantly more

rapid rates of decline in production than onshore wells.
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The sobering reality is that America’s producers are drilling more wells today

than they were 5 years ago. Nevertheless, supply is still down. U.S. gas producers

are on an accelerating treadmill, running harder just trying to stay in place. For

reasons that are partly due to technology, and partly due to the maturing of the

accessible natural gas resource base, a typical well drilled today will decline at a

faster rate than a typical well drilled a decade ago. Moreover, because up to half

of this country’s current natural gas supply is coming from wells that have been

drilled in the past 5 years, this decline trend is likely to continue.

Before we can meet growing gas demand, we must first replace the perennial decline in production. The U.S. natural gas decline rate will be in the range of 26–

28 percent this year. In practical terms, if all drilling stopped today, in 12 months

U.S. natural gas production would be 26–28 percent lower than it is today. The accelerating decline rate helps explain why U.S. gas deliverability has been stuck in

the 52–54-billion cubic feet per day range for the past 8 years, notwithstanding an

increase in gas-directed drilling.

In short, America’s natural gas fields are mature—in fact many are well into their

golden years. There is no new technology on the horizon that will permit us to pull

a rabbit out of a hat in these fields. These simple, and incontrovertible, facts explain

why we are today walking a supply tightrope. High and volatile natural gas prices

have become the norm and will become increasingly accentuated as the economy returns to its full vigor. There is no question that high and volatile natural gas prices

are putting a brake on the economy, once again causing lost output, idle productive

capacity, and lost jobs.

If we are to continue to meet the energy demands of America and its citizens and

if we are to meet the demands that will they make upon us in the next two decades,

we must change course. It will not be enough to make a slight adjustment or to wait

three or four more years to make necessary policy changes. Rather, we must change

course entirely, and we must do it in the very near future. Lead times are long in

our business, and meeting demand years down the road requires that we begin work

today.

We have several reasonable and practical options. It is clear that continuing to

do what we have been doing is simply not enough. In the longer term we have a

number of options:

First, and most importantly, we must increase natural gas production by looking

to new frontiers within the United States. Further growth in production from this

resource base is jeopardized by limitations currently placed on access to it. For example, most of the gas resource base off the East and West Coasts of the U.S. and

the Eastern Gulf of Mexico is currently closed to any exploration and production activity. Moreover, access to large portions of the Rocky Mountains is severely restricted. The potential for increased production of natural gas is severely constrained so long as these restrictions remain in place.

To be direct, America is not running out of natural gas, and it is not running out

of places to look for natural gas. America is running out of places where we are allowed to look for gas. The truth that must be confronted now is that, as a matter

of policy, this country has chosen not to develop much of its natural gas resource

base. We doubt that that many of the 63 million American households that depend

on natural gas for heat are unaware that this choice has been made on their behalf.

In this vein, the Rocky Mountain region is expected to be a growing supplier of

natural gas, but only if access to key prospects is not unduly impeded by stipulations and restrictions. Two separate studies by the National Petroleum Council and

the U.S. Department of the Interior reached a similar conclusion that nearly 40 percent of the gas resource base in the Rockies is restricted from development, in some

cases partially and in some cases totally. On this issue, the Department of the Interior noted that there are nearly 1,000 different stipulations that can impede resource development on Federal lands.

One of the most significant new gas discoveries in North America in the past 10

years is located just north of the US/Canada border in eastern Canadian coastal waters on the Scotian shelf. Natural gas discoveries have been made at Sable Island

and Deep Panuke. Gas production from Sable Island already serves Canada’s

Maritimes Provinces and New England through an offshore and land-based pipeline

system. This has been done with positive economic benefits to the region and without environmental degradation. This experience provides an important example for

the United States, where we believe that the offshore Atlantic area has a similar

geology.

In some areas we appear to be marching backward. The buy-back of Federal

leases where discoveries had already been made in the Destin Dome area (offshore

Florida) of the eastern Gulf of Mexico was a serious step back in terms of satisfying

consumer gas demand. This action was contrary to what needs to be done to meet
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America’s energy needs. With Destin Dome we did not come full about, as we need

to do; rather, we ran from the storm.

Geographic expansion of gas exploration and drilling activity has for the entirety

of the last century been essential to sustaining growth in natural gas production.

Future migration, to new frontiers and to new fields, in both the U.S. and Canada,

will also be critical. Without production from geographic areas that are currently

subject to access restrictions, it is not at all likely that producers will be able to

continue to provide increased amounts of natural gas from the lower–48 states to

customers for longer than 10 or 15 years. We believe that the same is true in Canada as well.

Quite simply, we do not believe that there is any way, other than exploring for

natural gas in new geographic areas, to meet America’s anticipated demand for natural gas unless we turn increasingly to sources located outside North America.

In the middle of the 20th century, when the postwar economy had begun its halfcentury climb and when natural gas became the fuel of choice in America, our colleagues in the producing business opened one new natural gas field after another

in the mid-continent. In this era, it was not that difficult to produce a triple or a

home run virtually every inning. As those fields developed, producers continued to

hit a regular pattern of singles and doubles, with the occasional triple or home run

in new discovery areas. This same pattern in the mid-continent was repeated in the

Gulf of Mexico. Today, however, it is extremely difficult to find the new, open areas

where the producing community can continue to hit the ball. As things are today,

America has confined them to a playing field where only bunts are permitted. The

Yankees did not get to the World Series playing that kind of game.

AGA does not advance this thesis lightly. Over the past several years both the

American Gas Association and the American Gas Foundation have studied this important issue vigorously. We have believed for several years that it is necessary for

policymakers to embrace this thesis so that natural gas can continue to be—as it

has been for nearly a century—a safe and reliable form of energy that is America’s

best energy value and its most environmentally benign fossil fuel. We think that

events in gas market in 2003–2004 underscore that our concerns have been on the

mark.

When the first energy shock transpired in the early 1970’s, the Nation learned,

quite painfully, the price of dependence upon foreign sources of crude oil. We also

learned, through long gasoline lines and shuttered factories, that energy is the lifeblood of our economy. Nevertheless, thirty years later we are even more dependent

upon foreign oil than we were in 1970. Regrettably, the Nation has since failed to

make the policy choices that would have brought us freedom from undue dependence on foreign-source energy supplies. We hope that the Nation can reflect upon

that thirty-year experience and today make the correct policy choices with regard

to its future natural gas supply. We can blame some of the past energy problems

on a lack of foresight, understanding, and experience. We will not be permitted to

do so again.

Meeting our nation’s ever-increasing demand for energy has an impact on the environment, regardless of the energy source. The challenge, therefore, is to balance

these competing policy objectives realistically. Even with dramatic improvements in

the efficient use of energy, U.S. energy demand has increased more than 25 percent

since 1973, and significant continued growth is almost certain. Satisfying this energy demand will continue to affect air, land, and water. A great American success

story is that, with but 5 percent of the world’s population, we produce nearly onethird of the planet’s economic output. Energy is an essential—indeed critical—input

for that success story both to continue and to grow.

It is imperative that energy needs be balanced with environmental impacts and

that this evaluation be complete and up-to-date. There is no doubt that growing

usage of natural gas harmonizes both objectives. Finding and producing natural gas

is accomplished today through sophisticated technologies and methodologies that are

cleaner, more efficient, and much more environmentally sound than those used in

the 1970’s. It is unfortunate that many restrictions on natural gas production have

simply not taken account of the important technological developments of the preceding thirty years. The result has been policies that deter and forestall increased

usage of natural gas, which is, after all, the nation’s most environmentally benign

and cost-effective energy source.

Natural gas consumers enjoyed stable prices from the mid–1980’s to 2000, with

prices that actually fell when adjusted for inflation. Today, however, the balance between supply and demand has become extremely tight, creating the tightrope effect.

Even small changes in weather, economic activity, or world energy trends result in

wholesale natural gas price fluctuations. We saw this most dramatically in the win-
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ters of 2000–2001, 2002–2003, and 2003–2004. Most analysts believe that we will

continue to see it on a longer-term basis.

In the 1980’s and 1990’s, when the wholesale (wellhead) price of traditional natural gas sources was around $2 per million British thermal units, natural gas from

deep waters and Alaska, as well as LNG, may not have been price competitive.

However, most analysts suggest that these sources are competitive when gas is in

a $3.00 to $4.00 price environment. Increased volumes of natural gas from a wider

mix of sources will be vital to meeting consumer demand and to ensuring that natural gas remains affordable.

Increasing natural gas supplies will boost economic development and will promote

environmental protection, while achieving the critical goal of ensuring more stable

prices for natural gas customers. Most importantly, increasing natural gas supplies

will give customers—ours and yours—what they seek: reasonable prices, greater

price stability, and fuel for our vibrant economy. On the other hand, without policy

changes with regard to natural gas supply, as well as expansion of production, pipeline and local delivery infrastructure for natural gas, the natural gas industry will

have difficulty meeting the anticipated 50 percent increase in market demand. Price

increases, price volatility, and a brake on the economy will be inevitable.

Second, we need to increase our focus on non-traditional sources, such as liquefied

natural gas (LNG). Reliance upon LNG has been modest to date, but it is clear that

increases will be necessary to meet growing market demand. Today, roughly 99 percent of U.S. gas supply comes from traditional land-based and offshore supply areas

in North America. Despite this fact, during the next two decades, non-traditional

supply sources such as LNG will likely account for a significantly larger share of

the supply mix. LNG has become increasingly economic. It is a commonly used

worldwide technology that allows natural gas produced in one part of the world to

be liquefied through a chilling process, transported via tanker, and then re-gasified

and injected into the pipeline system of the receiving country. Although LNG currently supplies less than 1 percent of the gas consumed in the U.S., it represents

100 percent of the gas consumed in Japan.

LNG has proven to be safe, economical and consistent with environmental quality.

Due to constraints on other forms of gas supply and increasingly favorable LNG economics, LNG is likely to be a more significant contributor to US gas markets in the

future. It will certainly not be as large a contributor as imported oil (nearly 60 percent of US oil consumption), but it could account for 10–15 percent of domestic gas

consumption 15–20 years from now if pursued aggressively and if impediments are

reduced.

It is unlikely that LNG can solve the entirety of our problem. A score of new LNG

import terminals have been proposed, each with capacities of about 1- billion cubic

feet per day. Even if all of these LNG terminals were built (which is frankly not

a likely scenario), LNG would only supply about 10–15 percent of the expected market in 2025 of 35-trillion cubic feet annually. Given the intense ‘‘not on our beach’’

opposition to siting new LNG terminals, a major supply impact from LNG may be

a tall order indeed.

Third, we must tap the huge potential of Alaska. Alaska is estimated to contain

more than 250-trillion cubic feet—enough by itself to satisfy US natural gas demand

for more than a decade. Authorizations were granted twenty-five years ago to move

gas from the North Slope to the Lower–48, yet no gas is flowing today nor is any

transportation system under construction. Indeed, every day the North Slope produces approximately 8-billion cubic feet of natural gas that is re-injected because it

has no way to market. Alaskan gas has the potential to be the single largest source

of price and price volatility relief for US gas consumers. Deliveries from the North

Slope would not only put downward pressure on gas prices, but they would also spur

the development of other gas sources in the State as well as in northern Canada.

Fourth, we can look to our neighbors to the north. Canadian gas supply has grown

dramatically over the last decade in terms of the portion of the U.S. market that

it has captured. At present, Canada supplies approximately 15 percent of the United

States’ needs. We should continue to rely upon Canadian gas, but it may not be realistic to expect the U.S. market share for Canadian gas to continue to grow as it

has in the past or to rely upon Canadian new frontier gas to meet the bulk of the

increased demand that lies ahead for the United States.

The pipelines under consideration today from the Prudhoe Bay area of Alaska and

the Mackenzie Delta area of Canada are at least 5 years from reality. They are certainly facilities that will be necessary to broaden our national gas supply portfolio.

We must recognize, however, that together they might eventually deliver up to 8-

billion cubic feet per day to the lower 48 States—just 8 percent of the 95-billion

cubic feet per day that is envisioned for the 2025 market.
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1Pulp, paper, paperboard, recycled paper and paperboard, tissue, lumber, and wood products

mills.

There is much talk today of the need for LNG, Alaska gas, and Canadian gas.

There is no question that we need to pursue those supplies to meet both our current

and future needs. Nonetheless, it is equally clear that, in order to meet the needs

of the continental United States, we will need to look principally to the lower 48

States.

STATEMENT OF THE AMERICAN FOREST & PAPER ASSOCIATION

The American Forest & Paper Association (AF&PA) appreciates the opportunity

to submit a statement for the record on the importance of increased access to natural gas. The high cost of energy is having a very negative impact on U.S. manufacturers of pulp, paper, paperboard, and wood products. U.S. environmental policies

of the past decade have encouraged increased consumption of natural gas while reducing access to natural gas reserves on public lands. This combination of increased

demand and reduced supply has driven prices substantially higher.

The U.S. forest products industry is vital to the nation’s economy. We employ approximately 1.3 million people and rank among the top ten manufacturing employers in 42 states with an estimated payroll of $50 billion. Sales of the paper and forest products industry top $230 billion annually in the U.S. and export markets. We

are the world’s largest producer of forest products.

Energy is the third largest operating cost for the forest products industry1, making up more than 8 percent of total operating costs. Since 1972, this industry has

reduced its average total energy usage by 17 percent through increased efficiencies

in the manufacturing and production process. In addition, it has reduced its fossil

fuel and purchased energy consumption by 38 percent, and increased its energy selfsufficiency by 46 percent. Although the industry is nearly 60 percent self-sufficient

(using biomass), use of natural gas, coal, fuel oil, and purchased electricity is necessary to meet the balance of our energy needs.

Annually, forest products companies purchase about 395-billion cubic feet of natural gas. The price of natural gas in 2003 was nearly double the average price for

2002, forcing the industry to spend almost $1 billion more for the same quantity

of fuel. This increased price for natural gas also significantly increases purchased

electricity and the price of chemicals needed for our manufacturing operations.

Higher natural gas prices have the additional effects of increased transportation

costs.

Five years ago, the American Forest & Paper Association conducted research to

determine the competitive position of U.S. manufacturers of paper and wood products as compared to our primary international competitors. Energy was the one area

where our cost of production was slightly better than our competitors. Today, that

situation is just the opposite. While the wellhead price of natural gas hovers between $5 and $6 per million British thermal units (BTUs) in the U.S., prices in the

rest of the world are noticeably lower. Prices of natural gas our competitors pay in

Western Europe are in the $3 to $4 range. Prices in Asia are around $1.50, and in

Russia the price for natural gas is less than $1 per million BTU, putting our industry at a significant competitive disadvantage.

This disadvantage is on top of other competitive disadvantages this industry faces.

Our taxes are higher than those of competing nations, and there are unfair trade

barriers to the export of our products. The cost of compliance with our nation’s environmental laws is higher, and transportation costs are greater than anywhere else

around the globe. Government restrictions are also limiting our access to fiber—

even though our forestry stock has increased by 39 percent since 1952. If we cannot

successfully address these challenges, the public demand for forest products will increasingly be filled by other nations who do not adhere to our high standards.

The forest products industry alone has lost more than 120,000 high paying manufacturing jobs and closed more than 220 plants since 1997. These are the direct job

losses and do not count the substantial multiplier effect of additional service jobs

that have been lost as a result of the lost manufacturing activity in these mostly

rural communities in America. Many of these plant closings have been attributed

to high energy costs.

The most important thing that Congress can do to turn around the recent manufacturing job losses is to address the energy and environmental policies that are the

root cause for the supply and demand imbalance of natural gas. Congress should

enact a new energy policy that promotes the environmentally responsible develop-
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ment of domestic oil and gas reserves and it should revise environmental laws to

eliminate the unnecessary bias toward natural gas.

POLICIES TO PROMOTE ADDITIONAL SUPPLY

While the energy bill passed by the Senate in 2003 made some modest reforms,

it fell short of dramatically changing the natural gas supply picture in the nearterm. For example, there are significant reserves in the Rocky Mountains that can

be accessed in a responsible way with little negative impact on the environment.

Congress should enact legislation to reduce the barriers to this supply. In addition,

expansion of transportation and infrastructure to bring additional natural gas to

consumers from the Rocky Mountains, Alaska, Canada, and from overseas in the

form of Liquefied Natural Gas (LNG) is essential to help keep gas prices affordable.

Permitting for new transmission and distribution pipelines takes too long to complete. It can take from two to 5 years to get the permits necessary for siting and

construction of transmission and distribution pipelines and natural gas storage facilities. Congress and the Administration should work to minimize the bureaucratic

red-tape and to expedite the permitting process for siting and construction of pipelines and natural gas storage facilities. The Department of Interior has recently

issued some new regulations that could speed the permitting process. But, ultimately, Congress must act to ensure that bureaucratic process does not prevent

timely development of natural gas supply.

Likewise, there are huge reserves in the Arctic National Wildlife Refuge (ANWR).

A small amount of exploration and development in ANWR could mean substantial

new supply available to meet the demand of a growing economy and provide a rebound for U.S. manufacturing and the many families and communities that depend

on these jobs.

Federal restrictions also limit access to offshore natural gas resources in the Pacific, Atlantic, and Eastern Gulf of Mexico Outer Continental Shelf (OCS). Congress

should, as a first step, require a Federal inventory of the gas reserves in the OCS.

Environmentally responsible technologies exist that could allow additional offshore

production without harming the environment; but, first, we must know the extent

of the reserves. In the long term, Congress must relax the current restrictions and

allow for environmentally responsible access to some of these OCS reserves.

The September 2003 National Petroleum Council study agreed that one of the biggest potential sources of new natural gas supplies would come from developing OCS

resources. OCS resources can be developed safely with minimal impacts to the environment using new, safe drilling technologies. The OCS resources of Maritime Canada are being successfully and safely developed today, and the Government of Canada is reviewing the potential to open offshore Western Canada for exploration and

development.

Concepts such as State revenue sharing, increased State authority in leasing decisions, and expanding and equalizing states’ boundaries, provide an opportunity to

overcome resistance to OCS development. By providing creative incentives to share

revenues from developed OCS natural gas resources, states are encouraged to be

part of the solution. In fact, by increasing states’ authority in leasing decisions,

much of the need for the current OCS moratoria could be eliminated.

Additional Federal research is also important to bring about potential new longerterm sources of energy and energy-related technologies. Research and deployment

of technologies such as clean coal, coal gasification, and biomass/black liquor gasification must continue to be pursued. For decades, many paper and wood products

mills have provided the majority of their own energy production. Many pulp and

paper mills, for example, have run their paper machines using electricity largely

supplied by mill-operated, onsite electric generators.

The forest products industry has embraced energy diversity by using both byproduct biomass fuels (such as spent pulping liquor, hog fuels, bark, and wood

chips) and purchased fossil fuels to produce steam and electricity used in its manufacturing processes. Successful development and full implementation of black liquor

and biomass gasification programs could make our industry a net exporter of renewable electricity—removing some 35 million tons of carbon emissions from the air and

generating nearly 22 gigawatts of electricity by 2020.

The introduction of gasification would enable far more efficient power generation

via combined cycle or fuel cell prime movers, as well as the production of additional

value added products like transportation fuels (e.g., Fischer-Tropsch middle distillates or hydrogen) and chemicals. In fact, the synthetic gas made from black liquor and biomass gasification could potentially produce 25 million gallons of liquid

fuel per day, thereby reducing U.S. dependence on imported oil.
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These initiatives entail substantial risk for an already capital-intensive industry.

Important R&D remains to be completed to prove the gasification technologies can

work without adversely impacting mill operations. Continued cooperation with the

Federal Government is crucial to reducing risk to a level that will allow significant

industry participation.

Similar initiatives are underway in the areas of clean coal technology and coal

gasification. These technology development programs are essential to creating new

and diverse sources of clean energy. Importantly, without guaranteed access to the

grid, these new power sources will not be developed and implemented. For this and

other reasons, it is critical that Congress maintain existing initiatives for combined

heat and power (such as in the Public Utility Regulatory Policies Act), which can

be as much as 80 percent efficient in the conversion of input fuel to useful energy.

Additionally, research on new technologies is needed to make inaccessible supplies

of natural gas available, and turn projected resources into proven reserves. Many

of the nation’s existing supplies of natural gas are now in harder to reach areas.

POLICIES TO PROTECT THE ENVIRONMENT AND THE ECONOMY

The Congress must re-examine current environmental policies that promote the

exclusive use of natural gas for power generation at the expense of other fuel

sources that can be used in an environmentally sound manner. Significant technology advancements have occurred in the past 20 years to make coal a viable fuel

source for power generation that is not damaging to the environment. Environmental rules should be updated to reflect these technological advancements and to

encourage a more diverse mix of fuels for power generation and other industrial applications.

Manufacturers are subject to a host of environmental laws that require control

technologies that are natural gas intensive. The recent bias in regulations toward

environmental control technologies that favor incineration is imposing substantial

new demand pressures on natural gas. For example, the Pulp and Paper Cluster

Rule, which was promulgated in the mid–1990’s, requires paper mills to use an incineration technology to burn small amounts of volatile organic compounds such as

methanol. This chemical is found in mouth breath in greater quantities than at

paper mill fence lines. The technology used is called a ‘‘regenerative thermal oxidizer’’ (RTO), and it runs on a natural gas system. The end result is higher energy

costs, higher emissions of SO2 and NOx for questionable benefits. For example, in

the last 2 years operating costs to run the technology at one paper mill increased

$1 million per year to $1.5 million. This increase was directly attributable to natural

gas cost increase.

Permitting requirements under the Clean Air Act often prevent fuel-switching,

which could in the short-term alleviate part of the industrial demand for natural

gas. Allowing flexibility in permitting to accommodate fuel switching under shortage

conditions could help in some limited circumstances. As a result, companies are prevented from managing energy costs through the use of other environmentally responsible fuels.

CONCLUSION

High energy costs, and particularly the high cost of natural gas, threaten the

long-term viability of U.S. manufacturing and its contribution to the American

standard of living. Congress can, and should, take action to increase the supply of

natural gas and update environmental laws to reflect the technological advances

that have occurred in the past decade, and to reduce the bias toward use of natural

gas. Abundant and affordable energy sources are critical to the competitiveness of

U.S. manufacturers, to the communities in which they operate, and the Americans

they employ. Many U.S. businesses have been crippled by high natural gas prices

that are driven in large part by U.S. energy and environmental restrictions. As the

economy begins to rebound, it is critically important that Congress act quickly to

ensure that government policies promote rather than restrict the responsible development of our nation’s abundant supply of natural gas—both onshore and offshore.
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STATEMENT OF SOUTHERN UTAH WILDERNESS ALLIANCE

UTAH’S REDROCK WILDERNESS RICH IN NATURAL BEAUTY—NOT NATURAL GAS

WASHINGTON, DC.—Testifying before the Senate Environment and Public Works

Committee, the Southern Utah Wilderness Alliance (SUWA), presented evidence

showing that the sacrifice of Utah’s crown jewel—America’s redrock wilderness—

would only provide a nominal quantity of natural gas. With 95 percent of oil and

gas resources coming from lands entirely outside of lands proposed for wilderness

designation, SUWA calls energy development in Utah’s last remaining wild places

both short-sighted and ineffective.

‘‘SUWA is pleased that the Committee is holding a hearing on the environment

and natural gas supplies because it allows the Congress and the American public

to understand that wilderness is neither a cause nor a solution to our nation’s energy predicament’’, said Stephen Bloch, SUWA Staff Attorney, who testified at the

Committee hearing.

Since 2001, the Administration has distracted the American public by focusing the

Nation’s attention and its Federal land management policies on energy development

in the country’s few remaining wild places. Lands that even the Bureau of Land

Management recognized as having wilderness values have been stripped of protection and are now targeted for energy leasing.

According to an analysis of data produced by the Department of Energy, the U.S.

Geological Survey, and the State of Utah, approximately 95 percent of the State’s

gas and oil resources come from seven energy-rich ‘‘hot spots.’’ None of Utah’s seven

key energy producing regions are proposed for protection in the America’s Redrock

Wilderness Act (S. 639/H.R. 1796). Even if Utah’s proposed wilderness were exploited for its energy resources, the most current USGS data suggests that the land

could yield little more than a few weeks of natural gas at current consumption levels.

‘‘Our nation’s last unprotected wilderness areas are an irreplaceable treasure, not

a cash cow for the energy corporations,’’ Bloch explained. ‘‘Moreover, even if we sacrifice Utah’s redrock wilderness we cannot meaningfully reduce the price of natural

gas.’’

‘‘While the government’s own data indicates that there is little natural gas to be

gained from drilling Utah’s wilderness quality lands, one thing is certain—exploration and development will leave lasting scars on this magnificent redrock landscape,’’ said Bloch. ‘‘That, in my estimation, is truly a high price to pay.’’

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