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OAR Box 1865 

Prepped by Charmelle Mathews 

Document Number: 

90) IV-J-33 

Docket Number: 

A-83-27 

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A-83-27 

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gopyrigbt Law rjjtje 17 u.S. Coca) 

THE SERVICE 

HOW SERVICES WILL MAKE 

THE U.S. COMPETITIVE AGAIN 

^ 

WF 

23 

C 1987 TIME INC 

PRINTED IN U S.A WJIIIIUIV 
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LOOKING AHEAD 

GUESS WHICH FUEL 

IS LOOKING HOT 

Natural gas is clean, efficient, and cheap. Most important, the U.S. has lots of it. If OPEC gets 

greedy again, Americans could be cooking with gas. • by Peter Nulty 

N I

ATURAL GAS is a regulated commodity that can be neither seen nor 

felt and tha^ sometimes smells awful. Long regarded as crude oil's 

poor cousin, gas has been wasted, vilified, 

and underutilized. Yet in many ways it is the 

best of all possible fuels. It is abundant in the 

U.S. and burns without spewing out much 

pollution. As the power in world oil markets 

swings back to OPEC, the fortunes of natural 

gas, if not its odor, should sweeten. 

Big changes are taking place in the gas industry, albeit slowly. The government is 

loosening regulations, making distribution 

and marketing more efficient. Even without 

government help, the free market is making a 

bit of a comeback. And new technologies are 

starting to produce such once impractical devices as natural-gas-powered cars and trucks 

and clean-burning electric power plants. A 

bubbling natural gas business would benefit 

consumers as well as U.S. energy policy. 

Come another OPEC crisis, gas may do more 

than in the 1970s to cushion the blow. Since 

there's likely to be more gas in your future, 

you probably have some questions. 

In the 1970s, it se.med that ga« wa* 

scare. Hew much dee* the U.S. have? 

A lot more than oil. Roughly 163 trillion 

cubic feet (tcf) of proven gas reserves lie in 

the lower 48 states. Alaska holds another 35 

tcf, but the transportation is so expensive 

that the gas is stranded there. All together, 

the U.S. has enough gas to last 12 years at 

the present consumption rate of about 17 tcf 

a year. By contrast, reserves of oil are sufficient for only eight years. 

Proven reserves, of course, are inventory 

much like cornflakes awaiting shipment from 

Gassing up on natural gas, letter carriers (left) in Rockford, Illinois, fill their delivery vans at 

the end o)'the day. Compressors taketen hours tofill all 138 of the gas-powered vehicles at the same 

time. Above: At Pierce Transit of Tacoma, Washington, a mechanic inspects gas tanks underneath 

one of two experimental buses that run on a mixture of diesel fuel and natural gas. 

Notice: This materia! may be protected by 

• Copyright Uv iTitla 17 U.S. Code) 
P.4 

There's Lots More Natural Gas Than You Think 

Though the shortages of the 1970s gave the impression that gas was scarce, consumption. If you add the gas that hasn 't been drilled yet, the s

the U.S. has enough proven reserves for 12 years at the current rate of could last 250 years. U.S. oil resources will probably last only 40. 

a warehouse. The gas industry aeates the 

inventory by drilling discovery and production wells. The Potential Gas Committee, 

which is affiliated with the Colorado School 

of Mines, estimates that about 739 tcf of easily recoverable gas may ultimately be liberated by the drill bit. That's enough domestic 

gas to last another 46 years. 

And there's more. An estimated 200 

years' supply of natural gas is trapped in 

geologic conditions that make it difficult and 

expensive to produce. These unconventional resources, as they are called, include gas 

dispersed in coal deposits, contained in 

shale and sandstone, and mixed with salt 

water and buried under tremendous pressure beneath the Gulf of Mexico. The high 

cost of extraction makes this a resource for 

the future. ' 

Canada and Mexico are positively bilious 

with natural gas and, unlike the OPEC countries, are potential sources the U.S. can 

count on. Canada has enough proven reserves to supply its own market at current 

rates of use for 50 years. Consequently it is 

piping nearly one tcf a year to the U.S. It 

would like to send even more, but the U.S. 

does not need it Natural gas from Canada accounts for 4% of U.S. demand and virtually 

all imported gas. Mexico has 77 tcf of proven 

reserves and produces a little more than 1 td 

for domestic use. 

What would It take to bring all that gas to 

market? 

Higher prices, but that will take a very 

long time. Natural gas competes with heating 

oil in most places, and oil prices put a ceiling 

on gas prices. That's because oil is much 

more widely used. With crude oil prices at 

only $19 a barrel (the heating equivalent of 

about $3 per thousand cubic feet, or md, of 

gas), producers are drilling for neither gas 

nor oil and reserves are falling. Higher oil 

prices would stimulate drilling. George 

Mitchell, chairman of Mitchell Energy & Development Corp., a gas exploration and production company located in Houston, says 

that a gas price of about $4.50 per md would 

stimulate gas production 40% over ten 

years. But for gas to reach that level, crude 

oil prices would have to rise to about $30 per 

barrel. Like some in the oil patch, Mitchell 

wants the federal government to speed that 

process by putting a variable tax on imported 

oil that would raise the price of crude in the 

U.S. to $30 a barrel That tax is higher than 

any currently contemplated in Congress; all 

would boost inflation. Besides, less government intervention, not more, will help make 

natural gas a market-oriented commodity. 

Another reason gas prices won't rise anytime soon is that since 1981 U.S. wells have 

been able to pump out more gas than consumers wanted. This surplus, called the gas 

bubble, did not send prices tumbling. In fact, 

though some big industrial consumers have 

enjoyed lower prices, the average price gas 

consumers pay is about what it was in 1982. 

Over the same period, the price of residual 

fuel oil has dropped as much as 60%. Consequently, a surplus many believed would be 

temporary has lasted five years. One expert 

calls the extended bubble "a gas sausage." 

If demand has fallen, why haven't prices? 

Federal regulations have governed the 

price of gas produced in one state and sold in 

another since 1938. In the mid-1970s, price 

controls caused a surplus of gas in producing 

REPORTER ASSOCIATE Patricia A. Langan 
P.5 

LOOKING AHEAD 

states, such as Texas, and a shortage in the 

interstate market where prices were being 

held artificially low. When a long and bitter 

freeze struck in the winter of 1977, gas supplies ran out in some interstate markets. 

To turn up production, Congress deregulated the price of certain costly varieties of 

gas, such as those from wells deeper than 

15,000 feet. And it allowed the price of new 

discoveries in shallower wells to rise slightly 

more than inflation. Production from existing 

wells ("old gas"), which could have been exgas started cutting back on purchases of old, 

low-cost gas. As they did, the average cost of 

the gas they were buying and transporting 

went up. Customers were furious. They 

could see the price of old gas, spurned by the 

pipelines and now in surplus, tumbling in a 

tiny but rapidly developing spot market. 

Many of these customers appealed to the 

Federal Energy Regulatory Commission for 

relief from their promises to buy take-orpay gas from the pipelines. The regulators, 

ever sensitive to the price voters and camPlants of the future may look like this gas-fired one in Daggett, California. 

panded at the least possible cost, remained 

controlled. As a result, producers went out 

and developed plenty of costly new reserves. 

Then the interstate pipeline companies, 

hoping never again to be caught short, 

rushed in to lock up the costly new gas with 

long-term contracts. Many of these deals had 

what are called take-or-pay clauses under 

which the pipelines agreed to buy up to 90% 

of production whether they could sell the gas 

or not. To increase the chances of peddling 

the stuff, the pipeline companies offered 

their customers contracts in which the customers promised to buy minimum quantities 

of the take-or-pay gas. With that the stage 

was set for what Richard Adkerson, managing director of Arthur Andersen's oil and gas 

group, calls the "death spiral." 

When high prices began eroding energy 

demand in the early 1980s, pipelines stuck 

with take-or-pay commitments for high-cost 

paign contributors pay for energy, declared 

the minimum purchase provisions void. 

Soon, big pipeline customers began doing 

end runs around their old suppliers. They 

contraded for spot market gas directly with 

producers. And, with the help of some armtwisting by the Federal Energy Regulatory 

Commission, they gained partial access to 

the pipelines' spare capadty in order to ship 

the gas. 

Both pipeline companies and producers 

suffered. The pipelines have accumulated almost $14 billion in take-or-pay potential liabilities, gas they are unable to sell but are 

obligated to buy sooner or later. They are 

frantically renegotiating those contracts, 

paying the producers as little as 8 cents on 

the dollar. 

Naturally gas customers, such as power 

plants and factories, that are big enough to 

buy supplies directly from producers love 

the spot market prices. They are, after all, 

about 25% less than the average wellhead 

price. But there's not enough spare capadty 

on the pipelines, or willingness on the part of 

pipeline companies, to carry all the available 

spot gas. The result is that overall gas prices 

have stayed the same in spite of the bubble. 

New that pipelines are renegotiating contracts and a spot market is developing, 

won't gas prices start to move? 

The situation is getting better. By renegotiating huge numbers of take-or-pay commitments, pipelines are starting to buy gas at 

something like market prices. And as the 

price of take-or-pay gas becomes less onerous, the pipeline companies are warming to 

the idea of carrying spot market gas. They 

do, after all, make money transporting gas no 

matter who owns it. Kenneth Lay, chairman, 

of Enron Corp., which owns the largest U.S. 

pipeline system, says, "Some pipelines are 

moving kind of slow, but eventually all will be 

open to spot market gas." Experts believe 

that in two to five years the natural gas business could be freer than it has been in decades, thanks to a healthy spot market Total 

deregulation of gas, however, is politically 

out of the question. Legislators see it as tantamount to throwing defenseless homeowners into the jaws of a monopoly. 

What ar* the new markets for gas? 

One of the biggest potential markets is 

gas-fired utility plants. Believing gas to be 

scarce, Congress passed the Powerplant and 

Industrial Fuel Use Ad of 1978, which restricted public utilities from building any major, or "base load," electric power plants 

using gas for fuel. The law permitted only 

small gas generators for use in such times of 

peak demand as the hot summer months. 

Now Congress has passed a bill that amends 

the 1978 law and allows gas-fired plants; it 

awaits the President's signature. 

The coal industry, which would rather not 

compete with gas in the utility market 

squashed previous attempts to repeal the 

ban on gas-fired plants. Since the Fuel Use 

Act was passed, coal sales to the electric 

power industry have grown 40%, while gas 

sales have dropped almost 20%. Trying to 

hang on to their advantage, coal men insisted 

that any repealing legislation stipulate that 

new plants be "capable" of burning coal. 

Gas's advantage for utilities is that gas-fired 

facilities cost less to build than coal plants, 

about $600 per kilowatt of capadty vs. 

roughly $1,500. But gas costs more than coal 

as a fuel. Thus, building a coal-capable, gas-
LOOKING AHEAD 

P.6 

fired plant would be getting the worst of both 

worlds. 

A nifty new technology with the galumphing name "integrated gasification combined 

cycle" (IGCC, for short) has brought compromise to the oil-vs.-gas debate. This technology allows base-load plants to be constructed 

in modules, with each successive stage contributing to the power grid as it is completed. 

In the first step, turbines are installed that 

might burn gas or oil or both. Second, a steam 

generator that converts waste heat from the 

turbines into electricity is added. Finally, 

should the price of gas and oil soar to previous OPEC-ian highs, a coal gasifier can be 

added. The gasifier would turn coal into synthetic gas for the turbines and, in the process, 

make heat to generate more electricity. The 

notion that these plants might someday consume coal mollifies the coal men. A $263-million, 120-megawatt demonstration plant 

called Cool Water has been generating and 

selling electricity for three years in Daggett, 

California, 130 miles from Los Angeles. 

Cool Water is run by a consortium that includes Texaco, Southern California Edison, 

1986 energy consumption 

Nuclear 

6% 

Hydroelectric 

5% 

A Bigger Slice, Please 

The U.S. is twice as reliant on oil as it is on gas, even though 

resources of natural gas are much larger. 

and the Electric Power Research Institute. 

Utilities, which have been whipsawed between the unpopularity of nuclear power and 

the high capital costs of big coal plants, like 

what they see at Cool Water. Peter Benziger, senior vice president of Potomac Electric Power of Washington, D.C, reports that 

his company plans to complete the first 

phase of an IGCC plant in the early 1990s. 

He says: "We like the fuel flexibility this 

gives us. We like the manageable schedule of 

investments. And it's clean. IGCC looks like 

the technology of choice in the Nineties." 

The way gas men see the future, IGCC is only one of the new 

ideas they have up their pipelines. 

Small new gas-powered cogeneration units that provide electricity 

and heat (or cooling) for stores, 

hospitals, and small offices may 

soon compete with the utilities in 

the commerci'Il market. One of 

these gas-powered units is a fuel 

cell that combines the hydrogen 

stripped from methane (or CH4, 

the main ingredient in natural gas) 

with air to produce electricity and water. The 

fuel cell is quiet, effirient, and, since no combustion is necessary, it is clean. But it's also 

expensive, about $2,500 per. kilowatt of capacity. Experts at the Gas Research Institute 

of Chicago, which helped develop the technology, expect that economies of scale in 

production could lower the cost to a more 

competitive $1,000 per kilowatt, vs. about 

$1,200 per kilowatt for comparable cogeneration units. United Technologies and Toshiba have formed a joint venture to make 

the fuel cells. 

LOOKING AHEAD 

If cars and trucks were fueled by gas, the 

U.S. might never worry about an oil crisis 

again. Would that be realistic? 

The last frontier for gas as a fuel lies on 

the highway. Optimists in the gas industry 

say their product could make significant inroads, and point to the fact that Italy has 

250,000 gas vehicles in operation, New Zealand has 70,000, and the U.S. 30,000. Gas is 

at least as safe a fuel as gasoline, and right 

now gas prices are about 20% less than gasoline's. Natural gas cars and trucks have 

lower maintenance costs than gasoline vehicles because clean-burning gas is less likely 

to clog the engine. People who drive gaspowered vehicles say they can't tell the difference from a gasoline one. Filling up a 

tank with natural gas can be as easy as putting air in a tire, though if the compressor 

isn't powerful enough it can take a lot longer. On the other hand, force of habit, countless gasoline stations, and the rolling stock 

of petroleum-reliant cars and trucks make it 

unlikely that natural gas will overtake gasoline anytime soon. 

Aha, say the proponents of gas buggies. 

Filling up a car's tank with 

natural gas can be as easy 

as putting air in a tire, 

though if the compressor 

isn't powerful enough it 

can take a long time. 

pollution control may soon take a hand. Over 

the next few years, several deadlines for 

cleaning up both ozone (which is partly the 

result of vehicular traffic) and particulate 

emissions from diesel-buming vehicles come 

due. The Gas Research Institute is working 

on technologies that would help diesel engines meet the emissions standards by converting them to burn gas or a mixture of 

diesel fuel and gas. Robert Catell, chief operating officer of Brooklyn Union Gas, says his 

company is working with New York City to 

convert 1,000 vehicles, including buses, taxis, and police cars, to gas in a program to 

clean up the air. Brooklyn Union, like many 

gas companies, powers its own 200-

vehicle fleet with gas. 

If gas can't beat oil, maybe it will join it. 

Standard Oil in Ohio is developing a catalyst 

to convert natural gas into gasoline. Standard 

would like to turn its vast reserves of Alaskan natural gas into a liquid that could be 

shipped through the Alaskan oil pipeline. (A 

gas pipeline from Alaska to the U.S. would 

cost so much—about $40 billion—that it 

would push the price of gas up to noncompetitive levels.) Rodger McKain, who is in 

charge of Standard's project, estimates that 

Prudhoe Bay's reserves of natural gas might 

yield as much as 200,000 barrels a day of gasoline, enough to replace 5% of current crude 

oil imports. 

Even if gas never catches on with cars, 

trucks, and buses, the American Gas Association estimates that other new technologies, 

and America's abundance, will give gas the 

potential to replace 1.6 million barrels of oil, 

or 30% of today's oil imports, within five 

years. That's a real ace in the hole against 

OPEC's hand. • 

Reprinted through the courtesy of the Editors of FORTUNE 

© 1987 TIME INC.