P. 1 

# OAR Box 

# 1865 Prepped by Charmelle Mathews



## Document

Number: 

# 90 ) IV-J-3 3 Docket Number: 

# A-83-2 7

Printed 12/3/20089:15:32 AM

Sheet 90of 105

### P. 2 

# A-83-2 7

Notice : Thi s materia l ma y b e protecte d b

y gopyrigb t La

wrjjtj e 1 7 u.S . Coca) 

# TH E SERVIC E

HO W SERVICE

S WIL L MAK E TH E U.S . COMPETITIV E AGAI N ^

W F 2 3

C 198 7 TIM E IN C PRINTE D I N U S. A 

# WJIIIIUI VP. 3 

# LOOKIN G AHEA D 

# GUES S WHIC H FUE

L I S LOOKIN G HO

T

Natura l ga s i s clean , efficient, an d cheap . Mos t

important , th e U.S . ha s lot s o f it . I f OPE C get s greed y again , American s coul d b e cooking wit

h gas . • by Peter Nulty 

# N 

# I ATURA L GA S i s aregulate dcom

modit y tha t ca n b e neithe

r seen nor fel t an d tha ^ sometime s smell s aw

ful . Lon g regarde d a s crude oil' s poo r cousin , ga s ha s bee n wasted , vilified, an d underutilized . Ye

t i n man y way s i t i s th e bes t o f al l possibl e fuels . It

i s abundan

t i n th e U.S . an d burn s withou

t spewin g ou t muc h pollution . A s th e powe

r i n worl d oi l market s swing s bac k to OPEC , th e fortune s o

f natura l gas , i f not it s odor , should sweeten . Bi g change s ar e taking plac e i n th e ga s in

dustry , albei

t slowly . Th e governmen

t i s loosening regulations , makin g distributio n an d marketing mor

e efficient . Eve

n withou t governmen

t help , th e free marke

t i s makin g a bi t o f acomeback . An

dne w technologie s ar e startin g to produc e suc

h onc e impractica

l de

vice s a s natural-gas-powered car s an dtruck s an d clean-burnin

g electri c powe

r plants . A bubblin g natura l ga s busines s woul

d benefi t consumer s a s wel

l a s U.S . energ y policy . Com e anothe r OPE C crisis , ga s ma

y d o mor e tha n i n th e 1970 s t o cushion th e blow . Since there' s likel

y t o b e mor

e ga s in you

r future , yo u probabl y hav e som

e questions . I n th e 1970s , i t se.me d tha t ga « wa * scare . He w muc h dee * th e U.S . have ? A lot mor e tha n oil . Roughl

y 163 trillion cubi c fee t (tcf ) o f proven ga s reserve s li

e i n th e lowe r 4 8 states . Alask

ahold s anothe

r 3 5 tcf , bu t th e transportatio n i s s o expensiv e tha t th e ga s i s strande d there . Al l together , th e U.S . ha s enoug

h ga s t o las t

1 2 year s a

t th e presen t

consumption rat e o

f abou t 1 7 tc f ayear . B y contrast , reserve s o

f oi l ar e suffi

cien t fo r onl y eigh t years . Proven reserves , o

f course , ar e inventor

y muc h lik e cornflake s awaitin

g shipmen t from

Gassin g u p o n natura l gas , letter carriers (left) in Rockford, Illinois, fill their delivery vans at the end o)'the day. Compressors taketen hours tofill all 138of 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 : Thi

s materia ! ma

y b e protecte d b y • Copyrigh t U v iTitl a17 U.S . Code

)P. 4



## There' s Lot s Mor e Natura l Ga s Tha n Yo u Thin k 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 supply the U.S. has enough proven reserves for 12 years at

the current rate of

could last 250years. U.S. oil

resources will

probably last only 40. awarehouse . Th e ga s industr y aeate s th e inventor y b y drillin g discover y an d produc

tion wells . Th e Potentia

l Gas Committee , whic h i s affiliate

d wit h th e Colorad

o Schoo l o f Mines , estimate s tha

t abou t 73 9 tc f o f eas il y recoverabl e ga s ma

y ultimatel y b e liberat

e d b y th e dril l bit . That' s enoug

h domesti c ga s to las t another 4 6 years . An d there' s more . A

n estimate d 200 years ' suppl

y o f natura l ga s i s trappe d i

n geologic condition s tha

t mak e i t difficul t an d expensiv e t o produce . Thes e unconvention

a l resources , a s they are called , includ e ga s disperse d i

n coa l deposits , containe d i

n shal e an d sandstone , an

d mixe d wit h salt wate r an d buried unde

r tremendou s pres sure beneat

h th e Gul f o f Mexico . Th e hig

h cos t o f extractio n make s thi s aresourc e fo r th e future . ' Canad aan d Mexico ar e positivel

y biliou s wit h natura l ga s and , unlik

e th e OPE C coun tries , ar e potentia

l source s th e U.S . ca

n coun t on . Canad

aha s enoug

h proven re serve s t o suppl

y it s ow n market a t current rate s o f us e fo r 5 0 years . Consequentl

y i t i s pipin g nearl y one tc f ayea r to th e U.S . It woul d lik e t o send even more , bu

t th e U.S . doe s no t

nee d i t Natura l ga s fromCanad

aac count s fo r 4 % o f U.S . deman

d an d virtuall y al l importe dgas . Mexic o ha s 7 7 tc f o f proven reserve s an

d produce s alittl e mor

e tha n 1 t d fo r domesti c use . Wha t woul d I t take t o brin g al l tha t ga s t o market ? Highe r prices , bu

t tha t wil l take aver

y lon g time . Natura

l ga s compete s wit

h heatin g oi l i n mos t places , an doi l price s put

aceilin g o n ga s prices . That' s becaus e oi l i s muc h mor e widel y used . Wit

h crude oi l price s a t onl y $1 9 abarre l (th e heatin g equivalen t o f abou t $ 3 per thousand cubic feet , o r

md , o f gas) , producer s ar e drillin

g fo r neither ga s nor oi l an d reserve s ar e falling . Highe r oi l price s woul dstimulat e drilling . Georg e Mitchell , chairma

n o f Mitchel l Energ y & De

velopmen t Corp. , aga s exploratio n an dpro duction compan

y located i

n Houston , say s tha t aga s pric e o

f abou t $4.5 0 per m d woul d stimulat e ga s productio n 40 % ove r te n years . Bu t fo r ga s t o reach tha

t level , crude oi l price s woul

d hav e t o rise t o abou

t $3 0 per barrel . Lik e som e i n th e oi l patch , Mitchel

l want s th e federa

l governmen

t t o spee d tha

t proces s b

y puttin g avariable ta

x o n importe d oi l tha t woul d rais e th e pric e o

f crude i n th e U.S . t o $3 0 abarre l Tha

t ta x i s highe r tha n an y currently contemplate d i

n Congress ; al

l woul dboos t inflation . Besides , les s govern men t intervention , not

more , wil l hel p mak e natura l ga s amarket-oriente dcommodity . Anothe r reaso n ga s price s won' t

rise any tim e soon i s tha

t sinc e 198 1 U.S . well s have bee n able t o pum

p ou t mor e ga s tha n consumer s wanted . Thi s surplus , calle dth e ga s bubble , di dnot send price s tumbling . I

n fact , thoug h som e bi g industria l consumer s hav

e enjoye dlowe r prices , th e averag e pric e ga s consumer s pa

y i s abou t wha t i t wa s i n 1982 . Ove r th e sam e period , th e pric e o

f residua l fue l oi l ha s droppeda s muc

h a s 60% . Conse

quently , asurplu s man

y believed woul

dbe temporar y ha s laste d five years . On

e exper t call s th e extende d bubbl

e " aga s sausage. " I f deman d ha

s fallen , wh y haven' t prices ? Federa l regulation s have governe d th e pric e o f ga s produced i

n one stat e an

d sol d i n anothe r sinc e 1938 . I

n th e mid-1970s , pric e control s caused asurplu s o

f ga s i n producin g REPORTE RASSOCIAT

E Patricia A. LanganP. 5 

# LOOKIN G AHEA D states , suc h a s Texas , an

d ashortag e i

n th e interstate market

wher e price s were being hel d artificiall y low . Whe

n alon g an d bitter freeze struck

i n th e winte

r o f 1977 , ga s sup plie s ra n ou t i n som e interstate markets . T o tur n u p production , Congres s deregu

late d th e pric e o

f certain costl

y varietie s o

f gas , suc h a s thos e fro

mwell s deepe

r tha n 15,00 0 feet . An d i t allowe d th e pric e o

f ne w discoverie s i

n shallowe r well s t o ris e slightl

y mor e tha n inflation . Production fro

mexistin g well s ("ol d gas") , whic

h coul d have been ex ga s starte d cutting bac k o n purchase s o

f old , low-cost gas . A s they did , th e averag e cos t

o f th e ga s they wer

e buyin g an d transportin g wen t up . Customer s wer

e furious . The

y coul d se e the pric e o

f ol d gas , spurned b

y th e pipeline s an

d no w i n surplus , tumblin

g i n a tin y bu t rapidl y developin

g spo t market . Man y o f thes e customer s appealed to th e Federa l Energy Regulator

y Commissio

n fo r relie f fro mtheir promise s to bu

y take-or

pa y ga s fro mth e pipelines . Th e regulators , ever sensitiv e t o th e pric e voter s an dcamPlant s o f th e futur e may look

like this gas-fired

one in Daggett, California. pande d a t th e leas t possibl e cost , remaine d controlled . A s aresult , producer s wen t out an d developed plent

y o f costly ne w reserves . Then th e interstat e pipelin e companies , hopin g neve r agai n t o b e caugh

t short , rushe d i n t o loc k u p th e costl y ne w ga s wit h long-ter mcontracts . Man

y o f thes e deal s ha

d wha t are calle d take-or-pa

y clause s unde

r whic h th e pipeline s agree d t o bu y u p t o 90 % o f productio n whethe

r they coul d sel l th e ga s o r not . T o increas e th e chance s o

f peddlin g th e stuff , th e pipelin

e companie s offere

d thei r customer s contract s i

n whic h th e cus tomer s promised t o bu

y minimu mquantitie s o f th e take-or-pa

y gas . Wit

h tha t th e stag e wa s se t fo r wha t Richar d Adkerson , manag in g director o f Arthu r Andersen' s oi

l an d ga s group , call s th e "deat

h spiral. " Whe n hig h price s bega

n erodin g energ y deman d i n th e early 1980s , pipeline s stuc k wit h take-or-pa

y commitment s fo

r high-cos t paig

n contributor s pa

y fo r energy , declare d th e minimu

mpurchas e provision s void . Soon , big pipelin

e customer s bega

n doin g end run s aroundtheir

ol dsuppliers . They contrade dfo

r spo t market ga s directly wit

h producers . And

, wit h th e hel p o f som e armtwistin g b y th e Federa

l Energ y Regulator

y Commission , they gaine

dpartia l acces s t o th e pipelines ' spare capadt

y i n order t o shi p th e gas . Bot h pipelin e companie s an

dproducer s suffered . Th e pipeline s hav e accumulated al

mos t $1 4 billio n i n take-or-pa

y potentia l li

abilities , ga s they ar e unable t o sel l bu t ar e obligatedt o bu

y sooner o r later . They ar e frantically renegotiatin g thos e contracts , payin g th e producer s a s littl e a s 8 cent s on th e dollar . Naturall y ga s customers , such a s powe r plant s an d factories , tha

t ar e big enoug

h t o bu y supplie s directly fromproducer s love th e spo t marke t prices . The

y are , afte r all , abou t 25 % les s tha

n th e averag e wellhea

d price . Bu t there' s not

enoug h spar e capadt y o n th e pipelines , o

r willingnes s o

n the par t o f pipelin e companies , to carr

y al l th e availabl

e spot gas . Th e result

i s tha t overal l ga s price s have stayed th e sam

e i n spit e o f th e bubble . Ne w tha t pipeline s ar e renegotiatin g con tract s an d a spo t marke t i s developing , won' t ga s price s star t t o move ? Th e situatio n i s gettin g better . B y renego tiating hug e number s o

f take-or-pa y commit

ments , pipeline s are startin g t o bu y ga s a t something lik

e marke t prices . An

d a s th e pric e o f take-or-pa y ga s become s les s onerous , th e pipelin

e companie s ar e warmin

g t o th e ideao f carrying spo t

marke t gas . The y do , afte r all , mak e mone y transportin g ga s n

o matter wh o own s it . Kennet

h Lay , chairman

, o f Enro n Corp. , whic

h own s th e larges t

U.S . pipelin e system , says , "Som

e pipeline s are movin g kin d o f slow , bu t eventuall y al l wil l b e open t o spo t

market gas. " Expert s believe tha t i n tw o t o five year s th e natura l ga s busi

nes s coul db e freer tha n i t ha s been i

n dec

ades , thank s t o ahealth

y spo t marke t Tota l deregulatio n o

f gas , however , i s politicall y ou t o f th e question . Legislator s se e i t a s tantamoun t t o throwing defenseles s homeown

er s int o th e jaw s o

f amonopoly . Wha t ar*

th e ne wmarket s fo r gas ? On e o f th e bigges t

potentia l market s i s gas-fire d utilit y plants . Believin

g ga s to b e scarce , Congres s passe dth e Powerplan t an d Industria l Fuel Us e A do

f 1978 , whic

h re stricte dpublic utilitie s frombuildin g an y major , o r "bas e load, " electri c powe r plant s using ga s fo

r fuel . Th e la

w permitte d onl

y smal l ga s generator s fo

r us e i n suc h times o f pea k deman d a s th e hot

summe r months . No w Congres s ha s passe dabil l tha t amends th e 197 8 la

w an dallow s gas-fire

d plants ; i t await s th e President' s signature . Th e coa l industry , whic

h woul d rathe r no t compet e wit h ga s i n th e utilit

y marke t squashed previou s attempt s t o repea l the ba n o n gas-fire d plants . Since the Fue

l Us e Ac t wa s passed , coa

l sale s t o th e electri c powe r industr y hav e grow

n 40% , whil

e gas sale s hav e droppe d almos t 20% . Tryin

g to han g on t o their

advantage , coa

l me n insiste d tha t an y repealin g legislation stipulat e tha t ne w plant s b e "capable " o

f burnin g coal . Gas' s advantag e fo

r utilitie s i s tha

t gas-fire d facilitie s cos t

les s t o buil

d tha n coa l plants , abou t $60 0 pe r kilowat t o f capadt y vs . roughl y $1,500 . Bu

t ga s cost s mor

e tha n coa l a s afuel . Thus , buildin

g acoal-capable , gas -

# LOOKIN G AHEA D P. 6

fired plan t woul d b e gettin g th e wors t

o f bot h worlds . A nift y ne w technolog

y wit h the galumph

in g nam e "integrate d gasificatio

n combine d cycle " (IGCC , fo

r short) ha s brough

t compro mis e t o the oil-vs.-gas debate . Thi s technol

og y allow s base-loa

d plant s to b e constructe d i n modules , wit

h eac h successiv e stag e con

tributing to the powe

r grid a s i t i s completed . I n the first step , turbine s ar

e installed tha

t migh t bur n ga s o r oi l o r both . Second , astea

m generato r tha t convert s wast

e hea t fro mth e turbine s int

o electricit

y i s added . Finally , shoul d th e pric e o

f ga s an d oi l soa r to previ

ou s OPEC-ia

n highs , acoa

l gasifie r ca n b e added . Th e gasifie

r woul d tur n coa l int o syntheti c ga s fo

r the turbine s and , i

n th e process , mak e hea t to generat e mor

e electricity . Th e notion tha t thes e plant s migh

t someda y consum e coa l mollifies th e coa

l men . A $263-mil

lion , 120-megawat

t demonstratio n plan t calle d Coo l Wate r ha s bee n generatin g an

d sellin g electricit y fo r thre e year s i

n Daggett , California, 13 0 mile s fro

mLo s Angeles . Coo l Wate r i s run b y aconsortiu

mtha t in

clude s Texaco , Souther

n Californi aEdison , 198 6 energ y consumptio n Nuclea r 

## 6 % Hydro electri c 

## 5 % A Bigge r Slice , Pleas e The U.S. is twice as reliant on oil as it is on gas, even though resources of

natural gas are much larger. an d the Electri c Powe

r Researc h Institute . Utilities , whic

h hav e bee

n whipsawe

d be

tween th e unpopularit

y o f nuclea r powe r an d th e hig h capita l cost s o f bi g coa l plants , lik

e wha t they se e a

t Coo l Water . Pete r

Ben

ziger , senio

r vice president

o f Potoma c Elec

tri c Powe r o f Washington , D.C , report s tha t hi s compan

y plan s to complet

e th e first phas e o f a n IGC C plan t i n th e earl y 1990s . H e says : "W

e lik e th e fue l flexibility thi s give s us . W

e lik e th e manageable schedul e o f investments . An

dit' s clean. IGC

C look s lik e the technology o

f choic e i n th e Nineties. " Th e wa y ga s me n se e th e fu

ture , IGC C i s onl y one o f th e ne w idea s they have u

p their pipelines . Smal l new gas-powere d cogeneratio n unit s tha

t provid e electricit y an dhea t (o r cooling ) fo

r stores , hospitals , an

d smal l offices ma

y soon compet

e wit h th e utilitie s i

n th e commerci'I

l market . On

e o f thes e gas-powered unit s i s afue l cel l tha t combine s th e hydroge

n strippe d fro

mmethane (o

r CH4 , th e mai n ingredien

t i n natura l gas ) wit h ai r to produc e electricit

y an d water . The fue l cel l i s quiet , effirient , and , sinc e no combustion i s necessary , i

t i s clean . Bu

t it' s als o expensive , abou

t $2,50 0 per . kilowat

t o f capacity . Expert s a

t th e Ga s Researc h Institute o f Chicago , whic

h helped develo

p the tech

nology , expec t

tha t economie s o

f scale i n production coul

d lowe r th e cos t t o amor e competitiv e $1,00

0 pe r kilowatt , vs . abou

t $1,20 0 pe r kilowat t fo r comparable cogeneratio n units . UnitedTechnologie s an d To

shib ahave forme

dajoin t venture to mak

e th e fue l cells . 

# LOOKIN G AHEA D I f car s an d truck s wer e fuele d b y gas , th e U.S . migh t neve rworr y abou t a n oi l crisi s again . Woul d tha t b e realistic ? The las t frontie r fo r ga s a s afue

l lie s o n the highway . Optimist s i

n th e ga s industr

y sa y their produc t coul d mak e significan

t in

roads , an d poin t t o th e fac

t tha t Ital y ha s 250,00 0 ga s vehicle s i

n operation , Ne

w Zea

lan d ha s 70,000 , an

d th e U.S . 30,000 . Gas i s a t leas t a s saf e afue l a s gasoline , an

d righ t no w ga s price s are abou

t 20 % les s tha

n gas oline's . Natura

l ga s car s an

d truck s have lowe r maintenanc e cost s tha

n gasolin e vehi

cle s becaus e clean-burnin

g ga s i s les s likel

y to clog th e engine . Peopl e wh o driv e gas powere d vehicle s sa

y they can' t

tell th e dif

ferenc e fro

magasoline one . Fillin

g u p a tan k wit h natura l ga s ca n b e a s eas y a s put

ting ai r i n atire , though i

f th e compressor isn' t powerfu l enough i t ca n tak e alo t long

er . O n the other

hand , forc e o

f habit , count

les s gasolin

e stations , an

dth e rollin

g stock o f petroleum-relian

t car s an dtruck s mak

e i t unlikel y tha t natura l ga s wil l overtak e gaso lin e anytim e soon . Aha , sa y th e proponent s o

f ga s buggies . 

# Fillin

g u p acar' s tan

k wit h natura l ga s ca n b e a s eas y a s putting ai

r i n atire , thoug h i f th e compressor isn' t powerfu l enoug h it ca n tak e alon g time . pollutio n contro l ma

y soon tak e ahand . Ove

r th e next fe w years , severa

l deadline s fo

r cleanin g u p bot h ozone (whic

h i s partl y the resul t o f vehicula r traffic ) an d particulat

e emission s fro

mdiesel-buming vehicle s com e due . The Ga

s Research Institute i s workin g o n technologie s tha

t woul dhel p diesel en gine s meet

th e emission s standard s b

y convertin g the

mto bur n ga s o r amixtur e o f diesel fue l an d gas . Rober

t Catell , chie

f operating office r o f Brookly n Unio n Gas , say s hi s compan y i s workin

g wit h Ne w Yor k Cit y to conver t 1,00 0 vehicles , includin

g buses , tax is , an d police cars , to ga s i

n aprogra mto clea

n u p th e air . Brookly

n Union , lik

e man y ga s companies , power s it s ow n 200

- vehicle fleet

wit h gas . I f ga s can' t bea t oil , maybe i

t wil l joi n it . Standar d Oi l i n Ohi o i s developin

g acatalys t to conver t natura l ga s int o gasoline . Standar

d woul dlik e to tur n it s vas t reserve s o

f Alas

ka n natura l ga s int o aliqui dtha t coul dbe shippe d through th e Alaska

n oi l pipeline . (

A ga s pipelin

e fromAlask

at o the U.S . woul

d cos t s o much—abou

t $4 0 billion—tha

t i t woul d pus h th e pric e o

f ga s u p t o noncom

petitiv e levels. ) Rodge

r McKain, wh

o i s i n charg e o f Standard' s project , estimate s tha t Prudho e Bay' s reserve s o

f natura l ga s migh t yiel da s muc h a s 200,000 barrel s ada

y o f gas oline , enoug

h t o replac e 5 % o

f current crude oi l imports . Eve n i f ga s neve r catche s o

n wit h cars , trucks , an d buses , th e America

n Ga s Associ

ation estimate s tha

t other ne w technologies , an dAmerica' s abundance , wil l give ga s the potentia l to replac e 1. 6 millio

n barrel s o f oil , o r 30 % o f today' s oi

l imports , withi

n five years . That' s area

l ac e i n th e hol e agains t OPEC' s hand . • Reprinte d throug h th e courtes y o f th e Editor

s o f FORTUN E © 1987 TIM E INC .