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S. HRG. 108–953 

NATURAL GAS: THE DOMESTIC SUPPLY AND COST 

FOR THE APPROACHING PEAK WINTER MONTHS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COMPETITION, FOREIGN 

COMMERCE, AND INFRASTRUCTURE 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED EIGHTH CONGRESS 

SECOND SESSION 

OCTOBER 6, 2004 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED EIGHTH CONGRESS 

FIRST SESSION 

JOHN MCCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON H. SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

ERNEST F. HOLLINGS, South Carolina, 

Ranking 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

ROBERT W. CHAMBERLIN, Republican Chief Counsel 

KEVIN D. KAYES, Democratic Staff Director and Chief Counsel 

GREGG ELIAS, Democratic General Counsel 

SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, AND 

INFRASTRUCTURE 

GORDON H. SMITH, Oregon, Chairman 

CONRAD BURNS, Montana 

SAM BROWNBACK, Kansas 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

BYRON L. DORGAN, North Dakota, Ranking 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

(III) 

C O N T E N T S 

Page 

Hearing held on October 6, 2004 ............................................................................ 1 

Statement of Senator Lautenberg .......................................................................... 4 

Statement of Senator Smith ................................................................................... 1 

Statement of Senator Stevens ................................................................................ 2 

WITNESSES

Caruso, Guy F., Administrator, Energy Information Administration, U.S. Department of Energy .............................................................................................. 5 

Prepared statement .......................................................................................... 7 

Hauter, Wenonah, Director, Public Citizen’s Energy Program ............................ 25 

Prepared statement .......................................................................................... 28 

Huss, Gary D., President, Hudapack Metal Treating, Inc. on behalf of the 

National Association of Manufacturers .............................................................. 21 

Prepared statement .......................................................................................... 23 

Wilkinson, Paul, Vice President, Policy Analysis, American Gas Association ... 32 

Prepared statement .......................................................................................... 34 

(1) 

NATURAL GAS: THE DOMESTIC SUPPLY 

AND COST FOR THE APPROACHING 

PEAK WINTER MONTHS 

WEDNESDAY, OCTOBER 6, 2004 

U.S. SENATE, 

SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, 

AND INFRASTRUCTURE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:40 p.m. in room 

SR–253, Russell Senate Office Building, Hon. Gordon Smith, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. GORDON H. SMITH, 

U.S. SENATOR FROM OREGON 

Senator SMITH. I’d like to call this Subcommittee hearing to 

order, the Committee on Commerce, Science, and Transportation. 

I want to thank the witnesses who have agreed to testify before the 

Subcommittee today. We are here to discuss the supply and price 

forecast for natural gas and the impact of continued high prices on 

residential consumers and industrial customers. 

This hearing is timely for several reasons. The demand for natural gas has traditionally followed a seasonal pattern, peaking in 

the winter heating months. In the Northwest, consumers are going 

into this winter paying significantly more for natural gas than they 

were just a year ago. Last week, the Oregon Public Utilities Commission approved steep rate increases for three natural gas companies that serve Oregon homes and businesses. These rate increases 

have been driven by the skyrocketing wholesale cost of natural gas. 

The rate increases for residential customers will range from 12 to 

18 percent. The business customers of the state’s largest gas utility 

will face increases of almost 20 percent. Needless to say, this will 

further strain the family budgets of Oregonians, particularly seniors on fixed incomes and low-income residents. In addition, the 

consequences of these increases will be dire for the state’s Low Income Energy Assistance Program, which helped over 54,000 Oregonians last year before running out of money. The impact on businesses will be no less dire. 

Today, we will hear from Mr. Gary Huss, on behalf of the National Association of Manufacturers, about the toll that high gas 

prices are having on his business and businesses like his that rely 

on gas for direct heat or as a feed stock. 

2 

The Industrial Energy Consumers of America estimates that U.S. 

businesses have paid an extra $90 billion in natural gas costs since 

June 2000. Since that time, an estimated 90,000 jobs have been 

lost in the U.S. chemical manufacturing sector. 

With respect to foreign competition, the American Chemistry 

Council projects that the U.S. chemical industry has lost 50 billion 

in business to foreign competition. They also claim that prior to 

2000, affordable gas helped make the chemical industry the Nation’s largest exporter and a low-cost producer. Now it is a net importer and a high-cost producer, largely due to high natural gas 

prices. 

The Energy Information Agency will be represented here today 

by Mr. Gary Caruso. It released its projection for the cost of heating fuel this winter. Essentially, regardless of where you live or the 

type of fuel you use to heat your home, you’re going to pay significantly more this winter. Across the nation, across every energy sector—be it natural gas, oil, gasoline, or electricity—prices will remain high. 

That is another reason why this hearing is so timely. The 108th 

Congress still has time to pass national energy legislation before 

we adjourn. We must also pass the FISC–ETI Conference Report 

that includes an expansion of the types of renewables that are eligible for the electricity-production tax credit and important provisions relating to the proposed Alaska North Slope natural gas pipeline. This pipeline is expected to begin transporting Alaskan gas to 

the Lower 48 states in 2018, with total Alaskan gas production 

forecast to be 2.7 trillion cubic feet by 2025. 

I want to thank my colleagues from Alaska for their tireless efforts to make this pipeline a reality. This pipeline will be an important new domestic source of natural gas in the years ahead. Until 

the late 1980s, the United States was self-sufficient in natural gas. 

Since that time, production has not kept pace with demand and net 

imports as the share of consumption tripled between 1989 and 

2000. Until now, the gap between supply and demand has been 

met by imports through pipelines from Canada and Mexico and by 

imports of liquified natural gas, LNG, to the existing LNG import 

terminals. 

In the future, LNG will play a much bigger role in meeting import needs. Expansions are planned at existing LNG import terminals, and more than 44 LNG import terminals have been proposed 

in the U.S., British Columbia, and Mexico, including ten along the 

West Coast of the United States. The siting and security issues related to these import terminals can and must be resolved in order 

to move forward with this needed infrastructure to meet our energy 

needs. 

I look forward to hearing from our witnesses today, and I will 

first turn to the Chairman of the Appropriations Committee, the 

next Chairman of this Committee, Senator Stevens, and then Senator Lautenberg, for their opening statements. 

STATEMENT OF HON. TED STEVENS, 

U.S. SENATOR FROM ALASKA 

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

3 

I come today to thank you for holding the hearing and to tell you 

I’m going to review the statements. I have to go back to the current 

involvement we have with the intelligence bill. But I do hope that 

we can have an impact on this problem greater than is predicted. 

I heard about the predictions from the Federal agencies and the 

gas association. 

I’m one who believes that if you look at the map of the world and 

look at the production in Russia and that part—the eastern portion 

of that continent, and look at Canada, and then look at our state 

and realize that we’re between those two areas of production, and 

realize that two thirds of the outer continental shelf of the United 

States is off Alaska, in addition to our land mass, which is one fifth 

the whole United States, I think there’s a great deal of gas in Alaska. We’ve only drilled for gas once, to my knowledge, with any intensity, and that’s in the Cook Inlet, and we’ve been very successful. We really have not drilled for gas in the Arctic. The gas we 

have there was associated with the oil production. And there has 

been no incentive to drill for gas in the areas where there might 

be substantial potential, because there has been no transportation 

system. 

Now, we’ve just started the initial—thanks to you, Mr. Chairman; you’ve been very forceful, I understand, in the conference on 

the bill to start the tax provisions, and we hope to get the balance 

of that authorization that was in the energy bill in something before it passes this year. Because I think if we announce to the industry that we’re going to do everything we can as a government 

to give incentive to build this gas pipeline, that will stir up the industry and bring people back looking for gas in Alaska. 

There’s going to be some drilling under the old Naval Petroleum 

Reserve Number 4 this next spring, and that will cause 25 million 

acres that President Harding withdrew right after Teapot Dome 

scandal to be drilled; it has really never been drilled. In the area 

where it was drilled during World War II, there were some shallow 

gas and oil wells, but that’s never been totally drilled. And the area 

that is south of the Brooks Range, where the gas came in once, 

we’ve never gone back to drill that. Some of that may be off limits 

now because of withdrawals, but a portion of it is still available for 

drilling. 

I do believe that the land mass and the area off of our land mass 

in the outer continental shelf, if we explore it, there is substantial 

gas—and probably oil, too—potential out there. 

So I congratulate you for helping us getting this started as far 

as the gas pipeline is concerned, but I also congratulate you for getting some of these basic estimates online. 

I’m not arguing with your near-term projection, Mr. Caruso, I 

just think the far term really is too speculative right now to say 

that we’ll only produce, by 2025, that percentage. I think we’ll be 

up equal to Canada by the time we start drilling out the Arctic and 

the South Slope of Alaska, as far as the gas potential is concerned. 

But thank you very much for what you’re doing—— 

Senator SMITH. You’re welcome, Senator Stevens, and—— 

Senator STEVENS. If you’ll excuse me—— 

Senator SMITH. You bet. 

4 

Senator STEVENS.—I’m going to FedEx your statements, gentlemen, to my friends up north. There’s two who are very anxious to 

build this pipeline. 

Thank you very much. 

Senator SMITH. Thank you, sir. 

Senator Lautenberg, opening statement? 

STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

You know, when one hears Senator Stevens talk about Alaska, 

you realize the size and excitement that surrounds Alaska. When 

Senator Stevens says that Alaska comprises one fifth of the land 

mass of the United States—and I don’t know what the percentage 

of the land mass is that we have in New Jersey, but it’s pretty 

darn small; however, we have a significant part of the national 

population, about eight million people there, and we’re concerned, 

Mr. Chairman, about the things that everybody worries about. 

The first thing that hits is the increase in prices that has come 

along, and moving at a very fast pace, upward. And then the other 

side of the coin is the falling supplies. 

Now, the government has—I think, wisely—promoted the use of 

natural gas at every turn as a clean, abundant energy source. But 

in less than a decade, the average price of natural gas has tripled 

in the United States, and the Energy Information Administration— 

we welcome you, Mr. Caruso—is forecasting that heating a home 

with natural gas this winter will cost nearly 50 percent more than 

it did prior to the year 2000. This is an unacceptable situation. 

Hundreds of thousands of lower-income households have already 

been disconnected from the gas company, or soon will be. And what 

are these families going to do this winter? How will they keep their 

homes heated? 

In my home state of New Jersey, natural gas accounts for about 

30 percent of the energy production that we use. The steep increases in price and uncertainty about our future supplies have 

created real hardships for New Jersey families and businesses, just 

as it is in many other states. 

It’s clear that we need policies for the future to manage our natural gas supplies, and I think the best way to extend them, perhaps, is on the demand side of the equation, through energy efficiency improvements. And I understand, Mr. Chairman, that there 

were—that we’re hearing about liquified natural gas as part of the 

solution to our current supply-and-demand dilemma. 

I look forward to this discussion. And I have, in the traditional 

energy—or environmental concerns that I have had about the safety and the environmental impacts of LNG, a new facility has been 

proposed in Logan Township in my state, and we’re still weighing 

the advantages and disadvantages of that. And I’m concerned that 

we may be moving a little too fast toward LNG as the solution to 

our problem without having sufficient regulations in place. And I 

think that we need to think through this option very carefully and 

make sure we have strong safety and environmental protections before we commit to increase the number of our LNG ports. I understand these are big vessels to carry the quantity that makes ecoVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\81470.TXT JACKIE
5 

nomic sense; and we welcome them, but we want to know exactly 

what we’re getting ourselves into or, rather, what we’re bringing 

into our country. 

And I commend you, Mr. Chairman, for having this hearing. 

Senator SMITH. Thank you, Senator. We appreciate your comments. 

And we will turn to our first panel, Mr. Gary Caruso, Administrator of the Energy Information Agency—Administration. And we 

welcome you, sir. 

STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF 

ENERGY 

Mr. CARUSO. Thank you. 

Senator SMITH. I said Gary, I’m sorry. It’s Guy. I apologize. 

Mr. CARUSO. Thank you, Mr. Chairman and Senator Lautenberg, 

for being here this afternoon and allowing me to present the Energy Information Administration’s Winter Fuel Outlook, which we 

released this morning, as you noted. And I’d be pleased to submit 

that full report for the record, if that was desirable. 

Senator SMITH. We will receive it, happily. 

Mr. CARUSO. And I will also go into a little bit of detail about 

our longer-term forecast that Senator Stevens referred to, as well, 

and be happy to go into more detail, as you desire, on that. 

But, in the short run, which is the focus of the Winter Fuels Outlook Report, Senator Lautenberg is correct, and that is that we are 

going to see substantially higher fuel prices this winter based on 

the outlook that we published this morning. For natural gas, the 

typical consumer will be paying about 15 percent more this winter 

than they did last winter. That is—— 

Senator SMITH. Fifteen percent or—— 

Mr. CARUSO. One-five. For this winter, compared with last winter. If one goes back to 2000 or prior to that, the percentage increase is even higher, as can be seen in this chart. [All charts submitted follow Mr. Caruso’s prepared statement, herein.] 

Heating oil and propane will also—consumers of heating oil and 

propane will also see higher prices this winter—for heating oil, 

about 28 percent compared with last year; and propane, about a 22 

percent increase. So, indeed, consumers will be feeling the pinch 

because of the tight crude markets and tight gasoline—natural gas 

markets that have led to these higher prices. And, of course, when 

Hurricane Ivan hit, there was a considerable impact on our Gulf 

of Mexico offshore production, which has exacerbated both the supply and the price situations. 

The one piece of good news that I can report in the Winter Fuel 

Outlook is that inventories of natural gas have been built up quite 

strongly during the summer months, and we are now at the top 

end, as shown in the second chart, of our normal working gas and 

inventory levels, which should enable us to meet the demand of our 

households and businesses this winter, even in the extremely cold 

winter scenario which we have modeled. Nevertheless, the prices 

will be, as mentioned, higher. 

Over the longer run, gas will continue to play an important role 

in our energy picture, an increasingly important role; but, as was 

6 

noted, production will not keep pace with consumption, and we see 

a growing need for imports in this country. In 2003, we imported 

about 15 percent of our gas, and we see that growing substantially 

by 2025, to more than—almost as much as 25 percent in the—in 

our long-term outlook. And we also see prices coming down from 

these recent highs by 2010 because of the—what we believe will be 

a substantial increase in LNG imports, and some improvement in 

domestic production from unconventional sources, as well. Nevertheless, prices will be higher, even in the long run, than they were 

in—previous to this runup since the year 2000, as can be seen in 

the chart before you, showing wellhead prices and prices to various 

consumers, from the electric generation through to the residential 

consumer. 

Where will our supply come from? As I mentioned, one of the 

major increases in the supply will be in net LNG imports, and we 

expect there will be a considerable number of new LNG regasification terminals built to supplement the four existing terminals 

that are currently in operation. 

The other large increase in our long-term outlook is from Alaska. 

We do expect the Alaska natural gas pipeline to be built. We see 

it coming on in the year 2018 in our latest model runs, and this 

varies based on price and the supply/demand picture. 

The third major increase will come from unconventional sources 

of natural gas, mainly in the Iraqi mountain area, and that would 

be tight sands and coalbed methane. But, indeed, for the traditional sources of Lower 48 production of natural gas, whether it be 

onshore or offshore, we see the depletion rates there leading to declines in production in the Lower 48 so that we will a need substantial increase in imports, whether they be from Canada or via 

LNG. 

The next chart shows how the role of Canada will diminish over 

the next 20 years as a supplier of gas to the United States. Canada 

was supplying most of our imports just as recently as 2002, with 

only 2 percent being LNG. By 2025, Canadians’ natural gas exports 

to the U.S. will be substantially less than LNG, and, indeed, there 

are other forecasts, such as the National Petroleum Council, which 

believe that LNG will be an even—will play an even more important role. In this case, we’re assuming about 15 percent of our gas 

will be LNG by 2025, and the NPC study, for example, indicated 

about 25 percent. 

So, clearly, the role of LNG will increase dramatically over this 

forecast period, and the 44 proposed projects that Senator Lautenberg mentioned, certainly we expect a substantial number of those 

will come to fruition and will be an important part of our long-term 

natural gas picture. 

With that very brief overview of our winter outlook and longerterm outlook for natural gas, Mr. Chairman, I’d be very pleased to 

answer any questions you or other Members may have. 

[The prepared statement of Mr. Caruso follows:] 

7 

PREPARED STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to appear before you today to discuss the Winter 

Fuels Outlook and the short and longer-run forecasts for natural gas supplies and 

prices. 

The Energy Information Administration (EIA) is the independent statistical and 

analytical agency within the Department of Energy. We are charged with providing 

objective, timely, and relevant data, analysis, and projections for the Department of 

Energy, other government agencies, the U.S. Congress, and the public. We do not 

take positions on policy issues, but we do produce data and analysis reports that 

are meant to help policymakers determine energy policy. Because the Department 

of Energy Organization Act gives EIA an element of independence with respect to 

the analyses we publish, our views are strictly those of EIA. They should not be construed as representing those of the Department of Energy or the Administration. 

Overview 

Concerns about crude oil supplies, low excess production capacity, volatility in 

crude-oil prices, and tightness in natural gas markets are expected to keep nominal 

crude oil and wellhead natural gas prices well above historical levels for the near 

term. Higher prices combined with a projected slightly colder-than-normal winter 

season (particularly in regions with major heating needs) mean that most households and businesses will be spending more for heating fuels natural gas, heating 

oil, propane, and electricity—than they did last winter. 

Natural gas currently is, and will remain, a primary source of energy in the 

United States. In the long term, we expect to meet growing demand through increased domestic production and through expanded imports of liquefied natural gas 

(LNG). After declining from near-term high levels, end-use natural gas prices are 

expected to trend downward through 2010 before beginning to gradually increase 

through 2025. 

Heating Fuels, by Type and Region 

Heating fuel consumption varies by type of end user, such as households or commercial buildings, and by Census region, as well as by variations in price and 

weather. In 2001, the most recent year for which we have detailed data, of the 106 

million households who use heating fuel, 56 percent or 59.1 million households used 

natural gas as their main space-heating fuel, while 29 percent or 30.9 million households used electricity, 8 percent or 8.0 million used fuel oil, and 5 percent or 4.9 

million used liquefied petroleum gases (LPG), primarily propane. 

Note: Three percent of U.S. households use kerosene for main space heating, primarily in the 

South. 

Source: Energy Information Administration, 2001 Residential Energy Consumption Survey. 


1006GUY1.eps
8 

While natural gas is used heavily in all four Census regions, electricity is used 

as the main space-heating fuel by more than half of the households in the South 

(19.3 million households). Fuel oil use is heavily concentrated in the Northeast. Almost 78 percent of LPG use is in the South and Midwest. LPG is concentrated in 

rural areas (3.5 million households out of 4.9 million households nationally). Heating fuel use in the commercial buildings sector generally follows similar patterns. 

Winter Fuels Outlook 

For the near term, our outlook is for crude oil and natural gas prices to remain 

higher than historical levels. Higher prices combined with a projected slightly colder-than-normal winter season (base case) mean that most households and businesses will be spending more for fuels than they did last winter. 

Consumption based on typical per household use for regions noted. Prices are retail national 

averages. 

*thousand cubic feet. 

• Last winter, per-household natural gas expenditures in the Midwest rose more 

than 8 percent despite a weather-induced 7 percent decline in consumption. 

This winter, expenditures are projected to rise 15 percent due to a 4 percent increase in consumption and an 11 percent increase in prices. 

• Last winter, heating oil expenditures for a typical Northeast household declined 

slightly as a 2 percent decline in consumption offset a small increase in prices. 

This winter, expenditures are projected to rise by 28 percent with higher prices 

accounting for almost all of the increase. 

• Last winter, expenditures for the average household in the Midwest using propane as a heating fuel rose slightly as an 8-percent price increase negated a 

7-percent consumption decline. This winter, expenditures are projected to rise by 

about 22 percent due to a 4 percent increase in consumption and a 17 percent 

increase in prices. 

While these calculations illustrate recent and projected trends in heating expenditures, actual expenditures for an individual household can vary significantly depending on local factors as weather variation and price differences among fuel suppliers serving a given region, and due to individual home characteristics such as 

size, heating equipment efficiency, the effectiveness of insulation, and thermostat 

settings. 

Natural Gas 

High crude oil prices and strong economic growth put upward pressure on natural 

gas prices this year until mid-summer, when cooler-than-expected temperatures 

kept peak electricity demands down, reducing summer natural gas demand below 

expectations. Prices began easing in July then fell to a September average of about 

$5.00 per million Btu at the Henry Hub, a decline of about $1.30 from the June 

average. The relatively weak demand and low prices resulted in very strong storage 

injections from mid-to late summer. Hurricane Ivan disrupted at least 2 billion cubic 

feet per day of natural gas production in the Gulf of Mexico during the second half 

of September. Operations in the Gulf may take a number of weeks to return to normal. 


1006GUY2.eps
9 

As of October 1, working gas inventories, estimated at 3.072 trillion cubic feet, 

were close to the upper bound of the normal range and 222 billion cubic feet above 

last year’s level. Also, given continued net injections during October, working gas 

inventories by October 31 are expected to be the highest they have been since 1990. 

The April-to-September rate of stock additions was well above the average refill rate 

of the previous 5-years, brought about by weak summer demand from cooler-than 

average weather. As a result, end-of-season (March 31, 2005) working-gas inventories are projected to be about 200 billion cubic feet above the year-ago level and 

about 530 billion cubic feet above the all-time low of 730 billion cubic feet at the 

end of the winter of 2003. 

Although underground storage levels are high, other factors, such as production 

losses in the Gulf of Mexico, modest growth in both U.S. production growth and imports, and increased winter demand, contribute to natural gas prices (wellhead and 

retail levels), which are expected to be above those of the previous winter season, 

particularly during the fourth quarter of 2004. The base case wellhead price is projected to average $6.04 per thousand cubic feet up nearly 23 percent from last winter’s average of $4.92 per thousand cubic feet. Residential prices, which reflect wellhead prices with a lag and also include cost of transmission and local distribution, 

are projected to average $10.86 per thousand cubic feet, up 11 percent from the average $9.77 per thousand cubic feet last winter. 

Total winter-season natural gas demand is expected to average about 1.5 percent 

higher than last winter due to cooler weather in regions with large concentrations 

of gas-heated homes and continued increased demand in the commercial and powergeneration sectors. Not only is the typical residential and commercial customer expected to increase gas consumption during this heating season compared to last winter, but the number of such customers is expected to increase as well. 

Domestic dry natural gas production during the upcoming winter is expected to 

remain flat compared to last winter, somewhat less than would have been expected 

had Hurricane Ivan not disrupted Gulf of Mexico production. The lagged effects of 

continued high prices in 2004, which induced additional drilling activity, are expected to raise winter output above last winter levels despite the above-average levels of gas in storage available to meet winter demand. 

Net imports are projected to provide 9.55 billion cubic feet per day this winter in 

the base case, higher than last winter’s average of 9.26 billion cubic feet per day. 

The bulk of net imports are shipped via pipeline from Canada. Last winter, imports 

from Canada declined by about 0.7 billion cubic feet per day from the previous winter but were more than offset by increased LNG imports. Pipeline imports from 

Canada are expected to decline again this year by an amount that will not be entirely offset by higher LNG imports. Meanwhile, gradual increases in natural gas 

exports to Mexico are expected to continue. 

Heating Oil 

Last winter season, the average household’s consumption of heating oil fell by 6 

percent—due to warmer-than-normal weather—while the average per-gallon heating 

oil price increased by 2 percent. As a result, the average heating oil consumer saw 

little change in total heating expenditures. 

This winter season, tight global oil markets and elevated world and domestic oil 

prices are expected to raise heating oil prices and expenditures considerably. Retail 

heating oil prices in the base case are projected to average $1.75 per gallon, up 29 

percent from last winter’s average. Per-household heating oil demand is projected 

to be slightly below last winter’s demand, but per-household heating expenditures 

are expected to rise 28 percent compare to last winter. This is the largest projected 

increase of all the fuels. 

Distillate fuel inventories (as of the end of September) are estimated to total 126.4 

million barrels compared to the 131.3 million barrels last year, within the normal 

range of 121.1 to 141.4 million barrels. Moreover, inventories in the Northeast, the 

main consuming region of heating oil, are reasonably comfortable, standing at 51.5 

million barrels, which is slightly less than the 52.6 million barrels at the beginning 

of the previous winter and within the normal range of 45.4 to 62.9 million barrels. 

Total end-of-season stocks are projected to be 102.1 million barrels, slightly lower 

than the 104.0 million barrels seen at the end of last winter. 

Net imports are expected to play a slightly smaller role in meeting the winter distillate requirement compared to last winter. Often the swing supplier of heating oil, 

net imports are expected to average just 245,000 barrels per day, down from 269,000 

barrels per day last winter, and well below the record winter average of 335,000 

barrels per day. On a short-term basis, net imports have been as high as 722,000 

barrels per day. 

10 

Propane 

Spot propane prices are primarily determined by crude oil and natural gas wellhead prices. Retail propane prices are influenced by heating oil and natural gas 

prices and alternative petrochemical feedstocks. Because of projected increases in 

crude oil, natural gas, and heating oil prices, residential propane prices for the upcoming winter season are expected to average $1.53 per gallon compared to $1.30 

per gallon last winter. 

Despite last winter’s mild weather, propane demand averaged a record 1.48 million barrels per day, 3.2 percent above the previous heating season, in part due to 

strong petrochemical feedstock demand and a record corn crop (propane is used the 

agricultural sector to dry corn after harvest to prevent spoilage). Continued economic growth, an even larger corn crop, and increased heating degree-days are expected to account for much of the projected 1.8 percent demand growth in the upcoming winter season. 

Propane inventories began the last winter at the lowest level since 2000 (at 62.5 

million barrels) and declined by 34.6 million barrels during the heating season. This 

was slightly less than the average draw rate due, in part, to the relatively mild winter conditions. As a result, end-of-season inventories were 27.9 million barrels, well 

within the normal range. During the summer, stockholders added 38.6 million barrels bringing beginning-of-season stocks to 66.5 million barrels. End-of-season 

(March 31, 2005) stocks are projected to be 29.0 million barrels. 

While small in volume, propane imports are critical when demand exceeds available supply. Through the first half of 2004, propane imports averaged 188,000 barrels per day, up more than 27 percent from that of the first half of 2003. Imports 

from Canada and other sources are expected to maintain their strong year-over-year 

growth rates during this winter season, assuming U.S. propane prices remain attractive to foreign suppliers. 

Electricity 

This winter, residential electricity prices are projected to average 8.50 cents per 

kilowatthour (kWh), slightly below the average 8.65 cents per kWh last winter. Retail electric prices are not very sensitive to demand surges or fuel price shocks that 

may occur in the winter. Increased costs of fuel and wholesale electricity would tend 

to be smoothed out in retail prices over a period of several months. 

The prospects of colder weather in regions where electricity is used heavily for 

heating combined with continued economic growth will likely result in increased residential as well as total electricity demand for the winter. Growth in total electricity 

demand is projected to be 3.1 percent. Residential consumption is projected to increase 3.4 percent, commercial demand is expected to grow 2.9 percent, and industrial demand is expected to grow by 4.3 percent. 

Cold Winter Case 

An alternative cold-weather case estimates the potential impacts of energy supply, 

demand, and prices, assuming base case values for real gross domestic product 

(GDP) and other key macroeconomic drivers. The cold weather case assumes a 10 

percent increase in aggregate heating degree-days from the base case level. Based 

on winter-season heating degree-day data from 1974 to 2004, the probability of a 

winter at least 10 percent colder than that projected for the base case is 4.2 percent. 

A winter that is 10 percent colder throughout the season is assumed to result in 

an additional 10-percent increase in heating-related demand across fuels. 

In the 10 percent colder case, retail prices for the three primary fuels would be 

expected to rise, reflecting higher marginal costs associated with the incremental demand. Heating oil prices would average $1.84 per gallon, 4.9 percent above those 

in the base case. As a result, the average total expenditure for a heating oil household would rise about 15 percent above the base case. Residential natural gas prices 

would rise by about 6 percent from the base case. Some of the increased cost of natural gas that would stem from colder weather would be rolled into future natural 

gas bills extending beyond the heating season. Changes in propane prices, which are 

highly related to changes in natural gas prices, would result in residential propane 

prices averaging $1.59 per gallon, up about 4 percent from the base case. As a result, total per-household propane expenditures would rise more than 14 percent 

from base case projections. 

Long-Term Natural Gas Supply and Price Projections 

The United States is the largest natural gas consuming country in the world. U.S. 

domestic production is also large relative to current world production, with only 

Russia supplying more natural gas. However, the United States historically has also 

met up to 16 percent of consumption with net imports of pipeline natural gas. ImVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\81470.TXT JACKIE
11 

ports by pipeline declined sharply in 2003 and are expected to show a decline again 

in 2004. Recent and likely further expansion of international trade involves importing LNG. 

Over the longer term, average annual natural gas wellhead prices in the lower 

48 states are projected to decline from recent highs between now and 2010 and then 

increase gradually, reaching $4.40 per thousand cubic feet in 2025, in constant 2002 

dollars. 

Price increases are held in check somewhat by increased LNG imports, technology 

improvements, and domestic production from unconventional sources and Alaska, 

but these are unable to fully offset the impacts of resource depletion and increased 

demand. Prices are projected to increase unevenly as major new, large-volume supply projects—specifically new LNG terminals and an Alaska pipeline—temporarily 

depress prices when initially brought online. In nominal dollars, the 2025 price is 

the equivalent of almost $8.50 per thousand cubic feet. 

For the most part end-use prices track the wellhead prices. However, EIA projects 

declines in average transmission and distribution margins, as a larger proportion 

of the natural gas delivery infrastructure becomes fully depreciated and fixed costs 

are spread over a larger base. In addition, some of the higher growth areas are in 

regions that are closer to supply sources. 

End-use natural gas prices are expected to increase gradually starting in about 

2010 as a result of increasing wellhead prices. The average end-use price is expected 

to increase by 78 cents per thousand cubic feet between 2010 and 2025 (in constant 

2002 dollars), compared with an increase of 98 cents per thousand cubic feet in the 

average wellhead price of domestic and imported natural gas supplies over the same 

period. Part of this difference is attributable to an increasing share of natural gas 

sold to electric generators, the sector with the lowest prices. 

By 2010, residential natural gas prices in inflation-adjusted terms are expected 

to decline from current levels. From 2010 to 2025, residential natural gas prices are 

expected to rise 68 cents per thousand cubic feet in real terms, reaching $8.56 per 

thousand cubic feet in 2025. Because of increases in efficiency and conservation, 

however, annual natural gas expenditures per household are projected to increase 

by only 1 percent, to $632. Industrial natural gas prices are expected to decline from 

$5.76 per thousand cubic feet in 2003 to $4.16 per thousand cubic feet by 2010 and 

gradually increase by 97 cents to $5.13 by 2025, in real terms. 

Changes in prices over the forecast period reflect changes in both supply sources 

and consumption patterns. By 2025 total U.S. natural gas consumption is expected 

to increase to 31 trillion cubic feet, while production is expected only to reach 24 

trillion cubic feet. Increasing use of imports makes up the 7-trillion-cubic-feet difference between consumption and production. 


1006GUY3.eps
12 

Net imports are projected to rise from 3.5 trillion cubic feet in 2002 to 7.2 trillion 

cubic feet by 2025. Nearly all of the increase is expected to come from LNG, with 

a 4.6-trillion-cubic-feet increase expected over 2002 levels. This is nearly a 16 percent annual growth rate. By 2025, we expect net LNG imports to equal 15 percent 

of total U.S. gas consumption, compared to less than 1 percent in 2002. Net LNG 

imports are expected to rise from 5 percent of net imports in 2002 to 66 percent 

in 2025. By 2025 we expect expansion at the four existing terminals and construction of new LNG terminals along the Gulf Coast, in the Bahamas, along the East 

Coast, and in Baja California, Mexico. 

Imports from Canada are expected to peak at 3.7 trillion cubic feet in 2010, after 

a pipeline from the Mackenzie Delta begins service in 2009. Production off the eastern coast of Canada and unconventional production are expected to be increase supply, but they are not expected to make up for the anticipated rapid decline in conventional production from western Canada and Canadian demand increases. LNG 

becomes the largest source of U.S. imports in 2015, as Canadian production declines. 

Mexico is projected to continue to be a net importer of U.S. natural gas. Expected 

new LNG import terminals on Mexico’s east and west coasts will be important contributors to Mexican supply. Net exports to Mexico are forecast to decline after 2006 

as LNG imports into Baja California begin to supply both the U.S. and the Mexican 

markets. 

Increases in U.S. natural gas production come primarily from unconventional 

sources and from Alaska. Unconventional gas production is expected to increase by 

3.2 trillion cubic feet over the forecast period—more than any other source, largely 

because of expanded tight sands gas production in the Rocky Mountain region. Annual production from unconventional sources is expected to account for 38 percent 

of production in 2025, compared to 31 percent in 2002. 


1006GUY4.eps
13 

* Includes total associated-dissolved, supplemental natural gas production, and Mexico imports. 

Alaska gas production is expected to increase by 2.3 trillion cubic feet over the 

forecast period from 0.4 trillion cubic feet in 2002 to 2.7 trillion cubic feet in 2025. 

It accounts for most of the growth in domestic conventional gas production. Alaska 

gas production begins flowing to the lower 48 states in 2018, with 3.9 billion cubic 

feet per day delivered to the lower-48 States in 2019. Expansion of the Alaska gas 

pipeline raises lower 48 deliveries to 4.8 billion cubic feet per day in 2025. 

Conventional onshore non-associated production decreases by 310 billion cubic 

feet over the forecast period, as traditional sources of natural gas are depleted, even 

with continued technological improvement. Non-associated offshore production declines by 210 billion cubic feet, as shallow water production declines. 

Electric generators, not including commercial and industrial combined heat and 

power facilities, lead the increase in consumption over the forecast. Consumption in 

this sector is expected to increase by about 50 percent over the forecast, from 5.6 

trillion cubic feet in 2002 to 8.4 trillion cubic feet in 2025. Demand by electricity 

generators is expected to account for 27 percent of total natural gas consumption 

in 2025. 

Most new electricity generation capacity is expected to be fueled by natural gas; 

consequently, natural gas consumption in the electricity generation sector is projected to grow rapidly throughout the forecast. Although average coal prices to electricity generators are projected to fall throughout the forecast, natural gas-fired generators are expected to have advantages over coal-fired generators, including lower 

capital costs, higher fuel efficiency, shorter construction lead times, and lower emissions. 

The industrial sector, excluding lease and plant fuel, remains the largest gas-consuming sector, with significant amounts of gas used in the bulk chemical, refining, 

and mining sectors. Industrial consumption is expected to increase by 3.0 trillion 

cubic feet over the forecast period, driven primarily by macroeconomic growth, 

which rises 3 percent annually as measured by GDP. The chemical and metal-based 

durables sectors show the largest growth. 

Combined consumption in the residential and commercial sectors is projected to 

increase by 2.1 trillion cubic feet from 2002 to 2025, driven by increasing population, healthy economic growth, and slowly rising prices in real terms. Natural gas 

will remain the overwhelming choice for home heating throughout the forecast period, with the number of natural gas furnaces rising by 17 million units. 

Thank you, Mr. Chairman and members of the Committee. I will be happy to answer any questions. 


1006GUY5.eps
14 


1006CARUS1.eps 1006CARUS2.eps

EIA's Winter Fuels Outlook and Long Term Natural 

Gas Projections 

Guy F. Caruso 

Administrator 

Energy Information Administration 

Subcommittee on Competition, Foreign Commerce, and 

Infrastructure 

Committee on Commerce, Science and Transportation Committee 

United States Senate 

October 6, 2004 

Washington, D.C. 

~ __ .e; •. dO.'~OV 

ela 'd,H+iY',ji.""f-iff.i,p·Y·i'd'.JN'N"·i,e 

Selected Average Consumer Prices and 

Expenditures for Heating Fuels During the Winter 

Average Actual Actual Actual Projections % 

1998-20002001-20022002-20032003-200 2004-2005 Change 

Natural Gas (Midwest) 

Consumption (mel') 888 81.3 94.9 89.1 92.3 3.7 

Avg. Price ($/mcf) 7.61 7.41 8.40 9.77 10.86 11.2 

Expenditures ($) 676 602 797 870 1003 15.3 

Heating Oil (Northeast) 

Consumption (gallons) 673 577 743 700 698 -0.3 

Avg. Price ($/gallon) 1.1 2 1. 10 1.34 1.36 1.75 28.8 

Expenditures ($) 754 637 995 953 1223 28.4 

Propane (Midwest) 

Consumption (gallons) 877 803 940 882 914 3.7 

Avg. Price ($/gallon) 1.10 1.11 1.20 1.30 1.53 17.3 

Expenditures ($) 965 888 1124 lt47 1396 2 1.6 

Consumption based on typical per household use for regions noted. Prices are retail national averages. 

·thousand cubic feet. 

Ener-gy Infonnatlon Administration 
15 


1006CARUS3.eps 1006CARUS4.eps

3500 

3000 

2500 

2000 

1500 

1000 

500 

Working Gas in Underground Storage 

(billion cubic feet) 

Previous 5-yettr 

MinIMall Range 

Projected 

/ 

~WW_.I._dQ·_ QV 

elQ 'B,i9+(+Mi.";'iji't.!'p·'·§W"",·.,9 

Natural Gas End-Use and Wellhead Prices by Sector 

(2002 dollars per thousand cubic feet) 

12 

History 

10 

8 

6 

4 

2 

+---~--~--~ 

Projections 

___ -_--Residential $8.56 

___ -Commercial $7.62 

Industrial $5.13 --""'=Elec. Gen. $5.01 

Wellhead $4.40 

1970 1970 1960 1965 1990 1990 2000 2000 2010 2015 2020 2025 

~.WW"""Oi •. dO._. O"" ela '+Hi·iAM!.ii"HWUt@@@@li.ii+ 
16 


1006CARUS5.eps 1006CARUS6.eps

35 

30 

25 

20 

15 

10 

5 

o 4""'--

1990 

Natural Gas Supply, 1990-2025 

(trillion cubic feet) 

History Projections 

1995 2000 2005 2010 2015 2020 2025 ·Includes total associated-dissolved, supplemental natural gas production, and Mexico imports 

5 

4 

3 

2 

@ __ .e; •. doe·Mo v 

ela 'a+iHiMHiiiEiM·""""'5¥i • .!i+ 

U.S. Natural Gas Net Imports,1990-2025 

(trillion cubic feet) 

History Projections LNG 

~-=~~~==~~~~~~ 20 2010 2015 2020 2025 

~ _ .• ; •. doe·l o v ela 'a,j,ji,HMi·.i .. ,iM·"··",!!b!6!ii.i.+ 
17 

Senator SMITH. Thank you, Guy. It’s a very helpful presentation. 

Just a few questions. How much have heating fuel costs increased since 2000? 

Mr. CARUSO. Let me—sorry—I’ll have to read it off the chart. 

Sorry. 

The actual cost of natural gas for a typical consumer in 2001/ 

2002 was $600-per-household, and we’re projecting, this year, about 

$1,000. So that’s a $400-per-household increase in just 4 years. 

Senator SMITH. Substantial. And how much will the average family, then, spend to heat their home this winter? It must vary quite 

a bit from region to region, but—— 

Mr. CARUSO. It does, considerably. We have used, in our chart 

here, as a typical household, a natural gas household using natural 

gas to heat their home in the Midwest, and that’s about a thousand. But, for example, heating oil, let’s say, in New Jersey, the average consumer would probably be closer to $1,200 because of the 

higher price of heating oil. And propane is used to a large degree 

in the Midwest and the South for heating, and that will be almost 

$1,400 per family for that source of fuel. 

It turns out that electricity in the—which is mainly favored by 

the—in the southern states of this—for heating, will actually have 

the smallest increase in price to the consumer this particular winter. 

Senator SMITH. Obviously, natural gas has to be delivered 

through pipelines, unless it’s LNG. Are there areas of the country 

that don’t have the pipeline infrastructure and have inadequate infrastructure, in terms of pipelines? And, if so, what are those regions? And are their prices substantially higher? 

Mr. CARUSO. Well, the infrastructure issue, including natural gas 

pipelines, is clearly what is an important part of why we have such 

a very tight natural gas supply/demand picture in this country. In 

the Rocky Mountain area, where we expect substantial increases in 

unconventional gas, there is a need for continuing to build new 

pipelines to deliver that gas to consumers, particularly in the West 

Coast. There’s clearly the need for the Alaska natural gas pipeline 

system that Senator Stevens mentioned. So we have built a lot of 

new natural gas pipelines in the last decade or so, but the need is 

to build even more. And in New England is the one area—another 

area where there was a substantial build in the last decade or so, 

but remains relatively limited in its access to natural gas because 

of its long distance from the main producing areas of Texas, Louisiana, Oklahoma, and the Gulf of Mexico. 

Senator SMITH. Guy, one of the things I have observed—and 

this’ll be my last question; I’ll turn it over to Senator Lautenberg 

for his questions—but one of the things I’ve observed during the 

last energy crunch for electricity is that lots of gas—natural gas 

generators were put in. I’ve got about three of them I can think of 

within 50 miles of my home in Oregon. What’s that done to prices 

of natural gas? And, you know, frankly, it just strikes me as a very 

inefficient way to create electricity through natural gas, as opposed 

to heating homes directly with natural gas. But it has to have had 

a tremendous impact, in terms of driving these prices up. Is that 

your understanding? 

18 

Mr. CARUSO. Well, it’s certainly the area within the natural gas 

demand structure that has grown the fastest in the last 10 years. 

Most of the new electric power generation has been combined-cycle 

gas turbines, and that has been a major factor in the increase in 

demand. And, to that extent, of course, that has put upward pressure on prices. And it has been pure economics. These combinedcycle gas turbines have been—capital cost has been—the lowest 

per-kilowatt-hour generated has been relatively quick to build, and 

they’ve been relatively small in size, so that the risk to the utility 

was so—it was a natural and, I think, the correct business decision—— 

Senator SMITH. But maybe not any longer, if the price of natural 

gas keeps going up. 

Mr. CARUSO. Well, that was when price of the gas was two dollars, or even lower. 

Senator SMITH. What is the percentage of natural gas going to 

electrical generation? 

Mr. CARUSO. If you include cogeneration, it’s in the low 20s. It’s 

about 21 or 22 percent. But I’ll certainly get the—— 

Senator SMITH. But it’s the biggest increase—— 

Mr. CARUSO. Oh, by far, yes. 

Senator SMITH.—in the use of natural gas. 

Mr. CARUSO. In the last decade or so, more than 95 percent of 

new electric generation has been natural gas fired. 

Senator SMITH. Thank you. 

Senator Lautenberg? 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

Mr. Caruso, one of the things in—I’m going to ask a couple of 

fairly elementary questions just so that I’m sure about my familiarity with natural gas and LNG and—propane is derived from 

where? 

Mr. CARUSO. Propane can be either a derivative from natural gas 

or from petroleum at the refinery. There’s two ways of producing 

propane, and so it can come from either one. 

Senator LAUTENBERG. So there—is there a cost of processing that 

adds to the cost of propane that makes it higher? And the appeal 

for propane, I guess, is that it can be relatively easily put into containers and shipped that way. 

Mr. CARUSO. It’s most useful for those areas that aren’t served 

by pipeline—as the Chairman mentioned, for rural areas and those 

where the final—the distribution of natural gas has not reached 

the local community. So propane is often used in those areas. 

Senator LAUTENBERG. Is propane a more volatile substance than 

natural gas? 

Mr. CARUSO. Um—— 

Senator LAUTENBERG. In terms of flammability or—— 

Mr. CARUSO. I don’t think it’s any more—you know, if it’s handled properly, I think it is—it’s not any more or less. 

Senator LAUTENBERG. No. The—— 

Mr. CARUSO. It’s under pressure, so, therefore, to that extent, it 

might be a little bit more—— 

Senator LAUTENBERG. Because I know there are restrictions in a 

lot of communities where propane gas tanks can be put, whether 

19 

or not they have to be subsurface, or shouldn’t be. I’m not really 

sure about it. I just know that I had to pay for it. So—— 

[Laughter.] 

Senator LAUTENBERG. And is natural gas—they use the term— 

I hear ‘‘stored.’’ ‘‘Stored’’ means in its natural environment? Just 

leave it in the ground? Is that—— 

Mr. CARUSO. Yes. 

Senator LAUTENBERG.—is that the best way to—— 

Mr. CARUSO. Storage is a critically important component in the 

natural gas peak heating season, because production is pretty flat, 

year—month to month in the U.S. We don’t see a great deal of variation from month to month. So during the summer months, what 

the industry does is re-injects natural gas into salt domes and 

other natural cavities that are placed strategically around the 

United States—there are around at least 400 of these sites—that 

we monitor on a weekly basis. And during the winter, it’s pulled 

out of those storage and put into distribution pipelines to reach the 

final consumer. In fact, in the typical winter season, we will consume, say, 70 bcf per day, billion cubic feet per day, of which about 

20 of that would come from storage. So it’s critically important. 

Senator LAUTENBERG. Storage, though, is a process; it’s not just 

lying in the ground waiting to be brought out. There has to be a 

system for storage. Do they build tanks for storing natural gas, or 

is the volume so great that to be efficient that it just wouldn’t pay 

to do anything like that? 

Mr. CARUSO. That would be—that is among the more—the most 

costly. And although there are some at local utilities, that’s a much 

smaller component. Most of it is—there’s large storage in salt 

domes and other natural cavities underground. 

Senator LAUTENBERG. Does Department of Energy get a lot of environmental concerns expressed about LNG, in terms of any potential environmental damage? And if you get those kinds of concerns, 

how do you deal with them? How do you address those concerns? 

Mr. CARUSO. Well, the Federal Energy Regulatory Commission is 

the body within the government that regulates, of course, the interstate commerce, so they’re very much involved in the issues with 

respect to safety and the movement of LNG, as well as the Coast 

Guard for safety. And DOE, in its Office of Fossil Energy, also has 

participated in studies with respect to the safety of LNG. And EIA, 

my organization, has not been directly involved, but I know that 

the Office of Fossil Energy has recently been involved in studies of 

the safety of LNG and—— 

Senator LAUTENBERG. Well, there are two issues. One is safety. 

And New Jersey had a very bad experience with explosions in the 

natural gas pipeline in fairly densely populated areas. And, as a result of that, it’s very hard to plan pipeline service around, because 

people are afraid to have these pipes too near their homes. And I 

think there are fairly fundamental protections that could be installed—sectioning off power—pressure measurements and things 

of that nature. So the safety factor, why they can’t easily convince 

people to have pipes running under the schoolhouse or under their 

own home. But what are the environmental concerns that are expressed that you deal with? 

20 

Mr. CARUSO. Well, EIA, of course, is—being a statistical agency, 

we don’t—— 

Senator LAUTENBERG. Right. 

Mr. CARUSO.—get directly involved—— 

Senator LAUTENBERG. But you get—— 

Mr. CARUSO.—but certainly we—— 

Senator LAUTENBERG.—you get the current concerns expressed 

through you. 

Mr. CARUSO. I think in terms of environmental issues, you know, 

natural gas, because of its cleaner burning qualities with lesser 

emissions of CO2 than, let’s say, other fuels—coal or oil—one of the 

reasons that there has been such a rush to use more gas, particularly in electric power generation, has been that it is among the 

fossil fuels considered the more environmentally friendly. So, to 

that extent, natural gas actually is—there are concerns, of course— 

use of the fossil fuels, more generally; but natural gas, among the 

fuels, has been, as I say, one we receive less concern about. 

Senator LAUTENBERG. Are you familiar with what—the problems 

that arise from trying to develop the transportation system—the 

ships, et cetera, that—to carry LNG and what conditions that imposes on the waterways or ports, et cetera? 

Mr. CARUSO. Not in a specific sense, but, clearly, this whole issue 

of the energy infrastructure of this country requires—and I think 

it has been addressed in the discussions on the conference energy 

bill—that there is the need to have enhanced infrastructure from— 

not only from the tankers, but the port facilities, as well as the 

pipelines that you mentioned earlier. So I’m aware that there will 

be a need to build a substantial number of new facilities to handle 

the LNG, and, of course, the tankers, to bring it in, but I think the 

industry, best of my knowledge, is prepared to do that, and in a 

way that’s—I think would satisfy the demands in the—that we 

project. 

Senator LAUTENBERG. Now, the LNG, the rush to increase the 

number of LNG ports suggests that we are prepared to be further 

dependent—and I don’t know that that’s such a bad thing with 

such a precious commodity—on foreign imports, because it just 

makes the supply that’s available, that’s further away, able to 

reach our shores. So we have to look fairly closely at that. 

You know, Mr. Chairman, very quickly, and I’ll close, before I 

was in the Senate, I’ve always been interested in the environment, 

as I know our Chairman is, and when I heard that there was consideration of a trans-Canada pipeline, trans-Alaska, et cetera, 

being put in place, I thought, ‘‘Wow, that’s really a threat to the 

environment.’’ And then we turned to the ships, and Valdez, Exxon 

Valdez, et cetera, appeared, and you say, ‘‘Well, you won’t get that 

out of a pipeline.’’ So I think we have to get as much as we can, 

safely and quickly, available through our own sources and through 

a system of piping that can help us deliver that—the material. 

Thank you, Mr. Caruso. 

Mr. CARUSO. Thank you. 

Senator LAUTENBERG. Thanks, Mr. Chairman. 

Senator SMITH. Thank you very much, Senator. And thank you, 

Mr. Caruso. 

We may have a few other questions we’ll submit in writing. 

21 

Senator SMITH. But, in the interest of time, because I know there 

are a series of votes scheduled shortly, probably no later than 4 

o’clock, I want to hear from our second panel. 

So we’ll call up Mr. Paul Wilkinson, Vice President, Policy Analysis of the American Gas Association; Mr. Gary Huss, President, 

National Association of Manufacturers; and Ms. Wenonah Hauter, 

Director, Critical Mass Energy and Environmental Program, Public 

Citizen. 

Gary Huss, I understand you may have a plane to catch or a 

time limitation. Shall we take you first? 

Mr. HUSS. Whichever your preference. It doesn’t matter. 

Senator SMITH. Why don’t we start with you, just in case you 

might? So we appreciate your traveling here and being part of this. 

STATEMENT OF GARY D. HUSS, PRESIDENT, HUDAPACK 

METAL TREATING, INC. ON BEHALF OF THE NATIONAL 

ASSOCIATION OF MANUFACTURERS 

Mr. HUSS. Thank you, I appreciate it. 

Chairman Smith and Mr. Lautenberg, I am Gary Huss, President of Hudapack Metal Treating in Elkhorn, Wisconsin. It’s a 

great honor, as a member of the National Association of Manufacturers, to have an opportunity to address you regarding our concerns about the huge impact of energy costs, especially natural gas, 

on our company in the manufacturing industry. 

At the outset, Mr. Chairman, I would like to thank you for your 

solid voting record in supporting manufacturing in America. This 

morning, the NAM released its voting record for the 108th Congress, and we greatly appreciate your voting to support our 23 key 

manufacturing votes on an 87 percent basis. 

Senator Lautenberg, on behalf of the NAM we look forward to 

working with you more so in the coming year. Thank you. 

Hudapack Metal Treating has been heat treating steel and stainless steel parts for almost 20 years. Heat treating is a process 

where heat, requiring considerable use of natural gas, is applied to 

steel parts and then fast-cooled to metallurgically change the structure of the parts. Without heat treating, steel is relatively soft and 

pliable, and does not last in its ultimate use. 

We operate two plants in Wisconsin and one in Illinois, and provide our 160 employees with relatively high-paying jobs with good 

health, life, short-term, disability, and retirement plans. Maintaining these levels of benefits and employment has been very difficult 

since the natural gas prices skyrocketed upward in 2000. 

As is the case with all energy-intensive manufacturers, during 

the past 4 years Hudapack Metal Treating has been faced with 

major cost increases that threaten our survival as a company. In 

fact, the results of a poll taken in last week’s meeting of the Board 

of the National Association of Manufacturers revealed that 93 percent of the Directors from small and medium manufacturing companies believe that higher energy prices are having a negative impact on their bottom lines. 

At Hudapack, we have struggled with increases in group insurance, workers comp insurance; but these increases pale by comparison to our cost of natural gas. We have experienced substantial 

runups in natural gas prices up at City Gate since 2000. NaturalVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
22 

gas prices are now averaging 75 percent higher than the 2002 

price. For the first time in our history, the gas prices are higher 

this summer than last winter. I respectfully recommend that a 

study be undertaken to determine the extent to which pure speculation and market manipulation created this summer’s price runup. 

These escalating natural gas prices have become a real negative 

impact on my company. Although the economy has improved greatly and we are currently producing and shipping at a record pace, 

our pre-tax profit will be a very modest 2 to 3 percent of sales this 

year, compared with 15 percent we should achieve with the sales 

level we’re at now. 

As an employer, one of the biggest kicks I get out of being an 

employer, I enjoy issuing bonus checks. In 2000, we disbursed an 

average bonus check of a thousand dollars per employee. Since 

then, we haven’t been able to pass out any bonus checks. 

Senator SMITH. Are you saying, Gary, that 13 percent of your 

profit is lost that you could attribute directly to the price of natural 

gas? 

Mr. HUSS. Very easily. 

Senator SMITH. Interesting. 

Mr. HUSS. We have also been limited in the cost increases we can 

charge our customers, because they have access to imported parts 

which may already be heat treated and compete with the ones that 

we produce. When our customers buy less-expensive imported 

parts, we not only lose the business, but so do the fabricator or the 

metal forger who sent the parts to us for the heat-treating process. 

In other words, natural gas prices not only affect the jobs in the 

heat-treating industry, but the high prices are also ‘‘outforcing’’ 

jobs in the businesses above me in the supply chain. 

Since there is no real substitute for natural gas in most our processes, we are fully engaged in energy efficiency recuperation. It 

costs between $75,000 and $100,000 per furnace, depending on 

size, to accomplish this improvement. I have 10 to 15 furnaces that 

require this upgrade. With lower profits due to high gas costs, I can 

only do one or two of them per year. 

Last year, last December, the NAM released a study which concluded that overall domestic manufacturers face at least a 22 percent price disadvantage as compared with our foreign competitors 

because we in this country face higher energy costs, higher 

healthcare and pension costs, a more punitive corporate tax structure, and a more costly regulatory burden, especially environmental, and a wildly out of control legal system. The cumulative 

effect of these factors and Congress’ unwillingness to address them 

is ‘‘outsourcing’’ manufacturing jobs to foreign workers. 

With respect to our disadvantage in high energy cost, Congress 

must face up to its responsibility to facilitate increases in natural 

gas supply. Congress needs to allow drilling in new fields. We need 

to get the gas where it is and facilitate the construction of the Alaska Pipeline. Congress also needs to help with the siting and permitting of new liquified natural gas facilities. 

In summary, Congress needs to pass comprehensive energy legislation that will increase the supply in affordable—will increase the 

supply of affordable energy, facilitate improvement to the natural 

gas and electricity infrastructure, and provide incentives for addiVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
23 

tional energy efficiency investments. Please do so, because I would 

like to continue providing value to my customers and a quality of 

life to my workers here in the United States. 

Thank you. 

[The prepared statement of Mr. Huss follows:] 

PREPARED STATEMENT OF GARY D. HUSS, PRESIDENT, HUDAPACK METAL TREATING, 

INC. ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Chairman Smith and members of the Committee, I am Gary Huss, President of 

the Hudapack Metal Treating company in Elkhorn, Wisconsin. It is a great honor, 

as a member of the National Association of Manufacturers, to have the opportunity 

to address you regarding our concerns about the huge impact of energy costs, especially natural gas on our company and the manufacturing industry. The National 

Association of Manufacturers is the Nation’s largest industrial trade association, 

representing small and large manufacturers in every industrial sector and in all 50 

states. 

Hudapack Metal Treating has been treating steel and stainless steel parts for almost 20 years. Metal treating is a process where heat, requiring considerable use 

of natural gas, is applied to metallurgically change the structure of the metal parts, 

thereby giving them strength and wear resistance. Without heat treating, metal is 

relatively soft and pliable. Using the spring as an example: the steel needs to be 

soft to be formed into the shape of the spring. The heat treat process, which in this 

case is called ‘‘austemper,’’ gives the material the strength and resiliency to be a 

‘‘spring.’’ 

We operate two plants in Wisconsin and one in Illinois and provide our 160 employees with relatively high paying jobs, good health, life, short-term disability and 

retirement plans. However, maintaining these levels of benefits and employment 

has been very difficult since natural gas prices skyrocketed upward in 2000! 

As is the case with all energy intensive manufacturers during the past four years, 

Hudapack Metal Treating has been faced with major cost increases that threaten 

our survival as a company. High energy cost increases have historically driven the 

economy into recession, by reducing orders for capital equipment, and lowering consumer confidence. I must give the Federal Reserve Board and the President’s three 

tax relief bills over the past three years credit for keeping the economy afloat in 

the face of unprecedented natural gas and oil costs. 

In addition, credit must be given to the continuous improvements in energy efficiency in the manufacturing sector in particular, which has led the country to be 

46 percent more efficient in energy use per unit of GDP versus 30 years ago. Despite 

these general improvements, high energy prices are still devastating to manufactures. In fact, the results of a poll taken at last week’s meeting of the board of the 

National Association of Manufacturers, revealed that 93 percent of the directors 

from small and medium manufacturing companies believe that higher energy prices 

are having a negative impact on their bottom lines. 

At Hudapack Metal Treating, we have struggled with increases in group insurance and workers comp insurance, but these increases pale by comparison to our 

cost increases for natural gas. We experienced a substantial run up in natural gas 

prices at the Northern Illinois City Gate during 2000 and 2001, and while prices 

did moderate in 2002, they were still 40 percent above 1999 levels. However, during 

the past two years, natural gas prices have skyrocketed, and have been averaging 

about 75 percent higher than the 2002 price. 

More specifically, during the four winters ending with the winter of 1999/2000, 

natural gas prices at the Northern Illinois City Gate averaged $2.65 cents per thousand Btu’s. However, the average of the past two winters’ prices has been $5.55 

cents per thousand Btu’s, more than doubling of the late 1990s price. Worse, for the 

first time in our history, the prices were higher for this summers’ gas at the city 

gate than the preceding winter’s prices. This summer, natural gas averaged $5.94 

per thousand Btu’s or about 150 percent more than the average summer prices for 

the four years ending in the summer of 1999. In fact, this summer’s prices have 

jumped 82 percent just since 2002. This is despite about a 10 percent reduction in 

natural gas use in the electricity sector this summer compared to 2002. 

In my view, this summer’s natural gas prices may well have been exacerbated by 

large investors, such as hedge funds and commodity-trading advisers, as suggested 

in an article on oil trading in The Wall Street Journal on September 2 of this year. 

I respectfully recommend that a study be undertaken to determine the extent to 

which pure speculation and market manipulation created this summer’s price runVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\81470.TXT JACKIE
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up. However, even if commodity market activities were a substantial influence on 

prices this summer, the core problem remains the same because tight gas markets 

invite investor influence on prices. The nation needs adequate natural gas supplies 

to reduce both price spikes and volatility. 

These escalating natural gas prices are having a real negative impact on my company. Although we at Hudapack Metal Treating are currently producing and shipping at a record pace, our pre-tax profit will only be very modest at approximately 

2–3 percent of sales, compared with the 15 percent we should achieve at these sales 

levels. As an employer, I enjoyed issuing extra bonus checks. In 2000, we disbursed 

over $50,000 in bonuses. Since then, we have been unable to do any bonuses. 

Although we are now passing a portion of our increased gas costs through, we are 

limited in the cost increases we can charge our customers. Our customers have access to imported metal products and parts that are already heat-treated and compete with the ones we produce. When our customers buy the less-expensive imported 

parts, not only do we lose business, but so do the part fabricator and the metal forger who sent their metal to us to heat-treat. 

In other words, high natural gas prices not only affect the jobs in the heat-treating industry, but the high prices also are ‘‘outforcing’’ jobs in the businesses above 

me in the supply chain. Still worse, the more our foreign competitors take advantage of their lower cost structure, the more experience they will develop in matching 

our quality and our supply chain efficiency. Thus, just as foreign competition with 

low natural gas prices hurts jobs in my industry and those companies above me in 

the supply chain, so do imports put increasing pressure on my domestic customers 

as foreign competitors increase the complexity and the value-added of the products 

they sell to the U.S. market. 

In the face of these higher natural gas costs, Hudapack Metal Treating has been 

trying to maintain its profitability and keep all of our workers fully employed. Since 

natural gas is critical to our whole business, and since there are no real substitutes 

for natural gas in most of our treating, we are fully engaged in energy efficiency 

measures. We have undertaken the task of adding recuperation of all of our burners 

for the furnaces. It costs between $75,000 and $100,000 per furnace, depending on 

size, to accomplish this upgrade. I have about 10–15 furnaces in two plants that 

need this upgrade. With lower profits due to the high gas costs, I can only do one 

or two upgrades per year. I would add that making these energy efficiency investments would be less difficult if there were more favorable corporate taxation and 

capital cost recovery rules. 

Last December, the National Association of Manufacturers and the Manufacturing 

Alliance released a study entitled ‘‘How Structural Costs Imposed on Manufacturers 

Harm Workers and Threaten Competitiveness,’’ which concluded that overall, domestic manufacturers face at least a 22 percent price disadvantage as compared 

with our major foreign competitors. This is because, compared to our trading partners, we have higher energy prices, higher health care and pension costs, a more 

punitive corporate tax structure, a more costly regulatory burden—especially environmental—and a wildly out-of-control legal system. In the past, U.S. manufacturing has been able to compete with imports made by low-wage competitors because of our extraordinary productivity. However, the cumulative effect of these 

other factors—and Congress’ unwillingness to address them—is ‘‘outforcing’’ manufacturing jobs to foreign workers. 

The U.S. manufacturing sector lost almost 3 million jobs during the period when 

natural gas prices started increasing in 2000, until we started adding jobs in the 

spring of this year. If Congress does not aggressively address these factors of energy 

costs, health care and pension costs, punitive taxes, regulatory burden and scandalous product-liability judgments, then it is pretty clear that most of these 3 million jobs lost over the past four years will not be coming back to the United States. 

For my company and others in the metal-treating industry, the recent run-up in 

natural gas prices has had a more acute impact than these other factors, but the 

natural gas cost increases have been piled onto the other structural cost disadvantages and caused some in my industry to close their doors. 

The persistent high prices during this past summer, when natural gas prices are 

usually lower, underscore a number of changes that have occurred in the natural 

gas supply/demand balance. First, during the 1990s, natural gas became the overwhelming choice for new electric generation. Second, the natural gas domestic supply ‘‘bubble’’ shrank and disappeared during the 1990s, and Canadian imports grew 

every year to pick up the gap between domestic demand and supply. However, in 

2003, Canadian gas imports began to drop. Despite active drilling in some areas of 

the United States, domestic production has been at its best level. Meanwhile, the 

industrial economy has been recovering. Consequently, there has not been enough 

gas to meet demand at reasonable prices. 

25 

In addition to creating a more favorable climate for energy efficiency investments 

for manufactures—such as my own investments in recuperation—Congress must 

face up to its responsibility to facilitate increases in natural gas supply. The very 

modest production response to the past four years of high natural gas prices is a 

clear indication that just drilling more holes in the same old fields is not a sustainable solution. Congress needs to allow drilling in new fields, especially in the Rocky 

Mountains and offshore. If more gas were available in Texas or Oklahoma, we 

would be getting it with these high prices. We need to get the gas where it is. 

In addition, Congress needs to help with the siting and permitting of new liquefied natural gas facilities, which are a vital component of any natural gas supply 

strategy. Congress should also pass legislation that will facilitate the construction 

of the Alaska Gas Pipeline. Many of the predictions of environmental disasters from 

an Alaskan pipeline have proven to be false; and with state-of-the-art materials and 

technology, construction of a new natural gas pipeline will be safer and cleaner. It 

is the responsibility of Congress to protect our jobs, our economy and our Nation 

by ensuring that these initiatives are put on a fast track, without fear of lengthy 

litigation. 

Unfortunately, none of the energy bills that have passed either body during the 

past two congresses have done enough to increase natural gas supplies. Nevertheless, Congress can help by recognizing that we need more of every type of energy 

supply including, coal, nuclear and affordable renewables. 

Electric generators must be able to increase their use of other sources if natural 

gas is to be affordable for manufactures and homeowners. And affordable electricity 

is the key, because overall, manufacturers use more electricity than any other energy input. Clean coal technology has become better, nuclear technology has become 

safer. Still, Congress must avoid command and control approaches to limit carbon 

dioxide emissions, to force use of expensive renewables and to impose draconian 

mercury reductions, any one of which would drive electricity prices through the roof 

and compound manufacturing’s structural cost disadvantage. 

I applaud the majorities of both houses for supporting H.R. 6, the Energy Policy 

Act. Most Members of Congress have it right—we need improvements in every energy area. Congress needs to pass comprehensive energy legislation that will increase the supply of affordable energy, facilitate improvements to the natural gas 

and electricity infrastructure, and provide incentives for additional energy efficiency 

investments. Please do this as a first order of business next congress, because I 

want to continue providing value to my customers and quality lives for my workers, 

here in the United States of America. Thank you. 

Senator SMITH. Thank you, Mr. Huss. That was a very real-life 

testimony you gave as to what this natural gas cost spike is doing 

to your company, the jobs you provide, and we’re very sensitive— 

we want to move sensitive to that. 

Mr. HUSS. Thank you. 

Senator SMITH. Ms. Wenonah Hauter—am I pronouncing that 

right? 

Ms. HAUTER. Yes. 

Senator SMITH. Very good. We’ll hear from you next. 

STATEMENT OF WENONAH HAUTER, DIRECTOR, 

PUBLIC CITIZEN’S ENERGY PROGRAM 

Ms. HAUTER. OK. Mr. Chairman, Senator Lautenberg, I appreciate the opportunity to testify. 

I am Wenonah Hauter, and I’m Director of Public Citizen’s Energy Program. Public Citizen is a 30 year old consumer advocacy 

organization with 160,000 members nationwide. 

I’m going to spend my time discussing market manipulation and 

speculation that has led to rising gas prices. Beginning in 2000, 

natural gas companies exploited energy deregulation to engage in 

one of the largest consumer ripoffs in history. Despite moderately 

rising demand, which grew only 4.2 percent from 1999 to 2000, natural gas prices increased 245 percent from 1999 to 2001. This inVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
26 

crease was not justified by the underlying market conditions of 

adequate supply matching moderately growing demand. 

During the past 2 years, Federal agencies and the State of Cali- fornia have authorized $2 billion in fines, penalties, refunds, and 

other enforcement actions against the natural gas companies for 

manipulating domestic natural gas markets. These fines represent 

only a fraction, though, of the total amount that consumers have 

been price-gouged. For example, California, alone, estimates that it 

is owed $9 billion for energy market overcharging. This has occurred because of inadequate regulation of the industry which engages in two types of abuse. The first is manipulation of energy 

trading markets where prices are set. And the second manipulation 

is of storage data which influences prices. 

I want to look at five areas that we believe need to be reformed. 

The first is the regulation of over-the-counter markets. The Commodities Futures Trading Commission is directly responsible for 

regulating commodities trade on futures exchanges such as the 

New York Mercantile Exchange, or NYMEX. But it also has the 

power to intervene against under-regulated over-the-counter markets. The Commodities Futures Trading Commission should use its 

authority and be given additional regulatory power to require 

transparency. Natural-gas futures trading only began in November 

1989. And since that time, the market has been plagued with volatility. Contracts representing billions of Btu’s of natural gas are 

traded every day. But, increasingly, a large share of this trading 

has been moved off the regulated exchanges, like NYMEX, and 

onto unregulated over-the-counter exchanges. The Bank of International Settlements estimates that in 2003 the global over-thecounter market has grown to $2 trillion, 150 percent increase since 

1998. Traders operating on exchanges like NYMEX are required to 

disclose details of their trades to Federal regulators, but traders in 

over-the-counter exchanges are not required to disclose such information, allowing energy companies, investment banks, and hedge 

funds to escape Federal oversight and more easily engage in manipulation strategies. 

Energy trading on these over-the-counter exchanges was greatly 

expanded at the beginning of 1993, when the CFTC granted an exemption requested by Enron and eight other companies for energy 

contracts that included natural gas from exchange-trading requirements and anti-fraud provisions of the Commodity Exchange Act. 

By doing so, the CFTC voluntarily limited its ability to police energy trading markets. The growth of these over-the-counter exchanges exploded in 2000, when Congress passed the Commodity 

Futures Modernization Act, which, among other things, largely exempted trading of energy commodities on these over-the-counter 

exchanges from any Federal Government oversight. As a result, 

many investment banks and energy companies opened their electronic exchanges, where the bulk of their activities were unregulated. Since the law took effect, the industry has been plagued by 

dozens of high-profile scandals attributed to the lack of the adequate regulatory oversight over traders’ operations. 

We’ve identified over 200 hedge funds with significant positions 

in natural gas trading markets. Given the sheer size of these funds 

and the investment banks that run them, they need to be regulated 

27 

so that we have more transparency over their actions. The government needs to be able to track shenanigans going on by having access to information. Companies engaging in futures trading should 

be required to report the details of their contracts, the prices, and 

who they are dealing with. 

The second area that needs to be reformed is the NYMEX natural gas trading price limits. Trading exchanges can impose a price 

limit on dialing trading as a way to protect consumers. For example, with the ‘‘mad cow’’ scare, the Chicago Mercantile Exchange 

imposed a price limit on cattle of three cents per pound so that if 

the price fluctuates more than that amount, trading in cattle is 

stopped until the next day. That’s about .4 percent of the current 

trading price of cattle. This is a very low threshold that protects 

against volatility. The same type of suspension is used in other 

commodity trading, such as milk and lumber. 

But NYMEX has very weak price limits. If the price changes 

three dollars per Btu during a daily session, trading is suspended 

for just 5 minutes. This three dollar limit is roughly half the current price of natural gas, as compared to the much smaller range 

used in other commodities. We believe NYMEX needs to set stricter 

price limits. 

The third area that needs to be addressed is the area regulated 

by the Energy—or by the Federal Energy Regulatory Commission, 

FERC, which is in charge of regulating pipeline activities, storage, 

LNG facility construction, and natural gas transportation issues, 

among others. FERC has a legal mandate to ensure that electricity 

prices under its jurisdiction are just and reasonable. And the same 

should be true for natural gas. 

The Ninth Circuit Court of Appeals recently ruled that FERC 

has broader power than it currently exercises to force energy companies to provide refunds to consumers. The ability of FERC to 

order such refunds, however, is contingent upon the existence of 

the just and reasonable standard enshrined in the Federal Power 

Act. We need a similar standard for natural gas. 

The fourth area that needs to be regulated are natural gas storage requirements. Lack of regulation in energy trading markets allows market gaming to set natural gas prices. It allows published 

natural gas storage levels to influence the price. If natural gas levels are high, the market will typically lower the price of natural 

gas. This correlation has resulted in the natural gas industry keeping less product in storage. 

Although at this time we do have adequate storage, it is important to note that the correlation between storage levels and price 

is weaker today than it used to be historically, and that’s because 

the industry is relying on futures trading more than storage as a 

hedging tool. Nevertheless, to be prudent, we need a federally controlled and regulated natural gas storage system to make sure that 

demand can be met at a reasonable price. 

Last, I will mention the need to improve local control over the 

siting of liquified natural gas import facilities. FERC has recently 

denied states the right to adequately regulate LNG import facilities 

which are already built or are proposed. Considering the threat 

from terrorism, security concerns for LNG tankers and marine terminals are justified because of the sheer magnitude of the fuel inVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
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volved. Legislation has already been introduced in the House on 

this issue, and we believe this type of legislation is necessary to 

clarify FERC’s jurisdiction over the facilities. 

Rather than increasing our dependence on foreign sources of energy, we need to do everything we can to reduce projected natural 

gas demand through improvements in energy efficiency and encouragement of alternative energy. 

In conclusion, Congress can restore accountability to natural gas 

markets and protect consumers by regulating over-the-counter natural gas trading exchanges, ordering trading exchanges to reform 

natural gas trading price limits, establishing a just and reasonable 

standard for natural gas, mandating natural gas storage requirements, and improving local control over LNG siting. 

[The prepared statement of Ms. Hauter follows:] 

PREPARED STATEMENT OF WENONAH HAUTER, DIRECTOR, 

PUBLIC CITIZEN’S ENERGY PROGRAM

Consumer Concerns with Natural Gas and LNG 

Thank you, Mr. Chairman and members of the Senate Subcommittee on Energy 

Policy, Natural Resources and Regulatory Affairs for the opportunity to testify on 

the issue of natural gas markets. My name is Wenonah Hauter and I am Director 

of Public Citizen’s Energy Program. Public Citizen is a 30 year old public interest 

organization with over 160,000 members nationwide. We represent consumer interests through research, public education and grassroots organizing. 

I last testified before the Senate Commerce Committee in April 2002, when I documented how Enron exploited deregulation to manipulate West Coast energy markets. 

Since I gave that testimony, Federal and state governments have authorized over 

$4.1 billion in fines, penalties, refunds and other enforcement actions against natural gas companies for manipulating domestic natural gas markets—an amount far 

less than the amount by which natural gas companies are alleged to have manipulated prices. Anti-competitive actions by the handful of natural gas companies— 

made possible by inadequate regulation over the industry—are a determining factor 

in the 155 percent increase in natural gas prices for consumers since 1999. 

In the wake of Enron’s collapse, Congress recognized that strengthening regulations over corporations was necessary to protect consumers and investors. In the 

summer of 2002, Congress wisely passed the Sarbanes-Oxley Act, imposing regulations on the accounting industry and the auditing process for corporations. The majority of recent corporate accounting scandals have been concentrated in the energy 

industry. But the Sarbanes-Oxley Act addresses what is arguably the ‘‘secondary’’ 

problem: natural gas and power companies primarily engaged in accounting fraud 

as a means to hide the enormous revenues they were earning from price-gouging 

consumers. Congress has thus far ignored the glaring need for a Sarbanes-Oxleytype reform of energy regulations. 

The two main types of abuse by natural gas companies are manipulation of energy trading markets (where prices are set) and storage data (which influence 

prices). Congress can restore accountability to natural gas markets and protect consumers by supporting Public Citizen’s 5-point reform plan: 

• Re-regulate natural gas trading exchanges to restore transparency. 

• Order trading exchanges to reform natural gas trading price limits. 

• Establish a ‘‘just and reasonable’’ standard for natural gas. 

• Mandate natural gas storage requirements. 

• Improve local control over LNG siting. 

Restore Transparency of Natural Gas Trading Exchanges 

Beginning in 2000, natural gas companies exploited energy industry deregulation 

to engage in one of the largest consumer rip-offs in history. Despite only moderately 

rising demand (which grew only 4.2 percent from 1999 to 2000), natural gas prices 

increased 245 percent from January 1999 to January 2001. This increase was not 

justified by the underlying market conditions: adequate supply matching moderately 

growing demand. This market manipulation trend may be continuing since Congress 

29 

and the two Federal regulatory commissions with jurisdiction have not reformed the 

rules that allowed the manipulation to occur. 

Over the last two years, two Federal agencies (the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission) have obtained $4.1 

billion in settlements against natural gas companies for market manipulation. 

These fines cover manipulation of energy trading markets, but only represent a fraction of the total amount by which consumers have been price-gouged. For example, 

California alone estimates that it is owed $9 billion for energy market overcharging. 

This wide discrepancy between what consumers are owed and what the government 

has forced natural gas companies to pay exists because the Federal government, 

through legislative and regulatory action, has severely limited its ability to effectively oversee the industry. 

Both the CFTC and FERC have been negligent in policing these markets effectively. The CFTC is directly responsible for regulating commodities trade on futures 

exchanges (such as the New York Mercantile Exchange), but also has the power 

under the Commodity Exchange Act to intervene against traders in the under-regulated over-the-counter (OTC) markets. FERC is responsible for most non-exchange 

natural gas market issues. 

Natural gas futures trading only began in November 1989, and it is clear that 

the significant problems that continue to plague these trading markets do not warrant the weak Federal oversight. Contracts representing billions of BTUs of natural 

gas are traded every day on NYMEX. An increasing share of this trading, however, 

has been moving off regulated exchanges like NYMEX and into unregulated OTC 

exchanges. The Bank of International Settlements estimates that in 2003, the global 

OTC market has grown to over $2 trillion, a 150 percent increase from 1998. 

Traders operating on exchanges like NYMEX are required to disclose details of 

their trades to Federal regulators. But traders in OTC exchanges are not required 

to disclose such information, allowing energy companies, investment banks and 

hedge funds to escape Federal oversight and more easily engage in manipulation 

strategies. The need for stronger consumer protections is more urgent as powerful 

new players—led by hedge funds and investment banks—now dominate natural gas 

trading. 

Energy trading on these OTC exchanges was greatly expanded at the beginning 

of 1993 when the CFTC, under the chairmanship of Dr. Wendy Gramm, granted an 

exemption requested by Enron and eight other companies for energy contracts (including natural gas) from exchange-trading requirements and anti-fraud provisions 

of the Commodity Exchange Act. By doing so, the CFTC voluntarily limited its ability to police energy trading markets. 

The growth of these OTC exchanges exploded in 2000 when Congress passed the 

Commodity Futures Modernization Act which, among other things, largely exempted 

trading of energy commodities on OTC exchanges from Federal government oversight. As a result, many investment banks and energy companies opened their own 

electronic exchanges where the bulk of their activities were unregulated. Since the 

law took effect, the industry has been plagued by dozens of high-profile scandals attributed to the lack of adequate regulatory oversight over trader’s operations. 

Public Citizen has supported efforts to re-regulate energy trading by subjecting 

OTC markets to tougher oversight and enhanced consumer protections. But the latest such effort, an amendment to the energy bill, was rejected by the Senate by a 

vote of 55–44 in June 2003 (Amendment 876 to S.14). The amendment would largely 

repeal the 1993 CFTC and 2000 Congressional deregulation acts. 

The measure was defeated after a public spat between Warren Buffett, chairman 

of Berkshire Hathaway, and Federal Reserve chairman Alan Greenspan, over the 

danger posed by under-regulation of derivatives. Buffett called the underreguated 

derivatives markets ‘‘weapons of mass destruction’’ in March 2003, and Greenspan 

took the unusual step of publicly disputing Buffett’s assertions. 

As if deregulation by the CFTC and Congress were not bad enough, the CFTC 

has experienced a troublesome streak of ‘‘revolving door’’ appointments and hiring 

which may further hamper the ability of the agency to effectively regulate the energy trading industry. In August 2004, CFTC chairman James Newsome left the 

Commission to accept a $1 million yearly salary as president of NYMEX, the world’s 

largest energy futures marketplace. Just weeks later, Scott Parsons, the CFTC’s 

chief operating officer, resigned to become executive vice-president for government 

affairs at the Managed Funds Association, a hedge-fund industry group that figures 

prominently in energy derivatives markets. Such prominent defections may hamper 

the CFTC’s ability to protect consumers. 

It is prudent to enhance regulatory oversight over natural gas trading markets 

considering the new breed of trader that is beginning to dominate these markets. 

Public Citizen research has identified more than 200 hedge funds that have develVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\81470.TXT JACKIE
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oped significant positions in natural gas trading markets. In addition, investment 

banks—led by Goldman Sachs and Morgan Stanley—have already firmly established themselves as dominant players in natural gas trading. Given the sheer size 

and political muscle behind these hedge funds and investment banks, greater transparency over their actions is needed now more than ever. 

Reform NYMEX Natural Gas Trading Price Limits 

Trading exchanges can impose price limits on daily trading as a way to protect 

consumers. For example, in response to the Mad Cow scare, the Chicago Mercantile 

Exchange (CME) imposed a price limit on cattle of 3¢ per pound—so if the price 

fluctuates more than that amount, trading on cattle is stopped until the next day. 

The 3¢ limit is about 0.4 percent of the current trading price of live cattle—a very 

low threshold that protects consumers and producers from volatility. Even commodities unafflicted with Mad Cow-like ‘‘scares’’ have strict price limits. Trading in milk 

futures contracts is suspended until the following day if the price changes more 

than 75¢ (about 5 percent of the current price). Trading in lumber futures is halted 

for the day if the price swings more than $10.00 per thousand board feet (3 percent 

of the current price). These severe price limits help control volatility and reduce 

damaging speculation. The CME implemented these strict price limits typically at 

the request of producers, since many of the price swings were hurting their bottom 

line. 

But NYMEX has weak price limits on natural gas trading. If the price changes by $3/Btu during a daily session, then trading is suspended for only 5 minutes. This 

$3 limit is roughly half the current price of natural gas (compared to the much 

smaller range of 0.4 percent to 5 percent listed in the above agricultural commodities). This means that NYMEX tolerates more volatility in natural gas trading markets, making it a more attractive market for speculators to profit at the expense of 

consumers. But, unlike agricultural products with tough price limits, the natural 

gas producers and speculators are making billions of dollars off these volatile natural gas markets. 

Public Citizen urges the Senate Commerce Committee to pass a law forcing 

NYMEX to set stricter price limits for natural gas in order to better protect consumers. 

Establish a ‘‘Just and Reasonable’’ Standard for Natural Gas 

While the CFTC regulates the natural gas futures markets, the Federal Energy 

Regulatory Commission is in charge of regulating other aspects of natural gas markets. While FERC has a legal mandate to ensure that electricity prices under its 

jurisdiction are ‘‘just and reasonable,’’ it has no such ‘‘fair price’’ standard for natural gas. As natural gas continues to have a bigger impact on the U.S. economy— 

not to mention setting the de facto price of electricity due to its use as fuel for 

power—Public Citizen strongly urges the Senate Commerce Committee to support 

legislation that would establish a ‘‘just and reasonable’’ standard for all natural gas 

production. 

The 9th Circuit Court of Appeals recently ruled that FERC had broader power 

than it currently exercises to force energy companies to provide refunds to consumers for overcharging. The ability of FERC to order such refunds, however, is 

contingent upon the existence of the ‘‘just and reasonable’’ standard enshrined in 

the Federal Power Act. Without such a standard for natural gas, consumers are left 

unprotected. 

Mandate Natural Gas Storage Requirements 

While under-regulation of energy trading markets allows market gaming to set 

natural gas prices, published natural gas storage levels influence the price. If natural gas storage levels are at historically high levels, the market typically will lower 

the price of natural gas, since more natural gas is available to release in response 

to demand fluctuations. 

For years there has been a strong correlation between the amount of working gas 

in storage and the wellhead price of natural gas. But in recent years, the natural 

gas industry has kept less product in storage, which in turn has sent strong signals 

to markets to help drive the price of natural gas higher. Acknowledging that there 

may be flaws in allowing natural gas companies to set storage levels by themselves, 

Public Citizen recommends the creation of a ‘‘Strategic Natural Gas Reserve,’’ perhaps modeled on the Strategic Petroleum Reserve. A federally-controlled and regulated natural gas storage system would help ensure that natural gas storage levels 

are adequate to meet demand. 

It is important to note that in recent years, the correlation between storage levels 

and prices has become less strong. This trend may be attributable to an over-reliance of natural gas users on futures trading, rather than physical storage, as a 

31 

hedging tool. In addition, the less-transparent natural gas trading markets since 

2000 may also be contributing to this deviation from standard correlations, as market manipulation—rather than true supply and demand—sets prices. 

Improve Local Control Over LNG Siting 

Last year, Federal Reserve chairman Alan Greenspan called on the U.S. to quickly approve a ‘‘major’’ increase in Liquefied Natural Gas (LNG) import facilities, 

claiming that domestic supply and demand trends require increases in natural gas 

importation. 

Such an analysis, however, ignores the benefits of reducing projected natural gas 

demand through improvements in energy efficiency and the encouragement of alternative energy. 

The Department of Energy projects that natural gas demand will grow at a rate 

of 1.4 percent a year from now through 2025, with domestic production growing at 

a rate of 1.0 percent a year. But the DOE projections assume little to no improvements in natural gas consumption efficiency, and only limited development of alternative electricity generation during that time. If America’s energy policies are 

prioritized to reduce demand and increase renewable fuels, the need to import LNG 

will greatly diminish. 

Indeed, one of the biggest debates in energy policy is reducing America’s dependence on foreign sources of energy. But importing LNG will make us more dependent 

on such imports, particularly from volatile regions of the world. 

In 2003, we obtained 98 percent of our natural gas needs from domestic production and pipeline shipments from Canada and Mexico (83 percent of our natural gas 

needs are derived from domestic production). The reminder come from LNG imports, 

with 23 percent of those imports coming from OPEC nations (Algeria, Qatar and Nigeria). Increasing reliance on LNG will result in the U.S. becoming more dependent 

on OPEC. 

Nonetheless, even assuming the need for an expansion of LNG facilities, the Senate Commerce Committee should make sure that such an expansion contains new 

protections for states to have adequate jurisdiction over safety, environmental and 

consumer protections. Given the concerns raised by state officials and at least 20 

U.S. Senators regarding improper FERC assertion of jurisdiction over traditional 

state domains on electricity markets, it would seem that Congressional action asserting the rights of states on LNG siting may be required. 

In March 2004, FERC denied California (and other states) the right to adequately 

regulate LNG import facilities located or proposed in the state. In July, the California Public Utilities Commission voted to appeal FERC’s ruling. Public Citizen 

feels FERC has overstepped its authority under the Natural Gas Act. This is probably why a bill has been introduced in the U.S. House of Representatives (HR 4413) 

that would clarify FERC’s exclusive jurisdiction over such LNG facilities. If FERC 

were on stronger ground, such proposed legislation would be unnecessary. 

Finally, FERC has not provided adequate guarantees regarding the security concerns of LNG import facilities. LNG tankers and LNG marine terminals pose significant terrorist targets due to the sheer magnitude of the amount of fuel carried by 

LNG tankers (they carry up to ten times the amount of fuel in a typical crude oil 

ship) and the risk of fires and subsequent thermal radiation associated with the 

heating of the LNG at the marine terminals. States have already raised serious 

questions about the adequacy of FERC’s security assessments. This is particularly 

important given assertions by the United State’s former deputy counterterrorism 

czar that Al Qaeda operatives trained in Afghanistan came to the U.S. smuggled 

aboard LNG tankers from Algeria and considered Boston a ‘‘logistical hub’’ for the 

terror network’s activities in the U.S. prior to the September 11 attacks. This, and 

the fact that Al Qaeda has already demonstrated the capacity to strike at sea, with 

the boat bombing of the USS Cole in 2000 and the oil tanker Limburg in 2002. 

32 

Senator SMITH. Thank you very much. 

Mr. Wilkinson? 

STATEMENT OF PAUL WILKINSON, VICE PRESIDENT, 

POLICY ANALYSIS, AMERICAN GAS ASSOCIATION 

Mr. WILKINSON. Good afternoon. I am Paul Wilkinson, Vice 

President of Policy Analysis at the American Gas Association. 

Natural gas is a safe, reliable, clean energy source, and it remains the most economical form of residential home heating. AGA 

members want what our customers want: adequate supplies at reasonable prices. 

Gas utilities do not profit from higher gas prices. They offer a delivery service, like UPS or FedEx. Higher prices only serve to reduce the demand for their service and also to increase their 

uncollectible accounts. 

In terms of our outlook for the impending winter, we feel a bit 

better about the supply situation this year, but only marginally so. 

Well completions were up 23 percent in the first 8 months of this 

year, but production remains flat. The volume of gas in storage, 

which accounts for about 15 to 20 percent of our winter-season supply, is very strong. As of September 24, storage fields were already 

90 percent full. We expect an increase in LNG imports this year 

of about 20 percent over 2003, but LNG still only provides 3 percent of our total supply. 

The supply situation in Canada, from where we get about 13 percent of our gas, is similar to that in the U.S. Drilling activity is 

strong, although production is relatively flat, and storage levels are 


1006HAUT1.eps
33 

well ahead of normal. Our imports of gas from Canada were down 

2.6 percent for the first 6 months of 2004, but we expect them to 

be up slightly this winter, relative to last. 

When you add all of these factors together, we think the gas supply situation is improving, but very slowly. In most of the 1980s 

and 1990s, we were in a situation of surplus deliverability; however, demand continues to increase more rapidly than supply, and 

there was no longer that flexibility in the market. Unfortunately, 

gas demand has the ability to move dramatically and quickly on 

the basis of weather and economic conditions. Because demand can 

change more rapidly than supply in the short run, we have seen 

a higher level of price volatility since 2000. 

The early winter of 2000/2001 was the coldest on record, and gas 

prices spiked to over $10 per million Btu. But the 2000/2001 winter 

was not an anomaly. We have now seen significant price spikes in 

three of the past four winters. 

In addition to this volatility, price levels have been significantly 

higher than they were historically. For example, well-head gas 

prices have been in the five to six dollar range for most of this 

year, in contrast to the two dollar equilibrium of the 1980s and 

1990s. We believe prices will remain higher and more volatile until 

there is significant action on the supply side to improve the overall 

supply/demand balance. 

Efforts to improve our gas supply must begin with a focus on 

production in the lower 48 states. Lower 48 production provides 84 

percent of our gas today, and it will provide the lion’s share of our 

gas for years to come. Unfortunately, lower 48 production continues 

to struggle. Many traditional producing areas are on the decline, 

and a migration to new areas is essential. Since gas demand is 

likely to increase by 40 percent by 2020, it is most disturbing that 

gas exploration and production is prohibited off the East Coast, off 

the West Coast of the U.S., in the eastern Gulf of Mexico, and 

throughout much of the inter-mountain West. We cannot continue 

to drill the same areas over and over again and expect increasing 

returns. Gas production technology and practices have changed 

dramatically over time, and gas production can be compatible with 

environmental protection. 

Going beyond the lower 48, it is imperative that the vast resources of Alaskan gas, estimated at 250 trillion cubic feet, be 

made available to the market. Unfortunately, the magnitude and 

financial risk of the pipeline required has delayed it for many 

years. We strongly believe that Federal action to reduce the financial risk of this project is in the public interest. 

Looking beyond our national borders, increased LNG imports are 

critical to the well-being of the gas industry and to gas customers. 

LNG is a proven, safe, and reliable form of gas supply, and it gives 

us access to 93 percent of the world’s gas reserves that lie outside 

of North America. LNG can now be landed in the U.S. at a price 

well below current market levels, but no new receiving terminals 

have been built in the U.S. for many years. Thirty or forty new terminals have been discussed, a number have fallen to NIMBY concerns, a few are moving through the regulatory process, but no 

ground has yet been broken for a new terminal. It is likely that a 

34 

true easing of tight market conditions will not be accomplished 

until there are new LNG terminals operational. 

I have spoken mostly about the supply side of the equation, but 

energy efficiency certainly has a role to play, as well. Our members 

firmly support and promote energy efficiency. But this is not new. 

Gas customers have become more and more efficiency-conscious 

over time. In fact, the average residential gas consumer consumed 

22 percent less gas in 2001 than in 1980. This pattern of declining 

use per customer, attributable primarily to tighter homes and better appliances, has been very steady and very significant. It is not, 

however, the entire answer. In addition to their support of energy 

efficiency measures, natural gas utilities attempt to ease the burden of volatile prices on their customers through a variety of physical and financial mechanisms, such as gas storage, hedging, 

levelized billing, and long-term fixed-price contracts. But these 

measures are, at best, partial solutions. True relief will require 

substantive action on the supply side. 

Finally, in light of our expectation of continued higher and more 

volatile prices, we stress the need for increased LIHEAP funding. 

Only about 15 percent of eligible recipients are receiving LIHEAP 

assistance, and we urge an increase in appropriations to $3.4 billion. We know the need for assistance is greater than ever, and we 

must respond to that need. 

The winter heating season starts in less than 4 weeks. Gas utilities and their customers have had to deal with a very difficult market for 4 years now. We, at AGA, appreciate the opportunity to 

come here once again to stress the vital importance of congressional action on a long-term energy plan that emphasizes the benefits—to the consumer, the economy, and the environment—of increased natural gas supplies. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Wilkinson follows:] 

PREPARED STATEMENT OF PAUL WILKINSON, VICE PRESIDENT, POLICY ANALYSIS, 

AMERICAN GAS ASSOCIATION

EXAMINING NATURAL GAS MARKETS—October 2004 

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 it 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. 

The key points of our testimony can be summarized as follows: 

• Natural gas demand has been increasing more rapidly than supply and the resultant tight market has exhibited higher and more volatile gas prices. 

• The short-term gas supply situation is better this year than last, but only marginally. 

• Without aggressive action by government and private industry, this unstable 

situation will persist. 

• Increasing our national gas supply is necessary for economic growth and consumer well-being, and it can be compatible with environmental protection. 

• The Lower-48 has provided about 85 percent of the total U.S. gas supply in recent years. This percentage likely will decline over time, but it will continue to 

35 

provide the majority of our gas for the foreseeable future. Increasing or even 

maintaining current Lower-48 production levels without increased access is 

problematic. 

• New sources of gas supply, including Alaska and imported liquefied natural gas 

(LNG), must account for a larger share of our gas supply portfolio in the future. 

The longer these sources are delayed, the longer U.S. consumers will face market instability. 

• There are market mechanisms, such as hedging and long-term fixed price contracts, that can reduce price volatility to some extent and they should be encouraged. However, these measures do not solve the fundamental market imbalance. 

• In light of the expectation of continued difficult market conditions, low-income 

consumers must be provided greater relief in the form of increased LIHEAP 

funding. Only 15 percent of eligible recipients currently receive LIHEAP funds, 

and the appropriation level should be increased to $3.4 billion. 

The natural gas industry is at a critical crossroads. Natural gas prices were relatively low and very stable for most of the 1980s and 1990s. 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 significant wholesale natural gas price fluctuations. Market conditions 

have changed significantly since the winter of 2000–2001. 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 strain natural gas 

customers—residential, commercial, industrial and electricity generators. 

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. 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. 

As this committee well knows, energy is the lifeblood of our economy. More than 

60 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. 

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 currently is 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 Alan Greenspan noted before the House Energy 

and Commerce Committee in 2003, today’s tight natural gas markets have been a 

long time in coming but there are still numerous unexploited sources of gas 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 we must confront now is that, as a matter of policy, this 

country has chosen not to develop much of its natural gas resource base. 

Today and for the coming winter heating season the supply picture is improving. 

Underground storage is strong. Inventories exceed the prior 5-year average by more 

than six percent. On the domestic natural gas production front, our current view 

is that gas production is stabilizing given the high levels of drilling experienced in 

the last 18–24 months. But the longer-term faces many challenges. 

Without prudent elimination of some current restrictions on U.S. natural gas production, producers will struggle to increase, or even maintain current production 

levels in the lower 48 states. This likely would expose 63 million homes, businesses, 

industries and electric-power generation plants that use natural gas to unnecessary 

36 

levels of price volatility—thus harming the U.S. economy and threatening America’s 

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. 

This year, like last year, 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. 

• 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.’’ 

• The geologic conditions for oil and gas discovery exist in the U.S. 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 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. 

37 

• 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 in ways not originally 

intended to threaten or thwart offshore natural gas production and the pipeline 

infrastructure necessary to deliver natural gas to markets. 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. 

» 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 certainly will increase this winter, 

and LIHEAP appropriations should be increased to $3.4 billion—up from $1.9 

billion of total assistance in 2004. 

• 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 and electric generation consumers across America. Our members 

remain economically viable by delivering natural gas to consumers at the lowest 

38 

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 increased over the past several years; 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 continues to address this critical issue. 

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. Notwithstanding the inability of both houses to agree upon a 

comprehensive energy bill, AGA remains encouraged that Congress will 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. 

For the past two years, natural gas has been trading in wellhead markets throughout the Nation at prices often 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 for nearly two years. 

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. 

Of course, when families pay hundreds of dollars more to heat their homes, they 

have hundreds of dollars less 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 

15 percent 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 

39 

in drilling in 2002 set the stage for another run-up in prices in the 2002–2004 time 

frame. 

Today and for the coming winter heating season the supply picture is improving. 

With higher wellhead prices, nearly 20,000 new gas wells were drilled in 2003 and 

will be drilled in 2004. Regarding domestic production, AGA’s current view is that 

gas production is stabilizing given the high levels of drilling experienced in the last 

18–24 months and may even increase slightly in 2004 over 2003. Many of the wells 

drilled have been in coal seams, tight sands and shales, adding to the contribution 

of unconventional sources of gas to the supply mix. 

In addition, underground storage injections have been strong. By mid-September 

2004, storage inventories were the second highest they have been in ten years even 

with the interruption of significant hurricane activity in the Gulf of Mexico. National storage volumes exceed the prior 5-year average by more than six percent, 

with the Producing Region over 11 percent greater than the five-year average. 

However, the longer-term still faces many challenges. 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 five years, natural gas production has operated full-tilt to meet consumer demand. The ‘‘surplus deliverability ’’ or ‘‘gas bubble’’ of the late 1980s and 

1990s 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, 

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 two years. 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 five-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 

40 

five-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. 

For most of 2004, wellhead acquisition prices have remained above $5 dollars. 

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 63 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 nearly 2 percent per year over the next 

twenty years. Much of this growth in natural gas demand will occur as a result of 

power generation needs. In fact, the U.S. now has two 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 was 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 is no 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 twenty 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 twenty 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 

41 

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. 

The sobering reality is that America’s producers are drilling more wells today 

than they were five years ago. Nevertheless, domestic supply is struggling to be sustained. 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 five 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 twelve 

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 eight 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 work to sustain and 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 

42 

base. We doubt that that many of the 63 million American households that depend 

on natural gas for heat are aware 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 ten 

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 backward in terms of satisfying consumer gas demand. This action was contrary to what needs to be done to 

meet 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 

policy makers 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 1970s, 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 

43 

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 five 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 1970s. 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-1980s 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 winters 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 1980s and 1990s, when the wholesale (wellhead) price of traditional nat- ural 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 40 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 97 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 3 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 U.S. gas markets in 

the future. It will certainly not be as large a contributor as imported oil (nearly 60 

percent of U.S. oil consumption), but it could account for 15–20 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, some with capacities in excess of 2.5 billion 

cubic feet per day. However, 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 of natural gas—enough by itself to satisfy U.S. 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 

44 

is any transportation system under construction. Indeed, every day the North Slope 

produces approximately 8 billion cubic feet of natural gas that is reinjected 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 U.S. 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 14 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 5–10 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–less than 10 percent of the 

natural gas envisioned for the 2025 market. 

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 continue to look to the lower 48 

States. 

Senator LAUTENBERG. I have a question. Will the record be kept 

open for questions and—— 

Senator SMITH. We will keep it open, Senator. 

Senator LAUTENBERG.—for written questions? I have to go. 

Senator SMITH. OK, You’ve got to go. 

Senator LAUTENBERG. Yes. 

Senator SMITH. OK, you bet. 

Mr. Wilkinson, for the audience and anyone who may be interested in this—LNG, liquid natural gas, that is produced just by 

cooling the natural gas to condense it. 

Mr. WILKINSON. That’s correct. 

Senator SMITH. And it’s warmed, and, therefore, turned back into 

a gas when utilized. 

Mr. WILKINSON. That’s correct. 

Senator SMITH. Where is most of it produced now? 

Mr. WILKINSON. There are natural gas fields all over the world. 

The Mideast and the former Soviet Union are the two largest—— 

Senator SMITH. But the LNG—— 

Mr. WILKINSON.—sources in reserve. 

Senator SMITH.—condensing factories—— 

Mr. WILKINSON. Excuse me? 

Senator SMITH. The LNG factories that condense—— 

Mr. WILKINSON. The facilities are in the Mid-East, are in Trinidad and Tobago. They’re in Australia. They’re even in Norway. 

Senator SMITH. And that process and shipment here can be done 

at a price much lower than the current natural gas—— 

Mr. WILKINSON. Yes. 

Senator SMITH.—that people have utilized through pipelines. 

Mr. WILKINSON. Yes. That’s a—the price spike that we’ve seen in 

three of the past 4 years—we’ve seen a $10 spike, a $9 spike, and 

about a seven-fifty spike in 3 of the past 4 years. Those were the 

peaks. 

Senator SMITH. Now, the reason why—— 

45 

Mr. WILKINSON. Natural gas can be delivered to this country, es- timated at $3.50 to $4 per million Btu. 

Senator SMITH. Now, the reason why we can’t get it here, literally, is, there’s no places to receive it. There are—— 

Mr. WILKINSON. That’s right. 

Senator SMITH.—lots of things on the drawing boards. What’s the 

impediment to building the receiving areas? Is it regarded as incredibly dangerous or environmentally sensitive to the point where 

people are just opposed? 

Mr. WILKINSON. I think the primary impediment is a lack of understanding. People fear what they don’t understand. There are 

natural—liquified natural gas has been shipped worldwide for half 

a century. There have been almost no incidents of significance in 

that 50-year timeframe. Japan gets virtually 100 percent of its natural gas in the form of LNG. There’s never been a significant action in Japan. 

Senator SMITH. Why can’t we produce—if it’s produced in the 

Middle East, why can’t we produce LNG from our natural gas 

here? 

Mr. WILKINSON. LNG is no different than natural gas. 

Senator SMITH. Right. 

Mr. WILKINSON. We produce natural gas here. We could liquify 

it, but that wouldn’t do us any good. 

Senator SMITH. It wouldn’t do us any good because we have the 

pipeline—— 

Mr. WILKINSON. Because we consume it—— 

Senator SMITH.—infrastructure. 

Mr. WILKINSON.—here. Well, we need to consume—well, it— 

there’s an additional cost to LNG. You don’t—— 

Senator SMITH. Right. 

Mr. WILKINSON.—you don’t want to liquify it and then regasify 

it, and—— 

Senator SMITH. Exactly. 

Mr. WILKINSON.—then put it in your pipeline system. 

Senator SMITH. Exactly. 

Mr. WILKINSON. That would just be an added cost. 

Senator SMITH. But it is interesting that it can be done in the 

Middle East and brought here for less than the cost of natural gas 

in our pipelines. 

Mr. WILKINSON. That’s correct. 

Senator SMITH. That shows you how bizarre—to Mrs. Hauter’s 

point—how high these prices have spiked. 

Mr. WILKINSON. Well, I think it gets more to the point that—as 

I’ve pointed out, we have huge gas resources in this country, but 

you cannot drill for gas in many of the places that we have those 

resources. We have 250 trillion cubic feet in Alaska. We can’t do 

any of that. We can’t drill off the East or the West Coast. We can’t 

drill in the Gulf of—Eastern Gulf of Mexico. We can’t drill in much 

of the Rocky Mountains. 

Senator SMITH. Would it make sense to do LNG in Alaska, as opposed to—— 

Mr. WILKINSON. That has been proposed. In fact, that was proposed 30 years ago, when the first pipeline discussions were seriously made 30 years ago. It was determined, at that time, that the 

46 

pipeline route was the more economical alternative. And I think 

most people feel that it is more economical to move that gas by 

pipe. It could be done by LNG, by shipping it. You could ship it by 

pipe, parallel to the oil pipeline down to Valdez, and then liquify 

it and send it probably to the West Coast of the U.S. 

Senator SMITH. There are hundreds of small LNG storage facilities in this country that are receiving, but—— 

Mr. WILKINSON. That’s correct. 

Senator SMITH.—storing. And do they have a good safety record? 

Mr. WILKINSON. They have an exemplary safety record. 

Senator SMITH. Gary, the National Association of Manufacturers 

estimated how many U.S. manufacturing jobs have been lost due 

to high cost of natural gas? Do you have any kind of figure like 

that? 

Mr. HUSS. I’m sorry, I don’t. I don’t have that number. 

Senator SMITH. Where are your main foreign competitors located 

in your industry? 

Mr. HUSS. It has been the Asian countries. It’s—with China 

growing, you know, very much so. In today’s markets, many manufacturers are going to China, not only to manufacture over there 

on behalf of China, but they’re also doing it because of the lower 

cost. They are probably the largest concern of manufacturing right 

now. 

Senator SMITH. And how are they getting their natural gas, to 

compete with you? 

Mr. HUSS. Many of the furnaces over there run with electricity. 

And then natural gas has—I don’t know if they—and you may be 

able to answer it better than I—I’m not sure if they have the pipeline infrastructure yet which is necessary for the natural gas. 

As far as the heating industry, the heat-treating industry, it is 

not growing as greatly over in China as the manufacturing itself 

is. Heat treating is, kind of, a sidelight, like the plating industry 

or something like that, which is not—it’s necessary, as far as the 

manufacturing process, but usually comes a little bit after-the-fact, 

after the manufacturers are there in the first place. 

Senator SMITH. But you—I would assume, as a manufacturing— 

energy costs are probably at least a third of your costs. Would that 

be accurate? 

Mr. HUSS. I would say closer to 20 to 25 percent. 

Senator SMITH. Twenty to 25 percent. And how does that compare with your competitors in China? Do you have a sense of that? 

Mr. HUSS. No. That, I don’t know. 

Senator SMITH. Wenonah, I was the lone Republican to join with 

Senator Feinstein in calling for many things you identified, in 

terms of the West Coast energy markets; specifically, getting FERC 

to step up to their authorities that I believe are existing. I’m a real 

free-marketer, but I felt like the California energy crisis had nothing to do with the free market. It was, at best, a broken market; 

at worst, a rigged market. And I fear more rigged and certainly 

broken. 

But I wonder, does Public Citizen think that new supplies don’t 

need to be developed in the coming decades or are you okay with 

developing more supplies? Because I think that—at least my perception was, part of it was a broken regulatory system in CaliVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
47 

fornia, but also was an increasing demand and a supply that had 

been choked off from expanding. 

Ms. HAUTER. Well, I think that we believe, before we drastically 

seek new supplies, and so so in very delicate areas where there 

could be lasting environmental damage, that we need to explore all 

of the avenues for being more energy efficient, and that we just 

haven’t done what needs to be done to make our homes more efficient, our office buildings more efficient; simple things like doublepane glasses and—for office buildings. And those things need to be 

approached very seriously. 

Of course we will always need to find more supplies. But to simply say it’s a supply problem, I think, is the easy way out. And I 

know that since the natural gas market has been deregulated, we 

were promised lower prices, fewer problems with supply. And, instead, we’ve seen increasing volatility. And when you look at a 

chart from between 1989 and today, prices have just continued to 

go up. So I think that we need to look below the surface at some 

of the underlying causes. 

Senator SMITH. Just for my own recollection, I think the numbers 

I heard you state in your testimony had to do with the market that 

existed from the mid 1990s to the year 2000. But the California energy spikes were in 2001, were they not? 

Ms. HAUTER. Right. The number that I used, the 245 percent, 

was between 1999 and 2001. If you look between 1999 and today, 

it’s 155 percent increase in pricing. 

Senator SMITH. OK. Did consumers benefit, Wenonah, from 

your—in your view, from the restructured natural gas market in 

the 1990s, when prices were stable? 

Ms. HAUTER. Prices were stable for a while. But with the futures 

trading and the deregulation that occurred in the early 1990s, I 

think that the benefits that were gained have been lost. 

Senator SMITH. Well, we have, clearly, a very real problem in our 

country. I think your testimony really does speak to it. On the one 

hand, we want to grow our economy, we want jobs. And those jobs 

are dependent upon energy first. If you don’t have energy, you can’t 

increase your employment, can you, Gary? 

Mr. HUSS. No, it’s very difficult. 

Senator SMITH. And you’ve got to have competitive energy. And 

so if everybody’s clammering for jobs, clearly we need to do more 

on both sides of the equation, conservation and production. You 

just have to—you have to produce more. The question is whether— 

Which one comes first? And that is really what we’re debating, I 

suppose, in Congress, when we ought to have an energy bill this 

Congress; we don’t, because there seems to be just a real gridlock 

of feelings as to which one should come first. One side wants all 

conservation, the other side wants all production, or at least a priority for those. 

But that’s why we have a democracy. And we’ve got an election 

coming up, and who knows how it’ll turn out. But I come down on 

the side of: We need both, we’ve got to do both. And we can’t be 

shy about it, because if we don’t figure out how to conserve more, 

we’re going to continue our dependence upon foreign sources too 

much, and that affects our national security, not just our energy 

security. But if we’re so hamstrung here from utilizing our reVerDate Nov 24 2008 11:16 Jun 17, 2013 Jkt 075679 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\81470.TXT JACKIE
48 

sources in ways that are renewable, sensitive to the environment, 

then we will forever be dependent upon foreign places. And that is 

bad policy, too. 

So that’s the balance we’re weighing, and you all have helped us 

understand more what we’re facing. I thank you all. 

Do any of you all have a closing comment you would like to 

make? 

[No response.] 

Senator SMITH. If not, we’re grateful. We got this in before the 

vote started. I was worried about that, but we’ve done it. We thank 

you for your time, your testimony, and your participation. 

We’re adjourned. 

[Whereupon, at 3:50 p.m., the hearing was adjourned.] 

Æ