U.S. GOVERNMENT PRINTING OFFICE

64–772CC WASHINGTON : 2000

NATIONAL ENERGY POWER: ENSURING ADEQUATE

SUPPLY OF NATURAL GAS AND CRUDE OIL

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MAY 24, 2000

Serial No. 106–147

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND POWER

JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

Vice Chairman

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

RICK BOUCHER, Virginia

KAREN MCCARTHY, Missouri

TOM SAWYER, Ohio

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ALBERT R. WYNN, Maryland

TED STRICKLAND, Ohio

PETER DEUTSCH, Florida

RON KLINK, Pennsylvania

JOHN D. DINGELL, Michigan,

(Ex Officio)

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3

C O N T E N T S

Page

Testimony of:

Abbott, Catherine Good, President and CEO, Columbia Gas Transmission

Corporation, on behalf of Interstate Natural Gas Association of America ................................................................................................................... 98

Cavaney, Red, President and CEO, American Petroleum Institute ............. 83

Cooper, Roger B., Executive Vice President, Policy and Planning, American Gas Association ..................................................................................... 103

Hakes, Jay, Administrator, Energy Information Administration ................. 37

Johnson, Michael L., Vice President, Natural Gas and Gas Products,

Conoco, Incorporated, on behalf of Natural Gas Supply Association ....... 94

Kenderdine, Melanie, Acting Director, Office of Policy, U.S. Department

of Energy ....................................................................................................... 50

Martin, William, Chairman, Washington Policy and Analysis ..................... 30

Russell, Barry, President, Independent Petroleum Association of America,

on behalf of National Stripper Well Association ........................................ 109

Sharp, Phil, Harvard Electricity Policy Group, John F. Kennedy School

of Government, Harvard University ............................................................ 24

Watkins, James D., President, Consortium for Oceanographic and Research Education ........................................................................................... 11

Yergin, Daniel, Chairman, Cambridge Energy Research Associates ........... 18

(III)

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NATIONAL ENERGY POWER: ENSURING ADEQUATE SUPPLY OF NATURAL GAS AND

CRUDE OIL

WEDNESDAY, MAY 24, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON ENERGY AND POWER,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:15 a.m., in room

2322, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Largent, Shimkus,

Wilson, Fossella, Bryant, Boucher, Hall, McCarthy, Pallone, Rush,

and Strickland.

Staff present: Cathy Van Way, majority counsel; Elizabeth Brennan, legislative clerk; Sue Sheridan, minority counsel; and Rick

Kessler, minority professional staff member.

Mr. BARTON. The subcommittee will come to order. We are having a roll call vote on the floor on the Journal. Today is the vote

on Permanent Normalized Trade Relations for China, so the leadership on both sides is trying to find out how many Members are

willing to stick their head out of the foxhole today. As soon as we

get a few more members we will start, probably within the next 5

minutes. I am going to wait for Mr. Boucher. I am told that he is

on his way. So in about 5 minutes we will start the hearing.

[Brief recess.]

Mr. BARTON. The subcommittee will come to order. We are going

to go ahead and start. Congressman Boucher is enroute. His staff

is not sure exactly where on the route he is but he is enroute, so

we are going to start. I want to welcome my panelists today, the

first panel and the second panel. This is almost like old home week

for me. We have got Admiral Watkins, who I worked with on the

Supercollider when he was Secretary of Energy; the Honorable Phil

Sharp, who was subcommittee chairman of this subcommittee for

many years and taught me quite a bit about the energy policy

issues of the day.

And on the second panel we have got Cathy Abbott who I think

is one of the brightest energy experts in the world and taught me

unbelievably important things. And my memory of her is almost—

the last time I saw her she had at that time a baby on a pallet,

over I think at INGAA, and was doing policy work as her baby was

screaming that she needed a diaper change. So it is good to see

Cathy here. So anyway we are going to have a serious discussion

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today on what our energy policy should be. Hopefully it is going to

be done in a very positive way and with a lot of good feedback between the panel and the Congress.

I think we need to take a look at our energy policy. One could

argue the last 7 years we have been adrift in terms of a comprehensive, coherent, coordinated energy policy. Today’s hearing is

the first of three. We are going to focus on the oil and natural gas

industry and some of the issues that face us in that arena.

This past winter we got a wakeup call that gasoline is not for- ever going to stay below $1 a gallon at the pump. OPEC reemerged

as a force to be reckoned with. And we had the situation where our

Secretary of Energy, a former member of this subcommittee, was

running around the world trying to get OPEC to raise their production quotas, which was not a pretty picture in my mind.

As bad as the situation was this past winter, several of our witnesses today will paint a much more dismal picture for the future.

And according to them, and I happen to share their concerns, unless we do a course correction on our national energy policy, the

EIA representative will predict that by the year 2020 the United

States will be dependent on foreign suppliers for 64 percent of its

petroleum consumption and over 50 percent of that is expected to

come from the OPEC countries.

I think that those numbers indicate that it is time for us to do

this course correction sooner rather than later with respect to domestic oil and gas exploration and production policies in our Nation. We are a country rich in resources. There is no reason that

we can’t minimize that dependence.

Yesterday the Energy Information Administration released a report that estimated that there are 10.3 billion barrels of oil that

could be recovered from the Arctic National Wildlife Reserve which

we commonly call ANWR. Similarly, vast areas of the Outer Continental Shelf have been put off limits for natural gas exploration

and production in the last decade. The Destin Dome near Florida’s

coast is estimated to contain at least 2.6 trillion cubic feet of natural gas. If this is true, it would be one of the largest natural gas

fields in the Gulf of Mexico.

There are things that we could be doing to increase our national

energy security by offering greater support to our oil and gas sector, especially the independent oil and gas producers and

explorationists of this country. Marginal wells should be and could

be kept operating much longer than most of them are today. We

should look at ways to improve our natural gas infrastructure in

terms of pipeline construction and things of this sort. This is especially important in the Northeast, that has to import a great deal

of its energy.

As I said at our hearing, many believe that we need an energy

policy. I think we should have an informed energy policy and we

should try to develop an energy policy that assures that the United

States is in charge of its own energy future.

Again, I look forward to hearing our witnesses today. I want to

thank each of you personally for coming. We have made a really

good effort to get two panels of really top-flight folks and I think

we are going to have a very good hearing.

[The prepared statement of Hon. Joe Barton follows:]

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PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, SUBCOMMITTEE ON ENERGY

AND POWER

I’d like to welcome everyone to today’s hearing on energy policy. Today is the first

of three hearings on energy policy that I hope to conduct. At each of these hearings

I hope the Subcommittee can take a close look at our national energy policy and

decide if we are headed in the right direction or if we need to do a course correction.

Today’s hearing is focused on oil and natural gas policy. This past winter we got

a wake-up call that some aspects of our policy with respect to oil and natural gas

were being neglected. Unfortunately, we found ourselves in a situation similar to

the situation we faced in the 1970’s: suddenly rising fuel prices, a marketplace

dominated by foreign players, and too few tools to address consumer’s concerns.

As bad as the situation was this past January, several of our witnesses paint a

far more dismal picture for the future. Unless we do a course correction, the Energy

Information Administration predicts that by 2020 the U.S. will be dependent on foreign suppliers for 64% of its total petroleum consumption. Over 50% of that petroleum is expected to come from OPEC countries.

I, for one, believe that those numbers indicate that it is time for us to do a course

correction with respect to domestic oil and gas exploration and production. The U.S.

is a resource rich country. Yet, our policies deny our citizens the benefit of those

resources. Yesterday, the Energy Information Administration released a report that estimated that there are 10.3 billion barrels of oil that could be recovered from the Arctic National Wildlife Reserve (ANWR). Similarly, vast areas of the outer continental

shelf have been made off-limits for natural gas exploration and production. The

Destin Dome near Florida’s coast is estimated to contain at least 2.6 trillion cubic

feet of natural gas, one of the largest gas fields in the Gulf of Mexico.

There are things we can be doing to increase our national energy security by offering greater support to our independent oil and gas sector. Marginal wells should be

kept operating as long as possible. We should also look at ways to improve natural

gas infrastructure all over the country, and especially in the Northeast.

As I said at our hearing in March I believe we need and energy policy that

assures that the U.S. is in charge of its own energy future.

I look forward to hearing the testimony of the witnesses. Thank you.

Mr. BARTON. I don’t see the Honorable Mr. Boucher here yet, so

I am going to recognize Mr. Pallone for an opening statement. Oh,

Mr. Boucher just arrived. Do you wish to be recognized right off the

bat or would you like a little time?

Let me welcome my good friend from Virginia, the ranking member of the subcommittee, Rick Boucher, for an opening statement.

Mr. BOUCHER. Thank you, Mr. Chairman, for organizing this

hearing on a subject that is of high interest to the Nation’s economy and general well-being. We are planning a series of several

hearings in this subcommittee focusing on our domestic energy resources and our national energy policies. You are to be commended

for undertaking this initiative in your initial term as Chairman of

our subcommittee because this committee has not seriously and

comprehensively examined the Nation’s energy policy since the

early part of this decade.

In fact, neither the Congress nor the administration have spent

significant time on this subject over the last few years. I do not intend this statement to be a criticism; it is simply a fact. And it is

somewhat understandable when the economy is doing well and at

a time when energy prices are generally low. I share the concern

regarding our growing dependency on foreign sources of energy.

And this subcommittee is an appropriate forum to explore the various energy policies which exist today and to look at proposals that

are aimed at promoting a higher level of energy self-sufficiency.

In 1998, the United States imported approximately 22 percent of

the energy that we consumed in that year. And the Department of

Energy predicts that our dependence on foreign energy sources will

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continue to grow. In past years the Congress has taken prudent

measures to address these concerns. For example, in 1980 Congress

acted to encourage the domestic production of oil and natural gas

by establishing the section 29 tax credit for companies that sought

to produce oil and gas from unconventional sources such as tight

rock formations, coal beds and from biomass. Congress recognized

the benefit to the Nation of developing oil and natural gas from locations that are very difficult to reach and not economic from

which to produce using conventional means.

The section 29 tax credit is scheduled to expire on December 31,

2002. Allowing the credit to expire would result in the abandonment of many wells that are producing today by virtue of the section 29 tax credit, and I would encourage, Mr. Chairman, that we

recommend that the section 29 tax credit be extended, perhaps enduring the balance of this Congress, rather than waiting until the

next Congress at the conclusion of which the credit is scheduled to

expire. Having the credit expire and not be reauthorized would result in the loss of a substantial portion of our current oil and natural gas production base.

Mr. Chairman, I think the hearing that we are holding today is

an excellent opportunity to examine a range of proposals that could

lead to a higher level of energy self-sufficiency through greater utilization of our oil and natural gas production capabilities, and

when tied to the subsequent hearings that we will be holding on

oil and nuclear energy capabilities, these hearings do in fact provide an excellent forum for examining our Nation’s energy policies

and perhaps recommending ways that we can achieve a higher

level of energy self-sufficiency.

So I commend you for organizing these forums, and along with

you I look forward to the testimony of our witnesses.

Mr. BARTON. Thank you, Congressman. I want to let the panelists know that these microphones are live all the time, so be careful

what you say up here. We would recognize Congressman Bryant of

Tennessee for an opening statement.

Mr. BRYANT. Thank you, Mr. Chairman and ranking member, for

this hearing and several others that you have alluded to as we

begin to study this very important issue. We have two very qualified panels, and in the interest of time what I am going to simply

do is adopt your statement as my statement in the record because

I agree with you, Mr. Chairman, on what you said and yield back

the balance of my time.

Mr. BARTON. We thank you, Congressman. I was told that Congressman Ralph Hall was actually the first member here, even before the Chairman. So we are going to recognize him, and for such

time as he may consume, for an opening statement.

Mr. HALL. Mr. Chairman, members of the committee, I join everyone else in thanking you, and I probably ought to just endorse

what the gentleman from Tennessee said and go down the road,

but I think what I have to say is very important as one that probably knows more about this than anybody on the committee because I have heard it so doggone many times.

Mr. BARTON. I just thought that was a Texas attitude.

Mr. HALL. And your decision to hold hearings on the state of our

national energy policy is once again in vogue again like it has been

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so many times. It seems like we go up and down the system. The

development and implementation of a coherent and flexible energy

policy tends to recede into the background when energy prices are

stable but come roaring to the front when things go up or when the

public debates the prices as they rise, as they have over the last

year.

So I don’t believe there is a more important element of our economy on which Federal policy needs to be developed and carried out

more consistently than energy. And inasmuch as I have to listen

to your opening statements day in and day out, and you have heard

me say this a lot of times, it is my opinion that we do need an energy policy and that energy policy can be very easy and simple. It

simply is incentive to look for it and reward for finding it. Because

the little ones look for it, they borrow money from the big banks

to look for it, and when the little ones find it, the big ones buy it

and redistribute it, make money and live happily financially ever

after, while little ones go back to looking for a bank that will loan

them some money. Even in high times bank won’t loan money because there is no consistency.

If we could just have 4 or 5 years of consistency, I don’t care if

the price is at 16, 17, 20, 30, wherever, it has got to be consistent

for some length of time in order for people who are the old-timers

in the business to look for it. The ones that kept the energy thrust

alive even during World War II, that filled the big inch pipelines

to put in the land-leased destroyers to keep this country going,

those people are true heroes.

I say this while there are some young people on the group that

are to testify today. I see also much knowledge there in those of

you that have been with us before and have worked with us. I

think I don’t believe there is a more important element in our economy. And I support the railroads, and I have said that before, because they are a national asset.

Energy is a national asset. People ought to support it more. But

it is a fight between 10 of us that produce it and 40 of them that

use it.

I don’t like Amtrak. Darn things goes from here to Philadelphia

38 times a day and goes from here to New York 37 times a day

and we subsidize it. It has improved in my district. They now whistle when they go through my district. They don’t stop. And west of

the Mississippi, we get very little folks west of the Mississippi out

of Amtrak. But during national defense times, this country travels

by rail and we have to have it. It is something you have to have.

It is a national asset. They ought to look at energy like that.

I have got a lot more to say but I will give back my time. I don’t

think I have time to say it. That is, unless there is some insistence

that I do. Thank you, Mr. Chairman.

[The prepared statement of Hon. Ralph M. Hall follows:]

PREPARED STATEMENT OF HON. RALPH M. HALL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Mr. Chairman and Members of the Committee: I too, will join the others in thanking you for convening this hearing today. Your decision to hold hearings on the state

of our National Energy Policy, or as I believe—the lack thereof—is very timely. The

development and implementation of a coherent and flexible energy policy tends recede into the background when energy prices are stable, but comes roaring to the

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forefront of public debate when prices rise, as they have over the last year. However, I don’t believe there is a more important element of our economy on which

federal policy needs to be developed and carried out consistently than energy.

I say that not as a representative of a producer state—obviously I have a vested

interest in a strong and robust domestic oil and gas industry—but as also a representative of a state that has enormous potential for the development of renewable

energy sources. Wind and solar energy have bright futures in Texas and throughout

much of the Southwest.

We shouldn’t find ourselves attempting to choose among sources we need them

all. In fact one of the reasons we have dithered for years on energy policy is that

the U.S. is blessed with the greatest variety of viable primary energy sources in the

world. Other developed nations, Japan and France come to mind, without indigenous energy sources have had to be rather single-minded about the need to meet

energy demand at reasonable prices. Our time is coming, if in fact it hasn’t arrived

already.

Mr. Chairman, you have put together a pair of all-star panels for the Subcommittee today. It good to see some old friends back before us, and I appreciate

all of the witnesses’ continuing willingness to give us their time and the benefit of

their wisdom. Welcome to you all. I also look forward to the subsequent days of

hearings on coal, nuclear and the renewables. This is some of the most important

business that will come before the Subcommittee, and I hope that this and the following hearings will build momentum to seriously address energy policy issues.

With that, Mr. Chairman, I yield back the balance of my time.

Mr. BARTON. We thank the gentleman for the 10-minute statement on the 3-minute rule. That is appreciated.

We would like now to recognize the gentlelady from New Mexico,

Heather Wilson, who has done tremendous work this year on many

of the issues before the subcommittee.

Mrs. WILSON. Thank you, Mr. Chairman. I am inclined to yield

my time to the gentleman from Texas just because it is more entertaining. But in the interest of time and wanting to hear from several of the witnesses, what I will do is insert my opening remarks

into the record and move it along. Thank you.

Mr. BARTON. I thank the gentlelady.

I would like to recognize the gentleman from New Jersey, Mr.

Pallone, who has worked long and hard on many of these issues.

Mr. PALLONE. Thank you, Mr. Chairman. Our national energy

policy involves a lot of complex resource economic and national security issues. And I also look forward to our witnesses’ comments

on the various aspects of the Nation’s energy policy. But, Mr.

Chairman, I have to take the opportunity today to somewhat criticize the Republican leadership’s failure with regard to our national

energy policy.

Mr. BARTON. We would be surprised if you didn’t.

Mr. PALLONE. I know. I don’t mean this as a reflection on you

or the committee; more so in terms of the Republican leadership in

the Congress. But in the 6 years that the Republicans have been

in the majority, they have failed to pass any significant legislation

to protect our energy security and give consumers, commuters,

truck drivers, homeowners, farmers, any protection against these

volatile oil prices that we have been seeing for the last year or so.

And you know, I can’t help but go back to last year when the

leadership put forward the proposal again to abolish the Department of Energy. In April and May of last year, long after OPEC’s

March 23, 1999 announcement and long after oil prices started to

rise, Dick Armey, Tom DeLay, and John Kasich joined forces with

Todd Tiahrt to introduce H.R. 1649, the Department of Energy

Abolishment Act. And this bill would basically get rid of the DeVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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partment of Energy, and with it oil conservation programs and research and renewable energy conservation and research. That bill

basically suggests that we get rid of the Strategic Petroleum Reserve and sell off outright any other assets we have to guard

against an oil shock.

And that is why, in my opinion, probably why the Republicans

prevented us from filling the Strategic Petroleum Reserve when

gas was cheap. It is probably the reason why the Republican Congress hasn’t reauthorized the law giving the President the authority to release oil from the Strategic Petroleum Reserve. We all

know that that law, the Energy Policy and Conservation Act, expires or expired on March 31st. The Senate passed a bill that is

pending before the House Commerce Committee, but the House

leadership has done nothing and is on the verge of letting that authority slip away. I know we did it, we passed something in the

House, but there is still nothing on the President’s desk.

I have to also point out that the majority leadership’s idea of a

national energy policy involves drilling the Arctic National Wildlife

Refuge unfortunately, this is not sound policy. If we open the Arctic

refuge to oil and gas development, we will only have the equivalent

of 6 more months’ worth of oil supply. Yet in the process we would

destroy one of our Nation’s greatest natural resources forever. And

drilling the Arctic refuge will do nothing to increase our energy security or lower prices at the pump. Instead of drilling in the Arctic

refuge, we should be banning exports of Alaskan oil to other Nations.

Mr. Chairman, sound energy policy entails a comprehensive approach that includes promoting and funding commonsense programs to conserve energy and develop alternative energy sources.

Such programs also would reduce our reliance on polluting fossil

fuels and on oil imports from foreign nations. Regrettably, the Republican leadership has harmed the Nation’s energy security by

cutting funding for energy efficiency, renewable energy, weatherization and alternative fuel programs during the past several

years.

In the first effort after taking control of Congress, Republicans

cut energy efficiency programs by 26 percent. Over the past 5 years

the GOP has slashed funding for solar energy, renewable energy,

and conservation programs by nearly 1.4 billion below the administration’s request. Again, I know that is not this committee; that is

the Appropriations Committee. But we are talking about national

energy policy; I have to talk about the Republican Congress as a

whole.

We have to help ensure our Nation’s short- and long-term energy

security independence by using mass transit, bicycles, other fuel-efficient vehicles. There are a lot of things we can do in terms of conservation measures even here in the House of Representatives. And

I just would like to see a more proactive effort so that we can go

home and tell our residents and our children that we are working

to protect the Nation’s energy security as well as their pocket books

as well as our resources. Thank you, Mr. Chairman.

Mr. BARTON. I thank the gentleman from New Jersey. I will go

look in my folder in my office, as Chairman of Energy and Power

Subcommittee, for all the legislative proposals the Clinton AdminVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
8

istration has sent me to introduce, some of those issues that you

just talked about. When I checked it yesterday, I think it was

dusty, with nothing in it, but I will go back and look because there

may be something that I just missed.

Actually some of your points are well taken. That is the whole

reason we are doing these hearings. We appreciate your comments.

I would now like to turn to the gentleman from Oklahoma, Mr.

Largent, who has always focused on energy issues in his time in

Congress, and is one of our experts. Mr. Largent, for an opening

statement.

Mr. LARGENT. Thank you, Mr. Chairman. I want to thank you for

holding this very important hearing to examine what the future

steps need to be from a public policy perspective to ensure an adequate supply of natural gas and crude oil. Last March this subcommittee held a hearing to look at the cause and effect of the recent price fluctuations in the world’s oil markets. At that hearing

I commented that unfortunately it is not until we experience sticker shock at the gas pump, or American families have to pay significantly higher prices to heat their homes, that oil and natural gas

issues enter the national consciousness.

It would be a stretch to say that energy issues continue to garner

the same amount of national media attention as they did 3 months

ago. However, as we enter the summer driving season, coupled

with increase in electricity use as temperatures begin to rise,

Americans will again focus their attention to the price of gas at the

pump and their electricity bills.

Fossil energy, specifically natural gas and crude oil, have to and

will continue to dominate United States energy supply. According

to the Energy Information Administration, petroleum consumption

in the United States is projected to increase at an annual rate of

1.3 percent. However, also according to the EIA, our domestic petroleum supply, including natural gas, is projected to remain nearly

flat.

What does that mean? It means that instead of currently relying

on the rest of the world’s petroleum for 52 percent of our domestic

oil and gas consumption, in 20 years we will depend on foreign imports for 64 percent of our domestic consumption needs. Frankly,

I think that estimate is conservative.

Mr. Chairman, we continually hear that the engine driving our

economic prosperity is the growth of the information technology

sector. But without fuel for that engine, our economic growth could

come to an abrupt halt.

What do we need to do as policymakers to ensure our future energy security? A good start would be for the Federal Government

to create policies that allow for responsible domestic exploration

and production of our natural resources. Establish tax incentives

such as extending the section 29 tax credit and eliminating the net

income limitation on percentage depletion for marginal wells to encourage independent producers back into the oil patch rather than

shutting down wells and creating a reasonable regulatory framework that protects the environment but does not add unnecessary

compliance costs. These are just a few suggestions.

Mr. Chairman, I look forward to hearing what suggestions our illustrious witnesses have and I yield back.

9

Mr. BARTON. I thank the gentleman.

Now I would like to turn to the gentlelady from Missouri, the

Honorable Karen McCarthy, for an opening statement.

Ms. MCCARTHY. Thank you, Mr. Chairman. Thank you for having this very important hearing and thanks to our distinguished

panel. I look forward to your remarks and wisdom very much. Mr.

Chairman, if I might have the liberty of making a brief comment

on one of the members of the panel I would like to welcome especially.

Mr. BARTON. If it is a positive comment.

Ms. MCCARTHY. It is very positive. In 1982 I was a fellow at Harvard’s Institute of Politics, teaching a course on the development or

lack thereof of national energy policy. And I was a State legislator

then, chairing the Energy and Environment Committee. I had come

from a teaching background and obviously environmental issues inspired me to go into public service. And Dan Yergin came to my

class and wowed my students on what it would take and what we

would need to have in those days a cogent national energy policy.

Well, he has gone on to become, as we know, a Pulitzer prize-winning author and someone who has shaped national energy policy.

Mr. BARTON. He told us the only reason he came is because you

were on the subcommittee.

Ms. MCCARTHY. I don’t think he even knew. But I am delighted

to have him here today to share his wisdom, and also all of the

panelists, and to say to Mr. Hall, my former ranking member and

now an esteemed colleague, that I am very grateful for our support

of Amtrak because it whistles quite a few days in my district and

I was a State legislator who made that happen. I know how important alternative uses are. And to also echo my current ranking

member, Mr. Boucher, about renewing the tax credit for section 29

which would extend those tax credits to alternatives such as natural gas and to biomass.

And that leads me to thank the committee and you, Mr. Chairman, because when Mr. Shimkus and I began our plea of extending

credits and help to biomass to develop alternative fuels that would

give our buses and our vans and other transportation systems a

cleaner burning alternative for cities that were trying to meet those

clean air standards, I know you looked at us, somewhat surprised,

and wished we would go away. But thanks to you, it is now law

and it is working. I hope as we explore a national policy that we

take into consideration all the good things that we have accomplished as a Congress and as a Nation, but also the challenges we

continue to face in order to set that standard for the world.

Thank you, Mr. Chairman.

Mr. BARTON. Thank you Congresswoman McCarthy.

Now I would like to recognize Mr. Shimkus for an opening statement.

Mr. SHIMKUS. Thank you, Mr. Chairman. I will just add to what

my colleague, Ms. McCarthy, has mentioned in response to my colleague and friend from New Jersey, that this committee and Congress and the last Congress really passed, in addition to the Energy and Policy Conservation Act, on the biodiesel, the B-20 proposal which is probably the only significant piece of legislation that

helped add price to a commodity of agricultural farm products but

10

also moved us in the direction of addressing our reliance on foreign

oil. And it also helped in the environmental aspects, because the

B-20 in the biodiesel proposal cleans the diesel exhaust by 50 percent, a 50 percent reduction in emissions. It does all the things

that we ought to be concerned with as Americans.

I too, as a Member of Congress in 1996, questioned the role of

the Department of Energy. I have now become convinced that there

is a role and I look forward to working with DOE on provisions like

this.

I would also be remiss not to mention the ethanol aspects of having another renewable fuel option. The reality is we have an overreliance on foreign oil. And I do believe that we can safely go into

the Arctic Wildlife Refuge. I think that was proven with the Alaskan pipeline. My now-deceased father-in-law worked on that pipeline and it has a tremendous record of the environmental safety of

that program.

I think we also look at the continental shelves and also the marginal well issue as all part of a national energy portfolio along with

renewable fuels. I am very excited about this hearing and look forward to continuing to fight this cause in my remaining years here

in Washington. I yield back my time.

Mr. BARTON. I thank the gentleman.

No other members present. All members not present will have

the requisite number of days to put a written statement in the

record.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Mr. Chairman: I’d like to commend you for holding this hearing on national energy policy. As members of the 106th Congress, we are at an historical cross-road.

We are charged with putting in place the policies that will carry our nation into

the 21st Century. A comprehensive, forward-thinking national energy policy is essential to our continued success.

Our economy demands abundant energy supplies at affordable prices. I am a

strong believer in open, competitive markets. We have nearly twenty years of experience in letting the market set the price for oil. For natural gas, total deregulation

of wellhead prices was finally completed in 1993. Soon we’ll have competitive prices

for electricity. I hope we’ll be able to look back in a few years and say that occurred

in the 106th Congress in the year 2000.

Competition and an open marketplace have resulted in a more than adequate supply and lower prices. Although in the past two years, we’ve seen both record low

and high oil prices, when adjusted for inflation, oil prices today are still lower than

they were in 1981. Consumers have benefitted from competitive oil and gas markets, and they will benefit from more competitive electricity markets.

However, market pricing for energy is just one many U.S. energy policies. Overall,

I do not believe the U.S. has an energy policy. Instead we have many, often conflicting, energy policies. I believe we need to take a close look at these energy policies across sectors, as well as, look at how they interact with our environmental

policies. Today’s hearing is good first step in determining how these various energy

policies can complement each other and where they are currently at odds. Knowing

that I believe, will help us develop a single, unified national energy policy with

many components.

I look forward to hearing from today’s distinguished panels of witnesses. I hope

they will help us find the balance between energy security and competitive global

energy markets. Thank you.

Mr. BARTON. The Chair would ask unanimous consent that Congressman Tauzin of Louisiana’s statement be included in the record

at this point. He is not a member of the subcommittee but he is

11

a member of the full committee. Is there objection? Hearing none,

so ordered.

[The prepared statement of Hon. W.J. ‘‘Billy’’ Tauzin follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF LOUISIANA

Energy security for America requires not only an analysis for increasing domestic

production but also an examination of ways to ensure the long-term viability of our

nation’s existing production. In the latter category, current tax incentives that have

resulted in production from unconventional sources such as shale, tight sands and

coal bed methane are scheduled to expire at the end of 2002.

Part of our plans for protecting energy security in an uncertain world must include a review of a now uncertain tax code with its current risk of energy supply

loss resulting from abandonment of the wells qualifying for the tax credits that provided the incentive for their production. If abandoned, such supply sources cannot

be replaced.

Extension of the tax credit system (known as Section 29) should be considered

among the high priority options for strengthening our domestic resources for continued supply to Americans of low cost and environmentally efficient energy sources.

Mr. BARTON. We now want to welcome our panelists. I want to

give a very warm personal welcome to our first panelist, former

Secretary of Energy, Admiral James Watkins, one of the most decent people I have ever had the courtesy to know in public service

and someone who helped me tremendously when he was Secretary

of Energy.

We are not going to hold you all real tight to time but we are

going to set the clock at 7 minutes. And if you go a little bit longer,

that will be fine. We want to give each of you every opportunity

to elaborate on your written testimony. I also want to thank each

of you in the second panel also for having your testimony in on

time. Even the Department of Energy, I think for the first time

this year, got their testimony in on time. That is a record and I

am very very proud of that.

So with that, we welcome former Secretary of Energy, distinguished military Admiral of the United States, Navy Admiral

James Watkins.

STATEMENTS OF JAMES D. WATKINS, PRESIDENT, CONSORTIUM FOR OCEANOGRAPHIC AND RESEARCH EDUCATION;

DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES; PHIL SHARP, HARVARD ELECTRICITY

POLICY GROUP, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY; WILLIAM F. MARTIN, CHAIRMAN, WASHINGTON POLICY AND ANALYSIS; JAY HAKES, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION;

AND MELANIE A. KENDERDINE, ACTING DIRECTOR, OFFICE

OF POLICY, U.S. DEPARTMENT OF ENERGY

Mr. WATKINS. Thank you, Mr. Chairman, for inviting me to testify before your Subcommittee on Energy and Power. You asked

that my testimony today address the subject of U.S. energy policy

and security in general and answer the question as to whether or

not the U.S. is headed in the right direction or if changes are needed. You also asked that particular emphasis be placed on U.S. energy policy as it relates to ensuring adequate supplies of oil and

natural gas.

12

As you are well aware on this committee and from my experience

as Secretary of Energy in helping Congress craft the National Energy Policy Act of 1992, the entire complex of energy sources, both

production and consumption, needs to be analyzed and integrated

in order to address any one of the individual components, like oil

and gas, that aggregate to make up the whole.

As a consequence, I have prepared and submitted a long formal

statement for the record which goes back nearly 10 years to the

formulation of the National Energy Strategy by the Bush Administration in 1991. Lessons learned from that process and a review of

all components that made up the energy strategy indicate

interconnectivity and balance between these components and they

are demanded when considering any one of them.

Recall that the 1991 Bush strategy was the culmination of nearly

2 years of intense efforts, holding hearings around the country to

listen to all interested parties, developing a strategy which

emerged therefrom, and drafting a report for the Congress. That

report was reviewed by various analytically capable outside entities, including the Office of Technology Assessment here on the Hill

before it was abolished, and was published and sent to the Hill to

inspire the needed legislation. The strategy also included and complemented a number of Bush Administration initiatives which I

enumerated on page 3 of my longer statement.

The strategy was then used by both the Congress and the administration as the template for constructing and passing the Energy

Policy Act. This act, signed into law by President Bush in October

1992, was among the most comprehensive energy bills ever enacted. The Energy Policy Act affected every aspect of the way this

Nation produces and uses energy, including reshaping Federal regulation of the Nation’s energy sector to spur competition and investment in new technologies. It stands today as landmark legislation, but it must be periodically reviewed and updated if it is to remain relevant.

For example, an updated energy strategy is badly needed today

to provide the broad framework within which so many other related pieces of legislation like the Clean Air Act, the Public Utility

Company Holding Act, Public Utility Regulatory Policy Act, Nuclear Waste Act, and many others find themselves, and all of these

related pieces have to be periodically updated themselves, but within some kind of overarching umbrella strategy because of their inherent interconnectivity.

Our strategy in the early 1990’s, for example, predicted about

$30 a barrel in crude oil prices by the year 2000, recognizing cyclic

variations enroute. Sure enough, that is where we are today. Additionally, the act passed by Congress had the potential to reduce oil

imports by about 4.7 million barrels per day by the year 2010. This

represented at the time a one-third cut in the projected level of petroleum imports. Not only would this enhance energy security but

it would also positively influence balance of trade, effect considerable energy cost savings for consumers, and result in significant reduction in energy demand. Whether we are on track to achieve this

objective I have no idea, but knowing how we are doing relative to

that objective is germane to answering one of your questions.

13

In this connection, before leaving office in January 1993, we had

established a complex tracking program called the Energy Policy

Act Information System to comply with provisions of the 1992 act.

This system has been used successfully in development of the National Energy Strategy and had also been reviewed by the Congressional Office of Technology Assessment and found to contain reasonable models and predictions.

I prepared my final DOE posture statement in January 1993 and

reported the degree of compliance with the act to date. I also

passed information regarding this tracking system to my successor

in the new administration team.

The first required DOE report entitled ‘‘Implementation Status

Report’’ was then published in April 1993, shortly after I left office,

based on our tracking system. It is very well detailed, every single

section of the track, to see how we are doing against the advocacy

that was contained in the act. To the best of my knowledge, results

of the detailed tracking system were not reported out again. Rather, our system was replaced in July 1995 with what I would call

a puff piece, called the National Energy Policy Plan, allegedly the

new Clinton Administration’s energy policy.

The latter’s direct relationship with or even reference to the 1992

Energy Policy Act is not clear. I have no information which would

indicate the degree of congressional satisfaction in either specificity

or quality of this or any of the follow-on biennial reports required

under section 801 of the DOE Organization Act which demands

submission of a national energy policy plan.

You asked in your letter whether or not the direction was the

right one regarding energy policy and security in general, and oil

and gas in specific. My answer, admittedly rendered from a distance without detailed data, is a simple no. If we had a clue as to

the direction in which we were actually headed, we could have predicted the current oil crisis well ahead of time and may have had

a chance to influence our national attitude toward oil, for this crisis

was in part generated by our own failure to enhance U.S. oil production as initially recommended in the National Energy Strategy

10 years ago.

Further, east and west offshore oil and gas moratoria continue,

the Arctic National Wildlife Refuge remains closed. By the way, I

don’t agree with Mr. Pallone that we would destroy one of the great

areas of the world. I have been up to Prudhoe Bay. I have seen

large pads that were used for oil drilling have been taken away

and reconstituted into the tundra, the most beautiful sight you

have ever seen. It can be done. We have the modern technology to

do it. We spent the time to do it. The oil and gas companies up

there have been responsible and we ought to get on with it.

And it won’t all be dumped in 6 months. It is a contribution to

the annual thing that will go on for 20 years. The gas that is available up there can be brought back down again through Alaska, and

we can either sell it or use it at home.

So I really do believe that is a very important issue but it has

to be placed in the context of everything else. If we go after the

Arctic National Wildlife Refuge by itself, we will lose today politically. But if we put it in the context of what else we are doing, we

can win it. We ought to get on with it.

14

We are importing 10 percent more oil now than we were 10 years

ago. I just heard the data coming out of the Energy Information

Administration that it is going to be 10 percent higher than that

10 years from now. We watch while the OPEC oil cartel manipulates the world marketplace and gains more, not less, leverage on

the rest of us. Our trade deficit soars and the worst is not over.

We are utilizing more and more natural gas in our utilities and

this consumption will continue to grow exponentially. As a result,

without new offshore exploration on either coast, we are now dusting off our liquid natural gas depots again.

Ten years from now, I predict we will decrying the fact that we

are being held hostage on an energy security problem to foreign imports of LNG from states like Libya. Yes, the potential exists to

mitigate spikes in gasoline prices through enhanced oil production

and reduced consumption at home. However, with no sense of urgency on upgrading our national energy policy, only sporadic attention being given to the trade and diplomacy aspects of our dependency on OPEC’s whims, opposition to any increase in U.S. oil or gas

production, and an unwillingness on the part of DOE to track what

we are already supposed to be doing under existing legislation and

make recommendations as to new strategic direction where needed,

there is little hope of avoiding a repetition of unannounced oil and

gasoline spikes in the years ahead.

Sadly, I now think we need to start the process all over again,

similar to the one we put into place 10 years ago, and establish a

new baseline. The new administration should be tasked by Congress to do this. If we get serious about energy policy again and

follow such a path, we might be able to answer your question, Mr.

Chairman: Are we going in the right direction or are changes needed?

Thank you, Mr. Chairman.

[The prepared statement of James D. Watkins follows:]

PREPARED STATEMENT OF JAMES D. WATKINS, PRESIDENT, CONSORTIUM FOR

OCEANOGRAPHIC AND RESEARCH EDUCATION

Thank you, Mr. Chairman, for inviting me to testify before your Subcommittee on

Energy and Power. In your letter of invitation, you stated that the subject of the

hearing will be ‘‘National Energy Policy: Ensuring Adequate Supply of Natural Gas

and Crude Oil.’’ You asked that my testimony today address the subject of U.S. energy policy and security in general and answer the question as to whether or not

the U.S. is headed in the right direction or if changes are needed. You also asked

that particular emphasis be placed on U.S. energy policy as it relates to ensuring

adequate supplies of oil and natural gas.

As you are well aware, and from my experience in helping Congress craft the National Energy Policy Act of 1992, the entire complex of energy sources, both production and consumption, needs to be analyzed and integrated in order to address any

one of the individual components, like oil and gas, that aggregate to make up the

whole. As a consequence, I have prepared and submitted a long formal statement

which goes back nearly ten years to the formulation of the National Energy Strategy

by the Bush Administration in 1991. Lessons learned from that process and a review of all components that made up the Energy Strategy indicate the

interconnectivity and the balance between these components demanded when considering any one of them. Recall that the 1991 Bush Strategy was the culmination

of nearly two years of intense efforts to listen to all interested parties, develop a

strategy which emerged therefrom, and draft a report. That report was reviewed by

various analytically capable outside entities before it was published and sent to the

Hill for incorporation into needed legislation.

But, let me first review some of the background. In July 1989, the President directed me as his Secretary of Energy to develop a National Energy Strategy. The

15

mission was accomplished and announced by the President at the White House on

February 20, 1991. In his press conference, President Bush proposed a comprehensive and balanced program to ensure all Americans an energy future that is secure,

efficient, and environmentally sound. The National Energy Strategy was designed

to diversify U.S. sources of energy supplies and offer more efficiency and flexibility

in the way energy is consumed.

The National Energy Strategy was the product of twenty months of public recommendations and Administration consideration. In developing this Strategy, the

Department of Energy conducted eighteen public hearings and received thousands

of written comments.

With the benefit of this input, the Administration analyzed the full array of energy options and developed a strategy that supported continued economic growth,

increased energy efficiency, protection for the environment, and reduction of America’s vulnerability to energy supply disruptions.

The Strategy was consistent with the Administration’s policy of reliance on market forces. Over the next two decades, with well-thought out and periodic updates,

the Strategy would have made the U.S. more energy efficient and enhance our competitiveness without resorting to heavy-handed regulations, taxes, or import fees

that could hurt consumers and cost Americans jobs.

The Strategy acknowledged that the U.S. was part of an energy interdependent

world. It recognized that it was not in our interest to adopt measures that may reduce imports, but inflict severe economic or environmental damage. Therefore, the

National Energy Strategy balanced economic, environmental and energy security objectives.

Over the next twenty years, we believed that such a balanced approach to production and conservation would power a larger U.S. economy while using less energy.

At the same time, the U.S. would produce more of the energy it uses. The National

Energy Strategy by the year 2010 would have, if pursued aggressively:

• Reduced domestic oil demand by 3.4 million barrels per day, below projected levels.

• Increased domestic oil production by 3.8 million barrels per day above projected

levels.

• Increased the electricity produced from renewable sources, such as solar, hydropower, and geothermal by 16 percent.

• Raised the use of alternative transportation fuels, such as compressed natural

gas, ethanol and methanol, thereby reducing the need for up to 2.5 million barrels of oil per day.

• Reduced growth in electricity demand by unlocking market forces through elimination of costly regulation in existing law, thereby saving consumers approximately $27 billion per year in electricity costs.

• With its proposals to increase the use of clean coal technology, natural gas, and

nuclear energy to generate electricity, as well as to develop new energy efficient

technologies, the Strategy would have also:

—Held U.S. emissions of greenhouse gases by the year 2010 at or below 1990

levels.

—Improved air quality by reducing emissions of pollutants that contribute to

acid rain and smog.

—Mitigated solid waste problems by reducing coal ash waste 25 million tons per

year, and by lowering coal cleaning wastes by 50 million tons per year.

The Strategy incorporated and complemented a number of Bush Administration

initiatives. These included: (1) the 1990 provisions to the Clean Air Act; (2) natural

gas well-head decontrol legislation: (3) incentives provided to domestic renewable

and fossil energy producers in fiscal year 1991 budget agreement; (4) the energy research and development initiatives announced in the President’s FY-92 budget; (5)

the Administration’s domestic energy supply and demand measures adopted in response to the Iraqi oil disruption; and (6) the Administration’s science and mathematics education initiatives.

To meet the challenges that lay ahead, the National Energy Strategy called on

Federal, State, and local governments to work together to encourage energy conservation and new energy production through reduced regulation and streamlined

licensing procedures, particularly in the natural gas, oil and gas pipeline and hydropower areas. At the Federal level, the Administration intended to lead by improving

the energy efficiency of Federal buildings, Federal housing and accelerating the purchase of alternative fuel vehicles for the Federal fleet.

In February 1992, one year after initially promulgating the National Energy

Strategy, the Strategy was adjusted to fit the reality of the latest and continuallychanging data base of knowledge that drove the first projections in 1991. This upVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
16

dated baseline was then used by the Congress as the template for constructing and

passing the Energy Policy Act of 1992. This Act, signed into law by President Bush

in October 1992, was among the most comprehensive energy bills ever enacted. The

Energy Policy Act affected every aspect of the way this nation produces and uses

energy, including reshaping Federal regulation of the nation’s energy sector to spur

competition and investment in new technologies. It still stands today as landmark

legislation, but it must be periodically reviewed and updated if it is to remain relevant. For example, it is badly needed to provide the broad framework within which

so many other related pieces of legislation like Clean Air Act; The Public Utility

Company Holding Act (PUCHA); The Public Utility Regulatory Policy Act (PURPA);

Nuclear Waste Policy Amendments Act; and the like find themselves. All of these

related pieces have to be periodically updated themselves, but within some overarching umbrella strategy because of their inherent connectivity thereto.

I present all this background before addressing your question as to whether or

not our oil and gas policies are adequate in view of the recent shock to the nation

on high gasoline prices at the pump. As our National Energy Strategy clearly articulated, the inter-coupling of all energy generation and conservation mechanisms must

be continuously melded together into a sensible, comprehensive, integrated, and balanced relationship. If they are not, we will continue to have unannounced and unwanted perturbations when we could have better predicted and mitigated them. Our

strategy in the early 1990s, for example, predicted about $30 per barrel in crude

oil prices by the year 2000, recognizing cyclic variations enroute. Sure enough, that

is where we are today. Additionally, the Act passed by Congress had the potential

to reduce oil imports by about 4.7 million barrels per day by the year 2010. This

represented a one-third cut in the projected level of petroleum imports. Not only

would this enhance energy security, but it would also positively influence balance

of trade, considerable energy cost savings for consumers and significant reduction

in energy demand.

Finally, before leaving office in January 1993, we had established a complex

tracking program called the Energy Policy Act Information System to comply with

provisions of the 1992 Energy Policy Act. This System had been used successfully

in development of the National Energy Strategy and then reviewed by the Congressional Office of Technical Assessment (OTA) and found to contain reasonable models

and predictions. I prepared a final Posture Statement in January 1993 and reported

the degree of compliance with the Act to date and passed information regarding this

tracking system to my successor and the new Administration team. The first required report was then submitted to the Congress in April 1993, shortly after I left

office including an assessment using the tracking system. To the best of my knowledge, the detailed tracking system was not used again and was replaced by issuance

of a Strategic Plan in April 1994, followed a year later in July 1995 by a National

Energy Policy Plan which was allegedly the new Clinton Administration’s energy

policy. This Plan’s direct relationship with or even reference to the 1992 Energy Policy Act is not clear. I have no information which would indicate the degree of Congressional satisfaction in either specificity or quality of the biennial reports required

under Section 801 of the DOE Organization Act which demands submission of a National Energy Policy Plan every two years.

In my opinion, therefore, it is time to rebuild the National Energy Strategy as

we did ten years ago, using a similar approach—i.e. hold hearings around the country, listen to all parties with a goal of making recommended amendments to the

1992 Energy Policy Act so as not to lose the Act’s relevance. Unless this is done,

I do not believe the nation will be well served by a Department of Energy (DOE)

that seems to put out energy ‘‘puff pieces’’ that have no associated implementing

strategy for their execution or assessment. I have in mind here the Administration’s

‘‘Sustainable Energy Strategy, Clean and Secure Energy for a Competitive Economy’’ report to the Congress in July 1995 which was their own first real response

to the two-year reporting requirement. This 73-page document arrived on the Hill,

with little fanfare, and had little impact. This 1995 report pays only lip service to

the importance of energy policy. In reality this so-called ‘‘Sustainable Energy Strategy’’ is short on energy policy and long on wishful thinking. To take just two examples, among the five strategies set forth for a Sustainable Energy Policy are ‘‘Reinvent Environmental Protection’’ and ‘‘Engage the International Market.’’ Then,

later, during his confirmation hearings before the Senate Energy Committee in

1997, Secretary Pen ̃a promised that there would be a new National Energy Policy

Plan (NEPP) by the fall of that year to answer growing Congressional concern about

whether this nation has in place a program that addresses its energy and environmental needs for the next century. Subsequently, it was announced that this new

NEPP would be delayed another six months, well past the December 1997 meeting

in Kyoto at which commitments constituting a de facto energy policy would be

17

made. Whether it ever got submitted, I have no idea. But Secretary Pen ̃a departed

in the summer of 1998 and I can’t imagine his departing shot at a strategy was very

effective. I don’t know what the Congress has received since, but I can’t believe

there has been much substantive clarity or direction in whatever the DOE is doing

in this area.

Further, you may recall in 1997 that President Clinton casually remarked to assembled students at American University here that the U.S. could reduce its emissions of carbon dioxide and other greenhouse gases by 20 percent immediately at

no cost to the economy ‘‘if we just changed the way we do things.’’ This bold assertion was a shock to even his staff since it was an off-the-cuff remark. No one had

a clue, even the President, what or how he wanted us to change. Certainly, his remarks had nothing to do with studies emanating from within his own Executive

Branch that would justify such an assertion. His own 1995 Sustainable Energy

Strategy said there were no easy ways to reduce greenhouse gas emissions by 20

percent—immediately or over the next 10-15 years—unless the President had in

mind truly profound changes in the world in which we work and live, induced by

carbon taxes, rising energy prices and slower economic growth. With a realistic National Energy Strategy, the magnitude of such changes would be clear, along with

their effects on individual states and regions.

Without a well substantiated strategy, then, enforced through negotiated Congressional adjustments to some logical baseline, like the existing Energy Policy Act of

1992, we are victims of the rhetoric of whatever advocacy-only minstrels wander by.

Accountability and responsibility for our proposed actions can only be assured if we

demand responsible analytically—based, and agreed-to frameworks which can span

from one Administration to the next and against which we can monitor the reality

of any plans which claim to ‘‘save the world’’ through advocacy only. DOE should,

be held accountable to fulfill this responsibility on a continuing professional basis,

using best available and accepted models. Congress should, in turn, demand an accounting of DOE’s performance in carrying out, implementing and monitoring provisions of the Energy Policy Act and in making amendment recommendations to support an updated, well thought-out and analyzed strategy to justify change. If it cannot or will not do this, then the only function left to the DOE which has not already

been made into an independent agency will remain unattended, as it seems to be

today. If this situation is allowed to persist, then abolition of non-nuclear-related

segment of the DOE would be one justified outcome.

You asked in your letter whether or not the direction was the right one regarding

energy policy and security in general and oil and gas in specific. My answer, admittedly rendered from a distance without detailed data, is a simple no. If we had a

clue as to the direction in which we were actually headed, we could have predicted

the current oil crisis some time ago and may have made a course change in our attitude toward oil. But this crisis was in part generated by our own failure to enhance

U.S. oil production as initially recommended in the Bush Strategy ten years ago.

East and west off-shore oil and gas moratoria continue; the Arctic National Wildlife

Refuge remains closed; we are importing ten percent more oil than we were ten

years ago; and the worse is not over. We are utilizing more and more natural gas

in our utilities and this consumption will continue to grow exponentially. As a result, we are now ‘‘dusting off’’ our liquid natural gas (LNG) depots again. Ten years

from now we will be decrying the fact that we are held hostage to foreign imports

of LNG from states like Libya. Further, we have not even maximized oil recovery

from existing U.S. oil reserves to the extent possible. Yes, the potential still exists

to mitigate spikes in gasoline prices through enhanced oil production at home. However, with no sense of urgency on upgrading our energy policy; apathy for any increase in oil or gas production at home; and an unwillingness on the part of DOE

to track what we are already supposed to be doing, accompanied by recommendations as to new strategic directions, there is little hope of avoiding an accelerating

series of unannounced oil/gasoline spikes in the years ahead. We need to start the

process all over again that we put into place ten years ago. The new Administration

should be tasked by Congress to do this. If we follow this path, we might be able

to answer your question, ‘‘Are we going in the right direction?’’

Mr. BARTON. Thank you Admiral. We appreciate those remarks

and especially the intensity with which you discuss the ANWR.

That is impressive.

We now want to recognize Dr. Daniel Yergin who is Chairman

of the Cambridge Energy Research Associates. I have not had the

pleasure to meet you personally, but I have read many of your

works and books and have great respect for you. And Karen

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McCarthy did talk to me about how impressive you were not only

in the public arena but as a person. So we are delighted to have

you. We will recognize you for 7 minutes. Again, that is not a hard

7 minutes. And we will put your entire statement in the record.

STATEMENT OF DANIEL YERGIN

Mr. YERGIN. Thank you very much. Mr. Chairman, members, I

am very honored to be part of this expert panel today. I certainly

do want to thank Representative McCarthy for her gracious words.

I should say before becoming an outstanding Member of Congress,

she really was a great teacher.

This panel is drawn together today by what we are seeing happening in the world oil and gas market, and there are plenty of energy considerations that have come to the fore again. And I think

this series of hearings will be an important contribution to understanding on these matters.

In my testimony I really want to try and provide a context by

looking at three things; one, a subject that is really vexing the

American people today, which is gasoline prices, and more generally what is happening in world oil and natural gas markets.

The discussion on gasoline is drawn from a new study that we

are releasing today at Cambridge Energy called ‘‘Gasoline and the

American People.’’ I think we would all agree that gasoline is the

best known price in America. We see it dozens of times every day.

Right now it is also perhaps the most perplexing price.

There is plenty of reason for the American people to be perplexed. In 1997, the national average gasoline price which was

$1.23 in inflation-adjusted prices, fell to as low as 95 cents at the

beginning of 1999, which is actually lower than any time since recorded prices were kept; indeed, lower than the average price during the Great Depression. And now we are looking at $1.50 a gallon

on a national basis, and in some parts of the country a good deal

higher than that.

Well, to make sense of the prices, first we must think in inflation-adjusted terms. With that it becomes clear that actually the

long-term trend—and I should say the powerful long-term trend in

gasoline prices is actually down. The major exception, those times

of crisis: the oil shock years of the 1970’s and the Gulf crisis of

1990 and 1991, indeed even where prices today are lower in inflation-adjusted terms than they have been in most of the last 80

years.

As we can see, despite this trend, prices do move up and down.

This can be caused by an awful lot of different things, from political events, disruptions of refinery operations, new environmental

standards. Right now to just kind of get it into a framework, the

sharp increases in gasoline prices are the result of the higher crude

oil prices that we are seeing, the very low levels of inventories, and

new environmental regulations that are going into effect right now,

because we are at the beginning of the summer driving season and

we have a strong economy.

Let me turn then to what is the price of crude oil that is behind

gasoline prices. The main reason for the high oil prices of 2000 has

been the low oil prices of 1997, 1998 and early 1999. That is, these

low prices resulted from the Asian financial crisis and created,

19

really, a financial crisis for the oil-exporting countries, and also

really devastated the domestic U.S. oil and gas industry. And as a

result, these countries came together and we have the prices we

have now, accentuated by the fact that the U.S. economy and other

economies are so strong. South Korea was supposed to have zero

percent economic growth last year. South Korea is the sixth largest

oil market in the world. It had almost 11 percent. So we have a

strong economy driving prices, too.

What we do see is when prices reach around $30 a barrel, it

brings home the fact that oil prices are one of the few prices, along

with the price of labor and the price of money, interest rates, that

can really affect the economy and spook the stock market.

But also other factors are brought home. One is—and Admiral

Watkins addressed it—we are very highly integrated into the world

oil market and what happens there. But also things have changed

a lot from the 1970’s and it is the relative absence of confrontation

that so characterized the 1970’s that is striking today. We really

do have a dense interweaving of interests with oil-exporting nations and we have to look no farther than Mexico to see that.

But keep in mind, the current oil market supply is taut. These

prices could be subject to a great deal of volatility, which means

going up again as well as going down, and they could be driven in

that way by anything from another Iraqi showdown with the

United Nations, political or technical problems in an exporting

country, political tensions among exporters, to the pace of Eurasia’s

recovery and the strength of the U.S. economy. So there are a lot

of things out there that will affect prices in the next few months.

If prices are in the $300plus range for any period of time, we

think that the impact of slowing economies will provide an inevitable correction on those prices. But this wide band of prices that

we have seen, from 10 to $34 a barrel, in this most basic commodity over a little more than a year, underlies the inherent volatility in what is probably still the world’s most important commodity.

Let me in the last couple minutes turn to something that this

subcommittee has considered a lot—and Congressman Sharp and

I were talking about this for a very long time—which is natural gas

prices. In a sense, this subcommittee is the home of consideration

of that. So much of the energy consideration has been focused on

oil recently. But the United States natural gas supply system right

now is characterized by very tight supplies, and we are going to

hear a lot more about that in the next few months. The spring

market and the recent heat waves have shown how tight.

Natural gas prices right now are 70 percent higher than they

were at this time last year. Demand pressures are intensifying

while there are few signs of growth and supply. And recognize how

important natural gas is to our country for energy and environmental reasons. It provides 23 percent of our total energy and, increasingly, it will be the key to our future electricity supplies.

Indeed, the United States is making a very big bet on the adequacy of future gas supplies without realizing it. Fifteen percent of

our electricity today is generated with natural gas. In terms of proposed new capacity, that number goes up to 96 percent. We have

20

1Gasoline and the American People, Cambridge Energy Research Associates, May, 2000

seen a slow supply response, partly because of the oil and gas price

collapse the last couple of years.

Greater investment is needed. We do think by the end of the

year we will start to see a supply response. We do believe at Cambridge Energy that there is the gas supply potential to meet the

challenge of increased demand from power generation at a price

that would not discourage market development.

But a few thoughts. One, it is very important to avoid short-term

intervention, government intervention in the market that would

discourage investment and supply, particularly at a critical time

like this. Moreover, and it has already been suggested, we need to

consider how to facilitate natural gas development in such a way

as to support overall environmental objectives and not have the

two separated.

There are big challenges ahead. No. 1 is to reverse the decline

in supply. We estimate that in round numbers we need half a trillion dollars’ of investment in the upstream natural gas business to

get the kind of supply that we need in 10 years. We need to add

50 percent more reserves in this decade than in the last decade. We

will need to connect new frontiers of gas development, including, as

Admiral Watkins pointed out, the Arctic, and reduce the pressure

on the gas infrastructure system in our country. We need to recognize the very large reliance we are making and we are putting on

natural gas to power the growth of our new economy.

Thank you.

[The prepared statement of Daniel Yergin follows:]

PREPARED STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY

RESEARCH ASSOCIATES

This hearing is very timely, and the Subcommittee is to be congratulated for its

focus on this subject. The tightening world oil and North American natural gas markets and higher prices at the gasoline pump have pushed energy policy considerations to the fore again. Renewed consideration is at hand about the adequacy and

security of supply, and of energy and related foreign policy issues. This hearing will

be an important contribution to the national understanding on these matters.

In my testimony, I seek to help set the scene for this consideration by providing

a context both for something that is vexing the American people—gasoline prices—

and, more generally, on world oil and natural gas markets. The discussion on gasoline is drawn from the new study by Cambridge Energy Research Associates, Gasoline and the American People, which we are releasing today. This is a new version

of a study we originally did during the Gulf Crisis almost a decade ago.

Gasoline and the American People 1

The best known price in America is that of gasoline. Americans see it posted along

the road a dozen or two times a day; they pull in to fill up every week or ten days,

if not more. It’s also a price that—perhaps because of that visibility—can generate

a lot of heat, especially when it is going up, as it has in 2000.

This is, in fact, a price that tells a complex story—of global supply and demand,

of technological change and environmental consciousness, and of shifting consumer

tastes and social change. That’s the story we seek to tell in Gasoline and the American People. We hope that it provides not only the context for understanding what

makes the price what it is at any give time at the pump but a window on how life

in America is changing.

We produced the first edition of Gasoline and the American People almost a decade ago, during the Gulf Crisis, when major disruption threatened the security of

world oil supplies right down to the retail market. The timing of this new edition

is highlighted by the current volatility in gasoline prices, the need for a framework,

and the considerable changes in consumer tastes and American society over the decade since. The American people have plenty of reason to be puzzled. In 1997, the

21

national average gasoline price was $1.23 per gallon in current dollars. It fell briefly

to a low of 95 cents in early 1999. In inflation-adjusted terms, that price was lower

than at any time since recorded prices began—lower even than average prices in

the Great Depression. In not much more than a year since, however, gasoline prices

have exceeded $1.50 a gallon on a national basis and, in some areas, have been over

$2.00—the highest they had been since the Gulf Crisis of 1990-91.

Price: To make sense of price, one must think in inflation-adjusted terms. Those

with longer memories might remember 30 cent a gallon gasoline from the 1960s;

but, in today’s prices, that would be the equivalent of $1.75. More people will remember the $1.25 from 1980. But today that would equivalent to over $2.50 per gallon. For the purposes of comparison, let us put all gasoline prices into inflation-adjusted dollars. We use 1999 real or constant prices (which, owing to low inflation,

are very close to current prices). With that, it becomes clear that the long-term

trend in gasoline prices is down. The major exceptions are the periods of crisis—

the oil shock years of the 1970s and the Gulf Crisis of 1990-91. Since 1991, gasoline

prices (again inflation-adjusted) have continued to come down, and even at the high

prices of this spring are considerably lower than they were in the 1950s and 1960s

in most areas of the United States.

Why the Fluctuations? Despite the long-term trend, prices move up and down

a great deal. These can be caused, among other things, by political events, shifts

in the supply and demand of fuel, weather, the level of inventories, disruptions in

refinery operations, and the introduction of new environmental standards. The recent sharp increases in gasoline prices are the result of higher crude oil prices, very

low inventory levels of gasoline, and new environmental regulations. At the recent

level of $1.52 in late May 2000, they are about 25 to 30 cents per gallon higher than

the middle-1990s and about $1 below the peak years of 1980 and 1981.

How much in the gas tank? In 1999, the average driver used about 690 gallons and paid $780 over the course of the year. That compared—using 1999 dollars—to

$936 in 1990 and $1630 in 1980. If the price of a gallon goes up 10 cents over the

entire year, compared to the previous year that will cost a motorist an additional

$70.

Taxes: One thing has gone up, and that is taxes at the pump. The price that motorists pay for a gallon is made up of many things—the price of crude oil, transportation and refining costs, the costs to operate the filling station—and tax. In 1999,

the tax component of the price was about 40 cents per gallon or 34 percent—just

about the same percentage as the cost of the crude oil. About half that total, 18.4

cents, was Federal tax, and 20 cents was the average state tax. (The lowest state

tax is Georgia, at 7.5 cents; and the highest, Connecticut, at 32 cents.)

Compared to Other Countries: From an international perspective, however,

what is striking is how much a bargain gasoline is in America. Currently, the average price in the United States is $1.53 per gallon—compared to $4.69 in Britain and

$3.87 in France. The reason for the difference is almost entirely one thing—tax.

While the tax take by governments in America is just 34 percent of the retail price,

it is 82 percent in Britain and 80 percent in France.

Where? Motorists may still say ‘‘fill’er up,’’ but there are a lot fewer people to

respond today than 20 or 30 years ago. Americans have opted for the lower prices

of self-service over the higher prices that come with full service. Today, about 95

percent of the retail stations offer self-service. And more and more motorists (and

their families) pull in not only to fill up on gasoline but also on carbohydrates and

caffeine. For fully 45 percent of retail outlets now include convenience stores. One

of the biggest costs of operating a station is the land, and marketers have found

that they can do better by bolstering the revenue stream from gasoline with a separate revenue stream from hot dogs and Hostess Twinkies. The next stage is ‘‘cobranding,’’ in which a gasoline station shares the same real estate with one of the

familiar brands of fast food—and maybe a dry cleaning establishment too. Still unclear is whether the huge gasoline stations of the European style hypermarket

(about half of total gasoline sales, for instance, in France) are ready to emigrate to

the United States. And to what degree will gasoline, even if still pumped at the station, be sold over the Internet?

How much? Americans drive more and more. In 1980, the average licensed driver traveled 9,700 miles. In 1998, 18 years later, they were driving over 13,000—an

increase of 34 percent. The number of licensed drivers is now over 180 million. But

there are still more registered light duty vehicles—203 million—meaning that, on

average, each licensed driver has 1.1 vehicles. A big source of new drivers—and

more gasoline consumption and miles traveled commuting—has been the entry of

a significant number of women into the labor force. Now that the rate of women

entering the workforce has slowed and vehicle ownership has exceed saturation,

that suggests that the increase in the number of miles driven will flatten out. AnVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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other major new factor is the astonishing growth in the driver population over age

65, which has increased from 15.5 million in 1980 to 26.2 million in 1998. Their

numbers are increasing, but the mileage that they put on goes down, not up.

World Oil

The main reason for the high oil prices of 2000 was the low oil prices of 1997 and

1998 and early 1999. More than anything else, the low prices resulted from the

Asian financial crisis. Asia was then the region of strongest growth in oil demand.

When Asia went into sharp decline, the oil industry was perhaps the first major industry to feel the effects. Asian demand had been expected to grow by a million barrels per day in 1998; instead, it fell by 600,000 barrels per day. Worldwide production, however, remained geared to the anticipated demand levels, and the extra supply went into inventories, which were soon overflowing. Thus—the price collapse.

The domestic U.S. oil and gas industry was ravaged by the price collapse, and we

continue to see the negative consequences today. The oil exporting countries were

driven to act by the dire reality. Their own national budgets were being devastated.

Mexico has done a remarkable job since the early 1980s in reorienting its exports

away from dependence upon oil. But petroleum still provides up to 40 percent of the

national budget. The collapse in prices meant cuts in spending on education, health,

and social needs. For most of the major exporting countries, $10 a barrel oil portended social and economic instability.

All this was enough to get the exporters together. OPEC countries not only agreed

to new production restraint but also demonstrated a much higher degree of adherence than some anticipated. And non-OPEC countries, led by Mexico, collaborated.

What the calculations did not do was foresee the rebound in oil demand, driven

by economic growth. Few saw how buoyant the US economy would be in 1999 and

into 2000. A year ago, the consensus view on economic growth in South Korea (the

world’s sixth largest oil market) was for zero economic growth in 1999. At it turned

out, economic growth was almost 11 percent.

The attention on oil when prices reached $30-plus underlines the fact that oil

prices are one of the few prices—along with the price of labor and the price of

money (interest rates)—that can move the economy and spook the stock market.

One of the major changes from the oil turmoil years of the 1970s is the relative

absence of confrontation that characterized that earlier period. Nor longer is there

a North-South struggle. Instead, we are in an era of ‘‘emerging markets.’’ Countries

like Mexico and Saudi Arabia—recognize how integrated their economies have become with the United States. Mexico worries about oil prices. But, especially postNAFTA it also worries a great deal about the health of the United States economy.

Exporters also have assimilated the great lesson of the 1980s—that customers count

and you do not want to risk losing market share. They could see that prices at recent levels could well damage their interests in two ways. First, they could lead to

a slowing of economies, reducing demand and thus creating new problems for the

exporters. Secondly, although the oil industry has been cautious in its spending,

persisting high prices could end up stimulating the development of a lot of new supply. And the exporters have no interest in seeing oil prices turn into a big campaign

issue in the United States.

The message is similar for the United States. We import about half of our total

oil supplies, and our dependence will grow. We have a dense web of interdependence

with many of the oil-exporting countries, of which oil is but one, though a most important element.

The current supply picture is taut, which means that the market could be subject

to a great deal of volatility. With low inventories, prices could be driven up again

by everything from another Iraqi showdown with the United Nations, political or

technical problems in a major exporting country, or political tensions among exporters, to the pace of Asia’s recovery and the strength of the U.S. and European economies.

Continuing demand recovery in Asia and Latin America combined with further

gains in North America are expected to propel world demand growth through 2002.

We are looking at a 2.2 percent worldwide annual average increase in demand between 2000 and 2002c long as economies remain on the track on which they are.

If prices are in the $30 or higher range for any period of time, we think that the

impact of slowing economies will provide the inevitable if unfortunate corrective.

Many of the exporting countries suggest that an ‘‘appropriate’’ range for oil prices

is $20-25 a barrel—a price that is often said to be good for consumers and good for

producers. But the much wider band of $10 to $34 a barrel within one year underlines the inherent volatility in the world’s most important commodity market and

the difficulty in getting the price ‘‘right.’’

23

U.S. Natural Gas

Much of the energy attention in recent months has been focused on oil. But the

U.S. natural gas system is also characterized by very tight supply. The spring market and recent heat wave have shown how tight: Prices today are 70 percent higher

than they were this time last year. In CERA’s view, for the first time in many years,

there is real uncertainty about the ability of North American supply to meet demand without sharp price rises. Demand pressures are intensifying, while there are

few signs yet of growth in supply. The differences are being made up by withdrawing supplies from storage, where the levels are very low. There is a similarity

here to the oil market. Pressures on inventories are driving the market. But there

are major differences, too. In contrast to the oil-exporting nations, there are no suppliers withholding supplies from the market. And there is no capability to ramp up

production quickly to reduce the pressure in the market. In the months ahead, we

may see prices at new, higher levels that have not been seen since the emergence

of natural gas spot markets in the mid-1980s. How high will prices go this summer?

That depends on how hot the summer. We could well expect $3.50 to $4.00 levels.

With a hot summer, prices could spike to $5.

In examining the outlook for the industry in our new study, ‘‘The Future of North

American Natural Gas,’’ we see major challenges. Natural gas is a critical fuel for

the United States both for energy and environmental reasons. It currently provides

23 percent of our total energy. It heats 53 million homes; it is a major feedstock

for industry; and, increasingly, it will be the key to our future electricity supplies.

Electricity will continue to become ever more central to our economy; the digital

economy depends upon a very high quality electricity supply system. But that system, in turn, will more and more depend upon natural gas. Indeed, the United

States is making a major bet on future gas supplies—without realizing it. Currently,

just 15 percent of our current electric generating capacity is fired by natural gas.

However, 96 percent of proposed new generating capacity is gas-fired. The reasons

are cost, flexibility, technology, and environmental attractiveness.

Demand for natural gas is currently very strong, owing to the completion of new

gas-fired power generation plants, and as economic growth stimulates the demand

for the power that both new and existing gas-fired generation units an produce. At

the same time, high decline rates in existing natural gas production require higher

levels of drilling to maintain supply—let alone keep pace with demand.

The supply response—new exploration and development—has been slow in coming. The reasons are many and varied. One is the continuing impact of the 1998-

99 price collapse, which devastated the cash flows of the upstream oil and gas industry and continues to leave many companies cautious and capital-constrained. An

industry that has been hurt by boom-and-bust cycles is leery of setting off another

one. The industry has downsized so much in response to lean times that it faces

a shortage of labor. At least until recently, capital that might otherwise have flowed

into the industry instead went into the technology sector of the stock market—although that may well be ending.

The result is that US supply is likely to be down this year, while western Canadian supplies are only now beginning to grow, and then only modestly. Reversing

the recent declines in US wellhead supply requires offsetting higher decline rates

in existing production and moving beyond the current plateau of drilling. Greater

investment is needed in exploration as well as in development areas. Nevertheless,

CERA expects supply to begin to show year-over-year increases in the United States

toward the end of 2000, and in Canada supply growth is at last expected to be evident this spring.

CERA does believe that there is the gas supply potential to meet the challenges

of increased demand from power generation at a price that would not discourage

that market development. It is very important to avoid short-term government

intervention in the market that would discourage investment in supply. Moreover,

we need to consider how to facilitate natural gas development in such a way as to

support overall environmental objectives. There are big challenges ahead. The number one is to reverse the decline in supply. To meet the target of 30 TCF in ten

years, compared to the 22 TCF today, will require something on the order of half

a trillion dollars in U.S. upstream development. We will need to add 300 to 350 TCF

of new reserves in this decade, which is 50 percent more than we added in the

1990s. We will need to connect to new frontiers of gas development, including the

Arctic, and reduce the pressure on the gas infrastructure system in this country.

And we need to recognize the very large bet that we are making on natural gas to

power the growth of our new economy.

24

Mr. BARTON. Thank you, Doctor. I am a little disappointed; in

the Harvard Man, you have got this new study out, and you didn’t

have a copy out to hold up for the cameras.

Mr. YERGIN. Thank you. I will learn from my mistakes.

Mr. BARTON. We are now going to hear from another Harvard

man, the Honorable Phil Sharp, who is the past chairman of the

subcommittee and is the person that I try to model myself after as

we hold these hearings. Congressman Sharp, when he was the subcommittee chairman, was always courteous and fair and thoughtful

and comprehensive. And that is a tough act to follow. But I enjoyed

serving with you when you were the chairman of this subcommittee

and I enjoy having you on the panel today to give us your thoughtful comments on what our energy policy should be.

STATEMENT OF PHIL SHARP

Mr. SHARP. Thank you, Mr. Chairman, especially for those flattering remarks. And I am delighted to be back here with the committee and the members, some of whom know how wrong I have

been on some of these issues over the years and I trust will not

hold me to account at this point. And because of that battered experience from 1975 until 1995 on this committee, I do have a few

general remarks to make which I hope have some relevance today,

because I hopefully learned some things from all of us in this country from some of the mistakes that we made in the 1970’s.

Mr. BARTON. We are not going to talk a lot about NGPA.

Mr. SHARP. I would have to argue that ultimately that proved to

be successful. It was a very difficult route to a good end, which I

would admit readily to. But, Mr. Chairman, what I would like to

do is just mention a few general principles, because already I hear

the voices in the political system on both sides of the aisle that

might deflect us from some things that may not be wise for the

country, in my view and many others’, because I had to learn an

awful lot from everybody else.

First, our basic energy policy on additives and natural gas and

oil is to rely on the competitive marketplace. And we must stick

with this policy. We had an intense ideological and political battle

in this country for many years. It was very difficult to resolve and

very difficult to finally get a bipartisan agreement which is effective in this country and which perennially we are being drawn to

undermine in various ways.

And so I would strongly urge that we keep in mind no price controls, no efforts to temporarily try to dictate the price and allocation of energy supplies on this front. Every time we have turned

to that, we have made major mistakes. Now our policy, as everyone

here has been articulating, is certainly not one just of laissez-faire.

There are many supplementary policies in which we tried by various techniques, from research and development to tax incentives

to regulations, to alter the forces of the marketplace on both the

production and the consumption size. Many of those are wise and

some of them we find great difficulty making work in any consistent manner. But the unsettling price swings of this last year

have again raised doubts of this basic policy of sticking with the

marketplace.

25

And my overwhelming advice, I think, from all of us on the

panel, would be just say no to any proposals for controlling price.

Now, nobody is talking about direct price controls, but there are in

fact a number of proposals to indirectly try to control the price.

These are not nearly as Draconian as direct price controls, but

nonetheless they suffer the same disability because they seek to

outguess a very complex and rapidly changing marketplace: proposals like drawing down the Strategic Petroleum Reserve, proposals like having a reserve in New England for fuel oil, proposals

like requiring the private marketplace to maintain a certain level

of stocks. And I would applaud the President and this Congress for

not drawing down the Strategic Petroleum Reserve and not deciding to do that during this price increase.

Now we all know that the prices in the marketplace are not fair

to everybody equally. So we do need and we do have and we should

aggressively have policies that try to help those people most severely damaged and least able to cope with price swings, such as

the low income energy assistance program.

Mr. Chairman, let me suggest as a second proposition that we

are interdependent on the world energy markets. We struggled

mightily with the rhetoric in the 1970’s of being independent, and

of course it was what most Americans desired and it was a shock

to us in the seventies that we were so involved and so dependent

on the world oil market. But the hard fact and the reality is we

are very much a part of that marketplace and we make a big mistake when we try to pretend anything otherwise. There were no

sets of policies anybody has ever recommended that are acceptable

economically, particularly in this country, to guarantee us independence. It is wise, as you and others have been pointing out, for

us to try to reduce our reliance on oil in this marketplace for a variety of benefits. But we want to make sure that what choices we

make actually make sense economically and from an environmental

point of view.

It also behooves us, obviously, in our international policy to recognize that we have a major economic and strategic stake in open

markets. That means we don’t restrict our imports, we don’t restrict our exports. We have a major, major interest in the development of alternative other sources of oil outside of the Middle East,

such as in the Caspian Basin. We have a major interest in the

long-term development of cleaner fuels, renewable fuels here and

abroad. We obviously have diplomatic interest in keeping the peace

abroad.

The third big point, which is no surprise to anybody here, is that

if we are going to ensure adequate supplies that means we need

both supply and we need to work on the consumption side as well.

You have heard a number of proposals, and some of them are very

serious and well founded, of ways that we have got to try to enhance our oil and gas exploration and development in this country.

But at the same time, I would strongly urge you to take seriously

those practical and reasonable proposals to try to make us more efficient in the ways in which we use energy in this country. And we

have done a great job since the 1970’s, partly by government policy,

largely by the price in the marketplace, of improving energy and

oil sectors.

26

The fourth major point is that oil and gas markets and our energy markets are dramatically shaped by our environmental policy.

Indeed, the reality is that much of our energy policy is really environmental policy. It has to be. In fact, oil production and distribution and use have the greatest impact on our environment—land,

air, and water quality—and it is inevitably tied up together. Therefore, it behooves us to be as rational and sensible and scientifically

driven as we possibly can.

And there is a great need for Congress and the administration

in the years ahead to see if they can rationalize the Clean Air Act

and the energy environmental laws in general. This is a Herculean

task. It should not mean backsliding on our environmental commitment, but we do need to, where we can rely on market mechanisms

like in the NOX market, as we did in SOX, SO2, under the Clear

Air Act of 1990.

The second part of that is more difficult to politically swallow

perhaps today, but that is, we have got to address a prudent path

on carbon dioxide and other greenhouse gases. The reality is people

are pressing scientifically, politically, all the around the world to

do this. Our energy markets must respond to that. They are indirectly already taken into account, and we need to get some greater

assurance as to what that path is going to be so the long-term investments that have to be made on production and consumption

will know what the rules are.

Finally, on the environmental front, it is critical that we continue, as several members of the committee and both parties already indicated, support for renewable fuels. But we mustn’t kid

ourselves. They are not suddenly going to replace our fossil fuels

and our nuclear fuels, and we have got to consider ways in which

we enhance the clean and efficient use of those traditional resources. Much of that is a matter of research and development.

Finally, and I am sorry to run over, Mr. Chairman, but one of

our major priorities here, as you and others have articulated, is

that electricity and the electricity markets, which, by the way, increase the demand for gas, must be addressed at the Federal and

State levels, because the greatest potential, in my judgment, of

interruption of supply of energy may be in the electricity markets

rather than oil and gas markets, although I don’t mean to diminish

at all the intensity of your interest in oil and gas issues here. The

fact is, we are finding it is more difficult to create competitive markets with this enormous transformation undertaking.

It is much more difficult than it was in gas or oil for a variety

of important reasons. Part of it relates to the nature of electricity,

part it relates to the fact that the public policy issues that have to

be resolved are bound up in a hodgepodge of governmental jurisdictions at the Federal and State level. Our political system is not designed to try to create a nice smooth interstate market, and it

takes a lot of effort and a lot of cooperation to do that.

As you know, Mr. Chairman, although the task force I chaired

for the Secretary on this recommended, as one of its many points,

the reliability legislation that you have incorporated in your bill,

neither I nor anybody on that task force believe that alone is

enough. In fact, it is one of the most minor parts of having reliability in the electric utility industry, because the rules have to be

27

sufficiently in place, and investment will be attracted into generation, into distribution, and into the changes in consumption patterns. But the electricity system itself as we transform it, will become incredibly, in my view and many others’, more efficient at all

levels and that will help us on the environmental front and it will

help us on meeting our energy needs.

I applaud the effort of this subcommittee last fall to pass an electricity bill. I would personally strongly disagree with a couple of

provisions that I suspect the Chairman would.

Mr. BARTON. Did vote for it, though.

Mr. SHARP. I know you did, sir. I probably would have if I had

been in your shoes as well. I think it is critically important that

progress be made forward, and I know one of the values some

Americans forget about the Congress, is that the multiple steps

give it a chance to change and alter and adjust to what it learns.

And the reality is the political system will never focus on these

issues intensely until they start to move. Once they start to move,

boy, you heard from everybody. I am sure you plainly know that;

I don’t need to tell you.

But, Mr. Chairman, I appreciate very much your having me

back. I hope that we can move forward. I will answer any specific

questions that you have.

[The prepared statement of Phil Sharp follows:]

PREPARED STATEMENT OF PHIL SHARP, HARVARD ELECTRICITY POLICY GROUP, JOHN

F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY

Mr. Chairman, thank you for inviting me to testify. For the record, my name is

Philip R. Sharp. Currently, I am a Lecturer in Public Policy at the John F. Kennedy

School of Government, Harvard University. Recently, I chaired the Secretary of Energy’s Electric System Reliability Task Force which issued its final report, Maintaining Reliability in a Competitive Electric Industry, in September, 1998.

From 1975 to 1995, I was a Member of Congress from Indiana and for eight years

had the honor of serving as Chairman of the Energy and Power Subcommittee.

During those twenty years, I participated in nearly all major legislative efforts regarding energy policy and clean air policy as well. During that time I supported

policies which proved effective and others which did not. Fortunately, for me, no one

is keeping score.

Chairman Barton, I applaud your efforts in taking on the challenge of these complex issues. Undoubtedly you and the committee are being pressed with a plethora

of recommendations. You certainly have my sympathy.

Drawing from my battered experience on this committee, I would like to make a

few general observations and will be happy to respond to specific questions, if I can.

Our basic energy policy for assuring adequate supplies of oil and natural gas is reliance on the competitive market. Stick with it.

That has been the policy for two decades. After years of intense political and ideological dispute, after several ‘‘energy crises,’’ after experimenting with extensive economic regulation, a broad consensus emerged toward the end of the 1970’s that market forces, not the government, should determine the price and allocation of oil and

gas supplies—that market forces would be the main determinant of how we produce,

distribute, and use oil and gas. It is a bi-partisan policy. It is an effective policy.

It is not well understood.

Our policy has never been, however, simply one of laissez-faire. For reasons of equity, security, and environmental protection, we have a host of supplementary policies that seek to shape those market forces. Some of these supplementary policies

have big impacts on the oil and gas markets and should be periodically re-examined.

The unsettling price swings of this past year naturally raise doubts about

our market policy; and they inevitably give rise to political calls for short term-policies that will stabilize prices to avoid short term pain—either for producers or for

consumers.

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The overriding lesson from the past: ‘‘just say no’’ to proposals for controlling

prices—directly or indirectly. Be wary of the siren song that lures the government

to try to smooth the price path in a turbulent market.

No one yet is calling for direct price controls. Perhaps, we have truly learned how

ineffective, counterproductive and costly oil and gas controls can be for consumers

and the economy. Perhaps, there is also memory of how politically difficult it was

to change or abandon them. Like many others in Congress, I underwent the metamorphosis from supporting controls to helping end them.

Today, however, we hear proposals aimed at controlling price spikes—not directly,

but indirectly: release crude oil from the nation’s strategic petroleum reserve; create

a regional product reserve in New England to quell future spikes; require private

suppliers of fuel oil to maintain stocks at levels set by the government.

While not nearly as draconian as direct price controls, these proposals suffer some

of the same disabilities. They assume the government can regularly out-guess the

complex and rapidly changing market place. They are not likely to produce the desired result. They seldom can be invoked in a timely fashion.. They often produce

unexpected and undesirable consequences.

Earlier this year, the President was wise not to draw down the Strategic Petroleum Reserve; and the Congress was wise not to collectively press for such action.

Like it or not, in our enormously complex economy, it is the change in prices

which stimulates added production, which moves products to where they are needed

(like fuel oil to New England), and which encourages consumers to take seriously

energy efficiency.

Quite naturally it is harder to focus on the positive benefits of the market when

the imperfections are apparent and the pain is real. But our market policy should

not be casually dismissed or changed. Only if the economy is seriously threatened

should the government utilize the Strategic Petroleum Reserve or adopt other shortterm policies designed to control the price and allocation of supplies.

The pain of price swings and the benefits of the market, of course, are not evenly

distributed. That is why supplementary policies such as low-income energy assistance and weatherization are the compassionate courses to pursue, rather than efforts to control the price level.

We are energy ‘‘interdependent’’—integrally connected to world oil and gas markets.

While we Americans today are far more cognizant of ‘‘globalization’’ than we were

in the 1970’s, it is important to remind ourselves that we live in an energy interdependent world which is very difficult for most of us to understand. This may explain why some of our rhetoric about energy policy is so at odds with reality and

why so many policy proposals miss their mark.

One of the major lessons from the 1970’s: there is no set of acceptable importreduction policies which can achieve anything close to oil ‘‘independence.’’

In nearly every conceivable way, we are a part of the international market—in

terms of products, prices, capital investment, environmental impact, etc.

There certainly are benefits to us and to the world market if we can lessen our

reliance on oil. But when judging proposals that purport to cut our imports, it is

important to carefully ascertain the real benefits and carefully weigh them against

the real costs—economic and environmental.

Cutting US imports, for example, by several million barrels—would diminish our

drain on the world export market and diminish the potential impact on parts of our

economy if there were a disruption in Persian Gulf production. But such a reduction

in imports would in no way end our strategic concern with world oil markets in general and Persian Gulf supplies in particular. US crude oil prices are largely set by

the world market; the economies of our major trading partners rely heavily on oil;

and nearly 2/3 of the world’s proven oil reserves are located in the volatile Persian

Gulf region.

We have major stakes in the promotion of open energy markets, the diversification of sources of oil (as in the Caspian basin), the long-term development of cleaner

fuels, coordinated diplomatic efforts to advance peace in the Middle East., etc. etc.

The range of international policy concerns is broad.

‘‘Ensuring adequate supplies of oil and gas’’ is a question of demand—as well as supply.

As the Congress considers proposals to facilitate production and distribution, it

should also consider proposals that advance efficiency in the use of energy.

In the 1970’s, there was much rhetorical fighting over whether we could ‘‘produce’’

our way out of the crisis or ‘‘conserve’’ our way out—as if we had an ‘‘either-or’’

choice. In the end, of course, the market dictated both; and policies were adopted

in the name of doing both.

29

Efficiency improvements have played and will play a major role in helping us economically fuel the economy in environmentally acceptable ways.

Since the 1970’s, significant efficiency gains have been made in nearly every sector of consumption. While market prices and market forces have been, and should

be, the central driver of efficiency, government policies undoubtedly contributed to

those gains—through R & D, tax incentives, jawboning, and, in a few instances,

minimum efficiency standards.

In the United States, if we are talking oil, we are talking automobiles—that is,

passenger vehicles. It is disturbing that the projections for fleet fuel economy improvements are so dismal. This must be a matter of public concern.

One of the chief reasons for moving to competition in the electric utility industry

is to accelerate adoption of efficiency innovations throughout the system—from the

generator to the customer.

Oil and Gas markets—all energy markets—are dramatically shaped by environmental policies.

This is necessarily so, because energy production, distribution and use have such

significant impacts on the quality of our air, land, and water.

In the next few years, the Congress would perform a valuable service if it could

rationalize and modernize our environmental laws, especially the Clean Air Act, so

that we can more effectively protect the environment as economically as possible.

This may be a Herculean task. Where possible, for example, the law needs to

allow more opportunities for market implementation of federally set requirements,

as we did for SO2 in the 1990 Amendments. Such legislating, however, should not

mean backsliding on scientifically-identified environmental threats

In the next few years, the United States in conjunction with other nations must

come to grips with CO2 and other green house emissions and chart a prudent

course—the least costly course—for reducing the potential impact more and more

scientists claim these emissions will have on the global climate. It is increasingly

untenable to engage in political denial on this issue. There will be no quick and easy

policies.

Participants in energy markets regularly make decisions which have long-term

impacts on the way we produce and use energy—decisions which therefore have environmental consequences for years to come. The Congress must do the best job it

can in shaping the authority of EPA in order to provide clarity and consistency in

the rules that will govern those market decisions.

It is very important for the government to support the development of renewable

fuels in order to meet our long-term energy and environmental needs. There is no

realistic scenario, however, in which the United States and much of the world will

not be heavily dependent on fossil and nuclear fuels for the foreseeable future.

Therefore, we must continue efforts to find cleaner, safer, and more efficient ways

to use our main energysupplies.

Electric issues must receive priority attention.

Our electric markets are undergoing a radical transformation. During this difficult transition to competition, we face increased risks of supply disruption. That

was a major conclusion of the Secretary of Energy’s Electric System Reliability Task

Force.

Creating competitive markets in electricity is proving more difficult than was deregulating oil and gas. The nature of electricity requires a high degree of physical

coordination to keep the system operational. The market issues are complex. Important public policy issues fall into a hodge-podge of governmental jurisdictions.

Assuring supply requires a number of public policy decisions in order to facilitate

market development and attract needed investment. This, of course, is not simply

a matter of adopting the ‘‘reliability’’ legislative proposal which deals with making

and enforcing reliability standards.

Although I disagree with a couple of the provisions in the bill passed last fall by

this Subcommittee, Mr. Chairman, I certainly believe you and the subcommittee deserve great credit for getting the legislative process moving and for trying to resolve

exceptionally thorny issues.

Mr. BARTON. Thank you former Congressman.It is amazing to

me—before I recognize Mr. Martin—we ask you all to provide written testimony; you do that. We ask you to summarize it in 5 minutes. We give you 7 minutes, and you take 10 minutes.

Let me welcome the Honorable Bill Martin. I first met him when

he was in the National Security Council under President Reagan.

30

He later became Deputy Secretary of Energy, and I worked with

him there. He is one of the truly Renaissance men that I have had

the pleasure to meet since I have been a Congressman and we are

delighted to have you here. We are going to give you 7 minutes also

and see if you can give us back a little bit of that perhaps, because

we still have two distinguished members from the Clinton Administration that we want to give a chance have something on the

record.

STATEMENT OF WILLIAM F. MARTIN

Mr. MARTIN. Thanks, Mr. Chairman. It is real tough to follow

two Harvard types and an Admiral. I was thinking what Ralph

Hall said. He has left, of course, but Steve will appreciate this. I

come from Oklahoma. My great grandfather, my grandfather, my

father, were all wildcatters and of course they went out of business.

That is why I had to go into government.

I want to give a bit of a story about natural gas today. The Admiral and my two Harvard colleagues and dear friends have told the

story about energy security. Yes, we have a problem with rising imports, absolutely. Yes, we have a problem with rising CO2. Yes, the

rest of the world is increasing their oil demand just like we are.

The concentration of Persian Gulf exports in the next 15, 20 years

is going to be unimaginable. Therefore, we need to take measures

in order to protect ourselves, our environment, and our economy.

So thank you for having these hearings.

I am going to agree with most of what Dan Yergin said about

natural gas. But we prepared a study for the Natural Gas Foundation using our model which, unfortunately, was developed at MIT,

boys. We think in terms of numbers as opposed to arguments. But

this model has been around for about 25 years and it has appeared

before this committee many times—and the Senate. We are finally

getting it right, I think. But it shows something very interesting

about natural gas.

I think we will all agree natural gas is the fuel of choice. Whether you are a Democrat or a Republican or producer or consumer,

you like natural gas. But it is interesting, we found in the model

that coal and nuclear power plants are being extended quite a bit

for economic reasons. So the role of natural gas may not be as rosy

in electrical generations. Certainly it is capacity, but what if new

capacity is not replaced as quickly? So there might be a bit of a

problem.

So one of the things we looked at was the direct use of natural

gas. Indeed this is a bit of a technology story on the demand side.

If you look at the recent increase in use of turbines and fuel cells

and the fact that any of us can someday have something the size

of this chair at our house, which will actually convert natural gas

into electricity and be economic and, by the way, be dependable, it

is quite startling. And we are seeing companies, even on the stock

market, that are investing in fuel cells going right for through the

roof. So there a huge new technological development in natural gas.

We ask ourselves, what role is this technology going to have in

spurring natural gas demand? We had a rather encouraging result.

In fact, we are even more optimistic than the EIA, we are probably

more optimistic than anybody on natural gas demand. We say that

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natural gas demand could increase by 60 percent by the year 2020,

roughly go from 22 quads to 35 quads. For my Harvard friends, a

quad, as you know, is about 10 to 15 million BTUs and a quad

fuels Cleveland for a year, roughly—just for the sake of Harvard.

Mr. BARTON. We appreciate you for educating our Harvard men

and our Congress.

Mr. MARTIN. In any event, it is a good story for gas. It is not

going to happen easily, meeting that type of natural gas demand—

I think Dan and the Admiral said it well when they talked about

access and the need for access to gas and oil and ANWR and the

other resource base to stimulate gas production in this country—

because we need to do some things on the supply side. We also

have to make the rules of the game clear on the demand side.

For example, let’s take electrical appliance standards. You know,

we all go to Sears and we see now here is an electric hot water

heater, it is 90 percent efficient or something; you think gee, I am

really doing something for the country if I buy that hot water unit.

However, we have to recognize that electricity has so many enormous processing losses along the way that the reality is it is not

90 percent efficient, it is much less if you figure we lose two-thirds

of the energy getting it to that electric hot water unit. Whereas if

it is a gas or gas cooling, unit we don’t have all those processing

losses.

So, for example, on the demand side, when the consumer goes to

the store to make a decision between electric and gas, hey, you

know, let’s make it clear to him. And if he is doing something for

the country and for the environment, let’s make sure he is aware

of that. So things like appliance labeling—and there are a host of

other things which again levelize the field for natural gas consumption and use.

Now, let me mention here Dave Parker recently had a meeting

of all the CEOs and heads of the energy associations, and they

were talking about a national energy policy. It is interesting to me

that while during the seventies when I worked with John Dingell,

and in the eighties when I worked with you, Mr. past Chairman,

they had fuel wars. But in reality our numbers suggest—and they

are on page 12 and I commend them to you if you are numerative—these numbers suggest that if you increase natural gas demand by about 60 percent, and you could do it, and if you use this

energy more directly you can provide the same amount of service

to the consumer, whether it be automobiles or households or industry, for 6 percent less primary energy, again because you don’t

have these huge processing losses for electricity.

However, this doesn’t do in the coal industry. In fact, coal use actually increases and nuclear power does quite well. By the way, I

am a firm supporter of nuclear power as well. We need nuclear

power and we need renewables and we need efficiencies as well.

But also this particular scenario which utilizes all domestic fuels

efficiently reduces our CO2 by 900 million tons. So we actually

make a bit of a commitment to climate change or acid rain or whatever the environmental problem is, and our oil imports are 2.5 million barrels less than they otherwise might be. So, in my view, it

is a rather balanced energy scenario for the future.

32

I commend the Congress as you look at your policies, look what

the impacts are of the policies and see what they have to do with

oil imports. My scenario, which started out to be a natural gas scenario, ultimately ended up as a basically balanced set of energy for

all fuels.

So in conclusion, Mr. Chairman, I would like to offer this for the

record, and we also have a longer technological report. And I also

want to again thank you for the chance to appear before the committee.

Final point: This is a bit of a bipartisan study. Jack Gibbons, a

very close friend of mine, took part in this, the President’s Science

Adviser. We had a lot of help from the DOE and also from distinguished colleagues at the World Resources Institute who are excited about natural gas not only for the national security but for

the environmental contribution. Thank you.

[The prepared statement of William F. Martin follows:]

PREPARED STATEMENT OF WILLIAM F. MARTIN, CHAIRMAN, WASHINGTON POLICY AND

ANALYSIS

Natural Gas Consumption in the US Can Increase by 60 Percent in the Next Twenty

Years

Washington Policy and Analysis (WPA) has prepared a number of energy supply

and demand scenarios, both domestically and internationally for more than a decade. The methodology WPA uses is based on a spreadsheet model developed at MIT

in the 1970s and refined over the years. WPA Global Energy is an international

model that calculates energy supply and demand projections for 16 major countries

and by regional breakdown. The model makes supply and demand projections for

all fuels (coal, oil, gas, nuclear, renewables) across all end-use sectors (residential,

commercial, industrial, transportation).

In our projections, we take a relatively conservative approach to efficiency improvements and the real annual economic growth rate, basing these numbers on historical long-term trends. For a developed country such as the US, WPA believes that

significant declines in energy intensity can be safely projected because of anticipated

structural changes and rising productivity based on advanced information system

innovations as well as economic and policy-induced urgings toward greater energy

efficiency.

Energy intensive industries tend to shift from mature economies to developing

economies. This well-established trend is all the more evident today, as we move

increasingly toward a service-based economy or perhaps more aptly, an internetbased economy. As the WPA model is global, with the US model representing just

a segment of the global energy economy, it is noteworthy that the assumptions in

our US projections are consistent with the global energy forecast. By maintaining

this internal consistency, we avoid double counting that can occur in some modeling

attempts. Overall the US economy is expected to grow at 2 percent annually in tandem with increasing energy efficiency.

Within these parameters, how will we meet our energy needs over the next 20

years? What role will natural gas play? What will happen to oil imports? What will

be the impact on our environment? How will this impact the US economy?

We have answered these questions in a number of studies for a variety of academic, professional and government institutions, including: Council on Foreign Relations, The Trilateral Commission, the Senate Energy Committee, Los Alamos National Lab.

In 1999, WPA approached the American Gas Foundation for support in our study

of the US energy future. This was, in fact, our third study of national energy markets focusing on natural gas. WPA’s first study completed in 1988, which was

viewed as wildly optimistic in projecting a 25 quad consumption level by 2010, now

seems rather conservative. Our latest study Fueling the Future: Natural Gas & New

Technologies for a Cleaner 21st Century, reveals that consumption of natural gas

could increase by almost 60 percent over current levels, from 22 quadrillion Btus

(quads) in 1998 to 35 quads by 2020.

The study was completed with the assistance of the following experts: Dr. William

Fisher, Professor of Geological Sciences, University of Texas; Dr. John H. Gibbons,

former Science Advisor to President Clinton; Dr. Nancy Kete, Director of Climate,

33

Energy & Pollution Program, World Resources Institute; and Maurice Strong, Secretary General of the 1992 UN Conference on the Environment and Development

in Rio.

A Business as Usual Scenario for the US Energy Future Emphasizes Coal, Oil and

Natural Gas

Since the first WPA study on natural gas almost twelve years ago, the prospects

for natural gas have improved, due in part to political and economic support for the

natural gas industry and energy sector deregulation. Our energy economy has improved significantly over the last twenty years in terms of efficiency and our domestic energy resources have also expanded—especially coal, nuclear energy and natural gas.

As we look to the future, we can expect that efficiencies will continue and that

the market will be the primary driver of energy supply and demand. To analyze the

further potential of natural gas two scenarios were examined by WPA. The ‘‘business as usual’’ projection, called the Current Trajectory in our study, assumes an

economic growth rate of 2 percent per year on average, coupled with a continuation

of present local and federal energy and environmental policies.

This led WPA to the conclusion that both coal and nuclear power remain important for electricity generation. In fact, we expect nuclear and coal capacity is unlikely to decline as precipitously by 2020 as many forecasts predict. Our projections

assume that approximately two-thirds of all nuclear plants scheduled for retirement

before 2020 extend their licenses and remain operational. Natural gas consumption

is also seen as growing from 22 quads in 1998 to 29.7 quads by the year 2020, primarily in the electrical sector. We also see a significant increase in oil imports due

in part to higher demand and declining domestic production.

Under these assumptions, natural gas maintains market share in the electrical

sector, but makes relatively few inroads into growing end-use demand within the

transportation, commercial, residential and industrial sectors. Foreseeable problems

related to supply and demand constrain the expansion of natural gas usage.

On the supply side, WPA assumes that much of domestic natural gas reserves,

both onshore and offshore, remain restricted or off-limits to exploration and production. Additionally, we assume that pipeline growth is constrained by factors including siting problems and inadequate capital investment based in large part on uncertainties about future demand in specific areas.

However, this scenario should not be considered a constrained ‘‘business as usual’’

case. It postulates substantial increases in efficiency—along with other advances in

technology on both the demand and the supply side. Yet, this ‘‘conventional wisdom’’

scenario presents a number of problems for our energy future. It indicates a substantial increase in CO2 levels, precipitously high oil import requirements, and an

economy operating at less than optimum energy efficiency.

Natural Gas Can Play a Larger, More Direct and Dynamic Role in Meeting Our Energy Needs

WPA looked at an alternative case for the US energy future, one that emphasizes

the developments in natural gas end-use technology and its potential impact on energy efficiency, environmental quality, and energy security.

This High Gas Use scenario reflects conditions in which consciously ‘‘pro-gas’’ policies are adopted on the supply and demand side, avoiding ‘‘command and control’’

strategies, but endeavoring to remove market barriers of various kinds. In this case

demand exceeds 35 quads by the year 2020.

We see steady penetration of gas into the electrical market, but the key to the

success of this scenario is the penetration of end-use markets, including vehicles

powered in a variety of ways by natural gas, gas-cooling and increased use by key

industrial sectors. This projection foresees greater use of gas for distributed generation to site-based power for the industrial and commercial sectors, and by 2020 even

the residential sector will see growth in this category. The increasing share of distributed generation is reflected in WPA’s projections by end-use sector. In the electricity sector, coal and oil show little or no growth in market share, but grow in absolute terms. In our Current Trajectory scenario, coal exceeds 61 percent of generation share, while in the High Gas Use scenario, it remains well below that at under

56 percent.

Under this scenario natural gas consumption in 2020 is nearly 6 quads above the

Current Trajectory. Roughly half of the increase is attributable to the residential

and commercial sectors where more new customers choose gas and more customers

convert from other fuels to gas. This scenario also exhibits continued expansion in

a number of successful new markets such as residential gas fireplaces and commercial gas cooling. Additionally, distributed generation in the form of reciprocating enVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
34

gines, microturbines and fuel cells advances, accounting for roughly 20 percent of

all new electricity generating capacity and 5 percent of total capacity by 2020.

Industrial gas demand is roughly 2.5 quads higher, continuing the robust growth

of the past 10 to 15 years. Although the cogeneration market becomes saturated,

other forms of distributed generation are expected to prosper, and highly efficient

heating, cooling and process equipment continues to evolve, enabling gas to remain

the dominant industrial energy source.

Natural gas cars, trucks and buses consume over 1 additional quad. Although

these vehicles account for less than 1 percent of the overall vehicular market in

2020, they can make significant contributions to air quality and operational economics, primarily in fleet applications in congested urban areas.

There are Adequate US Reserves of Natural Gas to Meet a 35 Quad Future at Reasonable Prices

The decade of the 1990’s has demonstrated the vast and diverse nature of the gas

resource base. Further, the resource base continues to ‘‘expand’’ as estimates today

are larger than those made in the early 1990’s by the same estimators—despite the

fact that we have produced and consumed over 150 trillion cubic feet in this period.

Some components of today’s gas supply were not even acknowledged 10 to 15 years

ago. Coalbed methane, for example, which now accounts for 6 percent of domestic

gas production, was not included in most resource base estimates prior to 1988.

There were tremendous technological advances in the past 10 years, from 3D seismology to horizontal drilling and innumerable computer-related breakthroughs.

Similar advances will be required, and should be anticipated over the next 20 years,

in order to satisfy a 35 quad demand level. Such advances will enable domestic production to increase from over 19 quads today to over 29 quads in 2020. Canada will

contribute a slightly greater share in the future, increasing their exports from 3

quads per year to roughly 5 quads. Abundant worldwide and Alaskan gas resources

offer mid-term insurance, while methane hydrates and other more exotic sources

provide longer-term potential.

The natural gas industry is capital intensive, and to meet the demand levels of

the High Gas Use Scenario will require significant expansion of the gas production,

storage, transmission and distribution systems. The number of oil and gas wells

drilled, for example, may have to double from today’s level to some 50,000 wells per

year. However, this is well below the peak levels experienced in the mid-1980’s—

70,000 to 90,000 wells per year. The ramp-up for the production segment may prove

to be more of a challenge than for the transmission and distribution segments.

Natural gas prices will remain competitive, even at higher consumption levels.

Price regulation of natural gas was eliminated roughly a decade ago and from 1987

through 1998 the price of gas delivered to consumers increased by only 3 percent

while consumer prices overall increased by 36 percent. Thus, natural gas prices

have declined significantly in real terms in this deregulated era.

Although the gas levels analyzed in this report will exert somewhat more price

pressure than conventional forecasts, we anticipate only modest gas price increases.

In real terms wellhead prices will remain in the mid-$2.00 per million Btu (MMBtu)

range and consumer prices will be relatively constant. The gas resource base expansion and technological advances of the past decade in finding, producing and delivering gas will continue. The factors that lead to declining real gas prices in the recent past will continue, creating future price stability and an increasingly competitive energy market will also ensure this stability.

A Shift to Greater and More Direct Use of Natural Gas Provides Substantial National Benefits

There are many reasons why the country should capitalize on this powerful national asset in order to clean up the environment, spur economic growth, reduce oil

imports and conserve energy. Several key advantages of the High Gas Use scenario

are shown below:

1. Natural gas is inherently cleaner-burning than coal or oil. Switching from those

fuels to gas will reduce greenhouse gas emissions, acid rain, smog, solid waste

and water pollution. When burned, natural gas emits virtually no sulfur dioxide

or particulate matter and far lower levels of nitrogen oxides, carbon monoxide,

carbon dioxide and reactive hydrocarbons than either coal or oil. Our projections

show that CO2 emissions can be reduced by 930 million tons per year by 2020.

2. The efficiency of the natural gas system helps conserve the nation’s energy resources. When the entire energy cycle of producing, processing and transporting

energy is measured, natural gas is delivered to the consumer with a total energy efficiency of about 90 percent, compared with 27 percent for electricity. By

2020 overall US energy efficiency could be boosted by 6 percent, thanks in

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large-part to a shift to direct-use gas technologies and distributed generation.

To put that in perspective, 6 percent (7.4 quads) is an amount equal to the energy needed to power Cleveland for almost a decade.

3. Natural gas is a highly reliable North American form of energy. About 85 percent

of the gas consumed each year in the United States is produced domestically.

The balance is imported from Canada. In comparison, roughly 60 percent of the

oil used in the United States is imported, primarily from the members of OPEC.

We project that oil imports could be reduced by about 2.6 million barrels a day

(equivalent to Venezuela’s current total production levels).

4. Billions of dollars could be saved over the next decades as distributed generation

accounts for approximately 20 percent of new electricity generation capacity,

thus avoiding the need to build approximately one hundred and fifty capital intensive large-scale power plants

5. GNP and trade balance improvements would occur as global gas demand spurs

US exports of gas-using technologies. The US leads the world in terms of its

natural gas infrastructure, and US companies are providing their equipment to

countries in Latin America, Europe and the Far East that are just beginning

to develop natural gas systems. As US export of gas-using technologies accelerates with the global expansion of natural gas usage, job creation and trade balance effects will have major positive GDP effects.

Key Technologies Which Will Drive Natural Gas Growth in Residential, Commercial

and Industrial Markets Include Fuel Cells, Microturbines, and Gas Cooling

Equipment

Our study analyzes evolving patterns of demand for energy in key economic sectors. The report highlights leading gas-using technologies that are instrumental in

improving the utilization of natural gas in each of these sectors. The following technologies will have major impacts on the end-use energy consumption. By using natural gas directly at the source to generate power, they offer significant efficiency

and environmental advantages. In contrast to the production and delivery of central

station electricity that is only 27 percent efficient, gas is delivered to the consumer

with an efficiency of roughly 90 percent. Gas consuming equipment is highly efficient, as evidenced by the fact that residential customers are using about 16 percent

less gas today than they were in 1980. These new technologies offer even greater

efficiency improvements.

Microturbines: Each microturbine, a small and high-speed power plant, consists

of a generator, compressor, and turbine that share a single shaft, with a small rotor.

Microturbines can be linked to the power grid or operated independently. Advantages include their small size, high reliability, low emissions, and quiet operation,

with an ability to produce 25kW to 400kW of power. Microturbines are currently

being tested and used commercially and could become cost-competitive in the residential sector by 2005.

Gas Cooling Equipment: Natural Gas-powered cooling technology has a huge role

to play in the commercial and eventually the residential sector. The three basic

types of gas cooling are engine driven chillers, absorption chillers and desiccant dehumidifiers. Gas air conditioners have been available for decades, but they have not

fully met customer needs in terms of performance, economics, and reliability. That

is now changing. Residential gas absorption units are now available that use 30 percent less energy than their predecessors, have an expected 20 year life with low

maintenance, are extremely quiet and produce no polluting CFC’s or HCFC’s. Gas

air conditioning has great potential, particularly in the West and South. The clean,

dry air produced by gas-based desiccant systems is ideal for use in hospitals, schools

as well as office and retail space.

Natural Gas Fuel Cells: A fuel cell is a self-contained unit that converts natural

gas to electricity and heat through a chemical reaction as opposed to a combustion

process. Fuel cells preclude the need to construct costly and disruptive transmission

lines, and they protect consumers from power outages. They are energy efficient (40

to 60 percent) and they can reduce a number of pollutants—including CO2 by 70

percent relative to coal-based electricity and NOX by 85 percent relative to the ultratight Los Angeles standards—with no discharge. There are a limited number of residential fuel cells in use today with installed costs currently in the $7,000 to $10,000

range, although mass production could cut the cost in half within the timeframe of

this study.

The Enhanced Natural Gas Future Described in WPA’s Study Incorporates a Variety

of Policy Assumptions

A ‘‘detached approach’’ to the role of natural gas in the US energy mix is likely

to fall short of capturing the full benefits of that fuel’s resources and substitutive

36

potential. It takes years to gain approvals for and to build pipelines, processing facilities, compressor stations, storage, and even local distribution networks. It could

take the better part of another decade to develop some of the end-use products that

can constitute a sizable part of natural gas demand in 2020. Thus, both supply infrastructure and customer-pull were factors in WPA’s conclusion that the current

trajectory is toward consumption in the range of only 29 quads or so by that time.

It is equally clear that conscious policy changes could boost that figure. An overarching one happens to be a concentration on total energy efficiency and a concomitant redirection of regulation and standards for both energy and environment. Lifecycle considerations would need to be emphasized, rather than first-costs alone. This

is similar to a policy outlook that favors renewable energy in the longer run. It calls

for thinking and planning for the mid-to long-term future, rather than a ‘‘quick fix.’’

Our study did not spell out specific policy prescriptions, but it demonstrated that

achievement of the High Gas Use scenario it describes for 2020 is feasible from the

standpoint of timing, technology and economics. Seven policy assumptions were incorporated in the development of WPA’s accelerated gas scenario. It is difficult to

isolate individual assumptions and project the specific gas demand impact of each,

but the overall collection of assumptions fosters an environment conducive to the realization of the accelerated scenario and its resulting benefits. These general assumptions are:

• Energy efficiency and environmental regulations will be comprehensive, equitable

and balanced

• The federal government, in recognition of increased potential national benefits,

will promote rather than discourage increased natural gas consumption, and it

will step up RD&D activities

• The potential of new technologies will be fully recognized in regulations that govern the natural gas industry

• Access to the natural gas resource base will not be unduly restricted

• The costs of providing gas service to new electricity generating plants will not be

borne by residential, commercial and industrial customers

• Energy markets will be free and competitive, and natural gas utilities will be allowed to compete fairly in these markets

• Natural gas industry safety and reliability will not be compromised in a deregulated environment

Our Future Energy Policy Should be Based on Total Energy Efficiency to Achieve Environmental, Economic and National Security Objectives

We have discussed a conventional view of the US energy future and contrasted

that with one based on more use of natural gas directly by consumers. After examining these alternative cases, there is an appropriate question we must ask. Does

the conventional wisdom as reflected in our Current Trajectory or the EIA Reference

Case, represent a sustainable energy outlook or, does the Higher Gas Use scenario

offer a more sound mixture of our natural resources?

If you look at the coal projection in the High Gas Use scenario, it is actually very

similar to EIA—therefore our gas scenario does not harm the coal industry, which

has long been the backbone of our electric generation. The estimate for nuclear

power in our projection reveals that we expect less plant retirements than the EIA

Reference case. An enhanced natural gas future does not preclude a strong role for

nuclear power in the coming decades.

One does distinguish that WPA’s High Gas Use scenario offers significantly less

dependence on foreign oil. Comparing the WPA High Gas Case to the EIA Reference

Case reveals the energy security advantages of relying on North American reserves

of natural gas. The differential in oil imports amounts to approximately 4.6 million

barrels/day. At a price of $25/barrel, the net difference is equal to nearly $43 billion

a year. In reality we present a much more sustainable energy future in the High

Gas Use scenario because oil imports are kept to a more prudent level.

What does make a difference in our scenario is slightly less dependence on electricity and more emphasis on direct-use of our natural gas resources—the difference

in the amount of primary energy utilized in our two scenarios is approximately 7

quads in 2020. That represents a 6 percent improvement in the nation’s overall energy efficiency. This reduced demand for primary energy supply would likely have

a positive effect on energy prices, thus efficiency gains from the fuller use of natural

gas translate into gains for consumers in terms of lower energy costs.

Therefore, we commend to the Congress a prudent overall national energy plan—

which includes all of the elements of our ‘‘so called’’ High Gas Use case. It is a prudent balance of fuels, an efficient and environmentally friendly scenario, and one

that is strongly based on domestic technology and domestic resources.

37

But this scenario will not happen by itself. It requires a concerted national effort

to foster the fuller utilization of natural gas in accord with the principles of total

energy efficiency—measuring efficiency throughout the fuel cycle—and sound economics.

Mr. BARTON. Thank you.

And you finished with 7 seconds to spare. I think you have set

the standard. A lot of numbers though, a lot of numbers. I am not

sure we can all remember the numbers.

Mr. MARTIN. I understand the numbers up here, sir.

Mr. BARTON. We want to welcome now the Administrator of the

Energy Information Administration, the Honorable Jay Hakes, who

is soon leaving to go to the Jimmy Carter Library down in Atlanta.

And since this is your kind of swan song before the subcommittee,

I want to say what a pleasure it has been to work with you in the

years that I have been in the majority and you have been appearing before our subcommittee and the full committee on some occasions. You have always been fair, your studies have been well balanced. You have been very cooperative and responsive when the

committee has asked for information.

And I think we need to put on the record that EIA did predict

the gasoline problem that we experienced last winter, about a year

ahead of time, a year to 6 months ahead of time. So the fact that

the Clinton Administration didn’t act is not because they didn’t

know it was coming.

So we wish you the very best down in Atlanta, and I am sure

in the future you will be invited back to be a distinguished member

or some panelist when you are in the private sector. So your testimony is in the record. We recognize you for 7 minutes to elaborate

on it.

STATEMENT OF JAY HAKES

Mr. HAKES. Thank you, Mr. Chairman. I am appreciative of your

comments. One of the reasons we do the kind of work we do is to

be of service to policymakers, and we have worked hard at that,

and working with this committee has been a very positive experience for us.

I would like to, just because the time is limited, go over a few

of the major graphics in my presentation which, of course, is available in more detail. And this refers to some comments that have

been made earlier, but it sort of puts it in graphic form, this gap

between the supply, which is at the red line at the bottom over

there, and consumption at the top for the United States.

Mr. BARTON. Could we turn the chart so that the TV cameras at

least have a chance to see it? I know all the members can see it.

But thank you.

Mr. HAKES. What one can notice on the supply side is that we

reached the peak of U.S. production for petroleum in 1972, and

since that time have been more or less coming down. There have

been some ups and some stable periods and we find ourselves now

about 25 percent lower in U.S. production than we were at that

peak back in 1972. So there has been a drop, although it has not

been a complete dramatic fall-off.

On the consumption side, you see it looks a little bit more like

a roller coaster, and you got a peak in 1978 of about 19 million barVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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rels a day. And actually we are at about that same level right now.

So we had this deep drop as high prices and things like CAFE

standards brought down consumption, and then as prices collapsed,

consumption started edging back up and has a lot of momentum

in that direction.

Mr. BARTON. Mr. Administrator, I don’t normally interrupt the

testimony, but that chart shows about 10 million barrels per day

of products of oil and it ends in 1998. Isn’t it true we are about

8.5 million barrels of production a day?

Mr. HAKES. One of the things that is a little confusing about the

testimony is to make this chart work, you have to use all petroleum, which includes crude oil and natural gas liquids, refinery

gains, and lease condensate. So in my later charts where I use just

crude oil, you would have the number you are talking about. But

to make the imports equal the difference between supply and demand, you have to include those other factors. So basically you

have got a gap there of about 10 million barrels a day.

Imports rose rapidly in the 1970’s, reaching a peak in 1977. Then

we had dramatic improvement as consumption dropped and U.S.

production rebounded. And we actually didn’t get back up to that

level of imports until 1997. Again, though, there does seem to be

a lot of momentum for more imports.

Now, I wanted to concentrate on history so I left the projections

off. I think, as we all realize, the projection business is a little bit

risky. There are a lot of caveats that we would certainly put to any

of our forecasts, but I think it is important to have some baselines

that we deal with. You have about 25 million barrels a day of consumption in 2020, about 9 million barrels a day of production,

which is roughly what we have been seeing recently, and then a

gap of 16 million barrels a day for imports.

Now there is another way to look at this that I think is useful,

and that is in figure 4 of my testimony where we look at who are

the world’s major oil producers. And if you go back to 1970, the

United States was clearly the world’s major oil producer. Between

now and then, the Soviet Union ramped up its production for a

while and for a while was the leading producer. But today we have

fallen to the No. 3 position. This one is just for crude oil. It doesn’t

include natural gas liquids, that I included in the earlier chart. So

we are still one of the world’s major oil producers but we are not

No. 1 anymore.

There is some encouraging news when you look at who produces

the world oil, because crude oil production has become much more

widely disbursed than it was in 1970. The production total of the

top 6 producers amounted to 68 percent of the world’s crude oil produced in 1970, but in 1999 the top 6 countries produced just 45

percent of the world total, a drop from 68 to 45. Whereas 4 members of the top 6 in 1970 were members of OPEC, just 2 of the top

6 were from OPEC in 1999.

Now, I don’t want to slight natural gas. I want to refer to two

graphics on gas that make some points that I think are also relevant to oil but I think can be seen most clearly for gas. Incidentally, we do have in our projections natural gas reaching the 30

trillion cubic feet level of consumption in 2015. We had said 2013

back a year ago because of some of the factors that were mentioned

39

about nuclear plants operating at higher levels and coal developments. We have moved that back to 2015, but that is still a very

substantial amount of gas.

There are two points I would make on gas, and they also apply

to oil. One is that technology matters. We would not be where we

are today for domestic gas production or for domestic oil production

if we had not seen rather incredible advances in exploration technologies and in drilling technologies that have enabled the domestic industry to operate with a great amount of efficiency and an

ability to get the oil, frankly, that would not have been economic

with old technology.

So as we are looking to the role that gas may play in the future,

particularly in the electric industry, it is going to make a big difference what the pace of exploration and development technology

is. And we do assume in our models that there will be continuing

advances in technology beyond what is being implemented today.

If that does not happen, gas will be in tighter supply and at much

higher prices. But technology does have the ability, in our opinion,

to make gas available at a reasonable and very competitive cost.

The final point I would make with regard to gas, and it also applies to oil, is that drilling matters. The level of drilling is not a

constant. The ability to drill in many cases involves the ability to

convince the financial community that they want to finance your

drilling, and that is more difficult when prices are low and it is

easier when prices are high, particularly if there is an expectation

that those high prices will continue. You can see in the historical

part of this, to the left of the line, how drilling can vary a lot. If

you are looking back to why we would have expected high prices

to have occurred recently, one of the reasons would be that those

low price shocks discouraged drilling. And, whereas consumers at

the time may have thought this was really great because they were

getting the low prices, if they had observed what this was doing to

the level of drilling activity, it would have become clear that they

were planting the seeds of higher prices in the future.

As you can see in our projections, in the future we predicted

there will have to be a lot of drilling. Now we assume current Federal policy with regard to Federal lands, but wherever the drilling

occurs there is going to have to be a lot of it. And that will be difficult if the price is jumping all over the place and sending confusing signals to investors.

So I think I will leave it at that point. This is a big topic, and

look forward to your questions.

[The prepared statement of Jay Hakes follows:]

PREPARED STATEMENT OF JAY HAKES, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss the views of the Energy Information Administration

(EIA) on prospects for oil and natural gas supply and demand.

EIA is an 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 use of the Energy Department, other agencies, the 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 policy makers decide energy policy.

Because we have an element of statutory independence with respect to the analyses

that we publish, our views are strictly those of EIA. We do not speak for the DepartVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
40

ment, nor for any particular point of view with respect to energy policy, and our

views should not be construed as representing those of the Department or the Administration.

Today’s analysis is based on EIA’s Annual Energy Outlook, which provides projections and analysis of domestic energy consumption, supply, prices, and carbon emissions through 2020. These projections are not meant to be exact predictions of the

future but represent a likely future, assuming known trends in demographics and

technology improvements, and also assuming no change in current law, regulation,

and policy. EIA does not propose, advocate, or speculate on changes in laws and regulations. So, one of our key assumptions is that all current laws and regulations

remain as they were on July 1, 1999. That means, for example, that the Tier 2 vehicle emission and gasoline sulfur standards are not included in the reference case

because the regulation was not finalized until December 1999.

Oil

Petroleum consumption in the United States increased sharply in the 1970’s (Figure 1). From an average of 14.7 million barrels per day in 1970, petroleum consumption rose to 18.9 million barrels per day in 1978, a level that would not be reached

again for the next 20 years. More than half (57 percent) of the increase was in the

transportation sector and nearly 40 percent of the growth was attributable to motor

gasoline. Distillate and residual fuel consumption grew by 0.9 and 0.8 million barrels per day, respectively, between 1970 and 1978.

Domestic oil supply (including crude oil, lease condensate, natural gas liquids,

other liquids and processing gains) peaked in 1972 at 11.9 million barrels per day

then declined slowly in part because of price controls and aging fields in the Lower

48 States. Completion of the Trans-Alaska Pipeline System brought about a 1.0 million barrel per day increase in domestic oil production in 1978. The rising consumption combined with relatively flat supply resulted in a dramatic increase in net petroleum imports, from 3.1 million barrels per day in 1970 to 8.5 million barrels per

day in 1977. Ninety percent of the increase in net imports from 1970 to 1977 came

from OPEC countries, as OPEC’s share of U. S. imports rose from 42 percent to 72

percent.

From 1978 to 1980, world oil prices nearly doubled (Figure 2), resulting in a sharp

decline in consumption. From the 1978 peak of 18.9 million barrels per day, consumption fell to 15.2 million barrels per day in 1983, a decline of 20 percent. Residual fuel led the decline as industrial users and electric utilities switched to alternative fuel sources. Residual fuel use fell 1.6 million barrels per day over the 5-year

period, followed by gasoline (0.8 million barrels per day) and distillate fuel (0.7 million barrels per day.) By 1983, petroleum consumption in the United States had returned to the level of 1971.

Domestic supply remained fairly stable from 1978 to 1983, with rising Alaskan

production making up for production declines in the Lower 48 States. Reduced consumption, along with steady supply levels, resulted in a decline in net imports from

the 1977 peak of 8.5 million barrels per day to 4.3 million barrels per day in 1983.

The decline in petroleum net imports from OPEC countries fell by slightly more

than the total decrease as non-OPEC net imports increased slightly during this period. OPEC’s share of U. S. petroleum net imports declined to 43 percent in 1983.

The sharp decline in U. S. and world petroleum consumption resulted in lower

demand for OPEC oil, which in turn led to reductions in the world oil prices. From

the 1980 peak of $63.30 per barrel, the average world oil price fell to $19.57 per

barrel in 1986 (measured in 1998 dollars). The lower prices and growing economy

stimulated petroleum consumption growth. With the exception of 1991, petroleum

consumption has remained the same or increased each year since 1983. In 1998, petroleum consumption reached 18.9 million barrels per day, slightly exceeding the

previous peak in 1978. In contrast to the increase in the 1970’s, the rise in consumption from 1983 to 1998 was almost exclusively among the lighter petroleum products

(gasoline, distillate, jet fuel, etc). Residual fuel consumption continued to decline

during this period.

After remaining stable from 1978 to 1985, domestic supply again started to decline in 1985 due in part to the much lower oil prices. By 1998, supply had fallen

to 9.2 million barrels per day from 11.4 million barrels per day in 1985. Increasing

petroleum consumption and declining supply led to rising net import levels that ,

in 1996, surpassed the 1977 peak. By 1998, petroleum net imports reached 9.8 million barrels per day, comprising 52 percent of domestic petroleum consumption. Net

imports from OPEC countries contributed 56 percent of the rise in total net imports

from 1983 to 1998, in contrast to the 1970’s when they contributed 90 percent of

the increase. Net imports from Canada and Mexico made up 24 percent of the inVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
41

crease from 1983 to 1998, and in 1998, these two countries provided 26 percent of

U. S. petroleum net imports compared to 50 percent from OPEC countries.

Projected Prices

Just as the historical record shows substantial variability in world oil prices, there

is considerable uncertainty about future prices. Three AEO2000 cases with different

price paths allow an assessment of alternative views on the course of future oil

prices. For the reference case, prices are projected to rise by about 2.8 percent a

year, reaching $22.04 in 2020 (all prices in 1998 dollars unless otherwise noted). In

nominal dollars, the reference case price exceeds $36 in 2020. The low price case

has prices declining, after the current price rise, to $14.90 by 2005 and remaining

at about that level out to 2020. The high price case has prices reaching $28 by 2015

before leveling off. The leveling off in the high price case is due to the market penetration of alternative energy supplies that could become economically viable at that

price, if it is sustained. The AEO2000 price paths do not attempt to predict volatility. Oil prices have been quite volatile in the past, principally as a result of unforeseen political and social circumstances. The oil market volatility over the past

2 years has been the result of oil market fundamentals that are reasonably well understood but nearly impossible to predict. OPEC and some other producers responded to the low prices of 1998 by cutting back on production in the spring of

1999. This occurred just as several countries in Asia began to recover from their financial crisis and to increase oil consumption. The combination of lower production

and higher consumption brought inventories down rapidly and, as inventories got

to very low levels, prices rose sharply.

All three price cases reflect considerable optimism about the potential for worldwide petroleum supply, even in the face of the substantial expected increase in demand. Production from countries outside OPEC is expected to show a steady increase, exceeding 45 million barrels per day by the turn of the century and increasing gradually thereafter to more than 56 million barrels per day by 2020.

Petroleum Consumption Expected to Increase Steadily

Petroleum consumption in the United States is projected to increase 6.2 million

barrels per day, from 18.9 million barrels per day in 1998 to 25.1 million barrels

per day in 2020, an annual average rate of 1.3 percent (Figure 3). This compares

to the average growth rates of 1.5 percent per year from 1983 to 1998 and 3.2 percent per year from 1970 to 1978. Most of the increase in petroleum consumption occurs in the transportation sector, which accounted for two-thirds of U.S. petroleum

use in 1998. Petroleum use for transportation is projected to increase by 5.4 million

barrels per day in the reference case between 1998 and 2020.

In the industrial sector, which accounts for more than a fifth of U.S. petroleum

use, consumption in 2020 is projected to be higher than the 1998 level by 1.2 million

barrels per day in the reference case. More than half the growth is expected in the

petrochemical, construction, and refining sectors. Petroleum use is expected to decline in the residential, commercial, and electricity generator sectors, where oil gives

ground to natural gas. For electricity generation, our projections show oil-fired

steam plants being retired in favor of natural gas combined-cycle units.

More than 90 percent of the projected growth in petroleum consumption stems

from increased consumption of ‘‘light products,’’ including gasoline, diesel, heating

oil, jet fuel, and liquefied petroleum gases, which are more difficult and costly to

produce than heavy products. Although refinery investments and enhancements are

expected to increase the ability of domestic refineries to produce light products, they

are projected to compensate for less than half the additional demand; the remainder

will be imported.

In the forecast, gasoline continues to account for about 45 percent of all the petroleum used in the United States. Between 1998 and 2020, U.S. gasoline consumption

is projected to rise from 8.3 million barrels per day to 11.4 million barrels per day.

Increased air travel results in a near doubling of projected jet fuel consumption from

1.6 million barrels per day in 1998 to 3.0 million barrels per day in 2020. Consumption of liquefied petroleum gases (LPG’s)—primarily in the industrial sector—also

increases in the projections, from 2.0 million barrels per day in 1998 to 2.5 million

barrels per day in 2020. Consumption of ‘‘other’’ petroleum products, mostly petrochemical feedstocks, still gas used to fuel refineries, and asphalt and road oil used

in road construction, grows from 2.8 million to a projected 3.3 million barrels per

day by 2020. Distillate fuel consumption is projected to grow more slowly than other

fuels, because of increasing fuel efficiency. Residual fuel use, mainly for electricity

generation, is projected to decline by 250,000 barrels per day in the high oil price

case but projected to increase by 530,000 barrels per day in the low oil price case.

42

Crude Oil Production Declines then Stabilizes, Total Supplies Remain Flat

In the reference case, domestic petroleum supply is projected to decline slightly

from its 1998 level of 9.2 million barrels per day to 9.1 million barrels per day in

2020. This is the result of two offsetting factors. As U.S. crude oil production falls

off, refinery gain and production of natural gas plant liquids increase. In the low

oil price case, domestic supply is projected to drop to 8.3 million barrels per day in

2020. In the high oil price case, domestic supply is projected to increase to 9.9 million barrels per day in 2020.

Projected domestic crude oil production continues its historic decline through

2005. After 2005, technological improvements and rising prices are projected to arrest the decline, leading to relatively stable lower 48 production in the remainder

of the forecast. In 2020, the projected domestic production level of 5.3 million barrels

per day is 1 million barrels per day less than the 1998 level. Conventional onshore

production in the lower 48 States, which accounted for 46 percent of total U.S crude

oil production in 1998, is projected to increase to a 49-percent share in 2020 because

of declining Alaskan production.

Crude oil production from Alaska is expected to decline at an average annual rate

of 3.7 percent between 1998 and 2020. The overall decrease in Alaska’s oil production results from a continuing decline in production from most of its oil fields and,

in particular, from Prudhoe Bay, the largest producing field, which historically has

accounted for more than 60 percent of total Alaskan production. Offshore production

ranges from 1.4 to 1.6 million barrels per day throughout the forecast. Technological

advances and lower costs for deep exploration and production in the Gulf of Mexico

help to offset a decline in production from shallow waters. Production from enhanced oil recovery (EOR), which becomes less profitable as oil prices fall, slows

through 2006 and then increases along with projected world oil prices through the

remainder of the forecast. The projected EOR production in 2020 is close to the 1998

level.

Although the number of available drilling rigs has been declining since 1982, price

increases are a powerful incentive for increased drilling and the purchase of new

drilling equipment. The number of available drilling rigs increased by almost 16

percent annually between 1974 and 1982—from 1,767 to 5,644—as natural gas

prices more than quadrupled in real terms and oil prices more than doubled. This

number dropped off as prices generally declined, and about 1,700 drilling rigs were

available in the United States in 1998. Given the historical response to rising prices,

even a modest increase in prices is likely to make additional drilling rigs available,

and the forecast shows the number of rigs increasing to 1994 by 2020.

Both exploratory drilling and developmental drilling increase in the forecast. With

rising prices and declining drilling costs, successful crude oil well completions increase on average by 0.1 and 3.3 percent per year in the low and high oil price

cases, respectively, compared with a 1.7 percent projected increase in annual well

completions in the reference case. For most of the past two decades lower 48 production of crude oil has exceeded reserve additions and production is expected to exceed

reserve additions over the forecast period in all cases, meaning that projected U.S.

oil reserves in 2020 will be below 1998 levels.

Petroleum Imports Projected to Increase

With consumption rising and production nearly flat, net imports are expected to

continue to rise throughout the forecast period. Petroleum net imports are projected

to increase to 16.0 million barrels per day in 2020 in the reference case from 9.8

million barrels per day in 1998. In 1998, net imports of petroleum climbed to 52

percent of domestic petroleum consumption and are projected to reach 64 percent

in 2020 in the reference case. OPEC’s share of the U. S. import market is expected

to increase to 52 percent in 2020 while the North America and Caribbean share of

imports is projected to reach 33 percent. Total annual U.S. expenditures for petroleum imports, which reached a historical peak of $133.7 billion (in 1998 dollars) in

1980, were $46.6 billion in 1998.

Although crude oil is expected to continue as the major component of petroleum

imports, refined products represent a growing share. More imports of refined products will be needed as growth in demand for refined products exceeds the expansion

of domestic refining capacity. Net refined products make up 28 percent of net imports in 2020 in the reference case, compared with 12 percent in 1998.

The United States Remains One of the Top Producing Countries

The United States was by far the largest crude oil producing country in the world

in 1970, at 9.6 million barrels per day (Figure 4). The Soviet Union followed with

7.0 million barrels per day followed by four members of OPEC. By 1999, Saudi Arabia’s oil production had increased to 7.8 million barrels per day, the only one of the

43

top six producers in 1970 that had a higher production level in 1999. The Soviet

Union had broken apart but Russia remained in second place in global oil production in 1999. The United States had fallen to third and Iran fourth. China and Norway replaced Venezuela and Libya as the fifth and sixth largest oil producers.

The top six countries produced 29.6 million barrels per day of crude oil in 1999,

down 1.7 million barrels per day from the 1970 combined production level. However,

crude oil production has become much more widely dispersed than in 1970. The production total of the top six producers amounted to 68 percent of the world’s crude

oil produced in 1970, but in 1999, the top six countries produced just 45 percent

of the world total. Whereas four members of the top six in 1970 were members of

OPEC, just two of the top six were from OPEC in 1999.

U.S. production has fallen, because production elsewhere has been less costly. The

United States has remained a major producer, however, because of a relatively low

tax regime and innovative use of advanced technology.

Strategic Petroleum Reserve

The United States began putting crude oil into the Strategic Petroleum Reserve

(SPR) in 1977 (Figure 5). The SPR is considered the first line of defense against

an interruption in oil supplies and, therefore, is also considered a deterrent to possible oil import cutoffs. Between 1980 and 1985, inputs into the SPR averaged more

than 200,000 barrels per day. By 1990, the inventory level had reached 586 million

barrels. Since then, sales and additions have resulted in relatively small fluctuations in the total stockpile. The 1999 end-of-year inventory amounted to 567 million

barrels.

Natural Gas

Demand for natural gas, with increases principally from the electric generation

sector, is expected to rise to more than 30 trillion cubic feet (tcf) in 2020. As demand

increases, pressure on natural gas supply will grow. These demand-side pressures

will begin to raise questions like: Is there enough gas to meet demand at affordable

prices? and Can we produce the gas fast enough to keep up with demand?

Last year U.S. natural gas consumption was just over 21tcf and accounted for 24

percent of domestic energy consumption. Gas consumption is expected to grow 1.8

percent annually from 1998 to 2020—faster than any other major fuel source, mainly because of the growth in gas-fired electricity generation. Domestic gas production

is expected to increase a bit more slowly than consumption over the forecast, rising

from 19 Tcf in 1998 to 26 Tcf in 2020. Growing production reflects rising wellhead

prices, relatively abundant natural gas resources, and improvements in technologies, particularly for producing offshore and unconventional gas.

Net imports are expected to rise to make up the difference between domestic production and consumption, because they are generally expected to be lower priced

than competing domestic sources (Figure 6). Net imports are expected to climb from

3.0 Tcf in 1998 to 5.0 Tcf in 2020—somewhat faster than the growth in overall consumption. Projected imports continue to be dominated by pipeline imports from Canada over the forecast period.

Rising Natural Gas Demand

The industrial sector is the largest gas-consuming sector, with significant

amounts of gas used in the bulk chemical, refining, and metal durables sectors. Industrial gas consumption is expected to increase by 1.8 Tcf over the forecast—less

than 1 percent per year—particularly in the refining and metal durables sectors, because of relatively low and stable gas prices. Combined, the residential and commercial sectors add 1.8 trillion cubic feet from 1998 to 2020. Gas demand in the residential and commercial sectors is driven by increasing population and declining consumer prices for delivered gas. The declines in prices paid by the consumer reflect

expected gas distribution efficiencies in an increasingly competitive market.

Projected gas consumption by electric generators, not including industrial cogenerators, increases more than two and one half times during the forecast, from

3.7 trillion cubic feet in 1998 to 9.3 trillion cubic feet in 2020. The significant growth

in gas-fired generation is partly driven by electric industry restructuring, but is

mainly spurred by the addition of new gas turbines and combined-cycle facilities

and increased utilization of existing gas-fired power plants. Lower capital costs,

short lead times, and projected improvements in gas turbine heat rates give gas an

advantage over coal for new generation in most regions of the United States. In

1998 electricity generators were the third-largest natural gas consuming sector. By

2020, however, the projected enormous growth in gas-fired generation makes electricity generators the second largest gas-consuming sector—rising to within 1 tcf of

the industrial sector. Over the entire forecast, natural gas consumption is projected

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to grow by more than 10 tcf, and more than half of the increase comes from the

electric generation sector.

Through 2020, the share of electricity produced with natural gas rises from 14

percent to 31 percent of the total, while the coal share declines from 52 percent to

49 percent. Nuclear power declines as a source of electric power—from 19 percent

to 9 percent of electricity generation as no new nuclear power plants are expected

to be brought on line between 1998 and 2020 and 40 percent of the current stock

retires.

Before the advent of natural gas combined-cycle plants, fossil-fired baseload capacity additions were limited primarily to pulverized-coal steam units; today, however, combined-cycle plants cost about half as much and are about 40 percent more

efficient than new coal plants. The lower capital costs and higher efficiencies of combined-cycle plants offset their higher fuel costs (Figure 7).

To meet the new demand growth, utilities can be expected to use existing plants

more intensively, import power from Canada and Mexico, and purchase power from

cogenerators and wholesale generators. Even so, 300 gigawatts of new capacity will

be needed from 1998 to 2020 to meet projected demand. Of that new capacity, 90

percent is projected to be combined-cycle or combustion turbine technology fueled

primarily by natural gas. In other words, more than 900 of the 1,000 new power

plants—assuming an average plant capacity of 300 megawatts—that are expected

to be built between now and 2020 are projected to be gas-fired. New coal plants are

not projected to be cost-competitive until 2010, when rising natural gas prices exceed the price of coal by $2 per million BTU, leading to the projected construction

of new coal-steam power plants in some regions.

Many of the new gas-fired plants built over the next 20 years will replace nuclear

power plants. In AEO2000 about 40 percent of the existing nuclear capacity is expected to be taken out of service by 2020. No new nuclear units are expected to become operable by 2020, because natural gas and coal-fired plants are projected to

be more economical.

Growing Natural Gas Supply

Over the forecast period, increased U.S. natural gas production comes primarily

from lower 48 onshore conventional nonassociated sources. Conventional onshore

production accounted for 35 percent of total U.S. domestic production in 1998 and

is expected to increase to 41 percent in 2020. Offshore production, mainly from wells

in the Gulf of Mexico, also rises. Innovative, cost-saving technology and large finds,

particularly in the deep waters of the Gulf, have encouraged interest in this area.

Lower-48 offshore Gulf Coast natural gas production increased to 5.7 tcf in 1997—

the highest yet recorded—and dropped off slightly in 1998 to 5.6 tcf. Unconventional

gas production increases at the fastest rate of any other source over the forecast period, largely because of expanded tight sands gas production in the Rocky Mountain

region.

The Rocky Mountain (primarily unconventional sources) and offshore Gulf of Mexico regions are expected to account for just over half of the incremental natural gas

production between 1998 and 2020, as improvements in both unconventional and

offshore technologies continue. Increased production from the offshore Gulf Coast

and onshore Southwest regions account for almost one-third of the total increase in

the same period. Alaskan gas is not expected to be transported to the lower 48

States through 2020,because projected natural gas prices are not high enough to

support the required transportation system.

One of the key activities in producing natural gas is drilling. With rising prices

and generally declining drilling costs, drilling in 2020 is expected to reach 22,600

wells in the reference case and result in 16,900 successful natural gas well completions. This level of drilling is below the level reached in 1981 of more than 29,000

total wells drilled (just under 20,000 successful), but represents approximately a 15-

percent increase over current levels. (Figure 8)

Technological Development

Technology improvements have both reduced effective exploration and development costs, and increased the recoverability of in-place resources. Major advances

in data acquisition, data processing, and the technology of displaying and integrating seismic data with other geologic data-combined with lower cost computer

power and experience gained using new techniques-have exerted downward pressure

on costs.

Uncertainties about the pace of technological development are one of the key factors that could affect natural gas production and prices. Alternative cases were used

to assess the sensitivity of the projections to changes in success rates, exploration

and development costs, and finding rates as a result of technological progress. The

45

assumed technology improvement rates were increased and decreased by approximately one-third in the rapid and slow technology cases.

Changes in production in the alternative technology cases reflect the benefits of

lower costs and higher productivity for conventionally recoverable gas, as well as an

array of technological enhancements for unconventional gas recovery. The changes

in supply lead to price changes that affect new investment in gas-fired technologies,

especially in the industrial and electricity generation sectors. Rapid technology improvements yield benefits in the form of both lower prices and increased production

to meet higher consumption requirements.

Production from unconventional gas resources (tight sands, shales, and coalbeds)

is particularly responsive to changes in the assumed levels of technological progress.

Whereas the reference case projects total U.S. natural gas production in 2020 at

26.4 trillion cubic feet, the rapid technology case projects 28.1 trillion cubic feet of

production in 2020, with the increase coming primarily from offshore and unconventional sources.

Offshore gas production in the Gulf of Mexico is expected to grow from 5.5 trillion

cubic feet in 1998 to a peak of 6.7 trillion cubic feet in 2015 in the reference case.

In the rapid technology case, however, offshore Gulf of Mexico production peaks at

7.7 trillion cubic feet in 2017, and projected cumulative offshore production between

1998 and 2020 is 148.3 trillion cubic feet, compared with 137.1 trillion cubic feet

in the reference case. The rapid technology assumption has a similar but less dramatic, effect on unconventional gas recovery (UGR). Cumulative UGR production between 1998 and 2020 is projected to be 132.9 trillion cubic feet in the rapid technology case, compared with 129.5 trillion cubic feet in the reference case. Changes

in production in the alternative technology cases reflect the benefits of lower costs

and higher finding rates for conventionally recoverable gas, as well as an array of

technological enhancements for unconventional gas recovery.

Slowly Rising Natural Gas Wellhead Prices

Wellhead prices for natural gas in the lower 48 States increase on average by 1.7 percent a year in the reference case to $2.81 per thousand cubic feet in 1998 dollars

(Figure 9). The increase reflects rising demand for natural gas and the impact of

the progression of discoveries from larger and more profitable fields to smaller, less

economical ones. The natural gas price projections are highly sensitive to changes

in the assumptions about technological progress. Over the projection period, lower

48 wellhead prices increase at an average annual rate of 3.0 percent in the slow

technology case, rising fairly steadily to $3.74 (1998 dollars) per thousand cubic feet

in 2020. In the rapid technology case, average natural gas wellhead prices remain

below 1997 level of $2.39 through 2020.

Natural Gas Imports

Net natural gas imports are expected to grow slightly in the forecast from 14 percent of total gas consumption in 1998 to16 percent in 2020. Most of the increase

is attributable to imports from Canada, primarily from western Canada, although

some new gas is also expected from Sable Island in the offshore Atlantic. Gas trade

with Mexico is expected to consist primarily of exports. Conversion of power plants

from heavy fuel oil to natural gas, in compliance with Mexico’s environmental regulations, is expected to gain momentum and it is uncertain whether indigenous production can be increased enough to satisfy rising demand. LNG provides another

source of gas imports, and gross LNG imports are expected to grow at a rate of 7.2

percent a year, reaching a level of 390 bcf by 2020.

Summary

In summary, over the next 20 years petroleum consumption in the United States

is expected to be driven primarily by the demand for ‘‘light products’’ in the transportation sector. Petroleum consumption is expected to rise to over 25 million barrels per day in 2020, and domestic petroleum supply—including refinery gain and

natural gas plant liquids—is projected to decline slightly to just over 9 million barrels per day in 2020. Net imports are projected to increase to 16 million barrels per

day in 2020. Continued dependence on petroleum imports is projected, reaching 64

percent in 2020. Although imports are projected to grow, the United States is one

of the largest oil producing countries in the world, and domestic production is expected to remain a significant source of petroleum supply.

Over the next 20 years the U.S. natural gas market is expected to be largely driven by the demand for electricity. From now through 2020 gas consumption by electricity generators is expected to increase more than two and one half times. Total

gas consumption is expected to rise to more than 31 tcf in 2020, and U.S. production

is expected to increase to 26 tcf. Net imports, primarily from Canada, are projected

to increase to 5 tcf by 2020. In spite of this increase, technically-recoverable natural

46

gas resources are believed to be adequate to sustain growing production volumes for

many years without dramatic price increases.

47

48

49

50

Mr. BARTON. We thank you Mr. Administrator.

Our last witness, but certainly not least, on this panel, the Honorable Melanie Kenderdine, who is the Acting Director of the Office

of Policy, Department of Energy, which is the office that I was in

when I was a White House Fellow. I am used to seeing Ms.

Kenderdine out in the audience as she gives the right answers to

whomever the political appointee happens to be who is testifying

before our subcommittee. So it is good to have you here. So we are

going to get the expert at the table instead of in the audience. We

recognize you for whatever time you may consume, hoping it is

going to be in the neighborhood of 7 minutes.

STATEMENT OF MELANIE A. KENDERDINE

Ms. KENDERDINE. Thank you, Mr. Chairman. On that note, prior

to becoming Secretary Richardson’s senior policy advisor on oil and

gas, I was the Deputy Assistant Secretary in DOE’s congressional

office. I saw firsthand what happened to many DOE witnesses

when their testimony was late. And it was an inspiration to me,

and I hope to always be on time.

Mr. Chairman and members of the subcommittee, thank you for

the opportunity to discuss the administration’s energy policy. The

fundamental importance of energy to the Nation’s economic and environmental health has warranted investments by the Clinton/Gore

Administration in a set of policies in a portfolio of technologies to

encourage energy production to use energy more efficiently, to reduce its impacts on the environment, and to develop alternative

sources of supplies.

The administration’s first principle in energy policy is reliance on

market forces as the best means of informing supply and demand

and getting the most for the American consumer. Our commitment

to this principle has contributed to the longest period of sustained

economic growth in modern times. At the same time that the econVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
51

omy and energy consumption have been steadily growing, energy

use has been reduced. And if you look over at Chart 1, that is what

we are demonstrating there.

As you can see, since 1990 the economy has grown by 35 percent.

I think you all also have these charts with you. Since 1990, the

economy has grown by 35 percent, yet sulfur dioxide emissions

have been reduced by 20 percent. Also the energy intensity of our

economy, the amount of energy used per unit of economic output,

has declined by 40 percent since the mid-1970’s. The point of all

this is that we can have a robust economy, increased energy consumption and a cleaner environment at the same time.

The administration’s policy is supported by two national energy

strategies, two scientific reviews of our energy R&D portfolios, numerous R&D road maps and two extensive energy portfolio characterizations and analysis which I will talk about shortly. We are

also in the process of updating our 1998 energy strategy and it will

be done shortly.

Our energy policy focuses on these challenges, which I would like

to briefly discuss. Our first challenge, challenge number 1, is maintaining America’s energy security in global markets. To address

this challenge, the administration over the last 7 years has supported, taken, or proposed measures to do the following: .

Spur domestic oil and gas production through the support of tax

incentives such as the expensing of geological and geophysical costs

and delay rentals; addressing the generally high cost of U.S. exploration and production through technologies—Mr. Hakes just alluded to how important that is to help lower costs of production

and produce mature fields, which many fields in the United States

are; ensure that we are not overly reliant on imports from a single

region of the world; encourage the world to develop its oil resources

and increase productive capacity; privatize the Elk Hills Naval Petroleum Reserve in order to put that reserve into the hands of private industry and extend the life of the field; increase the size of

the petroleum reserve by 28 million barrels; provide deepwater royalty relief, which has increased oil and gas production in the last

5 years in deep water by over 250 percent; lift the ban on Alaskan

North Slope oil; simplify royalty collection on public lands; reduce

the AMT and percentage depletion tax relief for small operators;

promote the creation of a guaranty loan program for small domestic

oil and gas producers and the reauthorization of EPCA.

We can also reduce net imports of oil by focusing on the demand

side of the equation. Sixty percent of our oil is used in the transportation sector. If you look at chart number 2, you will see that

in the last 10 years, vehicle manufacturers have increased horsepower as opposed to miles per gallon. That is exactly the opposite

of what we saw in the 1970’s, which is the bars on the far right,

where you see miles per gallon down; increased mile per gallon up;

horsepower way down. And then you go over and look at the far

right and you see the opposite.

Mr. BARTON. Would the gentlelady yield just a second? We have

got a vote on the rule for PNTR. Congressman Shimkus is on the

floor. He is supposed to come right back. So we are going to try to

continue the hearing. If the members present want to go vote and

52

come back, I will wait until Mr. Shimkus gets here so we can try

to continue. Please continue.

Ms. KENDERDINE. Increasing the average fuel efficiency of America’s automobiles by just 3 miles per gallon would save us almost

a million barrels of oil per day. This demonstrates the value of fuelefficient vehicles and why we have focused a great deal of effort on

our PNTB program to produce a prototype 80-mile-per-gallon vehicle by 2004.

Our second challenge is harnessing the force of competition and

restructured energy markets. Comprehensive electricity restructuring legislation is the centerpiece of the administration’s energy

policy. The Clinton/Gore Administration encourages Congress to

pass comprehensive electricity restructuring legislation this summer before the peak electricity use season.

Our third challenge is mitigating the environmental impacts of

energy use. DOE invests in technologies to reduce the environmental impacts of energy by producing cleaner fuels, increasing the

efficiency of energy use and developing alternative sources of energy.

Domestically, our lead challenge is further reducing environmental impacts of energy use in the transportation and power generation sectors. Internationally, we believe our greater environmental challenge today is climate change.

And finally our fourth challenge, ensuring a diverse, reliable, and

affordable set of energy sources for the future. And again technology development plays a very strong supporting role in the Department’s pursuit of all of its energy policy objectives.

Chart number 3 summarizes our portfolio effort in which we

matched our energy R&D investments against key energy objectives. This is a significant document, Mr. Chairman. I have one

here and actually used it liberally when I was preparing my written testimony and it is very informative. I think it is a very important document and shows exactly how we are investing about $2

billion, maybe a little more than $2 billion, in lining those up

against our strategic energy goals.

And what you see in that document is our strategic objectives are

reliable and diverse energy supply—we are spending about $170

million in that area; clean and affordable power, $542 million; and

efficient and productive energy use, $437 million. And in addition,

the Department has a basic science portfolio of about $1.2 billion.

These are our requests for 2001, by the way, which supplies the

foundation for the applied energy R&D.

At this point in my written testimony, I take direction well, Mr.

Chairman, and limit at the end my oral statement to 5 minutes.

But since everyone has taken 7, I will go to my written testimony

here where I did talk a little bit about natural gas. Other people

at the table have also spoken about natural gas, and I would like

to associate myself with their remarks.

The administration is a very strong supporter of natural gas and

we bear significant supply issues and significant distribution issues

that I think we need to work on in a bipartisan fashion in the days

ahead in order to meet the demand for natural gas. Jay Hakes and

the EIA Office predict that we are going to need 1,000 new power

plants in this country by 2020, and 900 of them will be powered

53

by natural gas. And there is a lot of work to do on a whole lot of

issues, and we would like to work with the committee on that.

These policies and investments of the administration have paid

big energy economic and environmental dividends. As Mr. Yergin

pointed out, even with current high prices in today’s dollars, we are

paying substantially less for a gallon of gasoline than in 1980. We

have diversified our supplies of imported oil; three out of four of

our top importers are in the Western Hemisphere. I just looked at

a list that I pulled off Reuters news service today of our top 11 importers of oil. Only four of them are OPEC nations.

Royalty relief on the OCS, as I mentioned, has increased deepwater oil and gas production by over 250 percent in the last 5

years. Significant technology improvements have lowered oil and

gas exploration and production costs and reduced the environmental footprint of energy production to one-tenth the size it was

20 years ago.

The rapid development of energy efficiency and renewable technologies has enabled the United States to dramatically decrease its

energy use per dollar GDP; wind energy, energy interest in biomass and other renewables, show tremendous promise for some

cost-competitive power generation from alternative energy sources.

Despite this track record, the potential for increased savings in

energy demand in the U.S. economy remains enormous. And to

meet growing energy demand, it remains essential.

Much remains to be done. Secretary Richardson has called on the

Congress to work with us in a bipartisan fashion to pass legislation

for those energy incentives and programs which require congressional action; namely, comprehensive electricity restructuring; tax

incentives for oil and gas production; energy efficiency and alternative fuels; the reauthorization of EPCA; the creation of a home

heating oil reserve in the Northeast; and the supplemental appropriation to replenish emergency LIHEAP funds.

The Clinton/Gore Administration is proud of its progress in

achieving the Nation’s energy goals. Thank you, Mr. Chairman.

[The prepared statement of Melanie A. Kenderdine follows:]

PREPARED STATEMENT OF MELANIE A. KENDERDINE, ACTING DIRECTOR OF POLICY,

U.S. DEPARTMENT OF ENERGY

THE CLINTON/GORE ADMINISTRATION’S ENERGY POLICY

The Administration’s ‘‘First Principle’’: Reliance on Market Forces

Mr. Chairman and members of the Subcommittee, I am pleased to be here today

to discuss the Administration’s National Energy Policy with the Subcommittee.

Sound energy policy is not only important to the day-to-day functioning of our society, it is essential to the continued improvement in our standard of living. Energy

is a key economic driver and a strategic global commodity. Energy has significant

impacts on the environment at the same time it offers real market opportunities.

The ‘‘first principle’’ of the Administration’s energy policy has been a reliance on

free markets as the best means of informing supply and demand, and getting the

most for the American consumer. Our commitment to this principle has contributed

to the longest period of sustained economic growth in modern times.

The unprecedented economic expansion under this Administration has pushed the

overall unemployment rates to 30-year lows, led to increased labor productivity, generated extraordinary gains in the nation’s stock markets, given us the first federal

budget surpluses in several decades, and helped to significantly reduce poverty

rates, all while maintaining low levels of inflation.

This does not mean market failure will not occur. When markets are insufficiently

flexible to address critical national challenges... market transformations require

54

market pushes and pulls . . . or groups of individuals or businesses are threatened by

market disruptions or dislocations...this Administration has not hesitated to take

appropriate action. Examples of interventions in the energy arena include: the release of emergency LIHEAP funds during last winter’s home heating oil crisis; support for a home heating oil reserve in the Northeastern United States and support

for tax incentives for renewable energy or to increase domestic oil and gas production.

Economic Growth, Energy Use and Environmental Protection are Not Mutually Exclusive

At the same time that the economy has been steadily growing, many of the environmental consequences of energy use have been reduced—this point is clearly

made by Chart # 1 which plots growth in GDP against certain emissions associated

with energy use. There is good news:

• Since 1990, at the same time the US economy has grown by 35 percent, sulfur

dioxide emissions have declined by around 20 percent. • The energy intensity of our economy—the amount of energy used per unit of economic output—has declined by 40 percent since the mid-seventies. • In 1974, we consumed 15 barrels of oil for every $10,000 of gross domestic product—today we consume only eight barrels for every $10,000.

Energy use, while increasing, has been out-paced by the economic growth

achieved by the Clinton/Gore Administration. Also, increased energy efficiency—in

homes, businesses and manufacturing —has helped insulate the economy from

short-term market fluctuations in energy prices. Through wise policy choices and informed, targeted investments of public dollars, we can have an extremely robust

economy fueled by relatively inexpensive energy, and protect the environment and

the health of our citizens.

Policy Framework for our Energy Strategies

The Clinton/Gore Administration has published two statements of its national energy policy in the last several years: Sustainable Energy Strategy (July 1995) and

The Comprehensive National Energy Strategy (CNES, April 1998). Both documents

provide a guide to energy policies proposed and implemented by the Administration,

and seek to ensure that energy policy is well integrated into the Nation’s economic

and national security policies. We are currently in the process of updating the

CNES and should be releasing this update shortly.

In addition, the President’s Committee of Advisors on Science and Technology has

completed two scientific reviews of energy related technology development, Federal

Energy Research and Development for the Challenges of the 21st Century, in 1997

and, more recently, Powerful Partnerships in 1999. These two documents provide an

analysis of energy technologies being developed by the Department, and make recommendations on how to best utilize these technologies both domestically and internationally.

Finally, the Department over the last several years, has engaged in numerous

roadmapping exercises with industry, government, and academic stakeholder

groups, and two extensive energy portfolio exercises, in which we matched our energy R&D investments against larger strategic goals of the CNES. This process, followed by an analysis of the portfolio, has helped us to identify gaps in our portfolio

and opportunities for additional investments in energy technology.

The Comprehensive National Energy Strategy, which DOE released in 1998, identified five overarching energy goals:

• Improving the efficiency of the energy system;

• Ensuring against energy supply disruptions;

• Promoting energy production and use in ways to protect human health and the

environment;

• Expanding future energy choices, and;

• Cooperating internationally on energy issues.

The Nation’s Energy Challenges

In addition to identifying five energy goals, the CNES highlighted three major energy challenges for policy-makers. These are:

• Maintaining America’s energy security in global markets;

• Harnessing the forces of competition in restructured energy markets, and;

• Mitigating the environmental impacts of energy use

While each of these challenges warrants different Government actions, there is a

need to invest in the development of alternatives and longer-term technologies to

meet our future energy needs. We have added an additional long-term energy responsibility to the three CNES challenges:

55

• Ensuring a diverse set of reliable and affordable energy sources for America, now

and in the future.

I now want to summarize how the Clinton/Gore energy policy utilizes market

forces, policies, and investments in research and development to address each of

these challenges.

Challenge #1: Maintaining America’s Energy Security in Global Markets

The United States remains heavily dependent on crude oil. Since 1985, domestic

crude oil production has declined by 34 percent, while domestic oil consumption has

increased by more than 22 percent. In 1974, net imports of crude oil and products

supplied about 35 percent of U.S. consumption. In 1999, net imports supplied about

50 percent of U.S. consumption.

The Administration’s response to the important role of oil in our economy and the

increase in net imports recognizes the following:

• Consumption of oil continues to grow. • The cost of oil production in the U.S. is high relative to other producing nations. • The price of oil is a world price. High or low prices of oil worldwide will mean

high or low prices domestically. • Reducing volatility in oil prices will spur investment and match supply to demand. • Global capacity must be increased if we are to meet domestic and international

demand for oil. • Increasing net imports are not only an indicator of flat or declining domestic production, but also a reflection of increased domestic consumption. • Almost two-thirds of our oil is used for transportation.

To spur domestic production and lower the costs of doing business—without imposing quotas on imported oil, which would raise costs to consumers—the President has

proposed tax incentives for 100 percent expensing of geological and geophysical costs

(G&G), and allowing the expensing of delay rental payments. G&G expensing will

encourage exploration and production. Delayed rental expensing will lower the cost

of doing business on federal lands.

The Administration has also supported and promoted virtually all significant energy legislation enacted by the Congress over the last seven years. This includes legislation for: Deepwater Royalty Relief; lifting the ban on the export of Alaska North

Slope Oil; Royalty Simplification; privatization of the Elk Hills Naval Petroleum Reserve; the transfer and lease of Naval Oil Shale Reserves One and Three for production; Alternative Minimum Tax (AMT) and percentage depletion tax relief for small

operators; and creation of a guaranteed loan program for small domestic oil and gas

producers. The Administration has also proposed legislation to transfer Naval Oil

Shale Reserve Two to the Ute Indian Tribe for production; USGS estimates that

there may be as much as 0.6 tcf of gas on this property.

To address higher US exploration and production costs compared to other countries, we have invested in a portfolio of technologies designed to lower the costs of

exploration and production, and to produce hard-to-find oil in more mature fields.

In large part because of the joint R&D efforts of government and industry, the U.S.

petroleum business has transformed itself over the past three decades into a hightechnology industry.

The United States is a mature oil-producing region. While an estimated twothirds of all U.S. oil remains in the ground, much of it is located in deep, complex

reservoirs or environmentally-sensitive areas. Development of advanced oil and gas

technologies is essential to efficiently maximize the production of domestic resources

while preserving the environment.

A single project in DOE’s five-year, $118 million government/industry Oil Reservoir Class Program has already added 2.4 million barrels of oil from one field and

produced an additional $12.7 million in taxes and royalties. The final outcome of

this project is expected to produce an additional 31 million barrels of oil and $160

million in federal revenues.

The Department of Energy conducted the initial design of the polycrystalline drill

bit, now used in about 40 percent of drilling worldwide, with annual industry sales

in excess of $200 million. Innovations such as horizontal drilling have revitalized

oil production from the Austin Chalk region of Texas to the Dundee formation of

Michigan.

New imaging technologies developed by DOE labs are revealing large hydrocarbon

supplies beneath the ocean floor salt formations in the Gulf of Mexico and 3D seismic is now standard in the industry. Secondary gas recovery technologies have led

to new gas production from south Texas and the mid-continent. In Alaska, oil is now

being produced from wellpads that are one tenth the size of those 30 years ago. Industry and the Department of Interior estimate that new discoveries in the Gulf of

56

Mexico may yield as much as 18 billion barrels of oil—more than Prudhoe Bay.

Technological innovations in subsalt imaging, reservoir characterization, and drilling technologies will enhance our ability to economically produce these reserves.

To ensure that we are not overly reliant on imports from a single region of the

world, we have diversified our sources of supply. Although our oil imports have increased, our sources of these imports have changed significantly over the last two

decades. Last year, we imported 4.85 million barrels of oil per day from OPEC nations, down 22 percent from the 6.19 million barrels of oil per day in 1977. Our imports now come from over 40 countries.

During this same period, OPEC’s share of the world market has dropped from 49

to around 41 percent. In 1970, the top six producers in the world controlled 68 percent of the world’s production; this figure is now down to 45 percent.

I note that just recently, a significant oil find was made in the Caspian Basin

which is thought to have potential reserves equaling or surpassing the North Sea.

The Administration has invested in a significant diplomatic effort to encourage oil

development in this region, as well as to encourage the investment of U.S. energy

firms in the Caspian.

To help the world develop its oil resources and increase world capacity, Secretary

Richardson has actively promoted investment and development of the world’s energy

resources. Most notably, Secretary Richardson has held two international energy

summits—the Western Hemisphere Energy Ministers Summit in New Orleans and

the African Energy Ministers Summit in Tucson, to discuss energy issues and plot

a course for global energy development and future uses. In addition, the Secretary

has traveled to virtually all the major energy producing regions of the world—the

Caspian, Russia, the Middle East, Nigeria, Norway, Mexico, and Venezuela—to encourage energy production and business for U.S. energy companies.

To increase the coverage provided by our ‘‘national energy insurance policy,’’ the

Strategic Petroleum Reserve, we are adding 28 million barrels of oil to fill the Reserve back to the 590 million barrel level, its approximate size prior to the revenueraising sales directed by the Congress in 1996 and 1997. The replacement of this

oil in the Reserve was also done through a unique royalty-in-kind payment, with

no outlays for the government. In addition, we have completed upgrades for the Reserve—to make it safer and to extend the useful life of the facility. This seven-year

project was completed ahead of schedule and under budget.

To address volatility in world oil markets, we have strengthened our ties with the

world’s oil producing nations, worked closely with oil consuming nations through organizations such as the International Energy Agency, and launched a campaign to

improve the collection, dissemination and understanding of world oil supply and demand data. Last January, prominent industry analysts and data experts met at a

DOE-sponsored forum in Houston to discuss how the quality, timeliness and availability of oil data might be affecting volatility in oil prices. DOE will be co-hosting

an international conference in Spain this summer as a follow-on to the earlier meeting. There is significant international interest in this issue and growing consensus

that the world needs better data for producers and consumers to more accurately

gauge oil supply and demand.

We are also investing in reducing net oil imports by focusing on demand side technologies and policies. More than 60 percent of our oil consumption is for transportation, making vehicle fuel efficiency a ripe target for reducing the consumption side

of the net import equation. Specifically, the Department’s transportation program is:

• developing an 80 mile-per-gallon (mpg) prototype sedan by 2004 through our Partnership for Next Generation Vehicles Program; • improving light truck fuel efficiency by 35 percent while meeting newly issued

EPA Tier 2 emission standards by 2004; • developing technologies to increase fuel economy of the largest heavy trucks from

7 to 10 mpg (nearly 50 percent) by 2004; • increasing domestic ethanol production to 2.2 billion gallons per year by 2010; • develop production prototype vehicles that will double the fuel-efficiency of tractor

trailer truck and triple the efficiency of heavy-duty pick-ups; and • supporting tax credits for hybrid vehicles.

Let me illustrate just how important these investments are. As you can see on

Chart #2, over the past decade, vehicle manufacturers have focused on increasing

horsepower at the expense of miles per gallon, the exact opposite of what occurred

in the 1970’s when auto manufacturers were more focused on fuel-efficient vehicles.

Increasing the average fuel economy for cars and light duty vehicles by just three

miles per gallon would save almost a million barrels of oil per day. This represents

over 15 percent of current U.S. daily production. Investing in fuels and more fuelefficient vehicles could substantially reduce our reliance on imported oil at the same

time it contributes to a cleaner, healthier environment. Without minimizing the imVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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portance of increased oil production, it is clear that even a small commitment to

greater vehicle efficiency will net significant gains in reducing net oil imports, without compromising pristine onshore or offshore environmental ecosystems.

Challenge #2: Harnessing the Force of Competition in Restructured Energy Markets

As I have noted, the Clinton/Gore approach to energy policy is built around the

principle of market-oriented approaches to energy supply and use. A reliance on

markets is not unique to our Administration—it spans both Republican and Democratic Administrations.

Natural gas is a clear area of success for market-driven energy policies for recent

Administrations. With deregulation, natural gas has emerged as a plentiful, national energy resource. In the mid-1970’s, a labyrinth of outdated and counterproductive pricing regulations had handcuffed America’s natural gas industry, stifling exploration and production and conveying the false impression that America’s

natural gas supplies were on the wane.

Today, the onerous natural gas regulations which started in the 1950s, have been

replaced by a restructured and highly competitive gas market, and natural gas is

now one of the most plentiful energy resources available to meet the Nation’s future

energy and environmental needs. The decontrol of natural gas prices, the advent of

competition in interstate gas transportation, and the ability of industrial customers

(and increasingly residential consumers) to contract directly for their own gas supplies has clearly provided major benefits to both producers and consumers.

Electricity restructuring is the biggest prize of all. Over 40 percent of the nation’s

energy bill goes for electricity. With over $200 billion in annual sales, electricity is

the lifeblood of our economy, and the reliable supply of electricity is vital to our

economy and to the health and safety of all Americans. The Clinton/Gore Administration is seeking, with Congress, to extend the role of markets and competition into

the electricity sector.

At one time, the debate surrounding electricity restructuring focused on the pros

and cons of doing away with the vertically-integrated monopoly utility that generated, transmitted and distributed the power consumed in a state-designated monopoly service territory. That debate is over. As a result of the Energy Policy Act

of 1992 and the efforts of the Federal Energy Regulatory Commission (FERC), utilities are now buying power from competing generators and marketers at competitive

rates rather than building plants on their own, and independent power producers

are gaining an increasing share of the generation market.

Restructuring and competition are not, of course, limited to the wholesale markets. Twenty-five states have now adopted electricity restructuring proposals that

allow for competition at the retail level. Almost every other state has the matter

under active consideration.

These are positive developments—competition, if structured properly, will be good

for consumers, good for the economy and good for the environment. Companies that

had no incentive to offer lower prices, better service, or new products are now being

required to compete for customers. Consumers will save money on their electric

bills. Lower electric rates will also make businesses more competitive by lowering

their costs of production. By promoting the use of cleaner and more efficient technologies, competition will lead to reduced emissions of greenhouse gases and conventional air pollutants.

Securing a Competitive Future Requires Both State and Federal Action. We believe

that the full benefits promised by electricity competition can be realized only within

an appropriate Federal statutory framework. What we do at the Federal level, and

when we do it, will have a profound impact on the success of wholesale competitive

markets, as well as on state and local retail markets. Federal action is necessary

for state restructuring programs to achieve their maximum potential. Electrons do

not respect state borders. Electricity markets are becoming increasingly regional

and multi-regional. Actions in one state can and do affect consumers in other states.

States and the Federal government must work together. States alone can’t ensure

that regional power and transmission markets are efficient and competitive. They

can’t provide for the continued reliability of the interstate bulk power grid. And

states can’t remove the Federal statutory impediments to competition and enable

competition to thrive in the regions served by Federal utilities. Clearly, some states

are considering retail competition proposals at a less rapid pace than others. Nevertheless, Federal action is equally important to all states. If wholesale markets,

which transcend state boundaries, are not working efficiently, the impediments to

the flow of power between states will cause rates to go up and reliability to be endangered.

The Clinton/Gore Administration encourages Congress to pass comprehensive electricity restructuring legislation. In 1998 and again in 1999, the Administration preVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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sented the Congress with a comprehensive legislative blueprint of changes needed

for updating the federal statutory framework to support the advent of competition

in electricity markets. Indeed, this bill was a featured element of the Comprehensive National Energy Strategy the Administration sent to Congress in April, 1998.

A well-structured electricity bill is a centerpiece of the Administration’s energy

policy, and we look forward to working in a bipartisan manner with both the House

and Senate to pass this or similar legislation. Mr. Chairman, we recognize the efforts of this subcommittee, which reported an electricity bill last October. We urge

this Congress to replicate the earlier bipartisan successes with natural gas and oil

deregulation and pass a comprehensive restructuring bill this summer.

Ensuring the reliability of the energy grid is a growing focus of the Administration’s R&D efforts. While the electricity system powers other infrastructures, it will

also be increasingly dependent on natural gas as a fuel source for both central

power stations and small, distributed generation. EIA’s Annual Energy Outlook,

2000, projects the annual growth of 4.3 percent for the use of natural gas for electricity generation through 2020.

In addition, our energy delivery systems are becoming increasingly reliant on telecommunications and computing systems for fast, efficient operation. These trends

will likely result in increased efficiencies and a range of new consumer products,

but can also potentially increase physical and cyber threats to our energy infrastructure.

To ensure the reliability and security of the electricity and natural gas infrastructures, the Administration has proposed a new Energy Infrastructure Reliability initiative with three components:

• electric reliability which will focus on regional grid control, distributed resources

and microgrids, information system analysis, possible offsetting of peak summertime electric load with distributed generation and natural gas cooling technologies for example, and high capacity transmission; • natural gas infrastructure reliability to include storage, pipeline and distribution

R&D, and; • secure energy infrastructures, vulnerability assessments, interdependency analysis, risk analysis, and the development of protection and mitigation technologies.

Challenge #3: Mitigating the Environmental Impacts of Energy Use

The production, transport and conversion of energy is fundamental to our way of

life and continued economic prosperity, but energy has more significant effects on

the environment than any other economic activity. To reduce these adverse effects,

the federal and state governments have imposed environmental restrictions on energy, from production to end-use.

These restrictions have, as noted earlier, resulted in reductions in energy-related

pollution and environmental damage, and have been achieved without substantial

increases in energy prices, disruptions in energy supplies or other adverse economic

impacts. This achievement is due, in part, to the constructive role that the Department of Energy has played in the development of environment-friendly energy technologies and the adoption of regulatory policies that have enabled the energy industry to minimize costs and avoid supply disruptions.

We cannot, however, stop with the successes achieved to date. Domestically, one

of the leading challenges facing us now is further reducing the environmental impacts of energy use in the transportation and power generation sectors. We want

to minimize the negative effects of fossil fuel combustion in ways that do not increase prices or price volatility, or decrease reliability. Other domestic environmental challenges that will require careful monitoring include: assuring the continued access of the energy industry to new resource areas, in a manner that protects

our natural heritage; and ensuring that any further regulation of the energy sector

is based on good science and is cost-effective.

Internationally, responding to the threat of climate change is the greatest challenge facing the energy sector. To provide the technologies that reduce greenhouse

gas emissions, and to preserve U.S. competitiveness and economic growth, President

Clinton has proposed an aggressive $4.1 billion FY 2001 climate change package.

The package includes: the International Clean Energy Initiative, Clean Air Partnerships, Climate Technology Initiative and other programs that preserve jobs and the

climate. This includes R&D and deployment initiatives for a broad range of technologies including those using fossil fuel. For example, the President’s plan contains

a significant request for Clean Coal technology funding and for carbon sequestration

to offset the carbon emissions from fossil fuels.

We are working with other countries to elaborate rules and guidelines for the

flexibility mechanisms identified in the Kyoto Protocol—emissions trading, the

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Clean Development Mechanism and Joint Implementation. Only through the full

use of market-based emissions trading and related mechanisms, can we substantially slow or halt the growth in global greenhouse gas emissions without imposing

unacceptable costs on the United States. Many different economic analyses done

both in the private and the public sectors, indicate that the cost savings from full

implementation of the Kyoto Mechanisms could reduce costs in excess of 50 percent

from more regulatory approaches.

We have a historic opportunity to complete the elaboration of an internationally

unprecedented market-based approach to climate protection that will lower costs

and spur U.S. technology exports. The anticipated use of these mechanisms will also

provide the economic incentive for developing countries to make meaningful commitments to greenhouse gas emissions reductions.

Sound science is the cornerstone of DOE’s work on energy-related environmental

issues. The Department has been a partner with EPA and other regulatory agencies

in developing science-based regulations. This was seen recently in DOE’s work with

EPA on coal ash; and last year in our work with EPA on coal combusters of fossil

fuels containing cobalt or vanadium. These are two examples where it was demonstrated, through science and interagency cooperation, that regulations of the energy industry were not needed.

Our work on climate change on the other hand, is part of the substantial body

of scientific evidence that demonstrates the impacts of carbon emissions on the global environment, supports the Administration’s commitment to mitigating the impacts of greenhouse gas emissions on the atmosphere and human health, and

strongly suggests that significant and timely action to mitigate climate change is

needed.

Cost is a key consideration. The costs and benefits of alternative approaches must

be weighed. To the extent feasible, the costs of reducing adverse environmental impacts should be shared fairly among all of the contributors to an environmental

problem, not borne primarily by a small subset of industries or, in the case of global

climate change, a small subset of countries.

Most recently, the Department of Energy helped develop the economic analysis for

treating small refiners as a separate class of businesses under the recently released

Tier II gasoline sulfur rule. This treatment for small refiners will give them additional time and flexibility in meeting the requirements of the rule. We are similarly

engaged with other agencies in the government on proposed low sulfur rules for diesel fuel and for MTBE.

An important element of the Administration’s energy policy is support for the development of energy technologies to reduce environmental impacts of energy use by:

• promoting technologies to produce cleaner conventional fuels; • increasing the efficiency in the use of conventional energy sources, primarily fossil

fuels, and; • developing alternative sources of energy.

Cleaner Fuels. On the transportation side of fuel use, vehicles currently account

for a large portion of urban pollution, including 77 percent of carbon monoxide, 49

percent of nitrogen oxides, and 37 percent of volatile organic compounds. The transportation sector also generates one third of U.S. carbon emissions. In coming decades, increasing public health and environmental concerns will likely lead to new

environmental regulations that may be difficult or impossible to meet with current

fuels.

The President’s Bioenergy and Biobased Products Initiative is intended to address

this growing need. Recent scientific advances in bioenergy and biobased products

have created enormous potential to enhance U.S. energy security, help manage carbon emissions, protect the environment, and develop new economic opportunities for

rural America. This nation has abundant biomass resources (grasses, trees, agricultural wastes) that have the potential to provide power, fuels, chemicals and other

biobased products. The President has set a goal of tripling U.S. use of biobased

products and bioenergy by 2010, which would generate as much as $20 billion a

year in new income for farmers and rural communities, while reducing greenhouse

gas emissions by as much as 100 million tons a year—the equivalent of taking more

than 70 million cars off the road.

DOE has also launched a new initiative this year, the Ultra-Clean Fuels Initiative, to address the need for cleaner fuels within the context of the current refining

infrastructure. The Ultra-Clean Fuels Initiative will mobilize industry and DOE’s

national laboratories to develop and demonstrate new technologies for making large

volumes of clean fuels from our diverse fossil energy resource base. In the nearer

term, ultra-clean transportation fuels can be produced by upgrading refinery technology, and using new bio-fuel blends. In the mid-to-longer term, ultra-clean transportation fuels can be developed through biotechnology, or from natural gas and

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coal, which enjoy high levels of compatibility with the existing infrastructures and

could provide environmental benefits due to their suitability for use in advanced,

high-efficiency vehicles.

On the power side, fossil fuel-fired power plants emit about one third of the nation’s carbon dioxide and significant amounts of NOX, SOX and particulates. These

plants also account for 70 percent of all U.S. electricity generation and are projected

to dominate power generation for the foreseeable future.

Technologies for coal-fired power plants, developed by DOE, have resulted in improved performance at a fraction of the original cost. Coal is used to generate almost

52 percent of the nation’s electricity and scrubbers are now deployed on one-third

of U.S. coal plants. Our partnerships with industry have resulted in rapid development of low cost NOx technologies to address both near term needs and future environmental challenges. The near term challenge has been met by the addition of lowNOx burner technology to virtually all coal-fired boilers, and even more stringent

technologies will be installed on a substantial portion of coal units. These technologies are 50-90 percent cheaper than options available just 10 years ago.

To address pollution from coal and natural gas power systems, DOE has a program—Vision 21—with a goal of near-zero emissions from power generation and 60

to 70 percent generation efficiencies. The fleet of large, high-efficiency power systems envisioned by this program would produce emissions well below New Source

Performance Standards for SOX, NOX, and particulates, with most advanced systems achieving near-zero emissions for regulated pollutants.

DOE’s Carbon Sequestration Program is designed to develop technologies and

practices to sequester carbon that: are effective and cost-competitive; provide stable,

long-term storage; and are environmentally benign. Increased carbon emissions are

expected unless energy systems reduce the carbon load to the atmosphere. Accordingly, carbon sequestration—carbon capture, separation and storage or reuse—must

play a major role if we are to continue to enjoy the economic and energy security

benefits which fossil fuels bring to the nation’s energy mix.

Increasing Efficiency in the Use of Conventional Energy Sources. It is particularly

important to develop and deploy higher efficiency technology for fossil energy power

generation since 85 percent of America’s energy currently derives from oil, gas and

coal. In electricity generation alone, energy efficiency potentially could be doubled

through cogeneration and the application of advanced technologies.

DOE’s advanced turbines—fueled by natural gas or biomass, and capable of reducing NOX emissions and producing steam together with low-cost electricity—are already approaching efficiencies of 60 percent. High efficiency electric power systems,

where fuel cells are joined with combined cycle plants, could improve efficiency to

as much as 70 percent. Industrial resource recovery could be dramatically improved

with the development of technologies such as an integrated gasification combined

power technology, which would convert coal, biomass and municipal solid wastes

into power and products.

The U.S. uses 94 quads of primary energy a year. The nation’s 100 million households and 4.6 million commercial buildings consume 36 percent of the total. Buildings also use two thirds of all electricity generated nationally. Energy consumption

in buildings is a major cause of acid rain, smog and greenhouse gases, representing

35% of carbon dioxide emissions, 47 percent of sulfur dioxide emissions and 22 percent of nitrogen oxide emissions. Clearly, more efficient buildings will pay big dividends in reduced energy use and a cleaner environment.

Research and development areas for buildings include: heating, ventilation, and

air conditioning; building materials and envelope; building design and operation;

lighting; appliances, and; on-site generation. To use energy more efficiently, we are

working to develop ‘‘intelligent building’’ control systems, more efficient appliances,

and fuel cells to power commercial buildings. Standards to improve the energy efficiency of flourescent lighting in commercial and industrial applications, proposed

this March, are expected to save between 1.2 and 2.3 quadrillion BTUs of energy

over 30 years, enough energy to supply up to 400,000 homes per year over the same

time period. We have recently proposed an update to the efficiency standards for

water heaters, and expect to issue proposals for clothes washers and central air conditioners in the near future—each of which are likely to produce even greater energy and environmental benefits.

The industrial sector consumed almost 35 quads of primary energy in 1997—

about 38 percent of all energy used in the United States. The industrial sector contains extraction industries, as well as materials processing and product manufacturing industries. Over 80 percent of the energy consumed in manufacturing (including feedstocks) occurs in only seven process industries: aluminum; steel, metal casting, forest products, glass, chemicals, and petroleum. These major process industries

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are becoming more capital-intensive. Markets are continuing to become more competitive globally.

Reducing energy costs and waste, and reducing or eliminating environmental

emissions upstream (closely related to energy use) are recognized, controllable costs

that can increase productivity and competitiveness of U.S. businesses and decrease

costs.

The Department’s primary program for industrial efficiency is Industries of the

Future, which focuses on these seven most energy-intensive and supports collaborative research, development, and demonstration efforts to accelerate efficiency in

U.S. industries.

If the Department’s energy efficiency programs were fully funded, we could likely:

• reduce industry energy consumption per dollar of output; • increase the average fuel efficiency of new cars and light trucks by 20 percent by

2010; • reduce the annual energy consumed by buildings; and • by 2010, reduce energy consumption in federal facilities by 35 percent relative to

the 1985 consumption level, saving taxpayers $12 billion from 2000-2010.

These reductions in energy demand will result in comparable reductions in greenhouse gas emissions, as well as reductions of other environmental impacts associated with energy use. Of course, none of this can be achieved without the active support of other agencies, industry and consumers. DOE looks forward to working with

the Congress to develop and fund programs to increase the efficiency of our transportation, commercial, manufacturing and building sectors in order to save energy,

increase the competitiveness of U.S. industry, and reduce our reliance on imported

oil.

Investing in Renewable Power Sources. Renewable resources such as wind, solar,

photovoltaics, geothermal, biomass, hydrogen, and hydroelectric, are abundant.

These alternatives are used for power generation and their primary advantage is

that they produce virtually no emissions or solid wastes. Their primary disadvantages are the cost of producing power (except hydro) compared to coal and natural

gas, and the need to create an infrastructure required to deliver this power to market.

To take advantage of the environmental benefits of renewable power, the Department has focused on decreasing its costs and tackling infrastructure issues. The

most feasible approach to lowering cost and delivering renewable power appears to

be through distributed generation—alternatives to central power stations, where

power is generated locally or on-site. Distributed generation technologies are a

major R&D focus at DOE.

In addition, the Department is working on improving the performance of specific

kinds of renewable energy. The growth for wind power, for example, is the highest

of all sources of energy in the world. Dramatic improvements in wind turbine technology has helped spur a 25 percent increase in wind-generating capacity over the

last decade. Costs of wind generated power have dropped dramatically to between

four and six cents per kilowatt hour. Photovolatic costs are down from one dollar

in 1980 to between twenty and thirty cents today. Geothermal costs are almost competitive with conventional power generation costs, coming down from fifteen cents

to between five and eight cents today.

Last year, the President issued an executive order directing agencies to expand

their use of renewable energy. Meeting the goals of this order will reduce greenhouse

gas emissions by 2. 4 million tons and save taxpayers over $750 million a year. It

will also expand markets for renewable technologies, reduce air pollution, and serve

as a powerful example to businesses and consumers who can reap substantial benefits from environmentally-friendly energy sources.

The Government’s Commitment: Ensuring a Diverse, Reliable and Affordable Set of

Energy Sources for the Future

The energy options within our portfolio are oil, gas, coal, energy efficiency, renewables, hydropower, fission, and fusion. We must strategically manage energy R&D

with this understanding about the energy world as we know it: there is no single

silver bullet which will solve all our energy needs, making science and technology—

and a broad-based energy R&D portfolio—key to meeting our long term energy

needs..

Without energy technologies, a ton of coal, a barrel of oil, a cubic foot of natural

gas, a ton of uranium ore, a stiff breeze, or the sun’s warmth cannot directly contribute to the prosperity of modern society. With the very best technologies, however, society can use energy resources efficiently and responsibly and with great economic and environmental gain. While economic and security challenges continue to

demand investment in a robust energy research and development (R&D) program,

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environmental challenges provide additional impetus for increased focus on energyrelated science and technology during the coming years.

Technology development plays a strong supporting role in the Department’s pursuit of all of its energy policy objectives. It supports improvement in the competitiveness of the energy system; the development of more efficient transportation, industrial and buildings technologies as a key objective; our goal of reducing the environmental impacts of the energy sector, and; the further development of technologies

that reduce the environmental impacts of energy production.

The requirements for near term returns on investment, limited resources and the

risk averse nature of many industries warrant a special role for government in the

support of technology development, especially when new technology can help address national concerns not fully reflected in the marketplace. Consequently, the development of new energy technologies has been a central mission of the Department

of Energy’s since the late 1970’s. At DOE, we focus on maintaining a strong national

knowledge base as the foundation for informed energy decisions, new energy systems, and enabling technologies of the future, and developing technologies that expand long-term energy options.

Ensuring the success of the Department’s research and development efforts has

been a constant challenge, especially during periods of stable or declining energy

prices, when market incentives for technology development and adoption are at

their lowest. In addition, the unpredictability of technology development process and

the continual changes in scientific knowledge, social priorities and market demands

pose additional challenges to government efforts to effectively spur technology development.

I have already discussed many of DOE’s energy technologies and technology investments and successes. I would now like to discuss our energy portfolio more

broadly, and then focus specifically on natural gas as a transition fuel.

DOE’s energy resources R&D portfolio is organized in three broad strategic areas: reliable and diverse energy supply ($170 million, FY01 request); clean and affordable power ($542 million, FY01 request), and; efficient and productive energy use

($437 million FY01 request). In addition, the Department has a basic science portfolio ($1.2 billion FY 01 request) which supplies the foundation for much of the applied R&D in the energy areas.

A number of reviews and studies have been conducted that provide valuable information on the adequacy and focus of this portfolio. Overall, these studies have confirmed that our energy portfolio is generally well-focused on the nation’s strategic

energy goals. However, the studies also have identified a number of deficiencies in

how fully these goals are addressed by the portfolio and made a number of recommendations for important portfolio changes or additions, including:

• Significantly enhanced R&D funding • Renewed emphasis on electric power systems reliability • A Nuclear Energy Research Initiative • Carbon management R&D • Increased bioenergy R&D • Methane hydrate R&D • Hydrogen R&D • Clean fuels R&D • Integration of fuel cell R&D efforts • An international RDD&D effort

The Administration strongly supports the increased use of natural gas. Several of

these recommended changes or additions to our portfolio relate directly or indirectly

to natural gas—power systems reliability, carbon management, methane hydrates,

clean fuels, and fuels cells all involve the development of technologies to increase

the supply, improve the delivery of, or improve the environmental performance of

natural gas.

Also, as I mentioned earlier, because it is abundant and relatively clean, natural

gas will be the fuel of choice to meet the nation’s future power generation needs.

Of the 1000 powerplants the Energy Information Agency (EIA) projects the U.S. will

need by 2020, 900 will probably be natural gas power plants. If we are able to

produce the gas to meet this need, we will need the means to distribute it safely

and efficiently. Right now, there are 85 proposed pipeline projects just for the years

2000 through 2002, at the same time significant impediments exist for pipeline and

storage siting.

Investments in natural gas R&D are critical to meet future energy needs. The Clinton/Gore Administration has invested roughly $1.5 billion in natural gas R&D.

DOE’s joint efforts with industry have helped produce the fuel cells, microturbines,

reciprocating engines, and other enabling technologies to power the gas industry of

the future. DOE’s request for natural gas R&D funding in FY 2001 is around $215

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million and, as I mentioned earlier, includes an initiative for energy infrastructure

reliability. The natural gas portion of this initiative specifically focuses on methane

leakage, aging and corroding pipelines, and natural gas storage, to improve the safety and reliability of the natural gas distribution network.

Last December, Secretary Richardson established DOE’s newest national laboratory—the National Energy Technology Laboratory, co-located at Morgantown, WV,

and Pittsburgh, PA. This laboratory is dedicated to providing the nation with clean

and affordable fossil energy and will house a new Center for Natural Gas Studies, in order to give added focus and emphasis to natural gas policy and ‘‘bore hole to

burner tip’’ research and development.

Presidential Decision Directive 63—Critical Infrastructure Protection—establishes

safety and security of the natural gas infrastructure as a national security priority.

In addition, the Administration also envisions a substantial role for natural gas as

the transition fuel for a cleaner environment, and in reducing greenhouse gases. The

President’s Executive Order on the Greening of the Government promotes efficiency

in federal buildings, acknowledging that there are substantial efficiency gains to be

made by measuring energy from the source, not just at the site. Natural gas is a

winner in this scenario.

The Administration’s Comprehensive Electricity Restructuring bill will benefit natural gas as well by providing for more rapid market penetration of innovative technologies on both sides of the customer’s meter. End-use distributed generation technologies, for example, have a critical role to play in a restructured energy future.

Along with new uses for natural gas, these technologies promise relatively high efficiencies, low emissions, increased flexibility and reliability, and cost-effective alternatives to the traditional utility grid infrastructure.

To further develop natural gas power systems for the 21st century, DOE will be

focusing on advanced combustion science and technology; interconnect devices and

parameters for standard interconnect designs to enable distributed generation; low

temperature catalysts for emissions control; inexpensive sensors for emissions monitoring, and; carbon dioxide separation and sequestration technology. For natural gas

storage, we will be investing in developing non-damaging fluids for drilling, and

methods for controlling reservoir damage caused by drilling and perforating fluids.

We need to encourage increased natural gas supply. The National Petroleum Council’s recent study on natural gas projects increased consumption for natural gas of

29 trillion cubic feet (TCF) in 2010 and 31 trillion cubic feet (TCF) by 2015. At the

same time, EIA estimates that in 1998, reserve additions of natural gas were only

83 percent of production. To meet this demand, we will need to ensure that we have

an adequate supply of natural gas.

Several pieces of legislation I described earlier—specifically the deep water royalty relief and the guaranteed loan program for small oil and gas producers —will

benefit natural gas production, as will the G&G and delayed rental tax credits supported by the President. In addition, our energy supply R&D programs, designed to

lower the costs of oil and gas production, will help add to the nation’s supplies of

natural gas. These include:

• a Diagnostics and Imaging Program to cost-effectively locate and produce oil and

gas reserves;

• the Advanced Drilling, Completion and Stimulation Systems Program which focuses on the development of sophisticated drilling technologies and methodologies;

• the Gas Hydrates Program, a long term R&D effort to help turn potential methane hydrates into gas reserves, and;

• the Low Quality Gas Upgrading Program to purify gas reserves containing high

levels of contaminants.

Clearly, much remains to be done if we are to meet significant increases in demand for natural gas over the next two decades. We look forward to working with

Congress in a bipartisan effort to increase the nation’s supplies of natural gas.

PROSPERITY AND SECURITY ARE ‘‘ENERGY DEPENDENT’’

Energy plays a vital role in our economy. Somewhere between six and seven percent of our Gross Domestic Product—about $600 billion per year—is attributable to

energy consumption. Over $200 billion per year is spent on transportation fuels. Approximately $200 billion per year is spent on electricity—to power our factories, to

light, heat, and cool our homes, offices and schools, and to increasingly power the

electronically-based New Economy. The electric bill for the nation’s industrial sector

alone is around $100 billion annually.

Clearly, energy is the engine that drives our economy. At the same time, it represents a substantial cost to consumers and businesses—its fundamental importance

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to the nation’s economic and environmental health has warranted investments by

this and previous Administrations in a set of policies and a portfolio of technologies

to produce more energy, to use it more efficiently, to reduce its impacts on the environment, and to find alternative sources of supplies.

These policies and investments have paid big dividends. Over the 20-year history

of the Department of Energy, we have made a great deal of ‘‘energy progress.’’ In

today’s dollars, we are paying substantially less for a gallon of gasoline than in

1980. We have diversified our suppliers of imported oil—three out of four of our top

importers are in the Western Hemisphere.

We have, by far, the largest strategic petroleum stockpile in the world. Relatively

recent policy changes and technological advances have spurred oil and gas production on the Outer Continental Shelf and extended production on Alaska’s North

Slope. Significant technology improvements have lowered oil and gas exploration

and production costs dramatically and reduced the environmental footprint of energy production to one tenth the size it was twenty years ago.

In addition, the rapid development of energy efficient technologies and practices

and the restructuring of our industrial sector has enabled the United States to decrease its energy use per dollar GDP by around 40 percent since 1973, representing

an annual energy cost savings of over $400 billion. Between 1970 and 1990, the average fuel efficiency of automobiles went from 13 miles per gallon to 20 miles per

gallon. The efficiency of combined cycle gas turbines for electric power generation

exceeds 60 percent and wind energy and biomass show tremendous promise for costcompetitive power generation from alternative energy sources.

Despite this track record, the potential for increased energy savings in the U.S.

economy remains enormous—and to meet growing energy demand, it remains essential. In the utility industry for example, only one third of all thermal energy from

coal or gas is actually transformed into electricity in a typical power plant. In the

transportation sector, which accounts for 60 percent of the nation’s demand for oil,

the fuel economy of passenger vehicles has actually declined in recent years due to

the increasing market share of SUVs and minivans. Net imports of oil continue to

increase and domestic oil production has declined.

The Clinton/Gore Administration is proud of its record on energy policy and on

our progress in achieving the nation’s energy goals. Clearly, however, much remains

to be done. Secretary Richardson has called on the Congress to work with us in a

bipartisan fashion to pass legislation for those energy incentives and programs

which require Congressional action, namely comprehensive electricity restructuring,

tax incentives for oil and gas production, energy efficiency and alternative fuels, the

reauthorization of EPCA, the creation of a home heating oil reserve in the Northeast, and a supplemental appropriation to replenish emergency LIHEAP funds before we enter the summer power season.

We look forward to working with you in the days ahead. If we are going to meet

the nation’s energy needs of the 21st century, we have neither the time—nor the

energy—to waste.

Mr. BARTON. The Chair will recognize himself for 5 minutes of

questions. Admiral Watkins, I will ask you to elaborate a little bit

on your comments about being able to environmentally safely

produce some of the oil and gas that we think is in the Arctic National Wildlife Refuge.

Mr. WATKINS. We went through this in agonizing depth 10 years

ago. Members of Congress, as well as myself, went to Prudhoe Bay,

inspected the pads that were there. They have been refurbished

and returned to the tundra. We went over to the Arctic National

Wildlife Refuge, we looked at the footprints that were required to

do the horizontal drilling, used the technologies to be able to go

from small pads, convert them in, say, 20 years back to tundra. We

felt very comfortable that we could do this with modern technology,

with all the things that we had learned at Prudhoe Bay, in a sensible way environmentally. I agree it is a treasured area.

On the other hand, we have a lot of treasured areas like the Gulf

of Mexico. We seem not to put that off limits. We don’t mind exploiting that. What is it about? Is Alaska still a territory? Eightythree percent of the Alaskans, including the legislature, wanted to

65

do this. Is it the wisdom of this Congress that that State—we like

State’s rights on other things—closes it down when in fact we have

demonstrated that we can do it in an environmentally sound way?

The ramp that you see in the decline in supply is adjusted by

just the Arctic National Wildlife Refuge alone. Not a great deal, but

1 million or 2 barrels a day is a lot. It keeps us going a little bit

longer and has a little bit better contribution to energy security

than not. So we believed both we could do in an environmentally

sound way, that it did make sense over time as we transitioned out

of the oil problem and demand in this country. And we talked

about oil prices and the fact that it is down in real dollars to its

lowest ever.

Tell that to the little people out in the West who have the car

as their only source of enjoyment in life. But we tried to raise the

price of gas 5 cents—remember that in 1982—and the hue and cry

was incredible. And the Congress wouldn’t stand for a nickel.

We raised it 40 cents now. Because of OPEC, there is a little

whimper, but everybody is still driving. It is a fascinating set of

rules. But the Arctic National Wildlife Refuge and these other offshore for gas places are environmentally sound, much more so than

shipping oil and importing oil. We have already seen the Exxon

Valdez situation and we know that the contamination generated by

oil in these bottoms moving across the world are far more deleterious to the environment than drilling offshore and doing so competently.

Mr. BARTON. I will ask one more question, then I am going to

have to go. Mr. Martin in his testimony talked about the efficiency

of natural gas being converted directly to electricity through some

of these microgenerators that are coming online.

Congressman Sharp, you have studied some of these issues. I remember you were a leading proponent of some of the appliance efficiency standards that I voted against actually when they were before your subcommittee. Do you have a comment on what Mr. Martin said in terms of the overall cycle efficiency of direct——

Mr. SHARP. I can’t speak to the specifics of some of the problems,

but there is no question about the higher efficiency and environmental soundness if you don’t have to go through the loss in transferring into electricity, and then lost lines, even though we expect

newly improved efficiencies there if we can get a marketplace

working. But I don’t think there is any doubt that there is a great

deal of efficiency to be gained by the use of natural gas.

Mr. SHIMKUS [presiding]. Thank you, Mr. Chairman. Now I will

recognize myself for such time as I may consume or the ranking

member gets back. And I do that because I like to get the gavel

and I like to get some of these questions. You all were here on

opening statements.

Let me address a question. Part of the price equation right now

a lot of you have referred to is the environmental issues or the regulatory. Can you—Dr. Yergin, I know that is in your testimony—

can you address what some of those environmental issues are that

are we are projecting as being an increased portion of the cost?

Mr. YERGIN. Over about the past decade and a half, the refining

industry in this country has made about $22 billion of investment

to meet environmental considerations. What is striking is the deVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
66

gree to which that part of the industry has continued to push down

its other costs so that in effect it has absorbed a lot of that investment. Right now we are seeing some switchovers for environmental

reasons to new gasoline for summer driving. And that is one of the

factors. It is one of the four factors that is an element in the higher

gasoline prices we are seeing right now.

Mr. SHIMKUS. But percentage-wise, I think your initial response

was the cost of producing at the refinery and the emission requirements is the cost of doing business today. Is that——

Mr. YERGIN. It is a substantial cost.

Mr. SHIMKUS. Percentage-wise?

Mr. YERGIN. I will have to go through my papers here.

Mr. SHIMKUS. We know there have been accusations about numerical superiority or lack thereof. Mr. Martin, do you have a response? I know you are natural gas.

Mr. MARTIN. They might have a better feel on this.

Mr. HAKES. We have done some detailed studies on what this

cost is for the remaining industry. I can’t cite them off the top of

my head but we can make them available to the committee.

[The following was received for the record:]

EIA has done some detailed studies on the expected cost of Phase 2 reformulated

gasoline (RFG). The cost of manufacturing this new gasoline varies from winter to

summer and from North to South. For many refiners, no additional cost is expected

to produce Phase 2 RFG in the winter months as Phase 1 RFG already meets the

required emissions reductions. Producing summer-grade Phase 2 RFG, however, will

require additional investments and changes in gasoline blending at refineries that

will increase costs.

As with any analysis, the results of this study are influenced by the premises and

assumptions underlying the analysis. This analysis of the cost of Phase 2 reformulated gasoline was released in the spring of 1999 when oil prices were at much

lower levels than today. The added energy costs as a result of the sharp rise in oil

prices over the past year would increase the cost estimates. (For example, the price

of crude oil has almost doubled and the costs of producing RFG could be assumed

to increase proportionally. In addition, the spot price of MTBE, a major gasoline

blending component, more than doubled from $0.74 per gallon in May 1999 to $1.55

in June 2000.) In addition, some simplifying assumptions related to gasoline production and blending were made to facilitate the cost estimation. For example, in estimating the cost of reducing Rvp to the lower levels needed for Phase 2 RF6, a linear

extrapolation of the price spread between two types of gasoline that have higher levels of Rvp was used. However, costs are likely to rise at an increasing rate as gasoline specifications become tighter. Furthermore, this study did not analyze the cost

of producing Phase 2 RFG using ethanol as the oxygenate blendstock rather than

MTBE. The estimates presented are average cost estimates for producing the new

gasoline. The marginal cost of producing the new gasoline (i.e., the cost of producing

the last barrel) may be higher which could affect prices at the pump.

Given the caveats stated above, EIA estimated that the increase in cost from

Phase 1 to Phase 2 RFG in the summer months is expected to be approximately

1.0 to 1.5 cents per gallon. Phase 2 RFG is expected to cost 2.5 to 4.0 cents per gallon, on average, more than conventional gasoline, depending on the region of the

country and the time of year.

Like RFG Phase 1, the fuel economy (miles per gallon) of Phase 2 RFG is about

1.5 to 2.0 percent lower than conventional gasoline. There is no need for new equipment to transport or distribute Phase 2 RFG, beyond that needed for Phase 1 RFG.

However, in the past, the introduction of new types of fuel has led to supply problems and attendant price spikes.

For more detailed information, see Tancred Lidderdale and Aileen Bohn, Demand

and Price Outlook for Phase 2 Reformulated Gasoline, 2000, http://www.eia.doe.gov/

emeu/steo/pub/special/rfg4.html.

Mr. HAKES. I would agree with Dr. Yergin that the refining industry has done an incredible job to keep these costs from being

passed on much to the consumer because the refining margins in

67

this country are very, very low. It is rather a small part of the

overall price.

Mr. YERGIN. If I could just give you over the last couple of years

the averages. If you look at the gasoline price, 35 percent of it actually reflects crude oil costs. About 35 percent represents tax. And

the rest would be the refining, the marketing costs, including the

environmental.

Mr. SHIMKUS. The reason why I bring this up, I just have an article here from the Sun Times, to no one’s surprise, that I am a big

renewable fuel proponent of ethanol and biodiesel; because of the

high escalation of prices, I think the oil industry is going to try to

attack the oxygen standard, the clean air positive aspects of that,

and say that is one of the major environmental components for the

increase in costs.

In fact, I will quote from the Sun Times today from a Phillip K.

Velleger Jr., an oil expert from a Boston-based group, which says,

‘‘I wouldn’t be surprised if consumers pay $2.50 this weekend,’’

which has seen gas—and then that is his quote. And then in the

analysis, they have seen the gas prices rise faster than the national

average, talking about the Chicago and Minnesota market, because

of the increased use of ethanol in the blending process.

Would you agree that that is a major component of the increased

prices seen in the price of gasoline across the Nation, the oxygenate

standard and renewable fuel portion?

Mr. YERGIN. We are switching over to summer gasolines right

now and there are new specifications. But the bulk of the increase

in gasoline prices, although not all of it, that we have seen over the

last 4 months reflects the rise in crude prices on the world market.

Mr. SHIMKUS. That mirrors the testimony pretty much across the

board. I just wanted to put that on the record for our consumption.

Admiral, I have a question on the SPR. Not just from your experience in the Department of Energy but from your military background, which I have a limited one myself, and there is always an

assault on the SPR when the prices are high. We do use it, as was

in the testimony, to jimmy the market and the supply and demand

and try to affect prices. Why do we have a SPR?

Mr. WATKINS. We certainly don’t have it to jimmy prices. It was

never designed for that. It was designed for security purposes, so

in the event of a turnoff, something we might have had during the

Gulf War, it was there to use—rather low grade crude, as a matter

of fact—but for a period of time. And we have tested it and moved

it into the pipelines and got it to refineries to be able to live for

a few months supplying our ships, aircraft, and so forth with refined products and cut back on the urgency of dealing with the

transportation of oil primarily by sea. So it was designed from a

national security point of view.

And every time we have a gas price increase, somebody raises

the issue, why don’t you use the SPR? It is a classic one. I talked

to Secretary Richardson when I was over there finding the new nuclear czar. He said, we got it again. I said, don’t play around with

it. It is not to be used to influence the market. In the first place,

it is not that deep of a reserve, the pockets are not deep there.

That should not be used.

68

What we did in the Gulf War to show how important it is to national security is, in the fall of—and I am going to say it was 1990,

I can’t remember now but I think it was the fall of 1990, we tested

the SPR. Well, you can imagine the hue and cry I got from within

the administration itself. Just to test the SPR, you are fiddling

with the market.

Well, that was the an extreme position. We were trying this test

just to see if it would work. The fact that we tested it was extremely important. If you can remember what happened in the

Gulf War, in a very short period of time we spiked to $40 a barrel

and it came right back down. One of the reasons, in my opinion,

is we demonstrated that we were serious about that SPR for national security purposes and we were not going to allow the Iraqis

to interfere with that process.

That is what it is important for. And it did the job then. And the

preparation before that wasn’t to keep quiet and keep all our data

in DOE. We had a whole task group, including the futures market

from New York, come down and participate with us. We set up special systems to the Saudi Minister of Energy that I had a private

circuit with. I wanted to know what was going on in the Gulf all

the time, whether it was fact or fiction that was being reported by

CNN and other things. We had everybody connected with us and

we knew that we had to do that so that the market wouldn’t be

spooked.

But it had nothing to do with using that for those purposes that

many want to use it for and mal-use it. It was never decided by

Congress that we should use that for market manipulation, nor

should it ever be.

Mr. SHIMKUS. Thank you. Congressman Sharp, I know you have

a point.

Mr. SHARP. I want to very strongly reinforce what Secretary and

Admiral Watkins had to say. While we did have a bit of a political

dust-up at the time, it really is quite irrelevant to the proposition

that we tested at that point. And the President announced he

would use it if he needed to, and it was designed to deal with the

enormous speculation going on in the marketplace at a time when

we thought the Saudi fields could well be threatened by missiles

out of Iraq. So it may have had some clear justification for use.

That is the only time, the only time it has been used. And it

should not be used just to quell the marketplace.

First of all, you don’t know that it will work. Second of all, you

don’t know if you are really trying to fight the cartel. They still

might be in a position to totally undermine what you are doing in

terms of prices. And, third, you will have a disruptive effect within

the U.S. market as to where things flow because you will suddenly

glut certain parts of the U.S. market. It is just not an easy, clean

thing to do.

But it is, from a security point of view, as long as we have got

the world oil situation as it is, an important thing to have. And we

have it, by the way, people forget, in conjunction with international

agreements with a number of other of the consuming nations to

also have reserves.

Mr. SHIMKUS. Let me move to Ms. Kenderdine.

69

Ms. KENDERDINE. I just want to say for the record that the Clinton Administration has never advocated selling SPR oil to manipulate prices either. That is not allowed under the statute that authorizes the Strategic Petroleum Reserve. You are only allowed if

the criteria are anticipated or actual supply disruption.

In the situation in December Y2K, no one knew what was going

to happen about our imports of oil, and so we were prepared with

the documents to start a process to sell oil if an actual problem did

occur or if we saw something weird, if Mr. Hakes had seen something early on in December out there that was going on in the markets because of that, but we have never advocated using the SPR

for to manipulate prices.

Mr. SHIMKUS. Then let me take this premise what we, the SPR

for national security purposes, shouldn’t use it to manipulate the

market. It is limited, though. We all agree that is limited. And to

really supply the fuel for a theater war, it takes time. And, again,

it is limited.

Do you not think that it is in our national interest, our national

security interest, since we have an SPR that is limited, that we

continue to move to prepare for longer conflicts of duration and

continue to operate and work off the premise of making sure our

marginal wells are operating, address the other fuel locations and

also continue to help develop our renewable fuel opportunities, ethanol and the biodiesel options? Admiral.

Mr. WATKINS. I would only say that I would have to put the answer to that in the context of what else in the energy strategy? I

don’t believe you can decide whether you want to have an expanded

SPR, for example. That has been debated time and time again. It

has never looked economically sound. If you decide you are going

to closeout all new oil exploration and production, you are going to

closeout new technologies being applied to existing wells or existing

fields, if you are going to do those kinds of things, then I think the

answer is probably yes. But I think you have to balance off do you

want to increase SPR or do you want to increase our production of

oil in this country.

I would do the latter first. I don’t think the SPR is a great investment to go beyond just about what it is today. I have never

seen an argument that is well laid out that says we have such an

enemy out there such as the former evil empire that would demand

that kind of a larger SPR. So I would say no.

The ethanol issue I think, while it is related, is quite different.

And we certainly were proponents of pushing that component of

the energy supply system very hard during the Energy Policy Act

preparation in 1992 and still feel very strongly about it.

We have helped other nations as well. DOE would go to Brazil

and show them how to better produce the ethanol. They are 95 percent fueled in their transportation sector by ethanol. They do it

through the various reconstitution of their crops and so forth. We

help them do that.

That is what we should be doing worldwide. That is the kind of

thing that ought to be in AID. That is the kind of thing that the

State Department ought to be worrying more about on S&T and

foreign policy, which they don’t do. There are a lot of things to do

on the ethanol front that have not been exploited well in terms of

70

policy, execution of those policies, monitoring, getting into the foreign policy issue and so forth.

So I put ethanol aside from SPR. It is hard for me to link those

two.

Mr. SHIMKUS. Anyone want to venture into——

Mr. MARTIN. On the SPR, really I think Ronald Reagan got this

started with a lot of help from this committee in the early eighties.

It was not only an SPR for us, it was an SPR for everybody. To

the extent we show leadership other countries join us, because our

SPR is only as good as the SPR in Japan or Amsterdam or Germany or whatever. Because we coordinate these through the IEA.

We always have to keep our mind on that. It would have been very

bad from a leadership point of view if we start to use our SPR for

market mechanisms.

I agree with the Admiral on the ethanol point. That is really

quite long-term energy policy. That is infrastructure. That is the

need to put in place an adequate distribution system for the next

10 years so we are less reliant on oil. But we still need the SPR,

and it still has to be part of the IEA.

Mr. HAKES. I would like to make two comments that I think

might be helpful. One is that I think there could be a tendency to

have a false sense of security about the international situation in

the sense that Saudi Arabia has intentionally had a policy over the

years of having excess capacity available that they could bring online immediately, and under some circumstance that has, in effect,

been almost a petroleum reserve. I think that has been helpful to

the world market in a couple of instances. But I think there is the

question of whether one would just assume that into perpetuity. So

I think that some of the things like the reserve and other policies

that are kind of insurance policies are important.

I would say, on the ethanol issue, that this is even a better example of where technology matters. The current state of distilling

ethanol from corn is not terribly competitive, but if you look at

some of the less mature technologies that can be used on cellulose,

there are dramatic changes that could be made.

And, again, I would refer to another EIA study that I think is

helpful that looks at the long-term potential for ethanol. And if you

had a very crash program with these new techniques that would

use things like switch grass and other forms of cellulose, you could

conceive a situation in which ethanol might be cost competitive

with petroleum.

I know that we are a conservative agency in making those kind

of estimates, but I would commend that argument to you. But that

wouldn’t happen with today’s technology. It would require a very

strong effort to invest in those technologies.

Mr. SHIMKUS. I appreciate the comment because you are mirroring my comments on the ethanol research plant that I have

been diligently fighting for and I hope to have some success this

year.

Ms. KENDERDINE. I would just like to say that the Clinton Administration is a strong supporter of biofuels. And, you know, when

over 60 percent of your oil use is in transportation, 97 percent of

your transportation runs on oil, looking at alternatives such as ethanol is very, very important.

71

The President put out an executive order a couple months ago to

triple our investment in biofuels and biodiesel technologies—not

biodiesel, biomass technologies. And also with what is happening

with MTBE in the marketplace and the environmental groundwater problems that are associated with MTBE, we are projecting

large increases in demand for ethanol. We already have delivery

problems, infrastructure problems with that that we need to work

on; and that will take time. But it has a good future.

Mr. SHIMKUS. The administration is going to have an opportunity

within the next couple months—we do see a disparity between the

DOE and the EPA and working together. Of course, they are not

here, but we are also talking about the environmental effects of

this supply and-demand equation. And they really should be here.

I have taken much more of my time. But that is what I get for

being diligent and moving rapidly to the vote.

I would like to now turn to the ranking member, Mr. Boucher,

for his questions.

Mr. BOUCHER. Thank you very much, Mr. Chairman.

Mr. Martin, I was rather taken with your hopeful projections for

the energy circumstance for the year 2020 premised on a 60 percent increase in natural gas consumption with a corresponding increase in coal consumption and a decline in petroleum imports.

And I wonder if you could tell us a little bit about where you see

the natural gas that would fuel that 60 percent increase in consumption coming from? Is it purely domestic sources? Does it anticipate having access to the Outer Continental Shelf, production

from which has been under moratorium since the 1980’s and there

is no immediate sign that that is about to change? Where do we

get the natural gas that would fuel this 60 percent increase in consumption?

Mr. Yergin says we are making quite a bet on relying to that

great extent on natural gas in the future. Is he right about that?

Can we with some comfort assume that the gas will be there for

that significant increase? What will be the effect, in your opinion,

on natural gas prices and what will be the effect on the price of

other fuels?

So it is a fairly comprehensive question about some of the more

general effects of this hopeful future that you predict, but premised, first of all, on where we are going to get the gas.

Mr. MARTIN. That is a good question. Thirty quads of that come

from the United States and five from imports from Canada. None

of this presumes gas from Alaska, although that is certainly an option. I think perhaps if you ask Senator Murkowski or some Alaskan they might say the likely market conditions in Asia may prefer

that gas to the lower 48.

Mr. BOUCHER. And the Outer Continental Shelf?

Mr. MARTIN. Here I have come here——

Mr. BOUCHER. I am not asking whether it is a good idea or not.

I am——

Mr. MARTIN. I think we probably will have to drill to achieve

that level. I say this as an environmentalist. I am on the board of

World Resources Institute, and I am one of the two Republicans,

I guess a couple tokens, on that.

72

I am always trying to point out to the Board you cannot achieve

a clean future, you cannot achieve, if you want to meet your Kyoto

targets, you cannot achieve lowering SO2 and NOX without greater

use of gas. And yet to do that you have got to drill in places which

are presently off limits from the environmental community.

You also have to, by the way, have nuclear power, if we are really serious about national security and keeping those oil imports

low—and I should say my oil import number was, for 2020, around

11 million barrels a day. So part of this challenge is putting together a mosaic which achieves nationality security economics and

environment.

And there are going to be some tradeoffs. And drilling in presently restricted areas is going to be one of those areas.

As a guy from an Oklahoma oil and gas family, I can tell you

that there is a lot of gas out there. Nobody wanted gas originally.

They just wanted oil. They kept finding more and more and more

gas. So I guess I come from that Oklahoma optimism about the

supply side.

Also, the cold methane, Alaska, in fact, we are very lucky in this

country that we have so many accessible areas of gas, including

Canada which has enormous gas reserves. If we were in Japan or

Europe we would have to think about long distance pipeline, we

would to think about LNG, which again would increase the cost.

Final point on price, and at Harvard they are much more expert

in price than I am, because I have learned to be very humble. It

is a very interesting dynamic. Natural gas consumption has actually been rising quite rapidly in the last 10 years, and natural gas

prices have been going down. And if you couple that with the new

technology, as EIA pointed out, I am not so sure we have to see

a significant increase in the price of gas to achieve that. Yes, it will

be difficult, but so is expanding coal and meeting environmental

targets. So is expanding nuclear power. So is reliance on oil imports. As we look across the range of things I think the gas perhaps

is the most optimistic part of the energy strategy, as I see it, in

the future.

Mr. BOUCHER. Mr. Yergin, I would be very interested to hear

your comments on this optimistic scenario.

Mr. YERGIN. First of all, I think all these good things that have

happened to natural gas over the last 10 years we should obviously

attribute to the subcommittee and its wisdom.

Mr. BARTON. Of course. Mr. Sharp.

Mr. YERGIN. As I said, it is a bet that we are making. It is a good

bet that we are making. It is a bet we have to make in terms of

natural gas.

Because if you look at our overall energy picture, there is so

much discussion about the new economy that we are going to have

is very much an electricity-based economy. It depends on the quality of electricity, and that is going to depend a lot on gas. But we

have, over the last couple of years, had an industry that produces

gas, exploring for it that has been injured a lot by what has happened to it with very low prices which most people didn’t notice.

And so that there is a big agenda there in terms of investment, in

terms of access, in terms of infrastructure. It does mean look to the

north, look to the frontiers.

73

To some, a subject that we in our company, Cambridge Energy,

have been very concerned about, and I hope maybe by September

in the work we are doing that we will have some answers on the

future of natural gas supply because it really is an absolutely critical question for our overall economy. And September is our target

for that.

Mr. BOUCHER. Thank you.

I have one additional question, Mr. Chairman, if I can indulge

the subcommittee for that.

Mr. BARTON. Sure. It is just you and I for that right now.

Mr. BOUCHER. If I could indulge you for that.

It is not within the jurisdiction of this committee to legislate with

regard to taxes, but I think this discussion this morning would not

be complete if we didn’t address the question of the section 29 tax

credit. And I would be very interested in hearing from this panel

of witnesses your opinion with regard to the affect that the section

29 tax credit has had in terms of encouraging the production of oil

and natural gas from unconventional sources and the importance

of that tax credit going forward to encourage that very kind of production. And also any recommendations that you might have for

ways in which the tax credit could be modified to better enhance

our potential for oil and natural gas production from unconventional resources in the future. The credit expires at the end of

2002, at the end of the next Congress.

And the final part of this question is, would it be helpful to have

the credit reauthorized earlier, perhaps even this year? We will

have a variety of tax measures, no doubt, to consider this year and

would it be helpful to have it done this year as a way to give confidence to producers that the credit will be in place and encourage

them to begin oil and gas production from nonconventional resources in the near term?

Anyone? A mouthful of silence.

Mr. WATKINS. I am not an expert in this area, Mr. Boucher. I

would just say this. I think it makes a lot of sense politically, from

a public policy point of view, to let our great independents that are

out there working these problems in the field know ahead of time

that you are not going to let them down. So I can’t tell you how

important it is.

Let’s don’t let it run to the wire and then shock them either one

way or the other. They have got to know now so they can keep

their pitiful investments going, whatever it is. So give them some

hope with this.

I only hope by saying that, however, that that doesn’t become the

national energy policy of this Congress. The trouble is, we come in

to simple fixes like that which are wonderful and absolutely essential. We were on this same issue in the Energy Policy Act. By the

same token, it isn’t the answer to everything. It is very helpful,

though. Because, you know, it is the little mom-and-pop outfits in

Oklahoma and Texas and so forth that really are giving us the oil

production in this country. The big boys have gone overseas. So we

really do have to give them incentives as much as we possibly can

to take us through this transitional period until we get our act together on oil and gas.

74

Mr. BARTON. The gentlelady from the Clinton Administration.

We hope you will support your ranking member in wanting to do

this.

Ms. KENDERDINE. Absolutely, sir. That is just from me, not from

the administration.

Mr. BARTON. We will take it.

Ms. KENDERDINE. We recognize that section 29 has been a very

successful tax incentive. And from a committee that doesn’t write

tax law to an agency that doesn’t do tax law either, I think our tax

law would be very different if the Department of Energy were directly responsible and in control of it. But we would be happy to

examine this further.

I know that Bob Gee, our Assistant Secretary for Fossil Energy,

has met with industry on many occasions on this and talked to the

National Economic Council experts about this and discussed the

impacts and possibilities.

Mr. BOUCHER. Thank you for that. While we don’t legislate on

the subject, we can certainly talk about it——

Ms. KENDERDINE. And we do all the time.

Mr. BOUCHER. [continuing] what, if any, changes might be helpful. And to the extent that your department can give us advice on

that subject we would welcome it.

Ms. KENDERDINE. Absolutely. We have some very good tax people

in our Fossil Energy office. Happy to have them come talk to you.

Mr. BOUCHER. Thank you, Mr. Chairman.

Mr. BARTON. I only have one final question for this panel. Then

I want to welcome our second panel. I would like the staff to put

up the EIA chart that shows the outyear gap between production

and consumption. It is one of the last charts that Mr. Hakes referred to. It is right behind that. It is not that one. It goes out to

the year 2020. That is the one.

Now, I am looking at the Energy Information Administration energy info card, which is really excellent. And it shows on one side,

I guess the backside, that the total primary energy production is

73 quadrillion btus in the United States and the total consumption

is 97 quadrillion btus. So there is a gap of about 24 quads. And

that is, I guess, in 1998 or 1999 you look at this chart, and this

is really—show how old I am—the $64 question. Does anybody in

the audience remember the quiz show that the big question was

the $64 question? That shows.

Ms. KENDERDINE. No, sir.

Mr. BARTON. So the $64 question of these hearings is, what do

we do in the outyears, which means we need to act as soon as possible so that that net import gap is minimized?

Now there are a lot of things we can do. If we wanted, I don’t

think we would eliminate imports. But if we made a massive move

to nuclear power like France has done, if we made a massive move

to coal, if we really maximized our production of oil and gas resources in the OCS and up in Alaska, we can do significant things

to minimize that import gap there, that delta.

So my last question—and you may want to think about it and

submit it in written terms for the record—but this is really what

the whole purpose of these hearings is about: What is a baseline

supply for this Nation? I mean, how much energy are we capable—

75

within our existing political environmental regulations capable of

producing and what mix should it be? Should we move massively

into nuclear? Should we really make a major political effort to open

ANWR and the OCS? You know, what should that supply line be

in terms of quads and what is the mix in terms of supply?

[The following was received for the record:]

We believe we need to rely on market forces to be the primary determinant of

our energy future, with government intervention only to ensure that energy markets

are competitive, energy supply systems are secure and reliable, the Nation is prepared to respond to energy emergencies, and the environment is protected.

While government policies can influence energy sector trends, they cannot, and

should not attempt to, determine our energy future. For this reason, our key long

term objective is not to ensure that the success of any particular energy resource

or technology, but rather to provide diverse energy technologies for the future. If

we can help ensure the availability of a broad array of competitive energy technologies, we believe the Nation and the energy sector will be prepared to meet future energy challenges, whatever they may be.

Mr. BARTON. I will just open that up to the panel. Mr. Martin.

Mr. MARTIN. I had a chart on that—let me just mention it—on

page 12. I gave this a lot of thought myself. Because you need a

balance. Not everything is going to be a great solution here.

I think we can keep our oil imports to 11 million barrels a day

and our gas imports to about 6. Gas primarily from Canada. And

the way you do that, first is you use some energy more directly.

You don’t electrify everything in sight. You have some electrification, but you don’t go massively toward an electric solution. Coal,

nuclear power, certainly gas would fuel most of your electricity.

You use a lot of gas directly. That is how we get to our 35 quad.

You need renewables, and you need energy efficiency.

But I can get us to a scenario which is below the EIA reference

case on energy demand, which I thought was pretty good for a Republican. On here, they have 121 quads. I can get us to 115, for

example, through energy efficiency.

It is interesting, by enhancing your energy security you also enhance your environment interestingly enough, because you are

using less fossil fuels, in theory, if you are using less energy. So

you get a nice hit with lowering CO2.

But this is exactly the sort of debate this committee should be

involved with. I don’t think there is an easy solution. I think it

should be market based. But I do think there are things the Congress can do to enhance what I call a low energy import future, and

it is really relying on our domestic import base.

Ms. KENDERDINE. Mr. Chairman, the Department of Energy supports a very diverse portfolio of energy R&D technologies. But the

issue of oil imports is—you are not going to have much effect on

oil imports by increasing nuclear power or increasing natural gas.

Our oil imports go primarily for transportation, and we can’t run

our cars on nuclear power. And so the——

Mr. BARTON. Isn’t it about half?

Ms. KENDERDINE. I think it is 66 percent.

But so if you are going to affect the oil import piece of this equation, you either produce more oil at this point in time through

2020—I mean, you are talking about our current fleet of vehicles

is essentially what you are talking or even future until we develop

different alternative ways to power our automobiles. And so if you

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are—you either have to increase your production of oil or decrease

your consumption.

And as I mentioned to you earlier that you can—if we increase

the efficiency of our automobiles, the average efficiency of automobiles by just 3 miles per gallon, you would save a million barrels

of oil per day. That is a lot of oil. And that is why we are working

on an 80-mile-per-gallon vehicle because that I think is the most

feasible way at this point in time to decrease the net imports of oil.

I mean, we are also working, as I mentioned, on increasing production of oil. That is your tax incentives and lowering the cost of production.

There are some very fruitful areas. And the Outer Continental

Shelf, OCS, and the Gulf is very fruitful and also diversifying our

sources of supply.

There was a huge find in the Caspian. They are estimating that

that might be as large as the North Sea. I think that the estimates

of possible reserves in the deep Gulf are about 18 billion barrels

of oil. So there are places to go to increase our domestic production.

But also we—if you want to affect that equation, we very much

need to look at the demand side as well.

Mr. BARTON. Does anybody else before we recognize Mr. Largent?

Mr. Sharp and then Mr. Yergin.

Mr. SHARP. When we look at the import question that is very important because it gets our attention to a bunch of issues that probably need to be resolved.

But let me be a little bit of a skunk at a garden party. I think

if we are not careful we get so overfocused on imports we make a

lot of foolish and costly decisions, as we did in the 1970’s. Because

everything has got to be judged whether it is economic or not. Remember the fundamental facts of the oil market are it is cheaper

to produce it somewhere else, that the really cheap stuff is in the

Middle East. So you are always fighting the marketplace hard

when you go to high-cost fuel sources or alternative sources or

something of that sort.

The truth is, we can adjust and moderate that through tax incentives, through various things to get more fuels on the market, but

the reality is that world market will come crashing in on Republicans and Democrats and everybody else again and again and

again.

So I would be very careful about the concept that our whole goal

is to get down to 4 million barrels a day. Because we can design

a policy. We can also wreck the economy doing it. The truth is, if

we drive up the cost of energy in this country we can become less

dependent. Of course, we won’t export a lot of our products, and

our consumers will be angry, and a lot of things will be inefficient

in our country, and will we have achieved the goal of import? I

don’t mean to overstate this except that it really distorts our thinking if we are not careful.

I think I am in a dilemma because I think you are right to be

focused on this. I think we ought to be examining those other

places to produce in the United States if they are efficient places

to get gas. The moratoria are politically powerful in both political

parties. That is why they are on. That is why they stay on through

Republican and Democratic presidents. I wish it weren’t so. I think

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it is ridiculous in Florida and California we can’t do more with

newer technologies.

Mr. BARTON. Well said by the man from Indiana.

Mr. SHARP. It was easy for us in Indiana. But I think you have

got to work on both ends, and you have to work on the automobile,

too. The truth is, much as we don’t like it, and I came from a district where we manufacture automobiles, that we are not headed

in a very good direction at the moment the way we are building.

Mr. BARTON. I am really asking for the balance point. I probably

didn’t do it as efficiently. But I am——

Mr. SHARP. It is very hard to balance that. I think the Secretary

is right, because that was the direction he tried to take back in the

early 1990’s, which was to recognize you got to do multiple things

and in order to sell them on Capitol Hill or anywhere else you have

to package those up together. It is awfully hard to get one or the

other kind of proposition. With this election I suspect in both political parties we are hard to get that between now and the fall.

Mr. BARTON. Let’s let Dr. Yergin answer the question.

Mr. YERGIN. Really quickly, I think it is a question of balance

and getting the different elements together.

I think, on the foreign policy side, the reality is that whatever

the number is going to be, a large importer and good relations with

the importer is extremely important, diversification is extremely

important, an interweaving of interests so that the exporters see

that their interest is, among other things, a very healthy economy.

We talked about the needs to facilitate domestic production, and I

think that is part of the answer.

Certainly, listening to the discussion about cars, one of the

things in our study is that we now as American each of us drives

almost 35 percent more than in 1980. We are driving a lot more.

Of course, we are driving different kind of vehicles. One out of two

vehicles now is a sports utility vehicle or minivan, and they get

about 21 miles to the gallon; the car gets about 27 miles to the gallon. Fixing that is a contribution.

The emphasis on technology. I think one of the lessons I came

from writing this book, The Prize, was how technology really does

have such a powerful force that you don’t see it. And continuing as

the Department does, this subcommittee is encouraged to continue

to push technology different directions, is ultimately going to when

we get out to the year 2020, and there are lots of surprises there,

that technology will deliver a lot of them.

Mr. BARTON. We are going to recognize Congressman Largent for

10 minutes, because Mr. Boucher and I both took at least 10 minutes. Then we are going to excuse this panel, unless another member shows up before Mr. Largent leaves, to go to our second panel.

So Mr. Largent is recognized for 10 minutes for questions.

Mr. LARGENT. Dr. Yergin, I wanted to talk to you about your

book a little bit. I read this book, and I really commend it to members of this committee. I felt like it was a very helpful resource in

giving some history of oil. The title—in fact, the reason I ask for

this, is that the title says, The Epic Quest for Oil, Money and

Power. What I find missing from the discussion, and I think this

strikes at the heart of what Mr. Sharp just said, what I want to

take issue with, one of the things that I found very fascinating in

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particular was some of the historical views of World War II and the

demise of the Japanese and the Germans and its relationship to

the lack of supply of petroleum products.

And one of the things that I found missing on this particular

panel is the discussion of our dependence on this importation of oil

as it relates to our national security. And I would just like you to

make some comments about if there are some parallels that we

need to be aware of what occurred to Japan, of what occurred to

Germany to a lesser extent, in terms of their national security and

the lack of a consistent, reliable energy source.

Mr. YERGIN. Thank you. It was for me one of the kind of amazing

revelations, in terms of many years I spent researching that story,

to look at World War II differently and to see the degree in which

oil had been among the triggers of the war. I mean, why did Hitler

invade the Soviet Union? Partly was to get the oil, of all places,

Baku and the Caspian that is so much in attention now.

And our embargo against the Japanese, embargoing them on oil

prior to the Second Word War, was connected to the Japanese

march toward what became Indonesia. And of course the conduct

of the war and you look at it and you see that ultimately, in many

ways, both the Japanese and the German military machines were

immobilized by lack of fuel. And it was a great strength that we

had that Congressman Hall had the vitality and the creativity and

the energy of the U.S. oil industry in terms of really supplying the

entire Allied effort.

So I think your remarks tie into what Admiral Watkins said.

When we talk about what the SPR is about, it is not a long-term

answer, but it is one that provides very important time in a moment of crisis. And I think that underlying oil considerations and

imports—and I think this maybe goes back to Congressman Barton’s point, too. There is a continuing underlying national security

consideration that depends——

You know, the security issues, much of the time are not there.

Some of the time, they are there; and they can come as a surprise.

In 1990, 1991 things had tilted a little differently. If the world oil

market had been a little bit tighter we would have seen a different

kind of repercussion in the Gulf crisis.

So I think that the security consideration is not always at the

forefront, but it always has to be part of our thinking about something that is this vital to our well-being and the well-being of the

countries that are our critical partners around the world.

Mr. LARGENT. I guess maybe to focus my question a little bit better would be to say at what point does the red light on the dashboard go off in terms of national security issues? As we see these

forecasts going from 52 percent to 64 percent, at what point does

the light go off and say, wait a second; this is a real problem. What

are we going to address this problem? Where is that line?

Mr. YERGIN. That is talked about a lot. Basically, that line keeps

moving up as our imports keep moving up. A lot of it has to do

with how you assess the relationship with the countries that are

major suppliers of oil. If Iraq had not only kept Kuwait and was

dominating the Gulf we would have looked at any of these numbers

as very alarming. So I think it has to be seen within the context

of overall relationships.

79

I would look at the case of Mexico which gets 40 percent of its

government revenues from oil, very vulnerable to that, but Mexico

is equally or even more aware of how much it depends on the

health of the U.S. economy. So that part of the security picture is

their sense of their interrelationship and interdependence with us.

But I don’t know other people might maybe see where the red light

flashes more clearly.

Mr. LARGENT. I will go to you in just a second.

I had one other question before I leave you, Dr. Yergin. That

was, one of the comments that you made in your open statement

was to caution Congress about making short—or doing short-term

intervention. What kind of things are you talking about when you

say that?

Mr. YERGIN. Well, I think, and I think Phil Sharp referred to it,

there is a propensity when prices are up in these market situations

to talk about some kind of direct or indirect price control interventions in the market. We saw that even this winter where there was

legislation where any time the price got above $25 a barrel the administration was supposed to report to the Congress as to why they

are not using the SPR to bring down the price.

I am concerned this summer, because we could see spikes in natural gas prices, given how tight this market is, that if we had that

kind of intervention that came in even discussions of price caps of

some kind or another that we would see—as Admirable Watkins

said, it would affect the whole investment environment, and it

would work against what we need, which is to see more investment

flowing rather quickly into the natural gas sector maybe out of the

Internet sector so that we do have the supplies that we need to

meet our national needs. So it was really talking about market

intervention of the kind that recurs whenever prices are in the

upper frame.

Mr. LARGENT. Thank you. I am looking forward to watching the

video series. I haven’t gotten to see that yet, but I am planning to

watch that this summer.

Mr. Martin, you had a comment.

Mr. MARTIN. Very shortly, on the red line. The red line is an

international number I think. I think it involves all of the countries’ dependence on the Persian Gulf. And I think we are getting

very close to that red line. If we just look in isolation at the U.S.,

that really doesn’t do much. Indeed, this is an international strategy we are involved with.

That, again, is why the IEA is so important. I spent 4 years in

the IEA during the second crisis, the Iranian revolution. We may

have it all right here, but if other countries are demanding more

and more oil then we lose, too.

I note, for example, that it is remarkable how much Asian demand is increasing on the Persian Gulf, far more than us at the

moment. So what do we do with the Japanese, the Koreans, even

the Chinese? And why are the Chinese sending missiles to Iran

when they are getting oil from the Gulf? These sorts of questions.

It is really a foreign policy point.

And, honestly, the best way we can get our energy agenda

through, which nobody seems to be interested in when you go to

Cabinet meetings or in the public, but if you go with the national

80

security argument at a Cabinet table, then you have got some other

people fighting for the domestic oil producers in, for example, in

this country. You broaden the base of support for a rational energy

policy based on national security.

Mr. LARGENT. Well, I obviously have colloquial interest, being

from the State of Oklahoma and Tulsa, which is the oil capital, but

I still view this from a national security perspective first, because

I think that is the fundamental responsibility that I hold as a representative in Congress; and I think that that has to dominate

local interests or otherwise. So I appreciate your comments.

Ms. Kenderdine, I wanted to ask you a question. You talked

about the administration encouraging domestic production. I want

to know what specific proposals has the administration been promoting and initiating and proposing to increase domestic production?

Ms. KENDERDINE. Well——

Mr. LARGENT. All the folks back in Oklahoma are really interested in this answer.

Ms. KENDERDINE. I was out in Oklahoma with the Secretary. We

met a lot with your producers.

Mr. LARGENT. I was there. They are still waiting to hear.

Ms. KENDERDINE. The President on I think it was March 18th

announced support for delay rentals expensing. I know that there

are a lot of marginal oil producers in Oklahoma and in other

places; and, as always—I mean, you get into a discussion on support for marginal wells, as to whether it is cost effective. And you

get into the types of discussions we have been having here.

Because while the Department of Energy is very much interested

in preserving marginal wells, the domestic base we are concerned

about—we are concerned about shut-ins. We know what a shut-in

means, but then have you other players in the administration who

are very concerned about tax policy and cost, as they well should

be. That is their jobs. And it is not monolithic. We would like to

continue to work with people within the administration to see what

we can do on marginal well production.

As I mentioned earlier, we have supported and I have personally—I have been at the Department for 7 years—worked on a lot

of oil and gas issues, lifting the ban on the export of A&S oil, supporting production and NPRA, the National Petroleum Reserve in

Alaska, royalty relief in the Gulf of Mexico, and that has been a

wildly successful program in the last 5 years, dramatic increases

in oil and gas production in deepwater Gulf.

And I believe that this is not our area. It is Interior Department

relief for royalty payments for marginal producers on public lands.

So there are a list of things that we have done. It is——

But, again, the administration is not a monolith, just like the

Congress is not a monolith; and we are working through a lot of

issues. I feel really good about the tax incentives for G&G and

delay rentals and hope that the Congress will pass those.

Mr. LARGENT. Let me just say in closing—I am sure I am approaching my time—that to those who would question the cost effectiveness of addressing stripper wells and marginal wells let me

say, first of all, it is much less expensive to enhance production

81

from an existing well than to shut it in. Second of all, it is much

more environmentally friendly to do that.

What I would just say and hope that you will argue for as well

is that we need to see, I think, an increase in research to enhance

production from existing wells which is taking place and is an environmentally friendly—it is efficient, it is a less expensive way to

go, as opposed to just, you know, turning off the tap and closing

the wells.

Ms. KENDERDINE. Most of our oil supply R&D money is targeted

for smaller producers because they are the ones who cannot afford

what is expensive, is R&D. So we have invested a lot of our R&D

money in marginal well production.

Mr. LARGENT. Unfortunately, R&D budget is shrinking; and we

are trying to address that in this appropriation process that we are

in right now. But particularly targeting that research would be important. Thank you.

Thank you, Mr. Chairman.

Mr. BARTON. I was going to release this panel, but the Honorable

Phil Sharp is dying to have the last word.

Mr. SHARP. I just wanted to respond to Congressman Largent because I wouldn’t want to be misunderstood that I think that imports are not significant. The question is, it is not the only measure

of our national security.

I was trying to articulate—which Mr. Martin articulated somewhat better—which, even if we got our imports down we have

major stakes so we must not forget there what happens in this

world oil market. So I am a strong promoter of trying to get them

down.

But we sometimes make huge mistakes to raise the cost.

Throughout the synthetic fuels corporation, which finally the

Reagan Administration and the Democratic Congress repealed, was

all driven by national security arguments, all driven by production

and imports arguments, and it was a big mistake.

Mr. BARTON. Now the Honorable Admiral Watkins. Absolutely

the last time.

Mr. WATKINS. Everybody went to the right. It was wonderful

when I was in the Navy.

But let me just try something on you here now. I think this committee could take a look at the DOE Organization Act. It requires

a submission biennially of a national energy policy plan. Look at

that thing, straighten it out, get it harder. The EIA, Mr. Martin

runs a very good quasi-independent agency. They are great. They

have good data.

Mr. MARTIN. No, I don’t.

Mr. WATKINS. Mr. Hakes does.

Mr. BARTON. Mr. Martin is quasi-independent.

Mr. WATKINS. He has already gotten a good track record and

good report cards on his data.

The Congress should demand that models be prepared on the integration of all these various aspects of energy. Those should be

looked at by the private sector. Everybody else, they should have

access by everyone. We ought to play our advocacy against those

models, and we should demand with each administration that they

come forward with recommended changes to the existing laws. If

82

they think it is important, come up with the analytic data to base

up those advocacies. They will either win or lose, but at least we

will know what the new starting point is.

We ought to be doing that with every session of Congress, in my

opinion. I think that is something this committee can demand is a

better system so we go between one administration and the next

without discarding everything and saying that the Republicans did

a lousy job but just listen to our advocacy. We shouldn’t allow that

in this business. We ought to get analytically sound.

And people like Dan Yergin and Phil Sharp that work in this

continuously can be participants in that process and demand it.

Don’t let the energy policy atrophy the way it has.

The good things that we hear about DOE doing, who knows

about it? Have they recommended changes up here to the various

acts? Have they fought—are they up here pounding the table, saying this is best? Here is the analytic data. Look at these outfits

that have assessed this.

The IEA has looked at it in Paris. These are the things that

ought to be demanded in this committee. Then we will get this

thing going. Then the DOE may have some relevance.

Mr. BARTON. I appreciate the tongue-lashing that the former Secretary just gave this subcommittee, and I will try to honor some

of those requests. Because they are well taken.

We are going to release this panel. Before we do, though, I want

to personally tell you how much I appreciate each of you changing

your schedule. The only two we could force to come would be Mr.

Hakes and Ms. Kenderdine, but the rest of you made a real effort

to be here voluntarily.

And this is going to result in something. I can’t tell you what yet,

because we still have a hearing on coal, and we have a hearing on

renewable and alternatives. But I think at the end of the summer

as we look back on the hearing record it is going to be a great

record, whatever the administration is next year, to begin to build

a comprehensive and I hope bipartisan energy strategy for this

country. So I want to give each of you my personal appreciation

and release you from purgatory. So you are released.

Before we start the second panel I will suggest that we take

about a 7-minute personal convenience break because the second

panel has sat in the audience for 3 hours straight, and I don’t want

them fidgeting. So about 12:55, I want all my second panel to be

back here. We are in recess until 12:55.

[Brief recess.]

Mr. BARTON. If our panelists could take their seats, we will try

to get started with the second panel. I think we have everybody.

The subcommittee will come to order again.

We now want to continue with our hearing. We have a very distinguished panel of witnesses on the second panel.

We have Mr. Red Cavaney, who is the President and CEO of the

American Petroleum Institute.

We have Mr. Michael Johnson, who is Vice President of Natural

Gas and Gas Products for Conoco. He is here on behalf the Natural

Gas Supply Association.

83

We have Ms. Cathy Abbot, who is President and CEO of Colombia Gas Transmission, and she is here on behalf of the Interstate

Natural Gas Association of America.

We have Mr. Roger B. Cooper, who is the Executive Vice President for Policy and Planning of the American Gas Association.

And last but certainly not least, Mr. Barry Russell, who is President of the Independent Petroleum Association of America, and he

is representing, in addition to IPAA, the National Stripper Well Association.

Lady and gentlemen, we appreciate you being here.

We are going to recognize Mr. Cavaney for 7 minutes. We want

to set the record straight before we do that.

There are some in Texas that are not sure that Tulsa is the oil

capital of the world, but we are not going to get into a long-winded

debate about that in this subcommittee. Your statement is in the

record in its entirety, Mr. Cavaney; and we would recognize you for

7 minutes to elaborate on it.

STATEMENTS OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN PETROLEUM INSTITUTE; MICHAEL L. JOHNSON, VICE

PRESIDENT, NATURAL GAS AND GAS PRODUCTS, CONOCO,

INCORPORATED, ON BEHALF OF NATURAL GAS SUPPLY ASSOCIATION; CATHERINE GOOD ABBOTT, PRESIDENT AND

CEO, COLUMBIA GAS TRANSMISSION CORPORATION, ON BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF

AMERICA; ROGER B. COOPER, EXECUTIVE VICE PRESIDENT,

POLICY AND PLANNING, AMERICAN GAS ASSOCIATION; AND

BARRY RUSSELL, PRESIDENT, INDEPENDENT PETROLEUM

ASSOCIATION OF AMERICA, ON BEHALF OF NATIONAL

STRIPPER WELL ASSOCIATION

Mr. CAVANEY. Thank you, Mr. Chairman.

My name is Red Cavaney. I am president and CEO of the American Petroleum Institute. I appreciate the opportunity to offer our

assessment on the state of the U.S. oil and natural gas industry

and on how we can work with you to forge an energy policy that

is global in nature and helps ensure that America’s future energy

and security needs are successfully met.

I request that the statement of the Alaska Oil and Gas Association be included as part of my testimony.

Mr. BARTON. Without objection.

[The statement follows:]

PREPARED STATEMENT OF JOSEPH H. HEGNA, ARCO ALASKA INC. ON BEHALF OF THE

ALASKA OIL AND GAS ASSOCIATION

For the record, I am Joe Hegna from ARCO Alaska, Inc. I have spent over 20

years working in the oil industry—designing, building, and operating facilities. For

the last 12 years I have been involved with various environmental management

functions.

The focus of these written remarks will be on the use of new technology to minimize environmental impacts for arctic oil and gas development. In Alaska, we call

this ‘‘doing it right’’.

Before we get into a discussion of ‘‘doing it right’’ using new technology, I would

like to put things into perspective by describing the North Slope of Alaska. The

North Slope is a flat treeless plain, or tundra, which covers 88,000 square miles,

an area slightly larger than the state of Idaho. It stretches from the Canadian border to the Chukchi Sea. It is 600 miles north of Anchorage, and about 1200 miles

south of the North Pole. Winter temperatures are typically minus 30 to minus 40

84

degrees Fahrenheit with 30 to 40 mile per hour winds. Summers are generally a

balmy 40 degrees.

Prudhoe Bay, the largest oil field in North America, was discovered in 1968 and

went into production in 1977. Currently, there are 12 separate oil producing fields.

These fields occupy less than 2% of the total surface area. Since Prudhoe first went

into production, over 12 billion barrels of oil have been produced on the North Slope.

These are some of the best facilities in the world—in design and operation. I think

they are the ‘‘best of the best’’.

Extensive research indicates that oil field activities have had no adverse effect on

the North Slope’s fish and wildlife populations. For example, the caribou move freely

through the oil fields and have generally been unaffected by our facilities. In fact,

the number of caribou in the Prudhoe Bay area has grown from 3,000 in 1972 to

about 20,000 today.

Air quality is consistently better than required by state and national standards.

Emission sources are closely regulated by state and federal agencies. The largest

quantity of air emissions from North Slope oil operations comes from turbines that

power production facilities. These turbines are fired by natural gas, one of the cleanest burning fuels available.

All North Slope operators have a goal of zero spills. In operating these complex

fields, however, some spills will occur. Most are from a pint to 10 gallons. And the

vast majority of spills never reach the tundra or surface water because they are contained on the gravel pads on which the facilities are constructed, where they are

easily cleaned up. All spills, no matter how small, are reported and cleaned up immediately.

These existing facilities are very well designed and operated. Operating excellence, with regard to the environment, has been recognized by others including recently the Environmental Protection Agency (EPA) and the Interstate Oil and Gas

Compact Commission (IOGCC). In 1999, the EPA’s Region 10 gave Kuparuk its ‘‘Evergreen Award’’ for pollution prevention. In 2000, the IOGCC gave Kuparuk the

Stewardship Award for large oil and gas facilities.

Let’s look at how new technologies and new approaches are making it possible to

find, develop and produce new fields with even less impact on the environment. In

the arctic, we can now explore for oil without leaving a footprint on the land. And

when we do find new fields, we’re able to develop them in ways that have even less

impact on the land and the fish and wildlife that inhabit it.

The acquisition of 3-D seismic data is a key step in the exploration process. It’s

how we identify and map the prospects we’re interested in. Onshore seismic acquisition on the North Slope occurs only during the winter after the federal, state and

local governments issue permits authorizing tundra travel. Tundra travel doesn’t

begin until the tundra is frozen and there is six inches of snow cover. We use specialized low-impact tundra travel vehicles which weigh more than 10 tons. However,

the tracks are long and wide, spreading the pressure over a large area... protecting

the tundra from damage.

Onshore exploration is conducted only in the winter. We use ice roads to move

drilling rigs, camps, men and material to remote locations. We build ice roads with

water from lakes chosen with the assistance of the Alaska Department of Fish and

Game. The volume taken from each lake is determined based on water depth and

whether a lake contains fish. Ice roads are generally six inches thick. It’s not unusual for us to build 60 to 70 miles of ice road a year to support remote drilling

operations. In the spring, these ice roads simply melt away.

The best illustration of how we are ‘‘doing it right’’ is by a real example. I have

brought a brochure on the Alpine Field—‘‘Setting The Standard For The New

Millenium’’. On the cover is a drilling rig.

A drilling rig weighs several million pounds and is moved to its location via ice

road. The rig is set on an ice pad more than 12 inches thick. When drilling operations are complete, the rig and support facilities are removed, and all drilling

wastes are transported to existing facilities for disposal or injected back downhole.

The final step is to take a front end loader and shave the ice pad down to pure ice.

Scraped material is hauled out and disposed of in approved facilities. Pads melt,

leaving no trace.

On the inside page is a photograph of an exploratory well at Alpine taken the

summer after it was drilled. Six months before this picture was taken, a 160-toot

tall, 3 million pound drilling rig stood on an ice pad where the well was drilled to

an 8,000 foot depth. Prior to drilling we acquired seismic data over this entire area.

You can see how much impact we’ve had.

The only visible sign of our presence is the well tree. And this remains on location

because we are developing the field and will one day produce from this well. If the

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well had been unsuccessful, we’d have plugged and abandoned it below grade, leaving virtually no trace.

The thing that’s amazing about ice-pad technology is that the vegetation adjacent

to this well is completely undisturbed. We can explore without leaving visible footprints.

Producing oil requires infrastructure and a permanent presence for the life of a

field. Our goal is to design, build and operate fields in a way that minimizes impact

on the land, the water, the air and on the fish and wildlife that use a given area.

To see how, let’s look at the Alpine field which is now being developed and which

will begin production in 2000.

The first step is understanding the environment. We began environmental studies

of the Colville area in 1991, three years before we discovered the Alpine field.

We mapped 24 different habitat classifications that were developed with the assistance of the US Fish and Wildlife Service and the Alaska Department of Fish and

Game. Baseline studies were designed with the help of these and other resource

agencies. We used satellite infra-red photography, ground-truthed by summer field

parties to develop the map. We did regional study first, then focused on the Alpine

project area when the discovery was made. Different kinds of habitat are important

to different kinds of wildlife. Some kinds of habitat are scarce, others are not. To

avoid major impacts, you have to know where the high value and low value areas

are. Nuiqsut residents, who use this area for subsistence hunting and fishing, also

played a role in this process. We used their input, agency input and this data to

locate our facilities in areas where they would allow development of the field and

minimize impact. At Alpine, for example, we moved a drill site away from a lake

important to waterfowl and subsistence hunters.

Extended reach drilling allows us to drain oil from a very large area from a single

location. At the Niakuk field near Prudhoe Bay, where ARCO and BP have developed two offshore oil accumulations from a single, onshore drill site, we’ve done it

by drilling wells with departures of more than 20,000 feet—or four miles. Our drilling targets are 9,000 feet deep and four miles away from our drilling rigs.

To illustrate what this means, I had our engineering department prepare a drilling scenario for Washington, D.C. With today’s technology, and a 21,000 foot step

out well, we could build a drill site on the front lawn of the White House and

produce oil from beneath most of Washington and a big piece of Arlington, Virginia.

The world-record step out well is longer than 28,000 feet—or 6 miles. With wells

of that length you could produce from beneath the entire District of Columbia, all

of Arlington, Alexandria, and a big piece of the Maryland suburbs too.

The evolution of production pads—or drill sites—on the North Slope is a classic

example of how we have done it right. A drill site is a central location from which

we drill and operate as many as 50 wells. In the early days, they were generally

65 acres in size. Wells were spaced 120 feet apart, and the pads included large reserve pits for storage of drilling wastes. Today wells are 15 feet apart and we’ve

eliminated the reserve pits. At Tarn, we have space for 50 wells on a 6.7 acre pad.

Pads today are one-tenth the size that they used to be.

Traditionally, drilling muds and cuttings have been placed in surface waste disposal impoundments known as ‘‘reserve pits’’. Today, using grind and inject technology, cuttings are crushed and slurried with seawater in a ball mill, then combined with the remaining drilling muds and reinjected into a confining formation

3,000 to 4,000 feet underground. This permanent and environmentally sound disposal method isolates the wastes, eliminates subsequent disposal problems and

greatly reduces the spaced required for drilling operations.

The Alpine pipeline river crossing is the first of its kind completed in the arctic.

We proved the technology, by installing 18’’ steel pipe in a 4,200 foot bored hole

from one side of the river to the other. The pipe passes 100 feet below the river.

A cased oil pipeline was then installed within the 18’’ steel pipe. In short, we will

have a pipeline within a pipeline. This design ensures instant containment in the

unlikely event of a small leak. A state of the art leak detection system will also let

us know if we have a problem.

The Alpine field will be produced from just two drill sites, three miles apart. Pads

will be joined by a gravel road that will also serve as an airstrip. Surface impact—

gravel footprint—will comprise about 97 acres. From this small footprint we will be

able to access the Alpine reservoir, which encompasses some 40,000 acres-more than

ten miles long and four miles wide. Less than 0.2 percent of the field will be impacted—that’s less than one-tenth the percentage at Prudhoe. Construction is occurring during the winter, using ice roads. The construction will not disturb wildlife.

The Alpine field will not be connected by a permanent gravel road to existing infrastructure on the north slope. The operation will be much like that of an offshore

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platform. Drilling supplies and major equipment will be transported in winter using

ice roads. Food and personnel will be transported by air, and the number and frequency of flights will be limited for a six week period in June and early July to minimize disturbance of nesting waterfowl.

Our goal is to minimize our impact on the environment and operate oil fields that

are sanctuaries for healthy populations of fish, waterfowl, and wildlife. Thousands

of caribou still return to our fields to calve and rear their young. The herd is six

times larger than it was in the early 70’s. Our waterfowl populations are healthy.

We have turned our gravel mines into deep lakes that provide crucial winter habitat

for fish—a rare commodity because most of the lakes on the North Slope freeze from

top to bottom in winter. We’ve learned a lot over the years. We can explore without

leaving footprints. And the footprint required for new developments is a tenth of

what it once was.

Alpine—with its new technology—shows you what we mean by ‘‘Doing It Right.’’

Mr. CAVANEY. It is particularly appropriate that we discuss this

topic now because of the convergence of two powerful forces pulling

the industry in opposite directions. The first force is the beginning—this weekend, in fact—of the vacation driving season, which

offers a clear picture of the continued increase in demand for our

products by American consumers.

Gasoline-powered automobiles have been the dominant mode of

transport for the past century and there is no evidence that consumers are ready to change. The automobile will remain the consumers’ choice for personal transport because the mobility and

independence it affords is so highly valued. While substitutes for

gasoline may some day become prevalent, any such wholesale

change is more than several decades away.

The industry enters the new century with bright prospects for

sustained and significant growth for the foreseeable future. Most

forecasts anticipate an increase in worldwide demand for our products of 15 to 20 million barrels a day within the next 2 decades,

an increase of between 20 and 25 percent.

The second force I referred to is represented by two Federal Government actions, one on diesel fuel, the other on gasoline.

Last week, the EPA proposed to drastically lower the sulfur content of diesel fuel beyond industry’s unprecedented commitment to

reduce sulfur by 90 percent. Adopting EPA’s rule will almost assuredly have negative consequences on our industry’s ability to

supply petroleum products to consumers.

Concerning gasoline, on June 1, we must begin selling new federally mandated cleaner burning gasoline, RFG Phase 2, it is called,

in one-third of the country.

We certainly share government and consumer commitment to

clean air. These latest regulations, however, are too much too soon.

They represent yet additional layers of uncoordinated government

regulatory restrictions being piled on at ever shorter intervals.

Add to this the increasing tendency by government to deny our

companies access to Federal lands for responsible exploration and

production of oil and natural gas, and the cumulative effect is everincreasing constraints on this country’s energy infrastructure.

A steadily increasing demand for our products simply cannot be

sustained over time if government policies are consistently at odds

with the practical operational needs of the industry. And let me be

clear, our industry is committed to meeting the Nation’s energy

needs while contributing yet further significant gains in environmental protections.

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We are already seeing evidence of infrastructure stress in California where stringent specifications on the type of gasoline sold in

the State has led to fewer refineries, all of which are operating at

peak capacity. As the General Accounting Office pointed out in its

recent report, any supply disruption caused by California refinery

outages tends to quickly upset the State’s tight balance between

supply and demand. Surely the attendant volume and price volatility is not the type of future we want for the rest of the Nation.

Moreover, the current situation in the Midwest, where summertime reformulated gasoline is in short supply and significant price

differences are developing between reformulated and conventional

gasolines, underscores the need for regulators to provide refiners

the flexibility they need to continue to meet consumers’ needs at

affordable prices.

As we enter this new century, it is essential that the Federal

Government revisit energy policy. No change from the current position is a prescription for more price volatility and increasing concerns over supply adequacy. We urge Congress and the White

House to adopt an energy policy that recognizes four very important points: .

First, our industry’s flexibility to adapt to the demands of rapidly

changing cycles cannot be further eroded by uncoordinated new

government restrictions without adverse impacts on consumers.

Second, given our industry’s significant technological advances, a

vibrant U.S. oil and natural gas industry can coexist with a safe

and ever cleaner environment.

Third, our industry is highly globalized, and government actions

that damage its efforts to conduct business abroad are also harmful

to the Nation’s economy.

And, finally, government must begin an earnest effort to reconsider its view of the industry with an eye toward forging an energy

partnership to benefit consumers, government, and industry.

Because of its commitment to its consumers, our industry has always found ways to meet the challenges placed before it. Perhaps

because of that, some have come to believe that there is no limit

to the burdens they can place on our industry. I am here to convey

what our experts tell us. There are limits to the stresses that can

be endured without resulting impacts on consumers. As the heating

oil situation this winter and the recent spike in the gasoline market point out, flexibility is being regulated out, as is the convenience and affordability our customers, your constituents, have come

to expect. It need not be this way.

We recognize you are faced with increasing demands to address

these matters, and we applaud your efforts to look at an energy

policy. To the extent to which we can help in your efforts to better

understand the policy effects of the many actions that are under

your consideration, we are here to help you.

Thank you, Mr. Chairman and members of the committee.

[The prepared statement of Red Cavaney follows:]

PREPARED STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN

PETROLEUM INSTITUTE

The American Petroleum Institute (API) is pleased to have the opportunity to

present a statement on the state of the oil and natural gas industry in the United

States. We are also pleased to offer our thoughts on how industry and government

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can work together more effectively in implementing an energy policy that is global

in nature and helps ensure that Americans’ future energy and security needs are

met.

API represents nearly 500 companies engaged in all aspects of the U.S. oil and

natural gas industry, including exploration, production, refining, distribution and

marketing.

THE STATE OF THE INDUSTRY

It is particularly appropriate that we discuss this topic today because, as we all

know, this weekend is the beginning of what is traditionally known as America’s

vacation driving season. Perhaps nothing better illustrates how the products produced by our industry serve American consumers, how important those products are

to consumers, and how they affect their everyday lives.

It is important to emphasize that America’s oil and natural gas industry is committed to supplying American consumers with a reliable and affordable supply of

energy for all their needs. Meeting this goal has not been easy, particularly these

last few years that have seen the industry through countless twists and turns,

peaks and valleys. Last year, for instance, we experienced some of the lowest crude

oil prices in this century, and this year we’ve seen some of the highest in a decade.

Nevertheless, despite the industry’s penchant for rapidly changing cycles, we have

managed to continue fulfilling our mission—supplying consumers with the petroleum products that they need.

While there have been many cycles in the industry’s history, and surely more in

its future, we should not let these temporary booms and busts obscure some clear

long-term trends that are essential to understanding the industry. In fact, discerning the difference between these short-term cycles and long-term trends is likely

to be one of the most serious challenges to energy policy in this new century.

OIL AND NATURAL GAS AND THE COUNTRY’S ECONOMY

First, and most important, there is a clear link between the use of petroleum and

economic development. Through all the changes that have occurred in our industry,

one constant has been the growing use of our products by our customers. Gasolinepowered automobiles have been the dominant mode of transport for the past century. There is no evidence that consumers are ready to change that.

Regardless of fuel, the automobile—likely configured far differently from today—

will remain the consumer’s choice for personal transport. The freedom of mobility

and the independence it affords are highly valued. While substitutes for gasoline

may someday change this reality, any such wholesale change is more than several

decades away—the amount of time required to fully retire the existing and stillgrowing fleet of automobiles powered by gasoline and to deploy any replacement fuel

source throughout the world.

As a consequence of this, the industry has entered the new century, not with fading hopes, rather with the bright prospect for sustained and significant growth in

demand for our products for the foreseeable future. Most forecasts anticipate an increase in demand for our products worldwide of 15 million to 20 million barrels a

day within the next two decades. That is an increase of between 20 and 25 percent.

It is fair to ask, then, if the industry is up to the daunting challenge of supplying

these products.1The evidence suggests that we are. The remaining question, then,

is whether Congress and the White House can demonstrate the vision and foresight

to adopt an energy policy that assists in our efforts, or whether we will see a piecemeal energy strategy that extends encouragement and support with one hand but

creates bureaucratic obstacles with the other.

A successful energy policy must recognize four very important points:

• Our flexibility to adapt to the demands of these rapidly changing cycles cannot

be eroded anymore than it already has been by impractically conceived and uncoordinated new government restrictions.

• Given the great technological advances we have made, a vibrant oil and natural

gas industry can coexist with a clean and safe environment.

• Our industry is highly globalized and any legislation that would damage its efforts to conduct business abroad would also be harmful to our nation’s economy.

• The government must begin an earnest effort to reconsider its view toward the

industry with an eye toward forging an energy partnership to benefit all stakeholders: consumers, government and industry.

I am pleased to say we have already seen evidence of this last point, in the Department of Energy under Secretary Richardson, in some sectors of the Minerals

Management Service of the Department of the Interior, and in several other areas

of the federal government. Unfortunately, the same cannot be said for all of the fedVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00092 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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eral government. In all too many places, the oil and natural gas industry is viewed,

not as a partner, but as a force to be controlled and regulated every step of the way

without any full understanding of how such intervention will affect the industry’s

ability to meet its responsibilities to consumers and the nation. In some cases, government agencies even ignore laws enacted by Congress to ensure that multiple use

(recreation, preservation and development of natural resources) of government lands

is a fundamental consideration in implementing government land policy.

A failure to move toward this kind of sorely needed reform could have serious implications. A steadily increasing demand for our products simply cannot be sustained over time if government policies are consistently at odds with the practical

operational needs of the industry.

Additionally, government needs to inform consumers of some of the likely consequences they undertake in dealing with the subject of energy. For example, in the

state of California where stringent government specifications on the type of gasoline

and diesel fuel that can be sold are in place, this has led to many fewer refineries,

all of which are operating at peak capacity. As the General Accounting Office (GAO)

pointed out in its recent report, any supply disruption caused by refinery outages

tends to quickly upset the state’s tight balance between supply and demand.

Why are there fewer refineries? The economics of meeting the state’s regulatory

requirements all but create a situation where capacity quickly rationalizes to demand levels, eliminating much of the traditional flexibility which benefits consumers.

I suspect this type of volatility is not what any of us wants for the rest of the

nation. As we enter this new century, it is absolutely essential that we revisit energy policy in a new light. Circumstances have changed and will certainly continue

changing.1Given all that’s at stake for our nation in the area of energy policy, a

closer collaboration between government and industry needs to be fostered. The oil

and gas industry is not opposed to regulation; we favor smart, constructive and wellconsidered regulation, based on sound science and economics, which will benefit consumers.

Moreover, our industry has repeatedly demonstrated its commitment to environmental protection. The lion’s share of the progress made in reducing air pollution

is attributable to cleaner cars, fuels and industry facilities and operations. Together,

they account for approximately 70 percent of total emission reductions nationwide

since 1970. The U.S. oil and gas industry spent more than $90 billion on environmental protection during the 1990s. The industry spent $8.5 billion in 1998 alone—

and that was more than EPA’s total budget and more than double the net income

of the top 200 oil and gas companies.

MEETING THE COUNTRY’S CONTINUED ENERGY NEEDS

Our long-term ability to supply a wide range of products has been greatly enhanced by continual improvement of processes, technology and human resources. Indeed, the industry is remarkable in its ability to respond to adversity and develop

ingenious solutions that keep our products coming to market in ways and at costs

that consumers appreciate.

The intensive use of the latest, most advanced technology is making the centuryold oil and gas industry an innovative, visionary, and highly efficient new industry.

Our industry has been producing, and intends to keep providing, both the fuels and

feedstocks that make life simpler and safer, more comfortable and more convenient

for society. Our heavy reliance on technology makes us an industry with an exciting

future—a flexible, resilient industry that welcomes change and meets challenges.

Our industry has embraced technology in many ways, with many benefits. Daily,

the industry explores and operates safely in increasingly remote locations and in the

harshest of conditions.

Technology has driven the costs of exploration and development dramatically

downward: the cost of finding oil has declined by 40 percent over the past 10 years.

Moreover, despite sharp increases in costs due to added regulations, operating costs

at U.S. refineries have fallen by almost 20 percent per barrel, as refining has become more energy-efficient and new computer hardware and software have improved the processing of crude oil.

Technology in our industry—and throughout the energy business in general—

knows no boundaries.

RECENT DEVELOPMENTS

The recent pricing and supply situation has caused some concerns about our ability to meet the demand for gasoline and diesel. That is understandable, but several

important points should be understood about that:

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• First, prices at the gasoline pump are determined by the cost of crude oil, and

crude oil prices are determined by supply and demand in the international marketplace. • Second, high crude oil prices have resulted from a decrease in foreign oil production and a greater demand for oil from the recovering Asian economies and a

continued growth of Western economies. • Third, although prices rose rapidly, retail prices, after adjusting for inflation, are

generally 40 percent below the prices of the early 80s, and we have seen those

prices gradually decrease as the supply of crude oil increases. • The U.S. oil and natural gas industry is operating its refineries at record production levels—within safety and environmental limits—and will continue increasing through the prime drive season when the demand for gasoline is at its highest. • The requirements for new federally mandated cleaner-burning gasoline that will

be required in about one-third of the country beginning June 1 is creating uncertainties in the markets because of fears that refineries might not be able to

supply all the reformulated gasoline necessary. First, this new gasoline is more

difficult to make and has required extensive investments by refineries. Second,

a recent decision by the U.S. Court of Appeals for the Federal Circuit in a gasoline patent dispute has potentially significant implications for the California

and federal reformulated gasoline programs. Last week, the Court denied a petition to rehear this case. If the decision stands, it will likely impose additional

costs on the manufacture and importation of fuels without providing any additional air quality benefits to the public. The Federal Circuit decision could also

impact supplies of reformulated gasoline, as refiners and importers individually

evaluate whether to continue to participate in the reformulated gasoline programs and either pay patent royalties or incur the costs of developing formulations that are outside the scope of the patents. Because of the uncertainty created by the Court’s decision, concerns have also been expressed that importers

and blenders, in particular, may choose to supply less reformulated gasoline to

the market than they would otherwise have done to avoid potentially infringing

on the patents. • Finally—and perhaps this is the most important, the decision by OPEC to increase production in March may have contributed to a premature and irrational

exuberance. The OPEC decision brought some short-term relief, but the fact remains that the fundamentals of the world markets still have not changed, and

until this country changes its energy policy, we will continue to be faced with

the fact that we import over 55 percent of our oil needs.

The price increases we experienced were brought on by short-term shocks that resulted from sudden changes in supply and demand. Just as prices were up for a few

weeks, they began to turn down when factors changed.

In a free-market economy, we have seen time and again that price movements ultimately create balance between supply and demand. Leaving the marketplace free

to continue working is what allows this balance to be maintained over time.

As has been proven over and over again, the U.S. oil and natural gas industry

can best provide American consumers with a steady and affordable supply for all

their needs when markets are allowed to function as freely as possible. We are

pleased that the federal government took a balanced approach to the current situation by encouraging more foreign crude oil production while refraining from interfering in the marketplace, which is still the best way to get gasoline to consumers,

reliably and at the lowest cost.

The past year and a half has seen us go from a period of extremely low prices

to a peak where crude oil prices have reached levels that were three times those

of the previous year. This dramatic change in crude oil prices contributed to increases in the prices for petroleum products. These changes made it difficult for consumers to plan and budget for expenditures and have absorbed a larger share of

family incomes.

These changes were brought on by increases in world demand for petroleum due

to robust growth in world economies and reductions in supply by foreign oil producing nations. World petroleum stocks have been drawn down, and prices have

been driven up.

Despite the limitations on world supplies, our companies are working hard to

produce all the gasoline and diesel fuel that our customers will need during the

coming months. Refinery output of gasoline and distillate oil have set many records

this year.

How we got to this point is relatively simple: We have experienced 20 years of

more and more overlapping regulations that have left our nation’s petroleum distribution system with minimal flexibility. Restrictions on producing petroleum in

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this country have led to declines in domestic production by one third over the past

three decades. We now import over 55 percent of our petroleum needs. This large

demand on foreign supplies leaves us at the mercy of world supply and demand conditions and open to the volatility that we have experienced over the past year.

THE ENORMOUS COST OF VOLATILITY

While historically our industry and our nation have been able to survive the disruptions and nervousness brought on by market volatility, they have done so at a

price. Volatility is in no one’s best interest. Our companies suffer because it is much

more difficult to undertake the types of long-term planning and investment needed

for sustainability. When crude oil prices are rock-bottom, as they were last year,

companies simply do not have the resources needed to invest in projects that could

cost billions of dollars over many years. When oil prices are higher, as they are

today, companies are reluctant to take the kind of risks necessary for future growth

because they have no guarantee that prices will not plummet again. As one pipeline

supply company executive told us recently, ‘‘Uncertainty leads to paralysis.’’

Our suppliers—companies that make pipeline and other equipment needed for exploration and production—have to put their own interests first, so when producers

quit buying their products because of low crude oil prices, they have to search elsewhere for customers. By the time our companies are ready to buy equipment again,

those suppliers may no longer be making those products because they’ve found more

reliable customers.

Similarly, both producers and their suppliers are too often forced to lay off many

of their employees and those employees get other jobs—many in other industries—

and are thus unavailable when the producers are once again ready to expand. In

the highly specialized area of petroleum engineering, the number of students entering those programs at our universities has steadily decreased.

In addition, if the hard times last long enough, many of our smaller producers

and their suppliers will simply close up shop, never to return.

But there are other casualties as well. The first is the confidence Americans have

always had in our industry to provide them with the products when they need them

at a reasonable cost. Our companies have strived hard to live up to that trust, and

for the most part they have succeeded. However, there can only be so much of this

volatility and its resulting uncertainty regarding supply and prices before that confidence is brought into question.

And perhaps even more important are the national security implications of this

volatility. As the world’s only remaining super power, the United States has inherited a tremendous burden, at home and abroad. The question we must ask is this:

how dependent on a reliable source of the products our companies make are our

armed forces and those of our strategic allies?

The answer, of course, is extremely dependent. Any serious disruption of any segment of our industry—from production to transportation to refining to delivery—

could place severe strains on our armed forces’ ability to do their jobs. Without a

sound energy policy that encourages greater domestic production and lifts the stifling effects of over-regulation, we place too much at risk.

It is important to point out that despite the obstacles, our companies are striving

to supply products to consumers:

Refinery processing of crude oil is above average and set a record in 1999.

Refinery production of gasoline and distillate oil have set many records for this

year.

Refinery utilization is currently above average for this time of the year, exceeding

93 percent last week.

These measures indicate that our industry is working as hard as possible to safely

deliver the products that consumers need. It is also important to note that while

world supplies are reduced, there are no shortages today.

How we can meet the challenges: An effective energy policy

Government can and should also take steps to strengthen our domestic oil and

natural gas producing industry. Because the United States imports over 55 percent

of the oil Americans consume, the ebbs and flows of the world oil market impact

the industry’s ability to continuously provide consumers the fuel they need at fully

affordable prices. We can reduce rapid swings in prices by providing greater diversity in where companies get their supplies of crude oil, both at home and abroad.

We can reduce our reliance on foreign supplies and also potentially exert downward pressure on international crude oil prices by opening our most attractive domestic oil and natural gas prospects to responsible exploration and development.

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One hundred years ago, scientists were predicting the demise of both coal and oil.

Now, they are no longer forecasting the end of our coal supply, but we still hear

the question asked: ‘‘When are we going to run out of oil?’’

The fact is that oil is in plentiful supply—and is likely to remain so for the foreseeable future. According to the Oil & Gas Journal, the U.S. Geological Survey’s

2000 World Assessment (to be released at this June’s World Petroleum Congress)

estimates that, excluding the United States, the world’s undiscovered, conventionally recoverable reserves amount to 649 billion barrels of oil and 4,669 trillion cubic

feet (TCF) of natural gas.

The USGS assessment shows that U.S. undiscovered conventionally recoverable

reserves total 83 billion barrels of oil and 527 TCF of natural gas.

Looking to the future, technology could well permit the economic development of

the largest known source of hydrocarbons—methane hydrates—methane frozen in

ice. Located in deep water under intense pressure, methane could provide the world

with several more centuries of available clean energy. The U.S. Geologic Survey has

estimated that the United States has 320,000 TCF of methane in hydrates, which

is 200 times the size of conventional gas reserves.

However, our industry cannot draw upon our vast remaining hydrocarbon reserves unless access is provided for responsible exploration and development.

Currently, many of these areas have been placed off-limits by the federal government. Since 1983, access to federal lands in the western United States—where nearly 67 percent of our onshore oil reserves and 40 percent of our natural gas reserves

are located—has declined by 60 percent.

Our search for new domestic offshore oil and natural gas is limited to the Gulf

of Mexico and Alaskan waters because of the congressional moratoria that have

placed off-limits most of the rest of our coastal waters. Onshore, the President has

repeatedly used his executive powers to limit oil and gas activity on vast regions

of government lands. Congress has refused to authorize exploration on that small

section of the Arctic National Wildlife Refuge that was specifically set aside by law

for possible exploration in 1980. And most recently, the U.S. Forest Service moved

to make it more difficult for our companies to explore for natural gas and oil on government lands when it announced a plan to bar road building in virtually all of the

large areas in the forest system, spanning a total of 43 million acres in 39 states.

Our industry supplies the energy to keep America going strong, but to continue

to produce domestic oil and natural gas, we must have improved access to federal

and state lands.

Old arguments about the incompatibility of access and a clean environment have

been disproved. Technology has revolutionized how oil and natural gas are found

and produced. For example, geophysicists use three-dimensional seismic equipment

to locate oil and natural gas with greater precision so that more oil can be produced

with fewer wells. Fewer wells mean a smaller environmental impact. Improved drilling techniques allow companies to branch out underground to reach a variety of oil

and gas reservoirs from one location. Offshore wells can now safely capture oil and

gas in ocean depths of thousands of feet in areas far offshore.

Much has been made recently about the advantages of natural gas, and indeed

they are many. Natural gas is a clean-burning fuel and there is no shortage of it,

domestically. The National Petroleum Council, in its most recent report on natural

gas demand, reported that it expects that U.S. gas demand will grow from 22 trillion cubic feet (TCF) in 1998 to about 29 TCF in 2010 and could rise beyond 31 TCF

in 2015. But the fact that seems to be lost on some is that natural gas comes from

the same place as oil does, from reservoirs buried deep beneath the ground. There

is no magic fountain spewing natural gas, ready to be harnessed and delivered to

our nation’s homes, factories and electrical generating plants. We must look for it

in the same manner we look for oil, and to do this, we need to be allowed access

to the areas where it is likely to be found.

In addition to denying access for oil and gas development, the federal government

has imposed layer upon layer of regulations on U.S. refineries without sufficient regard as to how these regulations impact refiners’ ability to meet the full range of

needs of American consumers. In many cases, companies have simply given up attempting to meet the increasing regulatory demands and shut down their refineries

altogether, to the point that today we have about half the number of refineries we

had just 20 years ago.

Over-regulation reduces the flexibility that refineries need to respond to the fastpaced changes in today’s world. This is particularly true in the ‘‘balkanized’’ distribution system that we already have in place as a result of federal and state government mandates for different types of fuels for different sections of the country

as a result of clean air regulations.

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In the past, any refinery or distribution system disruption could easily be overcome by simply switching to another refinery or another pipeline. Today, with different refineries producing different grades of gasoline for different regions, such

source switching has become extremely difficult, leaving the system vulnerable to

serious supply problems.

Little effort is made by the government to explain to consumers why this balkanized distribution system means that people in some states or regions of the country

pay more for their fuel than do people in other areas. The result is too often unjustified suspicion of and anger toward our companies and the industry.

The EPA’s proposed regulation, announced last week, to drastically lower the sulfur content of diesel fuel is an example of a government action that could have significant, negative consequences on our ability to supply heating oil and diesel fuel.

We share the government’s interest in further cleaning the air. But emissions reductions beyond the 90 percent we have already proposed stand a good chance of further driving up fuel manufacturing costs unnecessarily, imposing yet additional burdens on our nation’s truckers and farmers. We do not believe it is unreasonable to

ask for a one-year moratorium on the implementation of these regulations—until

sufficient studies of this extreme policy can be performed. We all share the same

goal of emissions reductions but getting there sensibly without significant adverse

impact on the industry and our nation’s consumers is the smart way to go.

Even with greater access and flexibility, the United States will continue to need

to rely on foreign oil supplies. Thus, it is important that we maximize the diversity

of those supplies to help ensure the reliability of a continuous flow of oil imports.

Unfortunately, U.S. unilateral trade sanctions and the constant threat of sanctions

narrow our sources of supply, frustrating achievement of this important objective.

In recent years, unilateral economic sanctions have increasingly become the policy

tool of choice in the conduct of U.S. foreign policy. One of the favorite targets of

these recent sanctions has been major oil-producing countries. The U.S. currently

has sanctions in place against countries comprising over 10 percent of world oil production and 16 percent of estimated remaining oil resources. There is little evidence

that unilateral sanctions produce desired outcomes. There is a better way: working

with the governments in which they do business, some of our companies are adopting their own human rights and environmental standards.

In short, U.S. policymakers face a dilemma. Growing supplies of crude oil will be

required to sustain world economic prosperity, and diverse, ample foreign supplies

are needed to help ensure our own country’s economic growth. The drive to impose

unilateral sanctions is an obstacle to both of these objectives.

Any effective energy policy cannot ignore the global aspects of the oil and natural

gas industry. Every day we are becoming more and more integrated into a one-world

economy and we cannot seek to isolate the United States if we want to remain a

leading player in this economy. To that end, we must avoid all policies that make

it more difficult for companies to operate abroad, we must encourage free trade and

we must seek worldwide standards for technical equipment specifications to avoid

duplicity.

Government must also resist the siren song of politically popular short-term solutions that can have devastating long-term implications. For instance, the unexpectedly severe cold spell in the Northeast last winter and the resulting spike in home

heating oil prices led to efforts to create a regional home heating oil reserve for New

England. We are now hearing similar calls for a 1.5 million-barrel oil reserve for

California. In both cases, the motivation behind the proposals is understandable.

Public officials have a sincere interest in seeing that their constituents are not inconvenienced or harmed by supply disruptions that could lead to shortages or higher

prices. We share that interest. However, we must caution against the creation of

such reserves because they would have the ultimate effect of the government becoming a heavy player in the marketplace, something no one wants.

If the federal government is in the marketplace, many operators in the private

sector will choose to take their business elsewhere rather than compete head-tohead with the government. We need only look to the 1970s to see the nature of adverse impacts when the federal government plays a direct role in thr daily marketplace.

The premise behind a regional reserve is that the government would buy oil and

release that oil into the marketplace when prices get to be too high. It may sound

like a rational idea, until you stop to look at the details. Who would be responsible,

for instance, for deciding exactly when prices are too high and how much oil to release? What guarantees would we have that such a crucial question would not become embroiled in politics, particularly in an election year?

Equally as important are the economic considerations. With its deep pockets and

no need to turn a profit, government has the freedom to buy oil at high prices and

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sell low to keep retail prices artificially low. Private industry, on the other hand,

survives by being able to purchase large quantities of oil at lower wholesale prices

and holding it until it can sell the oil at higher retail prices. With the government

as a player the hope of making a fair profit evaporates and companies have no incentives for buying and holding large inventories. The result would be lower total

inventories than we’d have without the government reserves.

CONCLUSION

In closing, we share your concern for the future of the industry and the security

of our nation. America’s oil and natural gas companies have a long and proud history of providing this country’s consumers—including our armed forces—with a reliable and affordable supply of energy to make their homes comfortable and take

them where they need to go, when they want to go. Through good and lean years,

U.S. suppliers of natural gas and petroleum products have kept America’s armed

forces mobile, its factories running and have provided the fuel to move goods from

manufacturers to retailer and, ultimately, into America’s homes and offices.

To the extent to which we can help in your efforts to better understand our industry and our government can best work together to forge a sound and workable energy policy, we are here to assist you.

Mr. BARTON. Thank you, Mr. Cavaney.

We would like to hear from Michael Johnson, who is here on behalf of the Natural Gas Supply Association.

STATEMENT OF MICHAEL L. JOHNSON

Mr. JOHNSON. Thank you, Mr. Chairman; and greetings from the

great State of Texas where it is hot today. I would like to thank

you for this opportunity to discuss the important role natural gas

can play in strengthening our economy and improving our environment.

I am Michael Johnson. I am Vice President of Conoco, and I look

after the gas and gas liquids business. As you know, Conoco is a

major domestic and international oil and gas producer. I also represent the Integrated Independent Producers of the Natural Gas

Supply Association.

I would like to address four topics in my remarks, and then expand those for the record.

I will discuss, first, the supply of natural gas; second, the ways

that supply meets potential demands; and, third, the ways our industry is changing to reduce costs and increase investments in

technology. And, last, I would like to discuss government policies

that raise the cost of natural gas and, in the process, damage our

economy and our environment.

First, let me address supply. Producers are highly optimistic

about the long-term supply of natural gas. A recent National Petroleum Council study estimates the recoverable natural gas resource

space in the lower 48 States is 1,400 trillion cubic feet. That is

enough for many decades into the future. Today’s estimate is substantially higher than in 1992. That is in addition to the large volume of natural gas we produced between those years.

New technologies are permitting us to increase recoverable gas

resources faster than we are consuming them. One reason for this

increased resource base is an expansion into frontier areas such the

Mackenzie Delta, the Beaufort Sea and the North Slope. Tapping

into these resources is not inexpensive, however. Climate and terrain are frequently hostile. We must constantly balance cost, risk,

and potential to keep natural gas prices cost competitive.

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Today we are winning the battle to keep natural gas prices competitive, and the robust supply of natural gas makes us confident

of our ability to meet future market demand, demand that we all

agree will increase substantially in response to our Nation’s need

to fuel our economy.

Natural gas producers are also faced with a significant challenge.

That is fueling the majority of new electric power generators that

will be added in the next 20 years. We are confident that we can

meet that challenge and are preparing to serve that growing demand in addition to the traditional markets that we have always

served.

Producers have to bear much of the responsibility to keep prices

competitive, and we must do so by competing in the larger energy

marketplace that is a global marketplace, and there are traditionally volatile prices in that marketplace. We must also cope with

massive regulatory and technological changes that characterize today’s international and domestic wholesale and retail markets.

To meet these challenges our industry is undergoing a major consolidation. The companies that emerge will be stronger, better able

to compete, better able to invest in new technologies and better

able to control the cost of bringing natural gas to the marketplace.

But the changes we are undertaking to achieve that end are difficult and quite painful.

It would be nice to think that these wrenching industry changes

would be enough to ensure continuing gas supplies at competitive

prices to all Americans, but they are only part of the solution. Just

as vital is a policy climate that permits our companies to produce

resources in ways that are cost effective and efficient. We have the

knowledge and the technologies to do that, we have the resource

base, but we do not have the Federal policies we need to bring natural gas to the American public long-term at competitive prices.

Mr. Chairman, you have consistently demonstrated your concern

for energy costs and competitive markets. Unfortunately, not everyone in government shares your sharp eye for policy consequences.

There are people in positions of power today who are misleading

the American public. They refuse to acknowledge our industry’s

proven ability to produce natural gas in ways that respect and preserve the environment. They refuse to credit our technological

breakthroughs. They refuse to respect the Nation’s need for natural

gas. As a consequence, they are trying to prohibit natural gas exploration and production in some of our richest resource bases both

on shore and offshore that continue to be locked up.

There are two inevitable consequences to policies that reduce access to America’s rich natural gas resources, and those consequences are either higher natural gas prices or increased switching to higher-polluting fuels, which no one wants. Neither of those

consequences would prove beneficial to the economy or to our environment.

In conclusion, Mr. Chairman, we need your help to inform the

Americans about the facts; and we need your help to change Federal policies toward natural gas production in ways that benefit our

Nation, our economy, and all of our citizens. Thank you very much.

[The prepared statement of Michael L. Johnson follows:]

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PREPARED STATEMENT OF MICHAEL L. JOHNSON, VICE PRESIDENT & GENERAL

MANAGER, CONOCO INC.

Thank-you, Mr. Chairman, for this opportunity to discuss the important role that

natural gas can play in our future energy portfolio. I am Michael Johnson, vice

president and general manager of Conoco, Inc.

Conoco is an integrated, international energy company headquartered in Houston,

Texas, and is among the top dozen or so U.S. gas producers. The company had revenues of $27 billion in 1999 and operates in more than 40 countries. Conoco’s natural

gas and gas products operations include the gathering, processing, distribution, and

marketing of natural gas and natural gas liquids in North America, the U.K., Norway and Trinidad. In 1999, Conoco marketed natural gas volumes in excess of 4.4

billion cubic feet per day in the U.S. and Europe.

This year, Conoco is proud to be celebrating its 125th anniversary.

I am also today representing the producers of the Natural Gas Supply Association.

NGSA represents integrated and independent companies that produce and market

domestic natural gas. Established in 1965, NGSA encourages the use of natural gas

and a regulatory climate that fosters competitive markets.

I would like to address four topics in my remarks today:

• First, I will talk about the supply of natural gas available to U.S. consumers,

businesses, and industries.

• Second, I will address the ways supply meets potential demand.

• Third, I will talk about ways our industry is changing and evolving to meet America’s need for clean, cost-competitive natural gas.

• Lastly, I will address the government policies that raise fuel costs and unreasonably and unfairly limit our citizens’ access to the natural gas they need.

Supply

First, let me address the supply of natural gas.

I want to emphasize producers’ optimism about the long-term supply of natural

gas.

• Today, we supply about 23 percent of the energy America consumes. That’s about

19 quadrillion BTUs (or ‘‘quads’’) of domestic gas, and an additional 3 to 4

quads from independent and affiliated companies in Canada.

• There is no doubt that, in the future, the U.S. could—if we chose to do so—dramatically increase the amount of natural gas marketed domestically. The resource is there.

There are many estimates of U.S. natural gas supply. All are highly positive. At

the request of the Department of Energy, the National Petroleum Council (or

‘‘NPC’’) undertook a study in 1999 that estimates the recoverable natural gas resource base in the Lower-48 states at 1466 trillion cubic feet (or ‘‘tcf’’). That estimate

is significantly stronger than the estimate the NPC made in 1992. In fact, the new

study finds a strong probability of at least 171 tcf more than it found in 1992. That’s

in addition to the 124 tcf we produced between 1992 and 1999.

The reasons for this growth are the new technologies and new methods of locating

resources that the industry has developed and implemented. Our strides in these

area are so rapid that, as the NPC numbers show, we are increasing recoverable

resources faster than we are consuming existing reserves.

Part of this expansion of the resource base involves a re-exploration and re-assessment of areas that had been assumed to be in decline, such as California. We are

also expanding our reach out of the Lower-48 states to new frontiers such as offshore eastern Canada, where experts predict lie upwards of 45 tcf of natural gas.

Western Canada, the Mackenzie Delta and Beaufort Sea, and the North Slope offer

additional possibilities, through reservoirs in traditional formations and through our

greatly increased ability to tap coal-bed methane.

Tapping into the resources in these frontier areas is not inexpensive. Climate and

terrain are frequently hostile. We must constantly balance cost, risk, and potential

in an energy market that is frequently unpredictable.

Demand

Despite the risk, however, the robust supply of natural gas makes us confident

of our ability to meet market demand. We can, if called on to do so, increase both

the volume of natural gas use and the percentage of U.S. energy supplied by gas.

Analysts and experts agree. The most recent Annual Energy Outlook from the Energy Information Administration, for instance, shows natural gas production in 2020

at slightly more than 27 quads and imports at about 5.3 quads. On a consumption

basis, the EIA sees natural gas as rising from today’s 23 percent to almost 27 percent

of our total energy market.

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Such an increase would make natural gas the nation’s fastest-growing fossil fuel.

Over the next two decades, as total U.S. energy consumption grows at a rate of 1.3

percent annually, we see natural gas growth at about 1.5 percent.

Growth could, of course, exceed that level substantially. Should the U.S. decide

to pursue a strategy of tighter reductions in air emissions, the amount of natural

gas needed is likely to grow precipitously. Some models show natural gas use rising

as high as approximately 35 percent of the nation’s energy supply should the Congress choose to impose stricter pollution-reduction scenarios on U.S. business and

industry. And finally, our most significant increase in demand will be in electric

generation. The challenge that this poses our industry is significant—but I am confident in our ability to develop and supply natural gas in whatever quantity and

price is dictated by the market.

Industry Evolution

At the same time as natural gas demand projections are rising above previous expectations, the entire energy industry is becoming more competitive. Restructuring

of wholesale and retail markets in natural gas and electricity is well advanced. New

technologies like distributive power are giving residential and business customers

new options.

The result has been high volatility in energy prices. It has been difficult for U.S.

companies to predict revenue streams accurately and to plan capital investments.

Wall Street has at times been wary of our industry, making it difficult for some of

our companies to raise the capital required to expand exploration and production.

You only need to look at our stock prices so see that.

At the same time, we’re finding that reservoirs in some areas, such as the Western Gulf of Mexico, deplete more rapidly than originally projected. That puts additional pressure on our capital budgets.

The volatility of the global oil market has long-term negative effects on our companies because the vast majority of natural gas producers also depend on revenue

from oil production. Witness the historically low oil prices in 1998 and 1999. The

precipitous drop in revenue forced us to lay off tens of thousands of employees, shut

in wells, and ratchet back on exploration budgets.

Revenue volatility also brought on a wave of worldwide corporate consolidations

that continues today.

In the long run, these restructuring changes will help our industry recover from

the aftermath of low energy prices, keeping prices competitive as we rehire employees and redeploy equipment into the field.

The Policy Climate

Many of the market forces bringing about these changes are beyond the appropriate scope of U.S. government policy. But there are several major policy areas that

will, in the long run, determine the price America will pay for the energy on which

our economy rests.

Let me put that another way. As I have explained here today, there is no question

that the U.S. has vast natural gas resources and that our producers can bring these

resources to market. That information does not, however, answer the question: How

much will that gas cost?

Will the policies of the U.S. government cause the American people to pay unreasonably high prices for the clean-burning natural gas they need?

Mr. Chairman, you have consistently demonstrated your concern for energy costs

and competitive markets. You have supported federal policies for the natural gas industry that have reduced the unreasonable regulatory costs that have burdened our

industry—and our customers—in the past. You have moved through your committee

a bill on electricity restructuring that shows a deep concern for the budgets of American families and for the competitiveness of American industries.

Unfortunately, not everyone in government shares your sharp eye for policy consequences. There are those in positions of power today who are misleading the

American people. They are endorsing a position that locks up increasing amounts

of land—to prohibit natural gas exploration and production in our richest resource

areas, both on- and off-shore. And they are misleading our citizens into believing

that can be done without economic ramifications.

America’s richest natural gas resources—the resources we can produce most costeffectively—lie under onshore and offshore federal lands. Our industry can produce

this gas in ways that are environmentally sensitive, and we are committed to that

goal. Advances in our industry have reduced the impact of gas production on the

environment. And dozens of environmentally sensitive technologies are being employed by the industry.

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Yet, we hear constantly from a number of highly placed federal policymakers who

oppose domestic natural gas production and transport. I do not know if they are

merely misinformed, or if there is some other reason for their statements. What I

do know is that they are trying to convince the American people that it is in their

best interest to prohibit natural gas production and transport across much of this

nation.

It is not.

It is in all of our best interests to ensure that Americans have access to the energy they need at the lowest possible cost—low-cost in terms of price, and low-cost

in terms of environmental impact. Domestic natural gas production is the ideal way

to meet those conditions.

Thus, Mr. Chairman, denying access to public lands can only lead to two consequences—fuel switching, to the extent that is possible, and higher costs to future

generations. We do not think either of those choices are good alternatives. The recent rise in gas prices and the high likelihood of price spikes and supply disruptions

this year are consequences of previous policy decisions, its time to change directions

before damage is done to the U.S. economy.

Conclusion

Let me conclude my remarks today, Mr. Chairman, by asking for your help in

changing federal policies toward natural gas production. We need your help in getting across the facts about natural gas to the American public. And we need your

help in devising policies that give Americans responsible access to the clean, costeffective energy resources with which our nation abounds. We will work with you

and your staff to develop any of these needed policies.

Thank-you.

Mr. BARTON. Thank you, Mr. Johnson.We now want to hear from

Cathy Abbott, who is here representing the Interstate Natural Gas

Association of America.

Again, I just want to say for the record what a pleasure it was

when I was in the White House Fellows program to work you with

in the Department of Energy; and it was really, really an educational and a personally growing experience for me. And I want

to let the audience know that the young baby that was needing a

diaper change is now 6’5’’ and thinking about going to college at

Texas A&M. So times do change.

Your statement is in the record in its entirety, and we would recognize you for 7 minutes to elaborate on it.

STATEMENT OF CATHERINE GOOD ABBOTT

Ms. ABBOTT. Thank you, Mr. Chairman. And I think the education was all the other way. You were my one and only White

House Fellow that I had the chance to work with while I worked

in government.

Mr. Chairman, my name is Cathy Abbott. I am Chief Executive

Officer of Columbia Gas Transmission Corporation and Columbia

Gulf Transmission Corporation, which are the pipeline units of Columbia Energy Group. I am here to testify on behalf of INGAA,

whose members transport 90 percent of the natural gas consumed

in the United States.

I am submitting to the record two INGAA studies, one on pipeline and storage infrastructure requirements and the other one on

coordinating environmental agency review of new pipeline projects.

As I detail in my written statements, the Nation’s natural gas

policy has come a long way toward relying on market forces. In addition, we believe that, in crafting energy policy, we should acknowledge three key public benefits of increased natural gas use.

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The environment. Natural gas is an environmentally clean fuel

and will play an increasingly significant role in improving the Nation’s air quality.

Reliability and security of supply. The vast majority of the natural gas used in the United States is produced here in North America.

Safety. Natural gas is delivered to millions of homes, voters,

businesses, through underground pipelines which are by far the

safest form of energy transportation.

Today, natural gas provides 25 percent of U.S. energy consumption. My colleagues on the earlier panel from the Energy Information Administration project that natural gas will increase from

about 22 Tcf today to a little more than 30 Tcf shortly after 2010.

That reflects a 36 percent increase in use. The largest area of

growth, about 60 percent of this total, is in the electric generation

market where natural gas offers an inexpensive, clean solution to

improving air quality.

However, to achieve those public policy benefits and to grow the

gas market, interstate pipelines will have to construct new facilities. A study conducted for INGAA estimates that 2,100 miles of

new pipeline are needed every year between now and 2010 to serve

this increased demand.

We can only see the need for additional pipeline capacity from

today’s market signals. For example, this past winter, during a normal weather period, New York City, natural gas prices delivered to

the city gate in New York, normally about $3, jumped to as much

as $15 for a short period, indicating a lack of transportation capacity, not value going to the producers or the pipelines.

For the coming year, the value of delivering gas to New York

City from the producing area exceeds the actual cost of transportation by 50 percent, again, a market signal of insufficient transportation capacity.

Finally, demand in the Northeast is expected to grow dramatically, largely fueled by gas-fired power plants with a load factor of

70 to 80 percent, and we believe that current pipeline capacity is

insufficient to serve that load.

Now, with an energy policy that seeks to let markets work where

they can, what solutions do we have to offer? INGAA believes three

criteria must be met to achieve market-driven growth in gas

use:first, an efficient certificate and construction process to expedite the installation of needed pipeline infrastructure; second, increased regulatory flexibility to allow pipelines to serve the needs

of a changing market; and, third, regulated return sufficient to reward companies for the risk of building new pipelines and sufficient to attract capital to these projects.

Turning to the first, today the regulatory process for constructing

pipelines is overly complex and time-consuming. A good example of

regulatory delay is the proposed Millennium Pipeline Project which

we are involved in to serve the mid-Atlantic/New York/Northeast

market and has more than 90 percent of its right-of-ways in existing utility corridors. Millennium filed its application with the Federal Energy Regulatory Commission in December 1997. Two and a

half years later, the FERC has yet to take action.

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During that time, Millennium has spent $40 million for project

development, mostly to comply with various legitimate State and

Federal environmental regulations and to respond to almost 400

FERC environmental data requests.

In our experience, much of the delay and associated costs are

driven by the need to harmonize the often inconsistent requirements by the many State and Federal agencies with a role in the

approval process.

I mention Millennium because its experience is not unique, yet

it is dramatic. While interstate pipelines are committed to sound

environmental practices, we believe the environmental and regulatory review should and can be streamlined and coordinated to resolve tradeoffs among parties and to process contracts much more

quickly. We must reduce these excessive delays and permit the

timely construction of important new pipeline projects if we are to

connect growing supplies with growing markets.

Another critical issue facing pipelines and their customers is the

need for more flexibility in structuring and delivering services at

fair prices. Today, local gas distribution companies hold about twothirds of the firm contracts for pipeline capacity. However, in the

future, with unbundling and choice at the consumer level, a larger

share of pipeline capacity will be held by marketers, producers,

power generators, and other players. Because these new customers

use capacity significantly differently than our traditional customers, they expect pipelines to respond with new kinds of services

and new kinds of pricing packages.

FERC recently approved a rulemaking that provides additional

tools to meet these challenges, and we recognize and applaud the

progress FERC has made. We urge the Commission to continue to

press ahead with regulatory reform to allow pipelines to respond

quickly and flexibly with these new services and prices in an increasingly diverse customer base.

Mr. Chairman, while the environmental, economic and energy

policy benefits of increased natural gas use are clear, the regulatory challenges facing us in meeting that demand are also clear.

I want to thank you and the other members of the committee for

providing me the opportunity to testify today. Thank you.

[The prepared statement of Catherine Good Abbott follows:]

PREPARED STATEMENT OF CATHERINE GOOD ABBOTT ON BEHALF OF THE INTERSTATE

NATURAL GAS ASSOCIATION OF AMERICA

Mr. Chairman, my name is Catherine Good Abbott. I am chief executive officer

of Columbia Gas Transmission Corporation and Columbia Gulf Transmission Company, wholly owned subsidiaries of Columbia Energy Group. I am here today to testify on behalf of the Interstate Natural Gas Association of America (INGAA).

INGAA is the trade association that represents interstate natural gas pipelines in

the United States, the inter-provincial pipelines in Canada and PEMEX in Mexico.

These pipeline systems transport 90 percent of the natural gas consumed in the

United States.

Thank you for providing me this opportunity to testify before you today.

Natural gas today provides 25 percent of the energy consumed in the United

States. As you know, natural gas does and will increasingly play a major role in

improving our nation’s air quality. The chart attached to my testimony clearly demonstrates the environmental benefits of natural gas. In addition to the important

clean fuel benefits, the vast majority of the natural gas consumed in the United

States is produced in North America; only a tiny portion of our supply comes from

imports. Finally, transporting reliable natural gas to fuel millions of homes and

businesses by interstate pipelines is by far the safest and most reliable form of enVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00104 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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ergy transportation. We continuously monitor and inspect our facilities to ensure

they operate safely.

I’d like to discuss today the implications of a 30 trillion cubic foot (Tcf) market

for our nation and for the natural gas pipelines that will transport that energy to

customers across the country. Specifically, I will elaborate on the public policy benefits of increased gas use and the challenges facing U.S. pipelines in meeting this

demand.

First, some background on the natural gas industry is helpful in creating a clear

picture of where we are today. The history of wellhead price regulation in our country is a dismal one. Ten years ago, Congress took steps to repeal price controls at

the wellhead, which led to the transformation of our industry. In 1992, the historic

FERC Order 636 ended the regulation of pipeline natural gas sales, but the transportation of natural gas remained regulated and was restructured by FERC.

In the years since Order 636, interstate pipelines operating in a competitive environment have become more efficient, they have reduced their operating costs and

created and offered new services. In the period from 1991-1997, volumes flowing on

interstate pipelines increased by 13 percent, while operation and maintenance costs

were reduced by 42 percent across the industry. Today, the cost of transporting natural gas represents only about 16 percent of the price paid by the end user, down

from 23% in 1986.

The numbers show that competition works in the natural gas industry. We are

moving more natural gas today than at any time in history. Natural gas pipelines

bring the cleanest, most reliable and most efficient fuel source to our nation’s communities, and we stand ready to take on a larger role in assuring a plentiful and

reliable energy supply for our country in the new millennium.

PUBLIC POLICY ISSUES DRIVE DEMAND FOR A 30 TCF MARKET

The Department of Energy’s Energy Information Administration estimates that

natural gas use will increase from about 22 Tcf today to 30 Tcf shortly after 2010,

reflecting a 36 percent increase in natural gas use. The largest area of growth,

about 60 percent of this total, is expected in the electric generation market. In some

areas, the anticipated growth is even more significant. In the Northeast, for example, demand for natural gas used for power generation is expected to increase by

250 percent!

The primary reasons for the rapid growth in the power generation sector relate

to the relatively low cost of gas-fired generation, and the low air emissions that

allow these facilities to comply with stringent clean air standards. Advanced gasfired combined cycle turbines result in cleaner and more economically priced power

that provides equivalent or better reliability compared to other fossil fuels, without

the resulting environmental impacts.

Aside from other factors, this would be a positive situation, both for consumers

and our industry. But at the same time we are anticipating phenomenal growth in

natural gas demand, there is growing concern over weaknesses in the energy delivery system in the Northeast. These concerns were glaringly evident this past winter

during the month of January. For a period of just a few weeks, temperatures that

were statistically normal led to short-term energy shortages, and significant spikes

in energy prices. On January 18, 2000, natural gas prices delivered to the city gate

of New York City, normally about $3 jumped to as much as $15. Since interstate

natural gas pipeline rates are capped under current regulations, these increases did

not impact pipeline revenues. The shortages of fuel oil, and resulting price increases, during this same period are also well documented.

This is not just a winter issue. Concerns have also arisen about the ability of

power grids to maintain reliability during the coming summer months if temperatures remain high for a significant amount of time. Several areas across the country,

including the Northeast, report that power shortages are likely this summer. For

example, the New York Public Service Commission noted last week that limited

electric generation will have an impact on prices throughout the Northeast. Some

Northeast utilities (for example, Consolidated Edison) are predicting significant

price spikes as much as 25 percent higher this summer.

With this set of issues before us, our challenge is to maximize the public policy

benefits of increased natural gas use in order to respond to the growing needs of

the marketplace. As we see it, the following three criteria must be met in order to

achieve the ambitious objective of a 30 Tcf market:

• an efficient certificate and construction process to expedite the installation of the

infrastructure needed for the future;

• increased regulatory flexibility to serve the needs of a changing market; and,

• the availability of capital.

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EFFICIENT CERTIFICATE AND CONSTRUCTION PROCESS NEEDED

To meet the demands of a 30 Tcf market, interstate pipelines will need to construct a significant number of new facilities. A study called ‘‘Pipeline and Storage

Infrastructure Requirements for a 30 Tcf U.S. Gas Market’’ was conducted by Energy and Environmental Analysis, Inc. for the INGAA Foundation. This study found

that approximately 2,100 miles of new pipeline will be needed every year between

now and 2010 to have the capacity necessary to serve this increased demand.

The pipeline construction process has become increasingly complex. As you may

be aware, it is simply getting more difficult to build any type of new facility. In the

U.S., we must obtain and coordinate multiple state and federal environmental permits. We also must consider the concerns of landowners, who are becoming more

interested and involved in our projects. To keep our projects economic, we must keep

costs under control. And to keep the costs under control, we must promote more efficient review and approval processes—within our companies and among the regulatory agencies that ultimately decide the fate of the project.

Many new pipeline proposals have encountered delays and increased costs at

FERC due to the need to satisfy requirements under various environmental statutes

that are administered by a variety of state and federal agencies. While interstate

pipelines are committed to sound environmental practices, we believe the environmental and regulatory review of new pipeline proposals should be streamlined and

coordinated to reduce such costs, reduce the excessive delays that are now experienced, and permit the timely construction of important new pipeline projects.

As an industry, we have been working to encourage FERC, CEQ and other Administration Departments and agencies that participate in the project review of proposed pipelines, to develop an Interagency Agreement to coordinate this federal

agency review. The INGAA Foundation sponsored a study to identify those points

in the existing project review process where additional interagency coordination

could improve the process for both applicants and participating agencies. We have

received indications from CEQ, FERC and others that they are going to go forward

with this important effort to seek such an agreement.

INCREASED FLEXIBILITY REQUIRED TO MEET THE NEEDS OF A CHANGING MARKET

The evolving competitive nature of the natural gas industry requires mechanisms

allowing existing and new customers to gain access to natural gas pipeline services

at fair prices. Currently, gas utility companies hold approximately two-thirds of the

capacity on interstate pipelines. But we do not expect gas distribution companies

to be our only major customers in the future. Marketers, power generators and

other end-users, including producers, will join them. These customers use capacity

differently than gas utilities. So we will have to transform the services we sell to

meet the needs of these customers.

The challenge of accommodating diverse new customers is both operational and

commercial. The load profiles of gas utilities, industrials and electric generators are

diverse, and the economic factors that motivate them differ greatly. In order for

pipelines to serve all types of customers, changes are required to many pipeline tariffs, which are designed to provide high-quality service for residential customers.

Non-utility customers want different services than the standard utility tariffs provide. In addition, some gas utilities want the option to buy less or different service

from their pipelines, while others will be looking to non-pipeline sellers of capacity.

Pipelines will need greater flexibility, both to negotiate contracts with old and

new players in the capacity market as well as to price services appropriately for different markets. FERC has recently approved a rulemaking that will provide us with

some additional tools to meet these challenges by committing to expeditiously process requests to implement new and innovative types of services and to permit new

pricing structures. We recognize that the FERC has taken important steps in this

area, and urge them to continue to provide the resources and attention necessary

to make this a policy priority.

AVAILABILITY OF CAPITAL CRITICAL

As I mentioned earlier, between now and 2010, approximately 2,100 miles of new

gas transmission must be added each year to accommodate market growth to 30 Tcf.

To accomplish this, the natural gas pipeline industry will need to invest upwards

of $32 billion for pipeline transmission and storage facilities.

Pipelines must compete for investment capital in the marketplace with S&P 500

companies with similar risk profiles for the same capital. In most cases, pipelines

also have to compete for capital within their own organizations. A fundamental

tenet of this decision-making process is that increasing risk requires a return comVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00106 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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mensurate with that risk. If returns on pipeline investments are not commensurate

with the risks inherent in the pipeline business, less capital will be invested in pipeline projects relative to investments in other businesses that have a better risk/return profile.

Risks for the pipeline industry have increased substantially in this decade and

will likely continue. These increased risks include: (1) expiration of long-term gas

utility transportation contracts and the prospect of non-renewal; (2) movement to

shorter-term contracts with new non-gas utility customers; (3) competition from unregulated marketing firms who can buy capacity at regulated rates and sell it at

unregulated rates; (4) state commission restructuring of gas and electric services;

and (5) federal electric restructuring initiatives which cause uncertainty in the market that offers our best opportunity for future growth.

FERC’s current methodology for setting return assesses each pipeline’s risk and

sets a range of returns commensurate with that risk. In order for pipelines to compete effectively for capital, this model, which makes the reward commensurate with

risk, is necessary.

CONCLUSION

INGAA supports a strong national energy policy, and we believe it begins with

a strong natural gas industry from the wellhead to the end user. In today’s environment, our ability to meet the anticipated 36 percent market increase is not a given.

All segments of the natural gas industry will have to work cooperatively to develop

the 30 Tcf U.S. market. While the environmental, economic and energy policy benefits of this market are clear, also clear are the challenges facing those of us in the

natural gas pipeline industry who are being called upon to meet our nation’s energy

needs.

Mr. Chairman, I want to thank you and the other Members of the House Subcommittee on Energy and Power for providing me the opportunity to provide information on the public policy benefits of increased use of natural gas. As I have stated, INGAA believes three things are essential in order for interstate pipelines to

help deliver those benefits: an efficient certificate and construction process, the regulatory flexibility to respond to a changing market, and capital at competitive rates.

Comparative Emission Levels From a 300-Megawatt Power Plant

Existing

Coal Boiler

New Coal

Boiler

New GasFired Combined- Cycle

NOX Emissions (lb/MMBtu) ................................................................................................ 0.50 0.18 0.04

SO2 Emissions (lb/MMBtu) ................................................................................................. 1.20 0.42 0.00058

Particulate Matter (lb/MMBtu) ............................................................................................ 0.11 0.04 0.0029

CO2 Emissions (lb/MMBtu) ................................................................................................. 205 205 125

Source: Energy and Environmental Analysis, 1997.

Mr. BARTON. Thank you, Mrs. Abbott.

Mr. BARTON. We now would like to hear from Mr. Roger Cooper,

who is here on behalf of the American Gas Association.

STATEMENT OF ROGER B. COOPER

Mr. COOPER. Thank you, Mr. Chairman. I appreciate the opportunity to testify.

I am here on behalf of the American Gas Association. We represent 189 utilities that serve over 60 million customers in all 50

States and the District of Columbia.

I am here today to say ‘‘ditto,’’ to what much of the other panelists have said. Natural gas has come of age. It is today America’s

cleanest fossil fuel in abundant supply, as Mr. Johnson discussed.

This is a room where a lot of differences are often aired, and

today I would like to point out some similarities. We are at a point

where there is one area of energy policy where there is substantial

agreement across the board, and that is the use of natural gas will

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increase. Cathy Abbott says it will increase 36 percent by the year

2010. Bill Martin says it will increase 60 percent by the year 2020.

These are essentially comparable figures.

What will this mean? We have adequate supply. Will we be able

to get it out of the ground? Will we have the capacity to move it?

Will we have the capacity to get it to the ultimate consumer? Can

we do that economically? Can we do that in an environmentally

friendly manner?

This morning I would like to talk about the downstream side of

the business, some of the new technologies, and what is making

gas so valuable to customers. Before doing that, I would just like

to note that a number of our member companies were involved

with the National Petroleum Council gas study; and we do endorse

that study and the views as to what needs to be done to improve

the gas picture at the wellhead.

We are looking at a new energy future, and it is a good future.

It is one that is primarily market driven. It is not going to need

massive government intervention. It is aligned with the current

market trends. It is consumer friendly. It is environmentally

friendly.

As coal was the dominant energy source for the 19th century, as

oil was the prize of the 20th century, so natural gas will be the fuel

of the future, will be the fuel to the 21st century.

It is the only fuel out there today that can bridge the gap between the environmental demands and the economic realities. It is

the fuel that customers demand today.

Bill Martin talked a little bit about the Fueling the Future Study

which his group did for the American Gas Foundation, and I am

not going to go through all of those points he made. He gave you

a lot of numbers. I will repeat a couple of them: That gas will increase by 60 percent over 20 years, that under that study we would

decrease U.S. Energy consumption by 6 percent. We would do this

in a very environmentally friendly way, reducing SOX, NOX, particulates and CO2 emissions; and we could back out 2.6 million barrels of oil a day if we did it.

Where we differ at AGA somewhat from some of the other projections, EIA and some of the others, we all look at a growing gas

market. We slice up the pie somewhat differently. We see probably

a doubling of large-scale, gas-fired electric generation, the big turbines. EIA is probably looking at a tripling of that number. Where

we see the growth is going to be in other direct uses of natural gas,

primarily distributed generation, cogeneration, fuel cells, microturbines; and these systems are coming on the market today. I think

they will be incremental.

Sometimes people fear these sort of changes. Are we going to get

rid of all our power plants? No. I think the Fueling the Future

Study talks about a future that relies on coal, relies on nuclear,

and is going to rely on some of these new technologies.

One of the biggest challenges in energy policy today is the

NIMBY issue, ‘‘not in my backyard.’’ And what you have with distributed generation is the opportunity for YIMBY, ‘‘yes in my backyard,’’ yes, I want those technologies that I can use that are available to me that will give Americans their own sense of energy independence.

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We have put together a blueprint which we will be handing out—

and I take your cue. Mr. Yergin did not do this. Showing it for cameras that are not on—a blueprint on fueling the future and how

Congress should act to implement increased gas use. That would

include repeal of the tax on contribution and native construction,

which is essentially a tax on hooking up new gas customers; further RD&D for natural gas; and a lot of issues that Cathy and Michael talked about at the wellhead in streamlining permitting.

With that, I will conclude, and I will be happy to take any questions.

[The prepared statement of Roger B. Cooper follows:]

PREPARED STATEMENT OF ROGER B. COOPER, EXECUTIVE VICE PRESIDENT, POLICY

AND PLANNING, AMERICAN GAS ASSOCIATION

Good morning, Chairman Barton and members of the committee. I am honored

to be here today to present the views of the American Gas Association on natural

gas demand in the 21st century.

AGA represents 189 local natural gas distribution companies, which deliver natural gas to 60 million customers in the United States.

As coal was the dominant fuel of the 19th Century and oil during the 20th Century, we believe that natural gas will be the fuel of the 21st Century. That is because natural gas is the only energy source currently available that can bridge the

gap between environmental goals and economic imperatives.

Today you have heard the testimony of the author of the American Gas Foundation’s study Fueling the Future: Natural Gas & New Technologies for a Cleaner 21st

Century. Bill Martin described to you a scenario for an increase in gas demand from

22 quadrillion Btus (about 21.4 Tcf) today to 35 ‘‘quads’’ (almost 34 TcF) in 2020.

He told you about the enormous environmental, energy security and efficiency benefits that will result. If gas consumption in 2020 is 60 percent higher than today (35

quads) we can:

—Reduce CO2 by 930 million tons per year.

—Reduce oil imports by 2.6 million barrels per day.

—Reduce national energy consumption by 6 percent.

Another benefit that may be of particular interest to this subcommittee has to do

with reliability. Not only does the gas industry have an unparalleled reputation for

reliable service, but also natural gas technologies can be used to support the operations and reliability of the electric distribution system. The recent report issued by

the U.S. Department of Energy’s Power Outage Study Team emphasized the value

of natural gas technologies in easing strain on the electric power generation grid.

The report noted that ‘‘distributed generation,’’—that is, small electric-power generation units that are installed on or near the customer’s premises—can help relieve

the demand on the electric grid, especially during peak demand. Natural gas fuel

cells and microturbines are among these new distributed generation technologies.

Substituting natural gas cooling for electric air-conditioning can also help to level

summer electric peaks. Since natural gas use typically peaks in the winter months,

this is truly a win-win scenario for both the natural gas and electric industries.

Given the key role this subcommittee has in developing a national energy policy,

I want to emphasize that the Fueling the Future study projects a balanced energy

future. The study does not project high natural gas demand at the expense of other

fuels. All energy sources—including coal, nuclear and renewables—will continue to

play a critical part in supplying our growing energy demands in the future. For example, renewable energy use in 2020 will be greater under this study than the Energy Information Administration’s projections. However, natural gas is the one energy source that has the attributes to meet our nation’s policy goals and our energy

needs for the 21st Century. Using the data from the Fueling the Future study as

a foundation for a coherent national energy policy would be good for the environment, good for national security, and good for the economy and our consuming public.

AGA is a strong believer in this energy future because we see every day that consumers—industrial, commercial and residential—want to use natural gas. Nationwide, natural gas was the fuel of choice for 70% of the new single family homes built

in 1998—a continuation in a 15-year trend of natural gas growth. Residential, commercial and industrial consumers are using gas in a new and innovative ways. Gas

fireplaces, for example, constitute a strong new market due to ease of use and enviVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00109 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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ronmental considerations. An improved generation of gas air conditioners has great

potential in the West and the South. Technologies for residential scale fuel cells and

microturbines are currently being demonstrated.

Sophisticated and highly efficient combined cooling, heat and power systems

(CHP) are being installed around the country, and are especially popular at universities and large conference centers, such as Opryland in Nashville and the huge

McCormick Center in Chicago. Texas is one of the leading states in terms of industrial CHP capacity and is fourth behind New York, California and Pennsylvania in

commercial capacity.

Let me give you three examples of how natural gas technologies—which are commercially available—will help meet the nation’s energy goals.

—In 1994, Thomason Hospital in El Paso, which was undergoing a major renovation/expansion, had to find a way to meet energy needs in a cost-effective manner, while locked into the highest electric rates in Texas. Its solution was a combined heat and power plant that includes gas-fired reciprocating engines, dual

fueled boilers, gas engine driver chillers, and single effect absorption chillers.

This CHP system provides electricity, low pressure steam (heating and hot

water), and cooling for the hospital complex. Benefits to the hospital include reduced electric demand (330 kW), a levelized electric load and $460,000 in annual savings.

—My second example describes a ‘‘save-the-day’’ situation at the Brookfield Zoo in

suburban Chicago. During the winter of 1998, the local electric utility suffered

a power failure that could have resulted in suffering or death of 200 creatures

ranging from a massive Pacific walrus to the jellyfish. But the Zoo had installed

a natural gas cogeneration system that kept the facility running. There’s a financial benefit, as well: by operating in parallel with the local utility during

peak demand hours, the Brookfield Zoo expects to generate a positive cash flow

in excess of $700,000 during the next decade. That can feed a lot of walruses.

—Our final example comes from the retail sector. A Walgreen’s drug store in

Chesterton, Indiana, became an energy pioneer last year by installing a natural

gas ‘‘microturbine.’’ This unit—about the size of a commercial refrigerator—operates quietly and efficiently, using natural gas as a fuel to turn a small turbine

that generates electrical power. The unit is also equipped with a ‘‘desiccant

dehumidification’’ system that pulls moisture from the air, keeping customers

comfortable while they shop. The biggest benefit is reliability. Because this system runs on natural gas it is independent of the electric grid and therefore is

not affected by brownouts or blackouts caused by weather extremes. Imagine

how relieved you’d feel if you needed to buy medicine during a local power outage—and the familiar Walgreen’s is the only open business you see in a sea of

darkness.

I believe that these examples demonstrate why the market will drive natural gas

demand in the future. But the Fueling the Future study also makes clear that to

provide the adequate supply, build out the needed infrastructure, and develop and

improve the technologies, the government must play a critical part in assuring that

the regulatory and policy environment is conducive to natural gas use.

To achieve the 35 quad future with all of its societal benefits, the study says policymakers at all levels must make a commitment to replace barriers with incentives

to increase the production and use of natural gas. In other words, market forces cannot do it all. Congress, the administration and state and federal regulators each

have responsibilities.

A number of assumptions must become realities for this growth in natural gas demand to be realized. But what better time than the start of a new century to take

action so that future generations will inherit a cleaner environment, improved national security, continued economic growth and greater conservation of natural resources. The AGA Policy Blueprint attached to my testimony discusses in detail

eight policy goals and implementation steps that will ensure that the 35 quad Fueling the Future forecast becomes a reality. Congressional action will be particularly

important in the areas of competitive energy markets; safety and reliability; environmental regulations; federal research and development; tax barriers/incentives

and access to federal lands. We are very pleased to see that two of our specific recommendations were included in the National Energy Security Act (S. 2557) introduced last week by Senator Murkowski. These recommendations include a provision

that would lower the cost for American families to connect to natural gas and the

creation of an Interagency Work Group on Natural Gas to develop a comprehensive

policy for the use of natural gas. This is an excellent start and we look forward to

working with the subcommittee on other steps to implement the policy goals of Fueling the Future.

The goals are summarized below:

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Goal I—Energy markets will be free and competitive, and natural gas utilities will

be allowed to compete fairly in these markets.

As energy markets are opened to competition, consumers are being given the freedom to buy their energy and energy-related services from whichever suppliers they

choose. Gas consumers can benefit from choice and from competition that is open

to all competitors, including gas utilities and their affiliates.

Regulators must recognize that consumers benefit when utilities and utility affiliates are allowed to compete and to realize economies of scope and scale, just as

other competitors realize efficiencies from affiliation with a parent company. If regulators act to place utilities or their affiliates at a disadvantage in the marketplace,

they will thwart the market-expansion potential for natural gas.

Implementation of the following policies will promote fair competition:

• State regulation should permit utilities to offer traditional utility services, allow

utility affiliates to participate in unregulated markets and not bar an affiliate’s

use of the parent utility’s name or logo. • Any uniform business practices adopted by the states to implement retail competition should be consistent with the interests of gas utilities. • The Public Utility Holding Company Act should be repealed.

Goal II—The historic reputation of the natural gas industry for safety and reliability

will not be compromised.

Even though the U.S. natural gas industry operates one of the safest and most

reliable gas delivery systems in the world, it continues to look for ways to improve.

As a result, safety incidents on the gas distribution system during the past decade

have decreased by 38 percent, while the amount of gas delivered to customers has

increased by nearly 25 percent.

Because gas pipeline safety regulation involves technical issues, the best way to

approach development or amendment of safety standards is for the government to

take advantage of all the expertise available within the gas industry. It makes sense

that regulators and the gas industry should pool resources to develop the most effective and reasonable measures to meet their common goal of the safe and reliable

delivery of gas. In addition, this approach promotes increased knowledge and understanding among all the interested parties—the regulators, the industry and the public.

While the gas industry’s strong commitment has been, and will continue to be,

a significant factor in ensuring safety and reliability, implementation of the following policies would improve the effectiveness of safety programs:

• Performance- and risk-based pipeline safety regulation and regulatory alternatives should be initiated to enhance delivery system safety. • Stronger regulatory mandates should be put in place to prevent pipeline damage

caused by excavation. • Regulatory treatment of unbundling programs should not compromise safety or

reliability.

Goal III—Energy efficiency and environmental regulations will be comprehensive, equitable and balanced.

Many energy and environmental regulations are flawed and even counterproductive because they are not comprehensive enough. They are too narrowly focused and do not take into account the overall effect of the regulatory decision.

Energy-efficiency regulations that look solely at the efficiency of the energy-consuming equipment, and not at the efficiency of the entire process of providing the

energy, can push consumers toward equipment that ultimately wastes energy, emits

more pollutants into the air and costs more to operate.

Similarly, environmental regulations can be counterproductive when they are not

equitable. For example, some regulations are not ‘‘fuel-neutral’’ but, in fact, are

more stringent for natural gas than for dirtier-burning fuels, such as coal and oil.

This ends up promoting consumption of dirtier fuels. In a precedent-setting move,

the Environmental Protection Agency (EPA) in 1998 issued a fuel-neutral standard

for industrial boilers that sets the same emission level for all new boilers, regardless

of which fuel the boiler operates on. This precedent should be expanded to all applications in which natural gas is penalized for being cleaner.

Regulations are out of balance when their costs and benefits are not accurately

weighed. It is possible, for instance, to set standards for indoor air quality that are

so stringent they virtually rule out the use of natural gas. This is foolish because

the gains that can be made in improving outdoor air quality often far outweigh

small changes in indoor air quality.

The following policy recommendations are designed to remedy these kinds of situations:

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• Energy efficiency standards must not discriminate against natural gas.

• Regulations should encourage innovative technologies and approaches to pollution

control.

• ASHRAE Standard 90.1 should not be endorsed by the Department of Energy or

adopted by the states.

• Federal and state energy conservation programs should reflect the ‘‘total energy

efficiency’’ concept.

Goal IV—The federal government will aggressively promote the use of natural gas

through its research and development program and by using innovative gas technologies in federal facilities.

Given the significant benefits that natural gas offers the nation as well as its consumers, the federal government needs to promote greater use of the fuel by increasing the funding of the Department of Energy’s (DOE) gas research and development

program. In addition, the government should lead by example. Federal facilities

should be showplaces for clean, efficient and economical gas equipment and technologies.

Adopting the following policies will help ensure that natural gas is the fuel of the

21st century:

• Federal spending on gas-related R&D should be increased to support end-user

equipment advances and enhance gas delivery system safety and reliability.

• Tax credits should be provided for collaborative R&D.

• Executive Order 13123 should be fully implemented.

Goal V—The potential of new technologies will be fully recognized in regulations,

codes and standards affecting the natural gas industry.

The federal government and standard-making bodies are required to review existing rules and standards periodically, as well as develop new ones when technological

developments merit action. This sometimes involves evaluating the safety performance of natural gas delivery systems and equipment. These standards must be developed objectively, based on technically sound science and credible, accurate performance data.

Adoption of the following policies will further this goal:

• Pipeline safety regulations should reflect new, proven technologies and best practices.

• Building codes and standards should accurately reflect safety performance.

• Regulations that impede promising new technologies, such as distributed generation, must be modernized.

Goal VI—Access to the natural gas resource base will not be unduly restricted.

Today, access to significant portions of the U.S. natural gas resource base is totally or partially restricted. These restrictions inhibit energy exploration and production activities in the eastern Gulf of Mexico, most of the offshore West and East

coasts and in parts of the Rocky Mountains.

In general, the restrictions were imposed for environmental reasons and have

been in place for decades. Obviously, exploration and production technologies and

practices have changed dramatically over these decades. It’s time to reexamine

these restrictions in light of today’s technologies and practices that are more environmentally sensitive than those of the past. It’s also time to reassess the restrictions because of the national environmental, economic and energy-security benefits

that would accrue from using more natural gas.

Adoption of the following initiatives is recommended to implement the policy goal:

• The federal government should establish an interagency task force capable of balancing the national benefits and costs associated with increased natural gas

use.

• The federal government should provide a baseline for consistent land administration among the numerous national and state agencies.

• The federal government should revise its land-use policies to reflect the positive

benefits of new natural gas exploration and production technologies.

Goal VII—The cost of providing natural gas service to new electricity generating

plants will not be borne by residential, commercial and industrial customers.

Significant amounts of new pipeline capacity will be needed to serve electricity

generating plants. Providing natural gas service to power plants requires that gas

pipelines and/or gas utilities invest in facilities and make operational changes, such

as adding new line, contracting for storage capacity and upgrading the ability to

serve severe load swings.

109

The costs incurred to serve new generating plants must be borne solely by power

plant operators and not by other natural gas customers. Otherwise, natural gas demand among residential, commercial and industrial customers will be artificially

constrained.

Implementation of the following policies will help ensure that costs incurred for

pipeline capacity expansions are appropriately borne by the customers being served:

• FERC’s implementation of pipeline rate reforms should not harm local gas utilities.

• FERC should protect the gas utilities’ pipeline service from degradation.

Goal VIII—The regulatory environment will facilitate expansion of the natural gas

infrastructure.

To provide gas delivery service for the new uses of natural gas that will benefit

the nation, natural gas distribution utilities will need to invest almost $100 billion

to upgrade and expand their distribution systems over the next 20 years.

Therefore, regulators should evaluate their policies in light of the fundamental

goal of facilitating critical maintenance and expansion of the natural gas delivery

infrastructure. The public benefits of increased gas use in terms of economic efficiency, environmental gains and energy security should be weighed fully in determining appropriate rates and permissions for facilities.

Implementation of the following policies will facilitate infrastructure expansion:

• The lead time for obtaining permission to build new pipeline and utility facilities

should be shortened.

• The benefits and costs of expanding the natural gas system should be reasonably

and comprehensively assessed.

• The tax system should promote rather than impede natural gas system expansion.

Conclusion

Adoption of these recommendations will lead to the greater use of natural gas to

meet a part of our nation’s growing energy demand. As a result, these policies will

lead to an energy future that is safe and reliable, as well as cleaner and more secure

than otherwise would be possible.

Natural gas is economical, abundant, clean and reliable. It is the energy solution

of the here and now. It is the bridge fuel to the new millennium. It must not be

overlooked; to do so would be to ignore what serves the best interests of our nation.

We look forward to working with this committee to implement the policy recommendations we have outlined today. These recommendations, if adopted, will

serve to ensure a strong, prosperous America—an America fully capable of continuing its role as leader of the free world.

On behalf of the American Gas Association, I thank you for the opportunity to

testify today.

Mr. BARTON. Thank you, Mr. Cooper.

Mr. BARTON. We now want to hear from Mr. Barry Russell, who

is here on behalf of the Independent Petroleum Association of

America and also the National Stripper Well Association.

STATEMENT OF BARRY RUSSELL

Mr. RUSSELL. Thank you, Mr. Chairman.

I am Barry Russell, President of the Independent Petroleum Association of America. Today I am testifying on behalf of IPAA, the

National Stripper Well Association, and 32 cooperating State and

regional associations. I detail a number of these issues in my written testimony, and I will summarize them here to save time.

First, natural gas and petroleum dominate energy supply in the

United States. Currently, they account for about 65 percent of the

national energy needs; and they will continue to dominate in the

future.

Second, regardless of the changes in world politics, energy supply

remains a national security issue. Whether we like it or not, our

sources of petroleum come from countries with a history of instability, and our policies must recognize our country’s vulnerability.

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Third, future domestic natural gas and petroleum exploration

and production will increasingly depend on independent producers.

The domestic industry has changed dramatically since 1986. Major

integrated companies now focus their activities in the deep Gulf of

Mexico and overseas. Today, independents drill 85 percent of the

wells in the United States. Independents need different policies

than integrated companies because their revenues come from one

source.

Fourth, domestic natural gas demand is estimated to increase by

about 40 percent by the year 2010. But this increase in demand

can be met, given the right conditions, through domestic and other

North American resources.

In my testimony, I discuss a number of the factors essential to

meeting the future demand for both natural gas and petroleum,

and I want to focus on two of them: access to capital and access

to the natural resource base.

First, the Federal Government needs to take action to improve

the flow of capital to this critical industry. The most immediate

focus should be on tax reforms. There are a number of specific proposals that have been either endorsed or discussed by President

Clinton or have been introduced or passed by Congress within the

past year. These include expensing of geological and geophysical

costs, expensing delay rental payments, and a number of reforms

related to marginal wells, such as the marginal well tax credit and

other provisions that would direct more capital to producers.

We are at a rare point in time when both Congress and the administration are moving in the same direction regarding these tax

reforms, and now is the time to act on them.

Second, we must address the issue of access to the Nation’s resources under government-controlled lands. Recently, successful

laws have addressed access like the Deep Water Royalty Relief Act.

We believe it is crucial to continue to provide a royalty structure

that encourages offshore development, and we are working with

the administration to meet this objective.

At the same time, it is equally important to recognize that a larger aspect of access to natural resources involves opening access to

areas now not available and halting the trend to further embargoes

of western lands. Over 200 trillion cubic feet of natural gas is either off limits or difficult to permit in these areas. It is important

to understand that access issues differ between these areas. ANWR

and offshore activities are constrained by policy decisions. Access to

western land is now limited by a mosaic of regulations. Some involve lands that are completely excluded from natural gas and petroleum exploration production, other involve permitting limitations, and still others indirect actions by Federal agencies.

Let me conclude with two immediate actions that can be taken

toward the environmentally sound development of these resources.

First, we can determine where the most likely resources lie. Congress should compel the development of such an inventory. Second,

we need a clear analysis of the impediments that we are encountering. We need to know which laws, regulations and conflicting

management plans are in play.

On balance, future supply of domestic natural gas and petroleum

will depend on a clear recognition of the value of these domestic reVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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sources. The domestic industry has changed dramatically and will

continue to change to a greater reliance on independent producers.

It will require a clear commitment from the Federal Government

that it is prepared to implement policies to allow domestic exploration and production in order to access the capital, the resource

base, the technology and the human resources that are needed to

meet the challenges confronting our country.

Thank you very much for the opportunity to speak.

[The prepared statement of Barry Russell follows:]

PREPARED STATEMENT OF BARRY RUSSELL ON BEHALF OF THE INDEPENDENT PETRO- LEUM ASSOCIATION OF AMERICA AND THE NATIONAL STRIPPER WELL ASSOCIATION

Mr. Chairman, members of the committee, I am Barry Russell, President of the

Independent Petroleum Association of America. Today, I am testifying on behalf of

the IPAA, the National Stripper Well Association, and 32 cooperating associations

of the IPAA that represent state and regional interests. These organizations represent independent petroleum and gas producers, the segment of the industry that

is damaged the most by the lack of a domestic energy policy that recognizes the importance of our own national resources. NSWA represents the small business operators in the petroleum and natural gas industry, producers with ‘‘stripper’’ or marginal wells.

Today’s hearing addresses a fundamental issue—National Energy Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil. This testimony will focus first

on several key factors that influence this issue and second on actions that should

be taken to improve the future domestic supply.

FACTORS IN DEVELOPING A NATIONAL ENERGY POLICY

There are many factors that affect the development of a sound national energy

policy. This testimony will focus on several key issues in crafting a sound policy to

address adequate supply of essential natural gas and petroleum.

1. Fossil energy—particularly natural gas and petroleum based energy—will continue to dominate energy supply in the United States. According to the National Petroleum Council’s Natural Gas study natural gas and petroleum account for 64.8

percent of national energy needs. Future projections show significant growth in the

use of these fuels as domestic energy demand continues to increase. The U.S. economy is driven by the availability of adequate energy supplies whether consumed by

manufacturing, by transportation to and from jobs, or by the expanding role of computer use and the Internet. It ignores this reality to suggest that an equally robust

economy can be sustained without substantial energy growth. And, it ignores this

reality to suggest that natural gas and petroleum will not be the dominant share

of this growth.

2. Regardless of changes in world politics, energy supply remains a national security issue. A decade ago energy supply from foreign sources would be viewed as a

national security risk in the context of the Cold War—supply routes at risk and energy sources subject to control by adversaries. Today’s national security issue is different, but it is nonetheless significant. Currently, we import over 55 percent of our

nation’s petroleum. It comes from diverse sources, but diversity is not security. In

1973 the OPEC oil embargo crippled this country. Yet, we now import over twice

as much petroleum on a percentage basis from the OPEC countries that embargoed

us—and neither Iran or Iraq participated in that embargo. Whether we like to address it or not, our sources of petroleum come from countries with a history of instability. We are currently importing approximately 500,000 barrels per day from Iraq.

Clearly, this is not a reliable source. Saudi Arabia is ruled by a monarchy in a world

without ruling monarchs; it is constantly subject to subversion by radical religious

elements. Even Venezuela is ruled by a government that has dramatically shifted

that country’s priorities over the past two years and continues to be difficult to predict. We must recognize that shifts in any of these suppliers can dramatically and

adversely affect our nation and our national economic security.

The past three years have demonstrated how susceptible the U.S. energy supply

can be to foreign actions. The precipitous drop in petroleum prices in late 1997

through early 1999 posed a catastrophic threat to domestic petroleum production

and a substantial threat to domestic natural gas production. As a result of the extended low petroleum prices in 199899, capital investment in petroleum production

throughout the world declined. Existing production was lost. In the U.S., production

dropped from 6.5 million B/D to less than 6.0—million B/D. Natural gas production

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suffered as well because the two commodities are linked. This year, the country has

seen the inevitable consequences of lost capital in the exploration and production

industry—as worldwide demand has increased, worldwide supply capacity has not

kept up. This year, petroleum prices have reached levels not seen since the Persian

Gulf war. Different segments of the economy have been threatened. In each case,

the price and supply issues have largely been defined by the actions of foreign producer nations. Our policies must recognize this vulnerability.

3. Future domestic natural gas and petroleum exploration and production will increasingly depend on independent producers. Domestic exploration and production of

natural gas and petroleum have changed dramatically since 1986—the time of the

last petroleum price crisis and major revisions to the federal tax code. Since that

time the role of independent producers has increased. Generally, for example, domestic petroleum production is divided roughly 60 percent from the lower 48 states

onshore, 20 percent from the offshore, and 20 percent from Alaska. Since 1986, the

share of onshore lower 48 states production by independents has increased from

about 45 percent to over 60 percent. Independents are also increasingly active in

the offshore. In the aggregate, independents drill over 85 percent of the wells in the

U.S., produce 45 percent of the petroleum, and produce over 65 percent of the natural gas.

This is a trend that will continue. The reasons are straightforward. Large, integrated petroleum companies are driven by their need to generate adequate shareholder returns. In the ‘‘Dot Com’’ world we are living in, this requires finding and

developing large ‘‘elephant’’ fields. Mature fields that yield more limited quantities

of natural gas and petroleum characterize most of the U.S. Many of the U.S. large

field prospects such as the Arctic National Wildlife Refuge (ANWR) are not available for development. In the offshore, moratoriums limit many options; those that

are left are largely in the ‘‘ultradeep’’ portions of the Gulf of Mexico. So, compelled

to fill their refineries, major integrated companies focus their development funds to

the deep Gulf of Mexico and overseas. This leaves the brunt of future domestic resource development to independent producers—large and small. Independents need

different policies than integrated companies. Independents rely on revenues generated solely in the upstream and are more susceptible to price swings that strip

away critical financial resources.

4. Natural gas is an increasingly important element of domestic energy supply. The

National Petroleum Council Natural Gas study concluded that domestic natural gas

demand will increase from the current 22 trillion cubic feet per year (Tcf/yr) to 29

Tcf/yr by 2010. Most of this increase will be needed to fuel expanding electricity generation. The study concluded that:

U.S. gas demand will be filled with U.S. production, along with increasing

volumes from Canada and a small, but growing, contribution from liquefied natural gas (LNG) imports...Two regions—deepwater Gulf of Mexico and the

Rockies—will contribute most significantly to the new supply... U.S. production

is projected to increase from 19 TCF in 1998 to 25 TCF in 2010, and could approach 27 TCF in 2015. Deeper wells, deeper water, and nonconventional

sources will be key to future supply.

Importantly, this study concludes that these future natural gas needs can be

met through domestic resources supplemented by other North American resources. Equally important, it identified key issues that had to be addressed to

meet these needs.

ACTIONS THAT MUST BE TAKEN TO MEET FUTURE NEEDS

The NPC Natural Gas study identified a series of needs that serve to characterize

the key factors to meeting future demand. They also apply to addressing domestic

petroleum development. They can be divided into the following four areas: access

to capital, access to the natural resource base, access to technology, and access to

human resources. Of these, access to capital and access to the natural resource base

are highly dependent on federal policy.

Access To Capital

The federal government needs to take actions to improve capital flow into this

critical industry. Generally, there are two areas for possible action—tax reforms and

federally backed financial instruments. The most immediate focus should be on tax

reforms.

Following his recent radio address, President Clinton released documents indicating that he intended to propose legislation to allow expensing of geological and

geophysical (G&G) costs and of delay rental payments. These are sound first steps,

but more must be done.

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He also indicated that he was evaluating proposals dealing with marginal wells.

Action regarding these wells is essential to preserve existing production and we believe there are four key elements that should be enacted immediately:

• Creating a countercyclical marginal well tax credit. • Allowing a 5-year net operating loss carryback for independent producers; • Eliminating the net income limitation on percentage depletion for marginal wells;

and, • Eliminating the 65 percent net taxable income limit on percentage depletion;

All of these have been introduced or passed in some form over the past two plus

years. For example, Senator Kay Bailey Hutchison recently introduced S. 2265 incorporating the expensing proposals and the marginal well tax credit in one bill.

Several senators introduced S.2557 last week that includes these provisions.

We are at a rare juncture. Both Congress and the Administration are moving in

the same direction regarding tax reforms for domestic natural gas and petroleum

exploration and production. Both are looking toward provisions that will encourage

exploration. Both are looking at ways to extend the life of domestic marginal wells—

our true strategic petroleum reserve. Now is the time to act.

Will these steps guarantee that domestic production will rebound? Nothing is certain, but it will guarantee that more capital will get into this industry when it is

needed. And it will avoid the mistakes of 1986 when Congress enacted Alternative

Minimum Tax provisions, just as the industry needed capital to rebound from low

petroleum prices. This was one of many factors that have resulted in the loss of

about 2 million barrels per day of domestic petroleum production from 1986 to 1997.

This is not all that we need to do. We should also look at other tax reforms that

can help bring capital to this industry over the next decade and beyond. This industry must compete for capital against high technology and Internet companies that

are generating far higher returns than are likely from this mature but risky industry. Investors need reasons to put their capital in domestic exploration and production companies. Other tax reforms that could be addressed include modification of

the AMT, expanding the Enhanced Oil Recovery tax credit, considering what tax

treatment should apply to the unconventional sources identified in the NPC study

like the current Section 29 tax credit, considering a drilling tax credit, inactive well

recovery, and reevaluating the elements of percentage depletion including the rate

and the number of barrels of production that apply. Decisions on these reforms

should be made based on the importance of this domestically produced resource. We

must begin treating domestic natural gas and petroleum as a critical element of national economic security.

And, we should look at federal financial instruments like the PADDIE MAC concept that would create a FANNIE MAE-like program to help lower the capital costs

to the smaller producers so essential to maintaining the nation’s marginal wells.

Access To The Natural Resource Base

Addressing the issues of access to the nation’s resources under government controlled lands is complicated. Recent successful laws that have addressed access are

the Deepwater Royalty Relief Act, The Royalty Fairness and Simplification Act, and

moratoriums on rules for illegally assessing new petroleum royalties. We are

pleased to announce that in a recent decision, IPAA v. Armstrong, the District Court

ruled that in fact the government doesn’t have the legal right to require producers

to market at no cost to the lessor, a matter at the heart of the petroleum royalty

rulemaking. These actions have enhanced the development of federally controlled resources.

The legislative requirements of the Deepwater Royalty Relief Act are expiring.

The authority to continue royalty relief will rest in the hands of the Minerals Management Service. IPAA believes it is critical to continue to provide a royalty structure that encourages offshore development. The Deepwater Royalty Relief Act has

proven that its approach works. However, while its benefits have largely flowed to

the major integrated petroleum companies, independents are now moving more aggressively into the offshore generally and the deepwater more specifically. Major integrated companies are moving toward the ultra-deep water where their cutting

edge technologies are allowing them to go. IPAA and other associations, and companies involved in the offshore have begun working with MMS and the DOE to look

at how royalty policies can enhance domestic offshore production. Hopefully, these

efforts will lead to administrative actions to create a royalty structure throughout

the offshore that will enhance domestic production. However, if this result does not

occur, Congress will need to address offshore royalty policies.

At the same time it is equally important to recognize that a larger aspect of access

to natural resources involves opening access to that which is not now available and

halting the trend of further embargoes of western lands. Unfortunately, the AdminVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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istration avoids dealing with the clear need to open government lands to exploration

and production. It hides behind an environmental sensitivity argument that is proven wrong by its own DOE report. It focuses on arguments against opening ANWR

and avoids dealing with access issues offshore and in the Rockies where its own National Petroleum Council Natural Gas study concludes that over 200 trillion cubic

feet of natural gas is either off limits or difficult to permit.1t is important to understand that access issues differ between these areas. ANWR and offshore activity off

of California, the Eastern Gulf of Mexico, and the Atlantic are constrained by policy

decisions, both executive and legislative, through prohibitions and moratoriums.

These are based on outdated reactions to spills occurring in the past. The Administration’s own study, Our Ocean Future, concluded unequivocally that offshore natural gas and petroleum production is a success story. We need to move into the 21st

century and make enlightened decisions to use these critical national resources.

Access in the Rockies won’t be resolved by a single act. Here, we are dealing with

a mosaic of limitations. Some involve land that is completely excluded from natural

gas and petroleum exploration and production.

• The Antiquities Act of 1906 has been used to declare areas as national monuments placing land completely off limits.

• In other areas, the Department of Agriculture is proposing to expand roadless

areas in national forests that will preclude natural gas and petroleum development.

• Some national forests, like the Lewis and Clark National Forest, projected to be

a world class natural gas source, have been administratively closed to natural

gas and petroleum development

• Wilderness areas have been created without an understanding of the resources

that might be lost.

We must also deal with permitting limitations and other indirect actions of federal agencies.

• Because these are government lands, it is necessary that federal agencies issue

permits for the exploration and production activities. These agencies are

charged with the task of developing environmental management plans for areas

under the National Environmental Policy Act (NEPA). NEPA can be used to

create effective, environmentally sound management plans, or it can be used to

delay and deny access. Frequently, the results reflect the attitude of the agency

and its leaders. For example, in the Powder River basin the development of coal

bed methane has first been delayed by the inability of the BLM to process permits. But, as the magnitude of effort was more clearcut, BLM fell back to the

excuse that the EIS for the area was outdated and required a new plan under

NEPA. This has led to further delay. BLM then argues it needs additional

funds, requiring Congress to act and resulting in further delay. In the San Juan

basin, BLM has tried to argue that its management plan needs updating and

permitting needs to be delayed until another plan can be developed despite repeated assessments of the plan that demonstrate its adequacy.

• NEPA is only one of many laws that are involved in the planning or permitting

processes and BLM is only one of the agencies that must be dealt with. Others

include the Endangered Species Act and the Fish and Wildlife Service, the

Clean Water Act that can involve both the Environmental Protection Agency

and the Corps of Engineers when wetlands are concerned, and even the Clean

Air Act.

• For example, many areas in the Rockies are limited during certain times of the

year because of management plans designed to protect various species. While

each plan individually provides opportunities for resource development, collectively, they interact to effectively prohibit natural gas and petroleum extraction.

If we are to provide the country with the domestic energy it deserves, we need

to create national policies that allow environmentally sound development of these

resources. No one can expect that this mosaic of limitations can be instantly revised,

but we need to start the process.

First, we can determine where the most likely resources lie. Congress should compel the development of such an inventory. When actions like this have occurred in

the past, they allow the disputes to be better focused. They allow the issues to be

discussed in a real rather than hypothetical context. And, this can lead to real solutions for specific areas.

Second, we need a clear understanding of the impediments that we are encountering. We need to know how many laws, regulations, conflicting management

plans, and whatever else are in play. This perspective is essential to provide a real

sense of how these actions can result in effectively foreclosing any development. A

recent assessment of one area of the Rockies showed how a mixture of management

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plans for various species effectively foreclosed any petroleum or natural gas development, but no single plan would result in such denial (a graphical presentation is

attached to this testimony).

Third, we cannot expect to meet our nation’s needs for clean burning natural gas

without reasonable access to the resource. The NPC Natural Gas study and all other

analyses conclude that the Rockies contain significant extractable reserves of natural gas. Yet, in the Rockies access is being limited. It is either the unanticipated

outcome of laws, regulations, and plans that unintentionally deny access or the manipulation of these laws to produce that outcome. In either case, access limitations

are not the result of a clear policy decision. Consequently, we need a commitment

from Congress and the Administration that these types of constraints will be eliminated or restrained and proper funding will be provided on a continued basis to

allow environmental documents, leases, and drilling permits to be issued in a timely

fashion.

Clearly, there are environmental extremists who will not support this essential

development. But, as the DOE has demonstrated in its report, it can be done and

in an environmentally sound manner. It will take effort, and it will also take courage.

Other Issues

While these issues dominate the factors that influence future natural gas and petroleum exploration and production, there are many others that must be addressed—some that are dominated by factors largely outside the scope of the federal

government, others where the federal government is a key factor.

For example, the other factors identified in the NPC Natural Gas study relate to

access to technology and to human resources must not be overlooked. Domestic natural gas and petroleum development have changed dramatically during the past two

decades through the application of new technologies such as 3D and 4D seismic

analysis, horizontal drilling, and the use of advance offshore technologies. The widespread availability of these and other technologies will be critical to meeting future

challenges as well. Similarly, the industry has suffered further declines in employment. During the 1998-99 low petroleum price crisis, the natural gas and petroleum

extraction industry lost 65,000 jobs of which only about 7,000 have returned. Employment has dropped below 300,000 from levels that exceeded 600,000 in 1984.

These are highly skilled jobs at both the rig operator and engineering level. Many

of the domestic industry workers are Hispanics. But, once people leave the industry

it is hard to attract them back. Attracting new workers is equally difficult. For example, enrollment in petroleum engineering has consistently fallen over the past

several years. While these are not issues that are dominated by federal policy decisions, they are nonetheless essential to meeting future natural gas and petroleum

demand.

At the federal level, we must continue to work with foreign producer nations to

move toward petroleum policies that produce the stability needed to maintain and

enhance our domestic production. And, as we do, we cannot assume that other countries are willing to sacrifice their national incomes to meet our expectations that

product prices should be low in the U.S.

The federal government must strive toward sound environmental regulatory programs that do not burden the industry with regulations and paperwork that provide

little if any environmental benefits. For example, the Environmental Protection

Agency (EPA) is now being sued again to compel regulation of hydraulic fracturing

under the Underground Injection Program (UIC) of the Safe Drinking Water Act

(SDWA). Study after study has shown that hydraulic fracturing is an environmentally sound process involving the brief injection and subsequent removal of

fluids to place proppants necessary to open natural gas and petroleum formations

for development. Some analysts believe that over 60 percent of the natural gas wells

that will be needed to meet the projected 2010 demand will require hydraulic fracturing. It is exactly this type of poorly targeted regulation that must be avoided.

Similarly, EPA is proposing new reporting requirements under the federal Superfund and Right-to-Know laws that will add nothing to the scope of information on

emergency releases but burden natural gas and petroleum producers and other industries with needless paperwork. In an era when future natural gas and petroleum

production will depend on the amount of capital that must be invested, stripping

this capital away through unneeded regulations is counterproductive and unwarranted.

CONCLUSION

On balance, future supply of domestic natural gas and petroleum will depend on

a clear recognition—first by the federal government and more broadly by the nation

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as a whole—that these commodities provide a value as a domestic resource. It will

require a clear recognition that the domestic industry has changed dramatically

since the 1980s and will continue to change toward greater reliance on independent

producers. And, it will require a clear commitment from the federal government that

it is prepared to implement policies to allow domestic exploration and production to

access the capital, the resource base, the technology, and the human resources that

are needed to meet the challenges confronting the country.

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Mr. BARTON. Thank you, Mr. Russell. It is amazing. You are the

last testifier, and you are under 5 minutes. That is amazing after

13 other people have gone before you, and you are timely. We commend you for that.

We will recognize the gentleman from New York, Mr. Vito

Fossella—who is not running for the Senate, at least as of this

morning. The day is early yet——

Mr. FOSSELLA. We have time, the way things move in New York.

Mr. BARTON. [continuing] for 10 minutes for questions.

Mr. FOSSELLA. Thank you, Mr. Chairman. And thank you—I am

sorry I am late, but I thank you for holding this hearing.

I have a question for the American Petroleum Institute. With the

impending June 1 implementation of the reformulated gasoline program in certain areas of the United States, including my congressional district, there have been some concerns about the problem

in the Midwest as well as refinery capacity. In your opinion, will

existing refineries have the capacity to meet these new, more stringent requirements and, if not, what needs to be done to improve

this?

Mr. CAVANEY. We are facing a significant challenge, which is implementing this new grade, RFG Phase 2, as of June 1. There are

some things that have developed.

No. 1 among those is a lower court decision upholding an earlier

decision by the court on the Unocal patent. And the effect of this

Unocal patent, Unocal was one of six companies that worked collaboratively in the State of California to develop very low-polluting

gasoline. They patented essentially the process or the pathway, the

formulation, in order to produce this gasoline; and, therefore, they

are entitled under the latest court decision to receive a royalty of

about 5.7 cents per gallon.

That is an amount far in excess of the profit that you make on

a gallon, so it is really something that refiners are not in a position

to be able to accept at this time.

So the alternative is one of two things, either to try and build

gasoline around that particular patent, which is very difficult to do,

or to import gasoline from abroad. One of the things that has been

done is that many of the people who import gasoline are not sure

whether or not they may ultimately become a liable party, so there

are large questions about whether we are going to be able to import the traditional volumes, and the companies are working as

rapidly as they can.

But, in general, we are running flat out. We are at record production levels in our refineries. Our utilization rate is 95 percent.

We have most of it in place; and we think, with very few exceptions, that we are going to be able to be in a position to continue

to handle this phase-in of RFG Phase 2 as we move through the

drive season past June 1.

There is a difference, I might add, between this phase 2 gasoline

in your district and in Mr. Shimkus’ district, who was here earlier

with us. In the Midwest, a lot of ethanol is used. And when you

make RFG Phase 2 gasoline with ethanol, you need a different base

blend stock than what you will need in your area. That blend stock

that he needs for his area is a very much more expensive one than

yours.

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See, the difference in price for making RFG Phase 2 in your area

is going to be about as anticipated, which was somewhere in the

3 to 5 cents a gallon cost increase. But the difference in making

RFG if you are going to use ethanol is significantly greater, not unlike the amounts he was talking about.

These were figures that had been known as we have gone forward. I don’t know why those figures were not brought out as EPA

started to set these timetables there, but we have been working

with them as we will continue to work with all of our customers

because we are in the business of making sure that gasoline is delivered to consumers when and where they want it and that we are

in compliance with the laws.

Mr. FOSSELLA. So you do not anticipate any supply problems in

the Northeast?

Mr. CAVANEY. We think that we will be able to serve it fairly

well. We cannot say that every locality will have it at that time,

but we are confident that people will not go without gasoline if

need be.

Mr. FOSSELLA. You mentioned you are working with EPA. Are

you also working with the Department of Energy on this? Or are

the two working together, to your knowledge?

Mr. CAVANEY. We are working with both, but this is essentially

a regulatory requirement that was being handled through EPA.

Mr. FOSSELLA. Thank you. Thanks.

Just a question with the representative from the Interstate Natural Gas Association, I guess, Ms. Abbott. You discussed the energy

delivery systems in the Northeast and the impact that has on price

spikes both in the winter and the summer. What improvements are

needed, other than what you offer in your testimony, in the natural

gas pipeline as well as our power industry to prevent these spikes

and possible reliability problems?

Ms. ABBOTT. Thank you, I think that is a broad spectrum of

things. I think, largely, the broad policy of letting the market work

is the important thing. What people building new power plants and

trying to build new pipelines to alleviate those supply constraints

are trying to address is complying with all the regulatory requirements and permitting and the different agencies that you have to

deal with.

So, really, the key barrier here is in making more efficient and

getting more timely approvals for the construction of those projects.

And if you can get that, the private sector will respond to that demand for additional pipelines and additional power plants. And

that is really what we would like to do is to serve our customers.

So it is really around that regulatory reform within the permitting

process and getting to decision more quickly.

Mr. FOSSELLA. Have you put forward any proposals or suggestions on how you would reform this process?

Ms. ABBOTT. Yes, we have an entire study here from INGAA on

the exact steps we think would be needed. And really the key is

getting the lead agencies, which in our case is the Federal Energy

Regulatory Commission—usually, for power plants, it is a State

agency that is the lead agency—to really take the lead and bring

the tradeoffs to resolution in a more timely fashion.

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Mr. FOSSELLA. I guess the consequence, as you state in your testimony, is ultimately higher prices. But is there—in that study, do

you quantify more broadly or more specifically, depending on your

point of view, on what the opportunity loss is here as a result of

the certification process?

Ms. ABBOTT. Well, a good example would be what prices in New

York for the next year are facing where it is 35 cents, roughly 50

percent above the actual cost of transportation, which is about 60

cents right now. So you can see in very concrete instances if you

do not have the mechanisms to allow the supply response to occur,

whether it is in electric generation or in pipeline infrastructure,

that increases prices to consumers.

Mr. FOSSELLA. I guess, if I heard you correctly, the capital is

there, the folks are waiting to jump in, but, right now, there is just

no incentive or the cost of waiting and the time waiting just does

not make sense?

Ms. ABBOTT. Well, we all have projects that we have proposed,

and it is to get the regulatory approvals to be able to go ahead and

build those projects.

Mr. FOSSELLA. I have no further questions, Mr. Chairman.

Thank you.

Mr. BARTON. I thank the gentleman from New York.

The Chair would recognize himself for such time as he may consume, seeing no other members present. If other members show,

we will give them a chance to ask some questions.

Mr. FOSSELLA. I am running for Senate. I just gave it some

thought.

Mr. BARTON. All right. I am going to start with Mrs. Abbott.

Now, correct me if I am wrong, under Federal policy the Federal

Government, or the FERC as its representative, has the right of

eminent domain in terms of right-of-way for natural gas pipelines.

Isn’t that true?

Ms. ABBOTT. Yes, sir.

Mr. BARTON. Has it ever exercised that right?

Ms. ABBOTT. Typically what happens is, when you get a certificate to build an interstate pipeline and the Federal Government

has to find that there is a public convenience and necessity for

granting you that right of eminent domain, that allows then the

private company who typically has gone out and tried to negotiate

with the landowners on a voluntary basis, if there are any remaining landowners that have not voluntarily negotiated you then have

the right of eminent domain with respect to those parties and they

have an ability to get a fair price.

Mr. BARTON. Now, how does the right of eminent domain for

pipeline construction interact with all of the problems and the permitting or the environmental issues at the State, Federal, and local

level interact that you alluded to in your testimony?

Ms. ABBOTT. That is a great question. A key part of the certificate process is coordination among the various State and Federal

agencies over the environmental consequences of that Federal act

of granting a certificate. So it is basically doing the tradeoffs and

looking at the analysis as to what is the impact on the environment

of a particular pipeline route, are there alternative routings that

are necessary, and doing the studies necessary to do that. And

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what we are finding is that there are just inconsistencies among

the various agencies that have a stake in that process and what

is needed is a more timely resolution of those tradeoffs.

Mr. BARTON. Now, I want to make sure that the committee gets

this on the record. Eminent domain gives the Federal Government

the right to ultimately, once a route has been decided, require that

that route be made available for construction. But it does not give

the Federal or any other government the right to override all the

environmental and local zoning restrictions. Isn’t that correct?

Ms. ABBOTT. Yes, yes, and so you basically have all the State,

local, and Federal permitting processes that you must go through.

And just as Mr. Johnson indicated I think on the production side,

it is the web of those regulations and the lack of coordination to

get to resolution that is the key issue. I will give you a couple of

examples from our Millennium project that are quite notable.

When we filed this project, we filed 51 inches of data weighing

80 pounds, a moderate-size child in terms of the volume of data at

the front end that we filed.

One of the things we do in this is we cross the Hudson River.

It was a full year of wrangling among the various State and Federal agencies as to what the best time was to cross the river with

our construction. We did not care when that time window was. But

they couldn’t agree for a full year. That is not timely decisionmaking. It does not do anything to save the environment when you

are trying to decide. You had conflicting opinions, and there wasn’t

a mechanism to get to resolution as to what the best environmental

answer was.

Mr. BARTON. Now I am going to ask the whole panel this question, but I want to start with you. In your opinion, is it possible

for the Congress to develop a consensus pipeline review national

legislation that would satisfy the legitimate requirements of the

people that want to construct the pipeline and also the legitimate

requirements of the community that wants to protect the environment? Can we work together with the stakeholders to come up

with a comprehensive piece of legislation that would expedite the

pipeline construction process in this country?

Ms. ABBOTT. I believe it is possible, and the key is in holding one

agency accountable for timely resolutions of tradeoffs. You saw, in

that example, it should not take a year to resolve when the best

time is scientifically to cross a river.

Mr. BARTON. From an industry perspective you are not advocating to the subcommittee that we lessen or in any way ease any

of the environmental protections. You are simply saying let’s get

the Federal agencies and State and local agencies to have to sit

down and resolve those issues in an expedited fashion?

Ms. ABBOTT. Exactly correct.

Mr. BARTON. Now, any other panelists wish to weigh in on that

pipeline construction question? Anybody? Mr. Cavaney?

Mr. CAVANEY. Yes, Mr. Chairman. There is currently the Pipeline Safety Act is under review for renewal, and that affects liquid

pipelines, not natural gas pipelines, and I think it would be good

to take a look there. Because there are several issues where parts

of the Federal Government are arguing about having joint jurisdiction, and it is going to raise exactly the issue that you have just

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heard here and industry across the board is trying to argue: You

need one definitive point of reference that can make decisions or

you will end up repeating in the liquid pipelines the same problems

that you have now with the gas pipelines so it can be done. That

is a good model to look at. There are some good parts of that that

have worked well, but there are also some lessons learned that we

and many of the others would be glad to talk to you and your staff

about.

Ms. ABBOTT. And I think the key theme here is that, as industries, we are very supportive of matters to protect the environment

and matters to protect public safety, but let’s get to resolution and

not engage in infinite dialog about the best way to get there. And

I think it is that getting to resolution when you have a myriad of

regulatory agencies involved, and legitimately involved, given their

accountabilities. But getting to resolution I think is the key thing.

Mr. BARTON. Now, let’s assume that we can untie this Gordian

knot of pipeline construction permitting so that we actually get the

pipelines built. That is a big if, but assume that. What do we need

to do at the Federal level in terms of incentive pricing at the FERC

for the transmission and operation of these pipelines? Because you

alluded again to that in your testimony.

Ms. ABBOTT. Right. The dramatic changes that we are effecting

in the gas industry is that we have a different set of customers

now. Our traditional customer is the local distribution companies,

are now going through a choice process at the local level to allow

the ultimate consumer to choose their gas suppliers; and we as an

industry and AGA and INGAA both support that because we think

choice is a good thing. It goes along with that market support.

What it means is that different players now hold the pipeline capacity, and they need different products and services.

So the kind of model we are suggesting is very much the model

people have taken on the telecommunications side where your basic

service is regulated and is fairly structured but enhanced services

like call waiting and other kinds of things can be fairly quickly introduced and priced as a market moves.

If you think about the benefits we have seen in the telephone industry where the option used to be the black phone and then we

unbundled the telephone industry and you see the myriad of products and service—I don’t think cell phones ever would have developed in the telecommunications business if we had not unbundled

long line. We did not anticipate that coming. Pagers, all of the

things that we cannot function without. And that is the kind of

product innovation and benefits to the economy you get when you

go that kind of a route, and it is the kind of model that we are suggesting.

Mr. BARTON. I am going to show some of my ignorance because

I have not focused on this in a while. Does the FERC regulate the

transmission rate for interstate gas pipelines today?

Ms. ABBOTT. Yes, sir.

Mr. BARTON. So you want FERC to put an incentive mechanism

in place or do you want to deregulate that?

Ms. ABBOTT. We recognize that we are still considered to be a

natural monopoly by many, so it is the form of regulation that we

are talking about. Right today we basically provide one vanilla-flaVerDate 11-MAY-2000 15:38 Jan 04, 2001 Jkt 010199 PO 00000 Frm 00125 Fmt 6633 Sfmt 6602 E:\HEARINGS\64772.TXT pfrm08 PsN: 64772
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vor kind of service at sort of an average rate; and what we would

like is the flexibility to, on top of that, kind of like call waiting,

your basic telephone service is regulated, your dial tone is regulated on phone, but the products and services that you add on top

of that are subject to more market forces and more flexible kind of

regulations.

Mr. BARTON. What is the current FERC’s view of your idea?

Ms. ABBOTT. They have taken some good steps forward in it, and

I think the signal is to continue to move with the market. Because

we think as the market moves forward we are going to need more

flexible pricing options and service options. I think they are open

to it. It is the speed of decisionmaking and the resources devoted

to recognizing there is a need.

Mr. BARTON. What stakeholder groups tend to oppose that?

Ms. ABBOTT. We have had good support from our colleagues on

the distribution side. I think the production segment of the community is somewhat for skeptical on some forms of that. Would that

be fair?

Mr. JOHNSON. Yes, that is fair. On the producer side, the supply

side, we recognize in certain instances that it is a free market; and

there is no problem with competition locally. There are other segments, interstate pipeline market, that are specifically monopolies.

There is only one pipe out of one place to one other place where

you want to sell your gas. And what we really want to make sure

of is that that particular natural monopoly—and it is an efficient

monopoly, it really is, but it does need to be regulated to a certain

extent so that there is not discrimination which will add to the cost

of things.

Mr. BARTON. I would say you would be opposed to what we would

call price gouging, charging an unreasonable amount to transmit a

specific amount of gas. But if you put in some sort of incentive

mechanism that allows additional services, you would not oppose

that.

Mr. JOHNSON. No, incentive mechanisms would work for us. And,

again, there are certain services that the interstate pipeline industry offers and wants to offer that, again, we are not concerned

about. Because I think the bright light at the end of the tunnel on

a lot of this is that the Internet is going to open much of this up.

Mr. BARTON. I don’t think we can transmit natural gas by the

Internet, though.

Mr. JOHNSON. No, but what we are concerned about is transparency of transactions. Now transactions are extremely cloaked in

secrecy; and we do not see everything that goes on in the market,

which leads to suspicion, obviously. And I think what you need to

do with—what the Internet will affect so that everyone will see the

transactions that are going on. And it will also greatly lower transaction costs, which is a big part of my business and her business

and everybody else’s business.

Mr. BARTON. I want to switch to Mr. Russell. I did glance at your

testimony last evening, and I have one technical question and one

of personal curiosity.

You have got a huge list of people that are sponsoring your testimony. But I am puzzled by the fact that the Texas Independent

Producers and Royalty Owners, TIPRO, is not on there. Is there a

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reason for that? You have got North Texas and West Texas, but

you do not have TIPRO. And they are normally telling IPAA what

to do, I guess.

Mr. RUSSELL. That was a housekeeping error. They have asked

not to be included unless they have the specific time to go through

it in more detail.

Mr. BARTON. As far as you know, they do not oppose anything

you are saying in here?

Mr. RUSSELL. That is right.

Mr. BARTON. I want to double-check, because I have a lot of good

friends down in TIPRO.

On the back of your testimony you have a chart, you do not really allude to it in your testimony, but along one axis, it says Wildlife

Restrictions is the heading and then big game winter range, sage

grouse lek, L-E-K, sage grouse nesting, mountain plover breeding,

mountain plover nesting, raptor nesting, burrowing owl, prairie dog

avoidance. Are these all local or Federal restrictions in the Rocky

Mountains that you cannot drill during those times?

Mr. RUSSELL. A lot of them are. But it goes to the point that you

were talking about before with the pipelines, which is, if you take

an area of land and look at all the various environmental restrictions, this is just an example of some of the endangered species’

kinds of restrictions there that block access during certain periods

of time.

Mr. BARTON. The prairie dog is not an endangered species, is it?

Mr. RUSSELL. Yes, in some areas it is.

Mr. BARTON. It is?

Mr. SHIMKUS. Stop running over them.

Mr. BARTON. Not in Texas.

Mr. RUSSELL. You would be surprised at the list that we would

show you.

But what I was going to say is it is not only this list but if you

go through and look at not only endangered species but some aspects of the Clean Air Act—the permitting, the monitoring, some

of the things that you talked about before which really go to this

procedural aspect and the lack of coordination between State and

Federal agencies, that what happens is that whole areas are essentially taken off the table for development. That is what we were

trying to show there, and I can give you more supporting detail on

that.

Mr. BARTON. So this is more——

Mr. RUSSELL. That is really more in some of the Rockies rather

than across the country. That was put together by one of our Rocky

Mountain associations, but we can give you a lot more detail on

that.

But, again, it goes to the point of what you were raising before,

that there is an awful lot of what can be done in terms of coordination and in terms of not looking at the substantive requirements

but the overall effect of overlaying one environmental statute over

another when there is no sense of what the implication is going to

be for further gas development, something that you raised this

morning.

Mr. BARTON. I have two more questions, and then I will recognize Mr. Shimkus.

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Mr. Cavaney, Admiral Watkins earlier was fairly emphatic and

passionate about the ability to drill in ANWR without harming the

environment. What has been the experience in Prudhoe Bay in

terms of environmental damage to the land and also to the wildlife? Has there been documented any permanent harm to the wildlife or to the environment in terms of Prudhoe Bay?

Mr. CAVANEY. Well, I think, Mr. Chairman, to the contrary; and

we will be glad to work with the Alaska Oil and Gas Association

to provide you a bunch of the studies and the data that has been

collected.

Just to give some examples, they have monitored the herds; and

the herd development over the time. One of the herds that was up

there was about 3,000 at the time they finished off the pipeline. It

is up to 20,000 now. I could go on and on and on.

Mr. BARTON. So they need population control?

Mr. CAVANEY. They need population control. But, clearly, wildlife

has done quite well up there. It is well documented. And a lot of

that goes to the site preparation. In the testimony that Alaska Oil

and Gas Association committed, they point out the most recent

field, which is Alpine, they are going into, that they spent years of

prep work in getting the site ready by looking at all the local indigenous situations so they could track and keep records of that. What

we have found, that is a special place up there. It has a unique

habitat. The conditions are very harsh at times, and the industry

has brought to bear technology up in that area unlike any place

else in the world, and we have learned a lot from it.

Over the 20 years that the industry has been up there, they now

take a pad size, which is the area where the wellheads go, and it

has been reduced by over 90 percent.

And another thing that has happened is that, over that period

of time, we have learned instead of having to make one bore hole

for each individual well you can now utilize—with directional drilling one bore hole can go ahead and handle multiple wells. You can

actually go out as deep as 9,000 feet and as far out as 4 miles with

directional drilling to find what you need and bring it through. So

the footprint on the surface is down to close to de minimis levels.

In terms of the operations up there on the tundra area where

they operate, what we have learned to do is, any of the muds and

the like that are brought out in the drilling process from down

below they are reinjected into the ground, as is the gas and the

others, so that by the time you leave a site basically, you wouldn’t

know that people had been there.

So it is possible that people are concerned about looking at drilling operations 20 or 25 years ago and saying we just do not want

that up there, but it does not look at the reality of what is going

on up there today because technology continues to advance. We are

quite confident that we could be held to the world’s strictest standards, which we are up in Alaska, and we could go up in ANWR and

those other areas and both respect the environment as well as help

develop an energy policy that would provide more domestic production.

Mr. BARTON. Now put this in perspective. Assuming that the latest EIA estimate on the amount of recoverable oil and gas are true

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in ANWR, it is a huge number. It is almost as much as we have

in the lower 48 in terms of proven reserves. It is a big number.

Mr. CAVANEY. Yes.

Mr. BARTON. How big would the drilling platform or the drilling

footprint be to actually drill ANWR if everything is there that EIA

says is there? Put it in some sort of way that we can understand.

Bigger than the Capitol? Bigger than the State of Texas? How big

would it be to do all the drilling?

Mr. CAVANEY. Let me give you an example of this Alpine field,

which is not in ANWR, it is over in the plain. There you have an

area of 40,000 acres. Now, they have done all the seismic and the

testing, which has not been done in ANWR yet so you have to do

a lot of work before you can get the details down. But they can take

an amount which is less than 1 percent of the land mass, would

be all they would ever have to touch to be able to access and resource that entire area. So you would have to go in and, first of

all——

Mr. BARTON. That would be 400 acres based on 40,000 acres?

Mr. CAVANEY. Yes.

Mr. BARTON. Four hundred acres?

Mr. CAVANEY. And that is a relatively small amount and could

be smaller based on technology.

Mr. BARTON. What is a city block? How many acres is in a city

block?

Mr. CAVANEY. Gosh, I think a city block is considered to be 10

or 12.

Mr. BARTON. We are going to show all of our technical expertise

here. So if a city block is 10 acres, you can drill this entire area

in 40 acres. Four city blocks could drill this entire field?

Mr. CAVANEY. I think it is not fair to extrapolate this, because

we have not had a chance to go in with seismic and determine

whether these reserves would all be in several large deposits or

caverns or whether they are——

Mr. BARTON. I am trying to help. This is not an unfriendly question. But I am told that we could have a drilling platform on the

parking lot of the Capitol; and if there were referable oil and gas

reserves in the District of Columbia, one drilling platform centrally

located could drill all the wells that would be needed to drain the

District of Columbia.

Mr. CAVANEY. That is correct. That is correct.

Mr. BARTON. So this image of these forests of rigs like you remember from the 1930’s in Kilgore, Texas, in reality in Alaska, if

we are allowed to drill in ANWR, you are going to have very few

platforms; and to the caribou or an animal walking through, they

are probably not even going to notice the drilling, unless at night

they stumble into it.

Mr. CAVANEY. They won’t. I have stood at a site up in Alaska

and actually had caribou walk within 50 feet of me undisturbed.

It is not the old sepia-toned tintype of all these rigs and everything

those are from the 1920’s and 1930’s.

What you use today is modern technology. You bring the rig in,

drill the hole, remove the rig, pull it out. You have a small wellhead that is there, and that is all that is seen, and then some lines

to be able to collect the oil and move it on to tankers, basically. All

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about invisible to the eye once the actual bore hole has been

drilled.

Mr. BARTON. I have some more questions, but I will recognize

Mr. Shimkus for such time as he may consume, and then I will finish the hearing.

Mr. SHIMKUS. Thank you, Mr. Chairman.

I think 400 acres would be classified as a small farm in Illinois.

In fact, it is probably a small family farm that cannot make it

today at today’s commodity prices.

Mr. BARTON. That would be a backyard in Texas.

Mr. SHIMKUS. I appreciate the panel’s longevity and staying

through. It is a long day, and I know most of you were here for

the previous panel.

I have always been very vigilant on this national energy policy,

and if you went back to the records of other hearings I have bemoaned the fact that we really do not have a strategy that takes

in these other fields that we could do, the marginal wells that I

have in my district and, obviously, the renewable portion.

Now we are going to have a hearing on the renewal portion, but

I only wish, Mr. Chairman, that some of that renewable portion,

especially in the fuel blending area, could have been today because

it does fit well in the fuel debate. To separate it with the wind and

hydroelectric and solar I think does a great disservice to the debate, and next time I will be a little bit more prompt and involved

in seeing that there is good representation.

So, not to be adversarial but to continue to push the issue, on

a small portion of the national energy strategy which has to be that

renewable portion of our portfolio, I visited Williams Companies’

Pekin energy plant that produces ethanol and many other products. 100 percent, there is no residue in the production, and ethanol is just one of the products—feed, protein, starch, all this other

stuff. I was just amazed at the lack of residue in this refinery, and

I would encourage people to visit it. And DOE mentioned the fact

and the first panel mentioned about science research and development will not only help us move us further down the line.

I also want to take the chance to ask if anyone on the panel here

disagrees with the EPA’s evaluation of the phase 1 RFG areas,

which obviously is part of the oxygenate debate. There EPA says

that volatile organic compounds, VOC, reductions average 27 percent, and the goal was 15 percent. So exceeded the goal by using

the oxygenate standard. Air toxin reductions averaged 22 percent;

the goal was 15 percent. Average NOX reductions for phase 1 is 3

percent. There was no requirement under the phase 1 program.

And ambient benzine levels decreased by 43 percent of the oxygenate standards.

Now benzine is a carcinogen. Does anyone dispute the fact that

the oxygen standard has been very helpful in the clean air battle

that we have been fighting the last couple years?

Mr. CAVANEY. I would like to make a point, because we have

been through much of that. I think in the initial stages the oxygen

mandate may have had some benefit, but I think most of the people who manufacture gasoline and the regulators who look at them

can now say—how shall we say—the low-hanging fruit has already

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ards without using oxygen and still get those results out. What

happens to——

Mr. SHIMKUS. If I might jump in, we have had a hearing on the

oxygen standard, and we did have the doctor from the Colorado

School of Mines that in testimony before the committee would say

that is true, but you then have a rise in aromatics. So—and the

possibility of—so the question is this: Do you dispute the EPA

standards on the reductions of the organic compounds, the air toxic

reductions, the NOX reductions and the benzine reductions?

Mr. CAVANEY. All I was trying to say is——

Mr. SHIMKUS. But, sir, the question is—but the question is, do

you dispute that the oxygen standard has been beneficial in the

Clean Air Act?

Mr. BARTON. I think you ought to give him a chance to answer

the question.

Mr. SHIMKUS. Well, he is not—the debate—the response is—the

question is, has the oxygen standard been helpful and has met the

standards that the EPA has directed? That is the question.

Mr. CAVANEY. In the beginning it did, yes.

Mr. SHIMKUS. How about currently?

Mr. CAVANEY. Currently, you can achieve the same effects without the oxygenate mandate in there.

Mr. SHIMKUS. Well, and that is debatable, based upon other testimony that we have had.

Mr. BARTON. Would the gentleman yield? To try to help you out

a little bit, can you achieve the same effect at the same cost?

Mr. CAVANEY. Actually, in some cases we can probably do it less

expensive. We are supporters. We are the largest user of ethanol.

What we object to is the idea of mandating. Because it gets you,

in certain conditions, into very high-expense things where we have

to pass that cost along to the consumer. We don’t disagree that

oxygenates have a very valid role. We think ethanol has a very

bright future in our industry. We will be using significantly more

of it, with or without a mandate. What I am just trying to say is

you are asking for a blanket statement in a condition, that the

blanket answer——

Mr. BARTON. The gentleman’s statement is correct. The oxygen

requirement under the current Clean Air Act has exceeded the estimates of the cleanliness of the air that would develop by using

those standards. I think that is a true statement. I think——

Mr. CAVANEY. And the industry can blend without an oxygenate

today and maintain those extra gains won’t be lost in the process.

The case that has been mentioned by the earlier panel, technology

does change, so what was true 10 years ago can be done different

ways now. We have to acknowledge those kinds of things. We are

not trying to back away.

Mr. BARTON. The gentleman from Illinois is an ethanol man, and

the gentleman from Texas is an MTBE man.

Mr. SHIMKUS. Just reclaiming my time. We know what we have,

and we know what we have works. There is dispute on other refinery capabilities, and this is how it ties in though—with the whole

energy security issue.

Also, the DOE and our testimony that we had in March, Mr.

Chairman, the question was asked of DOE: If we would eliminate

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the oxygen standard, what would that do to the cost of fuel? And

we had a hearing on the high cost of fuel. Their response was an

increase of 3 to 5 cents a gallon.

And if basic supply and demand—you are actually losing volume

and replacing it by refined petroleum product, i.e. A gasoline, that,

obviously, supply and demand is working in favor of the producers

now with high prices. So if we want a national energy policy, we

are in a schizophrenic time—a clean air benefit and a renewable

source of fuel. That is why the separation of these issues in various

panels sometimes is not very helpful. And I will continue, obviously, to fight for the interests of Illinois.

Mr. BARTON. That is a real news flash.

Mr. SHIMKUS. Last thing is because—and I mentioned this to the

first panel—because of the biodiesel provision in the Energy and

Policy Conservation Act, soy diesel—demand for soy diesel has increased 700 percent, and there is a great reduction in the ability

of the exhaust. We look forward to working with the Petroleum Institute and—working with us so that we can get cleaner air, but

we also address our national energy security by—hopefully, it

never happens, the oil lanes are closed and we start pumping out

of the SPR to meet the demands of our military forces. In essence,

that is a limited supply. We better have our marginal wells, we

better have some continental United States oil production, and we

better have a renewable portion of that portfolio.

More statements than questions, Mr. Chairman, but that is a

member’s prerogative. With that, I will yield back my time.

Mr. BARTON. I just have a few more questions. Then we will close

the panel.

This is really to Mr. Cavaney. We have reauthorized the Energy

Policy Conservation Act in both the House and the Senate. The

bills are somewhat different; and there is some controversy over a

provision of the House that if oil prices in the world market were

to go below $15 a barrel we would authorize the first time for the

Secretary of Energy to purchase oil at $15 a barrel for the Strategic

Petroleum Reserve from the stripper wells.

In the Senate, I don’t know if it is in the EPCA Reauthorization

Act, but Senator Hutchinson has a provision that if oil prices were

to go below $15 a barrel a tax credit of up to $3 per barrel would

be made in order for these same stripper wells.

Obviously, the intent on both the Senate and the House is to

keep the stripper well production producing when world prices collapse again, if they do. What is API’s position? Do you support both

provisions? Do you have a preference for one?

Because at some point in time we are going to go to conference

with the Senate and, obviously showing some personal bias since

I am the author of the discretionary authority by the Department

of Energy, I would hope that we would keep that in. But if Senator

Hutchinson were here I know she would speak on behalf of the $3

per barrel tax credit.

Mr. CAVANEY. We strongly support a strong domestic energy production capacity, and we would work very closely and do with

IPAA. They are the principal constituents with many of those people.

Mr. BARTON. We have to give Mr. Russell a chance.

129

Mr. CAVANEY. Whatever would work out and be good with them,

I think you would find the API would be very supportive of that.

Mr. RUSSELL. We support both. But we support those things, especially the marginal well tax credit that you mentioned. That is

the thing to preserve, the marginal wells in this country. We were

talking before about the strategic petroleum reserve and we have

this, the marginal wells, in this country that produce about as

much oil as what we import from Saudi Arabia. So it is geared to

protect that production when we have downturns.

Mr. BARTON. The House provision in conjunction with the Markey amendment on the reserve fuel oil refined product reserve in

the Northeast passed the House like 400 to 6. So we have actually

had a vote in the House, and it was overwhelming.

I support Senator Hutchinson’s provisions, too. Unless it has

been voted on at committee, I don’t believe it has had a vote in the

Senate.

Well, I am going to let this panel go. As I said to the first panel,

I want to give you my personal appreciation for attending today.

This is a very helpful dialog.

I especially think the testimony of INGAA about the need to reform our pipeline licensing process and try to bring the permitting

process into some sort of conformity and expedite the procedure is

very helpful. I will be working with the minority. If we can come

up with some consensus language to at least introduce for discussion purposes in this Congress, you know, I would like to do that.

On the larger issues of oil and gas policy, I can assure you this

is not a hearing just to hear ourselves talk. We are going to have

two more hearings this summer. Next hearing is going to be on

coal and nuclear, and then we are going to hold a hearing on all

the renewable and alternatives, environmental issues. And we are

going to try somewhere to put in some focus on electricity, which

kind of uses all the base sources but is an end use. People look at

electricity as something they use like natural gas or like gasoline.

So by the end of the summer we hope to have had a comprehensive set of hearings and have developed a record to begin to try to

develop, again on a bipartisan basis, a comprehensive national energy strategy for the next administration, whichever political party

is in power.

So, again, I want to thank you. This hearing is adjourned.

[Whereupon, at 2:10 p.m., the subcommittee was adjourned.]

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