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• October 7, 2004 Senate Joint Economic Committee hearing on the Long-Run Economics of Natural Gas
  
• October 6, 2004 Senate Competition, Foreign Commerce, and Infrastructure Subcommittee hearing on the domestic supply and cost of natural gas

Witnesses:
Daniel Yergin Ph.D., Chairman, Cambridge Energy Research Associates
Paul Sankey Senior Energy Analyst, Deutsche Bank
Logan Magruder, President, Independent Petroleum Association of Mountain States
Bill Prindle, Deputy Director, American Council for an Energy Efficient Economy

On October 7th, the Senate Joint Economic Committee, chaired by Senator Bennett (R-UT), held a hearing on the long term economics of natural gas. Senators Reed (D-RI) and Bingaman (D-NM) were also in attendance. In his opening statement, Bennett noted that American industry is being negatively affected by the high cost of natural gas. He attributed the rise in gas prices to an increasing dependence on gas-produced electricity and a decline in production from "mature" wells and increased environmental restrictions. "We are not running out of natural gas by any stretch of the imagination," he said, "what can we do to facilitate [natural gas] investments?" Senator Reed also voiced concern over gas prices, however he said, "I myself believe very strongly that the best strategy we have for dealing with these conditions in the natural gas market is to put a much greater emphasis on energy efficiency and conservation."

Dr. Yergin, Chairman of the Cambridge Energy Research Associates, said that, "The higher and volatile gas prices are not a failure of markets. Rather they are the result of a disappointing geological experience over the last several years, compounded by issues involving access to resources." He attributes the spike in prices to a simple rise in demand without a concurrent rise in domestic production, resulting in an increased dependence on foreign LNG imports. By 2020, Yergin said that imported LNG would account for 25-30% of the U.S. natural gas market. He urged the senators to move on legislation to increase drilling and domestic supply of gas.

In his testimony, Paul Sankey, the senior energy analyst for the Deutsche Bank, emphasized the potential role of LNG in America's energy future. He said that, "Abundant global gas is the overpoweringly logical solution to the increasing shortage of energy in the US." Accordingly, the U.S. should invest in the infrastructure needed to import large quantities of LNG. Currently, there are only four ports in the US where LNG can be received from tanker ships.

Mr. Magruder, a representative from the Independent Petroleum Association of Mountain States, focused his testimony on increased drilling for natural gas. He said that more than 25% of the nation's natural gas comes from the Inter-mountain West, an area where half of the land is owned by the federal government. Magruder criticized the federal land leasing process, which he thinks is abused by environmentalists who make legal appeals. He said, "Unfortunately, today's federal regulatory environment, particularly the permitting and appeals processes, discourages natural gas production on public lands by injecting uncertainty, additional costs, and delays into the process. Take for example the groups and individuals who make a regular practice of protesting and litigating to stop energy development." He called for a shift in government practice, specifically the BLM, to incorporate, "business principles in the management of federally owned minerals."

William Prindle, speaking on behalf of the American Council for an Energy-Efficient Economy (ACEEE), emphasized the importance and near term feasibility of energy efficiency standards. According to a study by the ACEEE, if the US could reduce gas demand by 4% over the next five years, the wholesale natural gas prices would be reduced by 20%, "a savings which would put over $100 billion back into the US economy at a cost of $30 billion in new investment, of which $7 billion would be public funds." Since the majority of natural gas is now used for electricity generation, Prindle believes that measures to increase the efficiency and conservation of electricity would have a huge economic stimulus effect.

In contrast to Mr. Magruder and Dr. Yergin, Prindle suggested that the long term prospects for significant expansions in the US gas production are limited. He said, "U.S. natural gas dry production peaked in 1973, and in 2002 was 13% below that peak. Most low-cost fields have been drilled; recovery of additional gas from existing and new fields will come at a premium price. The average depletion rate for newly-opened natural gas fields in the continental U.S. is approaching 30%. This means that the gas industry must work harder each year just to offset depletion, let alone increase net production." Because of the limits of the supply side of the gas equation, Prindle suggested that in the short term, the federal government should move towards increased funding for efficiency deployment programs, expanded public benefits funds for efficiency, tax incentives for high-efficiency technologies, and a national efficiency and conservation campaign. In the longer term, the government could accelerate federal efficiency standards for residential development and public utilities as well as invest in research and development in energy efficiency.

-DRM

Panel 1:
Mr. Guy F. Caruso, Administrator, Energy Information Administration / U.S. Department of Energy

Panel 2:
Mr. Paul Wilkinson, Vice President Policy Analysis, American Gas Association
Mr. Gary Huss, President, National Association of Manufacturers
Ms. Wenonah Hauter, Director, Critical Mass Energy / Environment Program

On October 6th, Senator Stevens (R-AK) held a Senate Competition, Foreign Commerce, and Infrastructure Subcommittee hearing on the domestic supply and cost of natural gas. Senator Smith (R-OR) and Senator Lautenberg (D-NJ) were also in attendance. In his opening remarks, Senator Stevens expressed his support for the proposed Alaskan natural gas pipeline. He said that it would allow for increased drilling in his home state, thereby bolstering the Alaskan economy and significantly increasing the supply of domestic natural gas. Lautenberg expressed his concern that natural gas prices on the east coast, specifically in his home state of New Jersey, were the highest in the country. He remains interested in improving distribution infrastructure while taking extra caution to minimize environmental risks.

Mr. Caruso discussed the findings of the Energy Information Administration's new report discussing the spike in natural gas prices since 2000. Since then, American companies have increasingly turned to natural gas to satisfy their energy needs, thereby moving from a natural gas surplus to a deficit. Because of this, the prices of propane, natural gas, and heating oil gone up 22%, 15.3%, and 28.4% respectively. Imported liquefied natural gas, or LNG, has increasingly supplemented dwindling supplies here in the U.S., however according to Mr. Caruso, our ports lack the infrastructure to receive large quantities of LNG.

Mr. Wilkinson, who represents the gas industry, testified that since natural gas demand has been increasing more rapidly than supply, resulting in a tight energy market and volatile gas prices, the federal government and private industry should take aggressive action to increase supply. He urged investment in Alaskan natural gas and the proposed North American pipeline. He said, "Without prudent elimination of some current restrictions on U.S. natural gas production, producers will struggle to increase, or even maintain current production levels in the lower-48 states. This likely would expose 63 million homes, businesses, industries and electric-power generation plants that use natural gas to unnecessary levels of price volatility-thus harming the U.S. economy and threatening America's standard of living."

Gary Huss, the president of Hudapack Metal Treating spoke on behalf of the National Association of Manufacturers. He emphasized that since the manufacturing industry is reliant upon the supply of natural gas to meet its energy needs, the recent spike in gas prices have had a significant negative effect. Of his company, Huss said, "Although we at Hudapack Metal Treating are currently producing and shipping at a record pace, our pre-tax profit will only be very modest at approximately 2-3 percent of sales, compared with the 15 percent we should achieve at these sales levels." He later stated the need for government stimulus given the 3 million jobs lost in the manufacturing sector since the spike in natural gas price in 2000.

Finally, Ms. Hauter weighed in on the importance of regulating industry and improving the efficiency of our economy to lower the demand side of the equation. She said that deregulation the energy markets in the 1990s has led to massive market manipulation by corporations such as Enron. She said:
"Natural gas companies exploited energy industry deregulation to engage in one of the largest consumer rip-offs in history. Despite only moderately rising demand (which grew only 4.2% from 1999 to 2000), natural gas prices increased 245% from January 1999 to January 2001. This increase was not justified by the underlying market conditions: adequate supply matching moderately growing demand. This market manipulation trend may be continuing since Congress and the two federal regulatory commissions with jurisdiction have not reformed the rules that allowed the manipulation to occur."

This manipulation, she testified, was directly responsible for the California energy crisis. She emphasized the need for a renewed focus on energy efficiency. Referring to a call from Allan Greenspan to quickly approve new LNG import facilities, Hauter said, "Such an analysis, however, ignores the benefits of reducing projected natural gas demand through improvements in energy efficiency and the encouragement of alternative energy…if America's energy policies are prioritized to reduce demand and increase renewable fuels, the need to import LNG will greatly diminish."

Full testimony can be found by clicking here.

Sources: Hearing testimony.

Contributed by David Millar, AGI/AAPG 2004 Fall Semester Intern

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Last updated on October 13, 2004.

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