Chairman Frank H. Murkowski (R-AK)
Senator Larry E. Craig (R-ID)
Senator Slade Gorton (R-WA)
Senator Conrad Burns (R-MT)
Senator Bob Graham (D-FL)
Senator Mary Landrieu (D-LA)
In a memorandum released prior to the July 23rd hearing, the Committee on Energy and Natural Resources provided some background information on natural gas, LNG and new technologies being developed. The following background section is derived mainly from that memo.
Natural gas produces little pollution and with proven technologies it can be inexpensive to produce and transport. Known proven reserves are 4,900 trillion cubic feet worldwide. Most of these reserves, however, are located in remote areas of low population and thus can prove expensive to process and transport.
Liquefied natural gas (LNG) is a technology used to transport large quantities of gas across oceans. Currently, LNG is exported from eight countries and imported into nine countries, including the United States. The Department of Energy's International Energy Outlook for 1997 predicts that natural gas demand will reach 145 trillion cubic feet by 2015, an 85 percent increase over the 1995 level. LNG represented 4.4 percent of the total world consumption of natural gas in 1995. Use of LNG is rising more rapidly than use of piped gas and this trend is expected to continue. LNG use is expected to be most prominent in Japan, South Korea, India, Thailand and China. Demand for LNG may continue to grow depending on the fate of the nuclear industry and results of the climate conference in Kyoto, Japan in December.
Algeria, Australia, Indonesia and Malaysia are the world's major sources of LNG. Middle Eastern producers are expected to account for 75 percent of additional supply between 1997 and 2000. Despite large reserves in the United States, only a small amount of LNG is currently exported from Cook Inlet, Alaska. There is an estimated 26 trillion cubic feet of gas reserves being stored for future gas sales. The project is called the Trans-Alaska Gas System (TAGS) and once completed would transport gas via an 800 mile pipeline to facilities in Valdez, Alaska where it would be shipped to East Asian markets.
Gas-to-Liquid technologies are gaining ground with respect to economic feasibility. Exxon is working on a process to synthesize diesel fuel from natural gas, which it is currently marketing internationally. Another company, Sasol, is now marketing a natural gas-to-oil technology. The Syntroleum Corporation of Tulsa, Oklahoma is also marketing a natural gas-to-diesel technology.
Chairman Frank Murkowski (R-AK) began the hearing by stating that its purpose was to "examine aspects of natural gas issues in the next century." In his view, significant change is occurring. With the decline in the nuclear industry and growing concern of global warming and its ramifications on the oil industry, natural gas seems to be an increasingly more important alternative. Murkowski went on to state his concern over the developing relationship between Russia, Iran and Iraq and how this relates to our energy needs.
Senator Larry Craig (R-ID) expressed his amazement that the U.S. had not moved ahead to new technologies given the threats of air pollution and global warming. He went on to say that the abundance of natural gas and its reasonable price make it very appealing. According to Craig, it is time to strike a balance between environmental needs and energy needs.
Chairman Murkowski established four points to be covered over the course of the hearing. (1) Examine natural gas supply and demand into 2015. What percentage of that demand will be filled by traditional natural gas and what percentage will be filled by LNG? (2) Determine the role of government in large-scale gas projects around the world. What are foreign governments doing to develop these projects and what is the United States doing to compete? (3) Discuss new technologies. What new technologies are being developed to help reduce cost? (4) Discuss changing interests of industry regarding development of large scale natural gas projects.
Panel I participants:
The Honorable Jay E. Hakes, Administrator, Energy Information Administration, Department of Energy
Mr. John Gault, Energy Consultant, Vessy, Geneva, Switzerland
Mr. John Horn, Consultant, Worldwide Natural Gas and LNG, Bartlesville, OK
Gault's testimony focused on what attributes a natural gas project needs to move ahead quickly. He stated that if any project is lacking one of these 10 characteristics it must emphasize the characteristics that it does possess. The characteristics that tend to make a project a "leader" include: (1) Appropriate natural gas reservoir, one that can support 20+ years of production. (2) Projects that are expansions of existing projects will move more quickly than the development of an entirely new project. (3) Ability and willingness to start on a small scale. (4) Experienced sponsors or owner(s). (5) Financially healthy sponsors. (6) Sound commercial markets and laws. A project aimed at a market where contracts are enforceable, where energy prices are fair and where foreign investment are welcome develop faster. (7) Innovative sponsors. Sponsors must be innovative financially as well as technologically such that costs can be brought to a minimum. (8) Integrated ownership. (9) Competitive prices. (10) Courage, patience and determination. Gault did not include government support in his list of characteristics because in his view all projects must have some sort of government support.
Horn focused his testimony on the Far East natural gas market and LNG. He began by clarifying Alaska's position with respect to gas markets in the Lower 48 states. According to Horn, the partial deregulation of well-head natural gas prices has reduced Alaska's importance as a supplier of gas to the Lower 48 states, and therefore, Alaska's gas must go to Asia to be marketed. Japan is the leading importer of natural gas. Horn estimated that LNG represents 12 percent of Japan's total energy mix. He stressed that LNG projects are capital intensive and require firm commitment and advanced planning of five to 10 years. Horn's statistics showed that by the year 2010, the demand from Japan, Taiwan and South Korea will reach 42 million tons of LNG. He went on to say that nuclear power is experiencing set backs with the "not in my back yard" syndrome, otherwise known as NIMBY. Natural gas could be a viable alternative to fill the gap left by nuclear. Horn concluded with predictions for a bright future for LNG and natural gas in Asia but with a warning that the market would not wait for the indecisive.
EIA Administrator Hakes began by discussing the growing use of natural gas worldwide. The highest growth rates in natural gas are projected for developing countries. According to Hakes, the fact that large reserves are located in areas not close to natural gas markets or vice versa creates a market for LNG. LNG is the main way to move large volumes of gas long distances across oceans to consumers. Hakes's charts showed that gas markets in Central and South America are expected to increase consumption by 5.3 percent annually. Among industrialized regions, Western Europe is projected to have the highest growth rate at 3.8 percent. Hakes also suggested that LNG is growing at far greater speed than nuclear energy and may overtake nuclear in the near future. He felt development in Russia and China should be closely watched. An agreement between these two countries to build a pipeline would be an attractive idea to many people who need gas in that area of the world.
Questions and Answers
Chairman Murkowski wanted Mr. Gault to clarify the differences between government support and government subsidies. Gault preferred the term support. He stated that some governments of exporting countries are heavily involved in financing. These governments are accepting price risk in order to make the price acceptable. Support differs from subsidies in that subsidies are not a world-wide practice. Gault felt that there needs to be international treaties to "advance cross-border projects."
Murkowski questioned whether there were any alternatives that could meet the increasing demand for energy by the world. Mr. Horn stated that other than nuclear energy, he does not see a new energy source that could be economically developed. Natural gas is the cleanest, most efficient alternative to coal and oil. Mr. Hakes thought there were some hydropower alternatives that could be further developed in Canada or China and he thought wind power could be a possibility but neither could be a baseline power. Murkowski wanted further information on the lack of money coming out of Russia. Gault responded that the production teams were working but the host government was given too much control. The political dispute between Russia and Japan over islands north of Japan is also holding up development. Gault felt that once these issues were resolved things should move ahead swiftly.
Murkowski asked the panel to comment on possible incentives that could be offered in order to move the TAGS project along more quickly. Horn saw lowering taxes early on and then picking them up after the project was in operation as an option. He stressed that a strong tax regime from the U.S. and Alaska was important so "don't change the rules as you go along." Horn felt the TAGS project was a win-win situation for the U.S. since there are no other projects in the U.S. with which TAGS has to compete with for the market.
Senator Bob Graham (D-FL) asked the panel to state their confidence in the reserve figures on a scale of one to 10 with one being the lowest. Hakes rated the figures at a 5 and predicted that at current use the reserves would last about a century depending on how fast developing nation's demand increased. Graham also wanted the panel's input on how an expanded LNG market would reduce the time required by developing nations to meet possible standards implemented in Kyoto at the Climate Conference. Gault saw natural gas developments as a way to help all countries meet any standards set in Kyoto. Finally, Graham wanted the panel to comment on methane hydrate, which is methane found in gas hydrate deposits located in oceanic sediments and sediments underlying the Arctic permafrost zone, as a potential source for future energy needs. Hakes told the committee that geologists and engineers are excited about the prospects of using methane hydrates in the future. Methane hydrates represent the largest potentially available source of methane on Earth. Hakes stated that methane hydrates could effect the natural gas industry by slowing down growth in the LNG market because the location of many gas hydrates is very close to LNG markets.
Panel II participants:
Ms. Julie D. Belaga, Director, Export-Import Bank of the United States
Mr. James T. Jensen, President, Jensen Associates, Inc., International Advisory Group, PECC Energy Forum, Washington, D.C.
Dr. David Jhirad, Deputy Assistant Secretary for International Energy Policy, Trade and Investment, Department of Energy
Dr. Pedro van Meurs, van Meurs and Associates, Ltd., Calgary, Alberta Canada
Panel III participants:
Mr. Robert S. Kripowicz, Principal Deputy Assistant Secretary for Fossil Energy, Department of Energy
Mr. Robert L. Pierce, Q.C., Chairman and CEO, Foothills Pipe Lines Ltd., Calgary, Alberta Canada
Chairman Murkowski had Panel II and Panel III testify before he began the question and answer session. Dr. David Jhirad began his testimony by stating that "capital to support this [demand for natural gas] will be staggering and will reach $4 trillion over 20 years." He went on to say that U.S. trade and investment internationally will benefit from this growth in natural gas demand but he cautioned that the North American market overall will be surpassed by the Pacific market. Jhirad focused his testimony around a discussion of what actions foreign governments are taking to assist gas projects, what type of assistance the U.S. government is providing American companies and what actions the U.S. can take to make domestic gas markets more competitive overseas. According to Jhirad, foreign governments are greatly assisting gas projects because of the environmental and economic advantages of natural gas. Foreign governments are currently implementing laws and policies that are consistent over time and are encouraging private investment with incentives. Jhirad went on to say that foreign governments are "becoming increasingly aggressive and innovative in helping their firms secure major procurement in foreign markets." Currently, the U.S. is promoting development of worldwide natural gas markets and opening markets through policy and regulatory devices including export credits, financial assistance and loan guarantees.
Ms. Julie Belaga spent much of her testimony promoting the Export-Import Bank, which is the official export credit agency of the U.S. government. She stated that the focus of the Ex-Im Bank is to preserve and expand jobs in the United States by financing American companies that enter into new markets where commercial financing is not available. The Ex-Im Bank has supported $75 billion in exports on appropriations of $3.7 billion. In other words, for every one taxpayer dollar invested, the Ex-Im Bank has leveraged approximately $20 dollars in exports. The Ex-Im Bank's support has directly supported hundreds of thousands of jobs in the U.S.. Belaga went on to say that the Ex-Im Bank is trying to level the playing field for American companies with a goal of "creating a world that doesn't need a credit agency." The Ex-Im Bank provides direct support of exports and new technology. The Ex-Im Bank is "proud to work with the American gas industry to keep it competitive abroad and create jobs."
Dr. Pedro van Meurs centered his testimony around the fiscal aspects of LNG projects. He divided the LNG market into two groups. The U.S., Canada and Australia represent countries with universal tax systems in which taxes are levied on LNG are part of the overall tax system. The second group includes Southeast Asia and the Middle East, which are countries where the fiscal package is negotiated. Between these groups, "the governments work differently and this is the source of the problem for the U.S. in competing with these nations." Van Meurs testified that Asian and Middle Eastern countries provide significant support to companies by way of footing the bill for construction or long-term tax breaks. He called it "corporate welfare" in some cases. Van Meurs noted another problematic difference between these countries is seen in the "style of leases." In the Middle East companies have limited lease time and therefore must get in, get the gas and get out. In the United States there is not this urgency to produce since leases can continue indefinitely. Van Meurs warned that the countries have different approaches with respect to LNG export and unless the U.S. finds some "structure," projects could continue to be delayed.
Mr. James Jensen discussed the growth of gas demand in the Asia Pacific region. He predicted that this growth would follow the "Japanese model not the U.S. model." That is, the emphasis will be on gas-fired power generation as the main use of natural gas. The Japanese model requires that transportation infrastructure be developed in order to market the gas. Finally, the projects will emphasis "project supply" rather than "commodity supply." Jensen concluded that there is an ongoing "tug of war" between market size and transportation. "Economies of scale affects ability of gas to penetrate remote markets." Perception of scale has changed. Cheap gas and expensive transport has replaced the old idea of cheap transport and expensive gas. Jensen went on to say that new competitors, such as Arco, are emerging with cheap gas and small-scale reserves. Very large projects, such as TAGS in Alaska, are having difficulties now because the focus in on small scale.
Mr. Robert Kripowicz focused his testimony on Research & Development initiatives at the Department of Energy. The key is to make developing technologies affordable. Kripowicz stated that federal involvement is very important because it reduces cost. These lower costs will help new technologies have better acceptance into the market. According to Kripowicz, if R&D can reduce capital costs, operations can be expanded. R&D benefits both ends of a conversion project. Current technologies allow both natural gas and coal to be converted to liquids. DOE, along with industrial partners are developing new technologies such as advances in coal gasification technology, process improvements for synthesis gas conversion, alternative fuel vehicles and new generations of fuel cells. These improvements translate into lower costs in all steps of natural gas production and conversion.
Mr. Robert Pierce testified on improvements in pipeline technology that would make pipeline projects more economic. The cost of pipeline per mile has been reduced by 21% since 1992 as a result of new technology. Pierce divided advancements in pipeline technology into three categories: materials technologies, construction technologies and operational technologies. He went on to say that LNG will have to enter into the market in smaller chunks and that gas-to-liquid technology remains unproven on a large scale. Pierce warned that gas-to-liquid technology is "highly inefficient" and that pipelines will remain the best means for transport.
Questions and Answers
Chairman Murkowski began by asking Mr. Kripowicz to comment on the economic feasibility of gas-to-liquid conversion especially with the substantial loss of energy that occurs in the process. Mr. Kripowicz responded that there are several companies investing in this technology and there is great interest in making the process more efficient so that it could be considered as an alternative to pipelines and LNG. Murkowski wanted Ms. Belaga to comment on what role the Ex-Im Bank could have in offering assistance to American companies. The Ex-Im Bank is mandated to help exports. Belaga went on to say that it is possible that the Ex-Im Bank could help support projects in the U.S. but they primarily go where commercial banks do not function. Dr. Jhirad stated that the U.S. would have to try and find a role for the federal government in developing gas projects. Most of the money would come from private banks. Jhirad went on to say that developing projects will continue to have difficulties because the government does not provide tax write-offs and doesn't take an equity position and thus, projects will have to be innovative technologically and financially in order to create a level playing field with the rest of the world.
Murkowski continued the questioning by asking Mr. Pierce to comment on the economics of new pipeline technologies. Mr. Pierce responded with the assurance that new technologies will be applicable and useful for some projects. They will cost less and are less risky than gas-to-liquid technologies. Murkowski wanted information about how companies such as Arco, BP, Exxon are reacting to the new technologies. Mr. Pierce replied that as far as he could tell, "they don't get excited about anything," and to date he has not been able to get his foot in the door.
At this point, questions turned to Chairman Murkowski's home state of Alaska and the developing TAGS project. Murkowski wanted the panel to comment of what role the state should take in the development of the project and whether it would be appropriate for Alaska to take an equity position in the pipeline development equal to its 12% ownership. Dr. Jhirad felt that state involvement should not be ruled out since the state does own some fraction. Mr. Kripowicz agreed with Dr. Jhirad that state involvement would be appropriate. Mr. Jensen thought it was an interesting option but one that could prove to be a tough sell. Dr. van Meurs responded that the possibility for state involvement was there but he felt the effect would be negligible. He concluded that he did not see much benefit or think state involvement would help the project compete.
Chairman Murkowski concluded the hearing by suggesting that the role of natural gas would surely change after the Climate Conference in Kyoto, Japan and that government had some homework to do in order to see what actions could be taken to promote exports.
Sources: Environment & Energy Weekly; Senate Energy and Natural Resources Committee
Contributed by Catherine Runden, AGI Government Affairs Intern
Last updated July 29, 1997