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Witness Testimony
Mr. John F. Riordan
Ultradeep Water Research and Development: What Are the Benefits?
Thank you for the opportunity to testify before your committee today. Mr. Chairman, I would like to commend you for holding this hearing and for your leadership on addressing the critical need for new domestic gas supplies to meet growing US demand. Mr. Chairman, as you know, this need is not trivial. Sixty million homes in the US are heated with natural gas. Natural gas is a major industrial fuel and feedstock. The processing of natural gas provides much of the propane that fuels rural America. A growing percentage of our electricity comes from gas-fired generation. Finally, natural gas, as the cleanest burning fossil fuel, offers environmental benefits and lower costs of environmental compliance -- benefits that will go unrealized if high prices and reduced supplies force us to switch to other fuel sources. The US is not running out of natural gas. According to the Energy Information
Administration's 2004 Annual Energy Outlook, "the volume of estimated
technically recoverable resources is sufficient to support increased reliance on
unconventional natural gas sources." We have roughly 1250 Tcf of
technically recoverable and proved natural gas reserves in the lower 48,
sufficient to meet 65 years of demand at current rates of consumption or 30-plus
years of demand at 2025 forecast rates. We are, however, limited by those
technologies that would enable us to actually produce those reserves at
affordable prices. Source: NPC Natural Gas Study, 2003 First, let's examine the price side of this problem. On April 13 of this year, natural gas prices at Henry Hub were $5.92 per million btu. Looking forward, the price of the average natural gas futures contract for next year is $5.99. This compares to historical prices in the $2 range, as well as to this sampling of recent overseas gas prices: Western Europe, $3.20; North Africa, $0.40; and Russia, $0.70. Today's six-dollar gas prices racked up against these low-cost international options highlight the stark choice faced by gas-dependent US companies: do they stay here or move overseas? High prices are damaging our industrial base, hurting consumers, and inhibiting a more robust economic recovery.
Let's now look at the supply/demand side of the equation. In 2003, domestic natural gas production increased by six tenths of one percent. The Energy Information Administration (EIA) forecasts a similar production profile for 2004. At the same time, demand for natural gas in 2003 increased by 2.4%. This trend is expected to continue. EIA forecasts a 38% to 53% increase in US gas demand by 2025, depending on the price of gas, yet gas recovery per well in both the US and Canada (our single largest supplier of imports) is declining rapidly and rising rig counts have resulted only in flat production at best. In other words, we are pushing harder but we are not advancing the ball. If we are going to continue to reap both the energy and environmental benefits associated with natural gas consumption, we must address this imbalance. To meet growing demand for gas supply, we generally have four options: dramatic increases in imports of liquefied natural gas (LNG); the building of a pipeline to move stranded Alaskan gas to the lower 48; increased access to the roughly 213 Tcf of natural gas reserves on federal lands currently off limits to production; and increased production of unconventional resources, onshore and offshore resources at greater water depths. 
Implementing each of these options is difficult and outcomes are very uncertain. Significant policy and political issues are raised by increased LNG imports as well as by opening up new federal lands to gas and oil production, particularly in those offshore regions that are under Congressionally- or state-directed production moratoria. The building of a gas pipeline from Alaska is not economic even at today's high prices and has a lengthy time horizon for development. Finally, development of unconventional resources is technically challenging. It is critical that we resolve the issues associated with each of these options because we will ultimately need all sources of gas supply in order to meet demand. In many respects, however, investing in the research and development necessary to develop our unconventional and ultra-deepwater offshore gas resources offers the most realistic and politically achievable option for helping to meet mid-term gas demand. These resources are within our borders, close to demand centers, and do not require substantial new infrastructure investments to develop. They do, however, represent very complex technical problems. These resources are large. Unconventional resources alone make up 475 tcf, more than one-third, of the technically recoverable resources in the Lower-48. As such, this option, to be successful, must embody programmatic and funding characteristics such as those found in the H.R. 6 conference version of the Ultra-deepwater and Unconventional Natural Gas Supply Research program. This legislation would provide both the ways -- as well as the means -- for producing large volumes of domestic gas supplies at consumer-friendly prices. Let me highlight what I believe to be the critical components of this program that will ensure its success: · The program is grounded in sound public policy. As I have noted, by 2025 the US will need between 38% and 53% more gas to meet demand. Domestic production has been flat for the last ten years and well depletion rates have increased from 25% to 45% annually. The US has a substantial gas resource base but these resources are increasingly difficult to produce at affordable prices.
The National Petroleum Council's 1999 natural gas supply study identified deep offshore and non-conventional onshore resources as the most likely sources of gas to meet growing demand. It suggested that technology investments in these regions must be accelerated in order to meet demand. Finally, it recommended additional federal collaborations with industry and academia to meet gas demand. The 2003 update of the NPC Gas Supply Study, while highlighting the variety of options we must pursue in order to meet demand, identified both the supply and price benefits associated with high technology investment scenarios. 
Source: NPC Natural Gas Study, 2003 Further, EIA indicates that the delta between rapid and slow technology investments in unconventional onshore production is a 21% difference in supply. The industry, for sound business reasons, is not investing in supply R&D sufficient to meet mid-term gas demand. The super-majors, while having large research budgets, have other more profitable options overseas. The service companies, which meet many of the research needs of large producers, do so at the direction of their clients. The smaller independents, which develop most of our onshore gas resources, do not have the money to invest in the R&D that will be required to further develop our unconventional onshore gas resources. Finally, the federal government's gas supply R&D budget of roughly $15 million per year is inadequate to alter the supply trajectory. Meeting the nation's mid-term gas supply needs will require a radically different approach. A new research model is necessary for program success. A program designed to help meet mid-term gas demand will require a singular focus as well as "ruthless program execution." Such a program must necessarily and successfully graft the expertise and operational experience of the industry and the knowledge and creativity of academia onto an applied government research program, with all of its requirements and restrictions. It will also require that program managers integrate highly complex program pieces into new production architectures or production methods. The natural gas supply research program in H.R. 6 addresses these needs in a manner that would optimize opportunities for its success. It is focused exclusively on meeting mid-term demand from the two most promising resource provinces, the ultra-deepwater (+1500 meters) and the unconventional onshore (coalbed methane, tight gas sands, gas shales, deep drilling). The program implicitly acknowledges that private industry R&D investments are appropriately guided by business, not public policy concerns, and would accelerate federal technology investments, consistent with NPC recommendations. Also consistent with NPC recommendations, the program promotes maximum collaboration between the federal government, industry, and academia and it establishes a program that is an order of magnitude larger than the Department of Energy's existing gas supply R&D program. In addition, this program will address the geologic and other production issues that limit the capacity of small producers to efficiently develop their resources. More specifically, the program in H.R. 6 would establish two different research management models. The ultra-deepwater program would be administered by the DOE but managed by a program consortium of academic/industry professionals, similar to the DOE's existing management and operation contracting structure; this construct acknowledges that the federal government has never managed an ultra-deepwater R&D program and that the management expertise resides outside the government. While allowing for appropriate government oversight, this management model will provide the program with maximum flexibility in meeting its program goals. 
Given its history of managing unconventional onshore research, the Department of Energy would directly manage this program component. Provisions in H.R. 6 would, however, require that DOE manage this program element largely through research consortia, seeking to replicate historically successful research models, such as the one that enabled the development of domestic coalbed methane resources.  · The Establishment of a Trust Fund for the Research Program. The conference report on this provision of H.R. 6 would establish a Trust Fund to pay for the research program. Specifically, it would place $150 million per year for ten years from federal oil and gas royalties into a fund for this program. Further, it would authorize an additional $50 million per year, subject to annual appropriations. A dedicated funding source for this program is perhaps the single most important element for program success. The nation needs additional, adequate and affordable gas supplies for both economic and energy security reasons. As has been already noted, the annual appropriations process for natural gas supply R&D has never resulted in funding levels sufficient to dramatically alter the gas supply trajectory through research investments. A fast-paced applied technology program requires predictable and readily available funding. Further, program success is highly dependent on the expertise and participation on the part of industry. The major technology investments envisioned for the program, particularly for the new architecture component of its ultra-deepwater component, requires extensive, commercial-type contracting and substantial cost sharing by industry (up to 40%). These necessary conditions for success will not be present without predictable and stable federal funding. In short, the program will not succeed without industry -- and the industry will not participate without stability and assurance of funds availability. This type of funding mechanism is not without precedent. The DOE Clean Coal Technology Program, arguably one of its most successful research efforts, was "forward funded" in the 1980s. This mechanism guaranteed program funds for the program's duration and offered the stability the industry needed for participation in the program, as well as for large industry cost-sharing. Further, EIA, in analyzing the supply provisions of the conference report, noted that, "dedicated funding outside the annual appropriations process implies relatively low funding-related uncertainty for this program." It went on to observe, "the new R&D funding would increase the technological programs for the affected resources (ultra-deep offshore oil and gas and unconventional gas production) by 50% over its value in the Reference Case." This analysis shows additional gas production of four trillion cubic feet and oil production of 850 million barrels, assuming a program of one-third the size. Analysis by the Bureau of Economic Geology (BEG) at the University of Texas indicates a much larger supply response. BEG, analyzing a larger program, estimates that this new research program could generate nearly 29 Tcf of incremental gas production and more than 4 billion barrels of incremental oil production by 2025. Finally, I would note that both the EIA analysis of this provision and similar analysis by BEG indicate that this program would, at a minimum, pay for itself in the form of increased gas and oil royalties from production on federal lands as a result of the program; the BEG analysis indicates that it would pay for itself several times over. This is not only important from the standpoint of the American taxpayer, but it is critical for "growing" the royalty stream in order to continue to pay for other important programs such as the Land and Water Conservation Program and the Historic Preservation Fund. Without the increased production and royalties from this supply program, the royalty stream will ultimately decline and be insufficient to fund these and other programs. _________________________________ Mr. Chairman, in closing, I would like to make one final point. The Gas Technology Institute is charged with developing and funding natural gas research that ultimately serves the natural gas consumer. Consumers - and the nation's economic health as well as its energy security -- are also the ultimate focus of policy makers. In our nation today, natural gas consumers and our economy are suffering from high natural gas prices - it is imperative that we address these fundamental and critical concerns. Some people will criticize this program as corporate welfare. I disagree. Without passing judgment on the value of the following programs, I would note that the Congress funds clean coal programs at around $250 million per year, energy efficiency and renewable programs at around $1 billion per year, and nuclear energy research at around $70 million per year. Last year, the Administration announced its FutureGen program that would cost roughly $1 billion and is promoting a hydrogen research program of even greater size. Incentives for ethanol use far outstrip any other single energy incentive supported by the federal government. Comprehensive energy legislation includes a production tax credit for nuclear power and a similar credit for wind energy. I strongly believe that meeting domestic natural gas supply needs has value to the nation on par with these other federally supported programs, and that Congressional and Administration program and funding priorities should reflect that importance. The federal government and its partners in industry and academia, in supporting the critical research program we are discussing today would be acknowledging the economic, energy and environmental benefits of natural gas to the nation, to consumers and to taxpayers. I urge the Congress to support this program and this legislation, and again, Chairman Hall, I commend you for your leadership and insight in moving this program forward. Thank you and I look forward to your questions. Related Documents |
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