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Prepared Witness Testimony The House Committee on Energy and Commerce
Natural Gas Supply and Demand Issues
Full Committee on Energy and Commerce
Mr. Carl L. English
Good morning. I am Carl English, President & Chief Executive Officer-Gas of Consumers Energy in Jackson, Michigan. I am testifying today on behalf of the American Gas Association in Washington, D.C. ("AGA") and its natural gas utility members. AGA is grateful for the opportunity to share its views with you on the critical importance to the nation of ensuring ample natural gas supplies at competitive prices. Doing so is necessary for the nation-both to protect consumers and to address the energy and economic situations we currently face. AGA is composed of 191 natural gas distribution companies, which deliver gas throughout the United States. Local gas utilities deliver gas to more than 64 million customers nationwide. AGA members deliver approximately 83 percent of this natural gas. Our members are charged with the responsibility, under local law or regulation, of acquiring natural gas for the majority of their customers and delivering it in a safe and reliable manner. Last year, this Committee addressed the safety issue by taking a balanced approach to the important issue of pipeline safety, and we thank you, Mr. Chairman and members of the committee, for having done so. Safety is a critical issue for the industry. Likewise, today having an ample supply of natural gas at reasonable prices is a critical issue for AGA and its members. AGA members and the consumers they serve share both an interest and a perspective on this subject. It is important for you to understand that the bread and butter business of AGA members is acquiring and delivering natural gas to residential, commercial, and industrial consumers across America. Our members remain economically viable by delivering natural gas to consumers at the lowest reasonable price, which we do by operating our systems-over a million miles of distribution lines-as efficiently as possible. Exploring for and producing natural gas is the business of our energy-industry colleagues in the oil and gas business, whether they are major, independent, or "Mom and Pop" operators. We are not here to speak for them today, but their continued success in providing natural gas to America's consumers is of the utmost importance to us as well. Today we are here to speak for consumers who want reasonable heating bills and good jobs. AGA is encouraged that Congress is addressing this increasingly critical issue. Earlier this year we were privileged to testify before both the Senate Energy and Natural Resources Committee and the House Resources Committee with regard to the challenging issue of natural gas supply. We also are gratified that H.R. 6, the Energy Policy Act of 2003, which was passed by the House of Representatives in April, 2003, contains a wide array of provisions designed to bring forth more of America's prodigious supply of natural gas to benefit consumers. That bill is without question more focused on natural gas supply than were the iterations under consideration in 2001 and 2002. Adequate natural gas supply is crucial to all of America for a number of reasons. It is imperative that the natural gas industry and the government work together to take significant action in the very near term to assure the continued economic growth, environmental protection, and national security of our nation. The tumultuous events in energy markets over the last two years serve to underscore the importance of adequate and reliable supplies of reasonably priced natural gas to consumers, to the economy, and to national security. AGA wishes to commend the leadership of the Committee for convening this important hearing so promptly upon the heels of the passage of H.R. 6. To be sure, there has been a crescendo of public policy discussion with regard to natural gas supply since the "Perfect Storm" winter of 2000-2001. Nevertheless, in the several weeks since AGA last testified on Capitol Hill-in February and March of this year-the volume and the tenor of this discussion have increased dramatically. Simply put, this issue becomes more critical with every passing day. Since the beginning of this year, natural gas has been trading in wellhead markets throughout the nation at prices floating between $5 and $6 per thousand cubic feet. This has not been a "price spike" of the sort that we have seen in the past lasting several days or perhaps several weeks. Rather, it has been sustained over a period of several months. And there is no sign that it will abate in the near future. Indeed, quotes for futures prices on NYMEX over the next 24 months have reached a consistent record level mirroring current cash prices. In the course of the last several months, business consumers of natural gas have been raising a cry of concern over natural gas prices. And this concern has touched businesses of all stripes. In Connecticut, for example, pizza shops complain that their natural gas bills have increased $500-700 per month. The chemical and pharmaceutical industry, which uses 10% or more of the U.S. gas supply annually, has been reeling from increased natural gas prices. It has been projected that the chemical industry in Louisiana will lose at least 2,000 jobs as a result of high gas prices. Similarly, a major chemical company in Mississippi has declared bankruptcy, citing natural gas prices. That industry needs gas prices between $2.50 and $3.00 per thousand cubic feet to remain competitive on the world stage, while prices since the beginning of the year have been averaging in the range of $5.00 per thousand cubic feet. Similarly, fertilizer plants, where natural gas can represent 80% of the cost structure, are closing one facility after another. Glass manufacturers, which also use large amounts of natural gas, have reported earnings falling by 50% as a result of natural gas prices. In our industrial and commercial sector, competitiveness in world markets and jobs at home are on the line. Businesses and factories tend to purchase most of their own gas, and they very quickly feel increases in prices. Residential customers, in contrast, typically rely upon their local utilities to act as merchants on their behalf. As a result of the manner in which state-approved regulatory mechanisms operate, most consumers will not begin to feel current high gas prices for months. From the point of view of the residential consumer, some families will pay hundreds of dollars more to heat their homes this winter, which will be hundreds less to spend on other things. Families will again be forced to make difficult decisions between paying the gas bill, buying a new car, or saving for future college educations. There are, of course, state and federal programs such as LIHEAP to assist the most needy. This winter the potential price increases will affect all families - those on fixed income, the working poor, and the lower-income group as well as those caught between living comfortably and living day to day. The level of gas prices we are experiencing today could unleash a firestorm of protest in the fall and winter of this year as some consumers may see their natural gas bills double. The next twelve months may make the winter of 2000-2001 look tame from the perspective of consumers, regulators, and legislators. Some forward-looking state public utility commissions, having learned from the 2000-2001 experience, are beginning to express concern over the possible impact of the winter of 2003-2004. We are pleased that Ohio Public Utility Commissioner Donald Mason is here today to express those concerns. The Secretary of Energy has also called for an extraordinary meeting of the National Petroleum Council to address the situation. These are but the first few alarms in what seems likely to become a very difficult year. Moreover, unless we make the proper public policy choices-and quickly at that-we will be facing an even more difficult several years. The natural gas industry is presently at a critical crossroads. The question before you today is: What will that crossroads look like? Will it look like a brand new interstate highway? Or will it look like a 100-car collision on a Los Angeles freeway? For the past three years, natural gas production has had to operate full-tilt to meet consumer demand. The "surplus deliverability " or "gas bubble" of the late 1980's and 1990's is simply gone. No longer is demand met while unneeded production facilities sit idle. No longer can new demand be met by simply opening the valve a few turns. The valves have been, and are today, wide open. The supply tightrope has brought with it several inexorable and unpleasant consequences-prices in the wholesale market have gone up and that market has become much more volatile. During the 2000-2001 heating season, for example, gas prices moved from the $2 level to approximately $10 and back again to nearly $2. In Michigan the average price of natural gas on the Consumers Energy system in 2000 was $2.84 per thousand cubic feet. In 2002 the price was $3.80. Today the charge is $5.18. Such volatility hurts consumers, puts domestic industry at a competitive disadvantage, closes plants, and idles workers. The winter of 2000-2001 made it abundantly clear to us (and to you as well) that consumers do not like these price increases and that they do not like the market volatility that is now an everyday norm. Unless significant actions are taken on the supply side, gas markets will remain tumultuous, and 64 million gas customers will suffer the consequences. Today's recurrent $5 price levels may represent a new, and regular, level of natural gas prices for the foreseeable future, although this prospect can be moderated with aggressive and enlightened public policy. As gas utilities, we do have a number of programs in place to insulate consumers to some extent from the full impact of wholesale price volatility, but consumers must ultimately still pay the price that the market commands. We believe that there will be considerable economic and political pushback should natural gas prices stabilize at the current $5 level for anything but a brief period of time. The problem that we face today is not simply one of finding means to meet current demands in the market for natural gas. Rather, we are in a growing market, and the demand for natural gas in the U.S. is expected to increase 50 percent by 2015-2020. Growth seems inevitable because gas is a clean, economic, domestic source of available energy. It does not face the environmental hurdles of coal and nuclear energy, the economic and technological drawbacks of most renewable energy forms, or the national security problems associated with imported oil. A significant sector where growth is occurring is electric generation. Nationwide most new electric generation is expected to be gas fired. In Michigan more than 4,600 megawatts of new gas-fired generation has come online since 2000. This represents a 20% increase in the state's capacity. The challenge for both government and industry is quite straightforward: to ensure that the current need for natural gas is met and that the future need for natural gas will also be met-both at reasonable and economic prices. There can be no responsible question that facilitating this result is sound public policy. Natural gas is abundant domestically, and natural gas is the environmentally friendly fuel of choice. Ensuring adequate natural gas supply will lead to reasonable prices for consumers, will dampen the unacceptable volatility of wholesale natural gas markets, will help keep the economy growing, and will help protect the environment. America has a large and diverse natural gas resource; producing it, however, can be a challenge. Providing the natural gas that the economy requires will necessitate: (1) providing incentives to bring the plentiful reserves of North American natural gas to production and, hence, to market; (2) making available for exploration and production the lands where natural gas is already known to exist so gas can be produced on an economic and timely basis; (3) ensuring that the new infrastructure that will be needed to serve the market is in place in timely and economic fashion. Natural gas-our cleanest fossil fuel-is found in abundance throughout both North America and the world. It currently meets one-fourth of the United States' energy needs. Unlike oil, about 99 percent of the natural gas supplied to U.S. consumers originates in the United States or Canada. The estimated natural gas resource base in the U.S. has actually increased over the last several decades. In fact we now believe that we have more natural gas in the U.S. than we estimated twenty years ago, notwithstanding the production of between 300 and 400 trillion cubic feet of gas in the interim. This is true, in part, because new sources of gas, such as coalbed methane, have become an important part of the resource base. But having the natural gas is not the same as making that natural gas available to consumers. That requires natural gas production. Natural gas production is sustained and grows only by drilling in currently productive areas or by exploring in new areas. Over the past two decades a number of technological revolutions have swept across our industry. We are able today to drill for gas with dramatically greater success and with significantly reduced environmental impact than we were able to do twenty years ago. We are also much more efficient in producing the maximum amount of natural gas from a given area of land. A host of technological advances allows producers to identify and extract natural gas deeper, smarter and more efficiently. For example, the drilling success rate for wells deeper than 15,000 feet improved from 53 percent in 1988 to over 82 percent today. In addition, gas trapped in coal seams, tight sands or shale is no longer out of reach. While further improvements in this regard can be expected, they will not be sufficient to meet growing demand unless they are coupled with other measures. Regrettably, technology alone cannot indefinitely extend the production life of mature producing areas. New areas and sources of gas will be necessary. Notwithstanding the dramatic impact of innovation upon our business, the inevitable fact today is that we have reached a point of rapidly diminishing returns with many existing natural gas fields. This is almost entirely a product of the laws of petroleum geology. The first ten wells in a field may ultimately produce 60 percent of the gas in that field, while it may take forty more to produce the balance. In many of the natural gas fields in America today, we are long past those first ten wells and are well into those forty wells in the field. In other words, the low-hanging fruit have already been picked in the orchards that are open for business. Drilling activity in the U.S. has moved over time, from onshore Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then to the Rocky Mountains. Historically, we have been quite dependent on fields in the Gulf of Mexico. But recent production declines in the shallow waters of the Gulf of Mexico have necessitated migration of activity to deeper waters to offset this decline. These newer, more expensive, deepwater fields also tend to have short lives and significantly more rapid rates of decline in production than is the case with onshore wells. In short, America's natural gas fields are mature-in fact many are well into their golden years. There is no new technology on the horizon that will permit us to pull a rabbit out of a hat in these fields. These simple, and incontrovertible, facts explain why we are today walking a supply tightrope and why the winter of 2000-2001 may become a regular occurrence, particularly at the point the economy returns to its full vigor. Having the winter of 2000-2001 return every year will undoubtedly put a brake on the economy, once again causing lost output, idle productive capacity, and lost jobs. If we are to continue to meet the energy demands of America and its citizens and if we are to meet the demands that will they make upon us in the next two decades, we must change course. It will not be enough to make a slight adjustment of the tiller or to wait three or four more years to push it over full. Rather, we must come full about, and we must do it in the very near future. Lead times are long in our business, and meeting demand years down the road requires that we begin work today. We have several reasonable and practical options. And, as I hope you do understand, continuing to do what we have been doing is simply not enough. In the longer term we have a number of options: First, and most importantly, we must increase natural gas production by looking to new frontiers within the United States. Further growth in production from this resource base is jeopardized by limitations currently placed on access to it. For example, most of the gas resource base off the East and West Coasts of the U.S. and the Eastern Gulf of Mexico is currently closed to any exploration and production activity. Moreover, access to large portions of the Rocky Mountains is severely restricted. The potential for increased production of natural gas is severely constrained so long as these restrictions remain in place. In this vein, the Rocky Mountain region is expected to be a growing supplier of natural gas, but only if access to key prospects is not unduly impeded by stipulations and restrictions. Two separate studies by the National Petroleum Council and the U.S. Department of the Interior reached a similar conclusion-that nearly 40 percent of the gas resource base in the Rockies was restricted from development to some degree, some partially and some totally. On this issue the Department of the Interior noted that there are nearly 1,000 different stipulations that can impede resource development on federal lands. One of the most significant new gas discoveries in North America in the past ten years is located just north of the US/Canada border in eastern Canada coastal waters on the Scotian shelf. Natural gas discoveries have been made at Sable Island and Deep Panuke. Gas production from Sable Island already serves Canada's Maritimes Provinces and New England through an offshore and land-based pipeline system. This has been done with positive economic benefits to the region and without environmental degradation. This experience provides an important example for the United States, where we believe the offshore Atlantic area to have similar geology. In some areas we appear to be marching backward. The buy-back of federal leases where discoveries had already been made in the Destin Dome area (offshore Florida) of the eastern Gulf of Mexico was a serious step back in terms of satisfying consumer gas demand. This action was contrary to what needs to be done to meet America's energy needs. With Destin Dome we did not come full about, as we need to do; rather, we ran from the storm. Geographic expansion of gas exploration and drilling activity has for the entirety of the last century been essential to sustaining growth in natural gas production. Future migration, to new frontiers, to new fields, in both the U.S. and Canada will also be critical. Without production from geographic areas that are currently subject to access restrictions, it is not at all likely that producers will be able to continue to provide increased amounts of natural gas from the lower-48 states to customers for longer than 10 or 15 years. We believe that the same is true in Canada as well. Quite simply, we do not believe that there is any way other than exploring for natural gas in new geographic areas to meet America's anticipated demand for natural gas unless we turn increasingly to sources located outside North America. In the middle of the 20th century, when the postwar economy had begun its half-century climb and when natural gas became the fuel of choice in America, our colleagues in the producing business opened one new natural gas field after another in the mid-continent. In this era, it was not that difficult to produce a triple or a home run virtually every inning. As those fields developed, producers continued to hit a regular diet of singles and doubles, with the occasional triple or home run in new discovery areas. This same pattern in the mid-continent was repeated in the Gulf of Mexico. Today, however, it is extremely difficult to find the new, open areas where the producing community can continue to hit the ball. As things are today, America has confined them to a playing field where only bunts are permitted. The Yankees did not get to the World Series playing that kind of game. AGA does not advance such a thesis lightly. Over the past two years both the American Gas Association and the American Gas Foundation have studied this important issue vigorously. We have believed for several years that it is necessary that policy makers embrace this thesis so that natural gas can continue to be-as it has been for nearly a century-a safe and reliable form of energy that is America's best energy value and its most environmentally benign fossil fuel. We think that events in gas market in 2003 underscore that our concerns have been on the mark. When the first energy shock transpired in the early 1970s, the nation learned, quite painfully, the price of dependence upon foreign sources of crude oil. We also learned, through long gasoline lines and shuttered factories, that energy is the lifeblood of our economy. Yet thirty years later we are even more dependent upon foreign oil than we were in 1970. Regrettably, the nation has since failed to make the policy choices that would have brought us freedom from undue dependence on foreign-source energy supplies. We hope that the nation can reflect upon that thirty-year experience and today make the correct policy choices with regard to its future natural gas supply. We can blame some of the past energy problems on a lack of foresight, understanding, and experience. We will not be permitted to do so again. Meeting our nation's ever-increasing demand for energy has an impact on the environment, regardless of the energy source. The challenge, therefore, is to balance these competing policy objectives realistically. Even with dramatic improvements in the efficient use of energy, U.S. energy demand has increased more than 25 percent since 1973, and significant continued growth is almost certain. Satisfying this energy demand will continue to affect air, land and water. A great American success story is that, with but five percent of the world's population, we produce nearly one-third of the planet's economic output. And energy is an essential-indeed critical-input for that success story both to continue and to grow. It is imperative that energy needs be balanced with environmental impacts and that this evaluation be complete and up-to-date. There is no doubt that growing usage of natural gas harmonizes both objectives. Finding and producing natural gas is today accomplished through sophisticated technologies and methodologies that are cleaner, more efficient and much more environmentally sound than those used in the 1970s. It is unfortunate that many restrictions on natural gas production have simply not taken account of the important technological developments of the preceding thirty years. The result has been policies that deter and forestall increased usage of natural gas, which is, after all, the nation's most environmentally benign and cost-effective energy source. Natural gas consumers enjoyed stable prices from the mid-1980s to 2000, with prices that actually fell when adjusted for inflation. Today, however, the balance between supply and demand has become extremely tight, creating the tightrope effect. Even small changes in weather, economic activity or world energy trends result in wholesale natural gas price fluctuations. We saw this most dramatically in the winter of 2000-2001. We may be seeing it today on a longer-term basis. In the 1980s and '90s, when the wholesale (wellhead) price of traditional natural gas sources was around $2 per million British thermal units, natural gas from deep waters and Alaska, as well as LNG, may not have been price competitive. However, most analysts suggest that these sources are competitive when gas is in a $3.00 to $4.00 price environment. Increased volumes of natural gas from a wider mix of sources will be vital to meeting consumer demand and to ensuring that natural gas remains affordable. Increasing natural gas supplies will boost economic development and will promote environmental protection, while achieving the critical goal of ensuring more stable prices for natural gas customers. Most importantly, increasing natural gas supplies will give customers-ours and yours-what they seek-reasonable prices, greater price stability, and fuel for our vibrant economy. However, without policy changes with regard to natural gas supply, as well as expansion of production, pipeline and local delivery infrastructure for natural gas, the natural gas industry will have difficulty meeting the anticipated 50 percent increase in market demand. Price increases, price volatility, and a brake on the economy will be inevitable. Second, we need to increase our focus on non-traditional sources, such as liquefied natural gas (LNG). Reliance upon LNG has been modest to date, but it is clear that increases will be necessary to meet growing market demand. Today, roughly 99 percent of U.S. gas supply comes from traditional land-based and offshore supply areas in North America. But, during the next two decades, non-traditional supply sources such as LNG will likely account for a significantly larger share of the supply mix. LNG has become increasingly economic. It is a commonly used worldwide technology that allows natural gas produced in one part of the world to be liquefied through a chilling process, transported via tanker and then re-gasified and injected into the pipeline system of the receiving country. Although LNG currently supplies less than 1 percent of the gas consumed in the U.S., it represents 100 percent of the gas consumed in Japan. LNG has proven to be safe, economical and consistent with environmental quality. Due to constraints on other forms of gas supply and increasingly favorable LNG economics, LNG is likely to be a more significant contributor to US gas markets in the future. It will certainly not be as large a contributor as imported oil (nearly 60 percent of US oil consumption), but it could account for 10-15 percent of domestic gas consumption 15-20 years from now if pursued aggressively and if impediments are reduced. Third, we must tap the huge potential of Alaska. Alaska is estimated to contain more than 250 trillion cubic feet-enough by itself to satisfy US natural gas demand for more than a decade. Authorizations were granted twenty-five years ago to move gas from the North Slope to the Lower-48, yet no gas is flowing today nor is any transportation system yet under construction. Indeed, every day the North Slope produces approximately 8 billion cubic feet of natural gas that is re-injected because it has no way to market. Alaskan gas has the potential to be the single largest source of price and price volatility relief for US gas consumers. Deliveries from the North Slope would not only put downward pressure on gas prices, but they would also spur the development of other gas sources in the state as well as in northern Canada. Fourth, we can look to our neighbors to the north. Canadian gas supply has grown dramatically over the last decade in terms of the portion of the U.S. market that it has captured. At present, Canada supplies approximately 15 percent of the United States' needs. We should continue to rely upon Canadian gas, but it may not be realistic to expect the U.S. market share for Canadian gas to continue to grow as it has in the past or to rely upon Canadian new frontier gas to meet the bulk of the increased demand that lay ahead in the United States. Recommendations To promote meeting consumer needs, economic vitality, and sound environmental stewardship, the American Gas Association urges the Congress as follows:
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