Remarks Prepared for
U.S. Energy Secretary Federico Peña
at the
Natural Gas Roundtable
Washington, D.C.
May 12, 1998

Thank you for your kind introduction, Tom (Hill, vice president for programs). I am delighted to be here today. The natural gas industry is increasingly important to the country's economy, and I am happy to be here this morning to discuss some of its challenges and opportunities.

Like every sector of the economy, the natural gas industry has entered an era in a global economy in which change seems to be the major characteristic.

Technological progress is driving exploration and development; proposed modifications in regulatory structures offer new avenues to provide new benefits to the economy, the public and the environment; and increasing global use is enhancing the demand for natural gas in the world market.

This morning, I want to discuss some of the implications of the changes implicit in the Administration's Comprehensive National Energy Strategy and in its proposal to introduce competition to the electric industry.

I want to make sure the proposals are fully and completely understood by everyone. The CNES and electricity reform are critical to future generations of Americans and to the national economy.

I would like to start this discussion by noting an interesting change in the market that I am sure you, too, have noted: the continued relative stability of natural gas prices.

The discussion of the CNES and competition in electricity is occurring in the context of a market in which the price of natural gas for the past seven months has held relatively steady compared to the price of oil, which has declined.

Prices in the oil market have been depressed by a number of factors, including higher OPEC production, the Asian economic crisis and the warmer temperatures in the northern hemisphere wrought by El Niño. (OPEC's recent move to exercise some control in production has firmed up oil prices slightly.)

In contrast, the natural gas market has remained strong as growing markets keep gas in high demand. The gas storage market, having begun its seasonal refill, remains stronger than expected despite the warm winter. Likewise, utility buyers seem to be forecasting a warm summer that will increase demand for natural gas for use in electrical generation.

The energy market is experiencing an unmitigating demand for natural gas for the short and long term because consumers are becoming accustomed to its efficiency, cleanliness and price competitiveness.

The strength in demand for natural gas is an obviously positive development and it is a reason why the natural gas industry should consider the CNES and the electric competition proposal in an optimistic context. Furthermore, demand for use of natural gas is expected to increase.

Afterall, the CNES is a market-based energy policy and strategy for the short and long term. It includes all components of the energy sector. It does not favor one sector over another; it establishes a comprehensive approach to the Nation's energy needs and resources; it balances the economic and environmental needs of the country. Natural gas fares well within CNES.

The CNES took almost a year to develop after many long hours of debate and discussion that included many of you. The amount of work and thought consumed in its development by industry professionals, academics and recognized energy experts indicates how strongly the Administration feels about the role energy plays in our economy and in our future.

The CNES is organized around five common sense goals. The first goal is to improve the efficiency of the overall energy system by, for example, bringing competition to the U.S. electricity sector. We want to accomplish this by improving the energy production of powerplants; and by increasing the efficiency of the industrial, transportation and buildings sectors.

The second goal seeks to ensure against energy supply disruptions. This goal includes stopping the decline in the domestic production of oil by 2005 and increasing natural gas production by 6 TCF by 2010; and ensuring that our Strategic Petroleum Reserve remains a bulwark against future supply disruptions. (I am pleased that the President signed the supplemental that avoids the sale of the Strategic Petroleum Reserve.)

As a third goal, we want to promote energy production and use in ways that respect health and environmental values that the American people share. We will do this by increasing the use of natural gas; by increasing the deployment of "climate friendly" energy technologies like solar, biomass and wind; and by maintaining a viable nuclear energy option.

The fourth goal is to expand our future energy sources by supporting and promoting technologies that will enable us to provide future generations with clean and affordable energy sources.

And in the final, fifth goal, we endeavor to co-operate internationally on global issues to secure energy supplies and sources to preserve the environment. To reach this goal, our Administration is pursuing policies to diversify the world's energy supply and use from the Caspian Sea to South America.

The five goals seek to ensure that we have abundant and affordable supplies of vital energy resources now and in the future. But they hold important, positive ramifications for the natural gas industry because they promote the use of natural gas. Our Administration strongly supports the development of natural gas.

One of the first steps to implementing the first goal of CNES is the Administration's proposal to increase retail competition in the Nation's electric industry. The proposal seeks to obtain the economic benefits of competition in a manner that is fair to all Americans; and it seeks to improve the environmental performance of the electric industry.

The competition proposal encourages states to implement retail competition in electricity markets; protects consumers by providing the reliable information they need in new, competitive markets; assures access to, and reliability of, the transmission system; provides incentives for states to maintain public benefits; and amends existing federal statues to clarify federal and state authority.

I believe that the electricity competition proposal is a positive development for the natural gas industry because it plays to the industry's strengths. These proposals will cause the market to reward those who can extract the maximum amount of energy from every unit of fuel. The efficiency of natural gas-fired generation -- the highest in the fossil fuel industry -- places it in good stead in the electricity competition proposal.

The move to a competitive electric power industry will result in pressure for competitive costs for capital in the industry. This will result in a shift from capital- intensive technologies like pulverized coal power plants to less capital-intensive technologies like natural gas turbines and combined cycle units.

Enron's recent announcement of a 500 megawatt gas-fired merchant plant in Pittsburg, California, to meet the state's projected 6,000 megawatt demand for new generation over the next four years is a case in point.

Competition will produce significant environmental benefits through both market mechanisms and policies that promote investment in energy efficiency and renewable energy.

As you may know, our proposal includes a Renewable Portfolio Standard. It calls for an expansion of the market for clean, renewable energy. We developed the RPS in order to continue the Nation's progress towards a cleaner, renewable and sustainable energy future.

Our analysis indicates that over the next two decades significantly more gas capacity will be added with electric industry restructuring, including the Renewable Portfolio Standard, than in a cost-of-service regulated industry.

Over the long term, gas use in electricity generation is a winner under either a competitive or a cost-of-service structure. By 2020, under a competitive structure, gas use in electricity generation is estimated will surpass 8 TCF. Under a cost-of-service structure, it is expected to hover around 7 TCF.

In a competitive environment, gas-fired electric generation is projected to be 17 thousand megawatts greater by 2020 than in a regulated environment -- an increase of 12 percent in the electric power market.

This will happen because gas is a desirable fuel and because gas-fired technologies are the cheapest on a first-cost basis. Natural gas-fired power plants can be expanded incrementally as electrical growth increases; and they can most easily meet emissions standards.

It is difficult for anyone to argue that electricity restructuring is not going to happen. The states have moved forward with their own proposals, and therefore it is almost certainly inevitable in some form. Unless we move in an orderly way with a coherent Federal proposal, we may find ourselves with a fractured situation that does not serve the national interest.

Let me now turn to the role of technology.

Our ability to meet demand is made possible by advancements in technology, which are driving our ability to deliver more gas to market. From my perspective, reservoir diagnostics and imaging -- including single well seismic source, receiver, and modeling technologies -- promise to yield higher efficiencies in production.

As we continue to develop more effective technologies, we will be able to produce natural gas from geologic formations which previously proved unrewarding.

I understand that there are some concerns that producers might not be able to meet the expected demand. We believe that advances in technology and access to new reserves will allow producers to meet the projected needs of the country.

Greater light will be shed on this point when we receive the results of a study on the natural gas market I requested from the National Petroleum Council . The Council's study will take about nine months to complete (once it starts).

To enhance production, we are also pursuing policies that will allow us to explore and drill in public lands while safeguarding the environment. I know some of you are concerned about access to federal lands for oil and gas development.

Under this Administration, for the first time ever, the Department of Energy weighed in on the National Petroleum Reserve-Alaska with our view that we should allow maximum access to public lands under policies consistent with the Administration's environmental standards.

We tested new technologies in the Alaska Alpine Field and found minimal environmental degradation.

I want to assure you that the Department of Energy supports environmentally responsible development of federal lands for oil and gas recovery. Twenty years ago, this might not have been a subject that was appropriate to discuss, but technology has made it possible to talk about exploration and development of federal lands. That is why we are entering discussions with the Departments of Interior and Agriculture on this issue.

The Administration is committed to the CNES, and we are working actively to begin its implementation. Despite my announcement of my departure at the end of June from the Department, we are working hard to devise a step-by-step implementation and we are going forward with it.

The CNES and electric competition proposals are the most effective approach to meeting the Nation's economic, strategic and environmental needs.

These proposals help the natural gas industry to develop cheaper, cleaner drilling and production technologies and to develop technologies that expand market opportunities for natural gas.

As we go forward with our proposals, I am confident that we can share our perspectives in a mutually rewarding way because we all have the best interests of the Nation at heart: to ensure that in a changing world we have abundant and affordable supplies of this critical resource.

Thank you very much.