Remarks by
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
at the
German-American Gas Conference
Cologne, Germany
May 23, 2000

Vielen Dank fur Ihre Einladung an mich als Vertreter der US Regierung. Deutschland ist ein wunderschones Land und Koln ist eiene Stadt reich an Geschichte und naturlich gelegen am Rhein. Eine Landschaft, die fur uns Americaner einen besonderen Reiz hat. (Good afternoon. I am honored by your invitation today to represent the U.S. Government at your conference. You have a beautiful country and Cologne is a city rich with history and located along a historic and scenic river. A region, that for Americans, is especially beautiful).

Let me begin my remarks by congratulating you as you embark on the journey towards liberalization of your natural gas markets. I am pleased to be here to share our country's experience as we travel a similar path.

Our progress over the last decade has in many ways has been possible due to an environment of successful economic expansion in the United States which has afforded the opportunity to make advancements in our natural gas industry. In this industry, jobs have been created, capital has been available to invest in technology and infrastructure, and because of deregulation, an environment exists which favors expansion to meet growing demand.

As you can imagine, in my capacity as Assistant Secretary for Fossil Energy, the recent emphasis on the supply of oil, has dominated much of my time and attention. Yet, in addition to oil, my office oversees the national research program to develop and demonstrate natural gas, petroleum, and coal technologies. This includes managing our Clean Coal Technology Demonstration Program, our Strategic Petroleum Reserves -- the nation's emergency crude oil stockpile, and the Naval Petroleum and Oil Shale Reserves.

While oil has been in the limelight the last few months, the focus of my presentation today is obviously on natural gas. However, it is essential to any discussion of energy to recognize the importance oil, natural gas, coal and renewable sources play in the overall energy mix.

My remarks today will center on how the United States managed the liberalization of its natural gas markets, and what lessons we might impart to Germany. As you know, the United States as in other countries, the oil and natural gas industries,

because of their importance, have been singled out for extensive legislation covering virtually every segment of the industry. It goes without saying that we have a great deal of experience in energy regulation . . . and we hope that we have learned from it.

Let me begin by setting a backdrop of key trends which are significant when discussing the natural gas industry in the 21st century: 1) we live in a global environment, 2) our guiding principles favor interdependence over independence and 3) utilization of electronic commerce is an essential business practice.

GLOBAL ECONOMY
The chart before you reflects the natural gas imports and exports for the United States in 1999. Although the U.S. does not rely on natural gas imports to the extent Germany does, 16% of our domestic demand is met through imports. In 1999, we imported natural gas from eight countries -- as far away as Australia and Malaysia.

The U.S. currently imports about 96 billion cubic meters of natural gas from Canada representing 97% of our domestic imports. Similarly, Germany imports 38 billion cubic meters of natural gas from Russia, 21 billion cubic meters from the Netherlands, and an additional 20 billion cubic meters of natural gas from Norway. Germany relies on over 75% of its domestic demand to be met through imports. Although our percentage dependence may differ, our markets are similar in this regard: we both rely on imports to some extent to meet domestic energy demand. The fact is that today we live in a global economy, and many countries are looking across borders for energy sources and supplies.

Interdependence
Thus, independence is no longer an option in the world today. As a prevailing trend, interdependence is a necessity - not just in the energy and fossil fuel worlds, but also in other areas of commerce. As a result of technology, consumption and business practices, we are all wise to look for ways to partner with our national neighbors in improving our quality of life. Meeting energy needs are no exception.

Electronic Commerce
Another trend is the ascendancy of electronic commerce. It has evolved from postings on computer bulletin boards to online trading now available from home computers. This has resulted in lowering transaction costs, eliminating middlemen, reducing warehouse inventories, and inducing economic efficiency.

Let me cite one example. Enron Energy Corporation, the U.S. largest natural gas producer, maintains an Internet web site, www.enrononline.com, where prospective natural gas buyers can place orders at posted prices for oil, natural gas and electricity. As you can see, e-commerce has become an integral part of the business community.

Let me turn now to addressing historic trends and developments in the U.S. natural gas market. From the late 1930's through the late 1970's, natural gas production, transmission and distribution was heavily regulated. Or, as some say, from wellhead to burner-tip. It was an elaborate system of controls at both state and federal levels. In 1978, we enacted a statute that began a gradual phase-in to deregulate wellhead price controls along with interim incentives to discover and develop more difficult to produce natural gas.

The chart before you summarizes the situation in the natural gas industry as it existed in the 1970's. It can be generally characterized as a time of shortages and comprehensive regulation - a time when the market was seen by many as not capable of functioning properly, from an economic and societal standpoint, and thus merited heavy government intervention.

During this time, some people in government thought we were running out of natural gas. The next chart summarizes our approach in the 1980's. During that period we removed wellhead price controls and incentives, lifted restrictions on gas use, and administratively transformed the transmission sector of the market from being merchants of gas -- holding title -- to being transporters. This allowed purchasers of gas (the Local Distribution Companies and industrial and commercial customers) to contract directly with producers, thereby permitting the communication of price and market signals.

Once we worked through the painful process of deregulating prices of natural gas at the wellhead, and allowing markets to send price signals, we discovered significant new quantities of natural gas for the interstate market.

As you can see from the chart before you, by deregulating our markets, more diverse supplies were discovered and competition led to lower prices and innovation in the industry. The U.S. gas market in the 1990's was very robust -- featuring futures trading, open-access pipelines, and an active spot market. Natural gas demand grew steadily during the decade and natural gas supplies were seen as being more than adequate. At this time, the market was setting the price.

National Petroleum Council Study
What have we learned, and where are we headed in terms of natural gas use potential? To answer these questions, the U.S. National Petroleum Council, a federal advisory committee to the Secretary of Energy, produced two reports, one in 1992 and the other in 1999, illustrating that natural gas can make an important contribution to the nation's increasing energy needs and meeting its environmental goals through 2015 and beyond. Many of you may be unaware of this Council. Let me take a moment to explain its role.

The National Petroleum Council advises, informs, and offers recommendations to the Secretary on any matter requested by the Secretary relating to oil and natural gas or to the oil and natural gas industries.

The 1992 study had four key findings:

• The natural gas resource base was abundant and could be produced and delivered at prices that allow both expansion of the market and continued development of the resource.

• The natural gas market was increasingly diverse, with new challenges and opportunities.

• Increased reliance on competitive market forces had improved the natural gas industry's ability to serve customer needs in a diverse and expanding marketplace.

• The natural gas industry faced significant challenges requiring pro active steps by industry and government.

Based on those key findings, two major recommendations were offered. First, federal, state, and local officials needed to allow competitive market forces to continue to develop and work. Secondly, industry needed to make the market work.

In May 1998, then-U.S. Energy Secretary Federico Peña requested the National Petroleum Council to reassess its 1992 report. The Secretary noted that U.S. energy markets had changed significantly since the 1992 study. The U.S. economy was growing more rapidly than earlier anticipated, and with that growth came a higher natural gas demand. Environmental regulations also favored natural gas consumption. The results of the 1999 study reflected on the next chart indicate both promise for the natural gas industry as well as challenges which must be addressed.

It is important to mention that the 1992 NPC study concluded that the United States had 1.3 trillion cubic feet of natural gas outside of Alaska. This past December in their 1999 study, despite the fact that Americans consumed 124 trillion cubic feet of gas since the 1992 study, they found that estimates of the nation's gas resources had actually increased. The resource now stands at more than 1.466 trillion cubic feet. Technology breakthroughs have opened new frontiers, and new production tools have led to more gas being extracted from both newly discovered and older fields.

A key factor which took place between the 1992 and 1999 studies had been the restructuring of the natural gas industry. As a result, new market structures - new market hubs/centers, futures trading for natural gas, and a capacity release market (a secondary pipeline capacity market) had either developed or matured.

Although market confidence has grown and technology has improved the state of the industry, recent events have led to questions about the industry's ability to meet the potential growth in demand. For example, the downturn in world oil prices between late 1997 and early 1999 dealt a heavy blow to the exploration and production sectors of the U.S. natural gas industry -- particularly to the oilfield supply/service contractors and the independent producers who supply over half of the nation's natural gas needs. We learned that downturns in oil prices lead to natural gas price increases.

Natural Gas Demand
The 1999 NPC study indicated that the U. S. natural gas demand has the potential to increase to 29 trillion cubic feet (TCF) per year by 2015 and could increase beyond 31 TCF by 2015. Please note that this projection is expected despite the anticipated use of other energy resources growing in the next 20 years. It also does not include the effect on demand of any proposed environmental requirements such as those required under the Kyoto Protocol. In any event, we expect the growth in the use of natural gas to predominate. For example:

• We see natural gas use growing in every major consumption sector - residential, commercial, industrial, and power generation. But the largest growth demand - in fact, almost 50% of the increase, is projected to come in the electric power generation market.

• A majority of the more than 200 new electric power generation projects recently announced in the United States plan to use natural gas.

If projections of future demand are correct, we must prepare for at least a 30 TCF per year natural gas market by 2010. That means that annual domestic natural gas production needs to increase by about 400 billion cubic feet per year.

Electricity Demand
In fact, the Department of Energy's Energy Information Administration projects electricity demand to grow even faster than overall energy demand, as much as 37% between 1998 and 2020, with two-thirds of this growth to be met by natural gas.

Let me put this growth in demand for power in perspective. Between now and the year 2010, the United States will have to add between 100,000 and 200,000 megawatts of new generating capacity. That is equivalent to adding the entire electrical grid of Germany to the U.S. power sector in the next 10 years.

But where do we see the nation meeting its needs for future gas supply? How about the reliability and adequacy of existing and future infrastructure?

Energy Information Administration Estimates
The Energy Information Administration estimates natural gas demand to grow nearly 5% this year alone. However, on the supply end of the equation it estimates that production is expected to increase less than 1%. Moreover, by 2001, the Energy Information Administration predicts demand to climb 3%, while production will rise a mere 0.3%. If these corrections are correct, the U.S. will be more reliant on natural gas imports in the future if domestic production cannot keep up with demand.

Short Term Issues with the United States Natural Gas Market Infrastructure
On infrastructure needs, the 1999 NPC study says that more than $1.5 trillion will be required by the U.S. natural gas industry through 2015 - more than half of which is expected to be for capital investments.

Many of these expenditures will involve higher risk projects - large deepwater projects or pipelines to new frontiers - each of which can easily exceed $1 billion.

Specifically, the NPC forecast shows that:

• More than 38,000 miles of new transmission pipelines will need to be required.

• Another 263,000 miles of distribution lines will be needed to serve 14 million new customers.

• The number of wells drilled annually will have to double.

• New resources will have to be found, including a large portion on federal lands.

• And, much of the current 300,000-mile interstate pipeline network could need future upgrading to maintain a system throughput.

Access
A major variable in the natural gas outlook is access to federally owned property onshore and offshore and development of oil and natural gas reserves. Two of the most promising regions for future natural gas production in the United States are the Rocky Mountains and the Gulf of Mexico. Both currently have significant access restrictions.

Access is also an issue for the transmission and distribution sectors of the industry as they seek rights-of-way for pipeline facilities. Environmental concerns or multiple-use conflicts are the primary reason for many of the restrictions.

Industry, in partnership with government, has made tremendous improvements in reducing the "footprint" of exploration, production, and transportation activities, and in maintaining clean, safe operations. These issues must be resolved and consensus sought if we hope to meet future demand. We can do this by applying minimally invasive technology.

In one area of Alaska's North Slope, the Alpine Project is a good example of technology and operating improvements. U.S. energy producers have reduced the total surface footprint to develop 365 million barrels of oil to only 114 acres - less than 1 percent of the subsurface drainage area.

Although there are conflicting views on environmental stewardship and energy production in the U.S., access issues must be addressed if we are to meet this anticipated demand.

Funding for Natural Gas Issues
As energy use trends emerge, we continue to modify and tailor our federal Fossil Energy budget priorities to reflect where we foresee energy consumption headed. In our Fiscal Year 2001 budget request to the U.S. Congress, we are emphasizing research on natural gas use technology. Such research and development will play a significant role in determining whether natural gas continues to be an economical energy source as demand for it increases substantially.

Among other things, our budget will focus on infrastructure issues, carbon sequestration and advancing a solid energy policy that is environmentally responsible. We also have a new national laboratory in the United States that has spun off another creation - a Center for Advanced Natural Gas Studies.

The new center will coordinate the development of new technologies to improve the way natural gas is found and produced, as well as new ways to make the future of natural gas cleaner and more efficient.

Technology Issues
On the technology front, we are proposing the development of new obstacle detection systems that can speed the boring of tunnels for gas distribution pipes. In addition, we will promote advanced sensors capable of inspecting and sealing leaks from inside of pipelines.

The track record shows that the Department of Energy's investment in exploration and production technology pays off. Technology has helped double the odds that an exploratory well will find producible reserves. And when producible reserves are found, technology has greatly increased their quantities. In the 1970s, an exploratory well, on average, added about 10,000 barrels of new reserves. Today, an exploratory well adds about 40,000 barrels of reserves.

However, our country's future requires continued advances in technologies to explore for and produce new supplies of natural gas. It is a future which requires more infrastructures to be built and innovative and more efficient methods for consuming natural gas.

Long Term Issues with the United States Natural Gas Market - The Kyoto Protocol
I must point out that nation's relying heavily on fossil fuels, like the United States, are not immune to the negative impacts resulting from their use. While oil, natural gas and coal provide the bulk of the world's energy supply, we must also be aware of both their immediate and long term impact on our environment.

Reflecting this concern, the Clinton Administration supports the Kyoto Protocol which calls for reductions in greenhouse gas emissions. The primary means for reducing our country's greenhouse gas emissions will be:

• increased energy efficiency -- at our power plants, in our transportation fleet, and in our factories, homes and businesses.

• increased our use of fuels that emit less carbon dioxide when burned - specifically natural gas.

• increased use of our renewable energy resources, and

• increased research and development efforts on the environment - specifically in our exploration and production venues.

Certainly, if it wasn't for the abundance of natural gas - both within our domestic borders and within our hemisphere - the goals of the Kyoto Protocol would be more difficult to attain . . . and certainly more expensive.

Additional sources of natural gas supply
One area the United States and others are exploring to meet future demand issues is methane hydrates. These are naturally-occurring ice crystals that have been found on the ocean floor and beneath the Arctic tundra. There could be huge supplies of natural gas in these formations - perhaps 5,000 times more than all of the natural gas in conventional reserves throughout the world. This has great future potential for the world's energy portfolio.

Conclusion

In sum, what have we learned? We must diversify our energy sources and not be dependent on one specific fossil fuel to be our salvation in the future, and become interdependent on each other in our global economy. We must continue to increase our use of technology -- it is today's business edge. It is revolutionizing the way we do business. Not only in computers and the medical fields, but also in fossil fuels research and development efforts.

We must continue to share our energy data with each other and improve our operational efficiencies, relying on the Internet and electronic commerce to our advantage. We must give consumers the best product and best value in an environmentally responsible manner.

Additionally, we must plan for changes in the structure of the natural gas industry market and adopt sensible policies to guide those changes. We must prepare for more supply and demand in the natural gas market and must be concerned with land and water access issues. We must continue steady funding for our research and development, both short and long-term with natural gas. Finally, government and industry must work closely to preserve and protect our environment.

We live in a rapidly changing world. Instead of asking someone "What have you done for me lately?" we now ask, "What have you done for me in the last hour?" We not only expect great things from technological innovation, we demand it.

I leave you this final thought. We must all work as partners as we address natural gas market liberalization with the goal of achieving optimal outcomes. I think you will find there are many opportunities for interregional imports and successful sharing.

We are fortunate to have a strong economy in the U.S. which has made our liberalization efforts in the natural gas market possible. I believe we must give consumers our best efforts and let the free world markets prevail.

A Chinese proverb says, "There are many paths to the top of the mountain, but the view is always the same."

Our view must be toward the economical and environmentally sound future of natural gas. We must share our ideas, our technologies and our discoveries. I challenge you to climb your mountains and enjoy the view. You will see the bright flame of natural gas on the horizon

In closing, I salute your persistence in moving to liberalize your country's natural gas market. While I recognize the challenge before you seems daunting, having walked a similar path in the United States and still walking that same path, I assure you a liberalized market offers benefits for all industry sectors and all classes of customers from borehole to burner tip. I wish you much success.

Vielen Dank (Thank you).