Meeting the Challenges of the
Nation's Growing Natural Gas Demand

Remarks by
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
at the
Natural Gas Roundtable of Washington Luncheon
Washington, D.C.
April 14, 2000

Good afternoon and thank you and the members for having me here today.

The makeup of the Roundtable is quite universal in representing various pieces of the "gas pie" so I hope that I can use this as an opportunity to stress the need for a collective dialogue between government and the gas industry. This bond must grow even stronger in light of a growing economy, a growing population and a growing demand for energy.

The media, the U.S. Congress, the oil industry, and namely, consumers, have focused their attention on oil prices for the last few months. Rightly so! Energy issues and, for that matter -- the Department of Energy, have been on the backburner for many people since the early '80s. Even a couple of years ago, many on Capitol Hill questioned the mission and existence of the Department.

The Secretary and I have heard the "hue and cry" more than once: "This Administration has no energy policy." Let me tell you something. We do have a policy. And a strong one to boot.

Our energy policies are based on a diversity of supply and strong diplomatic relations with energy producing nations; improving the production and use of traditional fuels through new technology development; diversity of energy sources with long-term investment in alternative fuels and energy sources; and maintaining and strengthening our insurance against supply disruptions - namely, the Strategic Petroleum Reserve. These represent the fundamental underpinnings of our current energy policy.

The recent spike in oil prices is an excellent example of how important it is to have a strong energy policy and a diverse supply of energy. Since 1974, the U.S. economy has grown nearly 120 percent. The Secretary has focused much of his time in recent weeks to discussions to stability in oil markets and explaining how volatility can threaten not only world, but U.S. economic growth.

Market volatility issues are on the President's radar screen also. He has looked at the option of using the Strategic Petroleum Reserve and tax incentives to increase domestic production. The President has proposed a tax incentive package to stimulate domestic oil and gas production, and to lower the business costs of producers when oil prices are low. This includes adjusting the treatment of the costs of exploration and development - geological and geophysical costs - in the tax code.

He is also calling for allowing expensing of delay rental payments. This will allow producers to expense payments in the year incurred, thereby lowering the cost of doing business and allowing more dollars to be invested in funding and producing new domestic oil reserves. Finally, the Administration will continue to examine measures to preserve marginal well production. We continue to evaluate whether a tax credit for selected marginal wells that could be activated under certain market conditions should be proposed as a "safety net" to help these wells maintain their economic viability during periods of low oil prices.

Although not one of the President's recent proposals, but certainly another important issue, DOE and the Department of Interior are working with NOIA (National Oceanic Industries Association) to examine the continued need for offshore royalty relief, specifically in ultra-deepwater an/or marginally economic fields after the Deepwater Royalty Relief Act expires in November. Industry's main concern is that losing this royalty relief will hurt some independent operators who still need the support to make these prospects viable.

While oil prices received most of the attention last winter, there was also a story in natural gas supply and demand, particularly in the Northeast. Preliminary data for the winter of 1999-2000 show that natural gas prices at the wellhead and in spot markets were higher this winter throughout the United States than last year by at least one third. However, prices experienced sharp surges in the Northeast during the late January-early February cold snap.

Following up on the experiences in the Northeast, the Administration is conducting two studies in which the market potential of natural gas is central. The first will attempt to determine the role of interruptible gas contracts in the Northeast's winter fuels market. The second will examine the potential for large users of heating oil to convert to natural gas or other energy sources by 2005, and the impact of these conversions on regional energy markets. Both of these studies highlight the challenges in meeting our nation's high expectations for natural gas with existing supplies and infrastructure.

The Department is aware of the pending gas pipeline proposals at the Federal Energy Regulatory Commission (FERC). We expect natural gas to be part of the solution to the demand for clean energy supplies in the Northeast. But we also recognize that it is FERC's responsibility to review and determine which applications meet their requirements for certification of new construction.

The Department is NOT taking a position on pending applications.

I can assure you that the Administration, the Department and my office want to assure that, in the long-term, Americans have affordable and diverse supplies of energy.

This brings me to the main focus of my remarks -- that natural gas is a key player in the nation's fossil fuel mix and that it does factor into our energy policy and strategy. As I stated, although oil has been in the limelight for the last few months and has caught the nation's energy focus, natural gas still captures everyone's attention.

Nearly 20 percent of the Nation's natural gas production is linked directly to the production of crude oil. To many of us -- no -- most of us -- the nation's natural gas supply is critical. For many people, the nation's gas supply is just as critical should there be a production decrease and a sudden surge in the pricing infrastructure.

Increased Demand for Natural Gas

At its meeting on December 15, the National Petroleum Council issued a report to the Secretary stating that natural gas demand has the potential to increase to 29 trillion cubic feet (TCF) per year by 2010 and could increase beyond 31 TCF by 2015. This projection is made notwithstanding that the use of other energy resources is also anticipated to grow in the next 20 years or so. At the Department, 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 demand growth - 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.

• More than 110,000 megawatts of new gas-fired generation capacity are projected to go into service by 2010, and 140,000 megawatts between now and 2015.

Roughly translated, our Energy Information Administration projects electricity demand to grow even faster than overall energy demand, as much as 37% between 1998 and 2020 according to EIA, with two-thirds of this growth to be met by natural gas.

In sum, if the NPC projection of future demand is correct, we must prepare for at least a 30 TCF per year natural gas market by 2010. That means that annual domestic gas production needs to increase by about 400 billion cubic feet per year.

U.S. Gas Supply

But where do we see the nation's gas supply? How about infrastructure? As most of you know, the government's ability to accurately predict gas supply is pretty miserable. Twenty-five years ago some people in government thought we were running out of gas. But once we worked through the painful process of deregulating prices of gas at the wellhead, we discovered significant new quantities of gas for the interstate market.

The EIA estimates natural gas demand to grow nearly 5% this year alone. However, on the supply end of the equation they estimate that production is expected to increase less than 1%. Moreover, by 2001, EIA predicts demand to climb 3%, while production will rise a mere 0.3%.

Financial Investments / NPC Study

To most of you, the National Petroleum Council's Natural Gas Study is as important to the gas industry as the recent OPEC minister's conference was to the oil industry. It gives you an idea about the future of the industry. It provides you with a tentative vision for your planning and budget needs.

Keeping our fingers crossed, steady prices for all fossil fuels will prevent hardships for customers and will keep the economy on track. No one benefits from market volatility in any industry. Uncertainty yields fluctuation on the financial markets and provides a ripple effect.

According to the NPC Study, more than $1.5 trillion will be required by the U.S. 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 forecasts that:

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

• 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. Quite a challenge in itself, not counting the new lines and mains.

To meet the required growth, we will have to continue to discuss access issues. As the NPC study points out, the most promising regions for future gas production will be the Rocky Mountain region and the Gulf of Mexico. We will continue working with both State and Federal land management agencies to resolve environmental concerns in these regions.

FY 2001 Budget

With these numbers, you can see that it is imperative that DOE and industry partner in bringing new exploration technology to the forefront in the years ahead. We must not only find the gas, but be able to retrieve it economically.

As I will detail in a moment, our FY2001 budget hopefully reflects what we expect to be our nation's most significant challenge in meeting increased demand for natural gas -- the financial investments that will be needed to find, develop and deliver the necessary gas supplies.

How do we propose to begin tackling these demand, supply, and infrastructure challenges? Well, to begin, as energy use trends emerge, we will continue to direct our fossil energy budget priorities to reflect where we foresee energy consumption headed. Accordingly, part of our emphasis will be on research in natural gas end-use technology. Such R&D will play a significant role in determining whether natural gas continues to be an economical energy source as demand for it increases substantially.

The theme of our recently submitted budget is "Strength Through Science." An investment in our energy future, our budget request is an opportunity to reach new heights in helping America to become more energy efficient and to focus on how we can manage our earth's limited resources.

The DOE Office of Fossil Energy is requesting an overall increase of 7.2 % (or just over $28 million) in FY 2001 above what was appropriated in FY 2000.

Our Natural Gas Program is seeking a 22.6% increase over the last fiscal year, the single largest increase in our fossil energy program. This amounts to a nearly $39 million total outlay for research and development in this area.

Why is this important? One principal reason is that the nation's investment in future gas technologies is declining. Specifically, within the next three years the Gas Research Institute will phase out its traditional regulatory-funded research program. DOE's gas R&D program thus will be the last remaining, nationally-funded research effort.

As public stewards responsible for fashioning energy policy, we do not take this lightly. Accordingly, last December the Secretary announced the creation of a new Center for Advanced Natural Gas Studies in the Energy Department, within our Office of Fossil Energy. This came on the heels of his announcing in Morgantown, West Virginia, that the former DOE Federal Energy Technology Center would become the nation's newest national laboratory, the National Energy Technology Laboratory.

The Center for Advanced Natural Gas Studies will coordinate gas technology development and gas-related analyses for the Department, working with the gas industry to identify and implement critical areas of research from "the borehole to the burner tip."

Details are still being worked out on the organizational structure, implementation of its programs, and its role in partnerships with industry. Also, at the National Energy Technology Laboratory, our Carbon Sequestration Center of Excellence serves as the focal point for all carbon sequestration R&D activities sponsored by the Office of Fossil Energy. It serves as a "hub" of national research within the U.S. scientific and technical community.

Program R&D / Technology

Our program priorities reflect these challenges. In our FY 2001 budget request, the largest requested dollar magnitude increase ($13.2 million) is found in what we call our "Gas Infrastructure," request - which is part of our "Energy Reliability" initiative. (This compares to a one million-dollar FY 2000 appropriation.)

The budget increase for FY 2001 will support the development of advanced materials and technologies needed for longer life, high-strength, non-corrosive pipelines. 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.

By August, DOE will conduct two workshops with representatives from the gas industry on enhancing gas system reliability and publish a report on infrastructure technology needs in the emerging gas market.

As part of that effort, we will explore novel gas storage methods that can site future gas supplies closer to the consumer. It may be possible in the future, for example, to store gas in the form of ice-like structures, called hydrates, that can be kept underground. Or perhaps there may be ways to store gas in steel-lined caverns in places where conventional geologic storage would not be practical.

On the supply or reliability end of the equation, we are aware of a number of alternatives for bringing Alaskan gas to market such as various pipeline proposals or shipping some to the Lower-48 states in the form of LNG. However, we also add the prospect of fruit-bearing research leading to commercially viable gas-to-liquids conversion. If realized, this opens the option of using excess capacity on the TransAlaskan Pipeline system to move gas in liquid form (i.e., not LNG). We support all options for bringing Alaskan gas to market so that none of these options are necessarily mutually exclusive. Market dynamics, as always, will determine which of these options will go forward.

The track record shows that our Department'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.

Technology has helped reduce the "footprint" of oil and gas operations. When Prudhoe Bay was first drilled, for example, a well pad required about 65 acres. Today, a well pad needs less than 10 acres.

Today, horizontal drilling allows producers to reach multiple targets from a single well pad. With extended reach drilling, those targets can be miles away from the surface well.

Seismic imaging has improved - providing resolutions many times better than just a decade or so ago. In the Gulf of Mexico, where 3D seismic has proven so valuable, we now are seeing the application of 4D seismic - adding time to the data set. In one instance, this has increased reservoir recovery to a previously unheard-of 70 percent.

Drilling and production rigs are moving into greater and greater depths - and increasingly, we are producing both oil and especially natural gas, from formations that were unreachable a few years ago.

These technology advances could not have come at a better time - because our demand for liquid and gaseous fuels continues to grow.

Looking to the longer range future of natural gas supply, we are continuing our work to determine the potential of methane hydrates. These are naturally-occurring ice crystals that are found on the ocean floor and beneath the Arctic tundra. There could be huge new supplies of natural gas in these formations - perhaps 5,000 times more than all of the gas in conventional reserves throughout the world. If we could only produce a small portion of it safely and economically, we could keep natural gas in our energy portfolio for literally decades to come.

The Office of Fossil Energy is also conducting crosscutting budget research. We anticipate pumping $26 million into the Coal and Power Systems new gas turbines program. In February, I joined the Secretary in Greenville, South Carolina for General Electric's unveiling of its new gas turbine for power plants. This is the most advanced - and cleanest - gas turbine in the world, one that can be sited in even the most environmentally constrained regions of the country. I'm pleased to say that it is the product of a joint DOE-industry development effort.

It will be more economical to operate than any turbine manufactured to date - and that means lower electric bills for consumers. It will produce fewer greenhouse gases, and that will be good for addressing future climate concerns.

When you realize that more than 80 percent of all the new electric power generation capacity to be added in this country over the next 10 years will be in the form of natural gas fueled turbines, you get a better picture of why it is important to develop the cleanest, most economical turbine possible. Its benefits will ripple throughout our economy - and that means continued economic growth, more jobs, and a stronger economic base.

It also reinforces President Clinton's State of the Union address where he pointed out that new technology can keep powering our unprecedented economic expansion while, at the same time, continuing to improve our environment.

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

It is a future which will require more - not less - coordination both within government . . . and between government and industry. The National Petroleum Council made that point in their December report. They called for an interagency working group to be set up at the White House to focus specifically on the future of domestic natural gas production. We are working with the White House to set up that group. It will bring together agencies from across the government in a focused effort to ensure that we tap the full potential of our natural gas resource.

We owe it to ourselves, our heirs and to our country to prepare for the future -- to find, develop and deliver tomorrow's energy supplies. And increasingly, that means natural gas.

Thank you.