Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
At the Midwestern Legislative Conference
Council of State Governments
in Pittsburgh, Pennsylvania
October 25, 2003

Good morning and thank you for a warm welcome.

As everyone who has been monitoring the economy and the energy situation can attest, this has been a busy year in energy. We have seen supply disruptions in Venezuela, a huge jump in natural gas prices and their impact on gas intensive industries, a spike in gasoline prices, and of course the August blackout.

Having said that do I need to detail the many other reasons why we need an energy bill?

As President Bush said during his first days in office: "America must have an energy policy that plans for the future but meets the needs of today." And I would note the President did develop a plan and it is a plan that is integrated and calls for a diverse energy supply.

However, since the price of natural gas has remained higher through this year, since the winter heating season is coming on, I will direct my initial comment to this situation.

In natural gas, it was noticed last spring that storage was lagging. To forestall a mid-winter crisis, Secretary Abraham made the rebuilding of storage a personal initiative and priority.

The Energy Information Administration's recent numbers on storage show:

• We've having a robust injection season.

• Storage rates for the first full week in October averaged 11.5 billion cubic feet a day, almost 60 percent above the five year average daily rate of 7.3 Bcf.

• Through October 10th the in-fill was a full 68 percent above the same period last year.

• Just this week the EIA declared that we had exceeded 3 trillion cubic feet in storage at the outset of the heating season.

• And, the American Petroleum Institute said this year's storage is on track for a new national record.

Meantime, the EIA's most recent price outlook expects that winter prices will be somewhat lower than estimates made earlier in the year. The early summer expectation for the first quarter of next year was $5.76 per million cubic feet. The newest outlook expects it to range from $4.50 to $5.00 per Mcf through the year.

That is the good news. We are seeing our stocks rebuilt, primarily due to friendly weather, a change in industrial use patterns, and, to a certain extent, must-fill storage requirements.

Clearly unfavorable weather, an increasingly active economy and a re-entry into the gas market by industrial users who have temporarily left the market have the potential of changing market dynamics.

However, all of these short term factors are a diversion from the more fundamental changes in natural gas supply and demand.

Among the fundamental changes in supply are these:

• We're drilling more in response to higher prices;

• But the increase in discovery is not commensurate with the rise in exploration;

• And the decline-rate in the gas we find sets in sooner than previously;

My point: We are having to run harder just to stay in place.

These trends and conclusions are substantiated by the most recent reports from the private sector even at the current level of higher prices.

The authoritative Baker-Hughes rig count found that the number of working gas rigs by the end of this September had increased 38 percent over November 2002. It numbered 943. Yet the most recent Lehman Brothers survey of production projects that output in the third quarter of this year will be 4 percent below the first quarter of 2002, which itself was 2.3 percent below the last quarter of 2001. Third quarter output this year will be a full 3 percent below the third of last year.

Meantime, in demand, the requirement for natural gas rose almost 20 percent through the last decade with electric generation claiming a significant share. This growth occurred despite improvements in energy efficiencies.

The range of longer-term forecasts sees demand growing by 33-to-50 percent over the next 20 years or so.

Some forecasters see total natural gas demand of almost 35 trillion cubic feet through 2025, which would be 26 percent of our delivered energy consumption.

But lower 48 production is expected to remain flat against this rising consumption. New Arctic production, plus LNG imports, will be required to fill the gap.

A prime objective of our Administration is to ensure adequate supplies of natural gas at prices that consumers and their employers alike can afford.

Neither these trends nor the numbers behind them are a huge surprise to those who watch developments in energy closely, nor did they surprise the President and the Administration.

The President saw a crunch coming in 2000 before he took office. We responded with a detailed plan of executive and legislative action in the National Energy Policy almost as soon as we took office. And we will continue to respond with executive actions, legislative proposals and other activity.

Our policies are comprehensive in scope, integrated as to purpose and application and forward-reaching in their objectives: We want energy for today and tomorrow.

In our Nation's energy mix, natural gas is an influence at every level of economic life from household budgets up through general industrial activity and specialty use as a principal feedstock for the materials of commerce, industry and agriculture. It is a staple of electric power, especially independent power production.

The President's National Energy Policy finds that natural gas is pivotal to a sound, environmentally-safe energy supply, including future power generation, if the mix is to be diverse, robust, responsive and secure.

And the policy recognizes that much of what we want to achieve at home and in the world depends on reliable, affordable and secure energy.

To make the connection in words the President has used from time to time: "National Security means economic security for every single citizen...if you're interested in having jobs, you'd better have reliable sources of energy...the greatest environmental improvement will come...through technology and innovation..."

Public policy must be comprehensive and integrated. The National Energy Policy identified actions to be taken both legislatively and administratively.

Administratively we have NEP steps underway that that include:

• Proposing royalty relief as incentive to produce new supply from deep formations in the shallows of the Gulf of Mexico.

• Inter-agency activities with the Department of the Interior, which controls access to significant reserves on federal lands.

• Work with Interior's Bureau of Land Management and its Minerals Management Service on improving both the processing of new drilling permits and the handling of new lease sales. And BLM is organizing regional task forces to make sure that new drilling applications are expedited.

• At DOE, we are promoting improved exploration technology through continued partnerships with public and private entities. This effort includes technology development through multiple industry-academic consortia oriented to increased recovery, unlocking unconventional reserves, reduced costs and higher success rates of discovery.

• In the longer term, we are seeking ways to tap what is a potentially inexhaustible reserve of methane hydrates. On the North Slope of Alaska alone the hydrate reserve is an estimated 590 trillion cubic feet, which is more than twice the size of North America's proved gas reserves.

• We've extracted the first core samples of Alaska's massive resource to gain understanding of hydrates and how to get natural gas from them.

• In addition, the Federal Energy Regulatory Commission has taken steps that will expedite the permitting and construction of LNG import facilities.

• Meeting coastal demand with LNG will benefit Midwestern consumers by relieving domestic production to serve their markets.

• And we're at work on questions that affect the future of both the nation's natural-gas and electric-power transmission systems.

In the wider realm of general and public activity, DOE is preparing to host a global leadership summit of energy ministers on LNG with the goal of facilitating a reliable flow to U.S. markets.

We are supporting a hemispheric energy center at Florida International University - an initiative to strengthen cooperation on policy, commercial, technical, infrastructure and regulatory issues. This will enhance U.S. access to oil and natural gas resources in the region.

We're working with the National Association of Regulatory Utility Commissioners on the development of their Natural Gas Task Force "tool kit" to address actions that public utility commissions and the federal government can take to influence natural gas supply, demand and prices.

We've also initiated significant activity to elevate public awareness. We are educating consumers on conservation and efficiency.

The Secretary and the administration have announced a series of initiatives that include public service advertisements, websites and utility-bill stuffers. State governments and utilities are joining us in promoting conservation efforts.

Through conservation, as Secretary Abraham has said, the impact of natural gas prices can be mitigated in the short-term while helping meet our domestic needs. The challenge is to use energy smartly. We put up a special website dealing with this. The address is www.energy.gov.

And, over the course of the summer, beginning with the national Natural Gas Summit in Washington last June, DOE sponsored a series of public meetings in eight regions of intensive gas use. They were dedicated to education and collecting input from individuals, commerce and industry.

Now let's examine some recent developments. The most recent is last month's report of the National Petroleum Council that updates the state of North American natural gas, which Secretary Abraham requested from this formal advisory body more than a year ago.

The council's comprehensive new study - entitled A Balanced Future for Natural Gas: Fueling the Demands of a Growing Economy - represents the producing industry's best collective judgment on the most effective ways and means of relieving the pressure.

Basically, it identifies four key areas to focus on in order for the nation to balance its energy use. Improve demand and flexibility; increase supply diversity; sustain and enhance infrastructure; and promote efficient markets.

Of the council's recommendations, those that have to do with flexibility and moderating the rise in demand for natural gas in power generation should be of special interest in the Midwest.

They call for actions that will lead to improved use of the Midwestern core of highly efficient coal-based power plants; and in the longer term they mean enabling continued reliance on our Nation's enormous coal resource.

In connection with these and kindred objectives, the administration already has undertaken, in addition to the pending energy bill, the following five initiatives:

• First, the New Source Review regulatory initiative of the Environmental Protection Agency. This reformation of the prior administration's proposed rule change would allow upgrades to standing plants that both reduce pollution and raise efficiency. The technology for it is ready within programs of the Department of Energy. It means the early availability of more power from coal to meet significant demand that would otherwise have been fueled by gas.

• Next, is the Clear Skies Initiative. This legislative proposal will require power producers to reduce their emissions of the pollutants sulfur dioxide, nitrogen oxide and mercury by an average 70 percent in phased steps over the next 15 years. It is the most ambitious pollution-production program ever proposed. Yet it provides the means of increasing coal-based power. And it relies entirely on the free market to achieve its objectives. Once again, DOE programs have technology on the shelf to achieve the goals.

• Next is the Clean Coal Power Initiative under the auspices of DOE. This $2 billion, 10-year program of research and development is underway. Its objectives include pushing the thermal efficiency of coal-based generation toward 50 percent and the virtual elimination of regulated pollutants I mentioned a moment ago.

• Next is the Carbon Sequestration Initiative, another DOE effort. Its purpose is to identify and develop the ways and means of removing carbon-dioxide from the exhaust stream of fuel combustion and then of permanently storing it in the event that sound science eventually proves the now-speculative connection between CO2 and climate change.

• And, finally, there is the $1 billion FutureGen Initiative to build and operate the world's first zero-emissions coal-based power plant, a joint venture of industry and government directed by DOE. Among its objectives are 85 percent efficiency in energy use and the production of hydrogen from coal to support the new, hydrogen based economy that would see pollution-free fuel cells replace the internal combustion engine in transportation.

Permit me a last word on coal for long-term perspective. The recoverable coal reserves of just four states represented in this body contain energy that is the approximate equivalent of all the proved oil reserves of Saudi Arabia. Illinois, Ohio, Indiana and North Dakota have 1378 quadrillion British thermal units of energy in coal against Arabia's 1477 quads in oil.

On a national scale, coal is more than 90 percent of our Nations fossil energy reserves. Our recoverable coal is the approximate equal of all the world's proved reserves oil: Or, in the alternative, of all proved natural gas.

This is why you have often heard, and will hear, the President say: "We've got to use more coal."

Now, let's look at the broader recommendations in the National Petroleum Council's report. It brings our situation of the energy situation virtually up to the minute.

The report finds that with a balanced policy of efficiency, conservation, new supply and flexibility our Nation can save up to $1 trillion in added natural gas costs over the next 20 years.

And it endorses Federal Reserve Chairman Greenspan's call for an end to the last decade's conflicted policy on natural gas - that is to say, the practice of encouraging gas demand with one set of policies while restricting its production with another.

In more specific terms, the council found that:

• The higher prices and volatility of natural gas in recent years are due to a fundamental shift in the supply-demand balance;

• Power generators and industrial consumers are more dependent on gas-fired equipment and less able to respond to higher gas prices by using alternate sources of energy. As a result more pressure is put on gas.

• Price volatility is a fundamental aspect of a free market reflecting the variable nature of demand and supply. However, by allowing the market to respond efficiently, the size and duration of fluctuation can be minimized.

• Conservation and greater energy efficiency are vital near- and long-term mechanisms for moderating price and reducing volatility. Gains here potentially equal the supply that would result from building the Alaska Gas Pipeline. But conservation is not a standalone solution.

• New supply must come from sources currently classified as unconventional reserves and from increased drilling in offshore areas and from exploration on now-restricted public lands. Production gains here could save $300 billion in natural-gas costs over the next 20 years.

• We also require significant new supply from now-unused large-scale resources such as LNG imports and new Arctic gas, which could meet 20-to-25 percent of demand but come with higher costs and long lead times.

• And, finally, we will have to invest $1.5 trillion in new production, pipelines and LNG terminals.

In the council's judgment, traditional North American production can meet 75 percent of future long-term demand: But 25 percent will have to come from LNG imports and resources we do not now use.

This, then, is how the administration is going about meeting the energy needs of today.

Looking ahead to 2025, the Energy Information Administration projects that our Nation's total energy requirement will grow from 97 quadrillion Btu a year now to 139 quads then. This is growth of 43 percent. And the growth alone is more energy than any other nation now consumes.

The numbers mean we'll need more of all forms of energy, not just natural gas alone: We'll require more from coal, nuclear generation, renewables, efficiency and conservation. We'll require it not because America is wasteful but because this economy is the engine of the world economy.

This has been a busy year in energy. It highlights that there is no single solution to our energy challenges. No one energy resource alone can do the job.

And so, I believe it will prove a pivotal year as well.

In the formal policy arena, Congress is nearing the end of its prolonged debate on energy legislation. The House-Senate conference committee on energy is negotiating the final provisions of legislation that will complement recommendations made by the President's energy policy development team more than two years ago. And President Bush will continue to work with Congress to ensure that the bill he signs into law contains the key elements of his National Energy Policy.

The real solution - as the President Bush often notes - is a balanced portfolio that ensures energy, environmental, economic and national security.

To apply the President's words directly: "Our goal is to promote energy [security] for our country while improving the environment...to promote energy efficiency and conservation and to produce more energy at home."

This is how things stand as of today - Saturday, October 25th, 2003. Energy policy is a work in progress.

Thank you for your attention.