Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
At the Independent Petroleum Association of America
Annual Meeting in New Orleans, Louisiana
October 28, 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 clear last spring that storage was lagging. To forestall a mid-winter crisis, Secretary Abraham made the rebuilding of storage a personal initiative and priority. Just last week the Energy Information Administration determined that we have exceeded 3 trillion cubic feet in storage on the verge of the heating season. And the American Petroleum Institute found that this year's storage is on track for a new national record.

In short, we're having a robust injection season.

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 - at least for consumers. 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.

On the other hand, 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. Of course, you're the folks who are doing the running; so this isn't necessarily news to you.

This administration recognizes that:

• Our nation's energy and economic security depend on increased supplies of natural gas and oil;

• That fully 65 percent of new gas and 50 percent of new petroleum in the lower 48 come from small, independent businesses;

• And that increased supply depends on the success of independent exploration and development.

The trends and conclusions behind the change in supply-demand dynamics in natural gas 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.

On the demand side, growth is the operative word. The requirement for natural gas rose almost 20 percent through the last decade. This growth occurred despite improvements in energy efficiencies. A portion of it was due to the command-and-control regulatory proposals that deterred coal-based power and provided incentive for increased use of natural gas.

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.

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.

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

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

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

Specific activity under the heading of executive-branch action that may be of special interest and particular use to independent operators is DOE-fostered technology development that includes the following:

• High efficiency, low-cost micro-turbines at well-sites to replace traditional power sources.

• Improved pump control that may raise production as much as 10 percent while lowering capital costs.

• Permeability restoration using bio-chemical agents to improve production in the West Texas field.

• Polymer-gel technology to increase recovery in Mississippian reservoirs of Kansas.

• ASP (alkaline surfactant polymer) chemical flooding to tap incremental reserves in Wyoming.

• Location and recovery of by-passed oil.

• And, finally, a low-cost, low-risk option for independents to obtain better seismic data.

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.

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.

Let's also touch briefly on another recent development.

Last month the National Petroleum Council published an update on 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 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.

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. And, it endorses Federal Reserve Chairman Greenspan's call to end 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.

This massive effort brings our assessment of the energy situation virtually up to the minute. But, if I go any further, I will be encroaching on the council's chairman Bobby Shackouls of Burlington Resources, who is here to discuss it in depth.

This, then, is how we're going about meeting the 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 - Tuesday, October 28th, 2003. Energy policy is a work in progress. And this administration is well aware that much of our Nation's progress toward ultimate energy and economic security depends on America's independent operators.

Thank you for your attention.