Natural Gas and America's Energy Future

Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
at the Natural Gas Roundtable in Washington, DC
October 16, 2003

Good morning and thank you for the warm welcome.

As everyone who has been monitoring the economy and the energy situation can attest, this has been a busy year. 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 explain 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 - a plan that was integrated and called for a diverse energy supply.

However, we are here today to talk about natural gas and that is where I will try to concentrate my remarks.

First, let's discuss the current situation in natural gas and short-term expectations. Then we'll move on to other points.

EIA's current numbers show:

• We are currently on track to reach normal or near-normal levels of storage by the end of October. Working natural gas storage, which finished the last winter season at record lows, is now about normal at the outset of this heating season.

• Today's report on gas in underground storage finds that for the week ending October 10th the storage rate is 68 percent above the same period last year and almost 3 percent above the previous week. Total gas in storage is 2.94 Tcf, which lags last year by 6.8 percent but is very close to the 5-year average of 2.95 Tcf. Storage additions appear on target to reach 3 Tcf by the opening of the heating season. Rebuilding storage is one of the Secretary's personal initiatives.

• In its latest winter forecast, the EIA predicted winter prices would 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.

• Injections for the past four weeks have averaged 13.5 Bcf a day - well above the five-year average of 9.6 Bcf a day for the same period.

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 reentry 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 the natural gas market.

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The set of four graphs you have comes from the National Petroleum Council's new report. If you're looking at the first one, it tracks productive capacity and production.

This graph goes to the dynamics of the change in the supply demand balance. The grey line represents our production capacity. Two things stand out when you look at the graph. First is that capacity is slightly lower than it was in 1995.

The second is that currently it is tied directly to the yellow demand line. Unlike the past, when demand peaked to capacity. What this means is that any anomaly will drive prices-such as weather or pipeline disruptions. There is no slack.

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Now let me refer you to the second NPC graph. This shows the difference between rig counts and production.

Again you see historically there has been an increase in total daily Bcf production when the rig count increased. Until recently, that is.

Then you see the 2001 drilling response and you see the striking lack of response in natural gas production. This is underscored during the current price environment.

The authoritative Baker-Hughes rig count found that the number of working gas rigs by the end of this September had increased by 38 percent over November 2002 and numbered 943.

And the most recent Lehman Brothers survey of production projects that 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.

In natural gas, over the last decade, demand increased 19 percent. This growth came on despite improvements in energy efficiencies. Projections indicating how gas is marketed are critical. The range of forecasts sees demand growing by 33-to-50 percent over the next 20 years or so. The challenge of our Administration is to ensure adequate supplies of natural gas at prices consumers can afford.

Through 2025, some forecasters see total natural gas demand rising to almost 35 trillion cubic feet, which would be 26 percent of our delivered energy consumption. Lower 48 production is expected to remain flat against rising consumption. LNG and new Arctic production are expected to fill the gap.

These numbers - and like numbers from other sectors - illustrate our Nation's profound need for a comprehensive national energy policy based on the requirements of today and tomorrow.

Most of these numbers don't come as a huge surprise to those who watch energy trends, and it did not to the President and the Administration.

One of the President's first acts was to begin the development of a National Energy Policy (NEP) - much of it we have implemented administratively but some portions are pending before Congress.

The President's plan for America's future energy recognizes that much of what we want to achieve at home and in the world depends on reliable, affordable and secure energy.

The NEP finds that natural gas must be a key component of a sound, environmentally-safe energy supply. Natural gas and private power generation must remain key components of our Nation's energy mix, if the mix is to be diverse, robust, responsive and secure.

The President envisioned that America's energy challenge begins with our expanding economy, growing population and rising standard of living.

Adequate and affordable natural gas is a cornerstone of the President's National Energy Policy.

In this mix, natural gas in an influence on 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.

Nearly two-and-one-half years into the National Energy Policy we have notable achievements. They include drilling deep and extracting the first core samples of Alaska's massive methane hydrate resource to gain a better understanding of hydrates and how to extract natural gas from them.

On the North Slope alone, the hydrate resource base has been estimated at 590 trillion cubic feet - many times more than the 100-to-150 Tcf of gas thought available in the slope's conventional gas-bearing formations.

We believe we have the right ingredients for improvements to our Nation's energy infrastructure. However, we must resolve environmental and pipeline issues to maximize beneficial gas production. We must address the Alaska gas and LNG issues. And we must focus on the hydrogen-economy initiatives proposed by the President in this year's State of the Union address.

The President's NEP calls attention to the continued need to strengthen our Nation's energy security by promoting enhanced oil and gas recovery and by improving exploration technology through continued partnerships with public and private entities.

We are taking executive actions to address the situation. For example, this spring the administration proposed a rule to extend royalty relief to to natural gas produced from deep formations in the shallows of the Gulf of Mexico. It is incentive to explore and produce.

In addition, DOE is 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 also have initiated multiple industry-academic consortia to conduct technology development that will increase recovery, unlock unconventional reserves, reduce costs and raise the success rates of discovery. For the longer term, we are seeking ways to tap the inexhaustible reserves of methane hydrates.

On LNG, the department is preparing to host a global leadership summit of energy ministers with the goal of facilitating a reliable flow to U.S. markets.

In other activity, reaching back to the national Natural Gas Summit in Washington last June, the department sponsored a summer-long series of public meetings in eight regions of intensive gas use. They were dedicated to education and collecting input from individuals, commerce and industry.

In the short-term, we are educating consumers to make the proper energy choices based 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.

The inter-agency effort includes important activity at the Department of the Interior, which controls access to significant reserves on federal lands. The activity includes work with the Bureau of Land Management and the Minerals Management Service on improving both the processing of new drilling permits and the handling of new lease sales. BLM is organizing regional task forces to make sure that new drilling applications are expedited.

Also in the last year, the Federal Energy Regulatory Commission set a landmark precedent on approving new LNG terminals. They decided not to require open-access tariffs and commission-approved cost-base rates. The decision signaled a new policy toward permitting LNG facilities where markets are competitive and other criteria are met. This will mean quicker siting and construction of LNG terminals.

Finally, in the spring of 2002 the Secretary asked the department's advisory board, the National Petroleum Council, for a detailed update on the state of North American gas no later than September. Their 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, the report identified 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. The result will be higher economic growth, higher employment and higher industrial activity.

There are several underlying themes to this report that need to be carried into any discussion on energy. One is that we need more energy. Not just natural gas, but all forms of energy. EIA projects our total energy requirement to grow from 97 quadrillion Btu to 139 quads through 2025 - growth of 43 percent. This means proportionately more coal, more gas, more nuclear, more renewables, and more efficiency.

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Let's look at the NPC's graph on demand projections.

There's a key word on the supply side and that word is AND. Conversely, there is another word bidding to enter the equation - the word OR. Failure to do our work on the supply side will essentially be choosing between higher or lower economic growth; higher or lower employment; stronger or weaker industrial activity.

Let's look at the NPC's findings on future supply.

The Council found that our 25 year gas requirement can be met through a combination of boosting lower-48 production to offset lower 48 depletion, and adding both Arctic production and imports of LNG.

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The NPC foresees a corresponding need for capital investment of more than $1.5 trillion in new production, pipelines and LNG import terminals.

The NPC study also found:

• There has been a fundamental shift in the natural gas supply-demand balance that has caused higher prices and volatility in recent years.

• Greater energy efficiency and conservation are vital near- and long-term mechanisms for moderating price levels and reducing volatility. In fact, the study notes that efficiency qains potentially equal the supply that would result from the Alaska Gas Pipeline.

• However, conservation is not a solution in its own right.

• 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.

• Traditional North American producing areas will provide 75 percent of long-term U.S. needs, but will be unable to meet projected demand standing alone.

• New, large-scale resources such as LNG and new Arctic gas are available and could meet 20-to-25 percent of demand, but they come with higher cost and long lead times.

• Increased access to U.S. resources - excluding wilderness and national park areas - for exploration and production could save $300 billion in natural-gas costs over the next 20 years.

• 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 can be minimized.

• And, finally, the NPC called for a balanced policy that includes increased energy efficiency, immediate development of new resources, and flexibility in fuel choice. It found that such a policy could save our Nation up to $1 trillion in added natural gas costs over the next 20 years.

The NPC endorses Chairman Greenspan's call to bring an end to our conflicted policy on natural gas. Public policy must support the needs of a growing economy.

In the Congressional policy arena, Congress is nearing the end of its prolonged debate on energy legislation. A House-Senate conference committee is negotiating the final stages of legislation that complements recommendations made by the President's energy policy development team more than two years ago. 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.

And finally, on the conservation front, as Secretary Abraham has said, the impact of natural gas prices can be mitigated in the short-term while meeting our domestic needs. The means are conservation, energy efficiency and fuel diversity. The challenge is to use energy smartly. We have a website on this. The address is www.energy.gov.

In sum, there is no single solution to our energy challenges: No one energy resource or action alone can do the job. The real solution - as the President often notes - is a balanced portfolio that includes energy efficiency, new sources of supply and the use of alternative energy sources for power and other basic economic activity. The key concepts are diversity of energy supplies and fuel flexibility.

This is how things stand as of today. Energy policy is a work in progress.

Thank you for your attention.