Remarks by Mark Maddox
Acting Assistant Secretary for Fossil Energy
to the
American Public Gas Association Annual Conference
Lake Geneva, Wisconsin
July 26, 2004

The Role of Natural Gas in U.S. Energy Policy

 

Thank you, Ben (Andrews, APGA Chairman) and good morning, everyone.  

In Washington, the American Public Gas Association is recognized as a constructive and robust participant in the public affairs of our nation on behalf of your members and your 5 million customers. 

And so, I'm pleased to have this opportunity to meet quietly with so many of you so far from the din of battle.  

It soon will be four years since President Bush asked the Congress to enact a new energy policy so America could deal with changes that were seen coming in energy markets, especially natural gas. 

This year has offered a tri-fecta of challenges – high oil prices, high gasoline prices and high natural gas prices – to everyone involved in energy, including your customers and all others who use it.  

The influence of energy is being felt throughout the economy, and Federal Reserve Chairman Greenspan spoke out again this spring on the need for the U.S. to have access to world reserves of natural gas through LNG imports.  

In natural gas, demand in the three largest markets keeps prices high.   Electric generators, industrial users and residential customers are competing for a mostly static supply. 

Most analysts would say that $2.50 gas should be looked upon much like the 25-cent cup of coffee – a quaint memory of the good old days. 

U.S. gas prices at close to $6 per million cubic feet are now the highest in the industrialized world; and a recent study by Cambridge Energy Research Associates has warned that we will be in line for the highest sustained prices in history if nothing is done to both enhance supply and moderate demand. 

Meantime, some chemical plants that use natural gas as a feedstock have closed and some new combined-cycle electric generation has gone into mothballs or been cancelled.  

And you know better than I what has happened to your residential customers. 

The story of natural gas markets is well-told by a headline I saw on your website last week in preparing to meet with you.  It read:

Another Day of Gut-wrenching Volatility. 

Your program posed a specific question for me to answer: What is the Role of Natural Gas in U.S. Energy Policy?

The answer is that natural gas is a major component of our energy supply and future. 

Let there be no doubt that the Bush Administration recognizes the critical role of natural gas in our Nation's energy mix. 

Natural gas is recognized as a factor of great importance at every level of economic life from household budgets up through general industrial activity, and use as a principal feedstock for the materials required by agriculture, industry and commerce.  And it has become a staple of electric-power generation. 

But let there be no mistake.  There is currently a supply shortage.  The result is higher prices and more volatility. 

Keeping natural gas affordable and reliably available is the principal objective of many proposals and initiatives in the Bush Administration's energy policy activity. 

Good policy will stabilize the market at affordable levels – policies that recognize there is no single energy source that can meet all of our needs  

To meet the growing demands of our economy we will need more coal, oil, gas, solar, wind, efficiency and nuclear generation.  

For the remainder of my time this morning I'd like to discuss, in addition to the pending legislation, the executive actions the Administration has taken which are meant to bring these conditions about.  

In doing this, I'll try to avoid encroaching on other representatives of the administration who will speak later.  This means I'll use only those statistics necessary to put natural gas in the perspective of policy.  

The EIA's Annual Energy Outlook for this year notes that through 2025 we will need: 

• An additional 900 billion cubic feet a year to meet new commercial demand;
• An additional 1.2 trillion cubic feet for new residential demand;
• An additional 2.8 trillion cubic feet for added electric generation;
• And, an additional 3.1 trillion cubic feet for new industrial demand. 

Total domestic demand for natural gas will increase by 8.6 trillion cubic feet, or almost 40 percent.

But domestic production will grow by only 5 trillion cubic feet, a 40 percent shortfall of more than 3.6 trillion cubic feet. 

The projections count on liquid natural gas (LNG) to fill the gap and also to make up for a decline in Canadian imports; for Canada faces conditions similar to ours.  

The conditions we face were specified in detail last fall in a special report of the National Petroleum Council entitled A Balanced Future for Natural Gas: Fueling the Demands of a Growing Economy.

In addition to making recommendations, this report updated and fleshed out the concerns about natural gas raised in the President's National Energy Policy Report of 2001. 

Among the findings were these:  

• That North American supply is flat to declining;
• That demand will continue to increase;
• That the high prices and volatility of recent years are due to this fundamental shift in the supply-demand balance;
• And that conservation and efficiency cannot sufficiently relieve demand as standalone solutions;

The Council found that demand and supply can be re-balanced if:

• New domestic supply can be obtained from drilling on now-restricted public lands and in off-shore areas;
• Production from non-conventional reserves is increased;
• New gas is made available via a new Arctic pipeline;
• Alternative generation can relieve growing pressure on natural gas from rising demand for electric power; 
• And, LNG can be imported in unprecedented quantities. 

Of LNG, the report said:

• It will be critical to satisfying the requirements of demand centers along both the east and west coasts of the United States;
• And it will be critical in settling prices in a free market. 

The Administration has been moving forward in these areas with action across many parts of the executive branch.  Other involved agencies include, but are not limited to:

• The Departments of the Interior and Agriculture on land use questions;
• The Environmental Protection Agency on imparting the kind of regulatory certainty that will relieve pressure on gas markets while increasing environmental performance; 
• And the Federal Energy Regulatory Commission on the permitting of LNG terminals. 

I'll touch briefly on the more important activities in these areas and conclude with a review of developments in LNG.  

Activities to stimulate more domestic production include:

• Royalty relief as incentive to produce new supply from deep formations in the shallows of the Gulf of Mexico;
• Inter-agency activities to moderate restrictions with the Department of the Interior, which controls access to significant reserves on public land;
• Work with the department's Bureau of Land Management to improve the processing of new drilling permits;
• BLM organization of regional task forces to ensure that new drilling applications are expedited;
• And work with the Minerals Management Service to improve the handling of new leases. 

In the Department of Energy in the office I direct – the Office of Fossil Energy – we're concentrating on developing technology that can add to increased exploration and supply through:

• Increased recovery from existing fields;
• Reduced costs in exploration and development;
• Higher success rates in discovery;
• And, unlocking the significant amounts of hard-to-get gas that is found in non-conventional reserves that include tight sand formations, shale and coal beds. 

Coalbed methane now accounts for at least 10 percent of our domestic natural gas reserves – which still are very large – and an increasing share of new gas coming into the market. 

Meanwhile, authorization for the proposed new Arctic pipeline is in the pending energy legislation, and I tend to think of as the "Alaskan unknown."

We know 35 trillion cubic feet of gas reserves have been discovered on the North Slope and there's reason to think total reserves may be in the neighborhood of 250 trillion cubic feet, which is more than our total current proven reserve. 

But, without an energy bill, it is unknown how we are going to build a pipeline, and without a pipeline it is unknown how we are going to meet ultimate U.S. demand. 

With a pipeline we can look for an additional 4 billion cubic feet of gas a day which would satisfy 1.5 trillion cubic feet a year of new demand.  If a bill passed tomorrow, we'd probably be pressed to have a pipeline open by 2015.  Most estimates say construction will take 10 years. 

Yet the sooner we have a bill, the sooner we'll have a pipeline. 

At the same time, we can also moderate demand for natural gas in power generation by changes in regulation and law that will allow greater reliance on new coal-based technology that will support emissions reductions of historic proportions. 

Among these changes are:

• The Clear Skies legislative initiative for phased reduction of the pollutants sulfur dioxide, nitrogen oxide and mercury by 70 percent by 2018, which is pending;
• The proposed Clean Air Interstate Rule and Mercury Rule – an executive initiative to achieve the same reductions through regulatory changes under existing law;
• And, the New Source Review Policy, which will allow generators to upgrade existing plants with new technologies in ways that contribute to achieving the goals of both the proposed regulations and the Clear Skies Initiative. 

Secretary Abraham has asked his advisory body, the National Coal Council, to prepare a study and recommendations on what it will take to begin deployment of the newest coal-based technologies as these provisions take hold. 

The newest technology links coal gasification and combined cycle generation with gas turbines in a new form called IGCC – integrated gasification combined-cycle generation. 

A study done this spring for the National Association of Regulatory Utility Commissioners and our National Energy Technology Laboratory made this finding: "…the rapid commercialization and deployment of coal gasification in the U.S. electric power sector should be a critical policy objective…of federal and state governments."

As Secretary Abraham told the Coal Council: "There's every reason to begin building clean-coal power generation plants and no reason not to…"

Meantime, at least one chemical company has announced plans to turn to coal gasification for its feedstock, joining Eastman Chemical which has done it profitably for more than a quarter century.  

And the trade press reports that some are considering coal gasification as a means of keeping newer gas-based generation on line in the face of current and projected high prices for pipeline gas. 

In the longer-term, the energy policy sees gasification as the foundation for a zero-emissions coal-fired power and hydrogen production plant – the foundation of an emissions free economy – the hydrogen economy. 

For the near term, all that remains to discuss now is liquid natural gas.

But LNG is by no means last among equals in the Bush Administration's energy activities; we see it as key to affordable and stable natural gas. 

By 2025 we could be importing as much as 4.8 trillion cubic feet of LNG a year, which would have it supporting more than half our total growth in demand. 

Three early steps have been taken at the federal level to facilitate expansion of LNG imports:

• Successful amendment of the Deep Water Port Act to give jurisdiction over off-shore terminals to the Coast Guard, a move that clarifies the regulatory path;
• A precedent from the Federal Energy Regulatory Commission that exempts terminals from domestic open-access and tariff-posting requirements so that operators can focus on the proprietary needs of themselves and their customers;
• And, a commitment from FERC to complete its permitting process within a year of receiving an application. 

We have four existing terminals – two on the Atlantic Coast and two on the Gulf Coast   Three new terminals have been approved recently, all in the Gulf region, two of them offshore.  

Dozens have been proposed and the proposals involve all three coasts – Atlantic, Gulf and Pacific.   The Gulf is a popular location because the existing pipeline infrastructure there can carry LNG to most regions of the country. 

Nevertheless, proposals for on-shore terminals are becoming controversial because of safety concerns that, in turn, are the result of conflicting information from a variety of sources. 

Unfortunately, much of the early debate has focused on the potential consequence of mishap and not on the historical record of safety at LNG receiving terminals; not on the pre-emptive security measures being taken to ensure safety; and not on the improbability that such an event would or could occur. 

The Department of Energy currently is seeking ways to resolve the problem.  But a lot of work will have to be done ultimately to educate the public and win acceptance, an undertaking that could involve the entire LNG chain.

Other goals include:

• Transparency in natural gas markets;
• Improvements in pipeline safety;
• And, timely growth of infrastructure. 

This is what the Bush administration has been doing in energy in the interest of affordable and reliable natural gas in the near and mid-term.  

Our policies are comprehensive in scope; they are integrated in purpose and application; and they are forward-reaching in their objectives.

In our broader and overall approach to energy, these policies emphasize a balanced portfolio of resources that includes conservation, efficiency, renewables, technology and expansion of supply. 

Now join me in thinking about what remains to be done. 

First, there's the matter of the legislation pending in Congress. 

No one should yet be tempted to write off the possibility of action this year no matter what the situation may seem at present, and for the following reasons: 

• I believe that President Bush will continue to work with Congress to enact key provisions of his National Energy Policy;  
• Developments of the kind that have driven energy so far this year will not go into a summer recess;
• And Congress – especially in election years – often acts just before adjourning.

No less important than the passage of legislation is seeing through to implementation the executive actions on a parallel track that would: 

• Enhance supply by means of the higher domestic production that will come from improved access to non-park federal land in Rocky Mountain region;
• Relieve significant pressure on supply making it possible for coal-based generation to meet a share of rising demand for electric power;
• And add to supply through the early development of new LNG terminals and the expansion of existing terminals. 

The American Public Gas Association is a constructive and robust participant in the public affairs of our nation, and a critical link in the natural gas supply chain. 

Join us in renewed advocacy of enactment of a National Energy Policy this year.

If opportunities offer, add the weight of your comment and support to those regulations and executive activity that will over time dampen the volatility of natural gas – and the gut wrenching. 

We may never share a 25-cent cup of Starbucks or never again see natural gas at $2.50 per million cubic feet. 

But working together we can put in place measures to ensure that it remains affordable, available and reliable in the future. 

Thank you for your attention.