Remarks by Mark Maddox
Acting Assistant Secretary for Fossil Energy
to the International Energy Agency
Working Party on Natural Gas
Houston, Texas
May 13, 2004

Thank you, and good morning everyone.

It's a privilege for me to address this Conference on one of the world's top energy priorities — providing ways to secure a sufficient supply of natural gas to meet growing demand.

I want to begin by acknowledging and thanking the Department of Energy's co-sponsor for this Conference — the Norwegian Ministry of Petroleum and Energy. We appreciate your understanding of the vital importance of international cooperation to the creation of a strong and smoothly functioning global market in natural gas.

I also want to thank the United States Energy Association for its invaluable assistance in organizing our meeting.

The United States is pleased to welcome the International Energy Agency and all of our foreign visitors and friends to Houston.

Long before we convened this morning, the IEA had already made an important contribution to this Conference's deliberations with the publication of its World Energy Investment Outlook study.

We look forward to hearing all of our international participants' perspectives:

• On the changing world of energy, and particularly of natural gas,
• On the emergence of a global market in natural gas,
• On the challenges the creation of a vastly expanded market in Liquefied Natural Gas presents to your countries, and
• On the solutions to these challenges that we can and must work together to devise.

It goes without saying that our success in addressing the technical, financial, and operating challenges central to so vast and complex an enterprise is dependent on cooperation and collaboration among all of us.

I would like this morning to survey:

• The supply-demand challenges we face
• The role of the U.S. as potentially the largest LNG customer in this global market, and
• Some of the larger issues we will have to address cooperatively if we are to succeed in meeting the world's requirement for secure supplies of natural gas in the decades to come.

Let me begin by highlighting our shared need for secure, affordable and adequate supplies of natural gas.

Economic growth in both developed and developing countries is the basis of rising standards of living and the prosperity we all desire — and adequate energy supply is the basis of economic growth.

Natural gas has become in recent decades one of our most important energy resources — and it will continue to grow in importance.

In fact, the U.S. Energy Information Administration forecasts that worldwide natural gas consumption will nearly double by 2025, to about 175 trillion cubic feet a year. If we somehow fail to meet this projected demand, the world's energy situation will become more difficult. Growth and prosperity are likely to suffer.

The developed world is already a major consumer of natural gas, and demand will continue to rise. Natural gas is also expected to become one of the most important energy resources in the developing world, where demand is projected to grow by about 135 percent, to more than 52 Tcf a year. That's about 30 percent of total world consumption.

Let's look at natural gas growth forecasts for the next two decades by region:

• The Energy Information Administration forecasts that demand in the United States will grow by nearly 40 percent, and overall North American demand should increase by 70 percent.
• In Central and South America, demand should grow by about 225 percent.
• Demand in Western Europe is expected to increase by more than 70 percent, and natural gas consumption in the nations of Eastern Europe and the Former Soviet Union is expected to nearly double.
• The Middle East can expect demand growth of about 75 percent.
• Industrialized Asia can expect to see demand growth of 40 percent by the year 2025.
• In developing Asia, consumption is expected to nearly triple.
• In Africa, the forecast is for a 130 percent increase.

Now that we've seen the demand picture, let's look at the supply situation.

Fortunately, the world contains huge reserves of natural gas. The EIA estimates world proven reserves at 5,500 Tcf, and undiscovered natural gas at nearly 5,000 Tcf - a total of well over 10,000 Trillion cubic feet.

To that we may someday soon be able to add the reserve potential of the natural gas contained in methane hydrates. Worldwide, estimates of the natural gas potential of methane hydrates approach 400 million trillion cubic feet — a staggering figure.

We have the reserves we need. The trouble is that our natural gas bounty is unevenly distributed. More than 70 percent of the world's proven reserves are evenly divided between the Middle East and the region encompassing Eastern Europe and the Former Soviet Union. Russia, Iran and Qatar alone account for more than half the world's proven reserves.

The remaining 30 percent of our proven reserves are fairly evenly distributed around the world by region, but not by country.

The world's natural gas picture can be summed up simply: Sufficient resources for everyone concentrated in a few geographic regions and countries, and growing demand...everywhere.

We are fortunate to have two tried and true solutions to the challenges we face: technology and trade.

Continually improving technology has led to new discoveries of gas reserves.

It has made possible the production of greater quantities of gas from existing fields.

It has allowed us to drill and economically produce gas from fields that were, until recently, beyond our reach.

It has produced environmental improvements that make an optimistic view of the world's environmental future possible even as energy demand increases.

It has produced energy efficiency improvements that will make it possible to keep the rate of energy demand growth within reason.

And, finally, technology has made for safer and more secure transportation of natural gas over longer distances by pipeline and in the form of LNG. In short, technology has made natural gas trade across continents and oceans a reality.

In order to match supply to demand in the decades to come, we will continue to rely on technology to find and produce added reserves, to increase the efficiency of energy production and consumption, and to help us create a new global market in LNG.

The United States will play an important role in the creation of this new market by virtue of the size of the market we represent. We are vitally interested in the development of improved technology and increased trade, not just to overcome our own natural gas supply challenges but to help lead in the cooperative effort to meet the world's natural gas needs.

As I said a moment ago, U.S. demand for natural gas is projected to increase by nearly 40 percent over the next 20 years. We will not be able to meet that demand with domestically produced gas. In fact, we produce only 85 percent of our natural gas requirements domestically today. We rely on imported natural gas for the remaining 15 percent.

Even after factoring in a comprehensive effort to develop the technologies to prolong the life of existing domestic gas fields and to reach gas reserves in deep formations, we estimate domestic production will account for only 75 percent of our needs by the year 2025. Imported natural gas will account for about 25 percent of total consumption. We see imports of natural gas nearly doubling, from today's 3.5 Tcf to 7.25 Tcf.

LNG will supply virtually all of that increase — nearly 4 Tcf, compared to our total LNG imports of 540 Billion cubic feet in 2003.

And if recent unexpected reports of significant declines in gas output for the first quarter of 2004 by major North American producers such as BP, Shell, ChevronTexaco, ExxonMobil, Marathon and Petro-Canada are any indication, our estimates of LNG's contribution may have to be revised upward.

That should give you some sense of how important a large and efficient global LNG market is to the United States — and of how important it is to the suppliers who will want to secure a foothold in the U.S. market.

Making the transition from our current condition (regional gas markets in which LNG plays a relatively small role) to an altogether new situation (a global market in which LNG is a significant player) is a daunting prospect.

Success will require huge increases in investment across the entire supply chain, from producing wellhead, to pipeline, to liquefaction facility, to LNG tanker fleet, to re-gasification facility, to domestic pipeline network. We estimate the capital requirements for a typical LNG development, from the producer's reserve source to the pipeline grid, to be $5 to $10 billion. Just to land 15 billion cubic feet of LNG at North American terminals every day in 2025, we must attract investment well in excess of $100 billion

We believe the necessary capital will be available to construct this vast global LNG network — if we work together to reduce risk to investors to acceptable levels by addressing a number of challenges the transition to a global LNG market presents.

The first challenge lies in the quality of the product — LNG — itself. For a truly global market to develop, we must all be confident that we are buying and selling the same product.

Interchangeability of gas — the adoption of uniform quality standards that will allow a consuming country to adapt to circumstances by supplementing or replacing supply agreements with more than one or two producers, and allow producing countries to sign supply agreements with more than one or two customers — is essential to the smooth functioning of a genuinely global market.

Developing a uniform quality standard of interchangeability for LNG will be a prerequisite for healthy market growth. It will, needless to say, require close cooperation by all the current and prospective participants in the LNG market.

A uniform quality standard will be one element in the new way of doing business — the new business model — the global market will both require and encourage. Other aspects will include mechanisms for more trading flexibility such as increased spot sales, arbitrage and the possibility of supplementing today's typical contract, which is measured not in years but in decades, with shorter-term contracts.

Participants must be willing to operate in a true market, with all the dangers and rewards (and overall efficiencies) of real-time changes in market conditions and prices.

Ensuring the safety and security of LNG operations is, of course, an absolute pre-condition for success. LNG operations have a long and excellent safety record. But as the recent LNG incident at an Algerian facility demonstrated, we can never take too many safety precautions when dealing with an energy source. LNG is safe, but we must make it even safer — and we must educate our citizens about LNG's safety, and the important economic benefits that will come with a robust international LNG trade.

The Department of Energy stands ready to assist with this industry's collective safety effort by making our technical expertise available to interested industry and government participants. We are also eager to learn from other participants who have broad knowledge and long experience liquefying, shipping, and re-gasifying LNG. We must recognize the importance of sharing safety "best practices" with one another, as well as the interdependence of safety efforts between producer, shipper and consumer.

There is no greater danger to the growth of a global market in LNG than a public misperception that LNG and its related operations present a serious safety hazard.

The final obstacle to investor confidence has to do with the participants in the growing global market, and not with the market itself.

In a world where there are many opportunities for energy investment, and in which investments are always large, oil and gas companies are exhibiting an impressive degree of fiscal discipline. They are becoming extraordinarily sensitive to the impact of investments on their balance sheets.

On the day that we have established a uniform quality standard for LNG, developed a flexible and open LNG market, and earned strong public confidence in the safety of LNG operations, we will still be susceptible to failure if we haven't established attractive investment environments within the countries that are participating, or hope to participate in the market.

Those nations that: (1) are well governed and politically stable; (2) operate under the rule of law; (3) guarantee the sanctity of contracts; (4) offer regulatory certainty; and, (5) establish sound economic policies, fostering enterprise and entrepreneurship such as more open markets, sustainable budget policies, and strong support for development, will attract the necessary investment and unleash the enterprise and creativity of their citizens for lasting growth and prosperity. Those nations that do not will be left behind. The choice is that stark and that unavoidable.

The natural gas producing and consuming nations of the world have been presented with a rare opportunity. We have he opportunity to participate actively in the creation of a new, global energy market that could over time make an enormous contribution to the world's energy security, the foundation stone for economic growth, rising standards of living, improved health and peaceful relations among nations.

The importance of trade and the bonds of cooperation, understanding and friendship forged by the pursuit of shared interests cannot be overestimated. As President Bush has said, "Over the long-term, trade is the most certain path to lasting prosperity."

Improved and expanded energy trade among the nations of the world, and particularly the creation of a global LNG market, will underpin and fuel economic growth and development.

We have a great deal of hard work ahead of us — and an enormous reward to be shared. It is as simple, and as difficult, as that.