Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
National Association of Regulatory Utility Commissioners
Summer Meeting
Austin, Texas
 July 26, 2005

Thank you and good morning. It’s a pleasure to be with you again. Your meetings are getting to be a habit with me.

Some of you will remember that I spoke at your Winter meeting in Washington last February about the importance of ensuring safe and secure LNG operations.

It was an important subject then and it’s just as important now.

Last year I attended the NARUC Roundtable in Washington and talked about the importance of clean coal to our energy future.

Energy from clean coal, with carbon emissions permanently captured and stored, will only grow in importance with the passage of time.

I take every opportunity to visit with NARUC because natural gas and coal, along with nuclear energy, are the chief sources of electricity in the United States and, therefore, among the main concerns of regulatory agencies on both the federal and state levels.
DOE and NARUC enjoy a productive relationship, and it’s important that we continue to communicate, cooperate and coordinate as much as we can for the benefit of energy consumers.

I’d like to talk today about two important and related energy topics, one general and one specific: the general topic is the energy bill now under consideration in Congress; the specific subject is natural gas, and the ability of natural gas suppliers to meet future demand.

As the price of energy has risen rapidly over the last several years – just as President Bush’s National Energy Policy predicted in 2001 – Congress has not been able to reach agreement on a comprehensive energy bill.

This summer Congress is debating an energy bill for the fifth time in as many summers and, if we are lucky, they will send up a bill for the President’s signature before the August recess.  

The importance of the energy bill cannot be overemphasized. It contains provisions that are essential to maintaining and enlarging the portfolio of varied fuels from diverse sources that is at the heart of the President’s National Energy Policy.

A comprehensive energy bill is long overdue. I urge you to express your support for action now to get Congressional agreement on a bill.

Now, let’s turn from energy in general to natural gas in particular. As you know, we are seeing record high prices for natural gas, an unwelcome development because the high price of gas is a pocketbook issue affecting the household budgets of American consumers.

Despite high prices, our economy continues to grow and create jobs at a healthy rate. That’s great news for Americans but it is masking the real effect of energy prices. As Alan Greenspan recently noted, economic growth would be even more robust if not for the cost of energy today.

More positively, natural gas consumption has been relatively flat in recent years as the price of gas has risen, driving consumers to conserve energy and seek alternatives to natural gas. And on the supply side, domestic drilling for natural gas is proceeding at record rates.

To meet today’s demand of about 23 trillion cubic feet of gas per year we rely primarily on conventional domestic gas production, supplemented by the growing contributions of unconventional domestic gas resources, and imported gas – from Canada via pipeline, and from overseas suppliers of Liquefied Natural Gas.

The short-term result is encouraging. Gas in storage as of July 15 totaled 2,339 Bcf, well above the total for the same time last year, and 10 percent over the five-year average.  
But in the long term it is precisely because our economy and population are healthy and growing that the Energy Information Administration forecasts that natural gas consumption will increase by more than a third over the next two decades.

The National Petroleum Council forecasts that our best efforts to expand production of our domestic natural gas reserves will bring us only 75 percent of the gas we will need in 2025.

The remaining 25 percent will have to come from the Arctic and from international suppliers.

Fortunately, Congress took an important step toward meeting our future gas supply requirements by passing legislation last summer that allows development of the Alaska Natural Gas Pipeline, which is projected to bring 1.6 to 2 Tcf of gas a year to the Lower 48 when completed in approximately 10 years.

Preliminary work by government and industry to bring this $20 billion project to fruition is already well underway.

And LNG is a big, rapidly growing and already vital contributor to natural gas supply.
Just look at the numbers:                 

In 2002, LNG imports to the U.S. totaled 229 Bcf, or 6 percent of imported gas. In 2004, LNG accounted for 15 percent of total imports, reaching 650 Bcf. The LNG numbers will increase yet again in 2005, and in the years beyond.   

We are all concerned about today’s historic high natural gas prices. Imagine where those prices would be without LNG. Last year’s total LNG imports of 650 Bcf were the equivalent of almost 20 percent of our peak natural gas in storage. Without that added gas, we would not have hit the magic minimum of 3 Tcf of gas in storage entering the last heating season. The result would have been panic in the gas markets. 

That is how important LNG is to meeting today’s demand. 

And its importance will only increase with the passage of time. U.S. natural gas demand could reach 31 Tcf a year by 2025, and LNG could supply more than 20 percent of it – about a ten-fold increase in LNG imports from 2004’s volume.

The facilities we need to support this growth are on line or coming on line:

• Our four existing onshore re-gasification terminals have FERC-approved expansion plans that will increase their total capacity from 1.2 Tcf a year to more than 1.6 Tcf. L
• Last March the Energy Bridge project delivered its first LNG cargo to a subsea pipeline in the Gulf of Mexico, and developers broke ground for the 2.6 Bcf a day Sabine Pass facility on the Louisiana Gulf Coast.
• Construction is underway on the 1.5 Bcf a day Freeport LNG facility on the Texas Gulf Coast.
• Two LNG terminals now under construction on the Canadian East Coast – in Nova Scotia and New Brunswick -- should be capable of delivering much-needed natural gas to American northeast markets. 
• Last month, FERC gave final approval to three proposed LNG terminals:

  • The Vista del Sol LNG terminal near Corpus Christi, Texas,
  • The Golden Pass terminal in Port Arthur, Texas, and
  • The Weaver’s Cove terminal in Fall River, Massachusetts.

In addition, there are another three-dozen proposals on the drawing boards for new LNG plants in North America, with new ones being added at regular intervals.

As promising as all this development sounds, there are questions remaining about the quality and interchangeability of LNG, and about the siting of LNG facilities on the East and West coasts.

The question of interchangeability, long a top priority of the LNG industry, was in the news recently when Washington Gas reported the results of a study that identified gas composition as one of a number of factors that contributed to increased gas leaks in its pipeline system.

To help provide the best possible information on gas quality and interchangeability to the LNG industry, regulators and consumers, the Office of Fossil Energy, in support of FERC, is kicking off a study on the impact of natural gas quality and interchangeability on turbines, compressor engines and industrial burners.

Local opposition to the siting of LNG facilities is fed by understandable community worry about the safety and security of LNG operations in this age of terrorist threats. 

Fortunately for LNG operations, for our natural gas supply requirements, and for the communities where LNG facilities are or will be located, the study of LNG operations over water commissioned by the Department of Energy and conducted by the Sandia National Laboratories, concluded that LNG can be transported safely when appropriate measures are taken.

As I mentioned earlier, I discussed the Sandia study’s purpose, conclusions and usefulness at length at your February meeting. Let me just say here that the study makes an important contribution to discussions about the siting, safety and security of LNG terminals by giving decisions makers a tool to use for evaluating and reducing the risks of an accident or terrorist attack.

Thanks to Sandia’s work, federal and state regulators, local community leaders, safety and security experts and private industry can now work together to provide communities with definitive answers to questions about the risks associated with the terrorist threat.

The powerful effect of increased knowledge and understanding of LNG operations and the need for LNG supply, combined with strong LNG industry activity here at home and around the world, should result in the rapid creation of a global LNG market, and a major new contributor to U.S. energy security.

I want to mention here the fine work being done by the DOE/NARUC LNG Partnership to bring the LNG story to the attention of policymakers and the general public. The DOE/NARUC primer on LNG, titled Liquefied Natural Gas: Understanding the Basic Facts, has been printed and posted to the Office of Fossil Energy’s website. And I have seen copies of NARUC’s recent LNG publications for regulators. 

Our growing reliance on imported LNG is not ideal.  But governments and oil and gas companies don’t have the luxury of working with ideal situations. We work with realities and practicalities.

And in the real world, we know that every cubic foot of domestic natural gas that we can produce – whether from existing fields; from new, deep formations; from Arctic fields; from highly prospective fields in the Rocky Mountain region and elsewhere; or from the fantastically promising potential of methane hydrates – every cubic foot we produce in the U.S. will reduce our reliance on imports and make us that much more energy secure.

The production of energy from another kind of gas – gasified coal – will also be an important factor in reducing our increasing reliance on natural gas for power generation.
The rapid adoption of Integrated Gasification Combined Cycle, or IGCC, as coal gasification technology is commonly known, would help maintain power generation from our most abundant domestic energy resource and dramatically improve environmental performance.

I want to mention here that incentives for IGCC adoption, if included in the rate base in your states, could have an important effect on the rapid adoption of IGCC.

Science and technology will provide the long-term solution to natural gas supply, as they have solved our energy challenges in the past.

One example of startling future possibilities is methane hydrates research. The latest hydrates research milestone was the recently concluded voyage of the drilling ship Uncle John in the Gulf of Mexico. Methane hydrate could, in the long term, make as much as 200,000 Tcf of gas available from domestic hydrate formations.

That is an almost unimaginably large number, but it pales in comparison to worldwide gas hydrate resources estimated at something like 4,000 million trillion cubic feet.  Someday we will find the technological key that releases the gas in methane hydrates, and when we do, our concerns about gas supply will be all but over.

As you know too well, many popular presentations of the issues related to energy and the environment can be depressingly predictable. They emphasize the difficulties we face in reaching our goal of dependable, affordable, environmentally sound energy for the future – in short, energy security.

You would think the energy sector had never before faced and overcome daunting challenges on the way to achieving one spectacular technological success after another over more than a hundred years.

I’d like to conclude this afternoon with something we don’t hear nearly enough in discussions of our energy and environmental future – an upbeat note.

I believe that, looking at the potential of new technology, and at the outcomes expected from implementation of our national energy policy, it takes a real effort not to be optimistic about our energy and environmental future.

It takes real effort to ignore the great strides we have made in recent decades in pursuit of our energy security and environmental goals, and it takes real effort to deny that we are today in sight of our objectives.

We will meet our natural gas demand requirements by taking maximum advantage of our domestic reserves and creating a new global market in LNG.

And we will meet our oil supply requirements by making the most of existing and new domestic resources, and by strengthening our international oil trading relationships.
We will extend our remarkable record of simultaneously increasing economic growth and energy efficiency, through such programs as President Bush’s Partnership for Home Energy Efficiency announced two weeks ago.

We will strengthen and add to the renewable energy sources in our portfolio.

We will, in time, develop, a hydrogen economy, simultaneously allowing us to reduce our dependence on imported oil and reduce the pressure on natural gas supply.

We will continue a welcome reliance on our abundant domestic reserves of coal by developing the technology to produce clean, efficient electricity and hydrogen fuel from coal.
A far-sighted, technology-based energy policy will work not only for the American public but for the entire energy-consuming world, as demonstrated by our many cooperative international partnerships on everything from oil and gas resource development and trade, to climate change science and technology, to next generation nuclear power plant design, to clean coal technology, to hydrogen research.

That short list gives only an inkling of the extent of our international partnerships in energy technology R&D.

All of us in the energy sector are engaged in a revolutionary activity: working to change the way people think about energy and the environment.

As a result of our efforts, energy security will someday be available to people everywhere. And the policies that got us there will be taken for granted.

That day can’t come soon enough.