Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
Propeller Club 78th Annual Convention
and Merchant Marine Conference
Boston, Massachusetts
October 5, 2005

Thank you and good morning. 

It’s a pleasure to be here with you to discuss our national energy policy, with particular reference to Liquefied Natural Gas, and to the critical role the maritime industry must play in meeting U.S. and world energy needs over the next 20 years.

No discussion of energy policy can begin at this time without reference to the damage and supply interruptions caused by hurricanes Katrina and Rita last month.

As of last Friday (September 30), nearly 60 percent of the manned platforms and 25 percent of the rigs in the Gulf were still evacuated.  Ninety-eight percent of Gulf oil production and 80 percent of gas production was still shut in.  Since September 26, we have lost a total of 41 million barrels of oil production, well over seven percent of yearly Gulf production, and nearly 200 Bcf of gas, more than 5 percent of yearly gas production. 
Complete repairs to production platforms and associated facilities will take months and there are reports that damaged or lost drilling rigs – on which we depend for future production – could take longer to repair or replace.

In addition, refineries accounting for more than 3 million of the 7-plus million barrels of oil refined on or near the Gulf Coast every day were shut down as of last Friday.

Producers, refiners and pipeline operators are working hard to get their operations back on line, and the American people will be counting on the maritime industry in the short term to help make up the shortfall in refinery output by increasing the delivery of imported refined products.

Once the affected refineries are back on line, I would expect that we will then be counting on the industry to increase deliveries of crude oil and LNG to at least partially compensate for lost production from the Gulf.

You are facing big challenges – and a big responsibility – and meeting them will require nimbleness and flexibility from your industry. Based on past performance, no one can doubt that you will rise to the occasion.

Turning to the larger energy picture, I’d like to run down some numbers that illustrate the world’s growing appetite for energy, especially for oil and natural gas. Using 2002 as a baseline, the Energy Information Administration projects world total energy consumption should grow by about 35 percent by the year 2015, and by 57 percent by 2025.

Oil demand is expected to grow from 78 million barrels a day to 103 million barrels a day by 2015 – a 33 percent increase -- and to 119 million barrels a day by 2025 – a 52 percent increase.

China’s oil consumption alone is projected grow at a 7.5 percent clip through 2010, after which it moderates to a 2.5 percent rate.

And oil imports to North America are expected to grow by about eight million barrels a day, from 13 million barrels a day in 2002 to 21 million barrels a day in 2025 – an overall 61 percent increase.

OPEC countries are expected to account for about 60 percent of the increase in production to meet this demand, but non-OPEC countries in the Caspian Basin, West Africa, Central and South America should contribute about 17 million barrels a day to the total.

This all adds up to long-term bullish news for the oil and oil products shipping industry. The future is clear: More tankers trading along established and new shipping routes to deliver oil and products to both mature and developing economies countries all over the world.

But that’s only part of the challenge maritime shippers face.

Increasing demand for natural gas is spurring the phenomenally rapid growth of a new global market in LNG – and for the tanker fleet to service it.

Natural gas is the world’s fastest growing energy source, with projected average annual consumption growth of 2.5 percent through 2025. That will take us from total consumption of 92 Trillion cubic feet of gas to 156 Tcf, a 70 percent increase.

Much of the world’s enormous natural gas resource is “stranded,” that is, it is located in places from which  it is difficult if not impossible to transport it via pipeline to a customer. 
The solution is to ship it via tanker in the form of LNG, a solution that has been around for 40 years or more but that was not until recently a significant factor in the natural gas industry. That has changed, and will continue to change.

The overall picture can be summed up in a few words: The world’s energy consumers – and potential consumers – want and need natural gas, and a global market in LNG must be developed to supply them.

The Department of Energy has been promoting the growth of a global market in LNG since the First International LNG Summit we hosted in 2003 attracted hundreds of representatives from nearly two dozen producing and consuming nations, and from industry. 

Since that meeting, developments in the LNG market have all been in the direction of growth and development, and the Department of Energy’s views and activities on behalf of a global LNG market have only strengthened.

The United States will not be the only market for LNG in the world, but it will be the largest, and the most convenient to suppliers, accessible from the Pacific Ocean, the Gulf of Mexico and the Atlantic.

The U.S. market can provide the base load guarantees needed by governments and industry in the Americas to finance the development of natural gas and LNG infrastructure.
And it is not just the amount of LNG the U.S. expects to import that will make it so important to the world LNG market. We are and intend to remain a more attractive customer for producers and marketers of natural gas than any other consuming nation in the world. We offer an established, reliable, continent-spanning free market in natural gas unlike that found anyplace else.  Our natural gas market is well regulated and its activities are transparent.

The United States will be a valued customer and trading partner to producing countries and all the other participants in this huge global trading system of the near future.
LNG has already grown to become an integral contributor to meeting U.S. energy demand – and we are on course and moving fast toward becoming the center of a global LNG market.

The numbers prove it.

In 2002, LNG imports to the U.S. totaled 229 Bcf, a mere one percent of natural gas consumption and 6 percent of imported gas. In 2003, imports totaled 506 Bcf, or 13 percent of all imported gas -- more than doubling 2002’s total. In 2004, LNG accounted for 15 percent of total imports, reaching 650 Bcf, nearly tripling in volume in just two years.

The LNG numbers are relatively flat so far this year, due to some slowness in infrastructure development on the production side, but with a large market filled with impatient consumers demanding more gas, those glitches should prove temporary. In fact, we estimate that LNG imports to the U.S. will reach well over 4 Tcf by 2015, accounting for 15 percent of total natural gas consumption, and 6.5 Tcf by 2025 – 10 times 2004’s volume and more than 20 percent of total consumption.

LNG’s growth in the United States is so rapid we’re having trouble keeping track of it. In 2003 the EIA forecast 13 Bcf a day of LNG would be needed to supply U.S. demand in 2025. Last year, the forecast rose to 15 Bcf, and the latest energy outlook has raised the ante to 17 Bcf.

Today, five re-gasification terminals – in Massachusetts, Maryland, Georgia and onshore and offshore Louisiana – serve the U.S. market. Several new Gulf area terminals are under construction, and nearly two dozen more have been proposed for the area. The Gulf is so hospitable to LNG that as much as 70 percent of all LNG imports to the U.S. could enter the country via the Gulf in 2025.

In addition to the Gulf, plans are well advanced for two new terminals on the Canadian East Coast and there are upwards of 50 proposals for additional LNG terminals on the drawing boards for new LNG plants in North America, with new ones being added at regular intervals.

The recently enacted energy bill includes a provision that should help improve the procedures for the siting of LNG terminals by affirming FERC’s exclusive authority to authorize new LNG import terminals while leaving intact the considerable authority states already enjoy in reviewing LNG import terminal proposals, and giving the states new authority to conduct safety inspections.

The principal – perhaps the only – obstacle to the rapid growth of the LNG market is concern about the safety of LNG operations.

New technology, practices and processes must be added to already established and successful ship and terminal operations to protect the rapidly growing LNG industry in the face of threats of terrorist attack, as well as traditional safety and security concerns. 

Thanks to the professionalism of the LNG tanker industry’s people, and to their concern for the safety and security of tanker operations, there have been no significant releases of LNG related to a breach or failure of a cargo tank over 40 years of LNG operations worldwide, and more than 35,000 cargo deliveries.

LNG is safe, but we must make it even safer – and we must educate our citizens about LNG’s safety, and the important economic benefit it delivers.    

The burgeoning LNG market represents both a terrific opportunity for the LNG tanker industry – and a tremendous responsibility for the continued safe conduct of tanker operations.

As you know, the Department of Energy is doing its part to help ensure safe and secure LNG operations, most notably with the release last year of the Sandia National Laboratory’s comprehensive study of LNG tanker safety and security and risk mitigation strategies over water.

The Sandia study for the first time gives public officials and planners the science-based tool they need to evaluate the safety and security issues surrounding the siting of an LNG gasification facility.

The Sandia study provides guidance on the use of risk-based management and planning to significantly minimize any threat to public safety. This guidance will be especially valuable in defining and determining site-specific risk for LNG facilities.

The Sandia study recognizes the proven safety record of the LNG shipping industry and attributes the safety record to engineering design, multiple layers of safety and security measures, and the creation of thorough safety, security and emergency response plans.
Sandia lays out the multiple existing techniques for enhancing LNG spill safety and security management and for reducing the potential for a large LNG spill due to intentional threats.

The study also recommends a number of management approaches to reducing the risk to public safety and property from LNG spills.

The approaches include operation and safety management, improved modeling and analysis, improvements in ship and security system inspections, establishment and maintenance of safety zones, and advances in LNG off-loading technologies.

With the definitive results of the Sandia study at hand, stakeholders at a specific site can engage more confidently in policy and procedural deliberations over the low probability of an LNG incident.

The Sandia study has already proven to be a much-needed, highly popular and effective guide, and we can expect continual improvements to worldwide LNG operations as the study’s findings and recommendations are adopted and refined by other LNG facility operators around the world.

The Department of Energy stands ready to assist with the industry’s collective safety effort by making our technical expertise available to interested industry and government participants. 

The United States is eager to promote the formation of partnerships in an expanded energy trade network.  It is a key element in our overall energy policy. We are continually working to initiate and improve energy cooperation and trade relationships bi-laterally and multilaterally through regional agreements.

The importance of trade and the bonds of cooperation, understanding and friendship forged by the pursuit of shared interests cannot be overestimated. Improved and expanded energy trade relations among nations will underpin and fuel economic growth and development.

The growing LNG market can help accomplish these things. We believe current and future LNG-exporting nations will recognize and capitalize on this opportunity, hitching their energy and natural gas development needs to the engine of U.S. LNG demand and realizing the economic benefits of rapid development.

The maritime shipping industry provides the indispensable connection between those nations that have natural gas and want customers for it, and those nations that need natural gas and want a reliable source of supply.

The creation of this vast global market can only be achieved if the tanker industry grows, and if it continues to add to its reputation for safe and secure operations.
I don’t want you to feel any pressure … but the future of the industry is in your hands. We’re relying on you.