Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
SAIC Conference on Oil and Gas Development
Boston, Massachusetts
August 23, 2005

Thank you and good afternoon. It’s a pleasure to be here today to talk about national energy policy – which got a big push earlier this month when President Bush was finally able to sign comprehensive energy legislation.

I’d like to broaden today’s discussion beyond oil and natural gas and talk about the provisions of the energy bill – excuse me, the Energy Policy Act of 2005 – and its contribution to overall energy policy. The change from energy bill to energy act is the biggest and best energy news in some time.

And I’d like particularly to talk about how the energy policy act addresses the concerns of the Northeast and New England.

While the energy act is a major step forward in implementing a comprehensive, far-sighted energy policy, there are a number of questions still to be answered regarding our energy future, and I’ll be talking about those as well.

Winston Churchill once spoke of finding security in diversity. The energy act follows that wise advice by taking a balanced approach to energy security. The Administration’s national energy policy employs a portfolio of fuels from a variety of sources to deliver reliable, affordable and environmentally sound energy to the American people.

Avoiding False Choices

Our energy policy and the new energy act avoid the trap of false choices that so many observers fall into when discussing ways to meet our future energy needs. We cannot be for natural gas and against coal; for hydrogen and against oil; for renewables and against nuclear power; for energy efficiency and against energy resource development and production. We have to be for them all to meet an overall 40 percent increase in demand for energy of all kinds over the next two decades to serve a growing economy and population.

We have to accept the basic premise that changing our energy picture will take years and decades, not weeks and months. It was amusing to note when Congress passed the energy bill last month that some media reported the bill would unfortunately provide no immediate relief from high oil and gas prices -- as if any responsible action government can take could provide immediate relief.

Clean Coal

We have to recognize and accept that coal, which provides just over half of our electricity and most of our base load today, will – and should – in two decades provide just over half of our total electricity and most of our base load. The difference will be in new technologies that provide greater efficiency and vastly improved environmental performance. The energy act promotes the productive use of our most abundant domestic energy resource by authorizing a 10-year Clean Coal Initiative and $2.5 billion in tax incentives for advanced clean coal technologies. Ten years from now the coal-based power plant of the future – FutureGen – should be generating electricity and producing hydrogen while emitting virtually no pollutants or greenhouse gases.

FutureGen should resolve environmental concerns about coal use in the long term but what about the short and medium term? What clean coal technologies are we going to begin applying now, when our coal power generation fleet has reached a critical aging point? Will we simply re-power the existing fleet or begin replacing the old with a new generation of advanced- technology plants?

The energy act helps to answer that question by encouraging the deployment of a clean coal technology – gasification – that has already demonstrated great efficiencies and high environmental performance. Industry today can take advantage of a 20 percent credit for industrial gasification projects; power generators can employ a 20 percent investment tax credit to develop integrated gasification combined cycle projects, and a 15 percent credit for other advanced clean coal projects; and the Secretary of Energy has the authority to allocate up to $800 million for IGCC projects, $500 million for other advanced clean coal technologies, and $350 million for industrial gasification.

Thanks to the energy act, the future of clean coal is assured – but there are still important questions to be answered. Among the most important are:

• How will we pay for the transition of new technology from demonstration projects to commercial deployment?
• What sort of incentives can government offer?
• Will state regulators allow industry to pass through the cost of new technology to customers?
• Will Public Utility Commissions catch up to industry in adopting environmental risk management programs?
• And will governments factor in the overall health, quality of life and cost benefits to society of greatly reduced mercury emissions, SOX and NOX emissions, and particulate emissions?

The answers to these and other questions will help to determine our energy security in this century.

Nuclear Power

We have to recognize also that nuclear power, which today provides 20 percent of our electricity, will – and should – in two decades provide 20 percent of our electricity. The difference will be in advanced reactor design that will make nuclear power even safer and more proliferation-resistant. The energy bill ensures that nuclear power will continue as a viable clean energy source by reauthorizing the Price-Anderson Act and providing $1.5 billion in tax incentives to encourage new investment in nuclear power.

Electricity Generation and Transmission

Electric reliability and the modernization and expansion of our antiquated electricity transmission grid are vital to our energy future. The energy act helps ensure the reliability of the electricity system through several provisions, the most important of which make electric reliability rules mandatory on all market participants, and create a self-regulating reliability organization to enforce reliability rules.

Other provisions encourage critically needed investment in energy infrastructure systems, among them: repeal of the outdated PUHCA and the transfer of strong consumer protection authorities to FERC and the states; establishment of conditions for eliminating PURPA’s mandatory purchase obligation, an obligation that costs consumers billions of dollars, and revision of the criteria for new qualifying facilities that seek to sell power under the mandatory purchase obligation.

Renewable Energy

Renewable energy use will grow significantly in decades to come. Renewable sources of energy, including hydropower, account for about seven percent of U.S. energy today, and in 20 years time likely will account for about 7 percent of a much larger U.S. energy market. The energy act promotes the use of renewables such as solar, wind, biomass, geothermal and landfill natural gas through mandates for purchase of electricity from renewable sources, increased production from federal lands, tax incentives for electricity production from renewables, and tax incentives for residential solar energy equipment, among other provisions.

The energy act promotes the ultimate renewable – hydrogen – by fully funding the President’s hydrogen initiatives, which will in the long term transform our transportation sector, significantly reduce our reliance on imported oil, and underpin an economy of unheard of efficiency and cleanliness.

Energy Efficiency

We all recognize that without our remarkable recent history of energy efficiency gains, the challenge of meeting our future energy requirements might be insurmountable. From 1972 to 2000, our economy grew by over 125 percent, yet energy use increased by only 30 percent. One-half to two-thirds of that very favorable growth-to-energy-consumption ratio can be ascribed to increasingly efficient energy use. Continuing efficiency improvement is vital to our energy security, and the Energy Information Administration projects a 35 to 40 percent improvement in energy intensity – energy consumption per dollar of Gross Domestic Product – by 2025.

The energy act promotes energy efficiency with, among other provisions, new standards for energy-intensive products; tax incentives for the purchase of energy efficient appliances and hybrid and fuel-cell vehicles, as well as for combined heat and power projects; and tax credits for consumers to make an array of energy efficiency improvements to their homes.

Oil and Natural Gas

Finally, we have to recognize the hard reality that oil and natural gas, which today account for about two-thirds of our total energy needs, will in two decades account for about two-thirds of our total energy needs. That may not be a fact that many want to hear but it is a fact nonetheless.  The energy act recognizes that hard reality.

I’ve listed some of the many provisions that promote the continued and expanded use of fuels other than natural gas and oil. Maximizing the use of existing fuels other than oil and natural gas, and providing for the rapid development of new fuels, should help to reduce the rate of demand growth for oil and natural gas.

Oil
Let’s take a look at where we stand historically regarding domestic oil and gas production. U.S. oil production peaked at over 11 million barrels a day in 1970. Today we are producing 5.4 million barrels a day. Looking ahead to 2025, we project production to remain flat if we develop ANWR. Otherwise, it drops to 4.7 million barrels a day. We currently import about 10.6 million barrels of oil a day, a number projected to rise to about 20 million barrels over the next 20 years.

That’s the bad news. The good news is that there are 22 billion barrels of domestic proved reserves awaiting development and production, as well as the estimated 10-plus billion barrels in ANWR. An additional 377 billion barrels of conventional reserves await the advanced technology and price environment that will make them economic to produce. And we estimate yet another 315 billion barrels of recoverable reserves are contained in our total domestic oil shale resource of 1.8 trillion barrels of oil.

We are not running out of oil.

The high price of oil is holding back an otherwise healthy and growing economy.  Alan Greenspan recently estimated that oil prices could be knocking seven-tenths of a percent off GDP growth this year – and that was before the sudden run-up to the mid-$60 range.  High prices, do, however, have positive effects: they stimulate changes in consumer behavior, as evidenced by the fact that oil demand has actually stagnated in the United States this year, even as GDP has grown by 3.4 percent – and they will stimulate investment by industry in the costly technology required to reach previously uneconomic reserves. 

Natural Gas
On the natural gas side, U.S. production peaked in 1974 at 21.7 Tcf for the year. We produced 19 Tcf last year and we project production of 19.5 Tcf in 20 years.

Proved reserves total 187 Tcf, and total reserves – proved and unproved – total over 1,337 Tcf. Alaskan reserves are estimated at 27 Tcf.

For the long term, research by government and industry is underway to unlock the fantastic potential of methane hydrates, with their potential 200,000 Tcf domestic resource.

For imported gas, LNG is where the action is. Last year we imported 650 Bcf of gas in the form of LNG. That should increase nearly 10-fold by 2025, to about 6 Tcf a year. Our imports by pipeline from Canada, which total 3 Tcf today, are expected to decline to 2.5 Tcf by 2025.

Earlier this year, natural gas in storage was encouragingly high but the positive gap between this year’s storage figures and historical figures is disappearing rapidly. Working gas in storage as of August 12 was actually 4 Bcf lower than at this time last year and only 140 Bcf above the 5-year average. We could face a natural gas crunch as we finish out this hot summer season and prepare for the coming heating season.

Prices for natural gas have risen rapidly in what one market analyst has called a “mindless stampede.” 

That’s the oil and gas supply story by the numbers. The demand story can be stated simply: an approximate one-third increase over the next 20 years.

The one indisputable lesson we can take from these numbers is that we must produce every barrel of domestic crude oil, and every thousand cubic feet of domestic natural gas that we can – not to reduce import growth, but to reduce the rate of increase of import growth. Those are the facts.

To encourage domestic reserve development, the energy act streamlines the regulatory process and speeds up leasing and permitting on federal lands. And to help us better understand our oil and gas resources, the act mandates a survey of all Outer Continental Shelf resources currently in development or under moratoria.

The Alaska Natural Gas Pipeline project is approved and underway, and we hope to have approval for development of ANWR later this year. On the import side, the energy act balances regulatory certainty with state protections 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 energy act also encourages improvements to the natural gas transportation system by reducing the depreciation of new natural gas distribution pipelines from 20 to 15 years; clarifying the depreciation period for natural gas gathering lines at seven years; allowing FERC to authorize companies to provide new gas storage capacity and related services at market-based rates; and setting deadlines under the Coastal Zone Management Act for the construction of interstate natural gas pipelines.

Challenges in New England

New England is affected, to a greater or lesser degree, by every one of these issues – and it faces specific challenges, the first of which is natural gas – securing an adequate supply and transporting it to the consumer at a reasonable price. Spiraling natural gas prices are having a negative effect on the national economy and on the New England economy and people in particular.

Because New England relies on natural gas for more than 40 percent of its electricity, as well as for space heating in winter, household budgets are being strained to a greater degree than elsewhere by the cost of energy.

New England endured a painful choice in January 2004, when average power prices hit 30 cents per kilowatt hour, a 600-percent increase over then-normal prices. An eighth of the region's power generators shut down either because they lacked gas or because they sold their gas to residential markets to keep homes warm and pilots lights burning.

People are losing their jobs because suppliers are diverting gas liquids from industrial feedstock to more profitable natural gas. Companies that require large volumes of natural gas for feedstock or for industrial processes face a choice between going out of business or relocating to lower price environments overseas.

Pipeline constraints are causing great concern. Many of you have heard New England’s natural gas transportation problem summarized in a short and graphic phrase: “2,000 miles of packed pipe between the Gulf of Mexico and Boston.”

One solution to the long-distance transportation bottleneck seems obvious: additional LNG import facilities located in the Northeast. But how is that gas going to get from the LNG terminal to the consumer when it can only travel through an already constrained regional storage and transportation system?

The New England Governor’s Conference recent study on meeting future natural gas demand states that the region has just five years to -- and I quote -- “…accomplish a substantial amount of demand reduction or infrastructure development.”  

The governors’ study goes on to say – and I quote again – “…that expansion of fuel switching, energy efficiency and renewable energy programs may be the least expensive ways to improve gas supply reliability while improving fuel diversity. On the other hand, expansion of LNG delivery and storage terminals provides considerably greater improvements to gas supply reliability than those scenarios.”

And the New England Council, in its May report on the imperatives for additional LNG supply, minces no words when it concludes that: additional supplies of natural gas are needed before 2010; LNG is the most realistic supply-infrastructure option to meet the economic imperative for additional supplies of natural gas in the region, and additional infrastructure construction is required now.

As I said earlier, the energy act addresses the LNG option that the Governors’ Conference finds most attractive, and the Council finds imperative, by clarifying the balance between FERC’s role and the states’ authority in siting new LNG facilities. This should be of great interest here in New England, where the public debate about siting has been lively and contentious.

The Department of Energy has also done its part by working with our international partners to promote the growth of a global LNG market, and by commissioning the Sandia National Laboratory’s invaluable study, released in December of last year, on the safety and security of LNG terminal operations.

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. Throughout the nearly 40-year history of LNG operations worldwide, and more than 35,000 cargo deliveries, there have been no significant releases of LNG related to a breach or failure of a cargo tank.

Sandia lays out the multiple existing techniques for enhancing LNG spill safety and security management and 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, including:  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.

Again, this should be of particular interest – and usefulness – to New England communities now debating new LNG facilities.

In addition to its LNG provisions, the energy act, as we have seen, also addresses every other need considered by the governors’ study -- energy efficiency, renewable energy, gas supply reliability and fuel diversity.

Heating oil is another area of special concern to the New England region. You are America’s leading consumer of heating oil, and you import most of your supply – for good reason. Domestic supplies of heating oil are affected by refinery constraints, with ever-increasing amounts of crude oil being funneled through a decreasing number of refineries. Not one new refinery has been built here in three decades, and half the refineries that existed in 1981 have been closed. Outages at refineries running all-out are contributing to the rise in crude oil and product prices.

Supplies of imported heating oil, mainly from Europe, can be expected to become scarcer as Europe devotes more of its refinery production to serving its own rapidly growing fleet of diesel-powered automobiles.

And speaking of diesel, the availability of diesel oil as a switchable fuel for natural gas may quickly become a moot point as environmental standards stiffen, taking diesel off the table.

Conclusion

I have strayed from the specific topic of this Conference because it seems to me that enactment of the Energy Act of 2005 is too important for New England’s energy future to pass over lightly. The Act’s provisions addressing our national energy security concerns, taken together with urgent actions to be undertaken by the New England states, hold great promise for overcoming your and our energy challenges.

There is a great deal of work yet to be done as we move toward our goal of cleaner and more efficient energy. Among the most important tasks ahead is helping the public to understand the dimension of the energy challenge.

The energy sector is huge and extremely complex, and the public should understand that we need every one of its many component parts working in conjunction with and complementing one another. There are no fast and easy answers, no “secret” solutions. We in government and industry have a hard, continuous and long-term job ahead. We must work in partnership to see our national energy policy through to success by researching, developing and applying the new technologies needed to guarantee our future energy security.

In New England’s case, perhaps the most pressing job is to enlist public support for the LNG and transportation infrastructure that is vital to the region’s economic survival. 
Fortunately, I believe we are forging a consensus view on the larger energy issues, and the public debate in the future will be more procedural than philosophical.

When and how do we take the next steps? How do we efficiently choose one promising technology over another? How do we proceed from demonstration to commercial application? How do we finance projects? How do we best manage risk and extract maximum benefit?

Those are the kinds of questions we face, and they are largely for the private sector to answer, as they have in the past, with the full participation of an aware and educated public, and subject to the monitoring and approval of public-spirited federal, state and local public officials.

The nation’s energy challenges are daunting but we are on the way to resolving them. New England’s particular energy challenges are especially daunting, and resolving them will require thoughtful, rapid and decisive action.

The energy world is one of facts and realities. We can’t fudge them, evade them, or ignore them. Like time, energy waits for no one.  For New England, the time to act is now.