Statement of
T.J. Glauthier
Deputy Secretary of Energy
to the
Committee on Energy and Natural Resources
United States Senate
September 14, 2000

Mr. Chairman and Members of the Committee:

Prospects for increasing demand for natural gas have led to a recent resurgence of interest in several projects to transport Alaskan North Slope (ANS) natural gas to market. Also contributing to this new interest is the reduced need for natural gas to maximize North Slope oil production and a change in ownership distribution of natural gas resources on the North Slope.

In recent meetings with the Department of Energy, sponsors of various proposed gas transportation projects have expressed optimism that ANS gas could be moving into the marketplace before the end of the decade. In light of this, the Energy Department has begun discussions with other Federal agencies to ensure that commercially-viable projects can, if necessary, move expeditiously through any required permitting process.

My testimony will discuss the factors that have led to this revival of interest in ANS gas transportation, including efforts underway that could help transform currently stranded gas on the North Slope into a viable new energy source that can help the United States meet both energy and environmental objectives.

Increasing Demand for Natural Gas

In 1999, the United States consumed more than 21 trillion cubic feet (tcf) of natural gas, which accounted for 23 percent of all the energy we consumed. Between now and 2020, natural gas consumption is likely to grow faster than any other major fuel source. Demand is projected to reach almost 30 tcf by 2015 and continue to rise to almost 32 tcf by 2020.

Current gas demand and projections for future growth exceed virtually all projections for gas consumption made just 8 to 10 years ago. This is largely because the U.S. economy is growing faster than anyone expected in the early 1990s. Also, more stringent environmental regulations that favor natural gas consumption are more firmly in place than a decade ago.

The most significant new demand for gas is for electricity generation. The use of natural gas to generate electric power is expected to increase almost threefold (compared to current levels). In fact, more than half of the growth in natural gas consumption over the next 20 years will come from the electricity generation market. As many as 900 of the next 1000 new power plants to be built in the United States will likely be fueled by natural gas.

Gas production in the lower 48 states is likely to increase somewhat more slowly than consumption over the next two decades. The Energy Department's Energy Information Administration currently projects that domestic gas production (outside of Alaska) will rise from 18.3 tcf in 1998 to almost 25 tcf by 2015.

Natural Gas Production, Consumption,
and Net Imports, 1970-2020 (trillion cubic feet)

Much of the difference between U.S. gas consumption and lower 48 production is likely to be made up by imports primarily from Canada. In 1999, net imports from Canada supplied the United States with 3.4 tcf of natural gas which represented 15.6 percent of U.S. consumption. These projections of supplemental gas supply requirements have raised prospects that significant quantities of currently stranded natural gas known to exist on the Alaskan North Slope can ultimately be brought to U.S. consumers.

The North Slope Gas Potential

For the more than 30 years since the giant Prudhoe Bay field was discovered on Alaska's North Slope, the focus of exploration and production has been for oil. Yet, even without a concerted effort to explore for natural gas, some 32-38 trillion cubic feet of natural gas are now estimated to be recoverable in the developed and known undeveloped fields on the North Slope.

About two-thirds of this gas is estimated to be available for sale. The balance will be consumed in oil and gas production operations on the North Slope (see below). This gas supply is equivalent to just under 20 percent of the proven gas reserves of the lower-48 states, both onshore and offshore. It has the energy equivalent of over 4 billion barrels of crude oil.

Natural gas consumption in Alaska is approximately 487 billion cubic feet per year (2/3rds of which is consumed in petroleum operations, e.g., fueling compressors, generating onsite power, providing fuel for heating and other processes). Therefore, there is clearly sufficient gas supplies to fuel "in-state" residential, commercial and industrial use while at the same time providing a potential source for export. If an economically viable way is developed to transport ANS gas to market, it is likely that exploration for natural gas will expand significantly, potentially revealing even larger supplies. U.S. Geological Survey estimates have placed the potential gas resources on the North Slope to be a mean of 63.5 tcf (1995).

Reduced Need for Natural Gas in ANS Oil Production

A typical petroleum reservoir on the North Slope is stratified into zones containing natural gas in the uppermost layer (the gas "cap"), water in the lowest layer, and crude oil sandwiched in between (Note: this is a somewhat oversimplified description in that some gas is in solution within the oil and some amounts of water can be found throughout the reservoir). As oil flows from a producing well, some gas flows out with it.

Since the giant Prudhoe Bay oil reservoir began commercial production 1977 (after its discovery in 1968), continuing oil production has decreased the thickness of the oil zone and the pressure in the zone. From the earliest days of production, Prudhoe Bay operators have reinjected most of the gas to maintain reservoir pressure (in later years, water has also been injected to squeeze the oil zone upwards). In 1981, nearly one billion cubic feet of natural gas were pumped back into the ground daily for pressure maintenance; today, more than 6 billion cubic feet are reinjected each day.

The use of the gas for pressure maintenance and improved oil recovery has been successful as illustrated by the increase in expected Prudhoe Bay recovery from the early estimates of under 10 billion barrels to the current estimate of 13 billion barrels.

The time is nearing, however, when separating and reinjecting these large quantities of natural gas will no longer be economical based on the amount of crude oil produced. Either wells that have begun producing much more gas than oil will have to be shut in, or additional investment will be needed to expand gas handling facilities. A third alternative would be to develop the means to market the available ANS gas.

Ownership Distribution of ANS Gas Reserves

Another factor that has increased the interest in the development of ANS natural gas resources has been the recent realignment of ownership of these resources. In the past, one company possessed more gas and oil resources than another; today, the gas ownership on the North Slope is essentially split evenly among three companies: Exxon-Mobil, BP and Phillips.⁽¹⁾ As a result, all companies basically are working from the same resource basis in terms of resource development and timing for commercializing these resources.

Phillips acquisition of ANS gas reserves is especially significant because for the past 31 years, the company has been a co-owner of a liquefied natural gas (LNG) facility on the Kenai Peninsula in the Cook Inlet area. The Kenai facility, commissioned by Phillips and Marathon Oil Company in 1969, is the only commercial LNG export operation in North America. During the time the facility has been in operation, LNG trade to the Pacific Rim has grown from about 3 billion cubic feet in 1969 to its current level of roughly 65 billion cubic feet per year over the past five years.

In April 1999, the Energy Department issued an order approving the extension of Phillips/Marathon's LNG export to Japan through March 2009, thereby extending the longest running LNG export sales arrangement in the world.

Natural gas for the LNG plant has been supplied from gas wells in the Cook Inlet region. Phillips acquisition of new gas reserves may mean that one day, the Kenai facility could also be acquiring its gas from the North Slope - if economical transportation can be developed.

Project Proposals for Transporting ANS Gas

	Map of Proposed ANS Gas Pipeline Projects [click for larger image]

As described to us, the private sector is currently examining three general strategies for transporting ANS gas to markets: (1) liquefied natural gas, (2) new gas pipelines running to connection points in Canada, and (3) gas-to-liquids that could be transported in the existing Trans-Alaskan oil pipeline.

Some of the proposed projects include:

Liquefied natural gas:

• Yukon Pacific project - In November 1989, the Department of Energy authorized Yukon Pacific to export 660 billion cubic feet per year of LNG from Alaska to Japan, South Korea, and Taiwan over 25 years beginning on first delivery (i.e., a total of 16.5 tcf over the term). As proposed in 1987, this project would have encompassed a proposed intrastate, 800-mile pipeline, the Trans-Alaska Gas System (TAGS), to transport ANS gas to Valdez on Alaska's southern coast, along with the liquefaction plant, marine terminal and 12-15 vessel tanker fleet. The pipeline would parallel the existing oil pipeline.

  At the time of its original 1987 application to DOE, Yukon Pacific expected TAGS to be operational and LNG exports to begin in 1996. Today, although it holds State and Federal permits, Yukon Pacific has not secured gas supplies or market commitments, and there is no timetable for construction of TAGS. Given the time lapse, environmental reviews associated with Yukon Pacific's authorizations may have to be revisited.

• Port Authority concept - Several Alaskan boroughs have joined together to propose an alternative financing option for the Yukon pipeline project. Creating a port authority with the ability to issue tax free municipal bonds could reduce the estimated $12 to $14 billion development costs of the project by some $3 billion, according to the proposers.

• The Alaska North Slope LNG Project - The Alaska North Slope LNG Sponsor Group was formed in late 1998 to develop a commercially competitive Alaskan LNG project for the East Asian market. Phillips Alaska, Inc., BP Exploration (Alaska) Inc., Foothills Pipe Line, Ltd, and Marubeni Corporation are the project sponsors. The group has completed a "Stage 1" feasibility study of a 7-million-ton per year, $7 billion project involving an LNG export facility either on the Cook Inlet (where it would make use, in part, of Phillips existing LNG facilities) or in the Port of Valdez. The "Stage 2" effort, expected to take 12-15 months, will focus on improving the project's economic competitiveness.

Canadian Pipeline Transport

• The Alaska Natural Gas Transportation System (ANGTS) - In September 1977, President Carter designated a specific transportation system known as the Alaska Natural Gas Transportation System, or ANGTS, for a streamlined certification process under the authorities of the 1976 Alaska Natural Gas Transportation Act. The proposal, selected by the President from three different projects then competing before the Federal Power Commission for certification, envisions a nearly 5,000-mile joint U.S.-Canadian overland pipeline capable of delivering up to 2.5 billion cubic feet of gas per day to markets in the lower 48 states. The President's decision was approved by a joint resolution of Congress.

  Portions of ANGTS have been constructed - the "prebuild" segments, extending 2675 miles along two legs from Alberta, Canada into the lower-48 states. The statutory framework, including the agreement on principles between the U.S. and Canada, still exists. Similarly to the Yukon Pacific situation, because of the time elapsed since authorizations were granted, environmental reviews may have to be revisited.

• Northern Gas Pipeline Project - Arctic Resources Co.'s Northern Gas Pipeline Project would run eastward from Prudhoe Bay and come ashore in the Mackenzie Delta area in Northern Canada, then follow the Mackenzie River south through the Northwest Territories to interconnect with pipelines in Alberta, Canada, providing access to lower-48 markets.

• BP Routes - BP currently is assessing the feasibility of three different pipeline routes: the northern route (similar to the Arctic Resources proposal), the ANGTS route, and a central pipeline route that would follow the ANGTS route to just below the Arctic National Wildlife Refuge and then travel southeast through the Yukon Flats National Wildlife Refuge into the Northwest Territories and south through the Mackenzie River Valley into Alberta.

Gas-to-Liquids

Advances in chemical conversion of natural gas suggest an added option for bringing stranded ANS gas to market. Using chemical "gas-to-liquids" technology, the gas could be converted into a petroleum-like liquid that is more easily transported via oil pipeline and tanker to market.

• BP gas-to-liquids project. BP is planning a $90 million test facility at Nikiski (Cook Inlet area) to validate its proprietary gas-to-liquids technology for Alaskan gas.

• DOE's R&D program. The Department of Energy is investigating several advanced gas-to-liquids technologies that could lower the cost of this option by 25 percent or more, primarily through reduced capital costs and conversion efficiency gains. Included in this effort is a cost-shared, public-private sector project to develop an "ion transport membrane," a ceramic device that would separate oxygen from air and use it to break apart methane, the chief constituent of natural gas. The result would be a mix of gases that could be combined into liquid fuels and chemicals such as diesel and naphtha.

The Issue of Future Gas Prices

The economic viability of an Alaskan gas pipeline project is clearly dependent to a great extent on anticipated natural gas prices.

This year, the average wellhead price of natural gas is likely to average more than $3.00 per thousand cubic feet, higher in nominal terms than any time on record (in constant dollars, prices are the highest since 1985). Sharp increases in demand, especially in the electric generation sector, coming on the heels of several years of relatively slow exploration and drilling, have created a tight supply situation which has contributed to the price increase.

Drilling has rebounded, however, and producers are expected to increase production to meet the demand increases, although this cannot be done overnight. Over the longer-term, however, the Energy Information Administration anticipates that prices will begin moving downward before beginning to rise again, reaching $2.81 per thousand cubic feet (1998 dollars) in 2020, according to the Annual Energy Outlook-2000 reference case.

In the past, such projections for future natural gas prices would likely have dampened interest in the investments necessary to bring ANS gas to market. However, technological progress in construction practices and equipment, in pipe materials, in welding, and in telecommunications are reducing pipeline construction and operating costs. Companies are now working on thin-walled, high-strength pipe that can lead to smaller-diameter, lower cost lines. Also, satellite-based communication systems provide real-time operating data at lower cost than traditional telephone lines.

Conclusion - DOE Remains Project Neutral But Committed to Expedited Review

As indicated above, the Federal Government has already given the necessary permits to two proposed projects to develop, transport and market natural gas from the Alaska North Slope: (1) in 1980, the Federal Energy Regulatory Commission (the successor to the Federal Power Commission) and its Canadian counterpart, the National Energy Board, approved the construction of the ANGTS, and (2) in 1989, the Department of Energy approved the Yukon Pacific application to export LNG to several Pacific Rim countries.

Although changing market conditions could result in the pursuit of these or the other project proposals, it is too early for the Department of Energy to determine which, if any, specific project proposal or combination of proposals will move forward. There are certainly sufficient natural gas reserves to support more than one project.

The Department of Energy is very supportive of the environmentally responsible development of Alaskan North Slope natural gas resources. However, it remains project neutral and believes the marketplace should determine when, how, and by whom these resources are developed.

Although none of the project sponsors to date has indicated a need for expedited regulatory procedures, the Administration is committed to reviewing and acting on any proposal in a timely and meaningful way.

In this regard, we have recently begun discussions with other Federal agencies on ways to ensure a coordinated effort, if necessary, that would expedite the review of whatever commercial project ultimately emerges as a viable candidate to bring Alaskan gas to market. The Department will be discussing this issue with the recently-created Natural Gas Interagency Working Group, established under the auspices of the National Economic Council.

Also, one of the initiatives discussed in DOE's July study, The Northeast Heating Fuel Market: Assessment and Options, was to resume the informal natural gas talks between Canada and the United States which took place from the mid-1980s to the mid-1990s, and we expect to resume these discussions shortly.

This completes my prepared statement.