[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
MEETING AMERICA'S NATURAL GAS DEMAND: ARE WE IN A CRISIS?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 14, 2005
__________
Serial No. 109-93
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy and Resources
DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida BRIAN HIGGINS, New York
JOHN M. McHUGH, New York TOM LANTOS, California
PATRICK T. McHENRY, North Carolina DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Brady, Staff Director
Dave Solan, Professional Staff Member
Lori Gavaghan, Clerk
Richard Butcher, Minority Professional Staff Member
C O N T E N T S
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Page
Hearing held on September 14, 2005............................... 1
Statement of:
Caruso, Guy, Administrator, Energy Information
Administration, Department of Energy....................... 15
Magruder, Logan, president, Independent Petroleum Association
of Mountain States......................................... 52
Slocum, Tyson, research director, energy program, Public
Citizen.................................................... 59
Watson, Rebecca, Assistant Secretary for Land and Minerals
Management, Department of the Interior..................... 29
Zenker, Michael, senior director, North American Natural Gas,
Cambridge Energy Research Associates....................... 44
Letters, statements, etc., submitted for the record by:
Caruso, Guy, Administrator, Energy Information
Administration, Department of Energy, prepared statement of 17
Issa, Hon. Darrell E., a Representative in Congress from the
State of California, prepared statement of................. 4
Magruder, Logan, president, Independent Petroleum Association
of Mountain States, prepared statement of.................. 54
Slocum, Tyson, research director, energy program, Public
Citizen, prepared statement of............................. 61
Watson, Hon. Diane E., a Representative in Congress from the
State of California, prepared statement of................. 9
Watson, Rebecca, Assistant Secretary for Land and Minerals
Management, Department of the Interior, prepared statement
of......................................................... 31
Zenker, Michael, senior director, North American Natural Gas,
Cambridge Energy Research Associates, prepared statement of 47
MEETING AMERICA'S NATURAL GAS DEMAND: ARE WE IN A CRISIS?
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WEDNESDAY, SEPTEMBER 14, 2005
House of Representatives,
Subcommittee on Energy and Resources,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:22 p.m., in
room 2154, Rayburn House Office Building, Hon. Darrell E. Issa
(chairman of the subcommittee) presiding.
Present: Representatives Issa, Marchant, Watson, and
Higgins.
Staff present: Larry Brady, staff director; Lori Gavaghan,
legislative clerk; Dave Solan and Chase Huntley, professional
staff members; Richard Butcher, minority professional staff
member; and Jean Gosa, minority assistant clerk.
Mr. Issa. Good afternoon. First, as the Chair I would like
to call this hearing to order. I want to apologize to all of
those of you here for the hearing today because of a conflict
by both the chairman and the ranking member required to be at
another vote. Once again, I want to thank you for being here.
Natural gas prices have been at record highs because of an
ongoing tight supply and demand situation in the United States.
Hurricane Katrina has put an increased pressure on markets. A
healthy economy has already stressed the capacity of natural
gas both here and abroad. Katrina, though, awakened us to the
possibility of a supply side shock and that we could find a
significant portion of our natural gas supply shut off for a
not so short period of time.
According to the Energy Information Administration, we are
facing high energy costs this winter, spending on natural gas
is forecasted to be 52 percent higher nationwide, with
residential consumers in the upper Midwest experiencing an
increase of 71 percent over last year to heat their homes.
U.S. industry will also be impacted by higher prices
because it derives 40 percent of its primary energy from
natural gas. Many industry users do not have the option of
switching to other sources of fuel when natural gas prices
rise. As a result of high prices, we are no longer the world's
top location for making chemicals. We are now a net importer of
chemicals.
Ongoing high prices have also helped to shutter 21 nitrogen
fertilizer production facilities and production has moved
overseas along with the highpaying jobs that industry normally
has with it.
Hurricane Katrina is not the sole cause for this sobering
market outlook. In fact, the tight supply and demand situation
and stubbornly high prices have been an ongoing problem for at
least 5 years. The natural gas market has become a victim of
its own success. Most newly-constructed homes are heated by
natural gas. It is a clean burning and efficient fuel compared
to other fossil fuel alternatives.
But the biggest reason for the increase in year-round
demand for natural gas has come from it being the preferred
fuel and choice for electrical generation. Since the 1990's,
for right or wrong purposes, almost every new electric power
plant is powered by natural gas. From 1996 to 2000, the use of
natural gas for electricity grew at an annual rate of 11
percent a year. It is time to diversify away from natural gas
as a cure-all for electricity generation. The recently enacted
energy bill is a step in the right direction toward that goal.
Clearly, events have caused a reexamination, or should
cause a reexamination of our policies and practices in terms of
domestic production. Some producers have suggested that onshore
drilling operations should take place throughout the year
rather than being restricted to seasonal activity, because it
may have less of an environmental impact than dismantling,
transporting and then rebuilding drilling pads. Likewise, some
have suggested that natural gas exploration and production
activities in the Outer Continental Shelf may have less of an
environmental impact than oil drilling. I would appreciate any
comments our knowledgeable witnesses may have on these
activities and others.
The fact is that we cannot meet our current and future
needs without taking a number of positive steps. We must build
flexibility to meet the demand for increasing domestic
production. Without a doubt we must increase imports, at least
in the short run, of liquefied natural gas. We must acknowledge
that the most important use of natural gas is for industrial
employment. It's for those items which do not have substitutes.
Certainly, the fertilizer industry, which today is leaving the
United States, is a classic example of an idustry dependent on
natural gas, as is the production of pharmaceutical products
and many other chemicals and plastics.
It has often been said that natural gas is too good to
burn, and yet that is what we are doing here today. There is a
fundamental disconnect between our appetite for natural gas and
our willingness to make the hard choices to satisfy it. It is
time that we look at these hard choices.
Today we will examine the current and future sources of
supply for natural gas consumed in the United States, as well
as the effect of regulatory policies on domestic production. In
short, where will our natural gas come from and what are the
economic implications of the choices we make to supply our
demand for natural gas?
It is often said here in Congress, and I will say it here
because it fits, that we are facing a crisis in terms of
adequate supplies, and with the effect of price on industry and
employment we will be exporting more jobs in the short run. If
we don't take steps, we will be exporting jobs in the long run.
Will homeowners be able to afford their natural gas heating
bills this winter, and if prices continue to skyrocket will
they be able to afford it next winter?
Katrina has made an already bad situation much worse. Let
us not continue a policy that makes it inevitably worse even
without hurricanes.
We all look forward to hearing from our distinguished
panel. We are pleased to have here today the Honorable Guy
Caruso, Administrator of the Energy Information Administration
at the U.S. Department of Energy. Welcome back again. The
Honorable Rebecca Watson, Assistant Secretary of Land and
Mineral Management in the Department of Interior. Welcome. Mr.
Michael Zenker, senior director of North American Natural Gas
at Cambridge Energy Research Associates. Thanks, Michael. Mr.
Logan Magruder, president of the Independent Petroleum
Association of Mountain States, and, I might say, a significant
California employer; and Mr. Tyson Slocum, research director of
the energy program at Public Citizen. I look forward to hearing
their testimony.
I would now yield to the ranking member, the gentlewoman
from California, for her opening statement.
[The prepared statement of Hon. Darrell E. Issa follows:]
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Ms. Watson of California. Thank you, Mr. Chairman, and
thank you so much for convening today's crucial, very, very
important hearing. This subcommittee will play a vital role in
examining critical issues regarding America's use of natural
gas and its cost to consumers.
In the upcoming months America will be faced with critical
choices in considering the amount of energy it uses, how much
it pays for it, and what the long-term outlook is for energy
consumption in our Nation. Now, we are here to examine the
current supply and demand of natural gas and investigate what
we can do to help America's consumers from paying such enormous
costs for these essential goods.
Energy is in very high demand in the United States, and our
country alone consumes 25 percent of the world's total energy
supply and 24 percent of the world's natural gas supply. Demand
is not standing still, but it is growing. Our current natural
gas consumption rate is steadily increasing and prices are, as
you know, at an all-time high. It is estimated by the Energy
Information Administration that this upcoming winter the cost
to heat houses using natural gas will be from 52 percent to 71
percent higher than it was last year. The price,
differentially, depends on your location in the country.
Estimates from the American Council for an Energy Efficient
Economy this year said the cost, adjusted for the higher
transportation, natural gas, and electricity costs, will be an
additional $2,105 to the average American household. We are in
a situation where people will have to choose between adequately
heating their homes and purchasing the bare necessities for
survival. So this committee must investigate solutions that can
help alleviate this problem.
Why is the United States increasing consumption and paying
these tremendous amounts for natural gas? We have seen prices
of natural gas soar over the past year, with wholesale prices
more than doubling from less than $5 per million Btu last
September to all-time record highs of around $11 today. Energy
companies are taking in revenues at rates never seen before.
While I stand by the American ideal of a free-market society,
my constituents should not be held hostage to heating and
rising gas prices that will crush their household's budget. So
I am greatly concerned, because we just had this debate with
our seniors over prescription drug prices. Just imagine the
added burden for this sector of American society, in addition
to a majority of Americans that struggle just to make ends
meet.
The effects of Hurricane Katrina have also played a huge
role in our offshore natural gas production in the Gulf of
Mexico, as well as onshore natural gas processing facilities.
Our energy problems preceded Hurricane Katrina with tightness
resulting from surging demand over the past few years. What
Katrina did was expose underlying problems in our energy
markets and infrastructure that we must address to avoid
spreading the pain that has been inflicted upon those in the
gulf coast and the broader country. In particular, I reiterate
that I am concerned about the impact of higher energy prices on
those least able to absorb the cost.
While much of the focus has been on a single fuel such as
today's topic of natural gas, the reality is that our problems
are much deeper and more interrelated. In the past we have been
able to switch between energy resources to relieve tightness in
a single market. What the United States faces now is tightness
in all major energy markets, which has put the country in an
energy straightjacket. As a result, we need to look at reducing
the demand for all energy to help rebalance our market.
Like so many of my fellow Californians, I can speak
firsthand on the energy crisis in my home State, which was
caused by short-sighted planning. Katrina is a natural disaster
of catastrophic proportions. Supply side shock, whether it is
by market manipulation, price gouging, production disaster, or
transportation difficulties, must not be allowed to cripple our
country.
Unfortunately, the recently passed energy bill is
environmentally costly, favors large businesses, and contains
inadequate solutions to reduce foreign energy dependence. I ask
that we revisit and support responsible legislation that will
produce effective long-term solutions.
I am fully aware that our Nation must find alternative
energy sources, but we must do so in a very responsible way and
in a way that will not sacrifice our precious resources such as
the Arctic National Wildlife Refuge. We do not need to weaken
environmental responsibility regulations.
According to the Bureau of Land Management, the data
clearly shows that they have issued far more drilling permits
than the industry has been able to use. Yes, we are in a
crisis, but a crisis does not mean that we should not act
responsibly and reasonably with due care. As legislators, we
should direct resources to the next generation of science with
the knowledge that it will produce more energy more efficiently
with less risk to the environment than the outdated and
wasteful practices of the past.
Refocusing on the topic of the day, the bottom line is we
need to facilitate the short and long-term solutions for
effective natural gas production and consumption while keeping
prices affordable.
Mr. Chairman, I look forward to the testimony, and I thank
you for bringing this subject to us today.
I yield back.
[The prepared statement of Hon. Diane E. Watson follows:]
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Mr. Issa. Thank you very much, Ms. Watson. Is there any
other Member that wants to make an opening statement? The Chair
recognizes the gentleman from New York for his opening
statement.
Mr. Higgins. Thank you very much, Mr. Chairman. I don't
have a written statement, but I do want to offer some thoughts
relative to perspective.
What you see happening here is indicative of not having an
effective energy policy in this situation relative to the
demands that our economy places on the supply of natural gas
and oil, which puts us in a very, very difficult position, from
a practical standpoint, and from an economic standpoint.
If you look at the history of this economy, any time
natural gas prices and oil prices increase from 50 percent from
the year before, the world economy and the national economy go
into recession. They go into recession because what typically
happens is the producers are in a very small concentration of
countries, and they are taking all of the revenues, and all the
money that would typically be spent in our economy for other
things goes to those countries. Thus, people's ability to buy
things and to sell things in the traditional economy is
significantly compromised.
But what most concerns me, at least in the shorter term, is
the place that I come from, Buffalo, NY. Buffalo, NY, like many
northeastern cities, is economically depressed. Buffalo is
statistically by population loss and job loss the weakest
economy in the entire State of New York. We also experience
very cold winters. When you look at statistics, the fact of the
matter is that there is going to be a 50 to 75 percent increase
in the cost of home heating using natural gas. That doesn't
even speak to the other sources of home heating.
Additionally, this administration cuts from year in and
year out the appropriations for the Home Energy Assistance
Program, which directly impacts low income and senior citizens
in the Buffalo, NY, area, and throughout the entire Northeast
and those other regions of the country who experience
inordinately cold temperatures during the winter months.
So what I would like to hear today is less of an analysis
of the problem and more solution-based responses. I know that
perhaps that sounds like an oversimplification, but I think, we
have enough analysis in front of us. We see that the natural
trends, the traditional trends, have had an adverse impact
relative to natural gas supply not meeting the demand. We also
see that a natural disaster has also adversely impacted the
supply side of providing natural gas.
But I think what people, particularly in Buffalo, NY and
throughout this Nation are looking for, are clear, decisive
answers to these problems, both in the short and the long term.
With this expert panel of witnesses, that is what I am hoping
to hear from this testimony today.
Thank you very much.
Mr. Issa. Thank you. I might also agree with the gentleman
from New York that we focus on, well, if we went from a SUV to
a more efficient vehicle how much fuel we could save, no
question at all.
However, if you drive 15,000 miles a year on a 20-mile per
gallon vehicle, you are only consuming $2,250 at $3 a gallon
worth of fuel. So very clearly, we have been looking at the one
area that has a limit to how much we really consume and how
easily we can reduce it. Having been a Clevelander, I would
share with the gentleman I do understand it is much more
difficult to find a way to keep your home warm by simple
changes in choice.
With that, I would ask that all of the witnesses rise and
also anyone who is going to advise the witnesses to take the
oath.
Ms. Watson of California. Mr. Chair, would you yield for a
just a second?
Mr. Issa. Certainly.
Ms. Watson of California. I wanted to announce at the end
of my statement that I wanted to submit the testimony from Neal
Elliott from the American Council for an Energy-Efficient
Economy for the record.
Mr. Issa. Without objection. That and any other revisions
or openings statements not entered here will be allowed into
the record.
[Witnesses sworn.]
Mr. Issa. Record that everyone here answered in the
affirmative.
The committee appreciates the substantive written testimony
that each witness has submitted for the record. I respectfully
ask that you consider it all heard and seen by us and use your
5 minutes of initial statements in order to add or find
additional items that you would like to have in the record.
However, it's your 5 or so minutes, and we respect the fact
that you know what you need to present to us.
Since I have already introduced the witnesses, I would like
to start with Mr. Caruso for his opening statements or his
testimony.
STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Caruso. Thank you, Mr. Chairman, and members of the
subcommittee. I appreciate the opportunity to present the
Energy Information Administration's views on the recent
developments in energy markets, with a focus on natural gas and
the impact of Hurricane Katrina.
EIA is a statistical and analytical agency within the U.S.
Department of Energy. As such we do not promote, formulate or
take positions on policy issues. But even before this tragic
natural disaster, crude oil, gasoline prices and natural gas
were already at very high levels. On August 29th, the average
gasoline price was $2.61. Diesel prices were $2.59. Crude
prices were about 60 percent above where they were over the
same period due to strong growth on world oil demand, in which
we have used up much of the world's surplus productive
capacity. Refineries, not only in the United States but in
Europe and in Asia, were running at very high levels of
capacity, and the production of distillate fuels and the higher
than average refinery outages this summer led to a tight
gasoline supply.
So the picture before Katrina was a tight oil market and an
even tighter natural gas market with prices above $10 per 1,000
cubic feet. Katrina has had a significant impact, particularly
on gasoline, diesel fuel and natural gas prices, with gasoline
prices reaching $3.07 for the national average on Labor Day.
They have come down by about $0.11 in our survey just this
Monday, but nevertheless they are still about $1 a gallon above
where they were a year ago. Natural gas spot prices at the
Henry Hub Center have risen sharply, reaching over $13 per
1,000 cubic feet on August 31st. Prices have declined somewhat
since then and are staying at about $11 per 1,000 cubic feet.
In the near-term, the outlook for the oil and natural gas
markets will depend on a number of factors, most importantly
the timing and pace of the recovery to the infrastructure and
operations in the gulf. Production of both oil and natural gas
in the Gulf of Mexico has recovered somewhat since the initial
shut-in in amounts of oil and gas. My colleagues and Secretary
Watson, will go into more detail about that.
With crude oil from the Strategic Petroleum Reserve
available to refiners and the full operation of crude and
product pipelines restored, the rate at which refinery capacity
affected by Katrina and which it can be brought back online is
certainly a major factor which will affect petroleum markets
this winter.
Fortunately for natural gas markets, we are in the shoulder
season between the period of high demand for electricity,
generation for air conditioning and the high demand for
heating. The level of natural gas in storage remains above the
5-year average, but the disruption in operations due to Katrina
is likely to reduce the amount put into storage during the
remainder of the injection season.
Our understanding with respect to natural gas production
and processing is evolving rapidly, but we are concerned that
about two or three of the remaining natural gas damaged
processing facilities may take several months--and this
certainly can affect our ability to put gas into storage for
the winter. Even if the energy system is nearly or fully
restored by December, the high prices for petroleum products
and natural gas are likely to remain.
In our most recent short-term energy outlook, which was
released on September 7th, we used three recovery cases. I will
focus this afternoon on our medium recovery case. In all of the
cases normal operations are assumed to be achieved or nearly
achieved by December. Natural gas markets are likely to stay
tight over the next couple of months as the heating season
begins.
Based on present trends, we expect natural gas prices this
winter to be significantly higher than last winter, that we
expect residential natural gas prices in the medium recovery
case to be about 47 percent higher than the heating season of
2004-2005. And as has been mentioned, the north central region
in the Midwest is likely to see some of the highest price
increases this winter, nearly 60 percent. On a per household
expenditure basis for natural gas, we expect that the north
central region will see price expenditures increase by about 70
percent compared with last year.
So clearly this winter the economic pain of higher prices
for heating by either natural gas or heating oil is going to be
felt across this country, but probably the Midwest region will
probably suffer the largest increases.
With that, Mr. Chairman, I would be happy to answer
questions when you deem appropriate. Thank you.
[The prepared statement of Mr. Caruso follows:]
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Mr. Issa. Thank you. We will hold those for the end and
next go to Ms. Watson for--the Honorable Rebecca Watson, not my
ranking member, for your statement.
STATEMENT OF REBECCA WATSON, ASSISTANT SECRETARY FOR LAND AND
MINERALS MANAGEMENT, DEPARTMENT OF THE INTERIOR
Ms. Watson. Mr. Chairman, Representative Watson, I
appreciate the opportunity to discuss the role of the
Department of Interior in meeting America's demand for natural
gas. I would first like to acknowledge our Gulf State
communities. It's difficult to comprehend the horrific impacts
of Hurricane Katrina on so many people in the Gulf of Mexico
region.
The Minerals Management Service is part of the New Orleans
family. Last week, when I testified to the Senate Energy
Committee, 67 MMS employees were unaccounted for. Today we have
located all but two individuals, and every effort is being made
to find them. All of us at Interior extend our condolences to
every individual impacted by Hurricane Katrina.
Hurricane Katrina has dealt the central Gulf of Mexico
region, its people and the oil and gas industry, a heavy blow,
but we will recover. MMS, from a satellite office in Houston is
working with industry to assess damage, facilitate repairs,
expedite critical business processes and resume full production
of oil and gas on the Outer Continental Shelf as rapidly as
possible to meet the Nation's energy needs.
The oil and gas produced from the Gulf of Mexico's Outer
Continental Shelf plays a major role in supplying our daily
energy needs. It accounts for about 29 percent of domestic oil
production and 21 percent of natural gas production. The future
of natural gas production in the gulf lies in the
technologically challenging frontier of deep shelf and deep
water gas.
I want to have a slide put up on the screen. This map shows
the path of Hurricane Katrina. It demonstrates that it moved
through a core area of offshore operations.
Accordingly, on August 30th, 95 percent of oil production
and 88 percent of gas production was shut in. Today, as of 2
p.m., 56 percent of oil production remains shut in and 35
percent of natural gas production is shut in. Gulf of Mexico
production facilities accounting for 90 percent of gulf
production escaped significant damage.
However, it is important to note, as Mr. Caruso did, that
critical onshore support facilities and infrastructure
sustained serious damage. The availability of these facilities
will be a crucial factor in the recovery of the gulf's
production.
As Mr. Caruso noted, before Hurricane Katrina we were
already in a tight supply. Demand for natural gas is expected
to increase dramatically both here at home and globally and
well into the future.
The Federal Government plays a significant role in helping
us meet this growing demand; 35 percent of domestic natural gas
comes from Federal resources and 50 percent of undiscovered
natural gas is expected to underlie onshore lands and offshore
Continental Shelf resources.
Accordingly, developing natural gas on Federal lands is a
high priority of both the President's natural energy policy in
the Energy Policy Act of 2005. Turning to onshore resources,
five Rocky Mountain basins hold the second largest source of
natural gas after the Gulf of Mexico. Those onshore basins
contain about 139 Tcf of natural gas, enough gas to heat 55
million homes for 30 years.
More than half of those lands are on public lands, managed
by the Federal Government. With high natural gas prices,
development interest is high. For the past several years, the
Interior Department has been implementing a balanced program to
aggressively make available Federal natural gas resources, yet
require industry to develop those resources in an
environmentally responsible manner consistent with the laws
that Congress has put in place.
This next slide illustrates the progress that has been made
in the last 4 years. We have issued more than 17,000 permits,
which is a 74 percent increase from the last 4 years of the
previous administration. Likewise, this issuance of permits has
resulted in an increase in natural gas production of 17.4
percent during this same time period.
The next slide that I would ask to be put on this screen
demonstrates one of the challenges. During this same time,
however, we had pre-lease protests--these are administrative
protests that were filed at the leasing stage, and these rose
an astonishing 664 percent. Appeals of leases were up 253
percent.
These lease protests slow energy development by delaying
lease or APD issuances. Leases are held up while these protests
are resolved and the BLM field staff is working on addressing
these protests rather than issuing APDs.
High gas prices and high demand create high workloads. As
prices rise, industry's perspective on what they want to
develop changes. They may come in and say, ``Well, this is what
we wanted to develop at this time, but these prices have made
us become a little bit more ambitious.'' That requires us to go
back and reanalyze the environmental impacts.
We are not as nimble as industry is in responding to high
prices. We can't pour resources and people as quickly to
address these high prices. So we are not as responsive, I
think, as industry would like us to be in issuing APDs.
The good news is the Energy Policy Act is giving us
resources and new direction and new timelines to address this
high demand. We are hard at work at the Department of Interior,
at the Department of Agriculture, at the Department of Energy,
and other agencies, regulatory agencies, to meet the
requirements in this act and utilize the resources to increase
APD issuance. We look forward to working with Congress.
I will be happy to answer any questions.
[The prepared statement of Ms. Watson follows:]
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Mr. Issa. Thank you. Before we move on, because I want to
make sure you have the full attention of the entire dais, not
just the dais that remains here during the vote, we are having
a series of three votes on the floor.
So with your indulgence, we are going to recess for about
15 to 20 minutes. Then all the Members will be returning
directly afterwards.
With that we stand in recess.
[Recess.]
Mr. Issa. The hearing will now come to order.
Mr. Zenker, we would look forward to your comments. Once
again, your entire written statement is in the record, so you
may revise and extend as you see fit.
STATEMENT OF MICHAEL ZENKER, SENIOR DIRECTOR, NORTH AMERICAN
NATURAL GAS, CAMBRIDGE ENERGY RESEARCH ASSOCIATES
Mr. Zenker. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the opportunity to appear before you
today to discuss the natural gas market in the United States
and recent developments from Hurricane Katrina.
The market today for natural gas is very different from the
one with which the Nation grew comfortable. Prices during the
1990's, as a reference period, averaged $2 per 1,000 cubic feet
at the wholesale level, reflecting abundant supply. These
prices certainly encouraged consumption of this environmentally
friendly fuel, led to restrictions on alternative fuels, and
helped launch a large wave of power plants that burn nothing
but natural gas, as you, Mr. Chairman, referred to. With the
market today with wholesale prices over $4 per 1,000 cubic feet
for what is now 35 consecutive months and over $7 averaging
this year reflects a very different market.
But I want to stress that these prices are not the result
of some unexpected mysterious force or some event that caught
the country off guard. Rather, the inability of continental
supply to keep pace with demand is the single greatest reason
for the sustained higher prices over the past few years. This
supply disappointment is nothing new. In fact, U.S. wellhead
capacity for natural gas has remained virtually stagnant for
the last 15 years.
Drilling for gas is up in the United States by over 175
percent since 2002, yet supply is still down over that period.
There are very few, if any, spare rigs available to drill more.
Canadian supply, a key source for the United States, has
faltered since 2001. Hurricane Katrina has only added to this
picture by removing some of that scarce supply.
But beyond winter, the challenge for the next few years
will be to meet demand growth that has all but assured the
power sector will comprise the bulk of demand growth. I think
we have heard that already today. Economic expansion is going
to push these power plants into higher utilization.
The Energy Policy Act of 2005 is encouraging development of
new coal, nuclear, renewable power sources--a very important
step--but the lead time for these plants means they will
provide no relief for the gas markets for the next few years.
With demand growth virtually assured, let's turn to the
outlook for supply. I describe in my prepared testimony the
substantial investment that we see that is under way in the
energy industry to bring new supplies. This will play out in
our view and CERA's view as follows.
Record level drilling in the United States and Canada will
just offset declines from existing gas wells for no net growth
in continental supply. Simply put, America's breadbasket supply
regions are in collective decline, and there is not enough
growth expected from the newer but smaller regions to offset
losses from the larger ones. This assumes no liberalization in
the land access rules. Significant additions of new LNG
receiving terminals will allow growing levels of imports to
catch up with demand. It's going to take some time, and it
could potentially exceed demand.
Importantly, CERA sees no feasible way to meet long-term
natural gas demand without substantial new LNG facilities. The
supply growth will begin to soften prices in 2008, in our view.
Unfortunately that means, barring anything in the immediate
term to change that course, price relief for natural gas
remains as far away as 2008.
Does this mean that there is nothing to be done to help
shield consumers from higher prices for the winter, to
Congressman Higgins' question? No, there are actions that could
be taken to soften demand and thereby provide some price
relief. Promoting conservation is the largest single action
that we can do in the near term.
As an example, if all U.S. consumers turn their thermostats
down 2 degrees Fahrenheit for the coming winter, the resulting
drop in consumption of about 8 percent would be bigger than the
impact that Hurricane Katrina is causing to the markets.
California, as I am sure the chairman recalls, cut electricity
consumption by a greater amount in 2001 in the electricity
crisis.
In addition, relief can also be achieved by granting
flexibility to existing power plants that can burn alternate
fuels. California, as an example, could demand alternative
energy from a power plant called Mohave to keep operating.
Mohave is a coal-fired plant that is being shut down.
I want to stress that these actions, if they are to be
efficacious for the winter, should be undertaken with great
haste.
Finally, let me turn to the effects of Katrina. Katrina, of
course, highlighted the precarious nature of supply in the
United States, but Katrina also highlighted the adaptive nature
of the gas industry. That supply was rerouted around
bottlenecks, so that destruction was minimized. Mr. Caruso
highlighted that bottlenecks are going to be gas processing
plants for the next few months.
Katrina also highlights the risk of concentrating our new
LNG facilities in the Gulf of Mexico, and that is the current
path the Nation is on. There is that concentration. A large
hurricane less than 300 miles to the west of the path of
Katrina would pass through this growing concentration of
receiving terminals. While this is not a safety concern,
because the terminals are built to withstand hur-
ricanes, it would certainly have a disruptive effect on supply
in the future.
This completes my testimony, Mr. Chairman, and I would be
happy to respond to any questions the committee may have.
[The prepared statement of Mr. Zenker follows:]
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Mr. Issa. Thank you very much. Now let me go on to Mr.
Magruder for his opening testimony.
STATEMENT OF LOGAN MAGRUDER, PRESIDENT, INDEPENDENT PETROLEUM
ASSOCIATION OF MOUNTAIN STATES
Mr. Magruder. Thank you very much. You have my written
testimony. What I would like to do is just point out a few
significant items of interest in that testimony.
I am here representing IPAMS, which is a regional trade
organization located in Rocky Mountain area. We cover 13
mountain States within the Intermountain West. We have over 315
member companies that make up IPAMS.
I want to try to educate the subcommittee members a little
bit about the uniqueness of the Intermountain West and what
role it can play in meeting the U.S. natural gas demand/supply
situation right now. We are in a unique position in that we are
located in the center of the United States. Pipeline conditions
right now are delivering about 80 percent of capacity to the
West, about 85 percent of the capacity going to the East. So
the Intermountain West is located in the center of the country,
and we deliver natural gas mostly to the East Coast and the
West Coast.
I noticed from the make-up of your committee there are a
lot of coastal representatives here. We have an individual from
New York, California, and coastal situations.
The thing that is unique about the Rocky Mountain area is
that 50 percent of the lands are owned and controlled by the
Federal Government. So that means that when we attempt to
develop natural gas and oil in those lands we have to work with
the Federal Government, with Secretary Rebecca Watson's group.
Like the Gulf of Mexico, the Rocky Mountain region is a
very important source of natural gas. We produce about 22
percent of the production for the United States. So 22 percent
of the natural gas comes out of the Rockies. It's not by
coincidence, but 50 percent of that production is derived from
Federal lands because 50 percent of the land mass is controlled
by the Federal Government.
Contrary to what Ms. Watson mentioned earlier, 60 percent
of the APDs that have been issued have been drilled in 2004,
and this is only 4 percent variance over the 5-year average. So
we are executing on as many permits as we possibly can. Oil and
gas operations only occupy about 1 percent of the land mass
that the BLM regulates. So we have a very small footprint
within the large vast areas of the Rocky Mountain region. Our
limitations in adding more natural gas are directly related to
attaining an adequate number of drilling permits on
nonwilderness and nonpark lands. It is important we also obtain
right of ways to be able to move the product out of those
areas. You need to keep in mind that it only takes days or
weeks to drill a well in the Rocky Mountain region. It doesn't
take months or years to drill a well. So we can drill multiple
wells in a very short time period, while at the same time the
complementary permit process may take 6 months, a year, to
receive a permit to drill an 8-day well. So thus, you know, as
a result of that, we have to have a large inventory of permits
in front of these drilling rigs in front of this--basically
this manufacturing process for methane. So it is very important
that we have an inventory of permits.
The current NEPA process needs to be overhauled. I think
that the BLM has done everything humanly possible to satisfy
the demand of the industry. Ms. Watson mentioned that they are
not as nimble as the industry, and I can tell you we are on the
doorstep and we are trying to get every possible permit that we
can get out of there to execute and drill wells. But the
process needs to be changed. And I think it lies within NEPA,
the interpretation of NEPA and the question of whether or not
we are interpreting and applying NEPA correctly.
Now, what can we do in the near term to try to satisfy
demand for natural gas this winter? There are a couple of
things you can do. In NEPA, you have the ability to execute
categorical exclusions. This is basically where someone within
the BLM at the field level can exercise good business judgment.
I don't think we will sacrifice any standards, any
environmental standards that are basically outlined within
NEPA. But basically, for us to meet the demand this year, we
are going to have to change what we currently do; otherwise we
are at steady state, whatever it is today. That's about all we
can do.
We could also consider relaxing some of the wildlife
stipulations in areas that are appropriate. The methane
manufacturing business is about to shut down on November 15th.
That's when the wildlife stipulations kick in in the Rocky
Mountain region, so the factory is about to shut down. The
question is: Can we apply good practices, best management
practices, in areas that don't affect the wildlife and have
everybody satisfied in the process?
I think in closing, I would like to say that high natural
gas prices are not the result of a cartel controlling supply.
They are the direct result of an inefficient regulatory process
that governs natural gas development on Federal lands. The
Federal Government, as an owner of the largest natural gas
reserves, has a responsibility to ensure the adequate supplies
of this domestic resource owned by Americans, produced by
Americans, and consumed by Americans is developed for the
benefit of the public.
I would like to thank you for the opportunity and I am
certainly available for any questions.
Mr. Issa. Thank you.
[The prepared statement of Mr. Magruder follows:]
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Mr. Issa. Mr. Slocum, as with the other folks, we very much
would appreciate your expanding upon your written statement, if
at all possible.
STATEMENT OF TYSON SLOCUM, RESEARCH DIRECTOR, ENERGY PROGRAM,
PUBLIC CITIZEN
Mr. Slocum. Thank you very much, Mr. Chairman, and other
members of the subcommittee. I am Tyson Slocum. I am Director
of Research for Public Citizen's energy program. We are a
national consumer advocacy group. We represent about 160,000
consumers across the United States. And I have done an
extensive amount of research on energy markets.
I last testified before this committee last year when I
talked about the role of recent mergers in the petroleum
industry, and lax regulations were having an impact on higher
gasoline prices. After I gave my testimony, those findings were
echoed by the U.S. Government Accountability Office.
We focus on energy policies at Public Citizen and how they
impact consumers. Speaking of energy policies, Congress and the
White House recently passed an energy bill that was supposed to
be comprehensive, but obviously it's not that comprehensive if
we are holding a hearing today on what we need to do about
natural gas policy. The only thing comprehensive about that
energy bill, unfortunately, was the large financial incentives
to energy producers. Public Citizen counted about $6 billion in
taxpayer subsidies to the wealthiest corporations in the U.S.
economy. We don't think that makes a lot of fiscal policy sense
or energy policy sense at the time of record high prices. The
market should be providing all that incentive, not taxpayer
dollars.
There was a lot of talk here on the panel today about
demand and problems with rising demand and the Council, the
American Council for an Energy Efficient Economy, provided
testimony for the record that's available here today that
outlines some very excellent policy steps to reduce natural gas
demand by 10 percent by the year 2020. Public Citizen strongly
supports backing those measures because clearly there are
things that Congress can do to provide incentives to
individuals and businesses to help us use natural gas more
efficiently.
I have also heard a lot of talk here today about natural
gas production. I am familiar with a January 2003 Interior
Department survey of natural gas and oil production on Federal
lands that found only 12 percent of natural gas on Federal land
is completely off-limits to drilling, and that leaves 88
percent of Federal land either completely open or partially
open to drilling. I think that should set aside any sort of
argument that environmental regulations are somehow standing in
the way of producing adequate amounts of natural gas.
The one issue that I have not heard today is the problem of
regulation over natural gas markets generally. I think it is
very important to note the research that I compiled as part of
my testimony that documents the significant problems that have
been going on with natural gas companies in the United States.
We have documented that America's natural gas companies have
been fined over $2 billion in the last 3 years for manipulating
natural gas markets. This clearly shows that we do not have an
adequate regulatory framework over natural gas markets, and we
feel that there is market manipulation continuing today in the
United States. Absolutely, supply and demand is playing a role
here, but we think that the evidence of massive amounts of
market manipulation, as evidenced by the fines levied by
Federal Government agencies, shows that we need a stronger set
of regulations, kind of like what Congress did when they passed
the Sarbanes-Oxley bill in the summer of 2002. Congress was
presented with clear evidence of systemic fraud and abuse in
the U.S. accounting sector and so as a result, Congress saw fit
to greatly improve and strengthen regulatory oversight over
that industry.
Well, you forget that many of the accounting scandals were
heavily concentrated in energy companies. And I think that
there continues to be inadequate government oversight, and so
Public Citizen has four basic regulatory suggestions that we
offer to this subcommittee and we urge you to support them.
The first one is to establish a just and reasonable rate
standard over the production of natural gas. Currently, such a
standard exists for the production of electricity. It is
enforced by the Federal Energy Regulatory Commission. And
because of that standard, companies like Enron that were
engaged in illegal manipulative behavior during the West Coast
energy crisis are now forced to provide refunds to West Coast
consumers. In fact, just several weeks ago, Enron had to
provide $400 million in refunds. That was only possible because
the Federal Government has regulatory jurisdiction over the
production of electricity. No such regulatory oversight exists
over natural gas production.
Second, we need to restore transparency over natural gas
trading exchanges. Since 2000 these exchanges were deregulated,
and we support legislation that was introduced in April by
Missouri Republican Sam Graves that would restore and
strengthen transparency and accountability over natural gas
trading markets.
Third, Public Citizen supports improving trading price
limits. Right now there are very strict price limits on
agricultural commodities like beef and lumber and milk. This is
to reduce volatility. The price limits over natural gas are
laughable. They are only $3 per 1,000 BTUs, and if that
threshold is crossed, trading is only suspended for 5 minutes.
This encourages a great deal of volatility and it allows hedge
funds and other financial players to make a lot of money at
consumers' expense.
We also support exploring the concept of natural gas
storage requirements modeled on the Federal strategic petroleum
reserve. Thank you very much.
Mr. Issa. Thank you.
[The prepared statement of Mr. Slocum follows:]
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Mr. Issa. And with that, I am going to ask the first round
of questioning. And perhaps just a comment to Mr. Slocum. You
know, I am a little older than you are, and I have been in
towns that enforced their speed by having a speed trap and
caught everybody and collected a lot of money. And I have been
in towns where they just sort of ignored the speed limit and
people drove 10 miles, 20 miles, 30 miles over the speed limit.
It was a surprise to me that in your opening testimony that
you indicated that the amount of money you collect is an
indication that there is no enforcement, or that there is a
pervasive problem. I would say from my experience that the more
money you are collecting, the more an agency is doing its job,
and perhaps even collecting money when somebody even makes an
unintentional error but makes an error for which there is
fining. And you might want to try to in your future testimony
try to break down the fines so as to eliminate logical good
enforcement that is doing its job from the possibility of, as
you said, a widespread lack of good enforcement. Today
obviously we don't have the facts for it, but like I say, I
look at $2 billion as a significant amount of enforcement.
Perhaps I could open up by quoting yesterday, while touring
the gulf and assessing the damage of Hurricane Katrina, Energy
Secretary Bodman said, ``The great concern is about natural
gas.'' Are we in a crisis? Will we have enough natural gas to
heat our homes and run our factories this winter, and at what
price?
I guess for those who were involved in the pricing--and I
am going to start with Mr. Magruder--are we going to have
enough, and at what price?
Mr. Magruder. I think we are in a situation right now where
production is at pretty much a steady state. If you take the
Rocky Mountain region as an example and its ability to deliver
more natural gas, I'd tell you yes. We do have the ability to
immediately deliver for natural gas because the wells don't
take that long to drill. The infrastructure is already there
and we can execute and eliminate some of the pressure this
winter. I don't think it's going to be a solution, and I don't
have the crystal ball to tell you what the price is going to
be.
We are certainly not pricemakers, as I mentioned in my
testimony. But I just know if we don't take any action, we can
expect higher prices and the current process is not going to
work. I would hope that this subcommittee has the power to
enforce or recommend some changes, and I personally think it is
all behind the NEPA process. If you look at the way that the
industry is able to execute and perform on State and fee lands
in the same States and in the same vicinity, just a sand wedge
away from a Federal lease, we are able to execute it within a
matter of weeks. But it takes up to a year in a lot of cases to
do the same thing, same procedure, same execution on a Federal
parcel.
So I think that yeah, we are in for a pretty tight winter
if we don't take any action right now. We've got Katrina that's
contributing to the supply picture. I don't know if we know the
total outlook of the results of Katrina at this time. I think
the jury's still out on that. But the Rocky Mountain region and
the players in the Rocky Mountain region stand ready to
perform, given the proper flexibility. And I don't think we
will sacrifice any of the NEPA standards in the process.
Mr. Issa. Thank you.
Ms. Watson, I have a question and maybe--I want to make
sure you're the right person for it. An application to drill
taking 6 months for an 8-day drilling--there was some testimony
that indicated that this, that the ratio between applications
and actual drilling, I think 60 percent were being drilled and
40 percent had not been drilled, if I understand correctly,
creating a backlog of approved applications--costs the U.S.
Government substantially zero.
Why wouldn't we want to encourage the greatest amount of
preapproved applications, the greatest amount of ability to
preload flexibility, particularly for a crisis like this?
Ms. Watson. Well, we are interested in processing
applications for permit to drill, so we have zero incentive not
to process them. But as Mr. Magruder testified, we have laws
that we have to comply with--NEPA is just one of them--on
Federal lands. In addition to the National Environmental Policy
Act, which is a process to take a hard look at the
environmental impacts, we also have to comply with the National
Historic Preservation Act. States do not. We also have to
comply with the Endangered Species Act, section 7. States do
not have to comply with that. They have to avoid the take of
endangered species. We have the Clean Water Act, the Clean Air
Act. In other words, we have a number of Federal environmental
laws that Congress in its wisdom has passed to protect and
balance the environment with the need to produce energy.
But I was struck by something that you said at the
beginning of this hearing. You--or actually it was
Representative Higgins, said this: He wanted to look at
solutions. And I would like to identify for you that in the
Energy Policy Act, we have some solutions, some of which are in
effect right now, and they also go to a problem that Mr.
Magruder identified. One that was put in effect the day the
President signed the bill on August 8th is a requirement that
we have to tell industry within 10 days whether their
application for permit to drill is complete. If it is complete,
BLM must process it in 30 days. That is in effect right now. We
are going to issue two instruction memorandums to the field--
they just went out of my office yesterday--to instruct our
field managers on these provisions of the act so they
understand what they mean, and so we are getting to work on
that provision of the act right now.
Another provision that went into effect the day the act was
signed are categorical exclusions that Mr. Magruder talked
about. There are five categorical exclusions for APDs that are
in the act; and again, we are working with the Forest Service
and the Bureau of Land Management, because they apply to both
of our lands, to get that written and prepared and out very
shortly. It's in effect now, but we need to give the proper
guidance to our field to implement that.
And finally one of the issues that was raised on the issue
of wildlife stipulations in year-round drilling, that is a very
difficult question, the issue of balancing wildlife. Wildlife
is important to many of these Western States. Many of those
States have a significant income from hunting. It's part of the
lifestyle of that State, part of what they look at as well as
whether they enjoy hunting or not. We work with the State game
and fish agencies and hunting groups to try and balance that.
We are working right now in Wyoming and looking with a couple
of companies up there at year-round drilling. How can we do
year-round drilling and still keep the wildlife herds at a good
level?
We also implemented a policy just this summer on offsite
mitigation. So while we are going to have wildlife impacts, we
are going to mitigate those impacts through utilizing money
that companies pay to purchase acreage elsewhere. And so we are
trying to be flexible to address some of the concerns that
industry has brought up.
Mr. Issa. I appreciate that.
And my final question is actually, again, or at least the
first round is again is for Secretary Watson and Mr. Magruder.
I saw that litigation in regards to natural gas production
on public lands has greatly increased. To the extent that we
have legal maneuvers tying up BLM resources and slowing down
the natural gas process, is there a way that we can qualify and
reduce these delays; and particularly noting that this is a
jump from the Clinton administration at 666 protests to 4,429
protests over a comparable period? I don't think there is any
industry that is growing faster than this.
Ms. Watson. It seems to be a booming industry. I'll agree
with you there. It's quite a jump.
Mr. Issa. So there are no lawyers considering going into
gas drilling, I guess, at this time.
Mr. Magruder. They don't need to take the risk. All they
have to do is file the case.
Mr. Issa. What can we do? Are there Executive powers that
can be used to somehow streamline this process? Because it's
not only, obviously, the quantity but the time they are
consuming and the gas that isn't coming on-line as a result.
Ms. Watson. I think the GAO did a study and examined the
administrative appeals process and compared how the Minerals
Management Service and the Bureau of Land Management handles
these type of appeals, and identified the fact that the Bureau
of Land Management has one more step in the process than does
MMS. There is administrative action that the Secretary could
take to address that.
There is always, of course, Congressional action that
Congress could take to address this situation. It is a tough
situation. I mean, clearly there are folks out there that do
not want to see public lands developed for any number of
commodities' uses. Natural gas production is only one area. We
are also seeing it in the renewable energy as wind energy is
being developed. Geothermal. In your State of California, folks
are stopping that as well.
Mr. Issa. I understand that now wind is not good enough
because a bird dies. So it is going to be interesting to find
out what form of energy is acceptable.
You know, solar also uses a lot of water to clean the
lenses. It is interesting that everyone's found that
conservation is the only answer so that we can save ourselves
into energy self-sufficiency while producing zero energy. I
have always found that to be interesting. Yes.
Mr. Magruder. I would like to offer--we were talking about
solutions, and I am certainly glad to hear that we have some
memorandums that will be sent out pretty soon. And believe me,
IPAMS is there to help implement those and assist any way we
possibly can.
But I'd like to suggest two things. And I think that--you
know, we have existing locations using directional drilling
technology; we can drill from the existing locations. If we
were to introduce an order immediately that it's OK to operate
within the given best practices defined for a given area that
has a known recess, you can drill from the existing locations,
we really don't do any further disturbance. We don't build any
more roads. All we do is drill a second well from a given
location. That could immediately offer more production and we
could start that immediately.
And the other thing is to do program-wide type permitting,
similar to what the BLM is currently doing in the Powder River
Basin. They will approve as many as 40 wells in one
application. In other areas of the Rocky Mountain region, with
the exception of that area, it has to be done site specific.
Each individual well has to be permitted. If we are in a given
area where we're basically just manufacturing natural gas and
we are applying the same best practices approved by the BLM,
the question is why can't we do--approve a certain area for
development as opposed to very site specific, as long as we
conform to the archaeological studies and everything else that
was mentioned.
So I think there is a lot of flexibility that can be
granted and still meet the guidelines of NEPA and all the other
requirements. Those two things would offer immediate increase
in production.
Mr. Issa. Excellent.
And with that, I would recognize the gentleman from New
York, Mr. Higgins, for his round of questioning.
Mr. Higgins. Thank you very much, Mr. Chairman. Just again,
thank you for your testimony. It's very helpful. But it's also
very revealing.
I think about where the problem is. There are some pretty
divergent views here. Some are suggesting more regulation,
others suggesting less. Some are suggesting that the energy
bill was helpful. Some are suggesting that the energy bill just
passed was harmful. The fact of the matter is it just seems
like we're stuck. And we're stuck because we have become
increasingly reliant on natural gas not only to heat our homes
directly, but also as an alternative fuel source to electricity
production. So whether you're paying a gas bill this winter or
you're paying an electricity bill, that bill is going to be
profoundly influenced by the price of natural gas.
Mr. Slocum, you had mentioned that the new energy bill had
some $6 billion in industry subsidies. Could you elaborate a
little bit further? I don't quite understand.
Mr. Slocum. Sure. Well, I mean first of all there are $27
billion total in subsidies to the energy industry. I isolated
$6 billion to the oil gas and natural gas industry. The largest
tax break for the natural gas industry was just over $1 billion
in tax breaks to allow them to depreciate the value of their
natural gas pipelines much quicker than under current law.
There are additional new government spending programs such as
the new ultra deepwater drilling program that is $1\1/2\
billion in new government spending in direct subsidies to
encourage research and development in new ultra water drilling
in the Gulf of Mexico. There is an additional $1 billion in tax
breaks for geological and geophysical expenditures that allows
companies to write off more of the cost of production.
Again--and then there's also a series of royalty relief
programs. Again, Public Citizen strongly feels that the record-
high commodity prices for natural gas and oil should be
providing all the incentives necessary to the industry to
provide this product and that scarce taxpayer dollars should
not be given to a highly profitable industry.
Mr. Higgins. You know, the other issue here is the whole
impact of Hurricane Katrina. Based on this map that was
provided in our packet here, I mean, just the cluster of oil
and gas platforms that are seemingly disproportionately located
on the border of host States indicate a further problem that
may be resolved in the longer term but obviously presents some
severely complicating factors relative to the price of natural
gas this upcoming heating season.
On the issue of conservation, a number of you, all of you,
have made, I believe, specific reference to conservation, and
it seems like there is always a rhetorical run-up to the whole
notion of promoting conservation toward the goal of reducing
dependency and reducing costs. But I have reviewed the energy
bill just passed by Congress, and I don't see it. I don't see a
real and meaningful Federal policy with respect to conservation
for individuals and for businesses. And when I say real and
concrete, I mean meaningful financial incentives, meaningful
incentives to really pull back or reduce significantly our
consumption.
Any thoughts with respect to that by any of you?
Ms. Watson. Well, I think the--when we speak of the energy
bill being comprehensive, I would like to defend the fact that
it is comprehensive; and the bill begins with conservation,
looks at supply and includes both renewable energy, fossil
fuels, future sources such as hydrogen and methane hydrates and
then looks at research and reports to develop energy. And as to
conservation there are several measures in there.
Now, what is meaningful is certainly in the eyes of the
beholder. But there are measures there for Federal agencies
with our fleet, and the Federal agency is the largest consumer
of energy in the Nation. So these directives to Federal
agencies to make their buildings and their fleets more
efficient will have an important impact on energy supply.
And I will tell you that the administration right now in
light of Hurricane Katrina is looking at these conservation
measures in the short term, and the direction of the energy
bill is in there and it is an important prong. Now, it
certainly is not what everybody wanted, but it is something
more than minimal.
Mr. Higgins. You know what I think it does now? Here's what
I think it does. I think it provides just enough incentive for
the development of alternative energy sources to say that we
are doing something, and disproportionately provides incentives
to the status quo. And the problem with that for me is that it
doesn't change anything. It doesn't change anything. Because we
are talking about it today, we probably talked about it last
year at this time and the year before, and we'll be talking
about it 10 years hence; because I think when you look at our
whole dependence on energy sources, be it natural gas or
foreign oil, we're really stuck. Unless we take aggressive
measures to promote aggressive measures, real measures to
promote real conservation, we'll continue to be stuck in this
rut.
The people who are held hostage are not the people who are
being talked about here today, and that's the people who I
represent, i.e., those who are going to get devastated in the
next several months with not only extraordinarily high home
heating costs, but extraordinarily high gasoline prices at the
pump. And of this exacts a devastating impact on the economy of
regions, particularly those that are most vulnerable in terms
of climate, in terms of economics, but it is devastating the
economy of this Nation as well.
In my hometown we used to have a place, called Buffalo
Color. Buffalo Color used to manufacture--a chemical company--
indigo dye, which was the supply source for all of the blue
jean companies. One of the consequences of high natural gas
prices is devastation of the chemical industry, including
Buffalo Color in my community. So from an economic standpoint
primarily, but there are so many other secondary impacts that
filter through this economy that are really hurting us badly.
I think it was Mr. Slocum who talked about other industries
where problems had been identified, be it the financial or
accounting industries, aggressive regulation followed which
seemingly provided safeguards. I would rather not have to take
into consideration more aggressive regulation of the energy
industry. But toward the goal of greater transparency, toward
the goal of greater accountability, toward the goal of fairer
gas trading prices, that is something that this Congress needs
to look at, because if we don't take more decisive action, more
meaningful action, more real action, the problem is only going
to get worse; because as all of you have agreed, the cost for
natural gas increases roughly with the rate of inflation. As
inflation increases, those prices will increase, and this is
what will hurt our consumers and ultimately the world economy,
and, more importantly, the U.S. economy.
So, but I thank you. This was very helpful and you were all
very informative and forthright. Thank you.
Mr. Magruder. Mr. Chairman, I would like to comment on one
statement earlier about all the incentives that were offered. I
can guarantee you for an independent producer in the Rocky
Mountain region, there were really no incentives offered in the
energy bill other than greater flexibility on access, which we
have talked about.
We have a pilot project that was incorporated in the energy
plan, energy bill, that identifies seven high-priority BLM
offices in the Rocky Mountain region. That is really the only
benefit that we truly gained.
We actually lost ground. If you had to score the energy
bill on our balance sheet, we actually lost ground. So it may
be that deepwater drillers in 7,000 feet of water have an
incentive. My hat's off to them for drilling in 7,000 feet of
water and willing to take that type of risk. But in the Rocky
Mountain region for the average driller and the average
producer, other than the pilot program that the BLM is
implementing right now to try to beef up the output of permits
in the seven critical offices, really that's the benefit and
that's the carrot that we are trying to bring to fruition. So
the big question we have as an independent community, when will
that be put in place?
So if there is anything that you can do to help the BLM
right now, it's to get behind that pilot program and make sure
that's implemented. And I would seriously reconsider some of
the actions that we could possibly implement and take
immediately, drilling on existing locations in the Rocky
Mountain region, that could offer additional production also.
Mr. Issa. Thank you.
And with that, we would recognize the gentleman from the
drilling of oil and natural gas region, the gentleman from
Texas, Mr. Marchant.
Mr. Marchant. Thank you, Mr. Chairman. My questions are for
Mr. Caruso, Ms. Watson, and Mr. Zenker. And it has to do with
the liquefied natural gas market.
Just a few months ago, I had an opportunity to go to South
America on a narcoterrorism fact-finding trip. But while we
were down there we were lobbied, and pretty heavily, about the
existence of a lot of liquefied natural gas in South America
and its availability and how cheap it was if we could just find
a way to get it into the United States.
Just recently, in Secretary Norton's comments about the
storm in the gulf, she talked about the fact that there is
really no world market yet for liquefied natural gas.
Could you comment about that whole market and did the
energy bill effectively address that issue? How long would it
take for those markets to kick in if we were equipped to have
docking stations, etc.?
Mr. Caruso. Yes, that's an excellent point. I think our--
the Energy Information Administration and, I think, Mike
Zenker's presentation from CERA today are pretty much in
agreement that if we are going to meet the kind of demand
outlook that most forecasters are expecting, LNG will have to
play a huge role in the supply of LNG from the existing
facilities in Trinidad. Algeria and Nigeria will need to be
supplemented. We expect to see a lot coming from Qatar in the
Persian Gulf. But there is also, as you point out, potential
from South America--Peru, Bolivia, Venezuela in particular--in
addition to the existing facilities in Trinidad.
So we're looking for a quadrupling of the amount of LNG
coming into this country compared with what it is today over
just the next 10 to 15 years. So we need to do our part, which
is building regassification facilities, which are I think well
underway, with a large number already approved by FERC and the
Coast Guard.
But the supply side also needs to be dealt with, and that
is the point you have made about gas in South America and
elsewhere that needs to be liquefied. So we're looking for LNG
supplies to, we think, put some downward pressure on gas
prices, but that is going to take time. We don't see a
substantial amount of LNG increments beyond the existing
facilities until about late 2007 and the beginning of 2008.
Mr. Marchant. Do you find that--is there a built-in
disincentive for the drillers and the domestic producers who
are the same people that are importing the liquefied natural
gas and regassifying it and putting in the pipelines? Are they
the same companies?
Mr. Caruso. Some are. You know, there are some of the major
oil and gas companies that are investing in regassification as
well as those who are not, who are more directly involved in
the foreign supply such as British Gas and others. But I would
say a substantial share of the new regassification facilities
are also the existing oil and gas companies.
And the point of the energy bill, there was a section in
that bill that did facilitate the permitting of regassification
under FERC jurisdiction, which I think will be helpful,
although as we found in Ms. Watson's comments that there are
still a number of other hurdles with respect to State and local
opposition as well.
Mr. Marchant. Thank you.
Mr. Zenker. If I could add to that. Certainly these prices
have triggered a huge enthusiasm to build LNG in North America.
We've gone from LNG not really being even an issue for North
American natural gas 5 years ago, to the point where we have
far more terminals than are needed. This industry has
demonstrated again and again that it will do a good job of
overbuilding the market and pressing prices back down quite
rapidly.
With LNG, I think what some of the overseas owners of gas
are looking at, is that just a few years ago gas prices in the
United States were too low to justify the construction of these
terminals. So while there's a lot of enthusiasm, there's also a
lot of risk in putting a $5 billion liquefaction cargo
container and regassification terminal program together.
That said, I agree with Mr. Caruso that enthusiasm is
translating into construction. We are going to see huge growth
in shipments of LNG into the United States. That's starting
already. Unfortunately that's a few years out. The big new
volumes are in 2008. And we have more terminals under
construction in the United States than we are going to need.
That's the good news.
The tricky part is that the supply piece, the areas that
you visited, that's going to be the pacing item, the building
of what are called the liquefaction facilities to put the
cargoes in, the liquefaction, the LNG tankers and then
transport to the United States. Our long-term price outlook
suggests that LNG is going to significantly dampen prices in
2008, so it's a very critical part of the outlook.
Mr. Slocum. If I may add something on LNG. I am sure that
Congress has held many hearings talking about the dangers to
national security of being reliant on OPEC member nations for
our crude oil supplies. I can safely predict that if all of
these LNG facilities are constructed in the United States, 10
or 15 years from now Congress will be holding hearings about
how did we allow our country to become reliant on OPEC for
natural gas. Because that is where the LNG is going to be
coming from; from OPEC. So I think that is a very important
consideration to make.
Also, the energy bill that was passed in August greatly
impedes the ability of State governments to adequately oversee
the construction of these LNG facilities. I personally work
with about 100 community organizations across the country that
have raised significant concerns, and their ability in our
democracy to have adequate oversight over the permitting and
construction of these facilities is hampered by the energy
bill, which gives FERC exclusive jurisdiction over the
construction of these facilities.
Mr. Marchant. Thank you very much.
Mr. Issa. Before I recognize the ranking member, I should
disclose that I was on the Energy and Commerce Committee as a
member at the time that we recognized that there are NIMBYs;
and I guess you pronounce them NIAOBYs, the ones that are not
in anyone's back yard. If any of you have ever tried to put an
LNG facility in, what you discover is there is no back yard
that wants it. There never will be a back yard that wants it.
I'm not saying there won't be a small city, but there'll always
be somebody in the area that doesn't want it.
So at least from this Member, on a bipartisan basis, I
actually think that one of the things that the Congress has
done that was very important was centralizing to the Federal
Government the authority, recognizing that the gentleman from
California, the gentleman from Michigan, Mr. Dingell, and all
the rest of us, certainly hear from our home but are filtered
through the greater national need.
I would like to, before I pass it on, just have one quick
question. Mr. Zenker, if I understood correctly, you said there
are too many facilities being built, physically under
construction. My understanding is there are zero in California
and as all of us from California know, there isn't enough
capacity right now to guarantee natural gas coming in from the
gulf area. So if I could modify what I think I heard you say
is, in some places there is an excess of construction, well, at
least in California there isn't any construction and we are an
area at the end of the pipeline. Is that correct?
Mr. Zenker. Yeah, that's a good clarification, Mr.
Chairman: And to followup on that, you are right that we're
seeing a growing concentration of the new construction of LNG
receiving terminals in the gulf, specifically in two Louisiana
parishes and in the eastern portion of Texas, and not in the
consuming markets of California or the eastern seaboard. When I
said we are, maybe the more appropriate term would be we're
seeing enough construction of regassification terminals
relative to the liquefaction facilities that are coming on,
that will not be the constraint in bringing LNG to the market.
However, we aren't seeing them built in the consuming markets.
Mr. Issa. Thank you. With that, I'd recognize the
gentlewoman from California, Ms. Watson.
Ms. Watson of California. Thank you so much, Mr. Chairman.
In noticing during Katrina, the fact that many people could
not escape the depressed area of New Orleans because, a, they
didn't have automobiles or, b, they could not afford the
gasoline, and all of us saw lines as long as 5 miles with
people waiting 5, 8 hours just to get gas, and then to get to
the pump and see the prices. Well, I call that gouging. So I
know that there is a great deal of profit attached to the
production of energy, be it natural gas, be it gasoline or
whatever.
I want to know--and I am going to direct this one to Mr.
Tyson Slocum because he is here representing Public Citizen--
what can we do in terms of public policy, Mr. Slocum, to
protect our environment, to address the demand, and to make
these different kinds of sources of energy affordable?
Mr. Slocum. Representative Watson, first of all, you are
absolutely correct that there is indeed a strong correlation
between the record profits being enjoyed by oil companies and
the record prices being charged to consumers. The EIA compiles
information, for example, on profit margins in the U.S.
refining industry. In the 1990's they were consistently around
$0.20 a gallon profit margin. In 2004 that profit margin had
jumped to $0.40 per gallon. And because large oil companies
like Exxon Mobil and Chevron Texaco and BP are monopolies,
they're vertically integrated. They have oil production in the
United States and all over the world. They own oil refineries.
They have other downstream mechanisms. You've got a lot of
control over the market.
As I mentioned in my testimony, it's not just Public
Citizen coming to that conclusion, it's the U.S. Government
Accountability Office, which showed in a study in May 2004,
that recent mergers have directly led to high gas prices and,
in fact, the largest five oil companies operating in the United
States today have enjoyed profits of $254 billion since 2001.
That's a very healthy profit margin.
So what can be done about it? Well, first of all, we
clearly need to do something about demand. Our Nation's fuel
economy is worse today in 2005 than it was in 1987. That's
because of our appetite for fuel-inefficient automobiles like
SUVs that have a loophole from the standard fuel economy rate.
This is where the energy bill really failed to address the
fundamental problem, because the United States is the largest
consumer of oil in the world. We use 25 percent. So unless we
address that, we are not going to be able to get our way out of
this crisis. Remember, the United States is the third-largest
crude oil producing Nation in the world and we are one of the
largest natural gas producers. Even if we doubled our oil
production to match that of Saudi Arabia, we'd still be
importing half of our oil. So we are never going to be able to
produce our way to independence, and that's where the energy
bill fails the logic test. We need to address demand.
Second, I think that we should order an immediate
investigation into allegations of price gouging by oil
companies. We already have evidence presented by the Federal
Trade Commission in March 2001 that major U.S. oil companies
were intentionally withholding supply from the market in order
to drive prices up. However, because no evidence of collusion
was found, there was no violation of antitrust law, a clear
loophole in our Nation's antitrust system.
I think that critical commodities, whether they be Enron's
control over electricity, whether it be natural gas companies,
or whether it be oil companies, should not be able to
intentionally withhold supplies in the market. That should be
illegal and I think that an immediate investigation should be
commissioned by Congress.
Ms. Watson of California. Let me just do a followup
question. You said that it should be illegal. What would be, or
who would be the body that would declare those activities
illegal? Where do you see--who has the authority to do that?
Mr. Slocum. Well I think the Department of Justice would be
reasonable. I mean, they enforce our Nation's laws, and I think
that you can have some clear laws on the books that oil is a
critical commodity in the U.S. economy and should be treated as
such. It should be treated a little differently, especially
when people like Federal Reserve Chairman Alan Greenspan talk
about the severe negative economic consequences of sustained
high energy prices.
So there is a national public interest involved here in
making sure that there is a direct connection between high
prices and supply and demand. Clearly supply and demand are
driving higher prices, but I think that an investigation is
warranted to find out whether or not there is anything going on
above and beyond that.
Ms. Watson of California. Now, this I am just putting out
for anyone who wants to address it. But I missed your testimony
and I'm sorry that I did that, particularly my relative over
there, Watson. But do you think that our laws are adequate when
it comes to conservation and environmental protections? What do
we need to do so that in our quest for energy sources we do not
continue to pollute our environment?
And by the way, I live in Los Angeles under the flight path
going to LAX, and they start to reduce their gasoline as they
come in toward the airport. You can go outside and you can run
your hand across the panes and it's black. So I know that gets
into my carpeting, it gets into my nostrils, and everybody
else's that lives in my household. So our environment certainly
has been changed because of our use of these fuels and all.
So what do you suggest in terms of conservation? Do we have
laws on the books already to take care of this? How do we
protect our environment, therefore protecting the health of our
citizens? Anyone want to comment?
Ms. Watson. Well, I think we, as I said in my testimony and
in answer to some of the questions, we have a number of Federal
laws on the books to protect the environment that Congress has
passed over the last 30 years setting standards for clean water
and clean air, protecting our cultural history, history of our
Nation. We have laws to protect wildlife, endangered species,
as well as other wildlife. So we try to balance the protections
of those important values, that quality of life that comes from
a clean and healthy environment with the quality of life that
comes from affordable energy.
You spoke eloquently of the impacts on the elderly and the
poor in our Nation from high energy prices. High energy prices
coming from a tight supply impact our quality of life. Equally
so, a bad environment impacts our quality of life. And the
trick for a Federal manager such as myself is trying to find
that right balance so that we protect the environment but get
the energy that our citizens need to have a quality of life
that they can afford.
I think we have good environmental laws in place. We heard
testimony that the processes that we have can sometimes pile up
one on top of each other and really impede our ability to get
energy out in the timeframe that we need it. Right now we have
high demand and lack of supplies: Can we work within this web
of laws to get the energy out in time to get the prices down so
they don't impact your constituents? That's the difficulty.
Ms. Watson of California. Can we do more?
Ms. Watson. I think we can always do more. I think that we
as American citizens can do more to conserve. I think that we
in this room, many of us are leaders, and I think we all can
lead by example and help educate the folks.
One of the things that I have found in my job is that many
of our citizens don't understand much about energy, where it
comes from, how we can impact our use of it. A simple thing,
turning down the thermostat can have a huge impact. Turning
lights out in a room. Again, California set an example when
they had their energy crunch. They had a campaign of education
to their citizens. They were able to reduce energy consumption
between 6 and 12 percent, which had an impact and helped them
get through their crisis. I think we do more in that arena. The
energy bill points a direction there.
The President's energy policy also has conservation prongs.
We in the Federal agencies can and have been doing that.
Industry has done that over the last 30 years. But we all can
do more and I think it's a public education effort that we need
to engage in.
Ms. Watson of California. I come from a State--we come from
a State where we love our automobiles. Our automobiles speak of
who we are. You know, you don't ask a person what kind of work
they do or what's their family history. You ask what kind of
car do you drive. I always use this test when I go into a high
school auditorium speaking to students, you know: How many of
you drive? How many of you want to drive? And it never fails,
every hand goes up. Either they drive or they want to drive. I
ask them what is the speed limit, and somebody will say 50,
somebody will say 75. I said, you're all wrong; it's whatever
we say it is.
Do you know we control everything that has to do with the
car? We tell you how many passengers can ride in it, how you
have to ride in it, what beverages you can have in it, what
condition they have to be in, what color you paint it, how much
you pay for it in terms of taxes, where you park it, on and on
and on. That starts bringing something home to them.
What I feel is that we probably are the greatest violators
in the State of California. My colleague, I don't know how many
cars you have, but you can only drive one at a time.
Mr. Issa. Fuel consumption is not based on how many are in
the garage, it is based on how many miles you drive and how
much mileage they get.
Ms. Watson of California. And what kind of fuel you have to
put in it. Our kids--you are right, I am saying all of this in
support. We have to do a better job of educating. Does anybody
know about these doughnuts? That means you drive as fast as you
can, you spin on the rims. You can see it. They do it at 4
a.m., by the way, from 1 a.m., to 4 a.m. You can see--I guess
the rubber on the wheels--and that is using energy.
So, I think one way is to really do a better job in our
elementary schools. But if any of the rest of you--I mean, if
you own six cars that use diesel fuel and you can only drive
one at a time, and when you get out there, you are expending
all of that time, or maybe each one of your kids drives one. I
am just wondering what we can do, because we really have a
challenge.
Mr. Zenker. Representative Watson, if I could add to that.
Ms. Watson of California. Yes.
Mr. Zenker. I am also from California. I did live through
the California electricity crisis. California did set an
interesting but cautionary example for energy conservation.
Just for historical precedent, American consumers have trimmed
on a per customer basis about 30 percent of natural gas per
household since 1970.
So these are the effects of energy efficiency programs
implemented for appliances, building codes, and so forth. Home
heaters--water heaters have become much more efficient.
In terms of what has been implemented to cause very
immediate or measurable impacts in the short term, California
is often held out as a leading example. But living in
California and having followed the energy markets during that
crisis, we saw that consumption of electricity in natural gas
continued unabated and grew through the crisis until we finally
faced real blackouts. Utilities implemented an incentive
program called the 20/20 program, which finally put an
incentive on top of increased prices in front of consumers.
They responded by cutting--9 percent is the number that we came
up with, electricity consumption in one-quarter, very swift
change and an almost equal amount of natural gas.
However, when those incentives are removed, gas and
electricity consumption rebounded to near pre-crisis levels. So
it showed that continuous incentives are required to cause
continuous conservation by consumer, at least in the current
mindset.
Mr. Issa. Thank you. Being a San Diegan, very specifically,
part of California, we delivered almost from the beginning of
the crisis, far more than the 6 to 9 percent, because our
prices went up immediately. Unfortunately, and I am not trying
to be partisan here, the history uniquely was it was probably
the only time in which there was a short supply while wholesale
price went up, retail prices were maintained, and as a result,
consumption didn't go down. We simply had Representative Watson
and my constituent--deliverers of electricity, go bankrupt. But
we share with some regularity comments about Enron, WorldCom
and other companies that have abused the public trust. But
certainly Pacific Gas & Electric was abused by a system that
said that you will pay for and you will sell for the same
amount, even when it becomes subsidizing retail price to where
you are delivering the electricity for less than you pay for it
wholesale. Hopefully, we will all learn that when it comes to
conservation, that is not the right way to attain it.
I am being cautioned by my able staff that it is time to
bring this session to a close. With your indulgence, members of
the subcommittee will be submitting additional questions in
writing.
But with that, I want to thank all the panelists for their
candid remarks in addition to their written testimony. Today
our witnesses confirmed that domestic production and current
imports do not give us the flexibility and supplies to meet
demand and reduce prices from the high level they are--the
unbelievably high level they have now obtained. The
vulnerability of concentrating much of our energy
infrastructure in one region, the Gulf of Mexico, is another
real issue that was brought up here today.
We must also insure that demand is not spurred by becoming
more dependent on natural gas for new electricity. Natural gas
is an efficient fuel that is essential to our economy. The
choices we make affect our industry's competitiveness, our
employment and the prices we pay to heat and cool our homes.
We must stay focused. We must insure that we make the tough
choices to meet our energy needs, both on the supply and on the
conservation side. Natural gas supplies are too important to
our country to do otherwise.
We will hold the record open for 2 weeks from this date for
those who may want to submit for possible inclusions. With
that, once again, I would like to thank the panel, and we stand
adjourned.
[Whereupon, at 4.45 p.m., the subcommittee was adjourned.]
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