Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mr. Thomas Skains

Chairman, American Gas Association

Testimony of

Thomas Skains
Chairman, President and CEO
Piedmont Natural Gas Company
Charlotte, North Carolina

On Behalf of the
American Gas Association

U.S. Senate Energy and Natural Resources Committee

Hearing on
Lease Area 181 of the Gulf of Mexico
for Oil and Gas Leasing

February 16, 2006

Contact:
Paul Wilkinson
American Gas Association
400 North Capitol Street, N.W.
Washington, D.C. 20001
(202) 824-7125
pwilkinson@aga.org 
 
Senate Energy and Natural Resources Committee
February 16, 2006
Statement of Thomas Skains
On Behalf of
The American Gas Association

Executive Summary

• AGA supports opening Lease Area 181.  AGA also supports unlocking other domestic sources of natural gas, both onshore and offshore.  Developing the Lease 181 Area is the next excellent opportunity to increase natural gas production from a producing area where infrastructure exists to move the gas to market. Trillions of cubic feet of natural gas are likely to be developed from the area. Pipeline infrastructure that moves gas to market is nearby and can be expanded to serve the gas gathering needs of successful producers. Individual well productivity is expected to be high and thus the impact of developing this gas resource to consumers would be immediate.

• Natural gas utilities, as is the case with our customers, do not benefit from higher natural gas prices.  We make our money on the delivery, not the production, of natural gas, which is regulated by each state we serve.  We support legislation and regulations to increase the supply of natural gas in order to moderate its price to consumers.

• The average residential gas customer is paying roughly twice as much for natural gas today as he or she did in 1999. For larger customers, the strain of higher gas prices has resulted in job losses and plant closures.

• Natural gas markets have been extremely tight for the past five years, with supply unable to keep pace with rising demand and prices reflecting the market situation.  New supply initiatives are crucial to correcting this imbalance, as are demand side actions. Put in other terms, it is not good public policy to let weather dictate who heats their home, which plant operates or shuts down or who keeps or looses their job.

• Natural gas demand is projected to increase by 37 percent over the next 15 years.

• Domestic natural gas production accounts for over 80 percent of the natural gas supplied to consumers in the United States. Sustaining or growing gas production is a crucial part of meeting consumer home heating, commercial or other needs at reasonable costs. Opening Lease Area 181 is a step in the right direction.

• New sources of gas supply must also be made available to natural gas consumers. Supplies of liquefied natural gas and pipeline gas from Alaska must be aggressively pursued.

• Even with natural gas imports from our North American neighbor, Canada, and even with increases in liquefied natural gas imports from other parts of the world, domestic production remains the preeminent source of natural gas to consumers and cannot be ignored.

• Public policy makers must consider both energy and environmental goals when developing regulations that impact natural gas resource development. That is, environmental goals must be achieved in concert with the pursuit of a greater diversity in natural gas supply sources.
 
• Given that natural gas supplies are constrained, it is not wise to continue to rely on natural gas to provide 90 percent or more of our new electricity generation capacity.  AGA supports efforts to diversify the electricity generation fuel mix. 

Introduction

 Thank you for the opportunity to testify before the subcommittee.  My name is Tom Skains and I am the chairman, president and CEO of Piedmont Natural Gas located in Charlotte, North Carolina. Piedmont provides natural gas service to nearly 1 million households, commercial and industrial customers and municipalities in North Carolina, South Carolina and Tennessee.

I am testifying today on behalf of the American Gas Association, which represents 197 local energy utility companies that deliver natural gas to more than 56 million homes, businesses and industries throughout the United States.  Natural gas meets one-fourth of the United States’ energy needs and it is the fastest growing major energy source. As a result, adequate supplies of competitively priced natural gas are of critical importance to AGA and its member companies. Similarly, ample supplies of reasonably priced natural gas are of critical importance to the millions of consumers that AGA members serve.  AGA speaks for those consumers as well as its member companies.

 The natural gas industry is at a critical crossroads. Natural gas prices were relatively low and very stable for most of the 1980s and 1990s.  Wholesale natural gas prices during this period tended to fluctuate around $2 per million Btus (MMBtu).  Today, however, natural gas markets are supply constrained and even small changes in weather, economic activity or world energy trends result in significant wholesale natural gas price fluctuations. Today our industry no longer enjoys prodigious supply; rather, it walks a supply tightrope, bringing with it unpleasant and undesirable economic and political consequences—most importantly high prices and higher price volatility. Both consequences strain natural gas customers—residential, commercial, industrial and electricity generators.

 As this committee well knows, energy is the lifeblood of our economy. Millions of Americans rely upon natural gas to heat their homes, and high prices are a serious drain on their pocketbooks. High, volatile natural gas prices also put America at a competitive disadvantage, cause plant closings, and idle workers. Directly or indirectly, natural gas is critical to every American.

 The consensus of forecasters is that natural gas demand will increase steadily over the next two decades.  This demand growth will be driven by the electricity generation market, as natural gas has been the fuel of choice for over 90 percent of the new generation units constructed over roughly the past decade.  In part, the dominance of natural gas in this market is attributable to environmental regulations that promote the clean-burning characteristics of natural gas.  The overall growth in gas usage will occur because natural gas is the most environmentally friendly fossil fuel and is an economic, reliable, and homegrown source of energy. It is in the national interest that natural gas be available to serve the demands of the market. The federal government must address these issues and take prompt and appropriate steps to ensure that the nation has adequate supplies of natural gas at reasonable prices.

New Natural Gas Resources from Lease Area 181

 Drilling for natural gas is expensive and time consuming. The process of discovery, reserves development and flowing gas to consumers can take years to complete, particularly in rank wildcat areas. However, when new gas resources are located near existing production, often the lead times for new supplies can be reduced. Such would be the case with new gas discoveries in Lease Area 181.

 Developing the Lease 181 Area is the next excellent opportunity to increase natural gas production from a producing area where adjacent infrastructure exists to move the gas to market. The volume of potential gas supplies estimated is significant. Trillions of cubic feet of natural gas may be available for development from the area. Pipeline infrastructure that moves gas to market is adjacent and is currently serving other central Gulf of Mexico production and can be expanded to serve the gas gathering needs of successful producers in Lease Area 181. Individual well productivity is expected to be high and thus the impact of developing this gas resource to consumers would be immediate.

 Despite the hardships imposed by high natural gas prices, there was a buy-back of federal leases where discoveries had already been made in the Destin Dome area (offshore Florida) of the eastern Gulf of Mexico. We do not understand or agree with that decision. To deny leasing in the 181 Area, which is further from the coast than the Destin Dome (100 miles minimum), would be even more difficult to justify to natural gas consumers. With that said, the following information addresses in more detail current conditions in U. S. natural gas markets.

Natural Gas Market Conditions

Stability in the natural gas marketplace is crucial to all of America for a number of reasons. It is imperative that the natural gas industry and the government work together to take significant action in the very near term to ensure the continued economic growth, environmental protection, and national security of our nation. The tumultuous events in energy markets over the last several years serve to underscore the importance of adequate and reliable supplies of reasonably priced natural gas to consumers, to the economy, and to national security.

There has been a crescendo of public policy discussion with regard to natural gas markets since the “Perfect Storm” winter of 2000-2001, when tight supplies of natural gas collided with record cold weather to yield record natural gas home-heating bills.  The vulnerability of the natural gas market to weather was demonstrated again in the summer of 2005 when weather that was 18 percent warmer than normal pushed more gas into electricity generators to meet air conditioning demand, and yet again in September when multiple hurricanes in the Gulf of Mexico eliminated nearly 25 percent of our total gas supply for a brief period, with lingering impacts even today.  The hot summer pushed natural gas prices upward from the $6.00 per MMBtu level to nearly $10.00, the hurricanes resulted in prices that fluctuated between $12.00 and $14.00 per MMBtu, and a brief cold snap in December produced a price spike to roughly $15.00 per MMBtu.  Only a substantially warmer than normal 2005-2006 winter heating season has dampened the impact of these price increases to consumers. Clearly, natural gas markets are higher and more volatile than at any point in history.  Moreover, there is no sign that this market volatility will abate in the near future.

It is harmful to individual families and to the entire U.S. economy for natural gas prices to remain both high and volatile. Unless we make the proper public policy choices—and quickly—we will face many more difficult years with regard to natural gas prices.  Of course, when families pay hundreds of dollars more to heat their homes, they have hundreds of dollars less to spend on other things. Many families are forced to make difficult decisions between paying the gas bill, paying for medicines or paying the rent.  There are, of course, state and federal programs such as LIHEAP to assist the most needy. But LIHEAP only provides assistance to about 15 percent of those who are eligible, and it does not provide assistance to the average working family.  These price increases have affected all families – those on fixed incomes, the working poor, lower-income groups, those living day to day, and those living comfortably.  We support the full funding of LIHEAP at the $5.1 billion level that is authorized in the Energy Policy Act.  In addition, the Energy Policy Act contains a provision to establish a new and innovative program that would allow the Department of Interior to provide royalty gas at a discount to low-income consumers.  While the Department of Interior has expressed interest in establishing such a program, it has determined the EPACT language does not grant clear authority to proceed.  We urge the committee to clarify this language.

 The impact of unstable natural gas markets on U.S. businesses is equally disturbing.  Since natural gas prices began rising in 2000, an estimated 78,000 jobs have been lost in the U.S. chemical industry, which is the nation’s largest industrial consumer of natural gas, both for the generation of electricity at manufacturing plants and as a raw material for making medicine, plastics, fertilizer and other products used each day. Similarly, fertilizer plants, where natural gas can represent 80 percent of the cost structure, have closed one facility after another. Glass manufacturers, which also use large amounts of natural gas, have reported earnings falling by 50 percent as a result of natural gas prices. In our industrial and commercial sector, competitiveness in world markets and jobs at home are on the line.

Natural Gas Demand Growth

In a study prepared for the American Gas Foundation in February of 2005, natural gas demand is projected to increase by 37 percent between 2003 and 2020 under a “most likely” energy scenario.  Although higher natural gas prices may moderate some of this projected demand growth, including the growth in demand for gas-fired electricity generation, we believe the fundamentals of this document remain sound and the basic tenets are unchanged.    

 
Natural Gas Supply

For the past five years, natural gas production has operated full-tilt to meet consumer demand.  The “surplus deliverability “ or “gas bubble” of the late 1980s and 
1990s is simply gone, as illustrated in the graphic below that compare actual natural gas production with production capability (prepared by Energy and Environmental Analysis).


 

Production facilities are operating at full capacity. No longer can new demand be met by simply opening the valve a few turns. The valves have been, and presently are, wide open.

America has a large and diverse natural gas resource; producing it, however, can be a challenge. Providing the natural gas that the economy requires will necessitate: (1) providing, in some cases, incentives to bring the plentiful reserves of North American natural gas to production and, hence, to market; (2) making available for exploration and production the lands—particularly federal lands—where natural gas is already known to exist so gas can be produced on an economic and timely basis; (3) ensuring that the new infrastructure that will be needed to serve the market is in place in a timely and economic fashion.

If we are to continue to meet the energy demands of America and its citizens, and if we are to meet the demands that will they make upon us in the next two decades, we must change course. It will not be enough to make a slight adjustment or to wait three or four more years to make necessary policy changes. Rather, we must change course entirely, and we must do it in the very near future. Lead times are long in our business, and meeting demand years down the road requires that we begin work today.

We have several reasonable and practical options. It is clear that continuing to do what we have been doing is simply not enough. In the longer term we have a number of options:

First, and most importantly, we must work to sustain and increase natural gas production by looking to new frontiers within the United States. Further growth in production from this resource base is jeopardized by limitations currently placed on access to it. For example, most of the gas resource base off the East and West Coasts of the U.S. and the Eastern Gulf of Mexico is currently closed to any exploration and production activity. Moreover, access to large portions of the Rocky Mountains is severely restricted.  The potential for increased production of natural gas is severely constrained as long as these restrictions remain in place.

 The graphic below shows how important sustaining domestic natural gas production is to supplying consumers with the natural gas they require. Even with natural gas imports from our North American neighbor, Canada, and even with increases in liquefied natural gas imports from other parts of the world, domestic production remains the preeminent source of natural gas to consumers and can not be ignored.


 

To be direct, America is not running out of natural gas and it is not running out of places to look for natural gas. America is running out of places where we are allowed to look for gas. The truth that must be confronted now is that, as a matter of policy, this country has chosen not to develop much of its natural gas resource base. We doubt that that many of the millions of American households that depend on natural gas for heat are aware that this choice has been made on their behalf.

It is imperative that energy needs be balanced with environmental impacts and that this evaluation be complete and up-to-date.  There is no doubt that growing usage of natural gas harmonizes both objectives. Finding and producing natural gas is accomplished today through sophisticated technologies and methodologies that are cleaner, more efficient, and much more environmentally sound.

Second, we need to increase our focus on non-traditional sources, such as liquefied natural gas (LNG). Reliance upon LNG has been modest to date, but it is clear that increases will be necessary to meet growing market demand. Today, roughly 97 percent of U.S. gas supply comes from traditional land-based and offshore supply areas in North America.  Despite this fact, during the next two decades, non-traditional supply sources such as LNG will likely account for a significantly larger share of the supply mix. LNG has become increasingly economic. It is a commonly used worldwide technology that allows natural gas produced in one part of the world to be liquefied through a chilling process, transported via tanker, and then re-gasified and injected into the pipeline system of the receiving country.  Although LNG currently supplies less than 3 percent of the gas consumed in the U.S., it represents 100 percent of the gas consumed in Japan.

LNG has proven to be safe, economical and consistent with environmental quality. Due to constraints on other forms of gas supply and increasingly favorable LNG economics, LNG is likely to be a more significant contributor to US gas markets in the future.  It will certainly not be as large a contributor as imported oil (nearly 60 percent of US oil consumption), but it could account for 15-20 percent of domestic gas consumption 15-20 years from now if pursued aggressively and if impediments are reduced.

It is unlikely that LNG can solve the entirety of our problem. A score of new LNG import terminals have been proposed, some with capacities in excess of 2.5 billion cubic feet per day. However, given the intense “not on our beach” opposition to siting new LNG terminals, a major supply impact from LNG may be a tall order indeed.

Third, we must tap the huge potential of Alaska. Alaska is estimated to contain more than 250 trillion cubic feet of natural gas—enough by itself to satisfy US gas demand for more than a decade.  Authorizations were granted 25 years ago to move gas from the North Slope to the Lower-48, yet no gas is flowing today nor is any transportation system under construction. Indeed, every day the North Slope produces approximately 8 billion cubic feet of natural gas that is re-injected because it has no way to market. Alaskan gas has the potential to be the single largest source of price and price volatility relief for US gas consumers.  Deliveries from the North Slope would not only put downward pressure on gas prices, but they would also spur the development of other gas sources in the state as well as in northern Canada.

Fourth, we can look to our neighbors to the north. Canadian gas supply has grown dramatically over the last decade in terms of the portion of the U.S. market that it has captured. At present, Canada supplies approximately 14 percent of the United States’ needs. We should continue to rely upon Canadian gas, but it may not be realistic to expect the U.S. market share for Canadian gas to continue to grow as it has in the past or to rely upon Canadian new frontier gas to meet the bulk of the increased demand that lies ahead for the United States.

The pipelines under consideration today from the Prudhoe Bay area of Alaska and the Mackenzie Delta area of Canada are at least 5-10 years from reality. They are certainly facilities that will be necessary to broaden our national gas supply portfolio. We must recognize, however, that together they might eventually deliver up to 8 billion cubic feet per day to the lower 48 States. That is less than 10 percent of the natural gas envisioned for the 2025 market.

There is much talk today of the need for LNG, Alaskan gas, and Canadian gas. There is no question that we need to pursue those supplies to meet both our current and future needs. Nonetheless, it is equally clear that, in order to meet the needs of the continental United States, we will need to continue to look to the lower-48 states.

Thank you for this opportunity to present our views.