Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mr. Christopher Helms

OCTOBER 6, 2005
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify on this important topic. My name is Chris
Helms, and I am President of the Nisource Inc. Pipeline Group. NiSource Inc. is a fully
integrated energy company engaged in natural gas transmission, storage and distribution,
as well as electric generation, transmission and distribution. Our operating companies
deliver energy to 3.7 million customers located within the high demand energy corridor
that runs from the Gulf Coast through the Midwest to New England. One of our
pipelines, the Columbia Gulf Transmission Pipeline, operates in the central Gulf of
Mexico and brings natural gas on-shore in central Louisiana.
I am here today on behalf of the Interstate Natural Gas Association of America (INGAA).
INGAA is a trade organization that represents virtually all of the interstate natural gas
transmission pipeline companies operating in the U.S., as well as comparable companies
in Canada and Mexico. Its members transport over 95 percent of the nation's natural gas
through a network of 180,000 miles of pipelines. Many of these pipeline systems operate
in the Gulf region – either off-shore or along the coastal area that includes Texas,
Louisiana, Mississippi and Alabama.
Before discussing the recent hurricanes and their effects on our industry, I first want to
make a few points about the structure of the natural gas industry. The natural gas
industry has never been as vertically integrated as the oil and electric power industries.
Put differently, it is the exception and not the rule for a single company to be
significantly involved in all segments of the industry. These segments can generally be
broken down into the following categories: production, gathering and processing (also
known as midstream services), interstate pipelines, marketing, and local distribution.
Some of these segments are subject to economic (i.e., rate) regulation at the federal or
state level, while others are not subject to any rate regulation.
INGAA represents the interstate pipeline segment, which is regulated economically by
the Federal Energy Regulatory Commission (FERC). As part of the natural gas industry
restructuring that occurred during the 1980s and early 1990s, the interstate pipeline
industry gave up its merchant role as the provider of bundled wholesale natural gas
services. Under the current industry structure, interstate pipelines transport and store
natural gas, but do not produce, purchase or sell the commodity itself. We are analogous
to a trucking company that provides both transportation and warehousing services for
goods, but does not take title to the goods themselves. The maximum rate an interstate
pipeline may charge for transportation and storage is set on a pipeline-by-pipeline basis
by the FERC, based upon the costs incurred by that pipeline to provide those services.
Despite the disaggregated structure of the natural gas industry, significant
interdependencies remain. This is especially true for off-shore production in the Gulf.
Generally speaking, the chain of delivery is as follows: Natural gas is first produced at
off-shore platform or wellhead facilities; it is then gathered and transported through
smaller diameter gathering pipelines for redelivery to FERC-regulated transmission
pipelines for transportation to onshore processing plants. There, the natural gas is
processed to remove hydrocarbon liquids, such as propane and ethane. Those liquids
must be transported, via dedicated pipeline, barge or truck, to markets for those products,
such as refineries and petrochemical facilities. Once the liquids are removed, the natural
gas is fit for consumption and is delivered into the interstate pipeline network where it is
transported to end-use customers. All of these systems must work together in order for
natural gas to flow onshore, and from there to the millions of customers downstream. If
any link in this delivery chain is disrupted, the remaining links in the chain will be
affected in some way.
I point this out to emphasize that Hurricanes Katrina and Rita have highlighted these
interdependencies. Links in the delivery chain have sustained major damage. In cases
where multiple links have been damaged, we cannot repair just a single link and expect
natural gas supplies to return to pre-hurricane levels. All of the links must be working in
order to achieve that result.
Mr. Chairman, I think it is safe to say that two major hurricanes striking back-to-back at
the heart of our nation’s energy system have caused an unprecedented disruption in our
Gulf-based natural gas infrastructure. As many of you know, the federal waters in the
Gulf of Mexico account for about 10 billion cubic feet (bcf) per day of natural gas
production, which is about 20 percent of total U.S. demand. As of early this week, about
72 percent of this daily production, about 7.5 bcf per day, remained “shut-in” due to the
storms. To place this number in some perspective, the United States typically consumes
on average 61 bcf per day nationwide. Given the tight supply/demand situation we were
already facing before the hurricanes, this loss of supply – even temporarily – is cause for
concern as we approach the winter heating season.
The media, and indeed most Americans, have focused on how the twin hurricanes have
affected the price and supply of gasoline. Gulf Coast oil production and refineries are a
critical part of the nation’s infrastructure for obtaining supplies of gasoline, jet fuel and
fuel oil. Nonetheless, the United States imports almost 60 percent of our petroleum
supplies from overseas. This means that a short-term increase in imports can mitigate
some portion of the impact of the hurricanes on petroleum supplies. However, when it
comes to natural gas, the United States still produces 85 percent of the total supplies
needed to meet domestic demand, while most of the remaining supply needed to meet
demand comes from Canada. Our ability to import natural gas from outside North
America is far more limited than with petroleum, given the limited number (5) of
operational liquefied natural gas (LNG) import terminals in the U.S. Therefore, even as
the country continues to be focused on gasoline prices, we believe the hurricanes will
have a greater and more protracted impact on natural gas prices and supplies.
I also want to challenge the notion that Hurricane Rita produced far less damage to
energy infrastructure than did Hurricane Katrina. While this might be true with respect to
the oil refinery complex in the Gulf region, it is not the case with natural gas. In fact, for
operations in the Western Gulf including my company’s pipeline, the Columbia Gulf
Transmission Pipeline, Rita had more impact than Katrina. For example, our offshore
system was able to redirect some natural gas produced in the central Gulf that was not
able to reach the shore due to damage from Katrina. This worked well for a few weeks,
but the impacts of Rita only compounded the difficulties associated with bringing more
gas production back on line. The “one-two punch” nature of these storms means that
repairs will take longer than normal, because the limited manpower and equipment
resources for assessing damage and making repairs are being stretched far beyond normal
capacity. Damage sustained during Rita that, for example, normally might take a week or
two to repair is taking much longer, due to the limited availability of crews, boats and
equipment that were already working on Katrina-related damage.
I want to assure the Committee that we are doing all we can. The dedication of our
employees, in the face of losing their homes and possessions and having their families
uprooted, has been phenomenal. Across the industry, people are showing up to work
long hours even as they have no place to go home to. Finding temporary housing within
the region so our employees can continue to repair critical energy facilities is crucial to
speeding the pace at which natural gas supplies in the Gulf can be brought back online.
Let me now turn to our outlook for the winter heating season. While assessments are
continuing, there can be no doubt that, compared to last winter, there will be less natural
gas delivered from the Gulf of Mexico region this winter. The damage is too widespread,
and the amount of repair work too great, for everything to be made right within a month
or two. The fundamentals of supply and demand in the North American natural gas
market already were tight before hurricanes Katrina and Rita. Consequently, any loss of
supply – even a relatively small one – can have a disproportionate impact on natural gas
prices over the winter. All of this puts an extra emphasis on natural gas storage levels.
While it is largely invisible to the public, the United States has a significant amount of
natural gas storage scattered throughout the country. These storage facilities, typically
located in depleted oil and gas fields, are usually filled during the warmer months of the
year when there is excess natural gas supply and pipeline capacity to move it. Storage
fills are generally completed by November 1, which is the beginning of the winter
heating season. During the coldest winter days which typically are the days of peak
natural gas demand, storage withdrawals can meet more than 50 percent of the daily
natural gas load.
Prior to the hurricanes, storage fills were proceeding at total volumes above the five year
average. The hurricanes have slowed storage fills somewhat, but volumes still remain
ahead of the five-year average.
Still, storage is a supplement to – not a replacement for – natural gas flowing through the
interstate pipeline network. Many of the pipelines serving the Midwest, Northeast and
Southeast draw their primary supplies from the Gulf region. If pipelines are not flowing
their full volumes of natural gas, and the winter is normal to colder-than-normal, greater
volumes of natural gas are likely to be withdrawn from storage earlier in the winter
season than is the norm. Should this occur, storage would be depleted more quickly and
there could be an even greater dependence on flowing pipeline gas to make up the
difference. This could create significant operational challenges for pipelines in late
winter, particularly if cold weather, limited supply availability, and low storage drive
customers to attempt to take more natural gas off a given pipeline than is available.
I should also mention the importance of returning damaged natural gas processing
facilities to service. As mentioned previously, natural gas processing plants remove the
heavier hydrocarbons entrained within produced natural gas. These “natural gas liquids”
include propane, ethane and butane. Once removed, there is a separate market for these
liquids, principally in the petrochemical industry. Just as with oil refineries in the Gulf
region, however, a number of natural gas processing plants were damaged by the
hurricanes. Several of these facilities may be out of operation during most, if not all, of
the winter.
This presents another operational challenge for pipelines. A certain amount of
unprocessed natural gas can be accepted into the natural gas pipeline network. If the
quantity of heavier hydrocarbons in the gas stream becomes too high, these substances
can “drop out” of the natural gas stream as liquids and collect in pipelines and end-use
equipment. This is a particular concern during the winter heating season when the lower
ambient temperatures cause the temperature of the flowing gas to drop, increasing the
amount of heavy hydrocarbons that will convert to liquids. This phenomenon can cause
safety and operational problems as slugs of liquids work their way through sensitive
equipment. Therefore, as off-shore production facilities come back on line, it is also
important to bring corresponding processing capacity back on line as well; otherwise,
pipelines may be compelled to limit the volumes of unprocessed natural gas that can be
accepted during the winter heating season in order to preserve the operational integrity of
the transmission and distribution pipelines and in order to protect end-users.
How high will natural gas prices go this winter? While a number of factors will affect
the answer to this question, the most important factor is completely outside of our
control. It is the weather. The single most significant factor in determining natural gas
demand, and therefore prices, will be the weather. Peak winter demand is driven by
space heating needs. If it is a mild winter, there will be less demand for natural gas and
prices will almost certainly moderate, even with the effect of the hurricanes. Conversely,
if the winter is normal or colder-than-normal, then the supply disruptions caused by the
hurricanes will be reflected in higher natural gas prices.
Another factor affecting the ultimate price level will be the rate at which demand is
reduced in response to higher prices. Price allocates supply in a demand-constrained
market. At what price will a consumer choose to conserve and reduce use of natural gas?
The industrial sector is the most price sensitive consumer of natural gas; and at a certain
price level, it can be anticipated that industrial gas consumers will choose either to curtail
production or to switch to an alternative fuel rather than purchase natural gas. The
market clearing price for natural gas will be driven by how much a customer is willing to
pay for the last molecule of natural gas available. My colleague from Dow Chemical,
who is already facing some of these challenges, can explain this better than any of the
other witnesses at the table today.
For most residential and commercial consumers the price paid for natural gas this winter
will depend on the purchasing strategy employed by the local natural gas distribution
company (LDC) that serves their community. For example, to what degree has the LDC
hedged the price of its natural gas purchases using either long-term purchase contracts or
financial instruments? How much natural gas does the LDC have in storage, and at what
price was that gas purchased before it was placed into storage? The price paid by the
average consumer will be a blended price, taking into account these factors, and not just
the spot price for natural gas on a given day.
The ripple effects of higher natural gas prices will be felt across the economy. All of us
expect to pay more for natural gas this winter to heat homes and businesses. Electricity
prices also will be affected, particularly in regions where gas-fired power plants make up
a significant part of the generating fleet. And, as I mentioned, higher natural gas prices
will affect the cost of manufactured products.
What can be done? The short-term imperative is repairing the infrastructure as quickly as
possible. That means expediting permitting and approvals for repair work. It also means
the various levels of government should consider the value of granting individual
companies some forbearance from legal restrictions that might frustrate their ability to
coordinate assessment and repair activities. The twin hurricanes have resulted in
extraordinary damage, and extraordinary measures are needed to get systems repaired on
a timely basis
Also in the short-term, both the energy industry and the government must educate
consumers in advance so they are prepared for higher bills and have the ability to
implement strategies for conserving energy. This is important, because unlike the
gasoline price that is posted at the local gas station, the consumer sees the price of natural
gas after the fact when he or she receives a bill for the previous month’s consumption.
Many of you are already familiar with some of these measures, including weatherization
of homes, regular inspections of furnaces and changing of filters, installing
programmable thermostats and setting them a couple of degrees cooler. The funding of
the Low Income Heating Energy Assistance (LIHEAP) program is also critical in helping
needy families cope with rising heating costs.
In the long-term, Mr. Chairman, we agree that more needs to be done to diversify our
supplies of natural gas. Katrina and Rita have clearly demonstrated the high degree of
our reliance as a nation on the Gulf region to supply our energy needs. Other regions of
the country can and should be a part of our overall energy resource development. Yes,
many groups have complained about the environmental risks associated with expanding
offshore energy to include waters outside the western Gulf of Mexico. After three
significant hurricanes in two years, it is time to concede that apprehensions about the
environmental consequences of offshore energy development are greatly overstated. The
fact that we have not had significant environmental incidents after Ivan, Katrina and Rita
must stand for something! Our national energy policy should not be premised on
hypothetical problems or on assumptions based on incidents from 40 years ago.
In addition, the United States will need to build new liquefied natural gas import
terminals to keep pace with our demand for this fuel. Most of the new terminals that
have been approved by the FERC in recent years have been located in the Gulf of
Mexico. There are good reasons why the Gulf is attractive, such as access to an extensive
pipeline network, but it is also true that the Gulf has been the “path of least resistance” in
terms of NIMBY-type opposition. Perhaps the hurricanes, and the effects this winter on
natural gas prices and the larger economy, will finally convince other regions of the
country of the importance of having a geographically diverse mix of these facilities.
Finally, it is worth examining the factors that have precluded electric generators from
installing dual-fuel capability when building a gas-fired power plant. Over the last
decade, dual-fueled facilities – facilities that can operate on both natural gas and fuel oil –
have been discouraged by emissions limits and by the difficulty in siting oil storage
facilities on site. Also, the rules in some electric power markets provide such generators
no assurances that the additional capital cost of such facilities can be recovered in the
price received for electricity. These factors have compelled developers to build power
plants totally dependent on natural gas. Should natural gas supplies remain tight this
winter, these facilities will face the choice of either paying huge fuel charges, or not
running at all.
Before I conclude, I want to suggest some responses that should not be undertaken.
During times of crisis, it is easy to overreact in ways that are ultimately
counterproductive. The first suggestion I would like to leave you with is this: please do
not try to regulate commodity prices. This country actually did regulate natural gas
prices for many years, resulting in artificial supply shortages and a misallocation of
resources. Similarly, the government should not attempt to pick winners and losers in
allocating scarce supplies among end-users. Some debate has surrounded the notion of
limiting the use of natural gas for generation. Mr. Chairman, you and Senator Bingaman
were present when Congress debated the deregulation of wellhead natural gas prices and
the Fuel Use Act, so you remember the problems that existed at the time. While it can be
painful in the short run, the market really does the best job of efficiently allocating scare
resources and sending the right price signals that will solve supply problems.
Mr. Chairman and Member of the Committee, I thank you once again for the opportunity
to testify, and I will be happy to answer your questions.