- Clear your browser's cache - Guide to clearing browser cache
- Close and re-open your browser
- If the above two steps do not help, please try another browser. Internet Explorer or Microsoft Edge have the highest level of compatibility with our player.
Senator Pete V. Domenici
S. 2253 -- 181 HEARING
Chairman Domenici -- Opening Statement
Good Morning and Welcome.
In today’s hearing we will discuss S. 2253, a bill to direct the Interior Secretary to offer areas within the 181 Area for oil and gas leasing. Yesterday, in his first congressional testimony since assuming the position of Federal Reserve Chairman, Ben Bernanke stated that while the US economy “performed impressively” in 2005, rising energy costs present an economic risk. The Chairman stated that, “The possibility of significant further increases in energy prices represents an additional risk to the economy; besides affecting inflation, such increases might hurt consumer confidence and thereby reduce spending on non-energy goods and services.”
I view this as a serious warning from the chairman of our nation’s monetary policy. We will likely hear these same warnings today from the agricultural community as we have in the past from the chemical industry, manufacturers, the paper industry, residential consumers and scores of other Americans and representatives of almost every sector of our economy.
What will history say about this nation’s policy makers when people look back on our time? On February 15, 2000, the price of natural gas closed at $2.61 per million btu. At the close yesterday, six years later, the price of natural gas in the U.S. was $7.32¬. Over that six year period, America’s natural gas bill has risen from $50 billion to $200 billion. That is $150 billion less that the American people have to spend, save and invest. And it serves as an additional burden on the businesses that drive this nation’s economy. This burden acts as a tax on the American people and only serves to stymie growth.
Last week, across the world in the midst of the frigid Russian winter, the price of natural gas was at about $1.25 per million btu and, in Oman where the government of the Sultanate has entered a joint venture in a petrochemical plant with an American chemical company, the price of natural gas is approximately $1. In today’s global economy our failure to act is setting us up to get left behind. So, what will history say about us when we are presented with all this testimony from our business leaders, from the Chairman of our nation’s central bank, and from our residential consumers? What will they say if we are too timid to act? What does it say about us when we let the misplaced fear of others, against all evidence to the contrary, get in the way of reasonable proposals that will bring much needed energy to the American people? What will we tell the folks in our home states who bear the burden of these costs in their winter bills? What will we say when they ask what we did to remedy this glaring problem?
I will try my best with this 181 bill. I, along with Senators Bingaman, Talent and Dorgan have offered a bipartisan plan to add an additional supply of natural gas to help alleviate the cost to consumers. We are told that this is the single most important thing that this Congress can do this year to bring a substantial supply of natural gas to the market. We are told that this should impact the price of the commodity in the market in the near term. While it is likely that production can be brought on within two years from the date of a lease sale, it is also likely that action on this bill will send a positive signal to the markets. The message will be that we are serious about taking action to increase the domestic supply of natural gas and to reduce the cost of energy. Remember, markets work on supply and demand, but they also operate on information, and on anticipated supply and demand.
Opponents of our plan have concerns about the Florida coast. I have said it in the past and I will say it again-- I would never do anything to hurt Florida, and I don’t think President Clinton, Secretary Babbitt and Governor Chiles would have done anything to hurt Florida either. They negotiated drilling in an agreed upon territory that is larger than the area in our bill and closer to Florida’s coast than the area covered under this Domenici-Bingaman Bill. And they negotiated in a price environment of $20 oil and $2.50 gas. Our 181 bill provides that the Secretary shall not offer leases within 100 miles of the Florida coast. The State of Delaware is 100 miles long and 30 miles wide. There is nothing minimal about the 100 mile area exclusion provided in this bill.
Also, in this bill, we protect the prerogative of our nation’s military to conduct activities in the Eastern Gulf of Mexico. Pursuant to a letter written by Secretary Rumsfeld in November 2005, we have stated in this bill that there shall be no leasing in the area east of the Military Mission Line that is within the 181 Area unless the Secretary of Defense agrees in writing that the lease does not interfere with military activities. This is clear in the bill and the seriousness with which we take the military’s request is not in dispute.
Today we have a broad range of witnesses who will testify about current state of energy costs in the United States and the effect on residential and industrial consumers; the level of industry interest in exploring and producing oil and gas in the area covered by this 181 bill; potential environmental challenges and impacts from exploration and production in the area; the potential resource base in the area covered by this legislation; the likely schedule for bringing these resources to market; and the possible effect that this additional supply of oil and natural gas will have on the price of these commodities. They are here at a critical time for our nation’s energy policy and we should listen to what they have to say.
Witness Panel 1
The Honorable Rejane "Johnnie" Burton
R.M. “JOHNNIE” BURTON
DIRECTOR, MINERALS MANAGEMENT SERVICE
UNITED STATES DEPARTMENT OF THE INTERIOR
COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
S. 2253, A BILL TO REQUIRE THE SECRETARY OF THE INTERIOR TO OFFER THE 181 AREA OF THE GULF OF MEXICO FOR OIL AND GAS LEASING
February 16, 2006
Mr. Chairman and Members of the Committee, I appreciate the opportunity to appear here today to discuss the area of the Federal Outer Continental Shelf (OCS) in the Gulf of Mexico commonly referred to as the “Sale 181 area”. We appreciate the Committee’s efforts to address our nation’s domestic energy needs. S. 2253, calling for the expansion of leasing within the Gulf of Mexico of non moratoria areas closely resembles the draft 5-year proposed program released by the Department on February 8, 2006.
The OCS Lands Act directs the Secretary of the Interior to make resources available to meet the nation’s energy needs. The accompanying congressional declaration of policy states, “The OCS is a vital national resource reserve held by the Federal Government for the public, which should be made available for expeditious and orderly development.” The Administration has directed the Minerals Management Service (MMS) to meet this charge through specific policy initiatives provided in the President’s National Energy Policy. This direction is all the more critical in the face of higher oil and natural gas prices and their impacts to our economy.
As the Nation’s offshore energy and mineral resource management agency, the MMS has a focused and well established ocean mandate – to balance the benefits derived from exploration and development of oil, gas, marine minerals and renewable energy resources with environmental protection and safety.
The environmental record of the OCS program is outstanding. There has not been a significant platform spill in the last 35 years. The Sale 181 area is a gas prone area and natural gas production offshore represents one of the most environmentally sound energy developments this country could propose.
The oil and gas produced from the OCS plays a major role in supplying our daily energy needs, accounting for 30% of domestic oil production and 21% of domestic natural gas production. The Gulf of Mexico is the most prolific producing offshore region, providing 27% of the oil and 20% of the natural gas produced domestically. The share of Gulf of Mexico production is expected to rise within the next several years to about 23% of natural gas and 40% of oil domestic production.
In 1999, MMS put out a call for information and notice of intent to prepare an environmental impact statement for a proposed Federal oil and gas lease sale in the area now referred to as the original Sale 181 area. This area, original Sale 181, included an area offshore of Alabama beginning 15 miles south of the Alabama coast and an area offshore of Florida more than 100 miles from the Florida coast. It included 1,033 lease tracts covering 5.9 million acres.
In 2001, the Secretary of the Interior spent a great amount of time speaking with officials and citizens of the affected states around the original Sale 181 area. Based on those discussions, a decision was made to modify the 181 area that would be offered in the December 2001, lease sale and that would become available for leasing during the 5-Year Oil and Gas Leasing Program for 2002-2007. This modification reduced the acreage available for leasing in the Sale 181 area from 5.9 million acres to 1.5 million acres. At the time, the Department projected the adjusted area contained an estimated 1.25 trillion cubic feet of natural gas and 185 million barrels of oil.
There have been three sales held in the modified Sale 181 area. The first, Sale 181, held in December 2001; Sale 189 in December 2003; and Sale 197 in March 2005. The results of Sales were as follows:
Sale 181: 95 leases were awarded, with total high bids of $340,474,113.
Sale 189: 14 leases were awarded, with total high bids of $8,376,765.
Sale 197: 10 1eases were awarded, with total high bids of $6,595,753.
There have been a total of 26 exploration wells drilled on the leases in this area. The first discovery on leases issued in these recent sales was announced in 2003 with seven additional discoveries subsequently announced. These discoveries are predominately natural gas.
Five independent exploration and production companies and a mid-stream energy company have come together to facilitate the development of multiple ultra-deepwater natural gas discoveries located in the Central and Eastern Gulf of Mexico, including all of the 7 discoveries mentioned above. The fields' water depths range from 7,800 to 9,000 feet. The production from these discoveries will be tied-back to a central platform, Independence Hub, which will be located on unleased Mississippi Canyon Block 920 in the Central Gulf. First production is expected in 2007.
5-Year Program for 2007-2012
In August 2005, the Department began the process of developing the next 5-Year Oil and Gas Leasing Program 2007-2012 by requesting comments on all OCS areas, including the Sale 181 area. On February 8, 2006, the Department announced its draft proposed program for the 5-year OCS Oil and Gas Leasing Program 2007-2012. This was the second step in a 5-step process which affords substantial opportunity for public comment. Under the draft proposal, the MMS would plan on conducting a lease sale in a larger part of the original Sale 181 area in the fall of 2007.
On January 3, 2006, the Department published in the Federal Register revised administrative lines that differentiate Federal waters of the Eastern, Central and Western Gulf of Mexico. These lines were drawn on the principle of equidistance. It is now clear which area of Federal waters is off the coast of each state. These lines are purely administrative with no legal effect on civil or criminal jurisdiction. We published the lines because the OCS is more and more subject to multiple-use activities, and it became timely to delineate zones of interest of coastal states in Federal waters.
The draft proposal includes consideration of leasing in an expanded area within the original Sale 181 area. The expanded area is approximately 2 million acres now located within the Central Gulf Planning Area under the new administrative lines. This area is in addition to the 1.5 million acres within the original Sale 181 area already offered for leasing under the current 2002-2007 5-year program.
MMS estimates that most of the prospective tracts in this area would be leased out within 5 years, under annual sales, and that the first production would occur within 5 years of the first sale.
The Sale 181 area, which we believe has a huge potential for natural gas and oil resources, is not under Congressional moratorium or Presidential withdrawal. Nevertheless, in accordance with the Secretary’s commitment, the draft does not propose any leasing within 100 miles of the coast of Florida, including that portion of the Sale 181 area which is now in the Central Gulf Planning Area. No lease sale is proposed in the Eastern Gulf Planning Area. This respects the commitment made by the Secretary, which was reiterated in the August 2005 Request for Information, that the Secretary “had no intention of offering for leasing areas in the Eastern Gulf of Mexico Planning Area within 100 miles of the coast of the State of Florida.”
In addition, the area proposed for leasing is west of the Military Mission Line (86 degrees, 41 minutes West longitude) and would not interfere with military readiness or training. We work extensively with the Department of Defense on all oil and gas leasing on the OCS and envision this relationship to continue with future leasing decisions.
The draft proposed program would continue to schedule annual area-wide lease sales in the Central and Western Gulf Planning Areas, as has been the customary practice.
The area south of the original Sale 181 area that is west of the new administrative line has been included for analysis. This area is currently under both Presidential withdrawal and Congressional moratorium; both of these would need to be removed before this area could be offered for lease. It is estimated that there could be 700 million barrels of oil and 3.68 trillion cubic feet of natural gas in this area. This area warrants further analysis and consideration in order to inform future decisions as to whether or not to include the area in the final program. Therefore, the draft proposed program notes that subsequent annual Central Gulf sales may consider the area to the south. No sale will be held unless the moratorium is discontinued by Congress and the Presidential withdrawal is modified. In addition, pursuant to Section 18 of the OCS Lands Act, no sale will be proposed until all affected states have the opportunity to comment.
2006 Resource Assessment
Concurrent with the draft proposed program, MMS released two documents: (1) Assessment of Undiscovered Technically Recoverable Oil and Gas Resources of the Nation’s Outer Continental Shelf, 2006; and (2) the Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural Gas Resources, which was sent to Congress. These documents report MMS’s new estimates for the total endowment of technically recoverable oil and gas resources for the entire OCS, including areas under Congressional moratoria or Presidential withdrawal. In the draft proposed program for 2007-2012, numbers were predicated on the 2003 estimates. These numbers will be updated in the proposed program that will be released in the summer of 2006.
MMS periodically updates its resource assessments to include any new data and information, incorporate advances in exploration and development technologies, and use new assessment methods. MMS did not directly acquire or contract for the acquisition of new seismic data or the drilling of wells. All of the data used was commercial data or published scientific research.
The Department has completed eight comprehensive resource assessments since 1976. During this timeframe, the magnitude of resources believed to be technically recoverable continued to grow with each assessment in those areas with leasing activity.
Estimates for the Sale 181 Area
MMS has examined the resource potential of the Sale 181 area under the 2003 interim update. Based on those assessments, we have estimated that the portion of the Sale 181 area east of the area currently available for lease has a potential of 930 million barrels of oil and 6.03 trillion cubic feet of gas. This is the area proposed in S. 2253. By contrast, the new area included in the Draft Proposed Program for 2007-2012 is estimated to contain 530 million barrels of oil and 3.42 trillion cubic feet of gas.
Mr. Chairman, I will now turn to S. 2253, the legislation that you, along with Senators Bingaman, Talent and Dorgan, introduced last week. The legislation would require the Secretary of the Interior to offer a large portion of the Sale 181 area for oil and gas leasing within one year of enactment. We support the goals of the legislation and we appreciate your efforts to make additional energy resources available for our nation. This proposal would make 3.6 million acres available for lease while maintaining a 100 mile buffer zone along the Florida coast. Leasing in the area east of the Military Mission Line, an area of approximately 725,000 acres, would be subject to the agreement and approval of the Secretary of Defense.
The work MMS must conduct to comply with the National Environmental Policy Act, Marine Mammal Protection Act, Endangered Species Act, and Coastal Zone Management Act is very similar for the sale included in its draft proposed oil and gas leasing program as for the lease sale called for in S. 2253. Mr. Chairman, we look forward to working with you and your staff on this legislation.
This Administration and the Department of the Interior remain committed to ensuring that the OCS remains a solid contributor to the nation’s energy needs. The relative contribution from federal offshore areas will increase in the upcoming years due to activity in the deep water areas of the Western and Central Gulf of Mexico.
Mr. Chairman, this concludes my statement. Please allow me to express my sincere appreciation for the continued support and interest of this committee for MMS’s programs. It would be my pleasure to answer any questions you or other members of the Committee may have at this time.
Witness Panel 2
Mr. Stephen Wilson
Stephen R. Wilson
Chairman and CEO, CF Industries Holdings, Inc.
Representing the Views of:
CF Industries Holdings Inc.
The Fertilizer Institute
Before the Senate Committee on Energy and Natural Resources
Regarding Natural Gas Supply and Sale 181 Area
February 16, 2006
Statement of Stephen R. Wilson
Chairman and Chief Executive Officer
CF Industries Holdings, Inc.
The United States Senate
Committee on Energy and Natural Resources
February 16, 2006
CF Industries is pleased to have the opportunity to discuss the urgent situation facing the U.S. fertilizer industry. The volatility and level of U.S. natural gas prices, virtually unprecedented in the history of our country, resulted in the permanent closure of almost 40% of U.S. nitrogen fertilizer capacity between 1999 and 2005. In the current environment this situation threatens an efficient U.S. industry and the thousands of workers who support it.
It is important to state up front that, while my comments focus on the fertilizer industry, they actually address a broader issue - food security. An estimated 40 percent of U.S. crop production is directly attributed to the use of commercial fertilizers. Consequently, if high natural gas prices continue to result in the outsourcing of the U.S. fertilizer industry, we as a country are basically putting our food security in the hands of major fertilizer export countries such as Saudi Arabia, Russia, the Ukraine and Venezuela.
CF also is appearing today on behalf of the Fertilizer Institute (TFI). TFI represents fertilizer from the plants where it is produced to the plants where it is used—and all points in between. Producers, retailers, trading firms and equipment manufacturers, which comprise TFI’s membership, are served by a full-time Washington, D.C., staff in various legislative, educational and technical areas as well as with information and public outreach programs. Both CF Industries and TFI are also members of the Agriculture Energy Alliance, a broad-based coalition of 100 farm organizations and agribusinesses severely impact by high natural gas prices.
The following summarizes the key points in this statement:
1. Natural gas is the raw material used in the production of nitrogen fertilizer, accounting for over 93 percent of the total cash cost of production.
2. High and volatile natural gas prices have a serious impact on the nitrogen fertilizer industry.
3. American fertilizer manufacturing creates high paying jobs.
4. Loss of this strategic U.S. industry leaves American farmers vulnerable.
5. Energy conservation and fuel efficiency are priorities at CF Industries manufacturing facilities.
6. The Energy Policy Act of 2005 was helpful, but new natural gas supply is needed.
7. Congress needs to continue to change energy policy to increase supply and decrease demand for natural gas. Opening up Sale 181 area for production is a direct, positive action to increase the nation’s domestic natural gas supply.
CF Industries Holdings, Inc., headquartered in Long Grove, Illinois, is the holding company for the operations of CF Industries, Inc. We are a major producer and distributor of nitrogen and phosphate fertilizer products. We operate world-scale nitrogen fertilizer plants in Donaldsonville, Louisiana and Medicine Hat, Alberta, Canada; conduct phosphate mining and manufacturing operations in Central Florida; and distribute fertilizer products through a system of terminals, warehouses, and associated transportation equipment located primarily in the midwestern United States. We were an agricultural cooperative for 59 years until we became a New York Stock Exchange listed public company last August.
In Louisiana, we employ approximately 450 full-time and contract workers. This facility contributes $48 million a year in wages and $12 million in sales and property taxes to the local community. The Company as well as the employees of this facility have been an integral part of the surrounding communities since 1966. During a normal production year, the facility converts approximately 78 million MMBtu of natural gas into 2.27 million tons of ammonia, 1.75 million tons of granular urea, and 2.35 million tons of UAN solutions. At capacity, the Complex has a daily requirement of over 200,000 MMBtu of natural gas as a feedstock and fuel, which at $8 per MMBtu represents a daily natural gas bill of $1.6 million. CF accounts for almost one-fourth of the nitrogen fertilizers applied in the United States and nearly one-third of the nitrogen fertilizers applied in the primary growing areas of the Midwest.
We also mine and manufacture phosphate fertilizers in Hardee County and Plant City, Florida and operate a distribution facility at the Port of Tampa. The Company has had operations in Florida since 1969. At Hardee, we employ approximately 200 full-time and contract workers. This facility accounts for $18 million per year in wages and $8 million in severance, sales and property taxes. During a normal production year, the mine produces over 3.6 million tons of phosphate rock. At Plant City, we currently employ approximately 500 full-time and contract workers. This facility accounts for $46 million a year in wages and $2 million in sales and property taxes. During a normal production year, the facility produces 2.5 million tons of sulfuric acid, 1.0 million tons of phosphoric acid, and 2.0 million tons of diammonium phosphate (DAP) and monoammonium phosphate (MAP). The Complex consumes over 400 thousand tons of ammonia annually. In Tampa, CF currently employs 35 full-time and contract workers. This facility accounts for $3 million a year in wages and $0.7 million in wharfage and property taxes. During calendar year 2005, the facility handled over 1.1 million tons of dry fertilizer product and .600 thousand tons of ammonia. We account for 14% of the phosphate fertilizer applied in the U.S. and approximately 20 percent of the phosphate applied in the Midwest. Additionally, we are an exporter of phosphate fertilizer products.
Natural Gas is the Raw Material Used in the Production of Nitrogen Fertilizer
My purposes today are first to discuss the serious impact that the unprecedented high level and volatility of natural gas prices has had and is having on both the fertilizer industry and the American farmer, and second to discuss steps that Congress can take to alleviate the current situation. While I will address the latter in more detail later in my testimony, let me simply state that, as a country, we need to do everything possible to expand our supply of natural gas as quickly as possible.
To fully understand why high and volatile natural gas prices create such fundamental difficulties for the nitrogen fertilizer industry, a basic understanding of our products and manufacturing process is necessary.
Natural gas is the primary feedstock in the production of virtually all commercial nitrogen fertilizers manufactured in the United States (Figure 1). It is important to be very clear about this: natural gas is not simply an energy source for us; it is the raw material from which nitrogen fertilizers are made. This distinguishes our industry from most other large consumers of natural gas in the United States. For example, the steel industry uses natural gas as a heat source, but can shift to other energy sources such as fuel oil.
Our production process involves a catalytic reaction between elemental nitrogen derived from the air and hydrogen derived from natural gas. The primary product from this reaction is anhydrous ammonia (NH3). Anhydrous ammonia is used directly as a commercial fertilizer or as the basic building block for producing virtually all other forms of nitrogen fertilizers such as urea, ammonium nitrate and nitrogen solutions, as well as in the production of DAP and MAP. Natural gas is also used as an energy source to generate heat when upgrading anhydrous ammonia to urea.
Natural Gas + Air Anhydrous Ammonia
(CH4) (N2) (NH3)
Because natural gas is the source of the hydrogen used in producing nitrogen fertilizers, it is by far the primary cost component. Today, in the case of ammonia, natural gas accounts for 93 percent of the total cash cost of production (Figure 2).
High and Volatile Natural Gas Prices Have a Serious Impact on the Nitrogen Fertilizer Industry
Given this heavy reliance on natural gas, high and volatile natural gas prices have a serious impact on the domestic fertilizer industry. As you are well aware, natural gas prices began to increase from historical levels during calendar year 2000. Although prices moderated in 2001, they have been climbing ever since and in recent months spiked to over $15 per MMBtu (Figure 3). To put this into perspective, the average natural gas price during all of the 1990s was just over $2.00 per MMBtu. This climb in natural gas prices has forced U.S. fertilizer production costs to unprecedented levels. For example, ammonia cash production costs have jumped from a historical average of approximately $100 per ton to an average over the last six months of just under $400 per ton and a high in December of $495 per ton.
Not surprisingly, over this period of high prices and intense volatility, the industry began to shut down production in response (Figure 4). Nearly 40 percent of the industry’s nitrogen capacity permanently closed between 1999 and the current run-up in natural gas prices in 2005. Most of the remaining facilities have had to run at less than full capacity in recent months. During the last half of calendar year 2005, U.S. ammonia production totaled 4.9 million tons compared to 6.0 million tons for the same period in 2004 and average July-December production volume during the 1990s of 8.7 million tons.
While U.S. production was already at low levels, the situation was exacerbated by Hurricanes Katrina and Rita. Immediately after Rita hit the Gulf coast, natural gas prices spiked to over $15 per MMBtu. The spike in gas prices combined with shortages of natural gas resulted in U.S. nitrogen fertilizer production dropping to its lowest level in over 30 years (Figure 5).
The sharp rise in natural gas prices and the resulting curtailment of U.S. fertilizer production also has had a dramatic impact on fertilizer prices throughout the marketing chain and, in particular, at the farm level. According to U.S. Department of Agriculture data, the U.S. average spring price to farmers for ammonia climbed from $250 per ton in 2002, to approximately $375 per ton in 2003 and 2004, to $416 per ton in 2005. Similarly, urea prices from 2002 to 2005 climbed from $191 per ton to $332 per ton and UAN solutions prices from $148 per ton to $243 per ton. Although farm-level data is not yet available for 2006, average prices this spring will likely be even higher (Figure 6).
While natural gas prices have had a dramatic impact on nitrogen fertilizer cost, they have also had a significant impact on the cost of phosphate fertilizers, DAP and MAP, that we produce in Central Florida. DAP and MAP are produced using ammonia and contain 18 percent and 11 percent nitrogen, respectively. As a result of the sharp increase in ammonia cost, the cost of producing DAP and MAP and the cost of these products at the farm level have also risen significantly. For example, DAP production cost has increased from approximately $125 per ton in 2002 to just under $200 per ton in December 2005. Similarly, farm level prices for DAP during the spring season have jumped from $227 per ton in 2002 to $303 per ton in the spring of 2005.
American Fertilizer Manufacturing Creates High Paying Jobs
Clearly, a scenario of sustained high natural gas prices could lead to more U.S. fertilizer plant closures and abandonment of infrastructure in rural communities. This would result in the further loss of high-paying, stable jobs in host communities. For example, the chemical industry in Louisiana (which depends heavily on natural gas) provides nearly 30,000 jobs at an average annual salary of nearly $55,000 and creates an additional 6.8 jobs for every direct job in the chemical industry. These companies also bring $800 million to the state treasury and local governments through household earnings generated directly and indirectly by the chemical industry.
In Florida, over 6,000 employees are directly employed by the phosphate industry, with an average total compensation of $72,000. The industry also supports an additional 5 jobs for each phosphate job. The Port of Tampa attributed more than 41,000 jobs and $5.9 billion in total economic benefits to phosphate and related chemical industries in 2001. The industry also paid over $85 million in severance, property, sales and other taxes and fees in 2003.
Loss of This Strategic Industry Leaves American Farmers Vulnerable
However, the most significant impact would be on the American farmer. The continued loss of production from the domestic nitrogen industry would force farmers to rely on a highly uncertain and highly volatile world market with no assurance that they will be able to obtain enough product to meet their full demand. This is particularly important when considering the importance of nitrogen to farmers. For example, according to the University of Illinois, 30-50 percent of corn yields can be directly attributed to nitrogen fertilizer.
Since the 1940s, farm demand for nitrogen fertilizers has always been supported by a large, efficient domestic fertilizer industry. For example, during the 1990s approximately 70-75% of the nitrogen fertilizers consumed by American farmers was supplied by domestic production. Since most of the nitrogen fertilizer in the U.S. is consumed within very short time frames in the fall and spring application seasons, an extensive distribution and storage infrastructure has developed to move product from the manufacturing plants to the major fertilizer consuming regions in order to bridge this seasonal gap. This system of production facilities and downstream infrastructure was designed specifically to ensure that American farmers would have adequate supplies of fertilizers at the right time and at the right place.
On the other hand, offshore supply was largely constructed to compete opportunistically in the world market. In other words, offshore exporters have little, if any, commitment or infrastructure to serve the U.S. market and generally sell wherever they can get the highest price netted back to these plants. That means that supply can and would be shifted from U.S. customers to other global customers based on relative price movement.
Imports also are subject to changes in world economic conditions, fluctuating exchange rates and political and/or policy changes in other countries. This point is particularly important when looking at the list of major nitrogen fertilizer exporting countries. These include Russia, Ukraine, Saudi Arabia, Qatar, Kuwait, Oman, the United Arab Emirates, Indonesia and Venezuela.
Higher import volume does not mean lower price. This can be demonstrated by looking at import volumes versus product prices. Since 1999 when U.S. natural gas prices first began to escalate, nitrogen imports have almost doubled from 6.3 million tons to a record volume last year of 11.3 million tons, with imports now accounting for just over half of the U.S. total nitrogen supply (Figure 7). During this same time period, average farm level prices have not gone down but have escalated at a record pace. Ammonia, urea and UAN solutions prices have climbed by 89 percent, 87 percent and 83 percent, respectively, since 1999 (Figure 8). This has forced a typical farmer’s total fertilizer bill to increase by more than 50 percent during the same time period.
Energy Conservation, Fuel Efficiency and Other Investments Are Top Priorities at CF Industries Manufacturing Facilities
Our company has focused for many years on improving the conversion of natural gas into fertilizer and on energy efficiency in general. We have a very strong economic interest in doing so. CF has completed several energy efficiency projects and continues to look for opportunities to conserve energy at all of our facilities.
The preponderance of natural gas we purchase is used as a chemical feedstock, rather than as an “energy” source at our Donaldsonville, Louisiana Nitrogen Complex. Our production process uses that feedstock gas as efficiently as possible. Each of our four Donaldsonville ammonia plants was designed to produce 1,000 short tons per day of anhydrous ammonia at an average energy consumption of 37.8 MMBtu per ton. As a result of investing over $100 million in efficiency improvement and debottlenecking projects in Louisiana, production capacity has been increased by 62% above the original design, while energy consumption has decreased by 13% per ton. We are investigating additional energy improvement projects that could reduce energy consumption by another 6% per ton from current levels.
Despite these steps and the fact that our nitrogen facilities are first class globally competitive assets, we cannot conserve our way out of this situation. It is the price of natural gas, not the lack of technology, that has created this serious situation. CF spent about $1 billion in the 1990’s improving and expanding our operations. Unfortunately, like other U.S. energy-intensive manufacturers, we must now look offshore for future projects.
In Florida the company spent $28 million on efficiency improvements. At our Plant City Complex, CF installed a cogeneration unit to generate electricity from waste heat (steam). The unit eliminated a monthly power bill of approximately $1.5 million at today’s energy costs and converted the facility into a net exporter of electricity. CF also installed air preheaters to utilize high pressure steam to heat dryer air and eliminate the use of natural gas to heat air, resulting in a savings of $2 million per year at today’s natural gas cost. Heat exchangers were installed at Plant City to utilize waste heat (hot water) from scrubbing systems to vaporize ammonia in lieu of steam. The savings when converted to electricity are worth approximately $1 million per year at today’s energy costs.
CF Industries recently was selected to participate in April 2006 in the Department of Energy’s “Save Energy Now” program in which DOE sends experts to the nation's most energy-intensive manufacturing facilities to conduct energy savings assessments. The purpose of the assessments is to identify immediate opportunities to save energy and money, primarily by focusing on steam and process heating systems.
The Energy Policy Act of 2005 Was Helpful but New Natural Gas Supply Is Needed
H.R. 6, the Energy Policy Act of 2005, was an important first step in moving our country towards a comprehensive energy policy. The energy bill facilitates the diversification of energy sources used to generate electricity, including encouraging development of alternative energy sources, and promotes the efficient use of energy in our homes, businesses and government facilities. These provisions should alleviate some of the demand pressure on natural gas.
The energy bill also has specific provisions to increase natural gas supplies including:
• creating incentives for natural gas production from deepwater wells and from ultra-deep wells in shallow water;
• allowing for more expedited leasing and permitting of production from federal lands and improved management of federal oil and gas leasing programs by all federal agencies;
• clarifying liquefied natural gas (LNG) terminal siting and safety responsibilities among federal and state agencies; and
• facilitating the expansion of natural gas delivery infrastructure.
Despite these initiatives, high natural gas prices remain the most serious threat to the fertilizer sector and to farmers in general, since the energy shocks of the 1970s. We need an increase in supply and a resulting reduction in price to ensure an adequate and stable domestic supply of nitrogen fertilizer for our farmers into the future.
Congress Should Continue to Change Energy Policy to Increase Supply and Decrease Demand for Natural Gas
So what can Congress do now? Put simply, Congress should continue the good work begun in the Energy Policy Act of 2005 and take further measures to reduce gas demand and increase gas supply. With regard to the issue of demand, Congress should continue to encourage the electric power industry to explore and invest in alternative technologies for power generation, including “clean coal” and next-generation nuclear plants. These technologies offer the best hope for limiting the increasing natural gas demand of the electric power sector.
With regard to the issue of supply, Congress should also take action to open up the Sale 181 area. This would be a direct, positive action to increase the nation’s domestic natural gas supply to help relieve the high prices now pressuring American consumers. Allowing exploration and development in the Sale 181 area is an essential commitment that our nation must make.
Back when the full Sale 181 area was analyzed in the 1990’s, it was determined that it had the potential to produce 7.8 TCF of natural gas and 1.9 billion barrels of oil. However, these numbers may be much higher today. They are based on the 1995 resource estimates and oil and gas prices that were much lower than today, and they did not include the data now available from the leasing that has gone on in a quarter of the original area. These natural gas resources belong to all Americans and should be developed for the benefit of the entire nation. Responsible development of natural gas resources represents the most significant policy option before Congress to address current and future natural gas needs in this country. We believe that opening the Sale 181 area would send a strong signal to natural gas markets and could increase the elasticity in North American natural gas markets.
For those of us in the fertilizer industry, “the future is now.” We encourage this Committee, the Congress, and the Administration to continue to look aggressively for ways to expedite those projects that will increase natural gas supplies and help get supplies to the fertilizer industry in the near term.
CF Industries supports the expedited opening of the Sale 181 area. We believe that access to these reserves can be of substantial benefit in meeting the nation’s energy needs without compromising other legitimate interests, including environmental protection. The Sale 181 area should be opened to environmentally responsible production.
Congress also should continue its efforts to support the construction of new LNG terminal facilities and the proposed Alaska Natural Gas Pipeline.
In summary, it is imperative that adequate supplies of natural gas be developed for the benefit of the American farmer given that almost one-third of U.S. crop production is derived from nitrogen fertilizer.
Thank you for the opportunity to discuss these issues with you today. We look forward to working with you over the next few months, and I would be pleased to answer any questions you may have on the fertilizer industry and natural gas pricing issues.
Agribusiness Association of Iowa
Agribusiness Council of Indiana
Agricultural Council of California
Agricultural Retailers Assn.
Alabama Crop Management Assn.
American Farm Bureau Federation
American Plant Food Corporation
American Soybean Assn.
Arkansas Plant Food Assn.
California League of Food Processors
Chemical Industry Council of Illinois
Colorado Grain & Feed Assn.
Crop Production Services
D.B. Western, Inc.—Texas
Delaware Maryland Agribusiness Assn.
Diamond of California
Far West Agribusiness Assn. (WA)
Florida Fertilizer & Agrichemical Assn.
Georgia Agribusiness Council, Inc.
Georgia Feed & Grain Assn., Inc.
Hartung Brothers, Inc.
Hawaiian Alliance for Responsible
Technology & Science
Helena Chemical Company
Illinois Fertilizer & Chemical Assn.
Indiana Grain & Feed Association
Indiana Plant Food & Ag Chemicals Assn.
Intermountain Farmers Assn.
International Chemical Corporation
International Commodities Export Corp.
International Raw Materials Ltd.
Iowa Institute for Cooperatives
JR Simplot Company
Jim Hicks & Company
Johnston Seed Company
Kansas Agribusiness Retailers Assn.
Kansas Grain and Feed Assn.
Land O’ Lakes, Inc.
Louisiana Ammonia Producers
Mayo Fertilizer Inc.
Michigan Agri-Business Assn.
Minnesota Agri-Growth Council
Minnesota Crop Production Retailers
Missouri Ag Industries Council, Inc.
Montana Agricultural Business Assn.
National Association of Wheat Growers
National Barley Growers Assn.
National Chicken Council
National Corn Growers Assn.
National Council of Farmer Cooperatives
National Renderers Association, Inc.
National Sorghum Producers
National Sunflower Assn.
National Turkey Federation
Nebraska Agri-Business Assn.
North Dakota Agricultural Assn.
Northern Ag Suppliers, Inc.
Oklahoma Ag Retailers
Oregon Wheat Growers League
Plant Food Association of North
Rocky Mountain Agri-Business Assn.
Society of American Florists
South Carolina Fertilizer and
South Dakota Agri-Business Assn.
Southern Crop Production Assn. (GA)
Southern States Cooperative, Inc.
Tennessee Agricultural Production Assn.
Tennessee Farmers Cooperative
Texas Ag Industries Assn.
Texas Agricultural Cooperative Council
The Andersons, Inc.
The Fertilizer Institute
The McGregor Company (WA)
The Mosaic Company
U.S. Canola Assn.
USA Rice Federation
United Suppliers, Inc.
Virginia Crop Production Assn.
Virginia Poultry Federation, Inc.
W.B. Johnston Grain Company
Washington State Council of Farmer
West Central Inc.
Western Peanut Growers Association (TX)
Western Plant Health Association (CA)
Wheeler Bros. Grain and Fertilizer Co.
Willard Agri-Service of Frederick, Inc. (MD)
Wisconsin Fertilizer and Chemical Assn
Mr. Michael Gravitz
Testimony of Michael Gravitz, U.S. Public Interest Research Group
S. 2253 Introduced by Senators Domenici and Bingaman
Senate Energy and Natural Resources Committee
February 16, 2006 at 10:00 AM
Good morning Senators and staff. My name is Michael Gravitz and I am the Oceans Advocate for the U.S. Public Interest Research Group, the national program and lobby office of the State PIRG’s. I appreciate the opportunity to appear before you today to testify on this bill and to answer any questions you may have for me. With your permission I would like my printed testimony to be entered into the record as I will considerably shorten my remarks. I have been asked to confine my remarks to a review of S. 2253, a bill “To require the Secretary of Interior to offer the 181 Area of the Gulf of Mexico of oil and gas leasing” and I will attempt to do so, though there are a number of other bills and Administration plans that include some of the same areas covered in this bill. So it seems proper to briefly refer to some of those proposals as well.
Understanding of the Area Covered by S. 2253 and Timing of Lease Sale
I am not aware of any official map, acreage delineation, or official estimate of energy resources that was released concurrent to the introduction of this bill. Newspaper sources and committee staff have stated that the area covers approximately 3.6 million acres and contains an estimated 6 TCF of natural gas and 930 million barrels of oil. From the bill, the areas boundaries are: the Military Mission line to the east, to the north a line at least 100 miles south of the coast of Florida’s panhandle, to the west the western edge of Lease Sale 181, and to the south the southern boundary of Lease Sale 181.
According to the proposed bill, the area would be offered by lease ‘as soon as practicable, but not later than I year, after enactment…’. Let’s assume leasing is completed by early 2007, one year from now. The interval between leasing and production can vary widely for a number of reasons, and U.S. PIRG has not studied this issue. But we believe, based on the most optimistic industry practices, that geophysical exploration might begin in 2007 or 2008, exploratory drilling by 2009 or 2010, and production could begin a year thereafter in 2011 or 2012. Therefore at the earliest, we believe there would be a five or six years interval until we saw the first production from this area. This would be a very optimistic timeframe.
U.S. PIRG opposes this bill for a number of important reasons:
• A drilling program of this size constitutes a measurable hazard to the marine environment of the eastern Gulf of Mexico and to nearby coastal resources like beaches and environmentally sensitive areas and species. In other words, the drilling program proposed will lead to a certain amount of environmental damage detailed below.
• The natural gas and oil (6 TCF and 930 million barrels respectively) estimated to be recoverable in this area will do little or nothing to help us deal with high energy prices. It won’t solve the problem of high natural gas prices in the short run (1-3 years) because the gas can’t be drilled that quickly, and can’t reduce prices significantly over the longer term (say 5 – 25 years) because there isn’t enough gas there compared to either annual U.S. production or consumption. Assuming a 20 year life for production of natural gas, the area would yield approximately 0.3 TCF on average per year which is approximately 1.5% of the total natural gas that the 2006 Annual Energy Outlook projects to be produced from all sources (both OCS and land) in 2015. I have used 2015 because it will take about 7 or 8 years after leasing for this field to be really brought on line.
In economic terms, over the 20-40 year life of the field that would be developed in Lease Area 181, the annual amount of gas or oil produced would not meaningfully shift the supply curve down and to the right on a typical price/quantity supply chart.
Let’s say, for the purposes of this discussion, that the price of natural gas were extremely responsive to even small changes in supply like this, that is very price elastic with respect to supply. Let’s say, again for the purposes of this discussion, that a 1.5% increase in supply could result in a 3% decline in price. This cu would be a price elasticity of 2.0. With natural gas at approximately $8.00 per thousand cubic feet, this would mean a decline of $0.24 per thousand cubic feet, surely not the major price relief that is claimed for this bill.
A Department of Energy, Energy Information Administration study done in 2001 (U.S. Natural Gas Markets: Mid-Term Prospects for Natural Gas Supply, SR/OIAF/2001-06) compared the price of natural gas with the OCS moratoria areas kept out of production and the price of natural gas with all of the moratoria areas opened for drilling in the 2007-2012 MMS 5 Year Plan. For the study, this meant that 58 TCF of gas was added to the existing 175 TCF of undiscovered technically recoverable resources thought to exist in the lower 48 states at the time, an increase in available gas of 33% and almost 10 times the amount of gas that is thought to exist in the Domenici-Bingaman area.
With all of its supply and demand information, DOE’s National Energy Model Modeling System (NEMS) predicted that the price of natural gas would be $3.26 per thousand cubic feet in 2020 without the gas under moratorium and $3.22 per thousand, or four (4) cents less with access to the additional gas in moratoria areas. This is a predicted price drop of a 1.2% from the addition of 10 times more gas reserves than would be freed up under this bill. Now clearly the model didn’t get the price of natural gas correct for 2006 let alone 2020 as natural gas is now approximately $8.00 per thousand cubic feet. But if the price of gas is $8.00 then the savings from having all of the lower 48 States OCS opened up is a decrease of around ten (10) cents per thousand cubic feet. Not nothing. But also not terribly significant either.
This is hardly major or even significant price relief. The effect is of such a magnitude that it would probably be drowned out by marketplace ‘noise’ or normal fluctuations or by catastrophic events we have no control over like the impact of a hurricane Katrina. Catastrophic events that effect production or distribution assets clearly have the ability to move prices much more than a mere addition of 5 TCF of technically recoverable resources.
For the oil resources estimated to be in the area, 930 million barrels is approximately 47 days worth of current U.S. consumption at our daily usage of approximately 20 million barrels per day. Of course, when the field comes on line, consumption may be higher and the actual benefit to the U.S. a briefer period of time.
• The vast majority –80%-- of the nation’s undiscovered technically recoverable OCS gas is located in areas that are already open to drilling, according to the Department of Interior’s 2006 Report to Congress: Comprehensive Inventory of U.S. OCS Oil and Natural Gas Resources. There are estimated to be 86 TCF of Undiscovered Technically Recoverable Resources (UTRR Mean Estimate) in all OCS areas withdrawn from leasing compared to 479 TCF of Reserves, Reserve Appreciation and UTRR in the total OCS of the U.S. Therefore, all the potential gas placed off limits to drilling at present constitutes less than 20% of the gas thought to exist in the OCS.
• The area covered in this bill will not contribute appreciably to the supply of natural gas available for production in the Gulf. According to reports, the field may have 6 TCF in it; approximately 2% of the total natural gas (290 TCF of natural gas in the entire Gulf OCS are categorized as reserves, reserve appreciation, and undiscovered technically recoverable) thought to remain in the entire Gulf.
• U.S. PIRG firmly believes that the focus of energy development efforts should be on conservation savings and alternative sources of clean energy, not drilling for new sources. We could save this much oil (930 million barrels) in less than two years simply by requiring auto makers to close the light truck loophole – that is, make SUV’s, minivans and pickups meet the same gas mileage standards as cars. We support efforts to pass legislation which saves energy and encourages the switch to cleaner sources of energy.
To summarize these main objections, U.S. PIRG believes that drilling in this large an area of 181 is likely to damage the marine environment of the Gulf and coastal beaches which the local tourist economy depends on. The program will fail to have an appreciable impact on oil or natural gas prices in the short or long term. Moreover, the proposed drilling is bad energy policy because it does nothing to either save energy or produce new clean energy such as would come from wind, solar or biomass sources. Even the President has admitted that the U.S. is addicted to oil. Drilling for more oil only feeds the habit and does nothing to help solve the underlying problem.
Environmental problems which come with oil and gas drilling fall into three categories:
• One-time problems related to exploration and drilling
• Chronic problems related to oil spills from production and accidents
• Catastrophic problems related to extreme weather events such as the hurricanes Katrina and Rita that pummeled the Gulf last summer
In order to explore for offshore energy, companies employ seismographic techniques that use high energy sound to penetrate the earth’s layers. These surveys can damage local fish populations and the hearing and navigation of large marine mammals. Some of these large marine mammals like sea turtles and whales do live and travel through the eastern Gulf.
Drilling platforms each produce an average of 180,000 gallons of drilling mud and cuttings for every well drilled. Most of this waste is dumped back into the ocean even though it contains toxic metals including mercury and lead. Significant concentrations of these metals can be found around drilling platforms in the central and western Gulf and have been shown to bioaccumulate their way up into the food chain into fish. Because oil rigs tend to attract populations of fish and because the pollution is concentrated around rigs, the problem is exacerbated.
Drilling produces a lot of air pollution from the equipment that drives the rig. Each rig produces 50 tons of nitrogen oxides, 13 tons of carbon monoxide, 6 tons of sulfur dioxide, and five tons of volatile organic hydrocarbons during the exploration phase. Put lots of rigs together and you get quite a lot of air pollution coming from one area.
Construction of oil and gas pipelines to bring the materials back to shore requires seafloor disturbance which suspends sediments and can create mounds on the seafloor which interfere with commercial fishing. Nearshore habitat can be destroyed or damaged wherever pipelines come on land. Many experts think that bringing gas and oil pipelines onshore through coastal wetlands has been one of the prime reasons for the rapid erosion and loss of protective wetland areas in Louisiana. These areas protect the shoreline and neighboring communities from the damage of extreme storm events.
Onshore oil and gas processing facilities can contribute to air and water pollution and industrialize the shoreline. If oil and gas from this lease sale move back to the Louisiana shore through existing pipelines some of these problems could be avoided. But then, of course, you are typically using increasingly aged pipelines as you get closer and closer to shore where the pipelines were built first.
Chronic problems result from oil spills from production platforms, pipelines and other transport back to shore by barge or tanker. In addition, active wells often release ‘produced water’ back into the environment. These produced waters coming from deep below the seabed can contain heavy metals and in the Gulf sometimes contain elevated levels of radium compounds which are released into the environment.
Over time the oil and gas industry have improved technology, vigilance, and understanding of how to prevent spills by leaps and bounds. However, spills still occur every year in the Western and Central Gulf. Interestingly, spills are 7 to 10 times more likely to come from pipelines than platforms and about 5 times more likely to come from tankers or barge transportation than platforms. Unfortunately, pipelines which are the most difficult element in the entire chain of production to monitor and correct are also the most likely source of spills according to this information which summarizes spill data over 15 years. And as more new fields are opened farther and farther offshore which connect to old pipelines closer to shore, one might expect the older inshore pipelines to be a larger source of the problem. Obviously leaks and spills closer to shore are more harmful to coastal resources than ones farther out.
Spill Source No. of spills equal/more than 1,000 barrels No. of spills equal/more than 10,000
OCS Platforms 0.13 spills/Billion barrels 0.05 spills/Billion barrels
OCS Pipelines 1.38 spills/ Billion barrels 0.34 spills/ Billion barrels
OCS Tankers 0.72 spills/ Billion barrels 0.25 spills/ Billion barrels
Source: Oil Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf Lease Sales, Eastern Planning Area, 2003-2007 and Gulfwide OCS Program, 2003-2042, OCS Report MMS 2002-069, Department of Interior, Minerals Management Service, Environmental Division, page 11
That said, anyone who claims that spills no longer occur because the industry is so sophisticated and the regulators so vigilant has not been looking at the newspapers or MMS, Coast Guard, or the National Response Center reporting web site. There are plenty of reports of spills in the Gulf to choose from, including spills that occurred as a result of Hurricane Katrina in the Gulf, not just oil washed out into the Gulf from the shore.
Oil-Spill Risk Analysis for Lease Sale 181
Extensive data on the probability of spills and the likelihood of a spill reaching important environmental resources comes from the Oil-Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf (OCS) in Support of the Environmental Impact Statement (EIS) for Proposed Lease Sale 181, Department of Interior, Minerals Management Service, Environmental Division, OCS Report MMS 2001-007. This report modeled where a hypothetical oil spill would go over a 3, 10, or 30 day period if it were released from any one of more than 600 different launch points within lease sale 181. Using real wind and current data from a 9 year period, the model calculated where the oil would go and whether it would touch either a coastal segment of land in LA, MS, AL, or FL or contaminate a number of highly important environmental resources like Big Bend Seagrass area of the coast of Florida or the Florida Gulf Island National Seashore.
We believe that the report actually underestimates the probability of spills and coastal pollution since it used a high estimate of 240 million barrels of oil from the entire Lease Sale 181, and we are now told that the smaller Domenici-Bingaman area will probably produce almost 4 times more oil, 930 million barrels. Since the number and probability of spills is directly proportional to the amount of oil produced, the estimates of damage coming from the report are therefore unrealistically low.
Nonetheless, the report concludes, “Spills from all the launch areas have an average probability of contacting the shoreline in the study area of 31 to 59 percent within 30 days of occurrence. With increased travel time, the complex patterns of wind and ocean currents produce eddy-like motions of the oil spills and multiple opportunities for a spill to make contact with any given environmental resource or shoreline segment”. pg 8.
Data shown below come directly from the report cited. We show the ‘maximum conditional probabilities’ because the maximum is based on production of 240 million barrels rather than the lower value of 30 million barrels also used for projections in the report. Obviously, the conditional probabilities of a spill contacting land would be even higher if they had used the new projection of 930 million barrels of oil. The table shows only land segments or resources where the probability of being hit by oil is above 10%.
Maximum Probabilities (expressed as a percent chance) that an oil spill will contact an environmental resource or land segment within 3, 10, or 30 days for Total Sale Area
Area or environmental resource 3 days 10 days 30 days
U.S. Shoreline 28 53 63
Alabama State Offshore Waters 26 29 29
Flower Garden Banks 3 11 13
Eastern LA State Waters 5 19 22
Mobile Bay 12 13 13
Florida Panhandle State Offshore Waters 18 25 27
Land Segment 24 (Alabama-Florida border) 18 21 21
Source: the Oil-Spill Risk Analysis: Gulf of Mexico Outer Continental Shelf (OCS) in Support of the Environmental Impact Statement (EIS) for Proposed Lease Sale 181, Department of Interior, Minerals Management Service, Environmental Division, OCS Report MMS 2001-007, Table 4A, pg. 24. NB: Only resources or segments with a 10% chance or higher of having oil spill contact are listed here.
Our conclusion based on this MMS report which we now believe substantially underestimates the likelihood of an oil spill reaching coastal resources is that there will be oil spills of significant size (above 1,000 barrels) and that some of those spills will strike the coasts.
When hurricanes strike the Gulf Coast they can generate wind in excess of 125 mph. Last summer’s hurricanes Ivan, Katrina, and Rita were a testament to the awesome power that these storms have to damage or destroy offshore and onshore oil and gas facilities. The Incident Summary from NOAA’s Office of Response and Restoration estimates an actual release of 7 million gallons of oil into the Gulf from at least 44 sites on land. By comparison, the Exxon Valdez oil spill, the largest one in U.S. history, dumped about 11 million gallons of oil into the Prince William Sound of Alaska.
In 2005, the National Response Center which is supposed to receive reports from all Federal agencies about oil and hazardous material spills reported 1,896 incidents from pipelines and 1,395 incidents from platforms.
According to the Mobile Register in a September 21, 2005 story titled, “Offshore Rigs Not Built to Handle Strongest Storms” which based on information from Federal reports, there were at least 64 spills associated with Gulf platforms following Katrina. Katrina destroyed 46 platforms and significantly damaged another 16, according to the American Petroleum Institute.
Some drilling rigs and platforms sank and disappeared, others became unanchored and floated way only to crash into bridges or the shore. Apparently, according to the Mobile Register article, most drilling rigs and production platforms are not designed to withstand the force of Category 5 hurricanes like Katrina that generate 100+ plus waves and 140 mph winds. Despite assurances to Congress, apparently the standards for oil rigs and platforms only mandate a design that would resist hurricanes between a Category 2 and 3 in strength. No wonder so many assets were damaged, blown away, or entirely lost.
A few specifics from a Bradenton Herald article of December 21, 2005 entitled “Hurricanes Wreak Environmental Disaster, Raising Concerns of Oil’s Future”. It reported that a Transocean drilling rig drifted for 80 miles before it was captured; another rig beached on Dauphin Island. The Mars platform, which is twice as tall as the Empire State Building, weighs 70 million pounds, and gathers oil from 16 wells was crippled by Katrina. During hurricane Ivan in 2004, a Taylor Energy platform sank and spilled 17,000 gallons of oil 19 miles off the LA coast.
Since November there have been at least three ship collisions between floating or submerged oil rig/platform debris in the Gulf. On November 11, 2005, one sunken platform ripped a 35 foot long hole in the hull of a double hulled tanker in the Gulf in November which released an estimated 1-3 million gallons of heavy fuel oil. This is one of the largest spills ever in the Gulf.
While seabed safety valves typically stop undersea wells from leaking if the platform above is damaged, this can’t be easily done for pipelines. When large storms hit, the underwater pipelines can be torn apart or damaged so that they leak. Many of the huge oil slicks on the Gulf after the recent hurricanes may come from pipeline leaks.
Attached to the back of this testimony are pictures taken from radar satellites of the Gulf of Mexico shortly after Katrina hit on September 2 and following days. The material was collected and interpreted by and organization called SkyTruth. The pictures can be found at www.skytruth.com. What they show is extensive oil slicks which appear to emanate from oil platforms, pipelines and shore facilities. The oil slicks covered over 500 square miles or over 300,000 acres of the Gulf on September 2nd which was three or four days after the hurricane struck.
What’s At Stake on the Florida Coast
What’s at stake on the Florida Coast if oil from spills or storm related accidents hit the shore is clear. The western coast of Florida has an immense tourist economy based, in large part, on having clean beaches and a clean Gulf of Mexico to boat and fish in. The whole state had an estimated $550 billion gross state product in 2003 that is heavily dependent on tourism. In fact, approximately 60 million tourists visit Florida each year. Because visitors pay so much in sales and use taxes, the state has been able to avoid an income tax. Coastal property values, coastal tourism, and the multiplier effects of those expenditures are a huge part of Florida’s economy.
According to the American Sportfishing Association, sportfishing generated $7.5 billion dollars of activity in Florida in 2001, much of which occurred in saltwater. Commercial fishery landings in 2001 were worth almost $120 million.
The eastern Gulf coastal waters are also home to a number of important environmentally sensitive areas like the Big Bend Seagrass Area and Tortugas Ecological Reserve. These reserves and coastal shoreline host a number of environmentally sensitive species such as:
• Sea Turtles
• Whooping Cranes
• Bald Eagles
• Brown Pelicans
Important beach areas include the: Florida Panhandle, the Big Bend area, Southwest Florida, and Ten Thousand Islands. Al these could be effected by a large oil spill in the eastern Gulf with the beaches of the Florida Panhandle most at risk.
Alternatives to Drilling in Lease Sale 181
If this country were to adopt quite straightforward energy conservation policies and techniques like improving the fuel economy of cars and trucks, providing incentives for better energy saving appliances and lighting, etc.; and if the country was exploiting even modest amounts of clean, alternative energy like wind and solar power, then drilling in environmentally sensitive places like the eastern Gulf of Mexico for the last drops of oil wouldn’t be necessary. But we waste so much energy today. We believe the government and Congress should invest their effort and our dollars in energy conservation programs and clean energy rather than in drilling debates.
There is some good news on this because some states have been quite busy on the renewable portfolio issue. By 2017, the renewable portfolio standards already enacted by the states will produce as much renewable power as would be produced by gas fired powerplants using 0.6 TCF of gas per year. That’s twice as much gas annually than the amount that the Domenici-Bingaman bill would produce from 181. It’s indicative of what states and the federal government could do on conservation and renewable energy to replace production of gas and oil from places like 181.
U.S. PIRG and Florida PIRG both strongly oppose this energy bill. We feel that the natural gas to be found there will make, at best, a very marginal difference in the supply or price of gas in the future. The natural gas would not be available any time soon to address more immediate concerns about home heating costs, the price of nitrogen fertilizer, or feedstocks for chemical plants. No one can lease, explore, drill, and produce product quickly enough to address these real concerns in the short term. We suggest that a better way to address these concerns more quickly than by drilling in 181, would for this committee to look at a much larger emphasis on energy conservation and use of renewable energy supplies.
We do not believe that Florida’s beaches, coastal environment and marine resources should be sacrificed to lower the price of natural gas by pennies five to ten years from now.
Michael Gravitz, Oceans Advocate
218 D Street, S.E.
Washington, D.C. 20003
Mr. Timothy Parker
Senior Vice President
Dominion Exploration & Production, Inc.
also on behalf of
Domestic Petroleum Council
Independent Petroleum Association of America
American Petroleum Institute
National Ocean Industries Association
Natural Gas Supply Association
U.S. Oil and Gas Association
National Petrochemical & Refiners Association
International Association of Drilling Contractors
Senate Committee on Energy and Natural Resources
Thursday, February 16, 2005
Mr. Chairman and members of the Committee, my name is Tim Parker and I am Senior Vice President of Dominion Exploration and Production, Inc.
Dominion is one of the largest US independents that are among the most active in the search for, and development and production of, new natural gas and oil supplies for our nation.
Today I am speaking on behalf of Dominion, but also for the Domestic Petroleum Council, the Independent Petroleum Association of America, the American Petroleum Institute, the National Ocean Industries Association, the Natural Gas Supply Association, the U.S. Oil and Gas Association, the National Petrochemical & Refiners Association and the International Association of Drilling Contractors.
Dominion’s experience includes an important project in the area adjacent to that contemplated to be leased by the provisions of S. 2253. In an area leased under the original 181 sale, Dominion and its partners will bring on-line in 2007 the Independence Hub project, a production platform in 8,000 feet of water capable of processing up to 1 billion cubic feet of gas per day -- enough to serve almost three and a half million homes. So, as you see, we believe we have a unique ability to address today’s subject. I will focus more on Independence Hub later in my testimony.
The key points of my testimony today are:
• Additional leasing in the original Sale 181 area as directed by S. 2253 is a crucial part of the overall program that we believe must be carried out to increase natural gas supplies for our nation. Even the prospect of such supplies can have a positive and calming effect on the natural gas market.
• The area included for leasing holds very significant additional natural gas resource potential that industry can develop with high technology such as that already being applied in the adjacent leased area of the original Sale 181 – bringing timely supplies to consumers.
• The offshore technology applied by U.S. companies today worldwide has demonstrated record of environmental compatibility that was demonstrated most vividly by there not having been a single significant offshore exploration and production facility oil spill caused by the otherwise devastating hurricanes Katrina and Rita.
Almost everyone agrees that the 181 area in the Gulf is the best single prospect we have in the U.S. for significant new near-term exploration and production. The Minerals Management Service estimated, at the time, that the original Sale 181 had the potential to produce 7.8 TCF of gas and 1.9 million barrels of oil. However, when the size of the sale was reduced from approximately 5.9 million acres to 1.5 million acres, much of that resource was placed off limits. Conservative estimates of how much natural gas may be found in the area withdrawn are in the range of 5 TCF and, if past experience is a guide, actual production could end up being much more than that.
It must also be pointed out that the proposed 181 area is considered a relatively low-risk resource. To date, the success rate in the adjacent area, using the same 3D seismic technology as would be applied to the proposed area, is over 50%, far greater than traditional wildcat exploration.
A footnote with respect to the resource potential in the area contemplated for leasing in S. 2253: It may be much bigger that we can even imagine today.
As many of you know, in the parts of the Gulf of Mexico where we have been allowed to buy leases and explore, we have produced three times as much gas as we once thought was there. And the current resource estimate, according to the MMS, is that there is nearly five times as much remaining to be found. The more we explore, the more we know.
In addition, there are significant additional potential resources outside the area contemplated for leasing by S. 2253 that could be developed safely and that we ignore to our consumers’ disadvantage. To the north, for example, in what is called the “stovepipe” area of the original Sale 181 area, there is natural gas potential that is close to existing transportation infrastructure – and still further from the Florida coast than other existing production. Surely there must be a way to reasonably consider how those resources might be added to our national energy portfolio
The Role of Technology
Today’s offshore technology allows us to produce more energy with fewer facilities and less impact – even visual -- than ever before. This graphic shows the Independence Hub project I mentioned earlier, overlain on a map of the Washington, DC area. As you can see, the wells connected to the floating platform by subsea flow and control lines would reach as far north as Columbia, MD and as far South as Mechanicsville, MD.
Independence Hub sets many new records for offshore production including the world’s deepest floating production system, the world’s deepest pipeline, and the world’s largest integrated subsea system – shown here.
Initially, production from 15 wells will flow to the platform. This cutting edge technology doesn’t come cheap, however. Total cost of this project, including wells drilled and the subsea connection system will exceed $2 billion.
The outstanding environmental record of U.S. companies operating offshore around the world is well recognized as …technologies are allowing the offshore industry to venture into deeper waters than ever before, while protecting marine life and subsea habitats… -- even in the most challenging areas such as the Arctic and North Sea and in otherwise catastrophic weather.
Off the part of our coast in which exploration and production is allowed, the safety of our operations was recently demonstrated in the most severe hurricane situations. Though many of the exploration and production facilities in the Gulf of Mexico were severely damaged or destroyed, the high-tech safety and environmental protection equipment and processes worked.
Here’s a brief look at why we can be proud of our environmental record.
Careful scientific environmental study and operational planning always precede such activity. For example, our offshore geophysical companies, which conduct seismic work that allows us to ”see” geologic structures beneath the seabed, have many procedures and practices designed to avoid harm to marine mammals, including:
o Monitoring for the presence of animals of concern
o Shutdown or no start-up when they are too close
o Slow, gradual ramp-up of operations just in case
According to the International Association of Geophysical Contractors, citing numerous government and private studies, no physical harm to whales or dolphins has ever been shown as a result of industry seismic operations.
During exploration, jack-up or semi-submersible rigs and drill ships have multiple systems and physical barriers to ensure that no spill occurs. Most important, along with multiple, redundant remote control systems, are “blowout preventers” which for deepwater wells are installed on the well at the seabed and are capable of immediate closure in event of any emergency.
Once a field has been discovered and is in the development or production stage, completed wells flow through permanent “Christmas tree” systems – increasingly on the seabed for subsea developments as opposed to on a surface facility -- of multiple valves to control oil and gas flow. These may be operated from tens or even a hundred miles away with multiple, redundant communication systems.
Finally, a “downhole safety valve” is installed in the well itself below the seabed to provide an added protection barrier in the event of some catastrophic event’s damaging the Christmas tree.
To summarize, the latest technology and sound management practices have made the U.S. offshore industry the envy of the world. Its environmental record is superb:
• Non-associated natural gas production such as we would expect in the Sale 181 lease area has no potential for crude oil-related incidents.
• There has not been an incident involving a significant oil spill from a U.S. exploration and production platform in 25 years (since 1980).
The last such U.S. incident in which oil reached shore occurred in 1969 (in Santa Barbara Channel) – and we can find no documented evidence of oil from an exploration and production facility incident in U.S. waters having reached shore from more than about 12 miles away.
• Today’s modern technology includes such environmental protections as automatic subsea well shut-in devices, including sub-seabed safety valves.
• Facility and stand-by cooperative spill containment and cleanup technology provide multiple environmental protection layers.
As mentioned earlier, the industry’s performance during last summer’s hurricanes, which moved through a core area of offshore operations, is instructive. Despite sustained winds reaching 170 miles per hour and towering waves and the resulting destruction of numerous platforms and rigs, there was no significant spill from production wells.
Because today’s weather forecasting capabilities provide ample lead-time as storms approach, operators are able to follow routine shutdown and evacuation procedures. In the case of the Katrina and Rita hurricanes, 100% of oil production was shut-in ahead of time and 94% and 85% of natural gas production was shut-in as the respective storms hit.
Opening up the remainder of the 181 area, while critically important, is but one part of the long-term natural gas supply solution.
Other necessary actions – some of which are underway and others of which need more prompt attention -- include finishing the restoration of production shut down by last year’s hurricanes in the Gulf of Mexico, improving processes and adequately funding permitting for federal onshore natural gas exploration and production, opening other promising areas on the OCS, construction of the pipeline from Alaska, and constructing additional LNG infrastructure.
I commend the sponsors of the bill and urge the Committee to move it and other supply legislation as swiftly through the legislative process as possible. Delay in dealing with this problem has cost consumers billions of dollars in recent years. Had the original 181 Sale gone through as planned, we would likely today have two or three more Independence Hub type projects preparing to deliver much needed energy to American consumers.
Mr. Thomas SkainsChairmanAmerican Gas Association
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
Lease Area 181 of the Gulf of Mexico
for Oil and Gas Leasing
February 16, 2006
American Gas Association
400 North Capitol Street, N.W.
Washington, D.C. 20001
Senate Energy and Natural Resources Committee
February 16, 2006
Statement of Thomas Skains
On Behalf of
The American Gas Association
• 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.
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.