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Industry Experts: Federal Action Still Needed on NPC Recommendations

December 26, 2005
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Many of the cost estimates and energy price forecasts in the National Petroleum Council's (NPC) $30 million natural gas study in 2003 came up well short of what actually transpired over the last two years, but its policy recommendations remain right on the money, according to presenters at the Department of Energy's (DOE) roundtable on Balancing Natural Gas Supply and Demand last week in Washington, DC.

The problem is that Congress has failed to take appropriate action and many federal agency efforts also have fallen short of what's needed, experts from many sectors of the industry said at the two-day meeting. DOE scheduled the roundtable to gather industry input for a gas supply and demand report that is scheduled to be delivered to Congress in February. The report was required by the Energy Policy Act of 2005.

"Very little has been acted upon out of the [NPC's] recommendations," said Burlington Resources CEO Bobby Shackouls, former chairman of the NPC when the natural gas study was conducted in 2003 (see NGI, Sept. 29, 2003). "The current situation in terms of prices shouldn't really be a surprise."

In September 2003, the NPC told Congress that by 2005 it should begin to phase out the moratoriums that have prevented producers from drilling in promising gas-prone areas of the Outer Continental Shelf (OCS). A number of other initiatives -- improved access and permitting for producers in the Rocky Mountains, accelerated regulatory reviews of new liquefied natural gas (LNG) and interstate gas pipeline facilities, and more emphasis on energy efficiency and conservation -- also were proposed to ensure reliable domestic gas supplies in the long term.

"Last summer's Energy Policy Act was the first significant attempt to address some of the issues that were highlighted in the NPC study, but still it was a couple years late," said Shackouls. "It included some things like diversion of some of the onshore rental payments to pay for more and better permitting, but I'd have to tell you we still haven't seen any additional personnel show up at any of the [Bureau of Land Management] offices granting permits. There has been some streamlining and they are issuing more permits, but still there's a lot more to be done."

Shackouls said there still is a serious land access problem in this country that the gas and oil industry faces everyday. "There are huge portions of Lease Sale 181 [in the Eastern Gulf of Mexico] that were approved for leasing but are still effectively off limits just simply because of the political pressures that have been applied there."

The NPC study's "reactive path" analysis showed that gas prices would continue to increase if no proactive steps were taken by Congress to address the tight gas supply-demand situation. "But when you put on top of that the fact that we've had three 100-year storms in a matter of 12 months, what we're seeing now is a price even higher [than we ever imagined]."

Gas prices have catapulted out of control to unexpected levels that could reach $20/MMBtu this winter, according to some forecasts. "Too many people believe that [producers] are sitting here enjoying this, but we're not," said Shackouls. "We truly would like bring more supply to the table and get prices down to a more affordable range."

David Trice, CEO of Newfield Exploration, presented a report by the Domestic Petroleum Council (DPC), a group sponsored by 24 independent producers, that noted the continuing access and permitting problems in the Rocky Mountain region. The report cited a backlog of more than 3,000 applications for drilling permits (APD), 300 of which are Newfield's, said Trice.

"Adequate funding and resources to process and clear out those backlogged pending APDs could increase natural gas reserves in the Rocky Mountain region by several trillion cubic feet -- some of which would begin flowing soon and would make a difference in today's tight market," the DPC's report said.

The DPC noted that conservation will have the most immediate impact on the gas market this winter and action is being taken on that front. The industry also is spending billions of dollars on restoration of the infrastructure damaged by the hurricanes this year. But beyond that, federal agencies including BLM, the U.S. Forest Service and others, need to speed up their approval processes when it comes to leasing and drilling, the report said.

A U.S. Forest Service representative said during a roundtable discussion at the DOE meeting that staffing and funding is so tight at the agency that he believes its role in the oil and gas development process really should be folded together with other federal offices. "Congress is going to have to look at combining the offices," he said. "We are understaffed. It's just not working."

Trice also warned that Lease Sale 181 "has to happen in 2006." The DPC report predicted that "first production from what is expected to eventually be trillions of cubic feet of additional discovered reserves [in Lease Sale 181] could probably begin flowing to market within 18 months to two years of a lease sale. Such a lease sale, based on appropriate congressional findings and direction and based on the environmental work already done, could be held as early as next summer."

According to other presenters, there are some significant steps that could be taken by other state and federal regulators to help bring more supply to market and reduce price volatility. Kevin Petak of Energy and Environmental Analysis Inc. and Ronald Brown of Kinder Morgan had some recommendation for the Federal Energy Regulatory Commission (FERC). Although FERC has made significant progress in shortening its review process, its restrictions on rate design may need to be relaxed, they said.

"FERC should allow pipeline operators to configure transportation and storage infrastructure and related tariff services in a way that meets recent changing market demand profiles," said Brown. "FERC has yet to revisit its policy that precludes pipelines and shippers from negotiating rates based on commodity price indices."

He also said FERC should be more receptive to industry proposals seeking greater flexibility in the pricing of new pipeline capacity for anchor shippers -- flexibility that might not be offered to smaller shippers or shippers who sign up for capacity after the greenfield pipelines are built.

Donald Santa, president of the Interstate Natural Gas Association of America, which represents interstate pipeline companies, agreed. He said if FERC wants to see new "supply-push" long haul pipelines built out of the Rockies to eastern markets, then the Commission is going to have to be more open to allowing special privileges for shippers who are willing to step up and make financial commitments to take a large part of the capacity on these projects.

However, Paul Wilkinson of the American Gas Association expressed concern about that idea, concluding it would be unjust to allow some shippers special treatment and rates just because they sign up for more capacity.

At one point in the open roundtable discussion, the issue of a strategic gas reserve, much like the existing federal Strategic Petroleum Reserve, was brought up as a potential tool to help reduce price volatility and lower prices during period of shut-in production, such as after a hurricane. An official with the Louisiana Department of Economic Development said he thought such a reserve would be an effective way to provide fuel to large gas consumers and power generators in the event of a supply curtailment. However, at least one speaker said taking enough gas off the market to fill a reserve to a level that would provide such a benefit would have extremely adverse consequences in a marketplace that already suffers from short supply.

If something isn't done soon by Congress and the federal government to boost supply and help bring prices down, said Murray Smith, counselor for the Province of Alberta, Canada, the demand destruction will be so severe between now and when the Alaska and Mackenzie Delta pipelines are built over the next decade that those multi billion dollar projects could end up becoming entirely unnecessary.

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