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Gas Industry Itemizes Obstacles to a 30 Tcf Market

Gas Industry Itemizes Obstacles to a 30 Tcf Market

In a rare display of unanimity, pipelines and producers yesterday said the federal government's ban on oil and gas production on a wide swath of public lands - both onshore and offshore - was the biggest obstacle to supplying the 30 Tcf of gas needed to meet the Clinton administration's proposed global-warming targets.

"I do think [greater] land access is the major issue facing the industry. That would be certainly my highest priority for a legislative involvement," Williams Cos. Chairman Keith Bailey told the Senate Energy and Natural Resources Committee, which held a hearing on gas supply, demand and transportation infrastructure. A federal policy that relies on the use of natural gas to meet environmental and natural security objectives but denies the industry access to public lands for production is "schizophrenic at best and ultimately self-defeating," said Bailey, who testified on behalf of the Interstate Natural Gas Association of America (INGAA).

Richard Sharples of Anadarko Energy Services, who represented the Natural Gas Supply Association (NGSA) at the hearing, noted that the need for greater land access "I think would go first on our list" also. He estimated that only 18% of the Outer Continental Shelf (OCS) presently is available for leasing. "...I have no hesitation in telling you that the United States cannot expand its natural gas supply significantly with 82% of its highest potential lands off-limits."

Committee Chairman Frank Murkowski (R-AK) questioned Jay E. Hakes, administrator of the Department of Energy's Energy Information Administration (EIA), about the administration's policy toward opening up more public lands for drilling, but Hakes indicated this wasn't DOE's domain. "If the Department of Energy doesn't aggressively foster finding new gas to meet the demand, who's going to do it?" the senator asked.

Running a close second to the land-access issue was the administration's proposal to mandate a larger portion of the electricity market to renewable fuels, Bailey said. "I just think that's wrongheaded, and sends a lot of very negative signals to the investors in the gas business." Bailey and Sharples also called for changes in the Minerals Management Service's (MMS) policy on royalty in-kind collection and its overall royalty assessment program. The agency's policy is "simply designed to shift economic value for the private investor to the public coffers," Bailey said, adding that it will only depress economic incentives to find reserves.

The two men diverged considerably on the issue of pipeline transportation rates, and their potential impact on the industry's ability to meet future demand targets. Sharples insisted rates were "considerably higher" than what was needed for pipelines to realize competitive returns on their investments, recover the costs of construction and attract capital. This has led to a "diversion of funds from the producing segment to the pipeline segment [that] will seriously, negatively impact gas deliverability," he told the committee.

Bailey countered that Williams and other pipelines "continue to be prepared to explore regulatory models that make pipeline risk/reward profiles more similar to those of marketers and producers." He said he thought the best way to accomplish this was to allow interstate pipelines to negotiate terms and conditions of service with their customers, which producers vociferously oppose.

Greg Stringham, vice president of markets and federal policy for the Canadian Association of Petroleum Producers (CAPP), believes all parts of the natural gas value chain - pipelines, producers, marketers et al - will have to be balanced in order to meet the needs of a 30 Tcf market. "...[I]f anyone part of this value chain tries to take too much value out of the system, then the whole system will suffer," he cautioned.

The EIA projects domestic gas demand, which averaged 21 Tcf last year, will come close to hitting the 30 Tcf level by 2013, and will rise to 32 Tcf in 2020 largely due to the anticipated increase in the role of gas in power generation, Hakes said. It's estimated the share of electricity produced from gas will jump to 43% in 2020 from 14% last year. About 88% of the new power plants due to come on line between 1998 and 2007 will be gas fired, he noted. In addition to power generation, gas will get a boost on the environmental front as the Clinton administration has given it a "principal role" in meeting its Kyoto protocols, which target a 7% reduction in 1990 carbon emission levels by the 2008-2012 period, Murkowski said.

Overall, U.S. gas demand is expected to grow 1.7% annually from 1997 to 2020, faster than any other major source of fuel, Hakes noted. During the same period, the growth in domestic gas production will be slightly slower, rising from 19 Tcf to 27 Tcf by 2020. Net imports from Canada, which currently account for 12%-13% of U.S. gas demand, will make up the difference. Murkowski questioned whether the Canadian gas imports would be competitively priced. "I am always a little uncertain when we become more dependent on foreign sources for energy..."

NGSA's Sharples believes a 30 Tcf market may be possible in the long term, but says it won't be an easy feat. For starters, the U.S. oil and gas reservoir is depleting rapidly. "Growing the natural gas market will require that we replace this depletion before we can grow the market," he said. Most importantly, a sustained turnaround in oil prices is needed.

In 1997, the 50 largest domestic producers spent $28.6 billion on oil and gas exploration and development in the United States. "That was about 120% of [the] cash flow generated from $20 oil and approximately $2.50 gas. For this huge investment, we only managed to keep natural gas deliverability flat. Today, we're spending much less," Sharples said. The collapse in energy prices in 1998 severely affected the spending capacity of the domestic oil and gas industry, hampering cash flows and drying up outside sources of capital. Most producers now "are focused on trying to get their debt repaid rather than growing," he noted.

"This situation is real...This cycle has been deeper than most others and I believe it may be longer as well. I don't believe that in the short term we have the resources or capital to mount the aggressive drilling effort that will be necessary to quickly stem the decline in production," he told the committee. Sharples noted that gas wells starts were down 47% from the peak in the third quarter of 1997.

H.G. "Buddy" Kleemeier of Kaiser-Francis Oil, who testified on behalf of the Independent Petroleum Industry, emphasized that a 30 Tcf market was closely linked to a strong oil industry. "Without a strong domestic oil industry, we cannot have a strong domestic natural gas industry. And the national goal of a 30 Tcf per year gas market will not be achievable."

The EIA projects that gas demand, and the corresponding need for new pipeline projects, will be greatest in the 2001-2005 period, Hakes said, adding that afterwards there should be a dropoff in construction activity. The pipeline industry "has anticipated this potential growth and is preparing for it now. And you're seeing all-time record construction going on..." He indicated, however, that the current rate of pipeline construction activity is "actually greater than [what] would be needed in the forecast period." The EIA is "fairly confident that the pipeline construction that's needed is not something that's unprecedented historically or, in fact, is that different than the amount of construction that's been experienced or planned in the current period."

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