If the United States wants to maintain its current standard of living, it is going to have to become a bigger player in the global gas market by importing more liquefied natural gas (LNG), Federal Reserve Chairman Alan Greenspan told a House panel last Tuesday.

“I think we have to make the choice” of whether to import more supplies despite potential security risks, he told the House Energy and Commerce Committee during a hearing on the gas supply-demand imbalance situation. “There’s no way [that] we can be self-sufficient” and completely meet demand with domestic resources, he said.

“One of the most important aspects of the American economy…reflects our globalization” efforts. “It is in the interests of this country…not to pull in our horns” when it comes to gas.

“If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required. Markets need to be able to effectively adjust to unexpected shortfalls in domestic supply,” Greenspan said. “Access to world natural gas supplies will require a major expansion of LNG terminal import capacity. Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility.”

Unlike with crude oil, Greenspan noted gas reserves are “somewhat more widely dispersed” throughout the world, which he believes would minimize the security risks to the U.S. Nearly two-fifths of the world’s gas reserves are located in Russia and its former satellite countries, while about one-third are in the Middle East.

Guy Caruso, administrator of the Energy Information Administration (EIA), agreed that LNG imports were a “very important part of our long-term outlook,” as well as non-conventional supplies (coalbed methane and tight sands gas).

Above-normal gas prices, which closed below the $6 mark in July futures last week, have made the U.S. a “potential very large importer” of LNG, Greenspan noted. “If we could get that [LNG] market functioning…it is a vast reserve.”

With rising gas demand “pressing against” supplies restricted to North American production, he said he doubted there will be a return to low gas prices or “relative abundance” in supplies “anytime soon.” The market is saying that “$2 gas is a historic relic at least for the time being.” He blamed the higher prices in large part on the inability of the U.S. to increase imports to “close a modest gap” between North American demand and production.

“Today’s tight natural gas markets have been a long time in coming,” according to the nation’s top banker.

Asked how long it would take the U.S. to become more LNG-dependent, Greenspan said he believed the market could be expanded “fairly quickly,” although he agreed it’s “obviously not a matter of months.”

Currently, the nation has five major LNG terminals in the continental U.S. and Puerto Rico, which the chairman doesn’t believe is sufficient. “My own projection is we ought to be doing more rather than less in this area,” he told House lawmakers. In 2001, he estimated LNG imports accounted for only 1% of total domestic gas supply.

The existing U.S. LNG terminals have a total deliverability of 4.3 Bcf/d, according to FERC. Applications for four new LNG projects currently are before the agency, which would add 3.7 Bcf/d of deliverability capacity, it said.

Greenspan said he didn’t have any concerns about the availability of capital to build new LNG facilities. As construction costs for terminals come down, “I think the markets will open in a very significant manner” for LNG, he noted. In fact, Greenspan said a “major expansion of U.S. import capability appears to be under way” already, spurred by improvements in technology. “These movements bode well for widespread natural gas availability in North America in the years ahead.”

He said he favored Congress taking steps to facilitate investment in new LNG terminals, but he opposed federal subsidies. He recommended that a “legal structure [or] regulatory structure” be set up to encourage investment in a “favorable manner.”

Citing LNG’s benefits, Greenspan said prices “are not particularly elevated,” and technology has helped to reduce the safety risks associated with the liquefied gas. One lawmaker from California, however, questioned him about the environmental hazards posed by the construction and siting of LNG facilities.

“There is no way to create energy without [any] risk,” he quipped. “Congress has got to make some very important judgments” regarding the trade-offs between environmental concerns and energy, whether it be for LNG terminals or domestic gas drilling. “We cannot, on one hand, encourage the use of environmentally desirable natural gas in this country while being conflicted on larger imports of LNG. Such contradictions are resolved only by debilitating spikes in prices.”

He noted the volatility of spot gas prices has placed major gas-consuming industries, such as the fertilizer industry, in a “weakened competitive position.” But he said he has not seen “significant shifts” by these companies to overseas markets yet.

Rep. Michael Rogers (R-MI), however, countered that the impact of gas prices on industrials was more pronounced. “If you’re a manufacturer in Michigan, this [thing] is an avalanche.”

Robert Liuzzi of CF Industries, who testified on behalf of the Fertilizer Institute, estimated that high gas prices have resulted in the permanent closure of nearly 20% of the U.S. nitrogen fertilizer capacity, and idled an additional 25%.

Lawmakers on the House energy committee got their first real sense of the seriousness of the gap between gas demand and supply last Tuesday, prompting some to ask if Congress might need to revisit price controls to prevent gas price spikes next winter, require utilities to prioritize their supplies and encourage the development of more pipeline and storage facilities.

“Are we building another case where we’re going to be debating price controls?” House Energy and Commerce Chairman W.J. “Billy” Tauzin (R-LA) asked rhetorically upon being told that conservation efforts would likely have only a “marginal impact” on reducing residential consumers’ gas bills next winter and that the fertilizer industry was facing the “most serious” gas price shock since the 1970s.

There is a “storm brewing on the horizon,” with the nation facing a possible “train wreck” between demand and supply, he said during the day-long hearing. Tauzin said he agreed with Greenspan, who attributed the current supply-demand imbalance to the federal government’s “contradictory policy” on natural gas. The federal government, on one hand, has advocated widespread consumption of gas, but on the other it has restricted producer access to resource-rich public lands. “Something has got to give,” Tauzin noted, adding that producers were not at fault. “Drilling companies are doing the best they can.”

Normally, discussion of gas supply and demand would put people to sleep, Tauzin said, but this is a “hotly debated topic today.”

An estimated 50 million households in the United States use natural gas, and the supply crunch has exposed them to a “roller coaster ride” in prices, said Consumers Energy CEO Carl L. English. Natural gas also forms the “energy backbone” of manufacturing in the nation, he noted. The price volatility could unleash a “firestorm of protests” next winter.

A number of lawmakers agreed that there was no “silver bullet” to significantly expand U.S. supplies in time for the next winter heating season. Other sources — demand destruction, LNG and Canadian gas supplies — will be critical in the months ahead, said the EIA’s Caruso.

Harold N. Kvisle, president and CEO of TransCanada PipeLines Ltd., agreed that the “near-term market balancing mechanism will be demand destruction.” But Greenspan doubted that Canada, a long-time supplier of gas to the U.S., can be relied on much in the near-term future, noting it has “little capacity to significantly expand its exports” to help close the demand-supply gap.

Spot gas prices, which are expected to stay in the $5-6 range for much of the year, could spike to as high as $10/Mcf for a “short-lived” period next winter, Caruso said. That “certainly [is] a possibility.”

The problem is the storage inventory rebuild, which was about 29% of the five-year average at the end of May, he noted. The gas industry “[has] a steep hill to climb” to fill the traditional 3 Tcf of storage by the start of winter. Caruso said he expects about 2.8-2.9 Tcf to be in storage by the end of October, which he believes would be enough to meet winter demand, assuming the weather is typical. Last Thursday, the EIA reported that industry injected a record-setting 125 Bcf into storage during the prior week.

He predicts that gas production could rise by 2% this year, but he added that is “by no means certain.”

Ohio regulator Donald L. Mason said he believes homeowners in the state will be paying $220 more for natural gas next winter.

Richard Sharples, senior vice president of Anadarko Petroleum Corp., the seventh largest U.S. producer, drove home the need for Congress to relax restrictions that bar producers access to public lands — excluding public parks and wilderness areas. “Our industry is not looking for blanket access. We’re looking for a reasonable balance” between land access and protection of the environment, he said.

Congress further needs to take steps to increase staffing at the Interior Department’s Bureau of Land Management (BLM) to reduce the production permitting backlog, streamline the permitting process for pipelines and promote siting of LNG facilities, according to Sharples.

Jeffrey R. Currie of Goldman, Sachs & Co. said the core problem underlying high prices and tight supplies is the “inadequate” pipeline and storage infrastructure. Even if there was a supply surplus now, the market doesn’t have enough capacity to deliver and store the gas. That’s because “investing in infrastructure is distinctly unprofitable” now, he noted.

In addition to boosting producer access, CF Industries’ Liuzzi called on Congress to restrict deliveries to certain industrial users, particularly power generators, whose demand he claims was “artificially induced” by the clean air laws.

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