A University of Houston energy expert told a House panel Thursday that Congress needs to consider lifting the 20-year-old moratoria on oil and gas drilling on federal offshore areas as it seeks to avert a potential crisis in the gas markets in the months ahead. The tight gas supplies, expanding demand and above-normal prices are not temporary market aberrations, but are here to stay for a while, lawmakers were warned.

“I think what needs to be revisited are the moratoria” on exploration and production off the Florida, California and East coasts, said Dr. Michelle Michot Foss, executive director of the university’s Institute for Energy, Law and Enterprise, during a hearing of the House Resources’ subcommittee on energy and mineral resources. This was the second House hearing in a week on the gas supply deficit.

“I think there have been some incredible advances in the ability to manage offshore activities in a way that [is] environmentally responsible, and I think that needs to be recognized…It suggests, in fact, given the success in the North Sea and Gulf of Mexico, that it’s worth it to revisit moratoria issues for other offshore areas in the United States,” she noted. “I think that we’re at that point.”

Moreover, more pipeline infrastructure needs to be built in the offshore, according to Foss. “We’re reinjecting gas” because there isn’t enough pipe delivery capacity, she told subcommittee lawmakers.

In the meantime, gas prices continue their upward climb. Since 1992, there have been three distinct gas cycles, with each one having a higher price floor than the previous cycle, Foss said. This “is the highest of all.”

Liquefied natural gas (LNG), which received a rousing endorsement from Federal Reserve Chairman Alan Greenspan last week, was seen as a far-off supply contributor by Foss and the others who testified. LNG is an “extremely slow-moving bullet,” said Ed Kelly, head of North American Gas & Power Consulting for Wood Mackenzie Global Consultants.

It will be at least 10 years before LNG, which currently represents about 2% of the U.S. gas mix, makes up a “significant” portion of domestic supplies — at least 10%, he noted. LNG is “happening…but [it’s] slower than you might think.” Arctic gas supplies “are on the horizon,” but they won’t become important until the next decade, Kelly believes.

“I think LNG will take time to develop” due to siting and public-acceptance issues, agreed Foss. She believes LNG will primarily be used as a peak-shaving tool, and will be only appealing to the U.S. when gas prices are extremely high.

It would “require prolonged [gas] prices of $4 or higher to really get LNG moving,” said Steve Brown, director of energy economics at the Federal Reserve Bank in Dallas, TX. He noted he doesn’t see LNG as an “attractive alternative.”

Foss tried to debunk the belief that the U.S. could purchase LNG more cheaply than it could develop gas domestically. That’s “not necessarily” the case since any LNG imported into the nation would have to compete in the domestic market, she said. Foss, along with the others, estimated LNG could reasonably sell in the U.S. at between $2.50-4.50 in the years ahead.

Greater producer access to Rocky Mountain gas is critically important, they all agreed. “It’s the only onshore or offshore basin in the U.S. itself that’s likely to [see an] increase” in production, according to Kelly. Mackenzie Global projects that Rockies’ gas production will increase by 4.5 Bcf/d by 2010, while the overall production in the Lower 48 is expected to drop.

If only half of the projected hike in Rockies’ production occurs, it would add at least $1-1.50 to the price of natural gas to be paid by residential customers, or a total of $7-10 billion, he estimated.

Kelly believes the U.S. needs a consistent level of drilling “somewhat north of 900” rigs to increase productive capability and gas supplies. Beyond 2005, that may have to climb to 1100-1200 active rigs searching for gas.

In 2001, he noted the nation experienced 37 weeks of drilling by 900 active rigs, which increased gas supply by 4%. In contrast, Kelly said last week was the first time this year in which more than 900 gas-directed rigs were in action.

“Drilling is up, but it’s not up that much and it’s been painfully slow to come up,” he said during the subcommittee hearing. Storage inventories also are being rebuilt, but they are “only keeping up with normal seasonal growth,” and are below the five-year average for June, noted the Federal Reserve’s Brown. Other “self-corrective mechanisms” are occurring, such as increased conservation and efficiency, but all agreed that these actions alone would not be enough to address the potential crisis facing natural gas.

“There does not appear to be a short-term solution” to the problem, said Subcommittee Chairwoman Barbara Cubin (R-WY), somewhat forlornly. “We continue to shoot ourselves in the foot when it comes to our energy policy.”

The natural gas market is in a “painful period of adjustment” as it moves from a surplus to scarcity, according to Kelly. “This period is here to stay for the remainder of this decade [or] perhaps longer.”

In 1986, U.S. gas demand fell to 16 Tcf, which Kelly said created an appearance of “systemic surplus” and led to complacency. The nation’s consumption level is now 24 Tcf, which has resulted in a more volatile market and put “high strain” on producers.

In the long term, the demand for gas is going to grow “more rapidly” than the demand for any other fuel, said Brown. As a result, “we [are going to] need all hands on deck,” particularly coal, to meet energy demand, intoned Kelly.

The gas resource base in the meantime has grown more mature, and the decline rate of wells is increasing. Any federal policy that delays drilling or LNG imports will result in a “sharper” decline in available gas supplies, Kelly said.

Rebuilding gas supply will take considerable investment, said Brown, but he noted the scandal-ridden energy industry wasn’t too highly regarded by investors at the moment. The “instability of the natural gas industry caused by the Enron debacle [makes for] a bit shallower pockets among investors these days,” he remarked.

Kelly dismissed the suggestion that producers were exercising monopoly power to drive up gas prices. “I don’t see any evidence of that” among producers in Texas, Louisiana and the Rockies, he said. Brown agreed, noting that concentration in the production end of the business “is not that much.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.