Most of the world’s attention has been directed toward the security and availability of crude oil supplies, but a global energy consultant told a Senate committee this month that domestic pressure on natural gas supplies and prices “poses a greater threat to energy security and to the U.S. economy.”

Vahan Zanoyan, CEO of Washington, DC-based PFC Energy, testified before the Senate Committee on Foreign Relations Subcommittee on International Economic Policy, Export and Trade Promotion earlier this month. PFC advises energy companies and governments around the world on business development opportunities, upstream and downstream strategies and international gas and liquefied natural gas strategies.

Because the United States “is much more vulnerable to shortages and disruptions in natural gas supplies than to shortages in crude oil,” Zanoyan warned that “the economic costs of this vulnerability are substantial.”

As the economy rebounds, said Zanoyan, natural gas demand will rise and aggravate an already high demand for gas, thus escalating prices even more. “Warm winters can mask the problem of inadequate growth in supplies by providing temporary relief to markets, but this simply helps prolong our complacency about the adequacy of natural gas supplies.” It also “exacerbates the fundamental problem,” he added.

The federal government encourages consumers to use natural gas, but at the same time, he said, it “actively discourages production in such gas-rich areas as the Mountain west, the Eastern Gulf of Mexico and offshore the northern East Coast. This has become more of an issue as traditional U.S. gas production areas have passed their peak production and will see declines in the years ahead.”

Zanoyan said it has become “extremely difficult to maintain production, let alone increase output in line with demand, no matter how high the price.” He singled out several factors that are causing a slow supply response, including basin exhaustion, accelerating decline rates, regulatory hurdles, LNG and a lack of pipelines.

“Basin exhaustion is a fact of life in a mature asset base, and the number of drilling prospects is declining in the traditional areas of production,” he said. Accelerating decline rates per well, however, have “created the so-called treadmill effect: the annual decline rates are around 20%, which means that every year just to keep production flat, a fifth of the production has to be replaced. ”

Another factor stifling response are the regulatory problems, said Zanoyan. “Large areas, over hundreds of millions of acres, were excluded from exploration and production. The U.S. is the only producing country in the world where a resource base of such significance will be kept off limits to development. ”

LNG, meanwhile, will provide only “modest” support in the near term, he said, because of infrastructure capacity limitations. However, the federal government, he said, “is grid locked over issuing permits for new terminals and for the expansion of existing terminals, with different agencies including the EPA, Commerce, Interior, Homeland Security, and Defense Departments squabbling over muddled and conflicting authority. The energy industry is eager to build new terminals, but without permits it cannot proceed.”

The proposed “Alaskan and Mackenzie Delta pipelines are the right answers,” but not “for this decade,” he said, because of the length of time it will take to complete the permitting process. “Recent high natural gas prices are likely to reinvigorate development of these long-distance pipelines, just as they did two years ago after the last price spike. To the extent possible, steps should be taken to facilitate development efforts to bring Arctic gas to the Lower 48.”

“Complacency about gas supplies rose with the unusually warm winter of 2001-02,” Zanoyan said. “This past winter, which was only slightly colder than the norm but still brought spikes in gas prices, should be a wake up call that gas supplies, not oil, are actually a greater threat to the nation’s ability to provide reliable supplies to consumers at a reasonable price.” The consultant noted that gas stocks “are at an all time low, and with production declining by 4% to 5% this year, it is unlikely that adequate storage will be built by the beginning of next winter to meet the high seasonal demand.”

Meanwhile, he noted that “industrial demand, which has already fallen, will be suppressed further to make sure that homes, schools and hospitals can keep their lights on. This suppression of gas supplies for industrial use means something concrete: factories will have to shut down, production will move offshore, and jobs will be lost. This is what is happening right now, and will continue to happen until the supply bottlenecks are cleared.”

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