Capping off a day-long emergency conference last Thursday called to address a potential crisis in the natural gas markets, Energy Secretary Spencer Abraham told reporters he planned to move quickly on submitting recommendations to President Bush that would soften the impact of a gas supply shortage this summer or next winter.

Abraham did not divulge what the recommendations would be, but he said he believed it was “pretty significant” that both the supply sector and the long-time advocates of energy efficiency measures came together on this issue, agreeing that, at least as a short-term option, more efficient use of gas would ease the pain of a supply crunch. This will be “definitely incorporated in our thinking,” he said.

More than 200 North American energy executives and major gas consumers converged on Washington, DC, last week to join Bush administration officials, congressional lawmakers and regulators at the emergency summit, which was organized by the National Petroleum Council (NPC). Their objective was to propose short-term solutions to avert a gas market crisis.

Major industry leaders called for policymakers, from President Bush down to city mayors, to launch energy awareness programs to inform the public of the gas supply shortfall and the resulting high prices, and to publicly ask consumers to initiate conservation, energy efficiency and others steps to reduce their consumption of natural gas and electricity. Given that power generators are a major user of gas, a Calpine Corp. official called for the White House to use its “bully pulpit” to require more efficient gas-fired generation plants to be run in place of older, natural gas-guzzling facilities.

This crisis was caused by governmental policies that promote the large-scale consumption of gas, while denying producers access to new supplies, said William Stavropoulos, president and CEO of Dow Chemical Co. He challenged the federal government to “step up” and fix the “root cause” of the current gas supply shortfall, which he said has made U.S. gas prices the highest in the world.

Stavropoulos projected that gas consumers will pay $70 billion more for gas this year than they did in 2002. Millions of jobs in the chemical and fertilizer industries, as well as other businesses, are at risk. “I’m not being hyper about this.” He urged Bush to launch a campaign to urge consumers to lower their energy consumption by 5%.

But short-term, stop-gap measures won’t be enough, he believes. In the end, “We’re going to have to put more natural gas on the table,” Stavropoulos said, adding that the 20-year-old moratoria on drilling in federal offshore areas must be replaced with a comprehensive strategy for growing gas supply in an environmentally responsible way. The nation must find a “positive way” to close the gas supply and demand gas.

Policymakers must “get on the same page” with respect to the environment and land-use policies, agreed Michigan regulator David Svanda.

In the meantime, Diemer True of True Companies Inc., an independent producer in Wyoming, said it was important that the Department of Energy (DOE) create public awareness programs about energy. The East doesn’t appreciate the problems that producers struggle with in the West, and the general public doesn’t fully understand the energy industry, he noted, adding the industry’s approval rating is only 36% and it is more distrusted than probably any other industry.

There must be “education, education, education at every opportunity,” said Svanda.

Until now, “It has been very, very easy for our government…to please environmental groups” and assure the nation that it will have plenty of gas supplies, said Devon Energy Chairman Larry Nichols. “Those days are over.” The nation is not running out of gas; it’s just “running out of places where we’re allowed to drill” for natural gas, he noted.

The United States is the only country in the world that bans drilling for prospective supplies, Nichols said. Producers aren’t to blame for the current fix the gas market is in. “Anybody who’s a natural gas producer is selling every molecule of [gas]” that they have, he told the NPC conference.

Producers in the Powder River Basin in the Rocky Mountain region could make supplies available quickly if only governmental permitting delays were resolved, Nichols noted. “We can drill those wells in three to four days.” All producers need are decisions by the federal government that aren’t “swayed by emotion.”

“I think the word is out that we have a natural gas problem,” said Mark Hopkins, vice president of Alliance to Save Energy. He also recommended that the president initiate a national campaign to cut energy consumption. Large industrials, which have been hit hard by high gas prices, insist they have taken all the conservation and energy efficiency measures they can. But “our experience of going into plants proves this wrong,” Hopkins said, adding that his group often finds room for 10% more savings in gas demand. Moreover, the federal government, a major gas consumer, needs to get serious about reducing energy waste at its own facilities, he noted.

Hopkins’ group advocates energy efficiency over conservation. He explained the difference. Merely turning off your lights when you leave a room is conservation. But installing a motion detector that automatically shuts off lights when you leave a room is energy efficiency, he said.

Until all aspects of a long-term comprehensive energy plan are in place and Congress passes a comprehensive energy bill, “we will continue to experience periodic price spikes and market dislocation of the sort we may see this winter,” Secretary Abraham admitted, adding the focus in the meantime should be on short-term solutions. That’s “why we are getting an early start to address” the gas supply shortfall, he said.

If gas prices go as high as some predict next winter, Abraham noted, the winter heating bill for an average Midwest residential household would be $915, a 19% increase over last year. An estimated 60 million households in the U.S. consume natural gas, said Stephen Ewing, president of DTE Energy Gas. Their annual bills are expected to average $900 million this year. Some of this pain could be absorbed if state regulators would relax restrictions on utility gas purchasing, particularly when it comes to hedging prices and lining up long-term supply contracts, he noted.

“State pre-authorization for utilities’ prudent purchases of natural gas at set prices under long-term contracts, energy conservation, energy education and increased federal aid for low income consumers [to $3.4 billion annually] are among the steps that can be taken to reduce the impact of projected rising natural gas prices this winter,” said Ewing, also chair of the American Gas Association task force on gas supply.

“I have discussed this [gas supply shortfall] with President Bush and he has indicated to me that this is a top priority,” Abraham said. “I will be reporting to him on the ideas that are generated here today.” DOE also plans to hold a series of regional natural gas conferences in the near future, he said.

Gas in storage is 29% below last year’s level and 19% below the five-year average after the Energy Information Administration’s (EIA) storage report last Thursday of a record 127 Bcf weekly injection. Abraham said DOE has been “monitoring the situation closely.”

Despite a series of extremely large weekly storage injections and falling gas prices, Abraham said DOE was still “concerned that the nation may not reach the normal level of about 3 Tcf” by the start of the next heating season in late October. EIA Administrator Guy Caruso agreed that meeting the 3 Tcf target will be “tough” because it assumes “everything will go right” between now and next fall.

He said the EIA expects the gas market to be “tight” for the rest of the year and into 2004, and believes it will be “very difficult” to turn around the current supply situation in the short run.

But “this is not some abstract problem about numbers and percentages… It’s about real people and real problems they confront,” Abraham reminded policymakers and energy executives during the summit.

Noting that some of the solutions may be administrative in nature, he announced DOE would soon undertake an “ambitious” natural gas data-collection initiative to improve the way EIA and the DOE’s Office of Fossil Energy gather and distribute information about the use and origin of gas supplies in the United States.

“We plan to conduct new surveys of natural gas production as well as on-system LNG storage,” Abraham said. “We also plan to collect critical information on natural gas imports [primarily from Canada] each month instead of waiting until the end of each quarter. We will enhance and streamline our data-collection operation, and better regionalize EIA’s Short-Term Energy Outlook. Better information means more efficient markets and that means stability for consumers,” he said.

More data can help producers identify where and when supply is needed and tell consumers where and when to conserve. Abraham gave no date for the start of the new surveys, but the DOE indicated steps already were being taken to implement them. A DOE spokesman said $2 million would be diverted from elsewhere in the department’s budget to fund the new initiatives.

Abraham acknowledged that these were “small steps,” but added they were “necessary” ones.

The National Association of Regulatory Commissioners (NARUC) last Thursday announced it has created a special task force to address the imbalance in gas supply and demand, and said it plans to work with the DOE, NPC and the Federal Energy Regulatory Commission. Sen. Lamar Alexander (R-TN), who sat in on the conference, reported he was working with several senators to develop a “short list” of options to provide relief in the near term.

Daniel Yergin, a prominent energy expert and chairman of Cambridge Energy Research Associates, said the widening gas supply-demand gap is “not a failure of markets. Rather it is the result of the disappointing geological experience of the last few years plus restrictions on exploration.

“One thing is clear: we are seeing a structural change in supply,” said Yergin. “This is the increasing internationalization of the North American natural gas market — and its increased integration with world markets. We will be importing a lot more natural gas. The United States is on its way to becoming part of the new global gas market.”

Yergin said the gas price spikes of the winter 2000-2001, which played a role in the California energy crisis, should have been seen as the first major signal that there was an imbalance in supply and demand. “Unfortunately the signal got lost in the abrasive noise.”

Of the 200,000 MW of new power generation recently constructed or about to be placed into operation over the next couple years, well over 90% is fueled by natural gas, he noted. CERA estimates that power demand could grow in the United States by 5.6 Bcf/d between 2002 and 2010, at the expense of industrial gas demand. About 3.5 Bcf/d of industrial demand could be lost by mid-decade as a result, Yergin estimated.

He anticipates that demand destruction due to limited gas supply and higher prices will total 2.1 Bcf/d in the combined U.S. and Canadian market this year. Yergin foresees a world in which “end users could be bidding against each other for available supply” unless there is a significant reduction in gas demand.

He believes it will be difficult to increase gas wellhead productive capacity onshore in the United States due to the decline rates of existing production, the mature resource base, and the accelerating decline rates in the Gulf of Mexico expected after 2007. Barring the discovery of a major field, “it will be difficult to meaningfully increase supply in North America.”

He said momentum is building for liquefied natural gas (LNG) supply growth, but “while the current high [gas] prices may seem a boon to the LNG industry, they paradoxically also create risk. Higher prices may permanently erode demand, make alternative fuels like coal more cost effective, and most ominously, could raise the ire of regulators and policy makers.”

In the meantime, however, FERC Chairman Pat Wood said the Commission was doing its part to increase LNG supply. The Commission recently revised its LNG policy so that companies could provide terminal services at market-based rates. Wood predicted that LNG imports would reach 4 Bcf/d by late 2004, and could reach 9 Bcf/d by 2007 based on the number of applications at FERC and the U.S. Coast Guard. He said he was encouraged by the geographic diversity of the proposed projects, and said FERC was encouraging applicants to build LNG facilities closer to market areas to minimize transportation requirements.

FERC also has done a lot to speed up pipeline certification, said Wood. A total of 16.4 Bcf/d of new firm transportation capacity has been added to the pipeline grid since 2001 through 55 pipeline projects.

FERC plans to hold a workshop in the Southwest region in July on the need for more gas storage facilities there. “Sufficient storage takes the pressure off of [pipes],” he said.

Wood reported that the industry was making progress on improving its system of natural gas price reporting and index calculation. In order to encourage more voluntary price reporting, FERC is considering including a safe-harbor provision to “inoculate” companies who make “fat finger” mistakes when submitting prices to industry trade publications that calculate indexes, he said. A safe-harbor provision would protect a company in the event it unintentionally reported an error.

It certainly is “an important thing to get people back in the hunt” of reporting prices, said Wood.

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