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

“I do think [greater] land access is the major issue facing theindustry…That would be certainly my highest priority for alegislative involvement,” Williams Cos. Chairman Keith Bailey toldthe Senate Energy and Natural Resources Committee, which held ahearing last Wednesday on gas supply, demand and transportationinfrastructure. A federal policy that relies on the use of naturalgas to meet environmental and national security objectives butdenies 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 Associationof America (INGAA).

Richard Sharples of Anadarko Energy Services, who representedthe Natural Gas Supply Association (NGSA) at the hearing, notedthat the need for greater land access “I think would go first onour list” also. He estimated that only 18% of the Outer ContinentalShelf (OCS) presently is available for leasing. “…I have nohesitation in telling you that the United States cannot expand itsnatural gas supply significantly with 82% of its highest potentiallands off-limits.”

Committee Chairman Frank Murkowski (R-AK) questioned Jay E.Hakes, administrator of the Department of Energy’s EnergyInformation Administration (EIA), about the administration’s policytowards opening up more public lands for drilling, but Hakesindicated this wasn’t DOE’s domain. “If the Department of Energydoesn’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 theadministration’s proposal to mandate a larger portion of theelectricity market to renewable fuels, Bailey said. “I just thinkthat’s wrongheaded, and sends a lot of very negative signals to theinvestors in the gas business.” Baileyand Sharples also calledfor changes in the Minerals Management Service’s (MMS) policy onroyalty in-kind collection and its overall royalty assessmentprogram. The agency’s policy is “simply designed to shift economicvalue for the private investor to the public coffers,” Bailey said,adding that it will only depress economic incentives to findreserves. The two executives diverged, however, on the issue oftransportation rates and their impact on gas deliverability.

Greg Stringham, vice president of markets and federal policy forthe Canadian Association of Petroleum Producers (CAPP), believesall parts of the natural gas value chain – pipelines, producers,marketers et al – will have to be balanced in order to meet theneeds of a 30 Tcf market. “…[I]f anyone part of this value chaintries to take too much value out of the system, then the wholesystem will suffer,” he cautioned.

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

NGSA’s Sharples believes a 30 Tcf market may be possible in thelong term, but says it won’t be an easy feat. For starters, theU.S. oil and gas reservoir is depleting rapidly. “Growing thenatural gas market will require that we replace this depletionbefore we can grow the market,” he said. Most importantly, asustained turnaround in oil prices is needed.

In 1997, the 50 largest domestic producers spent $28.6 billionon oil and gas exploration and development in the United States.”That was about 120% of [the] cash flow generated from $20 oil andapproximately $2.50 gas. For this huge investment, we only managedto keep natural gas deliverability flat. Today, we’re spending muchless,” Sharples said. The collapse in energy prices in 1998severely affected industry spending, cutting cash flows and dryingup outside sources of capital. Most producers now “are focused ontrying to get their debt repaid rather than growing.”

“This situation is real…This cycle has been deeper than mostothers and I believe it may be longer as well. I don’t believe thatin the short term we have the resources or capital to mount theaggressive drilling effort that will be necessary to quickly stemthe decline in production,” he told the committee. Sharples saidgas wells starts were down 47% from the peak in the third quarterof 1997.

H.B. “Buddy” Kleemeier of Kaiser-Francis Oil, who testified onbehalf of the Independent Petroleum Association of America,emphasized that a 30 Tcf market was closely linked to a strong oilindustry. “Without a strong domestic oil industry, we cannot have astrong domestic natural gas industry. And the national goal of a 30Tcf per year gas market will not be achievable.”

CAPP’s Stringham said Canada also was beset with depressed oilprices, which have “constrained” gas drilling and left it “long”on pipeline capacity. “But I want to emphasize that is only ashort-term phenomenon. There is every expectation that [it] willfill back up over time …”

The EIA projects that gas demand, and the corresponding need fornew pipeline projects, will be greatest in the 2001-2005 period,Hakes said, adding that afterwards there should be a dropoff inconstruction activity. The pipeline industry “has anticipated thispotential growth and is preparing for it now. And you’re seeingall-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 forecastperiod.”

Susan Parker

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