In a rare display of unanimity, pipelines and producersyesterday said the federal government’s ban on oil and gasproduction on a wide swath of public lands – both onshore andoffshore – was the biggest obstacle to supplying the 30 Tcf of gasneeded to meet the Clinton administration’s proposed global-warmingtargets.

“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 on gas supply, demand and transportation infrastructure. Afederal policy that relies on the use of natural gas to meetenvironmental and natural security objectives but denies theindustry access to public lands for production is “schizophrenic atbest and ultimately self-defeating,” said Bailey, who testified onbehalf of the Interstate Natural Gas Association of 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 policytoward 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.” Bailey and Sharples also called forchanges 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 men diverged considerably on the issue of pipelinetransportation rates, and their potential impact on the industry’sability to meet future demand targets. Sharples insisted rates were”considerably higher” than what was needed for pipelines to realizecompetitive returns on their investments, recover the costs ofconstruction and attract capital. This has led to a “diversion offunds from the producing segment to the pipeline segment [that]will seriously, negatively impact gas deliverability,” he told thecommittee.

Bailey countered that Williams and other pipelines “continue tobe prepared to explore regulatory models that make pipelinerisk/reward profiles more similar to those of marketers andproducers.” He said he thought the best way to accomplish this wasto allow interstate pipelines to negotiate terms and conditions ofservice with their customers, which producers vociferously oppose.

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, he noted. Inaddition to power generation, gas will get a boost on theenvironmental front as the Clinton administration has given it a”principal role” in meeting its Kyoto protocols, which target a 7%reduction in 1990 carbon emission levels by the 2008-2012 period,Murkowski said.

Overall, U.S. gas demand is expected to grow 1.7% annually from1997 to 2020, faster than any other major source of fuel, Hakesnoted. During the same period, the growth in domestic gasproduction will be slightly slower, rising from 19 Tcf to 27 Tcf by2020. Net imports from Canada, which currently account for 12%-13%of U.S. gas demand, will make up the difference. Murkowskiquestioned whether the Canadian gas imports would be competitivelypriced. “I am always a little uncertain when we become moredependent on foreign sources for energy…”

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 the spending capacity of the domestic oil and gasindustry, hampering cash flows and drying up outside sources ofcapital. Most producers now “are focused on trying to get theirdebt repaid rather than growing,” he noted.

“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 notedthat gas wells starts were down 47% from the peak in the thirdquarter of 1997.

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

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.” The EIA is “fairly confident that the pipelineconstruction that’s needed is not something that’s unprecedentedhistorically or, in fact, is that different than the amount ofconstruction that’s been experienced or planned in the currentperiod.”

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