The chairman of the gas demand task force of the NationalPetroleum Council (NPC) said yesterday his projections of a 30 Tcfmarket by 2010 in the December NPC study on natural gas “might havegrossly underestimated inherent demand.” The growth of gas firedpower generation has caught everyone by surprise and could have theunexpected effect of causing net gas withdrawals from storageduring the summertime as early as next year, said Matthew R.Simmons, president of Simmons & Company International.

Testifying before the Senate Committee on Energy and NaturalResources on behalf of the NPC, Simmons issued an alert that the”explosive growth” in planned new gas-fired electricity generatingplants could cause the 28 to 30 Tcf market for natural gas demandto “arrive in half the time” envisioned by the NPC report.

“Should this high demand come much sooner than 2010, there islittle way for this much new supply to be added so fast,” he said.”In fact some extremely knowledgeable industry executives andanalysts privately worry that the ambitious goals of reaching 29 to30 Tcf of natural gas supply by 2010 might be a real stretch even[if restrictions on drilling access to federal lands] and otherregulatory issues are cleared away. The decline curves for too manybasins around the country are so high, and still rising, that ittakes an increasing amount of drilling to simply keep the currentproduction base flat.”

The primary reason for Simmons possibly underestimating thedemand for natural gas was “misjudging the rapid growth in ordersfor new gas-fired turbines. This has caught virtually everyone,including the manufacturers of these efficientelectricity-manufacturing units, by surprise,” he noted. He alsosaid there is confusion about how often these new gas turbines willbe running. A booming economy, greater environmental restrictionsand fewer coal-fired and nuclear power plants operating will ensurethat new gas-fired plants run a lot more than previously expected.

“When all these changed assumptions are calculated into a revisedemand model, the 30 Tcf gas needs could jump ahead by half adecade.”

As these new gas-fired plants get hooked up, “the reliability ofthe North American gas storage system could also be called intoquestion,” said Simmons. “A case can be made that America couldstart to see gas withdrawal from our storage system during thesummer months as early as next year or the following year at thelatest… The dynamics of such a scenario require either a majorincrease in daily gas production during the shoulder months or werisk literally draining the natural gas storage system over thecourse of one to three years of winter and summer storagewithdrawal.”

This “energy conundrum” can only be solved by an increase indrilling, including access to off-limit areas in the Gulf and theRocky Mountain regions, said Simmons. But it also requires thatmore rigs are built and many more people are added to theworkforce. If those things cannot be accomplished, the electricityindustry will be forced to turn to new LNG import terminals, morecoal-fired power plants, new nuclear plants and more dams forhydropower, all of which will take the “better part of a decade toaccomplish.”

Committee Chairman Sen. Frank Murkowski (R-AK) said the hearingyesterday should serve as a “wake-up call” to the American peopleon what he called the coming “crisis” in the natural gas market. Ifthe Clinton Administration maintains the status quo of restrictingdrilling access to federal lands offshore and onshore, there simplywill not be enough natural gas to meet the demand projected,Murkowski warned in the third hearing he has held on the subject.

“Here’s the problem as I see it: We’ve put all our energy eggsin the natural gas basket, but we have not concentrated onproducing more eggs,” he said in a statement.

Using several administration officials as verbal punching bags,Murkowski highlighted the contradiction between the projectedbooming market for natural gas and the administration’s policy, orlack of policy, on natural gas.

“If it is the official administration policy for the nation touse more natural gas, why is the government working so rapidly tomake natural gas tougher to produce here at home?” The Departmentof the Interior has been placing domestic sources of natural gasoff limits. The Forest Service is about to make more than 40million acres off limits through its roadless policy. And the VicePresident said he would do everything in his power to stop newouter continental shelf (OCS) oil and gas drilling even in areasalready leased by previous administrations, Murkowski said.

As one example of the administration’s failed approach, he referredto the regulatory Catch-22 that has left the Destin Dome project inlimbo. Chevron, Conoco and Murphy Exploration & Production earlierthis week filed a breach-of-contract lawsuit against the government,charging that the Commerce Department and the Environmental ProtectionAgency created a regulatory stalemate, in which each agency said itcould not move forward in its review of Destin Dome 56, located 25miles offshore Pensacola, FL, without a favorable decision by theother (see Daily GPI, July 25).

“Are you going to encourage gas development or not?” Murkowskirhetorically asked the administration representatives.

“While the Department of Energy has been doing great things topromote natural gas technologies and use, DOE owns no land. Nomatter how right DOE is about natural gas, unless other departmentsare singing the same tune, our nation is heading for disaster,” hesaid.

T. J. Glauthier, deputy secretary of DOE, David Hayes, deputysecretary of DOI, and Mary Hutzler, director of integrated analysisand forecasting for the EIA, all attempted to convince the chairmanof the administration’s honest efforts to increase domestic supplyof natural gas. But Murkowski simply wasn’t buying it.

Glauthier reported, however, that an Interagency Working Groupon natural gas has been established at the White House under theleadership of the National Economic Council and held its firstmeeting last week. Forming the group was a recommendation of therecent study on natural gas by the National Petroleum Council.

Among other things, Glauthier added that the DOE, BLM, ForestService, Fish and Wildlife Service, the National Park Service andthe Bureau of Indian Affairs have formed a research group todevelop ways to streamline the environmental review process thatmust occur before drilling can be allowed on federal lands in theRocky Mountain region. He also said the BLM is looking at liftingthe drilling ceiling in the Powder River basin by 5,000-7,000 morewells.

But Murkowski said it’s a case of too little, too late. Themarket evidence of this failed approach already is rearing its uglyhead in the form of sharply higher gas prices. Prices alreadydoubled this year, he noted.

The projection that gas prices are coming down in a year to 18months doesn’t mesh with the reality that the gas industry needs toinvest $1.5 trillion over the next decade in gas infrastructure tomeet demand, he said. “We’re setting ourselves up for a crisis ongas.”

G. Warfield Hobbs, testifying on behalf of the AmericanAssociation of Petroleum Geologists, noted that there is plenty ofnatural gas to be found in the United States, enough for 50 yearsat a demand rate of 32 Tcf/year. However, only 10% (157 Tcf our of1,466 Tcf) of the resource is classified as proven reserves. Thereis an additional 313 Tcf in Alaska, for a total of 1,779 Tcf in theU.S., but without a pipeline, Alaskan gas won’t be helping the U.S.market.

In addition, most of the prospective areas for major new gasdiscoveries are on public lands where federal law prohibitsexploration. Using a map from the December NPC report, Hobbs notedthat 213 Tcf of gas reserves is currently off limits because offederal law, and it is likely that the resource in those areaswould grow significantly if exploration was allowed to take place.

He recommended multiple changes to the government’s policies onpublic land access, including lifting the OCS moratorium andopening up the restricted areas (1002) of Arctic National WildlifeRefuge. He also recommended regulatory reforms to streamline thepermitting process, change the wetlands rules of the Clean Waterand Endangered Species acts and improve DOI’s management proceduresin the Rocky Mountain region.

Murkowski lauded those suggestions. “I feel very strongly thatthis administration has not been forthcoming in leveling with theAmerican people about the realities associated with gas,” he added.”Gas is not going to be, in my opinion, just an automaticalternative to other sources of energy. We need to balance all ourenergy sources to [meet demand] or I think there’s going to be anenergy shortage. It’s going to affect the economy and is going toaffect inflation.”

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