In the aftermath of Hurricanes Katrina and Rita, the chief energy policymaker in the Senate warned the nation Thursday to expect a potential natural gas shortage and unprecedented high prices during the upcoming winter heating season. Top industry executives, reeling from the effects of the twin hurricanes, shared those concerns.

“We need to have a realistic expectation as to how long we should expect high prices of natural gas and related products [to last], and we need to prepare for potential shortages. I hate to say that,” said Sen. Pete Domenici (R-NM), chairman of the Senate Energy and Natural Resources Committee, during a hearing reviewing the extent of damage to energy facilities along the Gulf Coast and the status of recovery efforts.

Natural gas futures prices closed above $14/Mcf Wednesday, and “uncertainty about supplies may keep those prices painfully high” during the winter months, he said. “I don’t believe [that] just a few months ago anybody believed that was possible.” Domenici on Thursday called on the Bush administration to open portions of gas-rich Lease 181 in the eastern Gulf of Mexico to leasing activity. He said he has crafted a legislative language to clear the way for more drilling in the Outer Continental Shelf (OCS), while creating a buffer zone around the Florida peninsula.

The United States is in a “natural gas crisis,” and the back-to-back hurricanes have “dramatically underscored the problem,” Andrew Liveris, CEO of Dow Chemical, told the Senate panel. He noted that $14/Mcf natural gas was equal to a $7/gallon price for gasoline. These prices render the entire domestic chemical industry, which uses natural gas for fuel and as a raw material, uncompetitive.

He urged Senate lawmakers to take four policy steps: 1) allow more coastal states to engage in activity on the federal OCS; 2) expedite the development of Lease 181 areas in the eastern Gulf of Mexico that are at least 100 miles off the Florida coastline; 3) declare a national emergency, mobilizing every American to save energy; and 4) take steps to assure that the most efficiently generated energy is dispatched to the power grid first.

“Frankly, the OCS supply situation should have been tagged on to [the energy] bill” that was signed into law by President Bush in early September, Liveris said. Domenici and other pro-OCS senators attempted to do this, but were blocked by the anti-OCS drilling forces from Florida.

Red Cavaney, president of the American Petroleum Institute (API), said President Bush, in consultation with Congress, currently has the power to draw a line in the Gulf of Mexico between Florida and Alabama to allow production in the Lease 181 area off the Alabama coastline. Although production would not likely be forthcoming for another 5-7 years, he said this action would “send a very power signal” to the gas futures market that more supply was on the way, and would help to reduce the pressure on prices.

Cavaney said the natural gas market would likely show signs of relief and would turn in the opposite direction if it saw favorable policy changes coming from Capitol Hill.

He said he supported the proposal that would allow individual coastal states, such as Virginia and Alabama, to opt out of the congressional and presidential moratoriums on oil and gas drilling in the OCS. Cavaney, however, noted that any proposal calling for natural gas-only leasing would not be feasible with today’s technology.

Under questioning from anti-drilling Sen. Mel Martinez (R-FL), Cavaney conceded that there was “very little that can be done in the near term to change the dynamic” of high gas prices and limited supply. That’s because Congress has taken off the table nearly all of the “attractive areas” to drill for natural gas, he said. “The most powerful thing [that] we can do today is ramp up our…conservation [efforts].”

Dow’s Liveris believes that the dispatch of efficiently generated power first could free up to 644 Bcf of natural gas, and would make a noticeable dent in demand within two years. He also believes that Lease 181 could provide enough natural gas to heat 25 million homes for decades.

“I believe that we’re going to face some very serious challenges this winter…If we have a normal to colder winter, I think we have to be prepared [for] a number of significant operational challenges,” said Christopher Helms, president of the pipeline group at NiSource Inc., which owns Columbia Gulf Transmission, a pipeline that delivers gas from the Gulf to the Mid-Atlantic region and Northeast markets.

“We can’t afford to lose [anymore] natural gas supply.” He noted that the current gas supply situation is “very tenuous,” with Gulf daily gas production down by about 7 Bcf/d from pre-hurricane levels. “We may be facing this winter with a significant amount of gas not flowing on the pipelines,” which would cause the industry to rely more on natural gas in storage to meet the winter heating season demand, Helms said. Currently about 65% of the peak-day demand is met by storage, with the remainder supplied by pipelines.

“The real challenge is going to be in the late winter when storage deliverability is declining and we don’t have the same amount of gas flowing,” he told lawmakers.

In order to restore more Gulf gas production, “we’ve got to get [the onshore] gas processing infrastructure up and running” in Louisiana. In addition, “we need some federal coordination” of recovery efforts “quite frankly because we are so disaggregated.” Helms suggested that a federal agency, such as the Department of Energy (DOE), be named as a clearinghouse for the industry.

“We need to start talking about where we can prioritize repair equipment, lay barges…to get our industry back in shape.” As it stands right now, he reported that gas pipelines, processors and producers “are all competing for limited resources of crews, supply barges, helicopters [and] generating capability” in the Gulf Coast region.

“We can’t get our liquids separator plant operable for another five weeks. It had eight feet of salt water under it. Every pump, every motor, every electric piece of equipment [was affected], and we’re not alone. The refineries, Entergy…have the same demand for electricians,” Helms said.

The federal government also must make more funding for the Low-Income Home Energy Assistance Program (LIHEAP) a priority this winter, along with greater access to federal non-park lands for producers, according to Helms. He called greater producer access “the elephant in the room.” Helms estimated that gas deliverability could jump 1 Bcf/d by March 2006 if Congress would grant producers more access in the Rockies.

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