As the broad energy bill (HR 6) hangs in the balance in the Senate, representatives of the struggling steel, agriculture and paper industries told a House subcommittee last week that they need fast relief from high natural gas prices. Assurances of lower prices 10 or more years down the road, when liquefied natural gas (LNG) imports and Alaska gas are projected to play a bigger role in the U.S. supply mix, don’t help them now, they said.

“Things that happen in the timeframe 2010-2025 are really quite academic to us because if we don’t see some relief on these [natural gas] cost inputs in the three-to-five-year timeframe…we’re not here,” said Guy H. Ausmus of steelmaker Ispat Inland Inc. during a hearing before the House Resources’ subcommittee on energy and mineral resources last Thursday.

There is “enormous pressure on natural gas in this [steel] business,” he noted, adding that “relief has to be made” in the near term. Officials with the agriculture and paper industries echoed the sentiment, saying that high gas prices were the result of a failed U.S. energy policy.

Conservation and efficiency gains “alone” haven’t been enough to ease the imbalance in gas supply and demand, said Branko Terzic of Deloitte & Touche LLP and a former FERC commissioner. LNG imports, which are expected to grow 11% a year, will help in the “medium run,” and an Alaska gas pipeline will make a difference 10 or more years from now, he noted.

But “in the short run, only increasing domestic natural gas [production] is a viable solution” for bolstering supply and taming prices, he told Subcommittee Chairwoman Barbara Cubin (R-WY) and other lawmakers. This means increased land access for producers and a faster permitting process, Terzic said.

North America faces a “quite uncertain future” with respect to both crude oil and natural gas, warned Administrator Guy Caruso of the Energy Information Administration (EIA).

He noted the gas industry was operating at “very close” to full capacity at both the production and transportation ends, which means that “small changes” in conditions (weather, industrial accidents and political situations) can send prices soaring.

The agency foresees gas prices staying high throughout the winter, above the average spot price of $5.50/Mcf at the Henry Hub during the 2003 heating season, Caruso said. He attributed this largely to the frigid weather in New England and the Northeast.

Storage started the 2003-2004 heating season at a “robust” level, but it is being drawn down to the normal range, he noted, adding that the EIA was closely monitoring inventories.

In the longer term, Caruso said the agency sees natural gas prices coming “down a bit” as LNG imports, Alaska gas and gas from unconventional sources (coalbed methane, shale gas and tar sands) make up a bigger part of the fuel mix.

He anticipates that gas from the Rocky Mountains will be a “substantial component” of the supply mix over the next two decades, provided more public lands are made available for drilling and substantial investment is made in pipeline infrastructure.

Caruso said LNG will play an “extremely important role” in the years ahead. He noted the U.S. will need a substantial number of LNG facilities to offset declining gas imports from Canada. Approximately 40 LNG plants have been proposed so far, but the EIA head anticipates that only 9-12 will be built.

“Timing is critical” for the approval and construction of LNG plants because it will determine whether the U.S. sees $5 gas or much lower prices, according to Caruso.

Donald Santa, president of the Interstate Natural Gas Association of America and a former FERC commissioner, was more cautious about LNG. It is “clearly part of the [supply] answer,” but “it is not the silver bullet” that many seem to think it will be.

He believes LNG project developers “are going to face some of the same challenges confronting interstate pipeline developers — that is, state and local opposition to these projects.” He noted that two LNG developers in the Mobile Bay, AL, area (Cheniere and ExxonMobil) already have “stepped back” from their projects due to intense local pressure.

He advised LNG developers to take heed of states’ efforts to block FERC-approved gas pipeline projects, most notably the Millennium and Islander East pipelines, on the grounds that they are inconsistent with state coastal zone management plans. Both pipelines appealed the state decisions holding up the projects to the Department of Commerce. Millennium’s appeal was rejected in December; Islander East’s appeal still is pending.

The Commerce Department’s appeals process is “unreasonably long,” and “casts a cloud” over pipeline projects, Santa complained. Meanwhile, transportation prices to New York City, which both Millennium and Islander East would serve, hit a high of $40/MMBtu this winter, far above the Henry Hub average of $6/MMBtu. Although this was an “extreme and isolated example,” Santa said it underscored the need for more delivery capacity to New York City.

While he applauded FERC for its quick approval of pipeline projects, Santa said “there is a growing and serious concern with other federal [Commerce] and state regulators who have [their] jurisdictional hooks into aspects of the pipeline siting process.”

This “raises serious caution flags” for LNG import projects, which will have to go through the same “regulatory gauntlet,” he warned.

Santa said he was encouraged that two competing sponsor groups have stepped forward to build an Alaska pipeline, but he noted the project will bring “tremendous costs and financial risks.”

LNG and Alaska gas “alone are not enough” to meet the anticipated growth in U.S. gas demand, he said. The U.S. will have to look to the Rocky Mountains, deepwater Gulf of Mexico and Arctic Canada as well.

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