[ The usual partisan nonsense can be found here — Republicans blaming Democrats for not solving the energy crisis by “Drill Baby Drill” and Democrats berating Republicans for cutting energy efficiency programs. There are a few biophysical acknowledgements that energy underlies our economy (rather than money as economists would have you believe). So however clueless our representatives can appear to be, they are aware the U.S. is totally dependent on a finite amount of imported oil from unstable countries, and that this puts the U.S. at risk of energy shortage. Which of course implies endless oil wars abroad, though this is only spoken of military leaders invited to these hearings.
When the energy crisis strikes, I think historians will be struck by how much both political parties seek to solve the crisis with more energy — more biofuels, more gas, more oil, more wind, more solar. Not energy efficiency. Or a strategy to inform the public and ask them to do what they can to conserve energy (especially since Americans consume 5 times more energy than the rest of the world), or to make birth control and abortion more easily available here and the rest of the world to get population numbers more in line with carrying capacity as fossil fuels decline. So what if that’s political suicide, it’s the right thing to do for the long-term good of the United States and the rest of the world.
Alice Friedemann www.energyskeptic.com author of “When Trucks Stop Running: Energy and the Future of Transportation, 2015, Springer]
House 106-147. May 24, 2000. National energy power: ensuring adequate supply of natural gas and crude oil. U.S. House of Representatives.
Excerpts from this 133 page document follow.
Mr. BARTON. We are going to have a serious discussion today on what our energy policy should be. One could argue the last 7 years we have been adrift in terms of a comprehensive, coherent, coordinated energy policy. Today’s hearing is the first of three. We are going to focus on the oil and natural gas industry and some of the issues that face us in that arena. This past winter we got a wakeup call that gasoline is not forever going to stay below $1 a gallon at the pump. OPEC reemerged as a force to be reckoned with. And we had the situation where our Secretary of Energy, a former member of this subcommittee, was running around the world trying to get OPEC to raise their production quotas, which was not a pretty picture in my mind. As bad as the situation was this past winter, several of our witnesses today will paint a much more dismal picture for the future. And according to them, and I happen to share their concerns, unless we do a course correction on our national energy policy, the EIA representative will predict that by the year 2020 the United States will be dependent on foreign suppliers for 64% of its petroleum consumption and over 50% of that is expected to come from the OPEC countries.
I think that those numbers indicate that it is time for us to do this course correction sooner rather than later with respect to domestic oil and gas exploration and production policies in our Nation. We are a country rich in resources. There is no reason that we can’t minimize that dependence. Yesterday the Energy Information Administration released a report that estimated that there are 10.3 billion barrels of oil that could be recovered from the Arctic National Wildlife Reserve which we commonly call ANWR. Similarly, vast areas of the Outer Continental Shelf have been put off limits for natural gas exploration and production in the last decade. The Destin Dome near Florida’s coast is estimated to contain at least 2.6 trillion cubic feet of natural gas. If this is true, it would be one of the largest natural gas fields in the Gulf of Mexico.
Neither the Congress nor the administration have spent significant time on this subject over the last few years. I do not intend this statement to be a criticism; it is simply a fact. And it is somewhat understandable when the economy is doing well and at a time when energy prices are generally low. I share the concern regarding our growing dependency on foreign sources of energy. And this subcommittee is an appropriate forum to explore the various energy policies which exist today and to look at proposals that are aimed at promoting a higher level of energy self-sufficiency.
Mr. HALL. And your decision to hold hearings on the state of our national energy policy is once again in vogue again like it has been so many times. It seems like we go up and down the system. The development and implementation of a coherent and flexible energy policy tends to recede into the background when energy prices are stable but come roaring to the front when things go up or when the public debates the prices as they rise, as they have over the last year. I don’t believe there is a more important element of our economy on which Federal policy needs to be developed and carried out more consistently than energy. We do need an energy policy and that energy policy can be very easy and simple. It simply is incentive to look for it and reward for finding it. Because the little ones look for it, they borrow money from the big banks to look for it, and when the little ones find it, the big ones buy it and redistribute it, make money and live happily financially ever after, while little ones go back to looking for a bank that will loan them some money. Even in high times bank won’t loan money because there is no consistency.
Mr. PALLONE. The majority leadership’s idea of a national energy policy involves drilling the Arctic National Wildlife Refuge and unfortunately, this is not sound policy. If we open the Arctic refuge to oil and gas development, we will only have the equivalent of 6 more months’ worth of oil supply. In the process we would destroy one of our Nation’s greatest natural resources forever. And drilling the Arctic refuge will do nothing to increase our energy security or lower prices at the pump. Instead of drilling in the Arctic refuge, we should be banning exports of Alaskan oil to other Nations.
A sound energy policy entails a comprehensive approach that includes promoting and funding commonsense programs to conserve energy and develop alternative energy sources. Such programs also would reduce our reliance on polluting fossil fuels and on oil imports from foreign nations. Regrettably, the Republican leadership has harmed the Nation’s energy security by cutting funding for energy efficiency, renewable energy, weatherization and alternative fuel programs during the past several years.
After taking control of Congress, Republicans cut energy efficiency programs by 26%.
We have to help ensure our Nation’s short- and long-term energy security independence by using mass transit, bicycles, and other fuel-efficient vehicles. There are a lot of things we can do in terms of conservation measures even here in the House of Representatives. And I just would like to see a more proactive effort so that we can go home and tell our residents and our children that we are working to protect the Nation’s energy security as well as their pocket books as well as our resources.
Mr. LARGENT. Fossil energy, specifically natural gas and crude oil, have to and will continue to dominate United States energy supply. According to the Energy Information Administration, petroleum consumption in the United States is projected to increase at an annual rate of 1.3%. However, also according to the EIA, our domestic petroleum supply, including natural gas, is projected to remain nearly flat. What does that mean? It means that instead of currently relying on the rest of the world’s petroleum for 52% of our domestic oil and gas consumption, in 20 years we will depend on foreign imports for 64% of our domestic consumption needs. Frankly, I think that estimate is conservative.
DANIEL YERGIN. If prices are ever in the $30-plus range for any period of time, we think that the impact of slowing economies will provide an inevitable correction on those prices. But this wide band of prices that we have seen, from 10 to $34 a barrel, in this most basic commodity over a little more than a year, underlies the inherent volatility in what is probably still the world’s most important commodity.
Let me in the last couple minutes turn to something that this subcommittee has considered a lot—and Congressman Sharp and I were talking about this for a very long time—which is natural gas prices. In a sense, this subcommittee is the home of consideration of that. So much of the energy consideration has been focused on oil recently. But the United States natural gas supply system right now is characterized by very tight supplies, and we are going to hear a lot more about that in the next few months. The spring market and the recent heat waves have shown how tight.
Indeed, the United States is making a very big bet on the adequacy of future gas supplies without realizing it. Fifteen percent of our electricity today is generated with natural gas. In terms of proposed new capacity, that number goes up to 96%. We have seen a slow supply response, partly because of the oil and gas price collapse the last couple of years.
There are big challenges ahead. No. 1 is to reverse the decline in supply. We estimate that in round numbers we need half a trillion dollars’ of investment in the upstream natural gas business to get the kind of supply that we need in 10 years. We need to add 50% more reserves in this decade than in the last decade. We will need to connect new frontiers of gas development, including, as Admiral Watkins pointed out, the Arctic, and reduce the pressure on the gas infrastructure system in our country. We need to recognize the very large reliance we are making and we are putting on natural gas to power the growth of our new economy.
The attention on oil when prices reached $30-plus underlines the fact that oil prices are one of the few prices—along with the price of labor and the price of money (interest rates)—that can move the economy and spook the stock market.
One of the major changes from the oil turmoil years of the 1970s is the relative absence of confrontation that characterized that earlier period. No longer is there a North-South struggle. Instead, we are in an era of ‘‘emerging markets.’’ Countries like Mexico and Saudi Arabia—recognize how integrated their economies have become with the United States. Mexico worries about oil prices. But, especially post NAFTA it also worries a great deal about the health of the United States economy.
Exporters also have assimilated the great lesson of the 1980s—that customers count and you do not want to risk losing market share. They could see that prices at recent levels could well damage their interests in two ways. First, they could lead to a slowing of economies, reducing demand and thus creating new problems for the exporters. Secondly, although the oil industry has been cautious in its spending, persisting high prices could end up stimulating the development of a lot of new supply. And the exporters have no interest in seeing oil prices turn into a big campaign issue in the United States.
The message is similar for the United States. We import about half of our total oil supplies, and our dependence will grow. We have a dense web of interdependence with many of the oil-exporting countries, of which oil is but one, though a most important element. The current supply picture is taut, which means that the market could be subject to a great deal of volatility. With low inventories, prices could be driven up again by everything from another Iraqi showdown with the United Nations, political or technical problems in a major exporting country, or political tensions among exporters, to the pace of Asia’s recovery and the strength of the U.S. and European economies. Continuing demand recovery in Asia and Latin America combined with further gains in North America are expected to propel world demand growth through 2002. We are looking at a 2.2% worldwide annual average increase in demand between 2000 and 2002 as long as economies remain on the track on which they are. If prices are in the $30 or higher range for any period of time, we think that the impact of slowing economies will provide the inevitable if unfortunate corrective. Many of the exporting countries suggest that an ‘‘appropriate’’ range for oil prices is $20-25 a barrel—a price that is often said to be good for consumers and good for producers. But the much wider band of $10 to $34 a barrel within 1 year underlines the inherent volatility in the world’s most important commodity market and the difficulty in getting the price ‘‘right.’’
U.S. Natural Gas. Much of the energy attention in recent months has been focused on oil. But the U.S. natural gas system is also characterized by very tight supply. The spring market and recent heat wave have shown how tight: Prices today are 70% higher than they were this time last year. In CERA’s view, for the first time in many years, there is real uncertainty about the ability of North American supply to meet demand without sharp price rises. Demand pressures are intensifying, while there are few signs yet of growth in supply. The differences are being made up by withdrawing supplies from storage, where the levels are very low. There is a similarity here to the oil market. Pressures on inventories are driving the market. But there are major differences, too. In contrast to the oil-exporting nations, there are no suppliers withholding supplies from the market. And there is no capability to ramp up production quickly to reduce the pressure in the market. In the months ahead, we may see prices at new, higher levels that have not been seen since the emergence of natural gas spot markets in the mid-1980s. How high will prices go this summer? That depends on how hot the summer. We could well expect $3.50 to $4.00 levels. With a hot summer, prices could spike to $5.
In examining the outlook for the industry in our new study, ‘‘The Future of North American Natural Gas,’’ we see major challenges. Natural gas is a critical fuel for the United States both for energy and environmental reasons. It currently provides 23% of our total energy. It heats 53 million homes; it is a major feedstock for industry; and, increasingly, it will be the key to our future electricity supplies. Electricity will continue to become ever more central to our economy; the digital economy depends upon a very high quality electricity supply system. But that system, in turn, will more and more depend upon natural gas. Indeed, the United States is making a major bet on future gas supplies—without realizing it. Currently, just 15% of our current electric generating capacity is fired by natural gas. However, 96% of proposed new generating capacity is gas-fired. The reasons are cost, flexibility, technology, and environmental attractiveness. Demand for natural gas is currently very strong, owing to the completion of new gas-fired power generation plants, and as economic growth stimulates the demand for the power that both new and existing gas-fired generation units an produce. At the same time, high decline rates in existing natural gas production require higher levels of drilling to maintain supply—let alone keep pace with demand.
The supply response—new exploration and development—has been slow in coming for many reasons. One is the continuing impact of the 1998-99 price collapse, which devastated the cash flows of the upstream oil and gas industry and continues to leave many companies cautious and capital-constrained. An industry that has been hurt by boom-and-bust cycles is leery of setting off another one. The industry has downsized so much in response to lean times that it faces a shortage of labor.
At least until recently, capital that might otherwise have flowed into the industry instead went into the technology sector of the stock market—although that may well be ending. The result is that US supply is likely to be down this year, while western Canadian supplies are only now beginning to grow, and then only modestly. Reversing the recent declines in US wellhead supply requires offsetting higher decline rates in existing production and moving beyond the current plateau of drilling. Greater investment is needed in exploration as well as in development areas. Nevertheless, CERA expects supply to begin to show year-over-year increases in the United States toward the end of 2000, and in Canada supply growth is at last expected to be evident this spring. CERA does believe that there is the gas supply potential to meet the challenges of increased demand from power generation at a price that would not discourage that market development. It is very important to avoid short-term government intervention in the market that would discourage investment in supply.
There are big challenges ahead. The number one is to reverse the decline in supply. To meet the target of 30 TCF in ten years, compared to the 22 TCF today, will require something on the order of half a trillion dollars in U.S. upstream development. We will need to add 300 to 350 TCF of new reserves in this decade, which is 50% more than we added in the 1990s. We will need to connect to new frontiers of gas development, including the Arctic, and reduce the pressure on the gas infrastructure system in this country. And we need to recognize the very large bet that we are making on natural gas to power the growth of our new economy.
PHIL SHARP, Harvard electricity policy group, John F. Kennedy school of Government, Harvard University. I am a Lecturer in Public Policy and recently chaired the Secretary of Energy’s Electric System Reliability Task Force. From 1975 to 1995, I was a Member of Congress from Indiana and for 8 years had the honor of serving as Chairman of the Energy and Power Subcommittee. During those twenty years, I participated in nearly all major legislative efforts regarding energy policy and clean air policy as well. During that time I supported policies which proved effective and others which did not. Fortunately, for me, no one is keeping score.
Our basic energy policy for assuring adequate supplies of oil and natural gas is reliance on the competitive market. Stick with it. That has been the policy for two decades. After years of intense political and ideological dispute, after several ‘‘energy crises,’’ after experimenting with extensive economic regulation, a broad consensus emerged toward the end of the 1970’s that market forces, not the government, should determine the price and allocation of oil and gas supplies—that market forces would be the main determinant of how we produce, distribute, and use oil and gas. It is a bi-partisan policy. It is an effective policy. It is not well understood. Our policy has never been, however, simply one of laissez-faire. For reasons of equity, security, and environmental protection, we have a host of supplementary policies that seek to shape those market forces. Some of these supplementary policies have big impacts on the oil and gas markets and should be periodically re-examined. The unsettling price swings of this past year naturally raise doubts about our market policy; and they inevitably give rise to political calls for short term-policies that will stabilize prices to avoid short term pain—either for producers or for consumers. The overriding lesson from the past: ‘‘just say no’’ to proposals for controlling prices—directly or indirectly. Be wary of the siren song that lures the government to try to smooth the price path in a turbulent market. No one yet is calling for direct price controls. Perhaps, we have truly learned how ineffective, counterproductive and costly oil and gas controls can be for consumers and the economy. Perhaps, there is also memory of how politically difficult it was to change or abandon them. Like many others in Congress, I underwent the metamorphosis from supporting controls to helping end them. Today, however, we hear proposals aimed at controlling price spikes—not directly, but indirectly: release crude oil from the nation’s strategic petroleum reserve; create a regional product reserve in New England to quell future spikes; require private suppliers of fuel oil to maintain stocks at levels set by the government.
While not nearly as draconian as direct price controls, these proposals suffer some of the same disabilities. They assume the government can regularly out-guess the complex and rapidly changing market place. They are not likely to produce the desired result. They seldom can be invoked in a timely fashion. They often produce unexpected and undesirable consequences. Earlier this year, the President was wise not to draw down the Strategic Petroleum Reserve; and the Congress was wise not to collectively press for such action. Like it or not, in our enormously complex economy, it is the change in prices which stimulates added production, which moves products to where they are needed (like fuel oil to New England), and which encourages consumers to take seriously energy efficiency.
The pain of price swings and the benefits of the market, of course, are not evenly distributed. That is why supplementary policies such as low-income energy assistance and weatherization are the compassionate courses to pursue, rather than efforts to control the price level.
We are energy ‘‘interdependent’’—integrally connected to world oil and gas markets. While we Americans today are far more cognizant of ‘‘globalization’’ than we were in the 1970’s, it is important to remind ourselves that we live in an energy interdependent world which is very difficult for most of us to understand. This may explain why some of our rhetoric about energy policy is so at odds with reality and why so many policy proposals miss their mark. One of the major lessons from the 1970’s: there is no set of acceptable import reduction policies which can achieve anything close to oil ‘‘independence.’’ In nearly every conceivable way, we are a part of the international market—in terms of products, prices, capital investment, environmental impact, etc. There certainly are benefits to us and to the world market if we can lessen our reliance on oil. But when judging proposals that purport to cut our imports, it is important to carefully ascertain the real benefits and carefully weigh them against the real costs—economic and environmental. Cutting US imports, for example, by several million barrels—would diminish our drain on the world export market and diminish the potential impact on parts of our economy if there were a disruption in Persian Gulf production. But such a reduction in imports would in no way end our strategic concern with world oil markets in general and Persian Gulf supplies in particular. US crude oil prices are largely set by the world market; the economies of our major trading partners rely heavily on oil; and nearly 2/3 of the world’s proven oil reserves are located in the volatile Persian Gulf region.
As the Congress considers proposals to facilitate production and distribution, it should also consider proposals that advance efficiency in the use of energy. In the 1970’s, there was much rhetorical fighting over whether we could ‘‘produce’’ our way out of the crisis or ‘‘conserve’’ our way out—as if we had an ‘‘either-or’’ choice. In the end, of course, the market dictated both; and policies were adopted in the name of doing both. Efficiency improvements have played and will play a major role in helping us economically fuel the economy in environmentally acceptable ways. Since the 1970’s, significant efficiency gains have been made in nearly every sector of consumption. While market prices and market forces have been, and should be, the central driver of efficiency, government policies undoubtedly contributed to those gains—through R & D, tax incentives, jawboning, and, in a few instances, minimum efficiency standards. In the United States, if we are talking oil, we are talking automobiles—that is, passenger vehicles. It is disturbing that the projections for fleet fuel economy improvements are so dismal. This must be a matter of public concern. One of the chief reasons for moving to competition in the electric utility industry is to accelerate adoption of efficiency innovations throughout the system—from the generator to the customer.
William F. Martin, Chairman, Washington policy & analysis. Natural Gas Consumption in the US Can Increase by 60% in the Next Twenty Years. Our latest study Fueling the Future: Natural Gas & New Technologies for a Cleaner 21st Century, reveals that consumption of natural gas could increase by almost 60% over current levels, from 22 quadrillion Btus (quads) in 1998 to 35 quads by 2020.
A Business as Usual Scenario for the US Energy Future Emphasizes Coal, Oil and Natural Gas Since the first WPA study on natural gas almost twelve years ago, the prospects for natural gas have improved, due in part to political and economic support for the natural gas industry and energy sector deregulation. Our energy economy has improved significantly over the last twenty years in terms of efficiency and our domestic energy resources have also expanded—especially coal, nuclear energy and natural gas. As we look to the
This led WPA to the conclusion that both coal and nuclear power remain important for electricity generation. In fact, we expect nuclear and coal capacity is unlikely to decline as precipitously by 2020 as many forecasts predict. Our projections assume that approximately two-thirds of all nuclear plants scheduled for retirement before 2020 extend their licenses and remain operational. Natural gas consumption is also seen as growing from 22 quads in 1998 to 29.7 quads by the year 2020, primarily in the electrical sector. We also see a significant increase in oil imports due in part to higher demand and declining domestic production. Under these assumptions, natural gas maintains market share in the electrical sector, but makes relatively few inroads into growing end-use demand within the transportation, commercial, residential and industrial sectors. Foreseeable problems related to supply and demand constrain the expansion of natural gas usage. On the supply side, WPA assumes that much of domestic natural gas reserves, both onshore and offshore, remain restricted or off-limits to exploration and production. Additionally, we assume that pipeline growth is constrained by factors including siting problems and inadequate capital investment based in large part on uncertainties about future demand in specific areas.
Natural Gas Can Play a Larger, More Direct and Dynamic Role in Meeting Our Energy Needs
We see steady penetration of gas into the electrical market, but the key to the success of this scenario is the penetration of end-use markets, including vehicles powered in a variety of ways by natural gas, gas-cooling and increased use by key industrial sectors. This projection foresees greater use of gas for distributed generation to site-based power for the industrial and commercial sectors, and by 2020 even the residential sector will see growth in this category. The increasing share of distributed generation is reflected in WPA’s projections by end-use sector. In the electricity sector, coal and oil show little or no growth in market share, but grow in absolute terms. In our Current Trajectory scenario, coal exceeds 61% of generation share, while in the High Gas Use scenario, it remains well below that at under 56%. Under this scenario natural gas consumption in 2020 is nearly 6 quads above the Current Trajectory. Roughly half of the increase is attributable to the residential and commercial sectors where more new customers choose gas and more customers convert from other fuels to gas. This scenario also exhibits continued expansion in a number of successful new markets such as residential gas fireplaces and commercial gas cooling. Additionally, distributed generation in the form of reciprocating engines, microturbines and fuel cells advances, accounting for roughly 20% of all new electricity generating capacity and 5% of total capacity by 2020.
Industrial gas demand is roughly 2.5 quads higher, continuing the robust growth of the past 10 to 15 years. Although the cogeneration market becomes saturated, other forms of distributed generation are expected to prosper, and highly efficient heating, cooling and process equipment continues to evolve, enabling gas to remain the dominant industrial energy source.
Natural gas cars, trucks and buses consume over 1 additional quad. Although these vehicles account for less than 1% of the overall vehicular market in 2020, they can make significant contributions to air quality and operational economics, primarily in fleet applications in congested urban areas.
There are Adequate US Reserves of Natural Gas to Meet a 35 Quad Future at Reasonable Prices
The decade of the 1990’s has demonstrated the vast and diverse nature of the gas resource base. Further, the resource base continues to ‘‘expand’’ as estimates today are larger than those made in the early 1990’s by the same estimators—despite the fact that we have produced and consumed over 150 trillion cubic feet in this period. Some components of today’s gas supply were not even acknowledged 10 to 15 years ago. Coalbed methane, for example, which now accounts for 6% of domestic gas production, was not included in most resource base estimates prior to 1988. There were tremendous technological advances in the past 10 years, from 3D seismology to horizontal drilling and innumerable computer-related breakthroughs. Similar advances will be required, and should be anticipated over the next 20 years, in order to satisfy a 35 quad demand level. Such advances will enable domestic production to increase from over 19 quads today to over 29 quads in 2020. Canada will contribute a slightly greater share in the future, increasing their exports from 3 quads per year to roughly 5 quads. Abundant worldwide and Alaskan gas resources offer mid-term insurance, while methane hydrates and other more exotic sources provide longer-term potential.
A Shift to Greater and More Direct Use of Natural Gas Provides Substantial National Benefits.
There are many reasons why the country should capitalize on this powerful national asset in order to clean up the environment, spur economic growth, reduce oil imports and conserve energy. Several key advantages of the High Gas Use scenario are shown below: 1. Natural gas is inherently cleaner-burning than coal or oil. Switching from those fuels to gas will reduce greenhouse gas emissions, acid rain, smog, solid waste and water pollution.
The efficiency of the natural gas system helps conserve the nation’s energy resources. When the entire energy cycle of producing, processing and transporting energy is measured, natural gas is delivered to the consumer with a total energy efficiency of about 90%, compared with 27% for electricity.
Natural gas is a highly reliable North American form of energy. About 85% of the gas consumed each year in the United States is produced domestically. The balance is imported from Canada. In comparison, roughly 60% of the oil used in the United States is imported, primarily from the members of OPEC. We project that oil imports could be reduced by about 2.6 million barrels a day (equivalent to Venezuela’s current total production levels). Billions of dollars could be saved over the next decades as distributed generation accounts for approximately 20% of new electricity generation capacity, thus avoiding the need to build approximately 150 capital intensive large-scale power plants . GNP and trade balance improvements would occur as global gas demand spurs US exports of gas-using technologies. The US leads the world in terms of its natural gas infrastructure, and US companies are providing their equipment to countries in Latin America, Europe and the Far East that are just beginning to develop natural gas systems.
Melanie A. Kenderdine, acting Director of policy, U.S. Department of energy. Increasing the average fuel efficiency of America’s automobiles by just 3 miles per gallon would save us almost a million barrels of oil per day. This demonstrates the value of fuel-efficient vehicles and why we have focused a great deal of effort on our PNTB program to produce a prototype 80-mile-per-gallon vehicle by 2004.
Jay Hakes and the EIA Office predict that we are going to need 1,000 new power plants in this country by 2020, and 900 of them will be powered by natural gas.
The potential for increased savings in energy demand in the U.S. economy remains enormous. And to meet growing energy demand, it remains essential.
ENERGY POLICY. The Administration’s ‘‘First Principle’’: Reliance on Market Forces.
The Clinton/Gore Administration has published two statements of its national energy policy in the last several years: Sustainable Energy Strategy (July 1995) and The Comprehensive National Energy Strategy (CNES, April 1998). Both documents provide a guide to energy policies proposed and implemented by the Administration, and seek to ensure that energy policy is well integrated into the Nation’s economic and national security policies.
We have completed two scientific reviews of energy related technology development, Federal Energy Research and Development for the Challenges of the 21st Century, in 1997 and, more recently, Powerful Partnerships in 1999. These provide an analysis of energy technologies being developed by the Department, and make recommendations on how to best utilize these technologies both domestically and internationally. Finally, the Department over the last several years, has engaged in numerous road-mapping exercises with industry, government, and academic stakeholder groups, and two extensive energy portfolio exercises, in which we matched our energy R&D investments against larger strategic goals of the CNES. This process, followed by an analysis of the portfolio, has helped us to identify gaps in our portfolio and opportunities for additional investments in energy technology. The Comprehensive National Energy Strategy, which DOE released in 1998, identified five overarching energy goals: • Improving the efficiency of the energy system; • Ensuring against energy supply disruptions; • Promoting energy production and use in ways to protect human health and the environment; • Expanding future energy choices, and; • Cooperating internationally on energy issues.
The Nation’s Energy Challenges In addition to identifying five energy goals, the CNES highlighted three major energy challenges for policy-makers. These are: • Maintaining America’s energy security in global markets; • Harnessing the forces of competition in restructured energy markets, and; • Mitigating the environmental impacts of energy use While each of these challenges warrants different Government actions, there is a need to invest in the development of alternatives and longer-term technologies to meet our future energy needs. We have added an additional long-term energy responsibility to the three CNES challenges: • Ensuring a diverse set of reliable and affordable energy sources for America, now and in the future.
Challenge #1: Maintaining America’s Energy Security in Global Markets. The United States remains heavily dependent on crude oil. Since 1985, domestic crude oil production has declined by 34%, while domestic oil consumption has increased by more than 22%. In 1974, net imports of crude oil and products supplied about 35% of U.S. consumption. In 1999, net imports supplied about 50% of U.S. consumption. The Administration’s response to the important role of oil in our economy and the increase in net imports recognizes the following:
- Consumption of oil continues to grow.
- The cost of oil production in the U.S. is high relative to other producing nations.
- The price of oil is a world price. High or low prices of oil worldwide will mean high or low prices domestically.
- Reducing volatility in oil prices will spur investment and match supply to demand.
- Global capacity must be increased if we are to meet domestic and international demand for oil.
To spur domestic production and lower the costs of doing business —without imposing quotas on imported oil, which would raise costs to consumers—the President has proposed tax incentives for 100% expensing of geological and geophysical costs (G&G), and allowing the expensing of delay rental payments. G&G expensing will encourage exploration and production. Delayed rental expensing will lower the cost of doing business on federal lands. The Administration has also supported and promoted virtually all significant energy legislation enacted by the Congress over the last seven years. This includes legislation for: Deepwater Royalty Relief; lifting the ban on the export of Alaska North Slope Oil; Royalty Simplification; privatization of the Elk Hills Naval Petroleum Reserve; the transfer and lease of Naval Oil Shale Reserves One and Three for production; Alternative Minimum Tax (AMT) and%age depletion tax relief for small operators; and creation of a guaranteed loan program for small domestic oil and gas producers. The Administration has also proposed legislation to transfer Naval Oil Shale Reserve Two to the Ute Indian Tribe for production; USGS estimates that there may be as much as 0.6 tcf of gas on this property.
To ensure that we are not overly reliant on imports from a single region of the world, we have diversified our sources of supply. Although our oil imports have increased, our sources of these imports have changed significantly over the last two decades. Last year, we imported 4.85 million barrels of oil per day from OPEC nations, down 22% from the 6.19 million barrels of oil per day in 1977. Our imports now come from over 40 countries.
To help the world develop its oil resources and increase world capacity, Secretary Richardson has actively promoted investment and development of the world’s energy resources. Most notably, Secretary Richardson has held two international energy summits—the Western Hemisphere Energy Ministers Summit in New Orleans and the African Energy Ministers Summit in Tucson, to discuss energy issues and plot a course for global energy development and future uses. In addition, the Secretary has traveled to virtually all the major energy producing regions of the world—the Caspian, Russia, the Middle East, Nigeria, Norway, Mexico, and Venezuela—to encourage energy production and business for U.S. energy companies.
We are also investing in reducing net oil imports by focusing on demand side technologies and policies. More than 60% of our oil consumption is for transportation, making vehicle fuel efficiency a ripe target for reducing the consumption side of the net import equation. Specifically, the Department’s transportation program is:
- developing an 80 mile-per-gallon (mpg) prototype sedan by 2004 through our Partnership for Next Generation Vehicles Program;
- improving light truck fuel efficiency by 35% while meeting newly issued EPA Tier 2 emission standards by 2004;
- developing technologies to increase fuel economy of the largest heavy trucks from 7 to 10 mpg (nearly 50%) by 2004;
- increasing domestic ethanol production to 2.2 billion gallons per year by 2010;
- develop production prototype vehicles that will double the fuel-efficiency of tractor trailer truck and triple the efficiency of heavy-duty pick-ups;
- supporting tax credits for hybrid vehicles.
Increasing the average fuel economy for cars and light duty vehicles by just 3 miles per gallon would save almost a million barrels of oil per day. This represents over 15% of current U.S. daily production. Investing in fuels and more fuel efficient vehicles could substantially reduce our reliance on imported oil at the same time it contributes to a cleaner, healthier environment. Without minimizing the importance of increased oil production, it is clear that even a small commitment to greater vehicle efficiency will net significant gains in reducing net oil imports, without compromising pristine onshore or offshore environmental ecosystems.
Ensuring the reliability of the energy grid is a growing focus of the Administration’s R&D efforts. While the electricity system powers other infrastructures, it will also be increasingly dependent on natural gas as a fuel source for both central power stations and small, distributed generation. EIA’s Annual Energy Outlook, 2000, projects the annual growth of 4.3% for the use of natural gas for electricity generation through 2020.
In addition, our energy delivery systems are becoming increasingly reliant on telecommunications and computing systems for fast, efficient operation. These trends will likely result in increased efficiencies and a range of new consumer products, but can also potentially increase physical and cyber threats to our energy infrastructure. To ensure the reliability and security of the electricity and natural gas infrastructures, the Administration has proposed a new Energy Infrastructure Reliability initiative with three components:
- electric reliability which will focus on regional grid control, distributed resources and microgrids, information system analysis, possible offsetting of peak summertime electric load with distributed generation and natural gas cooling technologies for example, and high capacity transmission;
- natural gas infrastructure reliability to include storage, pipeline and distribution R&D, and;
- secure energy infrastructures, vulnerability assessments, interdependency analysis, risk analysis, and the development of protection and mitigation technologies.
The President’s Bioenergy and Biobased Products Initiative is intended to address this growing need. Recent scientific advances in bioenergy and biobased products have created enormous potential to enhance U.S. energy security, help manage carbon emissions, protect the environment, and develop new economic opportunities for rural America. This nation has abundant biomass resources (grasses, trees, agricultural wastes) that have the potential to provide power, fuels, chemicals and other biobased products. The President has set a goal of tripling U.S. use of biobased products and bioenergy by 2010, which would generate as much as $20 billion a year in new income for farmers and rural communities, while reducing greenhouse gas emissions by as much as 100 million tons a year—the equivalent of taking more than 70 million cars off the road.
DOE’s Carbon Sequestration Program is designed to develop technologies and practices to sequester carbon that: are effective and cost-competitive; provide stable, long-term storage; and are environmentally benign. Increased carbon emissions are expected unless energy systems reduce the carbon load to the atmosphere. Accordingly, carbon sequestration—carbon capture, separation and storage or reuse—must play a major role if we are to continue to enjoy the economic and energy security benefits which fossil fuels bring to the nation’s energy mix.
The U.S. uses 94 quads of primary energy a year. The nation’s 100 million households and 4.6 million commercial buildings consume 36% of the total. Buildings also use two thirds of all electricity generated nationally. Energy consumption in buildings is a major cause of acid rain, smog and greenhouse gases, representing 35% of carbon dioxide emissions, 47% of sulfur dioxide emissions and 22% of nitrogen oxide emissions. Clearly, more efficient buildings will pay big dividends in reduced energy use and a cleaner environment.
Research and development areas for buildings include: heating, ventilation, and air conditioning; building materials and envelope; building design and operation; lighting; appliances, and; on-site generation. To use energy more efficiently, we are working to develop ‘‘intelligent building’’ control systems, more efficient appliances, and fuel cells to power commercial buildings. Standards to improve the energy efficiency of fluorescent lighting in commercial and industrial applications, proposed this March, are expected to save between 1.2 and 2.3 quadrillion BTUs of energy over 30 years, enough energy to supply up to 400,000 homes per year over the same time period. We have recently proposed an update to the efficiency standards for water heaters, and expect to issue proposals for clothes washers and central air conditioners in the near future—each of which are likely to produce even greater energy and environmental benefits. The industrial sector consumed almost 35 quads of primary energy in 1997— about 38% of all energy used in the United States. The industrial sector contains extraction industries, as well as materials processing and product manufacturing industries. Over 80% of the energy consumed in manufacturing (including feedstocks) occurs in only seven process industries: aluminum; steel, metal casting, forest products, glass, chemicals, and petroleum. These major process industries are becoming more capital-intensive. Markets are continuing to become more competitive globally.
To increase the average fuel efficiency of new cars and light trucks by 20% by 2010; • reduce the annual energy consumed by buildings; and • by 2010, reduce energy consumption in federal facilities by 35% relative to the 1985 consumption level, saving taxpayers $12 billion from 2000-2010. These reductions in energy demand will result in comparable reductions in greenhouse gas emissions, as well as reductions of other environmental impacts associated with energy use. Of course, none of this can be achieved without the active support of other agencies, industry and consumers. DOE looks forward to working with the Congress to develop and fund programs to increase the efficiency of our transportation, commercial, manufacturing and building sectors in order to save energy, increase the competitiveness of U.S. industry, and reduce our reliance on imported oil.
Investing in Renewable Power Sources. Renewable resources such as wind, solar, photovoltaics, geothermal, biomass, hydrogen, and hydroelectric, are abundant. These alternatives are used for power generation and their primary advantage is that they produce virtually no emissions or solid wastes. Their primary disadvantages are the cost of producing power (except hydro) compared to coal and natural gas, and the need to create an infrastructure required to deliver this power to market.
To take advantage of the environmental benefits of renewable power, the Department has focused on decreasing its costs and tackling infrastructure issues. The most feasible approach to lowering cost and delivering renewable power appears to be through distributed generation—alternatives to central power stations, where power is generated locally or on-site. Distributed generation technologies are a major R&D focus at DOE.
The Government’s Commitment: Ensuring a Diverse, Reliable and Affordable Set of Energy Sources for the Future The energy options within our portfolio are oil, gas, coal, energy efficiency, renewables, hydropower, fission, and fusion. We must strategically manage energy R&D with this understanding about the energy world as we know it: there is no single silver bullet which will solve all our energy needs, making science and technology— and a broad-based energy R&D portfolio—key to meeting our long term energy needs.. Without energy technologies, a ton of coal, a barrel of oil, a cubic foot of natural gas, a ton of uranium ore, a stiff breeze, or the sun’s warmth cannot directly contribute to the prosperity of modern society. With the very best technologies, however, society can use energy resources efficiently and responsibly and with great economic and environmental gain. While economic and security challenges continue to demand investment in a robust energy research and development (R&D) program, environmental challenges provide additional impetus for increased focus on energy-related science and technology during the coming years.
DOE’s energy resources R&D portfolio is organized in three broad strategic areas: reliable and diverse energy supply ($170 million, FY01 request); clean and affordable power ($542 million, FY01 request), and; efficient and productive energy use ($437 million FY01 request). In addition, the Department has a basic science portfolio ($1.2 billion FY 01 request) which supplies the foundation for much of the applied R&D in the energy areas. A number of reviews and studies have been conducted that provide valuable information on the adequacy and focus of this portfolio. Overall, these studies have confirmed that our energy portfolio is generally well-focused on the nation’s strategic energy goals. However, the studies also have identified a number of deficiencies in how fully these goals are addressed by the portfolio and made a number of recommendations for important portfolio changes or additions, including: • Significantly enhanced R&D funding • Renewed emphasis on electric power systems reliability • A Nuclear Energy Research Initiative • Carbon management R&D • Increased bioenergy R&D • Methane hydrate R&D • Hydrogen R&D • Clean fuels R&D • Integration of fuel cell R&D efforts
The Administration strongly supports the increased use of natural gas. Several of these recommended changes or additions to our portfolio relate directly or indirectly to natural gas—power systems reliability, carbon management, methane hydrates, clean fuels, and fuels cells all involve the development of technologies to increase the supply, improve the delivery of, or improve the environmental performance of natural gas.
Because it is abundant and relatively clean, natural gas will be the fuel of choice to meet the nation’s future power generation needs. Of the 1000 power plants the Energy Information Agency (EIA) projects the U.S. will need by 2020, 900 will probably be natural gas power plants. If we are able to produce the gas to meet this need, we will need the means to distribute it safely and efficiently. Right now, there are 85 proposed pipeline projects just for the years 2000 through 2002, at the same time significant impediments exist for pipeline and storage siting. Investments in natural gas
The Clinton/Gore Administration has invested roughly $1.5 billion in natural gas R&D. DOE’s joint efforts with industry have helped produce the fuel cells, microturbines, reciprocating engines, and other enabling technologies to power the gas industry of the future. DOE’s request for natural gas R&D funding in FY 2001 is around $215 million and, as I mentioned earlier, includes an initiative for energy infrastructure reliability. The natural gas portion of this initiative specifically focuses on methane leakage, aging and corroding pipelines, and natural gas storage, to improve the safety and reliability of the natural gas distribution network.
We need to encourage increased natural gas supply. The National Petroleum Council’s recent study on natural gas projects increased consumption for natural gas of 29 trillion cubic feet (TCF) in 2010 and 31 trillion cubic feet (TCF) by 2015. At the same time, EIA estimates that in 1998, reserve additions of natural gas were only 83% of production. To meet this demand, we will need to ensure that we have an adequate supply of natural gas.
Clearly, energy is the engine that drives our economy.
In the utility industry, only one third of all thermal energy from coal or gas is actually transformed into electricity in a typical power plant. In the transportation sector, which accounts for 60% of the nation’s demand for oil, the fuel economy of passenger vehicles has actually declined in recent years due to the increasing market share of SUVs and minivans. Net imports of oil continue to increase and domestic oil production has declined.
Mr. LARGENT. Dr. Yergin, I wanted to talk to you about your book “The Epic Quest for Oil, Money and Power”. What I find missing from the discussion, are the historical views of World War II and the demise of the Japanese and the Germans and its relationship to the lack of supply of petroleum products. And one of the things that I found missing on this particular panel is the discussion of our dependence on this importation of oil as it relates to our national security. And I would just like you to make some comments about if there are some parallels that we need to be aware of what occurred to Japan, of what occurred to Germany to a lesser extent, in terms of their national security and the lack of a consistent, reliable energy source.
Mr. YERGIN. It was for me one of the kind of amazing revelations, in terms of many years I spent researching that story, to look at World War II differently and to see the degree in which oil had been among the triggers of the war. Why did Hitler invade the Soviet Union? Partly to get the oil, in, of all places, Baku and the Caspian that is so much in attention now. And our embargo against the Japanese, embargoing them on oil prior to the Second Word War, was connected to the Japanese march toward what became Indonesia. And of course the conduct of the war and you look at it and you see that ultimately, in many ways, both the Japanese and the German military machines were immobilized by lack of fuel. And it was a great strength that we had that Congressman Hall had the vitality and the creativity and the energy of the U.S. oil industry in terms of really supplying the entire Allied effort.
Mr. LARGENT. At what point does the red light on the dashboard go off in terms of national security issues? As we see these forecasts going from 52% to 64%, at what point does the light go off and say, wait a second; this is a real problem. What are we going to address this problem? Where is that line?
Mr. YERGIN. That is talked about a lot. Basically, that line keeps moving up as our imports keep moving up. A lot of it has to do with how you assess the relationship with the countries that are major suppliers of oil. If Iraq had not only kept Kuwait and was dominating the Gulf we would have looked at any of these numbers as very alarming. So I think it has to be seen within the context of overall relationships.
Mr. MARTIN. The red line is an international number and involves all of the worlds’ dependence on the Persian Gulf. I think we are getting very close to that red line. If we just look in isolation at the U.S., that really doesn’t do much. Indeed, this is an international strategy we are involved with. That, again, is why the IEA is so important. I spent 4 years in the IEA during the second crisis, the Iranian revolution. We may have it all right here, but if other countries are demanding more and more oil then we lose, too. I note, for example, that it is remarkable how much Asian demand is increasing on the Persian Gulf, far more than us at the moment. So what do we do with the Japanese, the Koreans, even the Chinese? And why are the Chinese sending missiles to Iran when they are getting oil from the Gulf?
Michael L. Johnson, VP & General Manager, CONOCO, INC. Producers are highly optimistic about the long-term supply of natural gas. A recent National Petroleum Council study estimates the recoverable natural gas resource space in the lower 48 States is 1,400 trillion cubic feet. That is enough for many decades into the future. Today’s estimate is substantially higher than in 1992. That is in addition to the large volume of natural gas we produced between those years. New technologies are permitting us to increase recoverable gas resources faster than we are consuming them. One reason for this increased resource base is an expansion into frontier areas such the Mackenzie Delta, the Beaufort Sea and the North Slope. Tapping into these resources is not inexpensive, however. Climate and terrain are frequently hostile. We must constantly balance cost, risk, and potential to keep natural gas prices cost competitive. Today we are winning the battle to keep natural gas prices competitive, and the robust supply of natural gas makes us confident of our ability to meet future market demand, demand that we all agree will increase substantially in response to our Nation’s need to fuel our economy. Natural gas producers are also faced with a significant challenge. That is fueling the majority of new electric power generators that will be added in the next 20 years. We are confident that we can meet that challenge and are preparing to serve that growing demand in addition to the traditional markets that we have always served.
It would be nice to think that these wrenching industry changes would be enough to ensure continuing gas supplies at competitive prices to all Americans, but they are only part of the solution. Just as vital is a policy climate that permits our companies to produce resources in ways that are cost effective and efficient. We have the knowledge and the technologies to do that, we have the resource base, but we do not have the Federal policies we need to bring natural gas to the American public long-term at competitive prices.
There are people in positions of power today who are misleading the American public. They refuse to acknowledge our industry’s proven ability to produce natural gas in ways that respect and preserve the environment. They refuse to credit our technological breakthroughs. They refuse to respect the Nation’s need for natural gas. As a consequence, they are trying to prohibit natural gas exploration and production in some of our richest resource bases both on shore and offshore that continue to be locked up. There are two inevitable consequences
Conoco is an integrated, international energy company headquartered in Houston, Texas, and is among the top dozen or so U.S. gas producers. The company had revenues of $27 billion in 1999 and operates in more than 40 countries. Conoco’s natural gas and gas products operations include the gathering, processing, distribution, and marketing of natural gas and natural gas liquids in North America, the U.K., Norway and Trinidad. In 1999, Conoco marketed natural gas volumes in excess of 4.4 billion cubic feet per day in the U.S. and Europe.
Let me address the supply of natural gas. I want to emphasize producers’ optimism about the long-term supply of natural gas.
Today, we supply about 23% of the energy America consumes. That’s about 19 quadrillion BTUs (or ‘‘quads’’) of domestic gas, and an additional 3 to 4 quads from independent and affiliated companies in Canada.
There is no doubt that, in the future, the U.S. could—if we chose to do so—dramatically increase the amount of natural gas marketed domestically. The resource is there. There are many estimates of U.S. natural gas supply. All are highly positive. At the request of the Department of Energy, the National Petroleum Council (or ‘‘NPC’’) undertook a study in 1999 that estimates the recoverable natural gas resource base in the Lower-48 states at 1466 trillion cubic feet (or ‘‘tcf’’). That estimate is significantly stronger than the estimate the NPC made in 1992. In fact, the new study finds a strong probability of at least 171 tcf more than it found in 1992. That’s in addition to the 124 tcf we produced between 1992 and 1999. The reasons for this growth are the new technologies and new methods of locating resources that the industry has developed and implemented. Our strides in these areas are so rapid that, as the NPC numbers show, we are increasing recoverable resources faster than we are consuming existing reserves. Part of this expansion of the resource base involves a re-exploration and re-assessment of areas that had been assumed to be in decline, such as California. We are also expanding our reach out of the Lower-48 states to new frontiers such as offshore eastern Canada, where experts predict lie upwards of 45 tcf of natural gas. Western Canada, the Mackenzie Delta and Beaufort Sea, and the North Slope offer additional possibilities, through reservoirs in traditional formations and through our greatly increased ability to tap coal-bed methane. Tapping into the resources in these frontier areas is not inexpensive. Climate and terrain are frequently hostile. We must constantly balance cost, risk, and potential in an energy market that is frequently unpredictable.
At the same time as natural gas demand projections are rising above previous expectations, the entire energy industry is becoming more competitive. Restructuring of wholesale and retail markets in natural gas and electricity is well advanced. New technologies like distributive power are giving residential and business customers new options. The result has been high volatility in energy prices. It has been difficult for U.S. companies to predict revenue streams accurately and to plan capital investments. Wall Street has at times been wary of our industry, making it difficult for some of our companies to raise the capital required to expand exploration and production. You only need to look at our stock prices so see that. At the same time, we’re finding that reservoirs in some areas, such as the Western Gulf of Mexico, deplete more rapidly than originally projected. That puts additional pressure on our capital budgets.
As I have explained here today, there is no question that the U.S. has vast natural gas resources and that our producers can bring these resources to market. That information does not, however, answer the question: How much will that gas cost? Will the policies of the U.S. government cause the American people to pay unreasonably high prices for the clean-burning natural gas they need? Mr. Chairman, you have consistently demonstrated your concern for energy costs and competitive markets. You have supported federal policies for the natural gas industry that have reduced the unreasonable regulatory costs that have burdened our industry—and our customers—in the past. You have moved through your committee a bill on electricity restructuring that shows a deep concern for the budgets of American families and for the competitiveness of American industries.
Unfortunately, not everyone in government shares your sharp eye for policy consequences. There are those in positions of power today who are misleading the American people. They are endorsing a position that locks up increasing amounts of land—to prohibit natural gas exploration and production in our richest resource areas, both on- and off-shore. And they are misleading our citizens into believing that can be done without economic ramifications. America’s richest natural gas resources—the resources we can produce most cost-effectively—lie under onshore and offshore federal lands. Our industry can produce this gas in ways that are environmentally sensitive, and we are committed to that goal. Advances in our industry have reduced the impact of gas production on the environment. And dozens of environmentally sensitive technologies are being employed by the industry. Yet, we hear constantly from a number of highly placed federal policymakers who oppose domestic natural gas production and transport. I do not know if they are merely misinformed, or if there is some other reason for their statements. What I do know is that they are trying to convince the American people that it is in their best interest to prohibit natural gas production and transport across much of this nation.
Catherine Good Abbott, Interstate Natural Gas Association of America. INGAA is the trade association that represents interstate natural gas pipelines in the United States, the inter-provincial pipelines in Canada and PEMEX in Mexico. These pipeline systems transport 90% of the natural gas consumed in the United States.
The Department of Energy’s Energy Information Administration estimates that natural gas use will increase from about 22 Tcf today to 30 Tcf shortly after 2010, reflecting a 36% increase in natural gas use. The largest area of growth, about 60% of this total, is expected in the electric generation market. In some areas, the anticipated growth is even more significant. In the Northeast, for example, demand for natural gas used for power generation is expected to increase by 250%!
To meet the demands of a 30 Tcf market, interstate pipelines will need to construct a significant number of new facilities. A study called ‘‘Pipeline and Storage Infrastructure Requirements for a 30 Tcf U.S. Gas Market’’ was conducted by Energy and Environmental Analysis, Inc. for the INGAA Foundation. This study found that approximately 2,100 miles of new pipeline will be needed every year between now and 2010 to have the capacity necessary to serve this increased demand. The pipeline construction process has become increasingly complex. As you may be aware, it is simply getting more difficult to build any type of new facility. In the U.S., we must obtain and coordinate multiple state and federal environmental permits. We also must consider the concerns of landowners, who are becoming more interested and involved in our projects. To keep our projects economic, we must keep costs under control. And to keep the costs under control, we must promote more efficient review and approval processes—within our companies and among the regulatory agencies that ultimately decide the fate of the project.
As I mentioned earlier, between now and 2010, approximately 2,100 miles of new gas transmission must be added each year to accommodate market growth to 30 Tcf. To accomplish this, the natural gas pipeline industry will need to invest upwards of $32 billion for pipeline transmission and storage facilities.
[my note $32,000,000,000 / 2100 miles = $15.238 million per mile – must include storage and other infrastructure].
Pipelines must compete for investment capital in the marketplace with S&P 500 companies with similar risk profiles for the same capital. In most cases, pipelines also have to compete for capital within their own organizations. A fundamental tenet of this decision-making process is that increasing risk requires a return commensurate with that risk. If returns on pipeline investments are not commensurate with the risks inherent in the pipeline business, less capital will be invested in pipeline projects relative to investments in other businesses that have a better risk/return profile.
Costs for the pipeline industry have increased substantially in this decade and will likely continue. These increased risks include: (1) expiration of long-term gas utility transportation contracts and the prospect of non-renewal; (2) movement to shorter-term contracts with new non-gas utility customers; (3) competition from unregulated marketing firms who can buy capacity at regulated rates and sell it at unregulated rates; (4) state commission restructuring of gas and electric services; and (5) federal electric restructuring initiatives which cause uncertainty in the market that offers our best opportunity for future growth.
Roger B. Cooper, Executive VP, Policy & Planning, American Gas Association. AGA represents 189 local natural gas distribution companies, which deliver natural gas to 60 million customers in the United States. As coal was the dominant fuel of the 19th Century and oil during the 20th Century, we believe that natural gas will be the fuel of the 21st Century.
Today you have heard the testimony of the author of the American Gas Foundation’s study Fueling the Future: Natural Gas & New Technologies for a Cleaner 21st Century. Bill Martin described to you a scenario for an increase in gas demand from 22 quadrillion Btus (about 21.4 Tcf) today to 35 ‘‘quads’’ (almost 34 TcF) in 2020. He told you about the enormous environmental, energy security and efficiency benefits that will result. If gas consumption in 2020 is 60% higher than today (35 quads) we can: —Reduce CO2 by 930 million tons per year. —Reduce oil imports by 2.6 million barrels per day. —Reduce national energy consumption by 6%.
The recent report issued by the U.S. Department of Energy’s Power Outage Study Team emphasized the value of natural gas technologies in easing strain on the electric power generation grid. The report noted that ‘‘distributed generation,’’—that is, small electric-power generation units that are installed on or near the customer’s premises—can help relieve the demand on the electric grid, especially during peak demand. Natural gas fuel cells and microturbines are among these new distributed generation technologies. Substituting natural gas cooling for electric air-conditioning can also help to level summer electric peaks. Since natural gas use typically peaks in the winter months, this is truly a win-win scenario for both the natural gas and electric industries.
Sophisticated and highly efficient combined cooling, heat and power systems (CHP) are being installed around the country, and are especially popular at universities and large conference centers, such as Opryland in Nashville and the huge McCormick Center in Chicago. Texas is one of the leading states in terms of industrial CHP capacity and is fourth behind New York, California and Pennsylvania in commercial capacity.
Let me give you three examples of how natural gas technologies—which are commercially available—will help meet the nation’s energy goals. —In 1994, Thomason Hospital in El Paso, which was undergoing a major renovation/expansion, had to find a way to meet energy needs in a cost-effective manner, while locked into the highest electric rates in Texas. Its solution was a combined heat and power plant that includes gas-fired reciprocating engines, dual fueled boilers, gas engine driver chillers, and single effect absorption chillers. This CHP system provides electricity, low pressure steam (heating and hot water), and cooling for the hospital complex. Benefits to the hospital include reduced electric demand (330 kW), a levelized electric load and $460,000 in annual savings.
My second example describes a ‘‘save-the-day’’ situation at the Brookfield Zoo in suburban Chicago. During the winter of 1998, the local electric utility suffered a power failure that could have resulted in suffering or death of 200 creatures ranging from a massive Pacific walrus to the jellyfish. But the Zoo had installed a natural gas cogeneration system that kept the facility running. There’s a financial benefit, as well: by operating in parallel with the local utility during peak demand hours, the Brookfield Zoo expects to generate a positive cash flow in excess of $700,000 during the next decade. That can feed a lot of walruses.
A final example comes from the retail sector. A Walgreen’s drug store in Chesterton, Indiana, became an energy pioneer last year by installing a natural gas ‘‘microturbine.’’ This unit—about the size of a commercial refrigerator—operates quietly and efficiently, using natural gas as a fuel to turn a small turbine that generates electrical power. The unit is also equipped with a ‘‘desiccant dehumidification’’ system that pulls moisture from the air, keeping customers comfortable while they shop. The biggest benefit is reliability. Because this system runs on natural gas it is independent of the electric grid and therefore is not affected by brownouts or blackouts caused by weather extremes. Imagine how relieved you’d feel if you needed to buy medicine during a local power outage—and the familiar Walgreen’s is the only open business you see in a sea of darkness.
Barry Russell, Independent Petroleum Association of America and the National Stripper Well Association. I am testifying on behalf of the IPAA, the National Stripper Well Association, and 32 cooperating associations of the IPAA that represent state and regional interests. These organizations represent independent petroleum and gas producers, the segment of the industry that is damaged the most by the lack of a domestic energy policy that recognizes the importance of our own national resources. NSWA represents the small business operators in the petroleum and natural gas industry, producers with ‘‘stripper’’ or marginal wells. Today’s hearing addresses a fundamental issue—National Energy Policy: Ensuring Adequate Supply of Natural Gas and Crude Oil. This testimony will focus first on several key factors that influence this issue and second on actions that should be taken to improve the future domestic supply.
There are many factors that affect the development of a sound national energy policy. This testimony will focus on several key issues in crafting a sound policy to address adequate supply of essential natural gas and petroleum.
Fossil energy—particularly natural gas and petroleum based energy—will continue to dominate energy supply in the United States. According to the National Petroleum Council’s Natural Gas study, natural gas and petroleum account for 64.8% of national energy needs. Future projections show significant growth in the use of these fuels as domestic energy demand continues to increase. The U.S. economy is driven by the availability of adequate energy supplies whether consumed by manufacturing, by transportation to and from jobs, or by the expanding role of computer use and the Internet. It ignores this reality to suggest that an equally robust economy can be sustained without substantial energy growth. And, it ignores this reality to suggest that natural gas and petroleum will not be the dominant share of this growth.
Regardless of changes in world politics, energy supply remains a national security issue. A decade ago energy supply from foreign sources would be viewed as a national security risk in the context of the Cold War—supply routes at risk and energy sources subject to control by adversaries. Today’s national security issue is different, but it is nonetheless significant. Currently, we import over 55% of our nation’s petroleum. It comes from diverse sources, but diversity is not security. In 1973 the OPEC oil embargo crippled this country. Yet, we now import over twice as much petroleum on tonnage basis from the OPEC countries that embargoed us—and neither Iran or Iraq participated in that embargo. Whether we like to address it or not, our sources of petroleum come from countries with a history of instability. We are currently importing approximately 500,000 barrels per day from Iraq. Clearly, this is not a reliable source. Saudi Arabia is ruled by a monarchy in a world without ruling monarchs; it is constantly subject to subversion by radical religious elements. Even Venezuela is ruled by a government that has dramatically shifted that country’s priorities over the past two years and continues to be difficult to predict. We must recognize that shifts in any of these suppliers can dramatically and adversely affect our nation and our national economic security.
The past three years have demonstrated how susceptible the U.S. energy supply can be to foreign actions. The precipitous drop in petroleum prices in late 1997 through early 1999 posed a catastrophic threat to domestic petroleum production and a substantial threat to domestic natural gas production. As a result of the extended low petroleum prices in 199899, capital investment in petroleum production throughout the world declined. Existing production was lost. In the U.S., production dropped from 6.5 million B/D to less than 6.0—million B/D. Natural gas production suffered as well because the two commodities are linked. This year, the country has seen the inevitable consequences of lost capital in the exploration and production industry—as worldwide demand has increased, worldwide supply capacity has not kept up. This year, petroleum prices have reached levels not seen since the Persian Gulf war. Different segments of the economy have been threatened. In each case, the price and supply issues have largely been defined by the actions of foreign producer nations. Our policies must recognize this vulnerability.
Future domestic natural gas and petroleum exploration and production will increasingly depend on independent producers. Domestic exploration and production of natural gas and petroleum have changed dramatically since 1986—the time of the last petroleum price crisis and major revisions to the federal tax code. Since that time the role of independent producers has increased. Generally, for example, domestic petroleum production is divided roughly 60% from the lower 48 states onshore, 20% from the offshore, and 20% from Alaska. Since 1986, the share of onshore lower 48 states production by independents has increased from about 45% to over 60%. Independents are also increasingly active in the offshore. In the aggregate, independents drill over 85% of the wells in the U.S., produce 45% of the petroleum, and produce over 65% of the natural gas.
This is a trend that will continue. The reasons are straightforward. Large, integrated petroleum companies are driven by their need to generate adequate shareholder returns. In the ‘‘Dot Com’’ world we are living in, this requires finding and developing large ‘‘elephant’’ fields. Mature fields that yield more limited quantities of natural gas and petroleum characterize most of the U.S. Many of the U.S. large field prospects such as the Arctic National Wildlife Refuge (ANWR) are not available for development. In the offshore, moratoriums limit many options; those that are left are largely in the ‘‘ultra-deep’’ portions of the Gulf of Mexico. So, compelled to fill their refineries, major integrated companies focus their development funds to the deep Gulf of Mexico and overseas. This leaves the brunt of future domestic resource development to independent producers—large and small. Independents need different policies than integrated companies. Independents rely on revenues generated solely in the upstream and are more susceptible to price swings that strip away critical financial resources.
Natural gas is an increasingly important element of domestic energy supply. The National Petroleum Council Natural Gas study concluded that domestic natural gas demand will increase from the current 22 trillion cubic feet per year (Tcf/yr) to 29 Tcf/yr by 2010. Most of this increase will be needed to fuel expanding electricity generation. The study concluded that: U.S. gas demand will be filled with U.S. production, along with increasing volumes from Canada and a small, but growing, contribution from liquefied natural gas (LNG) imports… Two regions—deepwater Gulf of Mexico and the Rockies—will contribute most significantly to the new supply… U.S. production is projected to increase from 19 TCF in 1998 to 25 TCF in 2010, and could approach 27 TCF in 2015. Deeper wells, deeper water, and nonconventional sources will be key to future supply. Importantly, this study concludes that these future natural gas needs can be met through domestic resources supplemented by other North American resources. Equally important, it identified key issues that had to be addressed to meet these needs.
It is equally important to recognize that a larger aspect of access to natural resources involves opening access to that which is not now available and halting the trend of further embargoes of western lands. Unfortunately, the Administration avoids dealing with the clear need to open government lands to exploration and production. It hides behind an environmental sensitivity argument that is proven wrong by its own DOE report. It focuses on arguments against opening ANWR and avoids dealing with access issues offshore and in the Rockies where its own National Petroleum Council Natural Gas study concludes that over 200 trillion cubic feet of natural gas is either off limits or difficult to permit.1t is important to understand that access issues differ between these areas.
ANWR and offshore activity off of California, the Eastern Gulf of Mexico, and the Atlantic are constrained by policy decisions, both executive and legislative, through prohibitions and moratoriums. These are based on outdated reactions to spills occurring in the past.
Access in the Rockies won’t be resolved by a single act. Here, we are dealing with a mosaic of limitations. Some involve land that is completely excluded from natural gas and petroleum exploration and production. The Antiquities Act of 1906 has been used to declare areas as national monuments placing land completely off limits. In other areas, the Department of Agriculture is proposing to expand roadless areas in national forests that will preclude natural gas and petroleum development. Some national forests, like the Lewis and Clark National Forest, projected to be a world class natural gas source, have been administratively closed to natural gas and petroleum development. Wilderness areas have been created without an understanding of the resources that might be lost. We must also deal with permitting limitations and other indirect actions of federal agencies. Because these are government lands, it is necessary that federal agencies issue permits for the exploration and production activities. These agencies are charged with the task of developing environmental management plans for areas under the National Environmental Policy Act (NEPA). NEPA can be used to create effective, environmentally sound management plans, or it can be used to delay and deny access. Frequently, the results reflect the attitude of the agency and its leaders.
Other factors identified in the NPC Natural Gas study relate to access to technology and to human resources must not be overlooked. Domestic natural gas and petroleum development have changed dramatically during the past two decades through the application of new technologies such as 3D and 4D seismic analysis, horizontal drilling, and the use of advance offshore technologies. The widespread availability of these and other technologies will be critical to meeting future challenges as well. Similarly, the industry has suffered further declines in employment. During the 1998-99 low petroleum price crisis, the natural gas and petroleum extraction industry lost 65,000 jobs of which only about 7,000 have returned. Employment has dropped below 300,000 from levels that exceeded 600,000 in 1984. These are highly skilled jobs at both the rig operator and engineering level. Many of the domestic industry workers are Hispanics. But, once people leave the industry it is hard to attract them back. Attracting new workers is equally difficult. For example, enrollment in petroleum engineering has consistently fallen over the past several years. While these are not issues that are dominated by federal policy decisions, they are nonetheless essential to meeting future natural gas and petroleum demand.
Study after study has shown that hydraulic fracturing is an environmentally sound process involving the brief injection and subsequent removal of fluids to place proppants necessary to open natural gas and petroleum formations for development. Some analysts believe that over 60% of the natural gas wells that will be needed to meet the projected 2010 demand will require hydraulic fracturing. It is exactly this type of poorly targeted regulation that must be avoided.
Mr. BARTON. On the back of your testimony you have a chart, you do not really allude to it in your testimony, but along one axis, it says Wildlife Restrictions is the heading and then big game winter range, sage grouse lek, sage grouse nesting, mountain plover breeding, mountain plover nesting, raptor nesting, burrowing owl, prairie dog avoidance. Are these all local or Federal restrictions in the Rocky Mountains that you cannot drill during those times?
Mr. RUSSELL. A lot of them are. But it goes to the point that you were talking about before with the pipelines, which is, if you take an area of land and look at all the various environmental restrictions, this is just an example of some of the endangered species’ kinds of restrictions there that block access during certain periods of time.
Mr. BARTON. The prairie dog is not an endangered species, is it?
Mr. RUSSELL. Yes, in some areas it is.
Mr. BARTON. Not in Texas.
Mr. RUSSELL. You would be surprised at the list that we would show you. But what I was going to say is it is not only this list but if you go through and look at not only endangered species but some aspects of the Clean Air Act—the permitting, the monitoring, some of the things that you talked about before which really go to this procedural aspect and the lack of coordination between State and Federal agencies, that what happens is that whole areas are essentially taken off the table for development. That is what we were trying to show there, and I can give you more supporting detail on that.
Red Cavaney, President & CEO, American Petroleum Institute. First, and most important, there is a clear link between the use of petroleum and economic development. Gasoline powered automobiles have been the dominant mode of transport for the past century. There is no evidence that consumers are ready to change that. Regardless of fuel, the automobile—likely configured far differently from today— will remain the consumer’s choice for personal transport. The freedom of mobility and the independence it affords are highly valued. While substitutes for gasoline may someday change this reality, any such wholesale change is more than several decades away—the amount of time required to fully retire the existing and still growing fleet of automobiles powered by gasoline and to deploy any replacement fuel source throughout the world.
THE ENORMOUS COST OF VOLATILITY. While historically our industry and our nation have been able to survive the disruptions and nervousness brought on by market volatility, they have done so at a price. Volatility is in no one’s best interest. Our companies suffer because it is much more difficult to undertake the types of long-term planning and investment needed for sustainability. When crude oil prices are rock-bottom, as they were last year, companies simply do not have the resources needed to invest in projects that could cost billions of dollars over many years. When oil prices are higher, as they are today, companies are reluctant to take the kind of risks necessary for future growth because they have no guarantee that prices will not plummet again. As one pipeline supply company executive told us recently, ‘‘Uncertainty leads to paralysis.’’ Our suppliers—companies that make pipeline and other equipment needed for exploration and production—have to put their own interests first, so when producers quit buying their products because of low crude oil prices, they have to search elsewhere for customers. By the time our companies are ready to buy equipment again, those suppliers may no longer be making those products because they’ve found more reliable customers. Similarly, both producers and their suppliers are too often forced to lay off many of their employees and those employees get other jobs—many in other industries— and are thus unavailable when the producers are once again ready to expand. In the highly specialized area of petroleum engineering, the number of students entering those programs at our universities has steadily decreased. In addition, if the hard times last long enough, many of our smaller producers and their suppliers will simply close up shop, never to return. But there are other casualties as well. The first is the confidence Americans have always had in our industry to provide them with the products when they need them at a reasonable cost. Our companies have strived hard to live up to that trust, and for the most part they have succeeded. However, there can only be so much of this volatility and its resulting uncertainty regarding supply and prices before that confidence is brought into question. And perhaps even more important are the national security implications of this volatility. As the world’s only remaining super power, the United States has inherited a tremendous burden, at home and abroad. The question we must ask is this: how dependent on a reliable source of the products our companies make are our armed forces and those of our strategic allies? The answer, of course, is extremely dependent. Any serious disruption of any segment of our industry—from production to transportation to refining to delivery— could place severe strains on our armed forces’ ability to do their jobs. Without a sound energy policy that encourages greater domestic production and lifts the stifling effects of over-regulation, we place too much at risk.
Looking to the future, technology could well permit the economic development of the largest known source of hydrocarbons—methane hydrates—methane frozen in ice. Located in deep water under intense pressure, methane could provide the world with several more centuries of available clean energy. The U.S. Geologic Survey has estimated that the United States has 320,000 TCF of methane in hydrates, which is 200 times the size of conventional gas reserves.
Currently, many of these areas have been placed off-limits by the federal government. The search for new domestic offshore oil and natural gas is limited to the Gulf of Mexico and Alaskan waters because of the congressional moratoria that have placed off-limits most of the rest of our coastal waters. Onshore, the President has repeatedly used his executive powers to limit oil and gas activity on vast regions of government lands. Congress has refused to authorize exploration on that small section of the Arctic National Wildlife Refuge that was specifically set aside by law for possible exploration in 1980. And most recently, the U.S. Forest Service moved to make it more difficult for our companies to explore for natural gas and oil on government lands when it announced a plan to bar road building in virtually all of the large areas in the forest system, spanning a total of 43 million acres in 39 states. Our industry supplies the energy to keep America going strong, but to continue to produce domestic oil and natural gas, we must have improved access to federal and state lands.
Even with greater access and flexibility, the United States will continue to need to rely on foreign oil supplies. Thus, it is important that we maximize the diversity of those supplies to help ensure the reliability of a continuous flow of oil imports. Unfortunately, U.S. unilateral trade sanctions and the constant threat of sanctions narrow our sources of supply, frustrating achievement of this important objective. In recent years, unilateral economic sanctions have increasingly become the policy tool of choice in the conduct of U.S. foreign policy. One of the favorite targets of these recent sanctions has been major oil-producing countries. The U.S. currently has sanctions in place against countries comprising over 10% of world oil production and 16% of estimated remaining oil resources. There is little evidence that unilateral sanctions produce desired outcomes. There is a better way: working with the governments in which they do business, some of our companies are adopting their own human rights and environmental standards. In short, U.S. policymakers face a dilemma. Growing supplies of crude oil will be required to sustain world economic prosperity, and diverse, ample foreign supplies are needed to help ensure our own country’s economic growth. The drive to impose unilateral sanctions is an obstacle to both of these objectives.
Government must also resist the siren song of politically popular short-term solutions that can have devastating long-term implications. For instance, the unexpectedly severe cold spell in the Northeast last winter and the resulting spike in home heating oil prices led to efforts to create a regional home heating oil reserve for New England. We are now hearing similar calls for a 1.5 million-barrel oil reserve for California. In both cases, the motivation behind the proposals is understandable. Public officials have a sincere interest in seeing that their constituents are not inconvenienced or harmed by supply disruptions that could lead to shortages or higher prices. We share that interest. However, we must caution against the creation of such reserves because they would have the ultimate effect of the government becoming a heavy player in the marketplace, something no one wants.
If the federal government is in the marketplace, many operators in the private sector will choose to take their business elsewhere rather than compete head-to-head with the government. We need only look to the 1970s to see the nature of adverse impacts when the federal government plays a direct role in the daily marketplace.
With its deep pockets and no need to turn a profit, government has the freedom to buy oil at high prices and sell low to keep retail prices artificially low.
In closing, we share your concern for the future of the industry and the security of our nation. America’s oil and natural gas companies have a long and proud history of providing this country’s consumers—including our armed forces—with a reliable and affordable supply of energy to make their homes comfortable and take them where they need to go, when they want to go. Through good and lean years, U.S. suppliers of natural gas and petroleum products have kept America’s armed forces mobile, its factories running and have provided the fuel to move goods from manufacturers to retailer and, ultimately, into America’s homes and offices.
WATKINS. As you are well aware on this committee and from my experience as Secretary of Energy in helping Congress craft the National Energy Policy Act of 1992, the entire complex of energy sources, both production and consumption, needs to be analyzed and integrated in order to address any one of the individual components, like oil and gas, that aggregate to make up the whole. As a consequence, I have prepared and submitted a long formal statement for the record which goes back nearly 10 years to the formulation of the National Energy Strategy by the Bush Administration in 1991. Lessons learned from that process and a review of all components that made up the energy strategy indicate interconnectivity and balance between these components and they are demanded when considering any one of them.
The 1991 Bush strategy was the culmination of nearly 2 years of intense efforts, holding hearings around the country to listen to all interested parties, developing a strategy which emerged therefrom, and drafting a report for the Congress. That report was reviewed by various analytically capable outside entities, including the Office of Technology Assessment here on the Hill before it was abolished, and was published and sent to the Hill to inspire the needed legislation. The strategy also included and complemented a number of Bush Administration initiatives which I enumerated on page 3 of my longer statement. The strategy was then used by both the Congress and the administration as the template for constructing and passing the Energy Policy Act. This act, signed into law by President Bush in October 1992, was among the most comprehensive energy bills ever enacted. The Energy Policy Act affected every aspect of the way this Nation produces and uses energy, including reshaping Federal regulation of the Nation’s energy sector to spur competition and investment in new technologies. It stands today as landmark legislation, but it must be periodically reviewed and updated if it is to remain relevant. For example, an updated energy strategy is badly needed today to provide the broad framework within which so many other related pieces of legislation like the Clean Air Act, the Public Utility Company Holding Act, Public Utility Regulatory Policy Act, Nuclear Waste Act, and many others find themselves, and all of these related pieces have to be periodically updated themselves, but within some kind of overarching umbrella strategy because of their inherent interconnectivity. Our strategy in the early 1990’s, for example, predicted about $30 a barrel in crude oil prices by the year 2000, recognizing cyclic variations enroute. Sure enough, that is where we are today. Additionally, the act passed by Congress had the potential to reduce oil imports by about 4.7 million barrels per day by the year 2010. This represented at the time a one-third cut in the projected level of petroleum imports. Not only would this enhance energy security but it would also positively influence balance of trade, effect considerable energy cost savings for consumers, and result in significant reduction in energy demand.
Whether we are on track to achieve this objective I have no idea, but knowing how we are doing relative to that objective is germane to answering one of your questions. In this connection, before leaving office in January 1993, we had established a complex tracking program called the Energy Policy Act Information System to comply with provisions of the 1992 act. This system has been used successfully in development of the National Energy Strategy and had also been reviewed by the Congressional Office of Technology Assessment and found to contain reasonable models and predictions. I prepared my final DOE posture statement in January 1993 and reported the degree of compliance with the act to date. I also passed information regarding this tracking system to my successor in the new administration team. The first required DOE report entitled ‘‘Implementation Status Report’’ was then published in April 1993, shortly after I left office, based on our tracking system. It is very well detailed, every single section of the track, to see how we are doing against the advocacy that was contained in the act. To the best of my knowledge, results of the detailed tracking system were not reported out again. Rather, our system was replaced in July 1995 with what I would call a puff piece, called the National Energy Policy Plan, allegedly the new Clinton Administration’s energy policy. The latter’s direct relationship with or even reference to the 1992 Energy Policy Act is not clear. I have no information which would indicate the degree of congressional satisfaction in either specificity or quality of this or any of the follow-on biennial reports required under section 801 of the DOE Organization Act which demands submission of a national energy policy plan. You asked in your letter whether or not the direction was the right one regarding energy policy and security in general, and oil and gas in specific. My answer, admittedly rendered from a distance without detailed data, is a simple no. If we had a clue as to the direction in which we were actually headed, we could have predicted the current oil crisis well ahead of time and may have had a chance to influence our national attitude toward oil, for this crisis was in part generated by our own failure to enhance U.S. oil production as initially recommended in the National Energy Strategy 10 years ago.
Ten years from now, I predict we will decrying the fact that we are being held hostage on an energy security problem to foreign imports of LNG from states like Libya. Yes, the potential exists to mitigate spikes in gasoline prices through enhanced oil production and reduced consumption at home. However, with no sense of urgency on upgrading our national energy policy, only sporadic attention being given to the trade and diplomacy aspects of our dependency on OPEC’s whims, opposition to any increase in U.S. oil or gas production, and an unwillingness on the part of DOE to track what we are already supposed to be doing under existing legislation and make recommendations as to new strategic direction where needed, there is little hope of avoiding a repetition of unannounced oil and gasoline spikes in the years ahead.
Sadly, I now think we need to start the process all over again, similar to the one we put into place 10 years ago, and establish a new baseline. The new administration should be tasked by Congress to do this. If we get serious about energy policy again and follow such a path, we might be able to answer your question, Mr. Chairman: Are we going in the right direction or are changes needed?
The Strategy acknowledged that the U.S. was part of an energy interdependent world. It recognized that it was not in our interest to adopt measures that may reduce imports, but inflict severe economic or environmental damage. Therefore, the National Energy Strategy balanced economic, environmental and energy security objectives. Over the next 20 years, we believed that such a balanced approach to production and conservation would power a larger U.S. economy while using less energy. At the same time, the U.S. would produce more of the energy it uses. The National Energy Strategy by the year 2010 would have, if pursued aggressively:
- Reduced domestic oil demand by 3.4 million barrels per day, below projected levels.
- Increased domestic oil production by 3.8 million barrels per day above projected levels.
- Increased the electricity produced from renewable sources, such as solar, hydropower, and geothermal by 16%
- Raised the use of alternative transportation fuels, such as compressed natural gas, ethanol and methanol, thereby reducing the need for up to 2.5 million barrels of oil per day.
- Reduced growth in electricity demand by unlocking market forces through elimination of costly regulation in existing law, thereby saving consumers approximately $27 billion per year in electricity costs.
With its proposals to increase the use of clean coal technology, natural gas, and nuclear energy to generate electricity, as well as to develop new energy efficient technologies, the Strategy would have also:
- Held U.S. emissions of greenhouse gases by the year 2010 at or below 1990 levels.
- Improved air quality by reducing emissions of pollutants that contribute to acid rain and smog.
- Mitigated solid waste problems by reducing coal ash waste 25 million tons per year, and by lowering coal cleaning wastes by 50 million tons per year.
The Strategy incorporated and complemented a number of Bush Administration initiatives. These included: (1) the 1990 provisions to the Clean Air Act; (2) natural gas well-head decontrol legislation: (3) incentives provided to domestic renewable and fossil energy producers in fiscal year 1991 budget agreement; (4) the energy research and development initiatives announced in the President’s FY-92 budget; (5) the Administration’s domestic energy supply and demand measures adopted in response to the Iraqi oil disruption; and (6) the Administration’s science and mathematics education initiatives.
To meet the challenges that lay ahead, the National Energy Strategy called on Federal, State, and local governments to work together to encourage energy conservation and new energy production through reduced regulation and streamlined licensing procedures, particularly in the natural gas, oil and gas pipeline and hydropower areas. At the Federal level, the Administration intended to lead by improving the energy efficiency of Federal buildings, Federal housing and accelerating the purchase of alternative fuel vehicles for the Federal fleet. In February 1992, one year after initially promulgating the National Energy Strategy, the Strategy was adjusted to fit the reality of the latest and continually changing data base of knowledge that drove the first projections in 1991. This updated baseline was then used by the Congress as the template for constructing and passing the Energy Policy Act of 1992. This Act, signed into law by President Bush in October 1992, was among the most comprehensive energy bills ever enacted.
The Energy Policy Act affected every aspect of the way this nation produces and uses energy, including reshaping Federal regulation of the nation’s energy sector to spur competition and investment in new technologies. It still stands today as landmark legislation, but it must be periodically reviewed and updated if it is to remain relevant. For example, it is badly needed to provide the broad framework within which so many other related pieces of legislation like Clean Air Act; The Public Utility Company Holding Act (PUCHA); The Public Utility Regulatory Policy Act (PURPA); Nuclear Waste Policy Amendments Act; and the like find themselves. All of these related pieces have to be periodically updated themselves, but within some overarching umbrella strategy because of their inherent connectivity thereto.
I present all this background before addressing your question as to whether or not our oil and gas policies are adequate in view of the recent shock to the nation on high gasoline prices at the pump. As our National Energy Strategy clearly articulated, the inter-coupling of all energy generation and conservation mechanisms must be continuously melded together into a sensible, comprehensive, integrated, and balanced relationship. If they are not, we will continue to have unannounced and unwanted perturbations when we could have better predicted and mitigated them. Additionally, the Act passed by Congress had the potential to reduce oil imports by about 4.7 million barrels per day by the year 2010. This represented a one-third cut in the projected level of petroleum imports. Not only would this enhance energy security, but it would also positively influence balance of trade, considerable energy cost savings for consumers and significant reduction in energy demand. Finally, before leaving office in January 1993, we had established a complex tracking program called the Energy Policy Act Information System to comply with provisions of the 1992 Energy Policy Act. This System had been used successfully in development of the National Energy Strategy and then reviewed by the Congressional Office of Technical Assessment (OTA) and found to contain reasonable models and predictions. I prepared a final Posture Statement in January 1993 and reported the degree of compliance with the Act to date and passed information regarding this tracking system to my successor and the new Administration team. The first required report was then submitted to the Congress in April 1993, shortly after I left office including an assessment using the tracking system. To the best of my knowledge, the detailed tracking system was not used again and was replaced by issuance of a Strategic Plan in April 1994, followed a year later in July 1995 by a National Energy Policy Plan which was allegedly the new Clinton Administration’s energy policy. This Plan’s direct relationship with or even reference to the 1992 Energy Policy Act is not clear. I have no information which would indicate the degree of Congressional satisfaction in either specificity or quality of the biennial reports required under Section 801 of the DOE Organization Act which demands submission of a National Energy Policy Plan every two years. In my opinion, therefore, it is time to rebuild the National Energy Strategy as we did ten years ago, using a similar approach—i.e. hold hearings around the country, listen to all parties with a goal of making recommended amendments to the 1992 Energy Policy Act so as not to lose the Act’s relevance. Unless this is done, I do not believe the nation will be well served by a Department of Energy (DOE) that seems to put out energy ‘‘puff pieces’’ that have no associated implementing strategy for their execution or assessment. I have in mind here the Administration’s ‘‘Sustainable Energy Strategy, Clean and Secure Energy for a Competitive Economy’’ report to the Congress in July 1995 which was their own first real response to the two-year reporting requirement. This 73-page document arrived on the Hill, with little fanfare, and had little impact. This 1995 report pays only lip service to the importance of energy policy. In reality this so-called ‘‘Sustainable Energy Strategy’’ is short on energy policy and long on wishful thinking. To take just two examples, among the five strategies set forth for a Sustainable Energy Policy are ‘‘Reinvent Environmental Protection’’ and ‘‘Engage the International Market.’’ Then, later, during his confirmation hearings before the Senate Energy Committee in 1997, Secretary Pena promised that there would be a new National Energy Policy Plan (NEPP) by the fall of that year to answer growing Congressional concern about whether this nation has in place a program that addresses its energy and environmental needs for the next century. Subsequently, it was announced that this new NEPP would be delayed another six months, well past the December 1997 meeting in Kyoto at which commitments constituting a de facto energy policy would be made. Whether it ever got submitted, I have no idea. But Secretary Pena departed in the summer of 1998 and I can’t imagine his departing shot at a strategy was very effective. I don’t know what the Congress has received since, but I can’t believe there has been much substantive clarity or direction in whatever the DOE is doing in this area. Further, you may recall in 1997 that President Clinton casually remarked to assembled students at American University here that the U.S. could reduce its emissions of carbon dioxide and other greenhouse gases by 20% immediately at no cost to the economy ‘‘if we just changed the way we do things.’’ This bold assertion was a shock to even his staff since it was an off-the-cuff remark. No one had a clue, even the President, what or how he wanted us to change. Certainly, his remarks had nothing to do with studies emanating from within his own Executive Branch that would justify such an assertion. His own 1995 Sustainable Energy Strategy said there were no easy ways to reduce greenhouse gas emissions by 20%—immediately or over the next 10-15 years—unless the President had in mind truly profound changes in the world in which we work and live, induced by carbon taxes, rising energy prices and slower economic growth. With a realistic National Energy Strategy, the magnitude of such changes would be clear, along with their effects on individual states and regions. Without a well substantiated strategy, then, enforced through negotiated Congressional adjustments to some logical baseline, like the existing Energy Policy Act of 1992, we are victims of the rhetoric of whatever advocacy-only minstrels wander by.
This crisis was in part generated by our own failure to enhance U.S. oil production as initially recommended in the Bush Strategy ten years ago. East and west off-shore oil and gas moratoria continue; the Arctic National Wildlife Refuge remains closed; we are importing 10% more oil than we were 10 years ago; and the worse is not over. We are utilizing more and more natural gas in our utilities and this consumption will continue to grow exponentially. As a result, we are now ‘‘dusting off’’ our liquid natural gas (LNG) depots again. Ten years from now we will be decrying the fact that we are held hostage to foreign imports of LNG from states like Libya. Further, we have not even maximized oil recovery from existing U.S. oil reserves to the extent possible. Yes, the potential still exists to mitigate spikes in gasoline prices through enhanced oil production at home.
Mr. SHIMKUS. I would also be remiss not to mention the ethanol aspects of having another renewable fuel option. The reality is we have an overreliance on foreign oil. And I do believe that we can safely go into the Arctic Wildlife Refuge. I think that was proven with the Alaskan pipeline. My now-deceased father-in-law worked on that pipeline and it has a tremendous record of the environmental safety of that program. I think we also look at the continental shelves and also the marginal well issue as all part of a national energy portfolio along with renewable fuels.
Mr. BOUCHER. In 1998, the United States imported approximately 22% of the energy that we consumed in that year. And the Department of Energy predicts that our dependence on foreign energy sources will continue to grow. In past years the Congress has taken prudent measures to address these concerns. For example, in 1980 Congress acted to encourage the domestic production of oil and natural gas by establishing the section 29 tax credit for companies that sought to produce oil and gas from unconventional sources such as tight rock formations, coal beds and from biomass. Congress recognized the benefit to the Nation of developing oil and natural gas from locations that are very difficult to reach and not economic from which to produce using conventional means. The section 29 tax credit is scheduled to expire on December 31, 2002. Allowing the credit to expire would result in the abandonment of many wells that are producing today by virtue of the section 29 tax credit, and I would encourage, Mr. Chairman, that we recommend that the section 29 tax credit be extended, perhaps enduring the balance of this Congress, rather than waiting until the next Congress at the conclusion of which the credit is scheduled to expire.