Meeting U.S. Natural Gas Needs

Natural gas in storage is at near record-low levels and prices are at near-record high levels. Are we in a natural gas crisis?

No, but the oil and natural gas industry is taking the current situation very seriously. The United States faces a serious challenge in balancing natural gas supply and demand. This situation didn't develop overnight, and it can't be solved overnight. It is the legacy of years of government policy that discouraged the development of domestic energy supplies. That is why major changes in our energy policy are needed. Maintaining the status quo assures that our nation will face a far greater risk of high volatility and tighter supplies, which have historically led to an upward pressure on price.

Why didn't the oil and natural gas industry anticipate this situation and be prepared to deal with it?

We did anticipate the current situation. That is why for years we have voiced our concerns about potential constraints on supply. That is also why we have been advocating greater access to federal lands with large natural gas resources. Strict environmental safeguards and vastly improved technology allow us to search for and produce these resources responsibly. We also have asked for a more rational tax policy that would ensure a strong domestic oil and natural gas industry.

What are the major factors that could shape the natural gas situation for the winter?

A number of factors could have an impact, but it may boil down to the weather. Hurricane activity in the Gulf of Mexico could shut down offshore platforms, causing production to fall - as it did in 2002. According to the Minerals Management Service, Hurricane Claudette, which developed in the Gulf of Mexico in July 2003, caused a loss of 18.1 percent of natural gas production from the Gulf and 20.8 percent of oil production (as of July 16). These and other factors could lead to a tighter market. On the demand side, a hot summer with high demand for electricity generated from natural gas could further exacerbate the situation as could an early, cold fall and winter. High petroleum prices, economic growth, hydroelectric generation declines, or nuclear plant outages could add further to the demand for natural gas.

What steps can government take to increase domestic natural gas supplies?

There are ways to address the natural gas challenge, but they require changes in the way Congress and the Administration manage federal lands and in their approach to energy development in general. The government must provide greater opportunity to responsibly explore resource-rich federal lands that are currently unavailable for exploration; and they must create a regulatory framework that encourages exploration and development to take place more quickly.

It is particularly important that government not resort to the failed command-and-control policies of the past. The Fuel Use Act of 1978 was enacted following severe shortages of natural gas during the winters of 1973-74 and 1976-77. While the shortages of these years were caused by price controls on natural gas (which have since been eliminated), the government responded by making the situation worse by passing the Fuel Use Act. The Act placed severe limitations on the use of natural gas by American consumers, businesses and industries. It also interfered with the market's ability to balance supply and demand. Portions of the law that had restricted certain uses of natural gas and petroleum were repealed in 1987 because Congress felt consumers should be allowed to make their own fuel choices in an increasingly deregulated energy marketplace.

Are we running out of natural gas?

No. The United States has adequate natural gas resources - if government permits them to be developed. Through technology that is advancing daily, industry can explore for and develop the nation's gas resources while protecting the environment. In the lower-48 states alone, federal onshore and offshore lands where exploration and production is forbidden, or severely limited, hold an estimated 213 trillion cubic feet of natural gas (a 10-year supply at today's demand rate). It is important that Congress and the Administration address the growing natural gas supply/demand gap today to ensure that this clean-burning fuel is available to Americans at an affordable price. Plentiful supplies of natural gas are critical to a strong, growing U.S. economy, and they are key to U.S. energy supply security.

Can you guarantee that there won't be any natural gas shortages this winter?

No, because the situation is very uncertain. Residential consumers are expected to get their supplies; some industrial users with interruptible contracts may have to switch to other energy sources if demand increases further and supplies remain tight -- or shut down operations. Employees would likely be laid off as a result of these shutdowns. The tightness in natural gas supply could affect consumers directly through their heating and cooling bills. In the longer-term, it could also result in job losses, as manufacturers that are heavy users of gas move to countries where natural gas is readily available or cheaper.

Where do our natural gas supplies come from, and why don't we just import more gas, as we do oil?

Eighty-five percent of natural gas used domestically is produced in the United States; most of the rest comes from Canada. Because it is expensive, only about 1 percent of gas is imported in the form of liquefied natural gas (LNG). As natural gas prices have risen, however, imports have been increasing.

Can't we increase natural gas supply to meet the growing demand?

U.S. natural gas producers have invested in finding additional natural gas for American consumers but their increased efforts cannot keep pace with the increased demand. Production in traditional gas-producing areas is declining as they approach the end of their productive lives. Without access to natural gas resources on federal lands that are not now available, even today's relatively high level of activity will not help increase U.S. reserves nor increase production.

Could the natural gas shortage be alleviated through increased reliance on other sources of natural gas supply?

We need to diversify sources of natural gas supply. Government actions should not impede responsible development of "unconventional sources" of natural gas, such as tight sands gas, shale, and coal bed natural gas. The government should take steps to expedite the permitting of liquefied natural gas (LNG) facilities and imports of natural gas from Canada to help bridge the gap between supply and demand. Moreover, pipelines must be built to bring North American natural gas (including Alaskan) to consumers in the lower 48 states.

Who is to blame for high natural gas prices and resulting lost jobs and other harmful effects? How could something like this happen without someone being asleep at the switch?

Rather than assigning blame, we need to find solutions to the current problems. One important solution is greater access to federal lands containing natural gas resources and the removal of barriers to development on lands already leased. The government, working with industry, can open new natural gas reserves and the consuming public can use existing supplies more wisely.

How high are natural gas prices going to go?

Nobody knows. We can't predict the future, but, economically speaking, anytime there is high demand and tight supply, prices historically have gone up.

It seems that energy companies are taking advantage of the situation and just gouging the public. Isn't it true that the industry benefits when prices are high (and the public is suffering), and that there is an incentive for the industry to keep supplies low and prices high?

Whenever there have been allegations about price gouging, investigations by the Federal Trade Commission, state attorneys general and other government agencies have repeatedly found no evidence to support such charges. Experience tells us that, when supply increases to meet demand, prices will generally stabilize.

Haven't the mergers of major oil and natural gas producers in the past several years reduced competition within the industry and allowed the remaining companies to raise prices at will?

There are more than 2,000 companies producing natural gas in the U.S. The five largest companies produce only 18 percent of the natural gas produced in the U.S. The Federal Trade Commission has approved all of the mergers.

Aren't companies making big profits on the backs of small customers for natural gas?

No. U.S. oil and natural gas industry profits have been very much in line with those of other industries. For example, the latest published data for the first quarter 2003 shows the profit margins of the oil and gas industry and their related equipment and services industry averaged 8.0 percent compared to an average of 6.4 percent for all U.S. industry. Over the last five years, the industry's net profit was 4.7 percent compared to an average for all industry of 5.2 percent.

What can consumers do if heating bills skyrocket this winter?

Homeowners can adjust their thermostats to consume less and take steps to better insulate their homes. There are numerous sources of information on how to accomplish this, including the local gas supply companies, local governments and the U.S. Department of Energy's website. Low- or fixed-income citizens in need can obtain financial assistance from the Low Income Home Energy Assistance Program (LIHEAP).

The industry advocates increased access to government lands for natural gas production. But how would that long-term approach help deal with the immediate supply and pricing problems we face this year?

Increased access by itself will not alleviate the problems we could face this year. It takes time to bring new supplies to the market. Especially in the short term, efficiency in natural gas use must be part of a national effort to balance natural gas supply and demand.

The oil and natural gas industry is committed to continuing to reduce energy consumption in its operations. For years, the industry has been aggressively pursuing energy and resource conservation. For example, companies turn waste heat at their facilities into useful electricity using a process known as cogeneration. They also invest in more energy-efficient lighting, equipment, production processes, and energy generation facilities. Companies make these investments to reduce costs, which make them more competitive in a business environment, and to provide energy to consumers at competitive prices.

Likewise, consumers can do their part to use energy more wisely. For example, consumers can dial down thermostats, insulate doors and windows, close off unused rooms and take other inexpensive actions. Qualified inspections of natural gas-fired home appliances also can help ensure that they work efficiently and safely.

In 1999, the National Petroleum Council concluded that there were 1,400 trillion cubic feet (Tcf) of natural gas left to be found in the lower-48 states, about 200 of which were in somewhat restricted areas. That leaves 1,200 Tcf without restriction. Why isn't the oil and natural gas industry aggressively going after that 1,200 Tcf to address the current supply problems?

The industry has been aggressively seeking to develop new natural gas supply. In fact, in response to higher prices, over 50 percent more drilling rigs are looking for new supplies than a year ago. But these efforts continue to be discouraged by government policies.

Even lands that are seemingly "available" for energy development have significant limits on development - in some cases, these restrictions are de facto removals from development. Many federal resource management plans are outdated. These plans, required by Congress, are necessary steps in preparing for lease sales and for managing development on federal lands. Furthermore, the process for obtaining permits is fraught with delays. Regional Bureau of Land Management (BLM) offices are inadequately staffed and the permitting process is overly bureaucratic, with frequent delays. Although BLM's own regulations call for 30 days for approval, there is a current backlog of more than 2,800 applications for permits to drill and permits can take in excess of 130 days to process. Finally, litigation is frequently pursued by environmental groups to block development despite the lower emissions associated with clean-burning natural gas.

A recent U.S. Department of the Interior (DOI) study (required by the Energy Policy and Conservation Act - EPCA) concluded that only 12 percent of the natural gas resources on federal land in the study area are limited to development, and that another 26 percent are available for leasing with some restrictions. This seems to indicate that 62 percent of the resources in the study area are available for leasing without restriction. Doesn't this show that the oil and natural gas industry has greatly exaggerated its claims that federal land is off-limits to development?

Not at all. Some lease stipulations are sufficiently restrictive as to preclude development in and of themselves. There are clear examples of this in the EPCA study. For instance, more than 90 percent of the natural gas resources in Montana's most promising area are totally unavailable for leasing. Moreover, the moratoria on leasing off the Atlantic and Pacific coasts and in the Eastern Gulf of Mexico have put resource-rich lands totally off limits. However, lease stipulations and moratoria are not the only barriers. There are many steps between leasing and production, and the simple acquisition of a lease does not alone add to supply. A backlog of permit applications is a testimony to the fact that leasing alone is not adequate to ensure access to resources. In the Rockies, while the rate of leasing has increased, so has the backlog of drilling permits - and permits can impose significant restrictions on operations, as evidenced by Montana's arbitrary limit of 200 exploration permits and an equally arbitrary limit on production permits.

Will supplies be sufficient only if we all make drastic cuts in our energy use?

The U.S. oil and natural gas industry has always encouraged responsible use of energy, but there is no easy way to resolve the current situation. Conservation alone will not solve the long-term problem.

Are you suggesting that we all cut back our use of natural gas while oil companies raise their prices as high as they like?

Natural gas prices have risen in response to market conditions and the market will balance supply and demand through price changes. Market conditions have resulted in price increases. America's natural gas producers are as concerned as consumers about price swings because such instability makes it difficult to plan for the future.

Couldn't increased use of liquefied natural gas (LNG) meet the current supply concerns?

Not in the near term. LNG use could increase some but new facilities must be built and undergo the permitting process - which can be particularly challenging for these facilities which are in coastal areas where regulations limit development.

Is there enough marine and/or pipeline capacity to import LNG into the U.S. to cover estimated shortfalls in the U.S. domestic gas supply? Would the four existing U.S. LNG terminals have to be expanded?

A significant increase in imports of LNG will require a major increase in capital spending for new or expanded LNG terminals and ancillary needs such as improved ports and harbors and channel dredging, and new ships and pipelines. New LNP import facilities, costing $300 million to $600 million each, will be needed domestically for imports. Liquefaction facilities in exporting countries cost an estimated $800 million to $1.5 billion each. Special tankers needed to transport LNG will cost billions of dollars more.

Federal Reserve Chairman Alan Greenspan, appearing before a House committee last year, spoke of the critical need to expand LNG terminals in the U.S. to increase natural gas imports given the substantial storage shortfall. He also said that an LNG facility in Alaska ships its production to Japan, not to the four LNG terminals in the U.S. How can this be the case when the U.S. market is in critical need of LNG?

Alaskan LNG is shipped to Japan because there are no LNG facilities on the West Coast of the United States to receive and process LNG. Shipping the gas to the East Coast or Gulf terminals would be far too expensive.

What is the natural gas potential of Alaska?

Alaskan natural gas resources consist of several parts.

First, there are massive gas resources estimated to yet be discovered in Alaska. Current estimates are that 68.5 trillion cubic feet (TCF) remain to be discovered on onshore federal lands in Alaska and 122.6 TCF on the Alaskan outer continental shelf (OCS).

Second, there is an enormous developed resource on state lands at or in the vicinity of Prudhoe Bay. These resources amount to about 32 TCF of gas, currently stranded by the lack of transportation facilities.

Third, there is an unknown volume of both conventional and unconventional gas yet to be discovered on state and private lands in Alaska.

While the second and third of these resource categories are not federally owned, their economic viability is strongly influenced by federal actions, insofar as any such development is likely to rely on common infrastructure and transport facilities.

Of most immediate importance, development of any North Slope gas resources will require construction of a pipeline link to the lower-48 states, completion of which is likely to involve federal policy involvement at a number of levels.