Speeches/Testimony

Statement of the National Petrochemical & Refiners Association
submitted to the House Committee on Resources
Subcommittee on Energy & Mineral Resources
concerning Domestic Natural Gas Supply Shortage
June 19, 2003

NPRA, the National Petrochemical & Refiners Association, is a national trade association whose members include virtually all U.S. refiners and petrochemical manufacturers. NPRA appreciates the interest of the House Committee on Resources in the vital issue of natural gas supply and demand. NPRA believes that diverse, ample and affordable supplies of fossil fuels are essential to maintain U.S. national security, economic growth, and the viability of the domestic refining and petrochemical industries.

America's standard of living and overall economic health are strongly linked to an adequate supply of energy at reasonable prices. The nation faces severe challenges as it strives to balance ever-increasing energy demands from all consuming sectors with sometimes contradictory and short-sighted public policies that limit supply while promoting additional natural gas consumption. These conflicting policies, either in the short or long term, are simply no longer compatible with continued U.S. economic growth.

NPRA believes that there is an urgent need to harmonize the nation's energy and environmental policies, and that any national energy plan must include traditional supply and market-oriented policies for all fossil fuels, including natural gas.

Background

Energy is a strategic commodity. Without it, either through insufficient supply, unreasonable cost (or both), any modern economy is at risk. The threat of shortages can cause significant price escalations and disruptions in the marketplace. In recent years, domestic demand for natural gas has substantially increased while production has recently decreased. Government, industry, and private experts agree that natural gas demand is expected to rise by the year 2020 by as much as 60% over today's levels. It is still unclear whether domestic gas production can increase to meet much of this new demand.

This is not a resource problem nor, lacking changes to current edicts, will it be short-lived. NPRA believes the current ill-advised national policy of limiting natural gas supply while encouraging gas use because of its environmental benefits -- mostly in the generation of base and peak load electricity -- has created and could exacerbate extended higher prices and volatility. In fact, EIA reports that demand by electricity generators is expected to account for 30% of total natural gas consumption in 2025. This equates to a doubling of gas use by the utility sector over current demand.

The domestic petrochemical industry, as well as others in the basic chemical sector, is primarily based upon natural gas and natural gas liquids. About 70% of U.S. petrochemical manufacturers use natural gas liquids as feedstocks. In contrast, about 70% of petrochemical producers in Western Europe and Asia use naphtha (a heavy oil) as a feedstock. While oil is a global commodity whose price is set on the global market, natural gas liquids are more locally traded commodities. As such, price increases in natural gas have had a larger impact on competitiveness in North American-produced petrochemicals.

The U.S. has generally maintained a reasonable-cost feedstock position relative to its competitors in Europe and Asia. However, that situation has been eroded as the price of natural gas has soared. North American natural gas and natural gas liquids prices have risen to unprecedented levels and placed a significant portion of the domestic petrochemical industry at a disadvantage to European and Asian producers. In fact, the increasing siting of base petrochemical production and expansion projects in overseas locations is directly attributable to this significant disparity in fuel prices. Additional displacements will occur if the current and projected gas price and supply situation is not addressed promptly.

Two years of extraordinarily high natural gas prices (2001-2002) have resulted in a negative trade balance for the U.S. economy. This negative trade balance allows foreign businesses to capture U.S. market share in part because European and Asian producers are not experiencing similar increased feedstock prices.

Short-Term Outlook: Focus on Conservation and Efficiency

Industry analysts report that domestic natural gas production has declined by 6% over the last six quarters. In turn, utilization of natural gas by the electric utility industry has caused unprecedented demand, especially in the summer season where natural gas provides "peaking" power to many industrial and residential users.

Historically, the summer months have been periods to re-supply natural gas storage facilities in preparation and anticipation of increased winter demand for commercial and residential home heating. The increased use of natural gas during the past summers has placed additional constraints on storage, and the U.S. is now experiencing some of the lowest levels of storage volumes ever-38% below normal volumes for the end of May according to the EIA. Under current conditions, it will take storage of 12.7 BCF per day for the remainder of the summer season to return to storage levels entering the previous winter of 2002-2003. Compared to the previous five-year average fill rate of 9.2 BCF, the nation currently faces a 3.5 BCF per day shortfall of natural gas as we enter the winter of 2003-2004.

Unfortunately, little can be accomplished from the supply side of this equation in what is a short, but nevertheless critical time period. In essence, our nation's natural gas energy policy for the next 8-10 months may largely depend upon good weather and good luck. We must try to improve things, but real possibilities of doing so are limited. We must hope that Congress and the Administration will act to provide greater supply and price certainty to natural gas markets in the mid and long-term.

While little may be practically accomplished on the supply-side of the equation in the immediate future, efforts can be made to help mitigate the problem through conservation and efficiency efforts. NPRA urges both Congress and the Administration to act to improve energy efficiency and conservation in the use of natural gas and power, especially as the nation enters the summer cooling season. Any reasonable reduction in electricity consumption would reduce natural gas consumption by the power sector and have a positive impact on natural gas availability. This, in turn, would help moderate natural gas supply and price concerns. Further, if natural gas supplies become extremely tight this summer or early fall, the federal and local government should consider allowing electric utilities and industrial facilities to switch to alternative fuels in order to conserve natural gas supplies.

Longer-Term Options: Energy and Environment Trade-offs

NPRA welcomes the Committee's review of the natural gas situation. We urge you to review current policy thoroughly and openly. The nation needs a frank and public debate on the future of natural gas and natural gas supplies. As previously stated, natural gas demand is projected to increase by 60% by the year 2020. The President's National Energy Policy Task Force projects that over 1,300 new electric generating power plants must be constructed to fulfill anticipated electric energy needs over the next 20 years. DOE suggests that over 90% of these facilities will be fueled by natural gas.

Based on these and other forecasts, Congress must evaluate current policies that inhibit or outright prohibit development of additional natural gas supply sources. Policies regarding natural gas must be modified to reflect both current and future realities. They must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf. New and promising domestic areas for development must be open for exploration and production. In the meantime, NPRA would urge caution when Congress and the Administration consider any policies, environmental or other, that will accelerate the demand for natural gas when viable alternatives exist.

Environmental progress and energy supply need not be mutually exclusive. However, long-standing and recent environmental policies have overwhelmingly limited fuel and energy supply choices, promoted or even required fuel switching while at the same time they discourage expanded domestic production of natural gas. Anticipated environmental constraints could aggravate the current situation. This is a formula guaranteed to make an already bad situation worse.

The National Petroleum Council (NPC) at the request of the Secretary of Energy is currently developing recommendations and policy options on the long-term future of natural gas as one of the key elements of our nation's energy menu. NPRA is an active participant in this study and urges Congress to seriously consider any and all of the NPC's specific findings and recommended policy options.

In the interim, NPRA urges Congress and the Administration to re-think and re-evaluate current and future policy initiatives that inhibit or prohibit such beneficial practices as:

Fuel choice mixture and flexibility.
Gas supply source diversity.
Modernization, expansion and permitting of infrastructure, including LNG facilities and pipelines.
Development of new technologies.
Natural gas market transparency and efficiency.

Conclusion

Natural gas and natural gas liquids serve as primary feedstocks in domestic petrochemical plants and other industries. Their availability at a reasonable cost is essential to keep the U.S. petrochemical industry competitive in a worldwide marketplace. We hope that the Congress will recognize that increased demand for natural gas supplies will result in even tighter supplies and the cost of gas as a feedstock will continue to rise. Policymakers should also recognize that since natural gas is used as a fuel and an industrial feedstock, negative impacts to our businesses will result if natural gas demand increases but supplies remain tight. Thus the principal focus of the discussion must be on the need for increased supply.

One thing is certainly clear: We urgently need a thorough review and analysis of natural gas-related policies and gas supply and demand to maintain a vibrant U.S. petrochemical industry and U.S. economy. Natural gas will play an increasingly important role in America's energy future. We must analyze, clarify, and correct policies to maximize the available supply of this key resource.

For this reason, NPRA appreciates the Committee's efforts to investigate the issues surrounding and impacting the supply, demand, and price volatility of this nation's natural gas resources. We hope to work with all stakeholders to craft a natural gas policy that provides adequate supply at reasonable prices to fuel the U.S. economy and maintain growth.