Speeches/Testimony

Written Statement of the National Petrochemical & Refiners Association Written Statement For The Record Senate Environment & Public Works Committee Hearing On Natural Gas Supplies And The Environment
March 24, 2004

OVERVIEW

NPRA, the National Petrochemical & Refiners Association is a national trade association with over 450 members, including those who own or operate virtually all U.S. refining capacity, as well as petrochemical manufacturers. NPRA members manufacture petroleum and petrochemical products that are essential to U.S. economic growth and maintenance of national security. These industries are dependent on adequate supplies of fuels, including natural gas and natural gas liquids, at predictable, affordable prices.

NPRA appreciates the interest of the Senate Environment & Public Works Committee in addressing the impact of environmental regulations and policies on natural gas supply and demand. We urge you to study and assess current policy thoroughly and openly. The nation needs and deserves a frank and public debate on the future of its natural gas supplies.

Short natural gas supplies and accompanying high prices threaten the health of U.S. industries, their significant contributions to national, state and local economies and the continued existence of thousands of jobs. 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 certain that domestic gas production can not satisfy this new demand unless current policy is altered significantly.

In addition, the President's National Energy Policy Task Force projects that over 1,300 new electric generating plants must be constructed to fulfill anticipated electric energy needs during the next 20 years. DOE suggests that over 90% of these facilities will be fueled by natural gas. This increase in gas usage for electric generation may not be achievable.

The United States has an abundant supply of domestic gas, but flawed government policies and regulatory red tape prohibit its development in many areas. In the short term, efforts should be made to encourage energy efficiency and conservation while also encouraging the substitution of fuel oil, coal or nuclear power where possible. For the long term, we must develop policies that promote continued environmental progress without reducing the supply of natural gas and other petroleum products.

FLAWED POLICES ENCOURAGE CONSUMPTION, DISCOURAGE SUPPLY

Our nation currently faces daunting challenges as it strives to balance ever-increasing energy demands from all consuming sectors, largely due to contradictory and short-sighted policies that have limited supply while promoting additional natural gas consumption. Increasing demand for natural gas because of its environmental benefits has come up against a North American production base, which has been artificially restricted due to contradictory policy initiatives. Those policies promote the use of clean burning gas while at the same time failing to ensure adequate, affordable supplies of the fuel.

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 continuing higher gas 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. Under present policies, it is not clear that adequate supplies will be available to accommodate this demand figure unless current natural gas users in core industries are forced to switch fuels or close.

This is really not a resource problem. Flawed government policies have prohibited the development of gas in many areas. If changes are not made to existing policies, our predicament will not be short-lived. This means that policymakers and stakeholders must act or accept responsibility for the ultimate consequences of short supplies, lost U.S. jobs, a worsening trade balance and further loss of U.S. industrial leadership. The U.S. has an abundant supply of domestic gas.

In January 2004, the Department of the Interior issued a rule providing new incentives to boost domestic natural gas production in the hard-to-reach, deepwater areas of the Gulf of Mexico. The rule is expected to save consumers some $570 million a year and create as many as 26,000 jobs. NPRA believes that the rule is an excellent short-term step which will go a long way to help sustain a reliable supply of natural gas. But more is needed. The comprehensive energy legislation (H.R. 6) is a good start to address longer term needs, but it lacks adequate incentives to increase natural gas supply in the near term. NPRA will work with Congress in 2004 to enact separate legislation to encourage natural gas production.

PETROCHEMICAL AND REFINING INDUSTRIES SEVERELY DISADVANTAGED BY HIGH ENERGY COSTS

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 heavy oil as a feedstock. While oil is a global commodity whose price is set on the global market, natural gas liquids are generally more locally traded commodities. Thus, 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 increased. North American natural gas and natural gas liquids prices have risen to unprecedented levels for a sustained period of time and placed a significant portion of the domestic petrochemical industry at a disadvantage to European and Asian producers. The trend towards increased siting of base petrochemical production and expansion projects in overseas locations is directly attributable to this growing disparity in fuel prices. Additional displacements will occur if the current and prospective gas price and supply situation is not addressed promptly.

High natural gas prices have created fundamental changes in the U.S chemical industry, with the petrochemical industry affected more than other segments of the industry. There have been a series of bankruptcies, plant closures, and reductions in production levels at many facilities because they can no longer compete at the current elevated gas prices.

On March 17th, The Washington Post published an article on the job losses in the chemical industry resulting from high natural gas prices. The Post reported that "Across the country, 1 in every 10 chemical-related jobs has vanished in the past five years - nearly 100,000 workers - and that number would be worse if not for a surge in one segment, pharmaceuticals." These chemical jobs tend to be well-paid and "virtually impossible to replace in their communities." Louisiana Governor Kathleen Blanco said, "Right now we've got big operations just shutting down because they cannot compete on the world market. We've had shutdowns before but they have always been temporary. We've not seen anything like this before."

U.S. trade receipts from chemical companies have also been adversely impacted by high natural gas prices. Over three years of extraordinarily high natural gas prices (2001-2004) have resulted in a depressed chemical export market and a negative trade balance for the U.S. economy. The U.S. balance of payment for chemicals went from an $8 billion surplus in 1999 to an estimated $9 billion deficit for 2003. This negative trade balance allows foreign businesses to capture U.S. market share.

Natural gas prices also impact petroleum product prices because refineries are significant users of natural gas. Many facilities switched to natural gas use at the order of environmental authorities such as the EPA. The result is that natural gas supply and price have considerable impact on the output of the nation's petroleum products as well as on refining industry profitability. This is even more critical as refiners face a tight supply/demand balance for petroleum products and higher raw material costs for crude oil.

Over the next six years and well beyond, there appears to be no relief for residential consumers, refiners, and petrochemical manufacturers. In its "2004 Annual Outlook", the Energy Information Administration (EIA) concludes that high natural gas prices are likely to continue to increase until 2010. EIA predicts "… greater dependence on more costly alternative supplies of natural gas" from LNG imports and remote resources in Alaska and Canada. This is difficult news for petrochemical manufacturers, refiners, and consumers. Congress should act to maximize production from the significant U.S. reserve base. Without urgent action, the United States will continue to lose thousands of manufacturing jobs and suffer billions of dollars in economic harm due to inadequate gas supplies.

SHORT-TERM POLICY OPTIONS - CONSERVATION, EFFICIENCY & FUEL SWITCHING

In the immediate future, efforts should also be made to help mitigate the natural gas supply problems through voluntary 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. This could be accomplished by offering appropriate incentives. Any adjustment in electricity consumption would reduce natural gas consumption by the power sector and have a positive impact on natural gas availability. This, in turn, could help to moderate natural gas supply and price concerns. Further, if and when natural gas supplies become extremely tight, the federal and local government should allow electric utilities and other industrial facilities to switch to alternative fuels in order to conserve natural gas supplies. Pre-emptive efforts to encourage fuel switching would be even more helpful.

LONG-TERM OPTIONS MUST FOCUS ON SUPPLY

We must develop policies that promote continued environmental progress without reducing the supply of natural gas and other petroleum products needed for a healthy economy and the nation's security. We need to forge a diversified national energy policy that reduces our dependence on foreign energy sources while increasing our domestic production. These policies must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf. We must also bring Alaskan natural gas to lower 48 markets as soon as possible. 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 other policy options exist.

Environmental progress and energy supply need not be mutually exclusive. However, long-standing and recent environmental policies have significantly limited fuel and energy supply choices. They have promoted or even required fuel switching while at the same time discouraging 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.

Recent reports support the need for increased domestic production. As an example, last fall, the National Petroleum Council (NPC), at the request of the Secretary of Energy, released its recommendations and policy options on the long-term future of natural gas. The NPC warned that the U.S. will pay an additional $1 trillion in natural gas costs over the next 20 years unless current policy is altered and action is taken to increase domestic production.

RECOMMENDATIONS

NPRA urges Congress and the Administration to re-think and re-evaluate current and future policy initiatives. We should focus on all energy options, including fuel choice mixture and flexibility; gas supply source diversification; faster permitting for modernization and expansion of infrastructure, including LNG facilities and pipelines; development of new technologies; and natural gas market transparency and efficiency. As a nation, we can not afford to inhibit any options that are beneficial to increasing supply.

Finally, 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. The current energy legislation is deficient, so separate legislation must be developed and enacted.

CONCLUSION

We urgently need a thorough review of natural gas-related policies to maintain and retain the U.S. petrochemical, refining, and other manufacturing industries in the context of a healthy and growing U.S. economy. It is clear that natural gas will play an increasingly important role in America's energy future; but we must analyze, clarify, and correct policies to maximize the available supply of this key resource. Therefore, we repeat that the principal focus of the gas policy discussion must be on the need for increased supply of this critical fuel.

For this reason, NPRA appreciates the Committee's efforts to investigate the issues surrounding and impacting the supply, demand, and price volatility of our nation's natural gas resources. We hope to work with all stakeholders to design a natural gas policy that provides adequate supply at reasonable and predictable prices while simultaneously continuing environmental progress.