[Senate Hearing 113-1]
[From the U.S. Government Publishing Office]
S. Hrg. 113-1
NATURAL GAS RESOURCES
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
TO
EXPLORE OPPORTUNITIES AND CHALLENGES ASSOCIATED WITH AMERICA'S NATURAL
GAS RESOURCES
__________
FEBRUARY 12, 2013
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
RON WYDEN, Oregon, Chairman
TIM JOHNSON, South Dakota LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan DEAN HELLER, Nevada
MARK UDALL, Colorado JEFF FLAKE, Arizona
AL FRANKEN, Minnesota TIM SCOTT, South Carolina
JOE MANCHIN, III, West Virginia LAMAR ALEXANDER, Tennessee
CHRISTOPHER A. COONS, Delaware ROB PORTMAN, Ohio
BRIAN SCHATZ, Hawaii JOHN HOEVEN, North Dakota
MARTIN HEINRICH, New Mexico
Joshua Sheinkman, Staff Director
Sam E. Fowler, Chief Counsel
Karen K. Billups, Republican Staff Director
Patrick J. McCormick III, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Beinecke, Frances, President, Natural Resources Defense Council,
New York, NY................................................... 29
Eisenberg, Ross, Vice President, Energy and Resources Policy,
National Association of Manufacturers.......................... 21
Gerard, Jack N., President and Chief Executive Officer, American
Petroleum Institute............................................ 51
Hickenlooper, John W., Governor of Colorado, Denver, CO.......... 7
Landrieu, Hon. Mary L., U.S. Senator From Louisiana.............. 3
Liveris, Andrew N., Chairman and Chief Executive Officer, The Dow
Chemical Company, Midland, MI.................................. 13
Medlock, Kenneth B., III, James A. Baker III, and Susan G. Baker,
Fellow in Energy and Resource Economics, and Senior Director,
Center for Energy Studies, James A. Baker III Institute for
Public Policy, Rice University, Houston, TX.................... 42
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 4
Wyden, Hon. Ron, U.S. Senator From Oregon........................ 1
APPENDIXES
Appendix I
Responses to additional questions................................ 95
Appendix II
Additional material submitted for the record..................... 121
NATURAL GAS RESOURCES
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TUESDAY, FEBRUARY 12, 2013
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Ron Wyden,
chairman, presiding.
OPENING STATEMENT OF HON. RON WYDEN, U.S. SENATOR
FROM OREGON
The Chairman. As the witnesses come in, I want to note to
my colleagues this is going to be, even by Senate scheduling, a
hectic morning. We anticipate having votes at 11 o'clock. We
will go from now until about 11:15 on the hearing topic, which
is natural gas challenges and opportunities. We will take a
break at 11:15 for what I anticipate will be about an hour.
When it comes to natural gas, America is truly the land of
opportunity.
First it's an economic opportunity. An affordable, stable
gas supply provides a competitive advantage for American
business that can spark a U.S. manufacturing renaissance.
Second, it is an environmental opportunity. Gas is 50 percent
cleaner than other fossil fuels, and it is a major reason why
American CO2 emissions have actually gone down in
recent years.
Finally, it's an energy security opportunity. For the first
time in decades, our Nation will be able to rely on its own
U.S. energy resources, especially new oil and gas development
from shale instead of being dependent on imports from the
Middle East and other parts of the world that haven't always
had our best interests at heart.
This is a major change for American energy policy. Thirty-
six years ago the predecessor to this committee called the
Interior an Insular Affairs Committee, and they held hearings
on natural gas as the country faced a supply emergency that
triggered shortages across the Northeastern United States.
During that supply emergency hundreds of thousands of people
were laid off as commerce and industry reduced hours or simply
shut down altogether.
We in the Northwest, particularly Senator Cantwell and I,
note that the committee at that time was chaired by our
legendary Senator, Henry ``Scoop'' Jackson, and the committee
released a report prepared by the Department of Defense
predicting that liquefied natural gas imports would account for
10 percent of the country's gas supply.
The view expressed in that 1997-1977 committee report has
dominated American energy policy until just a few years ago. In
2005, Congress, over the objection of some, swept aside the
ability of States to even approve the siting of LNG import
terminals. As recently as 2007, when the Congress last enacted
major legislation the focus was still overwhelmingly on energy
scarcity.
Today, the outlook could not be more different. Instead of
scarcity and shortages, the prediction is that domestic
production will soon outstrip American demand.
Given the dramatic change in the outlook for natural gas
supply, it is clearly time for a fresh look at our current
policies and to start thinking about how to update those
policies to reflect a very new reality.
As part of today's hearing, the committee is interested in
hearing from the witnesses what they think is needed to
safeguard the advantages of affordable, stable gas supplies for
our country. Now some of our witnesses are going to say the
best approach is that the market will take care of things.
Others are going to say caution is in order. Just a few years
ago investors were still betting on building new natural gas
import terminals. They now face, in communities across the
country, billions of dollars worth of stranded investment.
It is hard to see the logic behind replacing that kind of
speculation on gas imports with similar speculation on gas
exports.
My own view is we have to make sure we don't miss this
opportunity for our Nation's economy and millions of unemployed
workers who are now looking for good paying, family-wage jobs
in the American manufacturing sector.
As the CEO of Dow Chemical, Mr. Andrew Liveris will testify
that if unfettered exports drive the price of gas back toward
the $10 per thousand cubic feet (mcf) price America has seen in
recent years, that would essentially eliminate any competitive
advantage for American manufacturers and investment that could
be made here at home, and it will essentially advantage
overseas opportunities.
Instead of a manufacturing renaissance, major gas consumers
could find themselves hit hard with energy price hikes and
forced to side line job-creating efforts.
It's also important to keep in mind that the guidance the
Energy Department now uses for evaluating gas export
applications was originally created almost a quarter century
ago for import policy.
It seems to me that it's now time to have a serious
discussion as to whether the guidelines that are now in place
at the Energy Department for approving export applications are
what they need to be. A recent study commissioned by the
Department of Energy to examine the impact of natural gas
exports, in my view, raised more questions than it answered.
Now export policy is not the only issue on the table. It
would also be a missed opportunity if the environmental
benefits that natural gas can provide in terms of reduced
CO2 emissions were lost, lost because of inadequate
attention to issues such as fracking, methane emissions
flaring, and underground aquifers.
Communities across the country have already been in touch
with the committee to share their thoughts and concerns about
whether the hydraulic fracturing process that's used to produce
shale gas near their communities could result in the
contamination of their groundwater supplies. That type of
situation would not only be tragic for the affected community,
but also could lead to citizens? pressure to shut down not only
unsafe production, but also operations that were safe.
Colorado's Governor, who is here with us, the Honorable
John Hickenlooper, who has been on the front lines in terms of
grappling with these issues, is going to testify today on how
he's worked to strike a balance between the economic and
environmental interests in regulating natural gas production in
his State. Governor, we are anxious to hear about how your
approach could be a model for the country.
Here's my bottom line. Let's see if there is an economic
and environmental sweet spot where U.S. gas producers can make
enough money to continue producing, and U.S. manufacturers have
an affordable, stable supply of natural gas and where the
environment is not only protected, but actually benefits from
greater use of natural gas to lower CO2 emissions.
Today's hearing gives us a chance to look at these and
other issues. I look forward to hearing from our witnesses.
Senator Murkowski and I have talked about these issues on a
number of occasions, and I've worked very closely with her.
Senator Murkowski, it's going to be a pleasure to serve with
you during this session, and please go forward with any
comments you'd like to make.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
First, let me thank you all for taking time to appear today before
this committee to share your expertise on the issue of natural gas
development. You are here today because it is vital that we treat our
newfound wealth of natural gas in a fashion which protects the
interests of states, like Colorado, represented here by Governor
Hickenlooper, manufacturing, represented by Mr. Liveris of Dow and Mr.
Eisenberg of the National Association of manufacturers, the
environmental community, represented by Ms. Beinecke and finally our
producers, represented by Mr. Gerard.
This wealth of natural gas is extraordinary, with estimates
indicating America currently has 317 trillion cubic feet of proven,
accessible reserves, and a further 2,000 tcf in total resource base
estimates.
This is enough to fulfill our current demand, a little over 24 bcf
per day, for over 100 years.
Louisiana ranks second in natural gas production, behind only
Texas, with 29 tcf in 2011, representing 10% of total national
production.
This increased production has a direct impact on our economy,
supporting 2.8 million jobs nationally, along with tens of billions in
new investment.
In Louisiana, Methanex Corporation, which moved its last U.S. plant
overseas in 1999, is now spending over $1 billion to move a methanol
plant from Chile to Ascension parish, near Baton Rouge. This plant will
produce the raw materials for everything from windshield washer fluid
to paints and sealants, even wrinkle free shirts.
Williams, a petrochemical company based in Tulsa, is planning a new
$400 ethylene plant also in Ascension parish, where they will supply
our plastics manufacturers.
Finally, CF Industries, one of the world's largest producers of
nitrogen fertilizer, is looking to spend $2.1 billion to build a new
fertilizer plant in Ascension.
That's over $3.5 billion being invested in one parish in Louisiana,
all thanks to our new abundance of domestic natural gas.
Statewide, this could add over 200,000 new jobs, in addition to the
81,000 already supported by natural gas development.
Of course, that isn't the whole story; nationwide, these same
petrochemical, plastics, steel and fertilizer industries are planning
to invest upwards of $80 billion in new plants and new capabilities.
One of the most important topics in our conversation about how best
to approach this new wealth of natural gas is the issue of exports,
specifically liquefied natural gas, to nations around the world. There
are strong arguments to be made on each side, for and against the
expansion of these exports, and I am sensitive to both.
I believe, however, that there is enough domestic production, and
the capacity for enough production increase to support our vital
manufacturing industry and allow for responsible levels of export.
The recent NERA study, commissioned by DOE, supports this view, and
indicates that it is possible for a level of export to exist that both
incentivizes increased production while at the same time continuing to
provide our domestic consumers with reliable, low-cost natural gas.
I look forward to your testimonies, and to working with my
colleagues to develop a commonsense approach to managing our natural
gas supply.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you Mr. Chairman.
I'm pleased that for the first hearing of the 113th
Congress that we are focusing on natural gas, the opportunities
that natural gas clearly presents within the energy discussion
as we look at our energy mix, our energy portfolio.
I think it is absolutely clear that much of the economic
stimulus that we have seen--the jobs that have been created in
recent years--is coming from our States that are providing
opportunities within the natural gas sector.
So, I'm pleased that that's our focus today.
I welcome all of our witnesses.
Without a doubt, the new technology that we are seeing has
enabled a natural gas boom that has changed our energy
landscape and the outlook for our economy.
I have often said, this natural gas just didn't all of a
sudden migrate to these areas. It's been there for a long time.
But what has changed is our ability to access this resource
using the new technology.
Natural gas is now an abundant, affordable, clean source of
energy, providing great opportunities for economic growth, and
an energy security.
Mr. Chairman, you mentioned, the position that we have
moved to as a Nation, when we look at our energy sources just a
few years ago, we were talking about the scarcity of our
resources. We have now moved from a discussion about scarcity
to one of abundance.
This requires us to look critically and perhaps rethink
some of the conversations that we have had about energy.
Last week I introduced a proposal in a document about 115
pages, Energy 20-20, that I hope will spur us to conversations
about energy and how we should be looking differently at energy
because of exactly this--this paradigm shift, going from one of
scarcity to relative abundance. Our resource base estimates
have increased 44 percent for natural gas in less than 5 years.
That's pretty incredible.
Production is up, prices are low.
There's been a positive impact on our greenhouse gas
emissions.
In addition, our allies overseas are now looking at the
United States, they want our natural gas, and we've got enough
resources to help make that happen.
For these reasons though, we have to be thoughtful.
I would certainly agree in how we proceed in dealing with
the issues that impact natural gas.
There are several pending reports and studies looking at
hydraulic fracturing. We need to make sure that these efforts
are reasonable, based on sound science and they don't result in
unnecessary and overly burdensome regulatory requirements.
I think we need to take a very close look, a critical look,
at existing State regulations before we move to impose blanket
Federal rules that perhaps might cause more problems than they
solve.
I've had an opportunity to be out in the Bakken Region.
I've been out in the Marcellus with my colleague, Senator
Manchin, talking with my friends down in Texas about the Eagle
Ford.
The fact of the matter is we've got different geology all
around the country.
So when you're talking about a one-size-fits-all approach,
maybe we need to look a little more critically at that.
We also need to be careful about intervening in efforts to
export our LNG. There's a long established regulatory process
for natural gas exports through the Department of Energy and
through the FERC. This includes environmental review under
NEPA. So before we reinvent the wheel, I think we need to look
at existing laws and regulations and determine if and where
there are deficiencies.
The debate on this issue has focused on the impacts to
domestic natural gas prices and supply, but I think we also
need to include within this discussion an understanding of the
role that the market forces will play, not only on domestic
prices, but the number of projects that may actually be built.
These are mega projects that we are dealing with, in every
sense of the word, ranging from $8 billion to $25 billion,
depending on the amount of existing infrastructure.
Up in Alaska, we're talking about a project of about $65
billion.
This is real money.
Gas is a global commodity, and other countries, including
Canada, are already moving forward.
So I don't think that dragging our feet is an option here,
if we want to export our LNG.
We should also not forget the positive impacts that exports
would have on our trade imbalance and the geopolitical benefits
of exporting to our allies.
There are also other issues to discuss related to the
natural gas industry, but I'd certainly be remiss if I didn't
bring up the dire need for new pipeline infrastructure to move
our natural gas resources to domestic markets and consumers.
We need to address the roadblocks that prevent many of
these projects from moving forward.
I do hope that this hearing is just the start of a very
important discussion on these and many other issues impacting
our natural gas industry.
With that, I look forward to the comments from the
witnesses that have gathered here this morning, and thank them
for coming before the committee.
The Chairman. Thank you for an excellent statement Senator
Murkowski.
I think all of us would agree that in a big and diverse
country people have different impressions of the energy
challenge.
I know that I will never forget when I went to Alaska and
you served me a graham cracker treated with LNG,
Senator Murkowski. Dinner.
The Chairman. and that, uh,
Senator Murkowski. You're still alive to tell the story.
The Chairman [continuing]. I lived to tell about it.
So let's move now to our witnesses. Let me introduce them.
The Honorable John Hickenlooper, Governor of Colorado; Mr.
Andrew Liveris, Chairman and Chief Executive Officer of Dow
Chemical; Mr. Ross Eisenberg, Vice President of the National
Association of Manufacturers; Ms. Frances Beinecke of the
Natural Resources Defense Council; Dr. Kenneth Medlock, a
senior director for energy studies at the Baker Institute at
Rice; and Mr. Jack Gerard, Ppresident of the American Petroleum
Institute.
I would like to let a couple of our colleagues, Senator
Udall and Senator Stabenow, introduce witnesses.
Why don't we begin with you, Senator Udall, since Governor
Hickenlooper will be first, and then we'll go to Senator
Stabenow.
Senator Udall.
Senator Udall. Thank you Senator Wyden, Senator Murkowski.
It's great to start this new Congress off on this footing
and with this important topic.
It's a true pleasure and treat for me to introduce our
Governor, John Hickenlooper.
I know our other Senator, Michael Bennett, with whom I have
a strong working relationship, shares the sentiments I'm going
to share with the committee.
The Governor brings a great deal of policy expertise to
natural gas legislation and the issues that we're discussing
here today. John, I would tell you in part you're among
friends.
There are 4 former Governors on the energy committee:
Senator Alexander, Senator Hoeven, Senator Risch and Senator
Manchin, and I know they share the experiences you've had
leading an important State.
The Governor is a geologist.
He worked in the energy industry long before he became
Denver's mayor and Colorado's Governor. By the way, I should
mention, Mr. Chairman, that the Governor was in another energy
industry between his days as a geologist and a public servant.
He started what's now recognized known as the No. 1 Craft
Brewing industry in the country.
Colorado ranks No. 1 for beer production.
We also have a very robust Craft Brewing sector, if you
will, and the Governor became a very successful businessman and
restaurateur.
We are an all-of-the-above energy State.
The Governor's work is keeping us on the forefront of
energy innovation and a creator of jobs in the energy industry.
I'm really pleased he's here, as he can talk directly and
firsthand about the opportunities that we face, but also the
lessons from the challenges that are in front of Colorado
today.
So, again Governor, it's good to have you here. Thank you
for taking time from a very busy schedule that you have.
I know our legislature is in session. It has 120 days to
get up to mischief, as we sometimes do here in the Congress.
So I really appreciate you taking the time to join us here
in Washington, DC. So welcome. It's great to see you here.
The Chairman. Senator Udall, thank you. We will not compare
Oregon and Colorado now on the brew pub issue. That will be
later.
Senator Stabenow.
Senator Stabenow. Good morning.
First Mr. Chairman, you look great sitting there, and
welcome to the committee as our chairman. I know you and our
ranking member are going to do great work leading us.
It's my great pleasure to introduce Andrew Liveris. I said
before I corrected it, Ron is--Andrew Liveris, who is the CEO
of Dow Chemical Company.
I think that doesn't really describe what Dow's about,
though, because under Mr. Liveris' leadership, Dow has really
become an energy and advanced manufacturing leader in the
country.
So I'm very pleased that you're here in this very important
discussion.
Mr. Liveris came to Dow in Australia in 1976 and moved up
as president of Asia and Pacific operations to be chairman in
2006 and has a very deep knowledge of the importance of natural
gas as a source of energy in manufacturing, as well as chemical
feedstock to make so many of the products that we use every
day.
He also serves on the President's Export Council and a
number of other positions.
So welcome. It's wonderful to have you with us.
We are very proud to have you located in Michigan and
touching so many important areas of innovation for the future.
The Chairman. Thank you Senator Stabenow.
We welcome all our witnesses.
We'd like you to try to see if you could stay in the
vicinity of 6 minutes for your remarks. I know that there's
always a compulsion to, you know, read everything. If you'd
like to just summarize your views, that'll be accepted, and
we'll make your prepared statement a part of the record in its
entirety.
Governor, welcome.
STATEMENT OF JOHN W. HICKENLOOPER, GOVERNOR OF COLORADO,
DENVER, CO
Governor Hickenlooper. Thank you Chairman Wyden. Senator
Udall, thank you for your kind introduction.
The truth is I'm--I refer to myself as a recovering
geologist these days.
It is true I went from one fluid to another in my business
career.
Ranking Member Murkowski, thank you again for your efforts
on behalf of energy and this country and to the rest of the
Senate Energy and Natural Resources Committee.
Thank you for allowing us this opportunity.
The 3 interconnected issues right now facing our country--
obviously the economy is undergoing a steady recovery, but we
still have high unemployment, a deficit makes investment
difficult, we're vulnerable to shocks from overseas and our
productivity increases continue to demonstrate there are a lot
of people out of work.
At the same time the Persian Gulf is more volatile than
ever, and we see our national security--40 years after our
first energy crisis, the oil is controlled by unfriendly
regimes in many cases. A national security issue that remains.
Last, climate change. We've seen some serious drought and
wildfires that remind us in Colorado of what the potential
threat is from climate change.
I'm not about to get into a discussion of how fast the
climate is changing or what the causes are, but I think these 3
issues: the economic recovery, the national security, and
climate are tough challenges, but the crux of each of them is
energy.
We recognize that domestic energy creates jobs, that less
foreign imported oil enhances our national security and that we
have a much cleaner energy that will lead to ability to protect
our environment.
The key, of course, is to thread each of these needles.
Energy independence used to be a catch phrase, right, that
people would throw around, but I think we are legitimately on
the threshold of achieving it for the first time in my
lifetime.
You know I studied geology back in the--I'm not trying to
date myself--back in the 1970s when plate tectonics were just
being begun to be believed and yet what we've seen in the last
decade is truly transformational.
In 2005, 60 percent of our oil was imported. Last year, 41
percent was imported. That trend is going to go further.
Wind and solar, some of the alternative energies, have
added diversity to our energy portfolio. Twenty years ago that
was ridiculed, and now we see it very--in a very real sense.
I think our future is more secure with energy that's
renewable, that's sustainable.
One way that that happens is by integrating, as Senator
Udall mentioned, a kind of all-of-the-above policy.
We see that having cheaper natural gas means that we're
more competitive as a country. My friend, Mr. Liveris, Liveris,
we all have that challenge. Try having a name like
Hickenlooper, Andrew, and you'll see.
But we see that chemical industries, the American
fertilizer industries, a lot of these associated industries
beginning to really take off.
Foreign investment in electricity-intensive industries also
is coming home for the first time in decades largely because of
inexpensive natural gas.
It's also worth pointing out that carbon emissions, because
of inexpensive natural gas and the conversion of older,
inefficient electrical generation plants fueled by coal, are
per capita--CO2 emissions are the lowest since
Eisenhower turned over the White House to John Kennedy.
We are, as a country,--even though we didn't ratify the
Kyoto Protocols--we are half way toward compliance, and we have
reduced our carbon emissions in the United States more than all
that other signatories to the Kyoto Protocols.
This really is game-changing.
When I was a geologist this was unheard of. We'd find a big
field, and we'd think, well, we're going to adjust how the
value of coal--the value of oil, or the value of gas was going
to be projected.
This has been a technological revolution.
We did fracking when I was a geologist. I--The first well I
sat back in 1981 was a--we did a hydraulic fracking enterprise
on that.
What's happened is we've had better technology, the
discovery of massive--these tight shale and shale oil deposits.
The real transformation here is that we could see a natural
gas supply that is legitimately a hundred years long, and we
continue as the technology continues to improve, we find more
gas at lower cost.
At the same time, this has brought exploration to the
doorstep of communities that didn't have to deal with it
before, and I think the issues around health and safety, of
increased drilling, I mean these are industrial processes as
they come close to our--closer to our schools, our homes and
neighborhoods, we really have to take full advantage of the
technology by insuring that we have the absolute strongest
safeguards that you could possibly have and that includes
regulations that capture methane emissions, that we reduce
flaring of these emissions, make sure that we don't have any, I
mean zero, fugitive methane, and that we protect our precious
groundwater.
We passed years ago, or a year ago, regulations that
required disclosure of the composition of fracking fluids so
that we could protect intellectual property but at the same
time reassure the public.
We worked with the NRDC, the Environmental Defense Fund,
Halliburton and several large service companies.
At one point in my office, I'm not sure how this happened,
but the new frack fluid is made with food additives, and
somehow we all took a swig of frack fluid-the new frack fluid,
and it was not terribly tasty, but again, I'm still alive to--
like Senator Wyden coming back from Alaska is still alive to
tell the story.
What we're trying to do is create a national model for how
do we regulate gas extraction. We want to make sure we have,
anytime we're remotely near neighborhoods, that we have green
completions of drilling sites, robust groundwater manage--
monitoring. We're going--making it mandatory for testing both
before and after wells are drilled, that we have appropriate
setbacks and that we focus on well bore integrity, make sure
that we don't have communication around that well. We're
pursuing each of these in Colorado and try to move aggressively
to implement the EPA's greenhouse emissions regulations.
Simultaneously we're engaging on the universities and doing
the most comprehensive study of air quality around some of
these large fields to really be able to give facts instead of
estimates around a lot of these issues.
But recognizing that we are creating thousands of jobs by
having these--this energy created and extracted at home, we are
increasing our national security, and we are dramatically
reducing ground--greenhouse gas emissions.
I think our focus is to make sure that we continue this
momentum that we seize upon this opportunity in such a way that
we can have a regulatory environment that is comprehensive and
rigorous, but at the same time allows us to continue these
advances.
One primary goal throughout this is to make sure that we
have sufficient public involvement in the creation of these
rules and having industry have a voice, as well, so that we are
in all ways balanced and that we can be transparent to the
level that the public can feel that they are not working that
they are not working against an unseen villain.
[The prepared statement of Governor Hickenlooper follows:]
Prepared Statement of John W. Hickenlooper, Governor, of Colorado,
Denver, CO
Mr. Chairman and members of the committee, thank you for this
opportunity to offer Colorado's perspective on energy policy, as it
relates to natural gas, the focus of this hearing.
Our economy is making a steady recovery, but we are still fragile.
Too many Americans are out of work and the worldwide competition for
jobs is a great challenge. The international situation is still
volatile, particularly in the Persian Gulf. And record-setting high
temperatures over the last decade remind us that climate change could
have profoundly negative impacts on our planet.
Economic prosperity, national security and climate: Three
generational challenges of tremendous importance.
Energy is at the crux of all these challenges.
If we get energy policy right, we'll make progress on all three.
Responsible development of natural gas--the subject of this
hearing--is fundamental to a successful energy strategy.
Natural gas has made American industry more competitive. We have
seen new investment in energy-intensive companies. American chemical
and fertilizer industries are growing because of inexpensive natural
gas. Foreign investment in electricity-intensive industries has also
been flowing into the country, as natural gas helps keep utility rates
low, even as domestic coal remains cheaper.
We are on target to be a net exporter of natural gas by 2020.
Domestic development of shale gas and oil, homegrown renewable
energy and efficiency strategies are leading us toward energy
independence. With less reliance on foreign sources, our exposure to
the impacts of global events is reduced. Our oil imports are falling--
to approximately 40 percent of our consumption, down from 60 percent as
recently as 2006. By next year, imported oil is projected to make up
just 32 percent of demand. More energy dollars will stay home, our
dependence on foreign supplies will decrease.
A revolution in shale gas has brought welcome news. Inexpensive gas
is driving down carbon emissions in the United States. Last year, the
U.S. Energy Information Agency found CO2 emissions in the first four
months of 2012 had fallen to 1992 levels. When you consider that our
population has grown by 57 million since then, it translates to per
capita carbon emissions at the lowest level since President Eisenhower
left office in 1961.
Inexpensive natural gas, its associated efficiencies, and its
limited environmental impact are leading utilities to switch from coal
to gas. David Victor, Vice-Chairman on the World Economic Forum's
Global Agenda Council on Energy Security, has written that this shift
means U.S. emissions in 2012 are projected to be approximately 450
million tons lower than otherwise. That number is double the global
impact of all the Kyoto treaty's signatories combined, including the
European Union. This month, the Environmental Protection Agency
reported that U.S. power plants in 2011 produced 4.5 percent less
CO2 than in 2010, a drop the agency attributed to the
benefits in switching from coal to gas, as well as increasing use of
renewable energy.
This emerging data is nothing short of transformative. By improving
extraction technologies and extending natural gas to new markets and
new applications--including transportation--we can not only make the
U.S. economy stronger and enhance our security and independence, but we
can take significant steps toward reducing climate-warming emissions.
This doesn't mean abandoning a strategy focused on renewable
energy; quite the opposite.
We must chart a parallel path, continuing investments in wind,
solar and other renewable sources of energy, including conservation and
efficiency. A coherent strategy for the future cannot be dependent on
one fuel source. We need a diverse energy portfolio that drives the
economy, and at the same time prepares for future contingencies.
This is the approach that President Obama has rightly championed--
an ``all-of-the-above'' strategy--one that encourages domestic oil and
gas production, continues investment in clean energy research and
technologies, and partners with industry for dramatically more
efficient automobiles. It is a forward-looking strategy that combines
American ingenuity with a commitment to sustainability.
Colorado is moving forward with our own version of an ``all-of-the-
above'' strategy, and natural gas is a significant part of our energy
mix. We are also more broadly utilizing our abundant renewable sources,
as well as working on legislation and other initiatives to mine
efficiency and conservation for all they are worth.
We believe Colorado presents a model for the nation. Our approach
is balanced. We are reaping the benefits of advanced technologies, not
just in shale gas but also in renewable energy. We are encouraging
efforts to make coal a cleaner source of energy, but while that
research continues, we will work with the resources at hand.
Colorado has a long and proud history of oil and gas development.
Our first oil well dates back to when Abraham Lincoln was president.
We rank fifth in natural gas production and tenth in oil
production. Our diverse hydrocarbon resources encompass a variety of
shale, tight sand, coal bed methane, and other formations that span the
state. This landscape has changed over the years, and has taken a
significant turn as operators combine improvements in hydraulic
fracturing and horizontal drilling to unlock reserves of oil and gas in
formations, such as the Niobrara in Colorado, historically considered
impractical for extraction.
As a former geologist, I have some experience with this technology.
We worked on so-called ``frack jobs'' when I was in the industry in the
1980s. The industry, incidentally funded by billions of federal
research dollars in the 1990's, has made great advances since that
time.
Colorado also has a history of creativity in its approach to
energy. In 2004, we became the first state in the country to launch a
renewable energy standard through a statewide voter initiative, one our
legislature has strengthened in years since to become--at 30 percent--
the second highest in the country. In 2010, we passed the landmark
Clean Air Clean Jobs Act which switches much of our electrical
generation from coal power plants to natural gas, thereby addressing
both climate and air quality, and reducing water consumption.
Natural gas and renewable sources are proving to be ideal partners,
since gas efficiently cycles on and off to pair with intermittent
resources such as wind and solar power.
We are achieving these energy goals across party lines. Gov. Mary
Fallin of Oklahoma and I are leading a bipartisan effort to promote the
use of natural gas as a transportation fuel for state vehicles. What
started with Oklahoma and Colorado a little over a year ago has now
expanded to 22 states representing every region of the country.
With a little effort we see the potential for including the federal
government and perhaps Canadian provinces and other partners to build a
market for large vehicle fleets using natural gas.
These initiatives target larger and heavy duty vehicles. Converting
from diesel power to compressed natural gas reaps the biggest benefit
in reductions of carbon, particulates and other pollutants. We are also
finding ways to expand the fueling infrastructure, so trash haulers,
delivery vehicles, buses, and trucks have more options for refueling.
Electric vehicles also hold tremendous promise, particularly for
automobile consumers in the future, and we should pursue their
development. But we do not need to pick winners and losers at the start
of the game. Let's continue to pursue a comprehensive approach and let
the market work.
The expansion of natural gas certainly brings regulatory
challenges. As development moves into more urbanized areas we must be
responsive to public concerns about the health and safety of industrial
processes near homes and schools. Working together state and local
governments can minimize hazards through effective oversight and
enforcement.
As patterns and the extent of oil and gas activities change due to
constantly evolving technologies and economic demands, our regulatory
approach has to adapt.
Mr. Chairman, to put it bluntly, natural gas has a place in making
us more secure and is addressing climate change, but we'll need to make
sure that the production side is as protective of our environment and
human health as possible.
Our goal in Colorado is to be accountable for the highest ethical
and environmental standards with a regulatory structure based on three
principals--namely, that our regulations are reasonable,
scientifically-based, and protective of health and safety.
Our aim is to reduce emissions including the capture of methane,
and with, by necessity, the strictest rules in the country to protect
air and water.
In 2008, Governor Bill Ritter secured legislative support for
restructuring the composition of Colorado's Oil and Gas Conservation
Commission, reducing industry representation and diversifying
membership. This revamped commission embarked on a sweeping 18-month
overhaul of regulations that produced new protections for the
environment. These rules have become the basis for regulatory
initiatives in other states and even other countries, the latest being
Ukraine.
A year ago, working with such diverse partners as the Environmental
Defense Fund and Halliburton, we passed regulations requiring
disclosure of chemicals in hydraulic fracturing fluid. As described in
a recent edition of The Economist these rules suggest an international
model for disclosure, protecting trade secrets and intellectual
property, while providing a basis for public accountability.
Colorado now requires mandatory water testing near drilling and
completion sites both before and after operators conduct their
activities. We are one of just three states in the country that has
rules for mandatory groundwater sampling and the only state that
requires post-drilling sampling.
This month we are also finalizing rules to reduce the impacts of
drilling near communities. These rules increase the minimum distances
between drilling sites and occupied buildings and require the most
stringent mitigation requirements in the country to ensure work occurs
with the least disturbance to nearby residents, with ``green
completions'' required within 1,000 ft. of hospitals or schools.
In partnership with our universities, we are launching a
comprehensive study of the impacts of natural gas drilling on air
quality and public health. This comes after several steps in recent
years to reduce the pollutants that originate at oil and gas
facilities, including requirements for emission-control devices to
capture the emissions that can otherwise escape prior to a pipeline
connection.
Increased communication is central to our regulatory reform. Our
Commission has two staff members dedicated exclusively to local
government outreach and other staff members have devoted significant
time working with government officials. We formed a task force to
develop protocols for local government engagement that will further
address the impacts of development.
Our new rules also include extensive notice and outreach
requirements on the part of operators, both to local government
representatives and citizens. All this has resulted in greater
collaboration between our state regulators and officials at the local
level, reinforcing what we know to be true about most difficult
problems, namely, that conversation at the front-end reduces problems
at the back-end.
In short, the natural gas revolution and growth of renewable energy
technologies, present Colorado and the country with an extraordinary
opportunity: to create jobs, to make us more secure, more energy-
independent, and to do a better job of protecting the environment by
reducing greenhouse gas emissions.
These are mission critical goals for our country.
Mr. Chairman, the history of Colorado is largely a story about
American energy. From mining to oil exploration in the last century,
and, in this century, leading a green energy revolution, Colorado has
lessons to offer the country.
Our first oil well dates back to when Abraham Lincoln was
president.
Of course, with the country torn apart by war, Mr. Lincoln faced
deeper challenges than crafting bipartisan energy policy, but his
second address to Congress has wisdom we can still draw from. He said,
``We can succeed only by concert. It is not `can any of us imagine
better?' but `can we all do better?' The dogmas of the quiet past are
inadequate to the stormy present. The occasion is piled high with
difficulty, and we must rise with the occasion. As our case is new, so
we must think anew, and act anew. We must disenthrall ourselves, and
then we shall save our country.''
We should--all of us--no matter our perspective or experience--
disenthrall ourselves from bias and ideology to find a new path
forward.
Our future depends on how well we find this path together.
We know you share this view and look forward to this morning's
hearing.
The Chairman. Governor, we are at 7 minutes, and I know the
Senators want to ask you questions.
Governor Hickenlooper. Sure.
The Chairman. Would you like to wrap up?
Governor Hickenlooper. Yes. I was at that point right there
just saying that as long as we can maintain a focus on science-
based applications and make sure we have the competing interest
at the table, I think that we'll be able to continue the
pursuit of these innovations.
The Chairman. Well said.
Mr. Liveris.
STATEMENT OF ANDREW N. LIVERIS, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, THE DOW CHEMICAL COMPANY, MIDLAND, MI
Mr. Liveris. Thank you Mr. Chairman, Senator Murkowski,
distinguished members of the committee.
Senator Stabenow, thank you for that great introduction.
I'm Andrew Liveris now and that can go on the public
record. Thank you here for inviting me here to celebrate our
democracy in the intersection of government, business, and
civil society practiced in this chamber under your leadership.
Your collective leadership is something an individual like
me, as a foreigner living in this great country, does not take
lightly.
Thank you very much for inviting us to talk about this
important conversation.
As already stated, it has the promise of tapping this vast
new natural gas resource and coming up with a better answer.
This is being called the Shale Gale.
It's afforded America a new competitive advantage,
advantages which we now are becoming quite familiar with.
But it does pose us with these challenges, and I believe
that our democracy can rise to the better answer by having
these conversations.
How much of this natural bounty should we export?
I'm here because the answer is neither simple nor just
obvious. It actually isn't either binary. It's not binary to
talk about a neither-nor proposition here. It's not binary to
talk about for or against free trade.
As you know, the Shale Gale has only fueled the increases
in natural gas production--not only done that, but it's
provided this manufacturing renaissance.
For companies like Dow, the compounds that make up natural
gas, as already stated by Senator Stabenow, are the feedstocks
for vital manufacturing processes that create value across the
entire economy.
We use them as the first indispensable ingredient for
everything that is made and consumed in this country.
So when natural gas is not sold just as an export, when
it's used instead as a building block for these manufactured
goods, it creates 8 times more value across our entire
economy--8 times.
In this way, America's natural gas bounty is more than a
simple commodity. It's a once in a generation opportunity for
America to export advanced products, not just be to use.
It's a unique opportunity to make America's economy
stronger, more balanced, more sustainable.
This is not to say that America ought to keep all of this
gas onshore'not at all.
Exports are part of America's economy. It's one of the life
bloods of America's economy and the world's economy.
The U.S. should lead in both the sale and shipment of the
raw material and the finished goods.
But the fact is if we shipped half or more of this bounty
overseas today, as some propose, it'll have severe, unintended
consequences on the manufacturing and the sector inside the
United States on prices.
Not just domestic companies, because we're going to have to
compete with whatever's left over. Not just the effect on us.
It would actually mean higher gas and electricity prices.
It'll mean actually higher transportation and utility costs
for consumers, as well as industry.
These higher and more volatile energy prices would also
cause domestic energy producers to once again to ship
operations and to ship jobs overseas to ship factories overseas
to countries where natural gas is cheaper.
There are countries where natural gas is cheaper.
America would sacrifice this once in a generation
competitive advantage because gas is not an openly traded
commodity.
It is not and therefore does not have a world price.
European and Asian natural gas prices are actually indexed
directly to oil price, which makes them up to 5 times more
expensive than in the United States.
So it's very easy to see why other Nations want our gas.
They want to lower their prices.
What's harder to see is why would we be willing to do that
at such a potentially severe cost to the American consumer and
the American industry.
Globally, we need to continue our progression to rules-
based free trade, especially for gas.
Domestically, we need to choose a more prudent,
responsible, balanced approach, an all-of-the-above approach.
This is now, in our view, a pressing issue.
As you're aware, the Natural Gas Act requires the
Department of Energy to weigh the public interest in evaluating
applications to export liquefied natural gas.
Today, they are considering 12 such applications that taken
together would permit exports equal to half of today's U.S.
production, in effect exporting our competitive advantage away
and importing the world oil price for our domestic sector.
Our view is that DOE should thoroughly examine each and
every one of these applications to see what it is on its
merits.
Regulators should consider a full array of criteria, should
weigh the impact on everything from food prices to home heating
bills to jobs and job creation.
Let me be particularly clear. We're not asking lawmakers to
ignore the interests of any stakeholder to the contrary.
We believe that everyone affected by DOE's decisions should
be part and have a voice in informing these choices.
If we make these decisions cautiously and incrementally, if
we measure the effects of our decisions and adjust our actions
accordingly, then we can achieve not just a win-win, but a
quadruple win, and believe you me, I really see a quadruple
win--really in the world of business.
Firstly, energy producers can win. Energy producers can win
like those in Alaska because they explore and export more.
Second, manufacturers win because they, in fact, access
these fuel and feedstocks at stable, not volatile prices set by
some world oil cartel.
Third, the American people win. They win because they will
see, not just see the huge spikes in utility bills and home
heating bills like we did a decade ago, but actually will see
lower costs and create more jobs for the American consumer.
Last the U.S. economy wins. The U.S. economy wins because
it'll become advantaged and competitive, better balanced,
better insulated from price shocks and volatility, more
resilient and more robust.
So the question in front of us, can we do all of this and
act in the public interest?
This year is only the 4th or 5th year of a 100-year
advantage. We have the time.
Let's take the time.
Let's get this intersection right.
Let's manage this with prudence and caution in the public
interest.
Let's do it in the interest of American workers, American
consumers, American industry, American producers.
Let's put America first. We should all share that goal.
I thank you for the opportunity to discuss it.
[The prepared statement of Mr. Liveris follows:]
Prepared Statement of Andrew N. Liveris, Chairman and Chief Executive
Officer, The Dow Chemical Company, Midland, MI
The Dow Chemical Company appreciates the opportunity to submit
these written comments to the Committee on Energy and Natural
Resources. Dow is committed to sustainable market-based approaches that
further the national interest and competitiveness of the United States.
We applaud the Committee for holding a hearing on opportunities and
challenges for natural gas. With forward-looking government policy, the
shale gas revolution presents a once-in-a-lifetime opportunity for the
country to further critical national goals like economic growth, job
creation and investment, energy security and independence.
About Dow
Dow was founded in Michigan in 1897 and is one of the world's
leading manufacturers of chemicals, plastics and advanced materials.
Dow combines the power of science and technology to passionately
innovate what is essential to human progress. Dow connects chemistry
and innovation with the principles of sustainability to help address
many of the world's most challenging problems such as the need for
clean water, renewable energy generation and conservation, and
increasing agricultural productivity. Dow's diversified industry-
leading portfolio of specialty chemical, advanced materials,
agrosciences and plastics businesses delivers a broad range of
technology-based products and solutions to customers in approximately
160 countries and in high growth sectors such as electronics, water,
energy, coatings and agriculture. More information about Dow can be
found at www.dow.com.
Dow is a major user of natural gas and natural gas liquids (NGL),
both as an energy source and as feedstock for production of our
products. Consequently, we have vast experience that can help inform
development of thoughtful, constructive policies on the availability
and consumption of natural gas. Natural gas plays a critical role in
the U.S. economy, energy policy and the global competitiveness of the
United States. In this submission, we will discuss our views on
government policies that impact natural gas and the effect of those
policies on U.S. competitiveness.
Dow uses natural gas to drive the chemical reactions necessary to
turn our feedstocks into useful products, many of which lead to net
energy savings. Dow's global hydrocarbon and energy use amounts to the
oil equivalent of 850,000 barrels per day, approximately the daily
energy use of Australia.
Notwithstanding the challenges of being an energy-intensive
manufacturing company, Dow has continually improved its energy and
environmental performance, including limiting greenhouse gas emissions,
and we are committed to continuous improvement moving forward. Our
manufacturing energy intensity, measured in British thermal units
(BTUs) per pound of product, has improved more than 40% since 1990,
saving the company more than $24 billion and 5,200 trillion BTUs. Our
2015 sustainability goals, available at www.dow.com/sustainability/,
underscore our energy, climate and other commitments.
As both a consumer and an innovator in energy efficiency and
renewable energy technologies, Dow represents a company that believes
in an ``all of the above'' energy policy. As important as the promise
of natural gas is, we cannot call upon a single fuel source to do
everything we are asking of it.
Manufacturing renaissance
Natural gas is essential for American industry, and growth in shale
gas production has been a bright spot for the U.S. economy. Natural gas
is an essential component in thousands of everyday consumer products
such as cars, appliances, paper, steel, plastic products,
pharmaceuticals, and in fertilizer for our farms, in addition to
providing heat, hot water, cooking and electric power to tens of
millions of residential consumers.
Manufacturing in the United States is undergoing a renaissance,
facilitated in substantial part by reasonable and stable natural gas
prices. For the first time in over a decade, domestic manufacturers in
multiple industries, including petrochemicals, fertilizers, glass,
aluminum and steel, are planning to invest in production facilities in
the United States. Over 100 new projects have been announced so far,
representing approximately $95 billion in new investments. According to
Boston Consulting Group, natural gas price reductions could lead to the
addition of approximately 5 million manufacturing jobs. This
manufacturing renaissance was unimaginable but a few short years ago.
Dow alone is investing about $4 billion in new U.S. facilities that
will create thousands of new American manufacturing jobs. The outlook
for affordable U.S. natural gas was a significant factor behind our
decision to invest on this scale in facilities on the U.S. Gulf Coast.
To a great extent, continuing optimism for U.S. manufacturing is
founded on the prospect of an adequate, reliable and reasonably priced
supply of natural gas.
In and of itself, manufacturing is a critical part of a growing,
diversified economy and a major job creator. Beyond that, however,
benefits from a strong manufacturing sector ripple throughout the
American economy by creating jobs and increasing investments and
spending on research and development. For example:
Each job created in the manufacturing sector leads to at
least five more jobs in the larger economy.
Each job in petrochemical manufacturing creates at least
eight more jobs in the larger economy.
Industrial manufacturing creates $8 of value in the larger
economy for every $1 of natural gas consumed. The manufacturing
sector contributes a higher value added multiplier to the
economy than any other sector or any other use of natural gas.
Manufacturing firms drive innovation by conducting two-
thirds of U.S. research and development.
For these reasons, plentiful and affordable natural gas represents
a tremendous competitive advantage for American industry. It would be
misguided to take actions that threaten this advantage.
Natural gas supply and demand in context
As with any other commodity, the supply of and demand for natural
gas determine its price, and the balance between the two is affected by
governmental policies. At the same time, U.S. manufacturers are
particularly sensitive to natural gas price fluctuations. As natural
gas prices rise, manufacturers are more likely than other sectors of
the economy to reduce their consumption.
Because of this relatively high demand elasticity, manufacturers
tend to serve as ``shock absorbers'' for the economy when natural gas
prices rise. They cut consumption of natural gas, which reduces demand
and mutes price volatility for others.
Gas price increases undermine manufacturing jobs. The United States
enjoyed relatively stable natural gas prices from the 1970s to around
2000. Between 2000 and 2009, however, U.S. industrial gas demand fell
24% as prices rose to highs of almost $14.50/MMBtu from a base of
roughly $3.50/MMBtu. Job losses in the manufacturing sector totaled
approximately 5.4 million between 2000 and 2009, and volatile natural
gas prices were a significant factor. Manufacturing's high demand
elasticity also means that governmental policies that tend to encourage
upward pressure on natural gas prices affect manufacturers more than
other sectors.
Utilizing natural gas domestically would enhance employment and
value added throughout the economy. As demonstrated in the chart
below*, the effect of deploying 5bcf/day of natural gas in the domestic
manufacturing sector would be an increase of $4.9 billion in the
national value added (GDP) and a manufacturing employment increase of
180,000 jobs, both directly and through the supply chain.
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* All charts have been retained in committee files.
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In stark contrast, exporting that same 5bcf/day of natural gas
overseas as liquefied natural gas (LNG) would lead to a GDP increase of
only $2.3 billion and an employment increase of only 22,000 jobs.
Moreover, even within the construction sector the payoff from using
natural gas domestically far exceeds the benefits of exporting LNG, as
the plant-building construction activity associated with increasing the
supply of natural gas to energy intensive, trade exposed industries is
more than four and one-half times greater than the construction
activity associated with LNG exports.
Shale gas production has created a short-term focus on expanded
supply and the effect of that supply on market clearing prices. We
believe that focus is misplaced because very few policy-making and
investment decisions have an impact over such a short time horizon.
Instead, investment and policy-making should be focused on both the
medium-and long-term outlook for natural gas.
In the medium-and long-term, domestic natural gas demand growth is
expected to be driven by several factors, including:
The policy-driven shift in electricity production from coal
to natural gas,
Increased investments by industry, which uses forty percent
of the nation's natural gas and gas-produced electricity, and
Increasing numbers of truck and fleet vehicles that use
natural gas in lieu of conventional motor fuels.
Companies in the manufacturing, transportation and utility sectors
are already making investment decisions based on today's competitive
prices and the outlook for affordable and stable natural gas into the
future. These decisions will play out over the next ten to twenty
years. Our assessments indicate that demand for U.S. natural gas may
increase by approximately 60 percent above current levels by 2035. An
important corollary question is whether supply can possibly keep up
with this new demand.
Sound policy attracts investments and creates jobs
Federal policies on environmental regulation, transportation,
electric generation, exports and taxes will have a major impact on
natural gas supply and demand, which in turn will have a decisive
effect on business investment and job creation for manufacturers. Dow
supports policies that stimulate economic growth by facilitating
adequate and reliable natural gas supplies at reasonable prices.
Congress should be circumspect about policies that could disrupt
natural gas supply and pricing, such as:
Policies that focus consumption on one fuel source or that
artificially accelerate demand ahead of supply, such as
regulations that encourage rapid replacement of coal fired
power plants with natural gas power plants.
Bans or unreasonable limitations on recovering natural gas
and oil through hydraulic fracturing.
Exporting LNG without a thorough and inclusive process for
evaluating the implications for domestic supply and demand,
costs to consumers and manufacturers, jobs and economic growth.
Advances in hydraulic fracturing have spurred shale gas supply
abundance. Hydraulic fracturing technologies have existed for decades,
but recent innovation has made it possible to more economically recover
natural gas from shale deposits. While these advances have expanded the
supply of natural gas, regulatory authorities at the federal and state
levels are scrutinizing the environment effects of this production
technology. Dow believes that hydraulic fracturing can be done in a
safe and environmentally responsible way. But overly restrictive
environmental regulations or moratoria on hydraulic fracturing could
greatly reduce future supplies of natural gas, which would have a
dramatic impact on the manufacturing sector. A governmental policy that
incentivizes use and discourages production is a recipe for higher
prices.
Likewise, federal and state regulation of electricity generation
could affect demand for natural gas. In the power generation sector, a
transformation is underway as utilities and merchant generators switch
from predominantly older coal-fired power plants to newer, more
efficient natural gas-fired generation. The low price of natural gas is
driving some of these changes. Because natural gas power plants emit
fewer greenhouse gases than do coal plants, however, several
environmental policies, both enacted and proposed, would also encourage
fuel switching.
Over the last few years, Congress has considered legislation that
would establish a clean energy standard for domestic power generation
or that would tax carbon emissions. Such a standard would affect
resource allocations and would credit sources of generation that are
cleaner than coal. Under some policies, natural gas-fired generation
would qualify for this treatment. We urge caution in considering
policies that encourage fuel switching between natural gas and coal:
electricity producers are already choosing to add gas-fired generation
without these additional regulations. Unlike power generation, which
can rely on other sources such as nuclear, hydro, wind, solar, biomass,
demand response or efficiency measures to meet capacity requirements,
homeowners, farmers and the industrial sector do not always have
economic alternatives to natural gas.
EPA rulemakings have increased the cost of owning and operating
coal-fired power plants. Each of these policies will have the effect of
increasing demand for electric generation from natural gas-fired power
plants, which will put upward pressure on natural gas prices. Such
policies should be designed to avoid precipitously tipping the supply/
demand balance in a way that causes volatility in natural gas prices.
Tax policy also affects supply of and demand for natural gas. For
example, as part of recent negotiations, some lawmakers have also
proposed limits on certain tax incentives that encourage oil and gas
exploration and production. Tax policymaking should account for the
potential impact of policies on the availability and affordability of
natural gas.
As these examples show, government policies may profoundly impact
natural gas supply and demand, and thus, the manufacturing sector. At
Dow, we understand that forward-looking, thoughtful public policy is a
necessary part of addressing the challenges that confront the United
States today. At the same time, these policies should also focus on
renewing and sustaining our newfound American manufacturing advantage,
which we believe is critical to ensuring continued economic and job
growth in the United States and overall U.S. competitiveness.
Export licensing
Over 70 years ago, Congress recognized that the import and export
of natural gas, a finite natural resource, can have critical
implications for U.S. prosperity. In the Natural Gas Act, Congress
charged the executive branch with regulating the import and export of
natural gas in accordance with the public interest.
The Department of Energy (DOE) has extensive experience evaluating
import applications, but it has had limited experience with export
applications. Perhaps not surprisingly, there are no clearly
established criteria for DOE to apply in determining the public
interest with regard to natural gas exporting.
Dow supports expanded exports and trade. However, we also believe
it is crucial that DOE have the information and analysis necessary to
properly apply the Natural Gas Act requirement that exports be
consistent with the public interest. We applaud DOE's recent
acknowledgement that an economic study that it commissioned is but one
data point in the broad array of considerations that are relevant for a
public interest determination. In short, Dow supports an approach to
such determinations by DOE that is based on objective criteria and
metrics, established through a public process and applied on an
incremental, case-by-case basis in a consistent and balanced manner.
Today, DOE is considering 16 applications to export LNG. Since the
proposed importing countries do not have a particular type of free
trade agreement (FTA) with the United States, these applications are
not covered by the statute's presumption that an FTA represents a
determination that the application meets the public interest test.
After approving one such application, DOE has temporarily suspended the
processing of ``non-FTA'' LNG export applications. Implicitly
recognizing that more is at stake than can be resolved through its
traditional approach to processing export applications, DOE
commissioned a report from a private firm to evaluate the macroeconomic
effects of higher LNG exports.
As detailed in Dow's January 24 submission to DOE\1\, this
consultant report is fundamentally flawed and underestimates the
potential harmful effects of sharply higher LNG exports. More broadly,
though, commissioning the report should be the first step in developing
policies that will enable DOE to administer appropriate public interest
determinations for LNG export applications. No economic study can
account for the full profile of U.S. values that should inform a
determination of the public interest with regard to natural gas
exports.
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\1\ Dow's submission is available at http://www.fossil.energy.gov/
programs/gasregulation/authorizations/export study/peter molinario em01
24 13.pdf.
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The outstanding authorization requests present what is essentially
a new challenge. In the modern era, the U.S. government has not faced
the need to determine the public interest in connection with requests
to authorize exports of large volumes of natural gas. This Committee
should encourage DOE to continue its effort to improve the process for
evaluating LNG export applications by providing an opportunity for all
affected constituencies and the public at large to comment on how best
to assess the public interest as it pertains to exports of natural gas.
Newly discovered sources of natural gas present a great opportunity
for the United States. At the same time, natural gas remains a finite
natural resource with important implications for U.S. energy security,
energy independence and the environment. Exports can have supply and
price effects that have major impacts throughout the country. The
economic impact of LNG exports is also likely to vary by geographic
region and by business center. Consequently, public interest
determinations should be thorough enough to evaluate nation-wide
implications of LNG exports as well as localized effects.
Unchecked LNG export licensing can cause demand shocks, and the
resulting price volatility can have substantial adverse impacts on U.S.
manufacturing and competitiveness. In the recent past, the price of
natural gas was very high and volatile until the advent of substantial
shale gas production. Gas supplies and demand are inherently difficult
to predict accurately. Thus, Dow urges a cautious, considered,
comprehensive and deliberate approach to assessing the public interest.
Currently, DOE regulations provide for the adjudication of LNG
export applications on a case-by-case basis in proceedings that depend
on the parties to raise issues relevant to a public interest
determination and to support their positions with persuasive evidence.
DOE interprets the Natural Gas Act's public interest standard as
creating a rebuttable presumption that a proposed export of natural gas
is in the public interest. This means that DOE is to approve an
application unless those who oppose the application can overcome this
presumption.
In its principal order to date authorizing exports of LNG to non-
FTA countries, DOE identified certain topics as being relevant to its
evaluation of the impact of LNG exports on the public interest:
the domestic need for the natural gas proposed to be
exported,
whether proposed exports threaten the security of domestic
natural gas supplies, and
any other issue DOE deems to be important, including whether
the export arrangement is consistent with DOE's policy of
promoting competition in the marketplace by allowing commercial
parties to freely negotiate their own trade arrangements.\2\
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\2\ We are encouraged that the Deputy Secretary of Energy recently
acknowledged to the Chairman of this Committee that a variety of other
topics merit evaluation in connection with LNG export application
public interest determinations.
The topics that DOE has identified for evaluating the public
interest are too narrow and vague to capture all of the critical
national, regional and local issues at stake with LNG exports or to
offer any useful guidance. In response to the economic study it
commissioned, DOE has received more than 370 submissions from a broad
array of stakeholders covering an equally broad array of topics. The
sheer number of submitted comments reflects the depth of interest
regarding this issue. Unfortunately, the current process provides no
assurance that DOE will consider all aspects of the public interest in
any given proceeding. This is inevitable for an administrative process
that depends on arguments and evidence submitted by the parties to a
specific export application process. These parties are representing
their specific interests, and may not adequately represent the totality
of the public interest.
A timely DOE rulemaking process to formulate criteria for
determining the public interest as it relates to LNG exports could
ameliorate some of the shortcomings of the current process. All of the
major constituencies affected by LNG exports should have an opportunity
to be heard, which could enable DOE to obtain much broader public input
and do so efficiently in a single forum. This would increase the
likelihood that all relevant considerations will be identified and that
cumulative and national effects will be addressed as well as regional
effects. The result of such a rulemaking process-establishment of
uniform and actionable criteria with measurable metrics-would
facilitate balanced, comprehensive consideration of the public interest
by DOE, give parties in individual proceedings advance notice of many
of the most relevant considerations, and reduce the risk of
inconsistent adjudications across applications. DOE would then apply
these criteria and metrics incrementally over time in individual
application proceedings, which would assure fairness and uniformity,
while allowing DOE to consider changes in circumstances from one
application to the next.
More importantly, DOE could adopt a mechanism to balance, in the
aggregate, exports and U.S. interests that inform the public interest.
A new rule of this kind should generally ensure that DOE is presented
with adequate and accurate evidentiary records in each licensing
proceeding.
While criteria for determining the public interest should be
developed as part of the rulemaking described above, we believe the
list below provides a good starting point for identifying specific,
concrete and forward-looking criteria that DOE should evaluate in
connection with LNG export applications:
Domestic manufacturing--How will exports impact natural gas
prices and the supply/demand balance? Will natural gas supply
be reduced? Will there be less feedstock for announced
investment projects? Will the jobs created by increased exports
exceed jobs lost by the manufacturing industry? Will additional
exports displace U.S. consumption?
U.S. consumers--Will exports reduce the supply of natural
gas available for utilities or affect consumer prices or energy
costs? Will utilities decrease fuel switching to natural gas?
Energy security--Will exports reduce the volume of natural
gas available for domestic use or increase the need to rely on
imported petroleum?
Employment--How many new jobs will be created or existing
jobs impacted? Are employment gains in the oil and gas sector
offset by job losses in other areas of the economy affected by
relatively higher natural gas prices?
International trade--Will exports improve the U.S. balance
of trade payments sufficiently to offset falling exports in
other value-adding sectors of the economy? As to proposed
exports to FTA countries, are the exports destined for
consumption in the FTA country or will there be transshipment
of natural gas to non-FTA countries? How can export
applications be disposed of in a manner consistent with U.S.
trade obligations?
Environmental--What would the proposed exports'
environmental impact be?
Strategic interests--Will the exports support a strategic
American ally in a meaningful way and consistent with stated
policy priorities? Do proposed importing countries accord the
United States reciprocal favorable international trade
treatment? What are the implications for any current or
proposed FTA negotiations?
Price and volatility--How is the LNG contract being priced,
and is it linked to oil in some manner? What is the expected
short and long term impact on natural gas and electricity price
volatility?
Other regulatory impacts--What is the potential impact of
other regulatory decisions on natural gas demand or supply and
what is the interplay between those impacts and exports of
natural gas?
DOE should apply criteria that result from this rulemaking to
applications on a case-by-case basis and in an incremental fashion.
This would entail evaluating whether approving each individual
application is in the public interest, and whether the incremental
impact of approving that application, in light of DOE's prior
approvals, would be consistent with the public interest. Again, the
last ten years have seen great fluctuations in domestic gas prices, and
circumstances can change as drilling techniques are improved, sources
of consumption are expanded or the condition of the economy evolves.
Forward thinking public policy can spur American industry
At Dow, we are implementing a comprehensive plan to take advantage
of the structural change that has occurred in the natural gas market, a
market that we believe is working. Indeed, we have announced plans to
invest in American plants based on our belief that natural gas will
remain affordable for American industry and consumers. We are not alone
in our desire to expand our American footprint and create thousands of
new American manufacturing jobs.
Forward-thinking policy is essential for maintaining this momentum.
Dow wishes to support U.S. officials at all levels of government to
realize a shared vision of affordable natural gas continuing to
revitalize American manufacturing and enhancing U.S. competitiveness.
We are in year four or five of a 100 year energy advantage, and a
thoughtful, prudent approach to policy-making can ensure that we can
leverage the competitive advantage to the benefit of all Americans. The
country deserves no less.
We appreciate the opportunity to submit this statement. For more
information on Dow and our energy plans visit www.dow.com/energy/
perspectives.
The Chairman. Very good. America first-sums it up.
Mr. Eisenberg, welcome.
STATEMENT OF ROSS EISENBERG, VICE PRESIDENT, ENERGY AND
RESOURCES POLICY, NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Eisenberg. Thank you Chairman Wyden. Good morning. Good
morning Chairman Wyden, Ranking Member Murkowski, and members
of this committee. My name is Ross Eisenberg. I'm vice
president of Energy and Resources Policy for the National
Association of Manufacturers.
The NAM is the Nation's largest industrial trade
association, and we represent nearly 12,000 small, medium, and
large manufacturers in nearly every industrial sector and in
all 50 States. Now manufacturers are major energy consumers. We
use about 1/3 of the energy consumed in the United States. So
for manufacturers, natural gas is a critical component of an
all-of-the-above energy strategy that embraces all forms of
domestic energy production, including oil, gas, coal, nuclear,
energy efficiency, alternative fuels, and renewable energy
sources.
Thirteen years ago, or sorry, 13 months ago,
PricewaterhouseCoopers, with support from the NAM, released a
report called Shale Gas, a Manufac-Renaissance in U.S.
Manufacturing, and that report found that full-scale and robust
development of U.S. shale gas plays could lead to 1 million new
manufacturing jobs by the year 2025. Now that's just
manufacturing jobs by 2025. In addition, lower feedstock and
energy costs could help manufacturers reduce manufacturing gas
expenses by as much as $11.6 billion annually in that same
timeframe. PWC's predictions are very quickly becoming a
reality. Some are calling it the reindustrialization of
America. Almost weekly, we're seeing companies announce new
ventures and facilities to manufacture iron, steel, fertilizer,
chemicals, plastics, acrylic rosins, diesel fuel, and a wide
range of other energy-intensive products.
There's really no better example of the impact that natural
gas is having than the announcement last year by a Canadian
manufacturer that it plans to actually take apart a working
methanol plant in Chile and move it to Senator Landrieu's State
of Louisiana.
The natural gas boom has provided major opportunities to
manufacturers across the supply chain. Manufacturers design and
construct the drilling facilities, supply machinery and
materials for hydraulic fracturing and well completion, and
they provide needed infrastructure like pipelines, compression
stations, storage facilities, and processing facilities. All of
this new activity will require roads and bridges which, in
turn, require concrete, brick, gravel, and steel. Drilling
sites will need vehicles, fuel, and significant water supplies,
which will need to be supplied, transported, and treated, all
by manufacturers.
Downstream, the possibilities from chemicals to windows to
toys to electricity are truly endless.
But let's not kid ourselves here. None of this is going to
happen if we can't get the natural gas out of the ground. We've
got plenty of natural gas, and we believe the free market can
generally resolve any disputes over how the gas should be used.
But if the Federal Government takes an overly prescriptive
or reactive approach to permitting, to regulation, or to
exports, than our natural gas field manufacturing renaissance
will be over quicker than it began.
That is the NAM's message to the committee today. If we
truly want to create 1 million new manufacturing jobs by 2025,
we should be encouraging the responsible development of natural
gas, balanced by reasonable State-based regulation, a
manageable permitting process, and a free market approach to
potential exports.
If that happens, we can all be winners.
States have long been the primary regulators of hydraulic
fracturing, and the NAM believes that it should stay that way.
Governor Hickenlooper's testimony today shows that State
governments are up to the challenge. Where there's a perceived
efficiency in any one State's regulatory mechanisms, the
Federal Government should work with the State to fill in those
gaps rather than applying a one-size-fits-all Federal rule on
States like Colorado where really no deficiencies exist.
The NAM was founded in 1895 on principles of free trade.
With respect to LNG exports, the NAM fundamentally supports
free trade and open markets and opposes bans or similar market
destroying barriers to exports of natural gas or any other
commodity.
The NAM is not calling for policies that favor LNG exports
over the use of natural gas domestically nor are we calling for
the opposite. What we're calling for is for the free market to
be allowed to work.
The NAM encourages the cost effective use of natural gas to
grow American manufacturing and believes in a natural gas
policy that is open--a process that is open, transparent, and
objective, and we urge policymakers to rely on the best quality
of information regarding the impact of LNG exports on economic,
environmental, and national security interests.
Finally, the long and complex and often unmanageable
permitting process remains a major obstacle, if not the major
obstacle, to full and robust development of our Nation's energy
resources. For instance, the average time to complete an
environmental impact statement, under the National
Environmental Policy Act, takes an average of 3.4 years and
that gets longer by 37 days with each passing year. The
developer can then be sued for 6 years after a final
determination is made.
Manufacturers really must be able to depend on a
predictable, reliable, and efficient permitting process. The
NAM believes strong actions must be taken to streamline the
permitting process for energy projects before it is too late.
To conclude, with the right energy policies in place,
manufacturers can experience a true resurgence. Robust
development of our Nation's vast natural resources--natural gas
resources will help drive domestic manufacturing as a critical
component of a true all-of-the-above energy strategy.
The NAM stands ready to support the committee's efforts to
promote natural gas development and the manufacturing jobs that
it will provide.
Thank you very much for the privilege of testifying today.
I look forward to any questions.
[The prepared statement of Mr. Eisenberg follows:]
Prepared Statement of Ross Eisenberg, Vice President, Energy and
Resources Policy, National Association of Manufacturers
Good morning, Chairman Wyden, Ranking Member Murkowski and members
of the Senate Committee on Energy and Natural Resources. My name is
Ross Eisenberg, and I am vice president of energy and resources policy
at the National Association of Manufacturers (NAM). I am pleased to
share the NAM's views on the importance of America's natural gas
resources and the vital role they can play for manufacturing, jobs and
the economy.
The NAM is the nation's largest industrial trade association,
representing nearly 12,000 small, medium and large manufacturers in
every industrial sector and in all 50 states. Manufacturers are major
energy consumers, using one-third of the energy consumed in the United
States. For manufacturers, natural gas is a critical component of an
``all-of-the-above'' energy strategy that embraces all forms of
domestic energy production, including oil, gas, coal, nuclear, energy
efficiency, alternative fuels and renewable energy sources.
The United States has a mix of energy resources and innovative
technologies unmatched by any other nation in the world. The United
States is the ``Saudi Arabia of coal'' and has for years relied on its
dominant coal reserves for baseload power generation; more than 100
nuclear power plants cleanly and efficiently produce a substantial
portion of the nation's electricity; renewable sources are growing
quickly and diversifying the nation's energy portfolio; and advances in
energy efficiency continue to cut manufacturers' energy costs. Most
recently, technological breakthroughs have made vast domestic deposits
of oil and gas cheaply and easily accessible, offshore and onshore.
What was once a potential weakness has become a major strength for
manufacturers.
Natural Gas--Fueling Growth in the Manufacturing Sector
The natural gas boom has provided major opportunities for
manufacturers across the supply chain. Upstream, manufacturers design
and construct drilling facilities; supply machinery and materials, such
as cement and steel for hydraulic fracturing and well completion; and
perform a wide range of support activities and services for the natural
gas extraction process. Midstream, manufacturers provide needed
infrastructure, such as pipelines, compressor stations, storage
facilities and processing facilities. And downstream, the
possibilities-from chemicals to windows to toys to electricity-are
truly endless.
The natural gas manufacturing supply chain extends even further.
All of this new activity will require roads and bridges, which, in
turn, requires concrete, brick, gravel and steel. Drilling sites will
need vehicles, fuel and significant water supplies-which will need to
be supplied, transported and treated. Site employees will need
uniforms, and those uniforms will need to be cleaned and maintained.
The list goes on and on.
As more natural gas is recovered, domestic manufacturers gain a
substantial cost benefit relative to their international competitors.
Thanks to newfound supply and price stability, manufacturers in the
United States enjoy natural gas prices considerably lower than in
China, India, Brazil, Japan and the United Kingdom.\1\ This is a very
important point, since the NAM estimates that due to domestic tax, tort
and regulatory policies, it is 20 percent more expensive to manufacture
in the United States than in any of its nine largest trading partners-
and that excludes the cost of labor. Manufacturers in the United States
enjoy a slight competitive advantage regarding energy, and with the
right policies, this advantage can grow.
---------------------------------------------------------------------------
\1\ ``Shale Gas Will Fuel a U.S. Manufacturing Boom,'' MIT
Technology Review, Jan. 9, 2013, available at http://
www.technologyreview.com/news/509291/shale-gas-will-fuel-a-us-
manufacturing-boom/.
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In December 2011, PricewaterhouseCoopers (PwC), with support from
the NAM, released the report Shale Gas: A renaissance in US
manufacturing?\2\ PwC's study examined what a growing shale gas
industry could truly mean for manufacturing job creation in the United
States. The results are impressive: PwC found that full-scale and
robust development of U.S. shale gas plays could result in 1 million
new manufacturing jobs by 2025. In addition, lower feedstock and energy
costs could help manufacturers in the United States reduce natural gas
expenses by as much as $11.6 billion annually in that same time frame.
Chemical manufacturers had been the largest beneficiaries of this new
abundance of natural gas, owing primarily to less expensive ethane, a
natural gas liquid derived from shale gas. PwC identified Bayer
Corporation, Chevron Phillips Chemical Company, Formosa Plastics
Corporation and Westlake Chemical Corporation as companies taking early
advantage of the shale gas boom.
---------------------------------------------------------------------------
\2\ Available at http://www.pwc.com/us/en/industrial-products/
publications/shale-gas.jhtml.
---------------------------------------------------------------------------
PwC found that the benefits of shale gas for manufacturers were not
limited to the major natural gas users; the benefits extended
throughout the supply chain. According to PwC, companies that sell
goods, such as metal tubular products and drilling and power equipment,
were likely to experience near-term growth in sales as domestic natural
gas production rates increased. PwC identified projects by U.S. Steel
and Vallourec Ohio intended to supply steel pipe and related materials
for shale gas extraction activities. These higher production levels
would also yield benefits higher in the value chain, such as
manufacturers of components used in drilling equipment. Overall, PwC
found that 17 chemical, metal and industrial manufacturers commented in
SEC filings in 2011 that shale gas development drove demands for their
products, compared to none in 2008.
In the 13 months that have passed since PwC released its study, the
impact of new supplies of natural gas on manufacturing has become even
more pronounced. Nucor embarked on plans to develop a $750 million iron
facility in Louisiana and announced a $3 billion joint venture with
Canadian oil and gas producer Encana for 20 years of access to its
natural gas wells.\3\ Mitsubishi announced plans to build an acrylic-
resin processing plant adjacent to a newly constructed ethylene
plant.\4\ Fertilizer manufacturer CF Industries announced that it will
spend $2.1 billion to expand its fertilizer manufacturing
operations.\5\ Formosa Plastics Corporation increased the size of its
Texas ethylene plant included in the 2011 PwC\6\ report. Even foreign
manufacturers are now seeking to build operations in the United States.
Austrian steel manufacturer Voestalpine AG announced in late 2012 it
plans to build a $661 million steel factory in the United States.\7\
South African energy company Sasol announced plans to construct
America's first commercial gas-to-liquids plant in Louisiana, an $11
billion-$14 billion venture.\8\ Egyptian fertilizer manufacturer
Orascom Construction Industries plans to build a $1.4 billion nitrogen
fertilizer production plant in Wever, Iowa.\9\ Canadian methanol
producer Methanex announced in 2012 that it will dismantle a methanol
plant in Chile and move it to Ascension Parish, Louisiana.\10\
BlueScope Steel Limited, an Australian company, is building a steel
factory in Ohio in partnership with U.S. manufacturer Cargill.\11\ And
Indian manufacturer Essar Global Limited is planning a steel facility
for Minnesota.\12\
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\3\ ``Encana, Nucor report joint Piceance basin gas drilling
program,'' Oil & Gas Journal, Nov. 9, 2012, available at http://
www.ogj.com/articles/2012/11/encana-nucor-report-joint-piceance-basin-
gas-drilling-program.html.
\4\ ``Mitsubishi Chemical to build $710 million U.S. plant, eyes
shale gas cost savings,'' Reuters, Dec. 23, 2012, available at http://
www.reuters.com/article/2012/12/23japan-usa-mitsubishichemical-
idUSL4N09X05Z20121223.
\5\ ``The new boom: Shale gas fueling an American industrial
revival,'' The Washington Post, Nov. 14, 2012, available at http://
articles.washingtonpost.com/2012-11-14/business/35506130_1_natural-gas-
shale-cf-industries.
\6\ ``Formosa Plastics U.S.A. Will Invest US$1.7 B. in Expansion,''
CENS, Dec. 14, 2012, available at http://cens.com/cens/html/en/news/
news_inner_42344.html.
\7\ ``Shale-Gas Revolution Spurs Wave of New U.S. Steel Plants,''
Bloomberg, Dec. 31, 2012, available at http://www.bloomberg.com/news/
2012-12-31/shale-gas-revolution-spurs-wave-of-new-u-s-steel-plants-
energy.html.
\8\ ``Sasol Betting Big on Gas-to-Liquid Plant in U.S.,'' The New
York Times, Dec. 17, 2012, available at http://www.nytimes.com/2012/12/
18/business/energy-environment/sasol-betting-big-on-gas-to-liquid-
plant-in-us.html?pagewanted+all&_r=0.
\9\ ``Egyptian Bets $1,4 Billion on Natural Gas--In Iowa,'' The
Wall Street Journal, Sept. 5, 2012, available at http://online.wsj.com/
article/SB10000872396390443589304577633932086598096.html.
\10\ ``The new boom: Shale gas fueling an American industrial
revival,'' The Washington Post, Nov. 14, 2012, available at http://
articles.washingtonpost.com/2012-11-14/business/35506130_1_natural-gas-
shale-cf-industries.
\11\ ``Shale Gas Revolution Spurs Wave of New U.S. Steel Plants,''
Bloomberg, Dec. 31, 2012, available at http://www.bloomberg.com/news/
2012-12-31/shale-gas-revolution-spurs-wave-of-new-u-s-steel-plants-
energy.html.
\12\ Id.
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Last June, a report by independent global energy research firm IHS
CERA predicted that the share of U.S. natural gas produced from
unconventional sources will reach 67 percent by 2015 and 79 percent by
2035\13\. This would lead to $3.2 trillion in investments to develop
the resource and 1.4 million new jobs (on top of the 1 million already
created by the industry). These economic benefits are not limited to
gas-producing states; non-gas-producing states contributed 18 percent
of the total U.S. employment generated by unconventional gas activity
in 2010. IHS CERA concluded that increased unconventional gas activity
will contribute to capital investment, job opportunities, economic
growth, government revenue and lower prices across the country.
---------------------------------------------------------------------------
\13\ Fullenbaum, Richard, and John Larson, The Economic and
Employment contributions of Unconventional Gas Development in State
Economies, June 2012, available at http://www.anga.us/media/content/
F7D4500D-DD3A-1073-DA3480BE3CA41595/files/
state_unconv_gas_economic_contribution.pdf._
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Opportunities and Challenges for Natural Gas Development
This newfound natural gas renaissance has brought with it increased
scrutiny from our nation's capital. With increased scrutiny comes a
host of policy-related issues, from debates over how best to use this
valuable new resource to the need for federal oversight and regulation.
1. Federal Regulation
Whether and how the federal government plans to regulate shale gas
continues to pose a major concern for manufacturers. By early 2012, no
fewer than 12 federal agencies were considering some form of oversight
or regulation of the practice of hydraulic fracturing. The NAM brought
this issue to the White House, and in response, President Obama issued
an Executive Order in April 2012 requiring federal agencies to better
communicate and coordinate with one another.\14\ The pace of federal
oversight appears to have slowed, but there are still a number of
regulations under development. There is no easier way to limit the job-
creating potential of natural gas to manufacturers than to lump so many
costly, time-consuming regulations onto the drilling process that the
gas never gets out of the ground.
---------------------------------------------------------------------------
\14\ ``Executive Order--Supporting Safe and Responsible Development
of Unconventional Domestic Natural Gas Resources,'' Apr. 13, 2012.
---------------------------------------------------------------------------
One regulation that greatly concerns manufacturers is the pending
disclosure and well stimulation rule under development at the Bureau of
Land Management (BLM). The BLM performed a cost-benefit analysis for
the proposed regulation, and under virtually every scenario modeled,
the rule's costs outweighed its benefits. The BLM recently announced
that it has revised the rule and will issue a new proposal for public
comment. The NAM is cautiously optimistic that the BLM will fix the
rule, which an economic analysis by John Dunham & Associates for the
Western Energy Alliance found would cost $1.615 billion for new and
existing wells in the 13 western states that contain the preponderance
of the nation's federal and Indian lands. The regulation would impact
an estimated 5,058 wells waiting to be permitted or drilled. The study
found that Wyoming would see the biggest cost impact from the proposed
rule, with an average $771.7 million in costs, followed by New Mexico
with $169.0 million, Utah with $155.2 million and Colorado with $142.7
million.
States have long been the primary regulators of hydraulic
fracturing. The NAM believes states should continue to be the main
regulators of this industry and is concerned that reactive federal
regulation could harm any potential gains resulting from increased
exploration of shale oil and gas. Where there is a perceived deficiency
in any one state's regulatory mechanisms, the federal government should
work with the state to fill in the gaps rather than imposing a one-
size-fits-all federal rule on states where no deficiencies exist. In
fact, there are existing programs in place to ensure that state
regulation is sufficient. The State Review of Oil & Natural Gas
Environmental Regulations (STRONGER) program reviews states' oil and
gas regulatory programs and recommends improvements. The Interstate Oil
and Gas Compact Commission also supports the states with model
regulations. There is no legitimate reason why the continued operation
of these programs will not be sufficient to ensure effective state
regulation that meets the federal government's goals.
2. Liquefied Natural Gas (LNG) Exports
The NAM was founded in 1895 on principles of free trade. At the
time, the United States was in the midst of a deep recession, and many
of the nation's manufacturers saw a strong need to export their
products. This commitment to free trade and open markets continues to
be embedded in the NAM's policies today. Exports have been and continue
to be a critical source of growth and opportunity for manufacturers
throughout the United States. The 40 percent increase in goods exports
that the United States has enjoyed between 2009 and 2011 has enabled
many manufacturers to sustain and, in some cases, even grow employment
during very difficult economic times. Export growth is vital not just
for those businesses that directly export, but for the many suppliers
of inputs and services to those businesses throughout every state.
Natural gas liquefaction is a manufacturing process. To convert
natural gas to LNG, the gas is purified by removing any condensates,
such as water, oil and mud, as well as other gases, such as carbon
dioxide and hydrogen sulfide and trace amounts of mercury. The gas is
then supercooled in several stages until it is liquefied and ready for
shipping.
The Department of Energy (DOE) has received applications for 15
proposed terminals seeking to export LNG to non-free trade agreement
(FTA) countries. While most of these proposed terminals have received
approval to export to FTA countries, only one terminal in the United
States-Sabine Pass in Louisiana-has been permitted to export to non-FTA
countries. Under the Natural Gas Act of 1938, anyone seeking to export
natural gas must obtain prior authorization to do so from the DOE. The
Act instructs the DOE to issue an order allowing natural gas exports
unless, after opportunity for hearing, it finds that the proposed
exports would not be consistent with public interests. Exports to FTA
countries are deemed to be in the public interest and thus enjoy an
expedited permitting process. Even for exports to non-FTA countries,
the public interest of LNG exports is presumed, but this presumption is
rebuttable on a successful showing that the exports at issue are
contrary to the economic, environmental and/or energy security
interests\15\ of the United States. The public interest finding is
specific to and required for each individual export terminal seeking
exports to non-FTA countries; thus, each of the 15 pending applicants
will need to successfully navigate the public interest determination
process.
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\15\ Economic, environmental and energy security interests are the
factors the DOE traditionally considers, although it is within its
authority to consider other factors in making the public interest
determination.
---------------------------------------------------------------------------
The NAM believes that LNG exports should be governed by principles
of free trade and open markets. The NAM also opposes bans or similar
market-distorting barriers to exports of LNG or any other commodity.
Natural gas is vitally important to manufacturers and job creation,
as well as achieving affordable energy in this country. We are
committed to increasing our vast domestic onshore and offshore energy
resources with balanced and sensible regulation. Regarding LNG and
natural gas, the NAM's official policy positions were established in
March 2012 by the NAM Board of Directors, with full participation in
the drafting by both energy producers and users. They are as follows:
Liquefied Natural Gas
The dramatic increase in the domestic natural gas
resource base has reduced the likelihood of the need
for significant Liquefied Natural Gas (LNG) imports.
Some now believe the U.S. could eventually become a net
exporter of natural gas. An adequate supply of natural
gas is needed to meet the growing demand of the U.S.
manufacturing sector in a recovering economy. The NAM
strongly supports federal and state policies to
accommodate growth in domestic natural gas production.
We further believe abundant domestic natural gas
resources can fuel a renaissance in U.S. manufacturing.
The NAM fundamentally supports free trade and open
markets. We support a natural gas policy process that
is open, transparent and objective.
Natural Gas and Manufacturing
Industry relies on natural gas for much of its energy
needs and as a raw material. The NAM believes policies
that encourage the cost-effective use of natural gas to
grow American manufacturing should be encouraged.
The U.S. economy relies on natural gas for much of
its energy needs and as a feedstock for commercial
products. Natural gas is and will remain an important
manufacturing commodity because of its scalability,
affordability, versatility and efficiency. The NAM
supports policies at the federal and state level that
facilitate the responsible and expeditious development
of natural gas resources, allowing these benefits to
contribute to America's economic recovery and to accrue
for energy consumers.
The principles above remain the policy of the NAM on LNG and
natural gas.
As clearly indicated by the policy language above, the NAM is not
calling for policies that favor LNG exports over the use of natural gas
domestically. Nor are we calling for policies that would engineer the
opposite. Our policy statements highlight the important role domestic
natural gas resources can have for the manufacturing economy. Natural
gas truly does have the potential to be a game-changer that could fuel
major investments across the manufacturing supply chain, supporting
millions of jobs and ensuring that the United States remains the
world's top manufacturing economy. As our policy makes clear, we
believe ``abundant domestic natural gas resources can fuel a
renaissance in U.S. manufacturing,'' and ``encourage the cost-effective
use of natural gas to grow American manufacturing.'' We believe in ``a
natural gas policy process that is open, transparent and objective.''
With that in mind, the NAM urges the DOE and policymakers to rely on
the best-quality information regarding the impact of LNG exports on
economic, environmental and energy security interests.
The NAM also opposes bans on the export of LNG. From the
President's first State of the Union address, doubling U.S. exports has
been a top U.S. goal. From its origins, the United States has been
built on exports. In fact, Article I, Section 9 of the U.S.
Constitution provides quite explicitly that ``[n]o Tax or duty shall be
laid on Articles exported from any State,'' evincing a strong
disinclination to limit exports of any product.
With 95 percent of the world's consumers living outside of the
United States, export bans on any product, including LNG, can be
expected to have far-reaching negative effects, including on domestic
economic opportunities, employment and ultimately economic growth. The
NAM's policies on international trade, established by the NAM Board of
Directors in March 2012, form the basis for this position:
International Trade
The objective of the NAM's international trade policy
is to strengthen manufacturing in America and improve
the competitiveness of American manufacturing in the
worldwide economy. Fairly conducted trade provides
opportunities for growth and expansion of manufacturing
in America, increases the range of goods and services
available to consumers, enhances market-based
production globally and contributes to closer
understanding and cooperation among nations. The NAM
believes this objective can best be achieved by
limiting costs and other impediments imposed on U.S.
manufacturers and by pursuing and utilizing a rules-
based international trading system that enhances the
role of free market forces while seeking to eliminate
market-distorting governmental intervention.
WTO Dispute Settlement
The NAM believes all WTO member economies, including
the United States, should comply with WTO agreements,
including the Dispute Settlement Understanding.
The United States and its G-20 partners have repeatedly expressed
their deep concern about rising protectionism, including, in
particular, export restrictions, which began to proliferate globally as
the world economy declined in 2008. Export restrictions are viewed as
one of the fastest-growing forms of distortion in the international
trading system. The Organisation for Economic Co-operation and
Development (OECD) has been keeping an inventory on export restrictions
and has published analytical work examining the economic concerns with
imposing such restrictions.\16\
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\16\ The Economic Impact of Export Restrictions on Raw Materials,
OECD (Nov. 2010)
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The United States has been in the forefront of challenging other
countries' export prohibitions, starting with China's restrictions on
raw material exports and more recently China's restraints on rare earth
exports. In the raw materials case the WTO found conclusively that
China's raw material export quantitative restrictions were contrary to
the core international trade disciplines of the WTO, including GATT
Articles XI:1\17\ that generally prohibit the use of export bans and
quantitative export restraints. These obligations apply equally to the
United States, China and all other WTO members.
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\17\ GATT XI:1 states: ``No prohibitions or restrictions other than
duties, taxes or other charges, whether made effective through quotas,
import or export licenses or other measures, shall be instituted or
maintained by any contracting party on the importation of any product
of the territory of any other contracting party or on the exportation
or sale for export of any product destined for the territory of any
other contracting party.''
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The United States' ability to challenge other countries' existing
exports restraints on agricultural, forestry, mineral and ferrous scrap
products-just to name a few-will be virtually nonexistent if the United
States begins imposing its own export restrictions. Even worse, as the
world's largest economy and largest trading country, U.S. actions are
often replicated by our trading partners to our own dismay. If the
United States went down the path of export restrictions, even more
countries would quickly follow suit and could easily limit U.S. access
to other key natural resources or inputs that are not readily available
in the United States.
3. Permitting
The long, complex and often unmanageable permitting process remains
a major obstacle-if not the major obstacle-to full and robust
development of our nation's energy resources. Natural gas development
is no exception. The NAM strongly urges this Committee to consider
legislation to streamline the permitting process for energy projects.
Natural gas producers must generally obtain permits that include
approval of well design, casing and cementing, the well stimulation
(hydraulic fracturing) program, chemicals used, waste disposal and
storage. They now must also comply with EPA New Source Performance
Standards (NSPS) for emissions. For wells on Federal or Indian lands,
the BLM proposed rule would add an open-ended new layer of permitting
that governs many of the same areas (well construction, water
protection, chemical disclosure) as the state permits. Those drilling-
specific permits must be obtained in addition to other general state
and local permits for construction and related activities.
For an LNG export facility, the permitting process is truly
daunting. Applicants not only must apply to the DOE for an export
license, but also must engage in an environmental review of their
project under the National Environmental Policy Act (NEPA) led by the
Federal Energy Regulatory Commission (FERC). Compliance with NEPA
requires that the project developer first acquire land and begin design
and engineering plans, a two-year time commitment. The NEPA review
process requires the input of up to 20 federal and state agencies
coordinated by FERC that have a say in the review. During the course of
the NEPA review, applicants must obtain, among other things, a dredge-
and-fill permit from the Army Corps of Engineers (with input from EPA),
a Waterway Suitability Assessment from the U.S. Coast Guard, air
permits from EPA and state agencies, and the usual state and local
permits for construction and related activities. Detailed project
engineering design work and project study is required for compliance
with NEPA, requiring tens of millions of dollars in up-front capital
and a significant commitment in time. The average time to complete an
environmental impact statement (EIS) under NEPA takes an average of 3.4
years, a number that increases by an average of 37 days with each
passing year.\18\ Assuming the applicant can make it through this
process and receives final NEPA approval, the project is still subject
to lawsuits from private parties over the substance of the NEPA
environmental review for six years. If the applicant somehow survives
that process, it also must find long-term contracts to sell the product
and approach the financial community to secure financing (roughly $10
billion) to construct and operate the project. All of this is in
addition to the export license that must also be obtained from DOE at
some point during the process.
---------------------------------------------------------------------------
\18\ Piet deWitt, Carole A. deWitt, ``How Long Does It Take to
Prepare an Environmental Impact Statement?'' Environmental Practice
10(4), December 2008.
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The permitting process appears to be getting worse. The EPA and the
Sierra Club recently urged FERC to consider the upstream implications
of natural gas development when permitting LNG terminals and related
pipeline infrastructure in Maryland and Oregon. FERC concluded that
upstream natural gas development is not a reasonably foreseeable impact
of the construction of an export terminal or related pipeline
infrastructure, a finding consistent with NEPA, which requires a
``reasonably close causal relationship'' in order for an impact to be
relevant.\19\ However, the EPA and other officials are making a similar
argument to extend NEPA with respect to coal export facilities in the
Pacific Northwest, and negative precedent established in that context
could migrate to natural gas permitting. The NAM strongly opposes using
NEPA to require a cradle-to-grave, lifecycle impact analysis that
assesses the impact of the cargo and all similar cargo transported
through the region, which would create a very dangerous precedent that
could be used to block exports of all types.
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\19\ U.S. Department of Transportation v. Public Citizen, 541 U.S.
752, 767 (2004).
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If manufacturers are to create jobs and boost the economy through
natural gas development, they must be able to depend on a predictable,
reliable and efficient permitting process. The NAM believes strong
actions must be taken to streamline the permitting process for energy
projects before it is too late.
conclusion
With the right energy policies in place, manufacturers could
experience a true resurgence. Robust development of our nation's vast
natural gas resources will help drive domestic manufacturing as a
critical component of a true ``all-of-the-above'' energy strategy. We
must expect that other nations will soon develop the technologies and
methods to access their own unconventional gas resources, giving the
United States a relatively limited window of time in which it can truly
exploit the current cost advantage. The NAM stands ready to support the
Committee's efforts to promote natural gas development and the
manufacturing jobs it can provide.
The Chairman. Thank you very much Mr. Eisenberg.
We will be working closely with you.
Our next witness, Ms. Frances Beinecke, has been a leading
advocate for clean air, water, and protecting our land for many
years. We welcome you.
STATEMENT OF FRANCES BEINECKE, PRESIDENT, NATURAL RESOURCES
DEFENSE COUNCIL, NEW YORK, NY
Ms. Beinecke. Thank you very much Chairman Wyden, Senator
Murkowski, and members of the committee.
Thank you for holding this hearing today and for inviting
me on this critical to testify on this critical issue.
We all know that shale gas is changing our Nation's energy
profile.
If extracted and used in ways that minimize environmental
risks, natural gas can be one part of a broader strategy to
reduce carbon emissions while providing potential economic
benefits.
But natural gas cannot be the ultimate answer to our energy
future. For that we need clean and renewable power that is used
as efficiently as possible.
With stakes this large, it is imperative that we have in
place the national safeguards necessary to protect our
communities, our environment, and the public health from
needless and unnecessary harm. As of now, we lack such
safeguards, and those protections we do have are no match for
the explosive growth in the use of hydraulic fracturing or
fracking in some 30 States across the country.
NRDC believes we need to put those safeguards in place
before any further expansion in the use of fracking.
It is important and essential that we get this right as a
country.
In more than 3 decades as an environmental advocate, I have
never seen a single issue that has frightened, antagonized, and
activated people across the country like the practice of
fracking. Families are angered and frustrated by their
inability to control fracking in their towns and sometimes on
their own property. They want to know that their water is safe,
that their air is clean, and that their lands and farms are
protected, and they want to know that their children are
healthy.
Now against that background, I'd like you to imagine for a
moment that someone came to your community today and said they
had a new technology to try out near your home. It would use
massive amounts of fresh water and undisclosed toxic chemicals
to break up the bedrock deep underground. It would then bring
to the surface substances known to cause illness and
environmental harm while polluting the air and creating toxic
wastes. If someone said that to you today, would your first
reaction be to exempt those operations from existing
environmental protections and leave control to a patchwork
across the entire country? Not likely, and yet that's what's
happening with fracking.
Congress has exempted many fracking activities from the
most fundamental safeguards we all depend on to protect our
environment and health: The Clean Water Act, the Safe Drinking
Water Act, the Clean Air Act, waste disposal standards, and the
National Environmental Policy Act. No wonder people across the
country are worried, and we need to fix that.
Instead Federal agencies have only just begun,
halfheartedly at that, to use what authority they do have to
protect the public. It's still unclear how much they will
ultimately do as Chairman Wyden's letter to the Bureau of Land
Management indicated just last week.
A BLM document leaked to the press later in the week
indicated that BLM may be going in exactly the wrong direction,
weakening even proposed disclosure requirements that were
initially identified. There is no justification for these
exemptions and lack of action.
We ask this Congress to act and close these dangerous
loopholes which deprive Americans of the basic protections they
have come to expect.
Meanwhile, as I detail in my written testimony, scientific
evidence is mounting about the negative impacts of fracking on
the environment. These include damage to health from air
pollution that comes from industrializing our landscapes,
damage from industrial spills and poorly managed wastewater,
and damage to the climate from methane leaks and venting. At
the very minimum, the research shows there is no reason to have
a default assumption that fracking is harmless or somehow less
in need of the kind of Federal oversight that has been routine
for similar activities for decades.
Yet, we're not arguing for a complete hands-off approach
from the public.
The industry calls for regulation to be left to the States.
Let's be clear. We see this as forum shopping.
States often lack the technical resources or the political
wherewithal to enforce adequate safeguards. If a number of
States were to begin effectively to oversee this industry,
companies would come running to Washington to demand Federal
rules to preempt what they would surely call a patchwork of
State laws.
Instead, industry now claims that the specifics of fracking
are too local to allow for Federal standards. That argument is
belied by the industry's own actions because industry has begun
working to block Local Governments from controlling fracking.
There is simply no legitimate argument for not using the
same cooperative federalism model to oversee fracking that is
used for all the other industrial activities that are covered
by Federal law.
One final but important point, natural gas, even if
properly produced and consumed, is not a complete panacea for
our energy challenges. It is still a fossil fuel. When burned,
it produces fossil fuel pollution and contributes to climate
change. That means that even as we work together to put in
place the safeguards we need to protect our environment and
health, we must strengthen those policies that promote the
energy solutions of tomorrow, including efficiency and
renewable power.
We have learned as a country some hard lessons about the
consequences of uncontrolled resource extraction. As we
confront the emerging challenges of fracking, we must learn
from our history and not repeat mistakes of the past. We must
get these protections right because we may not get a second
chance.
Thank you for the opportunity to appear today, and I look
forward to your questions.
[The prepared statement of Ms. Beinecke follows:]
Prepared Statement of Frances Beinecke, President, Natural Resources
Defense Council, New York, NY
Thank you, Chairman Wyden and Ranking Member Murkowski, for the
opportunity to testify today. My name is Frances Beinecke and I am the
President of the Natural Resources Defense Council (NRDC). I have
worked with NRDC for more than 30 years. Prior to becoming NRDC's
President in 2006, I served as NRDC's Executive Director for eight
years. In addition to my work at NRDC, I was appointed by President
Obama in 2010 to the National Commission on the BP Deepwater Horizon
Oil Spill and Offshore Drilling.
NRDC is a nonprofit organization of more than 350 scientists,
lawyers, and environmental specialists dedicated to protecting public
health and the environment in the United States and internationally,
with offices in New York, Washington D.C., Montana, Los Angeles, San
Francisco, Chicago, and Beijing. Founded in 1970, NRDC uses law,
science and the support of 1.3 million members and online activists to
protect the planet's wildlife and wild places and to ensure a safe and
healthy environment for all living things.
i. introduction
Today's hearing addresses ``opportunities and challenges for
natural gas.'' This is a timely and critically important topic. We all
know that shale gas is changing our nation's energy profile. If strong
national and state environmental standards for natural gas were in
place and strictly enforced--that is, standards to protect health and
limit climate change--natural gas could be one part of a broader
strategy to reduce carbon emissions, with potential economic gain, even
as our country moves forward to a clean energy future centered on
renewable energy and energy efficiency. We must make sure that the
shale gas boom does not distract us from, or prevent investment in
these crucial clean energy strategies, which represent the best path
forward.
My testimony focuses on the significant environmental, health and
community risks of natural gas production as it takes place today. NRDC
opposes expanded fracking until effective safeguards are in place.\1\
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\1\ See http://www.nrdc.org/energy/gasdrilling/.
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Today, there is an extraordinary mismatch between the ever growing
scale of fracking--which is occurring in about thirty states--and the
limited scope of measures to govern it. Indeed, companies engaged in
fracking are not even required to provide enough information to enable
scientists and the public to fully understand the nature or extent of
the environmental and health risks fracking poses.
We can't eliminate all the risks of natural gas production, but
there are many actions the federal government--both Congress and the
Administration--as well as the states can and must take to reduce them.
Now shale gas production is expanding with supersonic speed without
having in place even the basic environmental and public health
requirements that apply to other industries. And the passionate and
growing community opposition to shale gas production, spurred by
concern about its environmental and health impacts, is becoming a major
challenge for the natural gas industry
Even George P. Mitchell, the Texas oil and gas magnate known as the
``grandfather of fracking,'' has recognized the need for stronger
federal oversight of fracking. In an article in Forbes last year,
Mitchell was quoted as saying: ``The administration is trying to
tighten up controls . . . . I think it's a good idea. They should have
very strict controls.''\2\
---------------------------------------------------------------------------
\2\ Billionaire Father of Fracking Says Government Must Step Up
Regulation, July 19, 2012, Christoper Hellman, Forbes, http://
www.forbes.com/sites/christopherhelman/2012/07/19/billionaire-father-
of-fracking-says-government-must-step-up-regulation/
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Improved regulation at both the federal and state level can greatly
reduce the risks presented by shale gas development by, among other
things, requiring the use of best practices and technologies, coupled
with strict enforcement. Some companies are already using such
practices as green completions, wastewater recycling, closed-loop waste
management systems, and more in some locations. These methods have
proved to be both economically and technically feasible. But these
practices are not being used by all companies in all locations even
though they can often save companies money by, for example, capturing
more natural gas rather than wasting it and by reducing other forms of
waste. Rigorous federal standards and requirements to improve
environmental performance are needed to mandate that all operators
employ best practices wherever hydraulic fracturing occurs.
ii. the environmental and public health challenges of natural
gas production
Oil and natural gas production are expanding across the nation,
largely because advanced hydraulic fracturing (also known as
``fracking'') and horizontal drilling have made it easier to extract
oil and gas from previously inaccessible or uneconomical sites.
Fracking involves injecting water and chemicals deep into the earth at
extremely high pressure to break up layers of rock that harbor deposits
of natural gas and/or oil. Hundreds of thousands of new oil and gas
wells have been drilled in the past decade, and oil and gas development
is now occurring in about thirty states and under consideration in
other states.\3\ According to some reports, about 90 percent of new
wells in North America are fracked.\4\
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\3\ http://www.eia.gov/dnav/pet/hist/
LeafHandler.ashx?n=PET&s=E_ERTW0_XWCD_NUS_C&f=M
\4\ Fracking Hazards Obscured in Failure to Disclose Wells,
Bloomberg, Benjamin Haas (Aug. 14, 2012), http://www.bloomberg.com/
news/2012-08-14/fracking-hazards-obscured-in-failure-to-disclose-
wells.html
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Shale gas production comes with the risk of a range of
environmental and health impacts, including contaminated drinking water
supplies; the release of methane, a potent greenhouse gas; unhealthy
air quality; poorly managed toxic waste disposal; impairment of rivers
and streams; disruption of communities; and destruction of landscapes
and wildlife habitat. These impacts stem from all aspects of the shale
gas extraction process, including hydraulic fracturing itself, site
development, well construction , water, wastewater and waste
management; and well operation, trucking and other activities that
result in air emissions-especially emissions of air toxics, ozone-
forming pollutants and methane, a highly potent greenhouse gas.\5\
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\5\ For that reason, in this testimony, when I refer to hydraulic
fracturing or fracking, I am referring to all aspects of shale gas
production, including site preparation, drilling, fracking, well
integrity, waste storage and management and air emissions.
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Real world impacts are occurring right now across the country. Just
last week, Ohio regulators observed 20,000 gallons of fracking waste
being illegally dumped into a waterway.\6\
---------------------------------------------------------------------------
\6\ Ohio EPA investigating dumping of drilling waste water in
Youngstown area, Feb. 4, 2013, Bob Downing, Beacon Journal, http://
www.ohio.com/news/ohio-epa-investigating-dumping-of-drilling-waste-
water-in-youngstown-area-1.370584.
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The risks and impacts of fracking are becoming more widely
acknowledged by a broad range of stakeholders. In 2011, Department of
Energy Secretary Steven Chu appointed a Shale Gas Subcommittee of the
Secretary of Energy Advisory Board (SEAB Shale Gas Subcommittee)\7\. In
their report, the members of this subcommittee, including leading
academic experts with a range of perspectives, identified four major
areas of concern: possible pollution of drinking water from methane and
chemicals used in fracturing fluids; air pollution; community
disruption during shale gas production; and cumulative adverse impacts
that intensive shale production can have on communities and ecosystems.
The Subcommittee concluded:
\7\ I serve on the Secretary of Energy's Advisory board, but not
the Shale Gas Subcommittee.
There are serious environmental impacts underlying these
concerns and these adverse environmental impacts need to be
prevented, reduced and, where possible, eliminated as soon as
possible. Absent effective control, public opposition will
grow, thus putting continued production at risk.\8\
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\8\ http://www.shalegas.energy.gov/resources/
081111_90_day_report.pdf
The SEAB Subcommittee recommended that the federal government take
a series of actions to address these issues; many of these
recommendations have not yet been acted upon.
Public concern is also increasing. A December 2012 Bloomberg
National Poll found that 66 percent of Americans want more government
oversight of fracking, an increase from 56 percent in a September
poll\9\.
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\9\ Tougher Fracking Regulations Backed by 66%, Poll Shows,
Bloomberg, Dec. 13, 2012, Mark Drajem, http://www.bloomberg.com/news/
2012-12-14/tougher-fracking-regulations-backed-by-66-poll-shows.html
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The concerns are well founded. Let's look in more detail at each of
the problems and risks associated with fracking.
A. Chemical Disclosure
Natural gas producers are not required by any federal law to
identify the chemicals in the fracking fluids they are injecting into
the ground, and state disclosure requirements vary widely. Of the
states where fracking takes place, only fourteen states require some
level of public hydraulic fracturing disclosure and none of these
provides comprehensive disclosure. An NRDC analysis found that even
where some disclosure is required, the public is hampered in getting
this most basic information about fracking. For example,
In some states it is difficult for the public to access the
information disclosed;
Only seven of fourteen states mandate the chemical
identification of all additives used in fracking fluids;
Only one state has a clear process for evaluating and
approving or denying trade secret exemption claims; and
Only six states provide for access to trade secret
information by health care providers.\10\
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\10\ NRDC Issue Brief, State Hydraulic Fracturing Disclosure Rules
and Enforcement: A Comparison (July 2012), Matthew McFeeley, http://
www.nrdc.org/energy/files/Fracking-Disclosure-IB.pdf
In addition, enforcement of state rules is uneven; NRDC has found
that state agencies have accepted disclosure reports that lack required
information.
The lack of standardized, national disclosure greatly hampers the
ability of researchers to study the impacts of fracking on health and
the environment. Scientists need transparent, thorough and consistent
information on what chemicals different communities are being exposed
to. The variation in disclosure requirements among states makes it
difficult to do comparative studies and deprives communities of
information they have a right to know.
B. Health Concerns Related to Drinking Water and Air Pollution
Scientific concern about the health impacts of fracking are
growing. In April 2012, the Institute of Medicine (IOM), part of the
National Academy of Sciences, convened a two-day workshop of public
health experts that included more than a dozen presentations raising
concerns about the health implications from natural gas
development.\11\ Additionally, government agencies, including the
Agency for Toxic Substances Disease Registry (ATSDR) within the
Department of Health and Human Services (HHS) and the Environmental
Protection Agency (EPA), have investigated and found risks from
individual sites and practices.\12\ Health-related advisories and
informational resources have been made available by the National
Institute for Occupational Safety and Health (NIOSH), the Occupational
Safety and Health Administration (OSHA)\13\ and the Pediatric
Environmental Health Specialty Units (PEHSU).\14\
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\11\ Institute of Medicine. 2012. Workshop on the Health Impact
Assessment of New Energy sources: Shale Gas Extraction. April 30-May 1,
2012. Washington, DC. http://www.iom.edu/Activities/Environment/
Environmental HealthRT/2012-APR-30aspx.
\12\ Masten, S. 2012. HHS & NIEHS Activities Related to Hydraulic
Fracturing and Natural Gas Extraction. Presentation made at the 2012
Shale Gas Extraction Summit: October 2, 2012. http://
environmentalhealthcollaborative.org/images/ScottPlenary.pdf; ATSDR,
Health Consultation: Public Health Implications of Ambient air
Exposures to Volatile Organic Compounds as Measured in Rural, Urban,
and Oil & Gas Development Areas Garfield County Colorado (2008); United
States Environmental Protection Agency (US EPA). 2012. EPA's Study of
Hydraulic Fracturing and Its Potential Impact on Drinking Water
Resources. http://www.epa.gov/hfstudy/.
\13\ Occupational Safety Health Administration (OSHA) 2012. Hazard
Alert, Worker Exposure to Silica During Hydraulic Fracturing.
www.osha.gov/dts/hazardalerts/hydraulic_frac_hazard_alert.html;
\14\ Pediatric Environmental Health Specialty Units and the
American Academy of Pediatrics. 2011. PEHSU Information on Natural Gas
Extraction and Hydraulic Fracturing for Health Professionals. http://
aoec.org/pehsu/documents/
hydraulic_fracturing_and_children_2011_health_prof.pdf;
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A growing number of people have reported health problems that they
attribute to chemical exposures from nearby fracking and production
activities. As noted above, research is stymied by the lack of
disclosure of information on chemicals used in fracking. In addition,
little if any on-site monitoring is required of emissions into air or
water. But some of the pollutants associated with fracking are also
known to cause the same types of respiratory and/or neurological
problems that are the focus of concern in impacted communities. Some of
these chemicals are also well-established as carcinogens.\15\
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\15\ ATSDR, Health Consultation: Public Health Implications of
Ambient Air Exposures to Volatile Organic Compounds as Measured in
Rural, Urban, and Oil & Gas Development Areas Garfield County Colorado
(2008)
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Fracking also can generate pollution from hazardous substances,
including metals, radioactive material, methane and other volatile
organic compounds (VOCs), that are found in the geologic deposits being
exploited and brought to the surface in the drilling, fracking, and
production processes.
Chemicals in Drinking Water.--Because fracking is exempt from many
environmental monitoring requirements, there are inadequate data on the
impact of natural gas production on water contamination. However, data
from private wells and a published investigation raise concerns that
water contamination from fracking is creating health risks. Potential
contaminants include methane, organic chemicals (including benzene, a
known carcinogen), metals and radioactive elements.
A published study from Pennsylvania documented evidence of drinking
water contamination with methane associated with shale gas extraction.
These researchers found increased levels of methane in wells closer to
well sites including levels that present an explosion hazard for
residents.\16\ Other household-level investigations conducted by state
and federal agencies have also found methane levels in drinking water
in homes near drill sites that were caused or are suspected to have
been caused by oil and gas operations and present an explosion hazard
as well as an asphyxiation hazard for residents.\17\
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\16\ Osborn, SG, A Vengosh, NR Warner, RB Jackson. 2011. Methane
contamination of drinking water accompanying gas-well drilling and
hydraulic fracturing. Proceedings of the National Academy of Sciences,
U.S.A. 108:8172-8176. http://www.biology.duke.edu/jackson/pnas2011.pdf.
\17\ See, e.g., USEPA 2011. Draft Investigation of Ground
Contamination near Pavillion, Wyoming. EPA 600/R-00/000
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One study reported severe impacts to livestock, including
reproductive abnormalities, acute kidney or liver failure and death, in
animals that drank from polluted ponds and creeks near fracking
operations.\18\
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\18\ Bamberger M, Oswald RE. Impacts of gas drilling on human and
animal health. New Solut. 2012;22(1):51-77.
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The same study also documented a family living near a fracking site
that reported symptoms such as headaches, nosebleeds, and skin rashes;
the symptoms subsided when the family was relocated, suggesting a
causal link with the nearby fracking operations.
Studies linking specific health impacts to drinking water
contamination resulting from fracking operations have not yet been
conducted, which illustrates the results of under-regulating this
industry, but the evidence suggests that current practices may be
exposing families to unsafe levels of contaminants.
Air Emissions. Fracking operations release air pollutants that can
have health consequences at the local and regional level. As with
water, researchers are hampered because fracking operations have been
exempted from many monitoring requirements. But some of the health
complaints reported by people living near fracking sites, particularly
respiratory and neurological symptoms, are consistent with exposure to
the chemical contaminants identified in some monitoring reports./19/
All of this underscores the urgent need to require effective pollution
control equipment and community-level air quality monitoring to better
assess the exposures and potential health risks. In the meantime, there
is a strong rationale for reducing this contamination immediately to
prevent potentially harmful exposures.
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\19\ McKenzie Witter RZ, Newman LS, Adgate JL. 2012. Human Health
Risk Assessment of air Emissions from Development of Unconventional
Natural Gas Resources. Sci Total Environ. 2012 May 1;424:79-87.
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The research, monitoring data, and public health expertise
available to date indicate that natural gas facilities produce air
pollution that can increase health risks. These risks increase with
proximity, particularly for populations more vulnerable to the impacts
of air pollution, which include children, elderly, and those with
underlying health problems.
Fracking activities expose communities to a range of harmful air
pollutants, including known carcinogens, and respiratory, neurological,
immunological and reproductive toxins. These pollutants are present in
the diesel emissions released by truck traffic and heavy equipment use.
Additionally, fracking operations can expose communities to silica
dust, which causes lung disease. Workplace investigations at fracking
sites have identified both silica and diesel as posing a health hazard
for workers exposed on the job site.\20\ Since state laws allow
drilling as close as 100 feet to residences, sensitive populations,
such as children, may also be threatened by this pollution.
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\20\ Esswein E et al 2012. NIOSH Field Effort to Assess Chemical
Exposures in Oil and Gas Workers: Health Hazards in Hydraulic
Fracturing. Presentation made at IOM Roundtable: The Health Impact
Assessment of New Energy Sources: Shale Gas Extraction. April 30-May 1,
2012
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VOCs released from natural gas wells and processing facilities have
been shown to play a significant role in increasing unhealthy air
quality, including from ground-level ozone. In the past year, four
published studies have identified pollution from oil and gas
facilities, where fracking is being deployed, as a source of pollutants
contributing to regional ozone in Colorado, Texas, and
Pennsylvania.21 22 23 24 Ground-level ozone is a powerful
respiratory toxicant that is well known to aggravate asthma and other
respiratory conditions.
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\21\ Petron G, Frost G Miller BR, Hirsch AI, Montzka SA, Karion A.,
Trainer M, Sweeney C, Andrews AE, Miller L, Kofler J, Bar-Iian A,
Dlugokencky EJ, Patrick L, Moore CF, Ryerson TB, Siso C, Kolodzey, W,
Lang PM, Conway, T, Novelli P, Masarie K, Hall B, Guenther D, Kitzis,
D, Miller J, Welsh, D, Wolfe D, Neff W, Tans P. 2012. Hydrocarbon
emissions characterization in the Colorado Front Range: A pilot study.
Journal of Geophysical Research, VOL. 117.
\22\ Gilman JB, Lerner BM, Kister WC, de Gouw J, 2013. Source
signature of volatile organic compounds (VOCs) from oil and natural gas
operations in northeastern Colorado. Environ Sci Technology DOI: 10.
1021/es304119a
\23\ Litovitz A, Curtright A, Abramzon S, Burger N. Samaras C.
2013. Estimation of regional air-quality damages from Marcellus Shale
natural gas extraction in Pennsylvania. Environ. Res. Lett. 8.
\24\ Olaguer E 2012. The potential near-source ozone impacts of
upstream oil and gas industry emissions. Journal of Air and Waste
Management. 62:8, 966-977
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Additionally, a study in Colorado found elevated levels of air
pollutants close to well sites during well production. Taken together,
these pollutants were found to be high enough to put nearby residents
at risk for respiratory and neurological health impacts.\25\
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\25\ McKenzie Witter RZ, Newman LS, Adgate LS, Adgate JL. 2012.
Human Health Risk Assessment of air Emissions from Development of
Unconventional Natural Gas Resources. Sci Total Environ. 2012 May
1;424:79-87.
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In addition, proximity to these facilities can also subject
individuals to light and noise pollution, wastewater spills, noxious
odors, and increased health and safety risks from explosions and other
malfunctions. For this reason, as noted above, separating vulnerable
populations from sources of air pollution and other hazards, should be
an integral part of ensuring health and safety.
All of these indications of health risks are cause for concern,
underscoring the need to better protect the public. That means
requiring mandatory disclosure of all chemicals used in fracking,
thorough evaluations of potential health threats, the best possible
pollution controls and drilling and fracking standards, and increased
air and water monitoring both before and after drilling and fracking
begin.
C. Climate Change Impacts
When natural gas is burned at a power plant to generate
electricity, it emits far less carbon pollution than coal-based
electricity.\26\ But the production of natural gas produces significant
methane emissions\27\ Methane, which makes up as much as 90 percent of
natural gas, is a potent global warming pollutant, trapping at least 25
times more solar radiation than carbon dioxide over a 100-year period.
According to both the EPA's national inventory of greenhouse gas
emissions and the EPA's tabulation of individual companies' emission
data reports,\28\ the oil and gas industry is the nation's second
largest industrial emitter of greenhouse gases (mainly methane and
carbon dioxide), surpassed only by electric power plants.\29\
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\26\ U.S. Environmental Protection Agency, Clean Energy-Air
emissions, available at http://www.epa.gov/cleanenergy/energy-and-you/
affect/air-emissions.html.
\27\ NRDC, Leaking Profits: The U.S. Oil and Gas Industry Can
Reduce Pollution, Conserve Resources, and Make Money by Preventing
Methane Waste (Mar. 2012), available at http://www.nrdc.org/energy/
leaking-profits.asp.
\28\ EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks:
1990-2010, Table ES-2, http:/www.epa.gov/climatechange/Downloads/
ghgemissions/US-GHG-Inventory-2012-Main-Text.pdf,
\29\ EPA, Greenhouse Gas Reporting Program, 2011 Data, http://
epa.gov.ghgreporting/ghgdata/reported/index.html
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Currently, methane leaks into the atmosphere at many points in the
natural gas production and distribution process--from wells during
extraction, from processing equipment while compressing or drying gas,
and from poorly sealed equipment while transporting and storing it.
While much better data are needed, EPA estimates that at least 2 to 3
percent of all natural gas produced by the U.S. oil and gas industry is
lost to leaks or vented into the atmosphere each year\30\, and some
recent studies suggest that the actual leak rate could be much
higher.\31\ Preventing the leakage and venting of methane from natural
gas facilities would reduce pollution, enhance air quality, improve
human health, and conserve energy resources.
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\30\ U.S. Energy Information Administration, Natural Gas Gross
Withdrawals and Production, 2010 data. available at http://www.eia.gov/
dnav/ng/ng_prod_sum_dcu_NUS_a.htm; U.S. Environmental Protection
Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks (1990-
2009) (Apr. 15, 2012). Net emissions of methane are just over 600 bcf
(billions of standard cubic feet), while gross withdrawals were
approximately 26,800 bcf; this implies a net leakage of approximately
2.3 percent.
\31\ Robert Howarth et al., ``Methane Emissions from Natural Gas
Systems,'' Background Paper Prepared for the National Climate
Assessment (reference number 2011-0003) (Feb. 25, 2012), available at
http://www.eeb.cornell.edu/howarth/Howarth%20et%20al.%20--
%20National%20Climate%20Assessment.pdf.
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The oil and gas industry can afford methane control technologies.
Indeed, capturing currently wasted methane for sale could bring in more
than $2 billion of additional revenue each year. Ten technically
proven, commercially available, and profitable methane emission control
technologies together can capture up to 80 percent of the methane
currently going to waste.\32\ EPA, other federal agencies, and the
states should move to require use of these technologies for methane
control, and industry itself should move quickly to adopt these
measures.
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\32\ NRDC, Leaking Profits: The U.S. Oil and Gas Industry Can
Reduce Pollution, Conserve Resources, and Make Money by Preventing
Methane Waste (Mar. 2012), available at http://www.nrdc.org/energy/
leaking-profits.asp.
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Last year, EPA issued a Clean Air Act rule to curb VOC emissions
from new and modified sources in the oil and gas industry.\33\ While
this is a step forward, the rule is not strong enough and doesn't cover
existing sources. EPA should also regulate methane directly, which
would achieve much larger emission reductions.
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\33\ U.S. Environmental Protection Agency, Federal Register Vol.
77, No. 159, Oil and Natural Gas Sector: New Source Performance
Standards and National Emission Standards for Hazardous Air Pollutants
Reviews (Aug. 16, 2012), available at https://www.federalregister.gov/
articles/2012/08/16/2012-16806/oil-and-natural-gas-sector-new-source-
performance-standards-and-national-emission-standards-for.
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D. Water Pollution
In addition to the risk of contaminating drinking water, shale gas
extraction can pollute streams, rivers, lakes and other
waterbodies.\34\ This can happen in a number of ways, including the
following:
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\34\ Hydraulic Fracturing Can Potentially Contaminate Drinking
Water sources, NRDC, http://www.nrdc.org/water/files/fracking-drinking-
water-fs.pdf.
1. Depletion of Water Resources.--Large volumes of water are
required for fracking operations. Fresh water is often taken
from local waterbodies. Because water can be contaminated when
it has been used for fracking, it cannot be easily be returned
to these waterbodies. Permanent loss of water from fresh water
resources can harm water quality and availability and also
aquatic species and habitat.\35\
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\35\ Soeder, D.J., and Kappel, W.M., 2009, Water Resources and
Natural Gas Production fromt he Marcellus Shale: U.S. Geological Survey
Fact Sheet 2009-3032, 6 p., available at: http://pubs.usgs.gov/fs/2009/
3032/.
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2. Spills and Leaks of Fracking Chemicals and Fluids.--
Fluids, including hazardous chemicals and proppants used in the
fracking process, are typically stored in tanks or pits on
site. If not stored properly, they can leak or spill, polluting
nearby waterbodies. Fluids can also be stored at a centralized
facility near multiple wellpads and then be transported to the
well by trucks or by pipeline, providing another opportunity
for leaks and spills during transit. Fracking fluid can also
spill during the fracking process. Leaks from tanks, valves,
and pipes, as a result of mechanical failure or operator error
at any point during these processes, can and do contaminate
groundwater and surface water.\36\
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\36\ See, e.g., DEP Investigating Lycoming County Fracking Fluid
Spill at XTO Energy Marcellus Well, http://www.portal.state.pa.us/
portal/server.pt/community/newsroom/14287?id=15315&typeid=1.
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3. Mismanagement of fracking waste.--After fracking, some of
the fracking fluid, often referred to as flowback, returns up
the wellbore to the surface. In addition, naturally occurring
fluid is brought to the surface along with the produced oil or
gas (referred to as ``produced water''). This waste, consisting
of both flowback and produced water, can be toxic, and the oil
and gas industry generates hundreds of billions of gallons of
it each year.\37\ In addition to the chemicals that were
initially injected, flowback and produced water may also
contain hydrocarbons, heavy metals, salts,\38\ and naturally
occurring radioactive material. The wastewater is sometimes
stored in surface pits. If the pits are inadequately
regulated\39\ or constructed, they run the risk of leaking or
overflowing and can pollute groundwater and surface water.\40\
The waste may also be disposed of on the surface, reused in
another well, re-injected underground, or transported to a
treatment facility. Each of these forms of wastewater
management carries its own inherent risks, including spills,
leaks, earthquakes (in the case of underground injection) and
threats to groundwater and surface water.
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\37\ U.S. Government Accountability Office, Energy-Water Nexus:
Information on the Quantity, Quality, and Management of Water Produced
during Oil and Gas Production, GAO-12-156 (Washington, D.C.: Jan 9,
2012).
\38\ Otton, J.K., 2006, Environmental aspects of produced-water
salt releases in onshore and estuarine petroleum-producing areas of the
United States: a bibliography: U.S. Geological Survey Open-File report
2006-1154, 223p.
\39\ NRDC, ``Petition for Rulemaking Pursuant to Section 6974(a) of
the Resource Conservation and Recovery Act Concerning the Regulation of
Wastes Associated with the Exploration, Development, or Production of
Crude Oil or Natural Gas or Geothermal Energy,'' September 8, 2010, 18-
23.
\40\ See, e.g., DEP Fines Atlas Resources for Drilling Wastewater
Spill in Washington County, http://www.portal.state.pa.us/portal/
server.pt/community/newsroom/14287?id=13595&typeid=1
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4. Stormwater Pollution.--During a rainstorm or snowstorm,
flowing water causes soil erosion and picks up pollutants along
the way, including toxic materials and sediment, and these
materials can flow into local waterbodies. Stormwater from
fracking operations can be particularly polluted because of
chemical and oil and gas residues. (Yet, as is described below,
the oil and gas industry is exempt from the stormwater
permitting requirements of the Clean Water Act).
I must stress that there are numerous examples of these types of
water pollution impacts occurring. I mentioned that just last week Ohio
regulators observed 20,000 gallons of fracking waste being illegally
dumped into a waterway.\41\ And a September 2011 Denver Post
investigation found that four oil and natural gas companies were
responsible for 350 spills in Colorado since January, 2010. The Post
reported that one of these companies was responsible for three spills
in one month alone, including benzene, a known carcinogen, and had
contaminated both local lands and water.\42\ Ironically, state
regulators had lauded these four companies as ``outstanding
operators.'' Overall, the investigation found that spills took place in
Colorado at the rate of seven per week and that from January to
September 2011, more than two million gallons of diesel, oil, drilling
wastewater and chemicals were spilled, and state regulators issued few
fines. A 2012 Post investigation found that over a five year period,
oil and gas operations were responsible for 2,078 spills and slow
releases and that 17 percent of these spills had reached groundwater.
In one county alone, Weld County, 40 percent of spills reached
groundwater.\43\
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\41\ Ohio EPA investigating dumping of drilling waste water in
Youngstown area, Feb. 4, 2013, Bob Downing, Beacon Journal, http://
www.ohio.com/news/ohio-epa-investigating-dumping-of-drilling-waste-
water-in-youngstown-area-1.370584
\42\ http://www.denverpost.com/breakingnews/ci_18880544
\43\ http://www.denverpost.com/environment/ci_22154751/drilling-
spills-reaching-colorado-groundwater-state-mulls-test
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E. Impacts on Wildlife Habitat and Sensitive Lands
Oil and gas development can destroy wildlife habitat and sensitive
lands if siting does not take these factors into account. Natural gas
production operations involve extensive road building and construction
of wellpads that can fragment and destroy habitat and cause species to
leave their historic breeding and nesting grounds. Light and noise
disturb wildlife populations and may drive them to lower quality
habitat, and runoff and spills can pollute aquatic habitat.\44\
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\44\ Energy Development and Impacts on Wildlife (Sept. 11, 2012),
Center for Western Priorities; http://westernpriorities.org/2012/09/11/
energy-development-and-impacts-on-wildlife/.
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F. Community Impacts
Oil and gas development can fundamentally change the nature of
communities. Fracking is a heavy industrial activity that entails
substantial construction, heavy truck traffic, traffic accidents, and
noise and light pollution\45\. It often attracts an influx of out-of-
state workers that can bring increases in crime and violence, sexually
transmitted diseases and community strife that can stress local
emergency, health and other community resources.\46\
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\45\ MISSING
\46\ Whitter R. 2012. Community Impacts of Natural Gas Development
and Human Health. Presentation made at IOM Roundtable: The Health
Impact Assessment of New Energy Sources: Shale Gas Extraction. April
30-May 1, 2012
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Under many state laws, oil and gas rights take precedence--or are
interpreted as taking precedence--over surface ownership, so oil and
gas wells and the associated industrial activity-including chemical and
waste storage and disposal-can be located in residential or
agricultural areas regardless of zoning or even the wishes of
individual property owners. To address these issues, NRDC has launched
a Community Defense initiative to provide legal assistance to
localities that seek to hold natural gas extraction to appropriate
scientific standards, protect their property or exclude oil and gas
production from their communities.\47\
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\47\ http://switchboard.nrdc.org/blogs/ksinding/
nrdc_launches_community_fracki.html
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iii. congress should close federal loopholes for oil and gas production
The oil and gas industry has succeeded over many years in getting
statutory exemptions from standard environmental protection laws and
practices. These unjustifiable loopholes appear in the Clean Air Act,
Clean Water Act, the Superfund statute, the Resource Conservation and
Recovery Act, and the Safe Drinking Water Act, among others.
There is simply no justification for exempting fracking from the
basic environmental laws that have applied to other industrial
activities for four decades. Fracking presents at least as many risks
as other regulated activities and has just as many interstate
implications. Moreover, the current level of disclosure and regulation
clearly demonstrates that states lack the technical expertise and
political wherewithal to govern fracking. Congress must close the
loopholes in cornerstone federal environmental laws.
This is not to say that states have no role to play. Under our
system of ``cooperative federalism,'' states can play the lead role in
the regulation, permitting, and oversight process. They can try out and
adopt different regulatory approaches, as long as they meet federal
minimum requirements. But all citizens deserve the protection of
federal standards.
Some of the key exemptions for oil and gas production facilities in
bedrock U.S. environmental laws are:
safe drinking water act (sdwa)
Fracking is exempted from the SDWA unless diesel is used in the
fracking process, under a provision enacted in the Energy Policy Act of
2005.\48\ This exemption prevents the Safe Drinking Water Act from
protecting underground sources of drinking water from fracking impacts
and exempts the siting, construction, operation, maintenance,
monitoring, testing, and closing of fracking sites from regulation
under the SDWA.
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\48\ Energy Policy Act of 2005, Pub. L. No. 109-58, Sec. 322, 42
U.S.C. Sec. 300h(d)(1)(B)(ii). This provision bypassed a court
decision that had previously ordered the EPA to regulate hydraulic
fracturing under the SDWA. Legal Environmental Assistance Foundation v.
United States Environmental Protection Agency, 118 F.3d 1467 (11th Cir.
1997).
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clean water act
Oil and gas operations are exempt from the stormwater runoff
permitting requirements of the Clean Water Act.\49\ With this
exemption, there is no way to know if a company has an adequate Storm
Water Pollution Prevention Plan in place to reduce the discharge of
pollutants to receiving waters, and to eliminate illegal discharges.
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\49\ 33 U.S.C. Sec. 1342(l)(2); 33 U.S.C. Sec. 1362(24).
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clean air act
The oil and gas exploration and production industry is exempt from
critical Clean Air Act requirements to adequately assess, monitor, and
control hazardous air pollutants.\50\ This makes it impossible, under
existing regulatory statutes, to perform an adequate assessment of air
pollution health risks to nearby communities and require adequate
safeguards. Excluding this important category of air pollution and air
contaminants significantly underestimates the health risks posed by
this industry.
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\50\ 42 U.S.C. Sec. 7412(a)(1)-(2); 42 U.S.C. Sec. 7412(n)(4).
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hazardous waste management and superfund statutes
Oil and gas waste is exempt from the central federal hazardous
waste management law--the Resource Conservation and Recovery Act--
including testing, treatment and disposal provisions that govern the
assessment, control and clean-up of hazardous waste.\51\ Similarly, the
oil and gas industry is protected from liability for spills under the
Comprehensive Environmental Response, Compensation and Liability Act
(the Superfund statute), which adopts the same definition of hazardous
waste.\52\
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\51\ 42 U.S.C. Sec. 6921(b)(2). Under this provision, EPA may act
to close this gap under specified circumstances, but has not done so.
\52\ 42 U.S.C. Sec. 9601(14).
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national environmental policy act (nepa)
Under a special provision of NEPA, when oil and gas companies lease
federal lands, they are often exempt from customary environmental
review requirements applicable to other industries.\53\ A recent
Government Accountability Office study found that in a sample from
fiscal years 2006-2008, the oil and gas industry received almost 6,900
categorical exclusions (CXs) that waived further environmental review
under NEPA. Of that total, almost 6,100 of those CXs were used to waive
requirements for permits to drill.\54\
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\53\ 42 U.S.C. Sec. 15942.
\54\ U.S. Gov't Accountability Office, GAO-11-941T, Energy Policy
Act of 2005: BLM's Use of Section 390 Categorical Exclusions for Oil
and Gas Development (2011).
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iv. blm's potential role in providing national leadership on best
practices for natural gas production
Given this Committee's jurisdiction, I want to stress an important
opportunity for the Bureau of Land Management (BLM) to show leadership
on this issue. The BLM oversees approximately 700 million subsurface
acres of Federal mineral estate and 56 million subsurface acres of
Indian mineral estate across forty states. As of 2011, 38.5 million
acres of oil and gas resources were leased by the federal government.
These lands include private property in a split estate situation, or
national forests that are watersheds for large populations. A March
2012 Department of Interior report found that 56 percent of federal
onshore leases were neither in exploration nor production-an area about
the size of South Carolina. This is the time to minimize the impacts
that will come with future fracking. As Chairman Wyden noted in his
recent letter to BLM, new BLM rules must require best practices for
fracking and protect environmentand health . But the latest indications
are that BLM is going in exactly the wrong direction.
A version of the draft rule leaked to the press last week indicates
that BLM is in the process of weakening disclosure requirements and
environmental protections in its proposed rule.\55\
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\55\ Revised Interior rule loops in industry-favored FracFocus,
EnergyWire, Feb. 8, 2013, Mike Soraghan and Ellen M. Gilmer, http://
www.eenews.net/energywire/2013/02/08/1
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The BLM rule should
provide adequate and comprehensive disclosure of chemical
and other information to the public;
place sensitive areas off limits;
require safe setbacks for homes, schools, and streams;
establishe strong standards for well construction that
ensure mechanical integrity;
require baseline testing of water sources; and
increase the safety of toxic waste management by prohibiting
open air pits.
Details on NRDC's proposals are available in our comments to the
BLM.\56\
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\56\ http://docs.nrdc.org/energy/files/ene_12091101a.pdf
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v. climate change and energy policy
Federal law and policy must also take into account the need to move
the U.S. away from the use of fossil fuels, including natural gas. The
United States' largest source of climate-changing pollution remains the
air emissions from hundreds of existing power plants. We must curb this
dangerous source of pollution and do so in a way that will build the
economy and promote energy efficiency and renewable energy. NRDC has
crafted a groundbreaking proposal\57\ that will help the United States
create jobs, grow the economy, and curb climate change by reducing
emissions from hundreds of existing power plants. NRDC's proposal shows
how EPA, in partnership with the states, can set new carbon pollution
standards under existing authority in the Clean Air Act that will cut
existing power plant emissions 26 percent by 2020 (relative to peak
emissions in 2005).
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\57\ Daniel A. Lashof ET AL., Closing the Power Plant Carbon
Pollution Loophole: Smart Ways the Clean Air Act Can Clean Up America's
Biggest Climate Polluters, NRDC (Dec. 2012), http://www.nrdc.org/air/
pollution-standards/files/pollution-standards-report.pdf.
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The approach includes an innovative provision that will provide
states with flexibility and drive investment in cost-effective electric
energy efficiency, substantially lowering the cost of compliance,
lowering electricity bills, and creating thousands of jobs across the
country. The benefits of this approach--in saved lives, reduced
illnesses, and climate change-exceed the costs by as much as 15-to-one.
The Administration should move quickly to finalize the carbon standards
they have proposed for new power plants and propose a system of
regulation for existing plants, building on the ideas we have proposed.
After electric generation, other primary uses of natural gas energy
are in buildings and industrial applications. There are many
opportunities to use natural gas more efficiently in these settings.
Enhanced building energy codes and stronger efficiency standards for
appliances, equipment and cooling and heating systems are among the
best ways to use natural gas more efficiently. As is explained in a
recent report by the Alliance to Save Energy's Commission on National
Energy Efficiency Policy (on which I served), it is important that DOE
stay on track to meet all of its statutory deadlines and
responsibilities to strengthen energy efficiency standards for natural
gas and electric appliances.\58\ After a strong start at the beginning
of the last term, DOE has fallen behind on this important
responsibility.
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\58\ Doubling U.S. Energy Productivity by 2030, ALLIANCE COMMISSION
ON NATIONAL ENERGY EFFICIENCY POLICY (Feb. 7, 2013), http://ase.org/
sites/default/files/full_commission_report.pdf.
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vi. next steps: building the overdue regulatory framework for
addressing the impacts of fracking
I've discussed above the need for Congress to take strong action to
protect the environment and health, including by requiring full
disclosure of fracking chemicals and closing loopholes in existing
environmental statutes. And I've reviewed the need for BLM to issue
rules properly governing fracking on public lands. Other significant
actions that the federal government should take to limit the damaging
impacts of fracking include:
Congress
Congress should mandate and fund comprehensive studies on
the environmental and health impacts of fracking and on how to
address them. EPA is conducting a comprehensive scientific
study into the risks of fracking on drinking water, due in
2014. This will be the first independent study of its kind. The
Agency for Toxic Substances and Disease Registry , the National
Institute of Environmental Health Sciences and the National
Institute for Occupational Safety and Health should conduct
worker and community health investigations.
Congress should ensure that both the BLM and EPA have
sufficient funding to inspect natural gas production facilities
and to enforce compliance. These agencies must be able to
vigorously investigate complaints.
Congress and the Administration should take action to
implement the recommendations of the 2011 Shale Gas
Subcommittee of the Secretary of Energy Advisory Board.
Bureau of Land Management
BLM should
Revise all of its rules for natural gas production including
leasing and management plans to reflect current technologies
and the extent of development so it protects the resources that
are used by Americans for hunting, fishing, hiking, and other
activities. The BLM is too often allowing oil and gas
development without conducting the proper environmental
analysis or considering the impacts on human health, the
environment, wildlife, and vital natural resources.
Together with other federal land management agencies,
protect the most sensitive public lands, placing them off
limits to oil and gas development. This includes important
drinking water sources and wilderness quality lands. For
example, the George Washington National Forest in Virginia is
home to the headwaters of the Potomac and James Rivers which
supplies water for approximately four million people, including
all of Washington, D.C. and Maryland and Virginia suburbs, yet
the Forest Service is considering allowing fracking there.
EPA
EPA should use its existing authority to the fullest extent
possible to address the impacts and risks of fracking, including taking
the following actions
Issue stringent standards to limit methane, carbon dioxide,
and hazardous emissions from natural gas production from both
from new and existing sources. Cost-effective technology exists
to do so, as noted above. In addition, EPA must adopt standards
for VOCs and methane from fracked oil wells, which can emit
huge amounts of this ozone-forming pollutant.
Ban the use of diesel in fracking fluid to protect drinking
water and waterbodies.
Issue strong Clean Water Act rules for the discharge of
wastewater generated by natural gas fracking and production.
To the extent possible under existing law, conduct a
thorough assessment of air toxic emissions, health threats, and
available pollution control technology that includes all
relevant sources of emissions of all contaminants. Based on
this assessment, EPA should set strong standards to limit
pollution that threatens nearby populations from new and
existing facilities.
Make resources available to state and local clean water
agencies as needed for the monitoring of groundwater,
investigation of drinking water contamination and remediation.
vii. conclusion
This testimony has focused on the scientific and legal issues posed
by the expansion of fracking, but in closing I want to bring us back to
the experiences and fears of real people to underscore what is at
stake. On a recent trip to western Pennsylvania, I spoke to many
families affected by shale gas production. These families told me that
they fear that their water is contaminated with toxic substances from
shale gas operations. They worry the air pollution coming from
compressor stations or well pads is harming their families. And they
believe their property values have been compromised. I witnessed two
instances of flammable water, one in a field, another in a jug of
drinking water. I don't know what caused them, and sadly the state
doesn't seem to have investigated to determine the causes, but I could
see how disturbing it was for homeowners to have flaming water. Every
single person we spoke with had stories of contaminated water or air.
I sensed a lot of fear in the communities I visited in
Pennsylvania. It reminded me of when I served on the National
Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling
and people in Louisiana and Mississippi told me how scared they were
for the health of their families. They knew they had been exposed to
oil and to chemicals used in the dispersants, but they didn't know if
that exposure would be harmful or how to keep their families safe.
I know that we can do better for these families and communities,
and hope that today's hearing will provide the basis for positive
change
As I've indicated, a lot of action is needed, and it is needed now.
The federal government has been asleep at the switch--although it may
be more accurate to say it's been anesthetized, given all the
exemptions that have been worked into statute. NRDC stands ready to
assist this Committee in its further deliberations. Thank you again for
the opportunity to participate in this discussion.
The Chairman. Thank you very much Ms. Beinecke.
I think you'll find a lot of bipartisan interest on those
efficiency issues that you made a point of at the end, and we
thank you.
Ms. Beinecke. Thank you.
The Chairman. Dr. Medlock, welcome.
STATEMENT OF KENNETH B. MEDLOCK, III, JAMES A BAKER, III AND
SUSAN G. BAKER, FELLOW IN ENERGY AND RESOURCE ECONOMICS, AND
SENIOR DIRECTOR, CENTER FOR ENERGY STUDIES, JAMES A. BAKER III,
INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY, HOUSTON, TX
Mr. Medlock. Thank you for the opportunity to be here.
I want to begin by just commenting on the State of the
regulatory infrastructure that we have in our natural gas
industry in this country and more broadly, North America. You
know, beginning with the Natural Gas Act in the 197--in the
late 1970s followed by several FERC orders that were passed up
through the 1990s, we've basically seen establishment of a
market which arguably is the most efficient market in the
world. Basically the reason we can say that is because any
consumer that needs or has a desire to get natural gas in any
given point in time, any producer that has a desire to actually
access a market, the ability is there.
This is largely the result of the regulatory infrastructure
that has been put in place. It encourages competition, it
encourages entrepreneurship, and it's basically been the reason
why in this country we've seen, as it's been called already in
this hearing, the Shale Gale emerge in this country.
So anything that sort of could stand to disrupt this very
well functioning market, I think would be a detriment to the
country and to the natural gas industry.
It was also referenced that, you know, in terms of the
number of licenses that have been applied for, we're talking in
excess of 30 billion cubic feet a day at this point, so it's
quite a large number. But one thing you have to do is take a
step back and realize the context in which that volume, that
potential volume sets. Namely, the global liquefied natural gas
market today is just over 30 billion cubic feet a day. There is
no way that if all of those licenses were approved you'd see 30
BCF a day of capacity constructed in this country. You're
basically talking about doubling the size of the LNG market. So
you have to understand and you have to take in to the proper
context, you know the kind of competition that you're seeing.
It's a race to win first move or advantage. It's exactly
what you'd expect to see in a competitive market.
Now when we sort of step sort of beyond what's happened
with regard to natural gas and shale gas development in this
country, we can think about national security issues, which
have been also referenced and as a matter of fact, we performed
a study for the International--the Office of International
Policy and Affairs of the DOE a little over--about 2 years ago
now where we looked at the broader geopolitical implications of
shale, and this is a mouthful, and I'm happy to expand in Q&A,
but there were 3 countries in particular that were most
affected by the emergence of shale in North America. When you
think again about foreign policy objectives of this country,
not only in the short-term, but even in the immediate-to long-
term, this is a mouthful: Russia, Iran, and Venezuela. Those
are the 3 countries that most--that were most heavily impacted
by shale developments in this country. You take shale out of
the mix, and those 3 countries really stand to benefit in a
very dramatic way because of their massive natural gas
resources and hydrocarbon resources more generally.
Moving beyond that, when we think about a lot of the things
that a lot of people have been talking about with regard to gas
and to transportation, there's a real potential here for
natural gas to displace some oil in our transportation
infrastructure, and I think that's a really very important
point when we think about national security.
However, there still exists challenges. Moving gas into
high use vehicles, into fleet systems, this is something that
already stands to benefit a lot of companies that already own
and operate these kinds of fleets, like FedEx, UPS. You're even
talking about now LNG in long haul trucking. So these sorts of
applications are already beginning to occur, not because of
policy, but because the commercial incentive is there. It's
there right now. So you're starting to see that migration
occur.
Moving into the cars that you and I drive, that's going to
be a little bit more challenging because you're not talking
about vehicles that are driven in excess of 20,000 miles a
year. You're talking about vehicles that are driven 12 to
13,000 miles a year and that matters a tremendous amount when
you talk about fuel choice and the kinds of capital costs
individuals are willing to incur when they buy new vehicles.
On the emissions front, there are studies ongoing with
regard to natural gas throughout the value chain and what
methane leakage might mean for the real potential that might be
there associated with natural gas developments and one of the
things that one of the studies that's ongoing--I'm actually
very much looking forward to seeing the results of is one
that's being conducted by the Environmental Defense Fund.
They're looking at--they're measuring methane leakage not only
at the well head, but all the way down to the end use. One of
the things that I fully expect to see as the result of that
study, because it's something that I've actually looked at a
little bit in my past is that what you'll see is the most
egregious source of methane leakage is what we call in
locations in the market in where we call behind-the-fence. So
this is after local distribution companies take charge of the
gas and that opens up a tremendous amount of discussion around
the appropriate policies for how maintenance is performed on
systems, not just interstate systems, not just gathering
systems, but even behind-the-fence systems, so local
distribution companies.
Finally, on the environmental front, when we talk about the
potential for natural gas to reduce or achieve certain climate
change objectives--emissions objectives. I think we've already
seen to some extent just in 2012 their preliminary data what
can actually happen if gas can displace older coal facilities
from the generation stack and we're talking about our
generation in particular. What we actually saw was that in
2012, because of the low price of natural gas, natural gas
actually rose to surpass coal share in generation for some
period of the year. What that basically resulted in was
CO2 emissions being as low in this country as they
have been since 1990. That's pretty remarkable. What that tells
you is that natural gas stands to benefit not only domestic
manufacturing, not only domestic producers to the extent that
LNG exports actually do occur under a market equilibrium, and I
think that's an important point, but it also stands to benefit
various environmental objectives.
Again, if we're going to think about appropriate policies,
I think the first thing we need to do is gather more
information. Which is why I applaud hearings like this and the
kinds of things that we're seeing going not only academic, but
in the industrial communities, as well.
Thank you.
[The prepared statement of Mr. Medlock follows:]
Prepared Statement of Kenneth B. Medlock, III, James A. Baker, III, and
Susan G. Baker, Fellow in Energy and Resource Economics, and Senior
Director, Center for Energy Studies, James A. Baker III Institute for
Public Policy Rice University, Houston, TX
During the past decade, innovative new techniques involving
horizontal drilling and hydraulic fracturing have unlocked a vast
resource potential and resulted in the rapid growth in production of
natural gas from shale. According to the US Energy Information
Administration, gross withdrawals from shale gas wells in the United
States has increased from virtually nothing in 2000 to over 23 billion
cubic feet per day (bcfd) in 2011, representing over 29 percent of
total gross production in the US. Moreover, a recent Baker Institute
analysis indicates shale gas production could reach over 50 percent of
all domestic natural gas production by the 2030s.\1\
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\1\ The techniques have also matriculated into the oil sector
triggering an upstream renaissance in US oil production driven by light
tight oil, or shale oil. In fact, domestic oil production has increased
year-on-year since 2008, something that has not occurred since the
1960s
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Without doubt, the natural gas supply picture in North America has
changed substantially, and it has had a ripple effect around the globe,
not only through displacement of supplies in global trade, but also by
fostering interest in shale potential in other parts of the world.
Prior to the innovations leading to the recent increases in shale gas
production, declining domestic production in the United States and
Canada was the consensus view, and was a harbinger of increasing
reliance in North America on foreign supplies. This resulted in an
expectation that prices would rise, and that the US would become a
major global sink for global supplies. While many producers around the
world began to invest in capabilities to move liquefied natural gas to
the US, the late 1990s and early 2000s also witnessed a decline in
industrial demand for natural gas as gas-intensive manufacturing
activities migrated away. Thus, the North American gas market was
undergoing a shift in preparation for increasing import reliance,
higher prices, and reduced domestic demand for industrial activities.
Even in the power sector, higher prices set the stage for more robust
growth in renewable energy sources. But, the rapid growth in shale gas
production has since turned all of these expectations upside down. In
fact, there is a valuable lesson in what has transpired. Market
stresses encourage responses on multiple margins, and there is nothing
different about what is going on currently.
To wit, the past few years of rising shale gas production has
contributed to lower domestic natural gas prices. This, in turn, has
encouraged the substitution of natural gas for coal in power
generation, and a revitalization of gas-intensive industrial demands.
There has also been interest in creating new demands, such as the use
of natural gas in transportation, particularly as the price of crude
oil remains well above the price of natural gas on an energy equivalent
basis. Finally, there has been growing interest in developing LNG
export capability to capture the arbitrage opportunity that currently
exists with domestic natural gas prices substantially below prices in
Europe and Asia.
This paper discusses the feasibility of the pathways for natural
gas that have emerged in the wake of the shale gas revolution. We begin
our discussion with the transportation sector, followed by industry,
power generation and LNG exports. While this is not meant to be
exhaustive, it will highlight some key points that must be brought
forth in any policy discussion around natural gas. Namely, there are
multiple margins of response to low natural gas prices, and one cannot
consider each in a silo; the market certainly does not.
In any case, the domestic supply capability is important in
determining the price impacts of growth in demand, regardless of the
source. According to a recent Baker Institute study, commercially
viable shale gas resources have rendered the domestic supply curve to
be very elastic.\2\ This means that even modest changes in price will
result in significant changes in production. So, the capacity for the
US market to absorb large increases in demand without significant
upward pressure on price is large. In fact, the central tendency of
prices is now projected to be between $4.50/mcf and $5.50/mcf over the
next few decades.
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\2\ Indeed, the US supply elasticity with shale included in the
resource base is roughly 5 times larger than when it is not included,
see Medlock, Kenneth B., ``US LNG Exports: Truth and Consequences'',
available at www.bakerinstitute.org (2012). Put another way, the
domestic supply curve is very flat.
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Altogether, the aim here is to highlight some critical discussion
points when considering the pathways for growth in U.S. natural gas
demand. In particular, in traditional end-uses, growth in natural gas
demand faces few obstacles other than those presented by market forces.
In new demand sectors, however, there are substantial barriers to
growth, largely due to high fixed infrastructure costs and return on
investment considerations. Thus, although the potential for growth is
large--especially in transportation where current gas use is very low
relative to total transportation energy use--realizing that potential
will be challenging.
natural gas into transportation
The transport sector has historically been dominated by crude oil
products, to the tune of 94% of all transport uses in 2010\3\. So, as a
point of departure, we must understand how natural gas might penetrate
the transportation sector. For the purpose of this discussion, we will
focus on two avenues for natural gas into transportation, one direct
and the other indirect:
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\3\ Data sourced from IEA Energy Statistics and Balances. Ethanol
comprises another 4% with natural gas making up the remainder. Note, if
pipeline uses are excluded, these values shift even more heavily
towards oil.
Compressed natural gas vehicles (CNGVs)
Electric vehicles (EVs).
One could argue that other issues should enter the discussion,
particularly if the goal is to reduce reliance on imported oil. For
example, fuel efficiency improvements ultimately lower fuel use per
mile driven. We could also discuss methanol and gas-to-liquids (GTL)
technologies, in particular because they both require natural gas as a
feedstock and could displace crude oil in transportation. Moreover, we
cannot ignore the developments in light tight oil (LTO) that have been
driving U.S. oil production up since 2008, reversing a downward trend
that had persisted since the early 1970s. But, we will return to all of
these options below when discussing the considerations that influence
investments in different fuel types.
CNG Vehicles
Currently, natural gas use in transportation is only 0.13% of total
gasoline use. So, there is a lot of room for growth. In fact, a ten-
fold increase in demand would push demand to about 0.9 bcf/day, which
is an increase the U.S. market could absorb with relative ease. But,
for the low levels of demand that currently exist to change, it will
take substantial investment in fueling infrastructure and large
adoption of compressed natural gas vehicles (CNGV) by consumers.\4\
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\4\ We could also discuss liquefied natural gas (LNG) options into
transportation, but this is primarily for large trucks and local
maritime transport. The arguments presented herein still generally
apply.
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One thousand cubic feet of natural gas yields eight gallons of CNG.
So, if natural gas price is $4/mcf then the cost of natural gas as a
feedstock for CNG production is $0.50/gallon. Adding the processing
costs for CNG of approximately $1.00/gallon, we have an estimated
wholesale price of $1.50/gallon. In addition, regional prices may
differ due to differences in the price of gas, but the price changes by
only $0.10/gallon for every $0.80/mcf change in the gas price, so the
wholesale price will not vary substantially by region. As a basis for
comparison, the wholesale price of gasoline on the NYMEX is currently
at $3.00/gallon. If these prices persist, the per gallon fuel cost of
CNG is about half the cost of gasoline, before accounting for things
such as distribution costs, profits, local and national taxes, and
lease payments by station owners. Assuming all these additional costs
are equal for CNG and gasoline, we still have a differential between
fuels of about $1.50/gallon.
Despite the preceding cost per gallon comparison, cost per gallon
is not the appropriate metric for comparison. We must compare the cost
per mile of each fuel option. In order to do this for privately-owned
vehicles, we need to incorporate the efficiency of a CNGV and a
comparable gasoline hybrid vehicle. Then, we can calculate the annual
fuel cost savings for each vehicle type. Importantly, we compare the
CNGV with the hybrid because these are the two ``next generation''
technology options currently available.
If we compare the Honda Civic, for example, we have a gasoline
hybrid engine efficiency of 44 miles per gallon in the city. The Honda
Civic CNGV has a city driving efficiency of 27 miles per gallon. Thus,
the cost per mile is $0.0126 lower for the Civic CNGV. If we assume
annual driving of 12,000 miles, the fuel savings is $151/year. Assuming
a 7 year vehicle life, we see an undiscounted lifetime savings of just
over $1,060. The current MSRP for a Civic CNGV is $26,305, and the
current MSRP for a Civic Hybrid is $24,200, meaning the price
difference is currently $2,105. Thus, the fuel cost savings does not
compensate the higher upfront cost of the vehicle. If we discount
future savings, the disparity grows. So, the CNGV is not the most
attractive option to the consumer looking to purchase a vehicle that
also reduces gasoline demand. If, however, the annual mileage jumps to
24,000 miles per year, then the undiscounted fuel cost savings just
compensates for the fixed cost differential over seven years. So, high
mileage is a prerequisite for the CNGV option to make economic sense
given these fuel costs.
The current pricing differential between natural gas and gasoline
has been sufficient to promote adoption of CNGVs in commercial fleets.
However, commercial fleet opportunities are small when compared to the
fleet of privately owned motor vehicles. So, while an economic argument
can be made for natural gas into high-mileage commercial fleets, the
same is not true for private vehicles, which, absent a change in fixed
costs differentials, will limit the movement of natural gas into
private vehicles.
Aside from the cost differences, another issue that stands in the
way of large scale CNGV adoption is a lack of re-fueling
infrastructure. There are currently about 1,100 CNG fueling stations
and 59 LNG fueling stations nationwide. These facilities primarily
serve large trucks in the case of LNG and light duty trucks in the case
of CNG. But, the ability to refuel becomes an issue when one considers
the current consumer driving behaviors. In particular, the flexibility
implicit in the existing fuel delivery infrastructure (for gasoline)
allows drivers the freedom to plan their activities without necessarily
planning routes so that they coordinate with re-fueling opportunities.
This point is what leads us to the so-called ``chicken-and-egg''
problem. Namely, consumers bear a cost if they have to search for re-
fueling stations (a so-called ``search cost''), and this cost can
prevent them from buying a CNG vehicle, even if the projected fuel
savings compensates for the incremental fixed cost. In turn, station
owners may be reluctant to install CNG re-fueling capability if CNGVs
are not prevalent enough in the vehicle stock to guarantee some demand
for the station's services. Hence, the conundrum--how does one overcome
this mismatch to ensure coordinated growth in both CNGVs and re-fueling
locations?
Electric Vehicles
Many of the issues facing CNGV adoption into the private vehicle
fleet are also faced by EVs, but by differing degrees. Cost of
ownership is certainly an issue, as most EVs are more expensive than
their non-EV counterparts. Of course, the low cost of electricity can
provide significant fuel savings, but even if EV fuel costs are driven
down near zero, the projected 7 year undiscounted savings approaches
$5,600. The base model Ford Focus EV lists an MSRP of $39,200. This
compares with the gasoline-powered base model Ford Focus MSRP of
$16,200. So, just as with EVs, the difference in fixed cost is not
fully compensated by the fuel savings. Even with the federal tax credit
of $7,500, the fuel savings is not sufficient. In other words, rational
individuals who buy an EV are doing so for some additional derived
benefit.
Aside from the issue of cost, there are also issues associated with
re-fueling. Refueling electric vehicles has both short term and long
term components. In the short term, the existing generating fleet is
sufficient to meet almost any expectation of electricity demand growth
associated with EV penetration. Moreover, many consumers can re-charge
at home, and in some cases re-charging capability is available at work
and other non-residential locations. But, the availability of non-
residential re-charging stations is not sufficient to support wider
adoption of EVs. As of September 2012, according to the EIA there were
4,592 non-residential re-charging locations in the U.S., where some
locations have multiple charging units. Moreover, most of these
locations are in only a couple of states.
The location of re-charging stations becomes a relevant issue
primarily when long distance travel is desired. Currently, range is
limited to less than 100 miles per charge in most commercially
available EVs on the market today.\5\ This creates logistical issues
for consumers who wish to drive more than 100 miles for a weekend
getaway.
---------------------------------------------------------------------------
\5\ For example, the Ford Focus EV has a range of 76 miles and the
Nissan Leaf has a range of 73 miles. The Tesla S has an estimated range
of over 250 miles, but its cost makes it a prohibitive option for most
car buyers.
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If we think about the prospects of EVs longer term, investments in
charging stations can be made, particularly if consumers show a
propensity to buy EVs. However, even if the proverbial ``chicken-and-
egg'' problem of vehicles and infrastructure can be overcome, the
resulting requirements for new electric generation capacity cannot be
understated. For instance, if EVs are widely adopted into the vehicle
fleet, a recent Baker Institute report put the projected growth in
power generation requirements are 5%, 12% and 21% higher than the
``business as usual'' case in 2030, 2040 and 2050, respectively.\6\
Given the regulatory burden facing other alternatives, the majority of
this incremental demand for electricity would likely be met by natural
gas. However, it is important to recognize that this incremental demand
will take decades to materialize, absent government regulations that
accelerate the process.
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\6\ See ``Energy Market Consequences of Emerging Renewable Energy
and Carbon Dioxide Abatement Policies in the United States,'' by Peter
Hartley and Kenneth B Medlock III (Sept 2010), available at
www.rice.edu/energy.
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Some other factors to consider for natural gas into transportation
There are other costs that exist, some of which are not even in the
current discussion. Cost of expanding and upgrading electricity
infrastructure can become an issue. Effectively, current mechanisms
would force non-EV owners to subsidize EV expansion. This could become
a political issue. Moreover, currently 18.4 cents per gallon of
gasoline purchased flows into the National Highway Fund to support
construction and maintenance of public infrastructure. As the gasoline
base diminishes, the fund will still need to be solvent, so electricity
and natural gas will need to be taxed accordingly. Currently, no such
tax exists, so it is left out of most breakeven calculations for
purchase of CNGVs and EVs. In the case CNGVs, assuming refueling
infrastructure is added, a tax at the pump can be instituted in much
the same manner as is currently done with gasoline purchases. But, its
implementation will almost certainly be protested by early adopters of
CNGVs as it could represent an ex post unexpected increase in the cost
of ownership.
In the case of EVs, if mechanisms are proposed whereby electricity
sales are taxed, then again, non-EV owners are subsidizing EV
expansion. While centralized refueling stations are a possibility,
their installation is still a pre-requisite capital expense. Moreover,
the issue of tax payments is still present. It is more likely that EV
owners will recharge at home. So, a mechanism to tax the owners of EVs
specifically must be considered. Just as with early adopters of CNGVs,
any tax implemented will represent an ex post unexpected increase in
the cost of ownership, and will likely be met with resistance.
industrial demand for natural gas
There are, of course, also ample opportunities for demand growth in
traditional, non-transportation end-uses. Power generation and
industrial uses make up the bulk of natural gas demand on an annual
basis. Seasonally, the balance shifts more heavily to space heating
applications in residential and commercial end-uses, specifically in
winter months, but the general trends in annual demand growth are set
by industrial and power generation uses. In 2012, power generation
comprised 36.1% of annual demand and industrial comprised 32.1%.\7\
Moreover, the recent low price environment has natural gas use in both
sectors poised to grow.
---------------------------------------------------------------------------
\7\ Data sourced from the U.S. Energy Information Administration.
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Industrial most recently demand peaked in 1997 (see Figure 1*)
reaching levels similar to what was witnessed in the early 1970s. It
steadily declined thereafter due to lower cost natural gas in
international locations. Industries such as the ammonia and fertilizer
industries were heavily favored by lower cost feedstocks elsewhere, and
the late 1990s and early 2000s saw many of these types of industrial
gas consumers shutter operations in the US Gulf Coast region choosing
to move abroad. However, much of this has changed in the last few
years, and industrial demand has actually grown since 2009, a trend
bolstered by low cost natural gas supply due to growth in shale gas
production.
---------------------------------------------------------------------------
* All figures have been retained in committee files.
---------------------------------------------------------------------------
An expectation for continued strong supply and stable pricing is
being seen in the slate of recent announcements by firms to expand
their businesses that rely on natural gas as a feedstock and energy
source. Dow Chemical, an industrial user of natural gas, has recently
announced a number of significant expansion plans in Texas. Other
industrial firms have also announced plans to expand domestically.
Methanex has moved forward with plans to relocate its Chilean facility
to Geismar, Louisiana, and Sasol has announced intent to move forward
with a GTL project in Southwest Louisiana. In short, if price does stay
low and relatively stable, it is possible that industrial demand could
rise to levels not seen since the mid-1990s. This would represent an
over 18% increase in industrial gas demand from its current levels.
It is important to point out that the long term trend seen in the
industrial demand sector bears resemblance to a cycle. Indeed, even the
recent growth in industrial demand has been modest in comparison to
power generation use. Nevertheless, the past few years have seen a
renewal of industrial demand for natural gas. Moreover, the planned
capital expenditures by gas-intensive industrial players are quite
large, signaling a substantial comparative advantage exists to siting
production in the US.
power generation demand for natural gas
Natural gas demand in the power generation sector has substantial
growth opportunity through fuel substitution, and it can occur in a
relatively short time frame. In 2012 we saw a dramatic increase in the
use of natural gas in power generation through substitution with coal.
In fact, the natural gas share of power generation in 2012 rose to over
30%, which was up from an annual average of 17.9% just 10 years ago.
This is in stark contrast to coal, which has seen its market share
deteriorate from 50.8% to 36% in the same time frame. In fact, much of
the drop in coal's share in power generation is directly attributable
to grid-level switching to natural gas.
The rise of gas use at the expense of coal was primarily the result
of relatively low natural gas prices, and the fact that there is
sufficient natural gas generating capability to allow for large scale,
grid-level fuel switching. Much of the existing natural gas fleet that
can capitalize on relative price movements was brought into service
between 2000 and 2005 (see Figure 2). In fact, natural gas generation
capacity surpassed the installed capacity of coal in the US in the
early 2000s. Moreover, most of the capacity that was added employs the
latest generation combined cycle technology, meaning its thermal
efficiency is substantially higher than the majority of the existing
coal fleet.
Figure 3 indicates the prices at which existing capacity of natural
gas displaces coal in power generation when the price of coal is $65/
short ton (the average 2012 NYMEX price of Central Appalachian coal),
and the heat rate of the competing natural gas plant is 7,000 btu/kWh
(which is representative of about 30 percent of the existing natural
gas fleet). We see that when the price of natural gas drifts below
$2.80/mcf, then gas will displace coal capacities with heat rates above
11,000 btu/kWh, meaning roughly 17% of existing coal capacity (or 52
GWs) could be displaced. Of course, this example is specific to a coal
price of $65/ton, but we can see in general that when gas price falls,
we have the possibility to see substantial fuel switching.\8\ If coal
trades at price levels seen in the international marketplace in the
last few years (over $130/ton), then the parity point for natural gas
price to displace 17% of coal capacity rises to around $5/mcf.
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\8\ Of course this is only a necessary condition. It may not be
sufficient. For example, if contracted coal deliveries continue to pile
into inventory, then the shadow value of coal will drop toward zero
when inventory nears capacity. Then, coal-fired generating stations
will operate even if the price of natural gas dips below this level.
This is, however, distinctly a short run phenomenon.
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If we see the price of natural gas regularly at a competitive
advantage to coal in power generation then older units of the coal
fleet will be retired. Initially, the existing natural gas generation
fleet will pick up the slack, but eventually, new builds of high
efficiency natural gas combined cycle units will be required. This
raises the natural gas pricing point for parity because a greenfield
expansion must include the cost of capital. However, when one also
accounts for the environmental regulations that the US Environmental
Protection Agency (EPA) seeks to impose via recent rule-makings, then
the competitive balance shifts in favor of natural gas.\9\
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\9\ The current rule-makings the EPA has made are all under various
levels of protest in US courts. So, it remains to be seen exactly how
binding the recent EPA actions may ultimately be.
Importantly, the EPAs recent rule-makings are focused on pollutants
other than carbon dioxide. However, a displacement of coal by natural
gas will have a substantial impact on US CO2 emissions.
Evidence of this was seen in 2012. The low price of natural gas
encouraged significant fuel switching to natural gas away from coal,
and US CO2 emissions were the lowest they have been since
1992. In fact, according to the EIA, CO2 emissions where
5,293 million metric tons in 2012 and 5,343 million metric tons in
1992. Moreover, this occurred without the EPA rule-makings in force,
and the real price of electricity was on average lower in 2012 than in
1992, dropping from $0.1361/kWh to $0.1187/kWh on an average basis
delivered to residential customers.
The above highlights a substantial opportunity for growth in
natural gas demand, particularly if resource abundance translates into
relatively stable and low prices of natural gas. Moreover, increased
use of natural gas in power generation, particularly if it comes at the
expense of coal, conveys desired environmental benefits. Government
action on air and water emissions and mandated pollution control
mechanisms will provide a substantial push in this direction.
lng exports
A recent paper by Medlock (2012)\19\ argues that the volume of LNG
exports from the US will ultimately be contingent upon domestic market
interactions with the international market. This is because US LNG
exports will occur in a global setting, meaning the entire issue must
be considered as a classic international trade problem. Only then will
any insight be gained with regard to export volumes and thus US
domestic price impacts. The paper goes on to argue that (a) the impact
on US domestic prices will not be large if exports are allowed, and (b)
the long-term volume of exports from the US will not likely be very
large given expected market developments abroad. The bottom line is
that the entities involved in LNG export projects may be exposed to
significant commercial risk.
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\19\ ``US LNG Exports: Truth and Consequence'' available at
www.bakerinstitute.org.
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Much of this conclusion derives from a relatively straightforward
analysis of domestic and international natural gas prices taking into
consideration the effects of short term deliverability constraints.
Indeed, the argument is made that the existing spread in prices between
the US, Asia and Europe is transitory. Referencing Figure 4 can
illustrate this argument. Specifically, spot prices in the UK, US and
Asia all move together until the middle of 2010. At that point, the US
price begins to drift below the prices in the UK and Asia. This is
largely the result of growth in shale gas production in the US.
A significant break in the pricing relationship between Asia and
Europe occurs at a specific date, March 11, 2011, the day of the
disaster at Fukushima. The Asian spot price jumped by almost $2/mmbtu
within a week and continued to climb through the end of the year with
the closure of every nuclear power plant in Japan. This was the result
of an unexpected demand shock as Japanese utilities scrambled to buy
any available LNG for power generation. At the same time, the spread
between the US and Asia was exacerbated by a negative demand shock in
the US. Namely, the winter of 2011/12 was one of the warmest on record
in the US, resulting in very low winter heating demands. As a result,
natural gas inventories remained very robust and the market was
oversupplied, leading to a price collapse to below $2/mmbtu in April
2012. As a result, the spread between the US and Asia rose to as high
as $15/mmbtu. The interest in exporting LNG from the US also
accelerated during this period. However, it is reasonable to expect
Asian price to revert back to its pre-Fukushima relationship with
European price as the current deliverability constraints subside--due
to new supplies and reactivation of nuclear capacity in Japan. The LNG
export opportunity looks a bit more sobering if that occurs.
Importantly, if we consider a longer term view of regional prices,
we can begin to understand the potential risk in myopic decision
making. Figure 5 indicates annual average price delivered to consumers
in Asia, the UK and the US from 1980 through 2012. We can see from
2000-2008 the US price was rising, and it coincides with the period
during which LNG regasification capacity was constructed with an aim to
import LNG to the US. However, the period since 2008 is characterized
by a wide divergence in regional prices, and this coincides with the
emerging interest to export LNG.
One must consider the longer term price relationships because the
recent past is not a prelude to the future. In fact, the 20 years prior
to the 2000s is characterized by a relatively stable relationship
between the regional market prices that saw Asian prices at a
consistent but relatively small (to recent history anyway) premium to
prices in Europe and the US. One must, therefore, question the nature
of the recent divergence in regional prices.
The conclusion reached in the study by Medlock was one of very low
export volumes from the US because the pricing premiums that exist
today will not likely persist due to new supplies from a variety of
sources as well as reactivation of nuclear reactors in Japan. In
effect, the high prices in Asia encourage responses on many margins and
thus result in a reduction in price. This follows from the adage, ``the
best cure for high prices is high prices.''
concluding remarks--bringing it all together
All the information, when taken together, points to a series of
cause-and-effect relationships that present challenges for some margins
of response and opportunities for others. It will be surprising if
``all of the above'' actually results in a market-driven equilibrium.
The traditional consuming sectors, specifically industry and power
generation, face fewer obstacles because the mechanisms for demand
growth--infrastructure and technology--are already in place. Natural
gas into transportation may be a mixed outcome, with fleet vehicles--
because they are high mileage vehicles--being the most successful in
migrating natural gas into the fuel mix. Absent a policy intervention
or a cost reduction, passenger vehicles still face hurdles to large
scale penetration of CNG due to lower mileage.
The likelihood of demand pull coming from international sources in
the form of LNG exports is high, but not in large quantities. This
follows from the fact that US prices will likely rise to reflect
marginal costs and international prices are not likely to remain at
their current premiums. In fact, if the Asian price reverts back to its
pre-Fukushima relationship with European price then the margin for
profitable export of LNG from the US becomes razor thin. Thus, market
forces will ultimately limit the volume of US LNG exports.
So, perhaps what is needed for demand growth for natural gas is a
relatively simply prescription--economic growth. Economic growth
stimulates demand for electricity and industrial goods, both of which
favor natural gas. Moreover, as demands in these traditional sectors
grow, this will create competition for supplies of natural gas for LNG
exports and new demands. It is for this reason that the most likely
demand for the robust supply of natural gas in the US will come from
industrial and power generation uses. Transportation and LNG exports
will likely remain marginal influences at best.
The Chairman. Well said doctor.
Mr. Gerard, welcome.
STATEMENT OF JACK N. GERARD, PRESIDENT AND CEO OF AMERICAN
PETROLEUM INSTITUTE
Mr. Gerard. Thank you Mr. Chairman, Ranking Member
Murkowski, and members of the committee. It's great to be with
you today.
In the interest of time, I will abbreviate my statement
consistent with your earlier counsel Mr. Chairman.
The invitation to join today is really an opportunity to
talk about the game-changing opportunity that's occurring in
the United States today, one that's unprecedented and that no
one would've predicted just 5 or 6 short years ago. Today's
hearing opportunities challenges natural gas is extremely
timely in light of our Nation's emergence now as a super power
in energy production.
This change in the global energy equation is due largely to
technological advances in the extraction of natural gas and oil
from shale formations. These technologies, though they have
been around for many years, are now being improved dramatically
in driving America's 21st century energy renaissance and have
the potential to benefit our Nation well beyond what we might
consider traditional energy policy. In the words of Pulitzer
Prize winning author, Dan Yergin, just last week he said ``this
is the most important energy innovation so far of the 21st
century.''
Recent research shows that in the upstream segment of the
oil and natural gas industry, and I want to emphasize this is
just in unconventional production of natural gas, we today
support 1.7 million jobs. That number is expected to grow to
2.5 million jobs by 2015, 3 million jobs by 2020, and 3.5
million American jobs by 2035. According to the Bureau of Labor
Statistics, jobs in the oil and natural gas industry,
exploration of production sector pay on average more than
$100,000 per year, more than twice the national average. These
are good jobs that our economy desperately needs.
Currently the entire natural gas and oil industry today in
the United States supports 9.2 million jobs, we're responsible
for 7.7 percent of our gross domestic product, and we
contribute $86 million a day to the Federal Government.
In addition to job creation, unconventional natural gas and
oil paid $62 billion in Local, Federal, and State taxes in
2011. By 2020, this number is expected to grow to $111 billion.
On a cumulative basis, unconventional natural gas and oil
activity is expected and projected to generate more than $2.5
trillion that's a T, 2.5 trillion in tax revenues between 2012
and 2035.
We should remember, this isn't happening in just a vacuum.
The world is watching us and understands that decisions you
will make as a committee, and more broadly the Congress, could
literally alter the geopolitical energy dynamic of the world.
Case in point, LNG exports which will create thousands of
U.S. jobs, generate billions in additional revenue, improve our
trade deficit, and spur major investment in infrastructure, all
while improving our energy security.
Additionally, the increased use of natural gas is critical
to reducing carbon emissions, which many have spoken about
already today. In fact, as mentioned earlier, carbon emissions
are at 1992 levels due largely to natural gas.
The question before us is not whether we have the energy to
grow and to prosper. We clearly do.
The question is whether we have the political wisdom and
foresight to create a national energy policy that harnesses our
great potential as literally an energy super power.
We look forward to working with you to make this potential
a reality. This hearing is a good start in that process.
Thank you very much Mr. Chairman for the invitation.
[The prepared statement of Mr. Gerard follows:]
Prepared Statement of Jack N. Gerard, President and CEO of American
Petroleum Institute
Good morning Chairman Wyden, ranking member Murkowski and members
of the committee. Thank you for the invitation to join you as we
consider the game changing energy opportunity before us resulting from
our abundant domestic natural gas supply.
My name is Jack Gerard, president and CEO of the American Petroleum
Institute. We represent all aspects of the oil and natural gas industry
with more than 500 members who supply most of the nation's energy.
Today's hearing, ``opportunities and challenges for natural gas,''
is extremely timely given our nation's emergence as a global energy
leader. This change in the global energy equation is due largely to
technological advances in the extraction of natural gas and oil from
shale formations. These technologies are driving America's 21st century
energy renaissance and have the potential to benefit our nation well
beyond traditional energy policy.
In the words of Pulitzer Prize winning author Dan Yergin, ``[this
is] . the most important energy innovation so far of the 21st
century.''
Recent research shows that in the upstream segment of the oil and
natural gas industry alone, unconventional natural gas production
supports 1.7 million jobs. That number is expected to grow to 2.5
million jobs by 2015; 3 million jobs by 2020 and 3.5 million jobs by
2035. According to the Bureau of Labor Statistics, jobs in the oil and
natural gas exploration and production sector pay on average more than
$100,000 per year, more than twice the national average. These are good
jobs our economy desperately needs.
Currently, the entire natural gas and oil industry supports 9.2
million U.S. jobs; accounts for 7.7 percent of the U.S. economy and
delivers $86 million per day in revenue to our government.
In addition to job creation, unconventional natural gas and oil
paid $62 billion in local, state and federal government taxes in 2011.
By 2020, this number is expected to grow to $111 billion. On a
cumulative basis, unconventional natural gas and oil activity is
projected to generate more than $2.5 trillion in tax revenues between
2012 and 2035.
And we should remember this isn't happening in a vacuum. The world
is watching and understands that our decisions could alter the
geopolitical energy equation for generations.
Case in point are LNG exports, which will create thousands of U.S.
jobs, generate billions of dollar in revenue, improve our trade deficit
and spur major investment in infrastructure, which will strengthen our
energy security.
Additionally, the increased use of natural gas is critical to
reducing greenhouse gas emissions. In fact, U.S. carbon emissions are
at 1992 levels due largely to increased use of natural gas in the
generation of electricity.
The question before us is not whether we have the energy we need to
grow and prosper. We do. The question is whether we have the political
wisdom and foresight to create a national energy policy that harnesses
our great potential as an energy superpower. We look forward to working
with you to make this potential a reality.
This hearing is a step in the right direction. Thank you for your
time and attention.
The Chairman. You get the record for the shortest
testimony, and----
Mr. Gerard. Thank you.
The Chairman [continuing]. We thank you.
So we're going to have votes in a few minutes.
I'm going to ask just one question to each of you. Senator
Murkowski, we'll get as many colleagues in as we can, and then
we're going to break probably around 11:15.
Here's my question for each of you that's willing to
comment. I think you heard Senator Murkowski and I both talking
about the importance of working in a bipartisan way. That's
what it's going to take in order to get anything done. What I'd
like is to, in effect, assess your views on one issue and that
is: Is there a way to a natural gas policy where America can
have it all? Economic growth, lower emissions, cheaper power,
and reduced trade deficits certainly are what come to mind.
What would each of you recommend that the committee do in order
to have it all, in effect find that sweet spot where we can
attain so many of these important objectives to the country?
Why don't we start with you Governor?
Governor Hickenlooper. That's certainly no easy question.
Again, I come back to the notion of regulation--appropriate
regulation, and my own inclination, obviously being a Governor
and knowing there are enough former Governors up there is that
States are the laboratory of democracy and that we are focusing
on how do we create a rigorous set of regulations that will
be--I mean we steal from each other every day, and I think the
Federal Government Lisa Jackson at EPA's been a great partner
with us in terms of trying to push us further and trying to
figure out where those sweet spots are by using some of the
technical expertise that she has had at her disposal. But I
think that that's going to take a, you know, certain amount of
time although we should have our full regulatory environment
together within--by the end of this year, and at that point
we're still doing testing and measuring the air pollution
issues and air quality around these large fields, trying to
push our large companies to do less trucking back and forth,
more pipeline transfers, to convert more of their diesel
operations to be fueled with LNG.
I--One of the large exploration companies, Noble Energy in
Colorado, they're based out of Houston, but they are now
building their own LNG plant in Colorado so that they can sell
it and run these operations in a more clean fashion.
The Chairman. If I can get some others in, Mr. Liveris.
Governor Hickenlooper. Yes.
Mr. Liveris. Yes, Mr. Chairman.
I had mentioned the quadruple win. We believe that if the
American public benefits and we get the benefit of jobs from
exports and domestic manufacturing, America can be an energy
and manufacturing super power.
All you have to do is follow the current law of the regular
regime that exists, which is--look at the public interests with
each application, take a cautious approach.
Our numbers suggest somewhere between 5 and 8 bcf a day
should be what we see in this first little while while we're in
the fifth year of these great energy finds.
I think we also have conversations around responsible
regulations.
We should have a con-responsible supply and making sure
demand and supply don't get out of check like they did 10 years
ago.
We should not let the market, call it the speculators, call
it Wall Street, call it the financial world, set the price
domestically because as we all have seen with commodities like
oil, that price is set in the main by financial markets as much
as real supply and demand.
So there is a way to have it all, I believe.
The Chairman. Very good.
We were just given a reprieve for 15 minutes. So we're
going to go until 11:30. Then we'll take a break.
Mr. Eisenberg.
Mr. Eisenberg. Thank you.
I think this committee is taking a very thoughtful approach
to the issue.
I note this is not the very--it's not the first time this
committee's had a hearing on the issue of LNG exports. I mean
you did this 14 months ago.
You're taking a very thoughtful and cautious approach to
try and understand all of the challenges.
If I could focus on one thing, it would be permitting. In
my written testimony, and I'll walk through it a little bit
again, I talk about some of the hoops that you really have to
jump through to actually get an LNG export facility up and
running.
So not only the DOE license is not the final hoop that they
have to jump through here. They have to engage in a very, very
broad environmental review of their project led by FERC.
Compliance with NEPA requires that the developer acquire
the land and begin design engineering plans. That takes about 2
years. Then NEPA requires the input of up to about 20 Federal
and State agencies, including the Army Corps for dredge and
fill permits, which we know can be very controversial; a
waterway suitability assessment from the U.S. Coast Guard; air
permits from State and EPA agencies; and then the usual State
and Local construction permits.
If they can somehow get through that and get a final EIS,
then you can be sued for 6 years.
If you can somehow get through that, then you have to get
the long-term financing in place and you have to get contracts
in place. Then when you get the contracts in place, then you
have to go find $10 billion to go building a facility.
This is not an easy process.
I really recommend to try and take on some real legislation
to try to make the permitting process work faster.
The Chairman. Let's do this Ms. Beinecke and for each of
you, understand the tradeoffs because if we all just go back to
our positions, then it's going to be hard to find the sweet
spot.
Ms. Beinecke.
Ms. Beinecke. Senator I think that one of the key issues is
gain--how you gain public confidence, and I think having minim
Federal standards and public disclosure of chemicals.
There--right now there in the 30 States in which fracking
is occurring. There's only chemical disclosure in 14, and those
States vary considerably.
So in order for natural gas to provide the benefit that my
colleagues on this panel have identified, you have to figure
out how you're going to assure the public that their health and
that their well-being is protected, and there need to be
minimum Federal standards that provide that, and they don't
exist now.
The Chairman. Very good.
Mr. Medlock.
Mr. Medlock. Yes, well, I actually second what Ms. Beinecke
just said with regard to Federal standards.
The one place I think the Federal Government could actually
have a very active role is in promoting transparency. I think
that's something that is lacking, with the exception of a few
States where certain States have actually taken initiatives to
make sure transparency regulations are put in place.
The other thing, and I'll shift gears here, that I think
could really help benefit an all-of-the-above kind of outcome
is to allow markets to do what they do, what they've always
done. They've actually resulted, as I mentioned in my
testimony, in a very efficient natural gas market in this
country, and it's hard to imagine anything that would be
adopted that would disrupt that.
But one thing that we need in this country that would
really benefit, not only the immediate-term, but in the long-
term, is the ability to store electricity. If we get to that
point, it actually changes the entire landscape of the energy
infrastructure in this country and would convey a lot of
benefits associated with renewables, associated with natural
gas, associated with nuclear power that we simply can't reap
right now.
The Chairman. You're spot out on storage. I'm over my time.
Mr. Gerard, just if you----
Mr. Gerard. I'll be brief. The first thing we can do is
remember how we got to where we are today. In a very real way
we are today at a sweet spot.
We got here because of market conditions and the free
market brought us to the point of $3 gas when it was $14 gas
just 4 or 5 years ago.
So the worst thing for us to do, and this is just where I
take strong exception with my friend Andrew, is to get
government involved in trying to set the price and trying to
control the market.
The market will sort this out and find the equilibrium.
We will from that we benefit from the improved environment
with lower emissions, having low cost, affordable natural gas.
We'll generate 2 million jobs, we'll generate $2.5 trillion
in revenue to the Federal Government, all while finding the
opportunity to literally have it both ways in terms of exports
and domestic production.
The Chairman. Very good.
Senator Murkowski. I'm just going to continue on the
discussion of exports. Several of you have raised the fact that
there are multiple applications pending right now. There are 18
that are for export to non-FTA countries and 3 that are for
export to FTA countries.
The suggestion has been, and not necessary with this panel
but out in the public discussion that somehow or other if all
these applications were to be approved, all of a sudden we
wouldn't have access to the natural gas in the volumes and the
quantities that we would hope for this manufacturing
renaissance.
I think it was you, Mr. Eisenberg, that noted some of the
difficulties.
I noted in my opening comments that we're talking about
billions of dollars to build out the infrastructure. Was over
in Japan a couple of weeks ago. They're looking at our prices
somewhat with envy, but when they account for the
transportation costs and the liquefaction costs, at the end of
the day there's not that much difference between what they're
currently paying and what they might pay if they were able to
take benefit of export from the United States here.
If I can ask, and Mr. Liveris you had mentioned that
potentially we could see half of our natural gas being exported
if, in fact, all of these applications were to be approved. The
question is: Do any of you believe that we will be in a
situation where we will see a dozen export applications
approved in this near term?
I throw it out to any of you, given the cost, given the
need for long-term contracts with other Nations, and the need
to obtain financing.
Mr. Liveris.
Mr. Liveris. I would actually firstly agree with my good
friend Jack, assuming we're friends, the conversation about
adding jobs is what we should be having 2 million plus 5
million, not 2 million or 5 million.
I think this conversation is seen before.
None of us get the gas price right. Five years ago we had
it wrong. We were building import terminals. Five years from
now, what's it going to be?
How many terminals should the public interest demand?
What is the public interest here?
It is to get volatility and instability out of an energy
price.
We care about agriculture here in this country.
We care about defense.
We should care about energy. This opportunity to get it
right by doing both in the public interest means we should take
a crawl-walk-run approach to how many terminals we approve and
how many of these occur over time.
As I said in my testimony, we're in the fifth year of our
100-year advantage. You can't move factories overnight, to
state the obvious.
Why put at risk the 5 million jobs, the $96 billion worth
of investment that are on the books today? Over 60 companies,
why put that at risk by doing either or? Why transfer the risk?
So be cautious, do what the public interest demands and the
DOE application process.
I agree, financing will be difficult.
I agree, prices will be volatile.
But why take the risk and let the speculators set the gas
price like they did 10 years ago, and we all remember the
Enron's and what the efficient market did for us 10 years ago.
It was hardly efficient. OK. It was very inefficient.
Senator Murkowski. We can talk about whether or not the
public interest determination includes the specific criteria
that we need to look at. I think that's going to be an
important part of it.
I have suggested, too, that we need to be very thorough in
the review. You don't just willy-nilly grant applications.
These all need to be recognized for what they might provide.
Governor, I want to take the balance of my time to talk to
you because I am interested in what Colorado has done in terms
of your leadership with the State's regulatory system. You
indicate that Colorado could be this national model. You speak
very highly of what you've been able to accomplish in terms of
the balance.
I happen to believe that the other States should be models
just as Colorado is a model and, again, as a former geologist
or a recovering geologist, however you recognize yourself, that
in your State and in your region you want to make sure that
things work for you.
I guess my question to you is: Given that you feel pretty
comfortable with your State's regulatory system and what you
have built there, do you think that we need new Federal rules
on top of what Colorado already has in place to provide for
further levels of safety or assurance or does it add another
layer and perhaps an unnecessary regulatory layer?
Governor Hickenlooper. Historically the way the regulatory
environment traditionally works in this country is the States
are the laboratories, and we are now--there are other States
that are aggressive in creating their own integrated and
comprehensive regulatory environment, and we--for the National
Governors Association, you former Governors know how
competitive Governors can be. But we also collaborate.
So I--the Republican Governor, Mary Fallin, from Oklahoma,
she and I went to Detroit last June to try and convince car
manu-automobile manufacturers that they should do more
compressed natural gas vehicles right off the assembly line.
At the same time, we're looking at how do we take our
regulatory environments and have those 30 States where we are
facing the issues of innovation technologies in horizontal
drilling and hydraulic fracturing, and how can we work together
to create a template where we would have sufficient flexibility
to respond to the different environments in different States,
different depth of the shale, the different quality of the
rock, but at the same time allow us to move toward some level
of Federal regulation.
So I think ultimately we will get to that Federal
regulation.
I want to make sure that the States work together in terms
of making sure we don't put one State or another at a
disadvantage.
Senator Murkowski. So then, in addition to what you already
have within your State, you think that additional Federal
regulation on top of that is a wise thing?
Governor Hickenlooper. I think what would happen Federal
regulations would probably be modeled after a group of States.
It wouldn't be in addition to.
They would--we talked to Secretary Salazar when he was with
the Interior in terms of what the appropriate regulation would
be for BLM land. What we came up with was Wyoming, Colorado,
Utah all have fairly strict transparency rules around frack
fluids, some of the same basic regulatory environments, very
aggressive about escaped fugitive methane. We got to the point
where, and we haven't done this yet, but we're talking about
having one application form that you would send if you wanted
to drill a well in Colorado or Wyoming on BLM land. It would be
the same form that you send in to the State. So you send the
same form to the Federal Government as to the State. So that--I
mean, isn't that the ultimate goal?
We're trying to get different States and the Federal
Government to work together so we cut the red tape and yet
still maintain a very, very, very high and rigorous set of
regulatory environments.
Senator Murkowski. Chairman, I'm well over my time, but it
seems to me that we're talking about regions, not necessarily
one level of Federal overlay.
But I'd like to pursue this conversation further with you
if I may.
The Chairman. Very good.
Unless things change now, again, we will go until 11:45,
then we're going to have 2 votes, and then we'll take a break
and will come back.
Next in line is Senator Udall, and then Senator Flake is
after Senator Udall.
Senator Udall. Thank you Mr. Chairman, again. Welcome to
all of you on the panel.
I want to turn to my Governor who provided an initial, very
insightful summary of what's happening in Colorado.
We have seen a big economic boost from the current oil and
gas boom, as the Governor mentioned.
It's also brought some challenges. In our neighborhoods and
communities we've seen additional drilling and concern from our
citizenry. I think the Governor and I both believe that there's
a great economic opportunity here, but our No. 1 priority is to
protect the health and well-being of our citizens.
We hear a lot about fracking and drilling, and there are
some efforts underway that have been challenging in Colorado
when it comes to those communities? rights versus the State's
rights versus the industry's rights.
Governor would you speak, because I know you're going to
field--and have already--some questions on how we balance all
of this, but speak in particular of the fugitive emissions
questions that have been raised?
There was a study that the EPA released last week that
concluded that oil and gas operations are the second largest
emitter of methane in the country. You've spoken about the need
to eliminate fugitive methane emissions, so we can get that
full environmental benefit.
Would you share with the committee what your vision is for
how we do that and what the industry's been saying to you in
Colorado?
Governor Hickenlooper. Sure, and thank you Senator for your
balanced approach on all of this.
I'm sure you senators all know this, but there's no one
who's climbed more mountains, I mean real mountains, in terms
of their life and at the same time recognizes and tries to
balance the needs of our communities for jobs and commerce so
that we can protect our natural environment at the highest
level but still focus on the realities of day to day life.
You know the issue around methane is crucial because it
is--fugitive methane is very harmful to our environment and
even as you burn gasoline, you know compressed natural gas is
cleaner than gasoline, but if you allow fugitive methane to
escape from where it's collected and then during transportation
and more importantly where it is put into vehicles or used by
end, whether it's commercial facilities or wherever, if that's
escaping, we lose much of the environmental benefit.
The one beauty of this is you don't have to push industry
too far to let them recognize this is something that they can
sell. Right? This is something that they can value and that a
higher level of regulatory oversight to make sure that
they're--that we measure fugitive methane really allows them to
benefit long-term by making those infrastructure investments.
We have--we're doing a $1.5 million project right now
through Colorado State University. We're going to go out to a
couple of our largest fields, but eventually within 2 years we
will have measured the air quality at different times of the
day at different seasons in most of our major oil producing
parts of the State so that we can actually demonstrate what are
the real, not just the estimates, but what are the real
consequences of this and how much methane is escaping and get
ourselves back down to a zero tolerance.
Most of the responsible oil and gas producers recognize the
imperativeness, and they willingly accept that regulatory
environment.
Senator Udall. Thank you Governor.
If I might, I'd like to ask Ms. Beinecke for her thoughts
on fugitive emissions. I know, Frances, you've really taken a
close look at this and----
Ms. Beinecke. We have Senator, and thank you for asking.
Our concern is--I mean we have concerns about all the air
emissions coming from natural gas. Methane is of particular
concern because of its potency as a climate-forcing emission.
So we think that the measurement that's going on now, trying to
find out where the methane is leaking from, putting forth the
technologies to stop it as quickly as possible is absolutely
imperative to protecting the climate.
We're also concerned with the other air emissions coming
from fracking, particularly coming from the trucking
operations--diesels.
There are people all across the country who are concerned
about what they're being exposed to. They don't know exactly.
We need ongoing air monitoring, and I'm happy to hear the
Governor saying that that's going to be something Colorado is
going to be doing because there's a huge gap between the
information that the public has and what is happening in their
own communities and until we, as a country, take that on and
address it head on, there is--there just a huge conflict
between the opportunity that people hear of identified with
natural gas and the concern that people have about their health
and well-being in their own homes.
I'm just saying that that is growing so quickly across the
country.
We hear from people each and every day, and just a poll
that Bloomberg did in January shows that 66 percent of people
in the country wanted stronger protections from fracking and
that went up from 55 percent in September.
So, this is an issue that is really exploding in the public
mind, and they need to know that you will all take on their
concerns and put in place those safeguards that will assure
them that they're protected in the future.
Senator Udall. As the Governor pointed out, these are
industrial processes, and we've all become comfortable with the
industrial zones around our cities and wherever they may be
located. But when these industrial processes come to people's
backyards and school yards and community areas, it really
drawns people's attention.
I know my time's expired.
I want to, for the record, thank the Governor for his
comments about my mountain climbing exploits, but I also wanted
to be clear that the great French climber, Lionel Torrace, said
that climbers are conquistadors of the useless.
We'll leave that there, but I did want to comment on
natural gas exports. I think there's real potential when it
comes to exporting natural gas, as long as it doesn't come at
the cost of our land, our water, and our air, or consumer
energy prices.
I want to keep exploring the national security implications
of exports, especially to our NATO allies. I think there could
be a real benefit. I sit on the Armed Services Committee, as
well as the Intelligence Committee, and I believe there's more
to this question that we ought to discuss, and I look forward
to continuing that conversation.
There's real geopolitical ramifications of this Shale Gale
that we now have available to us.
So, again Mr. Chairman, thank you, Ranking Member
Murkowski, thank you.
The Chairman. Thank you Senator Udall.
Senator Flake.
Senator Flake. Thanks.
In the interest of time, I'll just ask one question. Mr.
Liveris in your testimony you note the competitive advantage to
American industry by maintaining affordable gas prices. I think
we all agree with that. You talk when you look at Dow's online
policy statements, they will tout the benefits of a competitive
open market, particularly as it pertains to exporting
chemicals. Why do open markets work there in driving down price
and benefits to everybody, but they don't in terms of producing
natural gas and export of natural gas?
Mr. Liveris. I'll try and be brief.
It is a complex conversation.
Number 1, open markets we are very much for.
We are for exports, we are for balanced exports, so we
don't lose competitive advantage domestically.
Gas, as already noted, has to be liquefied and shipped at
billions and billions of dollars. That is not an open market,
that's a point to point contract. There's probably 30 of these
contracts around the world from nation states to nation states.
Not all go to free market NATO allies. These are countries
that need gas because they don't have oil. They--actually their
equivalent is to import oil. That's why there is a national
security interest.
But to take gas and actually export it as a primary-10
producers in the world that are gas rich, only one of them
chooses to disadvantage the domestic sector by not looking at
the efficiency of the domestic market because it takes so much
to make this shippable versus in oil. OK? You actually can
leave it home in an efficient market home.
So how do you actually balance how much of it goes offshore
versus home is a conversation that should be in a conversation
like this.
Domestic manufacturers in places like Saudi Arabia, in
places like Russia, who actually have top-down policies say I'm
going to keep the gas home to diversity my economy away from
just being exposed as an oil exporter and a gas exporter in
their 2 cases.
In a free market democracy, we need to get the balance of
all stakeholders to the table, but recognize that this is not a
commodity world price yet. One day it might be. There may be
enough LNG traders that's why I disagree with this market of
LNG being 30 BCF a day.
If the world energy market is the gas market, the gas will
substitute the oil.
The gas will substitute the coal.
The gas will substitute ultimately nuclear where nuclear is
not allowed.
So it's the world energy market that this serves.
Therefore, it's fairly infinite in that sense.
So you've got to be careful you don't let the current world
energy price, which is oil, set the domestic gas price as an
unintended consequence.
So, crawl-walk-run. Let some of this occur. Let the BCFs go
up. Let it rise as supply rises with responsible regulation.
Let's look at the public interest and the effect on the
domestic competitiveness in both the consumer and the
industrial user. Let's get both of them.
That's my quadruple win.
Senator Flake. If I understand right, Mr. Gerard, you're
saying that the best way to let that happen, to find that
balance, is to let markets to do that. Is that correct?
Mr. Gerard. Absolutely.
In fact, Senator when you look at the reality of what we're
dealing with today, there's already about 37 to 40 bcf a day
capacity that exists in the world. The expectation between now
and 2025/2030 is that the entire market for LNG is going to be
in the 50 to 60/65 bcf.
The amount that we're talking about in the U.S.'s potential
proposals or permits is about 30 bcf.
The potential additional build across the world is 50.
So if you look at all of the proposal to export LNG today,
you've got 114 bcf potential trying to satisfy a 50 bcf a day
market.
The amount that would leave here, and most of the studies
show, at most perhaps 5 to 6 bcf.
The natural gas industry increased our production in the
United States by 6 bcf in 2 years in the United States, and
we're just at the verge of figuring out how to further be more
efficient to produce even greater volumes.
The likelihood of this having any significant impact on
price, in fact all the other independent studies have done show
somewhere between 2 and potentially 11 percent impact on price,
is highly unlikely.
It's the market that brought us here today.
The market will continue to drive the price down.
The other added advantage is we're creating jobs in this
country, great paying jobs, as we try to fulfill the demand on
a global basis. We shouldn't overlook that, and we're really at
an opportunity to change the equation.
We're now the largest producer of natural gas in the world,
surpassing Russia. It's a great opportunity.
We shouldn't go slow and let that market dissipate because
it will be filled by others around the world, and we're putting
at disadvantage our own Americans and others who are prepared
to risk market capital and to build the facility to export the
product.
Senator Flake. Thank you, Mr. Chairman.
The Chairman. Senator Franken.
Senator Franken. Thank you Mr. Chairman.
Natural gas has contributed to lower U.S. emissions, which
is great, but oil and gas production is still the second
biggest contributor to greenhouse gases and eventually we need
to shift more emphasis to renewables.
When this committee heard testimony from former Lockheed
Martin CEO, Norman Augustine, on a report by the American
Energy Council, we were told that the country has yet to embark
on a clean energy innovation program deserving of the
priorities that are at stake.
Part of that is because my colleagues often criticize
government support for renewables. They believe it is only the
marketplace that can determine which technologies will become
relevant.
But the history of fracking tells a very different story.
The Breakthrough Institute has looked extensively into
this. They've examined the Eastern Gas Shales Project which was
an initiative of the Federal Government back in 1976 before
hydrofracking was a mature industry. The Project set up dozens
of pilot demonstration projects with universities and private
gas companies testing, drilling, and fracturing methods.
This was instrumental in the development of the commercial
extraction of natural gas from coal.
Other tool used in fracking, microseismic imaging, was
originally developed by Sandia National Laboratory, a Federal
energy laboratory.
The industry is also supported through tax breaks and
subsidies. In fact, according to former Mitchell Energy Vice
President Dan Stewart, Mitchell Energy's first horizontal well
was subsidized by the Federal Government. Mr. Mitchell said in
an interview, and I quote, DOE started it and other people took
the ball and ran with it. You can't finish DOE's involvement.
Anyone here but Mr. Gerard, Mr. Medlock do you agree with
Mr. Stewart that you can't dismiss DOE's role in the
development of this technology?
Mr. Medlock. I'm actually 100 percent with that. It's
actually a point I've made many times in talks that I've given.
I think it's actually remarkable how the foresight that was
demonstrated by the Federal Government back in the 1970s to
actually initiate the Eastern Gas Shales Project because it
didn't pay off in 5 or 10 years. It took over 30.
Now we're sitting in the midst of talking about what should
we do with this abundance of natural gas, and it owes its roots
to Federal Government programs, so I don't disagree with that
at all.
Senator Franken. I just want to emphasize that because we
hear this so often. But then if you look back at the actual
history of this, this thing that we celebrate now, this
abundance of natural gas came from the expenditure of Federal
dollars.
We need to do the same thing when it comes to renewables.
Governor.
Governor Hickenlooper. Senator, I think you're right on
point, and I know some of those guys from Mitchell Energy, and
they are the first to recognize over the 1980s--I remember that
I think it was 1982 and 1995 that the Federal Government
invested over $5 billion in terms of trying to create this
ability to extract shale gas from tight shales and to get oil
from tight shales.
Simultaneously, I think also we have to recognize that
renewable energy such as wind and solar is intermittent and
certainly as we are faced with challenges on storage we need
ways to be able to have electrical energy generation go on and
off efficiently.
Natural gas does that at a level that literally almost no
other energy can do, so it becomes a perfect partner for solar
and wind.
I think it will prove to be the transition energy that will
allow us eventually to get to a fully renewable energy
environment.
Senator Franken. Thank you Governor.
Since I have you, I just want to talk to you a little bit
about, and I'll do this very quickly because I'm running out of
time, the 2005 Energy Policy Act exempted underground
injections associated with fracking from Federal Safe Drinking
Water Act jurisdiction.
The only exemption was from fracking fluids that used
diesel.
Now we've had concerns over groundwater contamination that
have been raised, even documented by EPA in places like
Pavilion, Wyoming.
You've developed regulations in your State that include
disclosure of chemicals that are used. Have these regulations
prevented your State from sustaining a strong natural gas
industry? I think I know the answer, but I want to ask it.
Governor Hickenlooper. No, not at all.
But I think the key there is to make sure that all the
actors are at the table and so that as you're recognizing one
of the real issues when we sat down with executives from
Halliburton, they have a frack fluid that is made out of food
additives. You can drink it.
We did drink it around the table, almost ritual-like in a
funny way, but it demonstrated----
Senator Franken. Like a pact.
Governor Hickenlooper. Not like a pact.
It was a demonstration. We had environmental----
Senator Franken. Oh.
Governor Hickenlooper.--representatives. We had industry
representatives--everybody around the table.
Senator Franken. It was not like an occult?
Governor Hickenlooper. Not an occult.
Senator Franken. OK.
Governor Hickenlooper. No, there were no religious
overtures----
Senator Franken. Yes.
Governor Hickenlooper.--in any sense.
But I think the key was that there--that that was more
expensive that they've invested millions of dollars to create
what is really a benign fluid in every sense. It doesn't have
benzene or any of the other components that we generally get
from crude oil or hydrocarbons.
So, but if we were not a--if we were overly zealous in
forcing them to disclose what they had created, they wouldn't
bring it in to our State.
So it was an alignment of self interest to make sure that
we had a regulatory environment where they could protect their
investment in their intellectual property but at the same time
be sufficiently transparent so that the Marmel Defense Fund,
the NRDC, the representatives of environmental quality were
willing to say this is sufficiently transparent to--we know we
understand what's being pumped into the ground.
The Chairman. I don't want to be Draconian, but we have a
number of Senators who are trying to get in before the break.
Senator Franken, I'm going to follow up with, though,
because you're making good points.
Senator Franken. Thank you Mr. Chairman.
The Chairman. Senator Lee.
Senator Lee. Thank you Mr. Chairman, and thanks to all of
you for coming.
I appreciate your testimony and the thoughtfulness with
which you've addressed each of these issues.
I've got a few questions. I'd like to start with Mr.
Liveris, if I could.
In your testimony you suggest that increased exports are
likely to bring about upward price pressure on natural gas.
But it appears to me that you may not have taken into
account the impact that Mr. Gerard referred to a few minutes
ago, the impact that would result from increased demand
resulting in higher prices resulting in increased production
activity. Plus, and likely in more production of natural gas,
perhaps enough to keep the price of gas even, or close to even.
Is it--is that a correct characterization that Mr. Gerard
made, that we need to take that into account?
Mr. Liveris. So, I made several points.
Firstly, the world market for gas does not exist; it's a
world oil price.
The world oil price is currently $117 Brent.
It's got nothing to do with the cost of world production.
It's got nothing to do with the actually the affordability
of oil around the world.
It's got everything to do with speculation and geopolitics.
Before you index the domestic gas price to the world oil
price domestically and this up-swirl that Mr. Gerard refers to,
which is why you want to export in the first place, I said we
are for exports.
But we should be very careful that we don't do what is
called Dutch Disease. Economic theory brings back the highest
price back to your domestic sector with unintended
consequences.
Be careful of unintended consequences.
Have the production.
Have the exploration.
Gas prices should rise from where they are today.
They putting in-locking in wells because the gas price is
too low.
We fully expect domestic gas prices to rise, and that's not
even a question of----
Senator Lee. You're OK with that?
Mr. Liveris. Of course, of course.
Senator Lee. Some of this is going to have----
Mr. Liveris. There should be a return for everyone here.
A return for the people who have taken the risk.
A return for society.
Let's use some of this bounty and transition to a low
carbon economy, as Senator Franken talked about.
We're for an all-of-the-above energy strategy.
Let's use natural gas as a transition for our economy
first. Let's let that up swirl occur as a reasonable return for
everyone and for American manufacturing jobs and the American
consumer.
That's a thoughtful approach to how many of these
applications to approve.
Senator Lee. OK, so this is what you are referring to on
page 6 of your written testimony then when you refer to the
need to promote and enforce policies that would keep prices at
reasonable levels.
I think reasonable was the term you used.
Mr. Liveris. Absolutely.
Reasonable meaning to cover the risk of everyone in the
value chain, including the explorers, including the
entrepreneurs, including the producers, but including society
that needs smart regulations so as to produce responsibly.
Senator Lee. OK. One person's conception--one person's
concept of what is a reasonable price might be different than
another's.
Mr. Liveris. Clearly.
Senator Lee. Who gets to decide that?
Isn't that a highly unavoidably subjective standard?
Mr. Liveris. Senator, you would agree that if I go to a
completely different world, the world of agriculture, who sets
world food prices? Does the agricultural sector from every
country follow everyone's rules?
There is rules-based free trade in everything we do,
including my products.
I have standards in Japan I can't meet because the
government of Japan sets that standard so I can't export
anything from here into Japan.
The oil industry's quite familiar with that.
Senator Lee. OK, so you----
Mr. Liveris. Who sets the rules is where everyone has to be
at the table and figures out what the right rule for free trade
is.
Senator Lee. OK, so everyone's at the table and they do
make their arguments.
But you're suggesting a system in which the rule would
ultimately be made by the Department of Energy, and you suggest
that the Department of Energy should implement a rulemaking
process that would require the Department of Energy to analyze
a comprehensive list of criteria before they approve any LNG
export?
That one of those criteria ought to include an
identification by the wood-be exporter of any jobs that might
be lost in the manufacturing industry, is that right?
Mr. Liveris. So the current law, the public interest
criteria in the Department of Energy is our law, your law,
everyone's law.
You set the law.
So the regulatory regime has worked in the past by doing it
right.
This is a new found bounty. The criteria should be all-of-
the-above: responsible production, does society benefit as a
whole, and is job creation something that is additive here, can
we get job creation in the oil and gas sector and the
manufacturing sector, and I think that should be one of the
criteria that the gov-DOE looks at.
Senator Lee. Should----
Mr. Liveris. I'm not suggesting----
Senator Lee [continuing]. Anyone who wants to export
anything from the United States also be required before
exporting it to prove to government officials that it wouldn't
cost any jobs in any other industry in the United States?
Mr. Liveris. I didn't actually answer you by saying it
should be jobs only.
It should be all of the criteria:
Senator Lee. But that should be one of them?
Mr. Liveris [continuing]. Food security, national defense,
and energy security, in my view, are national interests.
So the DOE has public interests for some reasons, and I
would imagine the national interests being at the highest
hierarchy. The national interests includes lots of things, of
which job creation is one of them.
Senator Lee. OK. I see my time's expired.
Thank you very much Mr. Liveris. Thank you, Mr. Chairman.
The Chairman. Thank you Senator Lee.
Senator Stabenow.
Senator Stabenow. Thank you Mr. Chairman.
I want to talk more about exports, but I do want to start
by agreeing with Ms. Beinecke that we've got to make sure we
have the public confidence and the safeguards in place to make
sure that this--that this actually can be done in a safe,
responsible way.
But I do want to follow up as we talk about public
interests.
I find it interesting conversation that we--that there's
some surprise about talking about the need to not only export a
new natural resource that's--we have now, that is an incredible
opportunity, but also weighing how we leverage that, keep it at
a reasonable cost basis in order to create American jobs.
It seems to me that's what our job is to do, is to find
that balance to be able to do that.
When we look at what the DOE is looking at right now in
terms of their studies and so on, I would follow up. Mr.
Liveris you talked about the 100 new projects that have been
announced at a value of over $95 billion and that if we keep
natural gas affordable, we're looking at 5 million
manufacturing jobs and that's certainly something that seems to
me would be of significant importance in this economy as we're
trying to turn around, and manufacturing has really been
inching along leading the way.
But when we look at the study that the Department of Energy
has used, to your knowledge did it include the 100 new projects
and if not, how would that affect the reliability of that
study?
Mr. Liveris. Yes, we thank you Senator Stabenow.
The study did not include the $96 billion of projects that
are now on the books. It actually used the EIA re-Demand
Scenario as of 2010-2011.
These projects were not on the books in States like Senator
Landrieu's State. By the way, happy Mardi Gras Senator
Landrieu.
We definitely feel that this study should be reexamined.
It's not just us that said it's flawed. Many people have looked
at it and said this is a part that needs to be upgraded.
By the way, I think that we should do 2 or 3 or 4 more
studies and get everything on the table. I think that's the
whole discussion we're having here because one study does not
make a strategy. OK. One study does not make the decision.
I think we have lots of inputs to this decision, not the
least of them being making sure we have responsible supply.
Senator Stabenow. Would you discuss a little bit more what
you think is missing from the DOE approach at this point. What
more would you like to see considered in the broad
consideration of what we should be exporting and the approvals
of the export terminals?
Mr. Liveris. I think it's trying to describe almost the
unforecastable. Just like we were here 5 to 7 years ago.
I--last time, I only ever testified once before. It was on
the issue of natural gas, and I was actually trying to help the
oil and gas industry get more drilling rights offshore and get
more drilling rights to actually produce more.
So I understand what restricted supply does to markets, but
I cannot forecast energy demand. No one can, because it's
geopolitical.
So what we have to do is in the process look at responsible
exports over time that allows the win. I talked about. Job
creation in the oil and gas sector and the exploration side,
job creation downstream, and not hurting the American consumer
with the unintended consequence of bringing the oil price back
to the domestic consumers' electricity bills.
I think there's lots of factors that can be put into place
in there, and you've mentioned some of them. We can go into it,
and we have views on it, but I think that's what we should
study in fulsome detail.
In the meantime, let's allow exports to our FTA partners.
Senator Stabenow. Let me just ask in my final minute,
because it seems to me Mr. Chairman our goal ought to be to
export natural gas, but also export finished products.
Mr. Liveris you talked about the 8 times factor on a
finished product. Could you tell us a little bit more about how
the components of natural gas are used and how many different
things around us have those components in it?
Mr. Liveris. So the ingredients of natural gas are what we
call feedstocks, natural gas liquids. The bounty of shale gas
is, thanks to our great oil and gas sisters and brothers,
they--the bounty, the geology, is that the gas is very wet, so-
called NGO rich.
A God-given gift.
This is very unusual. The gas fields around the world are
not as rich as these gas fields.
Therefore there's a new unintended consequence, which is
all the ingredients for everything from laptops to smart phones
to pharmaceuticals to paints and varnishes to carpets to
cosmetics, all the vital ingredients, 95 percent of them come
from fossil fuels.
The best and lightest fossil fuel is natural gas for the
reasons the Governor and others have talked about, and natural
gas liquids should not be shipped overseas and be burnt in
Japanese cooking ovens. It should be kept home so we can add
value at 8 times by building these facilities.
There's $4 billion an ounce in Louisiana and Texas alone by
Dow Chemical, $20 billion by Sasol, $15 billion by Shell to
value-add.
This is a big bet that we're going to get responsible
supply and responsible production.
It's a risk. It's a managed risk, as long as we don't
interfere and create a new unfettered demand for it overseas
and stop all this value-add in the country.
We should be thoughtful on how to have our cake and eat it
too here by doing all these building blocks, all these jobs,
small businesses.
For every supplier to Dow that is less than $50 million in
size, I build a community. A hundred and fifty communities in
America--small businesses benefit from this value-add. That's
why there's a job multiplier of 5.
For every job I create, 5 jobs get created around me. This
is why it's a manufacturing renaissance that I never thought
I'd see in my career lifetime, right here in America.
Let's try and get it right.
Senator Stabenow. Thank you.
The Chairman. With the schedule of the witnesses and what
we're dealing with in the Senate today, I'm going to call
another audible.
Senator Barrasso is going to be back next. He will have
questions and other colleagues are going to come back.
We are going to stay here and just keep going. So if you
all will indulge us, you can be sure, Mr. Liveris, you are
going to get your discussion of fulsome detail on this
question.
We'll stand in recess until Senator Barrasso comes back.
[Recess.]
Senator Barrasso. Thank you for reconvening.
We'll ask some questions and then we're going to try to get
back and forth to vote so that all of you who have traveled
great distances and have spent your time will still have an
opportunity to share your wisdom and your thoughts with all of
the members of the committee. This is one of the best attended
of our committee meetings that I've ever seen.
So there's obviously a great deal of interest in this, even
to the point that in Investors Business Daily this morning,
front page, Natural Gas Exports Where The Jobs Are. We're
focused on obviously jobs and the economy.
Tonight the President promises in his State of the Union,
at least the White House Press has promised, that he will pivot
to jobs and the economy. This is apparently his eighth pivot to
jobs over the last 4 years.
So I'm--as someone from the State of Wyoming, a State with
exceptional amounts of energy reserves, this is a big issue for
us.
Mr. Eisenberg, I'd like to just ask you if I could, is in
your testimony you state, quote, the United States ability to
challenge other countries? existing export restraints will be
virtually nonexistent if the United States begins imposing its
own export restrictions. You go on to say U.S. actions are
often replicated by other trading partners, to our own dismay,
and if the United States went down the path of export
restrictions, even more countries would quickly follow suit and
could easily limit U.S. access to other key natural resources
that are not readily available in the United States.
So, would you please expand on this, in your comments for
the committee?
Mr. Eisenberg. Sure, and thank you for the question.
I should probably preface that by saying we have a team of
international trade experts who would be very happy to support
any questions for the record beyond what I can answer here
today.
Senator Barrasso. Great.
Mr. Eisenberg. But yes, I think if you look, certainly most
recently, at the China raw materials case that the U.S. just
won, and we're in a situation where if we actually turn around
and make the exact same argument, then we could basically be
laying the foundation for further challenges by others to our
commodities overseas.
So, yes, as I understand it there are significant WTO
issues here.
Senator Barrasso. Dr. Medlock, the--I'd like to ask you
about LNG exports to national security, and your comments
specifically made some focus points there.
Currently many of our closest allies in Europe are heavily
dependent on Russian gas.
Russia has used its natural gas resources for political
leverage against these countries.
Other allies are dependent on Iran's energy. Turkey, a NATO
ally, receives 20 percent of its natural gas from Iran. In
addition, Japan, one of our closest allies in Asia imports
significant amounts of Iranian oil.
I've introduced bipartisan legislation which is not always
that common here on Capital Hill-bipartisan legislation to
expedite LNG exports to our NATO allies, to Japan and to
others.
Would you explain how LNG exports would promote the
national security interests of the United States and its
allies?
Mr. Medlock. As briefly as possible.
Yes, in fact one of the----
Senator Barrasso. I thought we'd go until somebody else
shows up----
Mr. Medlock. Sounds good to me.
Senator Barrasso. Go ahead. That sounds fine.
Mr. Medlock. In a nutshell, and you've already seen a
microcosm of markets changing within Europe alone since what's
happened with shale in North America started to happen.
In particular, you had players that were invested all the
way to the upstream end to bring natural gas in the form of LNG
to the United States that were investing very heavily
throughout the value chain to do that.
As soon as shale took off in North America, those supplies
basically had to find a place to go, and the first point they
were actually directed to was Europe.
What that did was it created pressure on the existing
pricing paradigms, the existing contractual relationships
between large buyers in Europe and Russians, and in particular,
gas prime.
What that has basically led to is a destruction of the
preexisting pricing paradigm, which was one of oil indexation.
Now what you've actually seen is gas prime relent to a lot
of their major buyers in Europe and actually allow an element
of spot indexation in their pricing structures, and what that
tells you is that when you add liquidity to a market, you
change a lot.
What that means is it begins to challenges the revenue--it
begins to challenge the revenue streams the gas primes value so
much and puts them in a very precarious position because no
longer do they have a captive customer. Now they actually have
to think actively about price and negotiate on pricing terms
which basically changes their negotiating tactics, not only at
the bargaining table for natural gas, but also around other
geopolitical interests, visa vie Belarus, visa vie Georgia.
So we can think about lots of different things that this
begins to impact because ultimately they don't want to lose the
market. So that's but one example.
You can think about this spilling over into Asia, as well,
where the oil index paradigm has continued to persist until
recently when you actually see CO Gas actually signing up a
long-term contract for a cost plus, a Hub plus index, for gas
out of the Cheniere facility, it's a bean pass.
What do you think they're going to do with that contract at
every subsequent pricing negotiation they have?
They're going to walk in, they're going to put it on the
table and say look, I want a gas index deal because I've got
one and I've got a line of suppliers willing to provide it to
me.
It changes everything.
It's about liquidity, and that's something that has been
lost in a lot of the comments I've heard today, as there's been
no discussion of what liquidity actually means for the way
commodities are priced.
Gas has been indexed to oil because it has not had
liquidity. That's something that's changing in a dramatic way
largely because of what's happened with shale in this country.
Senator Barrasso. Thank you, appreciate it.
Mr. Gerard, I'd like to ask you about natural gas
production on public lands, Federal public lands.
Many in Congress are looking for ways to create jobs while
at the same time raise revenue for the Federal Government.
We can do this by increasing natural gas production on
Federal public lands, in my opinion. Right now companies are
unfortunately shutting in natural gas production on Federal
public lands.
Workers are losing their jobs.
Federal revenue is being lost, so would you explain how LNG
exports will help create jobs in this country and increase
revenues to the Federal Government?
Mr. Gerard. I think there's 2 issues there Senator.
The first relates to the public land itself, Federal lands,
and of course there's a question there of leases, permits,
etcetera. Unfortunately today, production coming off Federal
lands generally is going down. The number of permits, the
number of leases are going down. You're seeing a great
disparity being created between Federal land and private land.
I think the Congressional Research Service sent a report to
somebody here in the Senate-recently reported that this vast
Shale Gale we're talking about, particularly in unconventional
resources, 96 percent of that increase in production in the
United States is occurring on State and private land. So we've
got to get the politics right and the permitting right, back to
the Governor's earlier comments about the need to be more
efficient and thoughtful and actually allow access to the
Federal land.
Now a lot of the resource we're talking about today
excludes the potential for resource on the Federal estate. For
example, today 85 percent of the outer continental shelf has
been placed off limits. We're not sure just how large that
resource could be.
So when we have estimates talking specifically about
natural gas estimates today showing at least 150-year supply,
it could be multiples of that if we had true access to the
Federal lands to develop it there.
Laws of supply and demand will show that if given the
access to produce what we have on the Federal estate clearly
could help meet any demand for LNG exports would once again
find the market.
The issue today is not a supply question. We have abundant
supply. It's a demand question. How do we make sure there are
markets in place that we can fill?
LNG export is a perfect opportunity and that's why under
the Natural Gas Act we would strongly encourage the Department
of Energy to move quickly to approve those.
The market will sort out who eventually builds those
facilities, but if we don't get there quick, for all the other
economic reasons we talked about, that's going to be filled by
somebody else, and we're going to miss the window.
Senator Barrasso. Could you talk a little bit about how the
BLM's pending hydraulic fracturing rule could hurt jobs and
decrease Federal revenues?
Mr. Gerard. It goes back to the same issue of our ability
to produce on the Federal land and back to what Governor
Hickenlooper had said earlier.
Historically oil and natural gas have been regulated by the
States. For the past many, many years there's been a good
relationship between State and Federal Governments, in terms of
permitting access to the land and eventually producing the
energy on those lands.
When you add multiple layers, particularly Federal layers,
that potentially conflict, confuse, and further delay, it
further discourages the private investment on the Federal land.
So once again you create a great disparity in where the
investment dollars move away from the Federal estate because
they know there's a better market opportunity on private and
State land.
The days to permit on private land--you're looking at
places like North Dakota, today the second largest oil producer
in the country.
It takes days or weeks to get a permit compared to months,
and in some instances years, to get a permit on Federal land.
It's a big difference and something that ought to be looked at
by the committee.
Senator Barrasso. Mr. Eisenberg, I want to get back to you.
You talked about the National Association of Manufacturers and
how they strongly oppose using NEPA to require cradle-to-grave
lifecycle impact analysis that assesses the impact of exported
cargo.
Explain the EPA's asked Federal agencies to conduct such an
analysis for LNG export terminals and coal export facilities in
the Pacific Northwest, You go on to state that such a move
would create a very dangerous precedent that could be used to
block exports of all types.
So the question is: would you please elaborate on the types
of exports that could be negatively impacted by the EPA's
proposal?
Mr. Eisenberg. I mean, we're--thank you very much for that
question, Senator.
We are very worried that if we get a precedent that
requires a lifecycle cradle-to-grave environmental impact
analysis that the possibilities truly are endless for what you
could block to export.
Looking at the coal export projects in the Pacific
Northwest, what some have called for up there is to go all the
way back, to take an exam-underneath the impacts of the mining,
which are already permitted things, the transportation, the
construction of the port, the shipping overseas, and then the
ultimate burning of the commodity.
It would be a significant change in law and policy to look
at the environmental impact of cargo, and this is something
that can, I think, all manufacturers really have a concern
about because where do you draw that line? Is it agriculture, I
mean you could really bend this in a way----
Senator Barrasso. Could it be automobiles?
Mr. Eisenberg. It could be automobiles. It could be planes
Senator Barrasso. It could be airplanes, heavy equipment,
tractors.
Mr. Eisenberg. Anything.
So manufacturers are very, very concerned about heading
down that path for no matter what that commodity is.
Senator Barrasso. Thank you very much.
Mr. Liveris you argue that we shouldn't export LNG so we
can create jobs here in the United States, and you say that you
just want to see natural gas exported in solid form products
instead of liquid form. You say you want to give American
companies the opportunity to add value to natural gas and earn
a higher return for the resource.
Why shouldn't, you know, the Federal Government set up a
policy to benefit manufacturers higher up on the value chain?
You know, why shouldn't you just limit exports of chemicals
so that domestic manufacturers can add value to them before
they're shipped overseas, and the question is where you draw
that line, isn't it?
Mr. Liveris. Actually in my testimony Senator I didn't
actually say that it's either or. In fact I went to great
lengths to say it's and.
I think we should do both.
We should export LNG, and I think definitely we should look
at the public interests with respect to our NATO allies.
That's something we should have on the table.
But in addition, let's put the power of the and in place.
Let's look at the unintended consequences of a non rules-
based free trade market, gas. One day it may well have the
liquidity to be a rules-based free trade market, but today it
does not. OK?
The unintended consequence of trying to do one or the other
is you transfer the risk away and you let the risk be assumed
by American manufacturers and consumers to the positive of
someone else being de-risked overseas.
Let's do both. Let's have exports and look at the
intended--unintended consequences on domestic consumers.
Senator Barrasso. Mr. Medlock, can I ask you to respond to
what Mr. Liveris just said?
Mr. Medlock. Sure.
Liquidity is something that is gained as markets mature, as
you have more entrance of suppliers and demanders and that's
precisely what we're seeing in natural gas markets around the
world right now.
If you do anything to impede that progress than you slow
that progress of liquidity, you actually end up creating rents
along pieces of the value chain.
In this particular case, let's say hypothetically there was
a cap placed on the amount of LNG that could be exported that
was a nonmarket cap. Basically what you do is you provide rents
to those first movers, the ones who actually build the export
infrastructure because the prices will never adjust abroad to
actually bring them down so that you actually end up with super
profits basically for companies involved in the export
business.
So, I would not promote that because by actually limiting
how liquidity grows you actually support certain elements of
the value chain which is not competitive, to be quite frank.
Senator Barrasso. Thank you.
Senator Coons.
Senator Coons. Thank you very much Senator Barrasso, and
thank you to the panel for a chance to be with you.
I'm excited that this first energy committee hearing is
focusing on such a basic question about how we embrace the
broad energy future in front of us.
Let me start if I might with Mr. Eisenberg and Mr. Liveris,
from NAM and from Dow.
Just regarding the potential approaches for how to balance
the factors that you've spoken to: the competing environmental,
economic, and national security interests. You note that
policymakers should aspirationally rely on the best quality
information, on objective material, and on metrics that allow
making the best decision in a public policy process. This is
because of the inherently limited nature of projections and
modeling, particularly for world market conditions, especially
in energy.
What type of systems do you suggest might be put in place
to evaluate ongoing and potential impacts intended--not
intended, even while the DOE and FERC licensing processes are
underway. In your view, if we phase in licensing for export of
natural gas, what would be the most prudent timing in which you
would phase that at?
Mr. Eisenberg. Thank you.
I do think, and as you know in our testimony we do call for
the best quality information in this process, and I think it's
important, and this is a question that Senator Wyden raised in
his comments on the DOE study, which are that they used the
2011 Annual Energy Outlook Statistics, and we absolutely agreed
that that should be updated.
But at the same time that can be updated while the
permitting process is ongoing. Right now we are building none.
We are permitting none. We have a complete moratorium. So let's
get on with it and continue to have the best quality
information for the fact-specific determinations that DOE must
make as they go through this licensing process.
You know, there is, as Mr. Liveris said, there are 2
studies that DOE has done on this matter. There--I read them
over the weekend. There are no shortages of studies out there
that Delloyd and IHS and others are doing on this issue, and I
appreciate and am happy with the continuing dedication to
understanding the impact of this.
But that's not a reason not to let the free market work.
We--our policy says that we fundamentally believe in free trade
and open markets, and we do. We view it with respect to this
and just about any other commodity.
So we think we can have it all here, and we do think that
we should strive to have the best quality information.
But it shouldn't be a reason to continue with the
moratorium.
Senator Coons. Thank you.
Mr. Liveris. Senator Coons, I'm all for studies and
consultants. I'm all for academia, but they don't buy gas.
I buy, as Dow, more gas than most countries. OK? So we are
a significant purchaser of this risk and, therefore, when you
fool with this risk by not having the public interest in mind
in its totality, you have to get your criteria right by looking
at all the angles.
All the angles did not get looked at 10 years ago when we
deregulated power in the19 90s in the Clinton era. It had an
unintended consequences to the domestic sector.
We had gas prices spiking as high as $15 and $18 and $20
per million BTU.
Manufacturing was fleeing the country. Factories were being
announced across the world. It wasn't labor offshoring. It was
energy offshoring.
Energy is the lifeblood of an economy in all of its forms.
In its value-added form, the one that Senator Stabenow
asked me about, the consumer, the home heating bill of the
consumer, in all of its forms.
So be careful of one or 2 or 3 studies giving you the
absolute criteria. As you said in your comments and Chairman
Wyman made comment, as well, no one gets this right.
We're in the 4th or 5th year of trying to understand what
this bounty is. Can we produce it responsibly across the
country? There are regions that differ already. We know that.
The geology is different. We don't know how much supply we
have.
Let's be careful testing our country on when a market gets
to maturity on liquidity risk. Why should we take the liquidity
risk as a country in a totality while someone overseas benefits
from our bounty.
Be measured in the criteria, let's crawl-walk-run through
these applications.
Exports should be allowed. They should be allowed through
our FTA partners, that's the public interest.
Develop the criteria as we go along.
Figure out what the unintended consequences are.
I want to clarify I said over and over, there is no such
thing as free trade. It's rules-base free trade.
There is no GATT, there is no Doha. Why? Countries don't
agree on the rules.
What rules are we agreeing to here when we decide to
approve 12 applications overnight?
Be careful that we look at this treasure and set the rules
with America in mind. That's all.
Senator Coons. Thank you Mr. Liveris.
I'm very sympathetic to the strong perspective you've
presented that urges us to focus on job opportunities and on
the difference in portability between natural gas and
petroleum.
Natural gas is distributed throughout the United States
largely by a robust, nationwide network of more than 300,000
miles of pipelines, and we have a remarkable transmission
capacity in the United States. If I understand right, we've had
a more than 50 percent increase in pipeline capacity since
1995, and I just wondered, Mr. Gerard, if you had any comment
about the policies that have been adopted that have helped
facilitate that creation of that significant robust nationwide
transmission infrastructure?
Mr. Gerard. It's a great question Senator. One that we, I
believe, need to turn our thoughts to more often. For example,
the infrastructure issue in the United States will help
facilitate to continue to drive prices down for commodities,
particularly for oil and natural gas.
Yet today we find ourselves hamstrung in some
circumstances, I think as Mr. Eisenberg spoke of earlier in
permitting processes. But that infrastructure that exists today
needs to be expanded to truly seize the opportunity we have
before us to become an energy super power.
Where Andrew and I might take a strong difference is there
are other aspects of this view that we need to think of, as
well. That's the job creation opportunity in the oil and gas
sector itself and the opportunity to have it all.
But the government can't better--can't understand that risk
any better than the private sector can. So the worst thing for
us to do is to get the Government in the process to try to
determine through an export mechanism what that price should
be.
If the market signal to my people is that there's going to
be a limitation on where that demand might go, they then pull
back on their rig counts, on the production itself. So you have
a reverse adverse multiplier effect throughout the economy
because you're limiting potential demand where that market can
go.
As I mentioned earlier, we shouldn't underestimate supply
is not the issue. We have a vast supply, and it's by and large
due to our modern techniques and technologies.
It's really a question of demand and if we get the
government involved in limiting demand through slow walk
processes, review after review after review, we're then at a
disadvantage in the global market because there are others
pursuing that market very aggressively and providing liquidity
to the natural gas market.
Senator Coons. One of the mechanisms, if I might Mr.
Gerard, that I understand has made possible the financing and
construction of a world class transmission and terminal system
in this country is a tax structure called Master Limited
Partnerships.
In your view have master limited partnerships been
essential to deploying and developing the natural gas
infrastructure of the country?
Mr. Gerard. Yes, they've been very important to us. In fact
I know there's talk now of potentially looking at the renewable
space in the energy development, something we and the oil and
gas industry strongly support and spend billions of dollars to
try to figure out those new technologies.
But yes, they are important because they allow us to bring
in investors and others, not to put their resource at risk, so
that we can bring these commodities to the marketplace.
Senator Coons. Does that strike you as a structure that
might be able to support both natural gas, oil development as
it has in the past, and renewables? It would literally be an
all-of-the-above financing strategy.
Mr. Gerard. I know folks are looking at it and I understand
you are as well Senator.
We'd be happy to get some people much smarter than I am to
take a close look at that and come back to you with some
details on how that might be viewed in the marketplace.
Senator Coons. Thank you. I'd be grateful.
Mr. Gerard. Thank you.
Senator Coons. Before I yield the gavel to Senator
Alexander, I'd just if I might--a question to Dr. Medlock and
Ms. Beinecke. I also chair the Africa Subcommittee on Foreign
Relations, and I'm interested in what you think of the
potential impact of natural gas development on Africa. They're
fully exploiting both the dramatic new offshore gas discoveries
and the potential for shale gas, which exists in many places
across the continent.
What positive or negative consequences might there be for
U.S. businesses and technology export and how might this affect
development trajectory of the continent?
Ms. Beinecke. I'm going to defer to Dr. Medlock on that
because I don't--haven't looked at the issues in Africa, and so
I don't, we don't have an opinion on that.
Mr. Medlock. So, at a very high level, certainly the
discoveries off the east coast of Africa: Tanzania, Mozambique,
those portend to really convey a tremendous economic benefit to
a region of the world that needs it.
There are large shale gas resources that have been
identified in Algeria, already a large gas producer and
supplier to Europe, but also in South Africa, an area that
hasn't really seen a lot of natural gas development in the
past.
So the potential for, you know, the conveyance of benefit
is definitely there.
I think the thing that you really have to think about that
differentiates Africa from the United States is the regulatory
overlay. In particular, when you think about the mechanisms in
place in the United States to really insure the safety of the
general public, the safety of the environment, the safety of
the workers involved in these activities, those mechanisms
don't exist, more or less, anywhere else in the world the way
they do here.
So I think, you know, a real understanding of how to carry
what we've learned in this country, being such a large oil and
gas producer for so many years abroad we really will sort of
help to allow the development in a responsible way of those
resources.
Senator Murkowski [presiding]. Senator Coons, we're over
time. I'm sorry.
Senator Alexander.
Senator Alexander. Thanks Madame Chairman. Thanks to the
witnesses. I see the chairman and the ranking member here. I
want to thank them both not just for the subject of the
hearing, but for the even-handed way in which they've pursued
this, and I really appreciate that. I'm looking forward to
working with them on this committee.
Just an observation and then a question. The observation is
maybe one thing we can agree on here is that energy research is
a good thing. I mean it's hard to think of--well this is an
overstatement, it's hard to think of an important technological
advantage over the last couple of years that hasn't had some
government research and as the earlier discussion went back and
forth with unconventional gas clearly the Department of Energy
Demonstration Project, maybe even the Tax Credit, the Sandia
laboratories work on mapping all of that was essential, but I
keep thinking that-that maybe we actually have an energy policy
in the United States and don't know it and it boils down to
government sponsored research, private ownership of property,
entrepreneurial attitude, big market and free market and that
all of those things have suddenly given us what amounts to a
terrific advantage in energy.
I was in Germany recently, and they've got a big
complicated CAP and trade. They're closing their nuclear
plants. They're buying nuclear power from France. They're
subsidizing Chinese solar panels and they're buying coal from
the United States so we-we've ended up with a pretty sensible
policy and the one thing it would seem to me that it would
encourage that would be doubling the amount of Federal dollars
we spend on research for such things as what do we do with
CO2 from coal plants, how do we get a better battery
that's been mentioned by several people in terms of storage,
etcetera.
Now here's my question: Do we really have a problem here? I
have 3 images in my mind.
One is this weekend I went quail hunting in south Texas and
we didn't find any quail because of the drought. But what we
found--I hadn't been there in 3 years in that section. We were
in the midst of the Eagle Ford shale and there were 5 motels
where there was one, there were oil rigs everywhere, there were
new networks of roads, there were big lakes, big trucks going
back and forth. I mean it's an astonishing thing, gas flares
everywhere so it's easy to see the great production value and
the dollars that come in North Dakota and south Texas in our
economy from this production. Now that's one image.
The second image is Australia last year where they're
selling their gas to Asia at 5 times our price. Not only are
they selling it to Asia at 5 times their, our price, they're
paying 5 times our price for their own gas because they're
paying the world price for natural gas. I think back to
Tennessee about the number of workers at Eastman Chemical,
about the farmers we have, about the auto jobs we have, about
the truckers we have, and I see the enormous, incredible
advantage the United States has at the moment from having a
domestic price of natural gas. It's really a Godsend, and it's
very unusual, and I think our policy got us there, but I think
we should examine it very, very carefully which is what we're
doing today. I suspect it's a much bigger source of jobs than
the production value of oil and gas is in the United States.
The production value of all the farmers, all the chemical
companies, all the manufacturers in our State is a huge
advantage.
Then the third image I have is the United States going into
Iraq because of oil and because Iraq had gone into Kuwait and
there we are. So while I'm a big free market, free enterprise
person, I also see the value of the domestic price. I don't
want to lose that. I also see the national security
consequences of this.
So my question is, though, do we really have a problem?
One witness said that we might not export more than 5 or 6
bcf. That's about 10 percent of what we produce today, if I'm
correct. Is that about right? At what point at what percentage
of exports, and let me just go down the line and ask this
question. If we don't have time today to do it, maybe you could
write me out--the question has an A and B part. A--at what
point--at what percentage of exports begins--do we begin to
lose the domestic price advantage of natural gas that we have
today and No. 2, under present policies if you had to make a
guess, what would be the range of the percent of our natural
gas production that we'd be exporting in 10 years?
Mr. Liveris. I can't help but pass up the comment on my
home country of Australia who's desperately got it wrong. OK?
It's one of the only gas rich countries of the world that,
in fact, has the phenomena you just talked about. So, one
sector exports from the Northwest shelf of Australia, the oil
price bleeds back into the Southeast corner of Australia,
manufacturing is collapsed, and 2 of the 5 most expensive
cities in the world are Sydney and Melbourne. The retail prices
are through the roof.
So if you want a poster child for getting it wrong, and
this may cause me never to get back to my home country but I'm
going to say it, my home country is the poster child.
So, the questions. Is there a number? It's unknowable and
unforecastable which is why I believe the process has to work
with the public interests as its lens. Every single one of
these applications as you build up these terminals from one to
2 to 3, from 2 billion mcf to 3 to 4 to 5, the market will send
a signal. I'm a free marketer, but the market sends signals
like it did in 01-02 when the market read there wasn't enough
gas to meet current demand, the price went through the roof.
Eastman and other companies like Eastman suffered the
consequences.
So we've got to be careful. The market will work.
But don't just flood the market with one answer. It's not
an either or. Don't do 12 bcf. Don't do 20 bcf.
Senator, I can't give you the exact number. I'm not that
smart. All I can tell you is this is not an open market. As I
said, LNG, you have to work hard to make LNG work.
So I would think that as these terminals get built, we'll
get the better of job creation upstream and job creation
downstream. I already indicated that's a 5 times multiple.
We can get the farmers to win, we can get the Eastmans to
win, we can get the consumer to win, and we can have exports.
The Chairman [presiding]. Thank you Senator Alexander.
Senator Heinrich.
Senator Heinrich. Thank you Mr. Chair----
Senator Alexander. Mr. Chairman can I ask that the
witnesses answer that question in writing after the hearing?
The Chairman. Yes, that would be great.
Senator Alexander. Thank you.
The Chairman. Senator Heinrich.
Senator Heinrich. I want to thank Senator Alexander for his
comments about basic research and development. Obviously Sandia
National labs played a real role in the fracking phenomena, but
also in a whole range of energy development and research over
the years and that ought to be something I think we can agree
on that that is a good thing.
I want to ask our witnesses today about something that
hasn't received a whole lot of attention yet but Mr. Liveris
touched on it during Senator Stabenow's comments, and I want to
drill down a little further and get people's thoughts on this
and maybe Mr. Liveris, Mr. Medlock, and anyone else who wants
to comment, it's the issue of wet versus dry gas and we're
talking about natural gas here today, but that means many
different things and certainly what gas provides these
feedstocks that have been discussed as a lever, a job, as a
lever to create more jobs than just the energy production.
Then we also have in New Mexico we have basins that some
are wet and some are dry. So what I wanted to ask is do our
policies and does the market, and I'm not going to describe
this particular market as a free market because I don't think
it is yet, but do our policies both at the Federal level and
then do the economics recognize the distinctions between these
different products between natural gas liquids, natural gas and
the fact that it may have very different ramifications to
export dry gas to be used as an energy support versus exporting
gas that is rich with these natural gas liquids that are so
important for the manufacturing sector, and how do we make sure
that as we move forward that both our policies and economics
align with those job creation goals. Mr. Liveris and then----
Mr. Liveris. Yes, I think it's a very, very educated
question Senator, so thank you for asking it.
It allows me to make a new point and that is exactly your
point.
Wet gas, the LPGs, propane and butane, do have a market.
The market tends to work. It's the fuel equivalent of cooking
oil and home heating oil so if you extract propane and butane,
yes it can go to petrochemicals and other uses but it has a
heating market. That market is out there and it's working. No
one is suggesting anything different.
The real toggle in this conversation is that other
ingredient that only chemical engineers like me talk about and
that's called ethylene. Ethylene is unfortunately--can stay in
the gas. It doesn't get rejected.
It can go to Japanese power stations and when they set the
BTU speck they like to keep it in because it gives them more
BTUs. They like to pay the domestic, they like to pay a gas
price for a rich ingredient.
Some of these countries actually extract it and add value
to their own countries. So I think every country in the world
who extracts ethylene goes to the trouble of answering your
question in a very educated way. They put aside the ethylene
for their domestic economy.
Now that sounds like interrupting free markets doesn't it?
But ethylene doesn't trade. There is no real world ethylene
price. I can get ethylene in Saudi Arabia at a very different
price than I can get it in the United States.
That's where I think we have to be very measured on what we
export, but that opens up a whole new line of questioning, and
I'm happy to answer it at some future time.
Senator Heinrich. Mr. Medlock.
Mr. Medlock. Just real briefly with all of the longer chain
hydrocarbons which you're talking about here gas processors
when they actually see the gas at gathering systems come to
them will make a decision about the value of extraction versus
the value of leaving a certain component of those longer chain
hydrocarbons in the stream.
In a situation where the ethylene price and the propane
price and the butane prices are actually elevated sufficiently
enough, then you'll see them extracted. You'll see leaner gas.
It has to be within a particular range if it's going to be
pipeline inspected in the U.S., but there is a market mechanism
that actually drives how high that gas is in effect.
Senator Heinrich. Is that highly dependent on that sort of
the state of infrastructure and the local conditions because
many of these things are being produced in places that don't
have the long history of infrastructure that say the basins in
the Southwest like New Mexico and Colorado have? I mean----
Mr. Medlock. Oh certainly it does, certainly it does.
You're talking about gas coming on line say in south Texas.
This is an interesting example actually, what's happened in the
Eagle Ford and what it's done to actual NGL prices at Mont
Belview.
You've seen a massive disconnect between where Mont Belview
NGL prices have been in the past couple of years relative to
where they were in, previously in relation to crude oil prices
and it's because you've got a lot of NGLs coming into the
market that are being extracted because there's high value
associated with them.
But what that's done is it's led to a glut in that
particular market and so it argues for infrastructure.
Mr. Gerard. Senator I'd just like to say quickly, yes, it
does have a market because if you watch our rig count, you'll
see it move from what we call the dry gas to the wet gas. I
would also add one of the great benefits, particularly the
manufacturing sector today, more specifically even to
chemicals, is that we are now at record highs, unprecedented
highs for natural gas liquids production in the United States.
It's a very significant development by and large as part of
associated development with natural gas.
Senator Heinrich. Mr. Chairman, I yield back.
The Chairman. I thank my colleague.
We appear to have another vote, so I think we'll go with
Senator Manchin at this time and obviously Senator Cantwell's
great expertise in this area, so we want to get her in too.
Senator Manchin.
Senator Manchin. Thank you so much Mr. Chairman and Ranking
Member Murkowski.
Let me just say first of all as one of the greatest
concerns I think all of you, and I think I know that Mr.
Liveris that you said I'm more concerned about how we start
getting priced, who controls the American pricing, and once you
go into that overseas market you lose your ability to set your
own destiny. Is that correct? Is that probably one of the--I
mean people are coming to me and saying you know you keep
telling us how much oil you're developing now in America but
our gas prices haven't gone down. How come?
Mr. Liveris. Yes, the ultimate point here is that energy,
its fungible price around the world basis is oil.
Make no mistake. Everything else is domestic, nuclear, even
coal tracks oil.
Senator Manchin. Has OPEC always controlled the pricing of
oil?
I mean we developed our Nation on oil we found. We have a
State that was rich in oil back at the turn of the 19th
century/20th century.
Mr. Liveris. State-owned enterprises own 75 percent of the
world's oil reserves and 50 percent of the production.
So State-owned enterprises (OPEC) from the early 1970s to
this very day sets the world price based on supply.
They regulate supply. You know this, right?
Senator Manchin. I don't think anybody in the gas industry
want that to happen to gas prices, would you?
Mr. Gerard. Senator, let me respond to that if I can first
as it's been predicted due to this great technology we've been
talking about, this game-changing opportunity.
Experts now predict if we continue down this road that the
free market has brought us, the United States will surpass
Saudi Arabia as the No. 1 oil producer in the world in 7 short
years by 2020. We can ultimately have an impact and it all
comes back to the free market.
That's why we've got to be very sensitive and mindful of
attempting to intervene or to manage price or spots in the
marketplace.
Senator Manchin. When you, and I'm so sorry we've been
running back and forth in committees but I've been keeping up
with what was going on here, you all do agree that basically
this is our last great chance to have this type of a find in
energy that could be game-changing for our country. A
renaissance in manufacturing, transportation fuel, and what I
think the question was asked by the Chairman, where's the sweet
spot?
What I think we're saying is how can we work with you on
exporting certain amounts, give us a timeframe to build up the
demand in this market here in the United States?
Can you all live with something like that?
Mr. Gerard. Senator, most of us believe we're just at the
front end of this Gale, if you will, both on shale gas and oil,
that we haven't yet fully appreciate, just recently there was
an announcement in California at Monterey which some estimate
to be an oil reserve 4 times larger than what we found in North
Dakota.
Senator Manchin. But that didn't do us any good at all
because the price is still $4 a gallon. At $3.50 to $4 a gallon
so you can find, until the cows come home.
Mr. Gerard. It all comes back to supply and demand. It
comes back to what we produce and how we put that into that
global marketplace. Trust me----
Senator Manchin. To be on a level with a consumer in
America today hearing reports that we have more energy now and
we're about to be a net exporter, and yet they haven't seen any
of their costs come down?
Mr. Gerard. No, let's use natural gas as a price as a
great--as an example. That's a great question.
Today as a result of the natural gas price coming from
about $14 to $3, the average family in America that consumes
natural gas costs have gone down $1,000 a year. That's
estimated to increase to a couple thousand dollars year as we
become even more energy efficient.
Senator Manchin. OK.
Mr. Gerard. So there is a very significant consumer-
positive consumer impact, not to mention the environmental
benefits, etcetera, as the Chairman's----
Senator Manchin. I think finally the question I want to try
to get to--I'm looking for the--I guess as the Chairman keeps
saying the sweet spot. There's got to be an area where we can
say OK we can with the prudent measures we have with the
anticipated reserves we have export this much. We can dedicate
this much time to develop the markets in America. We can
transform our transportational fuels.
I've always said that I thought every State when I was a
Governor if someone said listen, we'll help you transfer all of
your commercial fleet which would be our school buses, our mass
transportation, our State road vehicles into gas-propelled
vehicles working out of bulk stations. It would be the most
cost-effective thing we could do. We could develop that within
a 5-year period. We could have a renaissance in manufacturing.
We have the crackers as we're talking about. If that's a
possibility we need some time to develop that. That's what I
would be asking for.
What is the time period? If we don't hit that mark, and
let's say it's 10 years, then we should open up the market
completely. If we can't get our act together, go for it
gentlemen--and ladies, I'm sorry. Let's just do this.
Mr. Gerard. Senator, Senator, I guess the thing that
concerns me in your comment is how you manage that, that
development.
Where we are today, the opportunity's been created that no
one would have predicted 5 or 6 years ago because the market
found that equilibrium. It found the opportunity to put the
downward pressure on the price.
The same is true of the discussion that we're having. The
market will find that. Let's let the market fine-tune that
recognizing we have a vast supply in the United States which is
what's driving that price today in this country.
The Chairman. My colleague and I are going to miss the
vote. We're going to let you all have about a 10 minute recess
and then we're going to come back.
Senator Manchin's asking important questions we need to
continue to dig into.
Thank you all.
[Recess.]
The Chairman [Presiding]. The committee will come to order.
Senator Manchin was practically in mid-sentence so he is
going to raise his additional question and then Senator
Cantwell.
Senator Manchin. I think where I am--if I can get an
answer. Has anyone come to an agreement identified on a
reserve, an amount of reserves that we have, proven reserves
that we have and how many years based on demand right now?
Because I read yesterday that no one can agree on anything--
brightest people in the country.
Mr. Gerard. It continues to change Senator. In fact----
Senator Manchin. OK.
Mr. Gerard. Six/seven years ago someone estimated that it
was about 20 to 30 years. Most recently the EIA has estimated
that it's at least 90-95 years. Other independent analysis--
ICF, etcetera have estimated it's 150 years, and there's some
who've believe it's 200-300 years worth of supply at current
levels of consumption. So that's----
Senator Manchin. That's a good thing.
Mr. Gerard. It's evolving quickly because of breakthrough
technology as we define more resource. It's going up
dramatically quickly.
Senator Manchin. Here it is. I am--I come from the private
sector. I'm a free trader, and I'm concerned. I'm concerned
that we're going to lose this opportunity of a lifetime,
generational if more, if not more.
But there has to be a balance too. That's what we keep
looking for, that balance. So if we're saying we had a 10-year
window and we come to an agreement with the industry that as
government, we come to an agreement for a 10-year window that
will have X amount of exporting while we develop the demand in
this country basically on transportational, manufacturing and
other things that we can develop that was left us that will
come back, I think Mr. Liveris' company has been all over the
world and they're coming back because of this energy, and
making sure that we never get caught in a world pricing such as
an OPEC. Those are the concerns I would have as a citizen of
this great country and definitely as a U.S. Senator from my
constituents.
I think that's what we're asking, and I'll use this as a
hypothetically. Let's say we agree to 5 bcf a day, just for the
sake of throwing a figure out. How--what are we exporting now?
Mr. Gerard. Virtually none. Small----
Senator Manchin. OK. So 5 billion, 5 billion, 5 bcf a day
is pretty substantial, correct?
Mr. Gerard. Less than 10 percent of what we currently
produce and consume.
Senator Manchin. OK. So 10--so if you're going to err on
the side of caution while we're building up our consumption in
this country, I'm not saying that's a hard rock figure, but
let's just say for, and we have a 10-year window, f we can't
get our act together and have an energy policy that works for
this country, then all bets should be off, and you should be
able to do whatever you have to do.
That's what I think we're kind of talking about and asking
if that's a possible--and I understand sitting, if I was
sitting where you, I would be cautious about that.
Mr. Gerard. I don't want to comment on your ability to get
an energy policy in the next 10 years but----
Senator Manchin. No, no we've got to move quicker than
that.
Mr. Gerard. But let me respond this way Senator. I think
the key is to look at the market fundamentals.
Senator Manchin. Yes.
Mr. Gerard. What happened today, and I can't overstate
this, what is happening today is unprecedented in the history
of our country in terms of our opportunity to become energy
secure and self sufficient. Just think back 5 or 6 years ago
nobody was having this conversation. Today we're the world's
No. 1 gas producer.
It's now estimated through this advancement in technology,
we'll be the world's No. 1 oil producer by 2020, 7 short years.
That's how significant this is.
That's why we're very reluctant to go down a road where we
say, well, let's take this great opportunity that indicates
where you've got vast supplies, and now let's bring the
Government in and see where we can manage the development of
the market.
Senator Manchin. Do you think it's a fair evaluation when
you look at all of the human sacrifices this country has made
because of our lack of independence on energy?
It's a tremendous price we've paid in human life and value,
if you would.
Mr. Gerard. I think the point, Senator, is if we've, again,
going back to the supply, we've got ample supply, we've got
vast supplies as far as the eye can see.
What we're seeing domestically, and those job numbers we're
talking about are so realistic. Production in Pennsylvania. Who
would've thought? Pennsylvania is a huge natural gas State
today. Your good State today, as you know, is on the verge of a
major breakthrough to become a big producer. Pennsylvania
production has gone up 526 percent.
Senator Manchin. We're trying to create the jobs in West
Virginia to use the product you're unleashing.
Mr. Gerard. I understand, I understand. I'm just using that
as an example because of what's happening all across the
country where we least expect it, Ohio, etcetera, etcetera.
We're creating hundreds of thousands of new jobs, and we don't
need to view it as we used to view it in terms of scarcity. We
don't have a scarce resource anymore. It's abundant. It's rich.
Senator Manchin. I've heard that before. I've got to be
honest with you.
Mr. Gerard. I understand.
Senator Manchin. I've heard it all before. OK.
Mr. Gerard. I understand. I understand.
Senator Manchin. The bottom line is we have a real golden
opportunity to be able to use the product in America, in West
Virginia, and other States around that had this find and
develop a whole new renaissance of jobs, quality jobs. So you
can imagine if we're being a little bit----
Mr. Gerard. I understand.
Senator Manchin [continuing]. Cautious about this. We want
to work with you, Sir. I can assure you.
Thank you.
Mr. Gerard. Thank you.
The Chairman. Thank you Senator Manchin.
Senator Cantwell.
Senator Cantwell. Thank you Mr. Chairman. I have been back
and forth between votes because first of all I wanted to make
sure that I was here to congratulate you on your new leadership
position as the chair of this committee, and I certainly look
forward to working with you and Senator Murkowski because I
know you're both very serious about moving legislation. I also
think this hearing is an example of the type of process by
which you intend to air these issues and to move forward. So I
thank you for that, and it's definitely worth coming back 2 or
3 times.
My question--I know I had some questions for Mr. Medlock,
but I understand how people's schedules don't always conform to
the Senate schedule.
But Ms. Beinecke you know the NRDC released a study
recently that found out that by 2025 taxpayers will be forced
to spend more than $270 billion a year for disaster relief if
we don't tackle climate change. While we're having this
conversation about natural gas, I don't know if you can make a
further comment on. Don't we, if we're going to see cost in the
future, have to do something better, putting a true market
price on carbon.
Ms. Beinecke. Senator Cantwell. First thank you for the
question.
Clearly we're seeing climate impacts now. Our study was
projecting to the future but here in this country just this
year the consequences of Hurricane Sandy which the Senate just
passed what was it, $60 billion of disaster relief for the New
York Metropolitan area. It's a huge expense. The drought that's
been going on in the Midwest all year, another huge expense,
almost stopped shipping in the Mississippi River just a few
short weeks ago. The consequences of wildfires in the West; we
are having extreme weather events all across the country. I was
talking to Mr. Liveris earlier today about what's been
happening in Australia, his home country, where the extreme
weather events have been even more serious.
So climate change is here. We need to take it seriously.
We have to get to a clean energy future that invests in
renewables and efficiency. Even as we use natural gas, it's not
the solution over the long term because it is a fossil fuel.
We have to develop it as responsibly as possible. There are
people who are so alarmed with what's happening unknowingly to
their health because of the lack of disclosure and the lack of
safeguards. So we have to deal with the consequences now but
we--and this of course if the committee's charge to deal with
the long-term future of the country and look at what the
investments we need to make in a cleaner energy future that
absolutely minimize the impacts of climate change, some of
which we will experience.
Our aim is to insure that this Nation experiences as few as
possible and that the planet does, as well. The U.S. is a major
contributor so we have a major leadership role to play.
Senator Cantwell. Thank you for that. I mean we're talking
about this now about what to do price-wise with export and
import, but to me it seems like a microcosm of a larger issue,
which is how to put the right signal on in general. Mr. Gerard
I just want to ask you, you know there's a lot of discussion
about the price today, but do you think that people developed
natural gas for the export market? Did they have that in mind
or were they developing it for the domestic market?
Mr. Gerard. Have export in mind when they developed it did
you say?
Senator Cantwell. Yes. Do you think the decision to invest
in natural gas in 2010 was driven by the look for large export
terminals or do you think they were looking at the domestic
market?
Mr. Gerard. I think the thinking has evolved on that, and
my sense is that over the past few years, yes, they look more
and more to look to other markets because our supply is so vast
here today to meet demand. Otherwise what will happen obviously
is we'll begin to cut back on the amount of jobs we create as
part of that energy production. So while 3 or 4 years ago when
this, we were all talking about LNG imports at the time,
clearly they weren't thinking about exports in that context.
But over the past few years, as you see the evolution, the
change in opportunity, today they clearly focus on that as
being a potential market opportunity that we should take
advantage of because it assists us here at home in creating the
energy, producing the energy, and all the other benefits we've
talked about to consumers and others.
Senator Cantwell. Oh, I'm just trying to sort through some
of this because some people are saying, well a lot of people
are, I think--I don't know if it was Mr. Tillerson or somebody
said, ``well, we're not making any money and this is why.''
So my question was whether you were looking just
domestically when you had the idea to expand or did you truly
have in mind these international markets.
Mr. Gerard. It goes back to the market itself and looked at
in a global context. Before when we were relying on other
imports for natural gas there wasn't focus on the potential
export market. Today the world has literally changed as we've
talked about.
No one would've predicted this a few years ago.
But today we're looking for all the markets, all the
potential for the United States to really establish itself as
the energy super power.
You know it's significant that we've got an opportunity now
to become energy secure as a Nation, but much of that with the
job creation potential, the economic recovery will come because
we allow the market to work and we allow that demand to be
created elsewhere that we can meet with this vast supply.
That's how we will influence on a more global context the
geopolitics.
Senator Cantwell. I'm probably in more agreement with you
than you think on allowing the market to work, but I just think
the market has to have a true price on carbon as well because
it's affecting us. So, I'm more than happy to look at this from
a global perspective, andI definitely think it's interesting to
see some of the applications like in my home State.
The shipping industry is going to go to natural gas which
is welcome but to me it's going to be a question of what are
those domestic applications--again this is why I wanted to
direct them to Mr. Medlock and I don't know whether Mr.
Eisenberg has something to say on that. What are those
transportation applications that could take us further down the
road of diversification in the United States, like the shipping
industry or truck transportation or other things?
Again, I thank the Chair for the hearing and I look forward
to how you're going to untangle all of this.
The Chairman. Thank you Senator Cantwell, and to untangle
it we're going to need your expertise on global markets and
global economics.
For those of you that don't know, in another part of our
Senate life we serve on the Finance Committee and arguably are
2 of the most ardent pro-trade members of the committee
because, in our part of the world, one out of 6 jobs depends on
international trade. What we try to generally do in the Pacific
Northwest is to grow things there, make things there, add value
to them there, and then ship them somewhere.
So the challenge is how to take that strongly expansionist
view with respect to trade and apply it in this area. It's
easier said than done, but it definitely gets easier if Senator
Cantwell is in the room because she understands global markets
and actually was in the private sector dealing with them.
So I thank my colleague.
We're joined by the Senator from North Dakota who has
already been gracious enough to spend a lot of time educating
me on natural gas issues because he lives it every single day
in his part of the world, and we really appreciate his
expertise. Please proceed with your questions.
Senator Hoeven. Thank you Mr. Chairman and I look forward
to having you in North Dakota to see what we're doing there.
I'm disappointed that Governor Hickenlooper had to go. I
wanted to commend him on building an energy policy for the
State of Colorado that he said is really about developing all-
of-the-above. I commend him for doing that.
So the question I wanted to put before him, but I'll start
by putting before Ms. Beinecke is: What about a States-first
approach just like that? In other words to have transparency at
the Federal level and to have certain standards that may be set
at the Federal level, but then beyond that having a States-
first approach to regulation on these issues of energy
development.
From what I heard from Governor Hickenlooper that's exactly
what he was talking about so would you support a State-led
approach to regulation and give States like Colorado and others
the flexibility to truly develop their energy resources?
Ms. Beinecke. Senator I think that first of all we do have
a States-first approach because right now the legislation is at
the State level. What I'm saying is that it's a patchwork quilt
really across the 30 States where fracking is going forward.
Some States have disclosure. What kind of disclosure
requirements they have vary considerably.
There are other different rules on setbacks, on well
casings.
In each State it's quite different.
What we're asking for is that the committee look at what
kind of Federal standards-minimum should be applied across the
country.
If the States, and I thought Governor Hickenlooper was very
eloquent on this point, that the States are working on this
every day. They're trying to figure out what the best standards
are. There may be a standard that the States, that a number of
States have developed which, in effect, becomes a Federal
standard which would apply then to all States.
I think the challenge now is the differentiation and the
diversity in the 30 States in which fracking is going on and
for potentially additional States in the future.
So what we're looking at from the environmental point of
view is how do you insure the public that this activity is
going on as safely as possible, that they have transparency,
they have access to information, there's ongoing disclosure and
monitoring and that the health impacts where there is growing
alarm across the country of what they're being exposed to from
water and air pollution, that they have the information on what
those chemical and what those emissions are and that the data's
available and that they are confident that the standards that
are being set will protect them.
Senator Hoeven. Would you say hydraulic fracturing is the
same everywhere in the United States?
Are they pursuing the same energy product?
Are they pursuing the same geological zones so Federal
standards----
Ms. Beinecke. The geology differs across the country but
the technology----
Senator Hoeven. Excuse me. Let me ask my question, please.
Ms. Beinecke. I'm sorry.
Senator Hoeven. You're talking about a Federal standard and
having it the same across the United States.
But isn't it true that hydraulic fracturing and what
they're doing in different places is different?
Ms. Beinecke. Senator I think that in many of our
environmental safeguards there's recognition that there are
conditions that differ in different parts of the country.
I mean our State implementation plans are on air quality
are differentiated State by State but they're based on Federal
standards and most of our environmental laws actually do
recognize that the conditions in States vary considerably. But
it does set a minimum standard that the public can be confident
is designed to protect them and that is a combination of
learning from the experience of what's going on in the States,
but then looking at what the Federal responsibility is and
applying that in a way that allows differentiation, but meets a
certain standard so the public is protected,----
Senator Hoeven. Are----
Ms. Beinecke [continuing]. I think that our focus here--
this really is a direct response to what we're hearing from
people all over the country.
Right now they don't feel protected because they don't have
access to information.
The growing health concerns are just beginning to be looked
at by EPA, by the National Institute of Environmental Health,
by the National Academy of Sciences.
I thought Mr. Liveris was very eloquent on this point that
we're 4 or 5 years into a major boom that could take as much as
a century.
Let's get it right at the start, and that's really what
we're asking for.
Senator Hoeven. Mr. Chairman, I'm going to ask for a little
leniency on my 5 minutes given the length of time it took to
get the answer questions and the length of some of the
responses. So if you would please bear with me for just a
minute.
Mr. Gerard, so in the conversation that Ms. Beinecke and I
just had clearly whether it's hydraulic fracturing or other
energy development, we develop different types of energy in
different places in different ways around the country. That
argues for a State-led approach with some Federal standard of,
you know, basic safety and transparency, which I think captures
your answer, which is exactly the kind of legislation that I've
tried to put forward.
Why isn't that a good approach? What's the concern with
that? Why do we run into resistance when we say State-led
approach, but we have to recognize there are differences in
different parts of the country and how we produce the energy
and what we're doing so you allow flexibility rather than a
Federal one-size-fits-all standard? Can you address that for
me?
Mr. Gerard. Yes, I think there are a couple of factors that
are--and it's a great point and goes back to Governor
Hickenlooper and I wished he was still here to address this
because he's dealt with it in Colorado where he's been able to
harmonize all those different interests.
But I think part of the conversation is based, in my view,
on a false premise. That premise is that somehow Washington is
the best place to regulate. We shouldn't forget in these States
which are the incubators of ideas with different hydrology and
geology, there is no one more highly motivated to protect their
water and to protect their air than the people who live in
those communities, governed by their State regulatory
activities, etcetera.
The phenomenon that we see today in the oil and gas
business is one of increase in terms of activity. Hydraulic
fracturing has been around for 65 years. We've drilled over 1.2
million wells with it, and as Lisa Jackson the administrator of
EPA has said, here in the United States there's never been a
confirmed case of groundwater contamination as a result of
hydraulic fracturing.
So this myth, in my view, of somehow we've got to rush in
and overlay a potential level of regulation that conflicts with
the States who know best about hydrology, water quality,
etcetera, and the geology they deal with--with their State
geologist, we need to look closely and look at those States and
say what's taking place here today.
I'll tell you the States have moved very quickly. The State
of Pennsylvania I mentioned earlier, they've modified their
State's standards, regulatory legislative activity 4 times
already to keep up with the fast-moving industry. The States
have moved quickly. Governor Hickenlooper and others--they're
very active, great blessing there, he gets it, he's a
geologist, he's been part of it and he's been able in a very
positive way to bring the different interests together and find
the proper role where the States historically have led in
regulating oil and natural gas.
Senator Hoeven. OK, so for each one of you, and I'm
wrapping up here, but I would like each one of you to respond
with a State-led approach where you have that ultimate Federal
backstop because I think this takes into account both your
answers.
How do we get people working?
We've all agreed we need a comprehensive energy plan for
this country. Governor Hickenlooper talked about it for his
State of Colorado. I could spend a long time telling you about
our State of North Dakota. Senator Murkowski could talk about
Alaska. Each one is different, but each State is doing amazing
things. We all want a comprehensive national energy policy,
jobs, energy, the whole ball of wax, but we've got to give the
flexibility and empower the private investment.
A State-led approach with this Federal transparency and
backstop does exactly that. I'm building off both your answers.
How do we get consensus built in this committee and this
Congress to get this legislation passed which myself and others
are putting forward? How do we bring people together to get the
consensus to do that? States-first approach, State-led approach
with that Federal transparency and backstop.
Ms. Beinecke if you could start on that and just an answer
from each of you, again, how do we get it done?
Ms. Beinecke. Senator I think that----
Senator Hoeven. We've been talking about it for years, how
do we get it done?
Ms. Beinecke. I would emphasize the important Federal role
here because I think there is differentiation among the States.
I thought Governor Hickenlooper really identified what
needed to happen is you need all the stakeholders at the table.
Now the way a lot of these standards that have been developed
at the States, the public is not at the table. The people that
have concerns in their local communities in some places are not
allowed to express those concerns. That's a situation we have
in New York State right now. So if you have a process that
really does bring all the stakeholders together to insure that
the concerns that the public actually have and are very deeply
concerned about are addressed as you work with the industry to
see how this industry is going to be developed, that would be a
good process.
I think up until this point a lot of concerned citizens
have felt they haven't had a participatory role in the process
and they're looking for one.
Senator Hoeven. It seems to me that's what the whole
comment process is all about that States have when they develop
their laws and regulations. I think that was what we were
trying to do, but I'm about trying to reach out and get people
working together here.
Mr. Gerard.
Mr. Gerard. Senator I'm just going to read 2 quick
sentences, and this is Lisa Jackson, the administrator of the
EPA, the vast majority of oil and gas production is regulated
at the State level. Then she goes on to say, so it's not to say
that there isn't a Federal role, but you can't start to talk
about a Federal role without acknowledging the very strong
State role. End quote.
My counsel would be as we look at the issues, let's
identify the real issues, let's talk about the issues that are
really a concern.
I take strong exception to what Ms. Beinecke said here.
There's a very active, transparent process taking place in
these States, and no place is it more evident than in the State
of New York and what's going on up there in terms of citizens
being involved, expressing their views and the Governors very
active in taking all of this in.
So let's sort through some of our own perceptions, our own
wishes of what should happen.
Let's look at the issues in light of the historic
regulatory role for the States and identify if there is
anything there we need to look at, but once again defer.
The States have done this well. Lisa Jackson said they're
this well.
There's no reason for the Feds to step in, overlay it, and
create conflict.
Senator Hoeven. OK Mr. Eisenberg. Now you're going to
explain in 2 sentences how we bring those 2 groups together and
get her done.
Mr. Eisenberg. That's a very good question.
You know I think the one-size-fits-all approach, I mean
there needs to be some trepidation on the part of the Federal
Government to regulate without understanding the consequences
of it.
How do we get those 2 groups together? Good luck. I mean
it's starting----
Senator Hoeven. But it's the key to a national energy
policy that works, and Senator Wyden I think if anybody can do
it, I think our Chairman's the kind of guy that can build that
kind of consensus. So we've got to figure out how to do this.
Mr. Eisenberg. Yes, an--I mean, and we're certainly at the
NAM certainly willing to work with the committee toward it,
toward that sort of goal.
I mean we would like to see more bipartisanship energy
issues. We don't think that energy, and particularly natural
gas, should be a partisan issue. In fact, on this committee I
don't view it as being that.
But we are certainly willing to work beyond that.
Senator Hoeven. We'll need your help.
Thank you all very much.
The Chairman. I thank the Senator from North Dakota. I
don't want to make this a bouquet-tossing contest, but I think
the Senator from North Dakota has really put his finger on it
because if you listen to how you described it, Senator, you
talked about Federal transparency.
You talked about a Federal backstop and, of course, a very
strong role for the States recognizing that there are
differences. When you look at the architecture of the
environmental laws, you see what the Senator from North Dakota
described all over the place, essentially these Federal minimum
standards and then a wide berth for the States to do their
thing.
I was telling Senator Murkowski I came to the U.S. Senate
in 1996, the first new senator from Oregon in 30 years. I had a
full head of hair and rugged good looks and the first thing I
voted for which dismayed some of my supporters, was for the
Kempthorne Amendment, which in effect had what you all are
talking about: a strong transparency and backstop role, but the
States could do their own thing.
So I know that as we go back and forth on this, it looks
like the gaps are insurmountable. But it looks like you 3 souls
have been willing to stay here as we got up and came back and
we got up and we came back. I so appreciate the good faith in
terms of desire to figure this out and that's why Senator
Murkowski and I are committed.
I'll just make 2 last points and let my colleague have the
last word. On this point with respect to confidence, Ms.
Beinecke, which I think is central, one of the ideas I have
heard has a lot of bipartisan interest from both industry and
environmental folks is if we can have a strong disclosure
program, a program, for example, where people are going to
really understand ahead of time, for example on fracking fluids
and these kinds of things. I'm very interested in following up
with you on that, and I think it's fair to say there are a lot
of people in industry who see this confidence issue as
extraordinarily important as well because there's tremendous
concern. We're hearing about it from communities around the
country, and if we can get some of these big elements right-
like what the Senator from North Dakota talked about-how you
can figure out how to have a strong disclosure program and
maybe address some of the issues that Governor Hickenlooper
brought up in connection with how you do it in addressing
various concerns. I think we're on our way.
The last point I want to make is the reason Senator
Murkowski and I are putting so much time into this- and we
thought together about what we ought to proceed on first-is
this issue has the potential to be a real American success
story where in effect if we work together, have all the
stakeholders at the table as you, Ms. Beinecke, said and the
Senator from North Dakota has indicated to me he's more than
open to, this has the potential to be an extraordinary success
story, a story for the times, an American success story.
That's the objective we're going to take in the committee,
and I'm going to let the last word go to my friend and
colleague, Senator Murkowski.
Senator Murkowski. Is this yours?
The Chairman. No.
Senator Murkowski. See we're just so close we don't even
know which microphone belongs to who.
Senator Wyden, I want to thank you for your summation
comments and also to acknowledge where you have been taking us,
Senator Hoeven, in this discussion because I think we've had an
opportunity here to have almost 3 hearings.
We started our overview of what natural gas has brought us
in terms of the manufacturing renaissance, jobs, and the
opportunity for reduced emissions.
As I point out in my Energy 20-20 document, it comes down
to one bumper sticker and that is ENERGY IS GOOD. I think when
we're talking about natural gas we recognize the benefits.
But we've also had a hearing for all intents and purposes
talking about the issues as they relate to export of this now
abundant resource and what that might mean to us and how we
might deal with some of the concerns that have been raised
here.
One of the things that I heard very clearly around the
Dias, we want to be careful. We don't want to run out and do
something precipitice that we might regret in terms of policy
later. Let's make sure that we've got our eyes open and are
mindful in terms of how we advance these issues.
Then the focus that Senator Hoeven has given us on the
issue of hydraulic fracking and really what that has meant in
terms of being able to access a considerable resource, but
recognizing that in this amazing country of ours that this
resource is not just situated in North Dakota. We've been
utilizing hydraulic fracking on the North Slope for decades now
without incident.
What Senator Manchin has been talking about regarding the
opportunities in his part of the country, States like Ohio and
Pennsylvania where people have been for decades and generations
and never envisioned themselves as coming from an energy-
producing State, and now all of a sudden they're in an energy
producing State.
The dynamics that are going on right now within the energy
sector are really quite profound so our responsibility is as a
committee to thoughtfully take up these issues and consider all
aspects of them, not rushing to judgment, but really allow good
thoughtful discussion. I think that this is critically,
critically important.
It's important that we look to our history when we talk
about LNG exports. I'm always quick to remind folks that we've
been doing it in Alaska for over 40 years now. The longest
contract in the country for export of anything has been
shipping natural gas to Japan. It's been a very quiet success
story, and in 4 decades they've never missed a shipment. It was
a remarkable run, and nobody really knows about it. That's
probably a good thing. When it doesn't make the headlines, it's
probably a good thing.
Mr. Chairman I want to--I want to commend you for how we
started off our first hearing in this committee. Maybe all of
them won't go until well after the expired hour, but I do think
what we took up here today and the manner in which we addressed
it is a good marker for how we can move forward on some very
difficult policy issues, but I think policy issues that have an
opportunity to really direct the economic future and well-being
of our country.
The Chairman. Thank you, thank you.
With that the committee's adjourned.
[Whereupon, at 1:10 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Ross Eisenberg to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a problem since we might only export 10
percent of our natural gas?
Answer. Thank you for this question. A great deal of the discussion
at the hearing centered on finding a ``sweet spot'' for LNG exports.
The NAM does not believe it is the role of the federal government to
find the ``sweet spot.'' If the market is allowed to work, the ``sweet
spot'' should happen naturally.
The LNG export study commissioned by the Department of Energy (DOE)
from NERA Economic Consulting helps illustrate this point. One of
NERA's key findings-which often goes overlooked-is that in the
scenarios NERA believes most likely to represent future conditions, we
will not export large amounts of LNG because we will not have enough
international customers willing to buy it at the price at which we
would have to sell it to make a profit. Specifically, NERA states:
NERA concluded that in many cases the world natural gas
market would not accept the full amount of exports specified by
FE in the EIA scenarios at prices high enough to cover the U.S.
wellhead price projected by EIA. In particular, NERA found that
there would be no U.S. exports in the International Reference
case with U.S. Reference case conditions. In the U.S. Reference
case with an International Demand Shock, exports were projected
but in quantities below any of the export limits.\1\
---------------------------------------------------------------------------
\1\ DOE 2012 LNG Export Study at 4.
DOE asked NERA to model price impacts of 6 and 12 billion cubic
feet (bcf) of exports. NERA concluded that, unless production costs
substantially declined or international demand spiked, the U.S. would
be unable to export the full amount.\2\
---------------------------------------------------------------------------
\2\ Id. at 76.
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Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Answer. Strictly speaking, U.S. consumers of U.S.-produced natural
gas will always have a price advantage over foreign consumers of U.S.-
produced natural gas due to liquefaction and transportation costs. LNG
export companies estimate that liquefaction and transportation of
natural gas adds roughly six dollars per billion cubic foot (bcf);
domestic consumers of this gas will therefore always have a six dollar
price advantage over foreign consumers of this same gas.
Your question also asks whether there is a point at which LNG
exports would cause U.S. natural gas prices to rise high enough that
domestic manufacturers no longer take advantage of it. That is a much
more difficult question, and unfortunately one that depends on much
more than simply LNG exports. It will depend on a multitude of factors,
including: whether we can continue to develop our vast natural gas
resources efficiently and inexpensively, how much gas we ultimately use
for electric generation for manufacturing and in the transportation
sector, whether we will discover even more domestic natural gas
reserves, how quickly other nations such as China increase their own
natural gas production, and whether international demand for LNG
exports will increase substantially. The NAM firmly believes that
responsible development of natural gas, balanced by reasonable state-
based regulation, a manageable permitting process, and a policy on LNG
exports governed by free trade and open markets will ensure that the
U.S. can export natural gas while maintaining a growing and vibrant
manufacturing sector.
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Answer. The NAM has not made specific projections for the amount of
natural gas the U.S. will be producing in 10 years. However, the PwC
study supported by the NAM in December 2011, ``Shale Gas: A Renaissance
in U.S. Manufacturing,'' based its projection of one million
manufacturing jobs that could be created from shale gas development in
2025 on the Energy Information Administration's estimate of 862
trillion cubic feet (tcf) of technically recoverable shale gas
resources.
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. If the DOE's current policy-a full moratorium on new export
licenses-were allowed to remain in place, we would be exporting the
same amount of natural gas in 10 years that we do today: none.
That said, we do expect the DOE to move forward with licensing at
some point. Again, the NERA study performed for the DOE is helpful
because it clearly states that current market conditions will not allow
for exports even at the 12 bcf level. If NERA is correct, the market
will ensure that a balance exists between exports and domestic
availability of natural gas.
______
Jack N. Gerard,
API, February 28, 2013.
Hon. Ronald Wyden,
Chairman, Senate Committee on Energy and Natural Resources, 304 Dirksen
Senate Building, Washington, DC.
Dear Chairman Wyden,
Thank you again for the opportunity to testify before the committee
on the game-changing opportunity that we have before us through the
development, use and export of domestic natural gas. The application of
the proven technologies of horizontal drilling and hydraulic fracturing
have allowed the United States to become the global leader in natural
gas production, and we are on our way to becoming the global leader in
oil production. This will enhance our energy security tremendously,
considering that the U.S. will rely on natural gas and oil for decades
to come for energy consumption, and the world will require
significantly more natural gas and oil. Domestically, the story is
compelling: the upstream oil and natural gas sector is now responsible
for 1.7 million jobs in the country in unconventional resource
development alone. And as I stated in my testimony to the committee,
that number is expected to grow to 2.5 million jobs by 2015; 3 million
jobs by 2020 and 3.5 million jobs by 2035. According to the Bureau of
Labor Statistics, jobs in the oil and natural gas exploration and
production sector pay on average more than $100,000 per year, more than
twice the national average. As we move forward with this important
debate, we must ensure that move down a path that fosters this
important economic and job growth through responsible development of
these resources.
Response of Jack N. Gerard to Question From Senator Wyden
Question 1. Ms. Beinecke noted in her testimony that one of the
benefits of natural gas, of course, is that when you burn it; it
releases fewer greenhouse gas emissions than resources like coal. This
benefit, though, can be offset if more natural gas leaks in to the
atmosphere. There are conflicting reports about the level of methane
leakage from natural gas production and transport, ranging from as
little as 0% leaked to as much as 9% in some reports for some basins.
How can we get our arms around this question of how much methane is
being leaked, and what are your thoughts for how we can make sure that
leakage is minimized?
Answer. API is keenly aware of the widely divergent estimates of
methane emissions from the U.S. petroleum and natural gas industry and
has been working to improve methane emission estimates. Methane
emissions associated with petroleum and natural gas production have
been typically assessed by engineering estimation. Such estimates are
typically used by EPA when compiling the national U.S. Greenhouse Gas
(GHG) Inventory and more recently by companies for reporting under the
mandatory Greenhouse Gas Reporting Program (GHGRP).
I. In order to make a comparison to ``% leaked'' as
identified in Question 1 (Senator Wyden), the analysis in
section I and II, reports methane emissions per production as a
comparable percentage.This variability of methane emission
estimates extends to the official inventory of methane
emissions in the annual U.S. GHG inventory prepared by EPA and
submitted to the UNFCCC. This inventory estimates GHG emissions
from various sectors including the Natural Gas Systems
sector.\1\ In the 2008 inventory (published in 2010), EPA
estimated methane emissions from Natural Gas Systems to be
4,591 Gg of methane (96.4 Tg CO2e) which equates to
about 1.2%\2\ of 2008 natural gas withdrawals\3\ (production)
from the natural gas industry. The 2009 and 2010 inventories
(published 2011 and 2012 respectively) estimated significantly
higher methane emissions with the 2010 inventory estimating
methane emissions of 10,259 Gg (215.4 Tg CO2e),
equating to about 2.6%\4\ of natural gas withdrawals from the
natural gas sector. The majority of this increase was due to
different assumptions and methodologies associated with the
onshore natural gas production segment. The 2009 inventory
played a significant role in public, policy, and regulatory
debates surrounding methane emissions from natural gas systems.
The 2011 inventory, released for public review on February 22,
2013, estimates methane emissions of 6,646 Gg (139.6 Tg
CO2e); equating to about 1.5%\5\ of natural gas
withdrawals from the natural gas sector.
---------------------------------------------------------------------------
\1\ Natural Gas Systems is comprised of sources in production field
operations (both onshore and offshore); natural gas processing; natural
gas transmission and storage (including LNG); and natural gas
distribution.
\2\ Calculated based on 239,115 MMscf of CH4 emissions
divided by 20,026,832 MMscf natural gas withdrawals.
\3\ Natural gas withdrawals mean EIA's gross gas withdrawals less
associated gas from oil wells, which for 2008 withdrawals = 20,026,832
MMscf; 2010 = 20,981,382 MMscf; and 2011 = 22,571,108; http://
www.eia.gov/dnav/ng/ng_prod_sum_dcu_NUS_a.htm
\4\ Calculated based on 534,323 MMscf of CH4 emissions
divided by 20,981,382 MMscf natural gas withdrawals.
\5\ Calculated based on 346,230 MMscf of CH4 emissions
divided by 22,571,108 MMscf natural gas withdrawals.
---------------------------------------------------------------------------
The emission sources, and their respective methane emissions,
included in EPA's calendar year 2011 inventory estimate are
shown in the table provided in the supplemental technical
information that follows on page 16.
II. Based on the 2011 data reported to EPA under the GHG
Reporting Program (which is designed to capture 85-90% of the
petroleum and natural gas operations in the U.S.) one can also
assess a leakage rate for petroleum and natural gas operations.
The data released in early February 2013 by the U.S. EPA
indicates that methane emissions for all sources within the
Petroleum and Natural Gas Systems category\6\ are 83 million
metric tonnes of CO2 equivalents, which equates to
an average methane leakage rate of about 0.7% of 2011 natural
gas gross withdrawals.\7\
---------------------------------------------------------------------------
\6\ Petroleum and Natural Gas Systems for EPA's GHG Reporting
Program is comprised of sources in petroleum and natural gas production
(both onshore and offshore); natural gas processing; natural gas
transmission/compression; natural gas distribution; natural gas
storage; LNG storage, import, and export; and other petroleum and
natural gas combustion sources.
\7\ Natural gas gross withdrawals is taken directly from EIA, which
for 2011 = 28,479,026. This includes gross withdrawals from oil wells
to be consistent with emissions reported under the GHGRP, which
includes petroleum and natural gas production. http://www.eia.gov/dnav/
ng/ng_prod_sum_dcu_NUS_a.htm
---------------------------------------------------------------------------
measurements of methane emissions
In order to gather more information on methane leakage rates, and
the adequacy of the engineering estimation methods, a series of studies
is emerging over the past couple of years each providing a snapshot of
leakage from a specific region and a specific segment of the natural
gas system at a specific point in time.
I. Fort Worth, Texas Study, 2010\8\.--Analysis of reported
routine emissions from over 250 well sites (with no compressor
engines) in Barnett Shale gas well sites in the City of Fort
Worth was conducted for the City of Fort Worth by Eastern
Research Group Inc. (ERG). The results revealed a highly-skewed
distribution of emissions, with 10% of the well sites
accounting for nearly 70% of total emissions. Natural gas leak
rates were calculated based on operator-reported, daily gas
production data at these well sites and ranged from 0% to 5%,
with six sites out of 203 showing leak rates of 2.6% or greater
due to routine emissions alone.
---------------------------------------------------------------------------
\8\ Natural Gas Air Quality Study (Final Report), http://
fortworthtexas.gov/gaswells/default.aspx?id=87074, Posted July 14,
2011, Updated July 19, 2011
II. Denver-Julesburg Basin, Colorado, February 2012\9\.--A
study by NOAA/University of Colorado scientists published in
February 2012 suggested that up to 4% of the natural gas
produced at a field near Denver was escaping into the
atmosphere. The study relied on 2008 ambient concentration
measurements, and estimated a leakage rate based on
concentration ratios, using a methodology that remains in
dispute. In a comment on this publication, Levi\10\ questions
the authors' assumptions about the composition of the gas being
leaked and where it is coming from (methane from natural gas
production or other hydrocarbon liquids from condensates).
Levi's analysis underscores the uncertainty about the study's
conclusion regarding methane leakage from natural-gas
operations elsewhere.
---------------------------------------------------------------------------
\9\ Petron, G. et al. J. Geophys. Res. 117, D04304 (2012).
\10\ M. Levi, Revisiting a Major Methane Study, October 2012;
http://blogs.cfr.org/levi/2012/10/12/revisiting-a-major-methane-study/
III. Joint Institute for Strategic Energy Analysis (JISEA),
November 2012\11\.--This study of the Barnett Shale area was
conducted by JISEA\12\ and released in November 2012. The study
analyzed 2009 emissions inventories of regulated air pollutants
submitted to the Texas Commission on Environmental Quality
(TCEQ) from more than 16,000 individual sources in shale gas
production and processing sub-sectors. Based on the estimated
methane content of this produced gas and the assumed average
lifetime of production from a well, JISEA estimated a methane
leakage rate--for the Barnett Shale basin--as 1.3% across its
life cycle.
---------------------------------------------------------------------------
\11\ Natural Gas and the Transformation of the U.S. Energy Sector:
Electricity. Logan, J., Heath, G., Paranhos, E., Boyd, W., Carlson, K.,
Macknick, J. NREL/TP-6A50-55538. Golden, CO, USA: National Renewable
Energy Laboratory.
\12\ The Joint Institute for Strategic Energy Analysis is operated
by the Alliance for Sustainable Energy, LLC, on behalf of the U.S.
Department of Energy's National Renewable Energy Laboratory, the
University of Colorado-Boulder, the Colorado School of Mines, the
Colorado State University, the Massachusetts Institute of Technology,
and Stanford University
IV. Uinta Basin, Utah, December 2012\13\.--In December of
2012, NOAA described the unpublished results of an airborne
ambient measurement study in the Uinta Basin, Utah. The data
was collected as part of a broad investigation of air quality
in the Uinta Basin, using ground-based equipment and an
aircraft to make detailed measurements, including methane
concentrations. Using what we believe are simplified mass
calculations and assumptions along with the aircraft
concentration measurements, the researchers suggest that the
rate of methane leakage may be as high as 9% of total
production, when compared to industry production data. A paper
detailing the study methodologies, data, and results has not
yet been published or released.
---------------------------------------------------------------------------
\13\ Methane leaks erode green credentials of natural gas, Nature
News, 02 January 2013; http://www.nature.com/news/methane-leaks-erode-
green-credentials-of-natural-gas-1.12123#/b1
V. University of Texas/EDF Study\14\.--A measurement campaign
was conducted in 2012 by the University of Texas at Austin (in
collaboration with nine petroleum and natural gas industry
corporate partners and EDF--Environmental Defense Fund) to
quantify emissions from natural gas production. Our
understanding is the results of this study will be published
later in 2013.
---------------------------------------------------------------------------
\14\ What will it take to get sustained benefits from natural gas?
http://www.edf.org/methaneleakage
---------------------------------------------------------------------------
conclusions
Engineering estimation methods, source measurement methods, and
ambient concentration measurement studies have inherent limitations and
are associated with a considerable level of uncertainty. Each piece of
information taken alone cannot provide an accurate picture of system-
wide leakage, due to spatial and temporal variability. Great care is
needed not to rely on partial data provided by various studies to-date,
hence indicating the need for additional investigations.
Most notably, the science of estimating leakage rates from ambient
concentration data is still evolving. The uncertainties and limitations
of the various methodologies being used have yet to be independently
validated and as such cannot be viewed as definitive measurements at
this time. They should also be viewed as snapshots in time and
location.
As Jeff Tollefson states in the journal Nature\15\, ``Whether the
high leakage rates claimed in Colorado and Utah are typical across the
U.S natural-gas industry remains unclear. The NOAA data represent a
'small snapshot' of a much larger picture that the broader scientific
community is now assembling.'' API and its members recognize the need
to improve both the scientific understanding of the range of data being
collected as well as operating practices that would minimize methane
leakage.
---------------------------------------------------------------------------
\15\ See http://www.gpo.gov/fdsys/pkg/FR-2013-02-21/pdf/2013-
03988.pdf.
---------------------------------------------------------------------------
Furthermore, it should be noted that implementation of the final
Oil and Natural Gas Sector New Source Performance Standard (NSPS OOOO)
will achieve significant reductions of methane as a co-benefit from
regulating volatile organic compound (VOC) emissions. EPA estimated
that the final rule will reduce methane by the equivalent of 19 to 33
million tonnes of CO2. The use of Reduced Emission
Completions (RECs) in the final rule, a process developed by industry
to minimize emissions and maximize resource recovery, will
significantly reduce emissions resulting from completion of gas wells.
Over the long term, this rule will have an ever-broadening impact on
our operations as new sources are regulated.
API recommends four steps:
1. Collaborative efforts between industry, government and
academia to agree upon a common set of methane measurement
methods and `best practices' for relating ambient concentration
measurements to source emissions in the field.
2. In-depth analysis of newly emerging data--from different
studies around the country--to assess the range and regional
variability of potential methane leakage and quantify the
economic benefits from its capture for sale.
3. Collaboration between EPA, the industry, and stakeholders
to mine the data reported under the GHGRP to improve methane
emission estimates in the U.S. GHG Inventory along with
improving the accuracy of methodologies in the GHGRP.
4. Evaluation of the impact of recently promulgated new
source performance standards (NSPS) for the Petroleum and
Natural Gas sector to forecast expected methane emissions
reduction trends once the new regulations are fully implemented
in 2015 and beyond.
Response of Jack N. Gerard to Question From Senator Landrieu
Question 1. It is obvious that everyone testifying today recognizes
the importance of environmental protection and responsible production.
While regulation is a vital part of ensuring that natural gas
production proceeds in a responsible fashion, it is also vital that
industry play an active role in self-regulation. What efforts are you
aware of that industry has undertaken to ensure that they operate in a
safe and responsible manner?
Answer. The industry's commitment to excellence and continuous
improvement in hydraulic fracturing operations is evident in its work
to develop best practices for oil and gas operations. More than 65 of
API's standards and recommended practices for completion of wells apply
to hydraulic fracturing operations. And over the past several years,
API has developed three additional new guidance documents uniquely
tailored to hydraulic fracturing in order to offer additional guidance
to operators. The API standards process, its work applicable to
hydraulic fracturing operations, and recent outreach efforts are
described below.
1. API's Standards Program.
API's standards program has been a recognized leader in the
development and dissemination of industry standards since 1924. New API
standards, certifications, and practices are developed through a broad-
based, formal consensus process that allows companies, regulators,
organizations, and other stakeholders to participate in an interactive
dialogue, addressing both cutting-edge issues and regulatory needs. API
is accredited by the American National Standards Institute (ANSI), and
API undergoes regular program audits by ANSI. API's standards process
utilizes the ANSI-approved API Procedures for Standards Development.
This process ensures that there is openness in participation on API
standardization committees; committee balance between users,
manufacturers, contractors/consultants and government; consensus based
documents (does not mean unanimity); and due process, within which all
comments and objections must be considered. API standards are
considered ``American National Standards'' for adhering to this
process.
In part because of this openness and consistency, API's standards
are the most widely cited in the petroleum and natural gas industries.
More than 100 standards have been cited 270 times in U.S. federal
regulations and 184 standards have been cited more than 3,300 times in
U.S. state regulations. Without specific codification in state or
federal legislation, the standards are not mandatory; however, they are
widely respected indicators of strong operations and therefore
routinely mandated by companies, service providers, and their insurers
even where compliance is not legally required.
API's standards are evergreen and reviewed a minimum of once every
five years. Announcements of upcoming standards work programs such as
formalizing the current hydraulic fracturing guidance are made in the
U.S. Federal Register through an agreement with the U.S. National
Institute of Standards and Technology, as well as API's own Web site to
encourage diverse participation.
2. Work Applicable to Hydraulic Fracturing.
The industry understands that the integrity of wells and effective
wastewater management is central to producing natural gas safely and
responsibly. API's existing body of rigorous internationally recognized
good practice supplements the extensive federal and state regulation
governing virtually every aspect of resource extraction. More than 65
of API's existing standards and recommended practices for completion of
wells apply to hydraulic fracturing operations. They address topics
ranging from planning and design of wells to post-production
reclamation.
a. Hydraulic Fracturing Operations-Well Construction and
Integrity Guidelines.
API HF1 (currently undergoing revision as RP 100-1) addresses
casing, pressure testing, and cement job evaluation (including cement
bond logs on a selective basis). Safe and responsible development
begins with strong wells, these standards and practices include, but
are not limited to, pressure testing of cemented casing, cement bond
logging, and inspections beyond those required by local permitting
procedures. API HF1 incorporates existing API guidance such as API
Specification 5CT (9th Edition, July 2011, pertaining to the design,
manufacturing, testing, and transportation of casing and tubing) and
API Standard 65 Part 2 Isolating Potential Flow Zones During Well
Construction (2nd Edition, December 2010, covering best practices to
isolate potential flow of hydrocarbons and other fluids throughout the
hydraulic fracturing process). API HF1 speaks extensively about the
variables operators should consider in planning and completing wells.
These include local considerations (e.g., regional geology, pressure
differentials, and temperature variations that affect cement slurry
composition), as well as advances in technology.
It is important to note that constantly evolving data collection,
analysis, and monitoring techniques offer operators access to an ever-
improving array of real-time information about well activities. API HF1
emphasizes that wholly isolated, solidly constructed wells and
conscientious monitoring are essential elements to responsible
development.
b. Water Management Associated with Hydraulic Fracturing.
API HF2 (currently under revision as RP 100-2) identifies practices
used to minimize the environmental and societal impacts from the
acquisition, use, management, treatment, and disposal of water and
other fluids used in hydraulic fracturing. This document focuses
primarily on issues associated with hydraulic fracturing in deep shale
gas development; however, its guidance also extends to many other
applications of hydraulic fracturing technology, including shale oil
development. In an attempt to address the development-related issues
stemming from the increasingly urban nature of shale gas development
and competing uses, API HF2 recommends that water quality be evaluated
on a regional level throughout the planning and completion process. It
also acknowledges opportunities for creative water use strategies
(e.g., companies that have used treatment facilities to make water from
non-potable aquifers appropriate for fracturing) and the continuously
evolving possibilities for greener fracturing additives (e.g.,
stimulants like propane or ultraviolet antibacterial agents). API HF2
strongly encourages companies to conduct baseline water quality
testing, and to continue periodic water quality testing throughout the
fracturing process. Careful water management in fracturing can often
help companies reduce costs, while protecting the environment. For
example, on-site storage facilities and pipelines can help minimize
truck traffic, thereby lowering the greenhouse gas footprint of the
extraction process. Similarly, treating and recycling water for future
fracturing projects can help eliminate community concerns about
releasing treated produced water for public consumption while also
reducing operator costs. Disposal options--whether through underground
well injection or treatment at specially accredited facilities--vary
according to region; however, the overarching theme of this document is
that responsible operators are careful planners who consider the
regional, state, and local environmental implications of every decision
in the water use lifecycle.
c. Practices for Mitigating Surface Impacts Associated with
Hydraulic Fracturing.
API HF3 (currently under revision as RP 100-2) summarizes the
strategies to protect surface water, soil, wildlife, other surface
ecosystems, and nearby communities. One of the great benefits of
hydraulic fracturing is that a multi-well production site the size of a
two-car garage regularly contains as many as five wells that can
produce gas for up to 40 years. This is one of the most compact
footprints of any large-scale energy source. That being said, however,
careful planning for on-site storage and stormwater management, as well
as continuous site inspections of both equipment and liners can
minimize the risk of any inadvertent surface discharge. Baseline water
samples and advanced disclosure about the additives used in fracturing
fluids can also help increase community comfort with operational
activities. HF3 draws heavily on API Recommended Practice 51R.
d. General Environmental Considerations.
API RP 51R--Environmental Protection for Onshore Oil and Gas
Operations and Leases, covers diverse operational areas, including the
design and construction of access roads, the placement of well
locations, and practices for restoring sites after production has
ceased. Notably, Annex A of Recommended Practice 51R focuses on ``Good
Neighbor Guidance'' and encourages operators to be proactive in
protecting public safety and the environment, while respecting the
property rights of all neighbors (e.g., the landowner, the surface
user, and adjoining landowners) and communicating effectively with
community stakeholders. These documents are available to the pubic
online at www.api.org/oil-and-natural-gasoverview/exploration-and-
production/hydraulic-fracturing.aspx and focus on some of the most
pressing water management issues in hydraulic fracturing (e.g.,
baseline water quality sampling, and regional water planning).
Additionally, they are currently being expanded thanks to additional
input from industry and other stakeholders (including regulators) as
they progress through API's open, ANSI-accredited standards review
process.
3. Stakeholder Outreach.
The task of improving the industry's ability to respond to public
concerns and to address issues important to communities and regions
where shale gas development is occurring continues through efforts at
the state, county and local levels. Toward that end, API is willing to
work with local and regional governments to identify and publicize
recommended practices for community engagement toward prevention,
mitigation and remediation of surface impacts and effects upon
communities from exploration and production activities. API has already
engaged in outreach to various county governments to address specific
issues brought to the attention of API by the county representatives.
In October 2011, API and its sister trade associations held the
first in a series of technical workshops specifically devoted to
analyzing and promoting industry guidance documents on hydraulic
fracturing operations. The workshop was held in Pittsburgh,
Pennsylvania and was open to industry members, community stakeholders,
environmentalists, state and federal regulators, and journalists.
Registration fees were reduced for nonprofits and community members to
encourage participation. More than 250 individuals attended and
contributed to active discussions throughout the workshop.
Based on the success of this model, API offered over 15 additional
regional one-day workshops throughout 2012. These workshops offered a
valuable opportunity to understand and address regional concerns, as
well as educate regulators and the public about the considerable safety
measures accompanying hydraulic fracturing operations.
These workshops were only one element of the ongoing dialogue that
industry has with regulators about continually evolving good practices
and effective regulations. Discussions occur regularly on a state-
specific basis, as well as through organizations like the Interstate
Oil and Gas Compact Commission (IOGCC) and the State Review of Oil and
Natural Gas Environmental Regulations (STRONGER). STRONGER is an
organization that specializes in recommending improvements to state
regulatory frameworks.
At a variety of meetings, industry has shared existing good
practices with state regulators, and discussed where improvements to
state regulations could effectively provide additional safeguards for
local communities and their water sources. These briefings have
occurred in Ohio, Pennsylvania, West Virginia, and Michigan and will
continue in these and other states, as long as regulators want to learn
more about industry practices.
Building on momentum from previous recent efforts, API is also
planning to continue outreach to both industry and regulators to foster
a dialogue of collaboration and continuous improvement. Industry and
government together must meet the challenge of developing our nation's
shale gas endowment in a sustainable way over time in ways that protect
the environment, respect other uses of lands and waters in the vicinity
and that are appropriately tailored to the character and context of the
regions in which shale gas development occurs.
With conventional well technology, development of shale energy
would have been prohibitively expensive. However, horizontal drilling
and hydraulic fracturing not only make harvesting shale resources
commercially viable--they allow it to be done with remarkably decreased
surface impacts.
The United States Department of Energy has recognized both
hydraulic fracturing and horizontal drilling as advanced technologies
that provide environmental benefits in a 1999 report entitled
``Environmental Benefits of Advanced Oil and Gas Production
Technology.'' According to DOE, hydraulic fracturing was first
introduced in 1947 and ``quickly became the most commonly used
technique to stimulate oil and gas wells. . . . By 1988, fracturing
had already been applied nearly a million times. Each year,
approximately 25,000 gas and oil wells are hydraulically fractured.''
Since the release of that report, hundreds of thousands of additional
wells have been hydraulically fractured. The report explains hydraulic
fracturing results in optimized recovery of oil and gas resources,
protection of groundwater resources, and less waste requiring disposal,
while horizontal drilling results in less impact in environmentally
sensitive areas, fewer wells needed to achieve desired level of reserve
additions, less produced water and less drilling waste. Furthermore, as
described above, the industry has actively developed standards and best
practices for safe and environmentally responsible operations.
Responses of Jack N. Gerard to Questions From Senator Barrasso
On March 14, 2012, the then-Bureau of Land Management (BLM)
Director, Bob Abbey, testified in the Senate that there has been ``a
shift [in oil and natural gas production] to private lands in the East
and to the South where there are fewer amounts of Federal mineral
estate.''
Question 1(a). What specific steps should the Federal government
take to make Federal public lands and Indian lands more competitive
with private and state lands for the purposes of oil and natural gas
production?
Answer. The federal government should take positive steps to
increase the number leases issued on federal lands, to expedite the
timeframe for completing environmental analysis, and expedite the
timeframe for issuing permits to drill.
According to a study titled, ``Employment, Government Revenue, and
Energy Security Impacts of Current Federal Lands Policy in the Western
U.S.'', prepared for API by EIS Solutions of Grand Junction, Colorado,
January 2012, which relies upon an examination of BLM Oil and Gas
Statistics compiled in 2010 and 2011 (the EIS Solutions report):
The number of new federal oil and gas leases issued by the
BLM in Western states is down 44% from an average of 1,874
leases in 2007/2008 to 1,053 in 2009/2010.
The number of new permits to drill issued by the BLM is down
39%, from an average of 6,444 permits to an average of 3,962.
The number of new wells drilled on federal land has
declined, 39%, from an average of 4,890 wells to 2,973.
The economic downturn starting in 2007 is recognized as a
factor contributing to these results. However, if market
factors were the sole driver of the federal lands permitting
slowdown, it would be reasonable to assume that non-federal
drilling permits would generally track the trends occurring
with their federal counterpart. But this is not the case.
We have attached the full report from EIS Solutions, which
describes in further detail the significant decrease in leasing,
permitting and the drilling of wells on federal BLM lands.
When comparing BLM statistics for the entire U.S. related to the
years from 2008 to 2012, the numbers paint a similar portrait. Natural
gas production increased on nonfederal lands nationwide and in Wyoming
when comparing 2008 to 2012, but it decreased on federal lands in the
same areas over the same timeframe. Nationwide, natural gas production
increased from 42.1 bcf/day to 56.8 bcf/day on nonfederal land, and
decreased from 8.4 bcf/day to 8.0 bcf/day on federal land. In Wyoming,
natural gas production increased from 1.8 bcf/day to 1.9 bcf/day on
nonfederal land, and decreased from 4.2 bcf/day to 4.0 bcf/day on
federal land. In terms of total wells drilled, nationally the number of
wells drilling on federal lands decreased from 5,044 in 2008 to 3,022
in 2012, which is a 40 percent drop. In Wyoming, federal wells drilled
decreased from 2,275 in 2008 to 776 in 2012, which is a 66 percent
drop. In terms of drilling permits issued, nationally the number of
permits decreased from 6,617 in 2008 to 4,256 in 2012, which is a 36
percent drop. In Wyoming, federal permits issued decreased from 3,155
in 2008 to 1,229 in 2012, which is a 61 percent drop. This information
is provided in a one-page attachment.
certainty and timeliness in the leasing and permitting process:
For years, western producers have been frustrated by the
uncertainty that the long timelines for operating on federal land
create. From leasing through project approval and drilling permits,
increasing regulatory requirements and often inefficient administrative
processes increase time and cost while reducing the certainty producers
need to create long term business plans for exploration, production and
resource development. Policies and priorities vary widely from
administration to administration, creating even more uncertainly and
leaving companies unable to determine timelines and costs, raise
capital, and to plan development. States and field offices operate
under widely varying interpretations of regulations, and producers are
subject to the different approaches among agency field offices that can
add ad hoc requirements to permits that have no basis in law. Improving
and clarifying current regulations was needed even before the addition
of recently enacted leasing policies which added more redundancy to the
process. In order to realize the full economic and jobs potential that
western oil and natural gas offer, companies must have certainty in the
process along with reasonable time and cost expectations to enable them
to execute their business plans.
streamlining the timeframe for completion of environmental analysis
Many large projects are held up in multi-year delays in processing
and completing environmental analysis under the National Environmental
Policy Act. The BLM should undertake reform to streamline the process
so that smaller projects that may include a dozen or so wells do not
take months and years to complete the associated analysis, and that
larger projects that may include thousands of wells do not take 3 to 10
years to complete the associated analysis. We are including an analysis
of NEPA delays that was completed by SWCA Environmental Consultants for
the Western Energy Alliance for your consideration.
re-examining and re-engineering the present permitting process
The government needs a reorientation of the federal onshore oil and
natural gas program. This should include a comprehensive re-engineering
and reform of the entire federal onshore process, including leasing,
project NEPA analysis, and permitting, to ensure the timely, efficient,
predictable and responsible development of federal energy resources.
Comprehensive reform should take advantage of emerging technologies and
best practices, eliminate redundancies, and explore market mechanisms
for achieving environmental protection. Government should refrain from
implementation of new regulations without careful examination of the
cost and benefit of current regulations.
Question 1(b). Would you please explain how the BLM's pending
regulations on hydraulic fracturing would push oil and natural gas
production off Federal public lands and Indian lands and onto state and
private lands?
Answer. States have demonstrated that they are in the best position
to regulate oil and gas development and have a proven track record of
regulating oil and gas activities. Governors Matt Mead (Wyoming),
Susana Martinez (New Mexico), Gary Herbert (Utah), Jack Dalrymple
(North Dakota), Brian Schweitzer (Montana) and Robert McDonnell
(Virginia), as well as Attorney General Scott Pruitt (Oklahoma) have
provided written statements that testify to the strong and efficient
track record of states to regulate oil and natural gas production.
States are in the best position to understand the unique aspects of
their hydrology and geology to inform and tailor their regulations.
Furthermore, states have demonstrated the ability to adapt their
regulations to address any changes in oil and gas activities in a
prompt manner.
When the BLM rule was originally proposed, we requested that the
BLM reconsider the rules and recognize the strong oversight provided by
existing state and federal regulations because conflicting or
duplicative federal requirements would delay development of abundant
oil and natural gas without providing additional environmental
protection.
We believe that the need for the proposed rule has not been
supported by technical or scientific information that demonstrate that
present federal and state regulations are inadequate to assure that
hydraulic fracturing of oil and natural gas wells drilled on federal
public lands takes place in a safe an environmentally responsible
manner. As we will explain further, API recommends that the proposed
rule be withdrawn and that prior to promulgating a new rule, the BLM
should undertake a careful analysis of the agency's current
regulations, onshore orders and other administrative practices
concerning the regulation of drilling, well completion and production
operations in collaboration with state agencies with similar regulatory
mandates, and organizations such as the Ground Water Protection Council
and STRONGER (State Review of Oil and Natural Gas Environmental
Regulations).
The record shows that there have been no incidents of contamination
from hydraulic fracturing in over 1.2 million wells drilled over more
than sixty years, and no groundwater contamination incidents from
hydraulic fracturing operations that have occurred on federal public
lands. Claims concerning the environmental and health impacts of
hydraulic fracturing have turned out to be unsubstantiated or have
resulted from activities or natural occurrences unrelated to hydraulic
fracturing--the application of fluids under pressure for the purpose of
initiating or propagating fractures in a target geologic formation in
order to enhance production of oil and/or natural gas.
We are concerned that the BLM has yet to show that it has carefully
examined the potential effects of the proposed regulation on the costs
of drilling operations on federal and tribal lands, and whether such
costs might discourage new investment in such drilling operations
without significant environmental benefit. More importantly, BLM has
not shown that it has carefully examined whether the proposed
regulations will increase or decrease production of natural gas and oil
resources on federal lands that belong to the American people and
provide revenues to the U.S. Treasury. The energy sector represented by
API supports 9.2 million jobs and 7.7 percent of America's GDP. Even as
the overall economy weakened the past several years, and millions of
jobs were lost, the oil and natural gas industry expanded and created
more than 86,000 new American jobs since the recession began. The
resource basins of the American West are projected to generate 1.3
million barrels of domestic oil and condensate production a day by the
year 2020, an amount that exceeds the current daily oil imports from
Russia, Iraq and Kuwait combined. These basins likewise hold the
potential to produce 6.2 trillion cubic feet (Tcf) of natural gas
annually by 2020, an additional one Tcf from 2010 levels. The benefits
to the nation and the region in terms of capital investment, jobs and
energy security from development of these resource basins, the majority
of which underlie multiple use federal public lands, are enormous,
especially in this time of economic uncertainty.
BLM states in the proposed rule's preamble that it has developed
the rule in response to ``public concerns'' related to hydraulic
fracturing activities. The preamble states that ``[T]he resulting
expansion of oil and gas drilling into new parts of the country as a
result of the availability of new horizontal drilling technologies has
significantly increased public awareness of hydraulic fracturing and
the potential impacts that it may have on water quality and water
consumption.'' Nevertheless, the agency has not shown that it has
carefully examined whether those concerns are warranted based on the
volume of information publicly available related to well stimulation
activities that have occurred nationwide for decades. This operating
record fails to show that actual instances of hydraulic fracturing
operations have adversely affected public health or the environment. A
rule of this significance should be based on facts, science, and
engineering, not on unsubstantiated concerns that lack empirical
demonstration. It has been long established that agencies must provide
some factual basis for their policy decisions, and ``that those facts
have some basis in the record,'' or they are arbitrary and capricious.
As API noted in written comments provided to the Office of
Management and Budget's Office of Information and Regulatory Affairs
June 11, 2012, API believes that the estimate of benefits and costs
associated with the BLM's proposed rule as described in the May 11,
2012 notice in the Federal Register is flawed and should be scrutinized
and re-determined. The benefits of the proposed rule are overstated by
unrealistic assumptions of baseline risks of subsurface contamination
in the Low Environmental Risk Case and grossly unrealistic in the High
Environmental Risk Case. The costs of implementing the proposed rule
are understated by the assumption that there will be no additional
delays in operations even though the proposed rule describes a number
of additional approvals that will be required throughout operations to
bring a well to completion, should the proposed rule be implemented.
Rules that impose regulatory burdens and delay without net benefit are
exactly the type of rules that the Administration has sought to
prevent. See Executive Order 13563 (agencies ``must'' craft regulations
``only upon a reasoned determination that [their] benefits justify
their costs,'' that they ``impose the least burden on society,'' and
``maximize net benefits . . . '').
More recently, in its study ``Future of Natural Gas,'' MIT examined
the potential risks of hydraulic fracturing to groundwater aquifers and
found that ``no incidents of direct invasion of shallow water zones by
fracture fluids during the fracturing process have been recorded.'' MIT
based its conclusions on the environmental record of more than 20,000
shale gas wells drilled over a 10 year period. MIT reviewed the results
of fracturing operations in the Barnett and Marcellus Shales and found
that in all cases the highest growth of the fractures remains separated
from the groundwater aquifers by thousands of feet of formation.
In addition, former BLM Director Bob Abbey testified before
Congress and stated that BLM ``has never seen any evidence of impacts
to groundwater from the use of fracking technology on wells that have
been approved by'' BLM. Director Abbey added that BLM believes ``that
based upon the track record so far, [hydraulic fracturing] is safe.''
Director Abbey's testimony on the safety of hydraulic fracturing is in
accord with former U.S. Environmental Protection Agency (EPA)
Administrator Lisa Jackson's testimony that there is no ``proven case
where the fracking process itself has affected water.'' The evidence to
date supports the conclusion that hydraulic fracturing poses no risk of
subsurface contamination--a conclusion with which BLM and EPA
apparently agree.
Moreover, the relationship between hydraulic fracturing and
drinking water resources is already the subject of a multi-year multi-
million dollar research study currently being undertaken by the EPA.
This national study includes a review of published literature, analysis
of existing data, scenario evaluation and modeling, laboratory studies,
and retrospective and prospective case studies. EPA released a 2012
progress report and will release the final report at the end of 2014.
API believes that the case has not been made for a federal, one-
size-fits-all approach. Oil and natural gas exploration and production
is currently regulated by comprehensive state and federal laws. These
include laws regulating well design, water use, waste management and
disposal, air emissions, surface impacts, health, safety, location,
spacing, and operation. State regulation of oil and natural gas
activities pre-dated federal regulation, and is particularly important
because it allows laws to be tailored to local geology and hydrology.
Organizations like STRONGER are available to help assess the overall
framework of environmental regulations supporting oil and gas
operations in a particular state, and could likewise be a resource for
the BLM. States also exchange information on regulatory experiences and
practices through periodic meetings of interstate organizations such as
the Interstate Oil and Gas Compact Commission (IOGCC) and the
Groundwater Protection Council (GWPC).
Question 2(a). Please explain how liquefied natural gas exports
would:
Increase natural gas production and jobs in public land states,
such as Wyoming, and Indian Reservations; and
Answer. Exporting LNG will open up new markets which will increase
natural gas production, including additional production on private,
state, tribal and federal lands and in Wyoming. LNG exports will create
jobs in the oil and natural gas industry, as well as the industries
supplying the oil and natural gas sector with materials, equipment, and
labor. These jobs would be created by the activities associated with
the construction and maintenance of liquefaction facilities and
increased natural gas production that would be required to support
export markets. Recent studies indicate that each bcf per day of
production supports between 25,000 and 35,000 jobs. To put this in
perspective, as a result of the current energy renaissance, the United
States increased its production of natural gas from approximately 60
bcf/day in 2010 to approximately 70 bcf/day in late 2012, a significant
increase to occur over just two short years.
Virtually all studies concur that natural gas production will
increase to support export volumes. The NERA study finds that in all
three baseline scenarios, natural gas production increases. The EIA has
estimated that 60 to 70 percent of LNG exports will be from increased
production, with about 75 percent of the increased production coming
from shale gas. The production of additional unconventional natural gas
will support the creation of many new jobs as highlighted by the series
of studies recently released by IHS. For example, an IHS report
estimated that in 2012, 36 Bcf/d of unconventional natural gas
production already supports over 900,000 jobs.
A preliminary report by ICF International that modeled the impacts
of LNG exports on the macro economy finds that there is a net gain in
overall employment with LNG exports and that the jobs impact are larger
the greater the export volumes. For example, in the mid-export case,
where LNG export volumes reach about 8 Bcf/d by 2035, approximately
309,000 jobs are created in 2035. The preliminary report by ICF
International shows that even in the manufacturing sector there is a
net increase in jobs because potential losses are offset by gains
related to building and supplying LNG and olefin plants with equipment,
building and supplying of materials and equipment for oil and gas
production and processing, and general economic growth. According to
the preliminary ICF International report, in the mid-export case, where
LNG export volumes reach about 8 bcf/d by 2035, manufacturing job
growth reaches 31,000 jobs in 2035.
Other studies that have analyzed the employment impact of increased
LNG exports conclude that the gains in jobs are greater than the
losses. For example, in summarizing the employment of LNG exports, Levi
concludes ``The bottom line . . . is robust: job gains in directly
affected markets are highly likely to be greater than job losses in
markets hurt by higher natural gas prices.'' In addition, Levi noted
that ``Most jobs supported by exports will be in gas production and in
its supplies--including in energy intensive areas like steel and
cement. My study estimates that those jobs will be roughly an order of
magnitude larger than the jobs lost due to higher natural gas prices.''
We are including with our response the preliminary results from the
ICF International analysis of the economic impacts of LNG exports,
which includes information on the positive employment opportunities.
Question 2(b). Increase revenues (e.g., through severance taxes or
royalties) to states, Indian tribes, and the Federal government?
Answer. Corporate income taxes accrue to both State and Federal
governments from oil and natural gas development. Any time that
production occurs on federal, state, or tribal lands, the respective
government receives the added benefit of additional revenue that is
associated with the bonus bids, rentals, and royalties. From a federal
standpoint, oil and natural gas production has provided billions of
dollars to the government, and the potential is there for the
government to receive billions more if production opportunities are
expanded. In fact, the oil and natural gas industry contributes over
$86 million a day to the federal government and we have the potential
to do much more. With LNG exports, the country would see expanded
production to meet the additional demand. The potential is certainly
there for this additional production to occur on federal, state and
tribal land, and those governments would in turn benefit from the
additional revenues accruing. A recent IHS report estimates that
projected revenue from unconventional development alone could reach a
cumulative $2.5 trillion by 2035 with roughly half going to the federal
government and half to state and local governments.
Responses of Jack N. Gerard to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a problem since we might only export 10
percent of our natural gas?
Answer. We are hopeful that we do not have a problem given the
undeniable benefits that will accrue to the nation as a whole with the
export of LNG from the United States. However, the U.S. is in a global
competition for the development of LNG export facilities. According to
ICF International, the current world LNG liquefaction capacity is
estimated to be approximately 37 Bcf/d.\16\ A survey of under
construction, planned, and proposed facilities around the world
indicates approximately 49.6 Bcf/d of new liquefaction capacity could
come online by 2025 outside of the U.S.\17\ Approximately 11.3 bcf/d of
capacity is currently under construction in Australia, Indonesia,
Algeria and Angola. Add to that the fact that approximately 28.7 Bcf/d
of U.S. liquefaction capacity has been proposed and you get a potential
total world LNG capacity of 115 Bcf/d. The expected worldwide demand
for LNG falls far short of that potential supply. Various projections
show that expected world demand for LNG will be in the range of
approximately 50 Bcf/d to 65 Bcf/d by the year 2025.\18\ A significant
share of the proposed liquefaction capacity may not be built (i.e., of
the 45 proposed LNG import facilities for construction in the United
States, only 7 were actually built).
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\16\ ICF International estimate for year end 2011 figure.
\17\ ICF International estimate as of Dec. 2012 based on current
project list.
\18\ Poten, BG Group, Credit Suisse, Facts Global.
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Each day that we delay affirmative decisions on export applications
puts U.S. projects at a competitive disadvantage in the global race to
construct LNG facilities. Therefore, we must ensure that DOE acts
expeditiously and moves forward with the approval of the pending
applications so that we do not lose this critical opportunity.
Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Answer. The expert analysis to date indicates that the U.S. will
not lose its price advantage of natural gas under any of the scenarios
examined. Testimony from representatives of industrial consumers
demonstrates that the U.S. petrochemical industry can operate
competitively if U.S. natural gas prices remain in the $6-8 range. In
testimony before the Senate Energy and Natural Resources Committee in
October 2009, Dow Chemical Company Director of Energy Risk Management
Edward Stone stated that ``U.S. petrochemical competitiveness depends
on a multitude of factors, such as the relative cost of energy
(including crude oil, coal, etc.), the relative cost of new facility
construction, the strength of the economy in each global area, and the
extent to which local industry is protected by local government
policies. In general, we believe that if crude were in the $75-$100
range, and natural gas were available at a consistent $6-$8 dollar per
MMBtu range, U.S. petrochemical facilities could be globally
competitive.'' If this is the case, then according to Dow Chemical
Company's own recent analysis, LNG exports should not jeopardize recent
petrochemical industry expansion plans. As summarized by a May 2012
Brookings report, the reference natural gas price forecast for all
recent major studies, projected total natural gas prices even with LNG
exports are in a range from $5.10 to $7.21 per MMBtu, well within or
below the $6-8 range. In the NERA study, all of NERA's reference case
core scenarios projected prices below $7.50 per Mcf. NERA's
unconstrained LNG export case, which reached an export level of over 15
Bcf/d, projected a natural gas price as high as $7.50 per Mcf, but only
in 2030 or at the end of the forecast projection. Therefore, recent
studies projecting natural gas prices, even with very high and
unconstrained LNG export levels, do not forecast natural gas prices
that jeopardize planned petrochemical industry investment.
In fact, the additional additive LNG costs of liquefaction and
transportation create a natural ceiling on exports. For example, the
NERA study compiled costs of exporting LNG from the U.S. Gulf Coast to
various demand regions around the world. See Fig. 62 in the NERA
report.\19\ NERA estimates that the total LNG transport costs to
Europe, Korea/Japan and China/India can range from $6.30 to $7.14 and
$8.39 per MMBtu in 2015, respectively. If the U.S. Henry Hub natural
gas prices are trading at $4, then U.S. LNG exports are economic in
these consuming markets since the current prevailing LNG prices into
Japan of about $16.50 per MMBtu is higher than the U.S. sourced LNG
price of $11.14. If, however, U.S. Henry Hub prices rise to $10, then
the price of LNG into Japan becomes greater than $16.50 per MMBtu
effectively rendering U.S. LNG uneconomic. As Japan adjusts further to
the tsunami impact on its nuclear power sector and LNG export projects
come on stream around the world, the tsunami-impacted price of $16.50
is likely to decrease. If the price of LNG delivered to Japan were to
drop to, say, $11.00, the incentive to export from the U.S. could
disappear.
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\19\ NERA, ``Macroeconomic Impacts of LNG Exports from the United
States,'' December 10, 2012, p. 90.
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The NERA study is one of the few studies to date that has
incorporated the potential supply response by foreign competing
suppliers of LNG that would limit the ability of the U.S. to export
volumes of LNG.\20\ According to NERA*, this consideration proved to be
quite important since in many of the hypothetical LNG export volumes
considered in the EIA study*, the world market could not fully absorb
the export volumes due to strong international competition from foreign
LNG and natural gas thereby further limiting the potential for domestic
price increases. Medlock summarizes this point by stating that ``the
analysis herein indicates that international market response will
ultimately limit the amount of LNG that the US exports as a matter of
commercial rationing.''\21\
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* All reports have been retained in committee files.
\20\ The Jan. 2013 Deloitte study, ``Exporting the American
Renaissance; Global Impacts of LNG Exports from the United States,''
also analyzes international markets.
\21\ Medlock, K.B. III, ``U.S. LNG Exports: Truth and
Consequence,'' James A. Baker III Institute for Public Policy (Aug. 10,
2012), pp. 32-33.
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Brookings' Study-by-study comparison of the Average Price Impact
from 2015-2035 of 6 bcf/day of LNG exports (unless otherwise noted):
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Answer. As a trade association, API defers to the opinions and
projections of the experts in the government and in the energy
consulting business when it comes to future production. An analysis of
projections of natural gas production from these organizations
indicates that the U.S has an abundant natural gas resource base and
outlook for natural gas production is more than sufficient to
accommodate LNG exports as well as growing domestic demand. For
example, the U.S. Energy Information Administration (EIA) projects that
natural gas production will reach 78 bcf/d by 2025 in their latest AEO
2013 ER. In AEO 2012, the EIA was projecting 72 bcf/d of natural gas
production by 2025, while in the AEO 2011, the EIA was projecting 66
bcf/d. (The AEO 2011 is the baseline that the EIA and NERA Consulting
used in their analysis of the impact of LNG exports.) The upward trend
in the outlook for natural gas production in the recent AEOs indicates
the positive prognosis for shale gas and the continued expectation of
robust supply growth in the next 10 years. Commercial forecasters are
even more optimistic than the EIA. ICF International and IHS Inc.
project 88 bcf/d and 89 bcf/d of natural gas production by
2025.\22\ \23\ Since commercial forecasters are continuously
updating their assumptions on such parameters as well spacing,
estimated ultimate recovery, and other factors that affect the outlook
for natural gas supply, it is reasonable to conclude that the outlook
for natural gas may be even rosier.
---------------------------------------------------------------------------
\22\ ICF International, ``ICF Base Case,'' February 2013.
\23\ IHS Inc., ``IHS America's New Energy Future: The
Unconventional Oil and Gas Revolution and the U.S. Economy,'' October
2012, p.15.
---------------------------------------------------------------------------
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. Similarly, API defers to the experts on the question of
projected future exports. EIA currently projects that the U.S. will be
exporting 3.4 bcf/d of natural gas by 2025. This of course will be
contingent upon a host of complex factors that will play out in the
global market, including global supply, global demand, and global LNG
export capacity. However, API will reiterate its concern that our
potential to export natural gas from the U.S. becomes less likely with
each day that we delay the approval of LNG export applications.
It is important to point out that the U.S. has demonstrated the
ability to increase production significantly over a short period of
time. In early 2006, U.S. marketed natural gas production was under 52
billion cubic feet per day (bcf/d). By late 2012, U.S. marketed
production grew by over 18 bcf/d to 70 bcf/d, which equates to a 36
percent increase in seven years. The growth rate for U.S. natural gas
production was even greater in 2010 and 2011. From January 2010 to
January 2012, U.S. production grew by over 10 bcf/d or 18 percent in
just two years. These production increases are larger than many
projections of the volume for LNG exports, and this demonstrates that
the capacity is clearly there for the U.S. to increase domestic
production of natural gas to satisfy the demands of the export market,
while at the same time providing affordable supplies domestically.
conclusion
Once again, it was a privilege to have the opportunity to highlight
the tremendous opportunity that we now have before us given our
nation's emergence as a global energy leader. The oil and natural gas
industry stands ready to harness this great potential and help the
country realize the important and significant benefits to be gained,
which include the creation of thousands of jobs, the generation of
government revenues, and enhanced energy security.
______
______
Response of John W. Hickenlooper to Question From Senator Wyden
Question 1. Last week, I sent a letter to the Secretary of the
Interior and to the White House encouraging the Administration to issue
a strong regulation for hydraulic fracturing on Federal lands. At least
four states (Wyoming, Arkansas, Idaho, and Montana) have a requirement
for disclosure of the anticipated contents of the fracking fluid prior
to the operation taking place. Colorado decided against that approach.
What was the state's reasoning?
Answer. We heard from operators that they sometimes alter the
contents of the fracking fluid at the last minute. It made sense to
require the disclosure after the operation to avoid the unnecessary
cost and confusion resulting from amending reports, especially since it
didn't seem to the Colorado Oil and Gas Conservation Commission
(``COGCC'') that in the end there would be any substantive difference
in the information that COGCC obtained.
Response of John W. Hickenlooper to Question From Senator Landrieu
Recently, BLM announced that it would be issuing a new version of a
proposed rule regulating hydraulic fracturing on Federal lands. This
would be a revision of an earlier proposal that threatened to
drastically increase the cost of hydraulic fracturing on Federal lands.
I am hopeful that this new rule will represent a more levelheaded
approach to regulation, one that leaves the final authority to regulate
in the hands of states, who have successfully managed hydraulic
fracturing for over 60 years, with the help of the production industry,
which has created a system of disclosure and self-regulation resulting
in increased safety and public awareness.
Question 1a. Given the successful track record of states and
industry regulating the process of hydraulic fracturing, do you agree
that it makes the most sense to retain final authority in the hands of
states, recognizing that government would assist in the creation of
broad standards, rather than ceding total control to the Federal
government?
Answer. We don't believe there is no role for the federal
government, but, on balance, we believe the states are better
positioned to regulate effectively. Given differences in geology, as
well as development patterns, locations and drilling intensity, a ``one
size fits all'' approach is not as efficient as state-by-state
regulations. In January 2012, Colorado passed one of the strongest
rules in the country for disclosure of hydraulic fracturing fluids and
since then many other states have followed Colorado's lead. If the
federal agencies do proceed with rules, we would hope that they look to
the state rules as models, defer to states that meet certain regulatory
control thresholds and avoid duplication of the regulatory process in
terms of paperwork and other aspects of permitting and control.
Question 1b. Do you believe that increased Federal regulation would
result in a decline in production activities, negatively affecting the
economies of many communities which rely on these industries for
economic support?
Answer. Increased regulation does not necessarily result in a
decline in production activities. In Colorado, we have undergone three
rulemakings: a regulatory overhaul in 2008; hydraulic fracturing
disclosure in 2012; and this year COGCC adopted rules for setbacks and
groundwater monitoring which are among the strongest in the country.
Regulations must constantly evolve to accommodate changing development
patterns and technologies and, in Colorado, production has not declined
as a result of these rules. Nevertheless, for the reasons stated above,
we do think the states are best suited to establish their regulatory
frameworks. In Colorado, we believe that we can best ensure our natural
resources and environment are protected, while fostering the
responsible development of oil and gas resources.
Responses of John W. Hickenlooper to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a [domestic price] problem [if U.S. exports
increase] since we might only export 10% of our natural gas?
Answer. We understand that there is intense debate over the future
of U.S. natural gas exports. Proponents say increased exports would
create thousands of jobs, reduce the trade deficit and enhance national
security. Opponents argue shipping large amounts of natural gas abroad
could cause price hikes for consumers and manufacturers, many of which
have benefited from recent low natural gas prices.
A December 2012 study commissioned by the U.S. Department of Energy
and conducted by NERA Economic Consulting found that U.S. natural gas
prices will increase when the U.S. exports liquefied natural gas
(LNG\1\). They conclude, however, that the global market will limit how
high U.S. natural gas prices can rise under pressure of LNG exports.
This report projects that in spite of limited price fluctuations, even
in the most extreme exporting scenario, the U.S. will gain net economic
benefits from allowing exports. In every one of the market scenarios
examined, net economic benefits increased as the level of LNG exports
increased.
---------------------------------------------------------------------------
\1\ NERA Economic Consulting, Macroeconomic Impacts of LNG Exports
from the United States, December 2012.
---------------------------------------------------------------------------
Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Answer. This is a very complex question since there are several
factors that influence the future price of LNG exports from the U.S.
into world markets, including global supply and demand conditions and
the future availability of shale gas in the U.S. The same study
referenced above, conducted by NERA Economic Consulting and
commissioned by the U.S. DOE, provides an analysis of natural gas
prices in the U.S. relative to several different export scenarios. The
study concludes that natural gas price changes attributable to LNG
exports remain in a relatively narrow range across the entire suite of
export scenarios studied. Natural gas price increases at the time LNG
exports begin could range from zero to $0.33 in 2010 dollars per
thousand cubic feet (2010$/Mcf). The largest price increases that would
likely be observed after 5 more years of potentially growing exports
could range from $0.22 to $1.11 (2010$/Mcf). The study employs a
complex macroeconomic model to derive these estimates and corresponding
export percentages are not clearly identified in the report.
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Answer. We must defer to national experts on projections for the
amount of natural gas the country will be producing in the next decade.
The U.S. Energy Information Administration (EIA) is the statistical and
analytical agency within the U.S. DOE and their products are
independent of approval by any other officer or employee of the U.S.
Government. EIA's 2012 Annual Energy Outlook projects that natural gas
production in the U.S. will increase by three trillion cubic feet (Tcf)
in the next decade, to approximately 26 Tcf in 2023.\2\
---------------------------------------------------------------------------
\2\ U.S. Energy Information Association, U.S. Department of Energy,
Annual Energy Outlook 2012, http://www.eia.gov/forecasts/aeo/
tables_ref.cfm.
---------------------------------------------------------------------------
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. Many factors within the global natural gas market will
affect U.S. exports, including international supply and demand for
natural gas. Again, we must defer to national experts on projections of
U.S. natural gas exports in the next decade. The EIA's 2012 Annual
Energy Outlook projects that natural gas exports will be approximately
3.32 Tcf in 2023, which would be just under 13% of U.S. production.\3\
---------------------------------------------------------------------------
\3\ Ibid.
---------------------------------------------------------------------------
______
Responses of Andrew N. Liveris to Question From Senator Murkowski
Question 1. Dow stated previously before this committee (2009) that
U.S. petrochemical facilities could be globally competitive if U.S.
domestic prices fell within the $6-$8 per MMBtu range. Has your
position changed today and if so, can you explain why?
Answer. Dow's statement relates to competitiveness, which is a
function of several interdependent variables. There is no absolute
price range that can guarantee competitiveness. When making investment
decisions, we look at the following parameters with respect to
feedstock and energy costs: the expected absolute cost, the cost
relative to competing geographies/the world price of oil, and
volatility. The expected absolute cost must be lower than our other
geographic alternatives. The same is true for volatility. Price and
volatility are generally a function of supply/demand balance but can be
subject to market shocks and distortions.
Question 2. You indicated in testimony before this committee that
you support the requirement for a public interest determination to
obtain a license to export LNG to non-FTA countries, particularly
because natural gas is utilized by certain industries as a feedstock.
Do you support a similar public interest determination for exports of
products that other industries in the U.S. may use for value-added
products? If not, why not? Why should LNG exports be regulated
differently than other exports?
Answer. Over 70 years ago, Congress determined that natural gas
exports should be measured against the public interest and enacted into
law an export licensing regime to require that natural gas exports not
be inconsistent with the public interest. The rationale for this action
in the Natural Gas Act was that natural gas is a strategic commodity
that has a critical impact on the well-being of consumers, the health
of the economy, the security of the nation and other public interests.
States and the federal government have enacted policies that virtually
compel consumers to purchase natural gas, whether through environmental
regulations or mandated fuel switching. The same cannot be said for
other commodities, making natural gas fundamentally unique.
Dow, as just one of many affected constituencies, has submitted
comments to the DOE dated January 24, 2013 and February 25 2013 urging
DOE to take the steps necessary to ensure that, the licensing of
natural gas exports fully meets the public interest.
Response of Andrew N. Liveris to Question From Senator Landrieu
Dow is one of several companies which have greatly benefitted from
increased natural gas production, with this new, affordable source of
gas allowing your company to invest billion in my state and others,
reopening one facility and planning more. You have expressed a desire
to see that natural gas exports are managed in a responsible manner, so
as not to place undue burden on American manufacturing. One of your key
points has been the number of proposed export facilities, which, if all
were approved and operating at full capacity, would represent 19 bcf
per day of export, almost 1/3 our current demand. However, many believe
that this figure is not achievable and will be limited by the capital
available to finance construction. Indeed, in a New York Times article
published January 5, Charif Souki, CEO of Cheniere, one of the
companies proposing an export terminal predicted that by 2018, the
country would manage to export only one billion to two billion cubic
feet of gas a day, or roughly 2 percent of current domestic
consumption. In 10 years, after two to four projects have received
permits and have been built, he said he expected exports to grow to
three billion to five billion cubic feet a day.
Question 1. Do you believe that a market-determined level of
export, reflecting the realities of financing and market entry, could
be maintained without placing undue pressure on manufacturers like
yourself who are poised to invest billions in new and existing
facilities?
Answer. It is critical to remember that although natural gas is a
newly abundant resource, natural gas exports should not be viewed in
isolation from the overall dynamics of the aggregate natural gas
market. In fact, it is important to note that there are currently 29.4
bcf/d of LNG export projects that have applied to the DOE. Before
acting on export applications, DOE should establish criteria and
metrics for natural gas export public interest determinations required
by the Natural Gas Act through an open process that elicits input from
the broad spectrum of affected U.S. stakeholders. Established criteria
and metrics will enable DOE to consider, based on appropriate data,
projections and analysis, anticipated demand and the supply needed to
maintain market balance (among other factors). An approach that rushes
toward exports without a full understanding of the implications builds
higher risk into the system and will change how investors plan for the
future.
Further, we do not believe that financing will be a limiting factor
as many have suggested. As evidence, financing for LNG projects in
Australia has not been a factor despite having relatively higher
natural gas prices. In fact, the Ichthys LNG projects recently
announced the biggest projected financing ever arranged in
international financial market at roughly US$20 billion. The role of
export credit agencies in financing projects cannot be discounted.
Financing was not an issue in overbuilding LNG import facilities in the
U.S. not so long ago.
We believe the normal dynamics of a market for domestic natural gas
can co-exist with preserving the public interest so long as abrupt
shocks, such as severe speculative price volatility, and major
artificial distortions, such as cartel pricing, can be ameliorated.
This is the challenge facing DOE: how to balance natural gas exports
with all of the other aspects of the public interest in the short,
medium and the long term.
Responses of Andrew N. Liveris to Questions From Senator Barrasso
Question 1. In your testimony, you express concern about
environmental regulations. You state ``overly restrictive environmental
regulations.on hydraulic fracturing could greatly reduce future
supplies of natural gas.'' You also ``urge caution in considering
policies that encourage fuel switching between natural gas and coal.''
To what extent is DOW concerned about: (a) Federal hydraulic fracturing
regulations; (b) EPA rulemakings that encourage fuel switching between
natural gas and coal; (c) a tax on carbon emissions; and (d) proposals
to establish a clean energy standard?
Answer. We are concerned about governmental actions that would
restrict supply and/or accelerate demand because of the potential
impact on domestic natural gas prices. We believe it is critical that
DOE, in making its public interest determination under the Natural Gas
Act, consider the impact of all policies that could affect either
supply or demand.
We are also concerned about policies that would rapidly and
excessively drive coal and other energy sources out of power
generation. We firmly believe that the nation's interest is best served
by maintaining robust diversity in power generation sources. Dow has
and will continue to evaluate any climate change policies in the
context of its effects on U.S. competitiveness in general and energy
sources such as natural gas. We would be very concerned about any
policies that call on a single fuel source to carry a disproportionate
share of the nation's energy burden. History shows us that whenever we
have done so, we have been disappointed.
Response of Andrew N. Liveris to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a problem since we might only export 10
percent of our natural gas?
Answer. There is a significant level of uncertainty regarding
exports and the broader natural gas market, and the stakes are quite
high. Some parties claim that exports will not exceed 10 percent of
natural gas production; we believe that it is quite likely that higher
levels of exports would occur. DOE has already approved natural gas
exports accounting for well over 50 percent of annual production. If
even a significant portion of that already-approved volume is exported,
then exports could easily exceed 10 percent of production. Approval of
pending LNG export applications would permit LNG exports to flow to
non-FTA countries that have markedly more demand for U.S. natural gas,
making it far more likely that a higher percentage of production would
be exported, with potentially severe consequences for domestic users of
natural gas.
Given the threat of exports at that level, broad issuance of
natural gas export permits could lead to natural gas price spikes.
Speculation in natural gas trading has in the past driven the price up
beyond what the purely physical market would indicate. This is what
drove prices up in the last decade. Therefore, the price movement would
likely occur well before the actual exports occur, due to expectations
in the market.
In these circumstances, we believe DOE should take a cautious and
measured approach to assuring an appropriate balance between natural
gas exports and the public interest based on criteria and metrics
established through a public comment process.
Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Answer. We believe that the domestic demand for natural gas is
going to increase significantly over the next 10 to 15 years and we are
skeptical that supply will be able to keep pace. Accordingly, we see
prices increasing from their current levels regardless of the level of
exports. Exports will constitute additional demand and will serve to
move prices even higher than they would otherwise be. Today we might be
able to export 10 percent of our production without a significant
impact on price. In out years, that may not be the case. Our analysis
shows the potential for significant demand spikes in the 2017-2020
timeframe, and that an unprecedented level of production will be needed
to balance the market. In a supply-constrained market, or even a
balanced market, exports will have a far greater price impact than they
would in a market with ample supply such as now. Australia currently
exports roughly half of its natural gas production and in doing so it
has imported much higher natural gas prices, placing its energy-
intensive industries in a difficult competitive position and subjecting
its population to much higher energy costs.
We believe that exports of natural gas should not be viewed in
isolation from the overall supply/demand dynamics of the aggregate
natural gas market. Indeed, current law requires exactly just such an
evaluation prior to approval of natural gas export applications.
Congress and the administration should work to define what is in the
public interest to determine a prudent and rational approach that
balances the interests of the American consumer and domestic needs with
exports. Rather than a particular level of exports, Dow advocates
movement beyond a single report by one economic consultancy to an open
process to enable the full profile of U.S. stakeholders to provide
economic and non-economic input to DOE to inform establishment of
criteria to make public interest determinations. We are in year 4 or 5
of a 100 year energy advantage. There are still many unknowns, so we
should exercise prudence as we move ahead.
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Answer. Dow is not a natural gas producer, but rather we are one of
the world's largest consumers. For that reason, our focus is on
understanding demand first and then the supply that would be required
to maintain balance. Our analysis shows the potential for significant
disconnect of demand from supply in the 2017-2020 timeframe in a high
export case, and that an unprecedented level of production will be
needed to balance the market without harming manufacturers and raising
prices significantly for consumers. With regard to increasing supply/
production, it is currently unclear how quickly this can happen and at
what cost.
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. Natural gas is a vital and finite natural resource that
plays a significant role in the overall health of the U.S. economy.
Under present policy, the DOE is required by law to determine whether
export applications are in the public interest and the level of exports
in 10 years will in large part be based on that determination. We
believe DOE needs more information in order to accurately assess the
public interest and determine an appropriate balance with the public
interest. Dow is asking DOE to solicit additional comments regarding
the impact of natural gas exports on jobs, consumer energy prices,
trade levels, environmental issues, and U.S. energy independence and to
establish public interest criteria against which to measure exports.
However, as noted above, our analysis shows the potential for
significant demand spikes in the 2017-2020 timeframe, and that an
unprecedented level of production will be needed to balance the market
without harming manufacturers and raising prices significantly for
consumers. It is for the reason that we are urging a cautious approach.
______
Response of Frances Beinecke to Question From Senator Wyden
Question 1. Ms. Beinecke, you note in your testimony that one of
the benefits of natural gas, of course, is that when you burn it, it
releases fewer greenhouse gas emissions than resources like coal. This
benefit, though, can be offset if more natural gas leaks in to the
atmosphere. There are conflicting reports about the level of methane
leakage from natural gas production and transport, ranging from as
little as 0 percent leaked to as much as 9 percent in some reports for
some basins. How can we get our arms around this question of how much
methane is being leaked, and what are your thoughts for how we can make
sure that leakage is minimized?
Answer. Natural gas contains less carbon per unit of energy than
coal and thus produces fewer greenhouse gas emissions per unit of
useful electric or thermal output when combusted.\1\ But that is not
the whole picture--natural gas operations also emit significant amounts
of methane, a powerful greenhouse gas, during the extraction,
production, processing, transmission, and distribution steps.
---------------------------------------------------------------------------
\1\ U.S. Environmental Protection Agency, Clean Energy - Air
Emissions, available at http://www.epa.gov/cleanenergy/energy-and-you/
affect/air-emissions.html.
---------------------------------------------------------------------------
According to most comparative lifecycle assessments of greenhouse
gas emissions during electricity production from natural gas and coal,
natural gas would produce approximately 50 to 60 percent fewer
emissions than coal, if there were no methane emissions at all from the
natural gas industry.\2\
---------------------------------------------------------------------------
\2\ Deutsche Bank Group-DB Climate Change Advisors, Comparing Life-
Cycle Greenhouse Gas Emissions from Natural Gas and Coal (2011),
available at http://www.worldwatch.org/system/files/pdf/
Natural_Gas_LCA_Update_082511.pdf.
---------------------------------------------------------------------------
However, when the impact of methane emissions from the natural gas
industry is included in the analysis, it can be estimated that natural
gas provides a clear advantage over coal only when methane emissions as
a fraction of total production are below 3 percent. When emissions are
between 3 percent and around 7-8 percent, natural gas does not have an
advantage over coal in the near-term, from a greenhouse gas
perspective; this is because methane leakage has more deleterious
effects in the nearer term. When emissions exceed 7-8 percent, natural
gas has no advantage over coal at any time, from a greenhouse gas
perspective.\3\ The numbers above are for electricity generation from
natural gas or coal; when using these fuels directly for useful thermal
output, natural gas squanders its advantage over coal from a greenhouse
gas perspective at even lower methane leakage levels.
---------------------------------------------------------------------------
\3\ Alvarez, R. et al., Greater focus needed on methane leakage
from natural gas infrastructure, published in Proceedings of the
National Academy of Sciences (2012), available at http://www.pnas.org/
content/early/2012/04/02/1202407109.abstract.
---------------------------------------------------------------------------
In its latest comprehensive inventory, the EPA estimated methane
emissions from the oil and gas industry to be about 2.5 percent as a
fraction of total production.\4\ Recent studies have suggested that
emissions could be much higher, in the range of 7 percent or higher in
certain basins.\5\ The oil and gas industry claims that industry-wide
emissions may be even lower than EPA's current estimate. Also, EPA
recently released the first set of greenhouse gas emissions reporting
data from the oil and gas sector, required by Congress in 2008\6\. The
reporting rule data confirms that methane leakage is significant and
provides additional insight into sources of leakage. However, the
reporting requirements omit a number of methane sources within the
industry, and so the data does not provide a complete picture of total
methane emissions from the sector. As such, much more accurate and
verified data is needed to ascertain the true extent of methane
emissions from the oil and gas sector. NRDC is encouraged that more
studies are beginning to be conducted to address this important
issue.\7\
---------------------------------------------------------------------------
\4\ U.S. Energy Information Administration, Natural Gas Gross
Withdrawals and Production, 2010 data. available at http://www.eia.gov/
dnav/ng/ng_prod_sum_dcu_NUS_a.htm; U.S. Environmental Protection
Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks (1990-
2009) (Apr. 15, 2012). Net emissions of methane were just over 600 bcf
(billions of standard cubic feet), while gross withdrawals were
approximately 26,800 bcf; this implies a net leakage of approximately
2.3 percent
\5\ Howarth, R. et al., Methane Emissions from Natural Gas Systems,
Background Paper Prepared for the National Climate Assessment
(reference number 2011-0003) (Feb. 25, 2012), available at http://
www.eeb.cornell.edu/howarth/Howarth%20et%20al.%20--
%20National%20Climate%20Assessment.pdf.
\6\ U.S. Environmental Protection Agency, Greenhouse Gas Reporting
Program, 2011 Data, available at http://epa.gov/ghgreporting/ghgdata/
reported/index.html.
\7\ Environmental Defense Fund, New Study To Provide Important,
Direct Measurement Data On Methane Emissions From Natural Gas
Production (2012), available at http://blogs.edf.org/energyexchange/
2012/10/10/new-study-to-provide-important-new-direct-measurement-data-
on-methane-emissions-from-natural-gas-production/.
---------------------------------------------------------------------------
Regardless of exactly how much methane is being leaked, it is
imperative to reduce methane emissions to the greatest extent possible,
to a sector leakage rate of well below 1 percent. Fortunately,
according to our report last year,\8\ NRDC found that 10 tried and
tested, cost-effective technologies exist today that could control up
to about 80 percent of these emissions. Some of these are: a)
technologies to control emissions soon after a well is fracked, as well
as while the well is operating; b) better seals for compressors; c) gas
flow controllers with reduced leakage; and d) better leak detection and
repair programs. (Importantly, these same technologies would help
control toxic air pollutants that are known to cause serious health
issues.)
---------------------------------------------------------------------------
\8\ NRDC, Leaking Profits: The U.S. Oil and Gas Industry Can Reduce
Pollution, Conserve Resources, and Make Money by Preventing Methane
Waste (Mar. 2012), available at http://www.nrdc.org/energy/leaking-
profits.asp
---------------------------------------------------------------------------
The technologies described in NRDC's report are cost-effective.
Most require a modest upfront investment. But in most cases these
investments would pay for themselves in less than two years, while some
investments could take a little longer. This is because these
technologies reduce the leakage of methane, which after being retained
or captured can be sold as fuel or used onsite. However, these
technologies are not currently being used widely enough by industry.
A number of these controls are required for some sources under
EPA's recently updated new source performance standards to control
volatile organic compounds, or VOCs, which are co-emitted with
methane.\9\ But due to their incomplete coverage, the standards fail to
reach the vast majority of methane emissions from the sector. Thus,
more can and needs to be done. Methane pollution should be addressed
directly, instead of as a co-benefit of other pollution standards,
which will more effectively control methane leakage by reaching methane
sources not covered by the VOC standards. More importantly, existing
sources of methane leakage should be addressed, as they contribute to
the bulk of methane leakage from the industry. The Clean Air Act
confers EPA with the authority and obligation to undertake these
activities.
---------------------------------------------------------------------------
\9\ U.S. Environmental Protection Agency, Federal Register Vol. 77,
No. 159, Oil and Natural Gas Sector: New Source Performance Standards
and National Emission Standards for Hazardous Air Pollutants Reviews
(Aug. 16, 2012), available at https://www.federalregister.gov/articles/
2012/08/16/2012-16806/oil-and-natural-gas-sector-new-source-
performance-standards-and-national-emission-standards-for.
---------------------------------------------------------------------------
Accordingly, we need stronger standards from the EPA to ensure that
methane emissions from the oil and gas industry are significantly
reduced, using technologies that are viable and cost-effective. This
can be done by EPA at the national level, and the agency has legal
tools available to address region-specific circumstances in conjunction
with the states.
Response of Frances Beinecke to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a problem since we might only export 10
percent of our natural gas?
Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. NRDC does not have a position on LNG exports and has not
yet engaged in analysis on these issues.
Right now, NRDC's shale oil and gas work is focused on the
environmental, health and community impacts of the fracking production
process. However and wherever shale has is used, protecting against the
environmental and health impacts of production is critically important.
Specifically, we've been working aggressively to advance stringent
and protective safeguards at the local, state and national level. And
in addition to our regulatory efforts, we recently launched NRDC's
Community Defense Project, a major new initiative to help local
communities protect and defend themselves against the risks presented
by fracking through the courts and the halls of state capitols.
Additionally, we are devoted to advancing policies to promote the
development of real clean energy sources, like energy efficiency and
renewable power sources, like wind and solar, as quickly as possible.
NRDC did submit comments to DOE on the specific issue of a study
that DOE commissioned on the price and economic impacts in the United
States of LNG exports. We pointed out some flaws in the study that
tended to underestimate the price impact of LNG exports and also
critiqued the study for failing to take into account the economic
impacts (social costs) of carbon pollution. Finally, we urged DOE to
look at the potential economic and environmental impacts of LNG exports
in other countries, including China and India, which are heavily
dependent on coal.
______
Responses of Kenneth B. Medlock to Questions From Senator Murkowski
Question 1. Dow has expressed concern about the ability of the
natural gas supply in the U.S. to meet potential increases in domestic
demand, particularly from the manufacturing, power and transportation
sectors. Do you have a response to this concern?
Answer. The concern seems to be actually one of how price will
respond to demand growth from many sectors. First, the price impact of
demand growth in multiple sectors is ultimately dependent upon the
elasticity of supply. If supply can expand significantly as price rises
(meaning it is very elastic--such as in Case 1 in Figure SM.1*), then
the capabilities of the upstream sector are more than adequate to meet
demands from multiple sectors. Figure SM.1 indicates the effect of
different supply capabilities in response to a particular demand
increase due to exports. Research done at the Baker Institute indicates
that domestic supply is highly elastic, which would suggest that price
will not rise substantially as demand grows.
---------------------------------------------------------------------------
* All figures have been retained in committee files.
---------------------------------------------------------------------------
Second, the opportunity for demand growth in each of the
aforementioned sectors is a function of the domestic price of gas. If
the price of gas begins to rise, then the opportunities for demand
growth are mitigated, although not at the same pace in each sector. For
example, as gas prices rise, the opportunity for natural gas into
transportation is likely reduced first. Then, certain sectors in
manufacturing will be affected, followed by power generation.
Importantly, the rank order is not independent from policy. For
example, as EPA actions aimed at reducing certain pollutants become
binding, coal-fired power generation will be displaced in favor of
natural gas, largely due to the already large installed natural gas
generation capacity in the US. So, gas demand in power is likely to be
the most responsive margin along which demand growth occurs in the US.
Industrial sector opportunities will persist as long as the price
of natural gas in the US is lower relative to price in other regions.
This is a very important point because low price in the US is but one
necessary condition--it is not sufficient. In fact, in the late 1990s
domestic gas price scarcely increases and was averaging in the mid $2/
mcf range, but domestic industrial gas demand was declining due to
efficiency improvement and certain activities moving offshore to
cheaper supplies (places such as Trinidad). So, the price abroad is
also an important factor when determining industrial demand
opportunities domestically. Indeed, if domestic demand rises to the
point that domestic price also rises, then some of the presupposed
industrial demand may not actually materialize because the
opportunities for expansion will be deemed greater elsewhere.
Policy makers must ultimately grapple with (i) whether or not
intervention is warranted and (ii) if so, what can (and perhaps even
should) be done to limit the increases in demand for US-produced
natural gas. For example, if there is a policy orientation to seeing
the industrial sector expand, then the EPA rule-makings that stand to
promote the expansion of gas demand in power generation must ultimately
be challenged. More generally, if the concerns are that expanded demand
will compromise the opportunity for industrial activity, then one could
argue government should take steps to limit demand growth on multiple
fronts--power generation demands, transportation demand, and exports.
This seems ill-advised when prices are allowed to serve a rationing
function that will ensure the greatest overall economic benefit--for
example, when price discovery occurs in a transparent marketplace
driven by supply-demand fundamentals.
However, if domestic supply is indeed highly elastic, as Baker
Institute research indicates, then the concerns are inconsequential. In
effect, there is room for growth from multiple sectors because supply
is adequate.
Question 2. The debate about LNG exports has included arguments for
action by the government to limit the volume of LNG exports to ensure
the domestic price of natural gas remains low. When the U.S. has
imposed price controls in the past, this has resulted in gas shortages.
What would be the impacts to the natural gas industry and U.S. economy
from efforts by the government today to restrict the level of exports?
Answer. Restrictions on export volumes, or any restrictions for
that matter, create market distortions. Constraining the margins of
demand response can have undesirable consequences because it
effectively subsidizes certain sectors at the expense of others. More
specifically, rents accrue to the consumers who are not constrained,
largely because revenue earning opportunities are diverted from other
sectors. This is distortionary by definition. Accordingly, the overall
welfare effect of such a policy is generally negative.
Importantly, it is not likely that shortages such as those in the
1970s would emerge, because the proposed policy is not one of direct
price control. It is indirect via quantity controls. The domestic
price, under a policy of export restrictions, would still equilibrate
supply and demand, so the central tendency should still reflect long
run marginal cost. The quantity control would result in lower domestic
production, but the result would be driven by lower demand.
Question 3. During the hearing before this committee, there was
testimony that natural gas prices index to oil prices worldwide and
concern expressed that this will lead to higher gas prices in the U.S.
if LNG exports to non-FTA countries are approved. Do you have a
response to this concern?
Answer. This is simply not true. To begin, oil indexation of
natural gas occurs in a contract-specific manner. So, an individual
buyer might be willing to contract a certain proportion of their supply
using oil-indexed terms. This only occurs if the buyer has concerns
about the ability to procure supply, which is indicative of a lack of
liquidity. Historically, this has been true in Asian and European
markets due to high fixed costs of entry. However, the oil-indexed
paradigm has already been significantly altered in Europe following the
opening of several hubs on the continent and expansion of various
supply options. In Asia, the market is changing much more sluggishly,
but buyers in the Asian market are already arguing for gas-indexed
purchase agreements, a development triggered by supply growth not only
in the US, but also Australia, East Africa, the Middle East, and
Russia.
In fact, in the last 10 years the spot (or short term) market in
both Asia and Europe has grown substantially. In Europe, spot and short
term sales have jumped from less than 10 percent of total LNG sales in
2000 to almost 25 percent of total LNG sales in 2011, and the pipeline
market is witnessing a similar evolution. In Asia, the trend is
similar, with spot and short term sales increasing from around 2
percent of total LNG sales in 2000 to just over 20 percent of total LNG
sales in 2011 (see *Figures SM.2 and SM.3). In addition, the contracts
in place to consumers in each market are not dictating flow. In fact,
Figures SM.2 and SM.3 together indicate significant diversion from the
Atlantic to Pacific basin as total trade in the Atlantic basin falls
well short of contracted volume in 2011 but the opposite is true in the
Pacific basin.
Importantly, the spot price in Europe is below the typical oil-
indexed price, as was the spot price in Asia until the disaster at
Fukushima, which led to an unexpected demand shock that drove a classic
basis blowout in the Asian price (see *Figure SM.4--Asian price is JKM,
European price is NBP, and US price is Henry Hub). As nuclear capacity
comes back online in Japan, the spot price in Asia will decline back to
its ``normal'' relationship with NBP. Growth in spot market trade is
expected to continue, so the price in any exporting region will at most
be the spot price in the importing region minus the cost of
liquefaction and transportation. Thus, if the long run price of gas in
Asia is $10/mcf, then the price in the US should be approximately
$4.50-$5/mcf, which is still significantly lower than oil-parity. This
simply means is that a basis differential should persist due to
transport costs. This is even true across the pipeline network in the
most liquid natural gas market in the world--North America.
Response of Kenneth B. Medlock to Question From Senator Barrasso
Question 1. In your opening statement, you mentioned that the three
countries ``most heavily impacted'' by the increase in natural gas
production in North America would be Russia, Iran, and Venezuela.
a. Would you please explain how liquefied natural gas (LNG) exports
from the United States would impact each of these nations (and their
state-owned enterprises), respectively?
b. Would you please explain how LNG exports from the United States
would promote U.S. national security interests and the energy security
of key U.S. allies such as NATO member nations and Japan?
Answer. To begin, the statement was made in reference to a study we
performed for the Department of Energy Office of International Policy
and Affairs. In that study (attached as an addendum), we simulated a
world with known shale resources and compared it to a world without any
shale. The second case was meant to capture the outcome that most
anticipated would occur in the early 2000s, when large investments were
being made to import natural gas to the US. A key result of that work
was that Russia, Iran and Venezuela were the three countries most
disadvantaged by the emergence of shale in the United States. So, the
dramatic change in North American gas market has already had a
significant ripple effect throughout the global gas market.
Importantly, this result is one very important reason why this question
has to be considered in an international trade context, as pointed out
in ``US LNG Exports: Truth and Consequence'' (also attached as an
addendum).
LNG exports from the US--were they to occur--would likely extend
those impacts. This follows from the fact that US LNG exports would be
directed at markets in Asia, and potentially Europe. Asian demands,
should they continue to grow, will naturally pull on resources in
Russia and the Middle East, as well as Southeast Asia, Africa and
Australia. In fact, Russia is a natural partner for pipeline trade with
Asia--barring of course any geopolitical constraints--and the Middle
East is a natural waterborne trade partner with Asian consumers--as
witnessed by trade in multiple commodities. To the extent that US
supplies are sold to Asian consumers, then, all else equal, this would
displace supplies from other locations. This would reduce dependence of
Asian consumers, and the world for that matter, on supplies from Russia
and the Middle East. Since Iranian reserves are among the world's
largest, Iran is impacted directly. Importantly, much of this is an
impact that is most likely immaterial in the near term, but longer term
could be substantial. However, expectations about future market
conditions are very much governed by actions today, and, in turn, those
expectations drive future investment decisions and hence are
influential to future outcomes.
LNG exports will not likely have any real impact in the short to
medium term on Venezuela. It is not currently a significant player in
global natural gas markets, and the political and economic fate of the
nation--and the resultant impacts on PDVSA for that matter--are highly
uncertain in the wake of the passing of Hugo Chavez. The only thing
that can be said is that global demands for Venezuelan natural gas are
generally abated with US LNG exports. But there could emerge regional
trading partners--such as Chile, Argentina, Brazil, and Colombia--that
enjoy a distinct transportation cost advantage to the US due their
proximity to Venezuela. But, even that is an uncertain stipulation as
gas resources exist in many of those countries as well, although
political pressures hinder development.
The effects on NOCs such as Gazprom and INOC are different and to
an extent uncertain largely due to the response pathways available to
each. In the case of Gazprom, domestic prices are highly subsidized in
Russia, and domestic sales account for almost 70 percent of Russian
volumes. So, export revenues have historically been a critical source
of revenue for the government and for field development. To the extent
export revenues are compromised, one option available is to phase out
domestic subsidies. This has, in fact, been discussed for different
classes of consumers--i.e.-industrial, commercial, residential, power
generators. It is not a politically palatable solution, as industrial
users in Russia argue decreased competitiveness, and residential and
commercial users argue a right to Russia's national wealth.
Nevertheless, a decrease in the subsidy levels would compensate for
lost revenues if exports are lower. Of course, if Russia cannot
accomplish a reduction in subsidies and it loses export markets, it
runs the risk of beginning to look like Mexico--a nation with resource
wealth that it cannot tap and, as a result, years of slowly declining
production.
In the case of INOC, a significant portion of current gas
production is used for enhanced oil recovery and the rest is sold
domestically at prices well below international market parity. This has
led to domestic gas shortages that have pushed up imports from
Turkmenistan, an almost inconceivable outcome given Iran's resource
wealth. But, this is an oft repeated unintended consequence of
artificial price setting. If Iran could export, it would likely do so
via pipeline to Pakistan and India and LNG to other Asian buyers. This
would provide valuable revenue uplift associated with gas production
that could be used to enhance Iran's position in global gas markets
through further development and bolster the government's budget. So, by
delaying the need for Iranian resources, the only real market for
Iranian natural gas is domestic, and unwinding subsidies is a tenable
and highly unlikely proposition, meaning Iranian natural gas is
effectively a stranded resource in terms of its global impacts. It also
denies Iran a potentially important revenue stream.
Any US national security interests and energy security benefits
bestowed to US allies follow directly from the above. By reducing
dependence on trading partners in volatile regions of the world and/or
trading partners who have demonstrated a willingness to manipulate
supply to gain a political advantage, any concerns about security of
supply are mitigated. Thus, it follows that more direct trade with a
stable trading partner where market forces are instrumental in
determining supply-demand balance will enhance security of supply. This
is, in fact, among the reasons that some Asian buyers are seeking to
add US LNG supplies to their portfolios.
Another important reasons Asian buyers seek trade with the US is
the desirability of a gas price indexed purchase rather than a price
indexed to oil for contracted flows. In fact, as the US enters the
global LNG market, liquidity will be enhanced. This is a very important
point that ties directly back to the impacts of US LNG exports on NOCs
and the gas market more generally. Oil indexation of gas sales is still
prevalent, particularly in Asia, as it provides a means of ensuring
delivery of supplies where there is no ability to buy at a hub or on an
exchange, and it follows from a lack of market liquidity. As liquidity
grows, the desirability of this paradigm wanes. In fact, short term and
spot sales of LNG have increased from around 5 percent of the global
LNG market in 2000 to over 20 percent in 2011. This is indicative of
the ongoing paradigm shift. Adding US LNG to the supply portfolio
enhances liquidity by adding a supply option as well as a direct link
to a liquid gas market, which will further erode the traditional LNG
contract paradigm. This will have direct implications for revenues for
all gas exporters, even those with existing contracts as LNG contracts
typically have re-openers (or price renegotiation clauses) that can be
triggered when markets shift in particular ways. So, the liquidity
effects of US LNG exports could indeed be significant and
transformative of the way LNG is traded globally. Note this could
happen even if export capacity is added but very little gas is actually
exported.
Responses of Kenneth B. Medlock to Questions From Senator Alexander
Question 1. Given the advantage of low domestic natural gas prices
that resulted from increased production from unconventional natural gas
reserves, do we really have a problem since we might only export 10
percent of our natural gas?
Answer. The answer depends entirely on how responsive domestic
supply is to price. The price impact of LNG exports, or any increase in
demand for that matter, is ultimately dependent upon the elasticity of
supply. Consider *Figure SA.1, which indicates the effect of different
supply capabilities in response to a particular demand increase due to
exports. If supply can expand significantly as price rises (meaning it
is very elastic--such as in Case 1 in Figure SA.1), then domestic
supply capabilities are more than adequate to meet such demand growth.
However, if one takes the view that supply is relatively unresponsive
to price, as in Case 2 in Figure SA.1, then the price impacts could be
significant for even small volumes of LNG exports. This would have
adverse effects on all sources of demand and would ultimately serve to
limit demand growth in all sectors as well as limit LNG exports.
---------------------------------------------------------------------------
* All SA figures have been retained in committee files.
---------------------------------------------------------------------------
Research done at the Baker Institute indicates that domestic supply
is highly elastic, as in Case 1, which would suggest that price will
not rise substantially as demand grows. So, this indicates that LNG
exports will not have a significant price impact domestically.
It is important to also note that an assumption about volume must
be made in the context of a fully responsive international trade
paradigm. In other words, export volumes are not simply given volumes.
They are arrived at through the equilibration of demand and supply
around price. Trade affects price in both exporting and importing
markets. This point is highlighted in ``US LNG Exports: Truth and
Consequence'' which is attached for your reference.
Question 2. At what percentage of exports, compared with the
overall U.S. production of natural gas, does the U.S. lose its price
advantage of natural gas that we have today?
Answer. There is no such volume. If the price advantage is
completely eroded than exports will fall until a price differential
exists that supports the cost of the trade. In fact, the price in an
exporting region will always be lower than the price in the importing
region. If it is not, then trade will cease. See *Figure SA.2 for an
illustration of equilibrium in an international trade context.
Importantly, this is not simply an academic exercise. It is proven
time and again in multiple markets where trade between regions exists.
Only when the cost of the trade (t in Figure SA.2) is diminishingly
small do we see price convergence in an absolute sense between trading
partners. For natural gas, the full cost of the estimated trade from
the US Gulf Coast to Japan is about $5/mcf, meaning the price
differential between the two markets should gravitate toward that
value. Even if one removes the fixed cost of infrastructure from the
calculation, the differential still persists at over $2/mcf. So, if
trade is occurring, a differential will exist, and as long as the US is
the exporting country, the price in the US will be lower.
During the testimony, it was claimed that the price to a consumer
in Australia is at parity with the price of LNG delivered to Japan.
Apparently, this was done to support the notion that the domestic price
for the exporter will rise to parity with the price paid by the
importer. This comparison is not apples-to-apples. The LNG price is an
ex-ship price, whereas the price to a consumer in Australia reflects
the cost of local distribution, taxes, fees and other costs. Even in
the US in 2012, when the price at Henry Hub averaged $2.76/mcf, the
national average price of gas delivered to the city gate, where the
local distribution company (LDC) takes possession of the gas, was
$4.73. Then, the LDC must account for its fees and costs thus resulting
in a national average price delivered to residential users of $10.68/
mcf and commercial users of $8.13/mcf. To make matters more
complicated, the fees and costs vary widely by LDC, so some US
consumers pay much more than indicated by the national average, such as
in Massachusetts where the average price to a residential consumer in
2012 was $13.42/mcf. Even industrial and power generation users of gas
who are not LDC customers pay more than Henry Hub as they must pay to
ship gas along the interstate pipelines.
In 2012, the spot price of delivered LNG was $15.09/mcf in Japan
and $9.48/mcf in the UK. But, comparing these wholesale spot prices to
delivered end-user prices is completely inappropriate when evaluating
the effects of trade. Moreover, the East Australian (or Sydney) market
is not connected to West Australia, which is where Australia's LNG
exports originate. Prices in East Australia are set entirely by East
Australian supply-demand factors having nothing to do with exports from
the Australian Northwest shelf to Japan. Moreover, the wholesale price
of gas in West Australia is well below the current price of LNG
delivered to Japan.
As one final point, it is important to note that US competitive
advantage can be compromised if other countries, who may also export
but need not, heavily subsidize prices to industrial users. This tilts
the scale, but also creates an unsustainable situation, as has been
witnessed many times over--Indonesia, Argentina, Iran, etc. Notably,
the advantage is not about absolute price, it is about relative price.
Even if the price in the US averages $2.50/mcf, industrial users will
offshore if the price abroad is lower. This, in fact, happened in the
late 1990s in the US.
Question 3. What are your projections for the amount of natural gas
the U.S. will be producing in 10 years?
Answer. The work done at the Baker Institute under the Center for
Energy Studies indicates the US marketed production volumes will be
about 8 percent higher than currently. Importantly, this volume is
projected to primarily be used to meet domestic demands, as the
prediction for export volume by then is just under 2 bcf/d, which is
less than 3 percent of current marketed production. The above
referenced paper ``US LNG Exports: Truth and Consequence'' highlights
the primary drivers of this result. Namely, international market
responses to current high prices will serve to ultimately lower them--
i.e.-the best cure for high prices is high prices.
Question 4. Under present policies, if you had to make a guess,
what would be the range of the percentage of U.S. natural gas
production that we would be exporting in 10 years?
Answer. We have done various scenarios to assess the market
potential for US LNG exports. We consistently see a range of between
0.5 bcf/d and 3.5 bcf/d, which equates to a range of between less than
one percent to about five percent. In order to drive export volumes to
the high end, we must make very strong assumptions about the long term
supply responsiveness of Russia, China (due to shale resources), and
Qatar.
______
Appendix II
Additional Material Submitted for the Record
----------
Statement of the American Public Gas Association
On behalf of the American Public Gas Association (APGA), thank you
for the opportunity to submit testimony on the Senate Committee on
Energy and Natural Resources hearing titled, ``Opportunities and
Challenges for Natural Gas.'' APGA believes that the Committee should
consider two issues critical for U.S. consumers of natural gas, which
are reform of Section 5 of the Natural Gas Act (NGA) and the export of
domestically produced natural gas in the form of liquefied natural gas
(LNG). We sincerely appreciate the opportunity to present our views and
stand ready to work with the Committee on these and any other natural
gas issues that may be considered.
APGA is the national association for publicly-owned natural gas
distribution systems. There are approximately 1,000 public gas systems
located in 36 states. Publicly-owned gas systems are not-for-profit,
retail distribution entities owned by, and accountable to, the citizens
they serve. They include municipal gas distribution systems, public
utility districts, county districts, and other public agencies that
have natural gas distribution facilities.
issue 1--reform of section 5 of the natural gas act
Background
In 1938, Congress gave the Federal Power Commission (now the
Federal Energy Regulatory Commission (FERC)) authority under the NGA to
regulate transportation rates charged by interstate natural gas
transmission pipelines. The NGA mandates that customers of interstate
pipelines are to be charged ``just and reasonable'' rates, mirroring
the core rate sections of the Federal Power Act (FPA), which mandate
just and reasonable rates for electric utilities.
Periodically, Congress has updated both the FPA and the NGA as the
electric and natural gas industries have evolved. Significantly for
these purposes, Congress amended the FPA in 1988 and again in 2005
allowing FERC to provide refunds to the extent customers were charged
unjust and unreasonable rates as found by FERC; with such refunds to be
effective as of the refund-effective date, which may be set by FERC as
early as the date that a complaint is filed under FPA Section 206.
Unfortunately, no such amendments were made to the NGA.
Until 1992, interstate pipeline companies were required to have
their rates evaluated every three years by the FERC to ensure that they
were just and reasonable, so the need for such reform was not as
pressing.
However, in 1992, FERC issued Order 636 as part of the transition
to unbundled open access transportation and ended the three-year rate
review process. The practical result of this has been that pipelines
with increasing costs file for and receive rate increases under NGA
Section 4; while pipelines with decreasing costs, ,whose rates have
long since ceased to be just and reasonable, simply continue charging
consumers excessive rates, often for very extended periods of time,
sometimes 10 or more years.
Even if customers or the FERC initiates an NGA Section 5 complaint
case against an interstate pipeline company, and the FERC agrees that
the just and reasonable standard was violated, the FERC can only change
the company's rates prospectively from and after the date of the FERC
final order, with no refunds to affected consumers during the often
lengthy period required to process such a complaint case. It goes
almost without saying that unless pipelines can settle such cases on
terms very favorable to themselves, as is usually the case, they have
every incentive and the resources to drag out the litigation of the
complaint case for years since there are no refund repercussions at the
end of the proceeding. This lack of parity between the complaint
sections of the NGA and FPA leaves natural gas customers ranging from
homeowners to industrial enterprises exposed to overcharges for
extended periods in violation of the NGA's just and reasonable
standard. This lack of protection has resulted in millions of customers
paying excessive, unjust and unreasonable rates for natural gas
transportation, affecting families' bottom lines and businesses'
ability to compete and create jobs.
Recent Developments
Since November 2009, FERC has initiated approximately three Section
5 cases each year. Whether or not Section 5 cases are initiated at all
is at the discretion of the Commissioners--there is no statutory
requirement that FERC do so. APGA believes that the recent FERC Section
5 actions are important for a number of reasons. First, the Commission
to its credit is taking the initiative to review pipeline Form 2
filings (annual filings containing pipeline financial data) and calling
out the most egregious over-earners, most of which have not been before
the Commission in many years for a rate review. The Form 2 data shows
that these entities are often earning returns in excess of 20 percent,
which, all seem to concede, is exorbitant for a regulated monopoly.\1\
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\1\ The annual report of the Natural Gas Supply Association,
``Pipeline Cost Recovery Report: 32 Major Pipelines 2006-2010,'' shows
that the twelve companies called on the carpet are but a small fraction
of the total number of over-earners (see Report at pp. 4-5).
---------------------------------------------------------------------------
The second point that these cases illustrate is the futility of
bringing such complaint cases if the goal is to achieve just and
reasonable rates under the NGA. The pipelines are able to use delay
tactics and threats of time-consuming NGA Section 4 filings to bully
both the customers into settling the cases on terms very favorable to
the pipelines and the commission into approving these unbalanced
settlements. These points have been made by the various parties to
these cases\2\ and fully recognized by the commissioners themselves.
For example, in one of the first complaint cases initiated by the
commission, involving Northern Natural Gas Company, Docket No. RP10-
148, Commissioner LaFleur observed as follows in a concurring
statement:
---------------------------------------------------------------------------
\2\ Natural Gas Pipeline Co. of America, RP10-147, comments of PGC
et al at 1-3, comments of Missouri Public Service Commission at 3-6;
comments of APGA at 1-3; comments of Pennsylvania Public Utility
Commission at 1; and in Northern Natural Gas Co., RP10-148, comments of
Northern Municipal Distributors Group et al at 2-3, 5-6; comments of
Michigan Public Service Commission at 1-2; response of APGA at 1-4.
I Irecognize the concerns raised by the Industrials on rehearing
regarding the unfair advantage pipelines may have in a section 5
proceeding vis-a-vis their customers. The Commission can only act,
however, within the existing statutory scheme. I believe that this
proceeding clearly demonstrates the need for reform of section 5 of the
NGA to prevent the asymmetry of leverage between applicants under
section 4 and complainants or the Commission under section 5. As
happened here, without Commission authority to set a refund effective
date upon institution of a complaint or investigation under section 5,
a pipeline can threaten to file a general section 4 rate case and move
those rates into effect prior to the date by which a Commission order
in the section 5 proceeding could lower those rates. This situation
places the parties supporting the section 5 proceeding in a difficult
situation in that they may be forced to pay even higher rates without
refund relief for some period of time. It also hampers the Commission's
efforts to ensure just and reasonable rates. I therefore support
legislative action to amend the NGA to provide the Commission with
refund authority in section 5, similar to that provided under section
206 of the Federal Power Act.\3\ ''
---------------------------------------------------------------------------
\3\ Comm'r LaFleur concurring statement (p. 2) in Northern Natural
Gas Co., RP10-148, Oct. 29, 2010
---------------------------------------------------------------------------
Similarly, in a dissenting statement in that same case Chairman
Wellinghoff stated:
``As a general matter, the lack of refund authority under section 5
of the NGA allows the regulated community to defeat the purpose of
section 5 at least in some circumstances. This is not the case under
the Federal Power Act (FPA). The Commission must establish a refund
effective date for a section 206 proceeding and has the authority to
order refunds for the period ending 15 months after the refund
effective date. Thus, the incentive for game-playing is removed and the
Commission can determine on the merits that a public utility's rates
are just and reasonable. For this reason, I support legislative changes
providing for NGA refund authority paralleling that provided to the
Commission in the FPA.\4\ ''
---------------------------------------------------------------------------
\4\ Chairman Wellinghoff dissenting statement (p. 4) in Northern
Natural Gas Co., RP10-148, Nov. 2 , 2010
---------------------------------------------------------------------------
In fact, all of the sitting commissioners including (newly
appointed Commissioner Clark has expressed his support for Section 5
reform in a meeting with APGA), being fully familiar with the outcomes
in these Section 5 proceedings, have stated their support for amendment
of NGA Section 5 to provide refund authority comparable to that
available under FPA Section 206.
The prospect of continuing to pay excessive rates for natural gas
transportation has brought together a diverse group of stakeholders
that is growing. Groups that have supported reform include: the
Industrial Energy Consumers of America; American Iron and Steel
Institute; American Forest and Paper Association; American Public Power
Association; National Farmers Union; Public Citizen; and, most
recently, the National League of Cities, which represents 19,000
cities, villages, and towns. This growing coalition of organizations
recognizes that the only way to protect individual consumers as well as
the competitiveness of major industrial users of natural gas is to
reform Section 5 of the NGA. As significant as the number and type of
entities supporting reform is the absence of entities opposing reform.
To date, only pipelines and their trade association have opposed the
efforts to amend NGA Section 5 to afford consumers meaningful
protection against rate overcharges.
The arguments for reform are straight-forward and persuasive. First
and foremost is the NGA mandate that pipelines charge just and
reasonable rates and that customers be protected from paying unjust and
unreasonable rates for natural gas transportation. The fact that
overcharges are an ongoing problem is illustrated both by the
pipeline's own (Form 2) data cited in the Section 5 complaints
initiated by the commission and by the data released each year by the
Natural Gas Supply Association (NGSA). In 2012, NGSA released a study
of the 32 largest interstate pipelines (representing 80 percent of the
transmission market), which found that these companies overcharged
customers by $4.2 billion from 2006-2010 (this is an increase of $100
million compared to the 2011 report).\5\ The study also used Form 2
data submitted by interstate pipeline companies and assumed an average
return on equity (ROE) of 12 percent to be acceptable.\6\ Over the five
year period, several companies averaged an ROE above 20 percent and one
above 42 percent.\7\
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\5\ Natural Gas Supply Association, ``Pipeline Cost Recovery
Report: 32 Pipelines 2006-2010'' pgs 4-5.
\6\ Of course, in today's financial markets, the assumed 12% ROE is
several hundred basis points above what could be justified.
\7\ Natural Gas Supply Association, ``Pipeline Cost Recovery
Report: 32 Pipelines 2006-2010'', p. 5
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Overcharging for natural gas transportation does not simply mean
fewer dollars available for businesses and consumers, but also means
fewer jobs in an economy where job growth is more critical than ever.
Major industrial enterprises spend millions of dollars on natural gas,
which constitutes a major input cost. The fact that many of these
enterprises are paying excessive rates for natural gas transportation
limits their ability to create new jobs in the midst of strong
competition from companies around the world. The money spent on
excessive natural gas rates could be better spent by creating new jobs
here in the U.S. and taking advantage of our nation's vast, newly
accessible shale gas reserves.\8\
---------------------------------------------------------------------------
\8\ Energy Information Administration ``Annual Energy Outlook 2012
Early Release,'' pgs: 1 and 5.
---------------------------------------------------------------------------
Addressing Pipeline Arguments Against Reform
The benefits to businesses and consumers of reforming Section 5 of
the NGA to limit pipelines to rates that are just and reasonable are
clear and compelling: lower costs and greater domestic job creation.
However, to date, interstate pipelines continue to resist reform since
it affects their bottom line, so it is important to address each of
their arguments to determine their merit or lack thereof.
Interstate pipeline companies' arguments against reform may be
summarized as follows: FERC-established rates remain just and
reasonable until changed; ordering refunds would constitute
``retroactive ratemaking''; providing for refunds would undermine
infrastructure development; and reform is unnecessary because
transportation rates themselves are a relatively small component of the
total bundled cost of natural gas to consumers. Each of those points
will be addressed below.
The pipelines argue that since the rates being charged by a
pipeline at any given point in time were previously approved by the
FERC, they must still be just and reasonable, and thus refunds should
be denied. This contention is self-evidently inaccurate since a rate
that is just and reasonable at any given point in time may become
unjust and unreasonable at a subsequent point in time if costs
materially increase or decrease. Pipelines are not bashful about filing
to increase their rates when costs are rising, and such rate increases
go into effect virtually immediately subject to refund after a nominal
suspension period under NGA Section 4. The suggestion that pipelines
should be allowed to supersede previous rates determined to be just and
reasonable after a nominal suspension period but that consumers should
have to wait potentially years before getting relief from unjust and
unreasonable rates is absurd on its face. This argument was obviously
found wanting in 1988 when Congress amended FPA Section 206 to provide
for refunds where rates were ultimately determined to be excessive.
Interstate pipelines also argue that reform of Section 5 to provide
refund protection for consumers is tantamount to ``retroactive
ratemaking.'' This statement is legally inaccurate and is designed to
conjure fears amongst policymakers of overzealous regulators
intrusively altering pipeline rates, creating uncertainty and harming
pipelines' business. In reality, if a customer files a complaint under
a reformed Section 5, the Commission, if it believes that the
complainant has shown good cause to set the matter down for hearing,
will set a refund-effective date, which date may not precede the date
the complaint is filed. Hence, all refunds are prospective from the
refund-effective date, and there will be no refunds unless the
Commission at the end of the proceeding determines that the pipelines'
rates are excessive under the ``just and reasonable'' standard. In
short, unless FERC determines that interstate pipelines are violating
the NGA, no refunds will be required. The identical provision under the
FPA has been upheld against charges of retroactive ratemaking.
The interstate pipeline companies also argue that reforming Section
5 will harm their ability to build infrastructure. This argument is a
red-herring and is misleading in at least five different ways:
First, new infrastructure projects are certificated to earn healthy
equity returns, usually in the 12 percent range. NGA Section 5 reform
does not affect by one iota the ability of these projects to earn such
returns; rather, NGA Section 5 reform is only applicable to those
egregious over-earners whose customers are underwriting returns far in
excess of the allowed returns.
Second, almost all significant new infrastructure projects are
undertaken on the basis of ``negotiated'' contracts between the
transporter and the shippers. Negotiated contracts are not subject to
rate changes by the transporter under NGA Section 4 or rate challenges
by shippers under NGA Section 5; the rate is fixed for the term through
bilateral negotiations. These negotiated contracts form the basis for
the project developer to go to the marketplace and provide the
developer with known returns for the contract terms. Thus, the argument
that NGA Section 5 reform would deter new infrastructure development is
false and misleading.
Third, the FERC is required by law in setting rates to provide for
a rate of return that permits the affected pipeline to recover all debt
costs plus raise capital in the marketplace at reasonable rates. FERC
has done just that, and the financial markets understand this, so NGA
Section 5 reform will not affect at all the ability of interstate
pipelines to raise capital in the marketplace.
Fourth, the FERC itself, which is pro-business and pro-
infrastructure, understands that the argument that Section 5 reform
would be bad for infrastructure development and thus bad for job
development is rash, for all of the reasons noted above, which explains
why all sitting commissioners, including the Chairman and prior two
Chairmen, support NGA Section 5 reform. Commissioner Clark has also
expressed his support in a private meeting with APGA.
Fifth, many of the leading builders of infrastructure are not the
more egregious over-earners, and they have successfully gone to the
marketplace for billions of dollars for new infrastructure
construction. For example, El Paso Natural Gas Company touts on their
website that in 2010 they invested $318 million in new infrastructure
projects.\9\ According to the NGSA study, El Paso had an ROE of 8.3
percent for 2010 and a five year average ROE of 10.7 percent.\10\ In
other words, there is no correlation between over-earning pipelines and
infrastructure construction.
---------------------------------------------------------------------------
\9\ El Paso Natural Gas Company website: http://
investor.eppipelinepartners.com/phoenix.zhtml?c=215819&p=irol-
newsArticle&ID=1532478&highlight=
\10\ Natural Gas Supply Association, ``Pipeline Cost Recovery
Report: 32 Pipelines 2005-2009,'' pg. 5.
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In brief, this ``infrastructure'' argument is nothing but a
strawman raised by the pipelines because they have no defense on the
merits against Section 5 reform--they are overcharging customers
because the rates of many of them are no longer just and reasonable.
Absent NGA Section 5 reform, FERC, which is supposed to ensure that
pipelines charge and consumers pay just and reasonable rates, is
basically helpless to prevent allowing pipelines to defeat the purpose
of the NGA.
Finally, the interstate pipelines also argue that transportation
rates for natural gas are a small part of the overall cost to
consumers, so policymakers should ignore it. First, this contention
tries to obscure the fact that excessive rates for transportation cost
consumers and businesses some $4.2 billion over a five-year
period\11\--money that should remain in the communities of the
customers that are being overcharged. The fact of the matter is that
the price of gas at the wellhead, which is the major component of the
blended gas cost paid by consumers, is deregulated and thus that
component is not at issue here. What is at issue is the FERC-regulated
component: pipeline rates to move the gas from the field to local
distribution companies and industrial loads and the issue that there is
no basis for a regulated entity under the Natural Gas Act to over-
recover its allowed return by hundreds of millions of dollars, as is
the case today, simply because the production component of the ultimate
charge paid by consumers is unregulated.
---------------------------------------------------------------------------
\11\ Natural Gas Supply Association, ``Pipeline Cost Recovery
Report: 32 Major Pipelines 2006-2010,'' pgs 4-5.
---------------------------------------------------------------------------
Conclusion
APGA believes that it is critical that businesses and individual
consumers pay a fair price for natural gas and for its transportation.
FERC is charged with ensuring this result, but in contrast to the
situation under the FPA, it is handcuffed from carrying out its mandate
by the same flaw in the NGA that handicapped the Commission under the
FPA until Congress acted in 1988. As FERC Chairman Wellinghoff (and his
predecessors) and all sitting FERC commissioners have observed
publically and/or privately, no credible public policy reason exists to
treat electric and natural gas customers differently in regard to
ensuring that rates of jurisdictional companies are just and
reasonable.
APGA thanks the Committee for its interest in this important issue
and respectfully requests a hearing at the Senate Committee on Energy
and Natural Resources so these issues can be debated in an open, on-
the-record forum.
issue 2--lng export
The Department of Energy Office of Fossil Energy (``DOE/FE'')
commissioned two studies regarding the effects of LNG exports. The
first, conducted by the U.S. Energy Information Administration
(``EIA''), studied the impact of LNG exports on domestic prices and
concluded that the exports will increase prices, with higher volumes
causing more drastic increases.\12\ The second, conducted by NERA
Economic Consulting, focused on the macroeconomic effects of LNG
exports, which it found would be a net positive while at the same time
confirming that LNG exports would raise domestic natural gas prices,
which would burden the U.S. consumers who can least afford the increase
and disadvantage domestic manufacturing.\13\ Policymakers must consider
both of these studies and the many non-governmental studies, but also
go beyond them to consider the profound tradeoffs entailed by exporting
away an increasingly valuable U.S. fuel rather than supporting its use
domestically.
---------------------------------------------------------------------------
\12\ Effect of Increased Natural Gas Exports on Domestic Energy
Markets, U.S. Energy Information Administration (Jan. 2012) (``EIA
Export Report''). As requested by the DOE/FE, the EIA Export Report
considered four scenarios: (1) 6 Bcf/d phased in at a rate of 1 Bcf/d
per year (low/slow scenario); (2) 6 Bcf/d phased in at a rate of 3 Bcf/
d per year (low/rapid scenario); (3) 12 Bcf/d phased in at a rate of 1
Bcf/d per year (high/slow scenario); and (4) 12 Bcf/d phased in at a
rate of 3 Bcf/d per year (high/rapid scenario).
\13\ Macroeconomic Impacts of LNG Exports from the United States,
NERA Economic Consulting (Dec. 2012) (``NERA Study''). APGA understands
(and applauds the fact) that the merits and demerits of the NERA Study
will be assessed independently by DOE/FE in a separate proceeding (77
Fed. Reg. 73627); and hence APGA's comments here on the NERA Study are
only preliminary and not intended to represent its complete assessment
of the NERA Study.
---------------------------------------------------------------------------
Increased production of natural gas in the U.S. provides the nation
with an unprecedented opportunity to pursue energy independence and
sustained economic growth through a manufacturing renaissance grounded
in plentiful, low cost natural gas. Price increases will also
jeopardize the viability of natural gas as a ``bridge-fuel'' in the
transition away from carbon-intensive and otherwise environmentally
problematic coal-fired electric generation and inhibit efforts to
foster natural gas as a major transportation fuel, which is important
to wean the U.S. from its historic and high-risk dependence on foreign
oil.
Background
To date, 22 applications have been submitted to DOE to export
domestic LNG from the contiguous United States to Free Trade Agreement
(FTA) or non-FTA nations based on the promise of huge unconventional
domestic gas reserves. Many of those 22 applicants own or are
affiliated with companies that own existing or previously planned LNG
import terminals. Also to date, the total export capacity applied for
is 29.41Bcf/d and 24.8 Bcf/d to FTA and non-FTA nations, respectively.
Total marketed natural gas production was approximately 66 Bcf/d in the
U.S. in 201l; therefore, based on current marketed production data, the
total applied-for export capacity would have the effect of increasing
the demand for natural gas by nearly 48 percent.
Policymakers in Congress and at DOE have a duty to ensure that any
application before it for export authority is not inconsistent with the
public interest pursuant to NGA section 3(a).\14\ The ``public interest
analysis of export applications'' should be ``focused on domestic need
for natural gas,'' threats to domestic supply, and ``other factors to
the extent they are shown to be relevant.''\15\
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\14\ 15 U.S.C. Sec. 717b(a).
\15\ Sabine Pass Liquefaction, LLC, Opinion and Order Denying
Request for Review Under Section 3(c) of the Natural Gas Act, October
21, 2010, FE Docket No. 10-111-LNG.
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LNG Exports Will Increase Domestic Natural Gas Prices
According to the EIA Export Report, ``[l]arger export levels lead
to larger domestic price increases.''\16\ EIA also concluded that
``rapid increases in export levels lead to large initial price
increases,'' but that slower increases in export levels will
``eventually produce higher average prices during the decade between
2025 and 2035.''\17\
---------------------------------------------------------------------------
\16\ Id. at 6. As requested by the DOE/FE, the EIA Export Report
considered four scenarios: (1) 6 Bcf/d phased in at a rate of 1 Bcf/d
per year (low/slow scenario); (2) 6 Bcf/d phased in at a rate of 3 Bcf/
d per year (low/rapid scenario); (3) 12 Bcf/d phased in at a rate of 1
Bcf/d per year (high/slow scenario); and (4) 12 Bcf/d phased in at a
rate of 3 Bcf/d per year (high/rapid scenario).
\17\ Id.
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Even under the ``low/slow'' baseline scenario in the EIA Export
Report, price impacts will peak at about 14 percent.\18\ Under the low/
rapid baseline scenario, EIA projects that wellhead prices will be
approximately 18 percent higher in 2016 than they otherwise would
be\19\. In fact, under all of the ``low'' scenarios accounting for
different economic and shale reserve conditions, EIA predicts price
impacts well above 10 percent that then moderate.\20\ Under the ``high/
rapid scenario,'' EIA projects that prices will increase by 36 percent
to 54 percent by 2018 depending on natural gas supplies and economic
growth.
---------------------------------------------------------------------------
\18\ Id. at 8.
\19\ Id.
\20\ Id. at 9.
---------------------------------------------------------------------------
The NERA study also concluded that the higher the volume of LNG
exports, the more domestic natural gas prices will rise. Both studies
underestimate potential price increases because they are based on
outdated projections of domestic demand for natural gas and the
questionable assumption that the demand for natural gas is sufficiently
elastic to prevent significant price spikes.
Domestic Demand Underestimated
On December 5, 2012, the EIA issued the Early Release of its Annual
Energy Outlook for 2013 (``AEO2013''). The AEO2013 projects greater
increases in domestic demand for natural gas than projected in prior
Annual Energy Outlooks. In particular, the AEO2013 projects greater
increases in demand for natural gas from domestic industry,
particularly from the bulk chemicals and primary metals industries and
as a result of ``higher output in the manufacturing sector.''\21\
However, even AEO2013 appears to underestimate the coming growth in
natural gas use for manufacturing, if domestic prices remain low.\22\
---------------------------------------------------------------------------
\21\ AEO2013 Early Release Overview at 2.
\22\ See Steven Mufson, The New Boom: Shale Gas Fueling an American
Industrial Revival, Washington Post (Nov. 14 (2012) (reporting that
manufacturers have plans to invest as much as $80 billion in U.S.
chemical, fertilizer, steel, aluminum, tire and plastics plants);
Letter from Edward J. Markey, Ranking Member, House of Representatives
Committee on Natural Resources, to Steven Chu, Secretary of Energy
(Dec. 14, 2012)(``Markey Letter'') (stating that AEO2013 domestic
demand projections ``fail to capture many of the more than 100 newly
announced natural gas-intensive manufacturing projects that have been
announced over the past 18 months. Those projects represent of $90
billion in investment and billions of cubic feet of additional future
daily natural gas use.'').
---------------------------------------------------------------------------
AEO2013 also projects greater increases in future reliance on
natural gas for electric generation than projected by the EIA in
previous Annual Energy Outlooks. The increased reliance on natural gas
for electric generation is partially based on low natural gas prices,
but also on implementation of the Environmental Protection Agency's
(EPA) pending Mercury Air Toxic Standards (``MATS''), which will force
the retirement of a number of coal-fired generators.
Both studies commissioned by DOE/FE rely on projected natural gas
demand from AEO2011. These outdated projections fail to account for
current EIA expectations regarding future demand and tend to
overestimate demand elasticity, or the ability of natural gas consumers
to curtail their purchases in response to higher prices in the electric
generation sector. Once a coal plant is retired due to MATS, or for any
other reason, the operator of the retired plant cannot switch it back
on in response to higher natural gas costs. Meanwhile, the EPA's new
greenhouse gas standards for new electric generators virtually ensure
that new coal plants will not be constructed to replace those that are
retired.\23\ Soon, electric generation companies will not only demand
more gas but also rely on it more heavily for base load production,
altering expectations about demand elasticity that prognosticators have
relied on when assuming that natural gas prices will not raise sharply
due to LNG exports.\24\ This same trend would also exacerbate the
increases in the price of electricity caused by LNG exports that are
projected by the EIA and NERA.
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\23\ ``Standards of Performance for Greenhouse Gas Emissions for
New Stationary Sources: Electric Utility Generating Units'' 77 C.F.R.
22392 (Apr. 13, 2012).
\24\ See Energy Information Administration, Fuel Competition in
Power Generation and Elasticities of Substitution (June 2012) (general
description of fuel switching and price elasticity among fuels in the
power generation sector) available at http://www.eia.gov/analysis/
studies/fuelelasticities/pdf/eia-fuelelasticities.pdf.
---------------------------------------------------------------------------
While demand elasticity will shrink in the electric sector, leading
to sharper increases in natural gas and electricity prices than
previously forecasted, manufacturers will continue to be ``responsive''
to increases in the price of natural gas--meaning that manufacturers
will curtail consumption and hence production due to higher prices.
Congress and the DOE need to examine what this means for the economy
and the broader public interest of the nation in its consideration of
this and other LNG export applications.
Effects of Higher Prices
Increases in the price of natural gas will impact the U.S.
consumers who can least afford the price increase, inhibit the
expansion of domestic manufacturing, and forestall the further use of
natural gas as a bridge fuel away from the carbon-intensive coal and
foreign sourced oil for transportation. The NERA study specifically
describes the effects of LNG exports and the attendant price increases
in terms of a ``wealth transfer.'' The DOE/FE must examine what this
wealth transfer would entail for the public interest when evaluating
LNG export applications.
Hurts Economically Vulnerable Households
Proposed LNG exports would raise domestic natural gas prices, which
will increase costs to households that rely on natural gas for heating
and cooking. NERA projects that these higher costs will be offset by
increases in the value of natural gas resources and related companies,
which NERA assumes many Americans own through retirement savings and
other investments.\25\ NERA admits, however, that ``[h]ouseholds with
income solely from wages or government transfers,'' will not share in
the benefits of increased profits from natural gas.\25\ Therefore, the
increase in natural gas prices due to exports will impact most those
consumers without investments or retirement savings, those living
paycheck-to-paycheck or relying on government assistance--in other
words, the most needy in our society.
---------------------------------------------------------------------------
\25\ See Markey Letter (casting doubt on the assumption that
benefits to the natural gas sector will be widely enjoyed by ordinary
American via retirement investments).
\26\ NERA Study at 8.
---------------------------------------------------------------------------
Suppresses Other Domestic Industries
The NERA study indicates that as the price of natural gas
increases, the economy demands or produces fewer goods and services.
This results in lower wages and capital income for consumers; under
such economic conditions, consumers save less of their income for
investment.
As a result, industries that rely on natural gas will experience
``a reduction in overall output,'' mitigated by a ``switch to fuels
that are relatively cheaper.''\27\ The latter argument assumes that
alternatives to natural gas are affordable and available, which is an
invalid assumption for fertilizer manufacturers and other industries.
---------------------------------------------------------------------------
\27\ NERA Study at 53.
---------------------------------------------------------------------------
Moreover, the NERA study identified chemical manufacturing as one
of the natural gas and energy intensive industries that will be among
the most severely disadvantaged due to natural gas price increases
caused by LNG exports.\28\ According to NERA ``[d]omestic industries
for which natural gas is a significant component of their cost
structure will experience increases in their cost of production, which
will adversely impact their competitive position in a global market and
harm U.S. consumers who purchase their goods.''\29\ Leaders in the
chemical sector have voiced concern regarding LNG exports and adverse
impacts on the industry caused by inflated natural gas prices.\30\
---------------------------------------------------------------------------
\28\ NERA Study at 64
\29\ NERA Study at 13.
\30\ Press Release, Dow Chemical, DOE Report on LNG Exports Short
Changes Manufacturing and U.S. Competitiveness (Dec. 6, 2012) available
at http://www.dow.com/news/press-releases/article/?id=6138
---------------------------------------------------------------------------
When evaluating whether export applications are consistent with the
public interest, policymakers must ask not only ``what will we gain
from LNG exports,'' but also ``what will we give up.'' A U.S.
manufacturing renaissance that promises greater economic growth and job
creation with positive effects rippling throughout the economy hangs in
the balance. Right now, industry is poised to invest billions of
dollars in new natural gas intensive facilities in the U.S. premised on
the promise of low domestic natural gas prices. For example, Sasol
North America, Inc. is currently considering investing in the first gas
to liquids plant in the U.S., an innovative technology for producing
diesel and other liquid fuels without oil, and U.S. natural gas prices
are a primary consideration regarding whether the investment will go
forward.\31\
---------------------------------------------------------------------------
\31\ Clifford Kraus, South African Company to Build U.S. Plant to
Convert Gas to Liquids, New York Times (Dec. 3, 2012) available at:
http://www.nytimes.com/2012/12/04/business/energy-environment/sasol-
plans-first-gas-to-liquids-plant-in-us.html?_r=0
---------------------------------------------------------------------------
Last year, in his State of the Union address, President Obama spoke
of ``an America that attracts a new generation of high-tech
manufacturing and high-paying jobs--a future where we're in control of
our own energy, and our security and prosperity aren't so tied to
unstable parts of the world,'' and ``an economy built on American
manufacturing, American energy.''\32\ Low natural gas prices in the
U.S. provide the path forward. Higher natural gas prices due to LNG
exports threaten this nascent return to American manufacturing, and
prior economic data demonstrate that when domestic energy prices
increase, the country loses manufacturing jobs, particularly in the
fertilizer, plastics, chemicals, and steel industries.\33\
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\32\ President Barack Obama, State of the Union Address (Jan. 24,
2011), transcript available at: http://www.whitehouse.gov/state-of-the-
union-2012.
\33\ U.S. House Committee on Natural Resources Democrats, Drill
Here, Sell There, Pay More: The Painful Price of Exporting Natural Gas
(March 2012) available at http://democrats.naturalresources.house.gov/
reports/drill-here-sell-there-pay-more.
---------------------------------------------------------------------------
Rather than trading a few existing manufacturing jobs for a few
natural gas and construction jobs, the DOE/FE should pursue policies
that create new manufacturing jobs and broader economic growth in the
U.S. Using natural gas for manufacturing provides a value-added benefit
to the economy because industry multiplies the value of every dollar it
expends on natural gas for energy or as a raw material. Rather than
investing in natural gas exports, which squeeze out investments from
other sectors of the economy, the U.S. should pursue policies that
allow industry to invest in natural gas dependent manufacturing. Energy
and natural gas intensive manufacturing produces chemicals, metals,
cement and other materials that may be low-value adding but create
positive ripple effects up the value-chain and throughout the
economy.\34\ Rather than exporting natural gas as a raw natural
resource, the U.S. could export processed materials, such as steel, or
higher value-added goods at more competitive prices, with greater
benefits to the U.S. job market and GDP.
---------------------------------------------------------------------------
\34\ NERA claims that harm resulting from exports will ``likely be
confined to very narrow segments of industry,'' namely low value-added,
energy intensive manufacturing. NERA Study at 67-69. NERA, however,
ignores the benefits of producing materials in the U.S. that can then
be used by other U.S. manufactures that are less energy intensive and
higher up the value chain. For instance, if plastics are produced at
competitive prices in the U.S., toy manufacturers may find it
economical to ``re-shore'' toy manufacturing plants. Steven Mufson, The
New Boom: Shale Gas Fueling an American Industrial Revival, Washington
Post (Nov. 14, 2012).
---------------------------------------------------------------------------
Threaten Transition from Coal
Current low natural gas prices provide an opportunity to wean the
U.S. off of carbon-intensive coal. Inflated natural gas prices due to
LNG exports will decrease the viability of natural gas as a bridge-fuel
to a lower carbon future. Current low prices make natural gas-fired
electricity generation an economically sound alternative to coal-fired
generation. Sustained low prices may encourage this transition by
private initiative regardless of increased environmental regulations as
investors find natural gas competitive with coal. If exports inflate
natural gas prices, the economics turn against cleaner burning natural
gas.\35\
---------------------------------------------------------------------------
\35\ EIA Export Report at 17.
---------------------------------------------------------------------------
In addition, as discussed above, new environmental regulations will
soon force coal retirements. Future greenhouse gas regulation could
cause additional retirements in the future. If natural gas prices
remain low, the U.S. may be able to transition away from carbon
intensive coal without causing electricity prices to increase
significantly. If natural gas prices are high, however, electricity
prices will spike as relatively cheap coal-fired generators are forced
to retire for regulatory reasons. Spiking electricity rates will have
rippling effects on the U.S. economy, especially energy intensive,
cost-sensitive manufacturing.
Keeps the U.S. Dependent on Foreign Oil
Currently, the U.S. imports billions of dollars worth of oil from
around the globe, a great deal of which is used as gasoline to fuel
vehicles. The replacement of current gasoline-powered fleets with
natural gas vehicles would significantly reduce U.S. dependence on
foreign oil, and thereby enhance U.S. security and strategic interests
and reduce our trade deficit.\36\ State governments and businesses are
expending substantial resources today to put the needed infrastructure
in place.\37\
---------------------------------------------------------------------------
\36\ Cheniere and other exporters claim that their proposed exports
will benefit the U.S. balance of trade, but it does not consider the
benefits to the trade balance of cutting oil imports and exporting
value-added goods manufactured in the U.S. with affordable natural gas.
\37\ Officials are planning a series of compressed natural gas
(``CNG'') filling pumps at existing filling stations across the
Pennsylvania US Route 6, stretching 400 miles from New York State near
Milford, Pike County, Pa. in the east and through Crawford County, Pa.
to the Ohio state line on the west, known as ``PA Route 6 CNG
Corridor;'' at the same time, Chesapeake Energy is converting its
vehicles in northeastern Pennsylvania to CNG and working with a local
convenience-store chain and transit authority to foster further CNG
integration. Eric Hrin, Pennsylvania Looks to CNG, The Daily Review
Online (May 26, 2011) available at http://thedailyreview.com/news/
pennsylvania-looks-to-cng-1.1135267; see also, Texas S.B. 20 (On July
15, 2011, the governor of Texas signed S.B. 20, supporting a network of
natural gas-refueling stations along the Texas Triangle between Dallas/
Ft. Worth, San Antonio, and Houston. The new legislation will lay a
foundation for wider-scale deployment of heavy-duty, mid- and light-
duty natural gas vehicles (``NGVs'') in the Texas market).
---------------------------------------------------------------------------
Automobiles are not the only modes of transportation that
businesses are interested in transitioning to natural gas; a company in
Canada is investing in commercial locomotives powered by LNG and
teaming up with Caterpillar to employ similar technology in heavy duty
equipment that currently runs on diesel.\38\ If Congress and the DOE
allow export applications to go through, the resulting increase in
natural gas prices would undermine recent investments to expand natural
gas as a transportation fuel.
---------------------------------------------------------------------------
\38\ Rodney White, Firm on Track to Build LNG-Fueled Locomotive,
Platts Gas Daily (Nov. 28, 2012).
---------------------------------------------------------------------------
Policymakers should not pursue an export policy that undermines the
efficient, domestic use of a domestic fuel stock and America's first
and best opportunity to move toward energy independence by decreasing
reliance on foreign oil.
U.S. and Foreign Natural Gas Prices Will Converge
Currently, there are significant disparities between domestic
natural gas commodity prices and prices in some nations that rely on
LNG imports. These disparities provide would-be exporters with
appealing arbitrage opportunities in the short-term, but they will not
last. Gas rich shale deposits are a global phenomenon, just now
beginning to be tapped. Also, despite relatively low domestic natural
gas prices, certain countries, such as Qatar, can produce massive
quantities of natural gas at even lower prices. As other nations
develop their resources and export capacity and as U.S. natural gas
prices increase due to export, international and domestic prices will
converge, leaving the U.S. with higher domestic prices that thwart
energy independence and that undermine the competitiveness of the
manufacturing sector that relies heavily on natural gas as a process
fuel.
The U.S. is at the forefront of technology in the development of
shale gas reserves. A recent study by MIT concludes that the U.S.
should export its technology and expertise.\39\ According to MIT, the
development of international non-conventional natural gas reserves will
create a more liquid market with less disparity between prices around
the globe\40\
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\39\ MIT Energy Initiative, The Future of Natural Gas, at 14
(2011).
\40\ Id.
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The U.S. should follow this strategy, instead of spending billions
of dollars to build facilities in order to export a commodity that will
possibly be abundant world-wide before the LNG export facilities can
even be completed.
The U.S. has an opportunity not even imagined two or three years
ago to significantly expand its manufacturing sector, transition away
from our reliance on coal-fired electricity generation (without risking
price shocks), and finally make real progress towards energy
independence. All of this, however, depends on relatively low and
stable natural gas prices (which sharply contrasts with the history of
natural gas price volatility). Congress and the DOE should not turn a
blind eye and allow the same businesses that gambled and lost on
projections of the need for future natural gas imports to now
potentially squander our nation's future on what may well turn out to
be another failed venture as natural gas production and export capacity
develop throughout the world.
APGA respectfully requests that the Committee hold at least one
hearing dedicated to examining the domestic impacts of LNG export on
consumers and businesses.
Conclusion
APGA appreciates the opportunity to submit testimony to the Senate
Committee on Energy and Natural Resources on these two critical natural
gas issues. We stand ready to work with the Committee on these and all
other natural gas issues.
______
Statement of Fred Krupp, President, Environmental Defense Fund
The United States is in the midst of a natural gas boom. Shale gas
accounted for only two percent of total U.S. natural gas production in
2001.\1\ With the development of horizontal drilling, hydraulic
fracturing, and advanced seismography, that number has grown
extensively to 34 percent in 2011. The U.S. Energy Information
Administration projects shale gas will account for 50 percent of
domestic natural gas production by 2040, spanning the nation from New
York and Pennsylvania to Ohio, Texas, Colorado, and California.\2\
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\1\ SECRETARY OF ENERGY ADVISORY BOARDD, SHALE GAS PRODUCTION
SUBCOMMITTEE 90-DAY REPORT 6 (Aug. 18, 2011), available at http://
www.shalegas.energy.gov/resources/081811_90_day_report_final.pdf.
\2\ U.S. Energy Information Administration, Annual Energy Outlook
Early Release 2012, http://www.eia.gov/forecasts/aeo/er/
executive_summary.cfm
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New supplies of domestic natural gas have caused a drop in price
that has benefited the economy and the environment alike. Low-cost
natural gas is one reason why proposals for new coal-fired power plants
have been withdrawn across the country and why old, inefficient, highly
polluting coal plants are finally retiring. Environmental Defense Fund
recognizes the potentially important benefits this shift from coal to
natural gas can achieve, particularly for air quality and the climate.
However, new natural gas development presents serious risks to
public health, the environment, and the climate. EDF believes that no
community should be forced to sacrifice health or a quality environment
for the sake of cheap energy production, nor should the potential
greenhouse gas benefits of switching from coal or oil to natural gas be
squandered through wasteful production and distribution practices. The
opportunity for natural gas to be a net ``win'' for America depends
upon whether we take serious steps to minimize these risks.
Fortunately, there are steps that can be taken now to significantly
reduce the risk to public health and the environment from
unconventional natural gas operations and to maximize the greenhouse
gas benefits that natural gas can provide in comparison with coal or
oil. As the committee goes about the important work of assessing the
future of natural gas in the United States, I respectfully urge you to
consider the following three points.
1. Strong regulation and enforcement is critical to safe
production of unconventional natural gas.--Oil and gas
production is governed by a web of federal, state, and local
regulation. The challenge is to strengthen those strands that
are weakest and to add new strands as necessary to ensure that
the web is complete. The federal government can start by
reviewing how oil and gas development is conducted on land that
it owns. The Department of Interior is currently in the process
of re-proposing a set of environmental standards for natural
gas development on public land, and it is important that these
rules be comprehensive and rigorous. I would also recommend
that the committee review how states are carrying out their
responsibilities and what the federal government can do to
support them in their necessary and important work, both
individually, and collectively through organizations such as
the Groundwater Protection Council.
2. Measuring and reducing fugitive methane emissions is an
urgent task.--The primary constituent in natural gas is
methane--a powerful greenhouse gas many times more potent than
carbon dioxide itself over 20 years. Even small leaks of
natural gas at the wellhead or along the infrastructure used to
process and transport the gas to our power plants, home, and
businesses can work to undo much, if not all, of the greenhouse
gas benefits we think we are getting when we substitute natural
gas for coal or oil.
A paper published in the Proceedings of the National Academy of
Sciences (PNAS) last April concluded that for natural gas to have a net
climate benefit, methane leakage needs to be reduced to one percent or
less. This finding was based on the best available science, which
indicated that natural gas offered a climate advantage, when
substituting natural gas for other fuels used in electric generation or
transportation. Current EPA data estimates methane leakage at
approximately 2.5 percent, and even the American Petroleum Institute
believes that the leakage rate is greater than 1 percent.
Reducing methane from the oil and gas sector can achieve
significant benefits, and while efforts are underway to replace leakage
estimates with hard data, we know enough and have the technology to get
started now. Enormous climate benefits could be realized if a 1 percent
methane emissions target is achieved--comparable to the impact that
increasing the fuel economy by about 10 miles per gallon across the
entire U.S. light-duty vehicle fleet could yield by 2035.
EPA's recently finalized national emissions standards for the oil
and gas sector helped to create a strong foundation on which to build.
Those standards, however, did not explicitly address methane, and as a
result, left too many emissions unaddressed. Right now there are three
steps that EPA can take to reduce methane emissions from the oil and
gas sector:
Include all significant methane emissions sources in the
national emissions standards.--The NSPS included green
completion requirements, but limited those requirements to gas
wells. Market fundamentals, however, have driven producers to
target oil-rich deposits that produce significant amounts of
gas. While the full scope of emissions from these sources is
not precisely known, we know they can produce a lot of
emissions and they're growing fast. In addition to emissions
resulting from oil and gas co-producing wells, other important
sources to address are liquids unloading activities and leaky
equipment at well-sites. By building out these protections, we
can ensure new sources are deploying state-of-the-art pollution
control technologies to reduce methane emissions.
Existing sources.--New sources are only part of the problem.
We need rigorous protections for existing sources in the oil
and gas sector under the NSPS. EPA can also help to lay the
groundwork by encouraging states with ozone non-attainment
concerns to deploy oil and gas controls as cost-effective
solutions. EPA can do this by providing clear pollution control
guidelines, documenting emissions reductions states can
achieve, and by underscoring the obvious cost advantages of
emission reductions from the oil and gas sector.
Accountability.--Finally, it is important for EPA's
greenhouse gas reporting program for oil and gas sources to be
comprehensive by expanding coverage to sources that don't
currently have to report (like co-producing wells and gathering
and boosting infrastructure). Additionally, EPA should move
away from emissions factors and non-standardized measurement
methodologies and toward reliance on direct, continuous
emissions measurement.
3. Natural gas is only a piece of our energy future.--We
cannot allow the recent abundance and market conditions of
natural gas to distract us from pursuing the policies that
continue our nation's progress in developing the energy
technologies and services necessary to accelerate our
transition to a modern, clean, low-carbon energy economy.
Numerous studies demonstrate that natural gas is not a panacea.
Investments in energy efficiency and renewables, along with a
transmission and distribution grid capable of supporting them,
are critical to our nation's energy future. There is much that
the federal government can and should do to accelerate the
development and deployment of efficiency and renewables, and I
would be pleased to share these ideas with the committee at the
appropriate time.
Natural gas has indeed transformed our nation's energy mix. And the
economic and environmental benefits of natural gas are clear. But the
jury is still out on whether gas production can and will be done safely
and responsibly--and whether it will help or hurt our efforts to solve
climate change. Getting strong, effective rules in place is the key.
Irrespective of whether the U.S. becomes an LNG exporter, or whether
the nation expands the use of natural gas vehicles, natural gas needs
to be produced responsibly. If we fail, the positive role it can play
in helping to accelerate our transition to a clean, low-carbon energy
future will be lost.
______
Statement of Paul Kouroupas, Vice President of Public Policy, VNG.CO,
Bala Cynwd, PA
My name is Paul Kouroupas. I am the Vice President of Public Policy
of VNG.CO (VNG), a start-up compressed natural gas refueling
infrastructure company based in Bala Cynwd, Pennsylvania. VNG offers a
nationwide retail CNG fueling program to support the widespread use of
light-duty natural gas vehicles (NGVs). VNG will install, operate and
maintain CNG fueling equipment, co-located within existing retail
gasoline stations. VNG will initially deploy its compressed natural gas
pumps to support fleets with CNG fueling services in the retail market
and ultimately expand its deployment to support the mass-market
consumer segment.
summary
The purpose of the present hearing is to ``explore opportunities
and challenges associated with America's natural gas resources.'' By
and large, the current discussion has focused on the benefits of low-
cost natural gas for chemical and manufacturing companies, as well as
the benefits (and potential costs) of allowing gas producers to export
this resource overseas. While these opportunities are considerable and
certainly merit discussion, this focus misses the greatest opportunity
for natural gas to improve our economy, environment, and national
security while also benefitting American consumers directly: the
potential of natural gas to fuel light-duty vehicles on a mass-market
basis, which could be our most potent weapon in the fight to eliminate
U.S. dependence on foreign oil.
On behalf of VNG, I am pleased to share with the members of the
Committee our company's perspective on the unique benefits of using
natural gas to fuel light-duty NGVs, as well several minor regulatory
changes that can unleash these benefits for the American economy.
NGVs provide direct benefits to consumers--Development of
the light-duty NGV market allows Americans to directly benefit
from the shale revolution, instead of limiting direct benefits
to manufacturers, trucking fleets, or exporters. With natural
gas priced 40% below gasoline for a gallon equivalent, the
average U.S. household that currently spends $3,000 per year on
gasoline could save $1,200 per year on fuel costs with natural
gas.
The greatest mass-market potential of any alternative fuel--
With over 15 million light-duty NGVs on the road worldwide,
NGVs are an established technology, and the shale gas
revolution gives America unprecedented potential to
commercialize them on a mass-market basis. The National
Petroleum Council of the U.S. Department of Energy last year
released a comprehensive report analyzing alternative fuels and
concluded that NGVs have the potential to achieve 17% of new
light-duty vehicle sales by 2020--far higher than other
alternatives, which face significant technological obstacles
and higher costs.
International clean energy technology leadership--
Development of the domestic market for light-duty NGVs can help
U.S. automakers lead in the burgeoning international NGV
market, which is already growing rapidly in countries like
Germany, Italy, Brazil, and Argentina. NGVs can also serve as a
platform for innovation and development of renewable natural
gas (RNG) and hydrogen fuel cell technologies, gaseous fuels
which can dramatically reduce transportation GHG emissions.
Despite this unique potential, light-duty NGVs have received
relatively little attention from policymakers, and this technology
still suffers from an uneven playing field compared to other
transportation alternatives like electric vehicles (EVs) and biofuels.
As the Committee considers the various opportunities and challenges
associated with America's natural gas abundance, the light-duty NGV
market ought to be included in the discussion as perhaps the greatest
opportunity of all, and lawmakers should seek to provide NGVs with a
level playing field compared to other alternative fuels. There is
substantial private investment in compressed natural gas (CNG) fueling
infrastructure and automakers are beginning to offer a growing breadth
of vehicles that run on CNG. By leveling the playing field for NGVs,
Congress will encourage additional private investment.
the light-duty ngv opportunity
The ability of natural gas to serve as a fuel for heavy-duty fleets
has been well known to policymakers for many years, but these vehicles
consume just a quarter of the total on-road fuels in the U.S.\1\ Thanks
to the vast new low-cost gas supplies unlocked by the shale drilling
revolution, it is now possible to consider the potential to bring the
benefits of natural gas fuel to the light-duty cars, vans, SUVs and
pickups that are driven by U.S. business and government fleets as well
as families that consume 75% of U.S. on-road fuels.
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\1\ Energy Information Administration. ``Annual Energy Outlook.'' 5
Dec 2012 http://www.eia.gov/forecasts/aeo/er/index.cfm
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Despite a relative lack of policy support, U.S. automakers and
natural gas refueling infrastructure providers like VNG have already
recognized the enormous opportunity represented by the light-duty NGV
market. GM and Chrysler have both introduced new bi-fueled\2\ NGV
versions of popular pickup truck models for fleet customers, and VNG is
working to develop the kind of retail-oriented fueling infrastructure
for these fleets that will also seed the market for future mass-market
consumers. Furthermore, natural gas producers like Chesapeake and
Encana are making their own efforts to promote widespread adoption of
natural gas in recognition of the fact that this market could be vital
to the long-term profitability of the U.S. gas drillers.
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\2\ Bi-fuel natural gas vehicles are capable of running the same
internal combustion engine on either gasoline or natural gas. Retaining
a gasoline tank while the natural gas refueling infrastructure is being
developed eliminates drivers' ``range anxiety.''
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While progress is already being made by the private sector in
developing the light-duty NGV market, greater policymaker understanding
of NGVs and support for a level playing field for them will help this
market achieve its full potential sooner.
Light-Duty Vehicles Are Chief Driver of Oil Dependence
Transportation accounts for 70% of U.S. oil consumption and 30% of
greenhouse gas emissions, making it a critical sector to address in the
pursuit of U.S. energy independence and climate change goals. And,
while other sectors of the economy (including power, manufacturing, and
home heating) have moved away from oil use over the past three decades,
the transportation sector is still almost completely dependent on
gasoline and diesel, leaving U.S. businesses, government, and
households at the mercy of volatile global markets. Increasing domestic
production of unconventional oil is a welcome development, but it does
not affect our vulnerability to global price swings, nor is it
sufficient to significantly reduce global prices.
Light-duty vehicles (including cars, SUVs, vans, and pickups) are
the main source of this dependency, accounting for 75% of on-road
transportation fuel use in the U.S. According to new data from the EIA,
the average American household spent nearly $3,000 on gasoline to fill
these light-duty vehicles last year--nearly 4% of household pretax
income, the highest level in three decades.\3\ Addressing the near-
total dependence of light-duty vehicles on oil must remain a central
priority of U.S. energy policy, for the sake of the economy, our
national security, and the environment.
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\3\ U.S. Energy Information Administration. ``U.S. household
expenditures for gasoline account for nearly 4% of pretax income.'' 4
Feb 2013. http://www.eia.gov/todayinenergy/detail.cfm?id=9831
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Other Alternatives Are Falling Short of Expectations
While policymakers have touted various preferred alternative fuel
technologies in recent years, these technologies have failed to make an
impact thus far and may not for the foreseeable future.
Electric Vehicles--Sales of the Chevy Volt and Nissan Leaf
in 2012 were less than half of automaker projections, combining
for less than 35,000 sold nationwide.\4\ The Administration, a
staunch backer of EV technology in the 2009 stimulus bill,
recently acknowledged the struggles of the industry and backed
off its 2011 goal of having one million plug-in electric
vehicles on U.S. roads by 2015.\5\ In fact, some industry
observers believe that EVs will not be able to overcome the
cost and recharging issues that limit their appeal to consumers
until there is a new breakthrough in battery technology--which
could be decades away.\6\
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\4\ Eisenstein, Paul. ``Are battery-powered cars losing their
charge?'' Autoblog. 6 Dec 2012. http://www.autoblog.com/2012/12/06/are-
battery-powered-cars-losing-their-charge/
\5\ Rascoe, Ayesha and Deepa Seetharaman. ``U.S. backs off goal of
one million electric cars by 2015.'' Reuters. 31 Jan 2013. http://
www.reuters.com/article/2013/01/31/us-autos-greencars-chu-
idUSBRE90U1B020130131
\6\ Borenstein, Seth. ``What holds energy tech back? The infernal
battery.'' Associated Press. 22
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Cellulosic Biofuels--Both the current and previous
Administrations have hailed the potential of cellulosic
biofuels made from non-food feedstocks to provide a sustainable
source of renewable transportation fuel. However, this
technology faces fundamental challenges in cellulosic feedstock
production and distribution as well as the high cost of
processing these feedstocks into fuels, which have prevented
any significant commercial volume of these fuels from being
produced despite government mandates for millions of gallons
per year under the Renewable Fuels Standard.\7\ Indeed, a
district court recently vacated EPA's 2012 requirement for
cellulosic biofuels due to a lack of availability.\8\
\7\ Congressional Research Service. ``Renewable Fuel Standard
(RFS): Overview and Issues.'' 23 Jan 2012. http://www.fas.org/sgp/crs/
misc/R40155.pdf
\8\ Green Car Congress. ``DC Circuit court vacates 2012 cellulosic
RFS standard, affirms 2012 advanced biofuel standard.'' 27 Jan 2013.
http://www.greencarcongress.com/2013/01/api-20130127.html
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While both EV and advanced biofuels technologies may hold merit in
the long term, the fact is that both face substantial near-term
technological barriers to their success. The seriousness and urgency of
our near-total transportation dependence on oil requires a focus on
solutions that are ready to make a difference today--not technology
gambles that may or may not become a viable solution five or ten years
down the road.
``Larger, Faster, Earlier'' Impacts for Light-Duty NGVs
In contrast to EVs and biofuels, NGVs are the only alternative fuel
solution to offer a ready technology at an affordable price--today.
Natural gas can save drivers up to 40% on fuel costs (or $1,200 per
year based on average household gasoline expenses of $3,000), and our
vast shale reserves guarantee stable, low-cost domestic supplies for
decades. Light-duty NGVs are also a proven technology with no `learning
curve' similar to electric vehicles (EVs)--indeed, there are over 15
million light-duty NGVs on the road worldwide in countries in Europe,
Asia, and South America.\9\ Since the engine and performance is the
same, natural gas can power any sort of vehicle that currently uses
gasoline, and fleets and consumers can continue to buy the vehicles
they like and need.
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\9\ Gas Vehicles Report. http://www.ngvjournal.com/en/magazines/
the-gvr/download/3523/11378/26
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These advantages were recognized in a landmark new comprehensive
study of alternative fuel technologies by the National Petroleum
Council of the U.S. Department of Energy. According to this ``Future
Transportation Fuels'' report*, NGVs have potential for ``larger,
earlier, and faster'' impacts on U.S. oil dependence compared to other
alternatives due to a lack of technological barriers combined with the
economic rationale presented by fuel savings. In the composite ``best
case'' scenario developed by the NPC, light-duty NGVs were able to
achieve a 17% share of new light-duty vehicle sales by 2020--double the
share of plug-in hybrid electrics (PHEVs) and pure EVs combined.\10\
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* All reports have been retained in committee files.
\10\ National Petroleum Council. ``Future Transportation Fuels
Study.'' Aug 2012. http://www.npc.org/FTF-80112.html
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A key finding of the NPC report* is the potential for rapid cost
reductions in the incremental costs of NGVs compared to gasoline
vehicles through simple manufacturing economies of scale. While today's
NGV incremental costs in the U.S. may be $10,000 or more, this is due
to the inefficiencies of low-volume conversions, and not due to the use
of expensive components (as is the case with EVs, whose even greater
incremental costs are due to costs of lithium-ion batteries, which are
already mass produced). The NPC projects that incremental costs could
be reduced by 2/3rds in the near term with a move to high-volume,
assembly-line production of 100,000 vehicles/year.
The European experience clearly shows that rapid cost reductions of
this magnitude are possible. Indeed, in Italy, Fiat already sells some
bi-fuel models at an incremental cost of less than $3,000, and Opel
(the European arm of GM) is offering rebates that can completely
eliminate incremental costs.\11\ This ability to achieve incremental
cost reductions in the near term without need for any technological
advances is key to understanding the vastly greater potential of NGVs
compared to other alternatives, as it gives NGVs a realistic path
towards mass-market viability--without the need for long-term
subsidies. EVs and advanced biofuels simply cannot claim a similar
path, as both depend on subsidies and technological breakthroughs which
may or may not materialize even in the long term.
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\11\ Ebhardt, Tommaso and Craig Trudell. ``Gasoline Sticker Shock
Fuels Fiat Natural Gas Auto Sales.'' Bloomberg. 17 Sept 2012. http://
www.bloomberg.com/news/2012-09-17/gasoline-sticker-shock-fuels-fiat-
natural-gas-auto-sales.html
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An Opportunity for U.S. Companies to Lead in Key Clean Energy
Technologies
NGVs may be an established technology compared to EVs and biofuels,
but the global market for these vehicles is just beginning to realize
its potential. U.S.-developed shale gas drilling technology is being
exported to countries all over the world, helping to usher in what the
International Energy Agency has called a ``Golden Age of Gas.''\12\ By
establishing America as the center of development for NGVs in the years
ahead, U.S. automakers will be positioned to take advantage of new
opportunities in overseas markets in Asia, Europe, and South America
that are just beginning to develop their shale gas resources.
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\12\ International Energy Agency. ``Are we entering a golden age of
gas?'' World Energy Outlook 2011. http://www.worldenergyoutlook.org/
goldenageofgas/
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NGVs are also a platform for the development of even cleaner,
ultra-low-carbon transportation fuels and technologies that will be
needed to combat climate change. NGVs can fuel on biogas (or renewable
natural gas, or ``RNG'') captured from landfills, wastewater plants,
and other sources, resulting in ultra-low lifecycle GHGs of 90% below
gasoline or less.\13\ Moreover, unlike cellulosic biofuels mandated in
the RFS, biogas is a renewable fuel derived from non-food feedstocks
that is being produced and used in commercial applications today.\14\
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\13\ National Petroleum Council. ``Renewable Natural Gas for
Transportation.'' 1 Aug 2012. http://www.npc.org/FTF_Topic_papers/22-
RNG.pdf
\14\ Energy Vision. ``Renewable Natural Gas: The Solution to a
Major Transportation Challenge.'' 2012. http://energy-vision.org/
wordpress/wp-content/uploads/2012/05/EV-RNG-Facts-and-Case-Studies.pdf
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In the longer term, natural gas will also facilitate the
development of hydrogen fuel cell vehicles (FCVs) due to numerous fuel
storage and refueling infrastructure synergies between these gaseous
fuels.\15\ FCVs are a crucial technology for meeting long-term climate
change goals, combining the zero-emission performance of EVs with the
gasoline-like range and refueling characteristics of NGVs.
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\15\ Cannon, James S. ``Natural Gas: An Essential Bridge to
Hydrogen Fuel Cell Vehicles.'' January 2012. http://vng.co/wp-content/
uploads/2012/05/Natural-Gas-An-Essential-Bridge-To-Hydrogen-Fuel-Cell-
Vehicles.pdf
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In comments on the 2017-2025 light-duty vehicle regulations,\16\
VNG argued that the development of the light-duty NGV market would
reduce several specific ``near-term market barriers to FCV adoption''
identified by EPA and NHTSA, including:
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\16\ VNG.CO. ``Comments of VNG.CO.'' 6 Feb 2012. http://vng.co/wp-
content/uploads/2012/05/Natural-Gas-As-Essential-Bridge-To-Hydrogen-
Fuel-Cell-Vehicles-With-Comments.pdf
Refueling Infrastructure--NGV refueling stations use most of
the same hardware used to dispense hydrogen fuel, enabling them
to be adapted to supply hydrogen or even hydrogen-natural gas
blends in the future;
Fuel Cost--Hydrogen produced through the steam reforming of
natural gas is the lowest-cost method of distributed hydrogen
production available today;
Vehicle Cost--Natural gas and hydrogen also share gaseous
storage technologies, and innovations and cost improvements for
advanced on-board storage and fuel management technologies for
NGVs will benefit FCVs as well.
The EPA acknowledged these linkages in its rationale for giving
NGVs additional ``advanced technology'' multiplier incentives in the
new 2017-2025 light-duty vehicle regulations, and cited VNG's comments
as well as those of Natural Gas Vehicles for America in support of this
decision.\17\
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\17\ Federal Register. ``2017 and Later Model Year Light-Duty
Vehicle Greenhouse Gas and Corporate Average Fuel Economy Standards;
Final Rule.'' 15 Oct 2012. P. 62814. http://www.gpo.gov/fdsys/pkg/FR-
2012-10-15/pdf/2012-21972.pdf
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maximizing domestic benefits of the u.s. gas boom
Despite concerns expressed by some parties over potential increases
in natural gas demand from NGVs or LNG exports, the reality is that the
shale gas revolution has unlocked an enormous amount of natural gas
supply capacity that can be tapped at relatively low costs.
A recent study by (hearing witness) Dr. Kenneth Medlock III
of the James Baker III Institute for Public Policy\18\ finds
that shale gas supplies have effectively increased the
elasticity of domestic gas supplies fivefold. Thus, the long
term price of gas will remain between $4-$6 per MMCF for
``decades'' even with substantial increases in demand.
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\18\ Medlock, Dr. Kenneth. ``U.S. LNG Exports: Truth and
Consequences.'' August 2012. http://bakerinstitute.org/publications/
US%20LNG%20Exports%20-%20Truth%20and%20Consequence%20Final--Aug12-1.pdf
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Chesapeake Energy has similarly noted that, based on the
production economics of current domestic gas plays, the U.S.
could add gas production sufficient to meet the fuel needs of
2/3rds of the entire domestic light-and heavy-duty
transportation fleet while maintaining long-term natural gas
prices of less than $7 per MMCF--still low by historic
standards.
When considering the ``opportunities and challenges'' for natural
gas, light duty NGVs offer the opportunity to save consumers an average
of $1,200 per year on their fuel costs, reduce greenhouse gas emissions
by 24% (and up to 90% with renewable natural gas), and achieve energy
independence by replacing oil use in the vehicles consuming 75% of on-
road transportation fuels. And if the domestic NGV market develops
robustly, natural gas producers will have strong domestic demand for
their product, reducing the incentive to export natural gas--and its
economic, environmental, and energy security benefits--overseas.
policy changes to level the playing field for ngvs
Policymakers can realize this vision for light-duty NGVs simply by
providing them with a level playing field to compete with other
alternative fuel technologies, potentially including the following
steps:
Remove Regulatory Barriers--While the new 2017-2025 light-
duty vehicle regulations promulgated by EPA and NHTSA take
important steps towards creating a level playing field for
NGVs, they still face arbitrary and unfair obstacles under the
CAFE program due to outdated legislative restrictions intended
to limit credits for E85 flex-fuel vehicles. Legislation is
necessary to harmonize treatment for NGVs, granting them the
fair, no-cost regulatory incentives that EPA and NHTSA have
already said they deserve.
Tax Credit Parity for NGVs--EVs currently benefit from tax
credits of up to $7,500 per vehicle included in the 2009
stimulus bill, while light-duty NGVs receive no tax credits. As
detailed in the NPC report, although NGVs do not face the same
long-term cost obstacles as EVs (which are unique to EV
dependence on expensive lithium-ion battery packs), incremental
NGV costs are high today simply due to low production volumes.
The current Administration has previously advocated for
identical tax credits for both EVs and NGVs,\19\ and such a
level playing field would help increase NGV demand and bring
down prices in the near term.
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\19\ The White House. ``Fact Sheet: All-of-the-Above Approach to
American Energy.'' 7 March 2012. http://www.whitehouse.gov/the-press-
office/2012/03/07/fact-sheet-all-above-approach-american-energy
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Federal Vehicle Fleets--Federal vehicle fleets should be
leaders in adopting light-duty NGVs, which would save taxpayer
money through lower fuel costs, help reduce vehicle costs for
consumers and businesses through increasing production
economies of scale, and support the private sector development
of retail-oriented CNG refueling networks for public use.
However, current federal fleet procurement of alternative fuel
vehicles is focused almost entirely on flex-fuel E85 vehicles
due to their low incremental costs--despite the fact that these
vehicles may end up costing more over their lifetime due to E85
costs that are higher than gasoline on a per-BTU basis. E85
also yields fewer environmental and energy security benefits
than natural gas. Federal fleets should be required to evaluate
the lifecycle costs and benefits of all fleet purchases, which
would reward the superior cost savings and environmental
performance of NGVs.
Alternative Fuel Standard--The current RFS, which as noted
calls for unattainable volumes of cellulosic biofuels that do
not yet exist, is broken and unfairly focuses only on biofuels.
Expanding this program to an ``Alternative Fuel Standard''
would allow refiners to meet requirements with credits
generated by any alternative fuel that reduces GHG emissions by
20% or more--including CNG and electricity as well as biofuels.
This type of ``fuel neutral'' policy would encourage much more
rapid progress towards energy independence goals than the
current biofuel-only RFS.
VNG played an active role in facilitating recent progress on the
regulatory treatment of NGVs by EPA, and is recommending Congress take
additional action to address these issues that cannot be addressed
simply through administrative action.
VNG appreciates the opportunity to submit this testimony and looks
forward to working with the Committee and other policymakers to support
the light-duty NGV market, which will reduce the cost of driving for
American households and businesses, reduce climate change impacts for
transportation, and help this country achieve energy independence. If
you have any questions or would like additional information, please
contact me at [email protected] (973-886-7675).
______
Statement of American Chemistry Council
February 12, 2013 The American Chemistry Council* is pleased to
submit for the hearing record our Executive Committee's unanimously
approved position related to energy and competitiveness (see attached).
The policy re-emphasizes our strong support for a comprehensive ``all
of the above'' energy strategy to support U.S. economic growth and the
growth of the chemical industry.
The policy also restates ACC's support for free market policies
that promote the export of American-made goods, including liquefied
natural gas. The Executive Committee unanimously expressed its
opposition to any new export bans or restrictions on liquefied natural
gas, such as a moratorium on export terminals or the prohibition on the
export of natural gas produced on public lands.
While there is broad agreement among ACC members on these key
principles, there is not a clear consensus on the issue of whether the
Natural Gas Act's public interest requirement should be further defined
in export permitting to non-FTA countries.
ACC will continue to discuss this issue. ACC members will also
continue to work together to vigorously advocate for sound energy and
related regulatory policies that will ensure the availability of
abundant, diverse energy supplies and stable reliable energy markets.
*The American Chemistry Council (ACC) represents the leading
companies engaged in the business of chemistry. ACC members apply the
science of chemistry to make innovative products and services that make
people's lives better, healthier and safer. ACC is committed to
improved environmental, health and safety performance through
Responsible Care, common sense advocacy designed to address major
public policy issues, and health and environmental research and product
testing. The business of chemistry is a $760 billion enterprise and a
key element of the nation's economy. It is one of the nation's largest
exporters, accounting for ten cents out of every dollar in U.S.
exports. Chemistry companies are among the largest investors in
research and development. Safety and security have always been primary
concerns of ACC members, and they have intensified their efforts,
working closely with government agencies to improve security and to
defend against any threat to the nation's critical infrastructure.
acc policy on energy and competitiveness
ACC supports public policies that promote the availability of
competitively priced natural gas and feedstock to support the continued
growth of the chemical industry in the United States. To that end, ACC
supports free trade principles in the context of U.S. energy policy.
Natural gas has enormous potential to renew and grow the American
chemistry industry, the entire domestic manufacturing sector, and the
U.S. economy at large, creating jobs and more exports of manufactured
goods. America needs to couple rules-based free trade principles with
an ``all of the above'' energy strategy to ensure we are fully
developing our domestic energy resources, including natural gas, and
taking full advantage of each energy source to promote sustained
economic growth.
elements of acc policy on energy and competitiveness
ACC supports a market-based ``all of the above'' national
energy policy anchored in maximizing access to competitively
priced domestic energy supplies, using energy efficiently and
developing a diverse set of energy sources.
An abundant, competitively priced and reliable supply of
natural gas and natural gas liquids (NGLs) has created a
manufacturing renaissance in the United States. ACC supports
policies that promote our industry's competitive advantage,
such as public policies and positions that encourage the
responsible production of natural gas and NGLs.
As America's largest export industry, we support exports of
American-made products, including liquefied natural gas (LNG).
ACC supports the application of existing trade rules
(including WTO commitments and bilateral Free Trade Agreements)
to all exports, including LNG.
Consistent with U.S. trade laws, we oppose imposition of any
new LNG export bans or restrictions, such as those that would
impose a moratorium on export terminals or prohibit exports of
gas produced on public land. We support full compliance with
the Natural Gas Act in the issuance of LNG export permits,
including the presumption that exports to Free Trade Agreement
countries are in the public interest.
There is a lack of clear consensus among our members
concerning whether the Natural Gas Act's ``public interest''
requirement should be further defined in export permitting for
non-FTA countries. ACC therefore will further study this issue
and ways to achieve consensus.
ACC will also continue to monitor the U.S. energy situation,
including natural gas supply/demand scenarios, and their
implications for global competitiveness of the industry.
______
Statement of Bill Cooper, President, Center for Liquefied Natural Gas
As President of the Center for Liquefied Natural Gas, I would like
to thank Chairman Ron Wyden and Ranking Member Lisa Murkowski of the
Senate Energy and Natural Resources Committee for accepting the
following testimony, to be entered into the public record.
I will be focusing on the topic of liquefied natural gas (LNG)
exports, specifically by identifying common myths and then providing a
summary of the facts. As you will see from this testimony, the United
States has abundant supplies of natural gas, more than enough to allow
for exports while also meeting growing domestic demand.
The ability to export LNG represents a window of opportunity to
create more jobs, generate more public revenues and reduce our trade
deficit. A multitude of industries and communities will benefit from
this opportunity to export some of America's abundant natural gas
resources in global markets.
By resuming its approval process for LNG export applications, the
U.S. Department of Energy can allow the United States to begin reaping
those benefits, without hurting U.S. consumers.
MYTH 1--We should use natural gas here in the United States instead
of exporting it.
Data compiled by the U.S. government and independent experts show
clearly that the United States has an abundant supply of natural gas,
more than enough to meet growing domestic demand and allow for exports.
For example, the U.S. Energy Information Administration's 2013
Annual Energy Outlook shows that U.S. natural gas production is
projected to grow by roughly 40 percent from 2012 to 2040. Over the
same period, U.S. consumption of natural gas is expected to grow by
less than 20 percent. Because production of U.S. natural gas is
projected to rise faster than consumption by 2040, the U.S. has a
natural gas surplus available for export.
Meanwhile, a recent report from Deloitte observed the following:
Producers can develop more reserves in anticipation of demand
growth, such as LNG exports. Indeed, LNG export projects will
likely be backed by long-term supply contracts, as well as
long-term contracts with buyers. There will be ample notice and
time in advance of the exports to make supplies available.
Furthermore, reports from the Brookings Institution, the
Congressional Research Service and the Baker Institute at Rice
University--among many others--have stressed the enormous size of
America's natural gas resource base, which in turn underscores the
large surplus, a portion of which the United States can leverage for
exports to create additional jobs, new tax revenues and a reduction in
our trade deficit.
In addition to fundamental economic realities about the benefits of
free trade, this large natural gas surplus is a key reason why a recent
macroeconomic report from the U.S. Department of Energy concluded that
``LNG export has net benefits to the U.S. economy.'' The DOE report
also observed that exports would specifically benefit consumers by
stating that the net result of allowing LNG exports ``is an increase in
U.S. households' real income and welfare.'' The report added that
``consumers, in aggregate, are better off as a result of opening up LNG
exports.''
MYTH 2--Natural gas exports would harm U.S. manufacturing.
Many of the largest U.S. manufacturers have voiced support for LNG
exports. Companies like General Electric and Caterpillar, for example,
have both written to the U.S. Department of Energy urging approval for
LNG export applications, stressing the economic benefits that exports
would yield, as well as the potential economic harm from retaliatory
trade restrictions that other countries could impose upon the United
States.
In a blog post entitled ``Banning LNG Exports Will Hurt Jobs and
Economy,'' the National Association of Manufacturers observed the
following:
Proposals that seek to limit LNG or coal or any other product
would have far-reaching negative effects on the United States
and should be rejected. Such restrictions limit economic
opportunities and stifle job growth rather than provide a
source of increased economic growth.
Export growth has created and saved manufacturing jobs over
the past few years, which were tough economically for the
United States. Export growth is vital not just for businesses
across-the-board that directly export, but also for the many
manufacturers in the supply chain.
In its Initial Comments to DOE on the NERA LNG Export Study, the
National Association of Manufacturers also noted:
With 95 percent of the world's consumers outside the United
States, export bans on any product, including LNG, can be
expected to have far-reaching negative effects, including on
domestic economic opportunities, employment and ultimately
economic growth.
The United States' ability to challenge other countries'
existing exports restraints on agricultural, forestry, mineral
and ferrous scrap products--just to name a few--will be
virtually non-existent if the United States itself begins
imposing its own export restrictions. Even worse, as the
world's largest economy and largest trading country, U.S.
actions are often replicated by our trading partners to our own
dismay. If the U.S. were to go down the path of export
restrictions, even more countries would quickly follow suit and
could easily limit U.S. access to other key natural resources
or inputs that are not readily available in the United States.
As added proof, major chemical manufacturers that also support LNG
exports are moving forward with plans to invest billions of dollars to
expand their existing petrochemical operations. Put simply, companies
would not be investing heavily in operations that rely on affordable
and abundant supplies of natural gas and natural gas liquids (NGLs) if
LNG exports truly posed a credible threat to that business.
MYTH 3--Unfettered exports could undermine our economic
competitiveness.
In addition to the points outlined above, which detail how LNG
exports would actually grow the U.S. economy, it's important to note
that arguing against ``unfettered'' or ``uncontrolled'' exports is a
straw man. There is no such thing as unfettered or uncontrolled LNG
exports.
The U.S. government--through the Department of Energy (DOE) and the
Federal Energy Regulatory Commission (FERC)--has a robust regulatory
review process in place for LNG exports. Absent affirmative evidence
from opponents that the proposed project is not in the ``public
interest,'' DOE is required to approve the applications, thereby
assuring a level playing field for all participants. Further studies
are not warranted; the NERA study was robust with 63 scenarios
including high and low side supply/demand cases. Every export scenario
yielded positive net benefits for the U.S. economy. The DOE has also
been studying LNG exports for more than one year already. DOE needs to
actively resume the review process for all projects in the permitting
queue and it needs to move expeditiously on those applications.
The opportunity to export liquefied natural gas (LNG) will not
remain on the table on the same scale, with the same benefits,
indefinitely. The U.S. is not the only nation with abundant shale gas
reserves. And while some debate the value of free trade in a global
economy, other nations are trying to duplicate the success of America's
shale industry.
Worldwide demand for LNG between 2020 and 2025 is projected to be
around 60 billion cubic feet per day (bcf/d), up from approximately 37
bcf/d today. The sizeable gap between future demand and current
capacity, 23 bcf/d, makes the global LNG market an attractive
opportunity. However, the United States is not the only nation capable
of seizing this opportunity.
The capacity of non-U.S. projects that are either planned, proposed
or under construction is approximately 50 bcf/d. In fact, proposed
foreign LNG capacity is more than double the expected global market
opportunity in 2025. If you add on proposed U.S. LNG capacity, the
global marketplace has a proposed supply of 80 bcf/d competing to fill
only 23 bcf/d of demand. The longer the U.S. delays, the more likely
other nations will satisfy that demand.
MYTH 4--Exports will lead to significant price increases for
natural gas in the United States.
Numerous assessments of potential LNG exports have found that any
impact on domestic prices would be minimal.
For example, the Brookings Institution observed that producers of
natural gas ``will likely anticipate future demand from LNG exports and
will increase production accordingly, limiting price spikes.''
Brookings also noted that any price impact would be ``modest.'' Kenneth
Medlock with the Baker Institute has said: ``The impact on U.S.
domestic prices will not be large if [LNG] exports are allowed.''
In a report commissioned for the U.S. Department of Energy, NERA
Economic Consulting found that ``price changes attributable to LNG
exports remain in a relatively narrow range across the entire range of
scenarios,'' adding that any such price changes ``do not offset the
positive impacts'' from exports.
What many opponents of exports cite in reference to prices is the
EIA's price impact study from 2012, which analyzed four different
export scenarios. In the most dramatic (and most unlikely) scenario,
the model suggested an extreme upper limit price impact of 54 percent.
But the scenario that many experts agree is the most likely is that
natural gas price impacts would peak at less than 10 percent. At least
one analysis, from Deloitte, pegged the price impact at only two
percent.
To provide a real-world example of how the price issue differs in
rhetoric from reality, Methanex is relocating one of its methanol
plants from Chile to Louisiana to take advantage of abundant and low-
cost natural gas supplies. Addressing the export concern head on,
Methanex CEO John Floren said it signed long-term supply contracts to
hedge against any potential price impacts, reflecting a fundamental
market reality of chemical manufacturing in the United States that
undermines the suggestion that future price volatility would prevent
the future growth of this industry.
Interestingly, at least one of the chemical companies that has
voiced opposition to LNG exports on the basis of price impacts has
stated that if ``natural gas were available at a consistent $6-$8
dollar per MMBtu range, U.S. petrochemical facilities could be globally
competitive.'' Current Henry Hub natural gas prices are less than $3.50
per MMBtu, meaning even in the worst-case and most unrealistic scenario
modeled by EIA (where LNG exports increase domestic prices by 54
percent), the cost of natural gas would be $5.39 per MMBtu--below the
price range that at least one major chemical manufacturer has said
publicly would keep the industry competitive.
A common criticism by opponents of LNG exports is that natural gas
production will lag demand, causing price spikes if there are LNG
exports. Since 2008, we've seen production increase by 10 bcf/d and
natural gas prices fall by more than $8 per thousand cubic feet (mcf).
Clearly, natural gas production was running faster than demand or there
wouldn't have been such a dramatic decline in natural gas prices. Given
the new shale gas realities, producers should be able to ramp up
production in anticipation of demand growth.
MYTH 5--The ``value-add'' for exports is low.
According to the U.S. International Trade Administration (ITA),
each $1 billion of exports could result in more than 5,000 new jobs,
many of which would be permanent manufacturing jobs. Thus, $13 billion
to $25 billion worth of LNG exports--the current range of investment
possibilities--could mean the creation of between 70,000 and 140,000
new American jobs. ITA has also observed that the value per export-
supported job is almost $165,000.
Construction and operation of new LNG projects will create as many
as 50,000 new jobs in design, engineering and construction, which
translate into hundreds of millions of dollars in new wages for U.S.
workers during the construction of the facility.
LNG exports will also lead to additional domestic natural gas
production, which will in turn create hundreds of thousands of new jobs
in the United States.
The enormous potential for new jobs is a major reason why labor
unions have also voiced support for LNG exports. Brad Karbowsky with
the United Association of Plumbers, Fitters and HVAC Techs said the
following about potential jobs created as a result of LNG exports:
The billions of dollars in wages generated by these well-
paying jobs will be multiplied throughout communities across
the country in the form of investment and taxes, which will in
turn be used to support schools, fire stations and other
essential public services. This new source of shared prosperity
will provide a foundation for future growth.
Harry Melander, President of the Minnesota State Building and
Construction Trade Council, has also observed:
Exporting America's abundant natural gas to global markets is
yet another excellent opportunity to increase job production
and investment as a result of the burgeoning U.S. domestic
energy production.
Nor are the benefits all directly related to the LNG industry. As
natural gas production has expanded in recent years due to the
responsible development of shale, local businesses like hotels and
restaurants in production areas have benefitted from a growth in demand
for their products and services. Adam Diaz, a small business owner in
Susquehanna County, Pa., recently observed:
In the last three years since the natural gas industry came
to Susquehanna County, Pennsylvania, my company has been able
to grow from 30 employees to 250, while our revenue has
increased from less than $2 million annually to almost $50
million today. This growth has led to an increased tax
contribution of almost $3.5 million in federal, state and local
taxes. Recently though, drilling rig counts have been falling
in my area. LNG exports will increase demand, bring back the
rigs and allow businesses like mine to grow and add much needed
jobs to local economies to keep them strong.
With LNG exports, U.S. natural gas production will grow even more.
That production will create U.S. jobs in support sectors that
manufacture steel pipe, equipment, control panels, heavy duty trucks,
and cement, in addition to well-paying jobs for welders, pipefitters,
cement masons, plumbers, machinery mechanics, pump operators and
engineers.
MYTH 6--Exports could lead to competitive disadvantages of U.S.
manufacturers in global trade
The price of natural gas in the U.S. will be priced below what
competitors will face in Asia, for example, even with U.S. exports.
There is a substantial cost to liquefying natural gas and transporting
it specialized tankers to distant markets (ranges from $8 billion to
$20 billion per project of 2 bcf/d), and that fact means the U.S.
domestic price for natural gas will be several dollars per thousand
cubic feet lower than the price of natural gas in countries which
import our LNG.
Rice University professor Ken Medlock notes in his 2012 LNG Export
study that these costs will average $2.92/mcf for liquefaction and
$2.15/mcf for transportation to Asia ($5.07/mcf total). Other studies
show the cost range to be higher, including the NERA study that has a
cost range between $6.30/mcf to $8.39/mcf.
Therefore, according to these studies, U.S. manufacturers would
still enjoy a $5/mcf to $8/mcf cost advantage over Asian competitors,
even if Asian prices and U.S. LNG delivered prices in Japan equalize.
That provides a huge competitive advantage to U.S. manufacturers even
with LNG exports from the United States.
MYTH 7--LNG exports will back out the same amount of gas used by
manufacturers.
Critics assume a zero-sum game in natural gas markets, where 1 bcf
of LNG exports takes exactly 1 bcf in supply away from the
manufacturing sector. Those critics assert that supply doesn't
increase; there is merely a reallocation of given volume of U.S. gas
production. History shows that markets don't work that way. They adjust
to increasing demands and gas supply can be expected to increase in
response to any increase in demand. Of course, producers will respond
to demand growth and changes in gas prices; they will develop more
projects and produce more gas.
Critics never mention that there will be more gas production to
feed LNG exports and to feed increased gas use by manufacturing. A more
realistic view of the world actually takes into account that producers
will respond to demand changes--i.e., that the supply curve is very
elastic and not completely inelastic as in the zero sum
mischaracterization of the critics. As producers increase gas
production in response to growing demand, manufacturing use of gas can
still increase.
An economically realistic depiction of what the shale gas
revolution is all about would yield benefits of exports plus the value
of the additional U.S. gas production and growth in manufacturing use.
In fact, the discussions about the benefits of manufacturing asserted
by critics are misleading because they try to make it appear that the
choice is stark between either manufacturing or exports, when the real
choice involves whether the U.S. wants to reap the benefits from
exports plus more natural gas production plus more manufacturing use of
gas.
This is not a zero sum game. The shale gas revolution requires a
change in this zero-sum mind-set in which natural gas supplies are
fixed or diminishing over time, and in which the policy issue is one of
deciding which sector gets what share of an ever-diminishing natural
gas resource. As Dr. Daniel Yergin, Vice Chairman of IHS and founder of
IHS CERA, explained in his testimony before the House Energy and
Commerce Committee's Subcommittee on Energy and Power on February 5,
2013:
[O]wing to the very large resource base, the market in the
U.S. is demand-constrained, rather than supply-constrained.
Larger markets--whether they be in electric power, industrial
consumption, transportation, or exports--are required to
maintain the investment flow into the development of the
resources.
It is worth repeating: the natural gas market is not supply
constrained as the zero sum mind set argues; it is demand constrained.
If additional demand comes, additional natural gas supply will come
along as well. The new shale gas reality is that there is an increasing
gas supply available for LNG exports in addition to increasing domestic
demand, including power generation, manufacturing and other gas
consumers.
MYTH 8--Natural gas deserves special restraints that apply to no
other product.
Critics argue that it is better for the economy to export finished
products made using natural gas rather than exporting natural gas.
Taken to its logical conclusion, that prescription would mean that it
is not beneficial to export chemicals or aluminum or any intermediate
product that is used by another manufacturer. American automobile
makers use considerable materials made from chemicals, plastics and
aluminum, so according to the critics' logic, exports of chemicals,
plastics and aluminum should be restricted to ensure low U.S. prices of
these products for the benefit of automakers or other consumers. The
long history of support for free trade by Democrat and Republican
administrations would be thrown out with this logic. There is no sound
economic rationale for claiming natural gas is a special case requiring
laborious study before exports are allowed; nor are chemicals,
plastics, lumber, wheat, aluminum, and countless other manufacturing
and agricultural products special cases calling out for extensive
review and study before their exports are allowed. The U.S. economy
would be a net beneficiary from unrestricted LNG exports, just as the
U.S. is a net beneficiary of unrestricted exports of chemicals,
plastics, and aluminum and countless other products.
Additionally, restraints on LNG exports run afoul of the United
States' obligations under WTO and GATT, as well as the long-standing
policy of the United States to support exports. As stated in the
comments filed with DOE by the Peterson Institute for International
Economics:
If the United States nevertheless does impose restraints [on
LNG exports], U.S. actions will certainly be cited in the
future by other countries that decide to flout international
trade rules and restrict their own exports of natural resources
as a means of subsidizing downstream industrial users. What's
more, it is likely that countries that are not FTA partners
will either retaliate with their own natural resource
restrictions or challenge U.S. policies at the WTO.
As General Electric stated in its comments filed with the DOE:
[D]eclining to approve exports of natural gas would be
squarely at odds with the United States' longstanding policy
and international trade norms disfavoring export restraints
(see GATT Article XI). Indeed the United States has been the
vanguard of those challenging such restraints globally. (See
US/EU/Mexico Challenge to China's Export Restraints on Raw
Materials--WTO DS 394, 395, 398, successfully challenging
China's export restraints on certain raw materials).For the
United States to now adopt such restrictions itself would
fundamentally undermine its own international trade policy,
which has served to preserve critical access to raw materials
globally.
MYTH 9--No clearly established criteria exist for DOE to apply the
public interest standard in permitting applications for LNG exports.
The DOE has provided regulatory clarity as to what constitutes the
public interest, establishing a clear standard for future decisions.
For example, in the Kenai LNG case, the DOE concluded: ``DOE
considers domestic need for the gas and any other issue determined to
be appropriate, including whether the arrangement is consistent with
DOE's policy of promoting competition in the marketplace . . . '' Since
then, DOE has added several considerations to the ``domestic need,''
but most appear to flow from the concept that the primary concern is to
have enough natural gas to meet the domestic needs of U.S. consumers.
For instance, DOE has added the following considerations, quoting
from the Federal Register notice in the Golden Pass Products LLC
filing:
To the extent determined to be relevant or appropriate, these
issues [considerations] will include the impact of LNG exports
associated with this Application, and the cumulative impact of
any other application(s) previously approved, on domestic need
for the gas proposed for export, adequacy of domestic natural
gas supply, U.S. energy security, and any other issues,
including the impact on the U.S. economy (GDP), consumers, and
industry, job creation, U.S. balance of trade, international
considerations, and whether the arrangement is consistent with
DOE's policy of promoting competition in the marketplace by
allowing commercial parties to freely negotiate their own trade
arrangements.
The record for the various proceedings at DOE overwhelmingly
contains evidence that the U.S. has an abundance of natural gas, more
than enough to meet growing domestic needs for years to come and allow
LNG exports. That evidence is in the form of the factual studies filed
in support of the various applications now pending before the DOE.
For further clarification, DOE issued its 1984 Policy Guidelines,
which were later amended to include exports, stating:
[t]he market, not government, should determine the price and
other contract terms of imported [or exported] natural gas. The
federal government's primary responsibility in authorizing
imports [or exports] will be to evaluate the need for the gas
and whether the import [or export] arrangement will provide the
gas on a competitively priced basis for the duration of the
contract while minimizing regulatory impediments to a freely
operating market.'' DOE's three stated responsibilities are:
One, ``to evaluate the need for the gas"; two, assure that the
``arrangement will provide the gas on a competitively priced
basis for the duration of the contract"; and three, to
``minimiz[e] regulatory impediments to a freely operating
market.
As to the need for the gas, borrowing from the Sabine Pass order,
there has been ``substantial evidence showing an existing and a
projected future supply of domestic natural gas sufficient to
simultaneously support export and domestic natural gas demand both
currently'' and over the terms of the projects proposed.
Concerning competitive pricing, there is a very liquid, competitive
domestic market for natural gas with a multitude of producers,
marketers, sellers, and buyers, thus assuring that the natural gas is
competitively priced in the U.S. market.
The third stated responsibility of DOE is to ``minimize regulatory
impediments to a freely operating market.'' Such a responsibility
certainly cannot mean that any one market determinant, such as price or
export volumes, could be used to impede the development of the free
market. What it surely means is that applicants that meet the statutory
and regulatory requirements should be granted the authorizations to
export LNG from the United States without regulatory limitation as to
export volumes. The ``freely operating market'' will then allocate
scarce and finite economic resources such as financing and end-use
contracts to determine which projects will be built and become
operational. For as some projects will likely be built, others may not.
The role of the regulator is to assure a level playing field for
all participants and to monitor developments for continued consistency
with the public interest, not to be a predictor of future events. DOE's
policy to allow a ``freely operating market'' to function with minimal
regulatory impediments directly acknowledges the plain reading of the
Natural Gas Act, which gives DOE the tools to respond to market
conditions that adversely affect the public interest, not to predict
future events during the authorization proceeding for projects with
lifespans in excess of 20 years each. Those market conditions are not
short-term phenomena such as temporary price increases.
Far from being vague in its regulatory framework, DOE has a clearly
defined set of criteria for making its LNG export determinations, with
that framework focusing on the domestic need for the natural gas
proposed to be exported in order to protect the U.S. consumer.
MYTH 10--DOE's process lacks opportunity for all affected
stakeholders and the general public to comment on what constitutes the
``public interest.''
Once DOE determines that an application is complete, it publishes a
notice in the Federal Register informing the public of the opportunity
to submit motions to intervene, protest, and/or to comment on the
proceedings. The opponents complaining about the lack of opportunity to
get involved have been publicly outspoken on the issue of LNG exports
since prior to the closing of those public comment periods and have
sufficient resources to monitor events and take such action as
necessary to protect their interests. They simply chose not to do so.
conclusion
LNG exports would provide the United States with enormous economic
benefits--new jobs, new tax revenue, new economic growth and a reduced
trade deficit. Better yet, these benefits will not come at the expense
of domestic consumers of natural gas, whether they are industrial users
or individual households.
Those opposed to LNG exports have employed a series of inaccurate
characterizations about LNG and the impacts that would result from
allowing exports. As such, I thank the Committee for providing me the
opportunity to explain why such claims are myths, and that the
overwhelming evidence shows that allowing LNG exports will be a net
benefit to the United States. I respectfully request that the Committee
urge DOE to commence issuing export approvals so the U.S. can reap all
of the benefits of our natural gas resources.
______
Statement of Paul Sansone, Sansone & Associates
The `Shale Gale', a huge expansion of available domestically
produced natural gas, is the subject of the hearing. I am writing to
provide documentation that the legal and regulatory oversight of the
industry was manipulated by apparent fraud to secure exception from
environmental regulation (Clean Air Act, and Clean Water Act
exemptions), fast track approval for LNG ``import'' terminals ( FERC
review not State review), and the right of eminent domain for natural
gas pipelines connected to these terminals. Substantial evidence exists
that the use of false and misleading information and industry wide
racketeering was utilized to allow industry to produce the current
oversupply of natural gas and create a political and economic
conditions necessary to convert the ``stranded assets'' of import
terminals and pipelines for the export of natural gas. The goal of the
apparent fraud and racketeering appears to be a covert effort to
convert limited regional natural gas markets into an internationally
traded commodity which could be used for speculative investment. The
scope and impact of this apparent fraud obligates an immediate
investigation, the cessation of any natural gas export permits until
the full facts are made public, and the criminal prosecution of those
responsible for misleading Congress and the American people.
Please find attached an Issue summary prepared in March of 2011,
before the industry was openly calling for the conversion of LNG
``import'' terminals to ``export'' facilities. Developers seeking
permits for a LNG ``import'' facility in Oregon (Oregon LNG, Leucadia
Corp.) publicly solicited investors for the project promoting
``import'' permits as a short-cut to more profitable ``export''
facilities.
Industry projections of domestic natural gas resource size and
estimated costs of production have been consistently unreliable. A
newly released analysis of the domestic natural gas resource entitled
``Drill, Baby, Drill--Can unconventional fuels usher in a new era of
energy abundance'' by J. David (http://www.postcarbon.org/reports/DBD-
report-FINAL.pdf) calls into question the actual size of the domestic
natural gas resource.
summary of lng
LNG export fraud--legal and policy options
We're truly going to go down as the dumbest generation.. It's
bad public policy to export natural gas--a cleaner, cheaper
domestic resource--and import more expensive, dirtier OPEC
oil.\1\
---------------------------------------------------------------------------
\1\ Natural gas prices set to jump with exports - Pittsburgh
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
T. Boone Pickens in response to U.S. Dept. of Energy's approval of the
first U.S. LNG export terminal
1. Summary--Booming U.S. natural gas production from shale
gas and the resulting low prices have triggered a wave of now
public proposals to export U.S. gas as LNG. The proposed LNG
export terminals were all either recently constructed or
expanded for the stated purpose of LNG import. While the
companies built their core facility infrastructure, such as
docks, pipelines and storage tanks, claiming they would
increase U.S. gas supplies, these same companies are now moving
to use this infrastructure to sell U.S. gas into the high-
priced Pacific Rim and European markets. With China's recent
announcement that it will increase is natural gas use by over
300 percent in the next five years,\2\ China is positioning
itself as the most likely purchaser of U.S. LNG pending
development of its own shale gas resources. Opening the door to
U.S. LNG export would cause a major increase in the price of
natural gas for consumers and unprecedented profits for gas
producers.
\2\ http://gulfnews.com/business/markets/china-s-natural-gas-push-
will-affect-energy-prices-1.829199
---------------------------------------------------------------------------
Despite the lack of any rational economic basis for LNG import and
Oregon's unique location for LNG export, investors behind two LNG
terminals planned for Oregon continue to claim to state and federal
regulators, their investors and the public that the Oregon terminals
are intended to import LNG. While the Jordan Cove terminal in Coos Bay
recently acknowledged it was considering export, its formal regulatory
filings continue to assert the terminals would be used for LNG import.
There is a strong basis, however, to believe that the claims that the
Oregon terminals are intended for LNG import are fraudulent and that
the planned terminals have long been intended to export expanding
Rockies shale gas production to the Asian market.
A review of the five existing U.S. LNG terminals now proposing to
export LNG supports that the Oregon projects are following a pattern of
intentional deception that involves some of the largest U.S. natural
gas producers and pipeline companies when they allege that their
terminals are for LNG import.
If true, falsely claiming intended export projects are import
projects to investors and government regulators would violate a host of
state and federal laws. These range from the federal Securities and
Exchange Act and criminal prohibitions against making false statements
to federal agencies to violations of Oregon's criminal prohibition
against ``unsworn falsification'' which prohibits providing false
information to a state agency in an effort to obtain a ``benefit'' such
as a wetland fill permit or state land lease.\3\ Furthermore, providing
false information to a state agency under ORS 162.085(1) is a predicate
offense under Oregon's Racketeer Influenced and Corrupt Organization
Act (ORICO). Oregon Federation of Teachers v. Oregon Taxpayers United,
345 Ore. 1; 189 P.3d 9(2008) (specifically affirming that violations of
ORS 162.085(1) qualified as ORICO predicate offenses.
---------------------------------------------------------------------------
\3\ ORS 162.085(1), ``(1) A person commits the crime of unsworn
falsification if the person knowingly makes any false written statement
to a public servant in connection with an application for any
benefit.'' The term ``benefit'' is broadly defined to mean ``gain or
advantage to the beneficiary or to a third person pursuant to the
desire or consent of the beneficiary.'' ORS 162.055(1). See Oregon
Federation of Teachers v. Oregon Taxpayers United, 345 Ore. 1; 189 P.3d
9(2008)(broadly defining what constitutes a ``benefit'' under ORS
162.085(1))
---------------------------------------------------------------------------
Because of the price impacts on consumers in states near proposed
LNG export terminals and the very similar pattern of expansion or
development for import followed quickly by a switch to export that has
occurred at each of the LNG terminals now proposing export there may be
grounds for a coordinated investigation with other states such as New
York and Maryland.
In addition to any potential criminal or civil enforcements, there
are strong public policy reasons for pressuring the investors pushing
LNG terminals in Oregon to stop their false claims that the planned
terminals are still intended for LNG import.
2. The national rush to export LNG
The largest gas producers and pipeline companies in the United
States are moving to convert at least five of the 11 existing U.S. LNG
import terminals into LNG export terminals that would export low-priced
U.S. natural gas to the Asian (primarily Chinese) and European markets.
The plans come as new drilling technology has opened up a surge in
natural gas production that has sent average gas prices in 2009 and
2010 to half of their 2005 levels.\4\ Asian LNG prices, however, remain
more than 300 percent above U.S. prices\5\ and LNG prices in Europe are
on the order of 200 percent above U.S. prices.
---------------------------------------------------------------------------
\4\ U.S. Energy Information Administration (2005 averge wellhead
price of $7.33/thousand cubic feet compared to 2009 and 2010 average
wellhead prices of $3.67 and $4.16.)
\5\ Henry Hub price of June 15, 2011 of $4.52/mmbtu. http://
www.neo.ne.gov/statshtml/124.htm; Japanese pre-earthquake LNG prices
from January 2011 were $11.96/mmbtu and as of June 2011 had risen to
nearly $ 14 mmbtu. Japan's December LNG Import Bill Rises 3.9% on
Crude, Bloomberg News By Dinakar Sethuraman - Jan 30, 2011 http://
www.bloomberg.com/news/2010-12-29/japan-s-november-lng-import-bill-
increases-6-after-crude-oil-prices-gain.html; http://www.asahi.com/
english/TKY201106220170.html.
---------------------------------------------------------------------------
The price equation has brought U.S. LNG imports to almost a
standstill and the Cove Point Maryland LNG terminal in June 2011 even
asked FERC to order LNG tankers to deliver LNG to its facility against
their will to maintain safety systems that depend on LNG for
cooling.\6\ In April 2011, Excelerate Energy announced it was
completely abandoning the offshore LNG import facility it built in 2005
in the Gulf because of abundant U.S. gas supplies.\7\
---------------------------------------------------------------------------
\6\ http://www.lngworldnews.com/usa-cove-point-lng-requests-ferc-
approval-to-order-lng-imports
\7\ http://www.excelerateenergy.com/2011/04/04-13-2011.html
---------------------------------------------------------------------------
In May, 2011, the U.S. Dept. of Energy (DOE) approved Cheniere
Energy's plan to export U.S. produced gas as LNG from its Sabine Pass,
LA LNG terminal which was permitted and constructed as an LNG import
terminal.\8\ Cheniere already has a contract to export the U.S.
produced LNG to China.\9\ The terminal is the world's largest and the
project is now pending FERC approval. DOE approved the project despite
Cheniere's own study showing that allowing just this one export
terminal could result in up to an 11.6 percent increase in the price of
U.S. natural gas.\10\ This price increase alone would generate more
than $10 billion a year in increased revenues for U.S. gas producers
based on 2010 gas revenues and would come directly from consumers'
pockets.\11\ But the potential 11 percent price increase from just one
LNG terminal highlights just how much producers would benefit from
opening the door to broader LNG export and what is at stake for U.S.
consumers.
---------------------------------------------------------------------------
\8\ http://www.bloomberg.com/news/2011-05-20/cheniere-surges-45-
after-u-s-expands-its-lng-export-approval.html
\9\ http://www.pennenergy.com/index/blogs/all-energyall-the-time/
blogs/Pennenergy/all-energy-all-the-time/
post987_6847736399226820909.html
\10\ U.S. DOE Order approving LNG export from Sabine Pass LNG
terminal at p. 11, citing Navigant Consulting's Market Analysis for
Sabine Pass LNG Export Project (NCI Report) at p. 14. See also Natural
gas prices set to jump with exports - Pittsburgh Tribune-Review http://
www.pittsburghlive.com/x/pittsburghtrib/s_741745.html#ixzz1QOd1TrPm
\11\ Estimate is based on a U.S. EIA 2010 reported marketed NG
price of 4.16/ thousand cubic feet and total marketed production of
22,568,863 million cubic feet. http://www.eia.gov/dnav/ng/
ng_prod_whv_dcu_nus_a.htm
---------------------------------------------------------------------------
In a recent Pittsburgh Times article on the potential for LNG
export to increase gas prices, the Times reported that if the five
already proposed export terminals were approved they could collectively
export 13.9 percent of total U.S. gas production\12\ and fundamentally
change the U.S gas market. But even this is a gross underestimate. If
the two proposed Oregon LNG terminals are included, as well as other
terminals that will likely soon move to export, the potential export
percentage number jumps significantly higher.
---------------------------------------------------------------------------
\12\ Natural gas prices set to jump with exports - Pittsburgh
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
The ease at which the United States could feel the pain of LNG
exports is highlighted by the fact that a modern large scale QMAX LNG
tanker (266,000 cubic meters), which has already docked at the Sabine
Pass LNG terminal, can export more than 8.8 percent of total U.S. daily
gas production in a single shipment.\13\
---------------------------------------------------------------------------
\13\ 1 cubic meter of LNG = 20,631 cubic feet x 266,000 cubic meter
LNG (for a QMAX tanker)= 5487846000 cubic feet of natural gas per
tanker. 5,487,846,000 cubic feet per tanker/total average daily of 2010
U.S. marketed natural gas production of 61,832,501,370 = 0.08875 = 8.8
% of average daily US marketed natural gas production.
---------------------------------------------------------------------------
Major energy consumers are finally waking up to the reality of how
LNG exports would drive a major increase in U.S. gas prices. The
Industrial Energy Consumers of America, which represents American
manufacturers with annual sales of $800 billion and 750,000 employees,
is now fighting Cheniere's Sabine Pass LNG export plans with its saying
that the impact on gas prices would be ``absolutely frightening.''\14\
T. Boone Pickens opposed the Cheniere LNG export saying that if the
United States approved LNG export we ``we're truly going to go down as
the dumbest generation.. It's bad public policy to export natural gas--
a cleaner, cheaper domestic resource--and import more expensive,
dirtier OPEC oil.''\15\ The American Public Gas Association, which
represents 700 public gas companies in 36 states is also opposing LNG
export because of the threat to increased prices.\16\
---------------------------------------------------------------------------
\14\ Natural gas prices set to jump with exports - Pittsburgh
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
\15\ Natural gas prices set to jump with exports - Pittsburgh
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
\16\ Natural gas prices set to jump with exports - Pittsburgh
Tribune-Review http://www.pittsburghlive.com/x/pittsburghtrib/
s_741745.html#ixzz1QOd1TrPm
---------------------------------------------------------------------------
The potential for LNG exports to drain seemingly abundant supplies
is not merely hypothetical. Alaskan industrial gas users, consumers and
some elected leaders strongly opposed Conoco's plans to extend its FERC
permit at its LNG export terminal in Kenai Alaska, which at the time
was the only U.S. export terminal. Alaska's largest electric utility
even filed suit to challenge the exports saying that the terminal,
which exported a third of all locally produced gas, drove up prices and
left it without adequate supply to meet local
needs.\17\ \18\ But with the facility nearing the end of its
FERC license, Conoco announced in February 2011 it was closing the
export facility because it could not obtain sufficient gas supplies to
export and meet local needs.\19\ Ironically, Conoco (which is now
proposing LNG export from its Freeport Texas LNG terminal) also said it
was considering converting the Kenai facility into an LNG import
terminal.
---------------------------------------------------------------------------
\17\ http://www.adn.com/2008/11/09/583470/utility-petitions-to-
block-gas.html
\18\ http://www.adn.com/2010/07/08/1359592/give-southcentral-
priority-on.html; http://www.adn.com/2010/08/14/1410315/parnell-backs-
liquefied-natural.html
\19\ http://www.adn.com/2011/02/09/1692895/ap-newsbreak-alaska-lng-
plant.html
---------------------------------------------------------------------------
In a similar example, Indonesia, for which for years was a major
LNG exporter, has recently found itself planning its first LNG import
terminal as it now faces gas shortages caused by LNG export.\20\
---------------------------------------------------------------------------
\20\ http://www.lngworldnews.com/indonesia-may-import-4-5-mtpa-of-
lng-from-2013/
---------------------------------------------------------------------------
3. Change to U.S. natural gas market
Allowing LNG exports would change the fundamental mechanics of the
U.S. natural gas market, which is currently defined by massive new gas
discoveries in shale formations, production increases, and low prices.
The United States recently outpaced Russia as the World's largest
natural gas producer\21\ and is by far the largest natural gas consumer
using 47 percent more natural gas than Russia, which is the second
largest consumer.\22\ Globally, the U.S. has the fourth largest proven
gas reserves with well over a hundred years of supply and only Russia,
Iran and Qatar have larger reserves.\23\ Exporting LNG, however, would
drive both increased prices and major increases in U.S. gas production
that could meaningfully reduce U.S. gas supplies.
---------------------------------------------------------------------------
\21\ http://www.bloomberg.com/apps/
news?pid=newsarchive&sid=aH0jhcEHz07s
\22\ http://www.indexmundi.com/
energy.aspx?product=gas&graph=consumption
\23\ U.S. EIA, 2010.
---------------------------------------------------------------------------
4. Investors claim Oregon projects still for LNG import
Despite the fundamentals of the U.S. gas market and agreement from
federal, state and private sector experts that there is no
justification for new LNG import terminals,\24\ the investors pushing
the two Oregon LNG terminals continue to tell federal and regulators,
investors and the public that their projects are for LNG import. While
the proposed Jordan Cove terminal in Coos Bay has recently acknowledged
that it is considering LNG export, it continues to formally claim to
FERC and the State of Oregon that its terminal is for LNG import. Both
companies are relying on the benefits of LNG imports to support that
the project is in the ``public interest'' and entitles them to the
powers of eminent domain.
---------------------------------------------------------------------------
\24\ ``Palomar gas partners pull the plug on controversial pipeline
proposal,'' Oregonian, March 23, 2011. http://www.oregonlive.com/
business/index.ssf/2011/03/palomar_gas_partners_pull_the.html
---------------------------------------------------------------------------
There is a strong basis for believing that such representations are
fraudulent and that there is no genuine intent to import LNG. As even
the Oregonian recently reported, ``Experts say export economics from
Oregon are a slam dunk, potentially doubling the price that Canadian
and U.S. producers net for their gas domestically.''\25\
---------------------------------------------------------------------------
\25\ http://www.oregonlive.com/business/index.ssf/2011/07/
oregon_lng_terminal_plans_reve.htm
---------------------------------------------------------------------------
A number of factors strongly support that the Oregon LNG projects
are intended for export. These factors include:
1. The absence of any market rationale for importing LNG
given the abundance and low price of U.S. gas and the
comparatively high price of global LNG;
2. The high profit margin from exporting low-cost U.S. gas to
the nearby Pacific Rim market and the increased revenues that
would result from the higher gas prices generally;
3. The new FERC-permitted pipeline infrastructure to the
Jordan Cove terminal would create a direct connection from
William's Opal Wyoming gas hub to the Coos Bay LNG terminal
with at least one company (PG&E Strategic Capital) owning gas
capacity on the new Ruby Pipeline (Opal Wyoming to Malin,
Oregon) and owning a 1/3rd interest in the Pacific Connector
(Malin, OR to Coos Bay);
4. Gas producers have a strong incentive to export abundant
Rockies' gas supplies which are driving low Rockies' prices.
Williams, which is Wyoming's largest gas producer as well as a
major pipeline owner, for example, is the co-owner and lead
player in developing the 234-mile Pacific Connector pipeline
that would connect the Jordan Cove terminal to the western
terminus of the new Ruby Pipeline from Wyoming at Malin,
Oregon.\26\ \27\ The 680-mile nearly completed Ruby
Pipeline, in fact, originates at the Opal Hub, which Williams
operates and is considered the gas epicenter of the
Rockies.\28\ Williams is well aware of the need for new export
capacity from the Rockies and decreased its Wyoming production
by 15 percent in 2009 due to low prices.\29\ \30\
\26\ http://www.williams.com/midstream/ms_operations.aspx
\27\ http://www.pacificconnectorgp.com/overview.php
\28\ Ruby Pipeline, Final EIS at p. 1-2.
\29\ http://www.investorvillage.com/
mbthread.asp?mb=2234&tid=8498013&showall=1
\30\ http://www.pacificconnectorgp.com/partners.php; http://
www.williams.com/midstream/ms--operations.aspx
---------------------------------------------------------------------------
While Ruby's owner, El Paso Energy, (which is also large U.S. gas
producer (22nd largest in 2009) will clearly benefit from the large
California gas market, El Paso is no stranger to LNG and actually owns
the Elba Island LNG terminal in Georgia. The terminal is operated by BG
Group, which has already proposed LNG exports from its Lake Charles
terminal and there is every reason to expect that LNG export will soon
be proposed from El Paso's Elba Island, GA terminal.
4. Oregon terminals are following a familiar path
The Oregon terminals appear to be following a similar path of
intentional misrepresentation which has become more obvious as U.S gas
supplies have remained high and prices low. A review of each of the
five LNG terminals now proposing LNG export shows that these facilities
were either constructed or significantly expanded in the last two to
three years with the project backers claiming that they would help
import low cost LNG into the U.S. market. Completion of construction
was soon following by announcement of plans to export.
The bonanza of new shale gas has been well known to gas industry
insiders since well before 2003,\31\ when even USGS described the
Barnett Shale formation in Texas, which was the first mega shale find,
as a ``giant gas accumulation'' and ``one of the most significant
domestic onshore gas plays.''\32\ Just as these shale gas formations
were spiking production and similarly massive gas reserves were being
discovered in the Haynesville shale in east Texas and Louisiana, a
group of companies all heavily involved in gas production (Exxon-Mobil,
Cheniere, Conoco-Phillips) launched plans for LNG ``import'' terminals
on the Gulf Coast in pipeline-close proximity to the Barnett Shale.
Four new terminals in the Gulf were completed between 2008 and 2010, as
were major terminal expansions at three existing LNG terminals on the
East Coast.
---------------------------------------------------------------------------
\31\ Huge natural gas field 'discovered' in Texas, World Net Daily
News; November 30, 2005 http://www.wnd.com/?pageId=33642
\32\ Richard M. Pollastro, U.S. Geological Survey, Denver,
Colorado, Geologic and Production Characteristics Utilized in Assessing
the Barnett Shale Continuous (Unconventional) Gas Accumulation,
Barnett-Paleozoic Total Petroleum System, Fort Worth Basin, Texas;
presented at Barnett Shale Symposium Ellison Miles Geotechnology
Institute Brookhaven College, Farmers Branch, Dallas, Texas 2003. On
file
---------------------------------------------------------------------------
Each project cost on the order of a billion dollars and was built
at a time when the then-existing LNG terminals were not even operating
at half capacity. Once the projects were completed, these same
companies effectively declared their LNG import projects obsolete given
the high price of LNG and low cost of U.S. gas and quickly re-
positioned to obtain export approval. While an LNG terminal needs to
install expensive liquefaction equipment to be converted to LNG export,
the roughly $3 billion costs are minimal given the potential price
differential between U.S. gas and Pacific Rim LNG prices. Although
permit modifications from FERC and U.S. DOE are needed, DOE approved
Cheniere's export application within nine months and FERC is moving
quickly on the application.\33\
---------------------------------------------------------------------------
\33\ Cheniere applied to US DOE in September 2010 and the
application was approved in May 2010.
---------------------------------------------------------------------------
These companies now frame their unique ability to quickly modify
their terminals to switch to lucrative LNG export as something they
stumbled into as a chance to salvage their expensive investments in LNG
import. As Cheniere Energy, which was exclusively a gas producer before
proposing the Sabine Pass and Freeport LNG terminals, explained in
announcing that the Sabine Pass import terminal would switch to LNG
export, ``[t]he 853-acre Sabine Pass site is strategically situated to
provide export services given its large acreage position, proximity to
unconventional gas plays in Louisiana and Texas, and its
interconnections with multiple interstate and intrastate pipeline
systems.''\34\ Cheniere further explained that, ``the Sabine Pass
terminal already has many of the needed facilities for an export
terminal. Cheniere would use its existing infrastructure, including
five storage tanks and two berths at the Sabine Pass terminal, as well
as Cheniere Energy Inc.'s 94-mile Creole Trail Pipeline . . . ''\35\
---------------------------------------------------------------------------
\34\ http://www.firstenercastfinancial.com/forums/
showthread.php?t=10&page=7
\35\ http://www.firstenercastfinancial.com/forums/
showthread.php?t=10&page=7
---------------------------------------------------------------------------
When Dominion Resources, which owns the recently expanded Cove
Point Maryland LNG terminal and is a Marcellus shale gas producer,
announced it was considering LNG export its Chief Executive made nearly
the same comment stating, ``If you think about Cove Point, where it
sits there in the Mid-Atlantic, a couple hundred miles from the
Marcellus region, it has got all the facilities it needs other than the
liquefaction itself.''\36\
---------------------------------------------------------------------------
\36\ http://uk.reuters.com/article/2011/02/01/lng-dominion-export-
idUKN0122810220110201
---------------------------------------------------------------------------
The idea, however, that the world's largest and most sophisticated
gas industry players, such as Conoco-Phillips, Sempra, Dominion and
Exxon-Mobil, all collectively responded to news of massive new U.S.
shale gas discoveries by making catastrophically poor decisions to
invest in costly LNG import projects that can now coincidentally be
used as the springboard for far more lucrative LNG export projects is
strained. While there clearly were assessments supporting the need for
new LNG terminals, there is no question that gas producers were well
aware of the unprecedented U.S. shale reserves when they proposed LNG
import projects.
From a geographical perspective alone, it is worth noting that the
biggest new LNG ``import'' projects in Freeport, TX (Conoco), Golden
Pass, LA(Exxon-Mobil), Sabine Pass, LA(Cheniere Energy),, and Cameron,
TX(Sempra) all constructed in the last two to three years, were all
built at the close proximity to Texas' Barnett Shale which was the
first mega-shale reserves to be ``discovered'' and commercially
produced with Halliburton's fracking technology in the 1990s and early
2000s.
5. Companies acquire shale gas interests while expanding LNG
``import'' terminals
It is also telling that many of the companies building new LNG
``import'' terminals or expanding existing terminals were acquiring
major interests in U.S. shale gas reserves at the same time they were
developing and expanding their nearby LNG terminal infrastructure for
the purported purpose of LNG import.\37\ For example:
---------------------------------------------------------------------------
\37\ Additional research is needed to better detail the timing of
LNG terminal development and shale gas acquisition generally described
below which should be considered preliminary.
---------------------------------------------------------------------------
Lake Charles and Elba Island LNG terminals--BG Group(formerly
British Gas), spent over $900 million expanding the Elba Island and
Lake Charles LNG terminals and constructing new gas pipelines while at
the same time acquiring gas production rights for almost a million
acres in the Marcellus and Haynesville shale formations.\38\ BG Group,
which controls almost 50 percent of the total LNG terminal capacity on
the East Coast, is now seeking permission to export LNG its Lake
Charles terminal.\39\ BG Group recently signed a 20-year $70 billion
deal in March 2010 to export LNG to the China National Offshore Oil
Corp (CNOOC) from Australia and the Chinese are potential purchasers
for the Lake Charles LNG as well.\40\
---------------------------------------------------------------------------
\38\ http://www.reuters.com/article/2010/03/02/lng-elba-expansion-
idUSN0215533320100302
\39\ http://www.ft.com/cms/s/0/d0443c62-7b26-11e0-9b06-
00144feabdc0.html#axzz1SsEVzme7
\40\ http://www.nytimes.com/2010/03/25/business/global/
25energy.html
---------------------------------------------------------------------------
Cove Point Maryland--Statoil (Europe's second largest gas importer)
doubled the storage and output capacity of the Cove Point Maryland LNG
terminal in 2009, shortly after buying a 32 percent interest in 1.8
million acres of the nearby Marcellus shale in 2008.\41\ At the same
time Dominion Resources, which owns the Cove Point terminal and is also
a Marcellus shale gas producer, expanded the pipeline infrastructure to
the terminal.
---------------------------------------------------------------------------
\41\ http://www.thestreet.com/story/10447133/1/chesapeake-statoil-
form-gas-venture.html;http://www.reuters.com/article/2011/02/01/lng-
dominion-export-idUSN0122810220110201
---------------------------------------------------------------------------
Cove Point Statoil's deal was with Chesapeake Energy(2nd largest
U.S. gas producer) who is a partner in the Cheniere LNG export project
and has likely been the most active industry proponent of LNG exports.
Freeport LNG terminal--Conoco-Phillips, the 3rd largest U.S. gas
producer and the 50 percent owner and operator of the Freeport LNG
terminal, received its first LNG shipment at its new billion dollar LNG
import terminal in April 2008, but less than four months later it
sought permission to re-export the LNG it had imported.\42\
---------------------------------------------------------------------------
\42\ http://www.chron.com/disp/story.mpl/headline/biz/5956709.html
---------------------------------------------------------------------------
Golden Pass LNG terminal--Exxon-Mobil, the largest U.S. gas
producer, and co-owner of the newly built Golden Pass LNG terminal
(which it co-owns with Conoco and Qatar Gas) in Texas received its
first LNG shipment in October 2010 with commenters noting that there
was no domestic market for the gas.\43\ As a part of that project Exxon
built a new 69-mile pipeline that connects the facility with Williams'
Transco Pipeline system which is near capacity with a flood of new
shale gas production.\44\ While Exxon-Mobil has thus far denied any
interest in exporting, or interesting even re-exporting LNG\45\, it
globally has significant experience in LNG and is currently building a
$15 billion LNG export terminal in Papua New Guinea.\46\ Exxon-Mobile
has also been aggressively acquiring shale gas producers in the
Haynesville Shale (LA/TX) and Marcellus Shale (NY, PA) including its
2009 $41 billion purchase of XTO Energy\47\ (3rd largest owner of U.S.
gas reserves), Haynesville shale producer Ellora Energy for $695
million in 2010\48\, and $1.6 billion for two Marcellus Shale producers
in 2011.\49\ These major acquisitions have made Exxon-Mobil by far the
largest holder of U.S. gas reserves.\50\ Its current silence on LNG
exports may reflect an effort to minimize attention while the first LNG
export terminals from lower visibility companies are being approved.
---------------------------------------------------------------------------
\43\ http://panews.com/local/x847473509/Golden-Pass-LNG-receives-
first-shipment
\44\ http://thetimes-tribune.com/news/gas-drilling/marcellus-gas-
has-transco-pipeline-almost-at-capacity-1.1118270#axzz1RLZJJwgV
\45\ http://www.advfn.com/news__Exxon-CEO-No-Thought-Of-Exporting-
LNG-From-US_40756658.html
\46\ http://www.bloomberg.com/news/2011-06-01/exxon-mobil-targets-
first-papua-new-guinea-lng-cargoes-in-2014.html
\47\ http://www.marketwatch.com/story/exxon-mobil-to-buy-xto-
energy-in-41-billion-deal-2009-12-14
\48\ http://www.denverpost.com/business/ci--16462625
\49\ http://www.haynesvilleplay.com/2011/06/exxon-still-buying-
gas.html
\50\ U.S. EIA, 2009.
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Cameron LNG terminal and Costa Azul (Baja)--Sempra, which is the
largest gas company in the U.S. in terms of coverage area and
population, served has said it is considering LNG export from its
Cameron LNG terminal in Louisiana and potentially its Costa Azul
terminal in Baja.\51\ The Cameron terminal was opened in June 2009\52\
as an LNG import terminal but within just a year and a half after
opening it had received full FERC permission to export LNG.\53\
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\51\ http://www.reuters.com/article/2011/06/07/lng-export-sempra-
idUSN079630320110607
\52\ http://www.lngpedia.com/2009/06/24/sempra-cameron-lng-
terminal-louisiana-gets-its-first-lng-shipment/
\53\ http://www.lngworldnews.com/usa-ferc-approves-sempra-to-re-
export-lng-from-cameron-terminal/
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Kitimat, B.C.--When the Kitimat import terminal was approved in
2006 it's investors claimed, ``The Kitimat LNG terminal is designed to
meet a supply shortage of natural gas in the North American
market.''\54\ But by November of 2008 Kitimat sought state and federal
permission to change the plant from an import to export facility citing
the abundant gas supplies in the ``worldclass unconventional gas
developments in northeastern BC (Horn River and Monterey fields).''\55\
Less than two months later, Kitimat had won a permit amendment that
authorized the export terminal and announced a deal to sell LNG to
Mitsubishi.\56\ Kitimat is now co-owned by major shale gas producers
Encana (7th largest gas producer), EOG Resources (9th largest U.S. gas
producer) and Apache.
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\54\ a100.gov.bc.ca/.../1137189645610--
5f08234ed4754316b54f925e36601e44.pdf
\55\ a100.gov.bc.ca/.../1226700475492--
8e248a8d30d89bba23feaf7f461ca741d9738f8be453.pdf
\56\ http://www.nrcan.gc.ca/eneene/sources/natnat/kitimat-eng.php
---------------------------------------------------------------------------
6. Laying the foundation to export LNG from shale gas
The gas industry was well aware of the massive potential for new
shale gas before 2003.\57\ Those interests, in fact, were very visible
in the 2005 Energy Policy Act, which was crafted with strong influence
from U.S. gas producers working under the Cheney Energy Task Force. The
2005 Act gave major tax breaks for shale gas development and the so-
called ``Halliburton Loophole,'' exempted shale gas extraction from the
Safe Drinking Water Act.\58\ Halliburton is considered the pioneer of
the ``fracking'' technologies needed for shale gas development and by
the mid-1990s was highly active in Texas' Barnett Shale.
---------------------------------------------------------------------------
\57\ Richard M. Pollastro, U.S. Geological Survey, Denver,
Colorado, Geologic and Production Characteristics Utilized in Assessing
the Barnett Shale Continuous (Unconventional) Gas Accumulation,
Barnett-Paleozoic Total Petroleum System, Fort Worth Basin, Texas;
presented at Barnett Shale Symposium Ellison Miles Geotechnology
Institute Brookhaven College, Farmers Branch, Dallas, Texas 2003
\58\ http://www.nytimes.com/gwire/2011/05/20/20greenwire-frack-
studys-safety-findings-exaggerated-bush-65374.html
---------------------------------------------------------------------------
But the same people promoting special treatment for shale gas were
intimately familiar with LNG export. Halliburton subsidiary KBR, for
example, has built 40 percent of the world's LNG export terminals\59\
and recently won the design contract for the Kitimat LNG export
terminal (originally permitted for LNG import) in British Columbia.\60\
---------------------------------------------------------------------------
\59\ http://www.kbr.com/Newsroom/Articles/Features/Did-You-Know/
Leading-With-Experience-KBRs-LNG-Firsts/
\60\ http://www.lngworldnews.com/canada-apache-eog-award-kitimat-
lng-feed-contract-to-kbr/
---------------------------------------------------------------------------
There are even signs that those crafting the 2005 Energy Act
actively planned to facilitate LNG export. For example, the Act
included a condition that for the first time allowed LNG terminal
operators obtaining permits before 2015 to use their terminal (import
or export) exclusively for natural gas owned by the terminal's
operators and with the assurance that FERC was prohibited from, ``any
regulation of the rates, charges, terms, or conditions of service of
the LNG terminal.''\61\ This opened the door for gas producers to own
an LNG terminal to export the gas they owned (or independently
contracted for) free from the type of ``open access'' requirements that
FERC had required for LNG terminals (and still does require for gas
pipelines) and operate the terminal for maximum profitability. While
this would benefit any LNG terminal operator, this special treatment
provides a unique incentive for vertically integrated gas producers who
are interested in export.
---------------------------------------------------------------------------
\61\ 15 U.S.C. Sec. 717(b)(e)(3)(b)(ii).
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7. Potential criminal and civil violations for
misrepresenting export terminals as import terminals
If LNG terminal developers, pipeline companies and gas producers
are misrepresenting efforts to develop LNG export infrastructure by
falsely claiming to investors, federal and state regulators and the
public that they are seeking to develop LNG ``import'' projects they
may be violating a host of state and federal laws. Cooperation with
U.S. DOJ would be needed for the investigation of any federal
violations and coordination with other states, such as Maryland and New
York, could make sense given the particular impacts on these states
from nearby export terminals. Because LNG export would likely trigger a
major increase in hydraulic fracturing of shale gas in New York City's
drinking watershed, where controversy over fracing is already high, New
York may be a particularly interested in investigating LNG export-
related fraud.
While a more detailed review of potential legal violations would be
useful, at least several areas for further consideration and review
include:
A. False statements to state regulators
The planned Oregon LNG terminal applicants have applied for a range
of state permits, such as wetland fill permits and water right permits.
In doing so the applicants have consistently claimed that the ``purpose
and need'' for their projects was LNG import and that the facilities
would in fact import LNG. While not sworn statements, Oregon law
prohibits false unsworn statements related to obtaining a ``benefit''
from the state. ORS 162.085(1) states: ``(1) A person commits the crime
of unsworn falsification if the person knowingly makes any false
written statement to a public servant in connection with an application
for any benefit.''
The term ``benefit'' is broadly defined to mean ``gain or advantage
to the beneficiary or to a third person pursuant to the desire or
consent of the beneficiary'' and would definitely appear to include a
water right, wetland fill permit or state land lease. ORS 162.055(1).
Oregon's Supreme Court has interpreted the term ``benefit'' very
broadly finding that even annual non-profit charity financial reporting
submitted to the Attorney General's office was in effect an application
for a ``benefit'' since the information in the form could lead to
withdrawl of an entity's charitable status. Oregon Federation of
Teachers v. Oregon Taxpayers United, 345 Ore. 1; 189 P.3d 9(2008). The
Court further held that ORS 162.085(1) extended not only to a permit
application itself, but any false statements made ``in connection'' to
that application. Id. at 15. Violation of ORS 162.085(1) is a Class B
misdemeanor.
Investigation of such a crime would obviously open the door to the
subpoena of internal documents related to potential LNG export under
ORS 180.073.
B. Oregon's Racketeer Influenced and Corrupt
Organization Act
Violating ORS 162.085(1)'s restriction against unsworn
falsification is a predicate crime under Oregon's Racketeer Influenced
and Corrupt Organization Act (ORICO). ORS 166.715(6)(a)(B). This has
been specifically affirmed by the Oregon Supreme Court. Oregon
Federation of Teachers v. Oregon Taxpayers United, 345 Ore. 1, 12; 189
P.3d 9(2008). While additional research regarding a potential ORICO
action is needed, ORICO's powerful remedial provisions could even allow
a court to order a defendant to abandon a permit obtained under
fraudulent pretenses. ORS 166.725(1). Furthermore, ORICO's attorney fee
recovery provisions under ORS 166.725(14) have obvious practical
benefits.
C. False filings with federal regulators
Federal law makes it a crime for any person to ``knowingly and
willingly'' make ``any materially false, fictitious or fraudulent
statement or misrepresentation'' or ``falsifies, conceals, or covers up
by any trick, scheme, or device a material fact'' or ``makes or uses
any false writing or document knowing the same to contain any
materially false, fictitious, or fraudulent statement or entry'' to any
Agency or department of the United States regarding a matter within its
jurisdiction. 18 U.S.C. Sec. 1001(a). Violations are punishable by up
to five years in prison. Id. The companies seeking LNG terminals in
Oregon have filed a broad spectrum of documents with federal agencies,
such Federal Energy Regulatory Commission (FERC) and the U.S. Coast
Guard, representing that their LNG terminals are planned and intended
for LNG import. The LNG terminal investors now seeking LNG export from
the Gulf and East Coast filed similar documents while seeking permits
for construction and expansion approvals. To the extent that projects
ultimately intended to be LNG export terminals were fraudulently
misrepresented to federal regulators as ``import'' terminals violations
of 18 U.S.C. Sec. 1001(a) may have occurred. Unlike Oregon law, such
false statements are not a federal RICO predicate act.
D. Federal and state securities fraud.
Numerous companies associated with the five LNG terminals now
proposing LNG export reported to investors and the Securities and
Exchange Commission (SEC) for years that they were pursuing LNG import
projects. Leucadia National, which has proposed the Oregon LNG
terminal, and Veresen (formerly Fort Chicago), which is co-owner of the
Jordan Cove project, continues to assert that such projects are for LNG
import. Verseen, however, in May 2011 first acknowledged in a letter to
shareholders it was considering LNG export.\62\ To the extent the
actual purpose of planned LNG terminals was to facility LNG export,
contrary statements to investors and the SEC may have violated the
federal Securities and Exchange Act and related statutes. 15 USC Sec.
77(q); 77(w). Securities and Exchange Act violations carry criminal
penalties of up to five years and $10,000. 15 USC Sec. 77(x).
Potential violations of Oregon's securities statutes should also be
considered if applicable. ORS Chapter 59.
---------------------------------------------------------------------------
\62\ Veresen May 12, 2011 Media release. http://
veresen.mediaroom.com/index.php?s=5043&item=38956
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E. Violations of the Natural Gas Act's prohibition
against market manipulation
Misrepresenting plans for LNG export projects as import projects
may violate the Natural Gas Act's prohibition against market
manipulation given the potential for export projects to significantly
increase domestic natural gas prices. 15 USC Sec. 717(c)1; 18 C.F.R.
Sec. (1)(c)(1). This anti-manipulation provision was first passed in
the 2005 Energy Policy Act and carries a maximum criminal penalty of
five years and $1,000,000 and additional penalties of up to $50,000 a
day. 15 USC Sec. 717(t)(1), (2). Civil penalties can be up to $ 1
million a day. 15 USC Sec. 717t-1. To prevail it would presumably be
necessary to show a specific intent to use export as a tool to increase
natural gas prices.
conclusion
The potential impacts of LNG export are very real and threaten to
squander a resource that is both a unique U.S. competitive advantage
and offers a chance to reduce U.S. dependency on foreign oil and
greenhouse gas emissions. There are opportunities, however, for using
the unprecedented price increases and potential supply shortages that
would result from export to motivate energy consumers to fight a
concerted effort by gas producers to open large scale U.S. gas exports.
This effort would be greatly strengthened by the exposure of fraudulent
efforts by some of the largest U.S. gas players to build the
infrastructure for LNG export terminals under the guise that they would
be used for ``import.''
______
Statement of Lee Fuller, Vice President of Government Relations,
Independent Petroleum Association of America
This testimony is submitted to the record for the Senate Energy and
Natural Resources Committee hearing examining the role of natural gas
in United States' energy policy on behalf of the Independent Petroleum
Association of America (IPAA).
IPAA represents thousands of independent oil and natural gas
explorers and producers, as well as the service and supply industries
that support their efforts, which will be significantly affected by
federal action. Independent producers develop 95 percent of American
oil and natural gas wells, produce 54 percent of American oil and
produce 85 percent of American natural gas. The average independent has
been in business for 26 years and employs 12 full-time and three part-
time employees. In total, America's onshore independent oil and natural
gas producers supported 2.1 million direct jobs in the United States in
2010.
American natural gas presents an opportunity for the United States
to utilize a clean burning, secure and affordable fuel. Projections
suggest that identified resources could provide enough natural gas to
meet America's needs based on current demand for as much as 100 years.
This abundance allows the opportunity for the American economy to
utilize natural gas in new ways--an expansion of US chemical
production, greater use of natural gas for electricity generation,
natural gas vehicle development and exports of liquefied natural gas.
The federal government can enhance or impede the development of
American natural gas. Two areas that can have substantial impact are
the regulatory framework for new production and tax policies that
affect the capital essential to meeting future American natural gas
demand. This testimony will address these issues.
Regulation of Hydraulic Fracturing
The notion that oil and natural gas production generally, and
hydraulic fracturing in particular, are unregulated flies in the face
of reality. The allegation that oil and natural gas production is
unregulated ignores the long, successful history of state-based
regulation of natural gas production. Drilling permitting is grounded
in state regulatory systems because it involves state land use
authority; the federal government has never--nor should it ever--
determine the use of lands properly governed by state jurisdictions.
Hydraulic fracturing has been used as a well stimulation technology
since the late 1940s for oil, natural gas, geothermal and water wells
that is regulated as a part of the drilling permits issued by state
regulators. Over the past decade, the combination of horizontal
drilling and hydraulic fracturing has allowed industry to produce oil
and natural gas from shale and tight sands that, previously, was
uneconomic to produce.
Hydraulic fracturing refers to one, temporal step in the oil and
natural gas production process. The term hydraulic fracturing has been
misconstrued to mean anything related to oil and natural gas
development. To be clear, when industry references ``hydraulic
fracturing,'' the industry is referencing the step in the oil and
natural gas development process that uses water, sand and additives to
break apart the hydrocarbon bearing formation (i.e. shale) to create
permeability and release oil and natural gas.
Regulation of oil and natural gas production depends, largely, on
where the oil and natural gas production is taking place. The federal
government has permitting and regulatory authority over production in
the Outer Continental Shelf (OCS) and on federally managed lands. These
regulations are frequently updated. The Bureau of Land Management, for
example, is currently in the process of promulgating new regulations
entitled, ``Oil and Gas; Well Stimulation, Including Hydraulic
Fracturing, on Federal and Indian Lands.''
Natural gas and oil production on state and private lands are,
generally, regulated by state regulatory authorities. The proximity
state oil and gas regulators to the operations occurring in their
respective states, combined with the regulators' understanding of the
unique circumstances in their states, creates the most efficient system
create for environmentally responsible oil and natural gas development.
Additionally, state regulators generally have the technical expertise,
resources and capabilities to manage the permitting process.
State oil and gas regulators, for example, have successfully
regulated the process of hydraulic fracturing for decades. Fracturing
regulations were developed and have been implemented by state oil and
natural gas regulatory agencies through well construction and
completion requirements. These regulations have effectively managed the
limited environmental risks of the fracturing process. Over the 60 plus
years since the earliest use of hydraulic fracturing, there have been
no incidents related to the fracturing process that suggests the
existence of a systemic environmental management problem.
Responsible, common-sense regulations on development are a
foundation of the oil and natural gas industry's operations--and
rightly so. Protecting the environment and developing our resources
must go hand-in-hand. Today, the oil and natural gas industry is
regulated by both state and federal environmental agencies. However,
uniform federal standards that usurp longstanding, state regulatory
authority are not the answer. In fact, most federal environmental laws
create a broad, overarching federal framework that delegates to the
states the responsibility of creating the specific regulations--
regulations that reflect the realities that circumstances differ in
each state are require different approaches.
These federal environmental laws apply regardless of whether
natural gas and oil production are occurring on federal, state or
private lands. Moreover, because most federal environmental laws are
drafted using a manufacturing facility as a model for the regulatory
framework, these laws have provisions that reflect industries that do
not fit that model including forestry, agriculture, mining and oil and
natural gas production. Uniformity is simply a flawed concept for
regulation. Examples of environmental laws adopting a broad framework
but delegating implementation to state regulatory agencies, including
the Clean Air Act, Clean Water Act, Safe Drinking Water Act and others.
IPAA has enclosed legal analysis of applicable federal environmental
laws to the upstream oil and natural gas industry.
Despite the numerous federal and state regulations applicable to
the oil and natural gas production process, fossil fuel opponents
frequently posit the need to create federal, baseline regulations for
hydraulic fracturing without any evidence that the current regulatory
approach is inadequate.
To the contrary, federal officials, state regulators, and
independent experts have publicly stated that shale development--
including hydraulic fracturing--does not pose ``substantial'' risks.
Interior Secretary Ken Salazar: Responding to what he deemed
``hysteria'' about hydraulic fracturing, Salazar said the
process ``can be done safely and has been done safely hundreds
of thousands of times.'' (Feb. 2012)
EPA Administrator Lisa Jackson: ``In no case have we made a
definitive determination that the [fracturing] process has
caused chemicals to enter groundwater.'' (April 2012) Jackson
also has said: ``I'm not aware of any proven case where
[hydraulic fracturing] itself has affected water.'' (May 2011)
U.S. EPA: ``EPA did not find confirmed evidence that
drinking water wells have been contaminated by hydraulic
fracturing fluid injection . . . '' (2004)
Former EPA Administrator Carol Browner: ``There is no
evidence that the hydraulic fracturing at issue has resulted in
any contamination or endangerment of underground sources of
drinking water.'' (May 1995)
U.S. Dept. of Energy and Ground Water Protection Council:
``[B]ased on over sixty years of practical application and a
lack of evidence to the contrary, there is nothing to indicate
that when coupled with appropriate well construction; the
practice of hydraulic fracturing in deep formations endangers
ground water. There is also a lack of demonstrated evidence
that hydraulic fracturing conducted in many shallower
formations presents a substantial risk of endangerment to
ground water.'' (May 2009)
CardnoEntrix (Inglewood Oil Field Study): ``Before-and-after
monitoring of groundwater quality in monitor wells did not show
impacts from high-volume hydraulic fracturing and high-rate
gravel packing.'' (October 2012)
Center for Rural Pennsylvania: ``[S]tatistical analyses of
post-drilling versus pre-drilling water chemistry did not
suggest major influences from gas well drilling or
hydrofracturing (fracking) on nearby water wells . . . '' (Oct.
2011)
John Hanger, Former Pa. DEP Secretary: ``We've never had one
case of fracking fluid going down the gas well and coming back
up and contaminating someone's water well.'' (2012)
Dr. Stephen Holditch, Department of Petroleum Engineering,
Texas A&M University; member of Natural Gas Subcommittee of the
Secretary of Energy Advisory Board: ``I have been working in
hydraulic fracturing for 40+ years and there is absolutely no
evidence hydraulic fractures can grow from miles below the
surface to the fresh water aquifers.'' (October 2011)
Dr. Mark Zoback, Professor of Geophysics, Stanford
University: ``Fracturing fluids have not contaminated any water
supply and with that much distance to an aquifer, it is very
unlikely they could.'' (August 2011)
Despite this consistent experience showing effective regulation,
the Obama Administration has sought to encroach upon the progress of
even state and private land development through instructions to
virtually every agency to find opportunities to federalize the
regulation of oil and natural gas production, particularly hydraulic
fracturing--the very technology that has unlocked the oil and natural
gas reserves from shale. In the spring of 2012, there were no less than
11 federal agencies trying to find ways to regulation hydraulic
fracturing. Since there has been no evidence of hydraulic fracturing
contaminating groundwater or suggestions that systemic regulatory
failure exists in the current regulatory framework, IPAA would
encourage Members of the Committee to oppose any new federal
regulations on the oil and natural gas industry to allow America's oil
and natural gas producers to create jobs and the energy to power the
American economy.
Tax Policy
Federal tax policy has historically played a substantial role in
developing America's natural gas and petroleum. Early on, after the
creation of the federal income tax, the treatment of costs associated
with the exploration and development of this critical national resource
helped attract capital and retain it in this inherently capital
intensive and risky business. Allowing the expensing of intangible
drilling and development costs and percentage depletion rates of 27.5
percent are examples of such policy decisions that resulted in the
United States extensive development of its petroleum.
But, the converse is equally true. By 1969, the depletion rate was
reduced and later eliminated for all producers except independents.
However, even for independents, the rate was dropped to 15 percent and
allowed for only the first 1000 barrels per day of petroleum produced.
A higher rate is allowed for marginal wells which increases as the
petroleum price drops, but even this is constrained--in the underlying
code--by net income limitations and net taxable income limits. In the
Windfall Profits Tax, federal tax policy extracted some $44 billion
from the industry that could have otherwise been invested in more
production. Then, in 1986 as the industry was trying to recover from
the last long petroleum price drop before the 1998-99 crisis, federal
tax policy was changed to create the Alternative Minimum Tax that
sucked millions more dollars from the exploration and production of
petroleum and natural gas. These changes have discouraged capital from
flowing toward this industry.
Independent producers historically reinvest over 100 percent of
American oil and natural gas cash flow back into new American
production.
The Obama Administration's budget request--and recurring advocacy
statements on an almost daily basis--would strip essential capital from
new American natural gas and oil investment by radically raising taxes
on American production. American natural gas and oil production would
be reduced. It runs counter to the Administration's clean energy and
energy security objectives. The following is a review of some of the
Obama Administration proposed changes to natural gas and oil taxation.
Intangible Drilling and Development Costs (IDC)--Expensing IDC has
been part of the tax code since 1913. IDC generally include any cost
incurred that has no salvage value and is necessary for the drilling of
wells or the preparation of wells for the production of natural gas or
oil. Only independent producers can fully expense IDC on American
production. Loss of IDC for independent producers will have significant
effects on their capital development budgets. A Raymond James analysis
in 2009 reported that the loss of IDC would result in capital drilling
budgets being reduced by 25 to 30 percent. This compares with
information provided to IPAA by its members indicating that drilling
budgets would be cut by 25 to 40 percent. Regardless of the exactness
of the assessments, clearly, the consequences would be significant.
And, the consequences would soon be evident. Roughly half of America's
current natural gas production is provided by wells developed during
the past four years.
Percentage Depletion--All natural resources minerals are eligible
for a percentage depletion income tax deduction. Percentage depletion
for natural gas and oil has been in the tax code since 1926 after
Congress determined that relying solely on cost depletion was leading
to the loss of important American mineral resources. Unlike percentage
depletion for all other resources, natural gas and oil percentage
depletion is highly limited. It is available only for American
production, only available to independent producers and for royalty
owners, only available for the first 1000 barrels per day (6000 mcfd of
natural gas) of production, limited to the net income of a property and
limited to 65 percent of the producer's net income. Percentage
depletion provides capital primarily for smaller independents and is
particularly important for marginal well operators. These wells--that
account for 20 percent of American oil and 12-13 percent of American
natural gas--are the most vulnerable economically. Input to IPAA from
its operators who take percentage depletion indicates that the combined
effect of the Obama Administration proposals on IDC and percentage
depletion would reduce drilling budgets in half. At this lower rate,
new production will not offset the natural decline in production from
existing wells. For example, one producer now drills ten wells per
year; without IDC and percentage depletion, this producer could only
drill five wells per year. A five well program will not replace
declining production in existing wells and the small business company
will have to shutdown. Congress' choice is straightforward: reduce
American oil production by 20 percent and its natural gas production by
12 percent or retain the current historic tax policies that have
encouraged American production.
Passive Loss Exception for Working Interests in Oil and Gas
Properties--The Tax Reform Act of 1986 divided investment income/
expense into two baskets--active and passive. The Tax Reform Act
exempted working interests in natural gas and oil from being part of
the passive income basket and, if a loss resulted (from expenditures
for drilling wells), it was deemed to be an active loss that could be
used to offset active income as long as the investor's liabilities were
not limited. Natural gas and oil development require large sums of
capital and producers frequently join together to diversify risk.
Additionally, natural gas and oil operators have sought individual
investors to contribute capital and share the risk of drilling wells.
Most American wells today are drilled by small and independent
companies, many of which depend on individual investors. There is no
sound reason for Congress to enact tax rules that would discourage
individual investors from continuing to participate in this system.
Moreover, Congress applied the passive loss rules only to individuals
and not to corporations. The repeal of the working interest rule,
therefore, would senselessly drive natural gas and oil investments away
from individuals and toward corporations. There is no apparent reason
why Congress would or should favor corporate ownership over individual
ownership of working interests. Furthermore, since AMT restrictions
apply to IDC of individual working interest investors, the application
of the passive loss rules to those investors is unnecessary and
excessive. In sum, to qualify for the exception, the taxpayer must have
liability exposure and definitely be at risk for any losses. If income/
loss, arising from natural gas and oil working interests, is treated as
passive income/loss, the primary income tax incentive for taxpayers to
risk an investment in natural gas and oil development would be
significantly diminished. In today's banking climate, smaller producers
find banks uninterested or incapable of providing capital; taking
private investors away will further exacerbate the challenge of raising
capital to sustain American marginal well production.
Geological and Geophysical (G&G) Amortization--G&G costs are
associated with developing new American natural gas and oil resources.
For decades, they were expensed until a tax court case concluded that
they should be amortized over the life of the well. After years of
consideration and constrained by budget impacts, in 2005, Congress set
the amortization period at two years. It also simplified G&G
amortization by applying the two year amortization to failed as well as
successful wells; previously, failed wells could be expensed. Later,
Congress extended the amortization period to five years for large major
integrated oil companies and then extended the period to seven years.
Early recovery of G&G costs allows for more investment in finding new
resources. Congress recognized that America benefitted if capital used
to explore for new natural gas and oil could be quickly reinvested in
more exploration or production of American resources, it was in the
national interest. Nothing has changed to alter that conclusion. If
anything, current capital and credit limitations enhance the rationale
to get these funds back into new investment.
Marginal Well Tax Credit--This countercyclical tax credit was
recommended by the National Petroleum Council in 1994 to create a
safety net for marginal wells during periods of low prices. These wells
as stated above account for 20 percent of American oil and 12 percent
of American natural gas. They are the most vulnerable to shutting down
forever when prices fall to low levels. Congress enacted in this
countercyclical tax credit in 2004 after ten years of consideration. It
concluded that the nation benefitted if these marginal operations were
supported during times of low prices, that the production from these
wells were--in effect--a national resource reserve that would be lost
forever if the wells had to be shutdown and plugged during difficult
economic times. No different conclusion is now warranted. A year ago,
as America faced high energy prices, the clear risk of foreign energy
dependency was all too evident; America's marginal wells are a first
defense against more foreign imports. Fortunately, to date, the
marginal well tax credit has not been needed, but it remains a key
element of support for American production--and American energy
security.
Enhanced Oil Recovery (EOR) Tax Credit--The EOR credit is designed
to encourage oil production using costly technologies that are required
after a well passes through its initial phase of production.
Conventional oil well production declines regularly after it begins
production. However, millions of barrels of oil remain in formations
when the initial production phase is over. The 2001 National Energy
Report indicated that ``anywhere from 30 to 70 percent of oil, and 10
to 20 percent of natural gas, is not recovered in field development. It
is estimated that enhanced oil recovery projects, including development
of new recovery techniques, could add about 60 billion barrels of oil
nationwide through increased use of existing fields.'' For example, one
of the technologies is the use of carbon dioxide as an injectant. In
2006, the Department of Energy studied the potential for using carbon
dioxide enhanced oil recovery (CO2-EOR) and concluded that:
``Ten basin-oriented assessments- four new, three updated and three
previously released- estimate that 89 billion barrels of additional oil
from currently `stranded' oil resources in ten U.S. regions could be
technically recoverable by applying state-of-the-art CO2-EOR
technologies.'' Given the increased interest in carbon capture and
sequestration, CO2-EOR offers the potential to sequester the
carbon dioxide while increasing American oil production. Currently, the
oil price threshold for the EOR tax credit has been exceeded and the
oil value is considered adequate to justify the EOR efforts. However,
at lower prices EOR becomes uneconomic and these costly wells would be
shutdown. The EOR tax credit was enacted in 1990 and provides the
potential to maintain important US oil production by supporting the
development of these wells in low price periods.
The Administration justifies its proposals based on two flawed
rationales. First, the provision `` . . . like other oil and gas
preferences the Administration proposes to repeal, distorts markets by
encouraging more investment in the oil and gas industry than would
occur under a neutral system.'' Second, to the extent that the
provision `` . . . encourages overproduction of oil, it is detrimental
to long-term energy security and is also inconsistent with the
Administration's policy of reducing carbon emissions and encouraging
the use of renewable energy sources through a cap-and-trade program.''
The Administration's second rationale is similarly irrational.
Production of American oil and natural gas serves the nation's goal of
improving its energy security. Production of American oil and natural
gas has been regulated to assure that wells are limited to volumes that
conserve the long term production of its reservoir. These limitations
have been entrenched since the mid-1930s. Current production reflects
the need for American production to be maximized and nothing suggests
that it should not be. Similarly, the Administration's climate goals of
reducing carbon emissions and encouraging the use of renewable energy
sources are enhanced by American natural gas and oil production.
Natural gas is a clean, abundant, affordable and American resource that
must be a part of any climate initiative. Oil will continue to be a key
component of America's energy supply for the foreseeable future and any
policies should rely first on American oil rather than foreign sources.
Conclusion
As the Committee considers policies related to America's natural
gas resources, it must recognize that federal actions can dramatically
affect the future of the nation's energy security and the nation's
ability to meet the potential for its economic growth. IPAA urges the
Committee to support those actions that enhance that future and reject
the ill-advised calls for adverse restrictions to capital and
unnecessary federal regulation of production.
ENCLOSURES--TOXIC RELEASE INVENTORY
The federal Emergency Planning and Community Right-to-Know Act
(EPCRA)\1\ was enacted by Congress as Title III to the Superfund
Amendments and Reauthorization Act of 1986. Adopted in response to
several highly-visible chemical incidents, EPCRA primarily addresses
two key issues: (1) support for emergency planning to respond to
chemical accidents, and (2) ``provid[ing] the public with important
information on hazardous chemicals in their communities.''\2\ In order
to achieve its first goal, EPCRA sets up a broad, comprehensive
framework for emergency planning at the state and local levels. For
example, EPCRA requires that owners or operators of facilities at which
hazardous chemicals are present to provide information contained in the
Material Safety Data Sheets (MSDSs) for these chemicals to various
state and local authorities. These MSDSs provide a variety of
information concerning chemical products, including information on
product composition, the physical and chemical properties of the
product, potential health hazards and toxicity information, and first
aid information and other steps to take in the event of a spill of the
product. Addressing its second goal, EPCRA specifically focuses on
major chemical and other industrial facilities--those categorized as
falling within Standard Industrial Classification (SIC) Codes 20 to 39
(covering only manufacturing operations such as chemical manufacturing,
automobile manufacturing, etc.)--and requires these facilities to
report annually to the U.S. Environmental Protection Agency (EPA)
regarding various releases of specified hazardous chemicals, a form of
reporting that is commonly referred to as ``Toxic Release Inventory''
or ``TRI'' reporting.
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\1\ 42 U.S.C. Sec. Sec. 11001-11050.
\2\ H. R. Rep. No. 99-962 at 281 (1986), reprinted in 1986
U.S.C.C.A.N. 3276, 3374.
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EPCRA was specifically enacted in response to the tragic incident
in Bhopal, India and to domestic chemical release incidents such as one
that had occurred in Institute, West Virginia. These incidents resulted
from the atmospheric release of chemicals from large chemical
manufacturing plants into the surrounding community, raising concerns
about the risks posed by these releases from large industrial
facilities.\3\ Based on these incidents, in enacting the TRI provisions
in Section 313 of EPCRA\4\ Congress specifically focused on the types
of facilities that created these risks--large chemical production
plants and other types of concentrated industrial operations using
significant volumes of hazardous chemicals, particularly where the
facilities are located in urban environments or other population
centers. Given this approach, Congress limited the EPCRA Section 313
reporting requirements only to those facilities that have the
equivalent of at least 10 full-time employees, are classified as being
in an industry that has an SIC Code of 20 to 39 (i.e., most
manufacturing facilities), and have manufactured, imported or processed
more than 25,000 pounds of any covered toxic chemical or ``otherwise
used'' more than 10,000 pounds of any such chemical.
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\3\ See, e.g., 132 Cong. Rec. H9595 (Oct. 8, 1986) (statement of
Rep. Edgar) (``my concerns rest with the families that live in the
shadow of these chemical and manufacturing plants'').
\4\ 42 U.S.C. Sec. 11023.
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congress did not intend to regulate oil and natural gas exploration and
production under the tri program
Congress made a conscious decision in enacting the TRI provisions
of EPCRA in 1986 to focus on the types of large manufacturing
facilities that were believed to be creating risks to individuals who
live in the neighborhoods in the vicinity of such facilities. In
adopting this approach, Congress chose not to impose TRI reporting
requirements on a wide range of other types of commercial and
industrial operations, including but certainly not limited to
facilities involved in the exploration and production of oil and
natural gas. For example, residential and commercial construction,
transportation services, and agricultural operations as well as other
types of decentralized operations were also specifically excluded from
the scope of the TRI reporting requirements as a result of the
congressional deliberations.
Oil and natural gas exploration and production operations in
particular differ in key respects from the types of manufacturing
operations on which Congress chose to impose TRI reporting obligations.
The industrial operations covered by SIC Codes 20-39 which were made
subject to TRI reporting--including not only chemical manufacturers
themselves but also manufacturing operations that use chemicals, such
as motor vehicle, ship, railroad car and aircraft manufacturers,
manufacturers of electronics and other types of consumer products and
industrial equipment, manufacturers of materials such as steel,
plastics and cement and even manufacturers of clothing--typically
involve manufacturing processes in large, centralized facilities. These
facilities often use or produce significant quantities of chemicals on
a consistent, long-term basis and consequently store substantial
quantities of chemicals as a routine matter. At the same time, these
manufacturing facilities are often located in urbanized environments
with many residences surrounding or in close proximity to the
manufacturing plant. It was these specific types of circumstances, for
example, that resulted in thousands of nearby residents being exposed
to the chemicals accidentally released from the chemical manufacturing
facility in Bhopal.
In contrast to these concentrated manufacturing operations, oil and
natural gas exploration and production facilities are generally widely
scattered. Well pads are spread out through many areas of the country,
with hundreds or thousands of feet separating individual well pads even
in those areas with substantial exploration and production activity. In
addition, these facilities are generally found in rural environments,
with few if any individuals residing in the vicinity of a well pad
itself. In fact, many well pads are located in isolated areas far from
any residential areas. At the same time, the operations at an
individual well pad typically use very limited amounts of chemicals and
many uses of chemicals--such as for hydraulic fracturing and other
stimulation operations--are indeed very short-term. As a result
operations at individual well pads do not at all create the types of
significant risks associated with the use of chemicals that are
specifically posed by large manufacturing operations. Consequently,
there is no indication that Congress ever intended that highly
decentralized operations such as oil and natural gas exploration and
production facilities were to be subject to TRI reporting requirements.
Moreover, when it first enacted EPCRA Congress gave EPA the
authority to revisit the scope of the TRI reporting when necessary and
to add to the categories of facilities that must file TRI reports if
the Agency deemed it appropriate. Nevertheless, even when EPA
subsequently decided to expand the scope of the types of facilities
that must comply with TRI reporting obligations, the Agency again
decided not to include oil and natural gas exploration and production
facilities within the scope of this program. In exercising its
authority, EPA added categories of facilities only when it found that
these plants engaged in types of activities which are similar to or
related to the activities conducted at the facilities within the
manufacturing sector.
Consistent with this congressionally-directed approach, EPA has
only added through the years such categories as petroleum bulk
terminals, wholesaling of chemicals and related products, metal mining,
facilities engaged in the processing (but not the extraction) of coal,
solvent recovery services and hazardous waste treatment facilities to
the industry sectors required to submit TRI reports;\5\ however, EPA
has specifically rejected adding oil and natural gas exploration and
production facilities to the list of industry sectors required to
comply with TRI reporting requirements. In justifying this action, EPA
stated that ``[t]his industry group is unique in that it may have
related activities located over significantly large geographic
areas.''\6\ EPA even noted that for individual well sites, operations
probably would not have exceeded the thresholds established in the Act
with respect to the minimum number of employees a particular facility
must have and the amounts of chemicals it must use in order to be
subject to the TRI requirements in the first place. Thus, EPA found no
compelling need to require oil and natural gas exploration and
production facilities to submit TRI reports, and in fact identified
significant concerns that might have arisen if it had decided
otherwise.
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\5\ See 62 Fed. Reg. 23834 (May 1, 1997).
\6\ 61 Fed. Reg. 33588, 33592 (June 27, 1996).
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tri reporting would be burdensome for oil and natural gas exploration
and production facilities and would not yield significant benefits
If oil and natural gas exploration and production facilities were
to be subject to TRI reporting, such requirements would be
unnecessarily burdensome, the usefulness of the data generated by such
reporting would not justify the costs and those costs, taken together
with other regulatory burdens, would severely affect the production of
American oil and natural gas.
According to its recent analysis of reporting burdens associated
with TRI reporting, the Agency has estimated that facilities that are
subject to TRI reporting will spend an average of 48 man hours and over
$2400 for each ``Form R'' report that must be submitted to EPA.\7\
Imposing these types of reporting burdens on operations at individual
well sites could result in substantial cumulative burdens for well
operators, many of whom would have to prepare dozens or even hundreds
of such reports (if they were eventually subjected to these reporting
obligations) because of the number of individual wells they operate and
the highly decentralized nature of the operations. These burdens would
in turn substantially impede the ability of oil and natural gas
operators to produce adequate supplies of American energy at affordable
prices. Moreover, these reports would only provide minimal benefit in
light of the fact the fact that few if any residents would ever be
exposed to any releases of chemicals from many well sites.
---------------------------------------------------------------------------
\7\ EPA, Toxic Release Inventory, TRI Form R Toxic Chemical Release
Reporting, Information Collection Request Supporting Statement, EPA ICR
No. 1363.15 at 24 (Dec. 10, 2007
---------------------------------------------------------------------------
At the same time, the imposition of such reporting requirements on
oil and natural gas exploration and production facilities could also
place substantial administrative burdens on EPA itself and on the TRI
program generally. EPA currently estimates that approximately 30,000
facilities throughout the country are subject to TRI reporting
requirements and will file a total of about 77,000 reporting forms.\8\
In contrast, there are over 933,000 operating well sites across the
country--if any significant portion of these well sites were to become
subject to TRI reporting, it would obviously result in a dramatic
increase in the number of reports submitted to the Agency and could
potentially overwhelm the system with information about facilities that
pose little risk of the type that EPCRA was designed to address in the
first place, thereby undermining EPA's ability to focus its attention
and resources on the types of facilities that Congress actually
intended to cover--those that pose a potential risk to significant
populations.
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\8\ ICR Supporting Statement at 41.
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conclusion
In short, Congress intended EPCRA to meet two principal
objectives--namely, first to provide chemical information for emergency
planning and response to key state and local governmental agencies, and
second to focus on large centralized manufacturing operations and
facilities to obtain information on releases to the environment. Oil
and natural gas exploration and production activities differ from those
types of manufacturing operations that are subject to TRI reporting
obligations in several key respects. First, in contrast to these
manufacturing facilities, oil and natural gas exploration operations
are widely scattered and relatively small in scale. Moreover, these
operations are generally not undertaken near large, urban centers in
the U.S. Thus, the decision of Congress not to include oil and natural
gas exploration and production activities within the universe of
facilities subject to TRI requirements was wholly consistent with
congressional intent. Indeed, many other commercial and industrial
sectors were likewise excluded from TRI coverage. In addition, EPA has
chosen not to add oil and natural gas exploration and production
activities to the universe of facilities required to comply with TRI
reporting obligations because there is no compelling reason to impose
new reporting burdens that would provide no significant benefit and
that would only serve to drive up the cost of oil and natural gas
production.
ENCLOSURE--CLEAN WATER ACT
Congress passed the Federal Water Pollution Control Act Amendments
of 1972 to address pollution of the nation's rivers, lakes, streams and
ocean waters, with the ultimate goal of eliminating all discharges of
pollutants into those waters.\1\ Commonly referred to as the federal
Clean Water Act (CWA), this federal water pollution law is aimed at
achieving the national goal of making our nation's waters safe for
swimming and fishing. To achieve these objectives, the CWA regulates
the discharges of pollutants into the ``waters of the United States''
from municipal, industrial and other sources (e.g., persons filling
wetlands or concentrated animal feeding operations such as feedlots).
The Act also includes provisions that are designed to prevent spills of
oil and hazardous substances from entering and contaminating national
waterways and that assign liability for cleaning up spills that do
occur.
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\1\ 33 U.S.C. Sec. Sec. 1251-1387.
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As a key part of this overall framework, the CWA authorized the
implementation of the National Pollutant Discharge Elimination System
(NPDES) program, which established a system for the issuance of permits
to control discharges of pollutants into the navigable waters and their
tributaries from wastewater treatment plants, industrial facilities and
other ``point sources.'' These permits establish limits on the amounts
of pollutants that a facility may have in the wastewater it discharges
to a stream, river, lake or other regulated surface water and set forth
permit conditions that require monitoring of discharges and reporting
to the appropriate permitting authority. The authority to issue these
NPDES permits has largely been delegated to the states, most of which
have developed their own wastewater discharge permitting programs.
At the same time, the CWA established a system for addressing
spills of oil and hazardous substances that is largely implemented by
the federal government through the U.S. Environmental Protection Agency
(EPA) and other agencies such as the U.S. Coast Guard. The CWA
prohibits the discharge of harmful quantities of oil or hazardous
substances into or on U.S. surface waters or adjoining shorelines and
imposes liability for any spill that contaminates these surface waters
on the owner and operator of the vessel or on-shore facility that was
the source of the spill. The Act also requires that the owners and
operators of vessels and facilities from which oil or hazardous
substances could be spilled in harmful quantities prepare plans--known
as Spill Prevention, Control and Countermeasure (SPCC) Plans--for
preventing these types of spills and outlining measures that are to be
taken if a spill does occur.
Oil and natural gas exploration and production operations are
subject to regulation under the Clean Water Act in various ways. Among
other things, any discharges of wastewaters such as produced waters
from well sites to navigable waters or their tributaries are fully
subject to the NPDES permit requirements under the CWA. In addition,
stormwater runoff from a well site that contains pollutants is subject
to the same permitting requirements that are imposed on stormwater
discharges from various industrial facilities under the CWA. Moreover,
oil and natural gas exploration and production facilities are fully
subject to the spill requirements of the CWA, including the need to
prepare SPCC plans to minimize any potential for spills that could harm
nearby waters.
the exemption from stormwater permitting requirements for oil and
natural gas exploration is quite limited
In adopting the CWA, Congress has at various times considered how
the provisions of the Act should apply to oil and natural gas
exploration and production activities in light of the unique
circumstances of well sites so as not to unnecessarily impede vital
energy production. For example, in fashioning the scope of the
stormwater permit program included in the CWA in 1987, Congress
specifically considered how these new permitting requirements should
specifically apply to stormwater runoff from oil and natural gas
exploration and production facilities.\2\ Following its review Congress
determined that it was appropriate to provide a limited exemption from
stormwater permitting requirements for oil and natural gas exploration
and production sites because of their unique nature. This exemption
applies only in those specific situations where the stormwater runoff
is not contaminated by and does not come into contact with raw
materials, intermediate or finished products, byproducts or waste
products in the first place. Thus, if the stormwater runoff from an oil
or natural gas well site is contaminated with materials such as oil,
grease or hazardous substances, the operator of the well site is not
exempt from the regulations under the CWA and must still obtain permit
coverage from EPA or from the appropriate state permitting authority
under the NPDES program.
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\2\ 33 U.S.C. Sec. 1342(l)(2).
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In enacting this limited permitting exemption, Congress recognized
that oil and natural gas operators were already taking the proper steps
to control stormwater runoff from well sites and other facilities.
Congress also recognized that if such runoff was uncontaminated there
was little more to be gained by requiring operators to incur the costs
and potential delays of obtaining a new burdensome permit. Therefore,
the congressional committee responsible for fashioning the stormwater
permit program concluded that:
to avoid penalizing operators for using good management
practices designed to prevent or minimize pollution and for
making expenditures to prevent stormwater run-off
contamination, uncontaminated stormwater diversion devices
should not be regulated under the permit scheme of the Act.\3\
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\3\ H.R. Rep. No. 99-189, at 37 (1985).
Consequently, ``[w]ith this limitation on the permitting
requirements for such stormwater runoff, important oil [and] gas . . .
operations will be able to continue without unnecessary paperwork
restrictions . . . .''\4\
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\4\ 133 Cong. Rec. H171 (daily ed. Jan. 8, 1987) (statement of Rep.
Hammerschmidt).
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At the same time, decided in 1987 to extend these stormwater
permitting requirements in general to construction projects. EPA
initially determined that these stormwater permitting requirements
should apply to construction projects that disturb more than five
acres. Moreover, EPA also determined that oil and natural gas well
sites being prepared for drilling should be treated as construction
sites and not as oil and natural gas sites subject to the limited
exemption from stormwater permitting requirements. Even after EPA
eventually lowered the threshold for the applicability of the
stormwater permitting requirements to construction activities from five
acres to one acre in response to litigation, the Agency believed that
relatively few oil and natural gas sites that were being developed
would fall under the NPDES stormwater permitting requirements. However,
it eventually became clear that this fundamental assumption was
entirely wrong--in fact, members of the oil and natural gas industry
subsequently made EPA aware that close to 30,000 oil and natural gas
sites annually could be subject to stormwater permitting under EPA's
interpretation. Given this key information, EPA decided to reassess
whether thousands of oil and natural gas sites that were just being
prepared for drilling should indeed be subject to the burdens of the
NPDES stormwater permitting program.
This issue was eventually resolved by Congress in the Energy Policy
Act of 2005 (``EPAct''). In light of the significant implications of
any permitting requirements for energy production, Congress clarified
in the EPAct that the limited exemption from stormwater permitting
requirements for oil and natural gas exploration and production
operations originally included in the 1987 amendments to the CWA should
indeed extend to construction-related activities at oil and natural gas
sites, including activities that are necessary to prepare a site for
drilling for oil or natural gas.
In taking this action, Congress rejected the notion that there
should be different standards applied for oil and natural gas
construction sites and simply subjected the process of preparing oil
and natural gas sites for drilling to the same standards for stormwater
permitting that already apply once drilling and production commence. In
doing so, Congress continued to provide an exemption from permitting
requirements that is limited in scope, i.e., again if stormwater runoff
from sites being prepared for drilling is contaminated with pollutants
such as oil or hazardous substances, the permitting exemption does not
apply and the operator is still required to obtain permit coverage for
such discharges. It is only when the stormwater runoff from oil and
natural gas sites--including runoff associated with construction
activities at these sites--is uncontaminated that operators are exempt
from permitting requirements. Under these circumstances, a requirement
that an operator obtain permit coverage would serve little purpose
other than imposing unnecessary and unjustified regulatory burdens--and
the associated costs--on oil and natural gas exploration and production
and would only serve to unreasonably impede the development of American
energy supplies.
Even with this limited exemption, there are still many layers of
other effective controls currently in place which act to ensure that
stormwater flows off of oil and natural gas sites do not adversely
affect human health and the environment. One layer of control is the
standard management practices already adopted by the oil and natural
gas industry itself to control stormwater runoff. In fact, EPA has
readily acknowledged that the oil and natural gas industry has already
implemented effective practices to prevent soil erosion and runoff
associated with the preparation of sites for drilling and other
construction activities. The Agency has stated that these industry
practices ``result in practical, cost-effective approaches that are
flexible enough to address the variety of situations and water quality
concerns that might be encountered in the field.''\5\
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\5\ 71 Fed. Reg. at 33633.
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At the same time, states still retain their inherent governmental
powers to exercise regulatory controls should they become concerned
about the impact of sediment or other discharges from oil and natural
gas site operations. In fact, many states with active oil and natural
gas exploration and production activity already have requirements in
place independent of their NPDES programs to effectively address
sediment and erosion control at oil and natural gas sites. For example,
the State of West Virginia requires the use of BMPs at sites being
prepared for drilling activity consistent with the erosion and sediment
control field manual issued by the Office of Oil and Gas of the West
Virginia Department of Environmental Protection. These requirements
have proven to be very effective and efficient in ensuring that any
concerns about sediment deposition are properly addressed. These state
programs are consistent with the national policy set forth in the CWA
of preserving the primary responsibilities and rights of the states to
prevent, reduce and eliminate pollution and to plan the development and
use of land and serve to supplement the federal permitting programs
already in place.
spcc regulation
EPA has likewise considered how to apply various other provisions
of the CWA to oil and natural gas exploration and production
activities. For example, in promulgating regulations for the SPCC
program, EPA has only taken very limited actions to accommodate the
unique circumstances of well sites. As noted above, oil and natural gas
production facilities are subject to the oil spill provisions of the
CWA and operators of well sites must therefore prepare SPCC plans for
their well sites if they meet the same criteria that apply to all
facilities, i.e., more than a specified amount of oil can be stored on
the site and if spilled the oil could enter a surface water in harmful
quantities. The SPCC plan must specify operating procedures that the
facility uses to prevent oil spills as well as control measures to
prevent any oil spill from reaching nearby waters and measures to
contain and clean up any spill that does reach nearby waters or their
shorelines. Like the owners and operators of other types of facilities
that are subject to these oil spill requirements, operators of well
sites must report spills of oil to the proper authorities and are
responsible for cleaning up and restoring the affected area in the
event of a spill.
However, when EPA amended its SPCC regulations in 2002, it imposed
requirements on oil and natural gas exploration and production
facilities that were subsequently found to be unduly restrictive and
burdensome. Accordingly, as part of its revisions to the SPCC
regulations in 2008, EPA modified certain requirements applicable to
well sites to provide the operators of these sites with greater
flexibility in meeting the regulatory requirements while continuing to
balance the need to ensure that that the potential for any spills of
oil or hazardous substances from well sites that may reach navigable
waters is appropriately minimized against the unnecessary burdens
imposed by new regulations on the production of American oil and
natural gas resources. These amendments remain subject to public
comment and may be further revised before they are finalized.
conclusion
As can be seen, oil and natural gas exploration and production
activities are subject to key regulatory requirements imposed by the
CWA. However, both Congress and EPA have taken reasonable steps to
minimize unnecessary burdens on oil and natural gas production without
compromising substantive environmental protection. The congressional
action in the EPAct extending the limited NPDES stormwater permitting
exemption to cover drilling and construction-related activities was not
an attempt to provide special treatment for oil and natural gas sites;
rather, it was an effort to clear up the unnecessary confusion and make
sure that these activities were subject to the same standards that
already apply to oil and natural gas operations themselves. This
congressional action did not expand any permitting exemptions for these
operations and the NPDES permitting exemption continues to remain
limited in scope and apply only where stormwater runoff is not
contaminated, just as was the case before the passage of the EPAct.
Likewise, well sites remain subject to the oil spill provisions of the
SPCC and recent EPA amendments to the SPCC regulations simply represent
an effort to minimize the impacts of these regulations on oil and
natural gas production without limiting critical environmental
protections for the nation's waters.
ENCLOSURE--NATIONAL ENVIRONMENTAL POLICY ACT
The National Environmental Policy Act (NEPA)\1\ was enacted on
January 1, 1970 in order to establish a national environmental policy
to be implemented by all federal agencies across the government. Viewed
as a landmark piece of legislation, NEPA was enacted in order to: (1)
formally declare a national policy which will encourage productive and
enjoyable harmony between man and his environment; (2) to promote
efforts which will prevent or eliminate damage to the environment and
biosphere and stimulate the health and welfare of man; and (3) to
enrich the understanding of the ecological systems and natural
resources important to the nation.
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\1\ 42 U.S.C. Sec. Sec. 4321-4347.
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NEPA imposes a number of key requirements on federal governmental
agencies in order to achieve these goals. For example, as a general
matter, the federal government is required to use all practicable means
to preserve and maintain conditions under which human beings can
coexist with the natural world in productive harmony. In addition,
federal agencies are specifically required to lend appropriate support
to initiatives and programs meant to prevent the degradation of the
environment, as well as to directly incorporate environmental
considerations in their decision making, using a systematic,
interdisciplinary approach.
Perhaps the most significant element of NEPA is the requirement
that federal agencies prepare an environmental impact statement (EIS)
for those actions which are classified as ``major federal actions that
will significantly affect the quality of the human environment.'' An
EIS is an in-depth analysis, often several hundred pages in length, of
the potential environmental impacts associated with a federal action.
The EIS also examines alternatives to the proposed action and the
environmental impacts of those alternatives. This requirement
concerning the preparation of an EIS addresses the federal decision-
making process by creating methods for stakeholders to present
information and concerns regarding the environmental aspects of various
federal actions. However, NEPA's EIS requirements are procedural in
nature; specific environmental standards are addressed under federal or
state regulatory laws such as the Clean Water Act or the Clean Air Act.
As directed under NEPA, the federal Council on Environmental
Quality (CEQ) has promulgated the necessary regulations to implement
the requirement to prepare these EISs in those cases where major
Federal actions are proposed. Under these regulations CEQ has specified
that the federal actions that are potentially subject to these EIS
requirements are defined broadly to include such actions as federal
construction projects, the issuance of federal permits and leases, and
federal funding of state, local or private actions, among various other
types of federal projects. However, while federal actions are generally
subject to NEPA, not every federal action requires an EIS; rather, only
federal actions significantly affecting the quality of the human
environment must have an EIS.
In fact, in many cases various federal actions may be exempted from
the EIS requirement through one of two mechanisms. First, the CEQ
regulations authorize federal agencies to specifically identify various
categories of actions that by their nature do not have a significant
impact on the environment in the first place; these categories of
activities are generally referred to as ``categorical exclusions.''
Most federal agencies have developed their own ``categorical
exclusions'' that cover a wide variety of routine federal actions,
including such actions as maintenance activities on federal properties,
oversight of state environmental programs, and inspections and
enforcement activities. Any federal actions which fall under a
categorical exclusion do not require any specific environmental
analysis and are not subject to EIS requirements.
Second, for those actions that are not covered by a categorical
exclusion, CEQ regulations authorize agencies to prepare a limited
analysis, commonly known as an Environmental Assessment (EA), which
generally amounts to a very preliminary review of the possible impacts
of a proposed federal action on human health and the environment. The
purpose of an EA is to determine whether a federal action will have a
significant impact on the environment, which would trigger the need for
an EIS. If the conclusion of the EA is that an action would not
significantly affect the human environment, the federal agency may then
issue a Finding of No Significant Impact (FONSI), which concludes the
agency's NEPA obligations for that action and in these cases the
federal agency is not required to continue to prepare an EIS in order
to satisfy NEPA.
congress has not provided an unwarranted nepa exemption for oil and
natural gas projects
In an effort to facilitate the prudent development of our nation's
energy supplies and to move toward energy independence, Congress sought
to reach a careful balance in the Energy Policy Act of 2005 (EPAct)
between encouraging oil and natural gas development and assuring the
protection of human health and the environment. As part of this
approach, Congress established under Section 390 of EPAct a rebuttable
presumption that activities related to oil and natural gas development
on federal land or pursuant to leases of federal interests in oil and
natural gas reservoirs should be subject to a categorical exclusion
under NEPA; in these cases the cognizant federal agency would not be
required to prepare an EIS or an EA. Under EPAct, this rebuttable
presumption applies where:
the surface disturbance associated with the activity is less
than five acres so long as the total disturbance on a lease
area is less than 150 acres and a site-specific analysis under
NEPA (i.e., an EA or an EIS) has previously been prepared;
an oil or natural gas well is being drilled at a location
where drilling has previously occurred within the last five
years;
an oil or natural gas well is being drilled within a
developed field where the drilling activity has been analyzed
within the last five years in an approved land use plan or an
EA or EIS prepared under NEPA;
a pipeline is being placed in an approved corridor; or
the activity consists of maintenance.
As can be seen, this EPAct requirement cannot be viewed as a
substantial ``carve-out'' from NEPA--rather it provides a well-
reasoned, limited categorical exclusion that avoids unnecessary,
duplicative, and costly EIS requirements for those oil and natural gas
projects that would be deemed to have minimal impacts in the first
place or have already been adequately studied in other prior NEPA
reviews. For certain oil and natural gas projects EPAct Section 390
creates a rebuttable presumption that a NEPA review is not required in
connection with an Application for Permit to Drill at a specific well
site where an EA or EIS has already previously examined the potential
impacts of drilling in the area in which the proposed drilling site is
located. In other cases this section would simply clarify that no site-
specific environmental review is necessarily required in two situations
where environmental impacts would be minimal in any event, i.e., where
the drilling will be conducted on a site that is already disturbed or
where the only activity being undertaken is maintenance.
In essence, this provision attempts to strike a balance and is
indeed quite narrow in scope--it does not at all represent a complete
exclusion from NEPA requirements for these types of oil and natural gas
activities. Instead, in enacting Section 390 Congress has established
only a limited categorical exclusion from the EIS requirements for a
set of oil and natural gas activities that have already been subject to
environmental review or are the types of activities that normally have
minimal environmental impacts. In fact, in any given case the federal
agency overseeing the activity could nevertheless still decide to
prepare an analysis of the potential environmental impacts of drilling
at a well site in the form of an EA or EIS because of particular
concerns about that impacts at that location.
In any event, because it only applies to the activities or actions
of federal agencies or activities on federal lands, NEPA would still by
its own terms have no application to many oil and natural gas drilling
operations in the first place even in the absence of the congressional
action taken in EPAct. For example, NEPA would not apply to most
drilling activities in the Marcellus Shale in the Northeast, the
Barnett Shale in Texas, or the Fayetteville Shale in Arkansas, where
the federal government owns relatively little land and few rights to
subsurface oil and natural gas. Likewise, it would have no
applicability to drilling in the coalbeds of the Black Warrior Basin in
Alabama since drilling activity there is undertaken solely on private
lands.
federal agencies will continue to protect the environment
While Congress has acted to reasonably streamline the NEPA approval
process for oil and natural gas drilling activities, this action does
not at all suggest that the federal government is actually attempting
under EPAct to abdicate its responsibilities to ensure that these
activities are undertaken in a manner protective of human health and
the environment--rather, just the contrary is true. In fact, the two
principal federal land management agencies--the U.S. Bureau of Land
Management (BLM) and the U.S. Forest Service (USFS--part of the U.S.
Department of Agriculture (USDA))--with responsibilities over federal
lands where oil and natural gas operations are undertaken have at the
same time also adopted specific policies under NEPA and other
applicable federal land management statutes to ensure that ongoing
operations are conducted in a manner fully protective of human health
and the environment and in accordance with federal environmental
policies. For example, BLM has formally stated as part of its agency
policy that it will:
conduct on-site inspections of all proposed drilling
locations even where a categorical exclusion under NEPA
applies;
review an Application for Permit to Drill in the same
fashion as would have been done in the absence of a categorical
exclusion;
continue to consult, where appropriate, with the U.S. Fish
and Wildlife Service, state historic preservation offices and
other officials regarding the potential impacts of drilling
activities; and
apply mitigation measures identified in previously prepared
EAs or EISs in order to minimize the environmental impacts of
drilling.
Similar to BLM, USDA (which includes the USFS) also has emphasized
in its operational agency policies that the Department will continue to
ensure that oil and natural gas drilling activities use best management
practices in order to minimize the effects of these activities on
surface resources and prevent unnecessary or unreasonable surface
resource disturbances, stating that:
It is critical to note that use of Section 390 in no way
limits or diminishes the Forest Service's substantive authority
or responsibility regarding review and approval of a [Surface
Use Plan of Operations] . . . . The Authorized Forest Officer
will continue to assure that operations on leaseholds on
National Forest System lands will minimize effects on surface
resources and prevent unnecessary or unreasonable surface
resource disturbance, including effects to cultural and
historical resources and fisheries, wildlife and plant habitat.
Best management practices are to be applied as necessary to
reduce impacts of any actions approved under these categorical
exclusions.
conclusion
In sum, the EPAct was not intended to be integrated as a new
government policy to excuse oil and natural gas projects from key
environmental reviews; rather, Congress enacted Section 390 of the
EPAct merely to eliminate unnecessary, redundant and costly
environmental reviews for certain types of oil and natural gas drilling
projects in an effort to streamline the approval process for the
construction and operation of energy projects that will move our nation
toward energy independence. In fact, while Congress authorized the
adoption of a process to exempt certain oil and natural gas projects
from further NEPA scrutiny in certain cases, this exemption was quite
narrowly drawn and therefore only applies to a limited number of energy
projects. It was based on a close review of the estimated impacts of
these proposed projects in light of actual experience and represents a
careful balance with respect to encouraging necessary energy
development while protecting human health and the environment. In any
event, even in those cases where these categorical exclusions from NEPA
may apply, the relevant federal land management agencies have
emphasized that they still continue to take steps to ensure that the
use of the categorical exclusions will not result in any lessening of
substantive environmental protections--that is, the permits will
continue to have specific provisions to manage the environmental risks
of oil and natural gas development. As a result Section 390 of EPAct
does not sacrifice environmental protections but simply expedites the
production of vital American supplies of oil and natural gas that is
needed for our country.
ENCLOSURE--RESOURCE CONSERVATION AND RECOVERY ACT
Enacted in 1976, the Resource Conservation and Recovery Act
(RCRA)\1\ was passed to achieve three key goals: namely, to (1)
conserve energy and natural resources, (2) reduce or eliminate the
generation of hazardous waste as expeditiously as possible, and (3)
protect human health and the environment. Congress subsequently amended
RCRA in 1980 to address a number of key new issues raised in
implementing this law, and then again in 1984 when it adopted the
Hazardous and Solid Waste Amendments (HSWA) Act; HSWA established
further waste cleanup and corrective action requirements, restrictions
that prohibit the disposal of certain wastes in or on the land unless
the wastes comply with specified treatment standards and/or waste
constituent levels, and various other technical requirements for the
management and disposal of solid and hazardous wastes.
---------------------------------------------------------------------------
\1\ 42 U.S.C. Sec. Sec. 6901-6992K.
---------------------------------------------------------------------------
One of the key portions of RCRA--Subtitle C--is intended to
effectively control the management and disposal of hazardous waste from
``cradle to grave.'' The waste management framework established by
Subtitle C is designed principally to address ``low volume,'' ``high
toxicity'' wastes generated at one site and transported to another for
disposal. Consistent with this framework, RCRA bans the disposal of
``hazardous wastes''--which are broadly defined under the statute--at
facilities without valid permits. In order to obtain a permit, any new
treatment, storage or disposal facility must meet stringent
specifications for handling RCRA Subtitle C or hazardous wastes.
Permitted facilities are subject to a wide range of management
standards mandating ground-water protection, facility closure, and
post-closure care requirements. Other specific management standards
apply to targeted waste management units such as containers, tanks,
surface impoundments, waste piles, land treatment units, landfills and
incinerators.
RCRA also establishes a comprehensive system designed to closely
track the generation, storage, transport and disposal of Subtitle C
wastes. Any company which generates these wastes above certain
threshold amounts must register with EPA and/or an authorized state
agency and comply with their requirements. These generators also must
satisfy applicable recordkeeping and waste marking, labeling and
placarding requirements in preparing wastes prior to shipment for off-
site disposal. The Act provides that EPA may delegate to the states the
authority to administer and enforce these various regulatory
requirements and in the case of most states, the Agency has done so.
Taken together, the Subtitle C requirements impose costly and
rigorous limitations--constraints that were made more demanding by the
1984 HSWA Act. However, RCRA's broad definition of hazardous waste had
the effect of expanding RCRA's scope well beyond the ``low volume,''
``high toxicity'' wastes it was originally designed to cover.
congress did not intend to regulate oil and natural gas exploration and
production wastes under rcra
As a result of regulations proposed by EPA in 1978 to implement the
1976 Act, Congress recognized that certain types of wastes presented
unique issues and were most likely not well suited to regulation under
EPA's highly prescriptive Subtitle C regulatory scheme. These concerns
particularly applied to those wastes that were produced in substantial
volumes but also had relatively low toxicity. In fact, these wastes
posed management issues that were far different than the issues posed
by Subtitle C wastes generated by manufacturing and other industrial
operations under routine circumstances.
One particular category of these ``high-volume, ``low-toxicity''
wastes consisted of drilling fluids, produced waters and other wastes
associated with the exploration and production of oil and natural gas.
In the course of early deliberations concerning potential amendments to
RCRA, Congress specifically considered regulations for these categories
of wastes that had previously been proposed by EPA. However, after
careful deliberation Congress found that the extensive regulatory
program proposed by EPA to regulate drilling fluids, produced waters
and related wastes, i.e., wastes generated from oil and natural gas
exploration and production operations, could have a significant
economic impact on American oil and natural gas production.\2\
Moreover, Congress also recognized that the large volumes of these
wastes really could not be handled by existing waste management units.
Based on these concerns, Congress concluded that these wastes should be
subject to a different regulatory scheme than other more ``mainstream''
Subtitle C wastes.
---------------------------------------------------------------------------
\2\ S. Rep. No. 96-172 at 6 (1980), reprinted in 1980 U.S.C.C.A.N.
5019, 5024-25.
---------------------------------------------------------------------------
epa has concluded that regulation of oil and natural gas exploration
and production wastes under the subtitle c waste management program is
not appropriate
Congress specifically considered the proper way to handle these
``high-volume,'' ``low-toxicity'' wastes in addressing changes to RCRA
in 1980. After considering a wealth of information, Congress decided
that instead of specifically including these wastes under the general
Subtitle C waste management program, EPA should instead set up a
specialized way to address the need for any regulatory controls for
these wastes. As part of this specified process, Congress first
required EPA to study how these wastes were being managed by the states
at that time and whether such existing management practices were
adequate in light of the nature of these wastes. As part of this
process, EPA was specifically required to look at the sources and
volume of drilling fluids, produced water and other ``high-volume,''
``low-toxicity'' wastes associated with oil and natural gas exploration
and production; potential risks to human health and the environment
from surface runoff or leaching from these wastes; existing disposal
practices, alternatives to such practices and the costs of these
alternatives; and the impact of any alternatives on oil and natural gas
exploration and production.
Once this study was completed, EPA was required to submit it to
Congress for its review. EPA was further required under this
specialized process to make a determination within six months from the
time the report was given to Congress regarding whether the imposition
of any additional regulatory controls on ``high-volume,'' ``low-
toxicity'' wastes was warranted. In the event that the Agency
subsequently determined that drilling fluids, produced waters and
related categories of wastes should be regulated under the standard
RCRA Subtitle C waste management controls, Congress directed that any
regulations implementing such a decision would not become effective
unless specifically approved by Congress. In amending RCRA in 1980
Congress applied a similar process to other similar types of ``high-
volume,'' ``low-toxicity'' waste such as fly ash waste and slag wastes,
noting that such amendments were necessary to ``bring the
implementation of the Act closer to the original intent of
Congress.''\3\
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\3\ S. Rep. No. 96-172 at 2, reprinted in 1980 U.S.C.C.A.N. at
5020.
---------------------------------------------------------------------------
As a result of this mandated study, EPA subsequently determined
that ``high-volume,'' ``low-toxicity'' wastes associated with oil and
natural gas production should not be regulated under the RCRA Subtitle
C waste management program. In reaching this conclusion, the Agency
first confirmed that the wastes produced in connection with oil and
natural gas exploration and production were being produced in
substantial quantities. For example, EPA found that 361 million barrels
of drilling waste were generated in 1985 as the result of drilling
activities at about 70,000 well sites and that over 800,000 active well
sites generated 20.9 billion barrels of produced water. Perhaps even
more important, EPA also found in this study that a wide range of
practices for the management of such waste had already been effectively
adopted under various state regulatory programs as a result of widely
varying geological, ecological, topographic, economic, geographic and
other differences among well sites.
Based on these findings EPA's study came to the conclusion that
imposing any form of RCRA Subtitle C waste management controls on these
types of oil and natural gas exploration and production wastes was not
effective and would not only result in substantial economic hardships
for the oil and natural gas industry, but would also place severe and
undue administrative burdens on regulated oil and natural gas companies
and regulatory authorities themselves. For example, EPA's 1988 study
found that:
imposing strict Subtitle C waste management controls on the
handling and management of ``high-volume,'' ``low-toxicity''
wastes could impose costs on the oil and natural gas industry
exceeding $6.7 billion;
imposing these controls could also lead to declines in oil
and natural gas production of up to 12 percent and costs to
consumers of approximately $4.5 billion;
the current RCRA program did not provide adequate
flexibility for addressing this specialized class of wastes;
regulating oil and natural gas exploration and production
wastes under the strict Subtitle C waste management controls
could lead to severe permitting delays that would disrupt
production of vital American energy supplies and could severely
strain the existing capacity of facilities authorized to treat
and dispose of hazardous wastes;
existing state and federal regulatory programs were
generally adequate to manage oil and natural gas wastes and any
gaps in these regulatory programs could be effectively
addressed by regulation under RCRA programs for non-hazardous
waste (Subtitle D) and by working with the states on their
regulatory programs;
the state regulatory programs were specifically tailored to
the unique circumstances of the oil and natural gas industry
and it would be impractical and inefficient to impose the
relatively inflexible RCRA Subtitle C waste regulations on oil
and natural gas exploration and production wastes because of
the potential for disrupting these state regulatory programs;
and
substantial burdens would be imposed on EPA and state
regulatory authorities if even a small percentage of the
hundreds of thousands of oil and natural gas exploration and
production facilities were required to obtain permits to treat,
store or dispose of waste under the RCRA Subtitle C waste
management program. \4\
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\4\ 53 Fed. Reg. 25446 (July 6, 1988).
In light of this independent review, EPA's decision not to regulate
these ``high-volume,'' ``low-toxicity'' wastes from oil and natural gas
exploration and development was a careful decision based on sound
science and technical support. In the years since it made its original
determination, EPA has still not found it necessary to revisit its
determination or change its conclusions regarding the inappropriateness
of regulating these oil and natural gas wastes under the RCRA Subtitle
C waste management system.
At the same time, consistent with its prior determination EPA has
continued to work with state regulatory officials to ensure that state
regulatory programs remain adequate to address any issues with respect
to the control and disposition of these wastes. For example, in 1988
the Agency initiated a program in cooperation with state regulators to
review state programs for the regulation of oil and natural gas
exploration and production waste on a periodic basis. This process has
now been formalized through the State Review of Oil & Natural Gas
Environmental Regulations (STRONGER), which involves representatives of
state and federal regulatory agencies, industry and environmental
advocacy organizations. As part of this review process, state
regulatory programs are compared to a set of national guidelines which
is regularly updated in order to identify areas for improvement in
existing state programs. More than 30 reviews of state programs
responsible for the regulation of over 85 percent of American onshore
oil and natural gas production have been conducted under this process.
conclusion
In enacting RCRA and overseeing its implementation, Congress
recognized that certain types of ``high-volume,'' ``low-toxicity''
waste such as the drilling fluids, produced waters and other wastes
produced in connection with the exploration and production of oil and
natural gas are different in key respects from the types of wastes
typically managed under the RCRA Subtitle C regulatory program and that
it may not be appropriate to subject such wastes to the strict
requirements of that program. After careful study EPA has again
subsequently confirmed that it would be impractical, costly and
disruptive to manage these oil and natural gas wastes under the RCRA
Subtitle C waste regulations. The decision not to regulate oil and
natural gas exploration and production wastes as Subtitle C wastes
under RCRA reflects the nature of those wastes and the reality that the
RCRA Subtitle C regulatory program is not designed to and was never
intended to address these wastes in the first place.
ENCLOSURE--SAFE DRINKING WATER ACT
Congress enacted the federal Safe Drinking Water Act (SDWA)\1\ in
1974 to ensure that water supply systems serving the public meet
appropriate standards to protect the public health. As part of SDWA,
the U.S. Environmental Protection Agency (EPA) is required to establish
(1) national drinking water regulations to address contaminants that
might adversely affect human health, and (2) an Underground Injection
Control (UIC) program to protect underground sources of drinking water
from contamination. To address these requirements, EPA has implemented
a program for the treatment and disinfection of water supplies that
must be met by public water supply systems across the country and also
has established standards for maximum levels of various contaminants
that may be found in drinking water provided to the public (these are
known as maximum contaminant levels or MCLs). SDWA also specifies that
EPA may delegate to the states the authority to enforce drinking water
regulations and to issue UIC permits if the state has a program in
place that meets certain minimum requirements established by Congress,
and in fact these federal programs are now largely administered by the
states.
---------------------------------------------------------------------------
\1\ H.R. Rep. No. 93-1185 (1974), reprinted in 1974 U.S.C.C.A.N.
6454, 6481.
---------------------------------------------------------------------------
Similar to other landmark federal laws passed at that time, SDWA
was specifically intended to cover the disposal of wastes that might
threaten underground sources of drinking water (USDWs) and not
production-related operations themselves. Congress initially passed
SDWA based on its recognition that various industrial and agricultural
practices had resulted in increased concentrations of potentially
harmful chemicals that were entering the nation's drinking water
sources.\2\ For example, in the key congressional report from the U.S.
House of Representatives Committee on Interstate and Foreign Commerce
accompanying the 1974 law, this congressional committee recognized the
concerns of the U.S. Geological Survey and the Bureau of Mines
regarding the ``indiscriminate `sweeping of our wastes underground'''
and noted that these wastes were coming from many sources, such as
municipalities that ``increasingly engag[e] in underground injection of
sewage, sludge and other wastes. Industries are injecting chemicals,
byproducts and wastes. . . . Even government agencies, including the
military, are getting rid of difficult to manage waste problems by
underground disposal methods.''\3\ Consistent with this view, the
intended focus of the UIC program when it was originally enacted as
part of SDWA in 1974 was on managing the discharge of wastes into
geologic formations. In order to ensure that this issue was effectively
addressed, SDWA was specifically designed to establish a federal-state
partnership to ``protect drinking water from contamination by the
underground injection of waste.''\4\
---------------------------------------------------------------------------
\2\ H. R. Rep. No. 93-1185 (1974), reprinted in 1974 U.S.C.C.A.N.
6454, 6459.
\3\ H.R. Rep. No. 93-1185 (1974), reprinted in 1974 U.S.C.C.A.N.
6454, 6481.
\4\ Natural Resources Defense Council v. U.S. Environmental
Protection Agency, 824 F.2d 1258, 1268 (1st Cir. 1987).
---------------------------------------------------------------------------
congress did not intend to regulate hydraulic fracturing under the uic
program
At the same time, Congress did not intend that the UIC program
would be extended to regulate wells that are themselves used for the
production of oil or natural gas. In considering SDWA, Congress
recognized that many states already had vigorous regulatory programs in
place to govern petroleum operations and that these programs had been
more than adequate through the years to ensure that these operations
would not harm underground sources of drinking water, particularly in
many of the energy-producing states in the South and Western portions
of the country. To ensure that SDWA was properly targeted, Congress
intended to limit the scope of SDWA to avoid imposing unnecessary
regulations that would be a constraint on energy production, divert
funds from energy development and represent an inflationary factor in
energy costs. In accordance with this approach,
Congress focused the UIC program on waste disposal activities that
threatened the quality of underground drinking water sources and never
sought to regulate wells that were themselves being used for oil and
natural gas production.
Given the focus of the UIC program on the underground disposal of
waste, EPA also had never thought to regulate energy production
operations such as hydraulic fracturing--a critical oil and natural gas
production technique that will be essential to the aggressive
development of the nation's energy resources--under SDWA. In fact,
EPA's regulations for the UIC program address a variety of wells,
including wells used for the disposal of hazardous waste (Class I
wells), wells used for the disposal of wastes from oil and natural gas
production activities and wells used to enhance oil and natural gas
production from existing production wells (Class II wells), and other
types of disposal wells such as cesspools (Class III-V wells). However,
those regulations do not purport to regulate hydraulic fracturing.
Hydraulic fracturing is a well stimulation technology that has been
used for 60 years in millions of energy production operations. As
Congress has already recognized, hydraulic fracturing has been
effectively regulated for decades by the states and is essential for
the future development of America's oil and natural gas supplies. State
regulations require the use of various techniques to protect drinking
water aquifers, including the use of steel casing and cement to seal
off shallow formations containing drinking water sources from materials
being pumped into and out of an oil or natural gas well. These
regulations effectively protect against any risks to drinking water
aquifers; consequently, there would be no additional environmental
benefits to further federal regulation of hydraulic fracturing under
SDWA.
In fact, hydraulic fracturing differs in many key respects from
what have traditionally been viewed as waste disposal activities
intended for regulation under EPA's UIC program. As part of these waste
disposal operations, wastes are specifically injected into subsurface
formations for purposes of disposal and are intended to be left in the
subsurface. In contrast, hydraulic fracturing is an activity that takes
place in the production well itself and is a part of the process of
completing the well and preparing it for the production of oil and
natural gas. The fluids used in the hydraulic fracturing process--
consisting mostly of water--are pumped into an oil- or natural gas-
bearing formation that is generally thousands of feet below any
aquifers being used for drinking water.\5\ Moreover, the fluids that
are pumped into the subsurface as part of the hydraulic fracturing
process are intended to be removed from the formations into which they
are pumped. Indeed, studies of coalbed methane wells in Alabama have
shown that 80 percent or more of the fluids pumped into a well during
the hydraulic fracturing process are eventually recovered from the well
during the production process.\6\
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\5\ While such formations may contain groundwater that would
technically meet the definition of an ``underground source of drinking
water'' under SDWA because the water contains less than 10,000
milligrams per liter of total dissolved solids, such groundwater would
not in practice be used as drinking water-and would certainly not be
tapped by a private drinking water well - because it is of low quality,
would require significant treatment in order to be potable and would be
quite expensive to access.
\6\ Palmer, I.D., et al., Comparison between gel-fracture and
water-fracture stimulations in the Black Warrior basin; Proceedings
1991 Coalbed Methane Symposium, Univ. of Alabama (Tuscaloosa), pp. 233-
242
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In light of these fundamental differences between hydraulic
fracturing and subsurface waste injection, many of the regulations
developed by EPA to implement the UIC program simply have no
application to hydraulic fracturing activities whatsoever. For example,
EPA's regulations require that certain parameters such as injection
pressure, flow rate and cumulative volume of fluids injected be
monitored weekly or monthly and in some cases on a daily basis.\7\
These requirements for ongoing monitoring would simply not apply or be
practical for an activity such as hydraulic fracturing that takes only
a few hours to complete.
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\7\ 40 C.F.R. Sec. 146.23(b)(2).
---------------------------------------------------------------------------
SDWA was never meant to create special treatment for these kinds of
energy-producing operations--instead, SDWA recognized that there was a
need to regulate waste disposal operations and not to impose undue
regulatory burdens on production operations if they were not necessary.
When Congress amended SDWA in 1980, it relied on the fact that the
states already had existing programs in place to regulate oil and
natural gas exploration and production activities, including activities
that could be considered as ``underground injection'' subject to
regulation under SDWA. In order to take advantage of the experience of
state regulators and to avoid disrupting existing state programs,
Congress specifically provided in Section 1425 of the Act that states
could assume primary authority over Class II injection wells--those
associated with oil and natural gas production activities--by
demonstrating that their programs meet the same basic standards as
those established by Congress for programs administered by EPA.
While many parties have sought to reexamine this law, even EPA
itself has specifically emphasized that SDWA was never intended to
regulate wells that are themselves used for the production of oil or
natural gas. For example, in addressing the scope of SDWA in Legal
Environmental Assistance Foundation v. U.S. Environmental Protection
Agency,\8\ the Agency expressly argued that Congress never intended to
regulate hydraulic fracturing as ``underground injection'' under SDWA.
While the U.S. Court of Appeals subsequently decided that hydraulic
fracturing fit the definition of ``underground injection'' and so had
to be regulated under the Act, the court's decision ignored the intent
of Congress and did not consider whether hydraulic fracturing actually
posed any risk to drinking water supplies in the first place. In fact
since this ruling the court's decision has been severely criticized for
its failure to follow the will of Congress and ignoring EPA's long-
standing interpretation of the specific scope of SDWA.
---------------------------------------------------------------------------
\8\ 118 F.3d 1467 (11th Cir. 1997).
---------------------------------------------------------------------------
Because of the regulatory uncertainty created by this court
decision, Congress amended SDWA in the Energy Policy Act of 2005 to
specifically clarify that hydraulic fracturing is not regulated as a
form of underground injection under SDWA except that EPA does have the
authority to regulate the use of diesel in the fluids employed in the
fracturing operations. This exemption simply confirmed the well-
recognized proposition that the UIC provisions of SDWA were primarily
intended to regulate the subsurface disposal of waste and that Congress
never intended to regulate an activity such as hydraulic fracturing
under SDWA. Moreover, Congress's decision to clarify SDWA to exempt
hydraulic fracturing from unnecessary regulation is consistent with the
longstanding congressional mandate under this law to avoid impeding oil
and natural gas production unless restrictions are absolutely necessary
to protect underground sources of drinking water.
federal regulation of hydraulic fracturing is not necessary
Contrary to unsupported claims, Congress's position that hydraulic
fracturing should be excluded from additional federal controls under
SDWA is based on sound science. For example, in 2004 EPA completed a
study of the potential impacts of hydraulic fracturing of coalbed
methane (CBM) wells on drinking water supplies; the Agency has, in
fact, characterized this study as the most extensive review of the
potential impacts of hydraulic fracturing on public health ever
undertaken.\9\ As part of this study, EPA reviewed information about
alleged incidents of drinking water well contamination believed by the
affected parties to be associated with hydraulic fracturing or other
CBM development activities. A draft of the study report was subject to
extensive public comment and was thoroughly reviewed by numerous EPA
offices, other federal agencies and a peer review panel of experts.
---------------------------------------------------------------------------
\9\ See Evaluation of Impacts to Underground Sources of Drinking
Water by Hydraulic Fracturing of Coalbed Methane Reservoirs, EPA Office
of Water (June 2004).
---------------------------------------------------------------------------
After much scrutiny and careful review, the Agency found in this
key 2004 study that, although thousands of CBM wells are fractured
annually, there were ``no confirmed cases [of contamination of drinking
water wells] that are linked to fracturing fluid injection into CBM
wells or subsequent underground movement of fracturing fluids.'' EPA
also identified a number of key factors that minimize the risk posed by
hydraulic fracturing to underground sources of drinking water (USDWs),
even though that term is very broadly defined in SDWA and may include
aquifers that are not in fact used as sources of drinking water and
would be quite unlikely to serve as sources of drinking water. These
factors include the removal of much of the fracturing fluid from the
subsurface once fracturing operations are completed and the dilution,
dispersion and adsorption as well as the potential biodegradation of
any fluids that remain in the subsurface. Consequently, EPA concluded
that hydraulic fracturing of CBM wells poses little or no threat to
USDWs. This EPA study confirmed the results of prior studies by state
regulators which essentially reached the same conclusion.\10\
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\10\ See Ground Water Protection Council, Survey Results On
Inventory and Extent of Hydraulic Fracturing In Coalbed Methane Wells
In the Producing States (Dec. 15, 1998); Interstate Oil and Gas Compact
Comm'n, States Experience With Hydraulic Fracturing (July 2002
---------------------------------------------------------------------------
In addition, Congress recognized that there was little need for
federal regulation of hydraulic fracturing because the states had been
quite satisfactorily regulating the practice for many years. For
example, the Ground Water Protection Council (GWPC), a highly-regarded
national organization representing state officials charged with
protection of groundwater, had studied the impacts of hydraulic
fracturing and came to the conclusion that there are no technical
threats posed by these oil and natural gas operations to human health
and the environment. In reaching this conclusion, GWPC noted that:
As the front line regulators of the state oil and natural gas UIC
program, we have not seen credible evidence that the hydraulic
fracturing of coal bed methane reservoirs, or any other deeper
formations, causes any documented threat to underground sources of
drinking water. The states have maintained oversight of hydraulic
fracturing as a part of the oil and natural gas production process.
This makes good regulatory sense and has stood the test of time for
over 50 years. Any requirement to regulate this process as underground
injection would not result in any additional environmental protection
of under ground sources of drinking water (USDW) and, it would strain
already depleted state UIC resources. The result would be that money
that could be used to solve severe contaminant source problems, such as
urban storm water or large capacity cesspools, would be diverted to a
practice that is already regulated under another program and is not a
threat to USDWs.\11\
---------------------------------------------------------------------------
\11\ Letter from Thomas P. Richmond, GWPC President, to The Hon.
James Inhofe and The Hon. James Jeffords (June 8, 2005).
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conclusion
In short, trying to regulate hydraulic fracturing under the UIC
program would be like trying to fit a square peg into a round hole.
Given the lack of harm to drinking water aquifers and the need to focus
limited regulatory resources on actual threats to drinking water,
Congress's decision in 2005 to clarify the scope of regulation under
SDWA to exclude hydraulic fracturing was entirely reasonable and
reflected the active support of state regulators in charge of
groundwater protection.
ENCLOSURE--SUPERFUND
In 1980 Congress responded to the problems posed by contaminated
waste sites such as those at Love Canal (near Niagara Falls, New York)
and Times Beach, Missouri by passing the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).\1\ Commonly referred
to as the federal ``Superfund'' law, CERCLA was intended to encourage
the prompt and expeditious cleanup of numerous abandoned hazardous
waste disposal sites and other contaminated properties scattered across
the country. In enacting CERCLA, Congress had recognized that there was
a ``gap'' in addressing the need to remediate hazardous waste sites--
the federal Resource Conservation and Recovery Act (RCRA) was already
in place to govern the handling and disposal of hazardous wastes from
active facilities, but there was still a need to address the
environmental problems posed by the plethora of old, non-operating
hazardous waste sites in the country.
---------------------------------------------------------------------------
\1\ 42 U.S.C. Sec. Sec. 9601-9675.
---------------------------------------------------------------------------
To help achieve the statute's goals, CERCLA established a very
onerous liability scheme under which parties could be held strictly,
jointly, severally and retroactively liable for the cleanup of
hazardous waste landfills and other contaminated sites. Under CERCLA
four categories of parties can be held liable for the cleanup of these
sites, including current and former owners and operators of the sites
as well as entities that generated hazardous substances which were
disposed of at a contaminated site and any entity that transported
these hazardous substances to these sites. In addition, CERCLA provides
broad powers to federal and state governments to recover the costs that
these governments incurred in remediating these sites to required
cleanup levels.
As part of the funding mechanisms for the law, CERCLA further
established a very substantial trust fund referred to as the Hazardous
Substance Superfund (the ``Trust Fund'') that was intended to be used
to help fund these cleanup activities. This fund, financed by an excise
tax on crude oil, petroleum products and other specified chemicals, was
specifically intended to help support the U.S. Environmental Protection
Agency (EPA) in carrying out the Agency's responsibilities under the
law, essentially amounted to a feedstock tax that was imposed on the
oil and natural gas industry in a manner to reflect the industry's
responsibilities for these hazardous waste problems. Additional monies
were provided to this Trust Fund in the amendments to CERCLA adopted as
part of the Superfund Amendments and Reauthorization Act of 1986 (SARA)
to further support cleanup activities.
In enacting CERCLA, Congress attempted to strike a careful balance
among a number of critical factors shaping the overall cleanup program.
First, there already were a number of federal laws on the books that
were intertwined with the scope of CERCLA. For example, the federal
Clean Water Act (CWA) had previously been adopted to regulate the
cleanup of oil spills and related remediation activities; RCRA also had
been passed in order to address cleanup issues at active industrial
sites. At the same time, there were also a number of other pending
federal legislative proposals that would have addressed other facets of
cleanup responsibilities such as the cleanup of oil pollution in the
nation's navigable waters. Against this background, two key elements of
CERCLA were included in order to strike a reasonable accommodation with
these other environmental activities: (1) the ``petroleum exclusion''
and (2) the treatment of ``federally-permitted releases.''
the ``petroleum exclusion''
The ``petroleum exclusion'' reflected the numerous reasonable steps
taken by Congress to fashion a responsible cleanup program in the face
of many competing pressures. First, Congress recognized that the
principal focus of the cleanup program should be on releases of
hazardous chemicals, which was the most serious threat to human health
and the environment posed by the abandoned waste sites. Indeed, in
commenting on the need for the Superfund program at that time, then-EPA
Administrator Douglas Costle noted that ``[t]he problem of hazardous
spills is acute and more threatening than oil.''\2\ As a result CERCLA
was passed to provide EPA with the necessary tools to address the
widespread and serious contamination at old chemical waste sites like
the Love Canal site in New York or the ``Valley of the Drums'' site in
Kentucky--these sites included large landfills covering many acres and
a wide variety of manufacturing and waste processing facilities that
had handled large volumes of chemicals for many years and that had very
high levels of hazardous chemical contaminants in the soils and
extensive plumes of contaminated groundwater that threatened drinking
water supplies.
---------------------------------------------------------------------------
\2\ 126 Cong. Rec. H 9248 (Sept. 18, 1980) (statement of Rep.
Harsha).
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Second, although the cleanup of chemical waste sites was given a
high priority by Congress in enacting CERCLA, Congress had never
intended to ignore the need to clean up petroleum contamination, but
instead decided to address these issues much more effectively through
other programs. For example, recognizing the need to address oil
spills, Congress had already passed key provisions in the CWA as noted
above to address spills of petroleum into the surface waters, thus
negating the need to address it again during the deliberations on
CERCLA. Congress subsequently expanded the regulation of oil spills by
passing the Oil Pollution Act of 1990 (OPA), which imposes liability on
any party responsible for a vessel or onshore facility from which oil
is discharged to the waters of the United States (which includes most
surface waters and adjacent wetlands) or adjoining shorelines for the
cost of cleaning up those discharges and for the damages that may
result from the incident. OPA was adopted to directly respond to the
concerns raised in the congressional debates on Superfund regarding the
need to hold parties responsible for a wide range of surface spills of
petroleum. For underground storage tanks (USTs) containing petroleum,
Congress also eventually added provisions to RCRA in 1984 to address
any leaking USTs. This program specifically imposes requirements to
prevent leaks from USTs containing petroleum as well as to ensure the
proper monitoring of these tanks and corrective actions if these tanks
leak.
In any event, the adoption of the so-called ``petroleum exclusion''
is consistent with the general principles that the courts themselves
have adopted in interpreting the scope of CERCLA responsibilities. In
addressing the question of CERCLA liability, an overwhelming number of
courts have consistently ruled that companies which sell useful
products such as petroleum and/or crude-oil products themselves should
not be subject to CERCLA in the first place. According to this
universally-standard rule, CERCLA was intended to cover only the
disposal of contaminated products, not the use of uncontaminated
petroleum and crude oil supplies.
Consistent with this view, EPA also has interpreted the ``petroleum
exclusion'' rule only to cover hauling and transport of crude oil and
refined petroleum products themselves, including those substances that
are normally found in crude oil or are normally added to crude oil as
part of the standard refining process. However, to the extent that
petroleum or petroleum products eventually become contaminated with
hazardous substances as a result of use or otherwise, then these
supplies would no longer be covered under the ``petroleum exclusion''
rule and they would then become subject to CERCLA liability just like
any other contaminated waste materials. As a result, companies which
have generated waste motor oils or hydraulic oils, or other types of
used petroleum products, would be required to clean up sites that have
become contaminated from the disposal of these waste products just as
with any other hazardous wastes.
federally-permitted releases
CERCLA also contains a provision excluding ``federally-permitted
releases'' from CERCLA liability. This exclusion covers releases of
hazardous substances to the environment that have been authorized
pursuant to a variety of federal permits, such as a National Pollutant
Discharge Elimination System (NPDES) permit or a dredge or fill permit
issued under the CWA, or an air permit issued under various provisions
of the Clean Air Act. In addition, Congress included within the
exclusion for federally-permitted releases any injection of fluids or
other materials authorized under state law (i) for the purpose of
stimulating or treating wells for the production of crude oil, natural
gas or water, (ii) for the purpose of secondary, tertiary or other
enhanced recovery of crude oil or natural gas, or (iii) which are
brought to the surface in conjunction with the production of crude oil
or natural gas and are subsequently reinjected into the subsurface.
These ``federally-permitted releases'' exemptions have been quite
misinterpreted in many cases. This CERCLA exemption was not included as
a means to avoid imposing any liability on responsible parties, but
rather to ensure that permitting issues were instead properly addressed
under the respective federal regulatory programs in which they were
administered in the first place. Indeed, in enacting this particular
exclusion, Congress specifically recognized that ``in view of the large
sums of money spent to comply with specific regulatory programs,'' any
liability for releases of hazardous substances in accordance with duly
issued permits ``should be determined based on the facts of each
individual case.''\3\ Accordingly, Congress provided that liability for
these types of releases should not arise under CERCLA, but should more
properly be determined under the law pursuant to which the release was
authorized or under common law so as to ``give regulated entities
clarity in their legal duties and responsibilities.''\4\ A similar
provision is included in the Oil Pollution Act of 1990.
---------------------------------------------------------------------------
\3\ S. Rep. No. 96-848 at 46 (1980).
\4\ 126 Cong. Rec. S 14965 (Nov. 24, 1980) (Statement of Sen.
Randolph).
---------------------------------------------------------------------------
conclusion
CERCLA was enacted in order to address the environmental problems
posed by abandoned, inactive contaminated waste sites and hazardous
substance spills. This law casts a broad web of liability on
responsible parties for the cleanup of these sites and resulted in a
dramatic shift in the nature of liability for these problems--imposing
a new federal standard involving strict, joint and several liability
that could be imposed retroactively and without regard to fault for
conduct occurring years earlier.
In adopting this approach, Congress had to grapple with the impacts
of imposing this far-reaching new liability regime on other pre-
existing federal environmental regulatory requirements and to try to
ensure that these other federal laws were still properly implemented.
To achieve this goal, Congress chose to codify two particularly key
provisions: the ``petroleum exclusion'' and the exclusion for
federally-permitted releases. Neither of these exemptions was adopted
in order to afford special treatment to the oil and natural gas
industry or any specific industry. Rather, they were included either
for sound practical reasons or because it was clear that the scope of
CERCLA should have never covered these situations in the first place.
There has been no intent to ignore any environmental problems caused by
the spillage of crude oil or petroleum. In fact, as Congress intended,
any environmental problems caused by contaminated petroleum or crude
oil supplies are amply addressed under CERCLA or under a plethora of
other federal environmental regulatory authorities.
______
Statement of The Wilderness Society
The oil and gas industry and their allies continue to insist that
the only way to address our country's energy challenges is to open more
public lands and waters to oil and natural gas drilling, and reduce
environmental and safety standards. In truth, oil and gas drilling in
America is already occurring at an astonishing pace and in a
bewildering number of places. Yet, in the Rocky Mountain West vast
expanses of public lands open to drilling and under lease by the
industry are not being used, and thousands of drilling permits issued
to companies by the Bureau of Land Management (BLM) are sitting idle.
More oil and gas drilling occurs in America every year than
anywhere else in the world.
As of January 13, there were 1,764 rotary drilling rigs operating
on U.S. lands and waters.\1\
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\1\ http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
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America ranks #2 in world natural gas production, and #3 in oil
production.
The U.S. is the second largest natural gas producer in the world\2\
and the third-largest producer of oil.\3\
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\2\ Data as of 2010 (most recent available). United States Energy
Information Agency http://www.eia.gov/cfapps/ipdbproject/
IEDIndex3.cfm?tid=3&pid=26&aid=1#
\3\ United States Energy Information Agency. http://www.eia.gov/
cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=53&aid=1
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Tens of thousands of wells are drilled every year in the U.S.
At the beginning of the last decade 27,000 oil and gas wells were
drilled in the U.S. in one year. But in 2010 over 40,000 new wells were
drilled on American lands and waters.\4\
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\4\ United States Energy Information Agency. http://
www.eia.doe.gov/emeu/mer/pdf/pages/sec5_4.pdf
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The West's public lands are already extensively drilled, leased,
and available for leasing. There are tens of thousands of oil and
natural gas wells on public lands, with thousands more currently
approved for drilling and tens of thousands more planned for the
future.\5\ Tens of millions of acres of federal public lands are
available for leasing under current BLM Resource Management Plans.
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\5\ As of December 1, 2008, there were 88,357 oil and gas wells on
BLM lands. Government Accountability Office. http://www.gao.gov/
new.items/d10245.pdf
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Tens of millions of acres of onshore and offshore federal lands are
already under lease to oil and gas companies--the vast majority of it
unused.
According to BLM data, as of the end of FY 2012, 37,792,212 acres
of federal public lands are leased for oil and gas development, an area
larger than the State of Florida.\6\ However, only one third of these
leases-- 12,512,974 acres-- are in production. In addition, over 34
million acres of offshore federal lands are under lease in the Gulf of
Mexico alone, where roughly 4,000 platforms produce oil and/or gas.\7\
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\6\ Bureau of Land Management, http://www.blm.gov/wo/st/en/prog/
energy/oil_and_gas/statistics.html
\7\ BOEMRE, Gulf of Mexico Region Blocks and Active Leases by
planning Area, January 3, 2011; EIA, Overview of U.S. Legislation and
Regulations Affecting Offshore Oil and Natural Gas Activity, p. 2,
September, 2005.
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The United States has become a net exporter of refined petroleum
products.
In 2011, the United States exported more petroleum products, such
as gasoline and diesel fuel, than it imported for the first time in
decades. The trend has continued into 2012 as the U.S. was exporting
about 1,000 Mbbl/d in May 2012, according to the United States Energy
Information Agency.\8\
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\8\ United States Energy Information Agency, http://www.eia.gov/
dnav/pet/pet_move_wkly_dc__NUS-Z00_mbblpd__.htm
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The oil and gas industry is sitting on nearly 7,000 approved but
idle federal drilling permits.
Though the industry and their political allies persistently
complain about ``restrictive'' government policies that allegedly are
thwarting U.S. oil and gas development, the BLM reported in February,
2013, that 6,990 approved onshore federal drilling permits were sitting
idle, unused by oil and gas operators who have obtained them\9\.
---------------------------------------------------------------------------
\9\ Correspondence from Celia Boddington, BLM, to David
Alberswerth, TWS, February12, 2012.
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The industry has ``shut in'' thousands of gas wells on western
public lands during the past four years, but continues to complain
about their alleged ``lack of access'' to federal lands for drilling.
For example, according to the Wyoming Oil & Gas Conservation
Commission, as of 2009, there were over 12,500 shut-in coal bed methane
wells in the Powder River Basin of Wyoming alone!\10\ Thousands more
natural gas wells have been shut-in elsewhere in Wyoming and the West,
primarily due to low natural gas prices.
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\10\ http://www.uwyo.edu/eori/_files/co2conference10/
tom%20doll%20eori_30june2010_2009-2010.pdf
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Low natural gas prices--not government policies or regulations--are
causing many companies to reduce spending on natural gas projects on
federal lands, a strategy intended to drive up prices.
For example, the CEO of Ultra Petroleum, a large independent
producer with major investments in gas wells on federal lands in
Wyoming, recently told his investors of the company's strategy to
curtail exploration activities because, ``We don't believe in cash flow
growth or production growth without economic returns.''\11\ Moreover,
``Industry-wide, you're just beginning to see natural gas production
roll over. Once it begins, it will accelerate, and I think we are
looking at a two-year window of monthly reductions in domestic natural
gas supply. So it's taken us and the industry some time to react to the
market signals, but we have and we won't be quick to over-invest in the
coming years. We've seen natural gas prices respond positively, but
they are a long, long way away from levels that will attract capital.''
In other words, natural gas producers will increasingly be curtailing
their drilling activities, in a strategy designed to raise consumer
prices.
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\11\ http://phx.corporate-ir.net/phoenix.zhtml?c=62256&p=irol-
irhome
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______
The Wilderness Society,
Washington, DC, February 19, 2013.
Hon. Ron Wyden,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Wyden and Ranking Member Murkowski:
We respectfully request that this letter and the accompanying
information be included in the Committee on Energy and Natural
Resources February 12, 2013, hearing record regarding ``Opportunities
and Challenges for Natural Gas''. Accompanying this letter are two fact
sheets: ``Oil and Gas Drilling on Federal Lands--Some Key Facts"; and
``Most BLM Lands in the Five Rocky Mountain States are Open to Oil &
Gas Leasing.'' These fact sheets document a number of often overlooked
but relevant facts regarding the availability of federal onshore lands
for oil and gas development.
At least one witness during the February 12 hearing implied that
federal land management polices are somehow inhibiting the oil and gas
industry's ability to gain access to federal onshore lands for oil and
gas development. The relevant facts, however, portray a completely
different reality with regard to this question: tens of millions of
acres of onshore federal lands are currently available for oil and gas
development; tens of millions of acres of federal lands are under lease
to oil and gas companies; nearly 7,000 federal drilling permits have
been issued to companies but are not being utilized by them; and over
ninety-two thousand oil and gas wells are operating on federal onshore
lands, with thousands of new wells permitted by the Bureau of Land
Management every year.
In conclusion and as the accompanying documents demonstrate, the
oil and gas industry has available to it tens of millions of acres of
onshore federal lands. The real issue that Congress should contemplate
is not whether federal policies are unnecessarily inhibiting the
extraction of oil and gas resources from our federal lands, but instead
whether there are sufficient safeguards in place to assure that (1) the
most environmentally sensitive public lands are protected from the
adverse impacts of oil and gas development, and (2) that oil and gas
extraction and development activities on federal lands are done in an
environmentally safe manner.
Sincerely,
David Alberswerth,
Senior Policy Advisor.
______
Theodore Roosevelt Conservation Partnership,
Washington, DC, February 18, 2013.
Hon. Ron Wyden,
Chairman, Senate Energy and Natural Resources Committee.
Hon. Lisa Murkowski,
Ranking Member, Senate Energy and Natural Resources Committee.
Dear Chairman Wyden, Ranking Member Murkowski and Members of the
Committee:
Thank you for the opportunity to provide testimony and comment on
the hearing entitled, ``Opportunities and Challenges for Natural Gas.''
The Theodore Roosevelt Conservation Partnership (TRCP) agrees that a
balance must be achieved among the range of natural resource values to
ensure the proper development of natural gas on federal public lands.
There must be an even balance between the development of natural gas
resources and the conservation of our natural resources to ensure
sustainability of the biological and economic values of these natural
resources.
TRCP supports responsible energy development and has worked over
the past decade to promote principles and recommendations that will
help our country achieve the balance needed to continue producing
energy while conserving the environment. TRCP and our conservation
partners, a coalition of 22 conservation and sportsmen organizations
that make up the Fish, Wildlife, and Energy Working Group, have
developed the, ``FACTS for Fish and Wildlife'' a set of recommendations
that, when implemented, resolve conflict that has been evident in the
past. FACTS, an acronym which stands for Funding, Accountability,
Coordination, Transparency, and Science, represent the key actions
needed to resolve on-going conflicts between energy and renewable
natural resources.
While the focus of the hearing was on how to manage the increase in
natural gas extraction and potential exports, it must be recognized
that there are significant impacts to the landscape during energy
exploration and production. New technology has allowed previously un-
developable gas resources to be tapped--many in sensitive fish and
wildlife habitats. This is evident in the serious decline of mule deer
habitats and populations in portions of Wyoming and Colorado, and also
has broad implications for development in sage grouse habitats in 11
western states. On federal public lands the priority for energy
development has overridden the multiple-use mandate in some sensitive
locations.
To successfully achieve balance between energy extraction and
natural resource conservation, we recommend implementation of the FACTS
principles and taking the following actions:
Identify habitats that are too valuable or special to have
natural gas development at this time and require that any
development be done off-site. This includes areas of world
class recreational opportunities and irreplaceable habitats or
landscapes;
Provide clear direction on what constitutes ``multiple-use''
and what is considered ``undue and unnecessary degradation'' of
the environment under Federal Land Planning and Management Act
(FLPMA).
Broadly and consistently implement the 2010 Department of
the Interior oil and gas leasing reforms.
Evaluate the economic and employment loss in local
communities due to the impacts of industrialized energy
development on outdoor recreation economies and communities.
Provide new guidance on mitigation at the landscape level
and what constitutes adequate compensation where impacts cannot
be mitigated effectively.
We must be aware that many landscapes and communities, particularly
those with abundant public lands and where natural gas extraction is
proposed, rely on the significant jobs and economic benefits associated
with outdoor recreation on public lands. In many cases the identity and
culture of locales have been built around these opportunities. For
example, a recent study by Southwick Associates for Sportsmen for
Responsible Energy Development showed that counties with a higher
percentage of public lands managed for conservation and recreation
reported higher levels of job and population growth than those with
higher percentages of lands managed for commodity production. In Cody,
Wyoming, hunters, anglers and wildlife watchers contributed over $30
million to Cody's economy in 2010-2011. Let's not forgo a sustainable
source of jobs and income based on a recreation economy for one that is
not sustainable--the key is to find the proper balance in both.
We are pleased that you chose to hold this hearing so early in the
113th Congress and look forward to finding the ``sweet spot'' where
energy development and natural resource conservation can coexist. The
sportsmen-conservation community has extensive experience in this area
and we believe TRCP and its partners can help Congress navigate this
new opportunity and chart the course for a strong domestic energy
supply that is balanced with the needs of fish, wildlife, and
sportsmen.
We look forward to working with Congress and the Obama
Administration on this endeavor.
Sincerely,
Whit Fosburgh,
President and CEO.
FACTS for Fish and Wildlife
energy development recommendations from the theodore roosevelt
conservation partnership
Energy and our ability to access affordable, reliable fuel and
electricity are fundamental to the American way of life. All forms of
energy, oil, natural gas, coal, wind, solar, geo-thermal and nuclear
energy must be transported via pipelines or transmission lines. These
two realities pose challenges for energy development and natural
resource management. Energy production and transmission have been
controversial for a long time in America, and in 2013 we still have no
comprehensive policy that drives energy production and transmission. As
a result, both have followed a scattershot approach, often based around
variables such as markets, investment, permitting and access instead of
a national strategy. One consequence of this approach is a great
underestimation of how energy production and transmission affects fish,
wildlife and outdoor recreation, often to the detriment or exclusion of
these values and resources. Sixty-seven percent of U.S. lands are
privately owned. In the West, the division of private and public lands
is about 50/50 with some states like Nevada (81%) and Utah (63%) being
mostly publicly owned. Because wildlife does not understand or respect
artificial boundaries like state or property lines, it is imperative
that lands be managed across boundaries.
Traditionally, conservation and sportsmen organizations with a
stake in energy issues have focused on public lands, and rightfully so,
as those lands are held in trust for all Americans and are mandated to
provide multiple-use, sustained yield for many values, including fish
and wildlife. But as our need for expanded energy resources
(particularly renewable energy) and transmission capacity increases,
the impetus for managing fish and wildlife throughout all lands--
regardless of ownership--is increasing as well. Good stewardship and
conservation benefit both public and private lands, and management
recommendations for fish and wildlife on public lands can easily be
adopted on private lands.
As part of our Passport for Responsible Development, the TRCP has
created the ``FACTS for Fish and Wildlife,'' specific recommendations
for balancing fish and wildlife needs with the development of energy
resources. First released in 2006, this revision updates those
recommendations, expands their applicability to broader geographic
regions and private lands, and addresses forms of energy development
beyond traditional oil and gas. The ``Passport for Responsible Energy
Development'' will allow for better fish and wildlife stewardship
through better policy and management during energy development.
The FACTS recommendations are applicable, with a few exceptions, to
land and water, traditional or renewable energy, public or private
lands, and infrastructure associated with development. They can
increase our ability to responsibly manage fish and wildlife during
energy development, balance competing values, become conservation
stewards and ensure a future for our fish and wildlife populations.
These practices-driven by the FACTS--will sustain and uphold our
nation's shared natural resources and unique outdoor legacy.
The TRCP supports and promotes responsible energy development that
balances land and resource values that sustain fish and wildlife
populations and maintain opportunities for hunting and fishing. Our
work is guided by the TRCP Fish, Wildlife and Energy Working Group
(FWEWG), a team comprised of representatives of our conservation
partner organizations, and a staff of experienced wildlife and policy
experts. By combining the science-based expertise of the FWEWG with an
active network of sportsmen, the TRCP Center for Responsible Energy
Development is working with hunters and anglers throughout the country
to conserve our outdoor traditions by supporting a balanced approach to
energy development and the management of fish and wildlife resources.
Too often, sportsmen's voices are not heard when energy policies
are being decided or when development is implemented. The Theodore
Roosevelt Conservation Partnership believes that if the principles
contained in this ``Passport for Responsible Development'' are
followed, the management of fish and wildlife habitats will be improved
and American sportsman will be given a voice, thereby resulting in the
conservation of millions of acres of wild spaces that fish and wildlife
need and that hunters and anglers cherish.
Join Hunters and Anglers for Responsible Development, a free
grassroots movement that will add your voice to those of other
sportsmen and -women nationwide. Speak up to ensure your values are
integrated into energy development on your public lands. For more
information about how join the TRCP go to our website, www.trcp.org, or
call 202-639-TRCP.
(F) Funding
Successful fish and wildlife management requires adequate funding.
Traditionally, fish and wildlife programs are underfunded or rely on
funding sources other than federal monies. While funding alone will not
solve the problem, it plays a critical role in our ability to balance
energy development with the needs of fish and wildlife. Funding must be
secure, substantial and properly allocated to make a difference.
F.1 Determine adequate funding for sustainable fish/wildlife
management, including monitoring, in areas proposed for energy
development.
F.2 Prior to development, identify and secure appropriate
funds for fish/wildlife monitoring and mitigation, including
compensation if necessary or required.
F.3 Establish a long-term, dedicated ``mitigation trust'' to
benefit fish/wildlife that is funded by royalties, rents, fines
or voluntary payments.
F.4 Ensure that funds designated and intended for fish/
wildlife management are not redirected to other causes.
F.5 Work cooperatively with various funding sources to
leverage additional federal or state grants.
(A) ACCOUNTABILITY
Doing what you said or promised defines accountability. It also
entails accepting responsibility for actions that you may or may not
have taken. On public lands, promises are made through various decision
strategies and should be considered ``contracts with the people'' that
mandate proper stewardship of the nation's lands and minerals. On
private lands, accountability increases trust, enabling projects to
transcend conflicts that can delay or stop development.
A.1 Proactively address fish/wildlife management and needs
with a specific ``Conservation Strategy'' for each energy field
or project. Finalize strategies before development starts,
specify recommendations and actions to minimize impacts and
establish plans for mitigation, detailed monitoring and
adaptive management.
A.2 Establish and update regularly a system of tracking
commitments, in plans or agreements, along with any actions
contrary to those commitments.
A.3 Ensure that laws, regulations and policies intended to
conserve and protect fish/wildlife during energy development
are not abdicated or abridged.
A.4 Utilize lease development plans or master lease planning
to evaluate and address potential impacts prior to development.
A.5 Notify the public and allow comment on development
projects involving public lands or resources. Provide the
public with information on modifications to current development
plans.
(C) Coordination
Energy development and natural resource management do not occur in
a vacuum. Coordination is essential in ensuring that fish and wildlife
are properly managed between boundaries. All stakeholders must be
involved, and experts that manage fish and wildlife at the local, state
or national levels must be included in energy project planning and
implementation. Coordination enables us to address unanticipated
actions that arise. A key stakeholder in public lands and fish and
wildlife resources, the public must be included to build trust and
brainstorm tactics.
C.1 Foster broad-based coordination between fish/wildlife
managers, landowners and affected stakeholders to ensure fish/
wildlife sustainability.
C.2 Establish expanded coordination across geopolitical
boundaries between property owners (public and private). Ensure
that managers consider the movement corridors of fish/wildlife.
C.3 Coordinate among all affected stakeholders during
planning and implementation of public-lands energy projects.
C.4 Include state fish/wildlife agencies in energy
development planning and monitoring of fish/wildlife during/
after development. C.5 Establish a process for annual review
and adjustments of actions that affect fish/wildlife. An
adaptive management strategy is appropriate if based on
established adaptive management guidelines and science.
(T) Transparency
``There is no disinfectant like sunshine.'' That statement was used
to describe how transparency can avert undesirable activities,
particularly in the public interest. Transparency is essential to
building trust among stakeholders. Transparency can prevent unnecessary
delays, stoppages or bad press. Openness during energy development
enables fish and wildlife management that benefits all stakeholders,
not just project proponents.
T.1 Identify ``Special Places'' with exceptional resource
concerns or values where energy development should not be
allowed. Map these places and incorporate these values into
management plans.
T.2 Provide up-to-date information through a range of media
and informational outlets to the public and fish/wildlife
managers for energy development projects.
T.3 Guide leasing/development by complete and up-to-date
baseline information on fish/wildlife resources and by
coordinated plans for energy development and fish/wildlife
management.
T.4 Provide the public with information about all proposed
public lands energy leases and development; allow sufficient
time for public comment.
1T.5 Make all meetings related to public-lands use and energy
development part of the public record.
(S) Science
Science is the foundation of good land and resource management. It
is essential to understanding how fish and wildlife react to energy
development and maintaining sustainable populations during and after
development. Utilizing known science enables a balanced approach that
sustains energy AND fish/wildlife instead of energy OR fish and
wildlife.
S.1 Utilize science in all fish/wildlife decisions,
particularly when specific research has been conducted on the
impacts of energy development. Assure that mitigation and
monitoring based on new scientific information is implemented
in the energy development process.
S.2 Incorporate science-based mitigation, using tested and
proven methods of adaptive management, when making decisions
about fish/wildlife management and energy development. Identify
and address ``gaps'' in science prior to development and
implement coordinated research to address these gaps.
S.3 If necessary, utilize a third-party review of development
and mitigation proposals.
S.4 Establish a credible and qualified ``science review
team'' and engage science-based organizations for fish/wildlife
management and development decisions.
S.5 Establish a process to incorporate new information/
science into planning/implementation of existing and new energy
projects.
A new Strategy for Managing Fish and Wildlife
Managing for impacts before they occur could help conserve some of
the species at risk from the current energy boom. The TRCP Fish,
Wildlife and Energy Working Group recommends that a ``Conservation
Strategy'' for resources be required before development begins. This
would identify/direct management in coordination to provide a balanced
approach. It also would allow stakeholders more involvement,
incorporate the latest science and future information, provide for
sustainable fish/wildlife, and help produce domestic energy with less
conflict.
The basic elements of a Conservation Strategy are:
1. Identification and protection of special places where
development should not occur, or be significantly restricted.
2. Establishment of baselines for resources and values for
which all future development and mitigation will be compared.
3. Creation of specific plans showing how fish, wildlife,
water and sporting recreation will be maintained during all
phases of development, including minimum value levels and
impact thresholds.
4. Coordination of development with the management of fish,
wildlife, water and sporting recreation using adaptive
management.
5. Establishment of monitoring protocols before development
begins, coordination of monitoring with state fish and game
agencies, and commitment of adequate funding for completion of
monitoring.
6. Creation of mitigation plans for affected resources and
values, implementation plans for mitigation actions based on
adaptive management plans, and the creation of a mitigation
trust to ensure adequate funding for mitigation activities.
7. Establishment of research protocols to address unknown
resource impacts and to provide input to adaptive management
programs.
8. Confirm a schedule of annual meetings to plan development
scenarios, address impacts and incorporate adaptive management.
9. Commitment to protective stipulations and other
restrictions for protecting and sustaining fish, wildlife,
water and sporting values.
10. Development of a process to share information/data
including publishing science, stakeholder involvement, and
integrating new science and information into future plans,
actions and management.
Species Spotlight--Sage Grouse
Sage-grouse are synonymous with the expanses of sagebrush prairies
in the West and have been a favored game bird for Western hunters for
generations. Human alteration of sage habitats for more than 100 years
has reduced grouse populations, and there are now less than half the
number encountered by early western settlers. Sage-grouse behavior is
negatively affected by the increased level of development from drilling
and energy production. This fact is confirmed by a growing body of
research on the impacts to sage-grouse, which have experienced an
approximately 80% decline in the Powder River Basin of Wyoming.
Breeding activity is reduced because sage-grouse males are likely to
abandon key display grounds within four miles of active drilling. Young
birds do not return to sites with heavy development activity,
suggesting that populations will not sustain themselves near active
well fields. Sage-grouse populations are affected by other factors like
drought and human disturbance, but managers cannot ignore or discount
the impact we create by developing energy resources. To complicate
matters further, wind power is now proposed on many of the remaining
core sage-grouse habitats, and it is unknown how sage-grouse will react
to this new threat.
In 2010, the U.S. Fish and Wildlife Service determined that the
sagegrouse deserved protection under the Endangered Species Act (ESA)
but was found to be ``precluded from listing'' by higher priority
species. This move effectively makes the bird a ``candidate'' species
and efforts are now under way from the western states and federal
resource agencies to address the deficiencies that will prevent the
bird from being listed under the ESA. There is also a push by some
advocates to stop hunting sagegrouse in states that still have healthy
and viable populations in a misguided attempt to address the declines
even though the biggest threats are to habitat and the ability of the
BLM to manage energy operations in occupied sage-grouse habitat.
Research in the Powder River Basin and the Upper Green River Basin has
shown that large blocks of undisturbed sage habitat are necessary to
sustain sage-grouse populations. Scientists predict that sage-grouse
will disappear from developed areas unless some key habitats are
protected. If we lose the ability to hunt sage-grouse or have the
species listed under the ESA, the bird will lose one of the biggest
advocates they have -American sportsmen.
Species Spotlight: Mule Deer
Mule deer, icons of western big game hunting, are declining in many
parts of their range due to changes in land use, drought, predation,
disease and periodic severe winters. Accelerated energy development
that is reducing irreplaceable, critical winter range could spell
disaster for existing populations. The most significant effects are not
seen on the land at drilling sites (which can be reclaimed), but are
caused by the trucks, personnel, equipment, roads and facilities that
displace wintering mule deer. This is evident on the Pinedale Anticline
natural gas field called the ``Mesa'' outside of Pinedale, WY where
mule deer populations have declined approximately 60% in the decade
since intensive development began. The threats to mule deer range from
heavy gas drilling and industrialization of the southwestern portion of
Wyoming to the more dispersed, but pervasive, coal bed methane
development in the Powder River Basin of Montana and Wyoming. New
development from south-central Wyoming to Colorado and Utah affects
deer from the Red Desert, Sierra Madre, Piceance Basin and Book Cliffs.
These impacts are most often felt in prime hunting destinations--
public lands where multiple-use mandates are supposed to guarantee
sportsmen that their wildlife will be sustained. Recent analysis
conducted by the TRCP shows a dismal level of coordination between
federal land management and state wildlife agencies, making the tough
job of managing habitats to meet population objectives much harder.
Combined with severe winters (like 2010-2011), other pressures on
habitats, the increased risk of poaching and inadvertent road killing,
mule deer populations are in significant risk. Energy development could
further reduce already declining populations unless federal agencies
and industry make changes to current energy development processes. When
mule deer lose crucial habitats, sportsmen are at risk of losing
access, opportunities and their hunting traditions.
Identification of Special Places
All landscapes and habitats are not created equal, nor do fish and
wildlife utilize habitats in the same way. The same can be said of
sportsmen. There are places that provide such unique, important,
sensitive or extraordinary values that energy development should be
restricted or significantly limited. The TRCP calls these areas
``Special Places'' and recommends that during responsible and balanced
energy development these areas be identified and protected. The
following criteria are recommended for identification and inclusion
into special places, but each part of the country will be different and
affected stakeholders (including state wildlife agencies, NGO's,
sportsmen, and landowners) should work together to identify areas
before the commitment to development begins.
CATEGORIES
1. Areas where no development takes place because of
extremely important resources or values, where energy
development would irreparably harm those resources, and where
no mitigation or compensation could replace their loss or
degradation.
2. Areas where development would be restricted to avoid or
minimize impacts to important resources and where impacts could
be mitigated or compensated for so that no net loss is
achievable.
CRITERIA
1. Area of concern provides significant recreational
opportunity (hunting/fishing) and is a major component of a
local economy. The term ``World Class'' may be used to describe
this resource. The ``World Class'' designation would indicate
that quality of the hunting or fishing experience could not be
matched anywhere else in the world.
2. Area of concern is a designated wilderness, a wilderness
study area, currently a roadless area, or provides significant
wildlife habitat that is not impacted by motor vehicle access.
3. Area provides irreplaceable and substantial habitat for
one or more game animals or fish at least during one season of
the year and is considered a limiting factor in species
population management.
As a nation, we have come to expect energy awareness and
conservation from corporations but sometimes forget that individuals
also play a big role. Sportsmen and -women are leaders in fish and
wildlife conservation and it's no surprise that they are stepping up as
leaders in energy conservation as well. Here are five simple steps
every sportsman can take to reduce their demand for energy, save money,
improve their experiences and ensure they have less impact on our fish,
wildlife and water resources as they pursue their passions in the great
outdoors.