Tuesday, July 19, 2011

Senate Hearing On "The Future of Natural Gas"

Jul 19: The Senate Energy & Natural Resources Committee, Chaired by Senator Jeff Bingaman (D-NM), with Ranking Member Lisa Murkowski (R-AK) held a hearing entitled, "The Future of Natural Gas." Witnesses included: Dr. Howard Gruenspecht, Acting Administrator, Energy Information Administration (EIA); Dr. Ernest Moniz, Co-Director, MIT Coal Study, Massachusetts Institute of Technology; and George J. Biltz, Vice President, Energy and Climate Change, The Dow Chemical Company. Among other things the hearing explored a new MIT study on U.S. natural gas supplies.
    In an opening statement, Chairman Bingaman outlined five major factors that have combined to raise the prominence of natural gas as a resource.
(1) First, the new application of technologies such as horizontal drilling and hydraulic fracturing has led to an increase in domestic natural gas production and a reassessment of the size of the U.S. technically recoverable resource base.
(2) Second, the international focus on reducing greenhouse gas emissions to address climate change has favored the lower carbon intensity of natural gas for power generation. 
(3) The third factor is the recent tragedy in Japan at the Fukushima nuclear plant has led both Japanese and German officials to speak strongly about fuel switching to natural gas to replace, or at least supplement, their remaining nuclear fleet.
(4) The fourth factor is concerns about our dependence on foreign oil, which have led some to propose switching our cars and trucks from imported gasoline and diesel fuel to domestic natural gas. 
(5) Fifth, proponents of domestic manufacturing have argued that a larger, more stable gas supply at competitive prices will lead to a resurgence of investment in manufacturing and job creation, which is very much desired.
    Bingaman said, "So, in the past several years, there has been an increase in the estimates of natural gas resources available at relatively low prices, leading many experts to suggest that we may now be entering 'a golden age of gas.' I'll leave those specific projections to our witnesses. But, I believe there is agreement that there is a greatly expanded unconventional gas resource available domestically, with potentially 100 years or more gas available if current rates of usage are maintained. This change in the resource base has already had significant impacts on investment decisions in the power sector, in manufacturing and in transportation, and many expect it to continue doing so far into the future. There are many reasons to be optimistic about the natural gas resource that recently have been discussed, but recent history suggests we should be cautious as well. . . 
    "The promise of expanded domestic gas resources comes with the responsibility to address environmental concerns about their exploration and production. Recently, the public has expressed concerns that relate to the wastewater management of flowback fluids from natural gas wells, as well as potential for groundwater contamination. The issue of induced seismicity from oil and gas extraction-related activities has been raised. And the National Academy of Sciences study is now being undertaken both at Secretary Chu's and my request. I expect that the environmental concerns related to developing unconventional gas resources can be managed, but only if they are addressed through a transparent and diligent and safe approach to wellsite management throughout each stage of the gas extraction process. . ."
    Senator Murkowski said in an opening statement, ". . .Natural gas is clean-burning and abundant; it's well understood and scalable; and it's clearly in our best interest to ensure that we maintain a stable and affordable supply going forward. One of the easiest observations to make is that we're now in the midst of a truly exciting time for the natural gas industry. Just in the past several years, we've witnessed game-changing technological innovations that have unlocked tremendous volumes of previously inaccessible natural gas. . . If this was 2005, our opening statements would probably have expressed at least some concern about our ability to ensure that supply kept pace with demand.  Prices were trending higher, and many forecasts suggested that we'd become increasingly dependent on foreign LNG. . .
    "Natural gas was once thought of as "too precious to burn" but that's changed, and for the better.  When I look at the deeply troubling situation in North Africa and the Middle East, I don't see a future where we can afford to play politics with energy at the national level.  The rest of the world has already figured that out, and I'm hopeful we're beginning to see this reality, as well. I'd like to add that developing all of our resources in a responsible way is of paramount importance, and natural gas is no exception. We cannot realize the many benefits of our tremendous natural gas resource unless we commit to safe, environmentally acceptable production and delivery, within a framework of appropriate regulation and access. Contrary to some reports, the industry actually has a very exemplary record in this regard.  I welcome its efforts to proactively seek ways to increase transparency and improve the efficiency of the extraction process. . ."
    EIA testified that after a decade of stagnation, U. S. natural gas production increased by almost 17 percent between 2006 and 2010, reaching 21.6 trillion cubic feet (Tcf) in 2010, the highest level since 1973. Production has continued to increase despite a significant and sustained decline in natural gas prices since mid-2008. The growth in U.S. supplies over the past few years is largely the result of increases in production from shale gas formations. Shale gas production grew from less than 3 billion cubic feet per day (bcf/d), representing 5 percent of overall production in 2006, to 13 bcf/d, accounting for 23 percent of overall production in 2010.
    Natural gas provides about 25 percent of the primary energy used in the United States, heating about half of U.S. homes, generating almost one-fourth of U.S. electricity, and providing an important fuel and feedstock for industry. About 31 percent of the natural gas consumed in 2010 was used for electric power generation, 33 percent for industrial purposes, and 34 percent in residential and commercial buildings. Only a small portion is used in the transportation sector, predominately at pipeline compressor stations, although some is used for vehicles. EIA's Annual Energy Outlook 2011 uses a total resource estimate for U.S. natural gas (onshore and offshore, including Alaska) of 2,543 Tcf, including 862 Tcf of shale gas, (35 Tcf of proved reserves plus 827 Tcf of technically recoverable unproved resources.)
    On the MIT Future of Natural Gas study, which is the fourth in a series that presents the results of an integrated technically-grounded analysis, MIT testified, "we find that, given the large amounts of natural gas available in the U.S. at moderate cost (enabled to a large degree by the shale gas resource), natural gas can indeed play an important role over the next couple of decades (together with demand management) in economically advancing a clean energy system. However, with increasingly stringent carbon dioxide emissions reductions, natural gas would eventually become too carbon intensive, which highlights the importance of a robust innovation program for zero-carbon options. We all recognize that today there is controversy about natural gas and its availability and affordability and about environmental impacts from its production and distribution."
    The MIT study concludes in part that, "In a carbon-constrained economy, the relative importance of natural gas is likely to increase even further, as it is one of the most cost-effective means by which to maintain energy supplies while reducing CO2 emissions. This is particularly true in the electric power sector, where, in the U.S., natural gas sets the cost benchmark against which other clean power sources must compete to remove the marginal ton of CO2. In the U.S., a combination of demand reduction and displacement of coal-fired power by gas-fired generation is the lowest cost way to reduce CO2 emissions by up to 50%. For more stringent CO2 emissions reductions, further de-carbonization of the energy sector will be required; but natural gas provides a cost-effective bridge to such a low-carbon future."
    Dow Chemical Company submitted 42-pages of testimony including an American Chemical Council (ACC) study on shale gas, describing the company's "views on natural gas supply and demand, and the value-add created by U.S. manufacturers who use natural gas. Dow believes that natural gas will play a critical role in US energy policy. Because US manufacturing jobs are dependent on the US natural gas market, policies that impact natural gas will have a direct impact on jobs in the US manufacturing sector. We recommend that any natural gas policies carefully consider the need to preserve and enhance the competitiveness of U.S. manufacturers."
    Dow indicated that, "US manufacturers provide the highest value-add of any sector. Using natural gas to make petrochemicals results in eight times the value over simply combusting it. This productivity stems from the fact that the chemical industry uses natural gas not just for fuel and power, but also as a raw material or 'feedstock.' When natural gas prices are low relative to oil, US chemical manufacturers have a competitive advantage."
    Dow said it is in "general agreement" with the MIT report, but said it "has concerns, however, with two of the report's recommendations. While the study does not openly call for government subsidies for natural gas vehicles, it does call for the government to revise its policies related to CNG vehicles in order to lower up-front costs of such vehicles and the necessary infrastructure. The study also does not recognize another fact: Electric vehicles are three times more efficient than natural gas vehicles. In addition, the infrastructure for an overnight, low-voltage charging infrastructure already exists -- our power grid -- and it is cheaper to scale up.
    "The second disagreement relates to the development of an efficient and integrated global gas market. It [the report] states, 'Greater international market liquidity would be beneficial to U.S. interests. U.S. prices for natural gas would be lower than under current regional markets, leading to more gas use in the U.S." It is hard to understand how this can be. The U.S. has very competitive natural gas prices and exposing it to the rest of the world, where prices are linked to oil price, will not lower domestic prices. In our view, a global market will raise US prices which will be bad for competitiveness of all US energy intensive industries including chemicals. If the US were to begin exporting natural gas, the world market would equilibrate to one world price (with transportation cost differences) which would bring lower prices outside the US and higher prices for US consumers. . ."
    Access Sen. Bingaman's opening statement (click here). Access Sen. Murkowski's opening statement (click here). Access the hearing website for links to testimony and a webcast (click here). Access a link to the complete and extensive MIT report (click here). [*Energy/NatGas]