Speeches/Testimony

Statement of the National Petrochemical and Refiners Association
Senate Committee on Energy & Natural Resources
Hearing on Natural Gas Supply and Prices
February 25, 2003

The National Petrochemical & Refiners Association (NPRA) is a trade association representing virtually all of the U.S. refining industry and petrochemical producers that use processes similar to those by the refining industry. NPRA appreciates the interest of the Senate Committee on Energy & Natural Resources in developing a national energy plan that includes traditional supply and market-oriented policies for fossil fuels, including natural gas.

NPRA believes that as part of the debate on national energy policy, it is essential that lawmakers recognize that natural gas is used as both a fuel and a feedstock to U.S. petrochemical producers and that its cost must be reasonable and its supply adequate and predictable in order to maintain a competitive U.S. petrochemical industry in a worldwide marketplace. Environmental requirements are creating increasing pressure for industrial facilities to convert to natural gas use. The impact of these environmental policies on natural gas demand has not been assessed, and must be part of the energy debate. NPRA believes that diverse, robust, and affordable supplies of all fossil fuels are essential for maintaining national security, economic growth, and the viability of the U.S. refining and petrochemical industries.

Natural Gas Is An Industrial Feedstock and Fuel

Natural gas and natural gas liquids extracted from natural gas are important raw materials or feedstocks used in the manufacture of petrochemicals. About 70% of U.S. petrochemical manufacturers use natural gas liquids as feedstocks. In contrast, about 70% of petrochemical producers in Western Europe and Asia use naphtha (a heavy oil) as a feedstock. While oil is a global commodity whose price is set on the global market, natural gas liquids are more locally-traded commodities, so price increases in natural gas have had more impact on competitiveness in North American-produced petrochemicals. For many years, the U.S. has enjoyed a low-cost feedstock position relative to competitors in Europe and Asia. However, that advantage has been lost as the price of natural gas has soared.

Also, domestic petrochemical manufacturers rely on large quantities of natural gas in their production processes, to fuel combined heat and power units, and to achieve energy efficiency.

Products of the Petrochemical Industry

The petrochemical industry supplies consumers with a wide variety of products that are used daily in homes and businesses. The industry manufactures chemicals that serve as "building blocks" in making everything from plastics to clothing to medicine to computers. They also contribute essential materials for making food and beverage containers, surgical gloves and gowns, fertilizer, blankets, cold weather and rain gear, sneakers, computers, insulation, cameras, medicines, artificial joints, auto and aircraft parts, disposable diapers, CDs, and many more key consumer products. Therefore, the costs of natural gas and natural gas liquids to petrochemical manufacturers affect the cost and availability of these essential consumer products.

Recent History of Unprecedented Price Increases - U.S At A Competitive Disadvantage

In 2000-2001, North American natural gas and natural gas liquids prices have risen to unprecedented levels and placed a significant portion of the domestic petrochemical industry at a disadvantage to European and Asian producers who use crude and its derivatives as feedstocks.

Two years of extraordinarily high natural gas prices has resulted in a negative trade balance for the U.S. economy. This negative trade balance is permitting foreign businesses to capture U.S. market share because European and Asian producers are not experiencing increased feedstock prices.

Another example of the competitive imbalance is the shortage and cost of ethane and ethylene. Ethane is the principal hydrocarbon raw material for organic chemistry in the United States. Currently only 50% of the ethane available is actually extracted from the raw gas stream. NPRA believes it is also important for the Congress to ensure there is enough ethane available to preserve the global competitiveness of this important U.S. industry.

Public Debate on the Future of Natural Gas Supplies

There is serious public debate on the future of natural gas and natural gas supplies. Natural gas demand is projected to increase by 60% by the year 2020. Based on this forecast, Congress must act on policies which will create additional natural gas supply sources on public lands. Environmental policies that promote multi-pollutant approaches to emission reductions and tax incentives for alternative-fueled vehicles will drive up the demand for gas and have significant impacts on natural gas supply and price. The impact on natural gas supply of such policies and programs that result in fuel switching should be factored in when making any relevant policy decisions. If the Congress should decide to press forward with increased use of natural gas, it must be mindful of what increased demand will do to the costs and competitiveness of businesses that use this fuel as a feedstock.

If policies regarding natural gas are to be modified, they must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf. New and promising domestic areas for development must be open for exploration and production. In the meantime, NPRA would urge caution as Congress and the Administration consider policies that will accelerate the demand for natural gas, unless they are accompanied by efforts to increase its supply.

Senate-passed Energy Legislation - 107th Congress

During the second session of the 107th Congress, the Senate passed energy legislation that could have negatively impacted U.S. petrochemical producers who use natural gas as a fuel and feedstock. These provisions were not adequately debated and could have resulted in short-sighted energy policy if allowed to prevail.

Ethanol Mandate - NPRA is on record in strong opposition to the Senate-passed ethanol mandate which would require that gasoline contain 5 billion gallons of ethanol by 2012. In addition to our policy of opposing bans and mandates, NPRA believes that the ethanol provision could have significantly impacted petrochemical producers who use natural gas as a fuel and feedstock. The ethanol mandate was intended to spur uneconomic production and consumption of ethanol, which means that additional plants would be built in excess of what we would see under current law.

These new ethanol production plants may very well be natural-gas fired, which would increase competition for natural gas and in all probability, this would result in increased feedstock costs. These increased costs would put additional competitive pressure on the domestic petrochemical industry which is already feeling the effects of rising international competition.

Combined Heat & Power - Combined heat & power (CHP) facilities use natural gas to create electric power and steam with the same, constant amount of fuel. These power generation facilities are usually located physically closer to the power sources and are usually more efficient because they avoid transmission losses associated with the consumption of power generated many miles away by large electric utilities. Thus, CHP facilities enhance energy efficient projects.

Last year's energy bill included a provision that would have eliminated requirements that utilities purchase or sell electricity to qualifying cogeneration facilities under the Public Utility Regulatory Policies Act (PURPA). PURPA has been has been important in allowing CHP units that serve as industrial and commercial facilities to compete in an otherwise monopoly market. NPRA supported an amendment by Senators Tom Carper (D-Delaware) and Susan Collins (R-Maine) that would have continued current law, and required utilities to purchase electricity from cogeneration facilities that did not have access to competitive wholesale markets. If electricity deregulation is included in the energy bill for the 108th Congress, the Senate must act to preserve the critical energy supplies provided by CHP.

Conclusion

Natural gas and natural gas liquids provide the primary feedstocks in domestic petrochemical plants. Their availability at a reasonable cost is essential to keep the U.S. petrochemical industry competitive in a worldwide marketplace. We hope that the Congress will recognize that increased demands on natural gas supplies result in even tighter supplies and the cost of gas as a feedstock will continue to rise. While the principal focus of the natural gas debate will be on development of resources on public lands, policy makers should recognize that since natural gas is used as both a fuel and an industrial feedstock that there could be negative impacts to our businesses if natural gas demand increases but supplies remain tight. One thing is certainly clear; we need a thorough review and analysis of natural gas-related policies and gas supply and demand to maintain a vibrant U.S. petrochemical industry and U.S. economy.