Speeches/Testimony

Statement of the National Petrochemical & Refiners Association
submitted to the Senate Energy & Natural Resources Committee
concerning Impact of Rising Prices of Natural Gas on the Economy
10 July 2003 Washington, DC

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

America's standard of living and overall economic health are closely linked to the need for an adequate supply of energy at reasonable prices. Our nation currently faces severe challenges as it strives to balance ever-increasing energy demands from all consuming sectors, largely due to contradictory and short-sighted policies that have limited supply while promoting additional natural gas consumption. These conflicting policies, either in the short or long term, are simply incompatible with continued U.S. economic growth.

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

Background

Energy is a strategic commodity. Without it, either through insufficient supply, unreasonable cost (or both), any modern economy is at risk. The threat of shortages can cause significant price escalations and disruptions in the marketplace. In recent years, domestic demand for natural gas has substantially increased, while production has recently decreased. Our experience with high natural gas prices and short supplies last winter was a reality check for the nation's flawed policies, and we must act now to correct that situation. Government, industry, and private experts agree that natural gas demand is expected to rise by the year 2020 by as much as 60% over today's levels. It is still unclear whether domestic gas production can increase to satisfy this new demand.

This is really not a resource problem that we face. But, if changes are not made to existing policies, our predicament will not be short-lived. This means that policymakers and gas issue stakeholders must act or accept responsibility for the ultimate consequences of short supplies, lost U.S. jobs, a worsening trade balance and further loss of U.S. industrial leadership. There is no OPEC to blame for this natural gas supply crisis; the United States has an abundant supply of domestic gas. Flawed government policies have prohibited its development in many areas. Thus, the blame for insufficient U.S. natural gas supplies rests on our nation alone. NPRA believes the current ill-advised national policy of limiting natural gas supply while encouraging gas use because of its environmental benefits -- mostly in the generation of base and peak load electricity -- has created and could exacerbate continuing higher gas prices and volatility. In fact, EIA reports that demand by electricity generators is expected to account for 30% of total natural gas consumption in 2025. This equates to a doubling of gas use by the utility sector over current demand. Under present policies, it is not clear that adequate supplies will be available to accommodate this demand figure unless current natural gas users in core industries are forced to switch fuels or close.

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

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

Chemical exports are usually significant contributors to U.S. trade receipts. Unfortunately, two years of extraordinarily high natural gas prices (2001-2002) have resulted in a depressed chemical export market and a negative trade balance for the U.S. economy. This negative trade balance allows foreign businesses to capture U.S. market share, in part because European and Asian producers are not experiencing similarly increased feedstock prices.

Short-Term Outlook: Encourage Conservation and Efficiency, But Increase Supply Wherever Possible

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

Historically, the summer months have been periods to re-supply natural gas storage facilities in preparation for increased winter demand for gas for commercial use and residential home heating. The increased demand for natural gas during the past summers has placed additional constraints on storage, and the U.S. is now experiencing low levels of storage volumes-624 Bcf less than last year at this time and 348 Bcf below the 5-year average volumes for the end of June, according to the EIA. This is roughly 17 percent below the 5-year average for the report week, and more than 27 percent below the level last year for the same week. Under current conditions, it will take daily storage volumes of record proportions for the remainder of the summer season to return to storage levels entering the previous winter of 2002-2003. Although recent data indicate a larger than normal storage rate over the past few weeks, we should not be lulled into complacency because favorable weather patterns have led to what may be only a temporary increase in these daily gas storage levels.

In addition, gas injection rates are only one facet of the natural gas supply dilemma. Industry must deal with the manifold implications of a generally higher price level for natural gas, also accompanied by more price volatility. Both factors mean trouble for all consumers-industrial, commercial, residential-regardless of gas storage volumes.

Unfortunately, much must be accomplished on the supply side of this equation in what is a short, but nevertheless critical, time period. In essence, our nation's natural gas supply for the next 8-10 months may largely depend upon good weather and good luck this summer and next winter. We must try to improve things, but real possibilities of doing so are limited in the short term. In order to address this shortfall in supply meaningfully, we must hope that Congress and the Administration will act to provide greater supply and price certainty to natural gas markets in the mid and long-term. And this requires a change in current policy to put greater emphasis on supply.

In the immediate future, efforts should also be made to help mitigate the supply problem through voluntary conservation and efficiency efforts. NPRA urges both Congress and the Administration to act to improve energy efficiency and conservation in the use of natural gas and power, especially as the nation enters the summer cooling season. This could be accomplished by offering appropriate incentives. Any adjustment in electricity consumption would reduce natural gas consumption by the power sector and have a positive impact on natural gas availability. This, in turn, could help to moderate natural gas supply and price concerns. Further, if and when natural gas supplies become extremely tight this summer or early fall, the federal and local government should allow electric utilities and other industrial facilities to switch to alternative fuels in order to conserve natural gas supplies. Pre-emptive efforts to encourage fuel switching would be even more helpful.

Longer-Term Options: Avoid Distractions; Focus on SUPPLY

For all these excellent reasons, NPRA welcomes the Committee's review of the natural gas situation. We urge you to study and assess current policy thoroughly and openly. The nation needs a frank and public debate on the future of its gas supplies. As we earlier stated, natural gas demand is projected to increase by 60% by 2020. The President's National Energy Policy Task Force projects that over 1,300 new electric generating plants must be constructed to fulfill anticipated electric energy needs during the next 20 years. DOE suggests that over 90% of these facilities will be fueled by natural gas. This increase in gas usage for electric generation may not be achievable, and should be one subject of the Committee's investigation.

We must also develop policies that promote continued environmental progress without reducing the supply of natural gas and other petroleum products needed for a healthy economy and the nation's security. We need to forge a diversified national energy policy that reduces our dependence on foreign energy sources while increasing our domestic production. These policies must include increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf. We must also bring Alaskan natural gas to lower 48 markets as soon as possible. New and promising domestic areas for development must be open for exploration and production. In the meantime, NPRA would urge caution when Congress and the Administration consider any policies, environmental or other, that will accelerate the demand for natural gas when other policy options exist.

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

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

Recommendations

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

Conclusion

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

Refineries are also significant users of natural gas to run their facilities. Many switched to natural gas use for this purpose at the urging of environmental authorities such as the EPA. The result is that natural gas supply and price have considerable impact on the output of the nation's petroleum products as well as on refining industry profitability. Remember that refiners face a tight supply/demand balance for petroleum products and limited profitability under normal circumstances.

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

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