NTF Issue Paper: Cong6. doc.  10-05 

NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
THE NATURAL GAS CRISIS.

BACKGROUND.  Natural gas supplies 24% of all energy used in the U.S.  Almost 58 million residences, or 61% of the total, use natural gas heating.  Its uses include electricity generation, residential and commercial heating, feedstock for chemical and fertilizer industries, and transportation. It provides the energy source or raw material to make a wide range of products, such as plastics, steel, glass, computers, synthetic fabrics, fertilizer, medicine, automobiles, and processed food.  Gas provides about 38% of all primary energy for industrial use and 13% for commercial facilities. It provides over 90% of new electricity capacity built in the last 5 yrs.1  As a fossil fuel, it burns 50% cleaner than oil and 85% cleaner than coal and emits less nitrogen oxide, sulfur dioxide, and soot and fewer hydrocarbons and greenhouse gases.  Natural gas abounds.  It is our fastest-growing energy source, demand and consumption forecast to increase almost 40% by 2025, including a more than 75% increase for electric power generation.  The United States produced 18.8 trillion cubic feet of natural gas in 2004, but production has fallen flat for 20 yrs.  Increased imports fill the gap.  Reserves in the U.S. and Canada will meet demand for 100 years, though potential natural gas resources will last only 60 yrs. at present production rates.  In the 1990s, natural gas was cheap and plentiful and expected to remain the same, an attractive alternative to more expensive electric commercial and residential heating.2   

THE PROBLEM.  The congressional Joint Economic Comm. regrets conflicting policies that encourage natural gas use but discourage development of new supplies.  Thus, since early 2000, prices for natural gas have sharply increased, particularly in Midwest states, a result of natural gas commodity prices almost doubling since 1999.  These price hikes pass along directly to consumers. Clinton Administration energy policies caused this crisis, because Clinton issued executive orders to restrict oil and gas drilling on federal lands in the West, where 67% of our reserves lie.  Laws and regulations here appear prohibitive.  Vast amounts of natural gas lie on federal lands, in the Gulf of Mexico, off both coasts, and under the Rocky Mountains.  Fed lands contain 59% of our undiscovered natural gas. Clintonites prohibited drilling here and cordoned off to gas drilling the Alaskan wildlife areas.  Current fed policies restricting access and development have placed substantial, new supplies off limits, enough gas to heat 100 million houses for 30 yrs.  Lawsuits by eco-radicals block development of other supplies. Banks refuse to loan to drillers, fearing that prices will fall and cause uncollectable loans.  Pipeline construction is difficult or impossible because of Clinton regulations.  Producers have no incentive to open capped wells or drill new wells. Clinton excessive rules and regulations delay construction of new refineries.  Our natural gas began flowing from Canada, because Canadians realized the lucrative market here.   Private energy exploration here has declined 60% since 1983.  Since 1970, natural gas production in the U.S. has declined by 14% while demand has increased 33%. Domestic production has grown at a yearly rate of below 1%, because existing and present gas fields in the U.S. are drying up.  To maintain production, producers must drill more wells and extract gas more efficiently from current wells.3  Demand grows by 3.5-4% annually, because clean-burning natural gas has environmental benefits.1  1990s economic growth and outrageous crude oil prices heightened demand for natural gas.  Several mild winters hid the gas shortfall until Winter 2000-01.  When summer air conditioning season arrives, gas use for electricity generation skyrockets, as do prices.  Natural gas prices spiked high, so gas companies mostly did not store gas in tanks, believing that prices eventually would fall. Thus, reserved gas flowed out of pipelines quickly, leaving no reserves.  Harsh Clinton regulations of power plants forced them to consume natural gas instead of oil or coal, thereby draining gas that otherwise would have heated homes and businesses.   Consequently, prices rose higher. Gas prices at the wellhead spiked about 55% in Winter 2000-01.  Most natural gas used in NE comes from domestic sources, the remainder from foreign sources, mainly Canada. The Omaha Public Power District in June, 1999 paid $2.41 for each million British Thermal Units of natural gas burned.  In June, 2000, it paid $4.45 for same.  Nebraska winters drain supplies.  Regional stock levels dropped 30% lower than the 5-yr. average.  Contract prices rose, though the Metropolitan Utilities District in Omaha had the foresight to purchase a goodly supply of gas in Summer 2000, before prices spiked higher.  MUD competed for gas supplies with users around the entire nation.  MUD stockholders are its customers, who received dividends in the form of lower rates than neighboring customers served by other suppliers. Federal regulations produced similar shortages in the 1970s.  Oil and gas leases on fed land must comply with rigorous environmental laws, like the clean air and clean water acts.  After paying for leases and complying with entangling regulations, companies often face frivolous litigation from eco-radicals that prevents preliminary exploration activities.  We cannot obtain great increases in supply short-term, because it takes years to develop and produce new supplies and build pipelines to send gas to consumers.  Most Nebraskans will pay about 63% more for natural gas in fall and winter 2005-06 than last year.  Our average January, 2006 heat bill will exceed $215.2 

THE ECONOMIC CRUNCH.  Small businesses and large industries that consume commercial amounts of natural gas are suffering. Businesses concerned about energy deliveries will not sign contracts or make investments based on such worry, causing a reduction in economic activity.  Chemical plants are closing, foreign competitors gaining their customers.  Natural gas prices affect electricity prices, because many electricity-generating plants increasingly use natural gas as a power source.   New power plants fired by natural gas have come on line, consuming 25% of natural gas production.  Gas prices parallel higher oil prices, because most big industrial users can switch from 1 fuel to the other.  The prospect of continued high gas prices will increase manufacturer costs and slow NE economic growth.   

FLUCTUATING PRICES.  Supply restrictions have caused higher prices and price volatility. The U.S. Energy Information Administration noted that a typical residential NE customer spent $762 on gas during the 2002-2003 winter, a 28% hike from the previous season.3  WE Energies predicted a 34% higher bill.  MUD customers paid about 50% more in March than February, 2003 because of unexpected colder weather and low reserves.  MUD storage levels were about ½ of 2002, providing about 20% of gas to customers, flattening fluctuating prices.  Prices on the futures market are high, so it will cost more to build reserves, and negotiating new long-term contracts will see higher base prices.  MUD customers paid about 33% higher prices in Winter 2004-05 than the previous year because of tight supplies and increasing demand. The rising price of petroleum hurt.  The price of crude oil stands at a 12-yr. high.  As these prices rise, industries switch to natural gas, adding to demand.  During winter, residential heating requirements include total demand for natural gas in excess of production and import capabilities.  Withdrawal of gas from storage provides the extra amount needed to meet customer requests.  The price of natural gas bases primarily on volume of gas going to your utility, transmission costs to move gas by pipeline from source to local utility, and distribution costs to bring gas from a utility to your house, which constitutes the largest cost because of the massive network required to deliver smaller gas volumes at many delivery points.  Factored in also are commodity costs, the price of the gas itself, which local utilities pass along to consumers.  Although higher commodity prices pass along to consumers, residential customers win protection from severe price fluctuations, partly because residential bills reflect monthly average prices, not daily market prices.4  Supply and demand dynamics determine natural gas prices.  There exists a 6-18 month lag time between initial drilling and when product reaches market.  Sometimes, supplies lag because of time needed to ready new supply sources.  It will take months or years to increase drilling activity and connect new well supplies to markets by pipeline.  There is plenty of natural gas in the ground; extracting it depends on new pipelines and abatement of government regulations. Demand for natural gas has grown faster than new pipeline capacity needed to transport gas to consumers.  Supply is not increasing as quickly as consumer demand, forcing prices longer term to remain high.  Domestic gas production is 4-6% lower than in 2002.  Production from many older gas wells is declining rapidly.1  Most gas fields now producing are old, returns lessening every year.  Higher demand resulted in quicker than usual usage of stored gas.  Greater turnover in gas storage means increased gas delivery costs.2  Storage supplies dropped 48% from 2002.3  Nebraska utilities typically lock in the price of part of their gas months in advance and store it, allowing them to withstand price surges. However, NE natural gas consumers paid about 6% more during the winter of 2003-04, about $850 more than the previous year.  Local utilities must bid up prices to buy enough gas to reserve for customers.  Prices could remain high for years.  Increased gas production costs to industry pass along to consumers.4  New wells have higher production rates than old ones.  Higher production utilization rates result in higher gas prices owing to increasingly tight market conditions.  Total U.S. imports of natural gas during the 1^st 10 months of 2002 rose more than 2% from 2001 levels.  To meet demand levels, the gas industry must tap new sources of supply.  It must drill offshore in the Gulf of Mexico and in sand and shale deposits on federal lands.5  Companies are drilling 18,000 wells per year, but gas production barely rises, insufficient to meet demand.  The Energy Dept. projects a 45% increase in gas consumption by 2015, but the number of gas wells drilled must reach 30,000+ per year, and domestic supplies will continue to lag nevertheless.  To maintain current production, the industry must increase production per well by 23% every year.  Thus, imports will become more vital to our energy future.  Our energy needs will become more heavily dependent upon natural gas, the cleanest of fossil fuels. Yet, Congress has barred drilling in the gas-rich Gulf and national monument areas.6  Wholesale gas prices have soared 9.7%, the largest gain in 8 months, because of expectations that subzero weather in the U.S. will strain supplies.7  From Nov. 2002 through Feb. 2003, U.S. temps were 15% colder than the year before.8  Natural gas prices have soared almost 50% since 11-03 on the spot and futures markets.   Price hikes also drive up costs of byproducts like propane.   

THE SOLUTION.  Vice-President Dick Cheney has lengthy administrative experience in the energy industry and realizes the economic pain experienced by American companies and consumers.  He and President Bush have proposed a 10-yr., $7.1 billion energy recovery plan to Congress, which includes conservation, tax incentives to drilling companies, drilling of gas in Alaska, the Rockies, and offshore, building new pipelines, and waiving red tape, which stops states from operating older power plants at full capacity. States, not the feds, would regulate gas leases on federal land. Natural gas suppliers state that this legislation will increase supplies greatly.  Cong. Lee Terry is on the House Energy & Commerce Committee and is helping to prepare short and long-term plans to implement a comprehensive and effective Bush energy policy.   Unfortunately, liberals killed the 2005 version of this bill.  We must eliminate many federal regulations, to cheapen natural gas and thereby boost economic growth and avoid power blackouts.  Prices continue to rise because of residual Clinton regulations.  Repeal them.  Prices probably will not drop considerably, until new major gas pipelines connect new gas fields in Alaska and NW Canada, so urge your congressman to make it easier for energy producers to start this needed flow.9   Open up federal lands in the Alaskan National Wildlife Refuge and Prudhoe Bay to drilling.  18% of our domestic reserves lie here. Energy Sec. Spencer Abraham warned that price volatility will continue without increased gas production. Notwithstanding a few price spikes, a free market offers lower prices and heftier continual supplies.   Allow companies easy access to fed lands with huge natural gas resources, so that extraction can proceed coordinated with streamlined permits, which now take 130 days to process, with backlogs of over 2,800 applications, and other administrative procedures.  Update resource management plans, necessary for preparing lease sales and managing development on fed lands.  Allow development of unconventional gas, like coalbed gas. Permit additional imports of volatile liquefied natural gas and build depots to accept it.10 

OPPONENTS.  Eco-radical groups like the Sierra Club whine about giveaways to the polluting fossil fuel industry and lobby for additional strangling regulations.  They do not care if we freeze or sweat to death in the dark.  These radicals refuse to acknowledge that we now import gas from nations that have very lax environmental regulations.  Rock-hugging lobbyists have killed every congressional initiative to cheapen natural gas. 

TAKE ACTION NOW.  Contact your representative and both senators to support legislation in both houses to 1) increase supplies of natural gas to both commercial and residential users; and 2) greatly lower the price we pay as consumers.  S.360 would treat natural gas distribution lines as 10 yr. property for depreciation purposes.  S. 696 would extend a tax credit for marginal natural gas well production. HR 427 would permit sale in many states of natural gas from other regions.  HR 503 would allow a credit for the production of oil and gas from domestic marginal wells. HR 794 would allow development of federal gas and coal reserves.  HR 1468 would modify the depreciation of natural gas pipelines, equipment, and infrastructure assets as 10-yr. property.  Tell congressmen to offer tax incentives for high-efficiency furnaces, boilers, and water heaters.  Also, obtain home energy audits, so that all appliances and furnace run efficiently.  Ensure that you have proper insulation in your home and water heater.  Lower the temperature on your thermostat when gone from home.6  Install a programmable thermostat.  Seal leaks around doors and windows and in furnace air ducts.  Change your furnace filter regularly.  7 

RESOURCES:
Competitive Enterprise Institute, www.cei.org.
American Petroleum Institute.

Research, documentation, and analysis for this issue paper done by Doug Kagan and Teal Morris.  This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by Citizens for Local Control, Cherry County Taxpayers, Dawes County Taxpayers, and other groups in the Tax Freedom Network.   10-05   C