SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 6848 words

COMMITTEE: HOUSE ENERGY

HEADLINE: TESTIMONY ELECTRICITY MARKETS AND NATIONAL ENERGY POLICY

TESTIMONY-BY: CHARLES W. STENHOLM , REPRESENTATIVES

BODY:
March 6, 2001 Statement for the Record Congressman Charles W. Stenholm I7th District of Texas Committee on Energy and Commerce Subcommittee on Energy and Air Quality U.S. House of Representatives MR. STENHOLM. Thank you Mr. Chairman, and I think the members of the committee for allowing me to come and be here today. I commend you for holding this hearing today on the development of a national energy policy. I have become increasingly concerned about this Country s lack of a national energy policy and what impact that failure has on both producers and consumers. The state of our energy industry has far reaching economic, geographic and political ramifications and we ignore it at our own peril. My hope is that this hearing can begin a process of developing a comprehensive national policy for this vital industry. Current Conditions Cold weather and ever-hotter gas prices have meant an expensive winter in Texas. The pinch, which consumers have felt in both electric and gas bills, is, in part, due to supply and demand as well as to the weather. Gas prices remained static for several years, hovering in the $2 per thousand cubic feet range. That, along with oil prices that remained low as well, discouraged drilling. Oil Production Oil prices, on a long slide, dipped to $ 1 0 and under in late 1998 and early 1999. The average dip in oil prices lasts about six months, and this recent one lasted three times as long. The price collapse forced many oil and gas companies to sell equipment, layoff employees, and shelve exploration and production plans. A number of energy companies went out of business as a result. In my District, the 1 71h District of Texas. which also is known as the "oil patch," claims for unemployment from the oil and gas industry quadrupled from 1, 1 71 to 4,730 between December 1997 and 1998. During this time, the lost oil wellhead value dropped $5.79 million and the value of oil to the Texas economy dropped almost $1 billion. The number of producing wells declined by 2,855 during this time as well. In my home county of Jones, oil production in December 1997 was 83,706 barrels, in December 1998 it was 69,966 barrels, and in December 1999 it had declined to 58,534 barrels. That's a decline of 25,172 barrels per month from December 1997 to December 1999, or a decline of ' )0%. Oil production in the United States is on the decline as we are operating from a mature resource base that makes the cost of production high as evident in Chart I from the Energy Information Administration. Total domestic crude oil production has declined from 8.7 million barrels per day in 1986 - the first oil price collapse - to 5.9 million barrels per day in 1999. We must recognize that a healthy domestic oil production industry is also essential for a healthy domestic natural gas industry, because they are inherently intertwined. Gas Production Much of the nation's natural gas comes from oil wells. Many of the nation's independent producers, particularly hard hit by the industry down turn, focused on finding natural gas. When prices are below the cost of exploring and producing crude, these small independent producers cannot stay in business, causing a ripple effect throughout local communities as schools and hospitals in Texas rely on a strong oil and gas industry for revenues. Over the past several years, we warned that critically low prices have the potential to turn into a price shock. Unfortunately, this is a lesson that we should have learned many times over in the last two decades. Production of both oil and gas declined in 1999 and, despite high prices paid to producers now, has not climbed to pre- collapse levels. As indicated in Chart 2, oil and natural gas producers are responding. In April of 1999, only 126 rigs were drilling for oil and _3 )62 rigs were drilling for natural gas, nationwide. By January 200 1, rigs drilling for natural gas more than doubled with 878 rigs in production and the rig count for crude oil double as well (240 rigs in production). However, wells generally take three months to a year to come on line, so, with temperatures lower than normal nationwide, prices likely will not go down significantly for several months. Despite a doubling of rigs in production, demand for natural gas is far out- weighing supply. According to a study conducted by the National Petroleum Council, the natural gas demand will increase by slightly more than 30% over the next decade (see Chart 3 submitted with this testimony). The US natural gas demand has grown from 19 Thousand Cubic Feet (TCF) in 1990 to approximately 2.1 TCF in 1998, or about 2% per year, and has continued to represent about one quarter of the nation's fuel needs. some may see it as a blessing that we are moving out of a season of high winter heating costs but, unfortunately, this will not alleviate the price pinch as we are moving into the spring and summer months with an average increase in transportation and cooling costs. Looking forward If ever there was a time of dramatic demonstration, the compacted experience of the last three years with its highs and lows illustrates the need for our Nation to take responsibility of its energy future. We do need a free market for the production of energy, but it cannot be a "free" market dominated by foreign producing countries that do not necessarily have our best interests at heart. Former Senator Lloyd Bentsen of Texas once said that when America imported more than half of its crude and petroleum products, it would have reached a peril point. We are now there! In formulating a national energy policy, it must be in the context of a continuously improved understanding of how energy demands of the 2 I' Century challenge the energy infrastructures of the 20th Century, of how the new economy is affecting the competition for the capital needed to improve and upgrade our energy infrastructures, and of how the government's incentive structure and statutory, frameworks should evolve to meet emerging energy needs. As policymakers, we can focus on the role of oil and gas in power production, producer incentives - including making more federal lands available and access to capital using tax incentives (an issue that the Ways and Means Committee should consider) - and conservation measures. And the impact of price on demand has not come to its full effect. The combination of increased production and price-induced conservation might balance supply and demand at a more comfortable price level. Improving Access At the same time we promote protection of our treasured environments as a high priority, it is imperative that we also consider enhancing our recovery and wildcat exploration by examining our federal lands, both onshore and offshore, for possible responsible exploration. From 1997 to 1999, oil well completions for drilling for new reserve declined by 54%, but by providing financial incentives and access to capital to increase domestic oil production and exploration, we can encourage the discovery of new domestic oil and gas reserves. The Bureau of Land Management oversees 264 million acres of Federal land and 300 million acres of subsurface mineral resources. (Refer to Chart 4) These lands contain subsurface resources amounting to eight percent of the natural gas and five percent of the crude oil produced annually, in addition to resources like coal, forest products, grazing forage, and rights-of-way for pipelines and transmission lines. Of the total $1.4 billion in annual revenues these lands bring, nearly $835 million (60%) is generated by royalties, rents, bonuses, sales, and fees from oil and gas operations. The total direct and indirect economic output of oil and gas production is estimated at nearly $12 billion annually. Chart 5, which I have submitted with this testimony, depicts resource estimates in restricted areas in the lower 48 states of the United States where enhanced, environmentally sound production could occur if these areas were to be opened up to drilling. Access to the resource base and to rights of way for infrastructure is critical for sustainable supply. Chart 5 estimates that slightly over 200 TCF, or 15% of the Lower 48 unproved resource base, is either off limits or is available with significant restrictions. Of the almost 1,500 TCF of the Lower 48 resource base cited in Chart 5, approximately 47% is owned by the Federal Government. Offshore drilling moratoria have virtually closed activity in the Eastern Gulf, Atlantic and Pacific coast waters, all under Federal jurisdiction. Policy makers need to understand the importance of this resource base in meeting the nation's growing gas demand. Chart 6 shows the decline profile for gas wells for their given year of completion - where the younger the vintage, the sharper the rate of decline. There are two key reasons for this increasing rate of decline: 1)The new field discoveries tend to be smaller in size; and 2)Drilling and completion technological advances have enabled higher flow rates, resulting in shorter reserve lives versus older vintages. This further indicates that drilling rates and better access to lands will have to increase to meet projected demand. Skilled Workers With increased drilling comes an increase in the need for skilled workers to build and run rigs used in production. The oil and gas industry has been experiencing a skilled worker shortage for some time. This shortage is a direct philosophical product of the volatility found in the oil and gas industry. By stabilizing the market, skilled workers are more likely to stay in the business instead of seeking jobs where the pay is steadier and the risks are much less. Additionally, we should consider utilizing our colleges and universities to establish federally qualified training centers to ensure workers have the best training and skills to safely operate drilling equipment. Improved Technology It is important to note that technology has advanced to a point that we can assess and develop resources in these areas more efficiently, and with less environmental impact, than ever before. In recent decades, new technologies have been key to finding and extracting recoverable oil and gas resources - located in deeper and more remote locations, in more challenging geologic formations, in more difficult terrain, in smaller pockets, under sensitive wetlands, and far out at sea. By maintaining federal funding in research and development for technological improvements either at high-end research labs or as a supplement to kick-start industry venture capitalism, we could really help bring new initiatives along like we have seen in the past with horizontal drilling, new methods to plug wellheads, and improved drill bits. Our nation has come to expect the benefits of fossil-based fuels and products, but also a cleaner environment. Ongoing research and development will be the lead force in continuing to protect the environment during exploration and production. Great strides have been made, but more opportunities remain. Consumer Needs We need to consider measures to help restore market stability with domestic crude oil and natural gas prices maintaining a level where domestic producers can compete in a global market. However, our national energy policy must recognize both producer and consumer issues. We need to consider the use of incentives to encourage consumers to make energy efficient improvements to their homes and purchase energy efficient automobiles as well as further promote and fund the Low-Income Home Energy Assistance Program (LIHEAP). Alternative and Renewable Energy Sources As part of a national energy policy, we also need to further improve and expand other avenues of energy, including wind, solar, hydroelectric, and other renewable energy resources as well as alternative sources such as nuclear energy. If we are to achieve energy independence, we must research and develop all sources of energy. Wind Energy - The U.S. wind industry has successfully financed and built wind plants capable of generating 1700 Mega Watts of power. These plants now produce more than 3.1 billion kilowatts per hour per year. Based on this performance, the industry is developing a corporate structure that has increasing access to some of the same capital markets as electric utilities. Many rural communities, including some in the 17thDistrict of Texas, are taking advantage of the wind's clean energy to provide their electrical needs or for pumping water when they are unable to be tied to a utility grid, lack conventional resources, or simply want to be independent of utility bills. This demand for wind energy is helping expand the industry as well as helping provide a cleaner environment while operating in harmony with fanning, ranching, forestry, and other open space operations. Research and development play a key role in advancing wind technology. These organizations include national laboratories and facilities for testing new hardware. Since the 1980's, wind energy production has increased its efficiency by a remarkable 80% -- from 25 cent per kilowatt-hour to 4.5 cents per kilowatt-hour. Through expected equipment and manufacturing efficiencies, the industry anticipates the cost of wind energy will fall to 3 cents per kilowatt-hour or less in the next few years. It is important that we continue to support the wind energy production tax credit (PTC) for this environmentally friendly form of renewable energy that produces no greenhouse emissions. Solar - Solar resources will remain infinitely available for as long as the solar energy system continues to exits - in other words, for the rest of Earth's history, a period of approximately five billion years. In order to use solar resources, we need continued research and development for improved technologies that can be applied locally. The use of solar resources leads to the operation of countless small- scale installations, involving a shift away from a few large-scale investments towards countless small investments and away from remote delivery of energy towards regional and individual energy subsistence. Solar energy is an important component contributing clean power to the nation's energy mix. Nuclear - The recent rolling blackouts in California may change forever how the public and policymakers think about U.S. energy policy. Many are comparing the recent energy crisis to that of the 1973 oil embargo - a time when soaring fossil fuel prices revealed the pitfalls of foreign oil dependence. One of the most compelling reasons for the recent focus on energy security is that supply has not kept up with demand. And, as a reliable, low- cost producer of large quantities of base-load power, nuclear energy promises to figure prominently in this important component of the nation's energy security providing emission-free electricity sources. In terms of public health consequences, the safety record of the U.S. nuclear power industry has been excellent. However, we need to address two major issues if the nuclear power industry is going to grow at a rate comparable to demand. First, we need to address the issue of what to do with the byproducts of nuclear power. There are solutions to this problem that could be responsibly put in place, and it is up to Congress to act on legislative proposals such as Yucca Mountain. Second, we need to continue to streamline the licensing process so that safety and site-related issues are resolved before capital is invested. Agriculture's Energy Needs I also come before you today as the Ranking Democrat on the House Agriculture Committee. I want to share with you not only the impact that energy price and availability have on agriculture, but also how America's farmers and ranchers can play a role in meeting our energy needs. As you can see from Chart 7 that is attached to my testimony, agriculture utilized 1.7 quadrillion BTUs in 1998, which equals about 2 percent of the total energy consumed in the United States that year. This chart includes the direct energy consumed in various forms as well as the energy utilized by farmers and ranchers in the indirect forms of fertilizer and pesticides. Keith Collins, USDA's Chief Economist, recently testified before the Agriculture Committee regarding the state of the U.S. agricultural economic. In his testimony, Dr. Collins indicated farmers' production expenses increased by 4 percent or $7.6 billion in 2000, and that higher fuel and oil prices accounted for over 1/3 of that increase. To put that increase in perspective, he recounted that farm production expenses had risen only one percent from 1997 to 1999. Particularly hard hit were farmers who utilize irrigation to produce their crops, since not only were natural gas and electrical prices two to three times higher than the previous year, but drought in many parts of the country forced producers to water more times at that increased cost. This may mean in a few cases that producers who actually had a crop to harvest in some regions of the country may have been worse off than their neighbors who didn't irrigate and had no crop to harvest. For 200 1, cash production expenses are forecast to increase $1.5 billion to a record level of $179.5 billion for the sector. Fuel prices are expected to remain close to last year's level, however, the recent spikes in natural gas prices have led to much higher fertilizer prices, which will have a major impact on producers' bottom lines and even what they plant this year. The recent spikes in natural gas prices have wreaked havoc in the domestic fertilizer industry. While natural gas prices appear to have moderated, albeit at a higher price, and the availability of fertilizer for spring pre-planting application is less in question, there is no doubt that farmers will be paying much higher prices for nitrogen fertilizers this spring. As an example, anhydrous ammonia prices went from an average price of $200 per ton in 2000 to $334 per ton at the beginning of January. As Chart 8 shows, nitrogen fertilizer is utilized on a range of agricultural commodities. Although application rates are lower for rice, soybeans, wheat, cotton and corn, the nitrogen that is applied accounts for 20-30 percent of the cost of production for those crops, as opposed to 5- 1 0 percent of the cost of production for the listed fruits and vegetables. The increase in natural gas and electrical prices is also impacting the floral and horticulture industries as well as poultry producers who utilize natural gas to heat and circulate air in their greenhouses and chicken houses. Agricultural producers cannot pass along higher costs. An increase in energy and energy-related input costs not only increases farmers' direct out of pocket expenses, but also results in lower prices from the market as the purchasers of their commodities try to recoup the higher costs they are paying for transportation, processing and marketing. As Congress has had to pump billions of dollars into the farm economy to prevent disaster, there is no doubt that the picture is not improving in the short term, especially with agriculture's reliance on energy in various forms and the impact that higher energy prices will continue to have on agriculture's bottom line. How Agriculture Can Help American agriculture can provide a ready source of raw materials to help meet our domestic energy needs. I was pleased that "The Biomass Research and Development Act of 2000" was enacted into law during the last session of congress. I hope that this legislation will continue the close working relationship that developed between the Energy and Agriculture Departments over the last several years to continue the research and development of all types of agricultural and forestry products and waste materials into energy sources. Now the Congress must do its share and continue to fund the ongoing work and new research that needs to be done in the areas ranging from cellulosic feedstock enhancement that would allow the expansion of ethanol production into areas where corn is not as readily available, to finding ways to utilize animal manure for energy production on and off the farm as well as continuing to address the remaining questions in corn ethanol production, such as the transportability issue. Any national energy strategy must include incentives for additional renewable fuel utilization. Over the last 20 years, we have made great progress in promoting the use of ethanol at both the state and federal level. I believe the time is right to also promote the use of biodiesel. It is a fuel that can be made from vegetable oils (which we currently have a surplus of) as well as recycled oils and animal fats. The fuel has passed vigorous environmental, health and engine testing. Soybean growers have spent over $25 million of their own money, with little government assistance, to successfully commercialize this fuel. Biodiesel blends are being used to meet the requirements of the Energy Policy Act (EPACT) due to the efforts of your colleagues here on the Energy and Commerce Committee, Karen McCarthy and John Shimkus. I am told the changes their legislation made in the EPACT program have resulted in biodiesel being used as a flexible, safe ,,,a,,- to help meet the requirements of the program. I am also reminded the legislation passed in 1998 resulted from a compromise with the natural gas industry and was supported by most members of the Committee. This proves to me that our energy policies should be comprehensive and framed to encourage the development and use of many viable fuels. The answers to our energy dependence and power generation problems can best be met by broadening our base of energy resources. I personally feel strongly that fuels like biodiesel and ethanol can be and should be a part of a national energy program. Additionally, there is a tax situation with ethanol that needs to be addressed by our colleagues on the Ways and Means Committee. Currently those states, mainly in the Midwest, which utilize ethanol the most are penalized in the amounts they receive for highway improvements and construction from the Transportation Efficiency Act for the 2 Is' Century or TEA-21 bill passed by Congress in 1998. 1 do not believe that we should be penalizing these states for using a homegrown product, corn, to meet their energy needs. I hope the Committee will be innovative and creative as you shape our country's next energy program. We can no longer rely on the same old policies and program. We must look for additional sources and resources to complement our traditional sources of energy. I look forward to working with the leaders of the Committee to make certain that renewable fuels made from our abundant agriculture and forestry resources are a part of the answer to our energy challenges. Concluding Remarks America needs a balanced-forward-looking energy policy based on the proposals that have been put before this Congress. We need a responsible approach that will infuse our energy sector with both efficiency and competition, seeking to protect America against emergencies in the energy market.

LOAD-DATE: March 8, 2001, Thursday