Natural Gas Supplies and Prices

February 25, 2003 Tuesday

HEADLINE: HEARING OF THE SENATE ENERGY AND NATURAL RESOURCES COMMITTEE
 
SUBJECT: NATURAL GAS SUPPLIES AND PRICES
 
SEN. JEFF BINGAMAN (D-NM): Thank you very much, Mr. Chairman. I welcome all the witnesses. I did want to just make a very short opening statement. We have, as I see it, two issues. One is short term, one is long term. How do we deal with both challenges? I just received today a—in the last hour or so a fax from Jon Huntsman who's with Huntsman Corporation, which is the largest chemical manufacturer in the—privately owned chemical manufacturer in the world. And I just wanted to read a couple of the things that he said in that fax and then just have that for you to respond to in your testimony perhaps.

He says, "To date, natural gas prices in America increased by over 40 percent from $6.61 to $9.60." As I say, I received this in the last hour. I don't know if that's still where the price is or not. It's higher than that now? "This unparalleled spike in prices represents the highest natural gas prices ever. There is pure manipulation going on to cause prices to increase so dramatically.

This is killing manufacturing and commerce in America. We are losing thousands of jobs, our entire chemical industry, because of the refusal of the administration to adopt an energy policy is threatened. I am frightened by this." He goes on to talk about his view that there is fraudulent manipulation going on by oil companies and futures traders in the New York Mercantile Exchange, and that's the only explanation for this kind of dramatic increase that he's talking about today.

I'd be interested in any suggestions that any of you could give us as to what can be done by the administration or Congress to deal with this short term crisis, because obviously this is not just impacting the chemical industry, it's going to impact consumers very dramatically if the situation continues. Thank you.

SEN. DOMENICI: Thank you very much. Who is this gentleman?

SEN. BINGAMAN: Jon Huntsman. He is the chairman and CEO of Huntsman Corporation of Salt Lake City, which is the largest chemical manufacturer in --

SEN. DOMENICI: Let me suggest --

SEN. BINGAMAN: In the country.

SEN. DOMENICI: All right.

Senator Bingaman, we're going to proceed in the following order. You're next, Senator Thomas, Senator Landrieu, and Senator Alexander. I again am going to excuse myself shortly and let you conduct the meeting.

I want to say just by way of my concern as chairman, I would say to all of you that was great testimony. I very much enjoyed it. But we almost hear the exact same thing, we could go back and read it last year, it was the same kind of testimony. And whenever we look at access it seems like there's lands out there that we ought to be attempting to get resources from, but nobody really thinks that it's that land. You go look at it and somebody has a reason for not doing it there and, of course, that isn't the land that's going to really make any difference.

We have to get to come up with some kind of conclusion as to what that means. I would say for now the access in the Rocky Mountain and western area that has been alleged by so many to be there in such large quantities is not proving out to be that much when you look at precisely what is there. And we'll continue to do that and have staff people do it. But it's very difficult to locate it in the large quantities that have been spoken of, unless you go offshore. If you go offshore you start talking about big numbers.

Senator Bingaman, I wanted to say you have worked on a number of these issues over and over and I would hope that in this area of natural gas we could come up with something together that might pursue or push ahead what has been recommended here today and that we're hearing from other people. Thank you all very much.

SEN. BINGAMAN: Thank you, Mr. Chairman. I agree with you. There's a lot that we should be able to do together on this, dealing with this problem.

Let me get back to a statement Mr. Best made there about how our interest is—I think you said, paraphrasing your comment, that adequate supply at reasonable prices is the interest that your company has. And that's our interest too I think: adequate supply at reasonable prices. What can be done, what should be done or could be done, to deal with the enormous volatility in wholesale prices of natural gas that we're facing? As I understand—if in fact the price is now $18 to $20 per Mcf, that's about twice what it was two years ago in California. At that time I guess it's now come out that there were some market manipulation activities going on. I don't know how much of the price increases there were explainable by that. I don't think any of us know that.

But, Mr. Caruso, do you have any ideas as to what could be done to get some of the volatility out of this? Or do you think that shouldn't be done?

MR. CARUSO: Well, I think volatility certainly has a dampening effect on investment decisions. So, of course, in general the market should be allowed to work. But one of the things that increasing the availability of supply and options in the gas market that we don't have in—that we do have in oil, for example, there is no real world—a global market for natural gas, for example. So in a situation like this where natural gas prices have spiked, if there were a world spot market, let's say, you would see LNG cargoes coming in very quickly. So I think developing the infrastructure, which a number of the speakers have alluded to today, whether it be Alaska, the Mackenzie Delta, domestic or—and LNG, all are needed and I think that's the only way you're going to really reduce the volatility. You'll still have some volatility but it will be, should I say, more manageable.

SEN. BINGAMAN: Any of the rest of you have a comment on this issue of volatility and wholesale gas prices, as to whether any action should be taken or whether we just—my own reaction is if we want adequate supplies at reasonable prices, these are not reasonable prices. And, I mean, I guess it's some consolation to say most people aren't paying these prices because they have long term contracts, but some people are. I mean—or some portion of the gas that various people are buying is being priced at this level presumably, if they're in the market today.

MR. BEST: If I might, Senator Bingaman?

SEN. BINGAMAN: Mr. Best?

MR. BEST: I would just comment. One of the things that we're trying to do—of course in our business we're trying to take the volatility out of our pricing, because that's what our customers want, that's what our regulators want. I think the way that we can do some of that is convince our regulators that we need a little bit longer term—be able to enter into some longer term contracts because, as I said at the beginning, we have hedged about 50 percent of our gas for this winter and that gas was hedged under $4. So we went into the winter and we have some storage, and we as an LDC have to fill our storage. I mean, we don't try to—you know, we're not in the commercial business, we're in the reliability business so we have to fill our storage.

I think if we could convince our regulators—and I'm not talking about 15 year contracts, but if there was a liquid enough market and we could enter into three to five year contracts at lower prices. Now, the danger is, of course, when you do that then the market falls lower than that and then, you know, that causes its own set of issues. But as I see it, I don't think—I mean, we have got deregulation at the wellhead. We have a market that price regulates supply and demand and so I think long term that still is the best model. But I do think that we've got to convince those that we deal with that we need to maybe have the ability to enter into longer term contracts, to try to take as much volatility out of the market as we can.

SEN. BINGAMAN: Mr. Rattie, do you have a comment?

MR. RATTIE: Yes, sir. Volatility in energy markets is the way the market rationalizes demand in the face of constrained supply and I think it's evidence that the markets are working. I would echo everything that Mr. Best said. Our utility has secured natural gas supplies under long term supply agreements that are by and large protecting residential customers in our market region from the brunt of this. There is very little volume moving at these prices. A lot of it is people speculating and speculators have a role in a market that's like this.

The reason we're seeing this today and we didn't see it 10 years ago is 10 years ago we had a lot of surplus capacity in our system. We had extra pipeline capacity, we had extra deliverability from production facilities. None of that is there today, so we get a situation where we get a short term surge in demand and a year like last year where drilling was down because prices had been lower the first part of the year, and we've got—we're just too tight.

We can't deal with that.

MR. WELCH: Mr. Bingaman?

SEN. BINGAMAN: Go ahead, Mr. Welch.

MR. WELCH: I just wanted to mention one thing in this regard as well, and I think the best thing you could do to improve volatility—which it's not good for our customers as you've just heard, and it's not really good for us either because it makes investment decisions almost impossible to make. The best thing that we could do is hook up all sources of domestic supply that are available within the political framework. And I know some areas are off limits and they will probably remain off limits. But the areas that are open to us, we should get those going.

And then I agree with Mr. Caruso that the reserve to production ratio here in the United States is around 10 or so. On the world market for gas it's 60. So there is a lot of natural gas around the world and I think the key to putting a little stability in there is making sure that we have adequate LNG infrastructures which will be at the margin. I see there is going to be room for our gas from south Louisiana or from the Gulf of Mexico, from the Rocky Mountains, from Canada, from Alaska, any place in North America, but that's going to be a base load. Where we get to the margin and we're competing with other countries like Japan and others for LNG, that's where having the LNG infrastructure would help to mitigate the volatility in the market. And fortunately FERC is moving in the right direction there.

SEN. BINGAMAN: You say fortunately they are?

MR. WELCH: They are. Indeed they are.