Industrial gas users list policy aims

Jan. 12, 2005
A group of US industrial consumers of natural gas will submit to the Senate Energy and Natural Resources Committee on Jan. 24 a long list of incentives to both reduce demand and expand supplies of gas in order to drive down prices.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 12 -- A group of US industrial consumers of natural gas will submit to the Senate Energy and Natural Resources Committee on Jan. 24 a long list of incentives to both reduce demand and expand supplies of gas in order to drive down prices.

The Consumers Alliance for Affordable Natural Gas (CAANG) claims US natural gas prices are two or three times their historical levels—"the highest in the industrial world"—primarily because of government policies that have encouraged use of the clean-burning fuel while restricting producers' access to domestic reserves.

CAANG members say the resulting high energy costs are eroding their abilities to compete.

"Plants have closed, jobs have moved to other countries, and communities are suffering," they say. "It has been estimated that as many as 2.7 million manufacturing jobs have been lost, each of which supports 5 jobs in a local community; many of them are linked to higher US energy costs."

More at risk
More jobs are at risk, say CAANG members in a preview of their proposal.

They say: "About 200 Gw of gas-consuming electricity generation capacity has been built since 1997, but only a portion is currently being operated. This overbuild of capacity represents a demand 'overhang' that could reach 3.3 tcf of increased gas consumption annually, a 'demand destruction' threat to the economy. If unaddressed by government, the gap between supply and demand will increase hardships for homeowners and renters, especially those on low and fixed incomes; make it difficult for many small businesses and farmers to keep their heads above water; and drive more industrial jobs from the US."

Members of CAANG, which was formed in 2004, include the American Forest & Paper Association, the American Chemistry Council, Association of American Railroads, Bayer Corp., the Carpet & Rug Institute, Crompton Corp., Dow Chemical Co., DuPont, Eastman Chemical Co., NOVA Chemicals Inc., Praxair Inc., Rohm & Haas Co., and the Society of the Plastics Industry.

"No single policy path can, by itself, close the current demand-supply gap," they say. "To resolve this growing crisis, we need both to reduce demand for natural gas and expand supply." They advocate:

-- Aggressive energy efficiency and conservation measures that "offer the best near-term opportunities for reducing price pressures on natural gas."

-- Diversification of fuels for industrial use and power generation, "including renewables, clean coal, [synthetic gas] from coal or biomass, and nuclear energy.

-- Expanded supply, "including new US production and increased LNG imports."

-- Expansion and upgrades of natural gas infrastructure "including an Alaska gas pipeline and improved storage and transmission facilities."

Reduce demand first
Because it takes longer to bring new gas supplies on stream, CAANG says, "In the short term, curbing consumption of natural gas through end-use efficiency and conservation is the most effective response to the current crisis facing natural gas." It says, "Aggressive implementation of recommended efficiency policies alone can result in gas savings of about 2 tcf by 2010 and over 4.4 tcf annually by 2025."

CAANG says that in the past 30 years, industrial consumers have improved efficiency by more than 60%. Electric utilities, which don't face global competition, have achieved efficiency improvements of less than 30%.

"It is in the national interest to encourage all natural gas users to be as efficient as possible and to diversify the mix of fuels used to run industrial and power-generating facilities," it says. "Polices that encourage more efficient use of gas for electric generation and that diversify the nation's fuel portfolio can contribute significant gas savings."

It says, "Aggressive and immediate fuel diversification, in both industrial and power-generation uses, is essential to meet the daunting challenges posed by the 200-Gw gas power-generation 'overbuild' and its existing 3.3 tcf 'overhang,'" which otherwise would "soak up all or most additional natural gas supply."

CAANG advocates government programs and incentives to "encourage rapid development and deployment of gasification-based power generation and polygeneration (which creates gaseous fuel along with other valuable products, e.g., fertilizer, from coal or other feedstocks)."

The group calls for a national efficiency performance standard to encourage and support programs to improve energy efficiency, noting that the concept was implemented for Texas electric utilities in 1999.

"This model could be followed at the national level for electric and gas distribution companies," CAANG says.

The group wants government to expand federal research, development, and deployment programs; establish appliance efficiency standards to "eliminate the least efficient products from the marketplace;" revamp building codes to reduce energy needs; and initiate a public awareness campaign modeled on a 2001 California program.

Under the CAANG plan, Congress and the Federal Energy Regulatory Commission would create incentives for states to adopt inexpensive, expedited, and simplified interconnection processes for combined heat and power (CHP) and polygen facilities and other generators up to 20 Mw. The Department of Energy would oversee certification of interconnection equipment for small generators to eliminate individual on-site testing.

CAANG says jurisdictional electric utilities must modify their tariffs so that all customers installing distributed energy resources have the same rates, rules, and requirements as those of other customers of the same class.

Competitively priced supplies
CAANG says, "The supply policy goal must be to ensure adequate supplies of natural gas in the US that [are] globally competitive in terms of pricing" while encouraging use of technology to reduce environmental risk.

Citing administrative barriers to onshore gas development, CAANG says, "Overlapping jurisdictions and a confusing matrix of policy directives currently hamper the effective [government] administration of resource development."

CAANG suggests several remedies. Noting government studies of permit issues, CAANG says, "Congress should insist that the process-streamlining measures that have been examined and tested over the past 4 years be put into action. In particular, Congress should codify Executive Orders 13211 and 13212, which require assessments of how new regulations impact energy supply, distribution, and use, and which establish accountability for agencies to process permits efficiently."

It also says the Bureau of Land Management should "move forward" with its initiatives to remove impediments to activities on federal leases.

It further urges Congress to provide "adequate funding" to the BLM and US Forest Service, along with "clear direction to lease available areas and process permits in a timely manner."

CAANG calls for reevaluation of the Outer Continental Shelf Lands Act "to give states the ability to play a greater role in resource management and ownership." Reforms might involve changes in royalty shares and use of funds for ocean management.

CAANG members believe that giving states a bigger share of the revenue from offshore operations would encourage natural gas production from areas now subject to moratoria. They say, "Coastal states should be provided the authority to petition DOI to lift the moratoria on acreage off their coasts, with emphasis on primarily unassociated natural gas exploration. Particularly sensitive areas should be protected."

They also suggest that the MMS consider giving preference to unassociated or gas-only production. MMS, says CAANG, should manage leasing and permitting programs to provide "the greatest opportunity for bringing significant additional supplies of natural gas to the market," including restructuring the Eastern Gulf of Mexico planning area "so that acreage closer to the Central Gulf could be reviewed taking into account similar areas that have been successfully and safely developed."

While not suggesting a blanket lifting of OCS leasing moratoria, CAANG says the Department of Interior should be able to selectively lift moratoria "as necessary to ensure production sufficient to meet domestic demand in the event that the state process proves insufficient."

The group advocates integration and coordination of state and federal oversight for all offshore exploration and production to avoid duplication and conflict.

Infrastructure issues
CAANG also points to the need to improve pipelines and surface facilities.

It wants FERC "to study and report on the needs for new transmission pipelines. Particular attention should be given to examining the capacity at our borders to accommodate more imports from Canada and ultimately from Alaska."

FERC also should study and report to Congress the needs for new gas distribution pipelines. "Particular emphasis should be given to examining the interconnection needs of new LNG regasification facilities, storage facilities, and any new transmission pipelines," it says.

Asserting that the addition of 1 tcf of gas storage capacity would greatly reduce price volatility, CAANG calls for a FERC study of costs and benefits to consumers of incentives for development of storage capacity. The group also wants FERC to examine "whether waivers or exemptions of certain environmental and certificate analyses, affiliate rules, or open-access reqirements would assist the development of storage facilities."

Expand LNG
CAANG supports President George W. Bush's efforts to expand US imports of LNG.

"Some LNG has the advantage of being able to come on line earlier than other sources of supply such as the Alaska natural gas pipeline and thus can begin to contribute to the supply side in the near to mid term," the group says.

Because the cost of building 10-12 "strategically located regasification facilities" with capacity totaling 10-12 bcfd by 2010 is estimated at $10-20 billion, CAANG says, long-term supply commitments form exporting countries are critical. The government can help by "demonstrating support for LNG generally, processing terminal applications efficiently, establishing terms and conditions for operating onshore facilities similar to those currently governing offshore terminals, and reinforcing US interest in LNG in international forums."

Since international suppliers of LNG are often government-owned companies, the US government "should be on record" as recognizing "the importance of consistent, stable policies toward LNG and committing to support the emerging expansion of LNG" in the US, it says.

Environmental issues
CAANG says it doesn't want to roll back environmental protections that have been implemented over the past 35 years but argues that environmental concerns must be confronted in the natural gas debate—on both the demand and supply sides.

"Energy and environment are core values that Congress must address, but there should be improvements in reconciling those values and rebalancing the current overemphasis on environmental concerns," it says.

In permitting decisions, CAANG says, the government should account for "the value of new technology to minimize environment risk potential" and provide timely environmental reviews that fully consider impacts without blocking exploration and development with endless delays. It calls for reexamining moratorium decisions with regard to both the growing demand for natural gas and technology advances that reduce environmental risks.

It wants Congress to direct DOE and EPA to identify ways utilities and industrial facilities might convert gas-powered units to use fuel made from gasification of other energy sources.

Investments and incentives
Recent lease sales and proposed LNG projects prove that the private sector maintains a vibrant interest in expanding US natural gas supplies, says CAANG.

"The problem is not willingness of the industry to invest," says the group, but "we have significantly constrained opportunities by locking up a majority of our offshore areas and restricting onshore [access]."

The group says, "Without addressing the policies and practices surrounding decisions on what areas will be made available, investment will remain fettered in this country. Similarly, investors want some certainty that they will be able to realize a return on their investment and will not face changes in policy that lead to stranded investments."

Members want Congress to direct the Energy Information Administration to change its inventory reporting policies and procedures to "increase the accuracy and reliability of data used by [gas] traders." The group also wants the Commodity Futures Trading Commission to "assess the potential negative influence of hedge fund activity in increasing volatility [in the gas futures market] and the ultimate price of natural gas to the consumer."

The group calls for a wide range of tax incentives and other measures to implement its suggested program, including some "calculated to deploy technologies that reduce or avoid use of natural gas."

Technologies eligible for incentives would include the production of synthesis gas, polygen techniques, applications of integrated combined cycle technology, combined heat and power, cogeneration, fuel cells, and advanced technology for the production of delivery of hydrogen.

CAANG supports the concepts of the National Gasification Strategy by William G. Rosenberg at Harvard's Kennedy School of Government that would provide incentives for industry and electric generation investments to manufacture the equivalent of 1.5 tcf of synthesis gas from coal, biomass, and petroleum coke. "This would provide additional domestic supply comparable to the expected throughput of the Alaskan gas pipeline by providing comparable loan guarantees (80% of project costs) along with other incentives (e.g., investment tax credits," CAANG says.

Contact Sam Fletcher at [email protected]