Oral Testimony of

R. Skip Horvath

President

Natural Gas Supply Association

Before the

Committee on Agriculture, Nutrition and Forestry

United States Senate-106 Dirksen

July 20, 2000

Thank you, Mr. Chairman, for this opportunity to discuss the important role that natural gas can play in agriculture.

I am R. Skip Horvath, President of the Natural Gas Supply Association (NGSA). The Natural Gas Supply Association represents integrated and independent companies that produce and market domestic natural gas. Established in 1965, NGSA encourages the use of natural gas and a regulatory climate that fosters competitive markets.

I would like to address four topics very briefly in my remarks today, then expand those remarks for the record. I will discuss:

· First, the increasing demand for natural gas.

· Second, the ways that supply meets potential demand.

· Third, what the natural gas producing industry is doing to bring more supplies to market.

Lastly, I will discuss government policies that raise the cost of natural gas and, in the process, damage our economy and our environment.

There has been a fundamental shift in the natural gas market. Natural gas is a clean, safe, efficient and reliable fuel, which is why the market is demanding it for residential, commercial, industrial and electric generation purposes. Farmers have used natural gas for crop drying, and possible future uses include air conditioning. This increased demand for natural gas, along with a strong economy driving up all energy use, is resulting in a paradigm shift in the market. Natural gas traditionally has a seasonal demand pattern based on winter residential and commercial heating demand; now it is also experiencing a strong summer market, as natural gas increasingly becomes the fuel of choice for electric generation.

· The Energy Information Administration (EIA) estimates that natural gas fired generation has increased between 3.5 percent and 4.0 percent over 1999 levels during the first half of 2000.

· The strong economy has increased energy demand from all groups of customers of the natural gas industry;

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A competitive, free marketplace works to everyone's advantage. Free markets have not always been allowed to work for natural gas, and consumers have suffered the consequences. For many years, the federal government regulated the price paid to natural gas producers (the "wellhead" price). This intervention resulted in artificial shortages, and government officials wisely decided to let competition evolve instead. History has shown that over the long term, customers benefit from a competitive natural gas market through lower prices and reliable service. In 1989 Congress enacted the Natural Gas Wellhead Decontrol Act, which phased out natural gas price controls. During the past 15 years, demand for natural gas has grown while the prices paid for natural gas service declined in real terms from $4.10/MMBtu in 1983, when the government regulated natural gas prices, to $3.05/MMBtu in 2000 under competition (1998 dollars; EIA data and publicly available data).

Today, natural gas is a commodity that is bought and sold in a competitive market where prices reflect supply and demand relationships. The natural gas supply industry is highly competitive with many participants.

· There are thousands of natural gas producers.

· The five top producers represent only 17 percent of U.S. market demand;

Almost all (87%) of the natural gas consumed in the U.S. is produced in the U.S. Most of the remaining natural gas supplies are transported from neighboring Canada via reliable pipelines.

Natural gas is a commodity. Like other commodities, natural gas is traded in an open market. Natural gas price movements occur as the supply and demand cycles interact. Factors affecting the current natural gas market are:

· Weather: The U.S. is projected is to have a warm summer and colder winter than in the previous few years due to the dissipating effects of La Nina;

· Other fuels: A falloff from recent highs in nuclear power and hydroelectric output is expected to bring forth more natural gas use for electricity generation this year and next;

· Storage injections: Storage injections are in the "normal" range.

Supply is tight. Because of lag times inherent in matching supply with increased demand, supplies can become tight. According to EIA and publicly available data, the price of natural gas and oil collapsed in 1998 and 1999, resulting in the industry allocating less capital to exploration and production activities. Now that continued strong demand has resulted in the increase in natural gas and oil prices, the industry is able to invest more in production. As a result, supply is expected to slowly begin increasing.

Tight supply is not a sign of inadequate resources. We have an ample resource base of natural gas to supply the growing market. The National Petroleum Council estimates that 1,466 TCF of natural gas resources exists in North America. That number continues to grow as new technologies allow producers to extend the frontiers for development of existing natural gas resources.

In the long run, producers face other challenges to ensuring supply. Much of the nation's resource base resides on federal lands or beneath federal waters that have drilling restrictions. The National Petroleum Council reports that two of the most promising regions, the Rocky Mountains and the Gulf of Mexico, are largely unavailable due to drilling restrictions. Access is crucial because the following natural gas resource base is off limits or subject to significant restrictions:

· 100 percent offshore both coasts

· 56 percent of the eastern Gulf of Mexico

· 40 percent of the Rocky Mountain region

Producers are responding to the market. Today, with tight supply and rising demand, producers are individually responding by working to bring more natural gas to the market. Indicators of increased production include:

· The number of active natural gas drilling rigs is up 90 percent from April 1999.

· 75 percent of the active U.S. drilling rig fleet is engaged in drilling for natural gas.

However, there is a lag between the time producers begin to drill and the time it takes to get that gas to market. It can take anywhere from a few months to several years to bring supply to market, depending upon the geographic location and point in the exploration and development cycle at which producers begin the process.

§ Wells: If a drilling prospect in a currently producing field already exists, it takes an average of three months to bring that gas to market. If, however, wildcat exploration for new fields is required to locate new sources of natural gas, and depending on the complexities of development, it can take several years for that gas to reach market.

§ Workers: Moreover, to the extent that individual companies had to cut back drilling, they also had to let go of rig workers; now, rehiring skilled and unskilled workers is part of the gearing-up process.

§ Safety and Environmental Compliance: Two cornerstones of drilling for natural gas are ensuring that we produce natural gas safely and in compliance with all environmental regulations. Producers are complying with existing regulations and are committed to do so.

We appreciate this opportunity, Mr. Chairman, to inform Americans about these facts. And we need your help to refrain from governmental interfering with the competitive forces introduced by the U.S. Congress in 1989, competitive forces which have brought benefits to natural gas consumers. In short, the best approach when dealing with natural gas supplies is to let the competitive market work to benefit all our citizens.

Thank you.