From the May 2012 issue of Research Magazine • Subscribe!

Creating a Future-Ready Natural Gas Industry Now

My top priority for this year as chairman of the American Gas Association (AGA) is ensuring that our customers, regulators and elected officials are confident in our ability to safely deliver our product. AGA’s members, more than 200 local energy companies delivering clean natural gas to 177 million Americans, provide service to 70 million residential, commercial and industrial customers and operate more than 2 million miles of distribution pipelines.  It is our job to keep them safe, and I take that job very seriously.

Our natural gas supply outlook is the most positive it has been in decades.  We are poised for robust growth ahead.  There are exciting opportunities to increase new market demand for natural gas, including greater direct use of natural gas in homes and businesses, electricity generation and natural gas vehicles. 

There has never been a better time for natural gas.  Natural gas is the future of the energy industry, and by extension our economic future.  Natural gas is abundant.  It’s domestic.  It’s clean burning.  The industry creates millions of jobs.

Gas remains the primary source of heat, hot water and cooking in residential/commercial markets.  Increased efficiency offsets customer additions.  In fact, the size of the average American home has increased by more than 50% since 1970, yet during that same time period natural gas consumption has gone down by 40% per household.  This is due to more efficient gas appliances and more efficient homes.

Some 71 million customers in 2011 consume essentially the same amount of gas as did 38 million customers in 1970. We are seeing increased penetration by natural gas into the electricity generation market, and this is expected to continue.

Gas Advantages

Gas has multiple advantages: the economic benefits, the environmental benefits, the efficiency of natural gas, and the abundant domestic supply of readily available gas. Heating oil costs about two and a half times as much as natural gas on a per British thermal unit (Btu) basis.

Electricity costs about three times as much as gas. As the electricity industry seeks to modernize and update its infrastructure, it will have to spend money to rebuild electricity generation, increase the use of smart grid technology and install new transmission capacity.  This could push electricity prices up, widening the gap between the two energy sources.

The competitive price of natural gas will continue to get better. The primary focus for utilizing our expanding gas supply has been electricity generation.  This has been driven by the benefits to the environment of clean-burning natural gas. More than half of the new electric generation capacity expected to be built in the coming decades will burn natural gas.

Most of the new plants will use highly efficient combined-cycle technology, consuming less natural gas to generate electricity than traditional plants. While these highly efficient plants are being added to the system, older, less efficient gas plants will be retired, helping to offset any increase in gas demand from these new units. Even if natural gas use for electricity generation grows at a faster pace than expected, our abundant supply of natural gas can meet that demand.

These same advantages are evident in other markets as well, like industrial and commercial. The low cost of energy due to the use of natural gas in an industrial capacity can bring the manufacturing base back to U.S.  We’re already seeing this with the chemical and steel industries, among others.

Safety Focus

I would like to explain how AGA members will capitalize on this opportunity and create a future-ready natural gas industry.  It is incumbent upon us to deliver that gas to our customers, safely and reliably, and as I mentioned, pipeline safety is always our industry’s highest priority—and will get even more of our focus this year.  We have the largest integrated pipeline system in the world, with 2.4 million miles of pipe, and we are expanding that infrastructure at a cost of many billions of dollars. 

U.S. Transportation Secretary Ray LaHood called upon U.S. pipeline owners and operators to conduct a comprehensive review of their oil and gas pipelines to identify areas of high risk and accelerate critical repair and replacement work. The pipeline industry, led by industry CEOs, has joined Secretary LaHood in his call to action to repair, replace or rehabilitate the highest-risk infrastructure.  America’s natural gas utilities have heeded that call and are leading on this issue.

AGA adopted a commitment to enhanced pipeline safety, and the association was commended by Secretary LaHood for our continued collaborative effort to keep safety our number-one priority.  We have been holding safety summits that are widely attended for years, and our members have been sharing best practices in the area of safety to learn from each other’s successes and failures.

AGA and our members are pleased with the bipartisan support for the “Pipeline Safety, Regulatory Certainty, and Job Creation Act,” which became law at the beginning of this year.  Hitting pipelines during excavation is a significant cause of natural gas incidents.  The bill contains a strong incentive for states to remove current one-call exemptions, requiring all entities that excavate around pipelines to call a hotline before they dig to learn about what might be below.  This provision is sure to help reduce the number of accidents due to digging.

The bill passed the House and Senate with unanimous bipartisan support.  You do not see that often these days—even naming a post office gets some nay votes.  It also has the industry’s support and really shows the commitment of everyone to get this right.

AGA’s members were fully engaged throughout the process to make sure a strong, safe and smart bill was developed.  We look forward to working with federal and state regulators to ensure that the natural gas distribution and transmission system continues to be the safest and most reliable method of delivering energy in the nation.

I believe we as an industry have to get over the hump of infrastructure replacement.  This is one challenge we have to be prepared to meet, but I think we can do so—it is already happening in parts of the country.  It is a capital-intensive process, and we have to find ways to balance the needs of our investors, our customers and our regulators.

There are several objectives in ratemaking, the principal one being to establish rates that permit the pipeline operator a reasonable opportunity to recover its costs and provide a profit to investors.  At the same time, rates must be reasonable and fair to customers.  The pipeline operator needs enough revenue to ensure it can meet its safety, environmental and other legal obligations.

Finally, rates can provide incentives for desired public behavior, such as shifting use to off-peak periods. Sometimes these objectives conflict, and we must strike a balance among them—but not at the cost of safety.

We believe it is our responsibility to police ourselves above and beyond.  We spend $7 billion annually on safety-related inspection and maintenance.  Safety is and always will be unequivocally the number-one priority for the natural gas industry. Any natural gas incident, no matter the size, is one incident too many.

Sources of Supply

Supply remains the headline of the natural gas story.  The unconventional has become the everyday, and abundance is a reality.  Today, the United States is the largest producer of natural gas in the world.  Domestic natural gas production has become the dominant supply source for customers here at home.

Since 2007, U.S. natural gas production has grown by 22%.  Most of that increase can be attributed to the emergence of natural gas from shale formations.

This growth in supply has limited imported pipeline gas from abroad, and liquefied natural gas (LNG) has contributed to the possibility of the U.S. becoming a world LNG exporter.  This is an extraordinary change in less than five years.

Another positive gas supply story is rooted in the nation’s infrastructure assets, including critical pipeline networks and underground storage capability.  Not only is the U.S. the largest gas producer in the world, we have the most integrated pipeline infrastructure and the largest underground storage capacity of any country.

Underground storage reached record levels in November 2011. It stood at nearly 3.9 trillion cubic feet (Tcf) of stored working gas for the third year in a row.  According to the Federal Energy Regulatory Commission, since the year 2000, nearly 1 Tcf of new working gas capacity has been certificated, and design capacity now exceeds 4.3 Tcf.  This is important, because during the average five-month winter heating season, 15-20% of domestic gas supply originates from underground storage. 

Coupled with known gas reserves reported by the U.S. Energy Information Administration, the total U.S. resource base is now estimated to exceed 2,100 Tcf—that’s about 100 years of gas supply at current U.S. demand levels and with current technology.  In fact, according to Potential Gas Committee and Energy Information Administration estimates, since 1990, the U.S. resource base has grown an astonishing 85%.  This reflects an incredible story of extraction technology advances during the past 20 years.

The main driver, as mentioned previously, is shale gas. In 2000, shale gas was 1% of our domestic production in the United States.  Today, it is nearly one-third and growing.  Shale plays now account for more than 20 billion cubic feet (Bcf) per day of domestic natural gas supply in the United States—and that will continue to grow.

This abundant shale resource is not located in remote areas.  Shale plays such as the Marcellus shale basin in New York, Pennsylvania and New Jersey, and the Haynesville shale in East Texas and Louisiana, are located near existing pipeline infrastructure, and near markets that are getting this gas quickly, reliably and cost effectively.

Large supply means low and stable prices for consumers.  The end result has been natural acquisition gas prices in recent months at or below the $4 per million British thermal units (MMBtu) level and even below $3, which has been great for natural gas consumers of all types.  The good news here is not just low prices, but also price stability, which is extremely important to our core customers, especially in the commercial and industrial markets.

This growth in supply is not without its challenges.  But the fact is, our country now has more natural gas than Saudi Arabia has oil, because of advanced technologies that allow access to shale gas, including hydraulic fracturing.  AGA and our member companies firmly believe that our domestic natural gas resource base can be developed responsibly, thereby providing America with an abundant supply of domestic natural gas and remaining good stewards of our environment.

Development Diligence

If we develop this resource in a responsible manner, we have an opportunity to transform the energy industry.  The environment will benefit from greater use of clean burning natural gas, which is by far the cleanest fossil fuel.

Natural gas producers must be committed to operational standards that ensure safe, environmentally sound, responsible, economically sensible and sustainable development of natural gas resources in the United States. Public dialogue and disclosure—particularly around well-completion chemicals, wastewater treatment and air quality—as well as fact-based education and stakeholder engagement, are vital to securing broad-based support for the continued development of natural gas resources.

We believe regulation is best done at the state and local level—[these governments] need to implement regulatory constructs that protect the environment and consumer interests, and need adequate manpower and funding resources, too.

We commend the leadership of the many producers who are now proactively and diligently addressing these principles. We join with and welcome every stakeholder with a commitment to open communications.

We are committed to growing demand in our core residential and commercial markets—including appliance conversions and expansions of our pipelines, but transportation is [also] a huge opportunity.  Natural gas can, and is, being put to use across the country to fuel a wide range of transportation options, from fleet and light-duty vehicles to heavy-duty trucking and off-road applications.

Transit, Financial Trends

More than 50 natural gas utilities and producers have joined forces and are working alongside fleet managers and other industry players to further policies for the use of clean, domestic, affordable natural gas as a transportation fuel.  The governors of Colorado, Maine, Oklahoma, Pennsylvania, Utah and Wyoming are teaming up to start replacing thousands of vehicles in their state fleets with ones that run on natural gas.  Their plan is to encourage U.S. automakers to develop affordable vehicles that run on natural gas, driving demand for more filling stations and cars that use this clean burning energy source.

The natural gas vehicle market has taken a while to get up to speed, [though] the cost of natural gas versus gasoline on a gallon-equivalent basis is just indisputable.  I think it may have to happen without significant government support.  We talk about government help in terms of the first-cost issues, putting the refueling infrastructure in place and things like that; but our country is running huge budget deficits, and I think that will have a tremendous impact on businesses, including ours.

During this continued period of stagnant economic growth, the shareholders invested in our industry are happy that we continue to pay strong dividends.  Most of our energy utilities have paid dividends continuously for more than 50 years.

As you would expect, with the scheduled expiration of the lower 15% tax rate by the end of 2012, a priority for AGA, remains to promote the benefits of lower dividend tax rates. And if the lower rate is not made permanent, the AGA will work hard to ensure parity between the dividend and capital gains tax rates.

We also must continue to support those who need assistance in paying their energy bills through the Low Income Home Energy Assistance Program—also known as LIHEAP.  Due to AGA’s ongoing efforts on Capitol Hill, in the very last days of December, Congress passed and President Obama signed into law the final appropriation level of $3.5 billion for LIHEAP funding for fiscal year 2012.  This funding amount is lower than the FY 2011 appropriation of $4.7 billion.  This year AGA will advocate for full funding of LIHEAP for fiscal year 2013.

Moreover, our industry’s bond ratings continue to reflect the positive financial health of our companies.  These ratings are generally in the BBB/BBB+ range or higher—which is significantly higher than the average ratings of the rest of Corporate America—with the natural-gas utility rating equally strong.

For overall investment performance, the shares of AGA member companies, as measured by the performance of the American Gas Association Index, have provided an average annual total shareholder return of above 8% over the 10-year period ending Dec. 31, 2011.  This compares with an average annual return for the S&P 500 of 2.8%.  And over the past year, the AGA Index performance clearly performed strongly in comparison with the Dow Jones Utility Index.

Remarks delivered on behalf of the AGA before a meeting of the New York Society of Security Analysts on January 25, 2012, in New York.

 

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