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 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.
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.