Creating a Future-Ready Natural Gas Industry Now

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.