AMERICAN CHEMISTRY COUNCIL

 

 

STATEMENT FOR THE RECORD

 

 

 

SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE AND NUCLEAR SAFETY

Committee on Environment and Public Works

 

UNITED STATES SENATE

 

HEARING ON

 

S.485, THE CLEAR SKIES ACT

 

MAY 8, 2003


 

 

The American Chemistry Council welcomes this opportunity to comment on the Clear Skies Act as it relates to the all-important issue of natural gas supply and demand.  Our country’s standard of living and the economic health of our citizens and our industries that provide the wealth of our jobs are tied intimately with the energy supply including a competitively priced natural gas component.

 

It is impossible to discuss the benefits of Clear Skies legislation without first asking Congress how it plans to address the larger issue of restoring balance to the natural gas markets.

 

Over the past decade, environmental legislation and policies, like the Clean Air Act, have had the effect of triggering a dramatic run-up in demand for natural gas.  Other environmental policies have put the nation’s most promising natural gas reserves off limits. As a result, all consumers are hurt by the high prices that result from the increased demand and shrinking natural gas supply.

 

American manufacturers are being priced out of the marketplace. Plants are closing. Jobs are moving overseas.  Over 35,000 well paying jobs in the chemical industry are at risk due to the latest run-up of natural gas prices and sustained natural gas prices of over $6.00/MMBtu will threaten over 200,000 jobs economy wide.  Natural gas pricing forecasts call for more of the same.

 

At the end of the day, the real environmental benefits that could be achieved by Clear Skies legislation will mean little to American manufacturers, if current energy policies continue, and more manufacturers and jobs are driven off shore because America now has the world’s highest energy prices.

 

The Natural Gas Crisis

 

Last month an energy-consulting firm, Energy and Environmental Analysis, issued a report saying that, “US natural gas prices will average $6.00/MMBtu at Henry Hub through the current storage injection season.”

Prices next winter will increase further, averaging $6.40 from November through March and peaking as high as $6.60 between December and February, the firm said. "Declining gas productive capacity due to the anemic drilling activity in 2002 has resulted in extremely tight market conditions,” EEA said in its monthly report.

 

Those US prices are more than double the price of natural gas in Europe, more than triple the price in parts of Asia, and nearly ten times the price of natural gas in the Middle East, North Africa, Russia, and Venezuela.

 

Natural gas is a regional commodity, but industries that depend on natural gas compete in a global marketplace.  The chemical industry is an example.  Chemical makers use natural gas to power their plants and as a raw material that is converted into plastics, fibers and other materials that are bought and sold around the world.  In recent years, when the price of natural gas was at its historic average, the chemical industry posted a $20 billion trade surplus.  Today, the US is net importer of chemicals.  Today, the US is the world’s high cost producer of chemicals because it pays the highest prices for natural gas.  With its competitive advantage gone, US chemical production capacity is being shut down and thousands of good-paying jobs are moving overseas.

What’s happening to natural gas is simple - the oft proven laws of supply and demand at work.  Demand for natural gas is booming and supply is declining.  The gap is growing rapidly and, as a result, the price of natural gas has tripled since 1999.  Compounding the problem – the inventory of natural gas is now at historic lows.  These inventories are unlikely to be replenished over the summer to a level sufficient to drive down prices in the face of next winter’s heating demand.

 

What America faces is not a seasonal disturbance, but a fundamental structural imbalance in supply and demand for natural gas.  America has developed a tremendous demand for natural gas.  It is clean. It is efficient.  It is critical to making important products Americans use every day.  And until recently, it was abundant and competitively priced.

 

Consumers demand it for heating their homes.  Half of new homes are now heated by gas.  Environmentalists demand it because it is clean burning.  Industries, including the chemical industry, demand it because it is an excellent raw material for making thousands of products that we each use, every day.

 

More recently the electric utility sector of the US economy has turned to natural gas.  Because of the low capital costs, shorter construction lead times, and environmental policies, natural gas used to generate electricity has increased by 35 percent in the past five years.  Natural gas consumption for electricity generation is projected to increase from 5.3 trillion cubic feet in 2001 to 10.6 trillion cubic feet in 2025.

 

America’s economy is becoming one that is increasingly reliant on natural gas.

 

Natural gas prices and subsequent impacts leave us with questions about how much Clear Skies will help our situation.  While Clear Skies could slow the drive to natural gas for power generation, and could even promote clean coal technologies for future generating capacity, additional action is needed.  Environmental policies like Clear Skies will have little bearing on businesses like ours if our operations continue to be driven off-shore by runaway energy prices.

 

Congress Needs to Act

 

Unfortunately, the nation’s current natural gas supply is running low.  Production capacity is lower today than it was 30 years ago when Americans were consuming far less natural gas.

 

The paradox is that America has adequate domestic natural gas reserves to meet current and future needs.  Unfortunately, Congress won’t allow access to those natural gas reserves.  The most promising – and desperately needed - reserves are currently off-limits to development.  Many of these reserves are in partially restricted areas like the northern Rocky Mountains, Alaska, or in fully restricted areas such as the eastern Gulf of Mexico and off the East and West Coasts.

 

In the final analysis, the natural gas crisis is a domestic political and public policy problem.  Environmental policies are driving new demand for gas to generate electricity and heat homes.  Other environmentally driven policies keep critically needed supplies off limits.  As a nation, we can’t have it both ways.  We can’t demand more natural gas and continue to cut off the natural gas supply.

 

Natural Gas Implications for the Clear Skies Act

 

This economic and energy context shapes how we look at environmental policies like Clear Skies.  National air quality policies have sharply accelerated the switch from coal to natural gas by electricity generators.  The Clear Skies proposal, in its current form, has the potential to slow the stampede from coal to gas and to partially help secure a period of more stable, diverse and sustainable supply of competitively priced energy.

 

Clear Skies does not go far enough, however, to promote the development and use of clean coal technologies for future generating capacity.  Clear Skies largely supports the continued use of existing generating capacity with add-on technology controls, but does little to encourage the adoption of control technologies that will actually grow the use of coal in America and mitigate the demands on natural gas.

 

When compared to other multipollutant legislation that has been introduced, Clear Skies would best promote continued fuel diversity.  Clear Skies attempts to balance the demand for continued Clean Air progress with maintaining energy diversity.  The debate surrounding the introduction of Clear Skies highlights this delicate and tenuous balancing act - even minor changes to the bill could drive utilities to switch to natural gas.

 

Clear Skies does not put mandatory controls on CO2 emissions.  If Congress does enact mandatory CO2 controls, the days of coal-fired power generation are numbered.  Coal, the one domestically abundant energy source that keeps energy prices in reasonable balance will no longer be used.  Natural gas prices will skyrocket with even greater demand and subsequent shortages of supply.  The three-pollutant approach, described in Clear Skies with implementation carried out over a reasonable timeframe will enable utilities to make use of the latest clean coal technology and move forward with development of additional coal technologies.

 

The right timelines also could enable power generators to maintain their diverse fuel base, and assure market entry of advanced fossil technologies, including natural gas and coal technologies.  The same holds true for timelines and stringency chosen to control mercury emissions.  Too tight a timeline or too stringent mercury reduction will force utilities to fuel-switch.

 

Clear Skies should provide an exemption for all energy efficient and low-emitting combined heat and power (CHP) generators.  Many of our member companies rely heavily on CHP systems to provide the steam and electricity for internal manufacturing processes.  These systems are universally recognized as being ultra-efficient when compared to traditional fossil fueled utility power generators because they capture the heat from the electricity generation process for use in the host chemical plant.  Today’s systems can reach or exceed efficiencies as high as 80 percent, nearly twice that of the best combined-cycle gas fired utility generator.  Obviously getting twice the energy outputs from the same energy inputs is beneficial.  Congress should be encouraging greater CHP usage by commercial, industrial and residential interests. 

 

The American Chemistry Council has not yet finalized our position on Clear Skies legislation as environmental policy.  But Clear Skies also has implications on national energy policy, and in that regard, our position is clear: Clear Skies can slow the stampede in power generation from coal to natural gas and Clear Skies can help America maintain a more diverse fuel base.  But Clear Skies cannot, by itself, restore balance to natural gas markets and it will not stop new generating capacity from being almost exclusively natural gas fired and increasing the price of natural gas.  Lastly, Clear Skies alone cannot make American manufacturing more competitive and help our economy regain and maintain its strength in global markets by lowering energy prices.

 

Congress must open up the domestic natural gas supply and restore balance to our nation’s fuel diversity.  A strong long-term economy that includes an energy policy that improves the economic well being of all citizens must be coupled with the actions that lead to improved health and environment.