As a recent report notes: 'Policies that simultaneously encourage demand and discourage supply cannot co-exist indefinitely.'

The current approach to national energy policy has failed U.S. consumers. The net effect of current oil and natural gas policy is to decrease reliance on domestic production and increase dependence on foreign imports. Moreover, while crude oil imports have been growing for some time, product imports are also growing rapidly due to constraints on U.S. refining capacity. The problems we face are very real. Growing world demand for energy, continued inaction by Congress on energy legislation and a lack of commitment to develop our domestic resources have resulted in a tight supply/demand balance for U.S. consumers, including industrial users. This has led to recurring price spikes, greater market volatility and overall strain on the nation's energy infrastructure. The big losers are America's consumers who depend so heavily on affordable, available energy to heat and cool their homes, fuel their vehicles and power their businesses. Just consider the energy-related problems that our nation has faced during the past four years of inaction by Congress on the issue of energy legislation:

·  An estimated loss of one-half to a full percentage point of GDP growth already, to say nothing of the related job losses, caused by higher prices, a worsening trade deficit and a loss in international competitiveness.
·  Gasoline and diesel price spikes and tight supplies in the Midwest and elsewhere.
·  Declining U.S. natural gas production in the face of increased demand, resulting in greater price volatility and higher consumer costs.
·  Soaring heating oil prices and tight supplies in New England.
·  Electric power blackouts in the Northeast and in portions of California.

Supply is Not Keeping Up
Domestically produced energy is not keeping up with increased demand, and we are relying more and more heavily on imports to meet our energy goals. We have placed large areas off limits for energy development, thus endangering our future ability to produce the energy our economy needs, if we are to grow and prosper. Clearly, increased energy efficiency and conservation will surely help close the supply/demand gap, but those gains alone cannot eliminate it.

Four years ago, when Congress began debating comprehensive energy legislation, we recognized the steadily growing U.S. demand for energy of all types. Today, that growth in demand continues to increase. The Energy Information Administration (EIA) recently forecast that by 2025:

·  Total energy consumption will increase by 36 percent.
·  Petroleum demand will increase by 39 percent.
·  Natural gas demand will increase by 40 percent.
·  Coal demand will increase by 34 percent.
·  Electricity consumption will increase by 50 percent.

These demand increases will occur even though the EIA expects energy efficiency to improve by 31 percent and renewable energy supplies to increase by 37 percent.

Cannot Be Ignored
While we must focus on producing more energy here at home, we do not have the luxury of ignoring the global energy situation. In the world of energy, the United States operates in a global marketplace. What others do in that market matters greatly.

Look at what happened just last year. Annually, world demand for crude oil typically grows by a bit more than 1 million barrels per day. However, in 2004, it grew 2.7 million barrels per day.

According to the International Energy Agency (IEA), over the past three years, South Asia has accounted for half the growth in world petroleum demand. IEA forecasts oil demand in South Asia to grow by 3.3 percent per year between 2000 and 2030, the highest of any region in the world.

Not surprisingly, China has played a big role in the increase in world oil demand, and India will not be too far behind in the future. China, long self-sufficient in oil, is now becoming one of the world's biggest importers. And, I might add, along with India, the most aggressive geopolitical competitors for world oil and natural gas supply.

For the United States to secure energy for our economy, government policies must create a level playing field for U.S. companies to ensure international supply competitiveness. With the net effect of current U.S. policy serving to decrease U.S. oil and gas production and increase our reliance on imports, this international competitiveness point is vital. In fact, it is a matter of national security.

Inherent Conflicts in Policy
The U.S. government's current approach to energy does not work. In fact, it produces the opposite of its intended and claimed results. Natural gas is a textbook example.

The amount of natural gas that lies deep in the earth on the North American continent, and off its shores, could meet much of our needs for the foreseeable future. But, counterproductive government policies and infrastructure challenges are making it increasingly difficult, if not impossible, to access and/or develop these promising reserves.

Last year, the Congressional Joint Economic Committee (JEC) clearly stated the problem: “Obviously, policies that simultaneously encourage demand and discourage supply cannot co-exist indefinitely.” The JEC also noted: “There is no disputing that known natural gas reserves both within and outside the United States are more than sufficient to satisfy demand for decades to come.”

American consumers annually use about 23 trillion cubic feet of natural gas - almost a quarter of all the energy used in the country. The United States produces about 84 percent of the natural gas it consumes.

Most of the rest is imported from Canada, and about 2 percent is imported in the form of liquefied natural gas.

Natural gas demand is growing rapidly. There are about 60 million residential users of natural gas. Further, natural gas is used inn 78 percent of restaurants

·  73 percent of lodging facilities
·  51 percent of hospitals
·  59 percent of offices
·  58 percent of retail buildings

Moreover, natural gas is vital to America's manufacturers not only to power their operations, but as an essential feedstock for the manufacture of many of the products we use daily. Natural gas is used in the production of paper, food, glass, iron and steel, textiles, rubber and cement. It is also a primary feedstock for chemicals, plastics and fertilizers.

Obstacles in its Pathway
The government has encouraged the increased use of natural gas. Because of its clean-burning qualities, using more natural gas can help ease a number of environmental concerns, including smog, acid rain and greenhouse gas emissions. Its low emissions are why more than 90 percent of recent new electricity generation relies on natural gas. But, at the same time, federal - and sometimes state - government has placed obstacles in the way of developing new natural gas supplies.

U.S. natural gas technical resources are abundant: about 1,450 trillion cubic feet, according to the National Petroleum Council (NPC). This is enough gas to meet current U.S. needs for 60 years, based on today's exploration and production technology. Much of the nation's future natural gas supplies lie beneath federal lands in the Mountain West and beneath offshore waters. According to the NPC, the Mountain West resource base is substantial (238) and comprises 24 percent of the remaining resource base in the lower 48 states. This region is one of the few areas where production is expected to increase - provided these resources can be developed.

However, some of the most attractive prospects for new gas discoveries are either explicitly off limits, as are most of our offshore areas, or so severely restricted that development is impractical, as in much of the Mountain West. In the West, the NPC found that there is either no access, or such highly restricted and high-cost access that more than half the region's resources are commercially off limits. Thus, we are denying ourselves the equivalent of almost a decade and a half of natural gas to power our industrial needs, including agricultural use.

Complicated and sometimes duplicative requirements are imposed on gas producers. Obtaining permits to find and produce oil and gas is a slow and tedious process. Just getting to the starting point for exploration and production is a huge hurdle - or, better said, a series of hurdles.

The numerous steps in this process provide ample opportunity for legal challenges designed to delay energy development. Anti-development groups have been quite candid about this. As the Wilderness Society has said: “If you bid on a lease on public land, you can expect [environmental litigation].”

After a hearing last fall, the Joint Economic Committee concluded that: “Another factor limiting domestic production is that gaining access to public lands, where most of the promising natural gas fields lay, has become increasingly difficult … just obtaining leases and complying with the law are often not sufficient to extract natural gas. Litigation has stifled access to natural gas sources as environmental groups have brought numerous lawsuits to prevent even preliminary, non-invasive exploration activities.”

The American Gas Foundation recently issued a study of how our public policy decisions could affect natural gas markets and consumers. The study found that a continuation of existing policies would result in prices that are 70 percent higher in 2020. It concluded that this represents $200 billion in additional costs to U.S. consumers compared with a scenario where current restrictions on exploration and development were partially lifted, LNG capacity expanded and the Alaskan natural gas pipeline completed.

As this report and others demonstrate, there is no “silver bullet” - no single policy to alleviate the tight supply/demand balance. Rather, a balanced portfolio of policies is needed. Both comprehensive energy legislation and regulatory changes are overdue.

Although conservation and efficiency can have important, near- and long-term effects and must be pursued, the urgent need to develop future supplies must also be addressed.

Too Long Ignored
For too long, the importance of the supply side of the equation has been ignored by policymakers. The American Petroleum Institute's (API) natural gas policy suggestions can be summarized in one phrase: Expand our future supplies by implementing the policy recommendations in the NPC's 2003 study, Balancing Natural Gas Policy: Fueling the Demands of a Growing Economy. Its key points include:

·  Increasing access to non-park, non-wilderness onshore lands and reducing permitting costs and delays - More than half of the technically recoverable resources in the Mountain West are either off limits or highly restricted - this amounts to enough natural gas (about 125 trillion cubic feet) to heat the 60 million homes currently using natural gas for 30 years.
·  Lifting constraints on key offshore areas with high-resource potential - Only 11 percent of the offshore lands under U.S. jurisdiction are available for leasing. Administrative moratoria preclude exploration and development in many outer continental shelf (OCS) areas until 2012. According to the NPC, areas of the OCS currently off-limits could contain about 16 billion barrels of oil and about 62 trillion cubic feet of natural gas. Yet, this estimate may be low, as it is based on old and limited data; reserve estimates can increase dramatically once exploration with advanced technology is allowed.
·  Expanding access to world gas supplies - Expediting the approval process for expanding existing LNG terminals and constructing new facilities is essential.
·  Developing infrastructure to deliver natural gas supplies to consumers - Large resources of Alaskan natural gas will be stranded until a pipeline can be built to move this gas to consumers in the lower 48 states. A straightforward and timely regulatory process is needed.

Vast Energy Resources
Federal lands contain potentially vast energy resources. For example, U.S. offshore areas supply more than 25 percent of the nation's natural gas production and more than 30 percent of domestic oil production - and most of it from the central and western Gulf of Mexico. However, reserve replacement in the central and western gulf has been declining, while the eastern Gulf of Mexico and the east and west coasts remain off limits. And, offshore areas contain the majority of future oil and gas resources. It is estimated that 60 percent of the oil and 59 percent of the gas yet to be discovered in the United States is located on the OCS.

Additionally, Western lands are also vitally important for our energy future. Natural gas production in the West has more than doubled since 1990. Further, the undiscovered potential is very large: 209 trillion cubic feet or enough natural gas to heat 50 million homes for 45 years.

And, we must not forget the substantial resource base (both oil and natural gas) in Alaska. Access should also be provided to the potentially vast oil resources beneath a small portion of the Arctic National Wildlife Refuge (ANWR) in northeastern Alaska that could provide the equivalent of current oil imports from Saudi Arabia for more than 20 years.

Plus, construction of an Alaskan natural gas pipeline would allow existing stranded resources to be tapped and new resources to be developed. Overall, the NPC estimated that northern Alaskan natural gas resources could total 213 trillion cubic feet - enough gas to meet current total U.S. demand for almost 10 years.

Yet, oil and gas leasing and production are occurring on only a small fraction of federal lands. Of course, some especially sensitive and unique lands, such as national parks and designated wildernesses, ought to be set aside, but many public lands were designated for multiple uses. These “multiple-use” lands were meant to sustain a variety of uses, including energy development.

The Bureau of Land Management (BLM) manages 262 million acres of surface and 700 million acres of minerals under U.S. Forest Service, BLM and private land. Oil and gas production is not the dominant use of these lands. In fact, ongoing production occupies less than one-tenth of 1 percent of BLM's surface acreage or the federal mineral acreage.

In recent years, people involved in the energy policy debate have begun to recognize that energy is also a consumer and jobs issue. People have come to understand the economic and jobs significance of domestic energy development. For example, in New Mexico, the oil and gas industry is the largest civilian employer.

And, people increasingly understand how higher energy costs are driving U.S. jobs and business overseas. The Joint Economic Committee, citing the impact of high natural gas prices, indicated that “employment in the chemical and plastics industries has fallen 12 percent since natural gas prices first went above $4 per million cubic feet in September 2000.”

The American Chemistry Council said that since natural gas prices began to climb in 2000, the industry has lost more than $50 billion in business to overseas competition and more than 90,000 good-paying jobs in the industry have disappeared, as well as collateral jobs in support industries and associated businesses.

Oil and gas production also generates revenues for government, both federal and state, helping to maintain roads, support schools and provide social services. According to BLM, in fiscal year 2003, onshore oil and natural gas bonus payments, rentals and royalties exceeded $1.26 billion. Importantly, 50 percent of federal onshore revenues is distributed to the states and most of the remainder (40 percent) is used for the Land and Conservation Fund to buy and restore wildlife habitat.

The offshore program administered by the federal Minerals Management Service (MMS) also generates substantial revenues - approximately $6 billion per year. These OCS revenues provide more than 90 percent of the revenues to the Land and Water Conservation Fund.

Expanding supplies from government lands through environmentally responsible energy development is also seen as an important means of protecting consumers from tight fuel supplies and price spikes. And, more oil and natural gas produced here at home bolsters our national security. Currently, we import approximately 60 percent of our crude oil needs. We draw upon imports worldwide, including areas like the Persian Gulf, where the geopolitical risks are high. We can reduce those risks by finding and producing more domestic energy. While we are never going to eliminate our dependence on imports, we can reduce it by producing more energy here at home.

Compatible with the Environment
Every lease contains a standard stipulation to protect air, water, wildlife, and historic and cultural resources, but leases may also include any number of 1,000 additional stipulations to further protect resources. Moreover, before a drilling permit is issued and a well is actually drilled, experts conduct a second round of environmental analysis, and the public is provided with a notice of an application for permit to drill as well as an opportunity to comment on the application.

In addition, the Bureau of Land Management is now requiring every field office to consider requiring the use of certain best management practices (BMPs) to reduce impacts on visual and other natural resources. If the BMPs are made part of the drilling permit and are processed through an environmental analysis, they become mandatory.

It has been suggested by some that we must choose between energy and the environment. However, I believe this is a false choice. Using advanced technology and sound business practices, we can develop energy supplies while also protecting the land and the environment. For example, surface presence for exploration and development wells has shrunk significantly. Actual land use for natural gas-producing wells is now about one-half to two acres. Where possible, horizontal and directional drilling utilize multiple wells from a single site. Actions are taken to accommodate wildlife, including moving equipment away from nests and taking special precautions as warranted during breeding season. Wildlife habitat is often enhanced, and lands are reclaimed and restored after operations have ceased. There are numerous examples of companies acting as good stewards and neighbors. Let me cite two:

·  Anadarko Petroleum Corp., through its subsidiary Howell Petroleum, has invested in a multiple-use reservoir at the Salt Creek oil field near Midwest, Wyo. Anadarko utilizes surplus water from its operations in the Salt Creek oil field to create and maintain a viable trout fishery and protected wetland habitat in a nearby reservoir.
·  During Colorado's worst drought on record, ExxonMobil gave thirsty Western Slope communities much-needed water. In July 2002, the company donated to the Colorado River Water Conservation District 5,500 acre-feet of its water rights from the Ruedi Reservoir near Aspen. One acre-foot of water can supply the needs of two families for a year. The district then made water available to users who would otherwise not have been able to obtain water.

Further, our industry has reached out to other land users to address common concerns. For example, oil and gas companies operating in New Mexico adopted “good neighbor” policies designed in partnership with ranchers, cattlemen and other land users. These are directed at improving communication with communities, demonstrating industry commitment to public safety and environmental protection, and respecting property rights of others.   E+P

Red Cavaney is president and CEO of the American Petroleum Institute. His comments are from a speech he delivered in February to the National Governors Association Committee on Natural Resources. For more information, visit www.api.org.