Short-term natural gas markets are notorious for abrupt price spikes. The latest instance, while hardly unprecedented, is for some an excuse to attack environmental safeguards on extracting and burning natural gas. There are obvious parallels to many attempts to exploit California's 2000-2001 electricity crisis. We were told then that air quality regulations and siting reviews had to be sacrificed to avoid blackouts and ruinous rate increases. California instead provided yet another demonstration that energy conservation is the fastest, cheapest and cleanest way to improve energy security and avoid costly shortages. California's experience also reminds us that wholesale gas and electric prices have proved vulnerable to manipulation, and legislators spanning the ideological spectrum are rightly demanding investigations of price spasms that seem wholly inconsistent with the normal operations of efficient markets. Also, NRDC agrees with the American Gas Association that, in addition to promoting energy efficiency more aggressively, the nation's natural gas utilities should be encouraged to move more of the nation's gas supply purchases out of runaway short-term markets and into less risky multi-year, fixed-priced contracts.

Rhetoric about the latest natural gas "crisis" betrays a failure of many in the nation's capital to learn from recent history. California brought energy prices down and eliminated blackouts with an adroitly coordinated conservation campaign. Following years of steady if modest annual growth in consumption, the state cut electricity use by about six percent in 2001, with even higher reductions during peak periods, despite hotter than normal weather and continued economic growth. The keys to that campaign were energy efficiency standards, incentives and public education, all of which need a far more prominent place in the nation's arsenal of policy tools.

It is also important not to overreact. Contrary to widespread impressions, U.S. natural gas use hasn't been soaring; it dropped in 2003 and again in 2004, according to the Energy Information Administration's Annual Energy Review 2004 (Table 6.1, Natural Gas Overview). The 2004 levels of consumption were more than four percent below those recorded in 2000, notwithstanding substantial intervening economic growth. Indeed, U.S. natural gas use in 2004 was within one percent of levels recorded more than thirty years earlier in 1973. The latest "crisis" could fade quickly from the headlines. But sharp price increases inflict real pain, and it is entirely reasonable to ask whether there are more and better ways to hedge the nation's risks in an unsteady market for a vital commodity.

Back in June 2003, U.S. Secretary of Energy Spencer Abraham acknowledged in a letter to the Senate that "over the next 12 to 18 months there are only limited opportunities to increase [natural gas] supply," and that "therefore, the emphasis must be on conservation, energy efficiency and fuel switching." The last item on that list almost always carries an environmental penalty, as dirtier fuels like fuel oil are substituted for natural gas, so the highest priority should go to ways of getting more work out of less gas. Unfortunately those 12-18 months passed with little federal action or leadership.

There is, however, a lot the federal government can do. In the short term, we recommend the following:

• Accelerate and extend energy efficiency tax incentives for buildings in the Energy Policy Act of 2005. The Administration should promptly issue regulations implementing the energy efficiency tax incentives enacted in the Energy Policy Act for buildings and equipment. Congress should extend the non-residential and equipment incentives to the four or five year period specified in the Senate version of the Energy Policy Act. Congress should also give the Department of Energy (DOE) funding to 1) promptly complete the implementation regulations for those incentives that require them and 2) provide information and programs to encourage the use of these incentives.
  
  
• Congress should enact additional tax incentives for energy efficiency retrofits of existing homes. Congress should pass the performance-based incentives for existing home retrofits contained in the Senate version of the Energy Policy Act for the full four-year period provided in that bill, while letting the smaller and less effective incentives of the Energy Policy Act (enacted version) expire in 2007 as now scheduled.
  
  
• Congress should fund the Low Income Home Energy Assistance Program (LIHEAP) and the Weatherization Assistance Program (WAP). The Energy Policy Act authorizes $5.1 billion for LIHEAP and $500 million for WAP. The upcoming winter heating season will be especially hard on these vulnerable households; it is critical that Congress fully fund these authorizations.
  
  
• Congress should expand federal energy efficiency programs. Certain members of Congress are proposing to cut major federal energy efficiency programs such as Energy Star and the State Energy Program. The last thing that should occur in advance of a very high cost winter heating season is the gutting of energy efficiency programs. Congress should instead expand federal energy efficiency programs.
  
  
• Congress should encourage states to consider utility regulatory reforms that would motivate utilities to implement more significant energy efficiency programs. In most parts of the country, the revenues of electric and gas utilities are tied to how much electricity they sell. Utilities therefore lose out financially when they help their consumers become more efficient. California recently embarked on a new regulatory strategy with bipartisan support that will allow utilities to invest well over $2 billion during the next three years to promote energy efficiency and make sure that their success at helping their customers doesn't hurt their financial ratings. State officials should reform their regulatory policies to ensure that utilities are not harmed by customers becoming more energy efficient. Congress should encourage states to 1) consider such reforms and 2) require utilities to implement cost-effective energy efficiency programs with annual savings targets equivalent to at least one percent of their systems' yearly energy consumption.
  
  
• Congress should establish a nationwide energy efficiency education campaign. A useful model is California's Flex Your Power public-education campaign, which has received national and international recognition for excellence. The campaign includes retail promotions, a comprehensive website, an electronic newsletter, educational materials and advertising. The campaign has been successful because there are financial incentives for energy efficiency and the utilities actively promote the campaign.

There is also much the federal government can do over the mid to long term to save natural gas. We recommend the following:

• Congress should enact a national renewable portfolio standard. The Energy Information Administration (EIA) has said that requiring major electric companies to gradually increase sales of electricity from wind, solar and other renewable sources to 10 percent by 2020 would save consumers over $22 billion. Such a renewable portfolio standard would also create over 90,000 jobs, foster rural economic development and reduce emissions that cause global warming.
  
  
• Congress should extend the production tax credits for certain renewable energy resources. Federal law currently provides a tax credit for electricity produced from wind and geothermal resources. The credit for these resources is scheduled to expire at the end of 2007. Congress should take immediate action to extend this credit to the end of 2010 and expand the eligible resources to include environmentally sensitive ocean energy. A modest extension is needed to continue the deployment of wind farms and avoid the "boom and bust" cycle that cripples wind developers. The ultimate goal of tax credits and other renewable energy incentives should be to enable renewable energy resources to compete with fossil fuels in the market place without the need for incentives.
  
  
• DOE should issue long-overdue minimum energy efficiency performance standards for certain appliance and equipment products. DOE has repeatedly ignored legal deadlines requiring it to issue minimum energy efficiency performance standards for over twenty kinds of power-thirsty appliances and equipment on which consumers and businesses depend. NRDC and two consumer organizations filed a lawsuit calling for DOE to issue the standards. DOE is at least six years and in some cases thirteen years late in issuing these standards. Fifteen state attorneys general also filed a lawsuit against DOE similar to NRDC's lawsuit. DOE should stop dragging its feet and issue the standards.
  
  
• DOE should quickly issue energy standards for federal buildings. The recently passed Energy Policy Act requires DOE to develop mandatory minimum efficiency standards for federal buildings. These standards could make a big difference, but only if they are adopted promptly and used as models for more broadly applicable standards. The standards for residential buildings can be developed quickly by beginning with the Energy Star residential building specification and enhancing it enough to meet the Act's 30 percent savings goal; the commercial building standards can be based on the New Building Institute's Advanced BuildingsTM Benchmark for such buildings, with slight enhancements in energy efficiency. Congress should provide DOE the necessary funding to develop the federal building standards and work with states to update their energy building codes to at least the same level as these standards.

The untapped gas efficiency "resources" described above will expand steadily, as a growing economy adds more opportunities to secure long-lived savings, in sharp contrast to the finite inventory of underground deposits. On the other hand, it is hard to argue that opening more publicly owned lands to drilling would be any kind of antidote for higher gas prices. According to a January 2003 report by the Interior, Energy and Agriculture Departments, only 12 percent of "technically recoverable" federal gas resources in the five major Western basins (the equivalent of some nine months of current U.S. consumption) are totally off-limits to leasing and development, and most of that 12 percent is in lands that Congress has designated as wilderness and national parks.

Moreover, much of the gas identified as technically recoverable is uneconomic to exploit at low gas prices and unavailable except over extended time periods. In offshore areas, the most recent Department of the Interior assessment indicates that 80 percent of economically recoverable gas reserves are now open to development. Because severe ecological and other damage can result from exploration and development activities, decisions about production from these -- and other -- reserves should be made after thorough environmental review and with full public participation.

In sum, the best way to reduce our economy's vulnerability to high natural gas prices is to waste less natural gas, starting with a California-style public education campaign and a stronger version of the tax incentives that Congress recently created for energy efficiency. At the same time, we must tighten equipment and building standards, while ending a dangerous trend of rollbacks and delays.

California has a quarter century record of using comparable strategies to reduce both natural gas consumption and the accompanying utility bills. Recent studies commissioned by the Pacific Gas & Electric Company indicate that, by 2001, longstanding incentives and standards targeting natural gas equipment and use had cut statewide consumption for residential, commercial, and industrial purposes (excluding electric generation) by more than 20 percent.

A nationwide public education campaign could start by simply reminding Americans about the very significant benefits of maintaining and repairing heating and cooling ducts and equipment; the Air Conditioning Contractors of America estimates that these practices alone could save up to 30 percent of heating and cooling costs, with immediate benefits to both consumers and the environment. For those who are considering purchases of new appliances, the Energy Star program managed by EPA and DOE provides a simple way to identify the most energy-efficient models within a product category. Gas-consuming products in the program include furnaces, clothes washers, dishwashers, boilers and programmable thermostats. In general, products that bear the distinctive Energy Star logo reflect the top 25 percent performing models.

Why Not Just Open More Lands and Offshore Areas for Gas Drilling?

The United States already meets about 85 percent of its natural gas needs from thousands of domestic wells both offshore and onshore; most of the rest is imported from Canada. As noted earlier, most of the nation's known and potential gas resources are already open to drilling, although better stewardship practices are crucial to avoiding severe environmental degradation. But some areas still are or should be off-limits.

Offshore development is associated with onshore infrastructure, including pipelines, which has caused significant harm to salt marshes and other coastal resources. The industrialization associated with offshore development is often at odds with the existing economic base of affected coastal communities. Offshore development also brings with it the risk of toxic oil spills, which in turn threaten a wide variety of marine species. Extraction of oil or gas from beneath the ocean floor creates massive amounts of drilling waste containing toxic metals and other contaminants, most of which is dumped untreated into surrounding waters. Offshore operations generate large amounts of "produced water," which is brought up from wells along with oil and gas. Produced water also contains a variety of toxic pollutants and typically is discharged into the ocean with minimal treatment. Offshore seismic exploration means noise pollution harmful to whales and other marine mammals that depend on sound to communicate. And drilling generates tons of air pollutants per well.

Onshore development, like the offshore variety, results in heavy-duty industrialization of affected areas. Exploration activities degrade wildlife habitats and roadless areas, harm fragile soils and archeological resources, and encourage damaging offroad vehicle use. And extraction activities have displaced wildlife and fragmented and degraded their habitats. Wilderness values on millions of acres have been lost and local communities transformed through "boom and bust" economies.

Well fields can cover thousands of acres and encompass hundreds, even thousands, of wells and well pads. Each field is accompanied by a dense web of power lines, miles of pipelines and roads, waste pits, compressors, processing plants and other production facilities. In addition to causing increased erosion and dust, these activities pollute once-quiet open space with noisy machinery -- typically powered by diesel engines -- that runs continuously. On many days in many places where development is now occurring, once-clear skies are marred by emissions from drilling, pumping and processing operations. Conventional drilling for oil and gas has depleted underground aquifers and contaminated surface waters with toxic drilling materials and produced water, while coalbed methane development has caused unique and severe water-related problems.

Given these impacts, NRDC has identified sensitive areas both onshore and offshore that should be off-limits to exploration and development activities. Domestically, these areas include the Arctic National Wildlife Refuge, Utah's Redrock Canyon Country and the Jack Morrow Hills, the heart of Wyoming's Red Desert. Sensitive areas of the U.S. Outer Continental Shelf include waters off the East and West coasts, the eastern Gulf of Mexico and offshore Alaska.

Outside the United States, these special places include national parks and other protected areas as well as areas of biodiversity significance, which deserve protection. In 2002, the government of Costa Rica decided not to permit offshore oil development on the Caribbean coastline of Costa Rica, which contains coral reefs, mangroves, sea turtle beaches and a number of protected areas. The Castle and Big Horn areas in Alberta, Canada are another example. These areas are important elements of the Northern Rockies wildlife corridor that are not currently protected and are threatened by gas development. The Castle Wilderness has seen 40 years of natural gas drilling around its edges, while the Bighorn Wildland is a potential target.

Where development does take place, it must be conducted in an environmentally responsible manner. Unfortunately, both at home and abroad, development is taking place without adequate consideration of impacts and feasible development technologies and mitigation measures are routinely ignored.

Offshore and onshore, produced water and drilling waste should be reinjected whenever possible, associated facilities should avoid coastal wetlands and other sensitive habitats, noise and air pollution should be minimized using the best available technologies, and oil spill detection and cleanup technology should be capable of addressing major spill events in a timely and effective manner. Seismic exploration must be conducted in a manner that does not harm sensitive resources, including marine or terrestrial animals and habitat, as well as cultural and historic resources. Surface disturbance and habitat fragmentation must be avoided, adequate reclamation standards imposed and enforced, reclamation bonds that cover actual reclamation costs required and all stages of operations subjected to effective inspection, enforcement and monitoring.

As indicated, practices such as these are infrequently employed -- even in connection with development on America's western public lands. Moreover, energy companies and their supporters have recently begun attacking the measures traditionally imposed by federal managers to protect other publicly owned resources from the adverse impacts of gas and oil development "restrictions and impediments" to production. In fact, these protections are sound measures authorized by federal law and their use has not prevented rapid escalation of development activities -- in some cases at record levels.

What Is the Status of Current Development Activities on Public Lands?

According to the Bureau of Land Management (BLM), most of the oil and gas resources -- 85 percent of oil resources and 88 percent of natural gas resources -- on federal lands in the intermountain West¹ are available for leasing and development.² Over 35 million acres of federal lands have been leased,³ although only about 12 million acres are in production.⁴ In 2004, the BLM approved a record number of drilling permits -- 6,052 permits -- a 60 percent increase over 2003.⁵ Thousands of those permits went unused: according to the Bureau, the industry drilled only 2,702 new wells on them.⁶ Nonetheless, natural gas production from onshore federal lands reached an all-time high in 2004. Indeed, between 2003 and 2004, production increased 42 percent.⁷

Clearly, environmental litigation and appeals have not been the obstacle to production that the industry and its friends claim. In fact, the chief obstacles appear to be the lack of drilling equipment and drilling personnel.⁸

What about lease terms and conditions? The industry and its supporters have complained that measures imposed by federal land managers to mitigate the environmental harms resulting from development are "restricting" and "impeding" oil and gas development on the public lands.

BLM is required by law to balance energy development with other resources of the public lands. The agency carries out this mandate by incorporating terms and conditions -- known as stipulations -- into oil and gas leases or as conditions of approvals at the permitting stage. These stipulations are routinely employed to protect wildlife, municipal water sources and recreational and cultural resources. Rarely, if ever, do they prohibit development entirely. Typically, they affect the timing and/or location of development activities. Energy companies agree to honor these measures when they purchase federal leases.

For example, all BLM leases generally include "standard stipulations." Typical of such measures are prohibitions on surface occupancy within 500 feet of surface waters and riparian/wetland areas or within one-quarter mile of an occupied building, road building on steep slopes, and construction when soil is saturated. They are designed to protect water resources, including waters used for drinking and other domestic purposes, as well as to prevent landslides and minimize erosion.

Seasonal or "special" stipulations are used in areas where oil and gas activities at certain times of the year could pose severe threats to wildlife resources: they allow development to go forward in sensitive wildlife habitat areas except during critical periods. Sensitive habitat areas include elk calving and winter range areas, big game migration corridors and critical raptor habitat. The BLM may restrict operations when these areas are in use by the species of concern. Frequently it does so at the request of state fish and game agencies or after consultation with the U.S. Fish and Wildlife Service.

On occasion, the BLM imposes "no surface occupancy" stipulations, which prohibit operations directly on the surface overlaying a leased federal tract. Usually the agency does so to protect another resource or use that conflicts with surface oil and gas operations, such as underground mining operations, steep slopes or campsites. Reserves subject to these stipulations may be tapped by drilling at an angle from another location.

While the industry is now attacking these stipulations as an unreasonable obstacle to development on federal lands in the Rocky Mountain West, a telling picture of their actual effect on oil and gas activities could be found in 2004 on the BLM's Pinedale Field Office's website. Here the office published its summary of "exceptions" to -- i.e., waivers of -- wildlife stipulations that it granted to oil and gas operators at their request during a recent season. It revealed that the agency granted every one of the 173 requests for waivers of stipulations designed to protect sage grouse, the numbers of which are rapidly dwindling on BLM-managed lands. The situation is similar for raptors and for big-game winter habitats, the BLM turned down just one waiver request.

The BLM imposes lease stipulations in order to protect western landscapes and resources and the quality of life of local residents. And it can -- and does -- routinely waive them at industry's request. Nevertheless, if the agency's authority to impose these protections is restricted directly (by changing its mandate) or indirectly (by establishing arbitrary deadlines for its actions) it is western communities and their residents who will suffer first and longest.

What is NRDC's View of the Proposed New Alaska Natural Gas Pipeline?

Geologic formations already drilled within onshore state-owned lands in the Prudhoe Bay region contain at least 35 trillion feet of natural gas, equivalent to about one-fifth of all U.S proved reserves (or slightly less than two years worth of nationwide consumption at current levels). A pipeline route linking these reserves to the U.S. and Canadian gas transmission system, using existing Alaska rights-of-way, was approved almost twenty years ago under the auspices of the Alaska Natural Gas Transportation System. The new pipeline would run parallel to Alaska's principal oil pipeline and the Alaska Highway. NRDC does not oppose construction of this system, provided that the earlier environmental reviews are updated in accordance with applicable federal and state statutes and regulations.

What About Liquefied Natural Gas (LNG)?

Liquefied natural gas (LNG) is natural gas that has been cooled to 261 degrees Fahrenheit below zero, reducing the volume of the gas 600-fold. Specially designed tankers with large, insulated storage compartments can carry more than 2.5 billion cubic feet (Bcf) of gas per shipment. In 2004, the United States imported approximately 652 Bcf of natural gas in the form of LNG,⁹ which is about 3 percent of its total gas consumption (22.42 trillion cubic feet (Tcf).¹⁰

Proposals have surfaced for many import facilities to serve the U.S. market.¹¹ As Alan Greenspan, chairman of the Federal Reserve Board, has indicated in testimony before Congress, adding more LNG capacity would provide additional access to natural gas reserves around the globe, but these are costly long-term projects with very challenging siting requirements. LNG importation facilities require enough land for regasification and storage infrastructure along with harbors with sufficient depth, anchorage and turning space to accommodate LNG tankers, which can measure 900 feet in length, 140 feet in width and 36 feet in draft below the waterline.¹² The size and draft of LNG tankers severely limit potential sites for new onshore LNG marine terminals, along with extensive local opposition and Coast Guard restrictions on LNG tanker movements in harbors and waterways. Moreover, major gas suppliers are balking at the long-term purchase contracts that would be needed to underwrite these capital-intensive installations.

NRDC recognizes both the potential value of LNG as a substitute for more environmentally destructive fuels and the legitimate concerns of local communities confronting the equivalent of a major new industrial facility. With careful siting, the greater price stability that LNG offers could help avoid increased reliance on dirtier fuels for electric generation and other purposes. In addition, NRDC recognizes the value of natural gas, in both compressed and liquefied form, as a relatively clean alternative fuel for vehicles. But increased use of LNG must not become a means for shifting natural gas exploration and extraction to especially sensitive areas or to nations lacking adequate environmental safeguards. NRDC will work to ensure that sources of LNG for US markets, including processing facilities, meet or exceed appropriate standards of environmental protection. And any LNG siting decisions, onshore or offshore, must analyze all potentially significant environmental impacts, take full account of coastal zone management programs of the host states or foreign nations, allow for full public participation and avoid marine sanctuaries, marine protected areas, sensitive habitats and fragile resources like deep corals.

Appendix: U.S. Natural Gas Use and Reserves

The United States consumed 22.42 trillion cubic feet (Tcf) of natural gas in 2004, to satisfy the needs of manufacturing, electric generators, residential customers and commercial consumers.¹³ In 2003 production of natural gas, both onshore and offshore, provided 19.43 Tcf,¹⁴ which was 87 percent of domestic demand (22.38 Tcf).¹⁵ Domestic natural gas proved reserves in 2003 were estimated at 189 Tcf, with 73 percent of proved reserves concentrated in Texas, New Mexico, Wyoming, Oklahoma, Colorado and Gulf of Mexico Federal Offshore areas.¹⁶

The Federal Offshore proven reserves are concentrated in the Gulf of Mexico off the coasts of Alabama, Louisiana (16.73 Tcf) and Texas (5.3 Tcf).¹⁷ Natural gas reserves are located in deep waters of the Federal Offshore Central and Western Gulf of Mexico. According to the Minerals Management Service (Department of Interior) undiscovered natural gas economically recoverable reserves for the Federal Offshore Gulf of Mexico areas are estimated at 100.3 Tcf.¹⁸ A majority of the natural gas reserves are located in deep water (exceeding 400 meters in depth) in the Federal Offshore Central and Western Gulf of Mexico areas.

Other domestic natural gas reserves await construction of pipelines to bring that gas to market in the lower 48 States. On the Alaskan North Slope in the Prudhoe Bay production area, oil producers have been reinjecting an estimated 38 Tcf of natural gas back into oil reservoirs to enhance oil recovery.¹⁹ A pipeline system to transport that natural gas from northern Alaska is estimated to cost up to $20 billion, and would require at least four to six years to construct.

Notes

1. Colorado, Montana, New Mexico, Utah and Wyoming.

2. Bureau of Land Management (BLM), 2000 Energy Policy and Conservation Act Inventory Fact Sheet, January 15, 2003, p.3.

3. BLM, "Total Number of Acres Leased," unpublished table, January 31, 2005.

4. BLM, "Number of Producible Acres on Federal Lands," unpublished table, January 31, 2005.

5. John Heilprin, "Officials intensify U.S. push to find oil," Associated Press, October 19, 2005.

6. BLM, "Number of Wells Spud during the Year on Federal Lands," unpublished table, January 31, 2005.

7. The Wilderness Society, September 19, 2005.

8. See, e.g., Blaine Harden, "Gas-Drilling Permits in Rockies Outstrip Ability to Tap Resource," Washington Post , April 28, 2005.

9. Energy Information Administration, Natural Gas Navigator (September 2005).

10. Ibid.

11. As of August 2002, 16 new LNG facilities had been proposed in the United States along the Pacific, Atlantic, and Gulf of Mexico coastlines, representing 5,363 Bcf, including projects in the Bahamas and Baja California intended to serve the U.S. market (Energy Information Administration, Annual Energy Outlook 2003 , p. 41).

12. University of Houston Law Center, Institute for Energy, Law & Enterprise, Introduction to LNG (January 2003) p. 19.

13. Energy Information Administration, Natural Gas Navigator (September 2005).

14. Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 2003 Annual Report (DOE/EIA-0216 (2003) Advance Summary) (September 2004) p. 3.

15. Energy Information Administration, Natural Gas Navigator (September 2005).

16. Information Administration, U.S. Crude Oil, Natural Gas and Natural Gas Liquids Reserves 2003 Annual Report , p. 5

17. Ibid.

18. Minerals Management Service, Outer Continental Shelf Petroleum Assessment 2000 (based on available data as of January 1, 1999).

19. T.J. Glauthier, deputy secretary of energy, testimony before the Senate Committee on Energy and Natural Resources, September 14, 2000.

last revised 12.8.05