5. CLIMATE: Senate bill would curtail U.S. natural gas production -- report (Greenwire, 05/30/2008)

Katherine Ling, Greenwire reporter

The Senate climate bill scheduled for floor debate next week would cause a decline in domestic natural gas production at a time when many expect demand for the fuel to soar, according to a report released yesterday.

The legislation authored by Sens. Joe Lieberman (I-Conn.) and John Warner (R-Va.) would place the carbon emissions limit for burning natural gas on processors -- companies that convert raw gas into a usable product.

Due to the industry's pricing structure, processors would pass the costs of expected carbon emissions to producers who would have no assurances for recovering costs from their customers, mainly power and industrial plants, according to the report by Houston-based energy research and consulting firm Wood Mackenzie.

Natural gas producers often sell their product through third parties, and price contracts are not directly linked to producer costs but to market indexes and similar consumer-driven price determinations.

Producers -- which are sometimes also processors -- could not recover the costs from consumers for the first two to three years -- or until carbon prices are stable and contracts can be renegotiated, said William Whitsett, president of the American Exploration and Production Council, which paid for the report. The council represents 25 of the largest independent U.S. natural gas exploration and production companies.

Producers, in turn, would reduce drilling and scientific research needed to find new supply, the report concludes. If producers are hit with 100 percent of the consumer emission costs, the report says, about 32 to 46 percent -- or about 18 billion to 26 billion cubic feet per day -- of the predicted U.S. production between 2012 and 2017 would be cut. Even if 50 percent of the costs go to producers, it may cause a 3 billion to 8 billion cubic feet per day drop in production, the report said.

Whitsett said other climate bills, including one introduced this week by Rep. Ed Markey (D-Mass.), would not place the burden on processors (Greenwire, May 28).

These types of details are why natural gas "is not automatically going to be a smooth winner" when the United States transitions to pricing carbon, Whitsett said at an American Gas Association event in Washington.

'Feedback loop' worries

Suedeen Kelly, a member of the Federal Energy Regulatory Commission, agreed with Whitsett. Natural gas is the most "viable option" as a baseload fuel for electricity generation over the next decade -- before nuclear power plants can be constructed and carbon capture and sequestration is developed, she said.

But Kelly added that the increased demand will cause a "feedback loop" between the prices of natural gas and coal. If carbon emissions are priced at about $30 per ton, she said, then natural gas will be a more economical fuel to burn than coal.

As more natural gas is consumed and supplies become tighter, gas prices will rise. And if carbon emission prices do not rise accordingly, burning coal as fuel -- even with the extra emission costs -- becomes a viable option again, Kelly said.

If the lawmakers do not craft climate legislation carefully, Kelly said, "the feedback on gas prices will make it very tough to reduce emissions in America."

Click here to view the report.

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