Guest Editorial: We Need You Now, Leland Olds

Few people outside natural gas trading understand just how concentrated the industry is. For example, Sempra Trading and Shell Trading together trade more than one-third of the natural gas bought and sold in the U.S., more than 20 Bcfd. In comparison, California consumes on average about 6 Bcfd. The Sempra/Shell joint venture LNG project in Baja California currently has the inside track to be the first LNG receiving terminal on the West Coast. Two companies that control such a large portion of the U.S. natural gas trading market working so closely together to promote the LNG ?solution,? with state and federal regulators cheering them on, is a treasure trove for investigative journalists, not a source of comfort for natural gas consumers. It has not always been this way. Leland Olds was the legendary public-interest chair of the Federal Power Commission, now the Federal Energy Regulatory Commission, from 1940 to 1950. Author Robert Caro devotes a chapter to Olds in the best book on politics I have ever read, Lyndon Johnson?Master of the Senate. Olds?s desire to look out for the consumer was forged in the 1920s, a time Caro describes thus: ?It was the Twenties?the Twenties of Harding and Coolidge and Hoover, the Twenties of ?normalcy? and complacency, the Twenties in which the federal government and courts, high and low, seemed to regard themselves as allies of Big Business, allowing corporations to break strikes and unions, relaxing even token regulations on business, and abandoning social reform.? Leland Olds was particularly adept at reining in the natural gas industry?s excesses. As Caro recounts: ?In the other principal field of FPC activity?natural gas?Olds insisted on enforcing the Natural Gas Act of 1938, in which Congress had given the FPC broad powers to regulate the price of gas brought by pipeline from Texas and other southwestern states to consumers in the big cities in the North. And he disallowed several accounting devices employed by natural gas companies to hide illegal profits. During 1948 and 1949, natural gas producers lobbied furiously for an end to federal regulation. Olds testified against the deregulation bill, which was vetoed by President Truman. As a Brown and Root attorney wrote at the time, ?There is nothing more important to the welfare of the natural gas industry in Texas than that Olds? confirmation be defeated.?? Lyndon Johnson got the message. Olds was denied reappointment as chair of the FPC by the Senate in 1950. It was the end result of a series of ruthless personal attacks engineered by Johnson. Fifty-three years later, I began speaking at liquefied natural gas industry conferences. In early 2003, five or six LNG receiving terminals had already been proposed for Baja California to serve the California market. The average wellhead price during the previous year was under $3/MMBtu. LNG developers were saying then, and continue to say now, that they could land LNG on the West Coast for $3.50/MMBtu or less. In contrast, the Department of Energy?s Energy Information Administration (EIA) was projecting a cost of well over $4/MMBtu to deliver LNG to the West Coast. LNG developers were also predicting much higher gas prices on the near-term horizon as the carrot to peak investor interest despite the unfavorable economics at the time. The bankers at these LNG conferences were having none of it. Many lamented that they had taken a bath in the merchant power debacle of 2000-01 after listening to the siren song of easy money in deregulated power markets. They had no intention of loaning a dime to merchant LNG projects, justified on the assumption that domestic natural gas prices would rise fast enough that LNG would be competitive by the time the import terminals came on line. These facilities, including liquefaction plants, LNG tankers, and the import terminals taken as a whole, can cost ten times or more the cost of a merchant power plant. Price volatility was another major concern. The message from the bankers was clear: Do not bother calling unless you have lined up 60 to 70 percent of terminal throughput on long-term contracts at attractive prices with investment-grade entities. The problem: the California gas market does not operate under the long-term (10-20 years) contracts necessary to finance an LNG supply chain. And following the 2000-01 debacle, there were no investment-grade entities left in the state. However, natural gas utilities were held up as the investment-grade model the bankers had in mind. Other complications became apparent as well, such as robust domestic natural gas supplies and static demand. EIA projects that domestic production will rise approximately 20 percent over the next 20 years and states that the U.S. has at least 60 years? worth of natural gas supplies that are recoverable with current technology. California?s natural gas demand has declined dramatically, more than 10 percent, from the 2002 peak consumption year. Current California natural gas utility projections do not see natural gas consumption returning to the 2002 peak until the 2014-16 time frame under ?business-as-usual? conditions. Nationally, gas demand fell 5 percent from 2002 to 2003 and remained unchanged from 2003 to 2004. The EIA predicts no growth in U.S. gas demand in 2005. The gorilla in the closet is manipulation of the natural gas markets. We do not have a competitive gas market. Domestic production is up, proven reserves are up, and storage is up. The average wellhead price was under $3/MMBtu in 2002. Yet the wellhead price averaged about $6/MMBtu in 2004, with demand down 5 percent relative to 2002. Spot prices are currently well above $6/MMBtu. Many of the largest industrial companies in the U.S., including Dow Chemical, Dow Corning Corp., Celanese Corp., Coors Brewing Co., Owens Corning Corp., Tyson Foods, Lyondell Chemical Co., and Eastman Chemical Co., are pointing to fraud and manipulation in the natural gas trading markets as their principal concern and are pleading with the federal government to tighten up regulation and enforcement. Despite readily available evidence that domestic natural gas production is keeping pace and natural gas markets are being manipulated, even traditionally skeptical energy industry analysts have adopted the ?domestic supply in crisis? position of LNG proponents with little or no critical analysis. The Wall Street Journal , Standard & Poor?s, and Cambridge Energy Research Associates have put out a steady drumbeat of natural gas supply and demand ?assessments? that use as their core premise some of the most over-the-top doomsday predictions prepared by the LNG proponents themselves. Clearly, the lobbying of the financial analyst community by LNG proponents has been quite successful. This is ominous, given that the bankers that will finance merchant LNG terminals tend to rely on these sources to make investment decisions. The California Public Utilities Commission has also climbed aboard the LNG bus with little or no critical assessment. The CPUC made a key decision in favor of LNG imports in September 2004. While highlighting the need to promote natural gas supply diversity to ensure reliability of supply to California, state regulators inexplicably authorized Southern California Gas and San Diego Gas & Electric (owned by Sempra) to terminate 1,400 MMcfd of existing natural gas capacity contracts with two of the four North American natural gas supply basins serving California. Natural gas supply companies warned against this action as being contrary to the stated purpose of ensuring reliability of supply. This action artificially creates a market for new natural gas supplies in California, even though our demand has declined more than 10 percent since 2002. I remember the bankers saying they wanted 60 to 70 percent of LNG terminal throughput committed to long-term contracts with investment-grade entities, and apparently a few project developers were listening as well. About 1,400 MMcfd provides sufficient baseload capacity to finance two LNG terminals. The most likely scenario at this point is that SoCal Gas/SDG&E will burden consumers with high-priced LNG supply contracts justified on the grounds of supply diversity, while simultaneously reducing the diversity of lower-cost domestic natural gas supplies reaching these same consumers. The CPUC members vigorously opposed evidentiary hearings in the gas proceeding. Thus, unsubstantiated and erroneous claims made by LNG project proponents of an imminent crash in U.S. domestic natural gas production went unchallenged by the CPUC. As former CPUC member Loretta Lynch stated after the 3-2 vote in favor of opening the door to LNG supplies, ?We were willfully blind. We decided that we didn?t need any evidence before we made the ratepayers pay for all sorts of natural gas.? As Leland Olds wrote in the 1920s, ?A true [political] keynote speech would reveal the political government handling certain administrative details for an immensely powerful ruling class.? In the case of LNG on the West Coast, substitute ?energy industry? for ?ruling class? and Olds?s statement could have been written yesterday. At a time when natural gas security and reliability of supply are the backdrop to all strategic energy discussions, the CPUC is allowing California?s natural gas utilities to terminate pipeline capacity contracts with domestic supply basins currently serving the state in favor of long LNG supply chains originating in Indonesia, Russia, Australia, and the Middle East. We need you now, Leland Olds. ?Bill Powers, PE, chair, Border Power Plant Working Group, billp@borderpowerplants.org

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Guest Editorial: We Need You Now, Leland Olds

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