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Remarks of Duane C. Radtke
President & CEO - Dominion E & P
Consular Corps Reception
Rotary Club of Houston

May 27, 2004

Good evening, and thank you.

I'm honored and pleased to join you tonight. My topic is the emerging global market for natural gas and North America's contribution to this important trend.

I don't often get the chance to address a gathering of distinguished individuals from so many different countries. I'm grateful to the Houston Rotary and to Lisa Whitaker and the International Service Committee for giving me this opportunity tonight.

I want to begin by tipping my hat to the Rotary Club. The city of Houston is truly fortunate to have an organization whose record of service to the community runs so deep and so broad.

For almost 100 years, Rotary club projects have touched virtually every aspect of civic life in Houston. They include important initiatives in youth education, literacy, health, human services and housing.

The list is truly impressive.

To all you Rotarians who live your organization's motto— "Service Above Self" —thank you for making Houston a better place to live.

The parent organization, Rotary International, also deserves to be recognized as an effective ambassador.

The media reminds us daily that we live in a world fragmented by fear and consumed with hatred. The need for organizations whose purpose is building bridges of understanding has never been greater.

Rotary International is such an organization—a worldwide network of volunteers linked by a shared commitment to global goodwill.

The business community also has a vital role to play in bringing countries and cultures closer together. Our tool is trade. Our common language is commerce.

Global trade requires a global perspective that is, by definition, inclusive and comprehensive.

Energy, as we all know, is a vitally important aspect of globalization. It is the foundation and lifeblood of economic and social progress. It literally fuels our ability to create wealth and raise the global standard of living.

Because access to energy ultimately means access to opportunity and a better quality of life, the emerging global market for natural gas has implications that transcend the energy business.

There was a time in this country—not very long ago—that the mere mention of a "global" market for natural gas would have sounded like a contradiction in terms. For technical and economic reasons, North American gas markets have traditionally been tightly integrated, from the wellhead to the consumer.

Those industry dynamics are going to change. Imported natural gas is going to figure more prominently in North American markets.

It's clear we have reached a turning point—similar to what happened with oil about 30 years ago. For reasons I'm going to discuss, North America must now look beyond North America for the natural gas it's going to need. This signals a major shift—and an important catalyst to the formation of a truly global market for natural gas, much like the one that already exists for its sister commodity, oil.

Several forces, in fact, are converging to reshape the natural gas business along global lines. They include

Together, those trends are accelerating the emergence of natural gas as a global commodity. Buyers and sellers are being linked throughout the world. New markets and trading relationships are forming. Already, close to 25 percent of the trade in natural gas occurs across international borders—either via pipeline or in specialized tankers for ocean transport.

So what accounts for the growing popularity of natural gas? Several reasons come to mind.

Gas is a relatively abundant resource. At current rates of consumption, known reserves should last more than 50 years. And the experts tell us that significant amounts of gas have yet to be discovered in the Middle East and the former countries of the Soviet Union.

Natural gas also has strong environmental advantages. It produces fewer emissions than its fossil fuel cousins, oil and coal. As concerns continue to mount about greenhouse gases and global warming, cleaner fuels like natural gas will have even more of a competitive edge in the future.

Natural gas is also versatile. It can be burned as fuel in its gaseous form or turned into a liquid to replace gasoline, diesel or jet fuel. In either form, it's less harmful to the environment than burning fuels that are refined from oil.

In broad terms, the increased use of natural gas signals a shift to lighter, less polluting fuels—a shift that will usher in a new era of global energy use.

Natural gas is on the leading edge of this transformation. It provides a link between the past—traditional carbon-based energy forms—and the future—energy forms that are carbon free. Those emerging technologies will play an increasingly important role in tomorrow's energy marketplace.

When we look at the projections about future demand for natural gas, it's clear the world's appetite is strong and growing. Consumption is expected to increase by about 70 percent over the next 20 years, with the fastest growth occurring in the developing nations, especially China and India.

Natural gas has been the fuel of choice for almost all new power plants built during the past decade. That trend should continue in the coming decade. Gas is also widely used in home heating, chemical and fertilizer manufacturing, and many other industrial applications.

Not surprisingly, the United States is the world's single largest consumer of natural gas. Virtually all of the gas consumed in the U.S. is produced here or in neighboring Canada, which supplies about 15 percent of total U.S. consumption. Another two percent comes from imported liquified natural gas, or LNG as we call it in the industry. I'll come back to LNG momentarily.

As I just indicated, the U.S. has historically been able to rely almost exclusively on North American gas to meets its needs.

In the exploration and production industry, it has always been a matter of faith that all we needed to ensure adequate future supplies was consistently high prices—like we've had over the past few years.

However, that historical linkage between price and supply seems to be breaking down. We've had sustained high prices for natural gas since 2000. That has led to more drilling activity—but not to higher levels of production.

What that indicates is this: Production from most U.S. and Canadian basins appears to be peaking. Drilling rigs are working a lot harder just to maintain existing supply levels, let alone increase supply to meet growing demand.

We are, in fact, facing a supply shortage in North America.

To make matters worse, current government policy in the U.S. does not support new domestic exploration and development—even though it does favor the use of natural gas.

It doesn't take a genius to recognize that when energy policy promotes consumption but limits supply, a serious imbalance will result.

The United States is sitting on an estimated 225 trillion cubic feet of natural gas that cannot enter the market. That's because companies like mine aren't allowed access to resources in parts of Alaska, the outer continental shelf, and the Rocky Mountain region.

With laws and policies prohibiting development in those and other resource-rich areas, natural gas production in the U.S. is going to stagnate—and eventually decline.

Canada won't be able to come to our rescue. Our neighbor to the north should continue producing more gas than it consumes. But exports to the U.S. are projected to decline as overall Canadian production slows down.

To our south, Mexico is a net importer of natural gas. It consumes far more than it produces, and that pattern is expected to continue.

From those trends, we can conclude that North America's traditional self-reliance in meeting its natural gas needs is going to end.

That opens the door for liquified natural gas to bridge the gap between rising demand and shrinking supply.

LNG is simply natural gas that has been cooled to minus 260 degrees Fahrenheit for shipment in large ocean tankers. After it arrives at a terminal, it's converted back to dry gas and sent to market via conventional pipeline.

Economies of scale and technological improvements have made LNG more available and lowered its costs at the same time—major factors in the transformation of natural gas into a global commodity.

There is growing consensus that LNG will play an important role in North America's energy future, not to mention the rest of the world. LNG imports to the U.S. are expected to grow about eight percent a year over the coming decade, according to Energy Research Associates of New York City.

As I mentioned earlier, Canada currently supplies the bulk of U.S. gas imports. But that trading relationship is going to change. Government forecasters predict that LNG imports will surpass pipeline gas from Canada by 2015.

Future trading arrangements in North America are going to differ from what they are today.

New opportunities for expanded international trade will present themselves—for both customers and suppliers—anywhere and everywhere in the world.

At present, the leading sources of supply for North American markets are Trinidad and Tobago, mainly because of their physical proximity to the continent. But other shipments of LNG have come from Algeria, Nigeria, Malaysia, Australia and various countries in the Middle East.

Three countries that hold significant gas reserves—Russia, Norway and Egypt—are in the process of building their first liquefaction plants. Seven other countries have LNG export facilities on the drawing board.

The global tanker fleet is also expanding to keep pace with demand. Some 60 new ships are on order for delivery in 2008, with another 70 expected by 2010. The addition of some 130 new ocean tankers will nearly double the world's existing LNG fleet. At a cost of about 170 million dollars per ship, that's a significant financial outlay.

As the market for LNG expands, it won't be long before we see gas from Algeria heating homes in Washington D.C.... or a chemical plant in Houston receiving LNG supplies from Indonesia.

As more and more gas is transported by sea, the possibilities multiply for new commercial ties between countries.

Of course, there's a key piece of the equation I haven't mentioned yet: LNG infrastructure. We're going to need a major expansion of LNG terminal import capacity if more world gas supplies are to reach North American markets.

At the present time, the U.S. has four operating LNG import terminals—three on the East Coast and one in the Gulf of Mexico.

Dominion owns and operates one of these. Its name is Cove Point, and it is located on the Chesapeake Bay in southern Maryland. From that strategic location, we can receive LNG tankers, store the liquid gas onshore, convert it back to gas, store it in our underground storage, and send it to markets along the East Coast where it's needed.

Dominion has plans to nearly double the amount of gas we can send out from Cove Point, from one billion cubic feet to 1.8 billion cubic feet per day—enough to serve the needs of 6 million homes. We hope to complete this expansion project in 2008.

Increasing capacity at our existing import terminals is important, but we're going to need new ones, too—especially on the West Coast and in the northeastern part of the U.S.

More than 30 new LNG projects have been proposed nationwide in recent years. Most of them won't get built. Developing a new LNG terminal calls for spending between two and three billion dollars. Add another 500 million to one billion dollars for a regasification facility, necessary tankers to support the facility, and you're talking about a truly world-class investment.

This is a business that takes big players with deep pockets. Building new energy infrastructure is expensive. And the permitting process is lengthy and cumbersome.

Then there's the issue of community acceptance.

Despite an excellent safety record, some members of the public have referred to LNG tankers and terminals as "floating bombs." Add the threat of terrorism to the mix, and you have all the ingredients of a public relations nightmare.

Industry and government must work together to thoroughly address public concerns about LNG safety and security.

Governments also must partner with industry in other ways to ensure that we have adequate natural gas supplies.

They must foster a stable climate that can attract the large amounts of private investment needed to build energy infrastructure.

They must eliminate troublesome barriers to competition and streamline regulations.

And they must support continued reforms to the nation's energy policy—reforms that allow markets to work efficiently.

Industry has its challenges, too. We must work to continue supplying reliable and affordable energy… and open new markets to move that energy where it's needed.

Alan Greenspan, the chairman of the U.S. Federal Reserve Bank, has testified before Congress that LNG offers the best hope for solving the nation's projected shortage of natural gas.

That may very well be true—if we succeed in addressing the obstacles I just discussed.

Energy production and delivery is a complex and costly business. It is also the foundation for global economic prosperity. It would be unrealistic to think that any one fuel source—natural gas or otherwise—can be relied on to meet the world's energy needs.

We must continue to get maximum use of all the energy resources at our disposal—including nuclear, coal, oil, natural gas, hydro power and renewables. All have a role to play in maintaining a balanced and diverse energy mix.

With further advances in science, engineering and technology, I'm confident my industry will build on its lengthy record of providing innovative energy solutions to benefit mankind.

Thomas Watson Sr., the founder of IBM Corporation, was fond of saying "The way to world peace is through world trade."

My hope is that the growing global market in natural gas will support that worthy goal… and improve the quality of life for all the peoples of the planet.

It has been my pleasure to be with you this evening. And thanks again to the Rotary Club for the opportunity to share my views about the intriguing world of energy.

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