Corporate

Executive Speech

Remarks of Thomas F. Farrell II
Chairman, President & CEO – Dominion
CEO Leadership Series
Institute for 21st Century Energy
U. S. Chamber of Commerce
Washington, D.C.
April 23, 2013

"Riding the U.S. Shale Gale to Global Energy Leadership"

Thank you, Karen.  I appreciate the warm welcome and the kind introduction. 

I have long admired the fresh thinking that Karen and her colleagues provide here at the Energy Institute.  I applaud their efforts to engage the American public and policymakers on a broad range of energy issues that shape our nation’s economic prosperity, social well-being and environmental quality.

My topic today is the so-called shale gale that has turned the world of energy on its head.  Unless you have been living in Outer Mongolia for the past few years, you are bound to know something about it.    Heck, even they have probably heard about it.

The subject has been written about and discussed extensively – on Capitol Hill, in state capitals and city halls, in social and traditional media.  Words like “boom, bonanza, renaissance and revolution” are often used to describe it.

Opinions about the shale gale run the gamut – from land-rush optimism to fear of the apocalypse.  Public reaction to fracking and shale drilling may be growing faster and louder only because of the dimensions involved.  It is big – and getting bigger.

It has even begun to infiltrate pop culture.  Matt Damon starred in a movie about it.  A New York City group – “Artists Against Fracking” – includes such experts on the topic as Yoko Ono and Robert DeNiro.  Even the Rolling Stones have weighed in with a reference on their latest single, “Doom and Gloom.” 

When the world’s greatest rock n’ roll band has taken notice, you know you have entered the cultural mainstream. 

The story of America’s growing oil and natural gas abundance and the technology behind it – fracking – has been well documented. 

My focus this afternoon will be on one aspect of the narrative we might refer to as “the quest”:  Ongoing efforts to export American LNG – the liquefied form of natural gas – to energy-hungry markets overseas.

At Dominion, this subject is particularly important to us.  As Karen mentioned in her introduction, we are one of the companies with an export application in the regulatory queue, waiting for the Department of Energy to complete its review and begin to issue permits.

There is no question that America’s emergence as a global natural gas superpower would make a great story for our country. 

Just a decade ago, the U.S. was preparing to import $100 billion worth of LNG from West Africa, the Middle East and the Caribbean Basin.  Fed Chairman Alan Greenspan and a host of economists saw imported LNG as a partial solution to the country’s declining natural gas production and growing energy supply crunch.

At the time, we were told that the nation’s energy deficit would worsen the balance of trade, add to our economic distress – even lead to an era of permanent resource scarcity.

What a difference a decade makes. 

Over the past few years, domestic gas production levels have surged to historic highs and imports have dropped to their lowest level in more than two decades.  Production from shale gas formations – about one-quarter of today’s total U.S. reserves – is expected to double by 2035. 

The experts say our country currently has at least a century’s worth of recoverable natural gas reserves. 

And here is a truly stunning prediction:  The United States will be a net exporter of natural gas within a decade.

That amounts to an extraordinary reversal of fortune. 

Here is what a Citibank study had to say about it last year:  “With no signs of this growth trend ending over the next decade, the growing continental surplus of hydrocarbons points to North America effectively becoming the new Middle East by the next decade; a growing hydrocarbon net exporting center.”

The U.S. as the new Middle East?  Or as Dick Vitale would say, “Are you kidding me?” 

Imagine a world in which OPEC is watching us more closely than the other way around.  That would be certain proof of a seismic shift in the energy landscape.

The dramatic and growing supply of U.S. natural gas has helped push prices to their lowest levels in more than a decade.  After peaking at around $13 per thousand cubic feet (Mcf) in 2008, prices fell into the $2 range last year.  They have recovered some since then to the $3-to-$4 range, but the U.S. still enjoys extremely cheap natural gas by global standards.

European countries are paying about three times as much for the commodity as we are.  In Japan and other parts of Asia, natural gas is four times as expensive as it is in the U.S.

With those kinds of price differentials, it is no wonder that companies like BASF, the large German chemical maker, has announced plans to expand its U.S. manufacturing operations.  Since 2009, in fact, BASF has invested close to $6 billion in North America, including a new chemical plant now under construction in Louisiana.

I do want to insert a cautionary note here before continuing.

We would be wise to guard against irrational exuberance, especially in light of mankind’s track record at foretelling the future.  The unanticipated – in some form or fashion – may be the most predictable thing of all.

I say this as an electric utility executive whose company is a major power generator.  It is important to recognize that despite the current production boom, natural gas continues to face risks in the political, regulatory and policy arenas. 

If, for instance, studies currently under way at EPA and elsewhere conclude that fracking is as harmful as some environmentalists claim, we may be forced to step back and recalibrate our expectations about shale gas development.  I believe that is highly unlikely, but it is still under review.

It is also the case that the growing use of gas for power generation as a substitute for coal has positive benefits for the environment. 

According to preliminary 2012 data, the U.S. Energy Information Administration has found that greenhouse gas emissions from the power sector will be approximately 15 percent below 2005 levels.  This is well on the way to the Obama Administration’s goal of a 17 percent reduction by 2020. 

Much of this can be attributed to the use of natural gas as an economic, efficient fuel source.  We know, however, that natural gas is not carbon free.  Gas has half the CO2 emissions of coal combustion.  But the direct release of methane along the natural gas supply chain must be addressed.  Efforts are underway in industry, government, academia and advocacy groups to begin measuring and quantifying these sources in order to take appropriate action.

The takeaway here is that we are moving in the right direction and making solid progress in reducing greenhouse gas emissions – and shale gas economics is playing a big role in that achievement.

At the present time, there is no question that market conditions favor gas as a fuel source.  My company – and our customers – have clearly benefitted from cheap gas. 

But at Dominion, we also believe it is prudent to resist going “all in” on gas.  Maintaining a diverse supply of fuels protects consumers from potential price volatility – a longstanding concern in natural gas markets.

That is why we continue to need nuclear power – and will need more of it – much more – going forward.  It is why we still need coal, despite its environmental challenges, and why we need more renewable energy and effective energy efficiency and conservation.  We need “all of the above” to get the job done – as safely, reliably and affordably as possible.

The truth is, we do not have the luxury of rejecting any of our fuel options.  All of them have their benefits – and drawbacks.  And none of them, alone, can meet rising electricity needs at the scale we require.

Nuclear has low operating costs and is the only major, base load power source that is carbon-free, but it is plagued by high capital costs and license delays.

Coal is an abundant domestic resource and a workhorse in many utility fleets, but it comes with significant environmental baggage.

Renewable sources, such as wind and solar, have strong green credentials and public support, but they are unpredictable, require enormous amounts of land and are almost always located in remote areas – which means they often require new transmission lines to transport their power to distant consumers.

The real estate footprint of renewables is simply ignored by renewable-only advocates – especially wind power. 

The numbers are pretty revealing.  The real estate footprint of a two-unit, 1,800-megawatt nuclear station, for example, is about 1,100 acres.  Nuclear units typically operate about 90 percent of the time. 

A wind farm capable of generating the same amount of power at the same 90 percent capacity factor would require 720 turbines spanning 108,000 acres – almost 100 times as much land as nuclear.   And keep in mind that wind farms have an average capacity factor of about 33 percent, according to the American Wind Energy Association.

A modern solar photovoltaic installation would need more than 13,000 acres – or about 12 times the land requirement of nuclear – to produce a comparable amount of electricity – if the facility operated 90 percent of the time, or 22 hours each day.  In reality, solar energy sources have an average capacity factor of about 25 percent, according to Department of Energy sources.

For Dominion to replace its current generation fleet in Virginia, we would have to use 15 percent of the land mass of the entire state – and a much larger percentage of the usable land – not including all of the transmission lines, towers and substations that would have to be built. 

Ever hear that indisputable fact from those who advocate going all in on renewable energy? 

Natural gas is the cleanest of the fossil fuels, but it has a history of price volatility.  It is currently the preferred fuel for electricity generation – and will be for the foreseeable future – but it should not be the only fuel. 

We only have to think back to the Carter era and the 1978 Fuel Use Act, which forced utilities to go all in on building coal stations to the exclusion of other fuel sources, mainly oil and gas.  Today, it is coal that is in the crosshairs of federal environmental regulation.  

The lesson is clear:  It is too risky to rely too heavily on any one fuel source to meet large-scale electricity needs.   Government attempts to intervene and select a preferred fuel type have never worked.  Times change, markets change, political agendas change.  Fuel diversity is always the best policy.

That said, if the U.S. continues on the current path of expanding hydrocarbon production, experts predict that the country will produce more natural gas than it uses by about 2020 – or possibly sooner.

That would put our nation in a new and enviable position – as a potential natural gas exporter and supplier to the world. 

Exports will create incentives for American companies to drill for more natural gas, create more economic growth, more jobs and more government revenues – while at the same time, boosting international stability, supporting our country’s geopolitical interests and reducing our trade deficits.

This is heady stuff, I admit.  But the world is starved for energy.  EIA forecasts that by 2035, natural gas consumption will grow by about 80 percent – most of it in China and India and the rest of the developing world. 

Because the U.S. has the ability to produce more gas than we need – and do so at levels that exceed what other producing nations can match – we have a tremendous opportunity to capitalize on this global market demand.

But, as with most things in life, there is no guarantee this story will have a happy ending.  Much depends on our ability to overcome regulatory inertia and move forward in a timely fashion in order to shape the way the narrative unfolds.

The primary hurdle today is the Department of Energy’s approval of export licenses.

Actually, under existing laws, there are two federal regulatory goal lines that have to be crossed before we can begin exporting LNG:

  • The first is the DOE export license granting permission to supply countries lacking free-trade agreements with the U.S.;
  • And the second is an environmental and safety review from FERC, the Federal Energy Regulatory Commission.

At latest count, there are about 20 export applications awaiting DOE approval.  The one in the queue the longest has been on hold there for 28 months.

DOE’s job is to make sure these applications are consistent with the public interest.  Conflicting interpretations as to what constitutes the public interest could be delaying the process.  Only one license has been granted so far – in May 2011 – to Cheniere Energy’s Sabine Pass facility in Louisiana. 

It is not as if there is a scarcity of data or analysis.  The LNG export issue has been studied thoroughly and repeatedly by respected public and private sector experts.  Almost every study demonstrates that the potential upside for the economy far exceeds the downside.

We are optimistic that DOE will move as quickly as possible to approve our project – and other LNG projects as warranted – so the United States can compete successfully on the global stage.

At a budget hearing last week, DOE Deputy Secretary Dan Poneman told members of the Senate Energy and Natural Resources Committee the department would “very soon” be in a position to make its decision.

“Very soon,” of course, was the phrase that got everyone’s attention.  When pressed to be more specific, the Deputy Secretary said, “I don’t think it would be months.”

Not exactly a date certain.  But remember, we are in the realm of government time here.

The demand for LNG is being driven by countries in the Pacific Basin – mainly Japan, South Korea, Taiwan, China and India.  The Asian market alone is estimated at $150 billion, and the leading suppliers are currently Australia, Qatar and Indonesia. 

Our neighbor to the north, Canada, has its mind set on becoming the go-to LNG supplier in North America.  With substantial reserves, strong government support and access to Asia, Canada is poised to be a fierce competitor in global LNG markets.

The total worldwide LNG capacity is currently about 37 billion cubic feet per day, according to ICF International.  The U.S. could expand that capacity by more than 40 percent – if all of the proposed 28 Bcf per day of capacity were to be approved and built – which, of course, will not happen.

That “if” become even bigger in light of the 50 Bcf per day of new LNG capacity either under construction, planned or proposed in the rest of the world over the next decade.  Not to mention various projections from Credit Suisse and others showing total global demand for LNG in the range of 50 to 60 billion cubic feet per day by 2025.

Most of the credible studies I have looked at predict between 6 and 9 Bcf per day’s worth of capacity being built in the U.S. in the coming decade – which means many of the proposed LNG export projects will not materialize.

In the immortal words of Yogi Berra, that is déjà vu all over again.  A decade ago, more than 40 LNG import terminals were proposed or announced in the U.S., only 8 of which – about one in five – ended up getting built.  There are currently 11 LNG import terminals in operation in the country.

To put the most likely projected export capacity in perspective, 6 billion cubic feet per day translates to 45 million tons of LNG, amounting to about 8 percent of current U.S. gas production and 16 percent of global LNG production. 

The incremental volumes of LNG that the U.S. is likely to supply the world market may seem relatively modest, but the potential impact on the American economy and U.S. foreign policy should not be underestimated. 

That leads me to a key point:  The U.S. must act very soon – or the door will close and our country will have missed a major economic opportunity.  As I mentioned a minute ago, the rest of the world is not standing by idly.  This is a competitive market, and it is growing more so by the day.

The studies have been done.  Comments have been filed.  It is time to act.

Dominion’s Cove Point project illustrates the potential economic benefits to which I just alluded.  Let me describe them.
 
Once we receive the necessary regulatory approvals, we plan to begin construction at Cove Point during the first quarter of 2014, with liquefaction and export services projected to start in 2017.  The estimated cost of the project is between $3.4 billion and $3.8 billion – and that is just to build the liquefier.  The rest of the necessary infrastructure is already in place.

The construction phase alone will support more than 8,000 jobs in Maryland and elsewhere.  Over the long haul – taking into account everything from additional royalties paid to private landowners to manufacturers supplying equipment to the final export value – Cove Point will support on average more than 18,000 jobs nationwide and $44 billion of total economic value added over a 25-year period.

Royalty payments to mineral owners alone could reach about $10 billion over this 25-year span.

Other studies show that natural gas liquids associated with the production of natural gas – ethane, propane and butane, for example – would increase dramatically.  Ethane serves as a feedstock for ethylene, which is widely used in the chemical and other manufacturing industries.

Earlier this month, Dominion reached three major milestones with the Cove Point project – milestones we hope will push us to the front of the line among the various LNG projects awaiting DOE’s blessing.

First, we have fully subscribed the project’s 4.6 million tons per year of marketed LNG capacity, with two signed 20-year service agreements with two important U.S. trading partners – Japan and India. 

Japanese trading company, Sumitomo Corporation, has contracted for half of the marketed capacity and will deliver LNG to Tokyo Gas and Kansai Electric Power.  Tokyo Gas supplies electricity and natural gas to about 11 million retail customers.  Kansai Electric generates and delivers power to more than 13 million customers in Japan.

The other half of Cove Point’s capacity has been contracted by GAIL Limited, India’s largest natural gas processing and distributing company.  India is now the world’s fifth largest energy consumer, importing about three-fourths of its total consumption. 

The Cove Point project is not for the purpose of Dominion becoming a global LNG speculator.  Rather, it will provide a vital source of energy to two important American allies for decades to come.

The second major milestone is the awarding of the project’s engineering, procurement and construction contract for the new liquefaction facilities.

And third, we have submitted our 12,000-page application to FERC, which covers all aspects of the project, including safety, environmental impacts, security, cost and community impacts and benefits.

These are important developments, especially since DOE has publicly stated its preference for projects that have taken concrete steps to address FERC’s extensive filing process.  To my knowledge, three projects in addition to Dominion’s have completed their applications and filed them with FERC.

In addition to being a win for the U.S. economy, LNG exports could provide a valuable complement to the State Department’s diplomatic tool box, for use in both the Atlantic and Pacific basins.

As former Secretary of State Hillary Clinton said in remarks delivered at Georgetown University last year:  “Energy cuts across the entirety of U.S. foreign policy.  It’s a matter of national security and global stability.  It’s at the heart of the global economy.”

In a nutshell, we have the opportunity to provide strategic assistance to our allies in Europe and Asia by adding LNG supplies to the global market. 

And we could do more than that. 

We could also provide a degree of certainty to our friends and economic partners that the United States remains a strong advocate for free trade and international commerce.

Of course, not everyone is on board with the idea of exporting American LNG.

Certain energy-intensive industrial users have opposed it – and quite vocally.  They claim that LNG exports will raise natural gas prices for American consumers, harm the economic recovery and stifle the current rebirth of domestic manufacturing.

They are not entirely wrong about gas prices rising as a result of LNG exports.  But just about all of the studies predict only very modest price increases occurring over many decades. 

If we assume anywhere from 6 to 9 billion cubic feet per day of exports, gas prices would be between 2 and 11 percent higher by 2035 than they would otherwise be if the U.S. did not export any natural gas.  Keep in mind we are talking about a period spanning two decades.

But there are some other key points that should not be overlooked.

Exporting LNG is likely to increase domestic gas production as supplies expand and contract.  If more markets are available to their sale, there will more demand, more investment and even more production.  In other words, more trade brings more supply to market – and with it, more jobs and economic growth.

So, I find the naysayers’ arguments entirely unconvincing – and self-serving – and so do many of the leading studies, including a highly anticipated one from NERA Economic Consulting, which was released last December by the Department of Energy. 

NERA found that under all 16 of the scenarios it evaluated, exporting LNG would produce net benefits for the country.

Other private studies have reached similar conclusions, including ones from Brookings, Deloitte, The Manhattan Institute and Rice University – not to mention analyses from other reputable groups, such as the National Association of Manufacturers, the Small Business & Entrepreneurship Council, and our host today, the Institute for 21st Century Energy.

At Dominion, we have already seen how the shale gas boom has helped turn the economy around in many of the communities where we operate. 

My company has been active in the gas fields of Pennsylvania, Ohio and West Virginia for more than 100 years.  We have encountered scores of good, hard-working people who are counting on the shale gale to keep blowing their way – and make it possible to put a new roof on their house, replace a collapsing fence or barn, and buy a new pick-up truck.

Research firm IHS reports that the Marcellus Shale already supports more than 100,000 jobs – just in the state of Pennsylvania.  And by 2020, that figure is expected to more than double – to 220,000 jobs.

That same research also shows that shale gas development provided a $14 billion boost to the Pennsylvania economy in 2012, generating almost $3 billion in taxes from all the extra economic activity.

Similar success stories are being reported in many other states where shale gas is being produced.  Think of what a robust LNG export business could add to this story:  even more American jobs, economic growth and government revenues.  Not to mention a shot in the arm for President Obama’s goal of doubling U.S. exports over the next five years.

In short, only a few energy-intensive American manufacturers would benefit from restricting trade to control prices.  Economic theory refers to those arguments as rent-seeking and protectionist behavior.  It is bad economic policy. 

Besides, as an American, I always thought economic sanctions were reserved for adversaries of the United States, not our own industries and citizens. 

I may be missing something, but I do not see why energy exports should be viewed any differently than exports of automobiles, agricultural products, medical equipment – or chemicals.  If restricting exports supports the national interest, I am at a loss to understand why.

There are also some consumer advocates and members of the environmental community who oppose exporting LNG.  They mostly fear the potential environmental consequences of fracking – adding greenhouse gases to the atmosphere, threatening the water supply, altering community life in negative ways. 

I understand their concerns.  Industry needs to take them seriously and address them appropriately.

But the American people must also recognize an inescapable truth:  All forms of commercial-scale energy production – including renewable energy – have some impact on the environment.  Those linked to fracking are not unique to shale gas extraction.  They have been managed in other energy-related activities – and done so responsibly.

I expect that as more and more members of Big Oil and other well capitalized players enter this business, we will see fewer and fewer health, safety and environmental incidents.  In fact, a recent front page story in The Wall Street Journal documented this favorable trend.

I was also encouraged by a recent announcement about a Pittsburgh-based alliance that has been created by some respected environmental organizations and industry drillers. 

You may have heard about it.  The parties put their heads together and came up with rigorous, voluntary standards to reduce the impact of fracking on groundwater and air quality.  That kind of collaboration is commendable and bears watching as a possible model for others to follow.

The benefits of the shale gale have been significant already – cheaper domestic energy, fewer energy imports, more business investment and job growth, a stronger dollar and a potentially improved balance of trade. 

This growing hydrocarbon abundance provides the U.S. with a golden moment to advance the nation’s economic, security and environmental interests – and also further America’s role as a world energy leader.

Success depends on how well we manage the nation’s vast energy endowment.  And for that, we need public policy to catch up with the 21st century.

As Michael Levi of the Council on Foreign Relations says in his new book, The Power Surge, “… the United States will miss out on much of the opportunity unless Washington plays a wise and active role in taking advantage of it.”

In the near term, I am comfortable allowing market forces, governed by existing law, to guide the nation’s entry into the expanding global LNG business as part of an inclusive, all-of-the-above natural gas strategy. 

But over the long haul, the U.S. still needs a comprehensive and coherent policy framework that promotes America’s energy interests.  For that, we are going to need bipartisan leadership and cooperation from the Obama administration and Congress. 

Short of a comprehensive national energy plan – always an elusive goal – we at least need a more coordinated federal policy apparatus to provide direction to our many energy initiatives. 

What our country has now are multiple layers and jurisdictions of overlapping regulatory structures, federal agencies and policies that often work at cross purposes. 

Former Senator Byron Dorgan of North Dakota has compared this to having “an orchestra without a conductor.”  In fact, I think it is the opposite – an orchestra with more conductors than musicians.

Out of curiosity, we did some checking.  In Congress alone, there are 16 Senate committees and 14 committees in the House having jurisdiction over energy programs. 

In the Executive Branch, we counted 7 cabinet-level departments overseeing energy matters – including Defense, Interior and Agriculture – 7 departments – not including the Department of Energy or the EPA – agencies you would think would have jurisdiction over all of it. 

Then there is the U.S. Office of the Trade Representative… independent agencies such as FERC and the NRC… and self-regulatory boards and commissions, such as NERC, the North American Electric Reliability Corporation.

And on and on and on.

In 2009, the Chamber’s Energy Institute did a study on this same subject.  They came up with an estimated 24 federal agencies and 25 congressional committees with a role in shaping energy policy. 

I am willing to bet that no one in the federal government has a complete grasp as to how many different agencies are working on energy issues.  Who then, has the ability to look out for the national interest across all of these areas?

That is why I suggested last year that we create the position of National Energy Adviser to the President… someone in the White House who would coordinate with the National Security Adviser and the Chief Economic Adviser on important energy issues.

The respected Bipartisan Policy Center has called for the formation of a high-level, national energy strategy council to serve the same purpose.  Their approach has merit and should be part of the conversation. 

Should energy really be elevated to the level of macroeconomics and national security?

If you have doubts, I recommend picking up a copy of Dan Yergin’s award-winning book, “The Prize.”  Read it, then we will talk.  The answer, of course, is yes.

If we fail to get energy right, not much else is going to fall into place for us.  And by all means, we must confront this challenge with reason and realism, not emotion and sensationalism. 

A superpower does not punch below its weight class and stay a superpower forever.  We owe it to the American public – and to future Americans – to act like the global leader we are and seize the energy opportunities before us.

To paraphrase Ralph Waldo Emerson, we can never do a thing too soon, for we never know how soon it will be too late.

Thank you.

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