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59th Annual Meeting of the Southern Legislative Conference

Chair's Report


Mobile, Alabama

July 30 to August 3, 2005

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Chairman's Report of Activities of the Energy and Environment Committee

at the 59th Annual Meeting of the Southern Legislative Conference


Mobile, July 30-August 3, 2005

 

October 7, 2005

                The Energy and Environment Committee convened on Sunday, July 31, for a program session and on Monday, August 1, for a business session during the 59th SLC Annual Meeting.  The Committee also participated in a Technical Tour at the Sea Lab marine research facility on Dauphin Island.  The following is a summary of the speaker presentations and Committee activities.
 

Program Session
Sunday, July 31

I.              The Increasing Price of Gasoline
                Sara Banaszak
- Senior Economist, American Petroleum Institute, Washington, D.C.

Background
                With gasoline prices on the rise for an extended period of time, Americans have been perplexed as to the reasons behind this increase.  Ms. Banaszak’s presentation offered an explanation to this conundrum.

Presentation
                Ms. Banaszak began her presentation by noting that, even though gasoline prices currently seem to be at record high levels ($2.37 per gallon as of August 1, 2005), when adjusted for inflation, they are lower than 1981 prices ($2.89 per gallon).  Answering the question “where does a consumer’s money go?” she pointed out that every dollar of the price of gasoline is composed of the following:  $0.55 for crude oil, $0.26 for refining and marketing, and $0.19 for tax.  Therefore, with crude oil selling at $1.44 per gallon in mid-July 2005, the price at the pump came to approximately $2.30 per gallon. 

            Ms. Banaszak added that the prices of the two commodities largely mirror each other.  Sometimes gasoline prices increase when crude oil prices go up, and sometimes when crude oil price falls, it takes a short while before gasoline prices fall. 

                A small change in global supply and demand can have a large effect in the oil market, since spare capacity is very limited.  With Asian demand increasing rapidly and demand from the developed world remaining high, the limited supply of oil leads to price increases.  Furthermore, the global spare capacity of oil stands at its lowest level in 30 years. Other factors play a role as well.   The decrease in the value of the dollar, the war in Iraq, a particularly cold winter, decisions made by the OPEC cartel, and domestic politics in unstable producers such as Venezuela and Nigeria all affect the price of gasoline.  Ms. Banaszak added that to combat reliance on unstable nations’ petroleum supplies, the United States imports oil from a wide variety of suppliers, including from neighbors Canada (10 percent of total U.S. consumption) and Mexico (8 percent).    U.S. crude oil imports have more than double in the last 20 years, increasing from 1.17 million gallons in 1985 to 3.67 million gallons in 2004.  Canada and Mexico continue to be the largest suppliers.

                In addition to internationally oriented factors, domestic aspects of the increase of the price of gasoline include continued strong demand, boutique fuels, and low refining capacity.  Regulatory measures such as phase outs of the harmful chemical MTBE in New York and California have also driven up the price of gasoline.  In any case, industry profit margins remain closely aligned with other domestic industries.  First quarter 2005 earnings for the oil/natural gas industry totaled 8.6 percent, compared to 21 percent for banks and 5.5 percent for retail.  Concerning refining capacity, the number of operating refineries has fallen sharply in the last 25 years, driving up costs, but gasoline production and gasoline in storage remain above average.  The futures prices of both gasoline and crude oil continue to increase as well.

                Ms. Banaszak continued with an overview of natural gas prices, which also remain higher than in past years but, as with gasoline, natural gas storage is above average.  She added that the number of rigs drilling for natural gas has increased to record levels, with 1,235 rigs drilling in July 2005.

                Summing up, Ms. Banaszak attributed the high price of gasoline to the following factors:  high crude oil prices resulting from strong global demand, restricted world supplies and little spare capacity, the decisions of OPEC, and political instability in oil-rich nations.  Gasoline supplies remain adequate, with record production, above-average inventories, high refinery utilization rates and an increase in imports.  However, the gasoline market faces challenges such as:  numerous and changing fuel specifications in various states; low rates of return for refiners; strong demand spurred by a growing domestic economy; and an increase in summer fuels requiring costly ingredients.

II.            The Role of Liquefied Natural Gas in the South’s Past, Present and Future
                Kristi Darby
– Research Associate, Center for Energy Studies, Louisiana State University
                Casi Callaway – Executive Director, Mobile Bay Watch, Inc.,
Alabama

Background
                Liquefied natural gas (LNG) has received considerable attention in recent years as a source of energy.  This session highlighted both LNG's role in state economic development and how industry and environmental groups can work together to find mutually acceptable solutions in the debate over the use of LNG.

Presentations
Ms. Darby’s Presentation
                Ms. Darby commenced the LNG discussion with a look at U.S. natural gas production and the monthly rig count, now peaking at between 1,200 and 1,300 rigs.  However, production continues to decrease even as the number of rigs increases.  Many areas around the U.S. coasts are restricted as well.  In any case, since 1994 Americans have seen an 8.7 percent increase in the amount of natural gas delivered to end users, from 18.0 trillion cubic feet (tcf) in 1994, to 20.6 tcf in 2004.  The increase in usage from the electric power industry has been tremendous, equaling 95 percent.

Ms. Darby related the fact that the natural gas industry supports the construction of new LNG terminals, both onshore and offshore.  So far there are four operating LNG terminals, with three of those in SLC states (Georgia, Louisiana and Maryland).  As of March 2005, the Federal Energy Regulatory Commission approved an additional five such terminals, and 16 more had been submitted to the Commission.
                By way of background, LNG is natural gas that has been turned into a liquid by cooling it to a temperature of -256°F.  It consists of primarily methane (typically, at least 90 percent).  LNG is odorless, colorless, non-corrosive and non-toxic.  Liquefying natural gas reduces its volume by a factor of 610, and the weight of LNG is 45 percent of that of water.  Many of the world’s reserves of natural gas lie in unstable countries, with Russia possessing the plurality of the energy source (31 percent) and Iran having the second-largest reserves (15 percent).
                The cost of transport of LNG plays a major role in its feasibility as an energy source.  The break- even point for onshore pipe is 2,200 miles, while that decreases to 700 miles for offshore pipe.  The total cost of LNG is constituted by the following links in the chain of supply: the gas producer (23 percent of the total cost); the liquefaction process (28 percent); shipping, which depends on distance (35 percent on average); and the receiving terminal (14 percent).  At the receiving terminal, pumps inside the tanks transfer LNG to the plant vaporizers as gas is required.  Then, gas is withdrawn from the tanks and compressed, and finally the LNG is warmed to the point of vaporization, when it then travels to the end user on through a pipeline.

                Ms. Darby noted that the United States is a relatively small importer of LNG, with imports totaling just 1 percent of total natural gas consumption.  On the other hand, South Korea’s consumption of natural gas occurs entirely through LNG imports.  However, LNG is expected to supply 14 percent of American natural gas by 2025.  Sendout capacity, which currently hovers around 3 billion cubic feet per day (bcf/d) is expected to reach more than 30 bcf/d by 2009.
                Referring to her home state of Louisiana, Ms. Darby related the reasons for her state’s interest in LNG.  First, LNG regasification facilities represent a major capital investment for the state.   Second, LNG allows Louisiana to leverage, and even extend, its existing energy infrastructure.  Furthermore, Louisiana has energy intensive users of natural gas and LNG expands a vital energy resource needed to preserve these industries.  Finally, the development of LNG is an important national energy concern in which Louisiana can make a significant contribution.  Construction of facilities could bring an economic boom to the state as well.  There is potentially a $220.7 million impact associated with the annual operation of LNG facilities in Louisiana and the Gulf of Mexico and the possibility of 1,607 jobs associated with the operation of these facilities.  Also, there is a potential of a $2.2 billion impact associated with the construction of LNG regasification facilities in Louisiana and the
Gulf of Mexico.  As many as 13,877 jobs could be associated with the construction of these facilities.  In addition, if all Gulf of Mexico regional facilities are developed, as much as a 237 percent increase in gas export volumes through the existing pipeline system could result.  Finally, a $350 million impact and almost 3,500 jobs are associated with announced pipeline additions and new natural gas storage facilities, according to Ms. Darby.
                Focusing further on Louisiana, Ms. Darby noted that extensive LNG development (15 or greater new projects) is forecasted to lower future natural gas prices and have considerable impacts on energy intensive industries.  As much as a $929 million benefit may be associated with the lower cost gas associated with high LNG development, and as many as 11,612 jobs could be regained from recent losses.  However, low LNG development (6 to 12 new projects), and higher resulting prices, could hurt Louisiana industries.   There could be a significant negative fiscal impact associated with the higher cost gas associated with low LNG development, and as many as 20,902 jobs could be lost.  Furthermore, the failure to act on LNG development (building fewer than 6 new plants), in addition to other negative resource development factors, could lead to the worst case, “do nothing” scenario which would have devastating impacts on Louisiana’s economy, with a maximum $2.8 billion cost associated with the higher cost gas associated with low LNG development, and as many as 61,926 jobs could be lost.
                Ms. Darby noted that Louisiana remains the second-largest producer of natural gas, behind only Texas, and is the third-largest consumer of the energy source, trailing only California and Texas.  This high consumption ranking results from high industrial use per customer, with industrial consumption in Louisiana ranking second (again behind Texas).  Louisiana also boasts an extensive pipeline system for transporting natural gas as well as 91 natural gas fired power plants.
                Ms. Darby continued by pointing out that Americans pay a higher price for natural gas than consumers in other developed countries.  The cost here equals $5.32 per million British thermal units (MMbtu), while Western Europeans pay only $4.12 on average.   She concluded her presentation by noting that Louisiana’s industrial and power generation gas consumption is larger than a number of countries, including that of Australia and Spain.

Ms. Callaway’s Presentation
                Ms. Callaway tackled the subject of LNG from an environmental perspective, asking how stakeholders can work together to make LNG a feasible energy alternative for everyone.  Ms. Callaway represents Mobile Bay Watch, Inc., an organization with more than 3,000 members in Alabama with a focus on protecting the Mobile Bay watershed.  Her organization’s experience with LNG began in 2003, when ExxonMobil proposed the construction of an onshore facility near Mobile.
                Ms. Callaway expressed her organization’s concern about the potential danger of LNG terminals, including the possibility of deliberate attacks on the sites, decrease in neighboring property values, and removal of local control. 
                Addressing one topic of contention, how LNG is reheated (regasified), she mentioned that the Gulf of Mexico is a warm area and has the best potential for zero impact to the environment by using solar energy to reheat the gas.  Two possibilities exist for reheating:  The first is the closed loop system, which uses boilers to reheat the LNG.  This requires 1-2 percent of the natural gas in a tanker to accomplish and results in low air emissions and zero impact to the fisheries.  On the other hand, according to Ms. Callaway, the competing open loop system uses an average of 150-200 millions gallons per day (mgd) of Gulf water daily to reheat LNG.  This results in maximum impact to fisheries, which Ms. Callaway believes is preferable to industry because of the low cost.  She opined that the open loop method will kill anything that goes through the piping, and that anything that does make it through alive will be treated with a chlorine solvent to keep the system clean.  The final impact is from the discharge back into the Gulf of waters at an average of 15 degrees cooler than the intake.
                Concerning the impact on the local fisheries, Ms. Callaway offered evidence that as much as 26 percent of the redfish or red drum landings in Alabama and Mississippi would be destroyed by an open loop system.  Ms. Callaway asserted that ConocoPhillips had undertaken no studies on crab, shrimp or other invertebrates and that 220 billion zooplankton would be impacted every year with no knowledge of how this impacts the marine ecosystem.   
                Regarding the economic impact of the fisheries, Ms. Callaway noted that according to a 2001 study by the American Sportfishing Association, saltwater recreational fishing alone had a $463.5 million impact on the state’s economy and sustained 5,477 jobs.  In addition, Alabama’s commercial fishing industry brings an additional $400 million to the state annually, along with numerous jobs.
                Ms. Callaway reiterated that her organization is not opposed to the use of LNG, which she regards as a clean burning fuel which offers a level playing field for economic development, is excellent for industrial recruitment, will possibly lead to a price reduction at the gas station and is easily transportable.  However, she would prefer to see more cooperation among industry and local stakeholders.  She said that there currently are 19 approved facilities around the country, and that there are 21 new facilities proposed for the Gulf of Mexico in the Federal Energy Regulatory Commission or the Coast Guard permit processes.  She asked whether this makes economic sense, with only one of the four facilities presently operating in the United States having remained open while gas prices were low.
                She suggested the following strategies for cooperation:  allowing local citizens be the bellwether for LNG projects; insisting that economic impacts to the local community be fully analyzed; not allowing money to be the driving factor for the natural gas industry alone; and looking long-term at these facilities.

III.           Closing Comments            
                Spirited conversation followed the presentations, with some audience members disputing some of the statistics used by the presenters.  Chairman Ullo thanked the participants for their presentations and adjourned the meeting with no further discussion.

 

Business Session
Monday, August 1

I.              Update on the Federal Energy Bill and on Nuclear Power
                Kenneth J. Nemeth
, Executive Director, Southern States Energy Board, Georgia

Background
                Alternative energy sources are the genesis of much debate over the current federal energy legislation being discussed in Congress.  This session highlighted relevant sections of the Energy Bill as they relate to states and provided more detail on one source of energy that may be making a comeback: nuclear power.

Presentation
                Mr. Nemeth began his presentation by noting that President Bush has sought passage of an energy bill since 2001.  After failing to reach agreement on two previous occasions, Congress passed the current $14.5 billion bill in late July 2005.  Mr. Nemeth hypothesized that today’s higher energy prices convinced Congress to move on the bill.   However, with oil prices staying around $60 per barrel and gasoline prices averaging almost $2.40 per gallon, the legislation is not expected to reduce current energy prices. 

Mr. Nemeth added that the United States imports 60 percent of the oil consumed by its population, and this number is expected to increase to 68 percent by 2025.
                The 2005 Energy Bill will neither lower the price of gasoline at the pump nor allow drilling in the Alaska National Wildlife Reserve.  Furthermore, it will not mandate the use of renewable fuel sources by utilities or increase automotive fuel efficiency standards.  Finally, the legislation will not provide product liability protection for MTBE (methyl tertiary-butyl ether).
                On the other hand, according to Mr. Nemeth, the Energy Bill will extend daylight savings time by one month, increase imports of LNG, require utilities to meet federal reliability standards, require the inventory of offshore oil and gas resources, and provide coastal impact assistance.  The Energy Bill also encourages the domestic exploration and production of energy, the construction and utilization of new nuclear power plants, and the expansion and modernization of the national energy grid.  In addition, Mr. Nemeth mentioned that the new legislation offers incentives for alternative energy sources such as solar power, biomass, wind and hydropower, as well as clean coal technologies.  About 60 percent of the tax incentives are earmarked for traditional energy industries, including coal, natural gas and electric, aimed at promoting new technologies.
                Switching to the topic of nuclear power, Mr. Nemeth posed the question of whether new nuclear plants were on the horizon.  While no one can answer this question, he mentioned that a new plant has not been built since 1973.  The nuclear power industry has welcomed the Nuclear Regulatory Commission’s new licensing process, which focuses on early site permits and the combination of construction permits and operating licenses.  Mr. Nemeth noted that all six sites undergoing review for permission to serve as the location for new reactor designs are in SLC states, including Alabama,
Mississippi and South Carolina.  Two sites will be selected in October 2005.  Taxpayers will share the cost of licensing the first generation of these new plants, with the Energy Bill capping industry liability in case of an accident.  Mr. Nemeth stated that the Bush Administration wants to protect investors against regulatory delays, and some policymakers want protection against fluctuations in electricity prices.
                Mr. Nemeth then enumerated the reasons cited by advocates of nuclear power.  According to champions of this source of energy, nuclear power would reduce America’s dependence on foreign energy sources, reduce greenhouse gases, and would become more attractive as the cost of other fuel sources increases.  On the other hand, opponents of nuclear power cite security concerns and the increasing taxpayer liability as reasons for their opposition.  Both supporters and opponents have expressed concern about the lack of a long-term nuclear waste disposal facility.
                In conclusion, Mr. Nemeth said that there may be a new nuclear power plant in the region’s future, but it is too early to be certain.

II.            SSEB Legislative Digest
                Senator John Watkins of Virginia, who also serves as Vice Chairman of the Southern States Energy Board, updated the Committee on legislation passed in the SLC states in this year’s legislative sessions. 

III.           Consideration of Policy Positions
                The Committee voted to recommend the adoption by SLC of all 11 policy positions before it, dealing with the issues carbon sequestration, liquefied natural gas, biogas energy, the EPA’s new Clean Air Rules, coal to liquids, global climate change, LIHEAP, natural gas and New Source Review (NSR).

IV.           Election of Officers
                At the recommendation of the Nominating Committee, chaired by Representative Warren Chisum of Texas, the Committee elected Senator Chris Ullo of Louisiana and Representative Ron Peters of Oklahoma to their second terms as Chairman and Vice Chairman, respectively.

V.            Closing Comments
                The Chairman thanked Mr. Nemeth for his presentation and the members of the Nominating Committee for their work, then adjourned the meeting with no further discussion.

Technical Tour
Tuesday, August 2

I.              Sea Lab Marine Research Facility, Dauphin Island, Alabama
                Dr. George Crozier, Executive Director of Sea Lab, led a committee tour of the facilities, enabling legislators and staff to visit the laboratories and estuarium at Alabama’s premiere marine research center.  Dr. Crozier also gave a presentation on his facility’s interaction with the natural gas industry and their cooperation in exploring how LNG can best be utilized in a delicate ecosystem.


Attendance List
Southern Legislative Conference 59th Annual Meeting
Energy & Environment Committee
July 30 – August 3, 2005
Mobile, Alabama

 Alabama
Representative Warren Beck
Representative Lynn Greer
Representative Howard Sanderford
Senator Gary Tanner
Representative Jack Williams
Judy Busby, Secretary to Senator Tanner
Jarrett Grover, Guest
Andrea James, Mobile Register
Dean Peeler, Alabama Petroleum Council
Bruce Windham, Drummond Company
Casi Callaway, Mobile Bay Watch, Inc.

Arkansas
Senator Denny Altes
Representative David Cook
Representative Frank Glidewell
Representative George Overbey
Representative Bill Pritchard
Representative Robbie Wills
Sammie Cox, American Electric Power
Tom Parker, American Petroleum Institute, Southern Region

Canada
June Dewetering, Canada U.S. Inter-Parliamentary Group

District of Columbia
Steve Blackistone, National Transportation Safety Board
Timothy Kichline, Edison Electric Institute
Sara Banaszak, American Petroleum Institute
John Felmy, American Petroleum Institute

Florida
Representative Carl Domino
Representative Dwight Stansel
Alexander Mack, Florida Energy Office

Georgia
Senator Ronnie Chance
Representative Harry Geisinger
Representative Chuck Martin
Representative Jon David Reinhardt
Senator Nancy Schafer
Representative Roger Williams
Steve Allen, Georgia Power Company
Kathryn Baskin, Southern States Energy Board
George Bullock, The Center for Energy and Economic Development
David Buxbaum, Southern Regional Environmental Office of the U.S. Army
Mark Crews, Southern Company
Todd Edwards, Association of County Commissioners of Georgia
Angie Fiese, Senate Research
Susan Gibson, Southern Regional Environmental Office of the U.S. Army
Douglas Jacobson, Southern Legislative Conference
Kenneth Nemeth, Southern States Energy Board
Tom Park, Southern Company
Leigh Parson, Southern States Energy Board
Kimberly Sams, Southern States Energy Board
Brian Sernulka, Southern States Energy Board
Canissa Summerhill, Southern States Energy Board
Rudy Underwood, American Chemistry Council
Sam Whitehead, Colonial Pipeline
Josh Young, American Chemistry Council

Kentucky
Representative Rocky Adkins
Representative Eddie Ballard
Representative James Carr
Representative Perry Clark
Representative Jim Gooch
Representative J. R. Grey
Representative Fred Nesler
Senator Joey Pendleton
Senator Dick Roeding
Senate President Pro Tem Katie Stine
Representative Robin Webb
Representative Brent Yonts
Eric Gregory, East Kentucky Power Cooperative, Inc.
Hank Marks, Legislative Research Commission
Tim Mosher, Kentucky Power Co.
Van Needham, Cinergy
Greg Pauley, ARP, Kentucky Power
John Talbert, Big Rivers Electric Corporation

Louisiana
Representative N. J. Damico
Representative James Fannin
Senator Butch Gautreaux
Senator Chris Ullo
Senator Mike Smith
Robert Baumann, Center for Energy Studies
Dave Cagnolatti, ConocoPhillips
Mary Beth Chevalier, Exxon Mobil
Malcolm Hood, Hood and Associates
Warren Privette, Roy O. Martin Lumber Company, LLC
Kristi Darby, Center for Energy Studies

Maryland
Senator John Hafer
Senator Kathy Klausmeier

Mississippi
Representative Jamie Franks
Senator Hillman Frazier
Representative David Gibbs
Representative Steve Holland
Allison Graves, Entergy, Inc.
Will Mayo, Entergy, Inc.
Giff Ormes, Mississippi Power Company

Oklahoma
Senator P.J. Hogan
Representative Ron Peters
Paul Renfrow, Oklahoma Gas & Electric Energy Corp.
Larry Smith, Oklahoma Gas & Electric Energy Corp.
Mike Smith, Southern States Energy Board

South Carolina
Scotty Griffin, Piedmont Municipal Power
Janelle McCain, Progress Energy

Tennessee
Charlie Sorrells, Eastman Chemical
Ellen Tewes, Office of Legal Services

Texas
Mike Cooper, Alcoa
Randy Eminger, The Center for Energy & Economic Development
Mark Shilling, Southern States Energy Board
Crayton Webb, Mary Kay, Inc.

Virginia
Senator Emmett Hanger
Delegate Harry J. Parrish
Senator John Watkins
Edward Rissing, Rissing Strategic, LLC

West Virginia
Senator Shirley Love
Senate President Pro Tem William R. Sharpe, Jr.
Jerry Bird, Public Service Commission
Steve Hannah, Department of Agriculture