Contact: Linda Guthrie (405) 521-2822 Wednesday, August 27, 2003

ENOUGH TALK ABOUT THE ENERGY CRISIS, SAYS BODE

Commission Chairman tells congressional panel action must be taken

(Oklahoma City) Speaking to members of a congressional task force at a hearing today in Oklahoma City, Corporation Commission Chairman Denise Bode called on lawmakers to take action to address the energy needs of America by, among other things, providing incentives and passing an energy policy aimed at encouraging domestic energy exploration and production.

“This is not rocket science in need of numerous studies,” Bode told the panel. “There have been ample warnings of the impending disaster.”

Bode urged lawmakers to pass federal energy legislation that removes tax penalties that discourage domestic exploration and production, and review the barriers that currently exist that stop domestic producers from going after known gas reserves on federal lands. She says the goal must be to lessen the violent energy price swings that have become the norm.

“If we are to be assured of abundant energy supplies, ‘affordable’ must be defined as true, market-based prices’, rather than merely “cheap energy”, said Bode. “The lesson we must take to heart from the not-so-distant-past is that the pressure on OPEC in the previous Administration for artificially low prices has resulted in the loss of natural gas production, and caused higher, more volatile prices. Ironically, these artificially cheap prices also slowed down development of alternative energy resources and effective conservation programs. Fueling the American consumer is what this effort is all about. Abundant supplies are necessary not for ‘cheap’ natural gas prices, but rather for affordable, stable natural gas prices.”

Bode was one of several officials who testified today at the Task Force For Affordable Natural Gas hearing. The Task Force is chaired by Oklahoma congressman Tom Cole.

Note: Chairman Bode’s filed testimony is attached.

Testimony of

Denise A. Bode

Chairman, Oklahoma Corporation Commission

Before the

Task Force for Affordable Natural Gas

U.S. House of Representatives

August 27, 2003

Chairman Cole, Congressman Barton, Congressman Shimkus, Congressman Carson and members, I am Denise Bode, Chairman of the Oklahoma Corporation Commission (OCC). The OCC is a three-member panel elected statewide that regulates public utilities, transportation and acts as trustee of Oklahoma's oil and gas resource base. I previously served for six years as President of the Independent Petroleum Association of America (IPAA).

The issue before you today is not only one of energy policy. Economic policy is also central to the crisis, and not only because of the threat an energy shortage poses industry. Natural gas production, even with the current problems plaguing production, is an economic boon. In Oklahoma, it is, in a sense, the number one cash crop. It gives Oklahoma the vital advantage of being able to ensure that both industries and residents will have the energy needed to fuel our economy.

With apologies to Mark Twain, rumors of the death of America’s domestic oil and gas industry have been greatly exaggerated. Extraordinary contributions to the wealth of both the state and the country have been made by the domestic industry. Over $11 billion in gross production taxes from oil and gas have been paid in the last century to fund such vital public concerns as roads and education. That represents an all time cumulative value of over $80 billion. The industry still directly employs over 37 thousand Oklahomans. In fact, the total direct and indirect contribution of the oil and gas industry to the Oklahoma economy is close to $2 billion a year. This year about 20 percent of the state's budget is gross production tax revenue from the domestic oil and gas industry.

That said, however, there is no doubt there is a problem. Using the latest data from our energy utilities and oil and gas division, the OCC’s new Oklahoma Energy Outlook projects an increase in natural gas and electricity bills of approximately 20% over last year. This does not include taxes and other fees. The average Oklahoman’s monthly natural gas bill this summer is projected to be $26.57, with an increase this winter to $133.66. The average monthly electric bill is projected to be $70.31 this summer, while the winter electric bill is projected to be $39.15. While it should be stressed these estimates are subject to change, other states are projecting even worse increases for their residents.

Why the increase and what can we do about it?

Here is the short term view: The harsh winter of 2002-03 caused demand for gas to skyrocket while storage levels were drained to record lows. Natural gas production continued to decline. At the same time, year-round gas demand increased, as clean-burning gas is put into use to power generation. Traditionally, natural gas prices have been low in the summer, when demand for gas was at its lowest. It is during this time that gas is purchased for storage for use in the coming winter. However, this year prices for the summer months are at record highs.

The bottom line is higher demand and a lower supply; a combination that will add up to higher natural gas prices for consumers. At the same time, the higher price for natural gas can be seen on your electric bill because most electrical providers in Oklahoma use natural gas to generate at least some of their electricity.

Why can’t supply keep up with demand?

The short answer is it can, if it is allowed to. The problem is, as the Red Queen said to Alice in Through the Looking Glass, "Now, here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast.” Cambridge Energy estimates that, at a minimum, the petroleum industry will need to add 50% more gas reserves over the next decade. Almost $1.5 trillion (in constant dollars) will be required to be invested in production through 2015 to meet estimated demand. Such is the state of affairs America faces as it tries to keep vehicles running, electricity flowing, and furnaces lit. The policies (or lack of same) of the past force us to run as hard as we can simply to stay in place.

There have been ample warnings of the impending disaster. In March of 1994, as then-President of IPAA, I joined with others in a successful call for an investigation of the impact of increasing oil imports. The Clinton Administration’s finding was that the situation did, in fact, pose a national security threat. The finding also detailed the impact of such imports on our natural gas supply. It agreed with what those in the domestic industry had been saying; that as cheap imported oil forced domestic rigs to shut down, our natural gas supply was in increasing danger.

In the fall of 2000, I worked with the Heritage Foundation on a national conference held here in Oklahoma, where we discussed the coming crisis in natural gas and the likely terrible consequences for our economy. While Chairman Greenspan's recent comments on the natural gas crisis have been widely repeated, I remember his warning on October 19, 2000: "Policy-makers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion." Like the grasshopper in the fable, America's live-for-today mentality in energy policy has finally caught up with us.

We are facing these energy shortages in energy-rich America simply because we have not made it a national priority to maintain our domestic energy infrastructure and provide reasonable access to our resource base. Instead of continuing to maintain a diversified energy portfolio, the previous Administration put all of its eggs in the natural gas generation basket. The result has been a dramatic increase in the demand for gas. At the same time, access to production was curtailed, or in some cases closed altogether. In short, there was no attempt to encourage new domestic production. Also at that time, Administration policies interfered in the marketplace by pressuring OPEC to keep oil prices artificially low. Investment dollars desperately needed for domestic energy exploration and development dried up, and many wells were plugged. The national rig count tells the story. As of August 22^nd of this year there were 1,082 rigs operating nationwide with 133 of them in Oklahoma. When compared to a year ago, that’s a gain of 30 in my state, and a gain of 244 rigs nationwide. While it’s good news, it’s not nearly enough, nor is it what one would expect given the current high prices. Compare the rig numbers I just gave you to the kinds of totals reported approximately 20 years ago, when oil prices were about at the current level and natural gas prices were overall much lower than now. At that time, there were approximately four times as many rigs operating in Oklahoma alone. Obviously, price is not the only problem when it comes to exploration and development.

The fact that our nation’s energy needs, regardless of conservation, are growing greater is being ignored. In the next 20 years total energy consumption is forecasted to increase by 32%. Last winter storage levels of natural gas dropped to record lows, and some engineers were worried we were teetering on the threshold of the minimum level of pressure needed to draw the gas out of storage. This winter we face one of the tightest gas markets seen since gas was deregulated. Consumers are likely to face higher prices. The situation is clearly a crisis that cannot easily or quickly be solved.

What must be done? -- Stability and certainty of support for domestic production. The first step is passage of federal energy legislation that removes tax penalties that discourage domestic exploration and production. Over 8 years ago while at IPAA, I began working on the tax package to support domestic production. That language has been included in your energy bill. It must be passed quickly. Existing incentives like the Section 29 credit for conventional gas production should be made permanent. Further, barriers to access on federal lands need to be revised. That work has begun at the Department of Interior and should be supported. We need a gas pipeline from the massive gas fields of Alaska that are currently going to waste. This is not rocket science in need of numerous studies. Energy companies, particularly the smaller ones that make up much of America’s domestic oil and gas industry, depend on investors for the capital needed to actively explore for and produce energy. Investors who have seen this volatility are hesitant to put their money into energy investments. In January 2001, prices rose to $10 mcf and then fell to $2.50 mcf by July. The average price for 2002 was $2.80 mcf. These investors need the encouragement to invest that such energy legislation can provide. And, probably more importantly, they need the federal government to quit contributing to the volatility and uncertainty by interfering in the marketplace.

The states recognized the need for barriers to be removed long ago. Twenty-eight of the thirty-three oil and gas producing states have significant incentive programs. This year our legislature extended our own incentive program. And at the OCC we are streamlining our case processing on unprotested filings and we have new initiatives that address our increasing concern about volatility of energy prices and consumers’ ability to plan for it. Two years ago when consumers were surprised by $10 mcf natural gas prices, the Commission began focusing on the fuel procurement practices of our utilities. Instead of the common practice of utility commissions reacting to the fuel plans and purchases after the fact, we now ask utilities to provide us with their plans and forecasted prices for the future. We asked for new options for consumers to minimize risk and all the utilities have responded. We have encouraged renewable energy alternatives, through modest incentives and regulatory policies, such as wind power and so should federal energy policy. In fact, two weeks ago the Commission approved the first wind power rates for a regulated utility in Oklahoma, which will result in the completion of a 150-megawatt wind generation facility in the state. In short, we are diversifying our energy portfolio.

I am struck by the title of this task force, which I assume is also its mission--to have affordable natural gas. The main problem faced by both investors and consumers isn’t so much one of price as it is one of volatility. Natural gas is affordable; in fact it is usually cheap. If we are to be assured of abundant energy supplies, “affordable” must be defined as “market-based prices”, rather than merely “cheap energy”. The lesson we must take to heart from the not-so-distant-past is that the pressure on OPEC in the previous Administration for artificially low prices has resulted in the loss of natural gas production, and caused higher, more volatile prices. Ironically, these artificially cheap prices also slowed down development of alternative energy resources and effective conservation programs. Fueling the American consumer is what this effort is all about. Abundant supplies are necessary not for cheap energy prices, but for affordable, stable natural gas prices. To do that requires enactment of the President's comprehensive energy plan, and a continued effort to eliminate unnecessary barriers to production and programs to rebuild our domestic energy infrastructure.

Finally, I would be remiss if I did not point out the obvious problem posed by our aging pipeline system. It does little good to increase exploration and production if the infrastructure is unable to reliably bring the energy to market.

Contact: Linda Guthrie (405) 521-2822 Wednesday, August 27, 2003

Testimony of

Before the

I praise your leadership in seeking out the answers to our national energy crisis and thank you for the opportunity to comment.