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Company's prediction of a natural-gas crisis is challenged by other energy experts

Associated Press

The Trunkline LNG terminal in Lake Charles, La., is one of just four operating in the United States. Plans for new terminals - which supporters say will be needed to ensure gas supplies - have sparked opposition from communities around the country.

San Diego-based Sempra Energy has a chilling view of the nation's prospects for producing natural gas, the fuel used to heat a majority of U.S. homes and increasingly used to generate electricity.

Within a decade and a half, Sempra says, North America's gas production will soon fall dramatically. That leaves the United States with no course but to build a large network of liquefied natural gas receiving terminals and vastly increase imports of the gas, the company says.

Sempra has used its dire vision to win regulatory backing for its plan to build terminals for LNG, projects opposed by many communities and environmentalists.

Last month, the California Public Utilities Commission voted for the first time to accept gas from an LNG terminal that Sempra proposes to build in Baja California, as well as other terminals planned along the state's coast.

But while most analysts say LNG will play a role in the future, there is no state or federal energy forecast that accepts Sempra's dire view of plummeting gas production.

Forecasts from the Department of Energy and the National Petroleum Council, a broad industry group, predict slight growth – not a decline – in gas production in coming years.

[ Ed's note: this table should most likely read 'Natural Gas Production Forecasts', not 'LNG Production Forecasts' -AF ]

The perspectives are as far apart as the difference between a problem and a crisis.

If Sempra's view is accurate, the United States will be forced to open new lands to natural gas drilling and vastly increase imports, through the use of LNG projects.

If more-optimistic estimates of natural production are accurate, conservation and renewable energy sources could bridge the shortfall.

Darcel Hulse, president of Sempra Energy LNG, says renewables and conservation won't be sufficient and adds that the company's forecasts were derived from extensive study.

In a decade and a half, Hulse says, natural gas production will plummet to less than half of current levels.

"There is no way we can reverse the decline," Hulse said.

For Sempra, the solution is unavoidable: Move quickly to bolster gas supplies with LNG. Sempra chief executive Stephen Baum predicts that by 2008, large imports of LNG will begin moderating U.S. natural gas prices, which have risen sharply in recent years.

Bill Powers, a longtime energy industry engineer, takes issue with Sempra's prediction.

Powers, who has been a consultant for government, industry and environmental groups for more than two decades, underscores that other energy forecasters expect gas production to grow in North America, albeit at a modest clip, or remain flat.

LNG development is a choice, not a necessity, he says. He argues that it's not a good choice for California.

"Sempra is trying to create this buzz that we are running out of natural gas and if we don't jump on this LNG train yesterday, we will be in desperate straits," said Powers, chairman of the Border Power Plant Working Group, which advocates for clean energy development along the U.S.-Mexican border. "That's not true."

Powers believes that Sempra's crisis forecast excessively influenced a majority of the California Public Utilities Commission, which voted last month to accept LNG into the state's pipelines.

In discussion leading up to that 3-2 vote, commission members warned of possible gas shortages.

"All experts agree that the current infrastructure and natural supply will be insufficient," PUC Commissioner Susan Kennedy said, before voting to approve LNG shipments. She also urged action to stem rising prices.

However, the California Energy Commission forecast late last year that supplies of natural gas will be adequate for the foreseeable future. The state imports 85 percent of its natural gas via conventional pipelines.

Although some outside sources are declining, the energy commission said, growing imports from the Rocky Mountains will offset production declines in California and elsewhere.

That forecast was issued before the PUC voted to require California to derive 20 percent of its electricity from renewable sources by 2010. Dave Maul, who oversees monitoring of natural gas supply and demand at the energy commission, said he expects that commitment to cut the growth in California's demand for natural gas from 1 percent annually to 0.5 percent.

Maul said he is more worried about price than supply.

"I am concerned we will pay more and more for the gas," he said.

Powers argues that LNG imported to the West Coast won't help moderate prices because the long distances required to ship it here – plus processing costs – will likely make LNG more expensive than gas produced in North America.

He also noted that LNG, whose technology is not new, has only become commercially viable because of a doubling in natural gas prices in recent years. While some assert the price increases prove shortages are at hand, others note the natural gas market has also been roiled by price and supply rigging in recent years.

Natural gas is extracted by driving taps into resource basins and funneling the fuel through land-based pipelines. By using LNG technology, the gas can be tapped from foreign fields, supercooled to a highly condensed liquid and imported to North America aboard supertankers.

When the tankers arrive at terminals such as the one Sempra proposes in Baja, the gas is reheated to its gaseous state, processed to ensure compliance with U.S. standards and injected into pipelines, where it becomes indistinguishable from gas from conventional sources.

LNG supporters say it will help diversify U.S. energy sources by increasing supply and transforming gas into a widely traded commodity like oil.

Opponents of the technology don't like all of that picture.

They argue that a growing reliance on LNG will hook the United States on an additional fossil fuel from abroad – just like oil – and squander resources better spent on building national energy independence through conservation and renewable power development.

They also note that much of the gas slated for conversion to LNG will be derived from poorer nations and from pristine natural environments.

Another potential roadblock to LNG development is an ongoing dispute between the PUC and the Federal Energy Regulatory Commission over which agency has jurisdiction to approve siting of the projects. That dispute is now being litigated.

No matter who wins, citizens in most towns are less than happy about the prospect of LNG terminals and tankers moving the highly flammable fuel through their communities. LNG opponents fear accidents and the potential for terrorist attacks.

Supporters say there have been few accidents, although an Algerian liquefaction plant exploded this year, killing 27 people, and an LNG accident in Cleveland in 1944 caused the deaths of 128 people.

More than 30 LNG terminals have been proposed around the country, and in many of the communities stiff opposition has arisen – in some cases causing plans to be scrapped.

Opponents in Long Beach are fighting a proposal to build an LNG terminal there. Another California terminal is proposed about 20 miles off the coast of Ventura County, and a third also is planned nearby off the coast.

So California is central to LNG plans, although no one suspects that all planned facilities will be built here. Donald Felsinger, Sempra's president and chief operating officer, believes that only a handful of all proposals nationwide will result in new LNG plants by the end of the decade.

However, Felsinger also believes that recent action by state regulators was a ratification of his company's LNG advocacy.

"The CPUC vote was a milestone because the utilities came to the conclusion that one of things that would be beneficial for California is to have a diversity of natural gas supply," he said.

The nation's demand for natural gas is rising because, compared with other fossil fuels – oil and gas – it burns cleanest. Increasingly, it is being used to fuel electricity power plants. Nearly all new large California power plants are fueled by natural gas.

Assuming the state has adequate gas supplies without LNG "would be a risky bet," said Sempra's Hulse. "Natural gas shortages would lead to severe shortages for our economy."

He said his company's forecast of a pending steep decline in gas production is shared by other companies investing in LNG. But he acknowledged that Sempra's forecast is far worse than those of the U.S. Department of Energy and the National Petroleum Council.

Still, he said he is comfortable with the company's outlook.

"We don't look at one source. We look at everything," he said. "The chance of us finding a huge new gas supply that would change our production decline is very remote."

The natural gas forecast is based to a large degree on studies of the decline in U.S. oil production, which began in the 1970s, he said.

"In oil we never did make that huge find that reversed our decline and at this level of maturity in our gas production, we don't think we'll find it there, either," he said. "And I think more and more consultants are coming around to our way of thinking."

However, LNG opponents say Sempra's "apocalyptic view" has been too influential and not carefully scrutinized.

Loretta Lynch, a PUC member who opposed Sempra's LNG proposal, said it should be subjected to the commission's "gold standard," evidentiary hearings in which industry executives testify under oath and are subjected to cross-examination.

At the hearings, commissioners could have considered proposals to retrofit older natural-gas-fired power plants with new equipment and cut natural gas demand more than 10 percent, she said.

PUC President Michael Peevey, who voted for LNG entering California, said such a proceeding is unnecessary.

"We've all come to the same conclusion: We need to increase natural gas supply," Peevey said. "I don't think anybody quibbles with that."

However, members of Ratepayers for Clean Affordable Energy, a coalition of environmental and citizens groups, said assertions by Sempra and other industry representatives could be challenged, if made under oath and subject to cross-examination.

"Those gas-crisis scenarios would have been blown away," Powers said.
Craig Rose: (619) 293-1814; [email protected]

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