Statement of Ben Hardesty, General Manager, Northeast Gas Basin Exploration and Production Company, Dominion, Jane Lew, West Virginia

Dominion appreciates the opportunity to submit these comments urging extension of the I.R.C. Section 29 credit for producing fuel from non-conventional sources.

Dominion is a leading provider of electricity, natural gas and related services to customers in the energy-intensive Midwest, Mid-Atlantic and Northeast regions - a market where 40% of the nation's energy is consumed. In addition to serving about 4 million retail electric and gas customers, Dominion operates 7,600 miles of transmission pipeline and 2.8 trillion cubic feet of reserves. Dominion Exploration and Production's operations are primarily in the Gulf of Mexico, South Texas, the Rocky Mountains and the Appalachian Basin, and in New York State we have about 43,000 acres under lease.

Dominion has a long history serving retail customers, but we became active in exploration and production after the energy shocks of the 1970s brought home the need for secure domestic supplies. At about the same time, in the wake of the widespread energy shortages and deep concern about American dependence on imported oil, Congress enacted the Section 29 non-conventional fuels tax credit.

The goal was to encourage U. S. production of oil and natural gas from "nonconventional" sources, such as Devonian shale, tight rock formations, coalbeds, geopressurized brine, and biomass. The credit was needed because these deposits are unusually expensive to locate and/or produce. An important feature was that the credit applied only to actual production - the consumer's tax dollar was spent only after the producer had taken the risk and achieved success.

Section 29 did result in a significant expansion of production from difficult sources, and it helped to drive new advances in production technology. According to the Gas Technology Institute, during 1986 to 1996, 70% of the increase in lower-48 non-associated gas production came from "nonconventional" sources. Today, however, the credit applies only to production from wells completed before Dec. 31, 1992, and even for these qualifying wells it is scheduled to expire on Dec. 31, 2002.

The U.S. now imports 56% of its oil, and that figure is projected to rise to 65% within 15 years. At the same time, the availability of domestic natural gas is more important than ever, in part because of its growing role in the nation's electric power infrastructure. The National Petroleum Council projects gas demand to rise to 31 Tcf by 2015, with about half of that increase related to electric generation. However, unless something is done, supply will lag demand. The NPC predicts that gas production will rise to only 27 Tcf by 2015. In order to meet demand, the NPC says, the total number of oil and gas wells drilled per year would have to double to 48,000.

Aside from the increasing importance of natural gas in the electric sector, new gas technologies translate into additional ways to assist in meeting the nation's twin goals of lowering emissions and reducing dependence on foreign oil. For example, today's natural gas vehicles meet the most stringent standards applicable to internal combustion engine vehicles, and natural gas air conditioning, when operated as part of an integrated cooling system, can play a critical role on easing reliance on electric systems that are overstressed.

The U.S. has substantial gas reserves found in the kinds of hard-to-reach formations addressed by Section 29. Production from these formations continues to be very expensive, however, and expiration of Section 29 could result in the plugging and abandonment of many of the qualifying wells. On the other hand, as history demonstrates, an extension of the credit to new wells could encourage the production of vital new gas supply.

The Section 29 credit is needed to unlock marginal supplies of natural gas. While gas prices are high today, producers -- and their bankers -- have learned the hard way about price volatility. Without Section 29 to protect them, they are not going to make the massive investments needed to produce gas from difficult sources. An extension of Section 29 will play a vital role in encouraging domestic supply, and assuring the availability of natural gas for high quality power generation, for home heating, and for a growing list of other uses.

We appreciate the opportunity to comment today about the Section 29 tax credit for actual production from challenging formations, and about of the importance Section 29 to the nation's supply of natural gas.