?Keith Rattie is in a unique position during a unique time. Chairman, president and chief executive of Salt Lake City-based Questar Corp., Rattie is leading the company through challenges—everything from low natural gas prices to new federal initiatives that are not always favorable to fossil fuels.

A native of Washington State, Rattie holds a bachelor’s degree in electrical engineering from the University of Washington and an MBA from St. Mary’s College in California.

He joined San Ramon, California-based Chevron Corp in the mid-1970s. He spent 19 years with Chevron, rising to general manager of the company’s international gas unit. In 1995, he joined Houston-based The Coastal Corp., where he rose to senior vice president responsible for the company’s nonregulated natural gas business.

Rattie joined Questar in 2001 with a mandate to grow Questar’s E&P business. Though primarily an E&P company, Questar also, through its subsidiaries, is active in all segments of the natural gas value chain, with investments in gathering and processing, interstate pipelines, energy marketing and retail gas distribution.

Recently, Rattie became a lightening rod at the center of the energy policy debate after delivering a speech to Utah university students in which he called for an “honest conversation” about policy, global warming and America’s energy future—a conversation based on“easily verifiable facts—not hype and propaganda.”

Rattie says he’s focused on the well-being of Questar in today’s difficult market. But with Congress now contemplating massive intervention in energy markets, including so-called cap-and-trade regulation of man-made CO2 emissions, he says it’s high time for business people and others who care about America’s energy future to stand up and insist that we get the facts straight about global warming and America’s options for addressing it.

Rattie took some time to speak with Oil and Gas Investor about Questar’s plans during the current downturn, its diversification from its original Rockies core, and the potential folly of cap-and-trade legislation.

Investor How have low gas prices affected Questar’s plans this year?

Rattie A lot. We’ve cut our 2009 capital budget by nearly 50% from $2.5 billion in 2008, to $1.3 billion this year, a level consistent with our cash flow from operations. We’ve dropped from a peak of 42 Questar-operated drilling rigs last September to 18 rigs today, and we may drop another two to three rigs over the next month or so. We’ve shifted capital to our higher-margin, higher-return plays at Pinedale and the Haynesville shale. We expect to do more with less—we forecast that Questar E&P production in 2009 will grow by 5% to 9% to 180- to 186 billion cubic feet equivalent (Bcfe). Our second E&P company, Wexpro, expects to produce an additional 45 Bcfe for delivery to our utility, Questar Gas.

Investor How has Questar diversified its strategy?
Rattie We’ve got terrific people and they’ve transformed our company in recent years. We used to be known as predominantly a Rockies-centric producer, but not anymore. Today, Questar E&P is a multibasin play. In the first quarter, 45% of Questar E&P’s production came from the Midcontinent. That share may grow as we shift capital to the Haynesville shale and horizontal drilling in the Cotton Valley play in northwest Louisiana. Based on the current forward curve, today we rank horizontal drilling in the Haynesville first, followed by the Pinedale Anticline in the Rockies, the Bakken play in the Williston Basin in North Dakota, and the Cana shale in western Oklahoma in the Anadarko Basin.

Investor Will your production growth on the Pinedale Anticline continue in 2009?
Rattie Yes. We plan to drill at least 93 wells at Pinedale in 2009. We operate on the northern third of the anticline, with an average working interest of about 65%, split between Questar E&P and Wexpro. Pinedale is our most valuable asset.
It’s the largest gas field in the Rockies—in fact, Pinedale may be the most concentrated unconventional natural gas resource in the world—with stacked pay across a 5,000-foot gross interval, low risk, with lower F&D costs than any other major resource play in the U.S. today. We have up to 1,400 low-risk future development locations to drill on a mix of five- and 10-acre density.
Pinedale wells currently cost about $5.5 million to drill, complete and connect, and recover anywhere from 2.5 to more than 10 Bcfe of reserves depending on whether the well is located on the flank or the crest of the structure, and also on density. Even with today’s poor Rockies prices, assuming prices consistent with the forward curve, we earn returns on Pinedale development that are greater than our cost of capital.

Investor What about your new Haynesville growth potential?
Rattie We have 31,000 net acres in what may be the “sweet spot” in the Haynesville shale play. In the past several months we’ve turned to sales several of the biggest wells this company has ever drilled, with IPs ranging from 17- to 24 million cubic feet per day in our core Elm Grove, Thorn Lake and Woodardville areas. We plan to drill or participate in 35 horizontal Haynesville wells in 2009.
Like every other Haynesville operator, we’ve got work to do to reduce drill times and get our well costs down. Completed well costs have averaged $10- to $11 million to date on both operated and nonoperated wells. We’ve tasked our technical team with getting those costs down to the $8- to $9-million range.

Investor What wellhead prices are you getting out there right now?
Rattie Wellhead prices have recently been below $3 per million Btu in northwestern Louisiana, and near $2 per million Btu in the Rockies. For the remainder of 2009, we’re looking at average regional prices below $4. So the obvious question is: why grow production into an oversupplied market? The short answer is: because we expect acceptable returns on capital in these core plays. That’s because the forward curve is in steep contango: the five-year Nymex strip currently averages almost $7 per million Btu.

Investor What are some of the infrastructure improvements you plan for your Uinta Basin assets?
Rattie Our gas gathering and processing business—Questar Gas Management—is one of the largest midstream field services companies in the Uinta Basin. We’re expanding our Stagecoach processing plant, a project that’s underwritten by long-term contracts with third-party producers. Also, our FERC-regulated interstate business, Questar Pipeline, has expanded capacity out of the basin in recent years, primarily to move gas west to markets served by our utility and to an interconnect with Kern River pipeline at Goshen, Wyoming.
That said, the pace of infrastructure expansion in the Rockies overall, and in the Uinta Basin in particular, is likely to slow in the near term because of the sharp pull back in gas-directed drilling. Unfortunately, that just perpetuates the chronic boom-bust cycle that has been a hallmark of the E&P business in the Rockies for decades. Given the region’s enormous natural gas resource base, there’s no question that we’ll need more pipelines to move more gas, both to markets in the Rockies and throughout the U.S.

Investor What led you to deliver your recent speech on global warming and energy policy in April?
Rattie I was invited to speak to a group of students and faculty at Utah Valley University, followed a few days later by speeches to the BYU Management Society, an alumni organization, and at a Salt Lake Chamber meeting.

Investor What was your main message?
Rattie One can’t undertake a comprehensive discussion on energy policy without addressing the Obama administration’s proposal to regulate carbon dioxide emissions—so called cap-and-trade, and the 80-by-50 idea—an 80% reduction in man-made carbon emissions in America by 2050. You can’t address cap-and-trade without dealing with the controversial issue of global warming.
Cap-and-trade in my view is a terrible idea. Any way you slice it, it’s a tax on the way we live our lives. It’ll drive the cost of energy painfully higher—and judging from Europe’s experience, it won’t work. It won’t work for one simple reason: with today’s energy technologies we don’t have the ability to sever the link between fossil fuels and modern life. So I tried to have an honest conversation with the kids in the audience, who will have to live with the consequences of the policy choices we make now.

Investor You spoke of some “inconvenient realities.” Can you summarize them?
Rattie America’s conversation about 80-by-50 needs to begin with several inconvenient realities. First, worldwide demand for energy is likely to more than double—and could triple—by 2050. Simply put, America and the world are going to need all the energy that markets can deliver.
Second, there are no near-term alternatives to fossil fuels. It’s not a matter of will. It’s not about who’s in the White House. It’s about thermodynamics and economics. America and the world’s energy choices are ruthlessly governed by the laws of thermodynamics.

Investor What about wind and solar?
Rattie That’s third. Contrary to the claims of their proponents, wind and solar are not alternatives to fossil energy. Over the past 30 years, our government has pumped $20 billion in subsidies into wind and solar power, yet according to government data, wind and solar together contribute just one-sixth of 1% of America’s total primary energy needs. To be sure, we’ll need all the wind and solar energy that markets can deliver at prices we can afford. But Washington needs to get real. Wind and solar are not alternatives to fossil fuels.
Promoters of wind and solar power like to talk about capacity. But capacity is not energy. Even the most productive wind farms and solar plants generate power less than one-third of the time. The problem is, the wind doesn’t always blow and the sun doesn’t always shine. Until there’s a breakthrough in high-density electrical storage—a problem that has confounded scientists ever since the days of Thomas Edison—wind and solar cannot be counted on to provide base-load power.
Four, you can debate whether global warming is a serious problem or not, but there’s no arguing that cap-and-trade will drive the cost of energy higher. That’s the whole point—to drive the cost of fossil energy higher so that otherwise uneconomic forms of energy can gain a foothold in the market.

Investor So you don’t think any of this will work?
Rattie Given its staggering cost, Americans should ask “will it work?” If Europe’s experience is an indication, the answer is “no.” What’s more, even if America does reduce CO2 emissions, the computer models that some scientists rely on to predict the long-term consequences of man-made emissions also predict that America’s sacrifice will have no discernible effect on global temperatures for decades, if ever.

Investor What sort of action does Questar support to encourage the development of domestic energy reserves?
Rattie First, our industry needs to redouble its effort to educate policy-makers about natural gas supply. Contrary to what many of our elected officials believe, America and the world are “swimming” in natural gas. Here and around the world, enormous amounts of natural gas have been found. More will be found. Yes, natural gas resources are finite. But the ingenuity of the people in our industry is not. Today, we’re producing from formations that a few years ago most of us thought were unproducible. A few years from now we’ll be producing gas from sources that are not included in today’s estimates of recoverable reserves.
Second, we have to refute the common belief that energy development and environmental protection are mutually exclusive. Third, we have to defend and grow our markets for natural gas. That includes not just our traditional industrial, commercial and residential markets. We need to grow the market for electric power.
When you do the math, the inescapable conclusion is that greater use of natural gas will be a consequence of CO2 regulation. You cut CO2 emissions by up to 50% when you use natural gas instead of coal in a power plant. And here’s the good news—we do not need massive new investment to do so.

Investor Why not?
Rattie Forty percent of America’s nearly one-million megawatts of existing, installed electric-power-generation capacity is built to run on natural gas. That’s a whopping 30% more than the total U.S. installed coal-fired capacity. But incredibly, the average utilization of our existing gas-fired power plants is less than 25%, versus nearly 75% for coal.
Just a mere 10% increase in the average utilization of our existing gas-fired power plants—from 25% to just 35%—would increase U.S. electricity supply by the equivalent of 40 base-load coal or nuclear plants—an incremental cost that’s a fraction of the all-in cost of new coal, nuclear or wind-power plants.
What’s more, over half of the nearly 400,000 megawatts of installed gas-fired capacity have been built since 1995, whereas most of this country’s coal and nuclear plants are 30-50 years old. But you wouldn’t know that from what you hear from Washington. The public discourse on energy shows a bias for massive new spending on so-called “clean” coal, nuclear, wind and solar power, while a much lower-cost and environmentally sound alternative—greater use of domestic natural gas in our existing gas-fired power plants—rarely gets mentioned.
That’s in part the perverse consequence of both misaligned incentives for regulated electric utilities, and unfounded fears that America is running out of natural gas. With U.S. gas supply clearly set to grow, our industry needs to get its act together. We need to educate the public and policy-makers, and we need to protect and grow all markets for our clean, abundant, affordable and American-made product.

-Nissa Darbonne