Senate energy bill’s key elements go beyond eastern Gulf of Mexico

Oil and gas trade associations applauded the bill which emerged from the US Senate Energy and Natural Resources Committee on June 17 because it would open parts of the eastern Gulf of Mexico for leasing and development. But the measure contained several other elements which would directly affect the industry.

These included establishing a 30 million bbl refined products stockpile within the Strategic Petroleum Reserve; requiring an inventory of marine resources off the US coast, including seismic surveys on the Outer Continental Shelf; increasing federal guarantees for constructing a natural gas pipeline from Alaska to $30 billion; requiring Senate confirmation of nominees to be US Minerals Management Service director, and repealing offshore royalty and other incentives in the 2005 Energy Policy Act.

It also would extend pilot offices for processing oil and gas development permits by five years through 2020, and require the US Interior secretary to establish a regional joint OCS lease and permit processing office for the Alaska region. It also includes a provision clarifying that Section 526 in the 2007 Energy Independence and Security Act does not mean that US refiners can’t buy crude oil produced from Canadian oil sands.

The bill also proposed energy commodity market reforms. It would direct the US Energy Information Administration to collect new data identifying all physical petroleum holdings of the 50 largest oil traders, as determined by the US Commodity Futures Trading Commission. It would create a financial market analysis office within EIA. And it would establish an energy markets working group, which would be required to report to Congress its assessment of factors influencing oil prices and its regulatory recommendations to make markets function more smoothly.

Another section would give the Federal Energy Regulatory Commission cease-and-desist authority, similar to power that the US Securities and Exchange Commission and the CFTC already hold, to stop improper market behavior as soon as it is detected. FERC also would gain authority to stop dissipation of assets so that actors found guilty of market manipulation could not dodge fines by moving assets to other parts of their businesses that are out of regulatory reach.

How it developed

The committee’s leaders set out to make the bill comprehensive. It was based on six major bills, all with bipartisan sponsorship, and five other measures introduced earlier in 2009. Provisions were developed in 39 bipartisan staff briefings, 20 formal hearings, and 12 open business meetings, according to the committee’s majority staff. As the bill was prepared, 100 amendments were considered and adopted, most on a bipartisan basis and many unanimously, they added.

Majority leader Jeff Bingaman (D-NM) and other committee Democrats generally emphasized the bill’s provisions dealing with alternative and renewable energy technologies, national electricity transmission grid improvements, energy and water efficiency, research and development, and carbon capture and sequestration.
“Getting America running on clean energy has been a key goal of this markup,” Bingaman said following the June 17 vote. “This bill will help shift our country to cleaner sources of energy, and more secure sources as well. The bipartisan, substantive, and forward-looking approaches to energy found in this bill will move America toward the clean jobs and economic growth we need.”

Lisa Murkowski (R-Alas.), the committee’s ranking minority member, also put a bipartisan face on the results. “Today, this committee reaches the end of a long and sometimes bumpy road toward reporting out energy legislation. Despite an uphill fight against Democrats’ three-vote majority, we were able to include a number of provisions that we need to drive this country,” she said. “While I support this bill in its present form, we simply must do more to increase our domestic production and use of nuclear energy. I will continue to fight for those provisions on the Senate floor.”

This did not mean that negotiations weren’t hard. Maria E. Cantwell (D-Wash.) submitted amendments on drilling requirements and discharge limits which the committee withdrew on June 15 after Murkowski said she would oppose the bill if they stayed in. Some Republicans on the committee voted against it anyway. “Quite simply, this bill rejects American energy. It allows foreign oil and energy producers to continue their grip on our country,” said John A. Barrasso (Wyo.).

Three key amendments

But it was a Democrat, Byron L. Dorgan (ND), who proposed the amendment to expand federal leasing in the eastern Gulf of Mexico which the committee adopted by 13 to 10 votes on June 9. His proposal would leave in place a 45-mile buffer along Florida’s coast as it opens offshore acreage including the Destin Dome, which he said was one of the nation’s most promising new gas resources. An amendment offered by another Democrat, Mary L. Landrieu (La.), to allow affected coastal states to get a share of future federal oil and gas revenues from leasing and production off their shores failed by a similar margin. But the committee passed by voice vote the amendment by Sam Brownback (R-Kan.) that US refiners would not violate Section 526 of the 2007 Energy Independence and Security Act by buying crude oil produced from Canadian oil sands.

The presidents of three leading US oil and gas trade associations separately expressed their approval when the committee reported the bill out on June 17. Jack N. Gerard of the American Petroleum Institute said that it was a positive step which recognized the importance of additional offshore oil and gas and Canadian oil to US energy and economic security.

“The majority of Americans favor greater offshore development, and they recognize this development means more jobs, more government revenues and more domestic energy supplies,” he said. “As the bill moves forward to the full Senate, we hope a resolution can be found that will ensure that coastal states are compensated for hosting development off their shores because that production will benefit all Americans in terms of revenues, additional jobs, and greater domestic energy supplies.”

Barry Russell, of the Independent Petroleum Association of America, said that the committee’s action “represented a major step forward in developing a sensible, supply-oriented energy strategy. The Senate should bring this commonsense legislation to the floor, make it better where needed, and move it forward quickly.”

And the American Gas Association’s David N. Parker specifically mentioned the Dorgan amendment, saying that it would provide access to vast amounts of gas close to existing pipelines and other infrastructure. “Increased access to domestic resources will not only help lower energy costs, but will also ultimately help make America more energy secure,” he observed.

Other provisions’ effects

The fact that their leaders didn’t mention other parts of the bill doesn’t mean that oil and gas trade associations aren’t aware of them and their potential impacts. Some have been mentioned the past few weeks in other contexts.

For example, the bill’s requirement for the US Department of Energy to hold at least 30 million bbl of oil products, such as gasoline and diesel fuel, within the Strategic Petroleum Reserve is a clear response to product shortages following Hurricanes Katrina and Rita in 2005 when much of the nation’s refining capacity was lost. The bill also would move authority to order SPR releases from the president to the US Energy secretary.

Products reserve proponents have argued that the nation already has experience running the northeastern heating oil reserve. Petroleum trade association officials have said that operating one for gasoline and diesel fuel would be more complicated.

“Our experience with the heating oil reserve has shown us a couple of things,” API Chief Economist John C. Felmy said during a June 15 teleconference on gasoline prices. “First, the existence of government stocks can discourage the holding of commercial inventories. Second, if the government inventories are for an emergency, where are you going to locate them, how are they going to get to market, and what are you going to put in them during an emergency?”

The United States has 14 different kinds of gasoline which are formulated to meet different areas’ environmental and emissions conditions, he noted. Felmy said that the US Environmental Protection Agency could issue waivers, as it did in the weeks following the 2005 hurricanes, allowing fuels not meeting specifications to be used for a short period. The reserves also could hold the highest-cost blends such as the formulation required in California, he added. “But that still doesn’t answer questions such as how much diesel would need to be in these reserves. These would have to be considered too,” he said.

OCS evaluation

The bill’s provision ordering a complete inventory of resources off the US Atlantic, Gulf and Pacific coasts, with authorized appropriations, included seismic exploration of oil and gas on the OCS. Priority would be given to areas with the greatest energy production potential and the first inventory would have to be available within two years of the bill’s enactment.

Congressional bans over three decades not just of OCS oil and gas leasing, but also of seismic or any other activity which could lay the groundwork for eventual production, have created a significant data gap. When the Potential Gas Committee prepared its latest biennial estimate of potential domestic gas resources, it had to use OCS figures developed in the 1970s in some cases, according to John B. Curtis, director of the Potential Gas Agency at the Colorado School of Mines , which provides guidance and technical assistance to the PGC.

That does not necessarily mean that scientists can’t estimate the OCS’s gas potential, he continued during a June 18 briefing on the committee’s latest report. “The Canadians already are producing from the same rocks off their east coast,” he observed. Curtis’s observation that technological improvements which have made it possible to economically produce gas from onshore shale formations could also be applied to conducting three-dimensional seismic surveys of OCS areas which were last evaluated with earlier methods that were significantly less precise.

Tantalizing as that prospect seems, the question of who would conduct such a survey and how it would be financed still has to be answered. Oil and gas industry groups have said that opening specific areas to evaluation by producers themselves would be the most efficient approach. Federal officials in Congress and the Obama administration are likelier to want to have the government handle it.

It’s also likely that any OCS evaluation would involve not just oil and gas, but also wind, wave and other potential renewable energy resources. US Interior Secretary Ken Salazar favors a more comprehensive approach to considering OCS resources, and would probably make implementation of this provision in the bill careful and deliberate. The provision itself seems to recognize this, stating that the report required within two years of enactment must include data on other marine resources, including the potential for alternative energy development, navigation uses, fisheries, aquaculture uses, habitat, conservation, and military uses.

Regulatory impacts

Other parts of the bill would have their biggest impacts on oil and gas leasing and regulation. The provision authorizing $30 billion of financing for the gas pipeline from Alaska also would authorize the Interior secretary to issue rights-of-way for the system in non-wilderness areas of Denali National Park near an existing road there, and sets forth terms and conditions to make sure that this complies with applicable existing laws.

The EPACT sections which would be repealed if this bill becomes law potentially would involve not just deepwater production incentives but also gas production from deep wells in the shallow Gulf of Mexico, marginal wells producing fewer than 15 bbl of oil or 90 million Btu of gas daily, and the royalty-in-kind program.

This provision’s most important feature is that it restores discretion for all the programs to the Interior secretary, an Energy and Natural Resources Committee spokesman explained on June 22. “It does not prohibit incentives but returns the task of justifying them to MMS and the secretary,” he told OGJ. (The secretary exercised control over RIK activities under EPACT, an examination of the law found. The marginal well provision apparently applies only to rates and royalties on federal lands, and would not affect the repeal of tax incentives covering domestic stripper wells which the Obama administration has proposed.)

The bill’s proposal to double the authorization for DOE’s energy research and development program from $3.28 billion in fiscal 2009 to $6.56 billion in fiscal 2013 does not specify where the money would be used. It’s unlikely that much, if any, of the funding would be directed to oil and gas programs, given the prevailing political perception that money is needed more urgently elsewhere. “The title includes provisions addressing large energy R&D grand challenges that are inherently interdisciplinary while enhancing training for energy utility technicians across all segments of the energy industry including advanced education for the subsurface geosciences and engineering fields,” the majority staff’s summary said.

The provision dealing with carbon capture and sequestration has oil and gas impacts that are not as direct as others in the bill. It establishes a national indemnity program through DOE for up to 10 commercial-scale CCS projects, sets qualifying criteria “to ensure that critical early-mover projects will be conducted safely while addressing greenhouse gas emissions from industrial facilities” including coal and gas-fired power plants and refineries, and establishes a framework for identifying geologic storage sites, the summary said.

Energy markets

The section in this bill which probably will be the most hotly debated once the bill hits the Senate floor is the one dealing with energy markets.

It would direct the EIA to collect new data identifying all physical petroleum holdings of the 50 largest oil traders, as determined by the CFTC; establish a new financial markets office within EIA to help determine connections between physical and financial energy markets; and create an energy markets working group which would be required to report its assessment of factors influencing oil prices and recommendations to make markets function more smoothly to Congress.

Obvious jurisdiction questions emerge, starting with EIA’s role. Acting Administrator Howard K. Gruenspecht has looked uncomfortable during congressional hearings when federal lawmakers have suggested that EIA move beyond its traditional responsibilities of gathering energy and analyzing energy statistics.

The CFTC also is working already with FERC, the US Securities and Exchange Commission, and other agencies and stakeholders on broader energy commodities regulation questions which include what this bill proposes for a new working group.

Energy commodities markets also could be overshadowed by broader reforms which the Obama administration and other Senate and House members have proposed. Those measures potentially would have a bigger impact on the physical hedging which many producers consider an essential part of their business than what the Senate Energy and Natural Resources Committee has put in this bill.

Contact Nick Snow at nicks@pennwell.com

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