The US energy policy spotlight will be on petroleum-rich federal lands in Alaska this spring, after Congress returns from its recess.
First up will be a hotly disputed issue as Congress decides whether the time is right to open the Arctic National Wildlife Refuge coastal plain to leasing. New developments in the past 2 weeks have served only to heat up the issue more.
Sen. Jeff Bingaman (D-NM), Senate Energy Committee chairman, on Mar. 27 asked Interior Sec. Gale Norton to release preliminary results of a US Geological Survey assessment of estimated oil and gas resources in the National Petroleum Reserve-Alaska (NPR-A). The latest USGS estimate is to be released in mid-May and is expected to be higher than earlier calculations. Bingaman says the information is essential to the ANWR debate.
At the same time, new information on ANWR's oil and gas potential must be weighed against yet another federal agency report citing scenarios of environmental impacts to the refuge in the event of industry activity there.
A second, if less controversial, legislative push centers on what it would take to make the proposed Alaskan natural gas pipeline to the Lower 48 viable.
Other issues of lingering concern-covered by a host of actions already taken or considered by the US Senate (see pdf)-are topped by changing fuels formulas and energy-based financial derivatives made newly controversial by the Enron Corp. implosion.
NPR-A
NPR-A, unlike ANWR, is already available to industry for drilling, although its remote location and poor exploration history discouraged some companies from investing there until recent years.
But Interior officials say recent successes by Phillips Petroleum Co. and other industry data may encourage future drilling there. When the Bureau of Land Management conducted a lease sale on a portion of the NPR-A in May 1999, industry showed interest, and more lease sales are expected (OGJ, May 17, 1999, p. 33).
"While I understand that USGS policy is not to release data in preliminary form, I also understand that much of this work, including the estimates of technically recoverable oil and gas resources in the NPR-A, is substantially completed," said Bingaman.
Earlier estimates by USGS showed the northeast portion of the 23 million acre area likely holds 1.8-4.7 billion bbl of recoverable oil.
"This information would be extremely useful to the Senate as we debate the future of the environmentally sensitive coastal plain of the Arctic National Wildlife Refuge," Bingaman noted to Norton in a letter. "Knowing the extent of alternative supplies of oil and gas is of assistance in the debate on whether drilling should be allowed in the arctic refuge."
New ANWR-related data
Using USGS data, the nonpartisan Congressional Research Service on Mar. 12 summarized the probability of the presence and recoverability of oil in the federal 1002 area of ANWR, adjacent state waters, and native lands. At a market price of $24/bbl, USGS said the mean estimate of oil in ANWR, including state and native lands, was 7.60 billion bbl. Of that total, 5.24 billion bbl would come from the 1002 coastal plain area, under a 1999 USGS assessment. Another 2.36 billion bbl may also be recovered under adjacent state waters and native lands, assuming the same market conditions under a new preliminary estimate released by USGS last month.
Bingaman maintains that policy-makers need the newest information possible on NPR-A and other sources of oil and gas to get a clearer picture of what is already available to industry before opening a portion of ANWR that is ecologically unique.
Senate Democratic leaders who opposed ANWR drilling for environmental reasons say they have enough votes to shut down debate on the issue this spring. A Republican-sponsored House bill passed last August includes an ANWR leasing provision. Leaders of the Democratic-controlled Senate have threatened to suspend further discussion on the energy bill unless ANWR proponents offer their proposal on the Senate floor in early April. Scores of amendments, some technical in nature, others controversial, have already been considered during 3 weeks of debate, and many more are still expected.
A big question remaining for industry and lawmakers from oil-producing states is whether the White House will accept a final energy bill that does not include ANWR. Administration officials have offered mixed signals on what President George W. Bush would do under those circumstances (OGJ, March 25, 2002, p. 30). However, some lobbyists predict Bush may never see a final bill because the House and Senate may not be able to resolve their differences.
The White House energy blueprint released in May 2001 calls for leasing in the 1002 ANWR coastal plain area.
Environmental issues
ANWR proponents weren't encouraged by new information from USGS suggesting that oil and gas development on the coastal plain of the Arctic National Wildlife Refuge could have a wide range of impacts on some native species. Studies on muskoxen, polar bears, and snow geese demonstrated that, if proper precautions are taken, the effect of human development on their populations and habitat could be minimal, according to USGS Director Charles Groat in a letter to Sec. Norton Mar. 29.
But new information in the report found that the Porcupine Caribou herd may be particularly sensitive to petroleum development within the 1002 portion of the calving ground in ANWR.
Exactly what kind of impact could occur would depend on the type of development and where the development is located, USGS said. Five development scenarios were simulated to assess the potential effects of development of the 1002 area, Groat said.
"These five scenarios demonstrate that the impact may range from none to substantial," he said.
Because the scenarios may not dovetail with what Congress is considering this month under pending energy legislation, USGS asked the scientists who undertook the controversial caribou studies to provide additional analyses that will be available to Norton and other members of the Bush administration by mid-April.
Environmental groups said the USGS report gave the clearest indication yet that the refuge's coastal plain should not be developed because it is ecologically unique and fragile. They also argue that industry's past track record shows it can't be trusted. A widely anticipated report by the General Accounting Office may further complicate the issue. Last year Democratic leaders who oppose ANWR leasing asked GAO to estimate how much it would cost industry to return the North Slope to its original condition once drilling stops and how companies plan to pay for it (OGJ Online, Mar. 16, 2001).
"We are interested in the cost of, and plans for, returning the wetlands and tundra on the North Slope to their biologically natural state following the completion of drilling and production activities," wrote Rep. Ed Markey (D-Mass.) and two key Democrats from the House leadership, Minority Leader Dick Gephart (D-Mo.) and Nick Rahall (D-W. Va.), ranking minority member of the House resources committee. They also asked the agency to offer a possible legislative remedy if deficiencies are found. GAO's report is due this month and is expected to project that cleanup may take several billion dollars.
Environmental groups allege that North Slope development has led to massive groundwater and offshore pollution that overrides any economic benefits gained over the last 20 years from extracting oil from the region. The oil industry refutes that position, saying oil development has provided much-needed jobs to the region without much environmental cost at all.
Meanwhile, the White House is doing more-immediate control of damage inflicted by green groups over the USGS findings, saying that energy development and environmental protection can coexist. Interior officials also maintain exploration would be limited to wintertime in deference to the breeding, spawning, and wildlife migration patterns cited in the USGS report and other scientific literature. Bush administration officials say they anticipate that most drilling would occur in the northwestern portion of the coastal plain, where USGS and industry's own private research indicate about 80% of the postulated oil reserves can be found.
ANWR momentum still possible
Proponents of ANWR leasing are hoping that record increases in retail gasoline prices and resurfacing concerns that Middle East violence could lead to sudden oil supply shortages will help make the argument that opening ANWR is as much a national security issue as an energy issue.
Bolstering those Middle East worries were recent comments from Iranian Foreign Minister Kamal Kharazi that his country would consider using oil as a weapon to force the US to pressure Israel into withdrawing from Palestinian territory, as reported by the French newswire service Agence France Presse at an Islamic conference. Most analysts and US government officials, however, say the possibility of another embargo along the lines of the 1973-74 Arab oil embargo is highly unlikely, and Iranian officials were careful to say they would only consider an embargo if there were a consensus from other Islamic countries. Iraq early this month called on other Arab nations to carry out an embargo.
Iraq-US policy may also be examined by the Senate this month if lawmakers opt to consider a pending proposal by Sen. Frank Murkowski (R-Alas.) to ban all Iraqi oil imports into the US. Proceeds from sale of those imports, which have been as much as 1 million b/d, do not go to Iraq. Instead, those sales are monitored and tightly controlled by the United Nations, which uses the revenue to buy food and medicine for the Iraqi people.
The White House endorses this "oil-for-aid" program, but Murkowski says the program is ineffective and is merely helping Iraqi dictator Saddam Hussein launder money to help finance his grip on power. Support for the amendment is not very strong at this point, given the White House's quiet opposition to it because of the impact it would have on oil prices. However, it is also too soon to assume Congress may not try to address this issue in some manner, industry sources said.
Gas pipeline
One issue that has more support in Congress is a proposal to build a new natural gas pipeline from the Alaskan North Slope to the Lower 48.
"Clearly, North Slope natural gas can be an important source of energy for our nation, assuming an appropriate transportation system is constructed," Bingaman said in his letter to Norton.
Pending energy legislation before the Senate includes provisions to encourage industry to build a massive new pipeline. However, some producers are skeptical it can be built, given that the current bill mandates a more expensive, southern route through Alaska that would be designed to maximize the control the state would have over gas shipments.
The new arctic gas line would be one of the largest construction projects ever undertaken and would parallel the oil pipeline to Fairbanks and then the Alaska Highway to British Columbia.
Canadians and North Slope producers favor a shorter, northern route from Prudhoe Bay field east across the Beaufort Sea to the Mackenzie Delta and then south along the Mackenzie Valley.
Before leaving Washington, DC, for a 2-week break, the Senate passed a new round of gas pipeline amendments that clarify how the state will control the gas to promote economic development in Alaska, how any gas line will be permitted (setting up a federal coordinator to oversee construction), how it will be reviewed by the courts if there are legal challenges, and how a pipeline will be expanded if new gas supplies are found.
"There is still much work to do to make this project a reality," said Mur- kowski, ranking member of the Senate Energy Committee. "I hope to continue working with all interests to continue to improve this legislation and the opportunities for this project." Murkowski is running for governor of Alaska this year in addition to performing his senatorial duties.
A pending issue is how much lawmakers are willing to let the federal government pay for the project. The existing bill would provide federal loan guarantees of as much as $10 billion for an Alaska gas pipeline, provided the applications for permitting certificates are filed within 6 months after the bill is passed. Producers may also get a guaranteed price for their gas under certain market conditions under an amendment expected to come when the Senate tackles energy tax incentives later on.
Other federal prospects
Along with NPR-A and a new gas line from Alaska, industry still has opportunities in the Lower 48 that could be pursued without having to open ANWR, Bingaman suggested to Interior officials.
"Similarly, there are 32 million acres of the Outer Continental Shelf off the coasts of Texas, Louisiana, and Mississippi that have been already leased by the government to oil companies for exploration and production that could serve as an important source of energy for our country."
Interior officials are hoping to further encourage exploration in the Gulf of Mexico by continuing a popular deepwater royalty relief program. MMS first instituted a royalty incentive for deep gas in March 2001, but the agency's latest gulf sale was the first time the most recent revisions were included for industry. Under the incentive, the first 20 bcf of gas production from 15,000 feet or greater is royalty-free. Such incentives have contributed to increases in US oil and gas offshore production.
Other issues
If and when the ANWR issue is resolved in the Senate, other controversial energy policy measures remain.
The Senate rejected attempts to dramatically increase fuel efficiency standards in motor vehicles. And in a similar vein, the Department of Transportation said Apr. 1 its fuel economy standard for 2004 model year light trucks will remain at 20.7 mpg, the same standard that has been in place since 1996. DOT's National Highway Traffic Safety Administration said it still may consider changing the rule at some future date, but it did not have enough time to examine the impact of a higher standard.
Under federal law, NHTSA was required to issue a final rule setting a model year 2004 light truck Corporate Average Fuel Economy (CAFE) standard by Apr. 1, 2002. NHTSA, however, could begin examining fuel efficiency standards only after a statutory prohibition was lifted in December 2001. Given this time constraint, NHTSA lacked sufficient time to complete its research and lay the factual and analytical foundation needed to change the existing standard, the agency said. Congress lifted a 6-year ban on studying CAFE standards last December.
The CAFE debate may be temporarily silenced, but other issues that have important implications for the oil industry still must be addressed.
For one, future regulation of energy derivatives markets in the wake of Enron's financial and legal problems will likely be considered. Strict new measures proposed by Sen. Diane Feinstein (D-Calif.) do not have enough support to pass the Senate in its current form because of opposition from both the White House and Federal Reserve Board Chairman Alan Greenspan. Negotiations between Feinstein and Sen. Phil Gramm (R-Tex.), a member of the Banking Committee who shares the White House view on her proposal, are ongoing. Nevertheless, Wall Street analysts still envision some kind of language in the Senate bill will seek to address the issue in some manner-and at a minimum will require those who trade energy and possibly other commodities to provide more detailed information to government regulators.
Energy lobbyists also expect lawmakers to examine the role US-backed financial loans may have played in the Enron collapse.
The Overseas Private Investment Corp. in March asked the Department of Justice to investigate whether Enron misrepresented its financial condition to government insurers when it received more than $1 billion in taxpayer-backed insurance and loan guarantees for several international projects. OPIC officials say if the Department of Justice does determine there was fraud, it may cancel the insurance and financing. The agency also may scale back its exposure on some international projects in the future.
Congress may try to give OPIC its own guidance on future energy projects, either as part of the pending Senate energy bill, or in a more likely scenario, as part of the budget process.
Domestic focus
Other than seeking more government policy involvement in the global climate change issue, the pending Senate energy bill currently avoids international energy issues such as sanctions policy.
Domestic issues that Congress is expected to revisit before the bill's final passage include clean fuel guidelines and taxes. Dramatically higher gasoline prices this spring could translate into waning support for a brokered deal between major oil companies and fuel ethanol interests to further streamline clean fuel rules provided there is a mandated market for ethanol-blended gasoline.
Similarly, budget pressures and resistance from the White House may make it difficult for House Republican leaders to preserve generous tax incentives for oil and gas production that have been estimated to cost about $8 billion over 10 years, according to congressional budget-makers. The Senate bill also includes tax incentives for domestic production, but the proposal is currently for only about half that amount-although that figure could change (OGJ Online, Feb. 13, 2002).
