Gas supply, energy bill on US political agenda

Jan. 10, 2005
Natural gas, with its static domestic supplies and rising prices, is the biggest single energy issue in Washington, DC, as 2005 gets under way.

Natural gas, with its static domestic supplies and rising prices, is the biggest single energy issue in Washington, DC, as 2005 gets under way. But oil and gas association leaders also consider passage of comprehensive energy legislation an essential goal as the new Congress arrives and President George W. Bush begins his second term.

"We have a new Congress, a new administration, a new energy secretary, and new congressional staff members and committee chairmen," said John C. Felmy, the American Petroleum Institute's chief economist and director of policy and statistics. "We'll have to see what they can accomplish, given the experience of the past couple of years where they got the ball close to the end zone but couldn't make the final push." Bush has nominated Treasury Dep. Sec. Samuel Bodman to be secretary of energy.

Industry groups are not treating enactment of an omnibus energy bill as a foregone conclusion, despite additions to Republican majorities in both the Senate and House of Representatives.

NOIA Pres. Tom Fry
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"Politically, energy [legislation] is an interesting issue. It traditionally has been regional," noted Tom Fry, president of the National Ocean Industries Association. "If you talk to Republicans and Democrats in Texas, they favor it. If you talk to lawmakers from both parties in California and Florida, they're against it."

Lee O. Fuller, vice-president of government relations at the Independent Petroleum Association of America, also sees differences of approach toward energy legislation.

"While the Republicans have their biggest majority in the Senate now, clearly the members from northeastern states have a different perspective from those in the Southwest," he said.

He pointed out that western Republican senators, such as Arizona's John McCain and Jon Kyl and Oregon's Gordon H. Smith, did not vote for cloture of the filibuster against HR-6, the comprehensive energy bill in the past session. Nevada's John Ensign, who did, said he would not do so again because of the bill's provision to authorize construction of a federal nuclear waste depository at Yucca Mountain.

"Of the 10 Democrats who voted for cloture, eight were from agricultural states," Fuller said.

Gas proposals

Parts of HR-6, such as authorization for construction of a natural gas pipeline from Alaska to the Lower 48 and selected tax provisions, wound up in other bills passed late in the 108th Congress's second session. Sen. Pete V. Domenici (R-NM), chairman of the Energy and Natural Resources Committee, also issued a call for natural gas supply and demand legislative proposals on Dec. 6 to be reviewed by committee staff and discussed at a conference on Jan. 24.

Donald F. Santa Jr., president of the Interstate Natural Gas Association of America, was encouraged by Domenici's action.

"The ball is in the Senate's court this time. In the past, it was the House that started the process," said Santa, who was the Senate energy committee's majority counsel from 1989 through 1993 and a Federal Energy Regulatory Commission member from 1993 through 1997. This time, House Energy and Commerce Committee Chairman Joe Barton (R-Tex.) "plans to wait and see what the Senate does."

The challenge, said IPAA's Fuller, will be to craft energy legislation that crosses both regional and party lines. The addition to the Senate Energy and Natural Resources Committee of three new Republican members from coastal states could limit consideration of offshore development, he added.

But others think a bipartisan effort to pass an energy bill is more likely in 2005 than it has been in the past. Martin E. Edwards III, INGAA's vice-president for legislative affairs, said Domenici and other Republican members of the Senate energy committee are working on energy legislation with New Mexico's other senator, Jeff Bingaman, and other Democrats this time.

"I think [Domenici] was accused of keeping Democrats out of the bill's development the last time around," while Bingaman, as a moderate Democrat, would like to see energy legislation passed, Edwards explained. "Hopefully, how this conference is coming together indicates the senior Democrat and Republican are willing to work together. I don't think [passage of] an energy bill is possible without a bipartisan effort, particularly in the Senate."

Santa also was encouraged when Sen. Lamar Alexander, R-Tenn., joined Sen. Mary L. Landrieu, D-La., in urging the US Minerals Management Service to expand its discussion of future natural gas leasing on the Outer Continental Shelf. Alexander is from a state that consumes more gas than it produces, INGAA's president pointed out.

"It could help build bridges to more consuming state members and show that what's broadly good for the natural gas industry also is good for consumers and the economy," he said.

IPAA's Fuller said, "The consumer side of natural gas has grown more active and is looking more closely at jobs and other consequences. Certainly, interior states like Alexander's are aware of it. As to whether it will lead to discussions of making more resources available, that's hard to say."

A bipartisan energy bill might seem an unlikely product of a Congress that has increasingly divided along party lines, but Santa and Edwards think it could still happen.

"The regional way energy tends to break down may set it apart from other issues that are more partisan," Santa said. "Also, whether you're a Democrat or a Republican, you still have to meet the voter's test of having accomplished something significant. Energy might be that issue in 2005."

Comprehensive approach

Santa said that in mid-November, when it became apparent that the 108th Congress was not going to pass HR-6, the Natural Gas Council—whose industry members include the American Gas Association, Natural Gas Supply Association, API, IPAA, and INGAA—discussed whether a 2005 energy bill should be gas-focused or comprehensive.

"The answer we got was that it should be comprehensive. I think some of that is a belief that a number of these issues cut across energy industry segments," Santa said.

NOIA also supports comprehensive energy legislation, according to Fry.

"There were a number of provisions in the last bill that we wanted to see passed, although HR-6 wouldn't have created substantial new supplies. This time, we hope the legislation gets further," he said.

Gas-consuming energy industry segments also prefer a comprehensive legislative approach, but not if it overlooks basic problems.

NPRA Pres. Bob Slaughter
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"I think energy legislation needs to be comprehensive," said Bob Slaughter, president of the National Petrochemical and Refiners Association. "There are enough interdependent issues that it certainly makes sense to take that approach, and we support it. But an energy policy debate shouldn't be an evasive exercise. The United States is a significant consumer, yet it doesn't use all of its potential supplies, even in an environmentally acceptable way. If we don't come to terms with our disinclination to produce our own energy resources, how are we ever going to solve our energy problems?"

High gas prices have hurt refiners and threaten to put petrochemical companies out of business, he maintained.

"We have promoted natural gas as an environmental alternative without paying attention to supplies," Slaughter said. "We think that it makes sense to review decisions that shut off significant supplies offshore. We also would like to see better access to onshore supplies. Higher gas prices have resulted in some 'conservation,' but I think a lot of that is demand destruction."

Need for supply

Association officials agree that today's natural gas prices result from policies that promoted greater use of the fuel to generate electricity without addressing the need to make federal land available for exploration and development to boost domestic supplies.

IPAA Pres. Barry Russell
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"The biggest mistake has been to take so many areas off the table when we believe we can develop them with minimal environmental impact," said IPAA Pres. Barry Russell. "Other countries do it efficiently and safely, and we have the same technology."

Gas-consuming industries recognize what he calls a "policy disconnect," but the general public apparently has not.

"It certainly doesn't put new gas-fired power plants together with a 28% annual domestic supply decline curve," Russell said.

Fry noted that the Outer Continental Shelf Lands Act includes a requirement that the MMS look at potential resources in all offshore areas and consider the national need when deciding whether to develop them.

"That's what we hope will happen when MMS's initial scoping notice comes out. The presidential withdrawals form a backdrop to this. But I think you have to talk about all the areas with potential if you're going to have the discussion," he said.

Emphasizing that it was a personal point of view, and not one held by NOIA as an association, Fry said that he would like to see MMS take an approach similar to commissions that reviewed military bases for possible closure. That would remove the question from a political debate that relies on assumptions about offshore oil and gas production technology that are 20 years old, he said.

"The industry sponsors trips offshore for congressional leaders that show them the technology we use today," said Fry. "We drill in 10,000 ft of water and can direct it from an office in Houston. Completions can be done on the floor of the ocean now instead of requiring a big offshore rig on the surface. But I'm afraid it will take a crisis to get us past the political opposition. Unfortunately, lead times for new projects are long. Even if lease sales are held, new offshore areas require 4-6 years to install infrastructure."

Association officials also recognize that importing LNG and constructing the pipeline from Alaska to the Lower 48 will help ease growing domestic gas shortfalls. But they also emphasize that these two sources will not solve the problem completely.

"LNG is closer than the pipeline from Alaska, but it's still 3-6 years away from making a meaningful contribution," said Fuller. "Any analysis I've seen to produce enough gas to meet our country's growing demand emphasizes aggressive development of domestic production. Our sense is that all available sources will have to be in play."

Slaughter said refiners and petrochemical plant operators also regard LNG as part, but not all, of a gas supply solution. But he added that NPRA's members are familiar with the "not-in-my-back-yard" attitudes some communities are taking to siting LNG import terminals. LNG also is not a complete solution for petrochemical plants because most liquids are removed before the gas is liquefied.

LNG issues

Santa pointed to questions over specifications for LNG, which can affect the integrity of storage and transmission systems. And he sees potential for regulatory jurisdiction problems.

"While FERC got it right in asserting its siting jurisdiction, the California Public Utilities Commission has challenged this, and it may need to be certified," Santa said. "FERC and its Office of Energy Projects are doing a good job on applications for pipeline and storage projects. State and other regulators aren't doing as well, and this may need to be addressed for other pipeline projects as well as LNG."

He warned that states acting under the Coastal Zone Management Act might act against a FERC permit, which effectively would pit one federal act against another.

"Opponents of natural gas infrastructure are using this to put sand in the regulatory gears. This could delay projects to a point that a developer would decide to put the money elsewhere," Santa said.

Fry also noted the number of issues raised by LNG imports.

"Some might say it increases US dependence on overseas sources similar to oil," he said. "Others say we need supplies wherever we can find them. I think the market should determine where we get the gas we need."

While NOIA members include oil and gas producers who would like to increase domestic offshore exploration and production, the organization also includes companies that have filed LNG terminal construction applications with the US Coast Guard.

"We have worked with the Coast Guard to have the processes move quickly and not be in conflict with the MMS leasing program," Fry said. "Space could be an issue. Producers make up less than 20% of our membership. The others—drilling contractors, steel fabricators, and offshore construction companies—are interested in LNG terminals that could be built offshore. As an association, we favor multiple use of the offshore."

Target items

While HR-6 included a provision that would have required MMS to conduct an inventory of potential oil and gas resources along the entire Outer Continental Shelf, Fry said NOIA would not push for such a requirement in 2005.

"It's more important to look at the 5-year leasing plan and more specific target items," he said.

Such items include deepwater royalty relief, which NOIA thinks needs to be codified, and provisions to drill for and produce ultradeep gas (from formations deeper than at 20,000 ft below the surface). Marginal offshore well definitions also need to be developed as the Gulf of Mexico's production life nears its end and output from individual wells drops, Fry said.

Fuller said IPAA would like to see Congress address the Bureau of Land Management's capacity to issue permits by committing extra money to permitting and not litigation. Producers also would like to see BLM overcome stipulation issues that IPAA considers unnecessary.

"If you have to protect a breeding area for 6 weeks, the regulation should not require a 2-month period, for example," Fuller said.

IPAA also hopes for legislation that would overcome the strategy of using litigation to keep oil and gas exploration and production decisions from being made. The National Environmental Policy Act allows all stakeholders to be heard, but Fuller said that the law has become so complex that each step creates an opportunity to challenge procedures.

"Our members have to keep replacing production lost in the decline rate," he said. "If you're going to take capital to do this within a certain window of time, and that window gets closed by any number of delays, you have to commit the money elsewhere."

"It's also frustrating because many of these steps are procedural and not substantive," Russell added. "Several BLM offices do not have the resources to turn the permits."

Fry, a former BLM director, said the Interior Department agency's problem has several parts.

"Normally, it would process all permits in 60 days," he explained. "The anomalies come in areas like Wyoming, where specifications such as the number of wells change. The biggest problem is when BLM runs into laws like the Endangered Species and Clean Water acts. It then has to consult with another agency, such as the Fish and Wildlife Service, which may not have the personnel. I would like to see all such consulting agencies brought in at the front end of the process. BLM also has to anticipate species, such as the sage grouse and lynx, that might yet be listed as endangered and protect their habitats, too."