DOE'S NEW ACTIVIST ROLE TURNS SPOTLIGHT ON U.S. OIL AND GAS SUPPLY, USE

Patrick Crow
Washington Editor

A little more than a year ago, Deputy Energy Sec. W. Henson Moore predicted before a group of oilmen the Bush administration's Department of Energy was about to undergo a big change.

"You're going to see an activist department you've never seen before," Moore told executives serving on the National Petroleum Council, the energy secretary's advisory group.

Since then, that transformation has begun under Energy Sec. James D. Watkins.

Under key points in the change DOE is:

Working on a National Energy Strategy (NES) that should reemphasize the need for U.S. oil and gas production.
Launching a program to promote the sale of U.S. oil field services and supplies overseas.
Shifting its research and development program to focus on industry's near term needs.

Those steps signify a break with the past.

When DOE was established during the Carter administration, much of the emphasis was on regulating the oil industry during a time of shortage.

The Reagan administration philosophically wanted to dismantle DOE. However, it had to settle for making it a neutral observer of the free market. That was a shift industry welcomed until oil prices plunged.

NEW DIRECTIONS

Industry representatives in Washington are optimistic about DOE's new directions, although they disagree on whether Bush or Watkins is behind the push.

An official with another agency said, "Philosophically, it's true they want to change direction. But implementing that philosophy is the tough thing. The bureaucracy at DOE is one of the worst in town. Watkins is trying, from all I've heard, to break that down.

"But it's important to note that he's not trying to help the industry so much as to help the industry help the country. "

George H. Lawrence, president of the American Gas Association, praised Watkins and Moore for their leadership and their effort to build "a groundwork of credibility" for the NES. "I feel confident the gas industry is going to come out well in this study."

Harold B. Scoggins, president of the Independent Petroleum Association of America, said, "The most important thing is a difference in attitude. For the first time, it's positive rather than negative. In the past DOE seemed to be there to harass the industry or just neglect the industry as much as possible.

"Taking direction from the president, it's trying to help the domestic energy industry-not just oil and gas but other fuels too-help provide an adequate supply of energy to consumers. We can't do that without DOE being a partner in the job."

Scoggins said DOE is doing all the right things: looking for ways to help the industry, shifting to R&D "oriented at the here and now rather than some day in the future," streamlining regulations, and hiring managers who either know what they're doing or are willing to ask the right questions of people in industry.

As an example-and in sharp contrast to usual behavior-DOE is working with the Treasury Department to draft tax incentives for Congress to consider that would help the oil industry.

Scoggins is optimistic the NES will be widely accepted, although the oil industry may not be totally satisfied with the report. He said Moore and Watkins are trying to get all interest groups involved in the process of fashioning the solution so all will support it.

"That's been the problem in the past, when DOE talked only to the petroleum industry."

ENERGY STRATEGY

Oil and gas producers think the NES will put the proper focus on the need for domestic production.

They told NES hearings the energy needs of the nation must be better balanced with its environmental goals, and a healthy domestic oil and gas industry should be the keystone of energy security. They expect the NES to bear out that conclusion.

The NES was Watkins' idea. After reviewing versions of DOE's annual, congressionally mandated national energy plans, he saw something was missing: something to transform those lofty goals into programs and policies that would achieve results.

Oilmen were encouraged because Watkins told them, "A truly effective national energy strategy must begin with oil and gas.

"Oil and natural gas account for two thirds of our nation's energy requirements and there are no readily available alternatives in the near term. It is that umbilical link to unstable oil producers in the world that threatens our energy security."

He predicts the NES will balance use of coal, oil, gas, nuclear, conservation, and renewable energy resources with market realities, environmental concerns, and energy security goals.

The task is Herculean and has not gone quickly. Watkins wanted a fast study, but DOE officials convinced him the material could not be gathered in less than 1 year.

The current timetable calls for DOE to send a report to President Bush in December. That report will contain energy policy options for the president to decide upon, after which a final NES will released.

Even then, the NES will be subject to changes. A new computer model, upon which it will be based, won't be finished for 2-3 years.

Even so, DOE officials say, the initial NES will be based on a computer model and data base better than the one the Energy Information Administration has now.

INTERIM REPORT

To gather current data, DOE heard from 375 witnesses at 15 hearings and analyzed about 1,000 written submissions.

Watkins called the process unique at the federal level.

"This is the first time in my memory the federal government has involved the public in such a direct way in development of a national strategy- 11

In an interim report released last April, DOE reported the American public is worried about the adequacy of electrical power and fuel supplies. The document contained no conclusions or recommendations.

But Watkins said the NES will have some noncontroversial goals: increased integrated energy resource planning, enhanced energy efficiency, increased use of renewable energy, streamlined technology transfer, increased mathematics and science education, strong environmental protection, minimization of waste products production, and development of a national energy modeling system.

The interim report said, "Many witnesses expressed concern about the health of their respective energy industries and their ability to respond to energy challenges. We heard concerns about excessive dependence on oil and petroleum product imports and about high prices for gasoline and home heating fuels.

"People in all parts of the country expressed concern about what energy production and consumption are doing to our air, water, and land. Many were concerned about the need to develop advanced technology to convert and control energy in an environmentally sound way.

"The loudest single message was to increase energy efficiency in every sector of energy use. Energy efficiency was seen as a way to reduce pollution, dependence on imports, and the cost of energy."

CONSENSUS SEEN

DOE said public comments reflected a consensus on energy policy goals in several end use sectors.

In transportation, commenters agreed the country should improve vehicle fuel efficiency, develop cost effective alternative fuels, and increase efficiency of the overall transportation system.

In the residential and commercial sectors, they agreed the nation should improve designs, materials, and construction of new and existing buildings to enhance conservation, improve the energy efficiency of systems and appliances, and maintain healthy indoor environments.

And in the industrial sector,

commenters agreed the country should improve energy efficiency and fuel flexibility, reduce generation of waste, increase waste recycling, and use more plant and consumer generated wastes as process feedstocks.

DOE received numerous recommendations, many of which were at odds with each other, regarding crude oil supplies. Most agreed the nation should minimize its dependence on insecure foreign supplies.

Several conflicting goals were to achieve energy security, maintain economic competitiveness, and minimize the environmental effects of exploration, production, transportation, and refining.

Commenters agreed the U.S. should increase its natural gas supply and broaden end use markets and improve the regulatory, economic, and institutional environment for gas market development.

EXPORT INITIATIVE

Moore, who handles most oil and gas issues for Watkins, has been pressing a campaign to boost exports by U.S. service and supply firms, which were hit hard by the 1986 oil price collapse.

Moore, a former Louisiana congressmen with family roots in the oil industry, says the government has not done enough to help U.S. companies sell equipment and services abroad.

DOE has created an office in its international section to promote exports. It will be headed by a deputy assistant secretary (OGJ, Apr. 23, p. 32).

Moore says small U.S. service and supply companies often are at a competitive disadvantage when they seek contracts overseas. Foreign countries may say they will accept the lowest bid but instead favor domestic firms.

As it has received such complaints from U.S. companies in the past 6 months, DOE has attempted to follow them up with talks with the foreign countries.

Moore, in several trips overseas, has lodged such complaints with foreign energy ministers. He currently is on a trip to the Far East, meeting with energy ministers.

He also has been trying to persuade European energy ministers that European Community provisions should not discriminate against foreign firms wishing to do business in EC member countries (OGJ, May 21, p. 16).

Along with Moore's efforts, DOE will use traditional means to battle "subtle discrimination" against U.S. firms.

It will not station DOE personnel overseas but instead is working more closely with State Department trade officials in the countries involved. And it is working with the Commerce Department and the Office of the U.S. Trade Representative,

DOE considered but decided against an even more activist role of helping U.S. service and supply companies identify opportunities overseas. Moore says talks with the companies convinced him they are able to find business opportunities themselves.

R&D SHIFTS

In a break with polices of the Reagan administration, Bush's DOE is shifting its oil research and development priorities to near term projects that would help slow the decline in U.S. production (OGJ, Feb. 12, p. 26).

DOE has proposed spending $40.7 million on oil and $13.7 million on gas research and development in fiscal 1991.

Moore said DOE plans to allocate more than 75% of its R&D funds during the next decade to develop better reservoir data and recovery technologies to keep marginal fields productive and increase their production.

DOE estimates an additional 15 billion bbl of oil could be recovered with more effective use of today's methods such as infill drilling and improved waterfloods.

The Reagan administration eschewed short term research, saying industry was funding those projects. It thought government should fund the long term, high risk R&D projects that companies could not justify.

Under the Bush administration, the priority will be to fund projects that keep oil and gas wells on stream that otherwise might be abandoned in the next 5 years.

The administration also will work more closely with industry to disseminate information and technology as quickly as possible.

ABANDONMENTS

Moore said the shift in R&D emphasis was prompted largely by a new study on well abandonment rates.

The study said conventional production methods will leave behind nearly two thirds of Lower 48 oil reserves, about 300 billion bbl, which is not economically recoverable with current technologies.

Recovering that oil later will require use of existing wells as points of access, but they are being plugged at record rates.

The study warned that if weak oil prices persist and technology advances are delayed, the remaining resource abandonments in the Lower 48 could reach 75% early in the next century.

Moore said, "Our program does not exclude long term research.

"But it recognizes the sobering reality that if we don't slow abandonments and improve production rates in this decade there won't be much of a domestic industry left in the next one to benefit from basic research."

The DOE initiative has two goals:

Develop data on reservoir characteristics for all major producing states.
Begin working with industry to apply more effective recovery technologies in the most threatened fields.

DOE will serve as a clearinghouse for information and technology transfer, getting the word to producers that technologies that work well in one field may work well in a similar field too.

It plans to start a network of state oil and gas extension agents who will work closely with small producers to help them solve operating problems and spread the use of more efficient technologies and practices.

OTHER INITIATIVES

DOE worked behind the scenes for passage of natural gas decontrol last year.

It also was involved in drafting the Clean Air Act amendments this year and lobbied on several provisions affecting the oil industry.

The department has supported the administration's proposal for some modest tax changes to help the oil industry (OGJ, Feb. 5, p. 28).

They include a 10% tax credit per year, per company on intangible drilling costs (IDCs) and a 5% credit on the balance, along with a 10% credit for new tertiary enhanced recovery projects.

It proposes that Congress eliminate 80% of current preference items generated by independents' exploratory IDCs under the minimum tax and repeal a depletion provision that discourages independents and majors from buying and selling leases from each other.

EXPECTATIONS

An observer who works for another government agency warned against expecting too much too soon from the energy department.

He said, "First term administrations are notorious for taking 2 years to get their programs in place and then sitting still for the next 2 years so they won't affect the next presidential election. The best opportunity for real change may be in Bush's second term."

Another industry spokesman, IPAA's Scoggins, admitted, "There is a lot of frustration in the petroleum industry about things not happening fast enough at DOE.

"But you have to recognize that DOE is still a huge bureaucracy.

"There are a lot of people in the bowels of the department who have been there forever and are not in tune with what the leaders are trying to do."