Rockies producer groups oppose US House energy bill

Nick Snow
Washington Correspondent

WASHINGTON, DC, May 21 -- Groups which represent Rocky Mountain oil and gas producers strongly oppose what apparently will be the major 2007 energy bill in the US House. Their reactions came 2 days before the House Natural Resources Committee holds a May 23 hearing on HR 2337, called the Energy Policy Reform and Revitalization Act, which was introduced last week (OGJ Online, May 18, 2007).

"My immediate reaction is that HR 2337 will be detrimental to energy security and harmful to consumers. It's going to decrease supply, increase reliance on foreign energy, and cause prices to increase," said Marc W. Smith, executive director of the Independent Petroleum Association of Mountain States in Denver.

"This legislation singles out a key domestic supply region, the Intermountain West, and almost guarantees that less energy will be produced in 2008 and beyond," he told OGJ in a telephone interview.

"I knew that it would be distasteful to the oil and gas industry. I was surprised at how extensive it was," said Claire M. Moseley, executive director of the Public Lands Advocacy in Denver. She expressed surprise that House Natural Resources Committee Chairman Nick J. Rahall (D-WVa.), who voted for the 2005 Energy Policy Act (EPACT), now apparently favors repealing nearly every provision in that law which benefits domestic oil and gas producers.

"This bill obviously would have a tremendous impact on the search for energy resources on federal lands. It would shift the financial burden from government to industry, yet we pay billions of dollars to the government already to search for oil and gas," said Moseley. She noted that in fiscal 2006, domestic producers paid the federal government $3.6 billion, more than 40 times the $89 million it cost the government to administer its onshore oil and gas program.

Moseley and Smith separately cited portions of HR 2337 that would substitute arbitrary approaches for federal land managers' decisions, which now are reached on a case-by-case basis.

Drilling permits
Section 102 of HR 2337 would repeal Title III of EPACT, which established a 30-day timeframe for the US Bureau of Land Management to issue a decision on applications for onshore drilling permits. Moseley noted that in the year following EPACT's passage, the number of permit applications processed was 35% higher compared to the prior 2 years. Equally important was that permit rejections rose 55% during that same period, a sign that BLM was not "rubber-stamping" drilling permit applications, she said.

Smith said repealing this EPACT provision would make it hard for Rocky Mountain producers to plan ahead. "We're competing with other regions of the country for equipment and services. It will create greater uncertainty as to whether companies will have locations to drill," he explained.

"We never asked for a guaranteed 'yes.' We do need a timely decision. This provision was on a track to provide that. When all other areas of government have seen process improvement the past few years, to not expect the same from our federal land managers is ridiculous," Smith said.

Smith and Moseley also questioned Section 103 of HR 2337, which would repeal that portion of EPACT directing that energy corridors be designated within 2 years. "I would guess this is troubling for every part of the energy industry in the sense that if you look at a US map at night and see where all the lights are, and then look at a map of where all the energy resources are, it becomes obvious that energy has to be moved from where it is to where it is needed," Smith said.

"You need corridors—whether you're transmitting energy from wind, geothermal, or natural gas," he said. "Stripping this provision sends us back into the dark ages of not planning ahead, not planning for our future. When I think there are some Third World countries in Africa with 50-year plans for energy, for the US to at least not try to develop an energy corridor plan to meet the next 10 years means we're engineering a crisis."

'Conflicting directions'
Moseley said Section 104, which deals with oil shale and tar sands leasing, is largely redundant. "What's taking place already is what they're asking. BLM is doing a programmatic environmental impact statement, which identifies on a site-specific basis where there's leasing potential and environmental impacts. Once leases are issued, there's still a National Environmental Policy Act analysis for any kind of project. We think federal land managers are doing everything they need to do already. They don't need conflicting directions two thirds of the way through the process," Moseley told OGJ.

HR 2337's Section 105 would repeal EPACT's categorical exclusion authorization, which Smith said told federal land managers not to second-guess themselves. "This simple reaffirmation of an existing authority really helped the US meet its energy needs in the last 2 years. If you look at the increase in permitting and supply out of the Intermountain West, no other provision was more instrumental in accomplishing this than the categorical exclusion provision. If they take that away, they will take away supplies and drive up the costs of oil and gas," he said.

Smith said HR 2337's drafters were headed in the right direction when they began to craft Section 106, but made a mistake when they didn't consult oil and gas producers or federal land managers. "They assumed a cookie cutter approach would work, which is not the case. Federal land managers need to look at each area and decide what would protect the environmental resources there. But it's a good idea to create an incentive for producers to go above and beyond what's required already so permits can be expedited. Many do this already and receive nothing for their extra work and expense," he said.

But Moseley said the section contradicts earlier provisions which would remove the 30-day drilling permit application deadline and categorical exclusions. "That doesn't make sense," she said.

Both were surprised at the provision in Title II of HR 2337 that would limit federal royalty in-kind oil payments to purchases for the Strategic Petroleum Reserve. "Royalty calculation is complex and constantly being revisited and altered through decisions. RIK provided a safe harbor for the federal government. It was getting a fair share of its royalties. RIK also limits the risk of someone saying the producer underpaid. Apparently, someone proposed this to eliminate fraud. If there was any, it would have been on the government side, not with the producer," said Smith.

Split estates
They also criticized Section 221 of the new bill, which purportedly extends protections for surface owners in split estate situations. Moseley said it duplicates existing BLM regulations and adds open-ended language which would encourage surface landholders to seek excessive damages. The provision that reclamation should be to a condition capable of supporting uses which the land was capable of supporting prior to disturbance would allow surface owners to seek damages "far beyond actual damages," she warned.

"If a surface use agreement cannot be reached and arbitration is necessary, that process should be accomplished by individual states consistent with local needs and statutes. A one-size-fits-all mandate from Congress is unrealistic and would undermine local flexibility," Moseley said.

"Ninety-nine percent of the time, oil and gas companies reach agreements with surface owners before operations begin. Industry recognizes that no one likes to be surprised. The more notice you can give, the better your chances at reaching an agreement that everyone likes. On lands where a private party owns both surface and subsurface rights, owners often wait for us with open arms," Smith said.

Moseley said Section 222, dealing with reclamation and bonding, actually would encourage defaults by small producers and place economic hardships on prudent operators. "Rather than increasing bond amounts, it makes more sense [for BLM] to establish a rigorous inspection and enforcement program to identify noncompliant operators as well as those who consistently avoid their environmental obligations," she said.

Besides, Moseley added, BLM already has the authority to increase to increase the bonds of operators who aren't in compliance, which makes it unnecessary to increase the amounts by statute.

Produced water
Section 223, which would establish new produced water requirements, struck her as another instance in which an arbitrary federal rule would replace state and local decisions. "In some cases, it makes some sense to reinject produced water. In other cases, it does not. The situation is more complex than can be imagined. This is something state and federal governments should address on a site-specific basis, not politics," she told OGJ.

Smith questioned Section 224, which would require federal onshore oil, gas, and coal lessees to pay a $1/acre due diligence fee on nonproducing acreage. The money would go into a fund to repair damage to federal land and resources from oil and gas development.

IPAMS recognizes the need to discourage "lease-banking" and supports the Healthy Lands Initiative, the fund which would receive the money, because it believes wildlife habitat should be protected while energy development occurs, according to Smith. "We don't agree with the $1/acre fee on nonproducing acreage would be worthwhile because that would give the federal government a reason to drag its feet on drilling permit approval. It would make money on nonproducing leases if it didn't approve the projects sooner," he said.

"There are a lot of other provisions I haven't looked through. Some deal with carbon sequestration and wildlife. All we can do is speak to how this bill would limit production from our region. The Intermountain West now is producing more than 25% of our domestic natural gas and almost 10% of our domestic oil production. This just looks as if it's a wholesale effort to turn back the clock and turn up the prices," Smith said.

"This bill just goes so far beyond what's rational that you wonder what the impetus for this legislation is. Is it an effort to get back at the president, simple political expediency or just an effort to get back at the so-called bad guys, the oil and gas industry? We need to be more efficient in getting our domestic supplies. This bill would prohibit that," Moseley said.

Contact Nick Snow at [email protected].