Patrick Crow
Energy Policies Editor
A. D. Koen
Senior Editor-News
Washington's offshore petroleum policy is a clumsy combination of fact and fiction many say is wringing the life from U.S. activity in federal waters.
On the fact side of the equation, oil and gas from the Outer Continental Shelf in the past 4 decades has become a mainstay in the mix of U.S. energy supplies.
Since the U.S. Interior Department in 1954 under the OCS Lands Act assumed authority over petroleum development in federal water:
- Wells in federal offshore planning areas by yearend 1992 produced more than 9.3 billion bbl of oil and condensate and more than 105.6 tcf of gas.
- More than 995 million acres was offered in 114 lease sales.
- Companies competing for offshore acreage offered bonuses totaling more than $56 billion to lease a combined area of more than 68 million acres.
- Cumulative offshore mineral revenue from all sources - including bonuses, rentals, and royalties - at yearend 1992 amounted to more than $1.24 trillion.
Politically fictional, many in the petroleum industry say, is the conclusion that upstream oil and gas operations are seriously damaging the ecology of the OCS.
Quite the contrary, oil and gas producers and service companies contend, federal offshore policies - because they are based on exaggerated perceptions of how much pollution is caused by oil and gas development - cause significant, widespread harm to offshore oil and gas development.
Defenders of the policies counter that strong rules are needed to protect the offshore from further environmental degradation.
CAUGHT IN THE MIDDLE
Caught squarely amid the controversy is the National Ocean Industries Association (NOIA), Washington, D.C., a group of more than 250 companies involved for more than the past 2 decades in all aspects of offshore oil and gas exploration and production.
A long time supporter of robust U.S. federal leasing policies, NOIA seeks to balance offshore economic development with the need to protect the offshore environment. NOIA says federal offshore environmental policies should be devised based more on cost - benefit analyses, full assessment of all perceived risks, and good science and less on emotional responses to effects - often short term - of oil spills on aquatic life.
While not all would agree, NOIA Chairman James C. Day says environmental sensitivity and oil and gas exploration and production are not necessarily mutually exclusive concepts. Day also is chairman, president, and chief executive officer of Noble Drilling Corp., Houston.
Unfortunately, Day says, politically motivated policies like the Offshore Pollution Act (OPA) of 1990 and bans on oil and gas exploration and development on most of the federal OCS already a relatively mature offshore area where the chance of a major discovery is becoming increasingly unlikely - are suffocating the U.S. off-shore petroleum industry. But it doesn't have to be that way.
Consequently, during his term as chairman of NOIA, Day intends to focus the group's activity on regulatory reform and heightened efforts to educate the public about the importance of the U.S. offshore oil and gas industry.
Day said, "It's important that everybody knows about the impending problems that will be facing consumers if we don't develop a viable domestic exploration and production effort."
POLITICAL HOT POTATOES
Offshore oil and gas environmental issues have been political hot potatoes ever since the Santa Barbara oil spill in 1969 and have grown even hotter since the Exxon Valdez oil spill in 1989.
U.S. congressmen recently have been so irreconcilably divided over OCS issues that the entire OCS chapter had to be dropped from the bill that became the 1992 Energy Policy Act so the measure could be passed.
One issue stricken from the bill was whether Congress should buy back leases it has sold industry but then barred industry from drilling. Oil companies have sued the government in the Court of Federal Claims to recover those investments.
Also dropped was coastal state impact assistance, which would have allotted state and local governments a larger share of federal OCS revenue.
The Senate recently approved a measure by Sen. Bennett Johnston (D-La.) to give operators a royalty holiday until they recoup their investments when they develop deepwater (beyond 400 m of water) fields, due to the much higher costs. The Clinton administration supports the concept but has raised some objections.
At a House natural resources subcommittee oversight hearing on the economic health of the offshore oil industry, Bob Armstrong, assistant Interior secretary for land and minerals management, I noted many U.S. oil companies are shifting exploration and development activities overseas because of lower finding costs, more favorable royalty and tax policies, and restrictive, costly rules in the U.S.
Armstrong said the U.S. offshore industry in 1993 accounted for about 24% of U.S. gas production and 14% of U.S. oil production. Yet the number of OCS exploratory wells in 1993 dropped nearly 40% and the number of development wells 26% since 1985.
Scattered signs of recovery in the past year, due in part to higher gas prices, indicate the industry remains interested in certain U.S. areas and is willing to invest in good prospects.
For example, companies bid $277 million for tracts at the Minerals Management Service's (MMS) Central Gulf of Mexico lease Sale 147 last Marc.,i, more than twice the total high bids of the Central and Western Gulf sales in 1992.
In addition, OCS development well starts in 1993 increased to 486 from 298 a year earlier, exploration wells spudded to 312 from 199, and the count of active rigs has been consistently higher.
Armstrong said the OCS program in the past suffered because of minimal effort to reach out to the various constituencies, including coastal states.
"Right now," he said, "the OCS program is centered around the Central and Western Gulf, and I expect that will continue to be the focus. Meanwhile, we need to take some time to understand the deeply felt concerns of various parties and work together to resolve conflicts."
NOBLE AS AN EXAMPLE
Offshore contractors like Noble Drilling must base strategic plans on their understanding of clients' expectations of activity.
Operations clearly show how U.S. policies have influenced the company's activity since Day was named to head the firm in 1984.
Day began work for Noble Affiliates Inc. in 1977 when the company was involved entirely in U.S. trucking, exploration and production, and contract drilling. In 1983, he was transferred to Noble Drilling Corp., then headquartered in Tulsa, and a year later was named the drilling contractor's president and chief executive officer.
When in 1985 Noble Affiliates spun off Noble Drilling in an effort to hike the value of the latter's stock, the newly independent drilling contractor developed certain basic objectives aimed at achieving consistent growth. The guidelines mainly involved expanding offshore drilling capabilities and reentering the international arena.
Under Day's leadership since the 1985 spinoff, Noble Drilling has evolved into one of the world's largest offshore drilling contractors, an accomplishment Day credits mainly to a series of strategic acquisitions:
- In January 1988, the company added 20 land rigs and six offshore rigs to its drilling fleet by acquiring Marine Drilling Co. and R.C. Chapman Drilling Co.
- In October 1988, Noble Drilling added land drilling operations in Africa, Canada, and Indonesia and offshore drilling operations in the North Sea and Malaysia when it acquired Peter Baldwin Drilling Co. from the Royal Bank of Canada.
- In January 1990, 13 offshore rigs based in the Gulf of Mexico joined Noble Drilling's fleet when the company acquired Transworld Drilling Co. from Kerr-McGee Corp.
- In October 1993, Noble Drilling acquired nine Western Oceanic jack up rigs from Western Co. of North America and two submersible units from Portal Rig Corp.
Although international offshore contract drilling in 1993 accounted for 47% of Noble Drilling's operating and international onshore drilling another 36%, the company's acquisition posture has remained steady during 1994.
Last April, Noble Drilling completed the acquisition of Triton Engineering Services Co., augmenting its engineering, consulting, and turnkey drilling service capabilities and adding oil field equipment rental services and manufacturing capacities.
Just last month, Noble Drilling disclosed plans for a merger with Chiles Offshore Corp., Houston, which bases 13 offshore drilling units in the Gulf of Mexico and off Africa.
When the Chiles acquisition is complete, Noble Drilling will tally a fleet of 44 mobile offshore rigs and 51 land based drilling systems.
In 1993, international offshore contract drilling accounted for 47% of Noble's operating revenue and international activity onshore for another 10%. Contracts for land based, U.S. drilling, which as recently as 1987 accounted for 62% of Noble's operating income, in 1993 accounted for only 4% of its operating revenue. U.S. offshore drilling in 1987 accounted for the other 38% of Noble's revenue.
"Part of the shift, obviously, is a result of our major clients exploring for oil and gas in areas overseas that hold more geological potential," Day said. "But just as important, the operating climate in the U.S. has a negative influence on domestic exploration."
CONTENTIOUS ISSUES
For offshore operators and contractors, OPA, approved by Congress in the aftermath of the oil spill by the Exxon Valdez tanker in Alaska's Prince William Sound, could become one of the most onerous pieces of legislation yet enacted into federal law. The measure serves as a prime example of the type of environmental overkill that can occur when political leaders set policy in an atmosphere of crisis.
To U.S. offshore operators, the most alarming OPA provision is the proposal to increase to $150 million from $35 million the certificate of financial responsibility required of companies operating on the OCS. The biggest problem from industry's point of view: The requirement doesn't reflect reality because it is tilted most heavily against that segment of the offshore oil and gas industry contributing least to offshore pollution.
Day says another major factor contributing to alarmingly high levels of U.S. crude oil and refined products imports, expected to cost about $96 billion in 1995 and as much as $139 billion by 2000, is the lack of access to some of the most prospective offshore acreage.
By most counts, of more than 1.4 billion acres making up the federal OCS, only 14% is available for drilling. So more than 200 million federal acres offshore are off limits to petroleum activity of any kind.
EXCESSIVE SURETY REQUIRED
Testimony last fall in Houston by the American Petroleum Institute revealed OPA's excessive proposed regulatory requirements for upstream operations offshore, especially if U.S. offshore operators are forced to meet the $150 million financial responsibility requirement (OGJ, Nov. 15, 1993, p. 26).
API figures show that of the 15 largest U.S. offshore oil spills since 1964, cleanup and damage costs for 12 amounted to less than $10 million apiece and the largest about $63 million.
OPA's treatment of oil tankers operating in U.S. waters-most of which are flagged in other countries-suggest the transportation industry's record of accidental offshore oil and gas releases is far superior to that of U.S. upstream companies. For example, OPA would require oil tankers to post financial surety bonds amounting to about $67.50/bbl of crude oil or refined products moved across U.S. waters.
By comparison, OPA's financial surety requirements would amount to $150,000/bbl for an offshore upstream facility producing 1,000 b/d of oil. That would cause trouble for many companies working offshore. Of the 116 companies permitted by the MMS in 1992 to operate on the federal OCS of the Gulf of Mexico, 73 produced less than 1,000 b/d of oil.
Even a company producing 50,000 b/d of oil offshore would have an average financial surety exposure of $3,000/bbl. But in 1992 only four companies produced an average of more than 50,000 b/d in the gulf . In fact, to achieve per barrel financial surety exposure equal to that required of tankers, an offshore installation in U.S. federal water would have to produce 2.2 million b/d. Yet combined production of all wells on U.S. federal offshore acreage in 1993 averaged less than 1.222 million b/d.
SOURCES OF SPILLS
OPA rules as proposed would heap costs for insuring against accidental petroleum releases on the federal OCS on the petroleum industry's upstream segment despite the excellent environmental record compiled by U.S. offshore operators and contractors.
According to MMS, U.S. operators working on the federal OCS spudded 21,715 wells during 1971-92, a period when the Gulf of Mexico gas flow gradually became more important as a U.S. energy resource, eventually accounting for more than 25% of the country's total gas production.
Cumulative oil and condensate production during the 22 years amounted to nearly 7.4 billion bbl.
By contrast, in that time federal officials counted 146 well blowouts of all kinds that released a total of 999 bbl of oil and condensate. Most of the petroleum spilled - 899 bbl - was accidentally released not during drilling operations but during workovers, completions, or while producing. Included in the sum are 49 exploratory well blowouts that released 100 bbl of oil and condensate and 41 development well blowouts with zero petroleum spilled. In 14 of the 22 years cited, no oil or condensate was spilled on the federal OCS by upstream activity. By comparison, MMS lists 1,897 spills from all sources since 1971 on the OCS and 116,524 bbl of oil and condensate released. Of the 449,678 bbl of petroleum reported released since 1964 in spills of 1,000 bbl or more, including pipelines, nearly 80%-355,786 bbl-was released before 1971.
None of the incidents listed since 1971 among spills of 1,000 bbl or more occurred during or because of upstream activity.
During 1974-92, 89 tanker accidents spilled 936,501 bbl of oil and 788,666 bbl of refined products in U.S. water, MMS figures show.
Day said, "It's apparent that the upstream segment of the domestic petroleum industry has made great inroads through training and the application of appropriate technology in order to achieve such results. Those results will continue to improve as new training and new methods of drilling and producing are applied."
Regardless of the extent to which new technology helps U.S. offshore oil and gas producers control unintended hydrocarbon releases, evidence is, mounting that man-made spills may be the least of the problem. A more likely source of most petroleum pollution: natural seeps from the ocean floor.
Gulf of Mexico data produced during continuing research by Texas A&M University's geochemical and environmental research group show that macroseeps in the Green Canyon federal planning area release about 120,000 bbl/year of hydrocarbons. At that rate, cumulative hydrocarbon releases in the Green Canyon area during 1971-92 could amount to as much as 26.4 million bbl, many times the volume reportedly spilled by man during the same period in the entire gulf.
MORATORIUMS NOTHING NEW
Since 1982, Congress has placed a hold on money the Interior Department would need to prepare for lease sales in certain offshore areas.
The original moratorium applied to parts of the Central and Northern California OCS totaling 740,000 acres. The current moratorium covers the OCS off Central, Northern, and Southern California, Washington, and Oregon; all of the North Atlantic; sale areas in the Mid and South Atlantic; part of the Eastern Gulf of Mexico; and the North Aleutian basin. Total withheld: 266.5 million acres.
The only OCS areas remaining available for exploration and development are the Central and Western Gulf of Mexico and portions of Alaska.
Thomas Neel, chief executive officer and senior vice-president of exploration and production for CNG Producing Co., in recent NOIA testimony said limited access to federal offshore acreage is a no-win situation for every body involved.
"Congress, through these annual moratoriums, gas agreed with our opponents that studies must be performed before new areas should become available for leasing," Neel said. "Then Congress denies funding for those scientific studies because no lease sales are planned for those areas under consideration. It's like the chicken and the egg."
Neel said offshore operators welcome such studies and are confident they will show U.S. offshore operators and contractors can operate safely "while providing essential resources jobs, and revenue to the country."
In June the House of Representatives passed the fiscal 1995 Interior Department appropriations bin, which would continue the moratoriums another year.
The Reagan and Bush administrations had opposed OCS moratoriums but could not stop them. The Clinton administration wants them continued while it collects more information lo provide "an informed resolution" of the offshore leasing issue.
FEAR OVER SCIENCE
In Washington testimony for API, R.E. Galvin, president of Chevron U.S.A. Production Co., said there is no scientific or engineering basis for denying oil industry access to offshore areas.
Even though during 1982-92 oil ar.d gas activities on the OCS spilled less than 0.001% of what was produced, federal law and administrative actions virtually have outlawed petroleum leasing and development on the OCS outside the Central and Western Gulf and parts of Alaska.
Galvin said, "I am no expert in the areas of public opinion, but it seems to me that many of these prohibitions result from a triumph of fear over science. The fears raised by critics of offshore drilling mean untold billions of dollars worth of opportunities foregone - opportunities that could provide new supplies of domestic petroleum that would mean more secure energy for the U.S. and lower cost energy for the consumer."
In addition, U.S. producers have spent more than $500 million in bonus bids alone to acquire acreage in areas off North Carolina, Southwest Florida, and Bristol Bay, Alaska, only to have the federal government impose new statutory barriers that prevent operators from exercising their rights under the leases.
"Not only can we not drill on that acreage, we cannot even get our money back," Galvin said. "This money has been tied up for years, and we are currently in litigation on these leases.
"When the U.S. government refuses to let us drill on leases we have paid for and then refuses to return our money, it raises serious questions about the risks and advisability of investing in domestic energy projects."
He said uncertainty about U.S. federal leases has led many operators to invest in prospects and projects outside the U.S.
"In 1982, U.S. companies spent 70% of their exploration budgets on domestic projects and 30% on foreign projects. Today it is just the reverse," Galvin said. "Our industry can produce oil and gas offshore and we can do the job without harming the environment. But we must leave access to new areas of the OCS to help replace our reserves, and we need certainty and speed from the government in the regulatory arena."
LEASING BANS ATTACKED
Nicholas Bush, president of the Natural Gas Supply Association, charges it is counterproductive for the Clinton administration to call for increased use of natural gas while offshore leasing moratoriums prevent production of competitive gas reserves.
Bush said, "Current government policies toward offshore natural gas production - most particularly, moratoriums on offshore leasing and drilling - are damaging the domestic producing industry and, more important, the nation as a whole."
Because about two - thirds of U.S. energy produced offshore is in the form of gas, Bush says, when offshore moratoriums are renewed, the country's gas supply is constrained. For example, from 1955 through 1982, when leasing moratoriums became a standard prerequisite to Interior Department appropriations, federal offshore natural gas production increased each year. Since 1982, however, federal offshore gas production has remained essentially flat (see chart).
Bush said, "Although the market tells producers to pursue large, economic gas reserves likely to be found in deeper federal offshore water, many of these potential reserves are being denied to consumers by federal moratoriums."
While technological advances have helped producers maintain federal offshore gas production, lack of access to many promising offshore areas means producers cannot sustain current production indefinitely at price levels to which consumers are accustomed.
Bush said, "If the most price competitive reserves continue to be off limits, that reality will impact the marketplace."
CALLS FOR MORE ACCESS
Reevaluation of the U.S. oil and gas resource base shows there is still lots of oil and gas to discover in the Gulf of Mexico.
William L. Fisher, director of the University of Texas bureau of economic geology, pegs future gulf new field discoveries at 9.5 billion bbl of liquids and 100 tcf of gas, compared with current reserves of 10.7 billion bbl and 130 tcf.
"These discovery estimates are clearly conservative in that they were made before the first major subsalt drilling success," Fisher said.
"I expect the existence of a major new play in the subsalt, firm gas prices, and the potential for on-shelf reserve growth by applying new seismic surveys to older fields will sustain and likely increase activity in the gulf."
Closing nearly all U.S. offshore frontier areas except the deep Gulf of Mexico to exploration as a matter of policy reduces the interest of majors significantly in U.S. offshore prospects and encourages them to shift exploration overseas.
Fisher said, "Further, a perception - if not a reality - of open-ended environmental liability in domestic oil and gas development and production clearly discourages some operators. If we want U.S. frontiers explored for the resources they could provide, we must address issues of access. As a nation, we have been unable to do so in an effective, balanced way."
Galvin said if the entire offshore were opened, companies could find a great deal of oil.
"Changing those policies would help slow or stop the ominous trends of recent years," he said. "In 1992 in the federal offshore areas, well starts fell to the lowest level since the initiation of the federal offshore leasing program in 1954. Over the 10 year period from 1983-92, offshore exploratory and development drilling declined by more than 50%."
Galvin said although only 5% of federal offshore acreage has been leased since the federal leasing program began in 1954, offshore operators have produced more than 9 billion bbl of oil and condensate and more than 100 tcf of gas and have contributed more than $100 billion in royalty and bonus payments to the federal government.
"Yet, in the last decade, federal OCS annual revenues have declined from $10 billion to $2 billion," Galvin said. "Today, more than 25% of domestic natural gas production and about 10% of domestic oil production comes from the OCS. I should add, 90% of that OCS production comes from the Central and Western Gulf.
"In contrast to conventional wisdom, the offshore areas are hardly exhausted. According to the Interior Department, federal offshore areas could contain as much as 29.9 billion bbl of recoverable oil and 204.8 tcf of recoverable gas."
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
