This March is an emblematic month for US energy policy schizophrenia. Connecting the dots among three seemingly disparate developments, all unfolding this month, yields valuable lessons about the need for the US to develop a coordinated national energy policy.
Ideally, such a policy should spur oil exploration and production, preempt any possibility of reverting to the energy crises of the 1970s and 1980s, and work out the huge antitrust problems bedeviling the energy area, as opposed to the distracting small ones.
Although the current administration has made great strides toward a carefully thought-through energy policy that transcends simplistic calls for lifting the gasoline tax, new exigencies require bold new measures and an even more comprehensive approach.
To be effective, the new policy needs to be global, spanning US views of competition in the energy markets and the promises made by the US government to its energy concessionaires. Immediate action in this direction will avoid having to move after a crisis has already started (as in the 1970s) and thus resorting to blunt and obsolete instruments, such as price controls or government intervention, that are even less likely to work today.
The current developments center on the battles about to take place in courtrooms in California and the District of Columbia and on the tension in households throughout the US ahead of clear indications as to whether the price of gasoline will recede, level off, or increase before summer driving season.
On Mar. 20, the US District Court in San Francisco is scheduled to consider whether to grant the Federal Trade Commission's motion to enjoin the BP Amoco PLC-ARCO merger. A few days later, the US Supreme Court will hear arguments about whether the federal government must repay Marathon Oil Co. and ExxonMobil Corp. forerunner Mobil Corp. $156 million they paid to purchase leases off North Carolina's Outer Banks. Then, at the beginning of next week, the Organization of Petroleum Exporting Countries will meet in Vienna to decide whether to increase oil production for its 11 member countries.
The diverse mosaic of US federal agencies charged with energy oversight has not viewed these three events as related, and this is part of the problem, because they are. The two court battles bear in equal measure on the worldwide energy community's assessment of the predictability of US energy policy; they in turn affect that community's willingness to commit the huge investment needed to spur oil exploration and production in the US.
Increased levels of exploration and production outside of OPEC are also key to unraveling the dominance of one group's influence on the most critical commodity of our times. Indeed, a juxtaposition of the BP Amoco-ARCO antitrust proceeding with the official US response to OPEC's efforts to manipulate markets illustrates a myopic deficit of our energy competition policy.
We are missing the forest for the trees and may be impeding, in the name of micro-competitive issues, what could be part of a solution to the true competitive problem-OPEC's hold on our energy future.
Lands access issue
In the Supreme Court case, the court will be deciding whether to refund to Marathon and Mobil their money for leases acquired in the early 1980s to explore for and produce oil and gas resources on the US Outer Continental Shelf.
When the leases were initially issued, the US was reeling from the havoc wreaked on its economy and national security by production shortfalls from certain members of OPEC. The philosophy at the time was to ensure that we would be prepared the next time OPEC's actions might affect oil markets by having our own oil and gas resources available. Then-Interior Sec. James Watt went on a personal crusade to lease as much of the US OCS for oil and gas production as possible, post haste. Despite memories of long lines at the gas pumps, his thinking was well ahead of the rest of the country and caused a strong backlash. The result was that the next US president, George Bush-although of the same party and a former oilman-decided to reverse Watt's policies by declaring that certain parts of the OCS would be off-limits for future leasing and that leases issued in other areas should be "bought back."
Although no funds were forthcoming for his enterprise, Congress took up where President Bush left off and enacted its own series of moratoriums on offshore leasing and operations, including the Outer Banks Protection Act, which required the Secretary of the Interior to closely scrutinize environmental information before approving an exploration plan off North Carolina. Companies holding leases in the areas that were supposed to be "bought back" and those with leases off North Carolina sued to get their money back on the ground that the federal government had breached its contract with them through its own legislative actions. Marathon and Mobil are the last two holders of leases off North Carolina that are still involved in this proceeding before the Supreme Court. They are asking that the court uphold its principle that "the US does business on business terms" and to give them their money back.
While the management of most offshore oil and gas resources is ostensibly in the hands of the Department of the Interior-under the aegis of the Outer Continental Shelf Lands Act-the Department of Commerce, other federal agencies, and states may supersede its determinations under other laws, and the president and Congress can issue new moratoriums willy-nilly. This lack of coordination and certainty has resulted in a failure to spur exploration and production activities in frontier areas. This might not be so troubling but for the fact that the federal OCS contains about one third of US oil and gas reserves and technically recoverable resources and accounts for 25% of domestic gas and 22% of domestic oil production, and its contribution is expected to rise.
Although an important milestone, the Supreme Court's decision in the Marathon-Mobil case, however it goes, does not promise to endow US energy policy with the necessary certainty and predictability. If the Supreme Court determines that Marathon and Mobil are not entitled to have their money back and their leases continue in effect, it may reinforce the notion that the US contractual obligations on the OCS are heavily qualified and, indeed, provide a roadmap on how the government can disrupt offshore exploration and production without breaching the terms of its leases in the future. The only possible upside of such a decision, from an energy policy perspective, is if the US is required to stand by the bargain it struck with the companies and approve exploration and production plans off North Carolina in the same manner that it would if those leases were off Texas or Louisiana.
If the decision goes the other way, Marathon and Mobil will walk away with $156 million, and companies that paid $1 billion for undeveloped leases off California-and perhaps companies with leases elsewhere-will perform a cost-benefit analysis about the risks of litigation versus the uphill battle toward exploration and production. More importantly, under the current moratoriums, once those leases are relinquished, they will be off the table for re-leasing until after June 2012. In either case, therefore, the Supreme Court's decision may leave all lessees without either incentive or ability to pursue all-important offshore deposits.
Meanwhile, in Vienna, the OPEC oil ministers will be considering whether to raise oil production levels.
Only a year ago, the ministers met to decrease oil production levels. Oil prices were then at a 10-year low of around $10/bbl. At the time, the departments of Energy and the Interior joined forces to relieve US oil producers' pain by agreeing to take its royalty oil in-kind and place it into the Strategic Petroleum Reserve. Less than 1 year later, oil prices have tripled to the highest levels since the Persian Gulf war. The Secretary of Energy has just returned from a week of shuttle diplomacy, meeting with officials from five of the largest oil-producing nations in hopes of cajoling them into increasing oil production. Rumors have filtered out in all directions about whether OPEC will decide to raise oil production, so we have no real clue about what they will do and, in any event, we are not in a position to do much about it. Some members of Congress are calling for the release of oil from the SPR to help lower prices. The administration has not discounted that option yet, but at best that option is only a temporary solution that would be of limited use during a true oil crisis.
While it thus reserves diplomacy and the kid-glove treatment for the most influential cartel in history, the US has opted to meet BP Amoco and ARCO in the courtroom. The contrast in treatment suggests a dramatic need to refocus our antitrust principles as they apply to the petroleum industry on the bigger picture. As in the management of offshore oil and gas resources, it is vitally important for the US to establish sound and predictable policies in dealing with this industry under the antitrust laws. There should be a recognition here, as there, that oil is vital to US national security interests, and that some consideration needs to be given to that fact, as is done for the US defense industry. We have seen time and again, from the Arab oil embargo to the Persian Gulf war, the importance of oil to US economic and national security interests. One key element of our national security and energy policies must be to ensure the viability of non-OPEC and non-nationalized sources of oil and gas worldwide. That includes encouraging oil production by US companies and by foreign companies that are not associated with a national government and by encouraging oil production in our own country.
To reach this result, we may have to readjust our consideration of mergers in the petroleum industry to recognize that it is somewhat far-fetched to assume that the merger of companies in this industry, especially in the upstream sector, will lessen competition in a manner that can substantially raise fuel prices.
The marketplace has changed dramatically since the days of the Standard Oil Trust. Analyzing a merger based on narrowly defined geographic markets makes all the less sense where the dominant player is-at least lately-so devastatingly effective in distorting the worldwide market. OPEC controls 40% of the world's oil production and 80% of its reserves. Independent oil companies, merged or not, are perpetually crude oil price-takers, not price-fixers. In these circumstances, the FTC's focus on California as the relevant market for Alaska North Slope oil (the heart of its case against BP Amoco-ARCO), while technically defensible, appears to rely on antitrust mechanics and to ignore antitrust substance.
Such a mechanical approach disregards other national interests. It is true that BP Amoco and ARCO control between them most of the ANS production, and that, until recently, ANS constituted the largest single source of US oil production. However, that has changed as oil from the OCS has eclipsed ANS as the No. 1 source of US production and ANS production levels have dwindled. Today, the key prospective US world-class oil pro- vince is the deep waters of the Gulf of Mexico's OCS. Given the declining production of ANS, is it really in the country's best interests to perpetuate multiple operators at Prudhoe Bay (see related item, Newsletter)? Would not one operator be most interested in maximizing the production from these and nearby leases and minimizing the costs? And should the merger crater, what company, if any, will be able to meet the antitrust standards now set up for the California marketplace to join with ARCO? Or will ARCO-probably weakened by this extended period of waiting-be required to renourish and carry on? Even at that, this entire micro-analysis misses the macro-point that even the combined BP Amoco-ARCO will still have to compete on an uneven playing field against an unfettered OPEC "trust."
To its credit, the current administration has made progress towards creating a sound energy policy for the nation. It has decreased US reliance on Persian Gulf oil and upheld the bargain reached with existing OCS leaseholders even in areas where it probably would not have allowed leasing itself. It has also supported enactment of several pieces of legislation (e.g., revisions to the Oil Pollution Act of 1990, removal of the ANS export ban, the Deep Water Royalty Relief Act, and the Royalty Simplification and Fairness Act) to assist the US oil industry, far surpassing the results of the preceding two administrations. Because it is a presidential election year, there will be a temptation to discount this record and score political points by offering short-term gimmicks to address these issues, but it is hoped more sensible heads will prevail. This is too serious an issue to play political football with.
Coordinated energy policy
It is clear that the US must create an energy policy that acknowledges the need for its own oil and gas exploration and production, sets goals for certain production levels, identifies where that production will come from, and plans strategically for how those goals will be achieved, including addressing national security, regulatory, environmental, scientific, and economic issues. That policy must be capable of withstanding the test of time and varying political considerations so that the government never again leases an area one year and tries to "buy it back" the next. That policy should also identify how the US plans to diversify its oil needs among oil-producing countries and its energy needs among energy products, encourage privatization of existing national oil companies, and convince countries to drop their membership in OPEC. It should plan for oil price crises and clarify whether the SPR is to be used to offset oil market price fluctuations or strictly for national security purposes; or, alternatively, recognize that regulation of oil market price fluctuations is a matter of national security. Finally, the US should ensure that all of its various arms embrace the resulting policy and prize it above jurisdictional battles.
In sum, US promises in the energy area must be as reliable as its blue-chip Treasury bonds, its commitment to spurring exploration and production cannot be fickle, and its tolerance of anyone trying to distort the worldwide energy market must be zero.
If the US does not compete for investment in resource development with the recognition that other countries are offering more-attractive mineral deposits with incentives for development, it will be subject to the whim of the OPEC countries or have to fight to stay on top. If the US does not invest the time and energy into creating a sound energy policy today, the country is destined to continue to repeat history until one day we get it right or irreversibly wrong.
Cynthia Quarterman is a partner in the Washington, DC, office of Steptoe & Johnson LLP, where she specializes in energy, natural resources, and environmental law. During March 1995-February 1999, she was Director of the Minerals Management Service at the US Department of the Interior. Prior to her appointment to federal service, Quarterman was an attorney with Steptoe & Johnson, where she was involved in various energy, environmental, and natural resources regulatory and litigation matters. She previously had served with a law firm in Kansas City, Mo. Quarterman received an industrial engineering degree from Northwestern University and obtained her JD degree from the Columbia University School of Law. While at Columbia, she served as Executive Editor of the Columbia Journal of Environmental Law. Prior to law school, Quarterman worked as an engineer for IBM. She has testified extensively before the US Congress and has spoken broadly on energy and natural resource issues.
Former MMS Director Cynthia Quarterman - US promises in the energy area must be as reliable as its blue-chip Treasury bonds, its commitment to spurring exploration and production cannot be fickle, and its tolerance of anyone truly trying to distort the worldwide energy market must be zero. If the US does not compete for investment in resource development with the recognition that other countries are offering more-attractive mineral deposits with incentives for development, it will be subject to the whim of the OPEC countries or have to fight to stay on top.