API: POLICIES ARE DRIVING OIL INDUSTRY FROM THE U.S.

American Petroleum Institute leaders last week mounted a rear guard campaign in defense of diminishing U.S. operations of major oil and gas companies.

At the group's annual meeting in Houston, API and oil company executives acknowledged with alarm the accelerating shift of major company exploration and production activities away from the U.S. And they slammed government policies encouraging the migration.

The major producing industry "isn't abandoning the U.S.," declared Allen E. Murray, outgoing API chairman and chairman, president, and chief executive officer of Mobil Corp. "It's being thrown out," he told a news conference.

Murray and other speakers warned that the costs of burgeoning environmental regulations will damage U.S. economic interests in an increasingly competitive world.

To punctuate the message, API released a study estimating that by the late 1990s, new or potential environmental regulations will raise petroleum industry costs, including annualized costs of required investments, by $15-23 billion/year. By comparison, profits of 22 of the largest U.S. oil companies totaled $21.3 billion last year.

Estimated petroleum industry costs represent 12-17% of what the API expects to be total national environmental outlays in 2000. The study notes that its cost estimates are by nature approximations, unpredictable advances in technology may reduce some costs, and the costs will produce some offsetting benefits.

It nevertheless points toward a significant jump in the 2.5% share of gross national product (GNP) the Environmental Protection Agency estimates the U.S. now devotes to cleaning and protecting its air and water.

Inevitably, said Texaco Inc. Chairman Alfred C. DeCrane Jr. at a news conference in which the study was released, "We're going to have to give up some other activities."

ENVIRONMENTAL COSTS

In its industry environmental cost study, API applied a statistical simulation technique to cost estimates for new and proposed federal agency requirements (see table, p. 23). The "Monte Carlo" process estimated a confidence interval for aggregated costs.

Cost estimates varied in quality, the study pointed out. Some were made for proposals that later were adopted with modifications. And some may not cover all petroleum industry sectors that may be affected.

The estimates came from government publications, written studies, articles, and API staff. When study authors had to annualize capital or other initial costs they used a discount rate of 10% and a 20 year term.

The study generally excluded taxes and other policies that mostly involve transfer of resources. It assumed estimates were denominated in 1990 dollars and adjusted some to that basis where necessary using a general GNP deflator.

The $15-23 billion/year expenditure range for the late 1990s does not include requirements for which cost estimates are available but chances for enactment are highly uncertain. It also excludes requirements for which costs haven't been estimated.

One of the estimated but highly uncertain costs is for possible "residual risk" requirements for hazardous air pollutants under the Clean Air Act amendments of 1990.

Those could follow by about 10 years EPA's implementation of maximum achievable control technology standards for various categories of industrial facilities. The residual risk requirements would apply to facilities EPA determines still present problems, which might not include oil and gas facilities.

An API study conducted in 1989 and updated in 1990 estimated initial capital costs for the residual risk requirements, if applied to the industry, at as much as $25.9 billion, with continuing costs as much as $826 million/year. Annualized, the total costs amount to as much as $4.365 billion/year.

The other uncertain cost for which estimates are available involves reauthorization of the Resource Conservation and Recovery Act, which might apply the act's stringent waste management requirements to exploration and production waste.

Cost estimates vary greatly, depending on assumptions about the stringency of requirements. Combining the estimates of two studies, the API study projected a range of $1.795-9.932 billion/year.

The API study identified 21 new and potential federal environmental requirements affecting the petroleum industry for which cost estimates aren't available.

COSTS, LOCKUPS

Speakers at the API meeting lashed not only the environmental cost explosion but also lockups of the Arctic National Wildlife Refuge and Outer Continental Shelf.

Mobil's Murray also cited OCS leases for which industry has paid about $1 billion in recent years and on which it cannot drill.

"The government, largely through Congress, has reneged on its part of the bargain," said Murray, whose company is battling to drill a large natural gas prospect on a federal lease off North Carolina.

In a news conference, Murray chided the "ludicrous situation" in which U.S. companies find the welcome mat out for exploration and production in other countries even as the U.S. discourages such activity.

"You have to go where you're wanted and where the prospects are," he told reporters. "Anybody (in the U.S.) who wants us back can get us back. Open up."

In his speech, Murray said the U.S., by refusing to produce as much energy as it can, is exporting jobs and associated paychecks, sending profits and royalty revenues overseas, and sacrificing tax revenues.

"Most important," he said, "it is surrendering the opportunity for economic growth."

And the country needs growth to improve educational and medical services, fight poverty, improve future standards of living, and compete "in what surely will be a more competitive world economy in the years ahead."

CAN U.S. COMPETE?

API Pres. Charles J. DiBona echoed Murray's concern about the U.S. position in an increasingly competitive world.

The U.S., he said, must confront the "harsh reality" that governments not just in the Soviet republics and eastern Europe but also in Asia, Latin America, and Africa recognize the benefits of market forces and are becoming more efficient and competitive.

With petroleum abundant and reasonably priced, DiBona said, the U.S. can't compete if it forces itself away from oil and gas. It can't afford to "lock away" its petroleum resource and add "unnecessary obstacles" to petroleum development and use.

"The country can't expect to compete in the world as it is now evolving if it squanders its resources in ways that do not produce environmental benefits that justify their costs," DiBona said.

The U.S. would suffer no disadvantage if all countries imposed unnecessary burdens on their economies. But that won't happen.

Governments in eastern Europe and the Pacific Rim will shun unnecessary regulation as they pursue economic growth. For competitive reasons, governments in western Europe and Japan will follow suit.

Yet the U.S. government continues to impose inefficiencies on the economy, adopting strict environmental controls without evaluating costs and benefits.

"How much more damage will be done to this great industry before policy makers recognize the heavy price being paid for outlandish proposals?" DiBona asked.

He urged the oil and gas industry to:

• Support efficient solutions where "real environmental problems are causing substantial harm."

• Argue that all environmental problems are not equal, that "it doesn't make sense to devote resources to marginal problems or to expend enormous amounts to meet extreme requirements with little environmental payoffs. "

• Stress that economic development generates environmental benefits.

"The fact is," DiBona said, "economic growth is the key to environmental progress."

THE ANWR SETBACK

The API meeting produced little optimism about leasing of the ANWR Coastal Plain. Leasing received a setback Nov. 1 when the Senate voted not to shut off a filibuster against the energy committee's bill containing a leasing provision.

"I'd have to say now we're pessimistic" on the issue, Murray said in a press conference. DiBona called the vote "a travesty."

The sharpest comments came from Sen. Malcolm Wallop (R-Wyo.), ranking minority member of the energy committee and a cosponsor of the bill.

Wallop said he and energy committee chairman Bennett Johnston (D-La.) thought the Persian Gulf war had created a political climate conducive to passage of balanced energy policy legislation.

"But the cry has changed from 'no blood for oil' to 'don't drill for oil.' "

Wallop said the bill would have produced more than 700,000 new jobs in 47 states, added $550 billion to the GNP, and reduced the balance of payments deficit by $200 billion. It also would have helped U.S. competitiveness.

"But it was deemed unworthy of debate."

The senator slapped the belief of environmentalists and "a cowed Senate" that "a magical conservation silver bullet" will reduce U.S. reliance on oil and that the country doesn't need a few days' or years' supply from domestic sources.

"No more idiotic concept has gone unchallenged in years than this: Because ANWR will provide only 200 days of American oil needs it is of no help."

Wallop also chided government rules that keep experienced persons out of public offices for which they're most qualified due to concern for conflict of interest, appearances of impropriety, or potential for influence peddling.

And he scolded oil and other companies for contributing funds to environmental groups, even moderate mainstream groups, that oppose their industries' interests.

"Special interest groups produce no goods, no services, no wealth," Wallop said. "To the contrary, their efforts generally have reduced our nation's ability to produce these items.

"The groups seek to govern and control the lives and property of individuals and corporations," Wallop said, adding that companies should pay closer attention to the results of their philanthroPY.

"These groups' allegiances have not been bought, but their activities have been paid for."

PANEL DISCUSSION

In a panel discussion, Thomas G. Burns, Chevron Corp.'s manager of economics, said the energy policy vote in the Senate, which he called a "debacle," intensified the shift of major companies' upstream operations away from the U.S.

"Environmental issues are replacing security issues as the driving force in the oil industry" in the U.S., he said. Companies must deliver environmental values to customers along with low costs and efficiency.

Edward N. Krapels, founder and president of Energy Security Analysis Inc., predicted U.S. environmental requirements for gasoline make the country a "boutique market" because other countries won't adopt such rigid fuel standards.

Gasoline capacity will increase faster than overall product demand, which will squeeze refining margins. Fast refining capacity growth in Asia might make the region a net exporter, Krapels said.

John F. Olson, vice-president of Goldman, Sachs & Co., cited a paradox in the U.S. natural gas market: Gas demand, driven by clean air legislation and growing oil import dependency, will grow at about 2%/year. But investments necessary to meet that type of growth aren't justified by present economics.

In the past 5 years, returns on equity for gas producers, pipelines, and distribution companies have significantly lagged the 15.5% return on equity of the Standard & Poor's 500.

"If gas is the fuel of the future, it is a profitless prospect for the present," Olson said.

As long as gaps remain wide between oil and gas values and between gas prices as reflected in the spot market and long term contracts, opportunities will arise only in niches.

"Clearly, the markets are telling us that something is very wrong in the gas industry," Olson said.

Arthur L. Smith, chairman and chief executive officer of John S. Herold Inc., cited declines in reserves replacement costs between 1980 and 1990--from $10.65/bbl of oil equivalent to $4.98/bbl in the U.S. and from $6.60/bbl to $4.22/bbl internationally--but said industry profitability remains too low.

Oil companies, which traditionally account for 20-25% of new issues in the securities markets, this year represent only about 1% of new issues totaling $73 billion.

According to the markets, Smith said, "oil and gas companies are not creating value."

Copyright 1991 Oil & Gas Journal. All Rights Reserved.