Rahall sees more agreement than disagreement over OCS strategy

US House Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.) sees more areas of agreement than disagreement about the US Outer Continental Shelf, he said as the last of the committee's three scheduled OCS hearings approached its conclusion on Feb. 25.

"There seem to be more commonalities than disagreements. I've been trying to explore those and those commonalities won't be lost. Where this will take us hasn't been defined, except that we do need to get a comprehensive energy policy out of this Congress. Its development will involve other committees and won't fall entirely within this committee's jurisdiction. When it does, I hope this committee will work hard with a lot of give and take," Rahall said.

The next phase of OCS activity will require a commitment to tapping its wind, wave and thermal energy potential as well as exploring for and producing oil and gas in an environmentally sound manner, he continued.

"There will be legislative acts of compromise while reaching that transition. But I hope at the end of the day that when these agreements are reached and compromises are made, these commonalities are etched not in stone but in our own good faith, and that we don't find that something else needs to be done down the road. I hope we can reach those areas of common agreement and have everybody on board when it comes time to develop legislation," Rahall said.

The apparent consensus among witnesses at all three hearings was that the next OCS moves should be part of a comprehensive US energy strategy and include new as well as traditional sources. The disagreements were over how this could be achieved. Proposals ranged from moving ahead with evaluating the oil and gas resource potential of the parts of the OCS which have been off-limits for more than 25 years to reinstating leasing moratoriums which expired on Sept. 30.

'Let's call it what it is'

Several committee members also expressed opposing viewpoints. Ranking Minority Member Doc Hastings (R-Wash.) said that US Interior Secretary Ken Salazar's Feb. 10 action delaying development of a new five-year OCS plan was a de-facto moratorium. "The true effect of Secretary Salazar's six-month delay is a reinstatement of a ban on drilling. Make no mistake: This action has precisely the same result as a moratorium. So let's call it what it truly is: a moratorium, not a delay," he said.

"The bottom line is that we need to develop the OCS, and we need to start now. We cannot keep sitting on our hands, talking, while all other industrialized foreign countries develop their own domestic resources. We have companies that are ready, willing and able to invest private dollars to develop these resources, along with the technology to do so in an environmentally friendly manner, and we should let them," Hastings continued in his opening statement at the Feb. 25 hearing.

The six witnesses at the final hearing were chosen to represent industrial perspectives on the OCS. Rep. Lois Capps (D-Calif.) asked them if another six-month delay was significant when it takes a long time to begin initial production from an offshore oil and gas lease already.

J. Larry Nichols, chairman of the American Petroleum Institute and Devon Energy Corp.'s chief executive, responded that a natural gas pipeline which runs from Louisiana to Florida passes by a 1 trillion cubic feet discovery which could come on-stream very quickly. He questioned the need for additional meetings on the five-year OCS plan which is being prepared since the US Minerals Management Service has received more than 152,000 comments already, with 87,000 or 57% of them supporting expeditious and expanded development.

"I would think that you might use that time, and some of your vast profits, particularly in relation to the rest of the economy, to address renewable energy technologies. Your companies certainly have been buying advertising about it," Capps told him.

'Not grounded in reality'

The six witnesses challenged the notion that federal oil and gas lessees are not diligently developing tracts they have been awarded and should not be given the opportunity to lease additional acreage. "While the 'use it or lose it' concept makes a catchy 'bumper-sticker' slogan, the arguments that are being made to support it are not grounded in reality," maintained Shell Oil Co. President Marvin E. Odum.

"In fact, we evaluate all of our leases. Prior to drilling, there are a number of activities that are taken on our leases as part of our overall exploration program. These activities include, but are not limited to, geological model building, seismic acquisition and processing, and reservoir analysis. The fact is, most are obtained in the exploration phase and the vast majority will not result in the finding of commercial quantities of oil and gas. This is one of the key commercial risks inherent in this business," he said in his written statement.

"Simply stated, both the existing regulatory process and basic economics ensure that leases are developed in a diligent manner. Leases are acquired at significant expense through a competitive bidding process and are subject to annual rental fees. If drilling or production is not commenced within the primary term, the lease is automatically relinquished to the government along with all of the bid bonus and rental fees paid. Beyond this due diligence obligation built into the lease structure, the regulations and lease terms contain numerous additional requirements specifying leaseholder obligations," observed Gary P. Luquette, president of Chevron North America Exploration and Production Co., in his written testimony.

Nichols also noted that legal challenges and bureaucratic delays also are common in both onshore and offshore oil and gas projects, often postponing delivery of new supplies to consumers. "Even where a project has not been delayed or canceled, companies must carefully consider whether to risk further investment if litigation has been initiated, but not yet decided, in opposition to their project. Leases within projects that have been obstructed or canceled due to litigation or bureaucratic delays are often wrongly characterized as 'non-producing' by opponents of offshore development," he said.

Witnesses also cited estimates that the OCS contains 86 billion bbl of oil and 420 trillion cubic feet of gas, but added that the numbers are conservative since they came from evaluations made decades ago which used now out-dated technology. "We have seen historic resource underestimates result from this. Where industry has been able to collect data utilizing advanced technology, the resource estimates have grown. In 1987, for example, the US Government estimated that there were 9 billion bbl of oil in the Gulf of Mexico. By 2006, advanced technologies caused the resource estimate for that area to grow to 45 billion bbl," said Tim Cejka, president of Exxon Mobil Exploration Co.

28-year differences

"Consider that in 1981, when the OCS moratorium was first implemented, typewriters were on every desk, people were still listening to music on record albums, and the easiest way to get directions was to buy a map at the gas station. Today, we rely on personal computers and the Internet, mp3 players, and GPS devices. Just as technology has the power to change and improve the way we live, it also has the power to change and improve the way we get our energy. The mongering fear that some engage in when it comes to expanding domestic production is neither factually accurate nor productive to a meaningful dialogue on our energy future," said Karen A. Harbert, president of the Institute for 21st Century Energy at the US Chamber of Commerce.

The witnesses also generally opposed delaying leasing while the federal government conducted its own OCS resource potential evaluations. Nichols said that an inventory with existing technology would not uncover any new information, except to confirm that the areas which previously off-limits contain significant oil and gas deposits. "Exactly where these are would be another question. The most efficient approach would be to make these areas available and let the companies do their own research," he said.

Luquette said that Chevron supports a phased approach to developing former moratoria areas, moving quickly to include highest priority areas in the five-year OCS plan currently under development for 2010-2015. The fact that there are 26 OCS planning areas makes it impractical for MMS to immediately focus on all the acreage formerly covered by moratoriums while continuing development in existing accessible regions, he said.

"A strategic approach to phasing in evaluation and leasing, starting with the most prospective areas and those closest to existing infrastructure, makes the most economic sense and will help bring on new domestic oil and natural gas as soon as possible. Through the stakeholder input process, MMS will be able to identify those planning areas with the highest level of interest which in turn may contain the greatest potential for commercial discovery of new domestic offshore resources," he maintained.

Luquette also suggested that Congress could facilitate compilation of more accurate OCS resource data by providing MMS money in its budget for this purpose and establish a mechanism where companies could contribute to pre-leasing data collection.

'Virtual drilling'

BP America Inc. Chairman and President Lamar McKay offered a more specific proposal in his written statement. "As a first step, we propose the acquisition of new regional 2-D seismic data in the OCS in order to identify the most prospective regions. From there, closely spaced 2-D or 3-D seismic data can be acquired to identify the best prospects in each area. Such surveys are costly and complex to plan and implement, but vastly increase the information content. This 'virtual drilling' protects the environment by providing greater accuracy in mapping deposits and reduces the need for drilling exploratory wells," he said.

Witnesses warned that delays in leasing more of the OCS could harm the United States in the long run. "American domestic oil production has fallen by around 4 million bbl a day since 1985. At the same time, demand has risen by roughly similar amounts, so the gap must be filled by imports. And when world demand rises, as it did recently, particularly in China and India, it makes those imports more expensive. That accounts in part for the dramatic rise in oil prices we experienced last summer," McKay said.

Since the first world oil price shock in 1973, it also has become apparent that wildly spiking and plunging prices kill jobs, he continued. The reduction of industry investment, as indicated by the number of operating US rigs falling to 1,399, its lowest level since July 2005, poses a real economic risk, according to McKay. "Prices could rise once again when the recovery occurs because investment may not be sufficient to offset the natural decline in the resource base. The challenge for all of us is to not allow this cyclical decline to create a structural loss in capacity. We must continue to invest in new technology and infrastructure development at the bottom of the cycle to provide continued access to supplies," he said.

The witnesses emphasized that climate change also should be a part of developing any comprehensive US energy strategy. "Fundamentally, it comes down to government taking its role in defining a framework. We need to create a viable, efficient and workable market, and free enterprise will innovate and solve this problem. The energy industry has a key role to play, including working on carbon capture and storage technology solutions. Currently, this technology is too expensive and our country lacks a regulatory framework to enable this technology," said Odum.

"What the nation needs is a policy that increases, not decreases, domestic energy production. Offshore development is a vital component of US energy development. Barriers to offshore oil and gas production contribute to volatile energy prices, slower economic growth, lost American jobs and a weakened US position in global markets. We need to find and develop our offshore oil and natural gas resources in an orderly, efficient, and environmentally sound way. By so doing, we can put America on the road to economic recovery and help ensure our nation's energy security for decades to come," Nichols maintained.

Contact Nick Snow at nicks@pennwell.com