DOE UNVEILS OIL AND GAS PLAN; INDUSTRY FINDS LITTLE TO PRAISE

The U.S. Department of Energy's new domestic gas and oil initiative, drafted to promote U.S. production and unveiled against a backdrop of plummeting oil prices, focuses on lessening regulation and increasing natural gas production and marketing.

The document lists 49 actions DOE and other federal agencies will take to help producers, but many of the actions simply call for studies on issues or continue existing programs.

Petroleum industry response to the plan was mixed. Natural gas groups praised the greater emphasis on their industry. But oil producers complained the plan will not relieve immediate problems caused by low world crude prices.

The Independent Petroleum Association of America has asked the Clinton administration to give domestic oil producers relief from low priced oil imports (OGJ, Dec. 13, p. 31). Clinton has the power to act under Section 232 of the 1962 Trade Expansion Act.

Meantime, oil prices still were searching for bottom at presstime last week. On the New York Mercantile Exchange, light sweet crude for January delivery closed Dec. 13 at $14.52/bbl, down 5 from a previous 5 year low (OGJ, Dec. 13, Newsletter).

The same low oil prices that are dogging U.S. oil producers also are putting money in U.S. motorists' pockets. American Automobile Association reports motorists during the holiday season will pay the lowest average gasoline price in 7 years. Its survey showed the U.S. average price of self-serve regular last week at $1.091/gal, the lowest price for the week before Christmas since 1986. That's in nominal terms. Discounted for inflation, current U.S. retail gasoline prices are the lowest in history, at least for any year in which comprehensive data are available (Table). And that includes a recent 4.3/gal jump in federal fuel taxes plus the added cost of new air quality rules affecting gasoline manufacturing.

That underscores how any kind of near term government action on sliding oil prices would be a tough sell politically. Economists across the board are hailing the plunge in energy prices as a net bonus for the U.S. economy. Clinton was elected largely because of his promised focus on fixing the moribund U.S. economy. Accordingly, any move to help domestic oil producers that might work against the fragile recovery under way--such as a s ike in domestic oil prices resulting from oil price floors or import fees--is fraught with political peril.

Perhaps a hint of the political underpinnings in the initiative can be seen in its downplaying the importance of U.S. energy security in favor of the issue of jobs creation.

WHAT'S INVOLVED

Only two of the 49 items require congressional action, while the Bush administration's national energy strategy a few years ago proposed a number of deep reforms that required changes in the law. Many of them were enacted as the 1992 Energy Policy Act.

The present plan has four main thrusts: reviewing oil and gas tax policies, improving industry access to advanced technologies, stimulating natural gas markets, and reducing regulatory costs.

Deputy Energy Sec. William White said DOE did not estimate how much the initiative might increase oil and gas production. He told reporters the plan's main goal is to create jobs. A secondary objective is to reduce oil imports.

As it implements the initiative, Energy Sec. Hazel O'Leary pledged the Clinton administration will try to educate the public and Congress on why a healthy oil and gas industry is important to U.S. national and economic security.

She acknowledged that the U.S. oil industry has fallen on hard times, with production levels at a 35 year low and thousands fewer employees getting paychecks.

O'Leary said, "Our economic wealth and security could be drastically diminished if we are forced to import more and more oil. In 1973, our net imports accounted for almost 35% of our consumption. We reached a low of around 27% in 1985.

"Yet the second quarter (of 1993) saw our net imports rise to 45% of our consumption. And projections from the Energy Information Administration for 2010 indicate that this percentage could reach 52-72%."

STUDIES PLANNED

The DOE plan calls for studies on a number of issues important to the petroleum industry.

The present initiative calls for the National Economic Council and National Security Council to coordinate an interagency study, due to be complete by next December, on the near and long term economic, environmental, and security implications of rising U.S. dependence on oil imports.

The study will spell out the government's policy options to reduce oil import vulnerability as long as those options do not undermine the overall economy or violate trade agreements.

That would appear to rule out an oil import fee or tariff. However, O'Leary said "everything's on the table," and low oil prices are "not good for the nation in the long run."

Nevertheless, White said DOE did not consider the possibility of leasing the Arctic National Wildlife Refuge as part of the initiative.

The initiative also launches an inter-agency study on barriers to the export of Alaskan North Slope crude. ANS exports are banned by law.

The ANS study will report by next April on the relationship between ANS exports and investment in producing and upgrading onshore California heavy crude oils and the effects on employment in the domestic Jones Act fleet.

DOE explained that if ANS production falls as projected in the late 1990s, the West Coast will again become permanently dependent on imported crude oil.

"Permitting ANS exports in the near term will potentially stimulate onshore California production and could initiate a less volatile transition away from imports in general."

DOE also said it will work with the Justice Department and California Public Utilities Commission to ensure that Central California oil pipeline tariffs are nondiscriminatory and reasonable for all users. The goal is to promote oil pipeline access for independent producers.

DOE and the Treasury Department will review the tax treatment of geologic and geophysical expenditures and other tax provisions by May 1994.

The National Petroleum Council will issue a study by June on the costs and benefits of tax incentives for maintaining marginal and stripper production.

EIA will issue a study in February analyzing the economic status, needs, and policy issues related to marginal well producers.

The Interior Department will recommend this month whether to grant royalty relief for deepwater leases in the Gulf of Mexico and by next February on how or whether it should take steps to encourage development of marginal gulf fields in shallow water.

TECHNOLOGY PUSH

DOE's program calls for an adjustment in its oil and gas research and development efforts.

"Because of the importance of using technology to reduce production costs, the initiative places a heavy emphasis on fostering industry and government partnerships to build on America's technological lead in gas and oil exploration and production," DOE said.

It plans an advanced computational initiative that will enhance, apply, and transfer technologies developed in DOE's national laboratories to industry sectors involved in domestic production.

"This program," DOE said, "will enable industry to capitalize on the capabilities of the national laboratories in earth sciences, computer science, fluid dynamics, and mathematics to meet specific industry needs."

DOE will launch a program to develop advanced underbalanced air drilling and high efficiency drilling rig retrofit systems for gas drilling.

It will increase the current program of demonstrating oil and gas recovery from common reservoir types from one geologic class/year to two/year.

DOE will revamp its oil research program to specifically address the technical needs of smaller independent producers.

It said, "This program will not compete with service companies and consultants. Rather, it will use them to commercialize and disseminate new and underutilized oil products."

The department also will coordinate development of a nationwide technology transfer network and assistance program for independents.

And it will test advanced drilling technologies at its Naval Petroleum Reserve sites.

DOE added a caveat to some of the R&D proposals. It said industry is expected to provide 50% or more of the costs for projects close to commercialization or in a demonstration phase and significantly more than 50% for actions that have a limited group of beneficiaries.

NATURAL GAS

The initiative pledged, "The administration will fulfill the Clinton administration's campaign goal of implementing policies to expand markets for natural gas, principally by improving natural gas storage and delivery infrastructure and upgrading supply and deliverability data collection and dissemination."

DOE will create a single gas production data collection point in each state and will make state and federal data more compatible.

It will develop a model by March 1995 to estimate pipelines' capability to deliver gas to customers, linking wellhead productive capacity estimates with pipeline capacity state by state.

In the gas storage area, DOE plans to develop an information system by late 1994 for evaluating domestic storage capacity, match it to end user requirements, evaluate new techniques for storage, and improve the effectiveness of storage fields.

DOE will work with the Federal Energy Regulatory Commission to propose alternative ways to structure the secondary market for pipeline capacity, including curbs on any monopoly abuse in capacity resale markets and the method for posting completed transactions.

It pledged to help FERC expedite certification of natural gas pipelines.

The initiative outlines six programs to encourage state regulators to reform their regulation of natural gas and open the way to more market competition.

In March DOE will establish a federal clearinghouse for oil and gas producers, providing them with contact lists for all federal assistance and regulatory activities in all agencies through a toll free telephone number.

"In addition," DOE said, "clearinghouse personnel will act as facilitators and ombudsmen for natural gas and oil producers, particularly for firms that lack specialized government affair and regulatory compliance specialists."

SIMPLIFY REGULATIONS

DOE said it will work with other federal agencies and the states to lessen industry's regulatory burdens by improving coordination, eliminating redundant or unnecessary rules, and avoiding duplication between state and federal regulatory programs.

A federal interagency group will work with states to eliminate duplication, "whether in the form of needless paperwork or duplicate permits or hearings. Wherever possible, one stop permitting and market based regulatory policies will be encouraged."

DOE plans to enhance state and federal regulatory decision making by "increasing the availability of sound technical information on the environmental risks associated with natural gas and oil operations, as well as the costs and benefits of alternative regulatory approaches.

"The administration will develop alterative approaches to environmental regulation that balance the cost of regulation against realistic health and environmental risks, establish priorities among the various environmental protection programs in achieving goals, and promote innovative methods of achieving environmental objectives."

It plans to seek "alternative approaches to conventional command and control environmental regulation that more accurately balance costs and benefits, promote rather than stifle technological innovation, allow for compliance flexibility, and achieve the same or greater levels of environmental benefit at less cost."

DOE and the Interior Department will demonstrate alternative regulatory compliance next May with a project on improving safety and environmental management planning for offshore natural gas and oil facilities.

DOE pledged to work with states and the public to address regional environmental issues that block drilling.

It also will work with Interior to help small operators with a 1990 Oil Pollution Act requirement that they carry $150 million of spill insurance on offshore projects.

And before next April an interagency working group will review a 2-1/2 year old NPC study on the future of oil refining, "to develop a strategy for maintaining a more viable domestic oil refining industry."

OIL GROUPS DISAPPOINTED

The American Petroleum Institute sounded the keynote reaction to industry's assessment of the Clinton initiative. It damned the move with faint praise, calling it only "a modest step" toward improving the energy future of the U.S.

"While not unwelcome," API said, "the measures announced by the government will do little to reduce imports or to aid the domestic petroleum industry.

"Perhaps it will help spur the necessary debate to acquaint more Americans about government decisions that impact adversely on their energy future and the kinds of actions that need to be taken.

"These actions, which are not addressed in the DOE initiative, include an end to the moratoriums on exploration and production of oil and natural gas, removal of conflicting and unnecessary regulations that hinder development, and a determination to prevent costly delays on petroleum industry projects.

"It is ironic that (DOE's) concern over rising imports is not matched by a willingness to take steps now that would increase domestic production. Those steps would result in increased domestic investment and job growth associated with it, both of which contribute to economic growth."

The Independent Petroleum Association of America called the initiative "a step in the right direction" which "details some proposals that may be important to the industry for the long term, especially for natural gas.

"However, we have to recognize that right now domestic oil producers are facing an emergency due to dramatically low prices. Producers need price stability in order to maintain a domestic industry."

The Domestic Petroleum Council, consisting of 17 medium sized companies, also said the initiative will do little in the short term.

"We recognize that limitations placed on the secretary may have prevented her from recommending actions which would directly confront the flood of cheap imported oil, but there are steps that can be taken by administrative action that can provide the domestic independent producer with some immediate relief."

For example, DPC said, the administration could declare a royalty relief program, announce continuation of an offshore leasing program, and lift restrictions on access to federal land that hold oil and gas potential.

GAS ASSOCIATIONS PLEASED

The Natural Gas Supply Association praised the interagency coordination behind the initiative.

"Administration coordination is particularly crucial, given the contributions natural gas can make to solving U.S. air quality problems," it said.

"We believe the positive way in which DOE has gone about developing its plan will help all parties find satisfactory resolutions to the challenges producers face as we attempt to respond to the administration's advocacy of natural gas use."

The Interstate Natural Gas Association of America said, "We endorse the initiative's call for increased funding for natural gas R&D and appreciate its support of industry efforts to establish the Gas Industry Standards Board."

The board would set basic parameters for pipelines' computer bulletin boards.

The American Gas Association said the initiative will strengthen a program to use natural gas vehicles in cities and allow natural gas cooling systems to compete more effectively with electrical systems.

AGA said, "We are very encouraged by DOE's support for gas related technology and commercialization and the department's desire to level the playing field by eliminating regulations that unfairly penalize natural gas."

PRODUCERS RESPOND

U.S. oil and gas producers mostly are critical of the gas and oil initiative.

Many welcomed the plan as an acknowledgement by the federal government of problems confronting U.S. operators. But most oil industry leaders said the initiative lacks substance, offers no quick aid to beleaguered producers, and proposes actions as likely to fail as succeed.

Many comments pointed out specific shortcomings of the plan:

• Phillips Petroleum Co. said the initiative recognizes the economic downturn confronting the U.S. energy industry. However, it includes none of the recommendations oil and gas producers have offered recently to the Department of Energy for maintaining the health of the U.S. petroleum industry and instead offers only long term proposals.

  "Access to areas containing oil and gas reserves and a stronger review of the burdensome economic regime that we work in are two things that would do more to revitalize our shrinking industry and slow reliance on foreign oil," Phillips said.

• Paul Taylor, vice president of corporate communications for Anadarko Petroleum Corp., Houston, said his company is skeptical about whether proposed actions will have the effects expected by Clinton administration energy advisers.

  Taylor said problems facing domestic producers stem from years of U.S. energy policy based on low priced, imported crude oil.

  "The policy will continue until we have a crisis and until we address that fundamental problem, the industry's situation is not going to change," he said. "We're not going to diminish oil imports by studying technology or with a tax incentive for stripper oil wells that will increase production by an incremental amount."

• Independent producer Thomas D. Coffman, president of the Texas Independent Producers & Royalty Owners Association (Tipro), said many Texas independents reacted to the announcement of the initiative with a sense of numbness.

  Coffman said independents are glad to work with federal officials to speed applications of modern oil field technology and cost saving tactics to their operations.

  "But saving dimes to match dollars lost to low prices is a losing proposition," he said. "Many independent producers might not survive long enough to help the nation maximize its energy potential down the road."

• Texas Railroad Commissioner Barry Williamson said the plan would allow the Clinton administration's energy doctors to continue studying and conferring while their patient lies dying in the emergency room.

"The ambulance has brought a critically ill patient to Washington, but nobody will administer CPR," Williamson said. He said the Clinton administration apparently is wilting to let producers continue going out of business, eliminating thousands of jobs, "while bureaucrats study a problem that's been painfully evident for years."

TOO MANY STUDIES

Williamson said too many of the plan's 49 action items propose long term study and review of existing energy regulations and policies rather than tax incentives or other measures that would help the industry survive.

While the plan offers some favorable long term proposals for U.S. gas producers, he said it holds little for oil producers and virtually ignores independents. Williamson noted that independent companies drill about 85% of all oil and gas wells in the U.S. and produce about 31% of U.S. crude oil output and 60% of U.S. gas production. Without tax incentives or other short term relief measures, independent operators and the wells they drill and maintain and the oil and gas reserves from those wells all will be lost.

"Years from now--when the studies are in, the problems acknowledged, and they're finally ready to do something--there might not be a domestic oil industry around to save," Williamson said.

ALTERNATIVE SOLUTIONS

Phillips said it hopes federal officials will draw on the U.S. industry's collective knowledge of domestic oil and gas operations to shape future energy policies.

Anadarko's Taylor said two obvious things that would benefit U.S. oil and gas producers would be price supports for domestically produced crude oil and more open access to federal lands.

"Either of those would have a more significant effect than what has been proposed," he said.

Tipro's Coffman said it would be tragic if the current economic crisis facing independents is allowed to continue eroding the viability of the U.S. petroleum industry.

"Even natural gas is feeling the brunt of decline," he said. "What we really need now that is not in DOE's initiative is a price stabilization program that would stem the tide and allow the industry to make a long term transition into the next century."

Williamson renewed an invitation to Clinton energy officials to visit Texas to see what government can do to support independent operators.

"The Texas legislature has given us the tools we need to create a diverse tax incentive package that encourages the drilling of new wells and the return of inactive wells to production," he said. "If the administration really wants to save the domestic energy industry, Texas can show them how."