CONGRESS EYES EFFORT TO LIFT U.S. PRODUCTION

Patrick Crow
Washington Editor

A key question these days for Washington oil lobbyists is whether the recent Middle East war will prompt Congress to do more to encourage domestic oil and gas production.

At least Congress plans to examine the issue. The Bush administration has sent a proposed National Energy Strategy (NES) to Capitol Hill, urging-among other things-leasing of the Coastal Plain of the Arctic National Wildlife Refuge of Alaska.

The administration also has submitted a modest 5 year offshore leasing program for public and congressional comment, a low-key approach it hopes will prompt Congress to end 9 years of moratoriums blocking leasing.

And the need for secure, domestic energy will be debated as Congress considers more western U.S. wilderness designation bills.

Key legislators say sweeping energy legislation must be passed early in the 102nd Congress if it is to be passed at all. Bennett Johnston (D-La.), Senate energy committee chairman, said action must be taken "before memories of the gulf war are too dim."

In addition to time, low world oil prices may work against passage of legislation.

"As long as energy prices are low," said Rep. John Dingell (D-Mich.), House energy committee chairman, "much of what we try to do will be ineffective or irrelevant."

ENERGY STRATEGY

For the first time in more than a decade, Congress is considering comprehensive energy reform legislation (OGJ, Mar. 4, p. 12).

Oil industry groups were quick to complain the administration's NES proposal does far too little to encourage domestic oil output or open federal lands for drilling-except the ANWR Coastal Plain. And it would not increase, or even hold steady, existing domestic oil and gas prices.

The Department of Energy estimates adoption of its NES would decrease U.S. oil demand 3.4 million b/d by 2010 while increasing domestic oil production by 3.8 million b/d.

Its plan would promote production in all energy sectors, including electric generation, coal, and nuclear. It would encourage conservation, although not as much as critics would like.

The plan would increase research and development for enhanced oil recovery. It also would implement a series of measures to ease regulation of interstate natural gas transportation and otherwise promote gas use.

The Senate energy committee has expedited hearings on the NES and plans to begin marking up legislation in April-with the optimistic goal of sending a bill to the Senate floor for debate late in the month.

House committees already are considering NES issues in hearings but will split the NES and consider its parts separately.

The NES drew criticism from legislators and lobbyists alike. The American Petroleum Institute (API) said, "More government lands-onshore and offshore-need to be opened to environmentally sensitive energy development."

The Independent Petroleum Association of America (IPAA) was quite critical, saying the plan does nothing for independents-who are unlikely to bid on multimillion-dollar offshore and ANWR leases.

It said the plan should work to increase Lower 48 oil production, possibly by setting a stable floor for oil prices and thus removing some of the risk for outside investment. Instead, IPAA said the NES would seek to encourage foreign oil production in countries outside the Persian Gulf.

ANWR LEASING

The ANWR Coastal Plain east of Prudhoe Bay field is the most promising unexplored region on federal land.

Leasing of the Coastal Plain is central to the administration's NES and the keystone of the leading Senate bill, filed by Sens. Bennett Johnston (D-La.) and Malcolm Wallop (R Wyo.).

The Interior Department estimates ANWR offers a 46% chance of economically recoverable reserves, up from an earlier 19% estimate.

API said ANWR could contain 9.2 billion bbl and might produce an average of more than 1 million b/d of oil for 20 years, peaking just below 2 million b/d by 2005.

The administration's ANWR provisions, Johnston-Wallop, and a bill by Alaska's Republican senators, Frank Murkowski and Ted Stevens, are similar in approach. They would offer relatively little land for lease, and the leases would carry the most stringent environmental restrictions the industry has seen yet.

The administration bill would permit sales of 300,000 acres every 2 years and impose a 50/bbl fee on production to build a $50 million reclamation fund.

The three bills differ on a critical point: money. Murkowski and Stevens would give 90% of the anticipated $1.9 billion in federal bonuses and rents to the state, as provided under the Alaska Statehood Act.

Johnston and Wallop would give the state half the revenues, using the rest to fund the conservation and energy development programs proposed in their bill.

The administration would keep all the revenues for the federal government. "ANWR is a national resource, and the revenues from oil and gas development should be used to benefit all Americans, not just those residing in one state," DOE said.

But the central fight will be over whether to lease ANWR at all. Environmental groups have pledged an all-out battle to block leasing.

The Senate energy committee has reported out ANWR leasing bills in the past two sessions, but environmental influences on the House interior committee have kept bills from passing there.

Environmental groups claim leasing would damage a fragile ecosystem, production would cause pollution as they claim it has at Prudhoe Bay field-and transportation of any crude would only increase the risk of a repeat of the 1989 Exxon Valdez oil spill.

Those groups argue the nation could save more energy than ANWR could produce if it would tighten the corporate average fuel efficiency (CAFE) standards for auto manufacturers' new car fleets.

NATURAL GAS

Industry's best hope in getting relief through the NES appears to be in reform of the natural gas transportation market, enabling producers to sell more gas.

The administration bill, Johnston-Wallop, and a proposal by Rep. Phil Sharp (D-Ind.), House energy and power subcommittee chairman, call for gas market reforms.

The administration said its NES would increase gas consumption by about 900 bcf in 1995 and 1.1 tcf in 2010, increasing revenue for domestic producers by $8 billion in 2000 and $7.5 billion in 201 0 because prices and volumes would increase.

The administration would streamline federal permitting of gas pipeline construction review and reform environmental review procedures. It would deregulate pipeline sales rates in competitive markets and reform gas pipeline rate designs.

It would expand third party access to gas pipeline transportation and eliminate certain gas import regulations. And it would promote the use of natural gas in alternative fuel vehicles.

Johnston-Wallop and Sharp also would lessen gas regulation and facilitate construction of new gas facilities. The Senate bill, the more far-reaching, would allow the Federal Energy Regulatory Commission alone to determine if new pipelines or facilities met environmental requirements.

The bill also renews the administration's proposal for oil pipeline decontrol, except for the Trans-Alaska Pipeline System. Lines deemed to have market power would be subjected to tariff limits. New lines would not fall under regulation or the price cap.

OIL PROVISIONS

The administration said its NES oil provisions, in addition to lifting production by 3.8 million b/d, would increase reserves by 25-70 billion bbl.

The NES would encourage oil production in countries outside the Persian Gulf through "trade negotiations and consultations" with foreign leaders. "The government will sponsor more energy related investment programs, encourage other countries to remove barriers to external investment, and work with allies in the International Energy Agency to expand oil and gas development and trade outside the Middle East."

DOE will work with industry and states to remove regulatory barriers to horizontal drilling and concentrate R&D funds on the technique.

It outlines an aggressive program to develop and use advanced oil recovery technology to recover some of the 300 billion bbl of domestic oil in place that is unrecoverable with conventional methods.

DOE projected that could result in a peak of 1.4 million b/d of additional production by 2005, adding total reserves of 5 billion bbl.

"The R&D program would, if fully successful, increase the amount of economically recoverable reserves by between 20 billion bbl (at $20/bbl) and 65 billion bbl (at $50/bbl)."

DOE pledged to work to remove technical and regulatory barriers blocking development of four Alaskan North Slope fields, which it said could add up to 1 billion bbl to domestic oil reserves.

The NES calls for leasing of the Elk Hills Naval Petroleum Reserve in California to private industry, encourage the use of natural gas for steam generation in California heavy oil fields, and promote the export of 25,000 b/d of California heavy crude.

NES specifically rejected a fixed or variable oil import fee, saying it would result in "net losses to the U.S. economy that would far outweigh its energy supply benefits."

But it did not rule out fiscal incentives for domestic oil production if "changing conditions in the oil and gas markets" justify them in the future.

5 YEAR LEASING PLAN

In an effort to avoid conflict, the Minerals Management Service has proposed a conservative 5 year Outer Continental Shelf leasing plan that calls for as many as 23 sales in 12 areas during 1992-97 (OGJ, Mar. 4, p. 16).

The current plan had 39 sales scheduled, but most of those were not held for one reason or another.

MMS also plans to offer less acreage in individual sales (except in the Central and Western Gulf of Mexico), a third less than in the 198792 plan. But Barry Williamson, MMS director, said his agency will try to offer only the most promising offshore structures.

Following a June 1990 presidential mandate, the plan does not offer any acreage off Washington/Oregon, northern and central California, the North Atlantic, and southern Florida.

Four sales are planned for the promising Beaufort and Chukchi Seas, one in the proven Cook Inlet, and two or three more in frontier areas off Alaska.

Two sales are planned for the Mid and South Atlantic, but only 250 tracts will be offered in each. In a similar approach, only 200 tracts will be offered in Eastern Gulf of Mexico sales.

The leasing program includes a stricter offshore area evaluation and decision process and will be more responsive to state and local governments' concerns.

"For the first time, post-lease activities are considered in the 5 year document," Williamson said.

Industry groups were not happy with the program. The National Ocean Industries Association called it "very inadequate" and contrary to the nation's effort to develop a NES based on reducing foreign oil imports.

API said, "We find it remarkable that our federal government has asked foreign countries to increase their oil output and then proposes such an unambitious offshore leasing schedule."

The 5 year plan will get no better-the process does not allow sales to be added, only to be deleted. After evaluating public comments on the draft proposal, MMS will issue another draft this summer and then a final proposal next spring. Congress has the option of rejecting the final plan through a majority vote.

TAX CHANGES

Tax-writing committees plan no oil-related tax bills this year, noting the 1990 Omnibus Budget Reconciliation Act had provisions to encourage domestic exploration and production.

DOE estimated those provisions may benefit industry by nearly $2 billion during 5 years and increase domestic production 177,000 b/d by 1995 and nearly 500,000 b/d by 2000.

The bill extended for 2 years the $3/bbl Sec. 29 tax credit for nonconventional fuels, including fuels from coal, oil from shale and tar sands, and gas from geopressured brine, Devonian shale, coal seams, tight formations, or biomass.

The credit now will apply to fuels from wells drilled before Jan. 1, 1993, and fuels sold before Jan. 1, 2003.

The new law allows a 15% credit toward qualified costs of an enhanced oil recovery project. The qualified EOR costs are the cost of property, intangible drilling and development costs, and the cost of tertiary injectants.

The law repealed a provision blocking independent producers from claiming percentage depletion on leases they buy from majors.

It also increased the percentage depletion rates on marginal properties by 1% (to a maximum 10%) for each whole dollar that the average domestic wellhead price of crude is less than $20/bbl (not adjusted for inflation).

And most importantly, the law provided a special deduction for oil and gas producers from the alternative minimum tax (AMT). The deduction cannot exceed 40% of the alternative minimum taxable income and may not be carried forward.

It will be phased out in taxable years in which the price of crude exceeds $28/bbl and will be eliminated if the average price of oil totals $34/bbl.

ONSHORE LEASING

After more than a decade of work on western national forest wilderness bills, the current Congress will shift its attention to potential wilderness areas overseen by the Bureau of Land Management.

Among the western states, only Idaho and Montana remain without statewide forest wilderness bills.

A bill had been filed for Montana, and bills also have been offered to create additional wilderness areas in California, Colorado, and North Carolina.

The Montana congressional delegation has been split on the wilderness issue, which also has influenced statewide political campaigns. So far, Sen. Max Baucus (D-Mont.) has filed a bill to designate 681,610 acres of the Kootenai and Lolo national forests as wilderness.

No Idaho bills have been filed, but several small pieces of legislation, rather than a statewide bill, are expected.

Wilderness leasing has been a political issue for Colorado, too. That state got a statewide wilderness bill in 1980, but stalemate occurred last session when Sens. William Armstrong (R-Colo.) and Tim Wirth (D-Colo.) filed competing and conflicting bills to increase the wilderness areas.

Armstrong has retired, and his successor, Hank Brown (R Colo.), plans to attempt a compromise with Wirth.

BLM is due to make recommendations to Congress by early fall on wilderness designations for areas under its control in several western states: California, Oregon, Utah, Nevada, New Mexico, Colorado, Idaho, Montana, and Wyoming.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.