ANWR LEASING: TOP ISSUE IN ENERGY STRATEGY

As expected, proposed leasing of the Arctic National Wildlife Refuge Coastal Plain is becoming a key issue in the Bush administration's blueprint for a U.S. National Energy Strategy (NES).

Energy Sec. James Watkins has told Congress that if NES legislation does not allow leasing of ANWR, Bush will veto it (OGJ, Mar. 18, Newsletter).

Watkins released a DOE study that said the Trans-Alaska Pipeline System (TAPS) may be shut down if Congress does not permit ANWR leasing within 6-7 years.

Even if several small known North Slope fields are developed in the 1990s, the study said, Prudhoe Bay field will decline to less than 300,000 b/d by 2009, making TAPS no longer technically or economically feasible.

Watkins said, "If there is one message coming from this study, it is that delaying exploration or development on Alaska's North Slope may be tantamount to a permanent shutin of the entire region."

He made the remarks during Senate energy committee hearings on three key sections of NES legislation: ANWR leasing, Strategic Petroleum Reserve (SPR) financing, and gas pipeline reform issues.

ANWR LEASING

Leasing ANWR is central to the administration's NES and a bill filed by Sens. Bennett Johnston (D-La.) and Malcolm Wallop (R-Wyo.).

In the House of Representatives, Rep. Walter Jones (D-N.C.) offered a "compromise" bill allowing limited leasing with stringent environmental safeguards. Jones, for example, would not allow leasing in 95% of the Porcupine caribou herd's core calving area.

At the Senate hearing, Johnston said, "The Coastal Plain of ANWR is not as fragile, undisturbed, and unique as some would have us believe. There is no biological evidence to support the popular notion that wildlife and plants in the region are fragile things, living on the edge of survival."

Johnston said Congress should ignore "asinine statements about ANWR containing only a few days supply of oil.

"If there is oil in ANWR, it's a lot of oil," he said.

Alaska Gov. Walter Hickel said ANWR is no Yellowstone Park. "It is a barren, marshy wilderness in the summer, infested with uncountable mosquitoes, and locked in temperatures of -60-70 for up to 9 months of the year."

Sen. Frank Murkowski (R-Alas.) said ANWR development would result in little disturbance of the environment. He said Prudhoe Bay field's roads, structures, pipelines, and other facilities occupy about 6 1/2 sq miles, but under today's technology and drilling methods would require only 2.4 sq miles.

The Bush administration's NES would keep all ANWR delay rentals and bonuses for the government, Johnston-Wallop would give the state 50%, and Murkowski would give the state 90%.

Hickel offered to negotiate with Congress on that issue.

He said, "If Congress offers a return of valuable additional acreage to state ownership, access to our land, a higher base royalty, or some other concept that has not yet surfaced, we will be pleased to come to the table."

Roger Herrera, executive consultant to BP Exploration (Alaska) Inc., said the Interior Department's mean estimate of 3.2 billion bbl of recoverable reserves under ANWR could mean peak production of 659,000 b/d.

He called ANWR exploration "a no lose situation."

Exploration would occur during the winter ice pack, and there would be no environmental damage if oil were not found. On the other hand, a discovery would benefit the nation, and the area would be restored after the field was depleted.

The Alaska Coalition, representing a number of conservation groups, said ANWR drilling would have major environmental effects. It said oil sites would be scattered over a large area and would require large volumes of water and gravel.

Brooks Yeager of the National Audubon Society said, "The U.S. drilling industry is not, in the short term, running out of oil to extract or prospects to explore but rather is the victim of an international oil market in which much of the U.S. oil reserve base is too expensive to produce. Development of ANWR will not change that fact."

IMPORT FEE

Another Senate energy committee hearing focused largely on a provision in the Johnston-Wallop bill that would require oil companies to hand over 9% of their petroleum imports to the SPR or Defense Department without compensation.

A bill by Rep. Phil Sharp (D-Ind.), House energy and power subcommittee chairman, would set the level at 3%, but the oil would continue to be privately owned. If the SPR were drawn down, owners of the oil would receive sales revenues.

In both bills, congressmen are seeking ways to expand the SPR without draining government revenues.

Witnesses agreed the Johnston-Wallop bill would increase the cost of imported oil and thus the price of domestic oil production.

The Independent Petroleum Association of America said the bill would hike the price of imported oil and thus provide an incentive to produce domestic oil.

IPAA Pres. Denise Bode said, "Independents are especially penalized by instability because they have to rely so heavily on outside investment for their exploration and development operations. All of their revenues come from the sale of oil and gas at the wellhead."

She said independents have had difficulty raising money since the mid-1980s due to tax law changes and steep oil price declines.

Charles DiBona, American Petroleum Institute president, opposed the provision. He said it would cost the economy about $12 billion/year, especially hurt low income families, and raise American manufacturers' energy costs above those of their non-U.S. competitors.

DiBona said, "It also would create inequities among oil companies themselves. Large importers of crude oil would be at a competitive disadvantage with companies having larger domestic oil production."

DiBona predicted the program would require "a major new bureaucracy" and would be riddled with exceptions for various importers and consumers.

The National Petroleum Refiners Association said meeting defense needs through imported products would "eviscerate" the economic bases of many small refiners that currently supply the Defense Department.

The Chemical Manufacturers Association said the provision would make U.S. petrochemicals uncompetitive in world markets, costing 13,000 U.S. jobs.

Robert Gentile, assistant energy secretary for fossil energy, said the fee could violate the Fifth Amendment, which bans the taking of property without compensation, and the General Agreement on Tariffs and Trade.

He said, "A regulatory system could simply not compare to the time tested system developed between the Defense Fuel Supply Center and its contractors."

NATURAL GAS

The Senate committee also explored differences between Johnston-Wallop and the administration's proposals for increasing natural gas use. Both would expedite pipeline construction and streamline the Federal Energy Regulatory Commission's regulatory process.

Johnston warned the NES goes too far in permitting parties to construct and operate pipeline facilities with minimal-and in some cases virtually nonexistent-regulatory oversight.

He said, "When Congress solved the problem of natural gas shortages on the interstate market we also unwittingly sowed the seeds for the take or pay problem. It would be unfortunate if, in solving the need for additional pipeline capacity, we created overbuilt, underutilized pipeline capacity."

He rejected the NES proposal to merge FERC into DOE. "The issue of FERC ... is best left for another day and another legislative vehicle-if at all."

Stephen Wakefield, DOE general counsel, said the merger is necessary to coordinate natural gas policy within the executive branch.

Independent producers warned the NES goes too far in deregulating gas imports, but Wakefield said they have misunderstood the issue. "All we are seeking to do is remove a regulatory layer that has been a rubber stamp through the years."