Governors take widely varying looks at energy's role in economic strategies

US governors will bring a wider than usual range of energy ideas to the National Governors Association's 2009 winter meeting Feb. 21-23 in Washington as they grapple with a deepening recession.

US governors will bring a wider than usual range of energy ideas to the National Governors Association's 2009 winter meeting Feb. 21-23 in Washington as they grapple with a deepening recession.

Some continued to embrace development of alternative and renewable resources as their primary goal in state-of-the-state addresses to their legislatures during January and February. Others cited falling revenues as oil and gas production has declined, and ongoing efforts to increase supplies.

All expressed concerns about deep budget deficits. Several said they expect traditional, as well as future, energy sources to contribute as their states try to recover.

"When oil prices and state revenue are on the rise, as was the case, there's temptation to assume it'll go on rising forever, and to spend accordingly. Since prices fell, there may be an equal temptation to draw heavily on reserves or, for some, to be tempted to tap the permanent fund earnings or tax our hardworking families," Alaska Gov. Sarah H. Palin said on Jan. 22.

"No. With the budget, the aim is to keep our economy on a steady, confident course. The aim is, with discipline, [to] protect our reserves and promote economic growth," she continued.

Unless crude oil prices increase soon, however, Alaska is looking at a more than $1 billion revenue shortfall in 2009, Palin told her state's lawmakers. Spending will need to be cut where necessary, and it will take cooperation to see the state through this uncertain period, she said.

Changing projections

Preparation of Wyoming's proposed 2009 budget was under way in July 2008 when crude oil prices approached $150/bbl and there was talk of more than $1 billion of revenue, according to Gov. Dave Freudenthal. By October, the projected revenue was $900 million based on a $75/bbl oil price, he said. Freudenthal added that he was not comfortable with those numbers and started planning on the basis of $440 million of revenue.

"Well, in a matter of less than three weeks from the time I submitted my budget, it became clear that that was not a safe number, and so in January you had a new set of budget projections of $259 million," he said in his Jan. 14 address to the state's legislators.

"So we arrive here with a little unease with regard to the quality of the projections. We also arrive here in the context of having had a set of expectations that were built up not only within this body and within the executive branch of government, but a set of expectations that were built up in the public and in the interest groups about what we were able to fund and what we might be able to do," Freudenthal said.

For the first time, many Cowboy State lawmakers will have to tell constituents "no, and maybe not for a long time," he went on. "But, before we conclude that the sky is falling, let's just take a brief look back. The year I was first elected in 2003, the projected number for the price of oil was $18/bbl. The price of oil in these current projections which we find so dismal is $40. In '03 the projected price for natural gas was $2/Mcf. Today, in these projections we're operating on, it is $3.75," the governor said.

Voters' faith in stable oil and gas markets has been severely tested, Arkansas Gov. Mike D. Beebe noted. "Oil prices skyrocketed in 2008, and we shook our heads and sometimes our fists at the record prices we paid for gasoline and diesel over the summer. Six months later, we are shaking our heads again as those same prices plummet to levels we thought would never return. However, we know that [gasoline] prices won't stay low, because oil-producing countries won't let them. [The Organization of Petroleum Exporting Countries] has already reduced supply in an effort to bring back higher prices and increase profits," he said on Jan. 13.

Americans and Arkansans "can change the game" by continuing to develop alternative and renewable energy sources, and by conserving energy and operating more efficiently, he told his state's lawmakers. "State government will lead by example, conserving both our natural resources and our tax dollars," Beebe said.

New revenue source

He also saw unconventional gas production as a possible new revenue source because the state sits amid the Fayetteville Shale play. "This year, we will see new revenue from the severance of this natural resource, money destined to improve our highways. The amount of revenue is tied to the price of gas, which has swung just as wildly as oil prices. Still, we will see tens of millions of dollars in new money for state and local roads. Additionally, this money will fund new resources for the Arkansas Department of Environmental Quality to regulate and monitor these drilling operations and safeguard our natural state," Beebe said.

Faced with a projected $2.3 billion 2009-10 deficit, Pennsylvania Gov. Edward G. Rendell proposed a natural gas severance tax in his Feb. 4 budget address. "We have a Pennsylvania gold rush going on in the form of drilling for natural gas along what is known as the Marcellus Shale. Scientists now estimate that if we can extract just 10% of the gas that exists below ground in the Marcellus, it would be enough to supply the natural gas needs of the entire United States for two years. Experts believe that much of the most potentially productive portions of the Marcellus Formation exist right here in Pennsylvania," he said.

His plan calls for a 5% tax at the wellhead, plus 4.7 cents/Mcf produced, identical to one which has been collected in neighboring West Virginia since 1987. State planners projected that it would produce nearly $1.82 billion over five years. Oil and gas associations in the Keystone State warned that it potentially could destroy many current producers who have shallow, low-volume wells. The Pennsylvania Oil and Gas Association suggested that the state could raise about the same amount with annual lease sales on state forest lands.

Other states' chief executives said that they plan to continue existing energy expansion efforts. ""Two years ago, I talked about the New Energy Economy as a way to build wind farms in wheat fields and make our universities research leaders in renewable energy. Today, our New Energy Economy is not just creating a culture of sustainability, it's fulfilling the promise of a new energy future and a new economic future for all of America," Colorado Gov. Bill Ritter Jr. said on Jan. 4.

He said that he was working with the state's congressional delegation and with US President Barack H. Obama's administration to ensure that the federal recovery package includes funds for transmission lines. Within Colorado, Ritter continued, legislators have proposed bills which would require that all new single-family homes come with a "solar-ready" option, help finance business and residential clean energy projects, and develop a plan for wind and solar projects for rural schools.

A role for gas

"My thanks also to Colorado's traditional energy sector, which is a key part of our New Energy Economy. We have some of the richest natural gas reserves in the nation. We must ensure Colorado's gas continues to meet America's energy needs today and serves as a clean-burning bridge fuel for tomorrow. That's why I'm working with industry and others to include funds for gas pipelines in the federal recovery package," he said.

Ritter also said that he would ask the legislature to finalize regulations which the state's oil and gas commission passed in 2008 to improve oil and gas production practices. The Colorado Oil and Gas Association and other groups have said that the regulations are too restrictive and could halt production growth. The governor defended them. "I'm proud of the commission's work. They listened to every interested party and found the right balance. With these rules, Colorado companies and Colorado workers can successfully drill for gas, while our air, land, water, wildlife and communities are protected," he declared.

North Dakota, meanwhile, began to invest in the future of its oil patch years ago by providing tax incentives to attract new investment and encourage exploration, by establishing a research fund to promote directional drilling and other new technologies which are applied in the Bakken Formation, and by creating a pipeline authority to make sure refined products get to market and gas which was previously flared at the wellhead reaches consumers, Gov. John Hoeven said on Jan. 6.

"To recruit and train workers, we established a Center of Excellence for Petroleum Safety and Technology at Williston State College to build the workforce," he added. Basin Electric Power Cooperative is working with an environmental technology company on a project to capture carbon dioxide from the power co-op's plant at Beulah and pipe it to North Dakota's oil patch for enhanced recovery, he said.

"All of these efforts, and more, have helped to drive the growth and development of our petroleum industry in North Dakota. And it doesn't stop there. Whether it's coal, wind, or renewable fuels like ethanol and biodiesel, we are continuing to pursue aggressive economic development," Hoeven said.

'Stabilize supplies'

South Dakota Gov. M. Michael Rounds said that his state's government, businesses and residents can contribute to economic growth by using energy more efficiently. "But, in addition to all of that, on the larger scale, our state and our nation need to stabilize and hopefully decrease the price of gasoline and other transportation fuels. We also need to stabilize supplies of those transportation fuels for our farmers, ranchers, businesses, ourselves, and for the tourists who want to visit our state. That means becoming much more energy independent from the Middle East and Venezuelan oil supplies," he told legislators on Jan. 8.

He said that while South Dakotans are working hard to generate more energy from renewable sources, "huge supplies of renewable fuels for South Dakota and nationwide use will not happen overnight, nor will they be able to totally replace petroleum. Therefore, for our own security, stable prices, and adequate supply, the United States must start using more Canadian crude oil." TransCanada Pipelines Ltd. has proposed a pipeline system from Alberta through the Dakotas to Oklahoma and Illinois which would transport 590,000 bbl a day of crude oil from tar sands to US refineries, he noted.

Rounds said that he also began issuing executive orders to let fuel delivery drivers operate beyond their normal legal hours so gasoline and diesel fuel could reach customers in eastern South Dakota. ""Even with these efforts, last fall during our harvest, there was a time when most of the fuel pipelines supplying South Dakota and North Dakota were dry. Only one out of seven fuel terminals in South Dakota had fuel, and numerous gas stations were completely out of gasoline and diesel for more than 12 hours," he said.

"Ladies and gentlemen, this shortage was not caused by a natural disaster or cold weather. It was caused by a nationwide lack of refining capacity. And, it doesn't help us that we are at the end of most fuel distribution systems. We are going to have more and more supply shortages until we increase our refining capacity," Rounds told his state's lawmakers. Fortunately, South Dakota is a finalist for the Hyperion Energy Center, a complex which would include the first newly constructed US refinery since 1976, he added.

"The company is committed to this being the most technologically and environmentally advanced oil refinery in the world, and we will hold them to their promise. In South Dakota, we roll out the red carpet, not the red tape, to any new potential business, but we do not cut corners. I believe this new refinery would help stabilize gasoline supplies in the Midwest, and that will be great for our farmers, our businesses, and all of us," Rounds said.

Alaska's gas pipeline

Economic priorities should be a powerful incentive for Alaskans to think clearly and act decisively, not politically, in pursuing funding for the state's next major economic lifeline: the gas pipeline from the North Slope to markets in the Lower 48 states, according to Palin. Alaskans were told 30 years ago that it would be impossible to build the Trans Alaska Pipeline System, she pointed out. The massive new project involves challenges too, she continued, "but we can be confident in this enterprise because it's founded on the fundamental interests of our state and nation. America needs energy [which is] affordable, abundant and secure. With international conflicts, war and environmental concerns, laws and markets seek safe, clean energy, and that's what we offer. The last president supported a gas line, and so does the new president."

Without revenues from gas development, Alaska won't be able to fund its priorities and financial reserves will be depleted within a decade, she warned. "Working together, we're developing a 10-year plan to keep a healthy balance in the Constitutional Budget Reserve. We're laying up stores, until strong revenue comes in with the flow of natural gas to feed hungry markets here and outside," she said.

"In Alaska, all roads lead . . . to the North Slope, and to the central importance of our North American gas line. America's security, Alaska's revenue, Alaskan careers, affordable fuel, even our ability to finally diversify our economy – all these hinge on the success of this great undertaking. I assure you: The line will be built. Gas will flow. Alaska will succeed," Palin declared.

Ironically, while the state has the largest US oil and gas supplies and is working to build a pipeline to deliver 4.5 billion cubic feet of gas daily to markets farther south, Alaska's governor said that its citizens are more vulnerable than other Americans to fluctuating energy prices. "The solution for our state is much the same as for the rest of our nation, only the source is ours and much closer to us, so delivery can come sooner. We're facilitating a smaller, in-state gas line with legislation we'll hand you next month. My goal for this in-state line is completion in five years. It will carry 460 million cubic feet of gas every day to energize Alaska," she said.

"Previously, we've relied on a diminishing gas supply from Cook Inlet, expensive diesel fuel, a mix of government subsidies, and not enough conservation, but that is not sustainable. And it shouldn't take another spike in energy costs to stir us into action. Alaska will help achieve energy independence and security for our country, and we can lead with a long-needed energy plan for America. But let us begin with energy security for ourselves. This includes meeting my goal of generating 50% of our electric power with renewable sources. That's an unprecedented policy across the US, but we're the state that can do it with our abundant renewables, and with Alaskan ingenuity," Palin said.

Contact Nick Snow at nicks@pennwell.com

More in Refining