What's Ahead in 2005

Industry must be proactive on policy to ensure success

George Boyadjieff, Chairman Emeritus and Director, Varco International, Inc., and Chairman, National Ocean Industries Association, Orange, California

Meeting US energy needs is our industry's vital mission. Offshore oil and gas output supplies nearly 30% of the country's energy, and it may be called on to produce more.

Our industry's outlook for 2005 is promising, but challenges lay ahead. Success depends on progress in three areas. First, we need to remain focused on technological innovation to recover greater quantities of oil and gas. Second, we must make a concerted effort to get the message out about our tremendous success in operating in an environmentally sustainable manner. Third, we must strive to be active in policymaking dialogues governing our activities, particularly in Washington, DC.

We are in an exciting era. Demand continues to increase, and crude prices have climbed to over $50/bbl as of this writing. These developments have led to ever-intensifying competition, as industry strives to recover scarcer resources within the narrow confines of offshore areas not held in moratoria. In the E&P industry, the race has always been to the swift, but recently the entire race has doubled in speed.

Deepwater issues. This heightened competition has spurred advances in offshore drilling and exploration technology that have focused attention on deeper waters. The industry has been practically doubling the definition of deep water every 10 years. Initially, the definition of deep water was the maximum depth to which a scuba diver could descend. By the 1970s, many companies had developed production capability in depths of up to 1,000 ft. In the 1980s, that depth swelled to 2,500 ft, and the following decade saw activity explode in the 5,000 – 6,000-ft range.

Now, 10,000 ft and beyond appears to be the frontier of deep water or ultra-deep water, as it is sometimes called. As oil and gas producers move off of the continental shelf and into the deep, the challenges are increasing, yet technology is rising to the occasion.

Rapid developments are also being made in determining where hydrocarbon deposits may lie. Petroleum companies have always put an enormous amount of research into developing better seismic techniques for detecting the presence of hydrocarbons. As operations move into ever-deeper waters, the accuracy of such techniques is difficult to maintain, and the expenses associated with such data collection continue to mount. Technology is rapidly being revolutionized to keep pace with industry demands.

Despite tremendous accomplishments, however, business growth through technological innovation, alone, will not be enough. Next year will see continued debate in Washington on a number of issues critically important to our industry. We need to be attuned to developments as they occur and be willing to weigh in, because public comment is a critical component of the policymaking process.

For our industry to have a seat at the table, we must communicate the extraordinary accomplishments that have been made in environmentally safe operations. Despite an enviable record of industrial safety and environmental performance, less than 20% of the US Outer Continental Shelf (OCS) is open to energy exploration because of misperceptions that our industry poses a serious threat to pristine beaches and wildlife. The opening of promising new OCS lands to development remains politically explosive.

Environmental record. We need to ensure that regulators, policymakers and the general public are aware that the National Research Council found that less than 2% of all the petroleum entering the marine environment comes from offshore energy development (including pipelines). Additionally, the US Coast Guard has shown that, although 6.3 billion bbl of oil were produced in federal waters between 1985 and 2000, less than 0.001% was spilled – a 99.999% record for clean operations. The US offshore industry must retake the high ground on environmental issues. We must make the case for expanded access.

OCS planning. Next year, the Bush administration will begin creating the next Five-Year Outer Continental Shelf (OCS) Leasing Plan. This plan determines where and when companies can lease offshore parcels. Areas included in the plan are considered for leasing, but need not be leased. Areas not included in the plan, however, may not be leased.

The current five-year plan is one of the smallest, most limited ever issued. We must actively participate in this plan creation, ensuring that the next five years build in the appropriate amount of flexibility to cope with energy demand spikes and other uncertainties by expanding offshore access.

Formulation of the next five-year plan begins this month, when MMS publishes a notice announcing the start of the planning process. This will be followed by a 45-day comment period, after which MMS will put together a more complete, draft, proposed leasing program. Scheduled for release next June, this will be followed by a 60-day comment period. These public comments are a critical opportunity for us to be proactive and make our voices heard, and ensure that our input is incorporated into the next plan.

Infrastructure renewal. Another issue that we must bring to Congress' attention is the need for serious, far-reaching investment in aging, US energy infrastructure. This means investing in the roads, pipelines and other infrastructure necessary to move energy supplies to consumers and businesses. Since passage of a comprehensive energy bill no longer seems likely, industry must maintain pressure on Congress to tackle specific aspects in more targeted legislation.

For too many years, Washington has spent the dollars reaped from offshore output without channeling enough of these revenues back to the people, communities and states that host the industry, work on the platforms, drive the trucks, and support America's energy production. Congress should consider formulating a bill that allows these communities to share in a proportional sum of the benefits of energy production – one that provides needed spending on infrastructure renewal and impact mitigation.

Federal vs. state priorities. The recently released final report of the US Commission on Ocean Policy, An Ocean Blueprint for the 21st Century, made 212 recommendations to Congress, the President, the Executive Branch agencies and numerous other actors to develop a comprehensive, coordinated ocean policy for the nation. This is the first time in 35 years that such an effort has been undertaken. Among those many recommendations are a number that directly affect the offshore industry. Thanks to the input our industry provided to the commission over its three years of work, the bulk of recommendations make good sense and deserve our support.

But the devil is in the details. In the coming year, President Bush will submit his reactions to the commission's report to Congress, and implementation will get underway. Already, a number of ocean-related pieces of legislation have been introduced, and more are likely when the 109th Congress convenes next year. Our industry needs to follow these proposals' progress and ensure that our views and requirements are well represented.

The same is true for monitoring implementation of these proposals. One specific example to consider is that the Ocean Commission called upon Congress to reauthorize the Coastal Zone Management Act. This act was passed with the laudable intention of creating a national program that encourages states to manage and balance competing uses of, and impacts to, coastal resources. However, states have used the law to stall or halt offshore development on public lands by taking advantage of loosely worded passages within the statute and regulations to enmesh offshore lessees in a never-ending loop of permit approvals and appeals.

States need to have a say in decisions that affect them, but the current situation invites abuse. We need a more fair and timely process for reviewing oil and gas projects. It should take into account state objections but not grant them broad authority to veto energy projects in federal waters seaward of the objecting state's coastal zone. The national interest must be overriding.

The coming year's set of tasks is by no means easy, but, if we succeed, the outlook for 2005 and beyond is promising.

THE AUTHOR
	George Boyadjieff is chairman emeritus of Varco International and chairman of the National Ocean Industries Association. He joined Varco in 1969 as chief engineer, was appointed CEO in 1991 and remains a director of the company. He has held numerous positions during his 33-year career at Varco, including vice president of operations, division president, corporate president and COO. Mr. Boyadjieff holds over 50 US patents, many of them contributing substantially to Varco's revenue growth. He began his career working for Lawrence Livermore Laboratory as a research engineer. He also worked for Bendix Corp., now a part of Honeywell, as an aerospace project engineer. Mr. Boyadjieff holds BS and MS degrees in mechanical engineering from the University of California at Berkeley. He serves on a local hospital advisory board, as well as on the advisory board of the business school of California State University at Fullerton. In addition, he is on the board of the Petroleum Equipment Suppliers Association.