What's Ahead in 2006

The teachable moment: A chance to alter OCS energy policy

Jon Marshall, President and CEO, GlobalSantaFe, and Chairman, National Ocean Industries Association, Houston

As the year ends, the US offshore oil and gas industry can look back on 2005 as a year that brought not only tremendous challenges, but also created an opportunity for finally breaking the logjam that has characterized Outer Continental Shelf (OCS) energy issues for nearly a quarter-century.

Widespread hurricane destruction in the Gulf of Mexico (GOM), increased activism by energy consumers, and legislative innovation in a number of states, led to a growing comprehension by the “man on the street” of how energy policy affects his daily life. A September poll by the Pew Research Center for the People & the Press indicated some shifting attitudes. Fifty-seven percent of respondents said developing new energy sources is now more important than protecting the environment, up from 49% last March.¹

It appears that we have arrived at something referred to by Secretary of the Interior Gale Norton as “a teachable moment.” Now is the time when our industry has the best chance to change the debate structure, and make strides in opening more areas to offshore E&P. This crossroads could change the political situation we face, where increasing amounts of US money are sent to other countries, while the nation ignores its own OCS potential through misplaced fears of environmental destruction. We must maintain momentum and continue to tell our story as widely and frequently as possible.

But what is this story? First, while reliable oil and gas supplies are vital to economic health, the US still limits resource access. Second, the energy industry is misunderstood. Its positive impact on communities requires a more thorough explanation. Finally, offshore E&P has a strong employee and environmental safety record.

Demand for energy is rising. That story begins with a basic review of supply and demand. There is no question that demand is rising, both in the US and globally. At current projections of world GDP growth, global energy demand may increase by over 50% by 2025,² while US demand could increase more than 30%.³ Developing nations will, likewise, require greater amounts of energy, as their economies modernize and raise the quality of life.

Addressing supply limitations. The strategic question is: Where will this energy come from? Some will come from renewables, for which we should keep pushing for rapid research, tax incentives and development. But widespread use of wind, solar and biomass is still far off. They will likely replace only a small percentage of demand over the next 20 years. Hydropower in the US should continue to generate about 5% of electricity, but it lacks major expansion opportunities. Nuclear power supplies about 20% of US generation capacity and is a potential source of new supplies, but negative public attitudes could impede expansion.

Oil and gas supplies will become more challenged, due to increasing decline rates. Operators are finding smaller reserves than in the past – the last field capable of producing more than 1 million bopd was found in 1976. Major fields will inexorably decline.

Meanwhile, output is hampered by increasing political and fiscal barriers. Venezuela’s quasi-nationalization of oil fields is but one example. There are similar political barriers limiting production at home, and here is where we must focus our attention. One clear example of these barriers is current US OCS moratoria. While demand continues to rise and consumers are pummeled by rising prices, nearly 80% of the OCS is off-limits to E&P. With rising energy prices, how can Congress still justify this ill-conceived policy?

Beyond supply and demand. A simple discussion of the economics of supply and demand, however, does not adequately capture the human dimension of energy policy. Access to reliable, affordable energy is the foundation for improving standards of living, and it would be immoral to hinder this.

Petroleum products and natural gas are widely appreciated as crucial to transportation, heating and power generation, but few understand their role in the manufacture of products as diverse as fertilizers, food preservatives, shampoo, pantyhose, crayons and pharmaceuticals. Consistent, affordable energy is vitally important to our way of life.

What about those employed by the industry? A Bureau of Labor Statistics analysis found that the E&P industry employs more than 123,000 people directly, and another 120,000 are indirectly employed. If offshore activity could expand to states under moratoria, there would be excellent opportunities for job creation and sustainable economic growth. And these are quality jobs. The Bureau said that our industry’s wage and salary earnings are more than 30% higher than average. Average hourly earnings of non-supervisory oil and gas workers are $19.27, compared with $14.95 for workers in private industry, overall. Petroleum engineers can expect to earn over $50,000 in their first year after graduation.

Most people think of large corporations when oil and gas are mentioned, but few outside the industry are aware that offshore development also incubates small businesses. Many service/ supply companies that play vital offshore roles are small businesses. About seven out of 10 such firms employ fewer than 10 workers.

When Hurricanes Katrina and Rita battered the Gulf Coast earlier this year, offshore companies – large or small – helped their employees and their families recover. Some companies extended loans, others built tent cities and brought in food and water; some distributed generators. Others donated tens of millions of dollars to humanitarian efforts like the Red Cross.

An enviable safety record. The biggest misconception about our industry relates to the environment. A point that must be communicated again and again is that offshore technology is already environmentally safe. Over the past 25 years, the industry has built an enviable record of safe, clean operations, as noted by the National Academy of Sciences’ Oil in the Sea III study (2002). Less than 2% of oil in US waters comes from drilling and production. Tanker transport of oil is four times more likely to cause a spill, and 30 times more oil comes from land sources.

Between 1985 and 2000, 6.3 billion bbls of oil were produced in federal waters, and the US Coast Guard said that less than 0.001% spilled – a 99.999% record of clean operations. That safety extends to the recent hurricanes, when less than 100 of 4,000 GOM platforms were destroyed. There were no injuries offshore, and the Coast Guard reported that there were no significant oil spills from offshore storm damage. As noted by Secretary Norton, “not one drop of oil reached the shore.”

The industry also contributes great sums to the public treasury. A record $1.7 billion were distributed to 35 states during fiscal year 2005, as their shares of Minerals Management Service (MMS) revenues. In addition, the industry paid $5.4 billion into the US Treasury, as well as $2.3 billion into the Land and Water Conservation Fund. Finally, the industry is a major contributor to environmental protection. In 2003 alone, per an industry study, E&P firms spent $10.1 billion to protect the US environment.⁴

Defining the audience. The next step is to determine who should hear this story of supply and demand, personnel and safety. We should communicate with several key constituencies.

Industry’s most important task in the coming year is to help prepare MMS’s 5-Year Plan, which determines where and when companies can lease ocean parcels for E&P work. Our industry must be vocal in ensuring that the next 5-Year Plan contains an appropriate amount of flexibility to cope with energy demand spikes and other uncertainties by expanding access to offshore hydrocarbons.

Congress is another key audience, as it continues to consider various pieces of energy legislation. Last July, Congress passed the Energy Policy Act. While the new law will help address royalty and incentive issues at the margins of energy policy, the Act failed to address the limitations on access to the 80% of the OCS under moratoria.

In November, efforts began in the House of Representatives to address this supply question. The budget reconciliation bill contained language that allowed individual states to “opt-out” of OCS bans, to allow leasing and receive a substantial royalty. These provisions were stripped from the House-approved, formal budget reconciliation bill, but there may be another chance to tackle access questions in February, when Sen. Pete Domenici (Republican-New Mexico) has promised to take up the OCS moratoria issue. Industry needs to weigh in heavily, to ensure that policy-makers understand our story as they tackle issues that will define our operations for years to come.

Not all work should focus on the federal level. Recent actions in Virginia indicate that the access debate is hitting the state level and the grassroots. This year, Virginia State Sen. Frank Wagner (Republican) secured passage of a resolution to remove Virginia’s offshore moratoria. Although the effort was vetoed on a procedural point, Sen. Wagner showed us how to shift some focus to talking with state leaders.

Also notable is the growing involvement of trade and consumer groups, such as American Gas Association, National Association of Manufacturers, American Chemistry Council, and American Farm Bureau. These energy end-users are changing access politics by offering strong testimony on the economic consequences of tight supply and rising prices. They are also energizing grassroots networks to convince policymakers of the importance of energy policy in people’s daily lives.

Conclusion. For the first time in nearly 25 years, there is an opportunity to change the slant of the offshore debate, breaking the current logjam. Together, rising costs, hurricane damage, legislative momentum, the 5-Year planning process, and the involvement of new allies provide a unique opportunity to tell our story. We must make the most of this “teachable moment.”

LITERATURE CITED

   ¹   Geman, Ben, “Soaring energy prices strengthen push for domestic oil drilling,” Greenwire, Nov. 7, 2005, [http://www.eenews.net/Greenwire/Backissues/110705/110705gw.htm]

   ²   Annual Energy Outlook 2005, Energy Information Administration, Washington, DC, November 2004.

   ³   Ibid.

   ⁴   “U.S. Oil and Natural Gas Industry’s Environmental Expenditures: 1994 – 2003,” American Petroleum Institute, Washington, DC, [http://api-ec.api.org/filelibrary/FinalEES02.pdf] (accessed Nov. 8, 2005)

THE AUTHOR

Jon A. Marshall is president and CEO of GlobalSantaFe and has been with the company for more than 24 years, beginning his career with Global Marine as a roustabout in 1979. After holding numerous operational and managerial positions, he served as president of the operating subsidiaries, ADTI, CMI and Global Marine Drilling Company. In 1998, Mr. Marshall was promoted to the position of executive vice president and COO of Global Marine Inc. In November 2001, he was appointed to the same position within GlobalSantaFe. Mr. Marshall earned a BS degree in engineering from the US Military Academy at West Point, New York.