What the industry expects in 2007

Offshore energy must cope with evolving political environment

Christopher T. Seaver, Chairman, President and CEO, Hydril Company, and Chairman, National Ocean Industries Association, Houston

The 2006 midterm elections are now behind us, as Washington, DC, actively prepares for the 110th Congress to begin in January. Democrats hold majorities in both houses for the first time in 12 years. Yes, it appears that due to this power shift, E&P companies face an uphill challenge to securing increased access to hydrocarbons on the Outer Continental Shelf (OCS). But a deeper look at the politics, including factors beyond the Beltway in state houses nationwide, shows there is reason for cautious optimism.

“Lame duck” legislation. Despite a major electoral shift delivered by voters on Nov. 7, important work could still be done in the old Congress before the holiday recess. Following the election, Senate Democratic leaders promised to work with Republicans in Congress’ “lame duck” session on legislation to expand offshore drilling. “I think it’s so important that we complete the work we did in the offshore drilling,” said new Senate Majority Leader Harry Reid (Dem.-Nevada). Reid partially supported expansion of OCS drilling by backing a Senate-passed bill that opens the eastern Gulf of Mexico’s (GOM’s) Lease Sale 181 area, and a tract to its south. It also shares royalties with four offshore leasing states – Alabama, Louisiana, Mississippi and Texas.

Sen. Mary Landrieu (Dem.-La.) has also urged passage of the Senate bill, without it being held over and wrapped into a package in the next Congress, because handling the issue separately is more appropriate. She stresses the need for revenues that the bill provides to help with Gulf Coast rebuilding. Incoming Speaker of the House Nancy Pelosi (Dem.-Calif.) could also support passage of the Senate plan, if it does not set a precedent for expanding drilling elsewhere.

The Senate passed legislation in August that opens 8.3 million GOM acres to new leasing, including part of the Lease Sale 181 area and an area to its south. The more expansive House bill passed in June would expand Gulf access and relax offshore leasing bans on most coastal areas outside the Gulf. The House plan allows drilling in all areas beyond 100 mi from state shores, while states could allow or block drilling closer to shore. House drilling advocates offered a compromise allowing several East Coast states to opt out of coastal leasing moratoria. Senate negotiators have said they could seek a smaller amount of additional leasing beyond their bill. Talks have also addressed how to reform offshore royalty relief incentives.

The impasse was strongly criticized by some consumer groups that were among NOIA’s most vocal allies in pushing for greater OCS access. An American Chemistry Council press release said that “[t]his summer, both the House and Senate passed bills that would – for the first time in 25 years – expand the nation’s access to its own abundant energy supplies in the (OCS). Such legislation is vital to help reduce and stabilize energy prices, preserve jobs, strengthen the economy and enhance security by reducing dependence on unstable or unfriendly foreign nations for energy. Yet, ...the House and Senate have not come to agreement on a bill to be sent to the President.

“The natural gas crisis is self-inflicted, caused by 25-year-old federal policies that drive up demand while restricting access to American energy supplies. We are the (only) industrialized nation that puts energy supplies off-limits....When Congress returns this fall, energy supply legislation belongs at the top of its priority list.”

MMS five-year plan. Most practical, operational decisions about offshore leasing are made by the Interior Department’s Minerals Management Service (MMS). MMS is preparing its 2007-2012 5-Year Leasing Program, and expanded access proponents have weighed in heavily during public comment periods. For example, anti-drilling forces submitted over 12,000 comments on the draft program, but MMS also received over 26,000 public comments favoring more access. Offshore energy firms, their employees and retirees, and end-use consumer coalitions from manufacturing and agriculture were vital in the latter number.

As a result, the evolving 5-Year Program has been developed more comprehensively than before. It includes new areas outside the Central and Western Gulf of Mexico for the first time in decades, as well as plans for leasing offshore Virginia and in Alaska’s Beaufort Sea, so that development can move forward if moratoria are lifted. However, the proposal still offers only 12% of the OCS for lease. We must continue fighting for that 12% and come back later to seek access to the remaining 88%. This process shows that the administration and its agencies still play a critical role in defining the scope of offshore operations.

Cultivating states’ involvement. Another battleground is forming at the state level. In 2005, Virginia’s legislature broke with decades of opposition to offshore drilling by passing a resolution asking the governor to lobby for a lifting of offshore moratoria. Rejected by then-Gov. Mark Warner on procedural grounds, this effort was passed again this year and accepted with some alteration by Gov. Tim Kaine.

Last May, Gov. Kaine signed into law the Virginia Energy Plan, which “provides that it is the Commonwealth’s policy to support federal efforts to determine the extent of natural gas resources 50 miles or more offshore and to support inclusion of the Atlantic Planning Areas in the MMS 5-Year Plan.” Impetus for this bill came from proponents recognizing that cultivating a Virginia offshore industry would spur economic development and address the rising cost of natural gas that adversely affects US industry’s competitiveness.

Building on Virginia’s example, coalitions of energy producers and consumers have reached out to educate state leaders on negative economic impacts caused by restrictions on offshore development. The National Ocean Industries Association (NOIA) has participated in a national effort to inform state houses and business leaders of the importance of OCS access. Over the past year, NOIA staff visited 13 states to promote lifting of OCS moratoria and coordinate outreach.

NOIA also works with the Agriculture Energy Alliance. This broad coalition of more than 110 farm groups and agribusinesses includes the US Farm Bureau, wheat and corn growers, agrichemical and fertilizer firms, farm bureaus, rural electric cooperatives, and manufacturing and pharmaceutical companies. These groups visit with governors’ offices, state legislators, county and business officials, and farmers and agribusiness directors. The promise of OCS development versus the hurdles imposed by high energy prices is a message that resonates.

Visits like these helped to pass four separate state resolutions in Idaho, Kansas, Oklahoma and Tennessee, and generated two legislative letters (in Arizona and Utah). Alone, these efforts do not lead to formal federal policy changes, but they do send a vital signal from state leaders to congressional delegations about folks’ intent back home. When Virginia undertook such a step, both senators became vocal supporters of offshore energy legislation.

In 2007, such efforts will push for more state resolutions and letters. Next month, South Carolina’s legislature should introduce an offshore energy study bill, based on Virginia’s example. Neighboring Georgia should also roll out a comprehensive energy strategy that includes an offshore component.

The politics of energy. Regardless of where it is debated, the story that industry must tell to policy makers remains the same. It begins with a review of supply and demand. Unquestionably, 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 2025,¹ while US demand could jump over 30% in the same period.² Developing nations will also require greater amounts of energy as they modernize economies and raise the quality of life.

Therefore, where will this energy come from? Some will come from renewables – we should continue to push for rapid research, tax incentives and development. But widespread use of wind, solar and biomass is still far off and may replace only a small percentage of demand in the next 20 years. Hydropower still accounts for about 5% of US power generation, but it lacks major expansion opportunities. Nuclear power supplies about 20% of US electrical generation capacity and is a potential new supply source, but negative public perceptions could impede expansion. Also, oil and gas supply is more challenged by increasing decline rates. Operators are finding smaller reserves than in the past, and major fields will inexorably decline.

This makes OCS resources even more important. We can not afford to keep 85% of the OCS off-limits to exploration, particularly when the biggest misconception about our industry is environmental. Technology used by the industry is already environmentally safe, a point that cannot be reiterated enough.

The industry has built a record of safe, clean operations over the last 25 years, as noted in a National Academy of Sciences study. Less than 2% of oil in US waters comes from drilling and production. Oil transport by tanker is four times more likely to cause a spill, and 30 times more oil comes from land-based sources. Between 1985 and 2000, 6.3 billion bbls of oil were produced in US offshore waters. In that time, noted the Coast Guard, less than 0.001% spilled. Safety extends to hurricane conditions. During the 2005 hurricanes, less than 100 out of 4,000 total GOM platforms were destroyed. There were no injuries offshore, and the Coast Guard reported no significant spills of oil from offshore storm damage – not one drop of oil reached the shore.

Within federal agencies, among state leaders, and in congressional sessions, industry and energy-consumer coalitions must vigorously push for expanded offshore access. The need is great for these resources, and the industry has the technology and experience to bring them safely to market.

LITERATURE CITED

¹ Annual Energy Outlook 2005, Energy Information Administration, Washington, DC, November 2004.
² Ibid.

THE AUTHOR
	Christopher T. Seaver is Hydril’s chairman, president and CEO. He was named chairman in November 2006 and has served as president since June 1993, and as CEO and a director since February 1997. He is chairman of NOIA, first vice president of PESA and a director of API. Prior to joining Hydril in 1985, Mr. Seaver was a corporate and securities attorney for Paul, Hastings, Janofsky & Walker, and was a foreign service officer in the US Department of State, with postings in Kinshasa, Congo and Bogota, Colombia.