Are Political Games Destroying Domestic Oil & Gas Industry?

January 2011 Vol. 238 No. 1

Carol Freedenthal, Contributing Editor

Changes announced on Dec. 1 of the administration’s new ruling banning offshore drilling along the East Coast and eastern sector of the Gulf of Mexico for five to seven years only further amplify industry’s questions of what the administration really wants with domestic oil and gas exploration and production companies. The continued changes to the offshore “drill – no drill” and potential changes in onshore production only further the uncertainty of U.S. oil and gas production and the desire to get closer to energy independence.

Uncertainty is the most toxic element to capital-intensive industries like oil and gas companies. For the millions and billions of dollars and the immense risk taken in prospecting for hydrocarbon supplies, uncertainty will kill the best company and its intentions. The day after the mid-term elections, President Obama made an issue of both parties cooperating in developing energy policy especially in energy projects to “advance cleaner-burning natural gas, electric cars, and nuclear power.”

Then, just a month later, Interior Secretary Ken Salazar announced a new moratorium on East Coast and eastern Gulf of Mexico offshore drilling. He claimed more time was needed to learn all the elements of April’s Deepwater Horizon disaster and develop new rules and regulations to prevent such an occurrence.

This latest flip-flop to halt American exploration and drilling for oil and gas in the offshore areas is especially interesting for a couple of reasons. First, in March, the administration opened some offshore areas to new exploration and drilling! While the motivation for this action may have been purely political, it did show the interest to open up new areas for E&P.

Further, to restrict E&P activities for a five-to-seven-year period on strictly the authority of executive fiat is questionable. There were no public hearings or congressional discussion of the merits – only a complete stop to further action for five to seven years while “what happened and who dunnit” is argued. That period could be the death knell for the offshore oil and gas industry.

When the drilling rig collapsed and the oil spill occurred, a six-month moratorium was announced for deepwater drilling. Salazar claimed his scientific advisory committee made the recommendation, which it denied. Two federal court rulings rejected the moratorium but this was handled easily by rewording the executive order.

The new moratorium, along with the slowness in reviewing and accepting all offshore drilling permits – deepwater and shallow – is so different from the rest of the world. Many countries and foreign oil and gas companies are going all over to tie up oil and gas leases in offshore locations. While the U.S. does its “wait and see,” the rest of the world is moving fast.

There is no shortage in offshore opportunities around the world as Africa, Brazil and other countries ramp up their operations. One problem of the government’s actions is that many of the rigs now sitting idle in the Gulf will be moved to active operating areas around the world. Once lost, they are gone for years, not just weeks or months. The loss of employment and impact on other businesses are severe.

Interestingly, Norway, which also has a major oil and gas offshore industry, was studied to see what it was doing in light of the Gulf disaster. Though operating in the North Sea is a notch above operations in the Gulf, Norway is not stopping its oil and gas offshore activities. Yes, they are reviewing what is done – how well it is monitored – how it could be safer but, no moratorium – operations are continuing.

Even the areas of the Gulf that are not considered “deepwater” are seeing a slowing in ability to start operations as permitting and regulatory procedures are taking much longer and rules are still in the developmental phase. “Permitorium” – a term used by Houston Chronicle business writer Loren Steffy, is just as effective as a moratorium in stopping oil and gas development. Nothing is being done to accommodate the rapid deployment of rigs, workers, and operations to help the country’s energy supply, improve U.S. employment, and the economy overall.

According to the Chronicle, shallow water drilling applications have fallen from 92 in 2008 to 22 in 2010. Wells approved have dropped from 90 in 2008 to only 19 in 2010. The changing rules and regulations have caused many operators to stop activities at least temporarily. While the additional delays from the regulatory agency have caused most of the decline, decreased natural gas prices have also played a role in the lack of activity.

And, to make it even more confusing, Salazar announces the Interior Department is considering imposing new regulations on hydraulic fracturing on public lands. Congress had asked to meet with him before enacting any new rules in order to study the overall impact.

The rest of the world, including many state-run energy companies, are running pell-mell to line up new supply sources of the very same fossil fuels. A group of Chinese and Cuban companies will be drilling and producing in the Atlantic way before the U.S. allows its first bid.

In this reign of indecision, it is impossible for an industry like oil and gas exploration and development to thrive. The impact on the economy from the moratorium is immense both in money, employment, and energy independency. All that is being done by the government is contrary to the administration’s own goals of making America energy-independent, increasing employment, and developing the cleanest burning fuels.

Regardless of how it is “wrapped,” it seems clear the administration is against fossil fuel development. Fossil fuels, which provide the country roughly 75% of its energy, are lumped together from coal, to natural gas, to crude oil. They are considered by some as dirty and environmentally bad in the production processes, conversion into fuel, and burning.

The major “green fuel” to date, ethanol from corn, is an economic failure on all accounts. Its fuel qualities are poor and its impact on fuel economics and environmental concerns make it marginal. Its impact on food economics is bad. Only the government subsidy per gallon of fuel and the import excise tax for importing supplies make it viable.

The administration continually stresses the dream of “green energy” quickly replacing fossil fuels. Problem is that is only a dream. If the country does not wake up soon to the impossibility of “overnight” replacing fossil fuels, it could be a nightmare!

Stop for a minute and look at the magnitude of what needs to be replaced. The U.S. uses around 20 million barrels of crude oil a day – of which 60% is imported. Natural gas consumption is roughly 60 Bcf/d and coal is 2.7 million tons per day. This enormous quantity of material is produced from the earth, refined and processed into usable fuels to meet demand. To change the fuel slate – assuming there is some miracle new fuel available whether it is a crop-driven alcohol, wind and solar, or even something far out like oil from algae – will take many years. Assuming there is something that can do it!

Meanwhile, fossil fuel is a necessity. Man’s progress is directly proportional to energy. For the U.S. to maintain the leading standard of living, energy is absolutely essential.

So far, the energy policy used by the administration is by executive order either through the Department of Interior, the Environmental Protection Agency or another regulatory body. Congress has not had an opportunity to fully evaluate or control the country’s endeavors. The only energy bill so far was “cap-and-trade” which won in the House but never reached the Senate floor.

Some of the action taken by the government is coming without public review or evaluation. Congress, which better represents the voice of the people, should have a say in these orders and regulations.

What is needed with the start of 2011 is for the elected bodies of the government to develop an energy policy based on reality, economics, environment, and on meeting U.S. demand. It should incorporate all possible fuels from all sources whether it is fossil, wind, solar, nuclear, etc.

As economic and environmentally acceptable fuels are developed, the least desirable ones will be discarded. Politics and ideology based on erroneous conclusions should not dominate the decision making. Sound economics, technology, and resource availability should be the forces behind the energy policy – something that has been absent from prior energy policies regardless of party!

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