The first step toward energy independence?

Lawrence Dickerson

In January 1974, President Richard Nixon said “Let this be our national goal: At the end of the decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation going.” At that time, the nation was importing 35% of our oil.

Five years later, during President Jimmy Carter’s “Crisis of Confidence Speech” he said, “I am tonight setting a clear goal for the energy policy of the United States. Beginning this moment, the nation will never use more foreign oil than we did in 1977 - never.” Three years after President Nixon’s speech, our country’s oil imports had increased to 47.8%.

In 1991 when President George H. W. Bush released his National Energy Strategy, he said, “When our administration developed our national energy strategy, three principles guided our policy: reducing our dependence on foreign oil, protecting our environment, and promoting economic growth.” By 1993, our oil imports reached 50%.

During President George W. Bush’s State of the Union address in 2003, he said “our third goal is to promote energy independence for our country, while dramatically improving the environment.” Today, we import more than 60% of our nation’s oil. What steps have we taken as a country to reduce our dependence on foreign imports while increasing domestic production?

Are the times changing?

It was once said, “Some people make things happen, some watch while they happen, and some wonder ‘what happened?’” On Dec. 9, 2006 shortly after midnight on a Saturday, members of the Senate from both sides of the aisle agreed 79-9 to allow offshore drilling in 8.3 million acres in the Gulf of Mexico as part of a tax and trade package. This historic legislation was the culmination of years of trying to approve some sort of offshore legislation that included a five decade battle to give Gulf Coast states a share of royalty payments for oil and gas produced off their shore.

During the signing President Bush said “This bill will help expand and diversify energy supplies. The bill will increase America’s energy security by reducing dependence on foreign sources of energy...Meeting the needs of our growing economy also requires expanding our domestic production of oil and natural gas. If we want to become less dependent on foreign sources of oil and gas, it is best we find some here at home...By developing these domestic resources in a way that protects our environment, we will help address high energy prices, we’ll protect American jobs, and we’ll reduce our dependence on foreign oil.”

One month later on Jan. 9, President Bush for the first time in 25 years, lifted the Presidential withdrawal from leasing in two areas. The first area was in the North Aleutian Basin in Alaska and the second in the “181 South Area” in the central Gulf of Mexico.

The Presidential withdrawals had been in place since 1990. In addition, Congress had imposed appropriations moratoria on oil and gas activities off the coast of Florida and in the North Aleutian Basin of Alaska. In 2004, at the urging of the Alaska Senators, Congress discontinued the yearly moratorium for the North Aleutian Basin. In 2006, then-Alaska Governor Frank H. Murkowski and other local government and Native Alaskan leaders expressed support for modifying the Presidential withdrawal in the North Aleutian Basin.

The Aleutians East Borough’s Administrator, Bob Juettner, said developing the offshore oil and gas presents “a wonderful opportunity” to bring jobs to the area and help the economy which has declined because of competition from foreign fisheries and the growth of farm-raised salmon.

This legislation did not come easy. Earlier in the 109th Congress, the House of Representatives passed a broader bill that would have allowed oil and gas development along most of the nation’s coasts. The House bill would have repealed the leasing moratoria while allowing revenue sharing. In addition, the states would have had the flexibility to decide whether the federal government would allow energy exploration and development out to 100 mi from the coast. The next 100 mi would have been decided solely by the federal government.

The Senate considered a series of domestic energy bills, but settled on Senate Bill S 3711 after a compromise was crafted to gain support from Gulf Coast lawmakers looking for a share of the revenues and Representatives from Florida that wanted to ban leasing off their coasts. After the Senate passed their bill, House negotiators said they would oppose this legislation as it would accomplish little more than what had been proposed by the Minerals Management Service in the upcoming Five-year plan. Eventually, the House agreed to accept the Senate bill, which was attached to the tax bill.

This legislation would not have been possible if it wasn’t for the numerous trade groups representing the manufacturing, chemical, utility and agricultural industries who advocated for House and Senate leaders to pass an offshore bill. Because of the high energy prices, particularly for natural gas, the economy has lost more than 2.8 million jobs since 2000. The chemical industry alone has lost more than 100,000 jobs and high energy prices resulted in the closure of 70 chemical facilities in 2004. And, since 1999, 40% of the U.S. fertilizer industry has been shut down or mothballed and the industry has been forced to move production to other countries, creating a threat to our food security.

How the bill helps all 50 states

The Gulf of Mexico Energy Security Act opened up 8.3 million acres and provides access to an area estimated to contain 1.2 Bbbl of oil and 5.8 tcf of natural gas. This is enough natural gas to heat and cool nearly six million homes for 15 years. The bill calls for opening approximately 2.5 million acres as soon as practicable, but no later than one year of the date of enactment. It also calls for opening an additional 5.8 million acres as soon as practicable.

While the bill prevents oil and gas leasing activities within 125 mi of the state of Florida until June 30, 2022, it benefits conservation efforts in all 50 states and compensates coastal states. For the first time, 37.5% of GoM production royalties will go to four Gulf Coast states - Louisiana, Alabama, Mississippi, and Texas. The revenue will come initially from the newly opened areas - the 181 Area and the 181 South Area. Beginning in 2016, revenue sharing will take place for all new leases after 2006 in the Gulf of Mexico planning areas. Between 2007 and 2055, the estimated revenue for the Gulf Coast States ranges from $22 billion to $56 billion.

Along the Gulf Coast, this revenue has to be used for one or more of the following:

• Projects for coastal protection, including conservation
• Coastal restoration, hurricane protection, and infrastructure directly affected by coastal wetland losses
• Mitigation of damage to fish, wildlife, or natural resources
• Implementation of a federally approved marine, coastal, or comprehensive conservation management plan
• Mitigation of the impact of OCS activities through the funding of onshore infrastructure projects
• Planning assistance and admin. Costs of complying with this section

In addition to the Gulf Coast State’s revenue sharing, the legislation also steers 12.5 percent of the royalties to the State Land and Water Conservation Fund (LWCF) to be shared by all 50 states and to be used specifically for recreational projects. Since 1965, more than $3.7 billion has been collected from offshore revenue which has funded recreational projects throughout the United States and its territories. Over the years, California has received more than $274 million from the State LWCF, New York $228 million, Illinois $152 million, Florida $123 million and Massachusetts $92 million.

The remaining 50% of the revenues will go to the U.S. Treasury.

What to expect

While much of the attention is currently being paid to the Gulf of Mexico Energy Security Act, it is important to recall that most practical, operational decisions over the scope of offshore leasing are made by the Department of the Interior’s Minerals Management Service (MMS). MMS is working through the final stages of preparation of its 2007-2012 5-Year Leasing Program, and proponents of expanded offshore access have weighed in heavily during each of the public comment periods.

Overall, MMS received more than 73,000 total comments. While the anti-drilling forces submitted 18,365, over 54,000 public comments favoring more access were received by MMS.

Offshore energy companies, their individual employees and retirees, and coalitions of end-use consumers of energy from the manufacturing and agricultural industries were a vital part of these numbers.

As a result, the evolving 5-Year Program has been developed using a more comprehensive approach than in past efforts, and currently proposes to include new areas outside the Central and Western Gulf of Mexico for the first time in decades. The proposed final program and the final environmental impact statement for the MMS five-year plan are expected to be released this spring, with the final program going into effect on July 1, 2007.

The MMS proposed final program would lease the following areas: the Central and Western Gulf of Mexico; a portion of the original 181 area; the 181 south area; the Beaufort Sea; Cook Inlet; the North Aleutian Basin - nearly 5.6 million acres, and; a small triangle of acreage off the coast of Virginia. That being said, the proposal would still only offer for lease 12% of the OCS. We must continue to fight for that 12% now and come back later to seek access to the remaining 88%.

The politics of energy

Regardless of the political arena within which it is debated, the overall story that industry must continue to tell to policymakers remains the same. That story begins with a basic review of the fundamentals: supply and demand. There can be no question that demand is on the rise, both in the United States and globally. At current projections of world GDP growth, this global demand for energy may increase by over 50% by 2025, while the United States’ demand could increase over 30% over the same time period. Developing nations will likewise require increasing amounts of energy as their economies modernize and raise the quality of life for their populations.

The strategic question, therefore, is: Where will this energy come from?

Some will come from renewable sources and we should continue to push for development on this front. But widespread use of sources such as wind, solar, and biomass is still far off, and will likely only serve to replace a small percentage of demand over the next two decades.

Hydropower in the United States will probably continue to account for about 5% of power generation, but lacks opportunities for major expansion. Nuclear power, which currently supplies approximately 20% of U.S. power generation capacity, is a potential source of new energy supplies, but negative public perceptions could impede sufficient expansion.

Biofuels have been hailed as the “new” energy source. According to the University of Minnesota, biofuels, such as ethanol made from corn, do have the potential to provide the nation with cleaner burning fuel. But because of how corn ethanol is made, only about 20% of each gallon is “new” energy. That is because it takes a lot of “old” fossil energy to make it: diesel to run tractors, natural gas to make fertilizer and, of course, fuel to run the refineries that convert corn to ethanol.

It is vital to note that oil and gas supply will become more and more challenged due to increasing decline rates. Energy companies are finding smaller reserves than in the past - the last field capable of producing in excess of 1 million bbl of oil per day was discovered back in 1976 - and current major fields will inexorably decline.

Whether within the federal agencies, among state leaders, or in current or future Congressional sessions, industry and energy-consumer coalitions must continue to vigorously make the case for expanded offshore access. The resources are there, the need is great, and the offshore energy industry has the technology and experience to bring it safely to market.