Hurricanes Revive Fight over Drilling

With hurricane-related shortages pushing energy prices to record highs, Congress appears to be headed toward a showdown over politically charged proposals to expand offshore drilling for natural gas and oil and to open an Alaskan wildlife refuge to development.

Chemical industry officials are pushing for quick action on a bill crafted by House Resources Committee Chairman Richard W. Pombo (R-Calif.) that would maintain a quarter-century-old moratorium on new oil and natural gas leasing on the outer continental shelf (OCS) but allow individual states to petition the federal government to lift the ban off their coasts.

“We are calling on Congress to immediately approve legislation by Congressman Pombo to increase the nation's gas supply,” says Owen A. Kean, senior policy adviser at the American Chemistry Council (ACC). “This would send a strong signal to the futures market that a correction to our long-standing supply/demand imbalance is in sight, and help bring prices down.” Kean says the bill would create new sources of natural gas supply, stabilize and reduce U.S. prices, and stem the tide of job loss in the manufacturing sector. “It has the potential to reverse 25 years of public policy that has directly contributed to the current crisis in natural gas markets,” he asserts.

Although chemical manufacturers were already suffering from the steady rise in energy and feedstock costs over the past few years, interruptions in oil and natural gas production caused by Hurricanes Katrina and Rita have driven prices even higher, further weakening the competitiveness of U.S. companies in the global marketplace.

As the nation's largest industrial consumer of natural gas, the chemical industry has seen its gas bill increase by more than $10 billion in just the past two years, according to ACC. High prices are a double whammy for chemical makers, who use natural gas both to fuel their plants and as a basic raw material.

At a Senate Energy & Natural Resources Committee hearing last month, Dow Chemical President and Chief Executive Officer Andrew N. Liveris told lawmakers that the U.S. is in a “natural gas crisis,” with prices soaring from about $2.00 per million Btu in 1999 to more than $14 in late October. “This price renders the U.S. chemical industry simply uncompetitive with the rest of the world. In fact, it undermines all U.S. manufacturers,” he declared.

Liveris noted that Dow and other chemical manufacturers have been forced to take aggressive action to mitigate the impact of high and volatile energy prices, including implementing cost-cutting measures and focusing on energy efficiency and conservation. “We've shut down 23 inefficient plants in North America since 2002. And we are investing in places like China and the Middle East, where energy is much cheaper,” he said.

To alleviate the crisis, Liveris said, Congress should promote “environmentally responsible” energy production in OCS and share revenues from new production with coastal states. He also urged lawmakers to expedite leasing in an area of the eastern Gulf of Mexico known as “Lease Sale 181,” which is off the coast of Florida. “If the right responses are put in place right away, tensions in the market can be eased, and gas consumers can weather the current crisis,” Liveris testified. “If prices remain at or near current levels, manufacturers will be driven out of the market, and many may not return.”

Robert G. Slaughter, president of the National Petrochemical & Refiners Association, told a panel of the House Energy & Commerce Committee on Nov. 2 that the cost and availability of natural gas presents a “challenge” for both refiners and petrochemical producers. He strongly urged lawmakers to take immediate action to increase domestic gas supplies by opening up to exploration and production both offshore and onshore areas that are currently subject to the drilling moratorium and other restrictions.

“The nation can no longer afford to place off-limits critical supplies of natural gas that are needed for residential, commercial, and industrial use,” Slaughter said. “The nation is in the process of exporting its petrochemical industry due to concerns about the availability and cost of future natural gas supplies. Action is needed in short order to protect hundreds of thousands of U.S. jobs that depend directly or indirectly on the domestic petrochemical industry,” he warned.

Industry officials say U.S. natural gas prices have spiked to all-time highs largely because supply has failed to keep up with rapid growth in demand. Over the past decade, utilities have increasingly turned to the clean-burning fuel as an alternative to coal to generate electricity. Natural gas now heats 55% of American homes. Domestic production, which has been flat in recent years, is limited by federal restrictions on where drilling can occur. The U.S. imports some liquefied natural gas (LNG), but not enough is available to boost supplies significantly, according to Robert Ineson, North American gas analyst with Cambridge Energy Research Associates.

“To attract LNG cargoes to U.S. shores, a U.S. buyer must pay a competitive price, including a premium to account for additional shipping distance,” Ineson notes. “Increased U.S. demand for additional LNG cargoes comes during a period of limited extra supply availability. Globally, LNG supply has been tight for the past 18 months, leaving numerous ships idle and receiving terminals operating below full capacity.”

ACC's Kean says U.S. policies have had the effect of boosting demand for natural gas to make electricity and restricting access to domestic supplies, including more than 85% of OCS that is off-limits to energy development. “These policies have resulted in U.S. natural gas prices that are the highest in the world, with disastrous consequences for gas-consuming industries,” he remarks. Since natural gas prices began spiraling out of control in 2000, the U.S. chemical industry has lost more than $50 billion in business to overseas operations and more than 100,000 jobs have disappeared, according to ACC.

The consequences of skyrocketing prices have sparked concern on Capitol Hill and are increasing pressure on lawmakers to boost supplies of domestic energy. “The disruption in the supply of energy caused by the hurricanes has highlighted a problem that policymakers have ignored for too long,” says H. Sterling Burnett, senior fellow at the National Center for Policy Analysis. “There is very little that can be done to improve America's energy prospects in the short-term, but allowing states to share the wealth from new energy development off their coasts is a good start.”

Pombo, a seven-term congressman, hopes to use the fiscal 2006 budget reconciliation bill now before Congress to advance his offshore drilling plan. “Americans want Congress to cut the deficit. They also want more domestic energy production. This package is going to give them both,” he remarked on Oct. 26 after the Resources Committee voted to approve his proposal. The Ocean State Options Act would allow states to “opt-out” of the federal moratorium on drilling for oil and natural gas off most of the Pacific and Atlantic Coasts.

The measure would also allow states to collect 40% of the billions of dollars in royalties from new offshore production. States currently do not share in the revenue generated from activities in federal waters, which begin 3 miles off the coast. The drilling moratorium, which has been renewed annually by Congress since 1982, would be extended until 2012 for waters up to 125 miles off shore. At that point, states would have to petition the Interior Department every five years to keep new oil and gas rigs away from their coasts.

Pombo insisted that he was not trying to weaken the moratorium for California and other states that are likely to oppose new drilling. But he noted that several states, including Virginia, Georgia, and South Carolina, have expressed an interest in allowing more offshore energy production. “What we were able to do was reach a compromise where states would have much greater control over their coastlines than what they do under current law and current regulation,” Pombo said. “It protects those states that do want to protect their coastline and don't want to have more coastal development.”

California officials from both political parties have staunchly opposed offshore drilling since an accident in 1969 at an oil rig off the coast of Santa Barbara spilled crude oil into the ocean and blackened miles of beaches.

The House bill also would open to production a section of Lease Sale 181, a tract in the eastern Gulf of Mexico that has been highly coveted by natural gas producers. Covering about 2.4 million acres of seafloor beginning 200 miles west of Tampa, Fla., the section could be leased starting in early 2007. A provision in the bill would open up a small portion to drilling immediately—a slice estimated to contain at least 6 trillion cu ft of gas and 1.5 billion barrels of oil. Lease Sale 181 is not protected by the drilling moratorium, but has been largely withheld from development because of opposition by Florida's governor and congressional delegation.

Pombo's legislation gained momentum this month after weeks of negotiations with officials in Florida produced a compromise agreement. For years, the state's politicians have fought against offshore drilling to protect beaches critical to the state's $57 billion-a-year tourism industry from spills and pollution. Gov. Jeb Bush (R), the President's brother, had previously opposed any attempt to ease restrictions on drilling in the eastern Gulf. But the governor says the agreement, writing a 125-mile buffer around the state into federal law, would offer better long-term protection by putting Florida in control of its shores.

At Gov. Bush's direction, the state's top environmental official, Colleen Castille, negotiated the deal with Pombo. “Florida will be able to prevent future oil and gas drilling near its shores in perpetuity,” she said in a memo released by her office. “I believe the new and final version of Congressman Pombo's Ocean State Options Act … represents a significant milestone in the protection of Florida's shores from the environmental and economic threat of oil drilling.”

Florida's House Democrats and the state's two U.S. senators, Republican Mel Martinez and Democrat Bill Nelson, oppose the deal and support renewal of the more restrictive moratorium. The state's Republican House members have been split. “We all understand that America must find new sources of energy. But drilling off Florida's sensitive coast won't solve the nation's current energy challenges, and it won't put us on a path toward achieving energy independence,” Rep. Connie Mack (R-Fla.) said in a statement opposing the Pombo bill. Environmental activists also oppose the legislation. “Allowing any drilling off the coast poses a serious threat to our way of life and our economy,” says Mark Ferrulo, director of the Florida Public Interest Research Group. “We would like to see our policymakers fighting to oppose any drilling in the eastern Gulf of Mexico.”

At a Senate Energy Committee hearing on Oct. 27, Chairman Pete V. Domenici (R-N.M.) applauded Pombo's plan for opening the door to new OCS leasing, but cautioned that adding the measure to a budget package that already includes a controversial mix of spending and tax cuts would further complicate passage. Domenici said he plans to pursue offshore drilling in separate legislation next year. But in the meantime, he is urging the White House to use its existing authority to lease a portion of the 181 area, saying such action would have an immediate “dampening effect” on natural gas prices, even if production takes a couple of years. “Conservation will be an important tool to help us get through the winter, but conservation alone will not solve the crisis,” Domenici declared.

In remarks to the Senate committee, Interior Secretary Gale A. Norton acknowledged that the Administration could open the area to production by presidential order. But she said that route would be no quicker than using her agency's standard five-year planning process for OCS leasing because of required environmental reviews. Interior's existing five-year plan ends in 2007, and, by next February, the department must present a draft proposal for offshore drilling from 2007 to 2012. “We would have to go through additional environmental analysis, which as a practical matter would put us at about the same time frame,” Norton said.

Domenici said his chief budget goal is opening the 1.5 million-acre northern coastal plain of the Arctic National Wildlife Refuge (ANWR) in Alaska to oil and gas drilling. Both the Senate and House budget reconciliation bills include such a measure. It calls on the Interior Department to sell leases in the protected refuge, a longtime energy policy goal of many Republicans. Such a sale would generate an estimated $2.5 billion over five years, according to the latest Congressional Budget Office estimate. ANWR drilling has passed the House several times in recent years, only to die in the Senate. But recent events have strengthened the hand of lawmakers who argue that the resource-rich area should be developed to reduce dependence on imported oil. “This provision will bring more than 10 billion bbl of oil to the lower 48 states in the next several years,” Domenici said. “Frankly, we should have developed the oil in ANWR 10 years ago. If we had had that oil after Katrina and Rita, I don't believe we would have seen $3.00-a-gal gasoline.”

Environmentalists oppose opening ANWR to oil and gas leasing as well as expanding offshore drilling. “At a time when oil companies are making record profits to the tune of billions of dollars, we're giving them the keys to the Arctic refuge and our coasts,” says Carl Pope, director of the Sierra Club. “They will line our coasts and wilderness with oil rigs while lining their pockets with profits.”

While ACC supports opening ANWR to exploration and production, Kean says it would take many years to bring new gas from Alaska to the market, and help is needed now. “It's important to proceed to lease 181 because it's the best short-term opportunity, and it would send an important signal that the government is taking concrete action to change the supply picture,” he says.

Although Domenici declined to include offshore drilling provisions in the Senate budget bill, Pombo's OCS proposal—if it survives the House floor—could come up for discussion when a joint conference committee meets to resolve differences in the House and Senate reconciliation packages. Regardless of the outcome, proponents of wider offshore oil and gas drilling believe that they are making substantial progress in overcoming what has been successful congressional opposition. National Association of Manufacturers President John Engler told reporters at a recent briefing that he sees a changed landscape because of the hurricanes and high prices. “It has really led a number of political leaders to reevaluate the positions they once held,” he remarked. “We can't run factories and compete globally without reliable supplies of energy at reasonable prices.”