Monday, March 15, 2010

It's Time to Let Virginia Drill

At last Thursday's Summit on Virginia's Energy Future in Richmond, Governor Robert McDonnell delivered a detailed talk on the state's energy opportunities and the bi-partisan commitment of the legislature and Virginia's US Senators and Congressional delegation to capitalize on them, including its offshore oil, gas and wind resources. He also declared his goal of making Virginia the "energy capital of the East Coast." While neither Virginia nor any of its neighbors up and down the coast seems likely to compete with Texas or Louisiana in total energy production, the new Governor's aspiration might be more than just wishful thinking. However, as the business and governmental leaders who spoke at the session made clear, Virginia doesn't control its own destiny in this regard. The Commonwealth's plans for tapping the value of those resources to help close its budget deficit depend on the cooperation of the US Department of the Interior (DOI), which controls the leasing and permitting process for exploration and development on the Outer Continental Shelf (OCS).

Attending the summit provided me with a much better appreciation of my state's energy situation. When we moved our family here nearly four years ago, I confess I didn't spend a lot of time thinking about local energy issues, beyond confirming that electricity was cheaper and likely to be more reliable than where we had lived in Connecticut. Although Virginia produces essentially no crude oil, it does have respectable quantities of natural gas and coal, a bit of hydro and biomass power, and is home to two nuclear power plants, each with two reactors. Unfortunately, like many states, Virginia's own energy production isn't sufficient to meet our needs, and we must import significant quantities of power, along with 100% of our petroleum supplies, either as crude oil for the single small refinery at Yorktown, or as finished products. Several speakers mentioned that the Commonwealth is second only to California in state electricity imports.

Also like many other states, Virginia faces a significant budget shortfall as a result of lower tax receipts, mainly due to unemployment that, while lower than the national average, is still well above pre-2008 levels. A consistent theme from the participants at the summit was that although Virginia's offshore energy resources don't appear to be large enough to make it energy independent, a share of the bid premiums, rentals, and royalties similar to that received by Texas, Louisiana, Mississippi and Alabama for their OCS resources under the GOMESA law of 2006 would be very useful in addressing state funding shortfalls, particularly for transportation. Together with the job creation and non-royalty tax revenue that would accompany development, the offshore resources constitute a very attractive economic proposition.

Estimates of potential resources included in Virginia's first lease area are around 130 million barrels of oil and 1.1 trillion cubic feet of gas. That's a lot smaller than the kind of deposits that have been found in the deepwater Gulf of Mexico, though as several speakers pointed out these figures are based on outdated technology and would likely increase significantly with current techniques. That's important because when the surveys underlying these estimates were done, the state of the art most likely wouldn't have found any of the big plays now being exploited in the Gulf or off the coast of Brazil. And even if any resources discovered were closer to the DOI's current estimate than the 800 or 900 million barrel upside potential that a couple of Thursday's panelists mentioned, it could still create a valuable stream of royalties and taxes for a medium-sized state. In addition to its oil & gas potential, coastal Virginia also has an excellent wind resource in the Class 5/Class 6 category desirable for offshore wind farms, with several firms indicating interest.

Having passed legislation declaring the Commonwealth's support for offshore development, along with a bill allocating resulting government revenues to transportation funding and renewable energy R&D, Virginia is, as the Governor put it, "ready to go." Under the previous US administration DOI included Sale 220 for Virginia's OCS in the 2007-2012 leasing program of the Minerals Management Service. That put Virginia in the first lease round for the Atlantic and Pacific coastal regions that had previously been subject to the expired offshore drilling moratoria. The sale was expected to occur in 2011. With appropriate revenue sharing in place, Virginia wouldn't have to wait for production to begin in five or more years, but could begin receiving bid premium and rental income as soon as the sale is held. Unfortunately, the current management of DOI has not exhibited much enthusiasm for advancing these plans. Virginia officials, including the Governor and our two US Senators, have contacted Secretary Salazar to convey the urgency of proceeding with the sale.

As I've noted on many occasions, the US still has significant undeveloped oil resources, and we're likely to need every barrel they can contribute in the years ahead as global demand grows. The Congressional and Presidential drilling moratoria that formerly blocked development on two of our coasts no longer apply, and it is in the financial and energy security interests of the nation to move ahead with development where the affected states support it. The clear message last Thursday was that it is now the official policy of the Commonwealth of Virginia to develop its offshore resources. By leasing Virginia's OCS oil and gas, DOI would turn the President's comments in support of offshore drilling in this year's State of the Union address into concrete action. That would produce immediate and long-term economic benefits for the state and local communities, while providing badly-needed revenue for the federal government. After decades of delay, there is no better time than now to move ahead with this.

FYI, I'll be traveling on business this week. Postings will likely resume Friday.

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