Yesterday's announcement by President Obama that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS) that had formerly been off-limits yielded a variety of reactions. Energy industry leaders were cautiously optimistic, environmentalists were disappointed or "outraged", and the Washington Post's print-edition headline called it a "political maneuver." From my perspective, it constitutes a welcome concession to the reality that the day when renewable energy sources can pick up the entire load now carried by fossil fuels is a long way off--decades, not just years--and that until then we still have some important levers to pull in minimizing the amount of foreign oil we must import. Yet however it plays in the Congressional dance to devise a "comprehensive energy bill"--the current terminology for describing legislation regulating greenhouse gas emissions--it clearly falls short of what would be required to put the medium-term energy needs of the country on a truly secure footing.
On the positive side, yesterday's announcement sets the stage for oil producers finally to gain access to offshore acreage that had been off-limits for decades as a result of a combination of Congressional and Executive drilling moratoria. So while it does not strictly speaking open up these areas for drilling--that happened in 2008 when the previous bans expired or were lifted--the President made it clear that he will not reinstate a ban for the Atlantic coast south of New Jersey or for the Chukchi and Beaufort Seas off Alaska. If you are concerned about the energy security of this country and the enormous sums we pay to import oil from abroad, that is good news, even if it will take years to go through the process that Interior Secretary Salazar has outlined.
As usual the traditional media has gauged the potential resources involved with its customary lack of insight into how oil & gas are produced in the real world, comparing them to a few years of total US consumption. The subtext here is clear: how much should we risk for a couple more years' supply of a depleting resource? The reality is quite different. Even at the low end of 39 billion barrels of recoverable oil cited by Secretary Salazar, the new zones could eventually contribute several million bbl/day for a couple of decades. If ramped up quickly enough, that could overcome the underlying decline rate of current US output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest: as the growth of Asia continues and the domestic energy needs of exporting countries skyrocket, but before renewables, conservation and vehicle electrification can achieve their full impact.
Perspective is crucial in situations like this, so let's start with some figures already familiar to my regular readers. If 39-63 billion barrels of oil doesn't sound like much compared to the vast energy appetite of the US, which even in last year's recession-dampened economy consumed 18.7 million bbl/day of oil, or when compared to the enormous reserves of the Middle East, consider that cumulative US oil production stands at around 200 billion barrels from reserves that at no point exceeded 39 billion barrels. If that sounds like a contradiction, it's because the industry has always found more oil and more ways to extract it than expected when the resources were first discovered. There is no reason to believe that won't still hold true, particularly compared to resource estimates based on technology that was current when PCs running on Intel's 286 chip were cutting-edge and cellphones were scarce and looked like bricks.
It's also worth thinking about the prospect of an extra couple of million barrels per day of domestic oil in the context of how much renewable energy we'd have to produce to provide a similar quantity of energy. Wind turbines and solar panels don't even enter into this discussion, because they do not displace any meaningful quantity of oil. That's because they produce electricity, and last year oil accounted for less than 1% of all the electricity generated in the US. On an energy-equivalent basis, each million barrels per day of additional oil production equates to the energy content of 27.9 billion gallons per year of ethanol, or more than 2.5 times last year's record US ethanol production. In terms of useful energy contributed after accounting for the energy used to produce it, that comparison grows to more like 5x: the equivalent benefit of more than 50 billion gallons per year of ethanol, or about half-again the ultimate contribution of the entire 36 billion gallon federal Renewable Fuel Standard. And even if we threw away everything but the gasoline yield from this oil, it would still displace as much imported energy as 40 million plug-in electric vehicles--for which we'd still need to come up with an electricity source.
So if there's so much potential in the areas that the President has offered up for drilling, why would anyone be disappointed or see this as a glass half empty? For starters, it imposes new drilling bans on the entire Pacific Coast and carves out of the eastern Gulf of Mexico some of the most prospective acreage closer to the Florida coast, where large natural gas deposits have already been found. And of course it doesn't even mention the Arctic National Wildlife Refuge, which the USGS estimated to contain another 10 billion barrels, give or take a few billion. Simply put, outside of the Gulf of Mexico more acreage will again be placed off-limits than will be made available for drilling, and even the expansion into the eastern Gulf will require the approval of a Congress that has not looked favorably on drilling there since it placed its own ban on that region in 2006. My disappointment at those limitations is mitigated by the knowledge that drilling there now would be a non-starter, politically. Better to begin where state and local governments are willing and some even eager. Closer to home for me, it appears that Secretary Salazar is postponing the bidding on the Lease Sale 220 area off Virginia that I blogged about a couple weeks ago from 2011 into 2012, holding up lease revenues my state badly needs to plug serious budget gaps. (This would also require Congressional approval of revenue-sharing for these bids and royalties, similar to what the Gulf Coast states currently enjoy.)
In his comments at Andrews Air Force Base President Obama made it clear that additional offshore drilling must be viewed in the context of a broader plan for addressing US energy needs. Yet because of the structure of our energy economy and the enormous relative impact of additional oil production compared to renewables at their current scale, only massive fuel economy improvements and conservation can contribute as much to reducing US oil imports, which even after last year's big drop still averaged 9.7 million bbl/day and cost approximately $210 billion. Opening up more of the OCS, which lies beyond visible range from the nation's shoreline, is a good step forward, and it is one that future administrations of both parties can build on.
Showing posts with label energy compromise. Show all posts
Showing posts with label energy compromise. Show all posts
Thursday, April 01, 2010
Wednesday, September 17, 2008
What Compromise?
I can't think of a single occasion on which I've reviewed the details of a piece of pending Congressional legislation when I haven't regretted the unintended civics lesson the experience provided. Poring over the text of the House Leadership's proposed "energy compromise" bill, HR.6899, the "Comprehensive American Energy Security and Consumer Protection Act" was no exception. Although the bill contains a version of the expected headline deal relating to offshore drilling and renewable energy credits, it also includes a hodgepodge of leftovers from the negotiations for last year's Energy Bill, along with some poison-pill measures such as the coerced, retro-active renegotiation of royalty relief on those late-1990s deepwater leases, plus an utterly half-baked idea to sell light crude oil out of the Strategic Petroleum Reserve and buy back heavier oil. Falling short of any dictionary definition of "compromise", this bill epitomizes my concerns about mixing energy policy with election-year politics.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
Friday, September 12, 2008
Royalties in Kind
It almost reads like the latest thriller. Just as the Congress is about to consider compromise legislation to expand the portions of the US offshore that are available for oil and gas drilling, and with another major hurricane headed directly for the center of gravity of the nation's energy industry, we learn of a scandal involving government employees responsible for collecting oil & gas royalties. The only element that doesn't fit the plot is that oil prices continue to falter, despite a big decline in US inventories, resulting from most of the production in the Gulf of Mexico having been shut in in preparation for Hurricane Gustav, two weeks ago. I'll reserve my comments on the energy compromise until I see the text of an actual bill, but the MMS scandal demands attention, because of its perceived relevance to the drilling debate.
The subject of oil and gas royalties is not one that ordinarily conjures up images of licentious behavior; it's normally the realm of accountants and auditors. I'm sure millions of Americans are wondering why a group of MMS employees in Denver was even in a position to have been offered lavish entertainment and allegedly to have engaged in conduct unbecoming to a public servant. Historically, most federal royalties were collected in the form of a check, based on the deemed market value at the wellhead of the portion of oil or gas--typically either 1/8th or 1/6th--to which the government was entitled under the terms of a specific production lease. (A notable exception is the late-1990s leases that waived royalties, in order to encourage companies to take the risk of drilling in very deep water, at a time when oil prices had fallen nearly to single digits.) But the problem with verifying the royalty amounts on oil is that the fair market value isn't always obvious, particularly for fields that differ in quality from West Texas Intermediate, or are not accessible by pipeline. The principle behind the Royalty in Kind Program is that if the government takes title to the oil, with volumes verified by a Lease Area Custody Transfer meter, and then sells it itself, there should be no dispute about fair market value.
It is thus ironic that the problems cited by the Inspector General of the Department of the Interior should have arisen from a policy that was designed to reduce the risk of the government receiving less than the full royalty amounts to which it is entitled, for oil and natural gas produced on federal lands or in the federal portions of the offshore. In fact, the Minerals Management Service (MMS) had just reported to Congress that RIK generated $63 million of additional revenue for the Treasury in FY 2007, over and above what it would have collected, had it taken these royalties in cash.
Participating in the oil market to the extent of 190,000 barrels per day, around 4% of total US production, made the MMS a very big player in a segment of the energy business that is highly social. You need to trust the people you do business with, because you must be able to rely on their help when you have a problem, and vice versa. Often, that trust is built by getting to know them over a meal, or at a sporting event. As I've mentioned many times, I traded oil and petroleum products for Texaco on the West Coast during the 1980s and early 1990s. Although I certainly never witnessed or heard of the kind of excesses noted by the Inspector General, I believe that in the absence of a strict organizational and personal code of conduct, the opportunities for someone to go seriously astray in that environment remain significant.
Every year, Texaco's legal department would meet with the company's traders and pipeline schedulers to warn us about conflicts of interest and the requirements of anti-trust law and other regulations. One of our best lawyers would sternly advise us, "Avoid the appearance of evil!" by which he meant, never engage in anything, the legitimacy of which we could not easily explain in a court of law without requiring the benefit of the doubt. Some of the MMS folks and their oil company counterparts might have benefited from such a speech.
My purpose in this posting is not to excuse misbehavior--not a bit of it. However, the stakes in the current energy crisis are too high to permit this incident or the broad generalizations it will spawn to influence the policies that determine how much energy the US will produce for itself in the years ahead, and how much we must continue to import, to the detriment of our trade balance and financial health. The events in question, however distasteful, by no means prove that royalties cannot be collected properly, or that oil companies can't be trusted to deal fairly with the government. All that is required for RIK to work on an arms-length and professional basis is clear and frequently-articulated policies and determined oversight. So by all means, ferret out those responsible, punish anyone who broke the public's trust, and ensure that the Treasury collected what it was due. But exploiting this incident to hold back domestic oil and gas production will cost the US public far more in the long run than any malfeasance that might be uncovered in the MMS.
The subject of oil and gas royalties is not one that ordinarily conjures up images of licentious behavior; it's normally the realm of accountants and auditors. I'm sure millions of Americans are wondering why a group of MMS employees in Denver was even in a position to have been offered lavish entertainment and allegedly to have engaged in conduct unbecoming to a public servant. Historically, most federal royalties were collected in the form of a check, based on the deemed market value at the wellhead of the portion of oil or gas--typically either 1/8th or 1/6th--to which the government was entitled under the terms of a specific production lease. (A notable exception is the late-1990s leases that waived royalties, in order to encourage companies to take the risk of drilling in very deep water, at a time when oil prices had fallen nearly to single digits.) But the problem with verifying the royalty amounts on oil is that the fair market value isn't always obvious, particularly for fields that differ in quality from West Texas Intermediate, or are not accessible by pipeline. The principle behind the Royalty in Kind Program is that if the government takes title to the oil, with volumes verified by a Lease Area Custody Transfer meter, and then sells it itself, there should be no dispute about fair market value.
It is thus ironic that the problems cited by the Inspector General of the Department of the Interior should have arisen from a policy that was designed to reduce the risk of the government receiving less than the full royalty amounts to which it is entitled, for oil and natural gas produced on federal lands or in the federal portions of the offshore. In fact, the Minerals Management Service (MMS) had just reported to Congress that RIK generated $63 million of additional revenue for the Treasury in FY 2007, over and above what it would have collected, had it taken these royalties in cash.
Participating in the oil market to the extent of 190,000 barrels per day, around 4% of total US production, made the MMS a very big player in a segment of the energy business that is highly social. You need to trust the people you do business with, because you must be able to rely on their help when you have a problem, and vice versa. Often, that trust is built by getting to know them over a meal, or at a sporting event. As I've mentioned many times, I traded oil and petroleum products for Texaco on the West Coast during the 1980s and early 1990s. Although I certainly never witnessed or heard of the kind of excesses noted by the Inspector General, I believe that in the absence of a strict organizational and personal code of conduct, the opportunities for someone to go seriously astray in that environment remain significant.
Every year, Texaco's legal department would meet with the company's traders and pipeline schedulers to warn us about conflicts of interest and the requirements of anti-trust law and other regulations. One of our best lawyers would sternly advise us, "Avoid the appearance of evil!" by which he meant, never engage in anything, the legitimacy of which we could not easily explain in a court of law without requiring the benefit of the doubt. Some of the MMS folks and their oil company counterparts might have benefited from such a speech.
My purpose in this posting is not to excuse misbehavior--not a bit of it. However, the stakes in the current energy crisis are too high to permit this incident or the broad generalizations it will spawn to influence the policies that determine how much energy the US will produce for itself in the years ahead, and how much we must continue to import, to the detriment of our trade balance and financial health. The events in question, however distasteful, by no means prove that royalties cannot be collected properly, or that oil companies can't be trusted to deal fairly with the government. All that is required for RIK to work on an arms-length and professional basis is clear and frequently-articulated policies and determined oversight. So by all means, ferret out those responsible, punish anyone who broke the public's trust, and ensure that the Treasury collected what it was due. But exploiting this incident to hold back domestic oil and gas production will cost the US public far more in the long run than any malfeasance that might be uncovered in the MMS.
Subscribe to:
Posts (Atom)