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IPAA and AGA Call for Review of Offshore Moratoria, Other Policy Changes

IPAA and AGA Call for Review of Offshore Moratoria, Other Policy Changes

Congress should put in place a process to begin lifting the congressional and executive branch moratoria to unlock "very significant potential resources" in the eastern Gulf of Mexico and off the East and West Coasts, independent producer and local distribution company (LDCs) groups recommended to the Senate Energy and Natural Resources Committee Friday.

"These moratoria -- both legislative and executive branch -- are unreasonable. They rely on antiquated and inaccurate assessments of the risks of developing offshore resources.," the Independent Petroleum Association of America (IPAA) said. It conservatively estimated that the offshore moratoria deny producers access to more than 70 Tcf of potential natural gas.

"Access to the federal resource base is the biggest challenge to developing domestic natural gas supplies both onshore and offshore," the producer group noted. In the Intermountain West, the Interior Department estimates that close to 40% of the resource base is either off limits or restricted. The remaining 60%, while not restricted at the time of leasing, is subject to limitations imposed by the federal permitting process, it said.

The American Gas Association (AGA), which represents LDCs, called for the "existing universal prohibitions" on drilling in the eastern Gulf and off the East and West Coasts to be "reevaluated with an objective, dispassionate eye" to determine if these areas can be explored without adverse environmental consequences.

"AGA believes that such an analysis will reach the conclusion that some areas should remain off-limits, some areas should be made the subject of stringently controlled activity, and many areas can be safely explored with the latest environmentally friendly E&P techniques," the LDC group said. "This blanket prohibition can no longer stand."

The AGA, IPAA and other groups submitted a number of policy recommendations to the Senate energy panel for consideration during the committee's upcoming Jan. 24 conference on natural gas supply and demand.

The current "tight natural gas markets have been a long time in coming, but there are still numerous unexploited sources of gas in the United States. We are not running out of natural gas; we are not running out of places to look for natural gas; we are running our of places where we are allowed to look for gas," the AGA said.

Absent the removal of the current drilling restrictions, "producers will struggle to increase, or even maintain current production levels in the Lower 48," exposing 63 million homes, business, industries and electric power generation plants that use natural gas to "unnecessary levels of price volatility," according to the LDC group.

The IPAA also recommended that states be allowed to share in revenues generated by federal lease bonuses and royalties in proportion to the amount of leasing and production that occurs off their coasts.

"Congress needs to develop a mechanism to expedite federal approval of natural gas projects while the nation faces current serious supply and demand challenges," the IPAA told Sen. Pete Domenici (R-NM), chairman of the Senate Energy Committee. Lawmakers "should assure that proper environmental factors are considered and addressed, but [they] should limit the opportunity to abuse the federal decision-making process to delay decisions" related to the exploration and production of oil and natural gas.

As part of comprehensive energy legislation, Capitol Hill lawmakers in the new session should require federal permits to be resolved in a timely manner, the IPAA said. They also should assure that the federal planning, leasing and permitting process, as well as oil and gas research and development, receives adequate funding in the fiscal year 2006 budget.

"The highest priority should be placed on streamlining the leasing and permitting process and bring greater certainty and quicker confirmation of approval or disapproval of permits. This is the fastest way to increase supply," said Paul N. Cicio, executive director of the Industrial Energy Consumers of America (IECA), which represents major industrial gas consumers.

Moreover, Congress "needs to recognize the essential need to create...balanced solutions as it considers future natural gas policy," the IPAA noted. A balanced energy future would include increased energy efficiency, immediate development of new resources (i.e. liquefied natural gas) and flexibility in fuel choice, which the National Petroleum Council estimates could save $1 trillion in U.S. gas costs over the next 20 years.

To hasten the construction of gas pipelines and storage facilities, the IPAA suggested that the Federal Energy Regulatory Commission's record in the certification process be the exclusive record for administration appeals. This, at a minimum, would shorten the time needed for the Department of Commerce to respond to a state's challenge of a FERC-approved project under the Coastal Zone Management Act (CZMA).

"Regulatory implementation and states' misuse of the consistency provisions of the CZMA have created uncertainty and have impeded federal offshore exploration and production projects as well as the siting of onshore and offshore energy infrastructure," the producer group said. The IPAA called on Congress to address the issues related to the CZMA in comprehensive energy legislation.

On the tax front, it urged lawmakers to clarify that geological and geophysical expenses can be expensed as similar costs are treated in other industries. In addition, Congress should review tax policies that encourage domestic gas development, particularly nonconventional gas and deep conventional gas. These could include tax credits or deductions for actions that boost domestic gas development activity, the IPAA said.

Congress also should consider enactment of capital-enhancing tax provisions, according to the producer group. These must be crafted in such a manner to assure that the Alternative Minimum Tax does not nullify the benefits that they would create.

In addition, the IPAA called on lawmakers to continue their support for offshore royalty incentives by enacting the provisions that were included in last year's H.R. 6 conference report, with updates reflecting the passage of time.

Last year was filled with headlines of traders reporting false prices to index publishers, and the Energy Information Administration's (EIA) inadvertent reporting of an inaccurate storage withdrawal number of Nov. 24. "The Committee [now] needs to look beyond the concerns with storage data and market information to the underlying issues of adequacy of storage capacity and natural gas availability," the IPAA told the committee.

Some industry participants have called on the Commodity Futures Trading Commission (CFTC) to put in place a more limited "stops" for natural gas trading on the New York Mercantile Exchange to prevent rapid run-up in prices. Under current Nymex rules, a $3/MMBtu change in prices results in a stop in trading for five minutes. "The current stop of $3 is reasonable for natural gas," the IPAA said.

"Congress should not enact legislation to interfere with a market that is responding to the need to control its abuse by past practices. Existing governmental authority is adequate to address these improper practices."

But the IECA's Cicio supports greater federal oversight of the gas industry. He called for daily reporting by the EIA of natural gas storage inventories. In addition, Cicio believes that Congress should restore and reinforce the CFTC's anti-fraud and anti-manipulation oversight of over-the-counter swap transactions in exempt commodities (natural gas), as well as bolster government oversight of the gas markets and the Nymex.

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