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Domenici Urges Lawmakers to Lift OCS Drilling Ban, Cites Perilous Winter Supply

In the aftermath of Hurricanes Katrina and Rita, the chief energy policymaker in the Senate last Thursday called on the Bush administration to seriously consider opening the gas-rich Lease 181 areas in the eastern Gulf of Mexico to production, saying the action was warranted in light of a potential natural gas shortage and unprecedented high prices that were expected during the upcoming winter heating season. Top industry executives, reeling from the effects of the twin hurricanes, shared those concerns.

"We need to have a realistic expectation as to how long we should expect high prices of natural gas and related products [to last], and we need to prepare for potential shortages. I hate to say that," said Sen. Pete Domenici (R-NM), chairman of the Senate Energy and Natural Resources Committee, during a hearing examining the extent of damage to energy facilities along the Gulf Coast and the status of recovery efforts. He said he was reviewing language that was drafted earlier this year that would permit interested coastal states to opt out of the moratoriums on drilling in the federal Outer Continental Shelf (OCS) to allow production off their shores.

Natural gas futures prices closed above $13/Mcf last Thursday, and "uncertainty about supplies may keep those prices painfully high" during the winter months, he said. "I don't believe [that] just a few months ago anybody believed that was possible."

The United States is in a "natural gas crisis," and the back-to-back hurricanes have "dramatically underscored the problem," Andrew Liveris, CEO of Dow Chemical, told the Senate panel. He noted that $13-14/Mcf natural gas was equal to a $7/gallon price for gasoline. These prices render the entire domestic chemical industry, which uses natural gas for fuel and as a raw material, uncompetitive.

He urged Senate lawmakers to take four policy steps: 1) allow more coastal states to engage in activity on the federal OCS; 2) expedite the development of Lease 181 areas in the eastern Gulf of Mexico that are at least 100 miles off the Florida coastline; 3) declare a national emergency, mobilizing every American to save energy; and 4) take steps to assure that the most efficiently generated energy is dispatched to the power grid first.

"Frankly, the OCS supply situation should have been tagged on to [the broad energy] bill" that was signed into law by President Bush in early August, Liveris said. Domenici and other pro-OCS senators, such as Sens. Lamar Alexander (R-TN) and Mary Landrieu (D-LA), attempted to do this during the debate on the energy bill this summer, but were blocked by anti-OCS drilling forces from Florida. Sen. Bill Nelson (D-FL) threatened to filibuster the energy bill if provisions to relax the OCS moratorium were included.

Red Cavaney, president of the American Petroleum Institute (API), said President Bush, in consultation with Congress, currently has the power to draw a line in the Gulf of Mexico between Florida and Alabama to allow production in the Lease 181 area off the Alabama coastline. Although production would not likely be forthcoming for another 5-7 years, he said this action would "send a very power signal" to the gas futures market that more supply was on the way, and would help to reduce the pressure on prices.

Cavaney said he supported the proposal that would allow individual coastal states, such as Virginia and Alabama, to opt out of the congressional and presidential moratoriums on oil and gas drilling in the OCS. Cavaney, however, noted that any proposal calling for natural gas-only leasing would not be feasible with today's technology.

Under questioning from anti-drilling Sen. Mel Martinez (R-FL), Cavaney conceded that there was "very little that can be done in the near term to change the dynamic" of high gas prices and limited supply. That's because Congress has taken off the table nearly all of the "attractive areas" to drill for natural gas, he said. "The most powerful thing [that] we can do today is ramp up our...conservation [efforts]."

Dow's Liveris believes that the dispatch of efficiently generated power first could free up to 644 Bcf of natural gas, and would make a noticeable dent in demand within two years. He also believes that Lease 181 could provide enough natural gas to heat 25 million homes for decades.

"I believe that we're going to face some very serious challenges this winter...If we have a normal to colder winter, I think we have to be prepared [for] a number of significant operational challenges," said Christopher Helms, president of the pipeline group at NiSource Inc., which owns Columbia Gulf Transmission, a pipeline that delivers gas from the Gulf to the Mid-Atlantic region and Northeast markets.

"We can't afford to lose [anymore] natural gas supply." He noted that the current gas supply situation is "very tenuous," with Gulf daily gas production down by about 6.6 Bcf/d from pre-hurricane levels. Total Gulf gas production lost since the start of the hurricanes has been 240 Bcf. "We may be facing this winter with a significant amount of gas not flowing on the pipelines," which would cause the industry to rely more on natural gas in storage to meet the winter heating season demand, Helms said. Currently about 65% of the peak-day demand is met by storage, with the remainder is supplied by pipelines.

"The real challenge is going to be in the late winter when storage deliverability is declining and we don't have the same amount of gas flowing," he told lawmakers.

In order to restore more Gulf gas production, "we've got to get [the onshore] gas processing infrastructure up and running" in Louisiana. In addition, "we need some federal coordination" of recovery efforts "quite frankly because we are so disaggregated." Helms suggested that a federal agency, such as the Department of Energy (DOE), be named as a clearinghouse for the industry.

"We need to start talking about where we can prioritize repair equipment, barges...to get our industry back in shape." As it stands right now, he reported that gas pipelines, processors and producers "are all competing for limited resources of crews, supply barges, helicopters [and] generating capability" in the Gulf Coast region.

"We can't get our liquids separator plant operable for another five weeks. It had eight feet of salt water under it. Every pump, every motor, every electrical piece of equipment [was affected], and we're not alone. The refineries, Entergy...have the same demand for electricians," Helms said.

The federal government also must make more funding for the Low-Income Home Energy Assistance Program (LIHEAP) a priority this winter, along with greater access to federal non-park lands for producers, according to Helms. He called greater producer access "the elephant in the room." Helms estimated that gas deliverability could jump 1 Bcf/d by March 2006 if Congress would grant producers more access in the Rockies.

In related developments on Capitol Hill last week, key Senate and House energy committees reported they are considering sending authorizing proposals to their respective budget committees to open up the Arctic National Wildlife Refuge (ANWR) and possibly more areas of the federal OCS to oil and natural gas activity.

The Senate Energy Committee has scheduled an Oct. 19 mark-up of a budget reconciliation package for fiscal year 2006 that would authorize E&P activity in Alaska's ANWR. Chairman Domenici also is said to be considering the hot-potato issue of expanded OCS drilling for inclusion in the budget reconciliation package, according to Capitol Hill aides. The current deadline for the Senate to complete work on the reconciliation package is Oct. 26.

The issue of whether to include OCS language in the budget reconciliation package "is still under discussion" by the Senate energy panel, said committee spokeswoman Angela Harper on Friday. A final decision will "most likely" be reached either late this week or early next week, she noted.

The Senate Energy Committee's reconciliation package assumes that leasing in Alaska's ANWR would produce $2.4 billion in revenue over five years. It will be melded with budget-trimming proposals from other congressional committees into an omnibus budget bill that seeks to cut net spending outlays of the federal government in fiscal year 2006.

Opening ANWR, which has been the target of a more than decade-long fight in Congress, and expanding access to the OCS may have a good shot at being passed as part of the budget reconciliation process, given that a budget package can't be filibustered under Senate rules. Pro-energy development Senate forces won't have to muster the necessary 60 votes to overcome a filibuster by anti-drilling lawmakers. Instead, the budget measure will require only a simple majority vote (51) to pass.

On the House side, Rep. Richard Pombo (R-CA), chairman of the House Resources Committee, also is looking to include language on ANWR and possibly the OCS in his panel's budget reconciliation proposal, according to committee spokeswoman Jennifer Zuccarelli. Pombo's committee in late September voted out a bill that would open ANWR and more of the OCS, but he decided to delay taking it to the House floor in an effort to work out a deal with Florida lawmakers, who have opposed any relaxation of the OCS moratorium.

The Resources Committee passed the bill by 27 to 17 on Sept. 30 and it was scheduled to be considered on the House floor last week (see NGI, Oct. 3). But Florida House lawmakers "asked [Pombo] to hold off on the bill to make sure that they have a proposal [that they] can support," Zuccarelli told NGI.

Pombo is expected to pursue ANWR and possibly expanded offshore drilling in the budget reconciliation package that is due to be taken up by Congress later this month, she noted.

The Florida House delegation is steadfastly opposed to an existing amendment in the House Resources' bill, sponsored by Reps. John Peterson (R-PA) and Neil Abercrombie (D-HI), that would remove the presidential and congressional moratoriums in the OCS to allow natural gas-only leasing (see NGI, Oct. 3). This language would bring gas production to Florida's shores, the lawmakers said.

The Peterson-Abercrombie is a "poison pill" that can't be supported in "any way, shape or form" by Florida Gov. Jeb Bush, who has worked closely with Pombo over the last couple of months to shape a bill that would satisfy the state's concerns, said Russell Schweiss, a spokesman for the governor. He noted that Gov. Bush does support provisions in the bill that would bar energy activity within a 125-mile buffer zone around Florida, and would remove a portion of gas-rich Lease 181 in the eastern Gulf of Mexico from the planning cycle.

A compromise now being negotiated between Pombo and Florida politicians could result in the leasing and drilling in about 70% of the eastern Gulf of Mexico area off the Florida coast that is expected to contain huge reserves.

The deal would allow individual states to decide whether to allow drilling (and collect royalties) off their coasts, while enforcing a federal ban on drilling around the Florida coastline. As it is being crafted, the legislation could free up a good part of the area believed to hold up to 2.9 Tcf and 396 billion barrels of oil, a Pombo aide said. The area originally had been included in Lease Sale 181 in the Eastern Gulf, which was held in 2001.

Following an outcry and political pressure from Florida politicians, that sale was reduced by Interior Secretary Gale Norton from 5.9 million acres to 1.5 million acres, denying access to about two-thirds of the area's potential (see NGI, July 9, 2001). The area actually leased was estimated to contain 1.25 Tcf of commercially recoverable (by 2001 price standards) natural gas and 185 million barrels of oil. The new agreement under construction would allow leasing of more, but not all, of the original Lease Sale 181 area.

Reportedly the deal being crafted by Pombo also would include drawing a line offshore between Alabama and Florida, with no drilling for oil allowed for 50 miles on the Alabama side and no drilling for natural gas for 25 miles on the Alabama side.

Gov. Bush, long an outspoken opponent of drilling anywhere near Florida, sent a letter to Pombo late last month commending him on portions of his OCS bill that would allow states to decide whether to permit drilling. Bush said he appreciated Pombo's efforts "to codify the presidential withdrawal of the waters around Florida [from leasing], which would include the newly-defined Florida Adjacent Zone, the newly defined Straits of Florida planning area and the portion of Lease Sale 181 within 100 miles of the coast of Florida."

Most members of the Congress from Florida have yet to look favorably on the proposed legislation. A Pombo aide said the two sides were "moving closer to consensus," and the result might surface the week of Oct. 17.

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