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Industry Claims Expanding GOM Leasing Will Help Stabilize Prices

Just the act of opening up an additional two million acres in Lease Sale 181 in the Central Gulf of Mexico with the prospect of substantial new supplies of natural gas in the relatively near term "will help to mitigate natural gas prices," an industry representative testified in a Senate hearing Thursday.

"Even the prospect of such supplies can have a positive and calming effect on the natural gas market. In my opinion. there is no single better place to grow production in the short- and mid-term time frame than the Eastern Gulf," Timothy Parker, senior vice president of Dominion Exploration and Production, told the Senate Energy and Commerce Committee. Parker was representing all the major oil and gas producer associations.

Thomas Skains, chairman and CEO of North Carolina-based Piedmont Natural Gas, representing the American Gas Association, also testified to the importance of opening Lease Sale 181 and other new areas for drilling in the GOM, as well as other measures necessary to increase supply and reduce demand for natural gas. Skains said because supply and demand are in balance and "there is no slack in the system" the market responds "immediately and dramatically" to small changes.

Committee Chairman Pete Domenici, R-NM, focused on Parker's claim for an immediate market impact, asking him to elaborate. "The prospect of substantial accumulations that we could bring to the market in the relatively near term, by itself, will help to mitigate natural gas prices," Parker said. Domenici repeated earlier testimony by the director of the Minerals Management Service (MMS) that 5 Tcf and possibly more natural gas could be produced from the additional acreage.

Parker said the 5 Tcf was a conservative estimate for what is believed to be a gas-prone area. "It may be much bigger than we can even imagine today... In the parts of the Gulf of Mexico where we have been allowed to buy leases and explore, we have produced three times as much gas as we once thought was there. And the current resource estimate, according to the MMS, is that there is nearly five times as much remaining to be found."

The Sale 181 area is considered a relatively low-risk resource. In the part of 181 that already has been explored the success rate for wildcats is more than 50%, "far greater than traditional wildcat exploration," Parker said.

Parker, Skains and Stephen Wilson, CEO of the ammonia fertilizer producer CF Holdings, all pointed to the lack of any spills from any of the damaged platforms in the Gulf during last summer's hurricanes as evidence of the low risk of any damage to coastal areas.

Regarding possible damage to Florida, Domenici said "this ocean ...this water...belongs to the United States of America... The issue to me is, one, the risk involved, and the need for the country. I don't hear a lot of people talking about the risk 'objectively.'" People are "scared," but Domenici questioned the basis of their fear given that "we had as bad winds as we're going to have when Katrina hit," but there were no significant leaks from damaged platforms in the storm's path. So the new drilling technology has been "tested in the most monstrous real laboratory that we're probably going to see."

Parker also demonstrated how with new technology a large area can be developed with a very small footprint. For example the Independence Hub, which Dominion and its partners are developing to tap discoveries in the original Lease Sale 181, adjacent to the proposed expanded area, is designed to bring in 1 Bcf/d, initially tapping 15 wells, with "the world's largest integrated subsea system" in 8,000 feet of water. Production should start to flow in 2007, Parker said.

Michael Gravitz, the Oceans Advocate for the U.S. Public Interest Research Group, disputed the claim that the risk of coastal contamination from oil spills was very low, citing an oil spills risk analysis done by the MMS in 2002 that he claimed found "a very plausible likelihood of an oil spill of 1,000 barrels or more" that will reach coastal areas if additional leasing and drilling occurs in Lease Sale 181. Further, Gravitz calculated the additional gas supplies to be gained from the area would lower the price of natural gas at the most 7-10 cents/Mcf.

Gravitz conceded that most off the spills come from barges, tankers and pipelines, not from E&P operations or the platforms themselves, although he claimed there were some spills resulting from last summer's hurricanes that came from platforms.

MMS Director Johnnie Burton, leading off testimony Thursday, said the extended Lease 181 area is believed to be gas-prone, but she said comments from industry led her to believe it would not be practical to lease for gas-only. Questioned, she said it might be possible, if the new area is opened up, to have production flowing within three to four years of leasing. While it would normally take five years, some wells in the new area might be able to be hooked into the hub platform being completed in the original Lease Sale 181 area.

The hearing was on a bipartisan bill introduced by Domenici and others that calls on the secretary of the Department of Interior to open up closed parts of Lease 181 to expanded leasing for oil and natural gas drilling within a year of enactment (see Daily GPI, Feb. 14). Domenici indicated he was prepared to push this legislation through without getting involved in other measures to increase leasing and drilling, although he would be following up on those later.

Domenici has gotten strong support from industrial users of natural gas, although most of them have indicated they would like to see more OCS areas opened. Wilson pointed out that "natural gas is to ammonia what flour is to bread," and said the nation's farmers are suffering from fertilizer prices that have doubled since 2002. Likewise ammonia imports have increased by 80% over 2002. Ultimately it hurts consumers if the natural gas is priced so high that ammonia has to be imported from places like Saudi Arabia, Russia and the Ukraine. Conversely, farm yields could drop 40% if the farmers don't have the nitrate fertilizer made from ammonia.

The Lease 181 measure, plus another proposal offered last week by senators from Virginia and Arkansas to allow states to opt out of the moratoriums and allow leasing off their shores, also got support from Dow Chemical. Chairman-Elect Andrew N. Liveris issued a statement at the end of the week pointing out that since natural gas is a raw material in chemical products and 96% of all manufactured goods have a link to the chemical industry "the high cost of natural gas is undermining the future of manufacturing in the United States."

Both manufacturers said they have made major strides in efficiency, cutting their fuel use, over the last several years, but still face rising costs.

A New Jersey senator took the opportunity to object to the proposed five-year lease plan offered by the MMS, which would leave open for discussion the possibility of leasing off the state of Virginia, which has expressed an interest in having the moratorium lifted off its coast. He questioned how the MMS could divide up the offshore and expect that possible oil spills offshore Virginia would not impact Maryland and Delaware. He warned of a domino effect "that threatens the whole Atlantic Seaboard, noting that New Jersey's second largest industry was tourism in coastal areas.

The battle lines appear to be drawn between inland states with manufacturing and farming industries and coastal states which rely on tourism.

Meanwhile, on the House side Thursday, Rep. Jim Davis, D-FL, introduced companion legislation to a bill introduced by Florida's senators to keep drilling at least 260 miles off Florida's shores.

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