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Danger! You Are Entering the 'Perfect Energy Crisis'

Danger! You Are Entering the 'Perfect Energy Crisis'

With gas prices near $5/MMBtu, oil above $30/bbl and power prices spiking 700% in Southern California this summer, the signs of struggle in the energy sector are clear. It's the required response that still seems a little cloudy.

The industry would be well advised to respond to these signs as the U.S. responded to the smoke rising from Pearl Harbor in 1941, according to Matthew R. Simmons, president of Simmons and Company International. But for many producers and generators, government restrictions and red tape block the way.

"We are as unprepared to fight the decade-long energy crisis as the U.S. and Europe were unprepared for war as the 1930s came to an end..," Simmons last week told an emergency conference on the nation's apparent energy shortage. The conference titled "Energy Shortages in an Energy Rich America: Why?" was organized by Oklahoma Gov. Frank Keating and the Heritage Foundation and was broadcast live over the Internet from the governor's mansion in Oklahoma City.

The energy crisis will get worse before it gets better, most speakers agreed. "Today we are in the early stages of a severe energy crisis, not an oil shock, but an energy crisis. It's the equivalent of a perfect storm - the convergence of shortages in all three energy sources: oil, natural gas and electricity," said Simmons. "We are now entering the perfect energy crisis."

There's no way to tell how bad it might get or how high prices might go, he said. "I only know the limits we face and the time it will take to expand our energy capacity while we simultaneously rebuild the entire energy base brick-by-brick from wellheads to tankers to rigs to refineries and power plants. All need to be expanded and rebuilt simultaneously. Do my costs have to double or triple to merely afford this Marshal Plan type energy reconstruction? I would hope not. Until someone prepares a rough blueprint and then gets a few bids on the process, no one knows."

But according to many other speakers at the conference last week, the government is severely lacking when it comes to developing a policy blueprint. Despite the fact that 96% of the new power generation being planned will be fueled by natural gas and a doubling of the rig count will be required to meet impending demand growth, the government has done little to lift the barriers blocking exploration and production on federal lands.

Denise Bode, vice chair of the Oklahoma Corporation Commission, laid out her own version of a national energy policy: "The United States must immediately state its intention that in the national interest it will encourage the rebuilding of our national energy production, refining and delivery systems and provide reasonable access to federal lands to provide reliable abundant and reasonably priced energy to fuel this high-tech, energy intensive American economy. That statement of national intent must be a policy stated as both domestic and foreign policy."

Bode noted that Federal Reserve Board Chairman Alan Greenspan said earlier this month that "policymakers will need to be on the alert for oil driven, indeed energy driven, risk to our [economic] expansion."

"That should be something that everybody listens to very carefully. He does not make statements like that very lightly. We are facing a national energy crisis. But that crisis can be averted with an honest assessment of our resource, existing infrastructure and demand for energy coupled with national leadership, bipartisan leadership that will put in place policy that will allow America to meet our energy needs."

She noted that many politicians simply don't "want to face the fact that it won't be there if we don't drill for it. If we want domestic production and gas supplies when we turn on the stove, the President and the Congress better let the producers in this country know that we want them here."

Record high gas and oil prices already are making producers feel wanted and are providing significant incentives for exploration and production. There already has been a 40% increase in the U.S. gas rig count compared to last year. But without access to public lands, drilling locations will quickly vanish, according to Anadarko CEO Robert J. Allison, who also spoke at the conference. "There won't be any natural gas to find in the long run," he said, unless producers are given greater access to public lands.

Allison agreed with Simmons that the situation is likely to get worse before it gets better. Politicians and bureaucrats in Washington have erected too many exploration and production barriers, he said. "It's not that the supply isn't there, we have...between 1,200 and 1,600 Tcf of reserves," he said. But a large amount of that is off limits, and even more of it could be restricted if current plans by the U.S. Forest Service, the Bureau of Land Management and the Environmental Protection Agency (EPA) are allowed to go forward, said Allison.

"The National Petroleum Council (NPC) estimates that there are 213 Tcf of reserves basically off limits to drilling in the lower 48 and offshore either due to moratoria or other restrictions. That's a 10-year supply at the current rate of demand and represents nearly 15% of lower 48 gas resources..... The NPC estimates that more than 76 Tcf of gas is being tied up offshore as a result of this environmental paranoia. The government has also put many of the richest onshore prospects off limits in the eight Rocky Mountain states, which hold more than one third of the U.S. natural gas resources. Nine percent of federal land in the Rockies controlled by the Bureau of Land Management and the Forest Service is completely off limits. Another 32% carry costly restrictions that discourage development. Together these onshore areas represent about 137 Tcf of gas; that's more than five years of supply.

"We've recently lost tens of millions of acres to national monument and wetlands designations," said Allison. "The national monuments designations came under an obscure 1907 law that President Clinton thought he could get around Congress by invoking. The proposed ban on the new road building on the Forest Service's land threatens to restrict an area the size of South Dakota."

But there's another issue developing right now that Allison said "scares the daylights" out of him. It has to do with a commonly used well completion technique called fracturing. When gas is trapped in tight sand formations, producers force water and sand down under extreme pressure to crack the rock and fill it with sand so it stays cracked. This makes it easier for gas to flow into the well bore. The EPA previously said fracturing does not threaten drinking water and that decision was shared by a 1989 study by the Ground Water Protection Council, which is made up of multiple state agencies. However, the EPA apparently has changed its mind and has decided to do a new study of fracturing and its impact on ground water. That decision came on the heels of a federal appeals court ruling in Alabama that required the water used in fracturing on coal-seam gas wells to meet safe drinking water standards.

That new study is "unnecessary and actually ridiculous when you look at it," said Allison. "If the EPA decides to apply this safe drinking water standard to all kinds of wells in this country, the resulting delays and additional costs will slow down or actually shut down an awful lot of gas development."

Allison said another study by the NPC estimates that 60-80% of future gas wells in the U.S. won't be commercial unless they are fractured.

"The politicians, bureaucrats and even the environmentalists recognize that natural gas is the single best solution we have to the air quality problems facing this country, so why are they still erecting regulatory barriers? I think it comes down in large part to our national energy policy," which the Clinton Administration doesn't have. "I don't think pulling oil out of the Strategic Petroleum Reserve to lower home heating oil prices in the Northeast constitutes an energy policy," said Allison. "Do you? By the way, the 30 million barrels of oil withdrawn is resulting in less than 300,000 bbls of additional heating oil in the Northeast. If there is an energy policy, I think it's pretty clear that it's 'oil, cheap oil, cheap imported oil.'"

With the high prices today for natural gas and oil, Allison said he is concerned that lawmakers will do the opposite of what's right. They might "try and slap price controls and windfall profits taxes and so forth on us again. These aren't the answer. All they will do is discourage new investment and exacerbate the problem." The real answer, according to Allison is increased drilling with less impact on the environment per well drilled.

"We're not asking for completely free access to roam these areas at will, but we're asking for safe reasonable access. It has become an industry standard; anywhere where we are doing exploration and production we are treading lightly. Through technological advancements, we are making an increasingly smaller impact on the environment every year."

If the nation wants cheap, dependable, abundant and clean energy to keep the economy growing, the conflict between the environmental forces and the energy industry need to be overcome, he said. "If we are going to keep doing our jobs, we have to get cooperation and understanding. Without access there will be no more natural gas, and we'll spend more on foreign oil and more on tankers."

Rocco Canonica

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