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Senate Natural Gas Bill Takes Aim at Offshore Leasing Moratorium

April 11, 2005
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Stand-alone natural gas legislation offered in the Senate last Wednesday seeks to tame gas prices by giving coastal states the opportunity to opt out of the federal moratorium on offshore oil and gas leasing and potentially freeing up gas-rich Lease 181 in the eastern Gulf of Mexico for leasing, as well as promoting a number of other initiatives to slice gas demand and bolster supply.

This is not a time for "tweaking" of the nation's natural gas policy, but rather is a time to take "bold and aggressive steps" to lower the cost of natural gas, said Sen. Lamar Alexander (R-TN), one of the bill's sponsors, at a press briefing on Capitol Hill Wednesday that was called to unveil the 250-page measure. "We need aggressive conservation, aggressive use of alternative fuels, aggressive research and development, aggressive production and, for the time being, aggressive imports of liquefied natural gas."

A key part of the bipartisan bill, which also was sponsored by Tim Johnson (D-SD), calls for the Department of Interior to draw a state boundary between Alabama and Florida with respect to the gas-rich Lease 181 in the eastern Gulf. If the lease area falls within Alabama's waters, then the state can decide to drill for natural gas, but if it's in Florida's waters, the moratorium would stay intact, Alexander said.

Under the measure, Florida would have the option to veto leasing off of Alabama's coastline if the activity occurs less than 20 miles offshore, the senator told reporters and industry executives.

Interior would have 270 days after passage of the legislation to determine the boundary between the two states, according to the senator. The portions of Lease 181 that are not located in the state of Florida and are more than 20 miles off the coast of Alabama and Florida would be leased by Dec. 31, 2007.

It's estimated that Lease 181 holds up to 20% of all the natural gas that would be produced in the Gulf of Mexico over six years, a staff member for Alexander said. "It's probably the quickest, easiest place we could get a lot more gas," said Alexander, who is chairman of the Senate Energy and Natural Resources Subcommittee.

The measure, "The Natural Gas Price Reduction Act of 2005," is the "first legislation in decades that seeks to address the politically complex issue of increasing access to offshore natural gas," said Paul N. Cicio, executive director of the Industrial Energy Consumers of America (IECA), in a letter to Alexander last week. "Your bill is of historic significance."

The cost of the legislation is $6 billion over a five- to six-year period, and would be paid for by revenues from Lease 181, the senator's staffer estimated.

If a coastal state is interested in leasing, the governor would first have to ask Interior to conduct an inventory of gas, or oil and gas, resources off the state's coast. The department would have 125 days to respond to the request. A boundary would have to be drawn for production purposes. The governor would then send a letter to Interior, President Bush and Congress signaling that he or she wants to start leasing off their state's coast. The moratorium for the entire state, or areas designated by the governor, would be lifted. A neighboring state can object if the leasing activity would occur within 20 miles of its coastline. The rule of thumb is "if you can see it, you can veto it," Alexander said.

"If the area identified is more than 20 miles offshore...then an adjacent state can not say development is inconsistent with their development plan under the Coastal Zone Management Act. However, if development is less than 20 miles offshore, the adjacent state could determine that development is inconsistent with their plan and the secretary of Commerce would have to override the decision," according to the bill.

A producing state would receive 100% of the bonus bids for the first five years after the first lease sale or start of production. A producing state also would receive 12.5% of the qualified production revenues, and a conservation royalty of 12.5% of production revenues would be established.

Alexander believes his legislation is a better alternative than the proposed federal State Enhanced Authority for Coastal and Offshore Resources Act of 2005 (SEACOR), which advocates opening up states' coastal waters to natural gas exploration and production (E&P) activities, and giving states a greater share of the leasing revenues. "My bill is simpler and easier for the states" than SEACOR, he said.

Alexander criticized Virginia Gov. Mark Warner's recent decision to veto a bill that supported drilling off of the state's coastline. "If I were the governor of Virginia, I'd do it in a minute," he noted.

Although the measure is a stand-alone natural gas bill now, Alexander acknowledged that it could become part of the comprehensive energy bill. He noted that Sen. Pete Domenici (R-NM), chairman of the Senate Energy and Natural Resources Committee, and the Senate would make that decision.

"I think some of his provisions should be included in the comprehensive energy bill [that] we will mark up in committee later this spring," Domenici said last Wednesday. "I look forward to discussing [Sen.] Alexander's legislation with my colleagues on the committee and working closely with the senator on the natural gas title of the bill."

In addition to offering states a way to opt out of the leasing moratorium, the legislation would provide a number of benefits that were contained in last year's failed energy bill (HR 6), including royalty relief for deep-water production, coastal impact assistance to producing states such as Louisiana and Texas, more efficient processing and better coordination of drilling applications, and incentives for Rocky Mountain producers.

Moreover, the Senate measure would address the need for more liquefied natural gas (LNG) terminals in the United States to receive imports from foreign countries to offset the domestic supply shortfall. Specifically, the bill would give the Federal Energy Regulatory Commission the "exclusive" authority over the siting of LNG terminals.

But it does not give the Commission additional authority to grant eminent domain, or the power to completely override a state with respect to the Coastal Zone Management Act (CZMA), the Clean Air Act, or the federal Water Pollution Control Act.

The measure also would require FERC to act on applications for LNG and pipeline projects within one year. Toward this aim, FERC is directed to establish a schedule of all federal and state administrative proceedings that need to be completed to issue an LNG permit.

The legislation would amend the Deepwater Port Act of 1974 as well, directing the secretary of Transportation and FERC to establish a procedure for coordinating the permitting of pipeline construction used to service an offshore gas facility within the Commission's jurisdiction.

In a significant move, the bill would allow a natural gas storage facility to use market-based rates even if FERC determines that the facility may have the ability to exercise market power. The legislation allows FERC to condition such rates on the use of an "open and transparent auction" for sale of storage services. FERC is directed to periodically review such situations.

The bill also would authorize regulators to provide Congress with an update on the Alaska natural gas pipeline every six months, and it would provide $50 million per year from 2006 to 2009 for research into gas methane hydrates. "Coastal U.S. areas are rich in gas methane hydrates. Estimates indicate a U.S. resource base containing 200,000 Tcf of methane, or one-quarter of the world's supply," a summary of the bill said. The current U.S. gas demand is 26 Tcf a year.

Given that gas prices are strongly linked to high crude oil prices, Alexander proposes that the Senate raise its target for reducing U.S. dependence on oil to 1.75 million barrels a day from 2013 levels. The Senate previously called for a reduction of 1 million barrels a day from 2013 levels. "Our foreign reliance on Middle East oil is the silent elephant in the room on high natural gas prices."

The measure also proposes a number of provisions aimed at reducing natural gas prices for residential, commercial and power generation customers. For example, it authorizes $90 million a year for each of the fiscal years 2007 through 2010 to fund public education programs for consumers to reduce the demand for natural gas, oil and electricity.

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