'Christmas Cancelled' for Producers in Eastern Gulf

Producers suffered a major setback when the Bush administration, in a concession to Florida, announced last week that it will radically scale back plans to allow exploration and production activity in the oil- and natural gas-rich eastern Gulf of Mexico.

At a press briefing last Monday, Interior Secretary Gale Norton said the department planned to limit drilling activity to a 1.5 million-acre region, leaving producers only 256 blocks on which to bid during the eastern Gulf lease sale --- known as 181 --- that's scheduled for December. The sale, which will be the first one in the eastern Gulf since 1988, originally had been sized at 5.9 million acres and covered 1,033 blocks.

With this action, the Interior Department has agreed to bar all drilling activity within 100 miles of the Florida and Alabama coastlines until at least 2007 --- areas that producers saw as possessing promising oil and natural gas reserves.

"It's like waiting for Christmas all year and being told...that Christmas is cancelled," said R. Skip Horvath, president of the Natural Gas Supply Association, which represents major producers. "What Interior Secretary Norton has done is said that 1 million U.S. families can have natural gas for 15 years. We hope that some day an additional 1.5 million families, or the total 2.5 million families originally expected to be served with natural gas from this area, will enjoy Christmas too."

"We're very disappointed by Interior's action," said Tom Fry, president of the National Ocean Industries Association (NOIA) and former director of Interior's Minerals Management Service (MMS). He estimated producers will be forced to "walk away" from as much as 80% of the gas and 90% of the oil potential in the region.

Interior last week put the natural gas potential of the downsized Lease Sale 181 at about 1.25 Tcf. Previously, it had estimated the gas potential of the lease sale at 2.9 Tcf, while the National Petroleum Council calculated it at a much higher level --- 7.8 Tcf. The oil potential of the lease area was cut to 185 billion barrels from 396 billion barrels.

Interior eliminated from Lease Sale 181 the offshore region closest to Alabama --- known as the "stovepipe" area --- that butts up against a lot of dry gas development, Fry noted, and it lopped off potential oil and gas development to the west of the Florida coast. Left to producers is offshore acreage that is located at least 100 miles from offshore Alabama in very deep waters, he said.

"We have listened and worked carefully with officials and affected citizens around the 181 area" in reaching this compromise, said Norton last week. She noted she conferred with President Bush, and the governors of Florida, Alabama, Mississippi and Louisiana. Norton also said the House vote last month to suspend Lease Sale 181 until April 2002 factored into her decision.

"The president has heard the voices of many people in Florida. He is concerned about...their reactions to the development of resources off of their shore," said White House spokesman Ari Fleischer, referring to the scaled-back lease sale.

Key Senate members of the Florida delegation last week weren't ready to declare a full victory despite the Bush administration's proposed compromise on the controversial issue of offshore drilling in the eastern Gulf region. They contend the administration's proposal to downsize the amount of acreage available for oil and gas leasing still will give producers a toehold in the eastern planning region of the Gulf that they didn't possess before, and could clear the way for heightened drilling activity in the offshore region in the future.

While this "appears to be a partial victory" for Florida, "I remain concerned about the 1.5 million acres still slated for lease [by Interior] and the possibility that this foreshadows further drilling and exploration activity," said Sen. Bob Graham (D-FL). "The threat to our beaches is still imminent," he added. "There are 105 outstanding lease blocks in the eastern Gulf. The Destin Dome, for example, is approximately 20 miles away from Pensacola. The only way to rid Florida of this specter is to buy back those looming leases" from the producers that currently hold them.

Although it addresses some of Florida's concerns, the compromise on the eastern Gulf lease sale remains "unacceptable," said Dan McLaughlin, a spokesman for Sen. Bill Nelson (D-FL). "One could see it as a victory for Florida, or the first time that oil companies will be allowed to invade the eastern planning area. As for being a threat to Florida, we don't see that much has changed."

The downsized lease sale "puts 1.5 million acres up for grabs by oil companies...and still is within close proximity to the Florida coast," he said.

As the debate over offshore drilling moves to the Senate floor, Nelson is considering offering an amendment to a Senate Interior appropriations bill that would block the spending of federal dollars to carry out the lease sales in tract 181, noted McLaughlin. "That is the plan that's on the table. [But] it is not completely firmed up," he said, adding that Interior's proposal for a less-ambitious Lease Sale 181 "changes the landscape somewhat."

As another option, he said the Senate may consider adopting an amendment passed by the House last month, which would suspend oil and gas leasing in the entire eastern Gulf -- including Lease Sale 181 -- until April 2002.

Rep. Sonny Callahan (R-AL), chairman of the House Appropriations subcommittee on energy and water development, opposed the House action because the initiative, which was sponsored by Reps. Jim Davis and Joe Scarborough of Florida, would block drilling activity in parts of offshore Alabama as well as off the coast of the Sunshine State. Callahan, in retaliation, proposed an amendment to hold up construction of the Alabama-to-Florida Gulfstream natural gas pipeline, which passed the full House in late June (see NGI, July 2).

Callahan is "disappointed that such a huge chunk [of acreage] has been taken off the table" for leasing in the eastern Gulf, but he believes the Bush administration made a "good faith effort" in trying to reach a compromise with Florida, said Jo Bonner, Callahan's chief of staff. The Alabama lawmaker hopes this will allow oil and gas leasing to go forward in the eastern Gulf, albeit on a reduced scale, and that the Bush administration "won't rule out the possibility" of returning to the original 181 tract in the future, Bonner noted.

The administration has made a "very generous concession to the state of Florida," he said. This action "should have appeased lawmakers in Florida" and "put to rest any reasonable concerns" that the state might have about drilling in its backyard.

The MMS said last week that it has completed a final Environmental Impact Statement (EIS) on Lease Sale 181, and that it soon would be available on its website at http://www.doi.gov. Copies also can be obtained from the MMS, Gulf of Mexico OCS Region, in New Orleans, LA, or by calling 1-800-200-GULF.

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