With gas prices near $5/MMBtu, oil above $30/bbl and powerprices spiking 700% in Southern California this summer, the signsof struggle in the energy sector are clear. It’s the requiredresponse that still seems a little cloudy.

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

“We are as unprepared to fight the decade-long energy crisis asthe U.S. and Europe were unprepared for war as the 1930s came to anend..,” Simmons last week told an emergency conference on thenation’s apparent energy shortage. The conference titled “EnergyShortages in an Energy Rich America: Why?” was organized byOklahoma Gov. Frank Keating and the Heritage Foundation and wasbroadcast live over the Internet from the governor’s mansion inOklahoma City.

The energy crisis will get worse before it gets better, mostspeakers agreed. “Today we are in the early stages of a severeenergy crisis, not an oil shock, but an energy crisis. It’s theequivalent of a perfect storm – the convergence of shortages in allthree energy sources: oil, natural gas and electricity,” saidSimmons. “We are now entering the perfect energy crisis.”

There’s no way to tell how bad it might get or how high pricesmight go, he said. “I only know the limits we face and the time itwill take to expand our energy capacity while we simultaneouslyrebuild the entire energy base brick-by-brick from wellheads totankers to rigs to refineries and power plants. All need to beexpanded and rebuilt simultaneously. Do my costs have to double ortriple to merely afford this Marshal Plan type energyreconstruction? I would hope not. Until someone prepares a roughblueprint and then gets a few bids on the process, no one knows.”

But according to many other speakers at the conference lastweek, the government is severely lacking when it comes todeveloping a policy blueprint. Despite the fact that 96% of the newpower generation being planned will be fueled by natural gas and adoubling of the rig count will be required to meet impending demandgrowth, the government has done little to lift the barriersblocking 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 UnitedStates must immediately state its intention that in the nationalinterest it will encourage the rebuilding of our national energyproduction, refining and delivery systems and provide reasonableaccess to federal lands to provide reliable abundant and reasonablypriced energy to fuel this high-tech, energy intensive Americaneconomy. That statement of national intent must be a policy statedas both domestic and foreign policy.”

Bode noted that Federal Reserve Board Chairman Alan Greenspansaid earlier this month that “policymakers will need to be on thealert for oil driven, indeed energy driven, risk to our [economic]expansion.”

“That should be something that everybody listens to verycarefully. He does not make statements like that very lightly. Weare facing a national energy crisis. But that crisis can be avertedwith an honest assessment of our resource, existing infrastructureand demand for energy coupled with national leadership, bipartisanleadership that will put in place policy that will allow America tomeet our energy needs.”

She noted that many politicians simply don’t “want to face thefact that it won’t be there if we don’t drill for it. If we wantdomestic production and gas supplies when we turn on the stove, thePresident and the Congress better let the producers in this countryknow that we want them here.”

Record high gas and oil prices already are making producers feelwanted and are providing significant incentives for exploration andproduction. There already has been a 40% increase in the U.S. gasrig count compared to last year. But without access to publiclands, drilling locations will quickly vanish, according toAnadarko 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 getworse before it gets better. Politicians and bureaucrats inWashington have erected too many exploration and productionbarriers, he said. “It’s not that the supply isn’t there, wehave…between 1,200 and 1,600 Tcf of reserves,” he said. But alarge amount of that is off limits, and even more of it could berestricted if current plans by the U.S. Forest Service, the Bureauof Land Management and the Environmental Protection Agency (EPA)are allowed to go forward, said Allison.

“The National Petroleum Council (NPC) estimates that there are213 Tcf of reserves basically off limits to drilling in the lower48 and offshore either due to moratoria or other restrictions.That’s a 10-year supply at the current rate of demand andrepresents nearly 15% of lower 48 gas resources….. The NPCestimates that more than 76 Tcf of gas is being tied up offshore asa result of this environmental paranoia. The government has alsoput many of the richest onshore prospects off limits in the eightRocky Mountain states, which hold more than one third of the U.S.natural gas resources. Nine percent of federal land in the Rockiescontrolled by the Bureau of Land Management and the Forest Serviceis completely off limits. Another 32% carry costly restrictionsthat discourage development. Together these onshore areas representabout 137 Tcf of gas; that’s more than five years of supply.

“We’ve recently lost tens of millions of acres to nationalmonument and wetlands designations,” said Allison. “The nationalmonuments designations came under an obscure 1907 law thatPresident Clinton thought he could get around Congress by invoking.The proposed ban on the new road building on the Forest Service’sland 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 commonlyused well completion technique called fracturing. When gas istrapped in tight sand formations, producers force water and sanddown under extreme pressure to crack the rock and fill it with sandso it stays cracked. This makes it easier for gas to flow into thewell bore. The EPA previously said fracturing does not threatendrinking water and that decision was shared by a 1989 study by theGround Water Protection Council, which is made up of multiple stateagencies. However, the EPA apparently has changed its mind and hasdecided to do a new study of fracturing and its impact on groundwater. That decision came on the heels of a federal appeals courtruling in Alabama that required the water used in fracturing oncoal-seam gas wells to meet safe drinking water standards.

That new study is “unnecessary and actually ridiculous when youlook at it,” said Allison. “If the EPA decides to apply this safedrinking water standard to all kinds of wells in this country, theresulting delays and additional costs will slow down or actuallyshut down an awful lot of gas development.”

Allison said another study by the NPC estimates that 60-80% offuture gas wells in the U.S. won’t be commercial unless they arefractured.

“The politicians, bureaucrats and even the environmentalistsrecognize that natural gas is the single best solution we have tothe air quality problems facing this country, so why are they stillerecting regulatory barriers? I think it comes down in large partto our national energy policy,” which the Clinton Administrationdoesn’t have. “I don’t think pulling oil out of the StrategicPetroleum Reserve to lower home heating oil prices in the Northeastconstitutes an energy policy,” said Allison. “Do you? By the way,the 30 million barrels of oil withdrawn is resulting in less than300,000 bbls of additional heating oil in the Northeast. If thereis 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 saidhe is concerned that lawmakers will do the opposite of what’sright. They might “try and slap price controls and windfall profitstaxes and so forth on us again. These aren’t the answer. All theywill do is discourage new investment and exacerbate the problem.”The real answer, according to Allison is increased drilling withless impact on the environment per well drilled.

“We’re not asking for completely free access to roam these areasat will, but we’re asking for safe reasonable access. It has becomean industry standard; anywhere where we are doing exploration andproduction we are treading lightly. Through technologicaladvancements, we are making an increasingly smaller impact on theenvironment every year.”

If the nation wants cheap, dependable, abundant and clean energyto keep the economy growing, the conflict between the environmentalforces and the energy industry need to be overcome, he said. “If weare going to keep doing our jobs, we have to get cooperation andunderstanding. 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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