Congress in two years should begin to phase out the moratoriums that have prevented producers from drilling in promising natural gas-prone areas of the Outer Continental Shelf (OCS), the National Petroleum Council (NPC) recommended in its much-anticipated study released Thursday.

A number of other initiatives — improved access and permitting for producers in the Rocky Mountains, faster regulatory reviews of new liquefied natural gas (LNG) and interstate gas pipeline facilities, and more emphasis on energy efficiency and conservation — also were proposed to ensure reliability of domestic gas supplies in the long term. But the suggestion to eliminate the moratoriums was undoubtedly the most controversial.

The lifting of the moratoriums, which have been in place for nearly two decades off the Atlantic, Pacific and Florida coasts, should be done in a phased manner and should target “selected OCS areas having high resource-bearing potential,” according to the 87-page report by the NPC, an oil and gas advisory committee to the secretary of the Department of Energy. Top executives from Kinder Morgan Inc., Reliant Resources, ExxonMobil, KeySpan Corp. and other energy companies were involved in the report, which was heralded as a “call to action.”

The council called on federal and coastal state governments to work with the energy industry to develop a plan to identify current moratoria areas of the Eastern Gulf of Mexico and the Atlantic and Pacific Coasts containing a high-resource potential, with a view toward removing the drilling restrictions in the offshore beginning in 2005.

The NPC would like to “get the right folks together” to begin a “dialogue” on the issue, said Mark Sikkel of ExxonMobil Production. Assuming the moratoriums are phased out by 2005, he sees leasing starting in 2007 and production getting underway by 2011. Opposition has always been stiff from coastal states’ governments and politicians.

It’s estimated the moratoria areas hold 80 Tcf of technically recoverable resources — 21 Tcf off the Pacific Coast, 33 Tcf off of the East Coast, and 25 Tcf off the Florida shoreline. The NPC noted, however, that only “limited data have been acquired in these areas due to the moratoria,” so the resource potential could be considerably larger.

Removing the long-standing moratoriums in federal offshore waters and increasing access to onshore public lands for producers will be especially critical as annual natural gas demand in the United States moves toward the 30 Tcf level, it noted. The NPC estimated that breaking down some of the barriers to drilling on federal lands (excluding designated wilderness areas and national parks) could result in customer savings of $300 billion in gas costs over the next 20 years.

If enhanced energy efficiency and greater flexibility in fuel choice are thrown into the mix, the savings in consumer gas costs could climb to $1 trillion over two decades, according to the NPC study.

Interestingly, the council did not “contemplate” drilling in the Arctic National Wildlife Refuge in its report, or take a position on whether Congress should offer loan guarantees or other fiscal incentives to build a long-line Alaska gas pipeline, although it projected the line would be in-service by 2013-14.

The “largest component of the future supply” will come from new discoveries in existing North American basins, the report said. It found that traditional North American basins will provide 75% of the long-term U.S. gas needs, but they won’t be able to satisfy all of U.S. demand in the years ahead. The existing North American resource base has shrunk to about 2,000 Tcf from nearly 2,500 Tcf in 1999, which was the last time the NPC reviewed gas supply/demand trends. The recovery rate per conventional gas well has dropped to 1 Bcf from abut 1.5 Bcf in the early 1990s, according to the council. While drilling has increased, the production response has been modest.

Rocky Mountain and Gulf of Mexico production must grow to offset declining production in mature U.S. basins and in Canada. “However, the trend towards increasing leasing and regulatory land restrictions in the Rocky Mountain region and the Outer Continental Shelf (OCS) is occurring in precisely the areas that hold significant potential for natural gas production,” the report noted.

The study found that 69 Tcf, or 29% of the Rocky Mountain area technical resource base, is currently “effectively” off-limits to exploration and development, and that access-related regulatory requirements impacted an additional 56 Tcf of potential resources with added costs and delays to development.

If the access/permitting conditions in the Rocky Mountains were improved and the OCS restrictions lifted, the NPC study projects that the changes could potentially add 3 Bcf/d of production by 2020. This would result in a reduction in gas price of 60 cents/MMBtu (nominal dollars), or $300 billion over a 20-year period.

The NPC study projects that large-scale liquefied natural gas (LNG) projects and Arctic gas could supply as much as 20-25% of domestic demand, but it notes that these involve “higher cost, have longer lead times and face major barriers to development.”

In the most optimistic scenario, the council projects that LNG imports — which currently account for less than 1% of U.S. gas supplies — will grow to 15 Bcf/d by 2020, accounting for 10-15% of domestic supply. This, it said, would require the construction of seven new regasification terminals and the expansion of three of the existing four terminals in the country. The existing terminals are expected to reach full capacity by 2007.

“This aggressive outlook for LNG import terminal construction will require streamlined permitting and construction to achieve the projected buildup. Expediting the approval process throughout all agencies (federal, state and local) is critical to overcome the many obstacles that may surface, including local opposition,” according to the NPC. Specifically, the study recommended reducing the time required to permit an LNG facility to one year.

The NPC further assumes the obstacles that have stymied construction of an Alaskan gas pipe for nearly 30 years will be overcome, and that the $20 billion line will be ready for service in the 2013-14 time frame. The pipeline, if ultimately constructed, would contribute 4 Bcf/d, or about 6% of U.S. gas supply.

On the transportation front, the study estimates that investments in pipeline and distribution facilities will average $8 billion a year, but it noted that an increasing share of capital will be required to sustain the reliability of existing infrastructure. This is due to the aging nature of the U.S. gas pipe infrastructure, 88% of which was installed prior to the 1970s.

“It is anticipated that over the next 22 years $70 billion of expenditures will be needed in sustaining capital for the existing pipeline and distribution infrastructure in the United States, and $3 billion in Canada,” according to the NPC study. It’s estimated that 21% of total capital expenditures for pipeline, distribution and storage are spent on maintaining the facilities at the present, and that figure will grow to 45% of total expenditures by 2020.

The NPC pressed FERC and state regulators to provide more regulatory certainty in order to create a “stable investment climate” and minimize the risks involved in investing in new and existing pipeline facilities. “Changes to underlying regulatory policy, after long-term investments are made, increase regulatory and investment risk for both the investor and customer.”

With respect to new pipeline projects, the Commission has done a “great job” of speeding up the review process in the past couple of years, but more work needs to be done, said Scott Parker of Kinder Morgan, who was involved in the NPC report. He believes the project reviews could be expedited even more through the use of a “Joint Agency Review Process.”

The review would require the “up-front involvement” of all interested parties and federal agencies that have jurisdiction over a gas pipeline project. “This will allow the decision process to proceed to approval and implementation more accurately, more timely, and at lower overall costs.” The final FERC record in a case would “resolve all conflicts” related to requirements of the U.S. Army Corps of Engineers, Coastal Zone Management Act and Clean Water Act, which have tended to drag out the certification process, the study said.

The NPC also urged regulators to address policies that have made pipeline customers reluctant to subscribe to transportation service under long-term firm contracts. “Regulatory practices that limit long-term contracts inhibit efficient markets and discourage the development and enhancements of pipeline infrastructure,” the council said.

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