June 2010

The Energy Legislation We Should Pass Today

While it is possible that the Deepwater Horizon disaster can, as President Obama hopes, provide new momentum to his effort to secure passage of a comprehensive energy and climate bill, chances are the more likely outcome will be a continuation of the stalemate that has existed on this legislation for months.

In early 2009 with the election of the President and overwhelming Democratic majorities in the Congress, the odds seemed high that a climate/energy bill would pass in short order. Since then, though, despite passage of the Waxman/Markey bill in the House, the Senate has been reluctant to act. Rustbelt Democrats have sounded a lot like Sunbelt Republicans when it comes to climate legislation, and there is growing apprehension that passing a potentially costly new bill to regulate carbon will further undermine our fragile economy.

Since members on both sides of the aisle and the American people would like to see action on such key energy matters as our dependence on foreign energy imports and the environmental challenges associated with producing energy, the question becomes: Is there a path forward that can help us improve our energy security and reduce our emissions of pollutants and greenhouse gases without bankrupting the U.S. treasury or undermining the economy? I believe there is.

Rather than losing more time in an effort to pass an energy/climate bill that lacks sufficiently broad support to prevail, let us focus instead on how we will structure our energy sector over the next 20 years—and then create a set of incentives that can make that structure a reality.

In recent years, many states have adopted renewable energy legislation mandating that a certain percentage of their power be derived from sources such as wind, solar, biomass and geothermal. The House-passed Waxman/Markey legislation sets up such a standard for the country as a whole, and a version of that approach has passed the Senate Committee on Energy and Natural Resources on a bipartisan vote. Today a principal barrier to final Senate passage is most likely the White House’s insistence that no energy bill be adopted unless it also contains some type of carbon regulation.

Yet even if Congress were to pass a national renewable energy bill, it would not be enough. Renewables are not the only “clean” domestic source of energy that can be ramped up over the next 15 to 20 years. If policymakers are truly serious when it comes to improving energy security and reducing the environmental risks associated with energy production, it is time for an increased role for nuclear power in America.

Around the world, from China to Finland to Abu Dhabi, nuclear power is being deployed and is considered a viable alternative energy source. Not so here. In the United States, we haven’t licensed and built a new reactor in decades. While there are many plans on the table, jump-starting the deployment of nuclear plants will require the U.S. government to play a major role in helping finance and license new units. Thus far, the Obama Administration has advocated for an enhanced government role in support of nuclear power. As with renewables, we need a full-court press to advance nuclear power if we are serious about realigning the energy sector. The time for that is now.

The simple fact is that we cannot improve our energy security or the environmental risks associated with energy production unless we significantly increase the roles of renewable energy and nuclear power. Neither one alone will be enough to sufficiently reshape the energy sector. What Congress needs to do now is to focus on passing an energy bill that sets attainable goals for both renewable energy and nuclear growth, and provides sufficient government incentives and support to make sure those targets are met.

I propose that we increase the role of renewables from current levels by 10 percent to 15 percent by 2030, and increase the percentage of power coming from nuclear energy by 10 percent during that same timeframe. If we do, in less than 20 years, America would derive more than half its power from non-emitting domestic sources. That would be an incredible achievement, placing us well on the road to addressing the energy challenges that most Americans and policymakers urgently want to overcome.

But to get there Congress needs to focus on the doable. As we learned in 2003 after the Northeast blackout, even a serious energy disaster does not cause members of Congress to vote against their constituents and political interests. Then, despite the fact that an energy bill was already in conference committee and leaders on all sides were confidently predicting its imminent passage, it took two years for a watered-down version of the legislation to make it to the finish line.

Rather than hoping that the Deepwater Horizon incident can help bring about a weak, likely unworkable energy/climate bill, the President and Congressional leaders should pursue a strategy with a higher chance of success. Let’s set some realistic goals and timetables to dramatically increase the role of renewables and nuclear power, and provide the federal backing needed to ensure those goals are achieved.

Such legislation may not solve all our energy problems, but the truth is there is no magic formula that can, by itself, accomplish everything. What we must avoid is continued inaction. Any new energy strategy will take years to fully implement and, therefore, we must begin the effort today. It is the best way to get us on the road toward enhanced energy and environmental security.

Spencer Abraham served as a U.S. Senator and America’s 10th Energy Secretary. He is also the author of Lights Out: 10 Myths About and Real Solutions to America’s Energy Crisis. The book can be pre-ordered on Amazon.com.

Gulf Oil Spill Further Slowing Oil and Gas Development on Public Lands

The disastrous oil spill in the Gulf of Mexico has not only put a freeze on plans to expand offshore drilling, it has added to an already chilled environment for developing oil and gas resources on public lands in the West.

The specter of the oil spill was raised two weeks ago when Interior Secretary Ken Salazar announced the department’s final reforms of its oil and gas leasing policies. Under the new guidelines, the Bureau of Land Management will develop “master leasing plans” in consultation with the public, allowing the agency to review other natural resource issues before deciding to lease lands for development.

“We must continue to move forward quickly and responsibly on our agenda to reform the management of our nation’s onshore and offshore energy resources and our oversight of the companies that develop them,” Salazar said in a statement. “The BLM reforms we are finalizing today establish a more orderly, open, and environmentally sound process for developing oil and gas resources on public lands. The BP oil spill is a stark reminder of how we must continue to push ahead with the reforms we have been working on and which we know are needed.”

Salazar started 2010 proposing these new restrictions on oil and gas leases and drilling permits, following up on his withdrawal one year earlier of nearly 2 million acres in three states that had been approved for development by the Bush administration.

Salazar took another step backward—at least in the view of energy producers—in March when he tightened limits on the use of “categorical exclusions” that had been authorized in the 2005 Energy Policy Act to streamline environmental reviews for new wells on public lands. The action, initially proposed in the changes announced in January, officially came in a settlement of a lawsuit over exemptions from environmental studies that had been granted for thousands of wells in the Rocky Mountain region from 2006 to 2008.

Two weeks ago, Salazar confirmed the agency’s new policy requiring a review of “extraordinary circumstances” before applying the “categorical exclusions” provision. A review would be triggered if the proposed actions were deemed to be of a degree or nature that they warranted environmental analysis.

Already, U.S. Sens. John Barrasso of Wyoming and Robert Bennett of Utah have sponsored legislation to block the reforms, responding to what they see as policies that exacerbate the already “uncertain business environment on public lands,” threatening jobs and communities throughout the West.

The pullback from drilling on federal lands in the West comes just as the need is growing to produce more energy from a region that has an estimated one-quarter of the gas reserves in the continental United States. Additionally, the Gulf spill triggered the recent Obama Administration announcement to freeze new deepwater drilling for six months as well as halted scheduled new exploration in Alaska waters and an upcoming lease sale off the Virginia coast.

Slowing offshore production would be a huge setback in efforts to increase domestic energy supplies, says Barry Russell, president and CEO of the Independent Petroleum Association of America. He cites estimates that there are 288 trillion cubic feet of natural gas and 59 billion barrels of oil still untapped in the Outer Continental Shelf off the U.S. coast, not counting Alaska.

More than half of all domestic supplies of natural gas come from federal lands, with roughly equal amounts produced onshore and offshore, according to the Interior Department.

The Gulf crisis has already made a bad situation worse in the western states, say independent oil and gas producers who do 90 percent of the drilling in the region, providing 236,000 jobs and nearly $6 billion in annual revenues for the federal government.

“It’s kind of hard to imagine it being any more difficult to operate on public lands in the West,” said Kathleen Sgamma, government affairs director for the Independent Petroleum Association of Mountain States, which represents more than 400 energy companies in the region. “Already this year we’ve seen $3.9 billion leave our region as a result of Interior policies that make it even more difficult to operate in our region.”

Now some members of Congress are having “knee-jerk reactions” to the Gulf spill, Sgamma said. “There are already several pieces of legislation that would make it even more difficult to operate onshore in the Rockies,” she said.

One is a bill introduced by Rep. Edward Markey, D-Mass., on the day after the oil rig exploded off the coast of Louisiana on April 20. The legislation would impose new fees on oil and gas leases on public lands that are inactive for more than 90 days per year. The bill is targeted at offshore leases that were exempted from making federal royalty payments under a 1990s law aimed at expanding domestic energy production. But Markey’s bill would apply to leases on both “onshore and offshore lands,” in effect assessing an added annual tax of $4 to $6 per acre for any leases not yet producing oil and gas in the West.

Western producers say Salazar put a chill on their industry as soon as he took office last year and halted leasing on 77 parcels near national parks in Utah that had been opened up by the Bush administration. A few weeks later, Salazar also rescinded lease offers and canceled a low royalty rate that had been granted for oil-shale development on 1.9 million acres in Colorado, Utah and Wyoming.

Last September, Salazar responded to an earlier scandal in the department’s Minerals Management Service (MMS) by eliminating the ability of producers on federal lands to fulfill royalty obligations with oil and gas in lieu of making cash payments. MMS officials were accused several years ago of using the royalty-in-kind program to solicit gifts and personal favors from the industry.

Then Salazar capped a year of new restrictions on western development by announcing regulatory reforms in January 2010 requiring extensive scrutiny of every proposed lease, including “public participation, an interdisciplinary review of available information, confirmation of Resource Management Plan (RMP) conformance, and national, state, and local guidance.”

Salazar also took a swipe at the Bush administration when he announced the changes, saying, “Under the previous administration, the oil and gas companies were kings of the world, with Interior their handmaiden.”

The energy industry responded that such claims are based on misconceptions, when in reality the Bush administration put more than 2 million acres off limits to drilling, designated 750,000 acres as “Areas of Critical Environmental Concern,” and increased the stipulations added to lease agreements.

Oil and gas production did increase on federal lands during the previous administration, the drillers acknowledge, but it has dropped precipitously under President Obama. There were 1,934 fewer leases and 1.1 million fewer acres open to development in 2009 than there were in the first year of the Clinton administration, according to statistics compiled by the Independent Petroleum Association of Mountain States.

Even some Democrats are upset about the trend. “To stifle the growth of this industry in the midst of record-setting national deficit and unemployment levels is not only outrageous but irresponsible,” said Rep. Dan Boren, D-Okla.

Perhaps adding insult to injury, Interior announced in April that it would launch a study of how other countries collect royalties on oil and natural gas as part of an effort to increase the return on development of energy resources on public lands.

U.S. royalty rates are currently 12.5 percent of the value of oil and gas produced from onshore leases and up to 18.75 percent for offshore leases, but a recent study by the Government Accountability Office found that U.S. revenues are well below the royalties received in other countries from oil and gas leases.

Despite the Administration’s claims of support for new domestic oil production, its recent actions both before and after the Gulf spill undermine the important goal of U.S. energy security—and at a significant cost to jobs and local economies.

The wrenching news and photos of the oil spill in the Gulf of Mexico have emboldened opponents of domestic oil and gas development, leaving supporters of this key industry to silently wait their turn until the next oil shortage or spike in gas prices.

Russian Oil—The Long-Term View

Russian oil production is hitting historic highs today, yet the question for the long term is whether the Russian oil sector can maintain these elevated levels of production. In March this year, Russian oil production hit 10.12 million barrels per day, a post-Soviet high. Russia’s latest energy strategy, issued in the autumn of 2009, calls for Russian oil production in 2030 to be 11 million barrels per day, about 10 percent greater than today’s production. Can Russia achieve this increase?

An increase of only 10 percent in Russian oil production by 2030 represents a significant challenge to the Russian oil sector. Most of today’s oil production comes from West Siberian oil fields, fields that have been producing oil for decades. Many of these fields have been rehabilitated during the past 10 years and are largely responsible for the 50 percent increase in Russian oil production during the last decade. But many of these fields have been substantially depleted and are nearing the end of their useful lives. To reach the goal of 11 million barrels per day, the Russian oil industry will have to find large amounts of investments to keep Western Siberian fields producing while developing new production in East Siberia, Sakhalin, Caspian and the extreme Northern fields.

Attracting investment in Russia’s oil industry has been a challenge. In 2009, only 60 percent of planned investments were realized in the energy sector as a whole (both oil and gas). While the oil sector has experienced significant investments, it has not been sufficient to stem the high depletion rates of old West Siberian fields, which are about 80 percent depreciated. To meet the goals of the 2030 strategy, four questions must be answered: How much money is needed? Where will this money come from? How much oil does Russia have to meet its future goals? Where is the oil located?

According to the Russian energy strategy, $600 billion must be invested in the oil industry through 2030 (in 2007 dollars). To break down this enormous number, the strategy assumes that the exploration and production (E&P) sector will need $110 billion from today to 2016, an additional $110 billion will be necessary from 2016 to 2022, and, finally, another $275 billion from 2022 to 2030. The remaining $105 billion will be needed in refining, transportation and marketing. According to the strategy, most of the E&P investment (approximately 70 percent) will have to be made in East Siberia and Sakhalin due to the very high cost of development in those regions. To compare this government estimate with a private-sector forecast, Lukoil estimated that $1 trillion would be needed over the next 20 years just to maintain Russian production at the 10-million-barrels-per-day level.

Before answering the question of where the money will come from, the answer to the third question—is there enough oil to reach the 2030 goal—appears to be yes. There is plenty of oil still to be developed. The strategy suggests that 77 billion barrels of oil, a cumulative total, will have to be produced by 2030, requiring Russia to increase its production to 11 million barrels per day in the intervening years. Today, Russia has a productive capacity of about 30 billion barrels. According to the strategy, if $600 billion is invested in production, it will lead to an additional 91.5 billion barrels productive capacity through 2030. This new capacity will be brought on line in stages with most of the new productive capacity in West Siberia (45.4 billion barrels), East Siberia (18.8), European North (4.6), and other areas that include Sakhalin, Volga/Urals, and Caspian (22.7 billion barrels). All the investments are made according to the Russian energy strategy, Russian oil productive capacity will total more than 120 billion barrels (new plus existing capacity). This is more than enough to meet the goal of 77 billion barrels (11 million barrels per day by 2030), with some 40 billion barrels remaining that can be produced in the post 2030 period.

But this analysis assumes sufficient reserves and sufficient investment. Are there reserves to meet these goals? BP’s annual analysis of worldwide reserves indicates that Russia’s proved oil reserves amount to 79 billion barrels, although there are large areas of undeveloped reserves that are not included in this total. Other analysts say that with enough investment in higher-cost regions, Russia could meet its future needs.

This brings us back to the most important question: Where will the money come from to meet the investment needs of Russia’s long-term strategy? In resolving this question, Russia’s fiscal and tax policies play an important role. Since 2004, Russia has put in place an extremely high tax regime to meet its budgetary needs. For exported oil, Russia takes 90 percent of revenues in total taxes on the marginal barrel produced and exported.  For all oil on an average basis, Russia’s taxes take about 60 percent or more of revenues.  To further clarify this analysis, one recent analyst indicated that for the last eight years, Russia’s gross oil revenues were about $1 trillion. Of this, about $700 billion went directly to taxes and only about $150 billion could be considered net income. Out of the $150 billion, only $50-70 billion was reinvested in the domestic oil industry. Many of the large Russian oil companies moved their investments offshore rather than put their money back into Russia. Meanwhile, the state-controlled companies—Gazprom and Rosneft—are not putting sufficient amounts of their profits back into the domestic industry to meet future goals. Foreign investment in the Russian oil sector has been declining sharply due to Russia’s policies of renationalizing oil assets, limiting where investments can be made by declaring the most important oil fields “strategic” (a designation of “strategic” severely limits foreign participation in the deposit), and undermining the investment environment through a variety of hardball tactics, high levels of corruption and the weak rule of law. The level of risk is much too high for large foreign investors in Russia today. While Russia has provided some tax incentives for new fields in East Siberia, these incentives have been viewed as inadequate to draw the kind of investments from Russian and foreign companies necessary to sustain long-term production. Thus, it is questionable whether Russia will be able to attract the level of investment necessary to meet its long-term goals. If this is true, then Russia’s long-term energy strategy is in doubt.

The last question is where is the oil located that will be developed? Today, the Russian oil industry’s focus is East Siberia. Tax incentives, pipeline infrastructure and investments have been concentrated there, making East Siberia the future for Russian oil production. But some analysts do not think that is where Russia’s oil future lies. They believe that West Siberia, Timan Pechora (northern provinces of Russia) and the North Caspian are the regions with the most oil. These analysts estimate that East Siberia only has about 5 billion barrels of oil reserves, far less than estimated in the Russian energy strategy.

The future for the Russian oil industry rests on answering these four questions in a way that supports its strategy to 2030. The plan estimated that $600 billion is needed, while one private Russian company estimated that $1 trillion is necessary. In either case, the level of investment necessary is massive. The strategy indicated that in addition to the current productive capacity of 30 billion barrels, another 77 billion barrels would be needed to increase overall oil production to 11 million barrels per day. Most analysts conclude that Russia has more than enough oil resources (proved reserves and yet-to-be-developed oil) to meet its expectations. While today’s focus of development is on East Siberia, a region that must be developed to meet future needs, some think that more should be going into the traditional regions of Russia and especially West Siberia. Of the four questions raised in this article, the most vital of the outstanding issues is where Russia will find the money to meet its future production goals. Today, both domestic and foreign investments are inadequate. Russia will have to change its investment environment to provide the incentives and stability necessary to attract the level of investment that is essential to meet its future goals. Without sufficient changes in its policies, Russia’s ability to achieve its oil production goals by 2030 is in doubt.

Analysis by Contributing Editor Leonard Coburn