A sea change for offshore energy?

In the aftermath of hurricane disruptions to energy supply from the Gulf of Mexico, increased activism by energy consumers and legislative innovation in a number of states are leading to a growing comprehension by the “man on the street” of how energy policy affects their day-to-day lives. A September 2005 poll by the Pew Research Center for the People & the Press indicated some shifting attitudes. Fifty-seven percent of respondents said developing new energy sources is now more important than protecting the environment, up from 49% who expressed that view in March.

Even in coastal states that have traditionally been the most stark opponents of offshore energy, there are signs of change. Americans are nearly as worried about their country’s dependence on foreign energy sources as they are about the war in Iraq, a poll released by the magazine Foreign Affairs showed in late March.

All indications are that we have arrived at something referred to by Secretary of the Interior Gale Norton as “a teachable moment.” Now is the time when our industry stands the best chance to truly change the nature of the debate and make real strides in opening more areas to offshore exploration and production.

This crossroads could change the political situation we face now, where increasing amounts of the nation’s money are sent to foreign countries while we ignore the potential of our own Outer Continental Shelf (OCS) by hiding behind scare tactics that raise the misplaced fear of environmental destruction.

We must maintain the momentum and continue to tell our story as widely and as frequently as possible. We now have an opportunity to broaden and deepen the quality of our alliances with energy consumers. These agricultural, manufacturing, and utility companies bring a vital, new voice to the debate over increasing access to the OCS. They have the capacity to tell the industry’s story more broadly and are better capable of illustrating the downstream effects of limited energy supply. It is incumbent upon us in the offshore industry to work to educate the public at-large.

But what is to be communicated? First, while reliable oil and gas supplies are vital to our economic prosperity, the United States continues to limit access to its own resources. Second, the energy industry is misunderstood and its positive impact on communities large and small requires a more thorough explanation. Third and finally, offshore production has a strong record of employee and environmental safety.

Demand for energy is on the rise

That story begins with a basic review of the fundamentals: supply and demand. There can be no question that demand is on the rise, both in the United States and globally. At current projections of world GDP growth, this global demand for energy may increase by over 50% by 2025, while the United States’ demand could increase over 30 percent over the same time period. Developing nations will likewise require increasing amounts of energy as their economies modernize and raise the quality of life for their populations.

Addressing limitations on supply

The strategic question, therefore, is: Where will this energy come from?

Some will come from renewable sources and we should continue to push for rapid research, tax incentives, and development on this front. But widespread use of sources such as wind, solar, and biomass is still far off, and will likely only serve to replace a small percentage of demand over the next two decades. Hydropower in the United States will probably continue to account for about 5% of power generation, but lacks opportunities for major expansion. Nuclear power, which currently supplies approximately 20% of U.S. power generation capacity, is a potential source of new energy supplies, but negative public perceptions could impede sufficient expansion.

It is vital to note that oil and gas supply will become more and more challenged due to increasing decline rates. Energy companies are finding smaller reserves than in the past - the last field capable of producing in excess of 1 MMb/d of oil was discovered back in 1976 - and current major fields will inexorably decline.

At the same time, production is hampered by increasing political and fiscal barriers. The current quasi-nationalization of oil fields in Venezuela is but one example. There are similar political barriers limiting production at home, as well, and here is where we must focus our attention. One clear example of these barriers is the current system of moratoria on U.S. Outer Continental Shelf. While demand continues to rise and consumers are pummeled by rising prices, nearly 80% of the OCS remains off-limits to exploration and production. With rising energy prices, it is hard to fathom how Congress can continue to justify this ill-conceived policy.

Beyond supply and demand

A simple discussion of the economics of supply and demand, however, does not adequately capture the human dimension of energy policy. Access to reliable, affordable energy is the foundation for improving standards of living, and it would be immoral to hinder this.

Petroleum products and natural gas are widely appreciated as crucial to transportation, heating, and power generation, but few understand their role in the manufacture of products as diverse as fertilizers, food preservatives, shampoo, pantyhose, toothbrushes, contact lenses, trash bags, car dashboards, hand lotion, bandages, floor carpeting, disposable diapers, crayons, pharmaceuticals. Consistent, affordable energy supplies are vitally important to our way of life, from the corner store to the far corners of the global economy.

What about those employed by the industry itself? An analysis by the Bureau of Labor Statistics indicates that the exploration and production industry employs over 123,000 people directly, and another 120,000 are employed in jobs indirectly related to the industry. If offshore development were allowed to expand to states whose waters are currently under moratoria, there would be excellent opportunities for job creation and sustainable economic growth.

And these are quality jobs. The Bureau of Labor Statistics also indicates that wage and salary earnings in the oil and gas industry are more than thirty percent higher than average. The average hourly earnings of non-supervisory workers in the oil and gas extraction industry is $19.27, compared with $14.95 for workers in private industry as a whole. Petroleum engineers can expect to earn over $50,000 in their first year after graduation.

Although most people think of large corporate entities when they think about oil and gas, few outside the industry are aware that offshore development is also an incubator of small business. Many of the supply and service companies that play such a vital role in offshore operations are small businesses: about seven out of 10 hydrocarbon-related companies employ fewer than 10 workers.

When Hurricanes Rita and Katrina battered the Gulf Coast earlier this year, offshore oil and gas companies - whether large or small - were there to help their employees and their families recover. Some companies extended loans, others built tent cities and brought in food and water supplies; some distributed generators, while others donated tens of millions to support the work of humanitarian efforts like the Red Cross.

An Enviable Safety Record

Perhaps the biggest misconception about our industry relates to the environment. The fact is that the technology employed by the offshore industry is already environmentally safe, a point which must be communicated again and again.

Over the past twenty-five years, the industry has built an enviable record of safe, clean operations, as noted in the Oil in the Sea III study performed by the National Academy of Sciences in 2002. Less than two percent of the oil in U.S. waters comes from drilling and production. Transporting oil by tanker is four times more likely to cause a spill, and thirty times more oil comes from land-based sources.

In fact, between 1985 and 2000, 6.3 billion bbl of oil were produced in federal offshore waters. In that time, according to the U.S. Coast Guard, less than 0.001% spilled - a 99.999% record for clean operations.

That safety extends to hurricane conditions as well. During the recent hurricanes, fewer than 100 out of 4,000 total platforms in the Gulf of Mexico were destroyed. There were no injuries offshore, the Coast Guard reported that there were no significant spills of oil from offshore storm damage, and as noted by Secretary of the Interior Gale Norton, “no one drop of oil reached the shore.”

The industry makes enormous contributions to the public treasury as well. A record $1.7 billion was distributed to 35 states during fiscal year 2005 as part of their share of federal revenues collected by the Minerals Management Service. In addition to the state disbursements, the industry contributed $5.4 billion to the U.S. Treasury last year, as well as $2.3 billion to the Land and Water Conservation Fund since the Fund was created in 1964.

Finally, it is worth noting that the oil and gas industry is itself a major contributor to environmental protection initiatives. According to an industry study, in 2003 alone the U.S. oil and natural gas industry spent $10.1 billion to protect the nation’s environment.

New OCS Allies

The next step is to determine who should hear this story of supply and demand, the human element, and the safety record. There are several key constituencies with whom we are building alliances.

NOIA is working hard to build alliances with state-level officials and consumer groups in an effort to spread the story of the offshore industry and alter the framework within which the debate has been frozen for some time. No longer is this a question of energy vs. the environment. Instead, the broader public is beginning to understand that reliable supplies of OCS oil and natural gas are critical to the maintenance of the broader economy. Energy is the underpinning of a system that offers jobs and opportunity across a variety of industries.

Industry’s most important task in the coming year is to contribute to the preparation of the Minerals Management Service’s 5-Year Plan. The 5-Year Plan determines where and when companies can lease parcels of ocean lands to explore for and produce oil and natural gas. Our industry must be a vocal proponent of ensuring that the next 5-Year Plan builds in the appropriate amount of flexibility to cope with energy demand spikes and other uncertainties by expanding our access to offshore hydrocarbons.

This focus on jobs is one reason for the recent developments in Virginia, which illustrate that the debate has moved to the state level and to the grassroots. This year, Virginia State Senator Frank Warner secured passage of a resolution calling for the removal of Virginia’s offshore moratoria. Newly-elected Governor Tim Kaine has opted not to retain the provision that would have specifically directed Virginia’s congressional delegation to seek a reversal of the offshore moratoria, but he has kept a section of the new statewide energy plan that encourages the Minerals Management Service to keep Virginia in the developing 5-Year Plan and urges MMS to open the entire eastern seaboard for a natural gas inventory.

NOIA is seeking the involvement of trade and consumer groups such as the American Gas Association, the National Association of Manufacturers, the American Chemistry Council, and the American Farm Bureau. These energy end-users are changing the political calculus of the access question by offering powerful testimony of the negative economic consequences of tight supply and rising prices. They are also energizing their grassroots networks to convince policymakers of the importance of energy policy to the daily lives of their constituents.

Conclusion

For the first time in nearly 25 years, there is an opportunity to change the nature of the offshore debate, breaking the current logjam. Rising costs, hurricane damage, legislative momentum, the 5-Year Planning process, and the involvement of new allies have come together to provide the oil and gas industry with a unique opportunity. Over the coming year, the industry has an opportunity - indeed, a responsibility - to tell our story far and wide, actively participating in policy debates and public dialogues. We must make the most of this unique “teachable moment.”

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