Rearranging the Deck Chairs on the Titanic

GAO scolds Interior Department on failure to encourage Energy Development

The U.S. Government Accountability Office has recommended that the Secretary of the Interior “develop a strategy to evaluate options to encourage faster development of its oil and gas leases.” The report to Congress, dated October 2008, goes on to say that the federal department does less than some state and private landowners in this regard. Beyond this, GAO statistics indicate that only 25 percent of all federal offshore leases granted were actually developed over a ten year period under study. To be sure, the study has merit and I’m sure, is accurate in its statistics. But laying the blame on the Interior Department at a time when the legislative branch continues to prevent the development of some of our most promising offshore areas is tantamount to rearranging the deck chairs on the Titanic, fifteen minutes before it sinks to the bottom.

Not withstanding the weak posturing of a lame duck House of Representatives, which recently voted to open up some closer in offshore areas to development, the primary blame for lack of domestic energy development in the past 20 years can be laid – with notable exceptions – squarely at the feet of Congress. And, in case you missed it this week, we have elected ourselves a new President, accompanied by a robust change in the balance of power within the beltway. With the Democrats firmly in charge in the New Year, you can be sure that the current sentiment to prevent drilling at every instance will only become stronger. And, while some House Democrats and the Democratic President-elect are on record as saying that oil companies should “use it or lose it,” they still routinely exclude the most promising areas for development from the lease awards. Look for this metric to continue for the foreseeable future.

There’s more: the dizzying heights of crude oil prices bouncing around at $150 per barrel have now receded to a much more palatable level and just yesterday, the price of Regular Unleaded gasoline in Charlotte, NC dropped to just $2.29 per gallon from $4.49 at some stations, in the immediate wake of the (supposedly) hurricane-induced shortages in the mid-Atlantic corridor. All that good news is tempered by the fact that, once again, Americans have a short memory when it comes to this type of thing. The urgency to develop domestic energy to prevent it from happening again will fade, and with it, the pressure (however anemic) on Congress to act, will go with it.

It doesn’t have to be this way. Arguably, the perfect model for what we could be doing can be found in Brazil. The 1973 Oil Embargo impacted Brazil with serious financial deficits for almost a decade, but the South American government immediately ascertained its vulnerability to imported oil and embarked on an alternative fuels program. In 1975, Brazil launched the National Alcohol Program to phase out fossil fuels and move to a transportation system based on ethanol produced from sugar cane.

In July 1979, and in response to the second oil crisis, the Fiat 147 was developed and became the first vehicle fueled by anhydrous ethanol in the country. Within six years, about three-quarters of all Brazilian passenger cars were manufactured with ethanol-burning engines. Today, most of the country’s light vehicles run on a mixture of 25 percent anhydrous ethanol and 75 percent gasoline. And by the end of 2006, about 33,000 gas stations throughout the country had at least one ethanol pump. Additionally, Brazil is now the second largest producer of ethanol, behind the U.S., and the world’s largest exporter of biofuels.

Not everything is the fault of Congress, of course. In Alaska, the oil majors have for decades sat on top of billions of cubic feet of proven reserves of “stranded” natural gas while haggling over the terms of the pipeline that could eventually bring that domestic energy to market. The arrival of Sarah Palin as Alaska governor changed that landscape not too long ago and her effort to open up the bidding process for the long-awaited gasline – thought previously to only be possible if the oil majors were to build it – has moved the football much closer to the goal line there. For those who lament the GOP loss (READ: disaster) this past Tuesday, her return to Alaska – at least for the foreseeable future – is likely a good thing for energy development here in the United States. And, her increased public profile thanks to a bruising, coast-to-coast presidential campaign, won’t hurt, either.

We’ll likely get ten letters from indignant readers next week, scolding me for asserting that ethanol and biofuels are the panacea that we seek. Far from it. Energy policy for this country needs to develop around a number of initiatives, one of which simply has to be the development of proven oil and gas reserves here at home. But don’t take my word for it. There’s a pretty famous billionaire out there who thinks so, too. But, even he recognizes the need for a “bridge” to get there. Like it or not, that bridge involves oil and gas. The maritime industry – domestic and international – is ready, able and willing to carry the ball when we collectively wake up to this reality.

The GAO report, in many ways, is laughable. To cite supposed Department of Interior failures as a major reason for inadequate domestic energy development misses the point altogether. On the other hand, the GAO did suggest that such measures as offering a lower royalty rate for faster production and shortening the term of the lease would provide better incentives for exploration companies. So, too, would increasingly the cost of leases for undeveloped lands. In the case of Alaska’s “stranded” gas, perhaps a combination of these measures, along with the specter of expulsion from a particular lease for non-performance might spur some action.

We live in a country that is decidedly unfriendly to the efforts to develop sufficient domestic energy. Certainly, this metric holds true for our elected officials today and more so in January of next year. In the meantime, foreign oil companies are queuing up to drill in Cuban waters, less than 100 miles from our shores. We’ll have little influence over how (can you say environmental exposure?) and when that happens and maximum exposure to the price of that energy, if and when it is developed. The decks of our imaginary ship – let’s call it the “Energy Titanic,” – are awash. And those deck chairs that we arranged so nicely? They’ve long since floated away. – MarEx.

Joseph Keefe is the Managing editor of THE MARITIME EXECUTIVE. He can be reached with comments on this or any other article in this e-newsletter at [email protected].