Gas-Only Drilling in Offshore Moratorium Areas Suggested

Oil and gas industry groups are criticizing a provision in House offshore drilling legislation that would allow the government to offer "natural gas-only" leases in areas that are currently off-limits to new production.

The criticism is included in wider comments by petroleum producers to the Minerals Management Service (MMS), which has begun collecting public comments as it begins preparing an outer continental shelf leasing plan for 2007-2012. MMS asked for comment on the gas-only concept.

Gas-only leasing was included in a bill by House Resources Committee Chairman Richard Pombo (R-CA.) that allows states to "opt-out" of offshore leasing bans. States exercising the option could allow gas-only leasing, or oil and gas leasing.

Senate legislation by Senator Lamar Alexander (R-TN.) -- and supported by chemical companies and other industries that rely on the costly fuel -- also accepts the idea.

However, the American Petroleum Institute (API), in comments this week to MMS, says gas-only and gas-preference leasing would offer the "false promise" of future supplies. The group says the concept would create uncertainties that could dampen investment, since it is impossible to predict with certainty what types of resources will be in an area.

"A company might spend up to $80 million to buy a lease, conduct seismic testing, obtain the necessary permits, and drill a well(s) to determine whether any resources are present in amounts that make the prospect economic," the group says. "A company is unlikely to know if it had met the gas only or gas preference requirement until the capital investment had been made. Companies will be reluctant to spend tens of millions of dollars to explore for and develop a prospect, only to be forced to abandon the resource, stranding substantial investments."

Another set of comments submitted jointly by several groups -- including the Domestic Petroleum Council and the Independent Petroleum Association of America -- also criticizes the idea, calling it unnecessary. "Oil can be produced in a safe manner on the OCS, and industry has clearly done so for over 30 years," the groups say, adding that "since it is not always clear prior to drilling whether a field will yield natural gas, oil, or both, it seems inconsistent with the principle of conservation of the resource to leave recoverable oil deposits behind in order to drill new wells for natural gas elsewhere."

Industry has pointed out that the Gulf of Mexico hurricanes did not result in major spills from offshore production platforms in touting the idea that fears of spills from wider OCS production are overblown.

A separate letter to MMS from the Domestic Petroleum Council says that if Congress directs MMS to issue gas-only leases, there should be ways to mitigate risk, including provisions for the federal repurchase of leases "ultimately found to be non-produceable because of an oil discovery or related regulatory prohibitions."

The Pombo plan has a repurchase provision, which includes the lease cost as well as other expenses, such as for drilling and seismic work. But API is skeptical that repurchase provisions would be an effective hedge against uncertainty. "With high deficits and the current outlook for continued budgetary constraints, it is unrealistic to expect the federal government to repay producers in full for their investments," API states.

The Pombo plan allows states to petition for gas-only or oil and gas leasing off their shores. But it also allows oil to be produced from the natural gas leases by companies unless the governor and state legislature allowing offshore production object.

"If there is a significant amount of oil there, as long as they comply with certain stipulations that come along with it, they can go in and get it," said Jennifer Zuccarelli, a committee spokeswoman. "We want to do whatever it takes to encourage states to have as much energy production as they want to have. We want to open it up to them, so we don't sit here and do nothing as energy prices rise, and we have such a wealth of available resources in our OCS."

Pombo's plan cleared the Resources Committee in a recent markup, but its path to the floor remains uncertain. Aides said it could be included as part of that committee's budget reconciliation package. Pombo has been working with several Florida House members who want longer-term coastal protections for their state in return for allowing offshore production to move closer to that state's shore than current policy allows.

Industry seeks wider access comments from energy producers, and industries that rely on costly natural gas are both pressing MMS to widen offshore production. A group called the Consumers Alliance for Affordable Natural Gas, which includes chemical companies, pulp and paper industry and others, says failure to address high gas costs will prevent domestic investment.

"We are losing jobs and sales, and find it difficult to make economically competitive investments in the United States in the face of these persistent, uncompetitive natural gas prices. To address this situation, it is critical that the federal government expand the offshore areas available for natural gas production," the group states in comments this week.

The group calls on MMS to open up portions of the Lease Sale 181 area in the eastern Gulf of Mexico as soon as possible, noting there is "no substantive reason to wait until the next 5-year plan." It says the next five-year plan should open the 181 area, if it is not done sooner, and should also expand available acreage off Alaska and provide a "flexible, timely process for amending the plan to allow inclusion of areas that outside the Gulf and offshore Alaska where development is currently prohibited, should they be opened in the future."

The current web of congressional and executive protections cover the East and West coasts, most of the eastern Gulf of Mexico and part of Alaska. API similarly pushes for expanded OCS production, noting federal estimates of almost 300 trillion cubic feet of gas and 50 billion barrels of oil yet to be discovered in the OCS.

API calls for a five-year plan that leases the 181 area, which has been mostly withheld from leasing, even though it is not included in the formal leasing bans. API also calls for expanded acreage to be offered off Alaska, including the Beaufort and Chukchi seas and Bristol Bay. They also call for a "flexible, timely process" to allow production in now-restricted areas should they be opened in the future.