Deep Gas Play Business Strategies – A Regulator’s Perspective
The Energy Forum – September 15, 2003
Johnnie Burton, Director Minerals Management Service
Luncheon Keynote Address
WELCOME
Thank you for inviting me to address this forum on the importance of the supply
of natural gas in our Nation’s energy picture.
I would like to talk about the challenges industry faces in providing clean-burning natural gas, and to tell you about the energy work underway at the Minerals Management Service, in the Department of the Interior.
As the nation looks for alternative sources of energy, we face an ongoing challenge of meeting today’s needs. So although your Honda may soon be hydro powered, and your Prius today uses hybrid sources of energy, your two-story Colonial will still need natural gas to maintain a high quality of life. Through President Bush’s Energy Policy, we will secure America’s energy future and the American quality of life.
DOI AND THE NATIONAL ENERGY PICTURE
The Department of the Interior is America’s mineral resource manager, with over 280 million onshore acres and a whopping 1.76 billion offshore acres of land under our jurisdiction. This capability makes the Department of Interior a critical player in generating natural gas for the Nation’s economy.
Securing America’s energy future through domestic production of natural gas is sound policy making for a number of reasons. During the 1990’s, with increased pressure on older coal fired utility plants, fears of increased dependence on foreign oil supplies and ongoing resistance to nuclear power, the United States made a decision to shift its electrical generating capacity to a natural gas base.
As a result, about half of all American homes are heated with natural gas--that’s 56 million homes. And because of its air quality benefits, about 90 percent of the new energy plants coming online in the next decade will be powered by natural gas.
This change was fueled by the thought that the domestic supply of natural gas was plentiful and that our major source of natural gas imports – Canada – which supplies about 15 percent of our current needs, would be able to increase its supply capacity in tandem with our growth in demand.
Well, the supply and demand for natural gas in 2003 is very different from the projections of the 1990’s. The crisis is real.
During the 1990’s, while plans were being made for new natural gas generating capacity, one of the chief sources of domestic natural gas – the shallow waters of the Gulf of Mexico shelf - was undergoing a dramatic decline in productivity. Between 1990 and 2000, natural gas production from the Gulf of Mexico shelf declined by 23 percent. This decline was masked by the increase in deepwater natural gas production, so that overall Gulf production remained level. However, this steep rate of increase in deepwater natural gas production is projected to level off over the next few years and reach a steady state, while the decline of the shallow shelf keeps on going.
Adding significantly to the situation over the last few years is the fact production from Canada’s prolific natural gas fields has been declining at a more rapid rate than anticipated.
So, with our available domestic resource base in decline and our major source of imports facing its own production limits, we are forced to find alternative reserves to meet increasing demand by American consumers.
Department of Energy projections indicate that the gap between supply and demand could increase by another 50 percent in the next 20 years. Consumers will be hard hit, directly, and indirectly. Natural gas is the primary source of fuel in the industrial sector, accounting for 38 percent of total consumption.
So, today’s short-term situation where the market for natural gas is characterized by high and volatile prices, low levels of gas in storage and flat domestic production in the face of growing demand, could become a long-term reality.
Shortly after taking office, President Bush charted a new course on energy policy. Many of the tenets of the President’s National Energy Policy are now under debate and the exact nature of the final package is still uncertain. But, one thing we do know is that the Minerals Management Service and the Interior Department will carry much of the responsibility to turn this policy into results.
Interior-managed public lands, onshore and offshore, produce about one-third of all domestic coal, oil and natural gas. And public lands also are one of the main sources of renewable energy resources.
But the demand for natural gas resources won’t wait for the implementation of an energy bill. The U.S. economy needs these resources now. It’s a fact that residential consumers in Central Ohio are paying nearly double what they were charged in June 2000. The poor, and those living on fixed incomes nationwide, are struggling to pay utility bills and winter is just around the corner.
Farmers are paying higher prices for fertilizer made with natural gas. Increased natural gas prices also make it more expensive to run irrigation pumps and heat greenhouses.
High natural gas prices are having a long-term negative impact on American factories. As you know, natural gas is the raw material used in many plastic and chemical products. Industries that planned on $2 gas, for both energy and raw material, sense disaster at prices three times that high. One chemical company has already lain off 20 percent of its workforce due to the higher prices.
Clearly, this affects Americans in all walks of life.
Long-term predictions of high natural gas prices are causing these companies to move natural gas-based manufacturing overseas, to locations where gas is available at lower cost. Since 1998, 2 million manufacturing jobs have been lost, and energy costs are a major contributing factor. As we’ve all seen recently in the national news, thousands of American jobs have been permanently lost and unless we do something about it the trend will continue.
We need a reliable supply of natural gas to heat our homes, power our lives, keep our businesses operating in the black, and the lights on in American homes.
So what is Interior’s Minerals Management Service doing to meet these challenges?
MMS ACTION
We recognize that the Gulf of Mexico is the Nation’s preeminent source of oil and natural gas. The deepwater success story of the last decade has led to an increase of over 75 percent in the amount of crude oil produced from our offshore waters.
At the end of 2002, the Gulf of Mexico was producing about 1.7 million barrels a day and there have been several deepwater projects come online in 2003 with a major deepwater hub – NaKika– scheduled to come online by the end of the year. In addition, there are several major projects scheduled to come online in the 2004 – 2006 time frame including Thunder Horse – the largest discovery in the United States in the last 35 years. Deepwater drilling is a promising frontier.
All that oil brings with it a significant amount of natural gas, which as I said before will help to stave off the decline in shelf natural gas production.
That’s not enough.
We must encourage exploration of new frontiers. We have to look at the potential for subsalt exploration as a promising source of additional natural gas. To promote this effort, we amended our regulations to provide operators with extensions of up to two years on the primary term of their leases to allow additional analysis for these types of prospects. Some of your companies may have already taken advantage of this positive change.
Our latest five-year leasing program is being implemented on schedule. The areas offered are estimated to contain enough natural gas to heat and cool all 56 million homes that rely on natural gas for a dozen years. We have already held two lease sales this year and will hold a third in December, in the Gulf. We are also holding a sale next week in the Alaskan offshore.
Although MMS began taking action to encourage additional gas production in early 2001, most of the activities will take several years to bring new gas to market. As we contemplated the need for immediate supplies, one proposal emerged as the most likely to produce quick results.
We believe significant gas resources exist, more than three miles deep, below existing shallow-water platforms in the Gulf of Mexico. This is a technological frontier, but it can be accessed from existing infrastructure.
This is what this conference is all about: Deep shelf exploration under existing shallow production.
MMS scientists are convinced that deep shelf gas has the potential to provide additional significant amounts of natural gas from this mature area. So, as part of the implementation of the MMS five-year plan, royalty relief is included for leases in waters of less than 200 meters, if depths of more than 15,000 feet are penetrated. This provision, instituted in 2001, now affects about 1,000 leases on the Gulf of Mexico shelf.
However, there are still an additional 2,200 leases without royalty relief available to defray the costs of tapping this new deep geologic play. That is why we proposed, in March 2003, a change in regulation that would allow operators the opportunity to gain relief for new, deeper drilling on these older shelf leases.
Let me cite an example: McMoran Oil and Gas is using old J.B. Mountain lease facilities off the coast of Louisiana to tap deep gas targets in shallow water. The lease dates back to the 1940s, but it has usable existing pipelines and infrastructure.
From this five decade old lease, McMoran expects to bring new gas on line within a year. That is good news and the kind of thing we are encouraging. It can cost hundreds of millions of dollars to develop one major oil or gas structure in the Gulf. Determining that we can reuse an existing modified platform is an incredible bonus.
We expect that this royalty relief will stimulate additional production of between 100 to 200 billion cubic feet (bcf) per year between 2004 and 2009.
WE MUSTN'T FORGET THAT WE HAVE TO BE ENVIRONMENTAL STEWARDS WHILE FACILITATING THE ENERGY NEEDS OF THE COUNTRY
Of course, Americans value a spectacular natural environment, just as they value a thriving economy. As the President said in his National Energy Policy:
"We must work to build a new harmony between our energy needs and our environmental concerns. Too often, Americans are asked to take sides between energy production and environmental protection…as if the people who produce America's energy do not care about the planet their children will inherit.”
President Bush goes on to say:
"The truth is, energy production and environmental protection are not competing priorities. They are dual aspects of a single purpose, to live well and wisely upon the earth."
In short, environmental protection must accompany energy production.
In every case, as land managers, we do extensive reviews under the National Environmental Policy Act and other laws before we recommend development.
As a routine part of the job, the bureaus of Interior conduct extensive multiple-use planning that involves input from all stakeholders. When environmental conditions warrant protection, DOI recommends no development or requires special mitigation. We respect all moratoria on offshore drilling. Where we do have offshore production, a billion dollars of these revenues per year goes into the Land and Water Conservation and National Historic Preservation programs. These programs are directly aimed at improving our environment.
The record of the last 50 years, but particularly in the last 20, shows the offshore industry is one of the safest industrial activities in the United States. And on the environmental front, few realize the incredible safety record the industry has achieved.
A recent study by the National Academy of Sciences reports that in the last 15 years there were zero platform spills greater than 1,000 barrels. Compared to worldwide tanker spill rates, outer continental shelf operations are more than five times safer. In fact annual natural seeps accounts for 150-175 times more oil in the ocean than OCS oil and gas operations. The environmental record is good and you have proven that a clean and safe environment can co-exist with production of oil and gas.
Production of enough natural gas to keep prices stable and reasonable does not hinge on the question of whether we have the resources.
The United States has plentiful resources of natural gas. At current consumption rates, the U.S. Geological Survey says there is a 50-year supply of technically recoverable undiscovered natural gas.
More than half of this supply exists offshore. With the existence of these ample supplies, our challenge is to implement reasonable policies for access, with economic efficiency and with full environmental protection.
We, at Interior, do what Congress asks us to do. We respect the moratoria but we also know that there are plenty of resources that could be explored and produced without damage to the environment.
To provide energy today, energy producers have to look in more remote locations, using innovative technologies. Often these resources are in areas where there are other competing uses of the land.
These technological advances provide us an opportunity to tell Americans about the pioneering spirit of this industry. We need to become better communicators in telling the story of drilling in record depths in the Gulf of Mexico, the use of directional drilling to probe great distances from a single development site, and further enhancements in environmental protection mechanisms. In fact, I am delighted to see that Industry is beginning to really try to broadcast its extraordinary accomplishments and its commitment to the environment. Lately, I have seen several TV spots sponsored by majors and large independents telling about their extraordinary feats on the OCS.
The Minerals Management Service is committed to a spirit of partnership. Working together, we can provide the natural gas America needs. To preserve our country’s standard of living, fuel a growing economy and protect the homeland, we have to meet our increasing energy demands through new and innovative exploration.
Sure, we at Interior, are the regulators and the monitors of public lands for the benefit of all Americans. So, we must wear two hats: one as regulators, and one as facilitators for industry to provide all of us with safe and clean energy.
Through effective stewardship, we will continue fulfilling a promise to future generations that they too will inherit a land worthy of the song “America the Beautiful”. And, that from sea to shining sea, we will work together to ensure America’s energy security.