Energy

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Late yesterday, the American Petroleum Institute (API) released a letter from their President and CEO, Red Cavaney, that was sent to Capitol Hill about the Group of Ten proposal.  As readers most likely know, the Group of Ten includes five Republican and five Democrat senators who have reached across the aisle to develop a compromise energy bill. It is our opinion here at the ‘Grok that this proposal does little to solve the rising costs of energy in the here and now while providing cover for politicians who might otherwise be held accountable to an electorate that want more domestic exploration and supply.

Here’s Mr. Cavaney’s letter as delivered:

The bipartisan "Group of 10" senators recently released a summary of their proposed energy plan.  Like many others, API was hopeful that a new proposal would show the way to break the current deadlock in Congress.  Our view is that the next step on energy policy should be to expand access to vital domestic oil and natural gas resources as a complement to the measures Congress approved last year on efficiency, technology and alternative fuels.

API must express its opposition to the approach outlined by the Group of 10 because it falls far short of what is needed.

Unfortunately, the proposal appears to be a classic case of one step forward, two steps back — or in this instance "light on new production/heavy on new taxes".  Current world events only reinforce the critical importance of ensuring that our nation develop the full range of its domestic energy resources for economic competitiveness and national security reasons.

The proposal’s approach to access to federal oil and natural gas resources is far too limited in its scope.  And, it is unfortunately paired with the imposition of at least $30 billion in new taxes on the oil and natural gas industry that would have the effect of limiting needed oil and gas investment.  A lesson learned well in the 1970-80 period.  These measures create an environment that will virtually assure a future with less, not more, domestic production. 

 

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At one point during the last blogger conference call with representatives from the oil and gas industry (American Petroleum Institute-API), the conversation shifted to the amount of lead time needed from proposal to study, drill, and bring product to market and whether, in the face of promised new alternatives, it was even worth the bother to start. You know- with politicians like Al Gore promising a total shift away from carbon-based fuels within ten years… Additionally, many claim that the length of time means no short term drop in prices…

MR. MCQUAIN (Q and O): Well, I think that’s a red herring. And that’s what I’m trying to figure out how to get around. I mean, you know, the bottom line is had we started 10 years ago, ANWR would be online. You know, everyone knows that. But what they’re looking for is some specificity here on when somebody starts throwing dates around or when something is going to come online. What does that mean and how do they know?

MR. CAVANEY (API): But the one thing that you can probably feel pretty assured would have some impact on the market is if the government announced a policy change on access, broad policy change, that would affect the market right away, even though not an additional drop of oil would come out of the next day. But it would be reacted by those that watch the market. And then, the process that we just described, the multi-year process, would begin not only in just one circumstance, it would probably begin in multiple circumstances because people would now be able to access some of the attractive things they’ve had their eye on but couldn’t touch.

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As noted in this prior post, I recently participated in a bloggers’ conference call with oil and gas industry experts from the American Petroleum Institute (API). While I highly recommend listening to the entire podcast or reading the entire transcript here, I thought I’d post the section with the discussion about the existing oil company leases for ‘Grok readers who wish to know the real facts behind the false rhetoric being dished out by many Democrats, including our own from NH.

The discussion included 10 or so bloggers and featured three speakers: Red Cavaney, President ad CEO, American Petroleum Institute; John Felmy, Chief Economist, American Petroleum Institute; and Jim Hoskins, Group President, Government and Financial Services, Harris Interactive.

What I’m learning from these discussions is how much I didn’t (and still don’t) know about the machinations and complexities of the many parts that make up the whole of the energy industry here in the US…

MR. LAMBERT (GraniteGrok): Okay. Earlier this week, I had a chance to ask a question of one of our senatorial candidates who’s been really kind of lacing Senator Sununu, our present senator, hard for his ties to big oil, et cetera. And so, I asked her – I told her that I’ve just bought a new vehicle. It’s traditional in engine and all of that. I’ll be paying for it for five years; I need it for business. So I said to her, if you’re opposed to drilling, what does that do for me with my vehicle? I can’t put a windmill on my car. I can’t put pinecones in the tank or water or anything. I’m stuck with the traditional gasoline.

And she gave me the standard answer – there’s another politician up here, Congressman Paul Hodes, who has filed legislation, and both of them are on the same track. And they’re saying that we have a 14-year supply just waiting on 68 million acres of land that they have present leases that, quote, "big oil just won’t drill on." Could you provide some kind of a talking-point-type answer that I can come back with when somebody tells me that because that seems to be – to a person, anybody who’s opposed to expanded drilling or exploration – is that it seems like that they are all singing from the same playbook now. And that’s – the oil companies have leases; they’re just not using them.

RED CAVANEY: I think we can help you here. First of all, these are arguments that are put forth by people who don’t understand how the industry operates. First of all, and I think this is sort of commonsensical, the Creator or evolution, whichever you want to tag, didn’t put hydrocarbons – oil and natural gas, specifically – every place on the globe. History would show you, if you went back and looked at the leases that the federal government has let over a period of time, that, far and away, the large, large majority of leases have proven not to contain hydrocarbons in sufficient commodities that you could commercialize it.

So it is a – very specific examples. We’re just getting data out right now. If you go back to the ’96, ’97 time period – and I choose that because that’s a 10-year spread and we’ll be talking about the OCS – if you look at the leases that were granted during that period, there were – the lease payments, in other words, the companies bid $2.3 billion to obtain about 3,200 leases. The lease term is typically 10 years, which means, at the end of 10 years, if a lease is not producing, then the company is obligated to turn it back to the federal government, forfeiting not only its original lease bid, but the annual lease payment it makes plus all of the expenditures it incurred in the exploratory phase to determine that there wasn’t sufficient oil and gas available in commercial commodities to go ahead and extend the funds to put a production facility in place and to ultimately produce.

Ninety-three to 95 percent of the leases from those two years were expired, terminated, or they were relinquished, in other words, given back to the government even before the 10-year term ran. That gives you a bit of a sense that most of the leases don’t end up being commercially producible oil or natural gas facilities.

Now, the other point that I would make is that companies have an idea, whether it’s onshore or offshore, that there’s the potential for oil and gas in certain areas. And so they make bids, but there’s about a 10-step process, which I would be glad to bore you with if you wanted, that starts with the bid being accepted, and then after it’s been accepted, you start with geological exploration, in other words surface work and before you go through all the other steps that lead up to the point as to whether or not you’re going to produce. Probably 80 to 90 percent of the work on a lease is in this pre-production determination phase. That period of time has been euphemistically tagged by our critics as an idle lease, but I would submit to you, the lease in most cases is anything but idle.

When you get to–

MR. LAMBERT (GraniteGrok): So, now, let me just if you would let me interrupt for a second, so in order to even begin to determine more exactly whether the supply, before you can study, you have to actually lease?

MR. CAVANEY: Yes, we – the federal government puts out a notice of a public lease process and companies submit bids. And the government is required, as long as they can satisfy the minimum operating requirements, they’re required to take the highest bid. That money is then paid before the company can do anything to go forward. A contract is signed with all the terms; it’s a government contract, the companies have no input on it. It determines the length of the lease.

It determines the amount they’re going to pay. It determines the royalty rate that they’re going to pay if they do get to a production basis. So that’s the very first step, and so a company, every company, has expended a fair amount of money to hold what in another business would be called inventory. In other words, this is their inventory. And it’s a long, extended process to work through these, and so it should not surprise anyone that they come into a certain area and they may go pretty far on one of these particular lease tracks and determine that the geology here doesn’t look like it has any oil or natural gas. And then they may look at a bunch of the surrounding tracks that are also leases and figure they’re so much the identical that I’m going to now move to the next place where I think I have a chance of making a commercial discovery of oil or natural gas.

And so companies are constantly trying to upgrade the quality of their portfolio at these each individual bid rounds that occur. And then as leases expire for things that clearly don’t have oil or gas, they give those back to the government and somebody else may bid on them or not. So this is a constant iterative process and the quality of their inventory, in other words, the things that they’re working on to determine whether they can get to commercial production, is a very important part in their competitiveness with one another. John?

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In addition to politics, I am very interested in energy and things related. I deal with energy-producers in my "real" job on a daily basis, I am a member of my town’s Energy Committee, and of course, like most Americans these days, above all, I am mostly interested in energy at the moment due to its escalating cost. When you think about it, energy affects pretty much everything. Along with food and water, plentiful energy is among the necessities of life. After all, it takes energy to GET the food and water…

Thursday afternoon, I participated in a Bloggers’ Conference Call hosted by our friends at the American Petroleum Institute. The biggest point I came away with is that there is much more to the topic of energy, its supply, and the exploration of, than you could imagine. While some politicians rail against "big oil" day in and day out, the fact is, "big oil" is an extremely complex industry made up of great numbers of skilled Americans, held together in a logistical system that is undoubtedly as intricate and complicated as anything one would find in almost any other human endeavor on the planet.

If you believe that "big oil" is nothing more than wealthy fatcats that work for a single handful of well-known corporate symbols like Exxon or Mobil, etcetera, hanging out all day in large, air conditioned buildings scheming ways of taking our money, you need to think about these matters for more than a nanosecond. And consider the whole concept of energy and its impact on our individual lives. It is my belief that without affordable, portable sources of energy, we would all but lose the freedoms we hold dear. The freedom to travel about when YOU want to, and go almost anywhere you want in short order, is nothing to take lightly. The freedom to live in your own home and rely on yourself to stay warm in the winter and cool in the summer is about as American as it gets. Are we ready to live in Soviet-style housing to stay warm? I think not. When the refrigerator replaced the icebox  and became widely available and affordable to ordinary people, it was hailed as an advance directly responsible for the improvement of peoples’ health through better, safer diets. Without energy, there would be no such thing.

Anyway, during the call, there was much discussion about the lengthy, expensive, and risky process involved with the successful discovery and delivery of oil and gas to the marketplace. We also learned about how some areas presently off-limits contain already existing wells constructed before banning new offshore exploration and drilling came into vogue. These can be quickly brought into production.

One of the people participating was David Mica, the executive director of the Florida Petroleum Council. I was particularly intrigued by recent news of the attitude change in Florida on the part of Governor Crist and wondered if it reflected a shift shared by many Floridians. Here is the transcript of our exchange at the beginning of the call:

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SECURING OUR ENERGY FUTURE

· John McCain Will Break From The Failed Energy Policies Of The Past And Lead A Great National Effort To Achieve Energy Security For A Peaceful And Prosperous America. Working with the leading energy experts inside and outside of the sector, John McCain will work to design and implement the right energy policies that will effectively govern our energy future by enhancing our economic stability, national security and environmental protection.

Our Growing Energy Challenges

The United States And Our Economy Are Overly Dependent On Foreign Sources Of Oil. America currently imports approximately two thirds of the oil it needs. Petroleum products (including diesel and jet fuel) provide 94 percent of our transportation fuel and over 60 percent of that transportation fuel comes from foreign sources. We have doubled our imports of foreign oil in the last 30 years which is a clear failure of leadership from both political parties, the Administration and Congress.

American Dependence On Foreign Sources Of Oil Contributes Wealth To Undemocratic Governments, That Are Both Supportive Of, And Vulnerable To Terrorist Attacks. Oil revenues are enriching the enemies of the United States. Iran alone receives more than $66 billion a year from oil sales. By relying upon oil from the Middle East, we not only provide wealth to the sponsors of terror — we provide high-value targets to the terrorists themselves.

Increased Oil Prices Effect More Than Just Fuel For Our Cars. In recent months, the world has seen an overall increase in the price of food. This is a direct result of increased fuel prices for transportation and the redirecting of grains and feed towards ethanol for our fuel supply.

America’s Increased Dependence On Foreign Sources Of Oil Is Resulting In An Increase In Our Trade Deficit. Since 1973, the United States has gone from importing 6 million barrels of oil a day to 12 million barrels per day with petroleum payments comprising 41 percent of the U.S. trade deficit ($293 billion of $759 billion).

America Needs To Reform Its Energy Portfolio To Rely On Both New And Proven Sources Of Energy. The United States needs to advance its research on clean, alternative energy sources like solar, wind and clean coal, while at the same time recommit itself to expanding the use of nuclear power.

Breaking Our Dependence On Foreign Sources Of Oil

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