The Obama administration has promoted its commitment to encouraging the development of all sources of energy – conventional and renewable – beginning with the State of the Union address last January. All-of-the-above became President Obama's rallying cry, but his and his administration's actions have not matched the rhetoric. For most observers that became evident when President Obama rejected the opportunity to accelerate the approval process for permitting the construction of the Keystone pipeline to bring oil sands output to the United States. The latest demonstration of this selective rather than all-inclusive embrace of energy supplies came with the unveiling of the latest five-year plan for offshore oil and gas lease sales, the principle driver for drilling and producing activity in the Gulf of Mexico.
On June 28th, the Department of the Interior and the Bureau of Ocean Energy Management (BOEM) released the proposed final offshore oil and gas leasing program for 2012-2017. The press release and supporting material for the proposed plan focused on how this schedule was an integral part of the administration's "all-of-the-above" energy strategy. They also trumpeted that the plan "makes all areas with the highest-known resource potential – including frontier areas in the Alaska Arctic – available for oil and gas leasing in order to further reduce America's dependence on foreign oil." The plan proposes 15 potential lease sales with 12 targeted for the Gulf of Mexico and three offshore Alaska.
With the resource potential of the Chukchi Sea in the Arctic being greater than that of the Western Gulf of Mexico, the fact that there is only one sale proposed suggests it is a sop to the oil industry while also making a statement to the environmental movement. The Obama administration plan could be described as following the old oil industry rule that your best place to look for new oil and gas discoveries is where oil and gas already has been discovered. On the other hand, we do know the domestic oil and gas industry found hydrocarbon deposits along the Atlantic Coast some decades ago when given the rare opportunity to drill. Now the industry would like to search again using newer technology, but it looks like it will not be allowed to explore until near the end of the decade if this plan goes forward.
In the BOEM press release the agency mentioned that proposed sale 244 for the Cook Inlet Planning Area, to be conducted in 2016, is subject to the completion of a full environmental impact assessment statement before a final determination can be made to hold the sale. We wonder when this environmental impact statement will be prepared since the government has yet to do one for the Atlantic offshore area targeted in 2009, but not a part of this five-year lease sale program.
The non-partisan Congressional Research Service reported after it examined the Obama administration's offshore lease sale plan compared to those of prior administrations that this new plan will offer the fewest number of sales since the program began in 1980. More importantly, as shown in Exhibit 6, the number of sales held has always been less than the number proposed in the original plan. The lowest percentage of sales held to those planned, 33 percent, occurred during President Jimmy Carter's administration in 1980-1982. In general, it seems that about two-thirds to three-quarters of the scheduled sales are held. By applying those percentages to the proposed Obama administration plan, it is likely that only 10-12 sales will actually be held.
Under current legislation, not all U.S. offshore areas are available for leasing. Those areas banned from oil and gas exploration and development are restricted due to long-standing environmental considerations and political decisions. A map of the offshore areas subject to these restrictions is in Exhibit 7.
Industry participants and promoters are quite concerned about the low number of proposed sales given the historic record of fewer actually being held. They are also frustrated by the appearance of a lack of commitment to the oil and gas industry by the Obama administration at a time when the industry has reversed the nation's declining production of hydrocarbons, which is helping to reduce the nation's imported oil volumes.
In response to these concerns, the offshore energy promoters mobilized to urge Congress to approve legislation to replace the Obama administration's proposed plan with a more expansive offshore lease sale schedule. Under existing legislation for offshore oil and gas leasing, once the Obama administration proposed the final five-year lease sale schedule, the plan entered a mandatory 60-day Congressional review period, after which it will go into effect unless there are changes made to the plan. Historically, this review period has been non-controversial. Not this time.
In response to the Obama plan, the House Natural Resources Committee approved, in a bi-partisan vote of 24-17, the Congressional Replacement of President Obama's Energy-Restricting and Job-Limiting Offshore Drilling Plan. H.R. 6082, as the bill is officially known and as amended, would provide for 29 offshore lease sales in 2012-2017. In contrast to the Obama plan with 12 Gulf and three Alaska sales, this alternative plan would hold 13 Gulf sales, seven Alaska sales, six East Coast sales and three West Coast sales. Exhibit 8 shows the offshore areas that would be open for leasing and those off-limits under the Obama plan. In contrast, Exhibit 9 shows the offshore areas available for lease under H.R. 6082.
After the House Natural Resources Committee approved H.R. 6082, the White House announced it would veto the legislation if it passed Congress. The House voted to replace the Obama administration planned lease sale schedule with the plan contained in H.R. 6082 in a bi-partisan vote of 253-170 late last week. There is little likelihood the U.S. Senate, controlled by the Democrats, will support the new plan. And, should we possibly be wrong, the White House will veto the legislation. One could legitimately ask why the Obama administration is so opposed to a more aggressive offshore lease sale program if it truly believes in an "all-of-the-above" energy program. Could it have something to do with its view of fossil fuel? A reading of oil and gas publications demonstrates the energy industry's intense desire to expand its activity in the Gulf of Mexico due to the basin's high potential for new, large oil and gas deposits. The industry also wants the opportunity to seek new oil and gas resources elsewhere in U.S. waters, but it appears it will not have that opportunity until the end of the decade. As a result, look for more oil and gas industry capital to flow to international offshore markets in the future.
As mentioned above, the Obama administration was once keen to help the state government of Virginia in its quest to open up its offshore area. That was in 2009 when the state's governor was a Democrat and a friend of President Obama. Now that the governor's office is held by a Republican, there seems to be less interest in helping the state. Supposedly, the problem with Virginia's offshore area is that the Department of Defense has determined that 80 percent of the targeted offshore acreage lies in areas that could interfere with military operations. We find this objection to be quite interesting given the federal government's desire to see the Atlantic Coast waters populated with wind turbines. Wind turbines have to extend above the waterline as opposed to offshore oil and gas facilities that increasingly are being located on the sea floor. One energy source clearly creates a long-term navigation hazard for naval ships while the other source might create a short-term hazard while the wells are being drilled, but then the hazard is removed.
Readers may have forgotten that in the spring of 2009 Secretary of the Interior Ken Salazar was promoting the potential for wind energy off the Atlantic Coast. At that time, Sec. Salazar spoke at four public hearings to discuss resource planning and the role that the nation's offshore energy resources would play in our future. Sec. Salazar said, "With respect to renewable energy, there is tremendous potential concerning wind off the Atlantic." He went on to state, "there is over 1,000 GW [gigawatts] of power or 1,000,000 MW [megawatts] of power developable off the Atlantic coast" that is "the equivalent of energy produced from 3,000 medium-sized coal-fired power plants." At the time he made these statements, the Energy Information Administration (EIA) website showed that there were only 1,470 coal-fired plants throughout the entire United States with a total nameplate capacity of 336 GW. Coal-fired plants accounted for 30.9 percent of the nation's total power resources with a net summer capability of 996 GW. In 2007, coal-fired power plants supplied over 48.5 percent of the total electricity generated that year. As of now, coal-fired power is down to about 32 percent of electricity generated, equal to the amount supplied from natural gas-fired power plants.
The promise of offshore wind power more than replacing all the dirty coal-fired power plants appears to be the core of the Obama administration's energy agenda. A lack of any understanding of the technology of wind power, especially when compared to our existing power generating sources further distorts the reality of the Obama administration's green-energy program. For example, one of the misstatements Sec. Salazar made in his many speeches and even in his testimony on Capitol Hill is that wind power can provide a one-for-one offset to conventionally generated power. We know that is not true, and while we believe Sec. Salazar knows the truth neither he nor anyone else in the administration ever discusses the economics of wind and/or solar power projects based on the requirement for alternative power sources. Wind turbines normally only output between 30 percent and 40 percent of their nameplate capacity, and at some times the output is as low as a single digit percentage, or even non-existent. The low and variable output of wind power forces utilities to maintain backup power sources in order to handle electricity demands at added costs and fuel consumption.
Additionally, the 1,000 GW potential wind power output that Sec. Salazar heralded assumes 770 GW of it comes from deepwater wind turbines (those located in water depths greater than 200-feet). As of now there are no offshore U.S. wind turbines in operation and none worldwide located in deepwater, other than a few test turbines. Thus, it is impossible to comprehend all the issues or challenges of building, operating and maintaining deepwater wind turbines, so estimating the cost of these facilities is highly speculative. This is part of the reason why all government estimates for the cost of power generation suggest that offshore wind will be a multiple of the cost of onshore wind power, and deepwater wind is estimated to be a multiple of offshore wind costs, making it the second most costly power generated behind solar. And we haven't even begun to consider the challenges for building offshore power transmission systems and integrating them into the onshore power grid.
While the Obama administration holds on to its support for green energy as the nation's future power sources, its actions demonstrate minimal support for the nation's successful oil and gas industries, and even distain for dirty coal, which has been targeted for a "death-sentence." It is no wonder then that President Obama would wave his veto pen at the House of Representatives for daring to pass legislation to boost energy sources he opposes, especially when he needs to secure the continuing support of his liberal (environmental) base in order to hope to be re-elected this fall.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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