Senate Energy Draft Gives FERC LNG Siting Authority

The oil and gas title of the Senate omnibus energy bill would spur development of natural gas storage, accelerate interstate pipeline projects, give sole siting authority over liquefied natural gas (LNG) facilities to FERC and promote the sharing of Outer Continental Shelf (OCS ) revenues with coastal states. The title was released by the Senate Energy and Natural Resources Committee late Friday and is expected to go through the mark-up process this week.

As expected, the chairman's mark of the 112-page title would give "exclusive authority" to the Federal Energy Regulatory Commission over the siting, construction, expansion or operation of LNG facilities located onshore or in state waters. It undoubtedly will draw fire from a lot of Senate Democats, who object to Republicans overlooking the role of the states in this area. The Senate draft appears to offer clearer siting authorization for FERC than a provision in the House energy bill, which was passed in late April.

The measure by the Senate energy panel, which is chaired by Sen. Pete Domenici (R-NM), does not take any action to overturn the congressional moratorium on oil and natural gas drilling on the federal OCS. This is a big disappointment for the energy industry, but hardly surprising. The bill, however, does make it more financially enticing for coastal states to allow exploration and production (E&P) off their shores. Specifically, it calls for the Interior Department secretary to distribute $500 million between fiscal years 2006 and 2010 to producing states and coastal political subdivisions (counties, parishes and boroughs).

Revenues would only flow to those states that have approved coastal impact assistance plans. Currently, the federal government shares half of the royalty revenues from onshore production with the states. Coastal states receive 27% of the royalties from offshore production in what is known as the 8(g) zone, which lies between the boundaries of state and federal waters, but they don't get any revenues from production in federal OCS waters off their coasts, with the exception of monies from special-purpose funds. Only five states now have oil and gas production offshore -- Texas, Louisiana, Alabama, Mississippi and Alaska.

In order to tempt other coastal states to open up their waters to drilling, proponents have argued that the states could use the offshore revenues to pay down their debt, but the Senate bill places restrictions on how the funds can be used. The money can only be spent on: 1) conservation, protection or restoration of coastal areas, including wetland; 2) mitigation of damage to fish, wildlife or natural resources; 3) planning assistance and the administrative costs of complying with these requirements; 4) implementation of a federally approved marine, coastal or comprehensive conservation management plan; or 5) mitigation of the impact of OCS activities through funding of onshore infrastructure projects and public service needs.

The Senate measure also allows FERC to award storage companies market-based rates for new storage and storage-related services that are placed in service after the enactment of the energy bill, even if the company is unable to demonstrate that it lacks market power. The Commission first would have to determine that market-based rates are in the public interest and are necessary for the construction of storage capacity in areas that need storage services, and that customers would be adequately protected.

In addition, the bill would set a specific deadline for the secretary of the Department of Commerce to decide the appeals of energy companies seeking to overturn state rulings blocking energy projects under the Coastal Zone Management Act (CZMA). It would allow the secretary to receive filings in a particular proceeding during a 270-day period, at the end of which a notice would be published in the Federal Register that the administrative record has been closed. The bill would allow the secretary to stay the 270-day period for no more than 60 days. Not later than 90 days after publication of the notice in the Federal Register, the secretary would be required to either issue a decision or publish a notice in the Federal Register explaining why a decision could not be issued at that time.

The inclusion of this language in the Senate bill is a big win for pipelines, which contend that the lack of a deadline on CZMA appeals has allowed states to hold up energy projects for years on end.

The bill further establishes FERC as the lead agency in carrying out reviews of energy projects to determine whether they comply with the National Environmental Policy Act of 1969 (NEPA). As the lead agency, the Commission, in consultation with other agencies, would prepare a single environmental review document, which would be used as the basis for all decisions (including CZMA appeals) under federal law, the Senate draft said. It also gives the Commission the green light to establish a schedule for all federal authorizations.

The measure would allow FERC to establish an electronic information system to provide the agency and the public with information to "facilitate price transparency and participation in markets for the sale or transportation of natural gas in interstate commerce." The system would provide "on a timely basis information about the availability and prices of natural gas sold at wholesale and in interstate commerce to the Commission, state commissions, buyers and sellers of wholesale natural gas, and the public."

But FERC shall not: 1) compete with, or displace from the marketplace, any price publisher (including any electronic price publisher); 2) regulate price publishers; or 3) impose any requirements on the publication of information by price publishers, the Senate bill said.

The Senate bill would increase the Commission's criminal and civil penalty authority under the Natural Gas Act (NGA) and Natural Gas Policy Act of 1978 (NGPA), something the agency has been requesting for years. Specifically, criminal penalties under the NGA and the NGPA would increase to $1 million and five years in prison, while maximum civil penalties under the NGA would increase to $1 million per day per violation. Violators of the NGPA also could become subject to maximum penalties of up to $1 million.

The measure also amends the NGA to prohibit market manipulation. It said it would be "unlawful for any entity, directly or indirectly, to use or employ, in connection with the purchase and sale of transportation services subject to the jurisdiction of the Commission, any manipulative or deceptive device or contravention of such rules and regulations as the Commission may prescribe as necessary in the public interest or for the protection of natural gas ratepayers."

Senate negotiators inserted a number of incentives to further promote oil and gas drilling offshore and onshore. Specifically, it calls for the Interior secretary to issue regulations granting royalty relief suspension for volumes of up to 35 Bcf with respect to the production of natural gas from ultra deep wells on leases issued in shallow waters located in the Gulf of Mexico wholly west of 87 degrees, 30 minutes West longitude. The affected leases would have to be issued within 180 days of the enactment of the bill. The secretary shall not grant royalty incentives if the average annual gas price on the New York Mercantile Exchange exceeds a threshold price specified, and adjusted for inflation, by the secretary.

The measure also would provide royalty relief for oil and gas production from blocks located in water depths of more than 400 meters in the Western and Central Planning Areas of the Gulf (including the portion of the Eastern Planning Area of the Gulf encompassing whole lease blocks lying west of 87 degrees, 30 minutes West longitude) occurring during the five-year period following the enactment of the bill.

The suspension of royalties would apply to volumes of not less than: 1) five million barrels of oil equivalent (boe) for each lease in water depths of 400 meters or more, but less than 800 meters; 2) nine million boe for each lease in water depths of 800 meters or more, but not greater than 1,600 meters; and 3) 12 million boe for each lease in water depths greater than 1,600 meters.

Moreover, the bill calls for the Interior secretary to carry out an expeditious program of competitive leasing of oil and gas in the National Petroleum Reserve in Alaska. Each lease shall be issued for an initial period of not more than 10 years, and shall be extended for as long as oil or natural gas is produced from the lease, according to the Senate measure.

It would provide incentives for marginal oil and gas wells when oil prices fall below $15 per barrel for 90 consecutive days and when gas prices fall to approximately $2 Mcf/d for 90 consecutive days, both of which are unlikely to happen, at least not anytime soon. The measure also gives the Interior secretary the authority to expand the royalty-in-kind program, allowing producers to use their production to pay off their royalty debt as opposed to making cash payments.

The bill further calls on the Interior secretary to arrange for the National Academy of Public Administration to conduct a review of federal onshore oil and gas leasing practices, focusing on the process by which federal land managers accept or reject an offer to lease; the process for applications for permits to drill; the process for considering surface use of operations; the process for administrative appeals of decisions or orders of officers or employees of the Bureau of Land Management (BLM) with respect to federal oil or gas leases; the process by which federal land managers identify stipulations to address site-specific concerns and conditions; and how federal land management agencies coordinate planning and analysis with federal, state and local agencies.

The Interior Department and National Academy are required to report the findings to the Senate Energy Committee and House Resources Committee within 18 months after the enactment of the bill.

For faster permitting of oil and gas production, the bill calls for the Interior Department to ensure expeditious compliance with NEPA; improve consultation and coordination with the states and the public; and improve the collection, storage and retrieval of information related to oil and gas leasing activities. It also called for the Agriculture Department to focus on more timely action for oil and gas lease applications.

Eighteen months following enactment of the bill, the Interior secretary would be required to develop and implement best management practices to improve the administration of onshore oil and gas leasing. Within 180 days of the development of the best management practices, the secretary is required to publish for comment proposed regulations that spell out specific timetables for processing leases and application.

The BLM would be appropriated an additional $60,000 in fiscal years 2006 through 2010 to carry out these activities, while the Fish and Wildlife Service would receive $5 million and the Agriculture Department would get $5 million in each of the fiscal years. The departments of Interior and Agriculture also are required to enter into a memorandum of understanding (within 180 days of enactment of bill) to establish administrative procedures and lines of authority to ensure timely processing of oil and gas lease applications, surface-use plans of operation, and applications for permits to drill.

Lastly, the bill calls on the Interior secretary to establish a "Federal Permit Streamlining Pilot Project." Toward this aim, the secretary is required to enter into a memorandum of understanding with the secretary of Agriculture, the administrator of the Environmental Protection Agency, and the Chief of Engineers. The Interior secretary also may request that the governors of Wyoming, Montana, Colorado, Utah and New Mexico be signatories to the memorandum.

Six BLM offices would serve as pilot project offices: Rawlins, WY; Buffalo, WY; Miles City, MT; Farmington, NM; Carlsbad, NM; and Grand Junction/Glenwood Springs, CO. Within three years of the enactment of the energy bill, the Interior secretary will submit a report to Congress on the results of the pilot project, and make recommendations to the president on whether the pilot should be implemented throughout the United States. (Copyright 2005 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.