Oil Industry Wary of New US Interior Secretary's Policies

WASHINGTON (Dow Jones Newswires), Feb. 2, 2009

Despite Interior Secretary Ken Salazar's vow to draft a comprehensive energy policy that includes new domestic oil and gas drilling, the industry is watching with a wary eye.

Salazar hasn't been specific about where he will open new acreage for lease sales. But based on his comments so far, some industry officials fear that new drilling rights under such a plan may be in areas that show little promise compared to other prospects likely to remain off limits.

The officials also say the secretary's pledge to reform the government's royalty program, which collects billions of revenue from the industry for federal coffers, may discourage even more new projects.

Since his confirmation late last month,the former Democratic senator from Colorado has repeatedly said he is considering revamping the five-year lease sale plan established under the George W. Bush administration.

President Barack Obama has said he wants to fundamentally shift the country's energy economy away from fossil fuels and toward renewable energy, warning of dire global warming consequences if the world doesn't cut its greenhouse-gas emissions. Since outlining his opposition to fossil fuels early in his campaign, the oil and gas industry has been in the cross hairs of his strategy to ax emissions. Under pressure from constituents feeling the pain from $4-a-gallon gas, however, Democrats late last year acquiesced their opposition to new drilling access and allowed a two-decade-old moratorium on development of large swaths of acreage in the Outer Continental Shelf to expire.

The new president, who along with the Democratic-controlled Congress was elected with strong environmentalist support, is trying to walk a fine energy-policy line on drilling.

Limited New Access?

"We will take a look at where it's appropriate to drill and where it's not," Salazar told reporters earlier last week. He said "particularly sensitive" areas would likely be closed, and that special attention would be given to local and state input and to "areas of greater controversy and pressure to keep the areas closed."

But he indicated to Congress that his department may develop a compromise package, saying during his confirmation hearing that his office will "move forward with a comprehensive energy plan that might include drilling in some areas on the OCS."

Some of the toughest opposition is likely to come from the California delegation, which still vividly recalls the late-1960s oil spills on their coast that helped to spark the environmental movement. Speaker of the House Nancy Pelosi, D-Calif., Chairman of the House Energy and Commerce Committee Henry Waxman, D-Calif., and Sen. Barbara Boxer, D-Calif., head of the Senate Environment and Public Works Committee, are all vociferous opponents of drilling off the West Coast.

Salazar is known as a deal broker, and some energy analysts wonder if he will develop a plan that mimics the compromise proposed last year when oil prices were at their peak. That proposal kept the West Coast and much potential Alaskan acreage off limits, but opened up areas off Florida's coast and allowed states, including Virginia, North Carolina, South Carolina and Georgia, to "opt in" to drilling off their shores. It also proposed a large buffer zone between the coast and drilling. Much of the Alaska prospects, where the country's last largest fields are thought to lay untapped, would remain banned from development.

"I would hope that in these times of volatile energy prices and economic woes, that the administration would not want to remove any options from the table that could benefit American industry and enhance national security," Sen. Lisa Murkowski, R-Alaska, ranking member of the Senate Energy and Natural Resources Council, said in an email to Dow Jones.

"I believe it's an issue for each individual state to determine, and that's why I support expanding the revenue-sharing program to provide those states that want development some benefit," Murkowski said.

Like many Democrats in leadership positions, the chairman of the Senate Energy Committee, Sen. Jeff Bingaman, D-N.M., is opposed to state revenue sharing, and is likely to fight hard against inclusion of such a provision, a measure that many say would be necessary bait to bring lawmakers onboard.

Industry officials say any new proposal, other than the current five-year plan, would be a step back, and buffer zones too far from the shore would cut the potential for recovering resources.

"We're supportive of opening those areas off the four southeastern states, but that may not be enough," said Erik Milito, an upstream lawyer at the American Petroleum Institute.

"Clearly with respect to the geology, the greatest majority of the prospects are going to be found closer to the shore," Milito said.

Does Royalty Reform Equal Project Cuts?

Milito is also concerned about the potential for the Interior Department to raise the required payments to the government for oil production, called royalties.

Besides trying to sweep clean the Minerals Management Service - the department responsible for collecting royalties and managing leases that has been mired in public scandal for years - Salazar said he is considering axing the royalty-in-kind, or RIK, policy and other programs. The RIK allows companies to pay their royalties to the government in oil rather than cash.

"Maybe as we deal with the royalty-reform issue, we might be able to create the kind of revenue stream that will allow funding of landmark conservation funds" and other programs, Salazar said.

That doesn't necessarily sit well with industry, however.

"Money out of our pockets is taking money from future resources," said a senior official at one of the larger oil majors who declined to be named.

Perhaps an indication of the type of reform to expect from the administration, Obama not only campaigned for a windfall-profits tax for the industry, but also late last year as a senator from Illinois filed a bill called the "Oil Subsidy Elimination for New Strategies on Energy Act," or Oil Sense Act. The legislation would repeal a raft of incentives for the oil, natural gas and refining industries, including incentives for production from marginal wells, natural gas production in the Gulf of Mexico, ultra-deep water and unconventional natural gas projects, and undo accelerated depreciation of pipelines and royalty-relief thresholds.

Obama's bill, which wasn't taken up for a vote, would also have required the interior secretary to renegotiate controversial lease sales made in the late 1990s that omitted payment provisions that auditors say could cost taxpayers up to $60 billion in lost revenue.

Michael Kearns, director of external affairs of the National Ocean Industries Association, says any change in the royalty structure could impact projects. "In the case of royalty relief, we're talking about measures that are meant to encourage investment dollars here in the U.S. as opposed to having to go to cheaper markets," Kearns said.  

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