Oil and gas producers, who have wanted the government to appreciate their efforts to supply the country with energy, seem to have received that with the Bush administration's proposed national energy strategy, which emphasizes domestic petroleum and natural gas. But the industry's work is far from over. The focus now turns to the details, such as attracting the capital necessary to increase production and shore up the nation's energy infrastructure as the plan advises. The energy plan is a balanced, practical, well-drafted framework for increasing domestic supply, observes Forest Oil president Bob Boswell. But it contains little in the way of specific measures to bring new capital into the industry, he says. He suggests industry representatives still must do what they've done for years-plead their case before Congress, whose input will be required to turn some of the plan's visions into policy. Earl Sims, a consultant to Forest and to Mariner Energy, testified on behalf of the Independent Petroleum Association of America before the House Energy and Mineral Resources Subcommittee about ways the government can help industry boost production from federal lands during the next five years. It was the first congressional hearing on the Bush energy plan. "The predominant areas where Congress and the administration play a major role in promoting or inhibiting domestic oil and natural gas production are providing access to the natural resource base and providing access to essential capital," Sims told committee members. He quoted a National Petroleum Council study from 1999 that says capital expenditures for domestic exploration and production of natural gas must increase by about $10 billion a year-about a third more than present levels-to meet the projected demand increase in the next 15 years. Because the industry competes for capital against more lucrative investment choices, much of its reinvestment capital comes from its cash flow. The federal government can help the industry retain and invest more of its cash flow through changes in tax code and royalty policy, Sims said. "As the past year has shown, capital markets have not shifted to supporting the energy sector. The slower the flow of capital, the longer it will take to rebuild and expand the domestic industry." Offshore, the IPAA supports the reauthorization of the automatic royalty suspension volumes that were contained in the Deep Water Royalty Relief Act of 1995, which expired last year. "These terms led to a boom in natural gas and oil activities in the deep waters of the Gulf of Mexico in the five short years they were in place," Sims said. In the shallow waters, the association also recommends royalty incentives be offered or extended for expensive, high-risk plays. These include wells drilled 15,000 feet and deeper into the ground in places where there is no current production, subsalt prospects, prospects located in abnormal pressure conditions, and highly deviated wells off of existing platforms which might not otherwise have been attempted. Sims indicated that the president's plan would support such measures. It directs Interior Secretary Gale Norton to consider economic incentives for environmentally sound offshore development where warranted by specific circumstances. The plan also directs the secretary to explore royalty reduction opportunities, consistent with ensuring a fair return to the public, to enhance production, reduce production risks in frontier areas or from deep gas formations, and to develop reserves that would not be economical otherwise. Onshore, the IPAA recommends royalty incentives for expensive, high-risk plays and marginal natural gas wells. It also backs a provision in Senate Bill 388, the National Energy Security Act of 2001, introduced by Sen. Frank H. Murkowski, R-Alaska, that would allow oil companies to forgo federal royalty payments in times of low energy prices and instead make capital investments in energy production. While industry gears up to convince Congress of the worth of these measures, there are parts of the plan that do not require congressional approval. Ben Dillon, IPAA vice president of political affairs and public resources, highlights two provisions that already have been implemented, following executive orders. The first requires federal agencies to prepare a "Statement of Energy Effects" when undertaking certain actions that might have an adverse impact on the nation's energy supply, distribution or use, including a shortfall in supply, price increases and increased use of foreign supplies. The statement would detail those impacts and propose reasonable alternatives to the action in question. The second states that executive departments and agencies will expedite projects to increase the production, transmission, or conservation of energy by accelerating their review of permits and other actions. An interagency task force will help monitor and assist the agencies in these efforts. "Important steps have been taken forward with the signing of these two executive orders," Dillon says. Boswell points out that it currently takes 90 regulations and 15 permits to drill one offshore well, so expediting the process is no small matter. Chuck Davidson, chairman and president of Noble Affiliates and the IPAA offshore committee chairman, puts a positive spin on the work that still lies ahead for the industry. While it won't be easy to convince Congress and the public to back some of the measures called for in the energy plan, there's no more denying that these issues demand discussion. "We finally have a recognition that energy is important in this country," he says. Wall Street oil analysts, meanwhile, said the proposals from the administration's National Energy Policy Development Group would have a net positive impact on domestic E&P. "Increased access to highly prospective federal lands, both in the Arctic and offshore regions, will be needed, given the projected growth in North American natural gas demand," suggests Bob Morris, who follows upstream independents for Salomon Smith Barney in New York. That demand is expected to reach nearly 35 trillion cubic feet (Tcf) yearly by 2020, compared with the present 22 Tcf of annual demand, he notes. "Importantly, this ultimately should provide E&P companies with access to new opportunities capable of delivering strong reserve and production growth with attractive economic returns," Morris says. "In addition, improved transmission and distribution infrastructure should not only allow the transportation of crude oil and natural gas from remote areas, such as Alaska's North Slope, but also should relieve regional bottlenecks in regions such as the Rocky Mountains and California." Incentives for increased use of coal and nuclear energy to generate electricity have the potential to temper projected gas demand growth, he adds. Matthew Warburton of UBS Warburg LLC in New York also cites the proposals' focus on North American production. "But there also are measures aimed at limiting demand, i.e. energy efficiency," he says. "The tax incentives that are proposed are directed at consumers, renewables and fuel-efficient technology, not at upstream oil and gas. Relative to our expectations and previous wire service commentary, the inclusion of possible royalty relief was a surprise. But the absence of widespread accelerated depreciation provisions on capital projects and of firmer proposals on CAFE [Corporate Average Fuel Efficiency] standards was disappointing." He suggests the Bush energy proposals offer few material near-term benefits for integrated oil companies. In the longer term, however, Warburton says greater access to coastal waters and the Outer Continental Shelf could benefit Chevron Corp., Conoco Inc. and Murphy Oil, with regard to the Destin Dome field. Phillips Petroleum would be the most leveraged to accelerated development of a potential gas transmission line from Alaska's North Slope to the Lower 48 states, he adds. Warburton's colleague who covers upstream independents, Bill Featherston, suggests Anadarko Petroleum stands to benefit from Alaskan gas moving to markets in the Lower 48. Increased access in the Rockies could improve earnings for it, Burlington Resources, Devon Energy and Tom Brown, he indicates. -Jodi Wetuski and Nick Snow
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