Offshore Energy Presentation (PDF File)
Past Offshore Drilling Moratoriums
Prompted by the sharp rise in gasoline prices since Hurricane Katrina in 2005, there has been much discussion in Congress regarding the expansion of opportunities for oil and gas exploration in the Outer Continental Shelf Waters (OCS) of the United States. Numerous bills have been introduced with such titles as Ocean States Option Act, Deep Ocean Energy Resources Act, OCS Natural Gas Relief Act, the Gulf of Mexico Energy Security Act and, most recently, the New Energy Reform Act of 2008 (commonly known as the “Gang of Ten” legislation). What all these bills have in common is a lifting of the Congressional ban on offshore drilling which covered much of the OCS area (3 – 200 miles) in the Pacific and Atlantic Oceans.
Due largely to a spill from an oil platform off the coast of Santa Barbara 1969, California was the first state to have its coastal waters come under a ban on leasing activities by theMinerals Management Service for oil and gas exploration and development. By the 1980s oil and gas drilling began appearing as ballot issues in California with many coastal communities passing zoning ordinances that prohibited the onshore support facilities for drilling operations. These ballot issues culminated in the State enacting an permanent ban on drilling in California waters not already covered by existing leases.
In 1982, Congress passed legislation that prevented the MMS from including unleased areas (“pre-leasing” ban) in future 5-Year Lease Programs in California only. In 1983, this pre-leasing ban was extended to the North Atlantic and in 1988 the first drilling ban was enacted that covered the Gulf of Mexico. In 1990, President George H. Bush, citing the National Research Council findings and concerns about preserving the ocean and coastal environment, supplemented the existing moratorium by prohibiting offshore leasing or pre-leasing activities in areas covered by the legislative ban until 2000. 1990 also saw enactment of the Outer Banks Protection Act (later repealed) that specifically prohibited leasing activities in North Carolina’s OCS area. In 1998, President Clinton extended the moratorium to 2012.
During the first half of 2008, gasoline prices reached $4.00 per gallon commensurate with oil prices reaching record levels. Amid calls for more domestic production, President George W. Bush lifted the executive moratorium in June and directed the MMS to begin preparation of a new 5-Year Lease Program to take effect once the current Program expires. The MMS began to solicit comments from the states on August 1st of this year. Despite a flurry of proposals that, in some combination, would allow states to independently choose to participate in oil & gas production, maintain bans in state waters, open all waters at specific distances from shore and the like, Congress allowed the legislative moratorium to lapse on September 30, 2008 by not renewing it in the appropriation bill. While the majority of the OCS is now no longer under a moratorium, this action does not affect the moratorium enacted under the Gulf of Mexico Energy Security Act that prevents leasing activities within 100 miles of the Florida coastline in the eastern Gulf of Mexico until 2022.
The Role of the Minerals Management Service (MMS)
The MMS manages the 1.76 billion acre OCS area through leases on approximately 43 million acres accounting for about 15% of the Nation’s domestic natural gas production and 27% of the domestic oil production. Under the authority of the Outer Continental Shelf Lands Act (OCSLA), the MMS leases the federal lands of the OCS through the development of a 5-Year Lease Program. A 5-Year Program consists of the schedule for lease sales as well as the size and location of blocks to be offered. Once a 5-Year Program is developed, MMS will allow companies to bid for specific lease areas. Oil and gas leases are issued for an initial period of 5 years or not to exceed 10 years where such longer period is necessary to encourage exploration and development in areas because of unusually deep water or other unusually adverse conditions.
Once production is established, the term continues as long as there is production. Upon completion of a lease sale, a company submits a Plan of Exploration (POE) with associated environmental documents. Exploration is comprised of seismic studies and exploratory wells. Once a discovery is made, a company may submit a Plan of Development and Production to MMS. There are about 20 federal and state permits required for production which include air and water quality permits from the EPA. It takes about 1-3 years to reach production.
In addition to oil, gas and sand resources, MMS has been granted authority under the Energy Policy Act of 2005 to develop lease programs for alternative energy development. In a manner similar to oil and gas leasing, MMS is developing polices for to issue OCS leases, easements or right-of-ways for activities that produce or support production, transportation, or transmission of energy from sources other than oil and gas.
The Current 5-Year Lease Program
The current 5-Year Program took effect July 1, 2007 and runs through June 30, 2012. Because this Program was developed under the legislative and presidential moratoriums, it does not include areas under those bans. However, the current Program does include a special interest lease sale of a 500,000-acre off the coast of Virginia approximately 25 miles north of the North Carolina-Virginia border. This lease sale could proceed as early as 2011. North Carolina submitted comments on the proposed Program in which the Governor raised concerns that by virtue of our close proximity, North Carolina’s coast would bear the direct adverse impacts of such a sale, with no commensurate benefit. In essence, the Governor opposed inclusion of the area in the proposed Program. In addition to the proposed lease sale of the area off the Virginia coast, the 2007-2012 Lease Program includes 21 lease sales, focusing on areas in the western Gulf of Mexico off Texas, Louisiana and Alabama as well as areas off Alaska.
The New 5-Year Lease Program
The MMS announced in July 2008 that it was jump starting the development of a new 5-Year Lease Program, giving the next administration a two-year head start in expanding energy production in federal waters (beyond three miles) that would include areas under the Congressional moratorium. In contrast to the development of the current Program, MMS solicited comments from all 50 governors relative to issues that were specific to their state. While unusual, the OCSLA does allow for “out-of-cycle” leasing programs.
The rationale for initiating this process now is that the nation is dependent upon supply from too limited an area (Gulf of Mexico and southern California) with the recent disruptions in supply due to hurricanes cited examples. According to MMS, 27% of US oil and 15% of natural gas comes from the Gulf of Mexico. Southern California accounts for about 70,000 barrels/day.
North Carolina has submitted comments on this proposal citing concerns about the effects on fisheries, tourism and continued dependency on fossil fuels. The MMS is currently reviewing 180,000 comments (compared to 5,000 comments on the last Program) that will be used in the development of the 5-Year Program. A draft proposed Program is expected to be completed by January 2009 at which point there will be a 60-day comment period. A proposed Program and draft Environmental Impact Statement is projected to be available by March 2010 giving the new administration a two-year head start should they decide to continue. The current Program will continue till 2012 at which point the new Program would go into effect. If implemented by the new administration, the new Program could replace and supercede the portion of the current Program remaining after the effective date of the new Program with any currently schedule sales for mid-2010 to mid-2012 being included in the new Program.
Under the current procedures outlined by the OCSLA, it takes approximately 2.5 years to develop a lease program and absent additional Congressional action, this is the fastest a new plan can be prepared. With the lapse of the legislative ban in September, the House and Senate have stopped having hearings on the issue and no legislation has been passed. There have been some discussions of streamlining the process – the National Environmental Policy Act requires three public comment periods and there is interest in reducing that to two.
Interest in North Carolina’s OCS
In the past, no interest in oil and gas exploration has been shown off the North Carolina Coast except for the Manteo Exploration Unit (MEU). The MEU is comprised of 21 blocks, each approximately nine square miles in size located about 38 miles east of Rodanthe. This is the location of an ancient reef structure with the age and composition likely to hold hydrocarbons, most likely natural gas. Industry experts estimate that there is a 7% chance of finding hydrocarbons in the area and 2% chance that it would be economically viable. However, the estimated potential reservoir (by federal and industry geologists) if a discovery is made is five trillion cubic feet of natural gas with a field life of 20-30 years. This puts the site on par with other large finds such as Prudhoe Bay Alaska.
The Role of North Carolina in OCS Decisions
When it comes to offshore energy development, the State has the ability to comment on the project under several authorities - the federal OCSLA, the NC CAMA and the administrative rules of the CRC. The OCS Lands Act outlines the provisions under which the Governor comments on a Plan of Exploration or POE. CAMA and the NC Coastal Program provide the authority for making consistency determinations. The CRC’s administrative rules outline the information needs and issues of importance in making the consistency determination under the Federal Coastal Zone Management Act (CZMA). The CZMA gives states the authority to review federal activities, licenses and permits that have reasonably foreseeable effects on any land or water use or natural resources of the coastal zone. This authority is known as a consistency determination. Federal activities must be consistent to the maximum extent practicable with the enforceable policies of a coastal state’s federally approved coastal management program. North Carolina may review the following stages of oil and gas development under the “consistency” authority:
Development of MMS-5 Year Plan;
Lease sale: the “bulk” lease sale that allows companies to bid for particular lease areas;
Plan of exploration: the plan of how a company will explore in order to determine if they will develop their lease site;
Plan of development and production: this lays out the plan for producing oil or gas from the lease site; and
Decommissioning: (federal consistency review may be required, but not in all cases) there is likely to be a review at this stage, especially if the rig is decommissioned as part of a rigs to reef program. However, decommissioning might also be included in the Plan of Development and Production in which case those activities are reviewed/approved under 4.
There a quite a few uncertainties to consider in trying to project when oil and gas exploration might be seen in the State’s coastal ocean. In addition to addressing the status of the new 5-Year Program, the new administration and Congress will need to address such things as royalties as well as areas that should be protected from exploration activities. Under the current 5-Year Program, there are no royalty provisions for activities beyond the three-mile state waters jurisdiction. The lapsed legislative moratorium also contained specific exclusion to prevent oil and gas activities in certain areas such as National Marine Sanctuaries. The most recent indications are that the House Natural Resource Committee will revisit the moratoriums as the first order of business next year with the intent of determining whether or not there should be drilling within three miles of the coast. There are also plans to revisit the Department of Interior Royalty Collection Program as part of a comprehensive energy bill.