Our Self-Limiting Energy Policies

Mark Green
Posted October 22, 2015

Recent reports assert that some of the world’s oil suppliers have had a strategy to curtail the U.S. energy revolution – and that the strategy has worked, citing U.S. Energy Information Administration data showing U.S. production in decline. Bloomberg this week:

After a year suffering the economic consequences of the oil price slump, OPEC is finally on the cusp of choking off growth in U.S. crude output. The nation’s production is almost back down to the level pumped in November 2014, when the Organization of Petroleum Exporting Countries switched its strategy to focus on battering competitors and reclaiming market share.

Market decisions by major suppliers certainly have impact. Yet, focusing attention on factors beyond U.S. control misses factors under U.S. control that have a clear bearing on the trajectory of domestic oil production, economic growth and American security.

We’ll name a couple: continuing the outdated ban on U.S. oil exports and regulatory and process roadblocks that limit access to energy reserves and production. Unfortunately, what we have is an administration whose self-sanctioning approach to U.S. energy is hurting American competitiveness in the global marketplace, to the benefit of other producers.

We’ve discussed the ample economic, security and energy production reasons for lifting the 1970s-era oil exports ban. Study after study has underscored the point that letting U.S. crude reach the global marketplace – to compete fairly with crude from other suppliers – would generate economic growth, stimulate domestic output and benefit consumers while positioning the United States to balance and stabilize energy markets while helping friends overseas.

In contrast, keeping the ban in place denies trade benefits to this country and tends to discourage domestic production. Studies by Rice University and IHS show that large volumes of U.S. crude sell below the global trading price because they’re shut in domestically. That’s a clear disincentive to production, one that’s heightened in a low-price environment. So, while there’s lots of talk about what others are doing to affect global markets, the fact is the United States is largely a spectator – by its own policy. Other energy-producing countries aren’t compelling the United States to retain this anti-growth, anti-competitive export ban, but they sure stand to benefit from it.

Now, about regulation and access to reserves. Just last week the Obama administration announced cancellation of scheduled 2016 and 2017 Arctic lease sales, citing “low industry interest” in Arctic energy development. The Bureau of Safety and Environmental Enforcement (BSEE) also denied requests from two current oil and natural gas leaseholders seeking extensions of their Arctic leases. The leaseholders said the extensions were justified because of delays beyond their control.

The decisions are more of the same from an administration that often has claimed credit for the recent surge in U.S. oil and natural gas production while, by policy and approach, it has actually discouraged production in areas under its control. Arctic development is the latest example.

The American people and America’s national security stand to be the losers. A National Petroleum Council report earlier this year laid out the stakes for U.S. offshore energy development in the Arctic:

Oil and gas activities in the Arctic have resulted in the production of over 25 billion barrels of liquids and 550 trillion cubic feet of natural gas. Additionally, an existing reserve base of 38 billion barrels of liquids and 920 trillion cubic feet of natural gas is estimated. The Arctic is also estimated to contain an additional 525 BBOE (billion barrels of oil equivalent) of conventional resource potential, 426 BBOE of which is undiscovered conventional liquids and gas … This 426 BBOE represents about 25% of the remaining global undiscovered conventional resource potential.

The report explains that while Russia has the largest Arctic resource potential, in terms of oil potential the U.S. and Russian portions are about the same, about 35 billion barrels each:

The report says the U.S. portion is equal to about 15 years of current U.S. net oil imports, based on EIA data. The report’s authors underscore the unique nature of energy development in the Arctic, entreating federal officials to craft Arctic-specific leasing policies and regulations that recognize, among other things, long lead times for Arctic exploration and production, long supply lines and a drilling season that typically lasts just three to four months, if that. Given the enormity of the energy potential, these aren’t unreasonable policy suggestions.

Looking more closely at last week’s Arctic announcements, these are hardly the positions of an administration that is trying to foster safe, responsible development of significant, strategic reserves. Rather, you see the outlines of a policy strategy that gives the appearances of supporting Arctic energy development but then sets the regulatory bar in a place that discourages actual progress.

Indeed, Arctic leaseholders facing delays caused by sea ice, the time needed to set up the infrastructure and acquire the vessels for work in the Arctic, difficulty obtaining various permits and more wanted the government to grant five-year extensions on their 10-year leases. The government said no and basically told the leaseholders that knew what they were getting into when they acquired Arctic leases. Thanks, Washington.

Meanwhile, the prospect of developing incredibly valuable Arctic energy resources gets kicked down the road, well into the future – as other Arctic nations get busy developing their reserves. Low industry interest? Not surprising. Given the uncertainty fostered by this administration’s regulatory and leasing stances, the landscape for Arctic energy development is chillier than a long Alaska night. Erik Milito, API upstream director:

“Our industry’s strong interest in developing our country’s vast offshore oil and natural gas resources in Alaska was undermined years ago when the administration began implementing a system of regulatory and permitting unpredictability and uncertainty. Investment decisions have been directly thwarted by the policy decisions of the administration related to Alaskan Outer Continental Shelf development, and lease extensions are clearly justified under the circumstances. And while it is not surprising that Interior canceled the remaining lease sales because there was an absence of nominations, it is the significant regulatory uncertainty that has created the reluctance on the part of our industry.”

More Milito:

“Still, America’s oil and natural gas industry remains firmly committed to the long-term development of offshore Alaska resources. Arctic oil and natural gas represent incredible potential for American energy security, jobs and revenue for the government. Access to the region’s oil and natural gas resources will remain necessary to provide energy supplies to meet the world’s growing demand and vital to keeping America’s status as a world leader in energy.”

It would be hard to identify another government in the world that has made its relationship with energy-producing companies as adversarial. But that’s where we are. The administration’s default position on energy development so often seems to be reluctant, begrudging. As a result, when we see articles about other countries shaping the global energy balance to the detriment of the United States, we must also acknowledge that our own policy is playing a key role in that. Again, Bloomberg, noting the market strategies of other energy-producing nations to slow the U.S. energy revolution:

“Their strategy is still working for them,” said Miswin Mahesh, an analyst at Barclays Plc in London. “It means pain now, but in the medium-to-long term they will reap the fruits of a more balanced market, moderated shale supplies, growing demand for oil and ultimately a higher price.”