Energy & Environment

What Now for Energy and the Gulf?

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LSU hosts industry leaders for insights on the post-spill situation

BATON ROUGE – On Tuesday, amidst the fallout of the deepwater drilling moratorium, Louisiana State University’s Center for Energy Studies hosted its annual summit. This topic, “Deep Exploration and the Future of the Gulf of Mexico,” drew approximately 80 attendees for what the organizer, David Dismukes, described as a “forward-looking discussion.”

James Lucier of Capital Alpha Partners, a DC-based consulting firm, gave the first of eight presentations, his being on the political realm of energy investment. Although his outlook was pessimistic in terms of administrative and legal battles for industry, he did not predict anything like an end of the Gulf oil industry.

“There is really no doubt that the quantity of the resource, the scale of the resource, is sufficiently attractive to keep the major companies there. And also, frankly, they’d much rather deal with the United States, even in the current chaotic situation.”

In his view, major energy legislation “will be very difficult for the next two years.” Narrow majorities in Congress would leave little opportunity for partisan legislation, and he believes Obama suffered a “missed opportunity” by failing to pass relevant legislation after the Deepwater Horizon spill. So the battle will be over administrative mandates, similar to that of the two deepwater moratoriums.

Regarding the moratorium, the presenters appeared to be unanimous in their disapproval, and Carl Rosenblum, of the Jones Walker law firm, gave a precise run-down. He outlined the order of the events and attacked what he viewed as dishonest actions on the part of federal officials. He argued that the executive branch had not obeyed their own appointed experts, and then that they lied about what their experts had said. Additionally, he asserted that Ken Salazar, secretary of the Department of the Interior, had used delay tactics to circumvent Judge Martin Feldman’s decision to strike down the moratorium.

John Hofmeister, the keynote speaker and former Shell Oil president, also railed on the federal government. He believes the country is “at risk of losing the plot” and “on a path to an inevitable energy abyss.” He pointed to widespread rejection of nuclear and coal power plants and the unwillingness to allow entrepreneurs to drill oil and gas. Louisiana and the other Gulf states “are doing their best as states to provide an energy-enabling environment… But once they get outside the borders of the state, then they are prohibited from moving in the direction they would like to by federal regulations.”

Since stepping down from his position with Shell he has founded and now leads a non-profit organization, Citizens for Affordable Energy, to educate the public. However, “only a crisis,” he believes, will turn this around – “a crisis of price or a crisis of availability… The forces of the anti-hydrocarbon movement… are the dominant voice of the nation today. The industry has failed to step up. The industry has not taken on the fight.”

Jim Diffley of I.H.S. Global Insight gave a data rich perspective on the economic role the energy industry plays in the Gulf region. He noted that this was the largest spill in history. However, deepwater reserves are growing in importance as a proportion of new found reserves, so the stakes of restraints on the industry are only growing. In addition to the predictably large economic value of the Gulf of Mexico by way of oil and gas – $70 billion in 2009 – he noted that independent oil and gas companies now make up half of that value, contrary to public perception. In 1988 independents had only 15 percent of the industry.

Another economist, Peter Hartley of Rice University, presented his findings on private versus socialized energy companies, which own or control 85 percent of the world’s oil reserves. Many of the national oil companies have some private ownership, but fully-private firms earn substantially more revenue per barrel of oil and per employee.

“We found two critical reasons for that. The national oil companies have overemployment, so they employ many more people than the private firms… The second reason is that the national oil companies are forced to sell products at subsidized prices.” He also noted that many of the national oil company profits are diverted away from future technological investment for social programs.

“It makes something like the Gulf of Mexico or the Canadian oil sands that much more valuable than they would otherwise be… Another important lesson is that institutions and incentives matter… If they want to, politicians can place so many regulations that private firms end up looking a lot more like national oil companies.”

Lloyd Guillory of ExxonMobil and Barbara Slanis of Willis Group Holdings, a financial advisory and insurance brokerage firm, dealt specifically with the ongoing environmental risks associated with the industry. Guillory is collaborating on a “marine well containment system” which the major energy companies will own jointly. With the goal of “restoring confidence in deepwater drilling operations,” he has already gathered $1 billion from Chevron, ConocoPhillips, ExxonMobil and Shell toward to the project.

Slanis discussed the concern that insurance companies would flee the industry after such a difficult year.

“It’s still very fluid, because there are a lot of open issues… You have $3 billion, this last year, in the [offshore premiums] world wide. This one loss is going to be between $1.5 and 3 billion. It makes it very difficult, at least from a profitability stand point.” The cost of insurance has already risen, but “it’s still palatable,” and she is “cautiously optimistic.”

Chris Knotts attended as director of the technology assessment division with Lousiana’s Department of Natural Resources. The event gave him a “better understanding of the industry’s perspective on oil and gas production in the state.”

“We have it from the governmental side and the regulatory side… It’s been very encouraging to hear that the oil company executives really don’t think much differently than we do, as far as the effects of this. It’s a little bit chilling to hear that if they don’t get some ability to move, all those resources are going to leave this region, and they’re going to places in the world that… want them there.”

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at fhodgson@pelicaninstitute.org, and one can follow him on twitter.