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Vol. 12, No. 18 Week of May 06, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

One tricky step to go

Virginia makes Bush administration’s proposed 2007-2012 offshore leasing program

Ray Tyson

For Petroleum News

For the first time in years, the U.S. government is proposing an offshore oil and gas lease sale in federal waters outside Alaska and the Gulf of Mexico. The distinction goes to the state of Virginia, or rather to state and local politicians who pushed hardest for a lease sale off Virginia’s coastline, in a region called the Mid-Atlantic Planning Area.

Offshore Virginia is among 21 lease sales in eight of the nation’s 26 offshore planning areas proposed by the U.S. Minerals Management Service for the years 2007 through 2012. This final version of the agency’s five-year outer continental shelf program was released to the public on April 30.

“Among the many decisions I will make as secretary of the Interior, I consider this to be one of the most important because of its far-reaching impact,” U.S. Interior Secretary Dirk Kempthorne said during a press conference in Washington, D.C.

MMS estimates that the new leasing program could generate production of 10 billion barrels of oil and 45 trillion cubic feet of natural gas, with $170 billion in net benefits for the United States over a 40-year time span.

A dozen Gulf sales proposed

As expected, the lion’s share (12) of federal offshore lease sales from 2007 to 2012 would be for exploration blocks in the Gulf of Mexico, America’s number one producing region. Eight sales are planned for offshore Alaska and only one for offshore Virginia, near the tail-end of the proposed five-year program.

However, while some polls conducted in Virginia indicated public support for an offshore lease sale in the Mid-Atlantic region, actually getting the necessary approval for one in the Democrat-controlled Congress could be tricky.

Between presidential withdrawals and congressional moratoria, the majority of the OCS around the Lower 48 states has been off limits to new leasing for nearly a quarter century, including all areas off Virginia. Therefore, the so-called “special interest sale” off Virginia’s coastline could only take place should the current presidential withdrawal be modified and the congressional moratorium discontinued in the Mid-Atlantic Planning Area.

“I think the leadership of Virginia would play a key role in what ultimately may occur there,” Kempthorne said.

Interestingly, the last offshore federal lease sale held outside the Gulf of Mexico and Alaska was Mid-Atlantic Lease Sale 76 in April 1983, which takes in the same general area as Mid-Atlantic Lease Sale 220 proposed for 2011.

48 million acres not currently available

The five-year program includes 48 million acres that have not been available since the early 1980s. In total, the program would make available for leasing some 180 million acres, 8 million acres of which are located offshore Virginia.

MMS, in an obvious move to make the proposed Mid-Atlantic lease sale more acceptable to the public, excluded a 50-mile coastal buffer from leasing consideration as requested by the Commonwealth of Virginia, as well as a wedge-shaped “no-obstruction zone” to avoid conflicts with navigation activities in and out of Chesapeake Bay. Moreover, the sale could not proceed without more site-specific analysis of its environmental effects under the National Environmental Policy Act, according to MMS.

“The offshore energy industry has a remarkable safety record,” Kempthorne said. “Two major hurricanes passed through the Gulf of Mexico in 2005 without causing a single significant spill from an OCS well. That’s a remarkable achievement.”

As required by the OCS Lands Act, the plan was submitted to President Bush and Congress. They had 60 days from April 30 to review the plan before the Interior secretary signs off on the final program. If approved, it would take effect on July 1.

The 2007-2012 leasing plan included three periods of public comment, resulting in more than 125,000 responses. MMS said it received comments from states, local governments, Native groups, tribes, the oil and gas industry, federal agencies, environmental and other interest organizations, and the general public to assist in the preparation of the leasing program.

“Seventy-five percent of the comments we received from the public supported some level of increased access to the domestic energy resources of the outer continental shelf,” Kempthorne said.

Two events during program development

Two events occurred during the program development — enactment of the Gulf of Mexico Energy Security Act of 2006 and modification of the presidential withdrawal in Alaska and small portions of the Central Gulf of Mexico.

The Act, signed by President Bush on Dec. 20, 2006, requires oil and gas leasing in 2 million acres in the Central Gulf Planning Area known as the Sale 181 Area and an area of about 580,000 acres in the Eastern Gulf Planning Area. Bush modified the presidential withdrawal for two areas in the OCS — the North Aleutian basin in Alaska, and an area in the Central Gulf of Mexico, referred to as the 181 South Area. These areas were earlier withdrawn from consideration for leasing through 2012 by former President Bill Clinton.

Congress lifted the moratorium on the 181 South Area with the Energy Security Act. The five-year program includes a Central Gulf sale in 2007 that involves a portion of the Sale 181 area and, as mandated by the Act, one lease sale in the Eastern Gulf in 2008. There is no leasing proposed within 125 miles of the Florida coast or east of the military mission line in the Eastern Gulf.

“In developing the OCS oil and gas leasing program, the administration considered all potential energy resources that can be developed in a safe and environmentally sound manner,” Kempthorne said.

He added: “The OCS is a vital source of domestic oil and natural gas for America, especially in light of sharply rising energy prices and increasing demand for these resources. It would be irresponsible not to make maximum use of our own domestic energy resources.”

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Gulf oil output expected to rise 40%

U.S. Gulf of Mexico oil production is expected to increase over the next 10 years to a possible 2.1 million barrels per day, roughly a 40 percent increase over pre-2005 hurricane levels of 1.5 million bpd.

In a recent report entitled “Gulf of Mexico Oil and Gas Production Forecast: 2007-2016,” the U.S. Minerals Management Service also projected that natural gas production in the U.S. Gulf would recover from declines over the next three years to a possible 8.3 billion cubic feet per day. However, this still would be about 17 percent below pre-hurricane levels of around 10 billion cubic feet per day.

The production forecast was released May 1 at the annual Offshore Technology Conference in Houston.

One of the nation’s major sources of oil and gas, the Gulf of Mexico was dealt a one-two punch by category-five hurricanes Katrina and Rita, causing destruction and substantial damage to offshore platforms within a four week period in August and September of 2005.

MMS estimated that 3,050 of the Gulf’s 4,000 platforms and 22,000 of the 33,000 miles of Gulf pipelines were in the direct path of either Katrina or Rita, resulting in the destruction of 115 platforms, damage to 52 others, damage of 535 pipeline segments and near total shut-down of the Gulf’s offshore oil and gas production weeks after the disasters.

In mid-June 2006, when the last official hurricane damage report was issued by MMS, 12 percent of daily oil production and more than 9 percent of daily gas production remained shut-in, resulting in the loss of 166 million barrels of oil and 804 billion cubic feet of gas.

Katrina, Rita two of 10 most intense

Katrina and Rita are still ranked as two of the 10 most intense hurricanes to ever hit the Atlantic Region and the greatest natural disasters to oil and gas development in the history of the U.S. Gulf.

MMS’ recent production forecast takes into account currently producing projects, oil and gas companies’ expectations for production over the next five years and estimates of undiscovered resources in the Gulf of Mexico.

Activity used for the forecast included the expectation of 16 new deepwater projects coming into production by year-end 2007. A major contributor would be the Independence Hub facility in the Eastern Gulf, which is designed to produce up to 1 billion cubic feet per day from multiple fields. First gas is expected in the second half of this year.

“With the continued interest and activity in the deepwater area of the Gulf, we anticipate that oil and gas production will continue to be strong with a large portion of the production coming from the projects in deeper water depths,” said Lars Herbst, acting regional director for MMS.

—Ray Tyson