Industry Affairs November 2011

OCAPL

INDUSTRY AFFAIRS REPORT

November 14, 2011

This is the 72nd report from the Industry Affairs Committee of OCAPL. The opinions expressed herein are those of the writers and not those of OCAPL, AAPL, former clients, or our current employers. The objective of this exercise is to alert OCAPLmembers to (a) the activities of organizations and governments that affect the way we do business, (b) public opinion that shapes legislation, and (c) judicial decisions relating to energy issues. Hopefully, this knowledge will provoke each of us to recognize the critical role we, as LANDMEN, play in sustaining America’s standard of living and thereby feel compelled to respond to the challenges before us. Your comments regarding this effort are always welcome. 

The Committee at Work: Current members in the OCAPL Industry Affairs committee include Phil Jones, Brandt Vawter, Brett Hudson, John Raines, and Jack Rayburn. If you would like to participate in the committee’s effort, we would be pleased to hear from you.

 

BHP Billiton to Spend $4.5B On US Shale This Year

by  Robb M. Stewart

Dow Jones Newswires

Monday, November 14, 2011

MELBOURNE (Dow Jones Newswires), Nov. 14, 2011

BHP Billiton plans to invest roughly US $4.5 billion developing the shale oil and gas assets it bought in the U.S.this financial year as it ramps up production, the head of the mining company's petroleum division said Monday.

BHP expects capital spending to jump to almost US $6 billion in the 2015 fiscal year and roughly US $6.5 billion by 2020 as the company ramps up the number of rigs on its four project areas, Michael Yeager said in a conference call from Melbourne.

BHP spent almost US $17 billion this year buying Petrohawk Energy Corp. along with its assets in Texas andLouisiana and Chesapeake's Fayetteville shale assets in Arkansas.

Yeager, who defended the hydraulic fracturing or "fracking" technology used to extract hydrocarbons from deep shale deposits, said BHP is targeting U.S. shale production of 90 million barrels of oil equivalent in the year through June or about 250,000 BOE a day. He said he expects this to reach 600,000 BOE a day in fiscal 2015 and 1 million by 2020.

BHP has targeted 225 million BOE this year from all its petroleum operations, including wells in the Gulf of Mexico and elsewhere. The figures don't include prospective oil shale projects in the Permian Basin in Texasacquired with Petrohawk and where Yeager said BHP is still actively expanding.

Yeager said shale is forecast to account for half of U.S. gas production by 2020 and is an opportunity for the U.S.to secure energy supplies. Although he acknowledged concerns over fracking technologies globally and its potential impact on the environment, shale continues to gain acceptance, he said

 

Salazar unveils new proposed 5-year OCS leasing program

By Nick Snow 
Washington Editor

US Sec. of the Interior Ken Salazar announced a proposed US Outer Continental Shelf program for 2012-17 with 15 potential oil and gas lease sales, 12 in the Gulf of Mexico and 3 off Alaska's coast. "This 5-year program will make available for development more than three-quarters of undiscovered oil and gas resources estimated on the OCS, including frontier areas such as the Arctic, where we must proceed cautiously, safely and based on the best science available," Salazar said on Nov. 8 as DOI's US Bureau of Ocean Energy Management released the tentative schedule.

A fact sheet about the proposed program—the second of three that must be issued before a final 2012-17 program is established—said it included five annual area-wide sales offering all unleased acreage in the western Gulf of Mexico beginning in fall 2012; five more similar annual area-wide sales in the central gulf beginning in spring 2013; and two sales in the eastern gulf, in 2014 and 2016, in areas not under congressional moratorium.

The proposed schedule also included a sale in the Beaufort Sea in 2015 and one in the Chukchi Sea in 2016 offAlaska. The schedule provides time to learn from interim exploration and further analyze environmental, subsistence use, and infrastructure issues so the sales can be tailored to address these issue. A special interest sale in Alaska's Cook Inlet, initially scheduled for 2013, might be delayed depending on industry interest.

It did not include any lease sales off the US Atlantic coast. The fact sheet said that while a 2009 OCS development strategy included the south and mid-Atlantic planning areas under possible consideration for a 2012-17 program, a lack of oil and gas infrastructure and spill preparedness and response capacity, along with potentially conflicting uses with the US Department of Defense, supported Salazar's decision to leave it out.

Virginia Gov. Robert F. McDonnell (R) reacted sharply. "Virginia is poised to become the 'Energy Capitol of the East Coast' by responsibly developing nuclear, natural gas, coal, biomass, wind, solar, and offshore oil and gas," he said. "There is a burgeoning energy exploration industry, hundreds of millions of dollars in new capital investment, and thousands of new jobs at stake if Virginia is not allowed to pursue its innovative and comprehensive energy strategy."

'A missed opportunity'

Oil and gas industry groups also were disappointed. "Moving forward with the proposed 2012-17 5-year OCS leasing program is a good first step," said Erik Milito, the American Petroleum Institute's upstream and industry operations group director. "However, this is a missed opportunity to open additional areas that could have helped address rising energy demand, create American jobs and reduce the federal deficit."

"This ill-conceived plan leaves us looking in the same areas we have looked for over a generation and would cast our energy reliability and security lot to the whims of other, often unfriendly nations," said National Ocean Industries Association President Randall B. Luthi. "While today's decision is not unexpected, the lack of new access is deeply disappointing, and frankly bears little resemblance to the president's announcement in March of this year—amid high energy prices—that [his administration] had set the goal of reducing oil imports by one-third by 2025."

Environmental organizations also were critical. "The president's Oil Spill Commission put forth a game plan to improve the industry's safety, but it has yet to be realized," said Natural Resources Defense Council President Frances G. Beineke, who served on that commission. "Congress has failed to pass a single law to better protect workers or the environment. Industry has not invested sufficiently in developing the technologies needed to prevent future disasters. And the government still needs additional resources and science in order to effectively police an industry that so desperately needs it."

Lori LeBlanc, executive director of the Gulf Economic Survival Team, said that the organization appreciated the latest proposed 5-year OCS plan with its 12 gulf and 3 Alaska offshore sales. "However, there continues to be tremendous uncertainty within the industry as to the ability of the government to timely approve the necessary plans and permits to enable future projects to move forward," she continued. "We fear that this air of uncertainty may impair the ability of the industry to invest in currently planned and future lease sales."

Written comments on the draft programmatic environmental impact statement for the proposed 5-year program will be accepted until Jan. 9, 2012. BOEM also has scheduled public hearings next month on the draft programmatic EIS in nine Alaska communities. Public hearings also are scheduled in Washington; Houston;Mobile, Ala.; and New Orleans.

 

Industry officials attack latest call to raise oil, gas taxes

By Nick Snow 
Washington Editor

Oil and gas industry association officials blasted a proposal sent by several congressional Democrats to the deficit reduction super committee on Nov. 2 to raise revenue by eliminating key provisions benefiting the industry. Congress and the super committee should take the necessary time to comprehensively address tax reform questions and resist apparently easy suggestions which actually would do more economic damage, they said on Nov. 7.

"Some of the proposals are just punitive to oil and gas as a sector. Others are even more specifically selective and more punitive by selecting just a handful of companies," American Petroleum Institute Pres. Jack N. Gerard said in a teleconference with reporters. "All you have to do is look at corporate earnings, and you'll find companies that make more but pay a lower effective tax rate. No one is calling for higher tax rates for those companies, nor should they. We should be focused on creating jobs, not punishing a particular industry."

Others questioned the wisdom of Congress trying to make major tax policy reforms in such a short period. "Proposals to drop corporate rates into the 25% level will require repealing significant depletion exemptions that are way beyond our industry, such as eliminating accelerated depletion and the manufacturers' tax deduction for every industry, not just ours," noted Lee O. Fuller, vice-president of government relations at the Independent Petroleum Association of America. "When you start sweeping through it in that context, we're a minor player."

In a separate interview, V. Bruce Thompson, president of the American Exploration & Production Council (AXPC), said, "It's a blanket approach—just get rid of everything oil and gas, and let the chips fall where they may. Our concern is with the thinking on intangible drilling cost deductions, which is clearly a tax code provision which lets us recover, in the year of expenditure, any items that have no salvageable tax value, as with any company's research and development expenses."

Negative impacts

"These tax increases would hurt American consumers and employers by raising the costs of driving, raising the costs of manufacturing and transporting products, and raising the costs of operating businesses," National Petrochemical & Refiners Association Pres. Charles T. Drevna said in a statement. "They would make it harder for American oil and gas producers, and fuel and petrochemical manufacturers to compete with foreign rivals on a level playing field. This would wipe out jobs, weaken our economy, and increase America's reliance on foreign oil, fuels, and petrochemicals."

Their responses came after several congressional Democrats urged the super committee to repeal federal tax provisions which directly benefit the oil and gas industry or exclude the industry specifically from general corporate tax exemptions. "This is not class warfare. This is common sense," declared Robert Menendez (NJ), a Senate Energy and Natural Resources Committee member, in a Nov. 2 press release. "We want the oil companies and their shareholders to do well, but we should not be spending 21 billion taxpayer dollars to unfairly reward their tremendous success."

"I applaud the success of these companies and believe that in the United States individuals should, through merit and hard work, be able to build wealth," Rep. James P. Moran (Va.), ranking minority member on the House Interior Appropriations Subcommittee, said in a commentary in the Nov. 3-9 Falls Church (Va.) News-Press. "But given their profitability, it's clear that these companies do not need their current tax breaks and the public subsidies they receive. Big oil tax expenditures are, without doubt, wasteful spending of taxpayer dollars. Removing these tax breaks will not hurt the oil and gas industry, nor will it affect the price of oil."

Gerard disputed such characterizations. Oil and gas pays more in total corporate taxes than any other USindustry, he maintained. Its effective 2010 tax rate was an average 41.1%, compared with 26.5% for other businesses in Standard & Poor's Industrial Index, and the tax provisions critics target are no different than normal business deductions and cost recovery mechanisms widely used throughout the US economy, he said.

 
 
Keystone Pipeline May Not ‘Survive’ U.S. Delay, Flaherty Says

November 14, 2011, 12:11 AM EST

By Andrew Mayeda and Greg Quinn

Nov. 11 (Bloomberg) -- The U.S. State Department’s decision to delay its review of TransCanada Corp.’s $7-billion Keystone XL pipeline until after next year’s presidential election may doom the project and accelerateCanada’s efforts to ship crude to Asia, Canadian Finance Minister Jim Flaherty said.

“The decision to delay it that long is actually quite a crucial decision. I’m not sure this project would survive that kind of delay,” Flaherty said yesterday in an interview at the Asia-Pacific Economic Cooperation summit inHonolulu. “It may mean that we may have to move quickly to ensure that we can export our oil to Asia throughBritish Columbia.”

The deferral on Keystone XL is a blow to the government of Prime Minister Stephen Harper, who called U.S.approval of the pipeline a “no brainer.” Canadian officials underestimated the strength of resistance to the project by Nebraska farmers and environmentalists, political and foreign-policy experts said.

The State Department said yesterday it will study an alternative route to avoid environmentally sensitive areas in Nebraska. Nebraskan farmers, officials in the state and some members of Congress argue the proposed route across the Sandhills area risks contaminating the Ogallala aquifer that supplies water to 1.5 million people.

Flaherty, who travels to China this week, called the State Department’s move “disappointing,” noting that unions and business groups appeared to back Keystone.

“This project would have provided thousands and thousands of jobs in the United States, a lot of unionized, well-paying jobs,” he said. “The delay, we hope, doesn’t doom the project. We hope it will still happen.”

Hollywood Opposition

The project was also opposed by environmentalists who, backed by Hollywood celebrities such as Daryl Hannah and Julia Louis-Dreyfus, said the crude it would deliver from the Alberta oil sands to Gulf Coast refineries produces more greenhouse-gas emissions than conventional oil.

“The whole thing was kind of mishandled by not understanding the local resistance to it,” said Andy Hira, a professor of political science at Simon Fraser University in Vancouver who studies energy policy. Harper and TransCanada need to be more flexible about the route for the project to be approved, he said.

Harper has promoted his country as an “energy superpower,” pointing to its political stability compared with other suppliers. Canada is already the biggest foreign supplier of oil to the U.S. and provides the country with almost a quarter of its crude imports, twice what Saudi Arabia does.

Canada had dispatched senior officials and diplomats to lobby on behalf of the pipeline. In an interview at Bloomberg headquarters in New York on Sept. 21, Harper said approval of the project was a “no brainer” because it would create jobs in the U.S. and help the country secure its energy supply.

Gulf Coast

The 1,661-mile (2,673-kilometer) pipeline would deliver 700,000 barrels a day of crude from Alberta’s oil sands to the Gulf of Mexico by crossing Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas.

Flaherty, 61, will travel later this week to Beijing, where he will discuss increasing energy exports to China and facilitating investment in Canadian natural-resource assets.

Enbridge Inc. has proposed building a pipeline, called Northern Gateway, that would transport crude fromAlberta’s oil sands to Canada’s Pacific coast, while Kinder Morgan Inc. plans to expand its Trans Mountain route to do the same.

Opposition to Keystone XL grew over this year, as environmentalists and other groups held protests outside the White House that led to arrests. The Nebraska legislature is in a special session weighing measures to force a rerouting of the project.

Environmental Risks

As the political pressure on his administration grew, Obama himself acknowledged the health and environmental risks in Nebraska.

“Folks in Nebraska, like all across the country, aren’t going to say to themselves, ‘We’ll take a few thousand jobs if it means our kids are potentially drinking water that would damage their health,’” Obama said in Nov. 2 interview with Nebraska TV station KETV. “We don’t want, for example, aquifers to be adversely affected. Folks in Nebraska obviously would be directly impacted.”

The Canadians appeared not to pick up on the shift in U.S. thinking on the pipeline, said Hira.

“Over the last month or two the Canadian government really should have re-assessed the situation based on the amount of resistance that was coming from in Nebraska,” he said.

Lobby Efforts

Canada’s drive to secure Keystone’s approval included two trips to Washington by Natural Resources Minister Joe Oliver, where he met with U.S. Energy Secretary Stephen Chu and pressed the case with Obama administration officials and numerous House representatives and senators, Patricia Best, Oliver’s chief spokeswoman, said in an e-mail.

In advocating the pipeline, Canada had appealed to the democratic and economic values it shares with the U.S.It is a position outlined by Canadian conservative commentator Ezra Levant in his book “Ethical Oil,” in which he argues that countries such as the U.S. should opt for oil from Canada rather than from Middle East dictatorships such as Saudi Arabia or socialist Venezuela.

“In Canada, as is the case in the United States, energy policy is rooted in the principles of the open market and shaped by a commitment to develop our energy resources in an environmentally and socially responsible way,” Oliver said in an Oct. 4 speech in Washington to the U.S. Energy Association. “How different the situation is elsewhere.”

Judged on Merit

Canada’s ambassador in Washington, Gary Doer, also lobbied U.S. and state officials to support the pipeline. After Obama’s televised interview, Doer told reporters in Ottawa that he expected the project to be approved if judged on “merit,” rather than ”noise.”

“We’re very excited here in Nebraska that our voices have been heard,” Nebraska Governor Dave Heineman, a Republican, said yesterday in an interview. “And I want to emphasize, most Nebraskans, including myself, we support the pipeline but we’re opposed to the route.”

In an environmental impact study in August, the State Department said it studied 14 “major route alternatives” for the pipeline. The department “did not find any of the major alternatives to be preferable to the proposed project,” it said at the time.

Still, environmentalists were able to raise doubts about the project’s impact, a factor that the Canadian government didn’t take seriously enough, said Michael Byers, an expert in international law at the University ofBritish Columbia.

Rigorous Review

“Their mistake was to gloss over the environmental dimensions,” said Byers, who ran as a candidate for the opposition New Democratic Party in a 2008 general election. ”Obama was conscious that he needs to get out his base on election day. He didn’t want the environmentalists to stay home.”

The delay is an opportunity for a more “sober” and “rigorous” assessment of the pipeline on all sides, outside of the politicized climate of a presidential election campaign, he said.

Russ Girling, chief executive officer of Calgary-based TransCanada, who had said rerouting delays might kill the project, said yesterday the company remains “confident Keystone XL will ultimately be approved.”

“This project is too important to the U.S. economy, the Canadian economy and the national interest of theUnited States for it not to proceed,” Girling said a statement.

--With assistance from Theophilos Argitis in Ottawa. Editors: David Scanlan, John Simpson