The People of America's Oil and Natural Gas Indusry

Energy Tomorrow Radio: Episode 110 - Kevin Book Discusses Impact of Gulf Oil Spill and Six-Month Mor

Jane Van Ryan

Jane Van Ryan
Posted June 16, 2010

In today's episode, I interview Kevin Book of ClearView Energy Partners LLC about the impact of the oil spill on energy policy and the effects of the six-month moratorium on domestic energy supplies and industry workers.

As you'll hear in this podcast, Kevin says deepwater discoveries have been playing an essential role in non-OPEC oil production. Similarly, the consulting firm Wood MacKenzie has projected that U.S. Gulf of Mexico deepwater oil and natural gas production will account for a third of total U.S. production and nearly 95 percent of total offshore production by 2020, according to Chevron's CEO John Watson.

The freeze on deepwater drilling clearly puts the United States at a disadvantage in the quest to find and harness new energy supplies.

Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.

00:16 U.S. energy policy is high on the priority list among policymakers in Washington, D.C., these days. The administration and the Congressional leadership are watching the Gulf oil spill and pushing ahead with agenda items that could have a major impact on consumers. To explain what's happening in Washington, Kevin Book of Clear View Energy Partners is with us today.

00:42 Now at the outset, I wanted to tell our listeners that your opinions are strictly your own and do not represent the views of API or the oil and natural gas industry. But, Kevin, in your view, how is the oil spill affecting the ongoing debate about energy policy today?

00:57 Kevin Book: Nothing less than a complete reversal in direction has taken place. In 1980, the process of liberalizing the production of unconventional sources began. In 1995, the deepwater got a push from the federal government. These resources have become the next frontier and America's acceptance of those resources had been growing to the point where it was a realistic part of everyone's energy plan to talk about producing onshore and off in places we've never been before. With the spill, that all appears to be changing.

01:28 You mentioned deepwater. In the short term, how do you think this six-month moratorium could affect energy supplies in the United States?

01:36 Kevin Book: The ironic thing, of course, is that when you have a 6 million barrel surplus of OPEC oil in the world on a daily basis, it's impossible to notice what declines away beneath you in the Gulf of Mexico. But years from now it won't be a small thing at all. The non-OPEC growth that the world has been counting on has been coming from the sub-salt resources--most pertinently from the ultra deepwater of the Gulf of Mexico. More than half of this year's non-OPEC supply we were expecting to see will decline out from underneath us with a six-month cessation and that's a big deal when you look ahead.

02:11 Speaking of looking ahead, there are several other initiatives that are likely to affect energy policy. One of them is the Kerry-Lieberman climate bill. Have you examined its impact on energy supplies and costs? What do you think its chances are of being enacted?

02:27 Kevin Book: I'll take the last question first. Without the explicit support from Sen. Lindsay Graham (R-S.C.), support from coal-state Democrats, and something we call "political containment" of the oil spill, effectively a deal that makes it OK to drill offshore, but imposes safety regulations that satisfy pro-environment members, the bill goes nowhere. Frankly, neither does an energy-only bill because it breaks the bank in the time of fiscal strictures. As far as what it would do, it would actually create some things that might be good, such as a needed discipline and necessary accounting with regard to our energy supply and resources. But what it's lacking is an acceptance of what you have to do when you look in the bank and you see that you're short. The problem with the bill isn't that it creates some compromises the industry supports. It actually is one of the most industry-supportive bills that we've seen so far. The problem is that it doesn't address the near-term needs for a rebound in energy demand when America recovers economically. It's essentially like planning to be starving for the rest of your life just because you're short of food right now.

03:32 Interesting way to put it, Kevin. At the same time the administration is supporting the Environmental Protection Agency's (EPA) plans to regulate greenhouse gas emissions under the Clean Air Act. It's as though they're holding a gun to the head of Congress in order to get something moving on the Hill. How do you think regulating GHGs through the Clean Air Act could affect consumers?

03:55 Kevin Book: First and foremost, any regulation that has no ability to differentiate between sources beyond a simple parameter, like the amount of emissions on an annual basis, doesn't take into account the diversity of inputs of the flexibility of the producer or the ability of that producer to actually move to a different locality. That's a regulation that sounds like it's going to be inefficient almost out of the gate. We think there is a default expectation that Democrats themselves will be the ones blocking stationary source regulation and it will merely be the CAFE standards that emerge from the original greenhouse deal. In the absence of a deal--whether it be on climate or an energy-only bill--it's not going to be the Murkowski resolution or something like it that undermines the endangerment finding that gave EPA that authority, but rather the Democrats back at the home district as the November polls approach and saying "wow, we don't want to be blamed for this."

04:46 Do you think then that could it make it more feasible for Sen. Rockefeller's (D-W.V.) proposal to be enacted? As you may know, Sen. Rockefeller is looking for a two-year delay that would at least give Congress time to act on climate change.

05:02 Kevin Book: We think actually that Sen. Kerry (D-Mass.) had one thing right. In terms of economic and political make-up of the country right now, this probably was the climate bill's last best chance. We do expect to see the Rockefeller proposal go through or something like it, whether it be a one or two year pause. What we expect to see as a realistic measure, potentially in 2011 or 2012, would not be the nature of a comprehensive bill, the likes of which Kerry-Lieberman embodies, but something more like a utility-only, stationary source regulation that might pair natural gas demand incentives with it. There's not enough economic motivation when the economy is strong and energy prices are rising. Nobody is going to make the trade that Kerry-Lieberman would have imposed.

05:42 On a very different topic now, Congress is considering changes to the Oil Spill Liability Trust Fund that could remove the cap on damage claims. If that cap is removed entirely, making companies reliable for unlimited damages, how do you think the U.S. oil and natural gas supplies could be affected?

06:01 Kevin Book: It's easy to look at it in broad brush strokes. Thirty percent of our oil comes from the Gulf of Mexico right now--our domestically produced oil that is--and 80 percent of that comes from the deepwater. The deepwater is where these high pressure, frankly, high-profit wells are the frontier that has allowed the United States to grow its supply for the first time since the 1970s. If you take a 2 percent of total damages premium and you expect that to be essentially the price you pay to ensure a well and you go to just a modest increase--modest relative to the no-cap increase--$1.5 billion. You've taken a $100 million enterprise and imposed a $30 million surcharge on top of it. Can companies handle that? Some can, but not the small ones. If you go all the way up to $10 billion, you've driven all but essentially the super majors out of the Gulf of Mexico If you take away the $10 billion cap, no one at the corporate board level ever supports the idea of unlimited liability, you'll find that the companies don't produce here; they'll produce in another sub-salt region, such as Brazil, Australia or Indonesia. That part of the economic value change--the most profitable part--will go to another country and we'll still be buying oil from overseas.

07:13 Absolutely, because we'd be producing less oil and natural gas here.

07:17 Kevin Book: It's a reasonable expectation that we're going to have at least the same electric power demand for many years to come and though petroleum distillates for light-duty vehicles might be flattening out and tapering off, there's absolutely no expectation that we'll see a fall in the middle distillates that we use for freight and for trade.

07:37 Now separately, the president is also pushing for tax hikes on the oil and natural gas industry. Again, how could these taxes affect energy supplies?

07:46 Kevin Book: This again goes back to the diversity of supply rather than necessarily the true economics of supply. What is underappreciated by a lot of the folks that support this proposal is that they're looking at tax policies that have been on the books in some cases since the 19th century. The use of last-in, first-out accounting for refiners' inventories goes back to 1939. There are opportunistic ways in which multinational corporations will always behave to outthink a slow-moving federal bureaucracy. So the unintended consequences of doing this is probably less revenue for the federal government, in spite of the fact that you have a one-time bump, because you lose the royalty stream and the taxes you're getting right now as these companies move overseas. In the meantime, what you have is an accounting trick. If I go to a restaurant and say I would like a free meal because I saved the cost of the meal by not staying in a hotel, I'm going to get thrown out on the street. Only in Congress is it possible to count money that hasn't yet been obligated as a savings when you've decided not to use it. This is the sort of faulty accounting that unfortunately creates a lot of challenges from a deficit management perspective, but in the corporate, cash-driven world it's not a question. If this changes, you produce elsewhere.

09:00 Excellent point. You're talking about accounting so this immediately comes to mind because there's a lot of people along the Gulf Coast that are just trying to figure out their own budgets at the moment. They've been hit by the oil spill and now they've been hit by the moratorium, which is clearly going to have an effect on energy workers if it continues. Just a few days ago, The New York Times produced a video showing the personal impact of the moratorium on offshore rig workers. Many workers have already been told that they could lose their jobs or that their jobs are going to be shipped overseas. One of them wondered if they were being personally punished because of a result of the tragic accident in the Gulf of Mexico. That's a pretty legitimate question. Do you agree that it appears that the entire oil and natural gas industry is being punished?

09:52 Kevin Book: I think it's important to get into the broader economics and the psychology of Congress, and for that matter, the administration in the wake of this accident. If you look at the Massey Upper Big Branch incident earlier in April it has produced not a sweeping requirement that coal mining stop, but a very site-specific response. There are still ongoing inquiries and investigations and questions about bad actors potentially within the industry that haven't followed the regulators requirements. Coal mining hasn't been shut down because the perception is that only the direct value chain--folks that willing entered into the risk proposition of mining--were harmed. Congress tends to get very antsy about who could be hurt in the wake of the accident like this one. What they're not counting in equation, and apparently neither is the administration, are the people who are also being hurt. What they've done is spare hundreds of thousands of people outside of the direct value change from the ongoing infinitesimal risk of another spill and they've directly harmed tens of thousands of people within the value chain. That is not necessarily a net social gain.

11:00 Good point. Thank you so much for joining us today on Energy Tomorrow Radio.