Historic gas prices

Byline: Milton Copulos, SPECIAL TO INSIGHT

This winter more than 60 million Americans who heat their homes with natural gas may face the unpalatable choice of either buying food or keeping warm. Natural-gas prices already are running well ahead of last year, and the combination of tight supplies and lower-than-normal storage levels signal that the worst is yet to come. Indeed, current forecasts indicate that residential prices will increase by at least 20 percent this winter and if, like last year, the weather is exceptionally cold, they easily could double.

What is most appalling about this situation is that it didn't have to happen. The tight supply situation in the gas market has nothing to do with the actual amount of natural gas available within U.S. borders. There's plenty of gas to be had. The trouble is that government rules keep it from being produced.

It is, in short, a crisis made in Washington.

How much gas is there? According to the Department of Energy (DOE), the United States has enough natural gas to last for more than 70 years at current levels of consumption, and almost 50 years if consumption were to increase by 50 percent as is expected. Moreover, so-called "unconventional" natural gas from a variety of as-yet-untapped sources could increase those figures a hundredfold. But if there is so much natural gas, how did Washington create a shortage?

To understand what happened, you first have to realize just how much land the federal government actually owns. The federal government is the nation's largest landowner, controlling 657 million acres, or almost 30 percent of the total U.S. land mass an area four times the size of Texas. With ownership of the land comes control over the resources lying under it.

According to the U.S. Geological Survey, 47 percent of all undiscovered natural gas in the United States lies beneath land owned by the federal government.

The trouble is that federal rules have placed some 314,069,760 acres of federal lands off limits to oil and gas exploration and production, and it's getting worse every year.

For example, in the Rocky Mountain states, the acreage closed to drilling increased by 19 percent during the last decade even as energy demand increased by 17 percent. A 1999 National Petroleum Council study estimated that 40 percent of the region's natural-gas resources were excluded from development by federal limitations on access. As a result 137 trillion cubic feet (TCF) of natural-gas resources are locked away.

The situation offshore is even worse. Today, oil and gas drilling is completely banned on the Atlantic Coast of the United States and a similar ban covers 97 percent of the Pacific Coast. Moreover, 46 percent of the Gulf of Mexico is unavailable for oil and gas drilling. Taken together, these restrictions on offshore development have blocked access to at least 85 TCF of known gas resources.

Environmentalists, of course, argue that drilling isn't necessary and probably wouldn't do much good anyway. History, however, suggests they are wrong.

In 1980, the University of Colorado's Potential Gas Committee (PGC), the body considered to be the leading authority on oil and gas supplies, estimated that the total recoverable natural-gas resource base of the United States was 1,780

TCF. In 2000, however, the PGC estimated the recoverable resource base at 2,208 TCF 24 percent more than the 1980 estimate even though 200 TCF had been consumed during the previous two decades.

How was this possible? Remember, the estimates of the size of the resource base are dependent on both existing technology and economic factors. Improvements in technology or price can have a major impact on resource-base estimates. Still, no amount of technological advances can help if you can't look for oil and gas supplies or develop them once they are found.

Drilling opponents argue that the federal government doesn't really ban drilling on much of its land. Surprisingly, what they say is essentially true. But it doesn't tell the full story. Take for example the oil- and gas-rich Green River Basin that runs through areas of Wyoming, Idaho and Utah.

A study released by the DOE last August found that only 1 percent of the federal lands in the Green River Basin and several adjacent areas were subject to outright statutory bans on drilling. So, the environmentalists were right? Well, not exactly. The study also found that drilling was barred on an additional 67 percent of the region as a result of various other federal rules limiting access.

The restrictions included such things as limitations on surface occupancy (you can drill as long as you don't put anything on the surface), prohibitions on roads (you can drill, provided you carry your equipment in on your back) and placement in "wilderness-study areas" (you can drill once we make up our minds maybe).

According to the DOE report the net effect of these "backdoor" limitations on access is to block the development of at least 79 TCF of domestic natural gas forever. Moreover, in many cases the restrictions arise from use of laws in ways they were never intended.

One example the DOE cited is the National Historic Preservation Act, which was established to "preserve historic and cultural buildings, objects and antiquities thought to be of national significance and for other purposes." When drillers indicate they plan to explore a particular parcel of land, environmentalists frequently file petitions requesting a "cultural/endangered-species" search of the property causing endless delay and cost, and frequently litigation.

Perhaps the most familiar legal barrier to oil and gas development is the National Environmental Policy Act (NEPA). During the last decade the cost of completing an Environmental Impact Statement (EIS), the study NEPA requires for most major projects, has increased sixfold to an average of $1.5 million for each oil or gas well drilled not counting the cost of litigation that may occur during the EIS process. But a commodity even more precious than money is involved time. It now takes an average of two-and-one-half years to complete the EIS process on an oil and gas well.

The Endangered Species Act (ESA), too, widely is recognized as an impediment to many forms of economic development. Administered by the Department of the Interior's Fish and Wildlife Service (FWS), the ESA requires all federal agencies to "conserve" any species on the endangered list. But it is not just the endangered species itself that is protected by the act; its habitat is protected as well. The rabid enforcement of this provision by the FWS has become the stuff of legend.

As onerous as the restrictions regarding onshore oil and gas development are, offshore restrictions are worse. Not only do restrictions on oil and gas exploration and development cover virtually all of America's coastal areas, but there also is an alphabet soup of agencies that have some degree of jurisdiction over offshore production. Perhaps the single most serious impediment, however, is the Coastal Zone Management Act (CZMA).

The CZMA was enacted to provide a means for balancing competing interests in offshore areas of the outer continental shelf. Under the act's provisions, priority was to be given to national defense, fisheries and energy-related projects. The act requires states to establish management plans for their coastal areas. It also requires that any federal action, including private actions that require federal permits, be "consistent" with the state's CZMA management plans. And there's the rub. In case after case, governors have used the "consistency" provision to block oil and gas development.

The issue primarily is one of perception. Governors know that permitting offshore drilling will generate howls of protest from individuals fearful of environmental catastrophe. Facts don't matter. It is the perception that political officials will respond to, and that perception is that drilling equals environmental disaster.

And yet, perceptions notwithstanding, the current impasse cannot be allowed to continue. If a compromise that allows the development of offshore energy resources is not reached, the consuming public will pay the price through needlessly high gas prices and diminished national security. Fortunately, there is at least one suggestion that may provide a means of resolving the offshore problem.

A recent proposal offers some hope. It would revise the provisions of the CZMA to give state governors a veto over offshore oil and gas drilling. In the case of oil, the veto power could be exercised in 25-mile increments up to 100 miles from the state's shoreline. In the case of natural gas, the veto would cover activities out to 25 miles. The veto power, however, comes at a price.