OUTLOOK ’07: US offshore gas victory may be last

27 December 2006 22:58  [Source: ICIS news]

WASHINGTON (ICIS news)--US chemicals producers should savour their hard-won victory in late 2006 in getting Congress to lift a tiny corner of the 25-year-old ban on offshore gas drilling - for that win might be their last for a long time.

Chemicals producers and a broad array of other manufacturing interests have laboured on Capitol Hill for five years to get Congress to lift most if not all of the late 1970s moratoria put on drilling in federally owned outer continental shelf regions off the US East and West Coasts.

They argued that the drilling ban on 85% of the resource-rich offshore areas no longer made sense with sub sea energy development, especially for gas, posing little or no environmental risk and with natural gas being five times more costly than during the late 1970's.

Natural gas is not only the principal feedstock for US chemicals manufacturers but also a major energy source for other industries and power generation; the increasingly high average annual cost for gas has been driving chemicals and other manufacturing capacity offshore - along with hundreds of thousands of jobs.

Natural gas futures prices began 2006 at their highest level, $12.25/m Btu, compared with spot prices as low as $2/m Btu during much of the 1980s and 1990s.

A warmer-than-normal North American winter season in the first quarter of the year helped ease pricing pressure even as additional capacity came back on stream with repairs to Gulf natural gas wells and pipelines damaged by the double hurricane hits of August and September 2005.

While prices dipped as low as $5.62/m Btu by summer’s end, gas prices still finished the year in the $7-8/m Btu range. In addition, the Department of Energy was forecasting an average annual cost of nearly $8/m Btu for 2007 - still far too high for chemical producers and other manufacturers.

Industry continued to press Congress for relief.

The lobbying finally paid off as 2006 drew to a close - but only just. Congress rejected a broad offshore energy bill passed by the House and instead settled on a far more modest Senate bill that opens just 8.3m acres of the eastern US Gulf to oil and gas drilling. The bill also gives Gulf coastal states more than one-third of federal leasing and royalty revenues generated by the new drilling areas.

While far from what industry had hoped for, it was better than nothing.

The first chink in the congressional armour against offshore drilling might be expanded in the new year when a new Congress convenes beginning in January, according to some industry representatives.

However, with Democrats in control in Congress for the first time in 12 years, the political winds have changed dramatically and further offshore access may have been blown off the agenda.

“We will be pushing for additional offshore access with the new 110th Congress but I do think it is going to be tough sledding,” said National Petrochemical and Refiners Association president Bob Slaughter.

Slaughter said he was also worried that some among the new Democrat majority in Congress might work to roll back even the small offshore access gain made by the end of 2006. They could, for example, codify the offshore moratoria - which are now routinely approved each year by Congress - as a permanent part of federal law.

Jack Gerard, president of the American Chemistry Council, is a bit more optimistic about offshore access prospects in the new year.  He argued that there has been a sea change in Congress on the issue, a change that won’t necessarily disappear in the 110th Congress.

(Additional reporting by Brian McIntyre)

By: Joe Kamalick
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