One-on-One With Sec. Scott Angelle

By Pike, Bill

Louisiana Department of Natural Resources sec. Scott Angelle addresses the aftermath of hurricanes Katrina and Rita, and later discusses with Hart Energy Publishing the state’s proud past and promising future.

More critical now, than ever before, is that everyone understand the value of the oil and gas industry in Louisiana to all Americans. Louisiana has a long and distinguished history and continues to soundly support energy production, refining and distribution. Nearly 30% of oil and gas consumed in America is produced onshore Louisiana, produced offshore Louisiana, or flows through our coastal wetlands.

Geographically, the eastern part of the state is more of an oil province while the western part is more of a gas producing area. With the ravages and destruction of Hurricane Katrina on the east and Hurricane Rita on the west, these regions have experienced severe impacts to these valuable hydrocarbons.

Katrina and Rita’s one-two punch to the industry hurt three strategic areas: production (at the well head), transportation (the pipelines), and onshore refining and processing.

Following the storms, I began a close working relationship with Don Bnggs, president of the Louisiana Independent oil and Gas Association, and Jim Porter, executive director of Mid-Continent Oil and Gas Association. Bv contacting these organizations and, with the Department of Natural Resources (DNR), forging alliances with the Public Service Commission, the Louisiana state police and the U. S. Coast Guard, a number of obstacles were averted that could have curtailed energy delivery even more severely.

It was also crucial that our agency work with the leadership of the Louisiana Chemical Association, so that natural gas for human consumption was not acutely impeded, in addition to keeping our vital petrochemical industry up and running during the throes of these disasters.

As the department proceeded to waive permitting requirements, offer assistance on contractual obligations, or whatever the immediate need, common sense relief was paramount.

I was proud to represent Louisiana by testifying before Congress in early September (after Katnna’s wake) on the energy infrastructure in Louisiana and the need for America to invest in its protection. I reminded Congress that 91% of the wells drilled last year in Louisiana were drilled by independents.

Angelle

In direct testimony, once again, Louisiana urged Congress to share 50% of the Offshore Continental Shelf proceeds as a means of funding hurricane protection, coastal restoration and (what we proudly call) America’s Energy Corridor to the nation.

What is most apparent now is that failing to invest before the crisis means extreme escalated expenditures after the crisis.

While the industry quickly rebounds from all of this, Louisiana is faced with and committed to long-term planning and rebuilding. Indeed, we are well on our way. Gov. Kathleen Blanco’s administration will remain steadfast in keeping our great state open for business, and in moving quickly and wisely toward rebuilding and revitalization efforts. The opportunity is before us at this juncture to strengthen and fortify a genuine federal/state partnership to ensure national energy security and a brighter economic future.

Bill Pike, Editor in Chief, E&P: Louisiana has a long and proud history of oil and gas development. How important has that been for the development of the business, governmental and social infrastructure of the state?

Sec. Scott Angelle: As a mature producing province, oil and gas drilling and production do not generate the proportion of state revenue or excitement they once did but, given existing reserves and the fact that production is well into decline, it should provide a stable economic and resource base for many years, albeit at a lower percent of GSP (Gross State Product) than in the 60s and 70s.

At the peak in Fiscal Year 1981/82, oil and gas revenues from severance, royalties and bonuses amounted to $1.6 billion, or 41% of total state taxes, licenses, and fees. For Fiscal Year 2003/04, these revenues were $927 million, or about 11.2 % of total estimated taxes, licenses and fees.

The oil and gas industry in Louisiana, though, is far more than exploration, drilling and production. Petroleum refining and petrochemical manufacturing, both of which get fuel and feedstock from oil and natural gas, are major industries and components of GSP in the state.

Pike: How has that development placed Louisiana in terms of the larger national economy and governmental structure?

Angelle: While most of the country opposes oil and gas exploration, particularly offshore of their coasts, Louisiana proudly serves as America’s Energy Corridor…with a direct link to Wall Street via the Henry Hub, Louisiana Offshore Oil Port, Mars crude oil contract, St. James terminal Louisiana Light Crude spot market reference (and Capline pipeline to the Midwest and Upper Midwest).

This is a mixed blessing in some ways. Louisiana bears the economic burden of building and maintaining the onshore and coastal infrastructure that makes offshore production possible. Louisiana also bears the economic and social costs of losing more than 24 sq miles of coastal territory each year – precious land and marshes on which infrastructure is built and which protects oil and gas producing infrastructure from storm damage. Some of this land loss is exacerbated by oil and gas activity. Yet, Louisiana receives no revenue from the average of $5 billion per year of offshore revenue the production off our coast supplies to the federal treasury each year. Not only does Louisiana require more funding to support the roads, bridges, highways, ports and other public works facilities needed to support this offshore development, but by not having this funding our parishes are further curtailed in their sources of revenue. It is only fair and appropriate for the federal government to start sharing offshore revenue with the few coastal producing states such as Louisiana, as it does with revenue from production from federal lands in interior states, which get 50% of the revenue.

With the federal Minerals Management Service offering added drilling incentives for royalty suspension volumes in the federal offshore, these drilling incentives siphon further investment from Louisiana parishes. With a decline in ad valorem taxes from new drilling more pressure is placed on local assessors to raise property taxes to support schools, hospitals, courts, etc.

This then results in increased property taxes on our local homeowners – all because we are not currently receiving what other states receive from royalty sharing from the federal government within their states.

Pike: With regard to continuing onshore and offshore oil and gas development, how important is the industry to the state today?

Angelle: When talking about the importance of the oil and gas industry to the economy of the state, there are two distinct regions – within state boundaries and in the OCS (federal Outer Continental Shelf waters). The predominant economic contribution comes from that activity from within the boundaries of the state, not that in the federal waters beyond the state’s 3-mile (5-km) offshore boundary.

Federal offshore

To a large extent the infrastructure burdens placed on Louisiana by the OCS are practically unrecoverable from a taxation perspective since a huge portion of the workers and most of the companies operating in the OCS are beyond the state’s taxing authority.

Although they work in federal OCS area, many OCS workers live and pay taxes in areas far remote from Louisiana’s taxing authority. Past efforts to find out where OCS workers live revealed that huge numbers (more than 60% by some estimates) commute from Texas, Arkansas, Mississippi, Alabama, Georgia, Tennessee, Florida and other states, as well as foreign countries such as Venezuela and Mexico. The 7-day-on, 7-day-off, 14-day-on, 14-day-off and similar schedules for offshore workers facilitate long distance commuting. Workers mostly pay taxes where they live, buy homes and cars, shop, etc. For large numbers of OCS workers, that is not Louisiana.

Additionally, the production, equipment, property, profits, etc. of OCS companies and operations are in federal waters, beyond the taxing jurisdiction of the state of Louisiana, other than the incomes of employees and the few small companies headquartered in Louisiana.

State boundaries

The oil and gas extraction and petrochemical manufacturing sectors are the largest of our economic sectors in relation to GSP (see graph). They will provide nearly 15.6% of the revenue to the state general fund for 2004/05 and 2005/06.

With more than 50% of industry investment in the state related to oil and gas, it is an indication of how important this sector is to the economy of the state. Three percent of the state workforce is employed directly in the extraction and transportation of oil and gas. An additional 5% of the state workforce is employed in processing oil and gas into useful products. If econometric multipliers are correct, this employment generates jobs for about 32% of the state workforce. This means that 40% of the st\ate workforce is dependent of the oil and gas development, production, or consumption (fuel and feedstock).

Pike: What activities are the state engaged in to bolster continuing and/or increased oil and gas exploration and production?

Angelle: Louisiana has a large portfolio of tax incentives for drilling and is considering more effective incentives to possibly offer, such as the dry hole royalty relief credit for deep wells drilled on state owned property that is under consideration in the legislature (Senate Bill 182). The state is taking steps to limit the liability chilling impact of legacy lawsuits spawned by the Corbello decision of the State Supreme Court, such as legislation passed last year to make the state (through the Department of Environmental Quality and the DNR) parties to these actions. The recent Castex court case decision further helped rein in unmerited lawsuits. The state is pursuing Congress to enact federal tax credits in the federal energy bill being debated in Congress to provide the same kind of tax credits to deep drilling that the federal government offers coal bed methane producers through section 29 of the IRS Code.

Even though oil and gas extraction and petrochemical manufacturing (petroleum refining, chemicals, paper, and plastic) are declining as a share of the Gross State Product, they remain the backbone of the Louisiana economy today.

The DNR has taken great strides to streamline permitting and reduce the time required to issue permits. The DNR has also extended the streamlining beyond the DNR by signing a new cooperative agreement with the Department of Wildlife and Fisheries.

Pike: Looking forward, what is the size of the remaining oil and gas resource base in Louisiana, both on and offshore?

Angelle: Louisiana is a mature producing basin which means that peak production happened a long time ago (1972), but there are enough reserves in the ground to sustain significant production (more than most states ever had to begin with) for some time to come. It should be noted that this production has come from the relatively shallow, and with today’s technology, relatively easy to find and drill, hydrocarbon resource base.

There is a new frontier, though, that new exploration and drilling technology is just now opening up, and that is the deep (15,000ft or 4,575m, to 25,000ft or 7,625m) and ultra-deep (greater than 25,000ft) resource domain. It is still technologically a challenge and extremely expensive to drill to these depths. Drilling costs, for example, rise exponentially at these depths.

The proposed Dry Hole Royalty Relief Credit is intended to provide incentives for deep and ultra-deep drilling into this resource base – starting out in the South Louisiana coastal zone.

Louisiana has a huge resource base left to develop, but most of this is in the expensive, deep resource base that has hardly been explored or tapped.

This new capacity should restore a suitable surplus capacity margin to nationwide natural gas deliverability by 2008-09. At that time, natural gas prices should come under some degree of downward pressure. If this happens, some degree of downward pressure will likely be felt by oil prices. We can be expected to achieve some degree of price stability by that time. That may encourage some restoration of petrochemical manufacturing capacity in the state and perhaps the nation.

We feel the price stabilizing mechanisms for strong job growth in Louisiana and the nation are being put in place, and Louisiana is doing more than its share as the Energy Corridor to the nation to see that this happens to the benefit of the entire nation.

By Bill Pike, Editor-in-Chief, E&P

Copyright Hart Energy Publishing, LP Nov 2005