Political Games

Steffy: Dodge, baby, dodge on drilling issue

By LOREN STEFFY Copyright 2010 Houston Chronicle

April 1, 2010, 10:49PM

My neck hurts.

I think I got a case of whiplash from listening to President Barack Obama's announcement on offshore oil and natural gas drilling. That's what I get for trying to look for logic in what passes for federal energy policy.

The headlines, of course, were that Obama was opening parts of the East Coast and eastern Gulf of Mexico to new drilling, but most of that is just a political dance to woo Republicans for a climate bill.

The real issue in the Obama policy is Alaska. The energy industry spent seven years persuading the Bush administration to open Bristol Bay, on the southern coast, and two regions in the north to new drilling.

Under Obama's plan, it would be closed again until at least 2017, just another zig in our ever zagging plan for energy development.

Houston-based ConocoPhillips has invested more than $500 million in its Chukchi Sea leases in the north during the past two years and is scheduled to drill its first well in 2012. It will be allowed to proceed under the new plan, as will a project Shell Oil Co. has in the region.

ConocoPhillips' investment, though, shows the level of capital and long lead times required for these projects. It's not the sort of money most companies are willing to gamble on wishy-washy government policies.

While shutting down new areas of Alaska, Obama plans to open new areas of the Gulf. Drilling will be limited to at least 125 miles off the shore of Florida.

Don't expect companies to be flooding into the area and setting up platforms.

Offshore drilling is a migration, from shallow waters to deep. The farther from shore the drilling occurs, the more expensive it becomes.

BP's massive Thunder Horse platform, for example, is 175 miles from New Orleans, but BP didn't just plunk it down in the middle of the Gulf. Fly out to Thunder Horse and you pass several generations of earlier rigs, each wave of development pushing farther from shore than the last.

What's more, unlike Louisiana and Texas, the East Coast has no drilling infrastructure to speak of — no storage facilities, pipelines, hubs, equipment yards, or transportation system for shuttling workers to and from the rigs.

Developing that will take years, and in the meantime, drilling costs will be astronomical.

BP spent $1 billion building the 50,000-ton Thunder Horse, and Shell spent about $3 billion on its Perdido platform.

Obama may score some political points with opponents. The oil industry was issuing cautious statements this week, calling the announcement “meaningful” and praising the job creation that will ensue.

But no jobs are going to be created until the money issues are settled, and in that, Obama has opened a 42-gallon drum of worms. If a companies finds oil or natural gas, who gets the royalties? The state or the feds?

With both levels of government hungry for revenue, the royalty fight could get ugly. After a bruising battle over similar issues in 2006, some federal lawmakers vowed to cut states out of the royalty picture in the future.

Meanwhile, the states affected by the plan — from Maryland to Florida — are already licking their fiscal chops. Virginia just last month enacted legislation for distributing energy royalties.

Billed as a compromise, Obama's policy is really an expensive trade-off, shutting down access to fields of known reserves in favor of some very expensive question marks.

It may be that, in time, the country will benefit from the new policy, that companies will be willing to place big bets in the newly opened areas, but that's likely only with a significant rise in oil prices that would make them worth the risk.

Obama was right about one thing: we need “to harness traditional sources of fuel even as we ramp up production of new sources.” Unfortunately, the plan he outlined this week doesn't do that.

All it does is make my neck hurt.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.