My Drilling Proposal is on the Table

I said I wasn’t going to update until Wednesday, but have a little free time this morning. Imagine my surprise to read this headline today:

Senate Democrats offer deal to break energy bill standstill

Turns out they are proposing the same deal that I proposed in my essay from last week on coming to a compromise on the drilling question:

WASHINGTON (CNN) — Senate Majority Leader Harry Reid surprised Republicans on Monday by offering them a chance to vote this week on four GOP-backed amendments to an energy bill, including one that would expand offshore oil drilling.

The possible breakthrough comes days before Congress recesses for August and lawmakers return home to face constituents anxious for relief at fuel pumps.

Reid, D-Nevada, said Democrats would allow votes on GOP amendments that would permit new drilling on the outer continental shelf; the development of oil shale in Western states; construction of new nuclear power plants; and broader legislation that Republicans have dubbed “find more, use less.” That legislation includes expanded offshore drilling, conservation initiatives, the improvement of battery technology, and language to curb speculation in the oil futures market.

Energy legislation also has been stalled in the House. A bipartisan “energy working group” of 28 lawmakers hopes to break the impasse this week by proposing a compromise that couples new offshore drilling with conservation and renewable energy programs.

Yet House Speaker Nancy Pelosi, a California Democrat, says she won’t allow a vote on a bill that includes new offshore oil drilling.

It is exactly this coupling that I think will get both sides to an agreement. Pelosi runs the risk here of losing all negotiating power if she blocks this sort of compromise. Pressure to drill will continue to increase, and right now the Democrats could still demand pretty generous concessions. I predict that unless supplies can grow (and I don’t expect them to grow much) and stay ahead of demand, then the pressure to drill will only increase over the next few years - and the Democrats will be in a weaker negotiating position. On the other hand, I think we are going to end up with a Democrat for president, and he will have something to say on the matter as well.

The Drilling Debate: Narrowing the Chasm

I have given a lot of thought to the issue of opening up new areas for drilling in the Outer Continental Shelf (OCS) and in the Arctic National Wildlife Refuge (ANWR). My position has always been to leave that oil in place for a very rainy day. I wanted to see major conservation efforts in place before we considered tapping that oil. Opening those areas when oil was $20 a barrel would have meant that much of it would have been used frivolously.

Now that oil is over $100 - and in my opinion will be much higher in 5 or 10 years (T. Boone Pickens predicts $300/bbl in 10 years) - we will have tightened our belts a good deal by the time any of this oil could actually reach the market. Therefore, I think now is the time for Congressional hearings on opening up these areas. Let’s have an open debate on the issue. However, if these areas are opened for drilling, I have a compromise that should be very attractive to those in opposition.

Hopefully this essay conveys a pragmatic approach designed to bring two sides in this debate closer together. At present it is hard to imagine that they could be further apart. A big part of the reason for the chasm between views is that there is a great deal of misinformation and misunderstanding surrounding the issues. I hope to address those in this essay.

A recent sampling of letters to the New York Times gives a flavor of the views of the opposing sides:

To Drill or Not to Drill? There’s the Rub

First a letter opposed to further drilling:

Allowing offshore drilling for gas as a solution to high fuel costs, as President Bush urges Congress to do, is as sensible as growing more food in response to rising levels of obesity or robbing a bank in response to overspending one’s budget.

While it is not popular, the clear answer, as it is in the case of overeating and overspending, is to cut back in the consumption of food, in the consumption of one’s salary and in the consumption of fuel.

Painful as it is, I applaud the $4 gallon because it is the one thing that has finally gotten the public to focus on the fact that we need to consume less. For the first time, one hears from every quarter, turn off the lights in rooms you are not in, recycle that paper, drive less and take public transportation or ride your bike. That is the kind of talk political leaders should be encouraging, not new ways to keep up the old habits.

And one in favor:

As a 40-year Alaskan, I can tell you that opening of the Arctic National Wildlife Refuge is the most sensible solution for America’s oil problems. Most of the people who are trying to stop drilling in the refuge have never been in our state.

You have no idea how little space they are talking about. Take a regular envelope, pretend that is the refuge … now where you would put the stamp, that is the area they want to open.

Alyeska Pipeline has worked, the gas pipeline is in the process, and the Arctic National Wildlife Refuge should be. Congress is making this a party fight. How about putting that energy into fighting for all Americans, as oil prices don’t care whether you are Republican or Democrat?

So, where does the truth reside? Is it not worth the effort? Or can we “drill here, drill now” and make a significant step toward energy independence? Let’s investigate.

What is the Objective?

This is the key to the entire debate. Different groups have different agendas, and desires are often based on misinformation. Take a couple of extreme examples. I consider myself an environmentalist, but one who is practical, and informed on energy issues. Let’s take an environmentalist who may be less-informed. Like me, they are concerned about the impact of continued fossil fuel consumption on our environment. When they think of drilling, they envision oil slicks washing up on the shore, and a polluted ANWR. They see oil companies - not ordinary citizens - as the primary beneficiaries if drilling is allowed. They are optimistic about the ability of alternative fuels to rapidly scale up and replace depleting fossil fuel reserves. Or, they don’t fully understand the implications of falling fossil fuel reserves, or in an extreme case they don’t care and think the earth could use a healthy die-off of the human population.

Each of these groups is going to be vehemently opposed to opening up areas to additional drilling. They simply don’t think there is a need, and that it will simply delay our transition to alternatives. Those in Congress who are so outspoken against additional exploration likely fall into the category of ‘alternative fuel optimist.’ If they can only keep the ban in place, alternatives, mass transit, and conservation will rise to the challenge. The key to this approach is that the alternatives must deliver when they are needed, and they must cover severe shortfalls. What if they don’t? What is Plan B? Shortages? Rationing?

For our other extreme example, let’s consider the Hummer-driving, non-negotiable lifestyle mentality. The majority of this group is also not very informed on energy. They believe that underneath U.S. territory lies an ocean of oil, waiting to be tapped - if those darned environmentalists would only get out of the way. They are prepared to drill through a polar bear’s head if it will mean cheap gasoline - which they know it will. These people are going to be very outspoken about the need to drill anywhere, anytime. This approach suffers from a very similar problem as the previous approach: What if the oil that is available simply can’t cover any severe shortfalls? What if the expectations of these vast oceans of oil lead us to delay actions on alternatives? Again, what is Plan B? Military action?

The majority of us fall somewhere in between, but it breaks pretty sharply along party lines. Democrats don’t want to drill, Republicans think we should drill. Perhaps we should first develop an idea of the stakes.

How Much Oil is at Stake?

That’s a big problem. We don’t know. All we have right now are ‘educated’ guesses. Multiple government agencies have made assessments. The Minerals Management Service in the Department of the Interior estimated in 2006:

The MMS estimates that the quantity of undiscovered technically recoverable resources ranges from 66.6 to 115.3 billion barrels of oil and 326.4 to 565.9 trillion cubic feet of natural gas. The mean or average estimate is 85.9 billion barrels of oil and 419.9 trillion cubic feet of natural gas.

Of that, they estimate that reserves in areas currently off-limits to exploration amount to just under 18 billion barrels. Based on the 2007 U.S. consumption rate of 20.7 million barrels of oil per day, 18 billion barrels would last just under 2.5 years.

The EIA estimate from areas currently off-limits to exploration was very similar at just over 18 billion barrels:

Impacts of Increased Access to Oil and Natural Gas Resources in the Lower 48 Federal Outer Continental Shelf

This graphic was recently used in a post at Grist by Joseph Romm, who argued that the amount of oil that is off limits has been greatly exaggerated. Based on the above graphic, Romm has a point, as the amount of undiscovered oil in areas open to exploration is more than twice the estimate from areas off limits to exploration. However, much of that oil is in mile-deep water that will be very expensive to develop. So the comparison isn’t necessarily apples to apples.

Estimates of recoverable oil from ANWR are of a similar magnitude. The Energy Information Administration (EIA) in a 2008 report noted:

In the mean oil resource case, the total volume of technically recoverable crude oil projected to be found within the coastal plain area is 10.4 billion barrels, compared to 5.7 billion barrels for the 95-percent probability estimate, and 16.0 billion barrels for the 5-percent probability estimate.

The EIA also presumes that it will take 10 years to scale up and bring production online:

At the present time, there has been no crude oil production in the ANWR coastal plain region. This analysis assumes that enactment of the legislation in 2008 would result in first production from the ANWR area in 10 years, i.e., 2018.

The primary constraints to a rapid development of ANWR oil resources are the limited weather “windows” for collecting seismic data and drilling wells (a 3-to-4 month winter window) and for ocean barging of heavy infrastructure equipment to the well site (a 2-to-3 month summer window).

The timeline broke down as 2 to 3 years to obtain leases, 2 to 3 years to drill an exploratory well, 1 to 2 years to develop a production development plan, and 3 to 4 years to build infrastructure.

What’s the bottom line? With an estimated 18 billion barrels of oil offshore and 10 billion barrels in ANWR, there is potentially enough oil there to meet four years of U.S. demand. However, in terms of imports, currently around 10 million barrels a day, there is potentially enough there to eliminate oil imports for nearly 8 years. Further, based on my proposal below, there may be enough there to eliminate imports for 20 years.

Finally, consider the economic ramifications. If we do nothing, despite well-intentioned calls for conservation, our insatiable demand for oil imports will continue. With production from some of our major suppliers having peaked (e.g., Mexico) and with internal consumption in other countries negatively affecting their exports, the price of oil will be under constant upward pressure over the long term. If we don’t produce those 28 billion barrels of oil, we will go and buy those barrels on the open market. At today’s oil price, that means that about $3.5 trillion will leave this country, much of it flowing into countries that are hostile to the U.S. By keeping that money at home, we can not only create jobs, but we have an opportunity here to fund a transition away from oil, and to more sustainable options.

Let’s Compromise

Both sides generally agree that our dependence on petroleum is a problem. Among the arguments from both sides is that this dependence puts our national security at risk and that it endangers the environment. I think both sides would agree that a long-term solution to the problem could be a combination of conservation, along with alternative options such as higher efficiency vehicles, electric transport, and mass transit. Where large numbers will start to disagree is whether this is achievable in the short-term, or whether it is going to take a few more years and a few more technological developments.

I fall into the latter category, for a variety of reasons. I am pretty familiar with a lot of the alternatives, and they are simply not competitive even at gasoline prices of >$4/gallon. To illustrate that point, consider Europe, where gasoline prices in many locations are now approaching $10/gallon. Even at that price, fossil fuels remain the dominant choice for transportation. It is going to take more than price - or at a minimum much higher prices than Americans probably anticipate - to drive us away from a very high level of dependence upon fossil fuels.

So how about a compromise? I propose that we open up some of the more promising areas to exploration, and then devote the royalties to funding fossil fuel alternatives. We could subsidize public transportation. We could provide a tax credit of $1,000 for each person who purchases a car that gets over 40 mpg. We could borrow a page from T. Boone Pickens’ plan, use these oil revenues to fund wind and solar power, and displace natural gas which could then be used to displace petroleum.

It is true that the oil won’t flow from these areas for perhaps a decade, but by then we are likely to be in very bad need of it. Prices will probably be very high, which means the royalties from the oil will provide a lot of money for funding alternatives. This should be a compromise that parties from both sides could agree to. If not, then what’s going to happen is that as prices continue to rise, so will the pressure to drill, and Congress will eventually cave in to these demands. But by failing to earmark the money for alternatives, it will just postpone the inevitable. So now is an opportune time to hold open Congressional hearings on the subject.

That’s a compromise I prefer. However, one that would have even greater support behind it would be to return an oil dividend to U.S. citizens (as Alaska has historically done). That is tangible for people, whereas funding the alternatives may not be. However, while I think this compromise would find wide support among many people with stretched budgets, it does nothing to address the problem of oil dependence. That, in my opinion, must be part of any solution.

A final excerpt from those New York Times letters summed it up best, in my opinion:

People say we should have a Manhattan Project-style program to develop alternative energy. That is fine, but while the Manhattan Project was continuing, we did not put World War II on hold while we waited for the atom bomb. The conventional war was continually fought throughout that time.

Conclusion

As I recently calculated, we could displace a great deal of our fossil fuel consumption with solar power, but it will ultimately take a multi-trillion dollar investment. We could borrow from T. Boone Pickens’ plan and use wind and solar power to displace natural gas that is currently used to produce electricity. That natural gas could then be used in CNG vehicles to displace petroleum. The net impact would be a large reduction in our fossil fuel consumption (and note that it is much easier to produce natural gas from biomass than it is to produce liquid fuels).

We sit on top of trillions of dollars of oil. We should use it – sparingly – to wean ourselves from oil dependence. The realistic alternative to this is that we continue to be highly dependent upon petroleum. As a result, we will watch those dollars flow out of the U.S. - right up until the point that our imports dry up and we watch a new generation of sons and daughters march off to fight resource wars because of our failure to plan ahead.

Epic Essay on Sustainability

I would like to direct your attention to the epic post written by The Ergosphere’s Engineer-Poet:

Sustainability, energy independence and agricultural policy

It is a monster (the last draft I saw before publication was over 8,000 words) and it is really thorough. It should be cross-posted to The Oil Drum in a couple of days. Here is a brief introduction of what the essay covers:

What would you say if I told you that we could use biomass to:

• Replace all the petroleum used by the ground-transport sector (55% or more)?
• Replace all the natural gas used by the electric-generation sector (about 1/3 of US natural gas consumption)?
• Replace every pound of coal burned for electricity (about 90% of all US coal consumption)?
• Eliminate over 1.2 billion tons of carbon emissions (4.4 billion tons of CO2) from oil and coal.

All that, and have some left over. I believe we could, and I’ll illustrate how (with numbers!) below. But to understand where we need to go, we should first see where we are and how we got here.

If you have a passion for sustainable energy, or just believe we need to change the direction of our energy policy, this is a must read. If only we had a Secretary of Energy with this kind of vision.

Incidentally, I have mentioned it on a couple of occasions, but The Ergosphere was the inspiration for starting my own blog. Whenever I needed some information on alternative energy, energy policy, ethanol, etc. a Google search kept coming up with The Ergosphere as the place for the answer. One Saturday, I spent about 3 hours reading through various essays there, and I kept thinking “This guy gets it, and he is making a real contribution in the energy debate.” I finally decided to start my own blog and make a contribution as EP has done. But I still check in almost every day to see if he has posted anything new.

Finally, I have been contacted many times since starting my blog with job inquiries, consulting offers, etc. While I have entertained some that I felt did not present any conflict of interest with my current employment, I have to decline most opportunities. However, Engineer-Poet, with his passion for sustainable energy, is looking for opportunities. At the end of his essay, he writes:

The author has an odd combination of energy tunnel-vision, an analytical nature and the ability to think outside the box. He feels his talents are not fully utilized in his current line of work. If you know of any opportunities which match, please drop him an e-mail at the address listed in the sidebar.

Drop him a note if you are looking for someone who knows his stuff.

DGA Conference Call on Energy

Update: They now have a news release on the teleconference: Democratic Governors Discuss America’s Energy Future. You can download the audio of the 30-minute teleconference at the bottom of the news release.

Today (6-22-06) the Democratic Governors Association (DGA) hosted a conference call on energy policy. Michigan Gov. Jennifer Granholm and Oregon Gov. Ted Kulongoski hosted the call, and listeners were able to submit questions beforehand. They answered 4 questions, including the one that I submitted.

Overall, it was a mixed bag. Gov. Granholm came across like a politician, offering solutions, but also out to score political points. Gov. Kulongoski sounded sincere, really focused on conservation, and did not attempt to score political points. It felt almost like a “good cop, bad cop” routine from my perspective.

I took notes, but hopefully they will make the transcript or a recording available. Gov. Granholm went first. Her “left hook” was “oil companies are bad”. Her “right cross” was “ethanol is good”. She went for the left hook most of the time. Here was the gist of her comments:

Fuel prices are too high, and oil companies are making too much money. She wants legislation to cap profits. She claimed that oil companies are not investing in alternative energy technologies (this is not true, but maybe they aren’t investing in the ones she wants them to invest in). She made a passing remark at conservation, but didn’t sound too passionate about it. She piled on oil companies again and really vilified them. (My concern before-hand was that this would be the tenor of the call). She really pushed ethanol, and she said Michigan needs a huge number of ethanol plants. She thinks we need more E85 pumps, and complained that the oil companies have not been eager to embrace them. Near the end of her opening statement, she reiterated that oil companies are not eager to cap profits. (What sector is eager to cap profits?)

At this point, I was thinking that America really needs a new political party. But they then went to Gov. Kulongoski. He really focused on the conservation angle, and he came across as less political, and more focused on finding solutions than in scoring points. He discussed what Oregon is working on. He has established targets for government agencies, and in 4 years wants all government agencies to run off of 100% renewable electricity. He said the state is making large investments into alternative electricity – wave, geothermal, wind, solar. He also noted that Oregon has no coal or oil deposits, which is one driver in their push for sustainability. He did mention biofuels, and also seemed to think ethanol will play a big part. He said he drives an E85 vehicle.

They then went to the Q&A. We were allowed to submit questions prior to the call, and they selected four questions to answer. I don’t like this format, because it lends itself to easy political posturing. Question 1 reaffirmed my fears.

Question 1 from Pittsburgh: “Why have oil company profits gone up as gasoline has gone up?” Of course Gov. Granholm took this one, as it was another opportunity to score political points by attacking oil companies. Her answer: Because they aren’t regulated, and they can get away with it. Says we need to regulate oil companies like public utilities. She said that profits are too high, and that we need to restrict profit margins. (I hope she understands the difference between a profit, and a profit margin).

Question 2: I already had a favorable impression of Governor Kulongoski, but he chose to answer question 2 from “Robert in Billings, Montana.” That’s me. They omitted part of my question, so here is the complete question I submitted:

I am a chemical engineer in the oil industry. One of the things that I, and many others, have been bothered by is the level of political pandering that has accompanied the present energy crisis. The Republicans say a solution is to drill in ANWR. Some Democrats say the solution is ethanol (not a chance), or they merely grandstand and point fingers at oil companies. I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

And here is what they read and answered:

I believe the root problem is our reluctance to embrace conservation, and unless this is addressed all other solutions are doomed. Who among you has the courage to get tough on this politically sensitive issue? And how will you address it?

Gov. Kulongoski: “Robert is absolutely correct”, and he sounded like he meant it. He went on to describe some of Oregon’s conservation measures – such as increasing standards for appliances. He said we must learn to live sustainably. He said that he believed the state, and not the federal government, would lead on this issue. He said state governments must lead by example, and concluded with “Again, Robert is correct. We must look at ourselves in the mirror and decide that we must change our behavior.” Gov. Kulongoski scored big points with me.

Question 3, from Michigan: Do you support PHEVs, solar, wind, etc? Gov. Granholm: Absolutely! She talked about giving personal property tax breaks to alternative energy providers, and said she was sitting in her hybrid as she was answering the question.

Question 4, from Oregon: How do you get the private sector to buy into alternatives? Gov. Kulongoski: He explained how Oregon moved to sustainable forestry practices, and said they must do the same for energy. He also mentioned the importance of combating global warming. Again, I thought he sounded passionate and sincere.

That’s my assessment. If you listened in and heard something different, or think I missed any important points, let me know. I was much more impressed with Gov. Kulongoski than with Gov. Granholm, even before he answered my question. I guess the one thing that struck me as ironic is that Gov. Granholm’s “cheap fuel for everyone” routine is at complete odds with Gov. Kulongoski “we must conserve” routine.

RR