Friday, July 29, 2005

Energy Bill Won't Cut Oil Imports

latimes.com

Energy Bill Won't Cut Oil Imports, Critics Say
The measure is expected to do little in the short term to boost supplies or reduce gas prices.

By James F. Peltz and Richard Simon
Times Staff Writers

The energy bill nearing passage in Congress, promoted by the Bush administration as an important step toward making the U.S. less reliant on foreign oil, would do little in the short term to boost the nation's energy independence or provide relief for motorists paying record gasoline prices, analysts said Wednesday.

The U.S. petroleum industry, already enjoying record profits from skyrocketing oil and natural gas prices, lobbied aggressively for the legislation and received billions in tax breaks and other incentives partly designed to encourage drilling projects.

But based on those incentives alone, the industry is unlikely to start sinking new wells — projects that require years of development before they add fresh oil and gas to the market, experts said.

"The energy bill is not going to make a meaningful difference in U.S. supplies," said Steve Enger, an analyst at Petrie Parkman & Co., an energy investment bank in Denver.

The bill, the first overhaul of national energy policy in more than a decade, is expected to be approved by the House of Representatives today and the Senate on Friday. President Bush, a former Texas oilman, has pushed for the energy bill since taking office in 2001 and is expected to sign it.

Some critics say the legislation represents a giveaway to the energy industry.

With crude trading near $60 a barrel, oil companies "don't really need much more encouragement" to launch exploration projects, said Rick Mueller, senior oil analyst at Energy Security Analysis Inc. "Companies already are looking anywhere they can to find additional barrels."

Moreover, the energy legislation wouldn't do much to quench America's thirst for oil. Rising demand in the U.S. — the world's biggest consumer of petroleum — as well as in China, India and elsewhere has been a major factor in keeping global oil markets tight and pump prices high.

"There's very little in the bill, really, to address that," Mueller said.

Even Energy Secretary Samuel Bodman cautioned Wednesday that motorists should not expect a quick decline in gasoline prices.


"There are no magic bullets in this law that will change energy prices in the next day, week or month," Bodman told reporters. "It's going to take a number of months, if not years, to deal with energy prices."

The bill's $11.5 billion in tax breaks over 10 years are not just aimed at generating more oil and gas supplies. They also include the first-ever production tax credit for nuclear power companies, as well as measures to promote conservation and energy efficiency.

However, lawmakers rejected language — opposed by U.S. automakers — requiring the federal government to adopt tougher fuel economy standards for sport utility vehicles and other gas guzzlers and to look for other ways to cut U.S. oil consumption.

Still, the Bush administration hailed the bill as laying the groundwork for energy independence.

"For over four years, the president has called for a national energy strategy for our national and economic security," and getting Congress "to come to an agreement is definitely an achievement," White House spokeswoman Dana Perino said.

Concerns about U.S. energy security increased last month when a Chinese oil company jumped into the bidding for El Segundo-based Unocal Corp.

The U.S., which consumes about 20.7 million barrels of oil a day, depends on imports from sources including Canada and the Middle East for about 58% of that oil, according to the Energy Department. That dependence on foreign oil has jumped from about 45% a decade ago.

About 30% of the 5.4 million barrels of oil produced in the U.S. each day comes from the waters of the outer continental shelf. Most of that is in the Gulf of Mexico; production off the coasts of Alaska and California is also included.

The energy bill's oil-related incentives, which include reduced royalties that companies pay on oil pumped from under U.S. waters, mainly affect deep-water projects in the Gulf of Mexico, where companies have stepped up exploration activities without the promise of additional tax breaks. Production in the gulf is expected to surge 33%, to 2 million barrels a day, by the end of the decade, Mueller said.

The incentives provide "an incremental step" toward boosting exploration in the gulf, said John Felmy, chief economist for the American Petroleum Institute, the oil industry's trade group in Washington. The measures included in the bill "could be the marginal difference between whether to do it or not."

Russ Roberts, spokesman for Exxon Mobil Corp., the largest U.S. oil company, called the bill "an important step toward providing consumers with reliable and affordable energy supplies, while addressing the need for conservation and energy efficiency."

Oil, utility and other energy companies have spent more than $314 million over the last 2 1/2 years lobbying federal officials on energy-related legislation and other industry concerns, according to PoliticalMoneyLine, a website that tracks lobbying expenses.

But energy companies didn't get everything they wanted — at least not yet. For example, in the face of opposition from environmentalists, a provision that would have opened Alaska's Arctic National Wildlife Refuge to drilling does not appear in the energy bill. Still, when Congress returns from its August recess, it is expected to vote to open a portion of the refuge to energy exploration.

Critics complained that the oil industry was receiving tax breaks at a time when it was enjoying record profit because of the surge in energy prices.

In the last three months of 2004, for instance, Exxon Mobil's profit shot up 27% from a year earlier to $8.4 billion — the largest quarterly profit ever for a U.S. public company. The oil giant's full-year profit was a company record $25.3 billion.

"While the energy bill does not decrease dependence on foreign oil, it does increase dependence on federal handouts," said Tom Schatz, president of the Council for Citizens Against Government Waste, a private watchdog group.

The global oil industry is expected to spend $60 billion to $75 billion on worldwide exploration and production this year, up about 20% from 2004. Despite the companies' gusher of profits, they remain cautious about ratcheting up that spending, because their projects can take several years to bear fruit — and oil prices can change dramatically in the meantime.

"Yes, oil is at $60 a barrel today, but only six years ago it was at $11," Felmy said.

Among other things, the energy bill would reduce or eliminate the royalties that oil companies pay the federal government for production in the deep waters of the Gulf of Mexico. The petroleum institute estimates that the industry pays about $8 billion a year in royalties to the U.S. government for oil and gas production.

The cost of finding and developing an oil well in the gulf averages roughly $5 a barrel, so a field that has 100 million barrels of reserves could require spending $500 million for drilling wells, erecting a production platform and other costs, Petrie Parkman's Enger said.

More than half of the exploratory wells produce dry holes. But once a successful project starts pumping oil, Enger said, about 16 or 17 cents of every $1 of oil sold would go to Uncle Sam in royalties. Being able to save those royalties might persuade a company to drill a marginal well, "but it's typically not the most important factor" for overall exploration.