Chapter 2

Central
California

Southern

Cailifomia
Activity by OCS Region &
Planning Area (1992-1997)
Region and Caneider
Planning Area Leasing*

| Atlantic Region
Nosth Atlantic
MicSoutn Attantic
Straits of Florida
Gulf of Mexico Region
Eastern Gulf
North of 26°
South of 26°
Contra! Gull
Western Guit

Annually
Annually

‘Note:

Consiger tor goolagic and arvivonmercal
studies all CCS Pianning Arse, wth the
teatpthar vf Stila w! Pisa, Aloution Aro
Bowers Basin and Aleutian Basin. Such stag-
jee would support decisions for sales progosed
in 192-1997 a9 wall as dockions on subse-
quent 5-year programs, based on leasing
decigian needs a budgetary constrains.

Actual Gates dapend upon the outcome

Pacific Region

of the Area and Boetsion Process,
osoribed in text.

euthemn California
Gentral California
Nosthern California
WashingtowOregon

Alaska Region

Gulf of Alaska

Yaketat

Midleton lend

Kodiak
Cook inletShelikof Strait
Shumagin
North Aleutian Basin
‘Aleutian Arc
SL George Basin
Bowers Basin
Aleutian Basin
Navarin Basin
St. Matthew-Hall
Norton Basin
Hope Basin
Chukchi Sea
Beavlort Sea

Straits of
Florida

Central
Gulf of Eastern

Mexico

Gulf of
Moxi

fexico

. ALASKA

Ghelikvot Strait
/

JKodiak

Final
Comprehensive
Program (1992-1997)

[i ee proposed for
consideration of leasing

oO Planning Area

Cook Inlet’

Gulf of Alaska

Statute Miles

Figure 3. Proposed location and timing of OCS leasing under the 5-year program for 1992-1997.

13

eayuUog Ard SIO


Chapter 2

4

sustained higher prices or government inter-
vention, oil is expected to continue to be the
primary transportation fuel for at least sever-
al more decades3. Third, total consumption
of primary energy has increased since 1972,
indicating that increased energy efficiency
and lower usage patterns have not fully com-
pensated for other factors—such as growth
in the economy and population—that have
increased demand for energy.

Recent Domestic Exploration and
Production

While average U.S. petroleum consumption
declined only slightly from 1988 to 1992,
domestic crude oil production is now at its
lowest level in about 30 years, falling from an
average of 9.0 million bbl per day in 1985 to
just over 7 million bbl per day in the latter
half of 1992. The reduction of 500,000 bb!
per day between 1988 and 1989 was the
largest yearly decline ever.

Domestic production declines reflect the
generally low level of exploration activity
over the past few years in response to low
crude oil prices. In 1981, when President
Reagan removed the last federal controls on
oil prices, the rig count reached an all-time
high of 4530 active rotary drilling rigs run-
ning. The weekly average rig count has
recently fluctuated from the mid-to-high hun-
dreds.

Figure 9 shows the steady drop in domestic
oil production from about 9 million bbl a day
in the mid-1980’s to about 7 million in the
early 1990's.

Recent History—Natural Gas

Natural gas did not become a common
source of energy outside of gas-producing
areas until the 1940's, when demand
increased and transmission systems
improved. Total gas consumption, at 3 tril-
lion cubic feet (Tcf) in 1940, roughly doubled
every 10 years, until it peaked at 22 Tef in
1972, when it accounted for almost a third of
our energy consumption.

Regulation of prices at the wellhead for nat-
ural gas bound for interstate markets, begin-
ning in the mid-1950's, helped spur the
growth of natural gas consumption and set
the stage for supply problems in the 1970's.
Regulators based allowable prices on the
cost of supplying the gas, so the price faced
by consumers was higher than the cost of
producing “old gas” but lower than the cost
of “new gas,” which was more expensive to
find and produce. Thus, the effect was to
encourage consumption while discouraging
exploration and production. In addition,
because only interstate markets faced
Federal price regulation, producers were
encouraged to sell their gas on intrastate
markets, where prices were allowed to rise
to account for the cost of replenishing
reserves. In 1968, the prices of newly con-
tracted gas for intrastate markets were 18
percent higher than those for interstate mar-
kets (although average intrastate prices were
still lower). In 1975 newly contracted
intrastate gas prices were 150 percent high-
er than interstate gas prices. This placed
further downward pressure on interstate gas
supply.

3 while there has been movement from oil to other energy sources outside of transportation, overall, increases in
demand have been met largely by coal and nuclear power. In transportation, while the number of alternative fuel
vehicles is increasing by 10-15,000 per year, they still represent less than 0.1 percent of the approximately 180 mil-
lion vehicles now on the road. However, the National Energy Policy Act of 1992 calls for a 10 percent displacement of
petroleum fuels by 2000 and a 30 percent displacement by 2010. The Department of Energy is conducting a study to
determine whether these goals are feasible by reducing petroleum consumption through a combination of incraased
numbers of alternative fuel vehicles and use of non-petroleum components in reformulated gasoline.


Chapter 2

Vv

Ki Texel indation of tl

Opportunities Report

= MMS should strengthen the role of
the Scientific Committee of the OCS
Advisory Board and pay greater heed
to its advice. Key officials in MMS
and the Department of the Interior
should use the Scientific Committee
more effectively in the interpretation
and application of environmental in-
formation in the OCS decisionmaking
process.

Le: au

The recent reviews by the NRC and others
have demonstrated the importance of the
Studies program in providing information
nooded by the public, states, anu federal

government tor making intormed manage-
ment decisions in the offshore oil and nat-
ural gas program.

Funding Constraints

While demands for information have contin-
ued to increase, the budget for the studies
Program has been decreasing. The pro-
gram's FY 1993 budget of approximately
$19.7 million is about one-third of its peak
annual funding lovel of $55.6 million, Pro-
gram reviews such as those performed by
the NRC and the North Carolina Environ-
mental Sciences Review Panel continue to
identify new topics for study. However, with
the current budget constraints, only a small
portion of candidate new study topics can be

Figure 8. Total environmental studies Spending vs. total acreage leased for each OCS region through

1992.


Chapter 2
v

Ine aavent ot neavy hauler ships trom Western Europe and Hussia have enabled mobile offshore drilling rig owners
to respond more quickly to changes in world market conditions. Here the Transshelf V carries two large jack-up rigs,
the Charles Rowan and the Rowan Juneau, from the North Sea to the Gulf of Mexico.

33

eayjumuog A21/Od SIO



Chapter 2

4

prices and long waiting lines at gas stations,
President Nixon set a goal for an even more
expanded OCS program intended to replace
petroleum imports. The Department of the
Interior responded with a plan for numerous
lease sales in frontier areas—including nine
off Alaska, five off the Atlantic Coast, one off
Central and Northern California, and one off
Washington and Oregon—all during the peri-
od 1974 to 1978.

The OCS Lands Act Amendments of 1978

While the nation perceived an urgent need to
develop domestic energy sources including
the OCS, the proposed expansion increased
concerns about the environmental and
socioeconomic effects of offshore develop-
ment. Heightened debate resulted, and the
Congress deemed the matter important
enough to establish a special committee—the
OCS Select Committee—to develop legisla-
tion. After two years of congressional deliber-
ations, the OCS Lands Act was amended
extensively in 1978.

The OCS Lands Act Amendments of 1978
primarily were intended to provide for more
environmental consideration and to allow
more state and local government involve-
ment in OCS decisionmaking. Section 18
prescribes a process for developing leasing
schedules in 5-year increments with review
and comment by coastal state and local gov-
ernments and others (previously, the OCS
leasing schedule could be prepared and
issued solely at the discretion of the Secret-
ary of the Interior). Section 19 prescribes a
process for coordination and consultation
with state and local governments concerning
scheduled lease sales and other OCS activi-
ties (under the OCS Lands Act of 1953 the
Secretary had the authority to consult with
affected states but was not required to do so).

However, both sections 18 and 19 still retain-
ed the Secretary of the Interior's broad discre-
tion to accept or reject the recommendations
of the states and local governments and

others. Thus, the OCS Lands Act Amend-
ments of 1978 preserved federal primacy in
the management of OCS oil and gas
resources, although provisions to allow
greater opportunities for government and
public involvement were included. Moreover,
it is noteworthy that although the national
purposes and policies set forth in the 1978
amendments recognize environmental princi-
ples, they also further the sense of urgency
created in the original legislation by calling
for “expedited” exploration and development.

Plans for Expansion Following the 1979
Oil Shortage

Following the Iranian revolution and resulting
oil supply disruptions and price increases in
1979, the sense of urgency for developing
OCS resources received another boost.
Although the 5-year OCS leasing program
for 1980 to 1985 that was developed by
Secretary of the Interior Cecil Andrus under
the Carter Administration provided for contin-
uing to pursue the OCS program in frontier
areas, the Reagan Administration decided
that program was an inadequate and ineffi-
cient means for developing OCS resources.
In 1982 Secretary of the Interior James Watt
issued a new 5-year program and
announced a policy of “areawide” leasing
intended to make available the largest area
of the OCS ever—nearly 1 billion acres—for
leasing, exploration and development.

Following the action of Secretary Watt. the
debate concerning the OCS program then
turned extremely contentious. Opponents
charged that Secretary Watt was indifferent
to the views of coastal states and localities
and their concerns about potential environ-
mental and socioeconomic impacts. As they
had all along, state and local governments
felt that they should have more say in OCS
program decisions and should share more in
the revenues generated by program activi-
ties. They opposed what they perceived as
a unilaterally imposed policy of unlimited

aayjusuo) AI110d SIO


Chapter 3

Vv

Environmental Sclences
Review Panels (ESRP’s)

Measures Considered by the 102nd
Congress

H.R. 776 provided for the establishment of
ESRP'’s for each of the following OCS areas:
North Atlantic; Mid-Atlantic; South Atlantic/
Straits of Florida; Eastern Gulf of Mexico;
Souther California; Central California;
Northern California; Washington/Oregon;
and North Aleutian Basin. The ESRP’s
would assess the adequacy of scientific
information, identify additional studies need-
ed, identify potential impacts, provide peer
review, and report to the Secretary with
respect to OCS leasing, exploration, and
development and production. The ESRP’s
would be composed of representatives of
MMS, the Environmental Protection Agency,
the National Oceanic and Atmospheric
Administration, and the U.S. Fish and Wild-
life Service.

The ESRP’s would be established for all of
the areas subject to the preleasing/leasing
moratoria provisions of H.R. 776, which also
provides that the Secretary consider the find-
ings and recommendations of the ESRP’s in
determining whether to lease any of those
areas. In addition to the moratoria provi-
sions outlined above, H.R. 776 provides that
no lease sale would be allowed in any of
those areas until after the expiration of 45
days of continuous congressional session
following submission of an ESRP report to
the Secretary.

S. 2166 did not include provisions for
ESRP's or any similar measures.

67

Recommendation of the Subcommittee

Environmental Sciences Review Panels
Should not be established.

The Subcommittee believes that the MMS
Environmental Studies Program receives
good and sufficient counsel from the
Scientific Committee of the OCS Advisory
Board and does not need any additional lay-
ers of advice and oversight. Thus, the Sub-
committee is unconvinced of the need to
establish a program of ESRP evaluation and
recommends against such action.

Additional Recommendations

The Subcommittee believes that the real
need in the area of environmental studies is
for a combination of adequate funding, good
science, and more cooperation between
MMS and other federal, state and local
agencies. This means sufficient funding for
the environmental studies program, including
more emphasis on socio-cultural issues,
socioeconomics, and information on public
perceptions, interagency coordination. en-
hanced data management, and public dis-
semination of results of studies. The MMS
needs to use the information it generates to
undergird its decisions and to better inform
the public on the impacts of OCS develop-
ment. Combined with continuing consulta-
tion, negotiation, and early resolution of con-
flicts among federal, state, and local agen-
cies, such an approach should enhance con-
fidence in MMS decisionmaking.

The programmatic review of the Environ-
mental Studies Program that recently was
completed by the NRC also should be noted.
That review found that overall, the studies
program has contributed significantly to the
accumulation of knowledge about the U.S.
OCS. The NRC has offered recommenda-

aayjusutog Ad[lod SIO


Chapter 3

Vv
Ill. FINDINGS AND RECOMMEN-

DATIONS OF THE SUBCOM-
MITTEE

Introduction

The Subcommittee believes that the OCS oil
and gas program has been a significant
component of the nation’s energy supply,
and there is a need for the program to con-
tinue in the near term to help in meeting the
nation’s energy requirements. An active
environmentally sound OCS program can
help to reduce dependence on imported
petroleum and maintain necessary techno-
logical capability, job skills, and infrastruc-
ture.

The Subcommittee also has concluded that,
as implemented, the existing OCS legislative
and regulatory regime represents an anti-
quated hierarchical approach to decision-
making by the executive branch of the feder-
al government. This regime is no longer
constructive, since it does not provide for a
predictable governing/planning process, an
equitable sharing of OCS benefits and costs,
an effective decisionmaking process that
meaningfully involves all who are affected
Parties, or taking a comprehensive approach
in managing our resources in light of other
ocean uses and resource concerns. While
the current system does provide the opportu-
nities to make OCS decisions based on con-
sultation and cooperation, in practice it has
led to protracted controversy and conflict.

The failure of the existing regime is evinced
most notably by the long-running congres-
sional moratoria that have proscribed OCS
program activities in a number of areas, as
previously described. Other primary indica-
tions that this system is in need of repair
include the current clamor for cancellation
and repurchase of OCS leases in certain
areas and the U.S. oil and gas industry’s
declining willingness to continue to partici-
pate in the OCS program.

49

The OCS program for the past several years
has been regressing rather than progressing,
and it is now at a crossroads. The nation
needs to choose whether to continue with a
retrograde program reminiscent of the 1950’s
or to conceive a forward looking program for
the twenty-first century.

The Subcommittee believes that the defi-
ciencies that have resulted in the symptoms
described above should be corrected to
enable the program to proceed responsibly
and effectively in the future. A new paradigm
involving revenue sharing, consensus build-
ing, and a multiple criteria approach to deci-
sionmaking is needed.

Several prescriptions for the OCS program
were considered by the 102nd Congress,
but no legislation was passed to effect them.
In developing this report the Subcommittee
considered those specific legislative provi-
sions along with a number of additional com-
prehensive long-term solutions for the pro-
gram (as explained previously in the back-
ground section of this report, the Subcom-
mittee deemed it necessary to take a com-
prehensive view of the OCS program rather
than examining it in the context of only the
legislative proposals). Thus, the Subcom-
mittee’s findings and recommendations are
presented below in two parts: Recommend-
ations on the OCS Legislation Considered
by the 102nd Congress; and Additional
Observa-tions and Recommendations.

sayjuutoD AD1/0d SIO


Chapter 2

Vv

England, the Baltimore Canyon Trough off
the Mid-Atlantic States, the Manteo Prospect
off North Carolina, and the Norphiet
Formation in the Eastern Gulf of Mexico off
the Panhandle Region of Florida.

Greater Fuel Efficiency

Greater fuel efficiency could reduce demand
for oil as a transportation fuel. However, in
the absence of higher gasoline prices and
additional subsidies for alternatives, most of
the options are somewhat limited.

Increased use of long-distance trains and
public transit systems in metropolitan areas
would reduce gasoline consumption and air
pollution, but the speed and convenience of
the personal automobile in most situations—
as well as the fact that some of the costs of
private automobile users are borne by soci-
ety as a whole rather than by individual
users—make a major shift to mass transit
unlikely. In fact, housing and employment
patterns are changing in a way that makes
efficient mass transit systems harder to
design and less convenient. With more peo-
ple not only living but working in suburban
areas, the old hub and spoke systems are
not as useful. Some cities have found it nec-
essary to provide large subsidies or to
impose strong restrictions on vehicle travel
and parking in order to overcome people's
reluctance to give up the convenience of
their cars.

Higher fuel economy standards would
reduce fuel requirements to travel a given
distance, but better fuel economy also
makes it cheaper to travel by car, leading to
increased travel by private vehicle and mak-
ing mass transportation comparatively more
expensive (for those who have cars). While
more fuel-efficient automobiles have reduced
overall gasoline consumption over the past
two decades, part of the theoretical savings
have been negated by increased travel.

As long as it is relatively inexpensive and
convenient to travel by private automobile,

47

people have little incentive to make major
changes in their travel patterns.

Consequences of Switching to Alternative
Sources of Energy

Concern about the potential environmental
effects of OCS development must take into
account environmental and other effects of
the energy sources and technologies that
might be developed to compensate for
restrictions placed on the OCS program.
The most direct effect of restrictions leading
to reduced OCS oil and gas production
would be increased imports of crude oil and
refined products. As discussed in a previous
section of this report, the record indicates
that the risk of large oil spills is greater trom
tankers than from U.S. OCS operations.

There are consequences of demand alterna-
tives as well. Some of the alternative fuels
have undesirable characteristics related to
air pollution and toxicity. Production and
transportation of the fuels need to be consid-
ered as well. To have an appreciable effect
on our energy security, any substitution of
alternative fuels for oil would have to be on
such a grand scale that it could create a host
of new problems to replace those created by
our extensive use of oil. Even lower energy
consumption, if required to the extent neces-
sary to replace OCS oil and gas, could
impose significant social costs, especially on
lower income citizens.

On the other hand three factors should be
considered along with these potential conse-
quences of replacing OCS resources. First,
technological advances may help to reduce
the disadvantages of certain alternatives.
Second, the fact that there may be negative
consequences of replacing OCS production
does not by itself mean that there are no net
benefits to be gained from encouraging or
forcing a switch to alternatives. Finally, as
the cost of finding and producing remaining
OCS resources increases, we eventually will
have to change our consumption patterns.

aamuUog ArIj0d SIO


Chapter 3

v

ers such impasses to be remnants of the pre-
vious flawed decisionmaking process that will
require attention under the new paradigm
proposed,

The use of regional task forces would enable
all interested and affected parties to be
involved in both the design and implementa-
tion of OCS programs. The regional task
forces would differ from existing advisory
bodies such as the Regional Technical Work-
ing Groups by being involved in OCS pro-
gram planning from the outset rather than
responding to proposals conceived by the
Department of the Interior. The most impor-
tant prorequisite for each stakeholder’s invol-
vement in a regional task force must be a
commitment to working toward consensus.
Since the OCS program proposals developed
by the task forces would be forged by con-
sensus, a majority of the specific actions pro-
posed would be expected to be less contro-
versial and contentious than those proceed-
ing from programs that have been developed
and approved by the Department of the Inte-
rior in the past.

Various designs for the regional task force
approach should be considered by the
Department of the Interior in conjunction with
the regional constituents. While the Subcom-
mittee believes that design of the regional
task forces should be accomplished by the
OCS program’s stakeholders, it would like to
offer a limited set of alternative conceptual
blueprints as examples that might be consid-
ered in the designing process. It should be
emphasized that the discussion of alterna-
tives presented below is provided merely for
discussion purposes and is not intended to
be an exhaustive description of all possible
designs available for consideration. The
design eventually adopted and implemented
may or may not embody one or more of the
components of these alternatives and could
combine certain elements in a way not dicus-
sed below.

§3

Alternative I—Broad Participation and
Voting Representation

Under this alternative the membership of the
regional task forces would be as broad and
balanced as possible, and all members
would have an equal vote in task force delib-
erations. With respect to achieving consen-
sus and providing findings and recommenda-
tions to the Department of the Interior, two
means are described below.

Unanimous Consensus

If all members vote the same way on a mat-
ter considered by the task force, then the
vote would constitute unanimous consensus
and the recommendation subsequently sub-
mitted would be binding on the Department
of the Interior (i.e, the Secretary would agree
in chartering the task forces that he will
adopt their unanimous recommendations).

Majority Consensus

If a majority of the members vote the same
way on a matter, then the vote would consti-
tute majority consensus and the recommen-
dation subsequently submitted would not be
binding. A minority report reflecting the
thoughts and recommendations of those not
voting with the majority would accompany
the majority's recommendation.

Alternative II—B Participation with
Core Votin resentation

Under this alternative the general member-
ship of the regional task forces would be as
broad and balanced as possible, but only a
core of membership—those members
deemed essential stakeholders with respect
to all matters deliberated—would have votes
in all instances. In an instance when a mat-
ter involving additional key stakeholders is
taken up, the core voting representation for
developing a recommendation on that partic-
ular matter could be expanded to include
appropriate additional members. In any

aayuIUog Ar110d S90


Chapter 3

Coastai Impact Assistance and
Revenue Sharing

Department of the interior Initiative

Following the President's June 1990 direc-
tive to prepare a legislative initiative to pro-
vide a greater share of OCS revenues to
coastal communities directly affected by new
oil and gas development, the Department of
the Interior developed and submitted to the
102nd Congress a proposal for providing
impact assistance to coastal states and com-
munities located near OCS oil and gas activi-
ties. The proposal was based on the view
that, despite strict environmental standards,
OCS development still can affect community
infrastructure, social services, and the envi-
ronment in ways that cause concerns among
residents of coastal states and communities.
Since those effects cannot be completely
eliminated and other means for obtaining
revenue to deal with those effects may be
limited, it would be appropriate to provide the
states and communities located near OCS
development with a greater share of the ben-
efits of development.

Under the department's proposal to the
102nd Congress, impact assistance would
have been distributed according to the fol-
lowing formula:

m the amount distributed would have
been 12.5 percent of new royalties
from each OCS tract;

w the money would have been allocated
to all coastal states within 200 miles
of a given tract—weighted inversely
according to each state’s minimum
distance from that tract; and

m@ within each state, 50 percent of the
allocation would have gone to the

57

state government, and the remaining
50 percent would have been distrib-
uted to eligible counties within 200
miles of the tract from which revenues
are generated—weighted inversely
according to each county's minimum
distance from that tract.

The assistance would have been provided
only from royalties on new production start-
ing after the date of enactment and would
not have applied to tracts covered under
section 8(g) of the OCS Lands Act. Pay-
ments to the fund would have started in FY
1993 and payments to state and local gov-
ernments would have commenced in FY
1994. Eligible counties would have been
designated by the governors of affected
states, with mandatory inclusion of all coast-
al counties and discretionary inclusion of
other counties within 60 miles of the coast.
The payments would have gone directly from
the federal government to the state and local
governments. The impact assistance pay-
ments would have been an entitlement
rather than an annual appropriation, and
there would have been no earmarking or
other restrictions on how the assistance is
spent.

Measures Considered by the 102nd
Congress

H.R. 776 provided for establishment of the
Ocean and Coastal Resources Management
and Development Fund to be comprised of 4
percent of the average amount of all OCS
revenues generated from the three previous
fiscal years and administered by the Depart-
ment of Commerce. This fund would have
been subject to appropriations, and the
amount deposited to it could increase up to 5
percent each year. Coastal states—includ-
ing Great Lakes states, territories, and pos-
sessions—would have been eligible for block
grants from the fund if they have an approv-
ed CZM plan or are making satisfactory pro-
gress toward one. All recipients were to re-
ceive fixed shares of the fund, ranging from

aayjumuo) Ad110d SIO


Chapter 2

Saeed

S
3

‘Source: U.S. Deparment of Energy (1552)

Figure 12. World oil reserves, 1960-1990.

Regardless of the way in which consumers
respond, and the means by which govern-
ments seek to influence their responses, the
extent to which major reductions in the
demand for oil and natural gas can be effect-
ed in the near future is limited by at least four
factors.

& Almost two-thirds of domestic oil

consumption is in transportation,
where there are infrastructure and
other constraints to many alternative
fuels. Oil accounts for more than 95
percent of the energy used fur trars-

portation in the U.S,

Many proposed alternative fuels have
associated disadvantages relating to
safety, creation of pollutants, or con-
venience.

One of the most promising altemative
automobile fuels is compressed nat-

45

S/OEG vonie

ural gas, the consumption of which
might increase should it become a
widely used alternative to gasoline.

@ In our market-based economy, the
most efficient, convenient, and eco-
nomical alternatives tend to have
been adapted already. Thus. it is
necessary to turn increasingly to
what consumers perceive to be more
expensive, less efficient, or less con-
venient alternatives to make large
reductions in oil and natural gas con-
surmpltion.

In addition to natural gas, the most common-
ly suggested alternative vehicle fuels are
electricity, hydrogen, ethanol, and methanol.
Since current batteries are large, heavy, and
expensive and provide a limited range of
travel before requiring recharge, major tech-
nological advancements will be necessary
before electricity is used widely for trans-

aeyjuuog AI0d SIO


Chapter 2

the Secretary. Numerous judicial opinions
have upheld past balancing decisions by cit-
ing and affirming the federal government's
primacy in the management of OCS
resources.

Participation under the CZMA

The states have a somewhat stronger role
under the CZMA, as a state may object to the
approval of any exploration plan or develop-
ment and production plan it Geems to be
inconsistent with its CZM program, thereby

preventing MMS from approving necessary
Permits until the state's objection is resolved.
Appeals can be made to the Secretary of
Commerce to override state decisions under
limited circumstances, but the criteria for
euch an override are vory limited.

The most recent change in the management
regime for the federal OCS program came
about in 1990 with reauthorization and
amendment of the CZMA to make OCS
lease sales subject to federal consistency.
The states previously had asserted that the

PENss| SUA HRD Jo 1eqUINN

ee — -
tM OR ODO
ERRERE SSS 8 3S
OMOOoaanannd DD YM co2)
ZSEeRZ2F2222 F222
Year

1985 7
1986 ~
1987 +
1988 +
1989 7
1990 7
1991 7
1992 ~

(D Yearly Totals |

Figure 5. Geological and geophysical exploration on the OCS. 1974-1992.

17

eejWiWog A21/0d SIO



Chapter 2

4

10
Effect of
Price Drop

QB fon nnn fen nnn nnn nnn nnn nnn rene enn ee
>
Fo | shake Wand is eee
o
a
a
Dob penne t anna neal eR Ape nen ene eee ee een nee ene nen
.-) —— Collapse in
2 Rig Count
i]
PA oe acetate eee «Near
= Loss of

2MMB/Day

1985 1986 1987

Source: Modified from Simmons & Company International

Figure 9. U.S. crude oil production, 1985-1992.

Supply Shortages in the 1970’s and the
“Gas Bubble” of the 1980's

tn response to supply shortages, in 1970
natural gas pipeline companies began to cur-
tail the amount of gas they made available to
industrial customers. Curtailments increased
rapidly until, during the unusually cold winter
of 1976-1977, they forced school and factory
closings in some regions of the country. At
the time, there were fears that our supply of
natural gas was nearly exhausted. While
this was true for the gas that could be pro-
duced at the artificially low, regulated inter-
state prices, there was no shortage of eco-
nomically producible natural gas at higher
prices.

1988

1989 1990 1991

1992

Year

35

Fears of further natural gas curtailments
(accompanied by resistance to higher gas
prices) led to the Natural Gas Policy Act of
1978, which set a series of price ceilings for
various kinds of gas, leading to phased de-
regulation of almost all categories of new
gas but retaining controls on prices of old
gas. Accompanying legislation restricted
some uses of natural gas and prohibited
others.

Due to the long time between the decision to
explore for natural gas and the arrival of
resulting supply on the market, the gas
shortage lingered in the late 1970's.
Because pipeline companies needed the
gas but were unable to bid prices higher

aaysumuog Ar//od SIO


Chapter 3

Vv

dressed. Ways should be found to avoid
delays in the regulatory review process that
could also provide a hindrance to deepwater
development since operating costs are so
high and the time value of money will be an
important factor for operators.

The Subcommittee thinks that with good
leadership and communication, deepwater oil
and natural gas development has the poten-
tial for generating the same kind of excite-
ment that has taken place in America's space
program. The scope and technical chal-
lenges of the program are similar, and just as
many states could be involved as far as jobs
and other favorable economic impacts are
concerned.

In addition to concerns expressed over the
financial risks involved in deep water opera-
tions, concerns have been expressed that
drilling and development operations in shal-
lower Gulf of Mexico waters dropped to
record low levels last year. These activities
are largely dependent upon natural gas
prices that have recovered recently. Never-
theless, continuing lack of capital investment
in production in mature areas throughout the
Gulf is already having an impact on royalty
revenues for the U.S. Annual OCS reve-
nues have fallen to $2 billion from $10 billion
ten years ago.

Financiat incentives could be used in the
more mature shallow water Gulf to achieve
objectives of making it possible for marginal
field developments to move forward, where
they might not otherwise proceed for eco-
nomic reasons, and also to ensure that exist-
ing reserves in productive fields are fully
developed and produced in an efficient man-
ner. Such objectives could benefit govern-
ment, industry and energy consumers.

The Subcommittee recommends that the
Secretary examine possible financial and
regulatory incentives that could stimulate
operators to develop shallower water margin-
al fields in the Gulf of Mexico and also
encourage full exploitation of existing fields

66

using the most efficient recovery methods.
For example, MMS might consider royalty
incentives that apply to current OCS leases
and not just new leases. The Secretary
already has the authority to implement a
number of incentives under existing OCS
laws and regulations. Here also, Congress
may wish to examine making production tax
credits available to offshore operators similar
to those that in the past have been made
available to onshore operators to stimulate
enhanced oil recovery and recovery of natur-
al gas from tight sands and coal seams. Tax
credits also could be applied as an incentive
for developing and using new technology
such as 3-dimensional seismic techniques to
find and produce new horizons in older
fields.

The Subcommittee is aware of the increased
financial responsibility requirements for OCS
operators under new MMS rules that are
about to go into effect. Pursuant to the Oil
Pollution Act of 1990, evidence of financial
responsibility for offshore pipelines and
mobile rigs will more than quadruple to $150
million from the $35 million now required.
Also, surety bonds or evidence of financial
responsibility to assure operator cleanup at
the end of field life will increase from $50
thousand per lease or $300 thousand per
area to $200 thousand per lease or $1 mil-
lion per area for exploration and $500 thou-
sand per lease or $3 million per area for
development and production. The Subcom-
mittee understands that these increased
financial burdens on OCS operators may
delay or prevent lease assignments to small-
er companies, which may in turn lead to
lower drilling activity in the Gulf of Mexico.
An appropriate solution to this dilemma
should be pursued.


Figures and Tables
Figure 1. Key events in the history of the Federal OCS Program........cssssseesseenenrsereneerrees 4
Figure 2. Millions of acres under OCS leasing Moratoria..........cssssseeseeeeseesesseessesseseeseenees D

Figure 3. Proposed location and timing of OCS leasing under the 5-Year Program,

1992-1997........
Figure 4. Drilling activity on the OCS, 1981-1992..........ccsssesceseeessesssnesssseetsseeseessessseteneceeessees 16
Figure 5. Geological and geophysical exploration on the OCS, 1974-1992... 17

--Total spending by region and fiscal year,

Figure 6. OCS Environmental Studies Program
1973-1993..........4 wee

Figure 7. Total environmental studies spending vs. total acreage offered for each
OCS region through 1992.

Figure 8. Total environmental studies spending vs. total acreage leased for each

OCS region through 1992........-ccecseceeseeseeseeceee ieee neatesneerenensensseensseneseneasencecerserertes 30
Figure 9. U.S. crude oi! production, 1985-1992... cesses eens reassess OO
Figure 10. Sources of petroleum consumed in U.S., 1973-1992. 1 87
Figure 11. Employment--petroleum vs. vehicle manufacturing, 1980-1991 .................eceeee 38

Figure 12. World oil reserves, 1960-1990

Figure 13. Number of fields and average reserves by discovery year, 1954-1990...

Table 1. Lease sales scheduled vs. lease sales held for each OCS region,1982-1992.

Table 2. OCS acreage leased by region by year (thousands of acres).

Table 3. Oil spills from tankers vs. oil spills from OCS facil
or more), 1974-1992.

Table 4. Petroleum equipment supply facilities by State... esessseeeeteseseetsseeesseteneeteeeee 40
Table 5. 1992 distribution of revenues from the Land and Water Conservation Fund,

National Historic Preservation Fund, and pursuant to Section 8(g) of the
OCS Lands Act..

Tabie 6. National Energy Strategy forecast of U.S. dependence on foreign energy
supplies in the year 2000.............0.04.

Table 7. Unmet petroleum needs as a percentage of total petroleum needs:
A comparison of contrasting forecasts by the U.S. * Department of Energy
and by the Union of Concerned Scientists, et.al. .

iv


Chapter 3

National Research Council has undertaken
an effort

“to look beyond the present federal
activities and policies for the oceans,
which are limited and fragmented, to
envision a truly national plan and policy
for sustainable development of the
U.S. Exclusive Economic Zone that
can serve as a guide for planning and
managing the nation’s development of
its ocean resources into the next
century.”

On April 28, 1993, the Marine Board con-
vened a forum entitled, The Future of the
U.S. Exclusive Economic Zone {EEZ], in
which various parties with an interest in the
EEZ could present their views and discuss
possible approaches to managing its diverse
resources. The consensus of the forum was
that there is a great need for a comprehen-
Sive national strategy that would take into
account the multiple objectives of EEZ stake-
holders. The absence of such a strategy
was cited as contributing to extreme policy
swings relating to development and preser-
vation, declining productivity of marine indus-
tries, serious conflicts among various inter-
ested and affected parties, and inconsisten-
cies between U.S. and international require-
ments relating to various ocean activities. In
turn such developments have imposed sig-
nificant costs on all of the EEZ stakeholders.

The ultimate objective of the Marine Board
effort is to develop through a partnership of
the stakeholders a national management
strategy for the EEZ that takes into account
regional differences and concerns. Toward
that end the forum has proposed considera-
tion of the following possible actions by the
NRC/Marine Board:

@ conduct an inventory of economic
Opportunities in the ocean that estab-
lishes a realistic basis for assessing
the environmental risks of those
activities;

69

m define a national interest in the EEZ—
both in terms of economic develop-
ment and environmental and biologi-
cal conservation;

TM examine and document the problems
arising from the lack of a comprehen-
sive national ocean strategy; and

m develop a model strategy to be ap-
Plied to a specific ocean region and
develop a regional strategy for that
region to be used as a model for
other regions.

Notwithstanding the belief the Subcommittee
places in the importance of implementing its
recommended regional task force approach
to foster multiple criteria decisionmaking, the
Subcommittee finds it appropriate and con-
sistent with the stated objective of regenerat-
ing the OCS oil and gas program for the
OCS Policy Committee to consider findings
and recommendations of the Marine Board
and to take the appropriate action.

aayjuimog Ar10g S90


Chapter 3

vw

tions on physical oceanography, ecology,
and social and economic studies that MMS
should pursue with advice from the Scientific
Committee.

One of the issues identified and discussed
by the NRC in its review pertains to MMS’s
management of the scientific information
generated under the environmental studies
program. The Subcommittee believes that
those data constitute an important and valu-
able resource that should be easily accessi-
ble to the public. The Subcommittee recom-
mends that MMS develop a comprehensive
and easy to use automated data manage-
ment and dissemination system to make the
contractual products of the environmental
studies program more readily available and
usable.

ADDITIONAL OBSERVATIONS AND
RECOMMENDATIONS

As recommended above, the Subcommittee
proposes establishing regional task forces
designed to resolve conflicts related to com-
peting ocean uses, providing a greater share
of OCS revenues to states and localities,
considering economic and technical incen-
tives to assure industry's continued participa-
tion in the OCS program, and developing a
better way of managing the information
acquired under the environmental studies
program. The Subcommittee is hopeful that
implementation of these measures will help
to regenerate the OCS oil and gas program
as a viable, effective and efficient means for
producing energy for the benefit of the
nation.

Recognition of Parallel Ongoing
Efforts

While the Subcommittee has developed its
own set of recommendations for the OCS oil
and gas program, it recognizes that a num-

68

ber of parallel efforts are in progress that
could produce relevant findings and recom-
mendations in the future. Selected projects
are identified and discussed below.

Alternative Leasing Policies and Industry
Incentives

The Subcommittee is aware that MMS is
looking into alternatives to existing leasing
policies and that the Department of Energy is
undertaking an effort to develop a strategy to
provide expanded opportunities for domestic
oil and gas producers. Since both of those
efforts parallel the work of the Subcommittee
on OCS Legislation, the recommendations
proposed by those efforts should be consid-
ered as they become available.

Multiple Criteria Decisionmaking

Efforts to formulate a workable blueprint for
the development, management, and protec-
tion of U.S. ocean resources have been
ongoing for nearly three decades, starting in
1965 with the Commission on Marine Sci-
ence, Engineering, and Resources (Stratton
Commission). These efforts include: a com-
prehensive review of U.S. ocean policy com-
missioned by President Carter and prepared
by the Department of Commerce in 1978
entitled, U.S. Ocean Policy in the 1970's:
Status and the Issues; extensive delibera-
tions by the then National Advisory Commit-
tee on Oceans and Atmosphere (NACOA);
congressional hearings and legislation to
enact a multiplicity of special-purpose ocean
laws; various reports and studies by such
groups as the Coastal States Organization,
the Council of State Governments, and the
Pacific Basin Development Council; and a
myriad of conference, workshop, and sym-
posia discussions, recommendations, and
proceedings. While much has been said and
documented on the need for and the ele-
ments of a national ocean plan and policy, no
tangible results have occurred.

Most recently the Marine Board of the


MMS. 1992b. Final Environmental Impact
Statement for the Comprehensive OCS
Natural Gas and Oil Resource Management
Program for 1992-1997.

MMS. 1992c. Federal Offshore Statistics:
1991.

MMS. 1993. Offshore Stats, First Quarter
1993.

Yergin, Daniel. 1992. The Prize: The Epic
Quest for Oil, Money and Power. New York,
NY: Simon and Schuster.

71

seyjumuog A10d SDO


Chapter 2

v
Millions
$60
$50
$40 NN
IS
$30 A mn
ae a i),
$20 4 tt ] ETE
$10 ; Ln
$0 +
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
Fiscal Year
Total [0:7 [$1.8 Jpoe.06] 655.50] sai sao 92] s01 20] sea 72] sav 51 [80005] $00.50] son 01] $20 75] 825.00] s22 50] 2a 08] 0s oon] sznas] rive] aro oc
HQ $0.37 | $0.96 | $0.92) $2.01] $1.48} $1.73] $0.55] $0.45] $0.65] $1.23] $1.83] $1201 $1.52) $1.77] $1.77) $1.80) $1.06] $1.76] 51.61] 1.06] $2.46
Pacitic | <]}s000 |40.12 | 450] $04) 4.06] 1.16] sacs] $240] $3.15] saci] $8.20] $509] sss] s702| $520/s1008) $e.22) $6.57] sas] soe] sea
G.0M []]] 9000 |s1.21 | $572] $120] £757] soso] see] 67.17] s204] sass] 85.48) saoo] ss] s2.90] 9541] s31] ssoe] sasfsia.ze/si29e) ¢o.40
Astrtic Hl s2.00| soso | a mafereza| enaelers ve sx eno] cod! eras] erae] once} ener] ecor] over] ana] erae] sezo|g:0) save] suse
Alaska f) $0.00 | $0.00 | 89.07 }820.97 S21 56}520.68]$16.11 |$25.28]$19.63| $24.19] $13.18] $13.15] $11.93] $10.34) $8.54) $7.20] $8.31] $6.95] $6.20) $2.16] $3.28]

‘Source: Minerals Management Service, March 1993.

“Note: FY1993 numbers are estimates

Figure 6. OCS Environmental Studies Program - Total spending by region and fiscal year, 1973-1993.

National Research Council Reviews

In 1986 the MMS contracted the NRC to
conduct an independent evaluation of the
program and make specific recommenda-
tions. The NRC has issued four separate
reports presenting findings on the MMS en-
vironmental studies program with respect to
the following topics: physical oceanography;
ecology; socioeconomics; and lessons and
opportunities. While the NRC reports
include compliments for many topical and
regional segments of MMS environmental
studies program, they also note a number of
specific deficiencies and provide recommen-
dations for dealing with them. Key NRC rec-
ommendations are listed below.

28

Key Recommendations of the Physi
Oceanography Report

= MMS should support studies on phy-
sical oceanoaraphic and meteorologi-
cal processes that are relevant to
MMS missions. Modeling physics
and methodology for oil-spill studies
should be revised and improved con-
tinuously.

MMS should not rely on modeling re-
sults alone without using field obser-
vation data to fully test and verify the
models.

MMS should continue to work coop-
eratively with other agencies. Pro-
gram priorities and operating proce-


Chapter 2

Lease | Atlantic

Gulf of

Progam Sales Region | Mexico Region | Region | Region Tote

5-Year

Program

1982-87" Held 2 12 3 6? 23
(57%)

Fa |

P

1967-02" Held 0 1u* 0 4 14
(41%)

Pacific

1 One additional sale (RS-2) which reoffered tracts located in the Atlantic, Pacific and Alaska Regions that pre-
viously had been offered but not leased was also scheduled and held.

2 Includes Sale 92, North Aleutian Basin, which was delayed by litigation. The sale planning process was com-
Pleted in 1986, but MMS was enjoined from opening bids until 1988.

3 Three additional sales (SU - 1, 2 and 3) which would have rectfered a limited number of tracts outside the
Central and Western Gulf of Mexico were scheduled but not held.

4 includes Sale 116, Eastern Gulf of Mexico, which was divided into two parts. Part 1 was held, and Part 2

was not.

Table 1: Lease sales scheduled vs. lease sales held for each region, 1982-1992.

Industry Response
Uncertainty over Unresolved Issues

While a main goal of the 5-year program for
1992-1907 is a predictable schodule, there

remain operative issues that undermine the
oil and gas industry's confidence in the OCS
program. For example, some of the areas
proposed for leasing consideration are now
covered by congressional moratoria. Even
more unseting to tne Industry are efforts 10
mandate cancellation and repurchase of
existing leases. These unresolved issues
may have a dampening effect on the indus-
try's interest in pursuing oil and gas resour-
ces outside the Central and Western Gulf of
es in the U.S. as reliable relative to contracts
with foreign govermments. That view is
rapidly changing.

Declining Interest and Activity

As Table 2 indicates, even industry interest
in the Central and Western Gulf of Mexico is
dropping in large part due to the persistence
of the lower world price of oil, an economic
downturn, and anticipation of more costly
environmental regulations. The decline of
the nation’s oil and gas Industry has been as
dramatic. Industry sources cite 450,000 jobs
lost over the last 10 years. Many major oil
and gas companies have redirected their
efforts overseas and have radically cut back
U.S. operations.


Chapter 2

4

types of activity or event. First, there are
routine permitted activities that have chronic
effects on the marine ecology and social or
economic conditions onshore. Such activi-
ties include: the discharge of liquids and
solids—including drilling muds—into the
ocean; emission of gases; tanker, service
vessel, and helicopter operations; and con-
struction, operation and removal of facilities
both offshore and onshore. Second, there
are accidents such as oil spills that have
acute effects. This latter category generally
is viewed as much more threatening to the
environment due to the damage and disrup-
tion a high-volume spill can cause to ecologi-
cal resources and to coastal livelihoods and
activities that depend on those resources.
The effects of trash and debris originating
from OCS facilities also is an area of great
concern.

The activities and events associated with
OCS oil and gas operations can result in
ecolagical and socioeconomic impacts.
Ecological impacts can include the degrada-
tion of water and air quality, lethal and sub-
lethal effects on marine wildlife (e.g., birds,
whales, turtles, and fish and shellfish), and
damage to shorelines, wetlands and estuar-
ies and the wildlife habitats they support.
Socioeconomic impacts can include effects
on coastal communities (e.g., changes in
land use patterns, greater employment
demands, higher population, and increased
need for government services), effects on
tourism and recreation (e.g., diminished aes-
thetics), hardship for commercial and recre-
ational fishing interests (preemption or clo-
sure of fishing grounds and damage or loss
of equipment), disturbance or destruction of
historic or prehistoric archaeological resour-
ces, and interference with cultural and sub-
sistence activities.

Operations Record
While large accidental oil spills have

occurred as a result of OCS operations,
there have not been many. Following the

20

most notorious event resulting from opera-
tions on the federal OCS—the 1969 Santa
Barbara blowout and oil spill—improvements
in government regulation and industry prac-
tices and technology were implemented.
Those reforms have resulted in OCS opera-
tions that have been relatively free of large
accidental oil spills.

According to records maintained by MMS,
since 1970 there have been 14 OCS oil spills
of greater than 1,000 barrels, accounting for
approximately 91 percent of the total volume
of oil spilled. About 99 percent of all OCS
spills have been in volumes of 10 barrels or
less. Spills of 50 barrels or less have consti-
tuted about 96 percent of the total number of
OCS oil spill events on record and have
accounted for only some 2 percent of the
total volume of oil spilled. Conversely, spills
of greater than 50 barrels have constituted

4 percent of the number of OCS spill events
and 98 percent of the volume spilled.

It is notable that no claims have ever been
made against funds that have been main-
tained to provide compensation for oil spills
tesulting from OCS operations since enact-
ment of the OCS Lands Act Amendments of
1978.

OCS Operations versus Tanker
Operations

Table 3 lists oil spills of 1,000 barrels or more
that have resulted from tanker operations in
coastal and offshore waters versus spills of
1,000 barrels or more resulting from OCS
operations during the period 1974 to 1992.
Comparison of these data indicates that
large oil spills have occurred more frequently
and in greater quantities as a result of tanker
operations—including those transporting
imported oil—than as a result of OCS opera-
tions. However, it should be noted that when
spills from tankers and OCS operations are
compared in the context of the total volume
of oil handled, the difference is less marked.
Over the last ten years (1982-92) OCS activ-


Chapter 2

v

Figure 4 shows OCS exploration and devel-
opment drilling for the period 1981 through
1992. Figure 5 shows exploration permits
issued for the period 1974 through 1992.

Role of State and | ocal Governmonts

The role of coastal states in the OCS deci-
sionmaking process is limited under federal
law. Under the laws that have been govern-
ing the federal OCS program since its incep-
tion the states have a subordinate role to the
federal government. Politically, however, the

Figuro 4. Drilling activity on the OCS, 1901-1992.

coastal states have played a significant role
in the program.
Participation under the OCS Lands Act

The OCS Lands Act, as amended, mandates
consultation with states, and they, along with

16

local governmental bodies, can submit com-
ments and recommendations on OCS pro-
gram proposals. The Secretary must consid-
er these recommendations and strike a prop-
er balance as required by the statute. In
developing a S-yoar OCS loasing program
pursuant to section 18 the Secretary is
required to strike a balance between the
potential for environmental damage and
adverse impact on the coastal zone and the
potential for the discovery of oil and gas. In
considering a state governor's recommenda-

tions concerning specific lease sale propos-

Siam Jo equ

als and development and production plans
pursuant to section 19 the Secretary is
required to strike a balance between the
national interest and the well-being of the
state’s citizens. However, there is a great
deal of discretion allowed in such balancing
decisions, and the final decision rests with


Chapter 2

i

Figure 7. Total environmental studies spending vs. tolal acreage offered for each OCS region through

1992.

dures should be timely modified to
reflect the advancement of science
and availability of resources.

Key Recommendations of the Ecology
Report

m MMS should support more “process-
oriented” studies to understand why
species congregate where they do.

= MMS should monitor the various im-

pacts of development and produc-
tion, including routine discharges, to

assess chronic effects.

suo

@ MMS studies should be integrated
across disciplines, such as joint eco-
logical and physical oceanography
studies.

= MMS should improve its data manage-

ment.
Key Recommendation of the Social and
Economic Report

While the NRC did not make specific

study recommendations, it suggested
@ ee-phase approach to designing

sayuuog Ar1Jod SIO

a national socioeconomic program.

29


Chapter 2

wW

MMS's jurisdiction over air quality on the
OCS off California.

Institute for Resource Management
Bering Sea Project

In 1986 the Institute for Resource
Management (IRM) provided a forum in
which industry, environmentalists, and fish-
ery interests reached consensus on areas of
the Bering Sea OCS to be recommended for
inclusion for leasing consideration in the
5-year program for 1987 to 1992. The IRM
proposal was submitted to the Department of
the Interior for consideration in developing
the 5-year leasing program but was not fully
adopted, partly because state and federal
officials and some key industry interests
were not involved in the negotiations.

Office of Technology Assessment OCS
Conflict Resolution Workshop

In 1986 the U.S. Congress promoted a con-
flict resolution effort concerning OCS issues.
Its Office of Technology Assessment orga-
nized and sponsored a workshop involving
key participants in the OCS decisionmaking
process that produced a draft report and rec-
ommendations. However, there was no
agreement by the participating parties on a
final report.

Consultation with the State of North
Carolina on the Manteo Unit

In 1989 the MMS, the State of North
Carolina, and the operator of the Manteo
Exploration Unit located off Cape Hatteras
executed a Memorandum of Understanding
(MOU) to govern analysis and consultation
related to review and approval of an explo-
ration proposal for that unit. In accordance
with the MOU—and unprecedented in the
process for considering an OCS exploration
proposal—a detailed environmental report
concerning the Manteo Unit proposal was
completed in August 1990. However, the
state did not concur on the operator’s coastal

an]

zone consistency certifications for a dis-
charge permit from EPA or for the explo-
ration plan submitted to MMS.

The State of North Carolina’s position on the
Manteo Unit changed markedly following
President George Bush’s June 1990 findings
and directives concerning the OCS program
(described below). State officials felt that
since they had been cooperating with MMS
and others to study the proposed project, the
president’s decisions should have applied to
that area as well as those such as Washing-
ton/Oregon and the North Atlantic. The
North Carolina officials believed that the
states adjacent to those OCS areas had
been strongly opposed to OCS activity and
had shown little or no willingness to work to
resolve conflicts. North Carolina felt that
those other states had been rewarded for
their steadfast opposition while North Caro-
lina had been penalized for its conciliatory
approach. Thus, the state’s opposition to the
Manteo Project was solidified by the presi-
dent's announcement, and officials success-
fully sought a congressional moratorium for
the OCS off North Carolina.

PRESIDENT BUSH'S JUNE 26,1990
ORDER

By 1988, due to the prevailing controversy
and conflict, the OCS program had become
a presidential campaign issue. As a conse-
quence of pledges he made during that cam-
paign, President Bush brought about an
abrupt change in federal OCS policy. On
June 26, 1990, following analysis and rec-
ommendations by an Inter-departmental
OCS Oil and Gas Leasing Task Force, he
announced a series of decisions regarding
the nation’s offshore oil and gas program.
The president's key directives were:

TM cancel all scheduled sales off Cali-
fornia, southern Florida, North Atlan-
tic, Washington and Oregon, and
withdraw those areas from leasing
until after 2000 (except for 87 tracts

eeyjumuiog Ar1}0d SIO


Appendix 8
wv

EXPLANATION

(J Federal
[7] non-Federal

a

Federal Decision

CC) industry

Plan seni to
Governors and

Development & Production
Plan submitted to MMS

20 days maximum

Development & Production
Plan complete? H

CZM agencies of 5
affected States ke—working 4
and to local days

governments that

Development & Production

Plan returned to
Lessee/Operator
for madification
or for
supplemental

j/no——_> information

Plan made

available to

appropriate
Federal agencies,

Plan deemed submitted

interstate entities,
and the public

request copies

(Must notify MMS within 3
months of basis for further
delay, or concurrence is
presumed). State CZM
agency may take up to
6 months total.

APD returned to
Lessee/Operator
for modification
or for
supplemental
information

1. 1 Comments
L Technical & Environmental submitted and
Governors submit | _ 59 Evaluation joint consultation
written comments | gays I performed, as
a appropriate
Draft EIS sent [yt Environmental Impact H Yes
to Governor Statement required? 9 }- up to—T Final
years EIS
NO, released
State CZM agencies notify . 60 days 60 days
MMS of concurrence or CZM NO——_——_——»
objection with CZM consistency
consistency certification at concurrence Lessee may request
earliest practicable time. cu mediation or review

YES

a

Development & Production

by the
Secretary of Commerce!
(Section 15 CFR 930).

Plan approved?

Application for Permit
to Drill (APD) submitted

Development wells.
drilled/Production

If disapproved, plan
may be resubmitted it
conditions change.
(Leases may be
canceled in
accordance with
43 U.S.C. 1334).

SOURCE: MMS. Office of Stotiohes & Information, OT

Figure B-3.

83

aang A20d S90


Chapter 3

4

References

Congress of the United States, Office of
Technology Assessment(OTA). 1977.
Federal Role in OCS Oil and Gas Develop-
ment, Agency by Agency Analysis. Wash-
ington, DC: U.S. Government Printing
Office.

OTA. 1991. Energy Technology Choices:
Shaping Our Future.Washington, DC: U.S.
Government Printing Office.

Davis, Kenneth C. 1984. Administrative Law
Treatise, Second Edition, Volume 5. San
Diego, CA: K.C. Davis Publishing Company.

Feliman, Bruce. 1993. Forestry Goes Global.

In Yale, March 1993.

Guertin, Donald L., Davis, W., and Gray, J.
1992. U.S. Energy Imperatives for the
1990's. Lanham, MD: University Press of
America.

Marshall, Hubert and Betty Zisk. 1967. The
Federal-State Struggle for Offshore Oil. New
York, NY: The Bobbs-Merrill Company, Inc.

Public Land Law Review Commission. 1968.
Study of Outer Continental Shelf Lands of
the United States, Volume 1.

National Petroleum Council. 1987. Factors
Affecting U.S. Oil and Gas Outlook.

National Petroleum Council. 1992. The
Potential for Natural Gas in the United
States.

National Research Council (NRC). 1990.
Assessment of the U.S Outer Continental
Shelf Environmental Studies Program |,
Physical Oceanography. Washington, DC:
National Academy Press.

NRC. 1992a. Assessment of the U.S. Outer
Continental Shelf Environmental Studies
Program Il, Ecology. Washington, DC:
National Academy Press.

70

NRC. 1992b. Assessment of the U.S. Outer
Continental Shelf Environmental Studies
Program III, Social and Economic Studies.
Washington, DC: National Academy Press.

NRC. 1993 Assessment of the U.S. Outer
Continental Shelf Environmental Studies
Program IV, Lessons and Opportunities.
Washington, DC: National Academy Press.

Oil and Gas Journal, 1993, v. 91 no. 34,
August 23, p. 17.

Union of Concerned Scientists. 1991.
America’s Energy Choices: Investing in a
Strong Economy and a Clean Environment.
Cambridge, MA.

U.S. Department of Energy (DOE). 1988.
United States Energy Policy, 1980-1988.

DOE. 1991. National Energy Strategy, First
Edition 1991/1992.

DOE. 1992. Annual Energy Outlook with
Projections to 2010.

DOE. 1993a. Annual Energy Review 1992.

DOE. 1993b. Monthly Energy Review July
1993.

U.S. Department of the Interior, Minerals
Management Service (MMS). 1986.
Managing Oil and Gas Operations on the
Outer Continental Shelf.

MMS. 1987. Proposed Final 5-Year OCS Oil
and Gas Leasing Program for Mid-1987 to
Mid-1992.

MMS. 1990. OCS National Compendium,
Outer Continental Shelf Oil and Gas
Information through October 1990.

MMS. 1992a. Proposed Final Comprehen-
sive OCS Natural Gas and Oil Resource
Management Program for 1992-1997.


Chapter 3

Ww

means to assure states that their comments
and recommendations on proposed leasing
programs and individual lease sales would
receive serious consideration by the
Secretary, as a higher standard could make
it more difficult for the federal government to
prevail in ensuing litigation. As mentioned in
the background section of this report, the
Congress also has been considering similar
proposals to strengthen the role of states in
OCS decisionmaking.

The Subcommittee considered a proposal to
require that the balancing decisions made by
the Secretary of the Interior be supported by
“substantial evidence.” However, it was dis-
covered that while section 23(c) of the OCS
Lands Act, as amended, already does pro-
vide explicitly for the “substantial evidence”
standard of review to be applied to the
Secretary's findings, the U.S. Court of
Appeals for the District of Columbia has
issued an opinion that controls the standard
of review regardless of the legislation’s
explicit requirement. In State of California v.
Watt [668 F.2d 1290 (1981)] the court con-
cluded that a “hybrid” standard of review
should be applied to the Secretary’s section
18 decisions. The court stated that the
review of “findings of ascertainable fact” pur-
suant to section 18 will be guided by the
“substantial evidence” standard while “policy
judgments’ will be tested under the less
demanding “arbitrary and capricious” stan-
dard.

In light of such circumstances the Subcom-
mittee decided not to recommend revision of
the legal standard for Secretarial decisions
pursuant to sections 18 and 19 of the OCS
Lands Act, as amended.

55

Lease Cancellation and
Buyback

Department of the interior Initiatives

Following President Bush's June 1990 direc-
tive concerning buyback of the 73 existing
OCS leases located in the Eastern Gulf of
Mexico Planning Area south of 26° N. lati-
tude, MMS suspended those leases for the
purpose of considering them for cancellation
and compensation in accordance with sec-
tion 5 of the OCS Lands Act (43 U.S.C.
1334). Section 5 provides that leases may
be canceled if it is determined that continued
lease activities pose a threat of serious harm
or damage, the harm will not diminish to an
acceptable extent over time, and the advan-
tages of cancellation outweigh the advan-
tages of continuing the leases in effect.

Section 5 also provides that the leases be
suspended continuously for a period of 5
years (or a shorter period at the request of
the lessees) before cancellation may take
place. The holder of an OCS lease canceled
under section 5 is entitled to compensation
amounting to the lesser of: (1) the fair value
of the lease rights; or (2) the excess of lease
expenses over revenues {including interest
on both expenditures and revenues).
According to MMS, should the Secretary
decide to cancel the 73 Eastern Gulf leases
under section 5, the earliest cancellation
could occur would be October 1, 1995,
unless the lessees request a shorter period
of lease suspension and deliberations.

The Department of the interior also has been
involved in responding to a lawsuit filed by
lessees that alleges a breach of contract and
5th Amendment taking of their interests in
the 73 Eastern Gulf leases as well as addi-
tional leases off North Carolina and in the
North Aleutian Basin Planning Area off
Alaska. The section 5 cancellation and re-

aaqjuog Ad{Jod SIO


Chapter 2

Vv

il. BACKGROUND ON THE OCS
PROGRAM

Introduction

Although significant amounts of petroleum
have been produced from the OCS, generat-
ing considerable federal revenues, the OCS
oil and natural gas program has become
mired in controversy and confrontation.
Continuous stalemates and disagreements
over OCS activities have limited the pro-
gram’s effectiveness, causing many people
to question the program’s existence and abil-
ity to help the nation meet its energy needs.
While different views as to how and why the
program reached this state are held by vari-
ous interested and affected parties, there
appears to be a general consensus that the
existing way of conducting the OCS program
can and must be improved. It is time to
break the pattern of contention that has been
So pervasive over the last decade. As a first
step in seeking to develop program improve-
ments, the Subcommittee prepared an
objective account of the OCS program and
the factors influencing it, which is presented
below.

ORIGINS OF THE FEDERAL OCS
PROGRAM

The Tidelands Controversy

The federal OCS oil and gas program origi-
nated off Louisiana and Texas in the Gulf of
Mexico in late 1954. A historical overview of
the program is presented in Figure 1.
Establishment of the federal OCS program
followed years of conflicting federal and state
claims for offshore jurisdiction that had been
motivated largely by their interests in off-
shore oil and gas resources. This federal-
state struggle for control of offshore lands is
known as the Tidelands Controversy.

In 1937, at the urging of the Secretary of the
Interior, legislation was introduced in Con-

gress that would confirm federal ownership
of lands seaward of the low-water mark. In
1938, as the proposed federal legislation
was being considered and ultimately defeat-
ed in Congress, the State of Louisiana
enacted a law asserting its jurisdiction out to
27 miles offshore. Texas and California also
made claims to the seabed off their shores.

In 1945 President Harry S. Truman issued a
proclamation asserting federal jurisdiction
over offshore resources. That same year the
Department of Justice filed litigation to enjoin
offshore lease activities being administered
by the State of California. In 1947 the
Supreme Court decided the case against
California in favor of the federal government,
stating,

“_.. California is not the owner of the
three-mile marginal belt along its coast,
and that the Federal Government rather
than the state has paramount rights in
and power over that belt, an incident to
which is full dominion over the resour-
ces of the soil under that water area,
including oil.”

\n 1950 the Supreme Court issued similar
findings with respect to offshore claims that
had been asserted by Louisiana and Texas.

The Submerged Lands Act and the OCS
Lands Act of 1953

As the nation headed toward the 1952 presi-
dential election, the issue of jurisdiction over
offshore lands became a hotly debated politi-
calissue. In 1952 Congress passed legisla-
tion granting states ownership and jurisdic-
tion over the first three miles of land off their
coasts. Citing the Supreme Court's rulings,
President Truman vetoed the bill. He called
for using offshore oil and gas resources for
national defense and one year later issued
an executive order to make the continental
shelf a naval petroleum reserve. Meanwhile,
presidential candidate Dwight D. Eisenhower

eaqjuog Ar1}0d SOO


Chapter 2

4

tration. Exploration plans are subject to the
consistency provisions of the CZMA and
undergo state consistency review for up to
180 days. While an exploration plan may be
approved by MMS before required state con-
sistency determination is received, required
permits for the activities proposed in the plan
may not be issued—and the project may not
commence—until state consistency concur-
rence is granted.

Among the permits necessary for OCS explo-
tation drilling are: MMS-approved Applica-
tion for Permit to Drill; Coast Guard aids to
navigation and certification of mobile offshore
drilling unit; Army Corps of Engineers naviga-
tion permit; and EPA National Pollutant
Discharge Elimination System permit. In
addition, the exploration must comply with
specific lease stipulations developed by MMS
as well as the requirements of laws including
the Clean Air Act, Oil Pollution Act, Endan-
gered Species Act, and Marine Mammal
Protection Act.

Figure B-2 depicts the exploration plan
review and permitting process.

Development and Production Plan Review
and Permitting

Regulations at 30 CFR 250.34 require OCS
lessees to submit and receive approval of a
development and production pian before pro-
ceeding to bring to production oil and gas
resources discovered by exploration activities
(for leases in the Central and Western Gulf of
Mexico areas, an abbreviated form of plan
known as a development operations coordi-
nation document meets the requirement in
lieu of a full-blown development and produc-
tion plan). As with exploration plans, devel-
opment and production plans receive simulta-
neous review by states and other federal
agencies. They are also subject to similar
CZMA consistency review requirements but,
unlike exploration plans, may not be approv-
ed until consistency concurrence is granted.

26

Development and production operations
require permits similar to those necessary for
exploration. Additional permits related to
design, fabrication and installation of plat-
forms and production and transportation of
oil and gas also are needed.

Figure B-3 depicts the development and pro-
duction plan review and permitting process.

The Environmental Review Process

The National Environmental Policy Act
(NEPA) requires environmental review of
OCS leasing proposals and operations
plans. According to NEPA, a detailed envi-
ronmental impact statement (EIS) must be
prepared for any proposed major federal
action that will significantly affect the quality
of the human environment. The MMS pre-
pares an EIS for proposed OCS 5-year leas-
ing programs, for each proposed lease sale,
and for development and production plans
for leases in areas other than the Central
and Western Gulf of Mexico. Development
operations coordination documents for leas-
es in the Central and Western Gulf undergo
an environmental assessment to determine
whether a particular plan would have signifi-
cant impacts and therefore lead to prepara-
tion of an EIS. Exploration plans, except
those submitted for leases in the Central and
Western Gulf, also undergo an environmen-
tal assessment. Since the numerous envi-
ronmental assessments conducted in the
Central and Western Guif have indicated that
the activities proposed in exploration plans
would have no significant environmental
impact, they have been classified as cate-
gorical exclusions from the NEPA require-
ments and are subjected to a more limited
environmental review.

The EIS prepared if it is determined that a
proposal constitutes a major action with sig-
nificant Impacts provides a comparison of
the potential environmental impacts of the
proposed action and the alternatives under


Chapter 3

m There is no restriction on the use of

disbursements to participating states
and territories.

Incentives to Industry

Background

The increasing interdependence of the
United States national economy and the
global economy is nowhere more evident
than in exploration and development of off-
shore oil and natural gas resources. As
nations around the world strive for increased
energy self-sufficiency, Americans must
understand that in many economic endeav-
ors governments, like the private sector,
must compete for limited investment capital.
In the highly competitive world of natural
resource development, contract terms, tax
and royalty systems and other elements of a
government's “take” become factors by
which the attractiveness of oil and gas in-
vestment in a particular country is judged.

As more and more countries make adjust-
ments in their fiscal systems in order to
attract investment in offshore areas, the evi-
dence, including declining federal revenues
from the OCS, indicates that the U.S. has
become a relatively less attractive place to
invest capital. In fact, the U.S. OCS is con-
sidered the highest cost oil and gas arena in
the world in terms of bonuses, rents and roy-
alties as well as regulatory requirements and
resulting delays. Figure 13 indicates the
recent trend in Gulf of Mexico OCS activity
by showing the number of fields and average
reserves discovered each year since incep-
tion of the program in 1954,

After three decades of development, the
mature shelf areas of the Gulf of Mexico
have become economically marginal and
thus activity in these areas has become

62

dominated by small independent companies
that can operate at lower costs than their
major oil company predecessors. At the
same time, multinational parents of many
major oil companies are labeling U.S. deep
water drilling and development as “excessive
risk with limited upside potential,” and thus
are diverting money abroad in pursuit of
other opportunities.

There is a tendency on the part of the gener-
al public and even citizens knowledgeable
about the OCS program to view the Gulf of
Mexico as one oil and natural gas province.
From an economic and technical viewpoint
the Gulf should actually be seen as two
hydrocarbon provinces—a developed mar-
ginally economic shallow water shelf pro-
vince and an undeveloped frontier deepwa-
ter province with potential for discovery of
reserves larger than prospects remaining in
the shelf area. The environmental and safe-
ty record in both the mature shelf and frontier
deepwater provinces has been excellent

The costs of producing OCS resources in-
crease significantly with water depth. For
example, a conventional fixed leg production
platform in 800 ft. of water can cost $360 mil-
lion to construct, whereas a conventional
tension leg platform in 3,000 ft. of water may
cost nearly $1 billion.

According to Department of the Interior esti-
mates, there are 11 billion barrels of oil
equivalent in the Gulf of Mexico in waters
of a depth of 200 meters or more. In recent
years there have been an estimated 50 deep
water discoveries with estimated reserves
equivalent to 2.5 billion barrels of oil for
which there are no plans for immediate dev-
elopment because proceeding is not eco-
nomic. Both the Department of the Interior
and the Congress have considered incen-
tives entailing some form of royalty relief to
increase the economic viability of OCS
resources.


Chapter 3

v

On February 4, 1993, U.S. Senator J.
Bennett Johnston, Chairman of the Commit-
tee on Energy and Natural Resources, intro-
duced to the 103rd Congress S.318,

“..to provide for the energy security of
the Nation through encouraging the
production of domestic oil and gas
resources in deep water on the
Outer Continental Shelf in the Gulf of
Mexico and for other purposes.”

This proposed legislation would provide a
royalty holiday on new production from leas-
es in the Central and Western Gulf of Mexico
located in 200 meters of water or greater
until capital costs directly related to such
new production have been recovered by the
lessee. Such royalty relief would not apply
when oil or natural gas prices exceed $28
per barrel or $3.50 per million Btu’s, indexed
for inflation.

Both S.3127 and S.318 include provisions
for expanding existing discretionary authority
for royalty relief by enabling the Secretary of
the Interior to grant such relief for producing
and nonproducing leases based on a broad-
er range of reasons.

In addition, on February 18, 1993, U.S.
Senator John B. Breaux introduced S.403,
which would amend the Internal Revenue
Code of 1986 to allow a tax credit of $5 per
barrel of oil equivalent for new production
from any offshore area located in water
depths of 400 meters or more.

Expected Results of Royalty Rate
Reductions

An appropriately structured program of royal-
ty reductions could provide financial incen-
tives to companies to maintain or increase
production while resulting in greater govern-
ment receipts overall in the long term. Even
with appropriate discounting, royalty reduc-
tions applied over an extended production
life can yield royalty revenues comparable to

the royalties now collected under existing
procedures where royalties cease with pre-
mature shut-in. Additional regulatory authori-
ty to reduce royalty rates could be employed
to encourage new development and produc-
tion in high-cost deepwater areas. This
would slow the decline in domestic produc-
tion, reduce dependence on imported oil,
reduce the trade deficit, and provide employ-
ment benefits.

On September 14, 1993, the Department of
the Interior's Assistant Secretary for Land
and Minerals Management testified before
the Senate Energy and Natural Resources
Committee and supported the objectives of
§.318 to increase investment, production,
and employment in the Gulf of Mexico OCS.
However, the Assistant Secretary also cited
the results of an MMS analysis of the specific
provisions of $.318 that was conducted to
determine its effects on future production as
well as its impacts to the federal treasury.
That analysis looked at 30 meaningfully-sized
discoveries in the Central and Western Gulf
of Mexico in water depths over 200 meters
and concluded that the provisions of S.318
would affect the decision to produce for only
two of those discoveries. The MMS further
concluded that the estimated revenue gains
associated with producing those fields would
be more than offset by royalties foregone
from other fields that would have been devel-
oped and produced even without the incen-
tive. The MMS analysis also found that the
overall impact of this particular bill to the fed-
eral treasury would be a reduction in receipts
amounting to approximately $1 billion over
the life of the fields.

The Assistant Secretary concluded his testi-
mony on S.318 by suggesting the following
modifications to address the bill’s potential
fiscal impacts: the mandatory royalty sus-
pension should apply to new leases only and
should be limited to tracts in 400 meters of
water or greater; and the term “capital costs”
shouid be defined to allow the Secretary to
set a schedule of allowable costs in regula-


Chapter 3

vw

tion rather than require the use of actual
costs. The Assistant Secretary indicated
that if these changes were made, $.318
would be more acceptable to the Department
of the Interior.

Recommendation of the Subcommittee

Economic and technical incentives
should be thoroughly analyzed and con-
sidered for implementation by the Depart-
ment to encourage the U.S. oil and gas
industry’s continued participation in the
OCS program.

With respect to royalty relief measures to
encourage OCS oil and gas development,
the Subcommittee recommends that the
Department take the following measures:

@ implement a program similar to the
royalty reduction program for onshore
stripper wells that would be designed
to extend the producing life of OCS
leases;

TM complete the implementation of regu-
latory and administrative initiatives
announced by MMS; and

m@ consider new legislation to broaden
the authority of MMS to provide royal-
ty relief on all existing but undevel-
oped OCS leases.

While the Subcommittee endorses consider-
ation and analysis of a royalty rate reduction
and the lowering of the deep water threshold
from 400 meters to 200 meters as measures
that might stimulate new OCS activity, other
incentives for development that could be pro-
vided through the tax system also should be
considered. Further analysis is needed to
determine whether a more comprehensive
package of incentives—including possibly
production tax credits—may be required.
The Subcommittee encourages the Secret-
ary to examine this issue carefully. Such an
examination should be taken from a global

65

economic perspective—and in the context of
existing domestic tax incentives and related
measures—along with due consideration of
tisk to the environment and cost to the U.S.
Treasury.

In addition to examining economic incen-
tives, MMS and the Secretary of the Interior
may wish to examine possible relief from
technical restrictions in the deepwater Gulf of
Mexico and also to cooperate with industry in
studying phased development, low-cost pro-
duction methods and shared facilities as fur-
ther means of lowering the financial risks
inherent in reserve recovery in deep water.
The primary intent of such incentives should
be to reduce operating costs and financial
risks associated with deepwater exploration
and development.

The Subcommittee believes that from the
standpoint of both technology and the regu-
latory regime, Gulf of Mexico deepwater
development should not be seen as a simple
extension of historical development in the
shallower Gulf shelf area. In fact, North Sea
development or Brazilian deepwater opera-
tions may provide better models for what will
happen in the deep water Gulf in the future.
New ideas and concepts will be required on
the part of both industry and government for
both surface and subsea activities. A higher
level of cooperation will be required both
among operators and between industry and
government.

The Subcommittee is aware that MMS has
been participating in the oil and gas indus-
try’s DeepStar project, which was initiated in
1992 to examine technical and regulatory
issues associated with future deepwater
development activities, and we encourage
MMS to continue in this important endeavor.
Issues such as physical size of tracts, shar-
ed facilities, large mooring spreads that dur-
ing testing operations may extend into adja-
cent blocks, gas handling systems, extended
testing and gas flaring, and lease periods, as
well as financial incentives, should be ad-

aayjuiuiog A2110d SIO


Chapter 2

Vv

in U.S. coastal walers to have oil spill
response plans and capability in place by
August 18, 1993. The MSRC, a private oil
spill response contractor for offshore ship-
pers, became fully operational by that dead-
line, spending some $400 million on ships
and gear in preparation. !t has stationed
equipment and trained personnel in order to
be able to make the best effort at responding
to oil spills in volumes ranging between
1,200 to 210,000 barrels in U.S. coastal
waters. The MSRC will have an operating
budget of about $90 million per year.

International Code for the Safe Operation of
i Pollution Prevention:

Recently the United Nations International
Maritime Organization (IMO) has taken
action to adopt the International
Management Code for the safe operation of
ships and for Pollution Prevention (ISM
Code) and to urge member governments to
adopt the ISM Code at the earliest possible
opportunity. In response to the IMO’s initia-
tive the U.S. Coast Guard's National
Offshore Safety Advisory Committee has
formed a working group to develop guide-
lines implementing the ISM Code in the U.S.
offshore industry. Such guidelines will
include minimum standards individual com-
panies must meet to demonstrate compli-
ance with the ISM Code and will outline
steps to be taken to ensure continued com-
pliance.

Industry Initiative on Marin
Debris:

Through the OOC based in New Orleans,
the oil and gas industry has established a
program to reduce waste and debris off-
shore, commit more companies to sound
waste management practices, and provide
educational tools and public information con-
cerning marine debris. One of the goals of
this program is to increase participation in
semi-annual beach cleanups sponsored by

23

the Center for Marine Conservation and vari-
ous coastal state agencies.

Development of OCS Natural Gas

Most of the energy produced from the OCS
is in the form of environmentally preferable
natural gas. Natural gas also comprises
more than half of proven OCS reserves and
about 55 percent of estimated undiscovered
OCS resources. Not only does the use of
natural gas produce less pollution than most
other conventional energy sources, develop-
ment and production of gas is unlikely to
result in oil spills. Generally, natural gas
incidents on the OCS have resulted only in
the loss of gas into the atmosphere, which
has caused no discernible adverse effects.

Technological Advances

The U.S. offshore industry has been preemi-
nent in the development of technology for
OCS oil and gas operations. In addition to
the equipment and practices used in the rel-
atively calm seas and conventional water
depths of the mature Gulf of Mexico OCS,
technology has been developed for applica-
tion in harsh sea ice conditions such as
those found in the frontier areas of the arctic
OCS, and exploration has been accom-
plished safely in other areas with waters sev-
eral thousand feet deep and relatively strong
ocean currents. Current OCS technology
also includes production systems that have
been in operation for several years in over
1,000 feet of water in the Gulf of Mexico.

The industry's technological achievements.
also include the development of equipment
and practices for operation in specific sensi-
tive environments. For example, in certain
biologically sensitive and nearshore areas of
the Gulf of Mexico where the effect of dis-
charges of drilting fluids and cuttings is of
greater concern mobile offshore drilling rigs
with closed systems allowing zero dis-
charges to the ocean have been used.

aayyunuseg AajJod S20


Appendix A

Side-by-Side

OCS Amendments to the Energy Bill
IMPACT ASSISTANCE (cont.)

H.R. 776

S. 2166

Legislation Proposed by
the Bush Administration
(H.R. 4138)

Monies allocated as follows:

- Approximately 89% of total
monies in Fund:

- 2.5 % to each coastal
territory.

- 5.0% each for Alabama
and Mississippi.

- 10.0% each for Alaska,
California, Louisiana and
Texas.

- 1.75% each to all remain-
ing states.

- Remaining 11% of monies
in Fund is allocated to
States in proportion
to OCS production/first
landed (TX, LA, CA).

All leases within 200
miles of the coastline are
available for impact
assistance.

All leases within 200
miles of the coastline are
available for impact
assistance.

Payment is annual.

State must submit a report
te: the use of the money
before it can receive its
annual grant. State must
allocate no less than 1/3 its
block grant to local govern-
ments.

One half of the fund is to
be distributed to coastal
states. The remaining half
is to be distributed directly
to coastal counties. Pay-
ment is annual.

One half of the fund is to
be distributed to coastal
States. The remaining half
is to be distributed directly
to coastal counties, Pay.
ment is annual.

State and local use for
management of ocean
and coastal resources
and ameliorating energy
facility activities.

Funds are to be used for
designated environmental
and natural resource use.

No earmarking.

Audit Requirement.

Audit Requirement.

No Audit Requirement.

Sunset clause -
09/30/2004.

75

aayimuog Ar110d S20


However, if the program is to proceed suc-
cessfully out of its present state of conflict

and controversy, a new paradigm of OCS

decisionmaking will be necessary.

A summary of the Subcommittee on OCS
Legislation's findings and recommendations
is presented below.

Summary of Primary Recommendations

Moratoria are a symptom of the federal gov-
emment's past hierarchical approach to OCS.
decisionmaking; the OCS process should be
modified to focus more on reaching consen-
sus in order to obviate the need for morato-
tia; regional task forces should be estab-
lished to build consensus on OCS leasing.

Calls for lease cancellation and buyback
teflect the same problems underlying mora-
toria; specifically, with respect to the leases
considered for buyback in the 1992 compre-
hensive energy legislation, the Subcommit-
tee favors a prompt and suitable solution;
generally, the Subcommittee believes that
section 5 of the OCS Lands Act should be
the sole means for considering an OCS
lease for cancellation, and section 5 is not in
need of amendment.

impact assistance and revenue sharing
measures should be enacted. Two alterna-
tives are presented for providing impact
assistance to coastal states, Great Lakes
states, and U.S. Territories as well as coastal
localities: one provides for allocating a por-
tion of the present revenue stream; and the
other provides for appropriating money
annually for a trust fund to generate interest
that would be distributed either through an
entitlement or an annual appropriation mech-
anism. OCS revenues would be used to fund
the regional task forces discussed above.

Incentives to industry—especially relating
to royalty relief—should be considered fur-
ther. Possible measures include: a program
similar to the reduced royalty program apply-

vi

ing to onshore stripper wells that would
extend the producing life of OCS leases; full
implementation of the initiatives announced
by MMS in Fall 1992; and new legislation to
give MMS the authority to provide royalty
relief on all existing undeveloped leases.

The Secretary should consider carefully mea-
sures such as $.318—which proposes a
deepwater royalty holiday—as well as other
possible incentives for both the mature shal-
low and frontier deepwater portions of the
Gulf of Mexico. Existing technical restrictions
as they apply to deepwater operations also
should be analyzed with an eye toward
reducing costs and risks.

Environmental sciences review panels
should not be established because they
would add an unnecessary layer of review to
that of the Scientific Committee of the OCS
Advisory Board. Instead, the existing MMS
environmental studies program is in need of
adequate funding, good science, and appro-
priate cooperation among MMS and other
involved parties. Further, the MMS should
develop a comprehensive, efficient, and
accessible data management and dissemina-
tion system for the studies program.

Summary of Additional Recommendations

The Subcommittee is aware that MMS is
looking into alternatives to existing leasing
policies and that the Department of Energy is
undertaking an effort to develop a strategy to
provide expanded opportunities for domestic
oil and gas producers. The Subcommittee
recommends that the results of those efforts
be considered as they become available.

The Subcommittee finds it appropriate for the
OCS Policy Committee to consider the find-
ings and recommendations of an effort in
progress by the National Research Council's
Marine Board concerning the concept of a
national multiple criteria decisionmaking
regime for managing the resources of the
U.S. Exclusive Economic Zone.


REPORT OF THE OCS POLICY
COMMITTEE'S SUBCOMMITTEE
ON OUTER CONTINENTAL
SHELF LEGISLATION

EXECUTIVE SUMMARY

The federal Outer Continental Shelf (OCS)
oil and gas program has provided significant
benefits to the nation by helping to fulfill
energy needs, contributing to economic well-
being, and providing an important source of
revenues for the U.S. Treasury. The OCS
program also entails a variety of environ-
mental and socioeconomic impacts to the
marine and coastal environment that primari-
ly affect the coastal states and localities.

Owing to both the benefits and costs associ-
ated with the OCS program, there has been
a great deal of controversy over the owner-
ship and management of offshore oil and gas
resources. Some of the controversy pre-
dates the inception of the federal program in
1954, as both the United States and individ-
ual coastal states vied for jurisdiction over
the nation’s offshore realm, with the federal
government eventually gaining title to the
great majority of the continental shelf.
Additional controversy has arisen over the
years as Concerns about the program’s envi-
ronmental and socioeconomic impacts have
increased.

Conflict and contention related to the OCS
program have intensified over the past
decade, in large part because of the federal
executive branch's approach to managing
the program under the existing legal and reg-
ulatory regime. The Department of the
Interior and other federal agencies have
prime authority for OCS program decisions
while states have a subordinate role. This
regime has allowed the exercise of a hierar-
chical method of management on the part of
the executive branch.

Since 1982, affected state and local govern-
ments have turned to the federal legislative
branch to check the executive's authority by
enacting annual appropriations legislation
prohibiting the use of funds for OCS leasing
and related activities. Such restrictions have
played a substantial part in dampening the
U.S. offshore industry's interest in participat-
ing in the federal OCS program. Overall, the
prevailing controversies and the measures
used to deal with them have seriously dimin-
ished the effectiveness of the federal OCS oil
and gas program in helping to meet the
Nation’s energy needs.

The National Energy Policy Act of 1992 pro-
vides a comprehensive framework for man-
aging the nation’s energy future. Enactment
of proposed OCS measures related to mora-
toria, lease cancellation and buyback, impact
assistance and revenue sharing, incentives
to industry, and environmental sciences
review panels was considered. However,
reflecting the great degree of conflict and
resulting political polarization currently affect-
ing the OCS oil and gas program—as well as
the cost to the U.S. Treasury of impact assis-
tance and lease buybacks—the conferees
from the House and Senate could not agree
on the pertinent legislative provisions that
were proposed, so ail of those measures
were removed from the bill that ultimately
was signed into law. Subsequently, the OCS
Policy Committee decided to conduct its own
review of those legislative provisions in the
broad context of the overall legal and regula-
tory regime governing the OCS program and
chartered the Subcommittee on OCS
Legislation for that purpose.

As a starting point, the Subcommittee under-
took an independent and objective assess-
ment of the history and current state of the
OCS program. The Subcommittee conclud-
ed that there is a need to maintain an active
OCS oil and gas program to continue to help
in meeting the nation’s energy requirements
for the foreseeable future.

saMUNLOD ADJ0d SIO


Chapter 2

4

off southern California that could be
considered for leasing in 1996 at the
earliest, but only if studies satisfact-
orily address concerns related to
those tracts);

m begin a process that may lead to
buying back existing leases in the
Eastern Gulf of Mexico off southern
Florida;

@ approve establishment of the pro-
posed Monterey Bay Marine Sanc-
tuary and ban oil and gas leasing
there; and

TM prepare a legislative initiative to pro-
vide coastal communities directly
affected by OCS development with a
greater share of the financial bene-
fits of new development and with a
larger voice in decisionmaking.

President Bush’s decision was the first with-
drawat of numerous and extensive areas of
the OCS under the authority of section 12(a)
of the OCS Lands Act, as amended. The
stated objective of all of his decisions was to
balance energy production and environmen-
tal protection and to allow the OCS program
to go forward in the areas not withdrawn
from leasing consideration. To the degree
that these decisions were designed to elimi-
nate the motivation for congressional mora-
toria, they did not succeed. The Congress
continued to enact moratoria for the areas
withdrawn by the presidential order and even
expanded prohibitions to some areas and
activities that had not previously been sub-
ject to moratoria.

The president's announcement did not
specifically address the Alaska OCS. The
State of Alaska generally has been receptive
to the OCS program, especially in the Beau-
fort Sea and the Chukchi Sea. Alaska’s
opposition to the OCS program has been
very narrow and limited to certain specific
areas such as Bristol Bay. Leasing and

exploration off Alaska have declined substan-
tially as elsewhere, but mainly due to declin-
ing world oil prices in the mid-1980’s and the
lack of any major discoveries. Since the
costs of operations in Alaska are so high, the
price drop and poor exploration results made
exploration less attractive for most compa-
nies. It should be noted, however, that recent
discoveries in the Beaufort Sea and in the
vicinity of Cook Inlet have sparked renewed
interest.

CURRENT STATUS OF THE OCS
PROGRAM

Reliability

5-Year Leasing Programs and Results
Since 1962

Recent OCS 5-year leasing programs have
proven unreliable for planning by MMS, other
federal agencies, state and local govern-
ments, and the oil and gas industry. More
sales were canceled or deferred than were
held during the 5-year period 1987-1992, and
few leasing milestones actually occurred in
the months scheduled. Table 1 shows the
number of sales scheduled versus the num-
ber held since 1982.

The Current 5-Year Leasing Program

The current program for 1992-1997 attempt-
ed to address the issue of reliability in two
ways. First, and most important, there are
fewer, smaller sales in less controversial
areas so the likelihood is greater that pro-
posed sales will actually be held and the sale
preparation processes will go forward as
planned. Second, an Area Evaluation and
Decision Process (AEDP) was developed
with built-in flexibility to accommodate delays.
Figure 3 shows the general location and tim-
ing of OCS leasing proposed in the 5-year
program for 1992-1997.


Chapter 1

Vv

The OCS Policy Committee chartered the
Subcommittee to review the primary OCS
provisions of the National Energy Policy Act
of 1992 (P.L. 102-377) that were considered
by the 102nd Congress but were not enacted
as part of the Act. Those primary provisions
fall into the following five general categories:

TM moratoria;
m lease cancellation and buyback;

m impact assistance and revenue
sharing;

m incentives to industry; and

@ environmental sciences review
panels.

A table listing the specific OCS provisions
considered is presented in Appendix A.

In undertaking this task the Subcommittee
chose first to assess the state of the federal
OCS program under the existing legal
regime of the OCS Lands Act, as amended.
The program was examined in light of the
events and circumstances, policies and pre-
rogatives, and perceptions and attitudes that
have shaped it since its inception in 1954.
The Subcommittee then applied all of these
considerations in determining what role the
OCS program should have in helping the
nation to meet its future energy demand and
what type of legal regime best would support
that role.

In addition to Issues related to the five cate-
gories listed above, the Subcommittee con-
sidered a number of other issues in terms of
the existing overall legal and regulatory
regime, including the following:

® environmental studies;

m the program's role in a comprehen-
sive ocean management regime and
national energy policy;

m offsets for onshore impacts;

® state and local government participa-
tion in the decisionmaking process;

@ the role of Congress;

& incentives for industry to participate in
the program; and

@ the ability of the program to provide a
fair return for the use of public re-
sources.

Based on its review, the Subcommittee on
OCS Legislation has prepared both specific
recommendations relating to the primary leg-
islative proposals considered by the 102nd
Congress and more comprehensive recom-
mendations intended to provide long-term
solutions to the problems facing the OCS
program. This report presents all of those
racommendations for consideration by the
full OCS Policy Committee. Subsequently,
the Policy Committee may submit to the
Secretary of the Interior a resolution regard-
ing any of the recommendations of the
Subcommittee. It should be noted that the
findings and recommendations of the
Subcommittee on OCS Legislation are
intended to provide information and sugges-
tions that wilt be helpful in future delibera-
tions concerning the OCS program.


Appendix C

Vv

Resolution of the OCS Policy Committee
October 20, 1993

Whereas, the OCS Policy Committee on October 21, 1992, authorized the formation
of a subcommittee charged with reviewing the primary OCS provisions that were con-
sidered for the National Energy Policy Act of 1992 (P.L. 102-377) but were excluded
from the legislation that ultimately was enacted; and

Whereas, the Subcommittee on OCS Legislation undertook its charge by conducting
an extensive review and assessment of the state of the OCS oil and gas program
under the existing overall legal and regulatory regime; and

Whereas, the subcommittee has prepared a report that documents its review and
concludes that--while the OCS oil and gas program has become mired in controversy
and conflict--there is a need to maintain a sound and active program to continue to
help the nation in meeting its energy needs for the foreseeable future; and

Whereas, the report of the subcommittee presents both findings and recommenda-
tions relating to the specific legislative proposals considered as well as recommenda-
tions intended to provide more comprehensive, long-term solutions to the problems
facing the OCS oil and gas program;

Now therefore be it resolved, that The Report of the OCS Policy Committee's
Subcommittee on OCS Legislation be approved and adopted by the Policy
Committee; and

Further, be it resolved, that the subcommittee report be sent to the Secretary of the
Interior with this resolution; and

Further, be it resolved, that the Secretary of the Interior is urged by the Policy

Committee to take timely action to implement the recommendations of the subcom-
mittee report.

84 “U.S. G.P.0.:1994-301-078 80424


Appendix A

v

Side-by-Side

OCS Amendments to the Energy Bill
ENVIRONMENTAL SCIENCE REVEIW PANELS/ ENVIRONMENTAL STUDIES

H.R. 776

Current Law

- Compensation pursuant to
Section 5 of OCSLA, plus
Compensation can take form
of forgiveness of royalty or
rental obligations on other
OCS leases (in addition to
the provisions of section 5
OCSLA).

- No such provisions.

- No such provisions.

Other Requirements for
Areas Under Moratoria

- Establishment of Environ-
mental Sciences Reveiw
Panels to assess adequacy
of, and need for additional
data to make leasing, ex-
ploration and development
decisions and to supervise
peer-review of proposed
studies,

- Each panel comprised of
Federal, State representa-
tives.

- Also, Secretary of
Commerce to appoint 3
scientists to the panel.

- No lease sales can be held
in the areas subject to mora-
toria until the Secretary of
the Interior submits a report
to Congress pursuant to the
provisions concerning the
Environmental! Sciences
Review Panel.

Other Requirements for
Areas Under Moratoria

- No such provisions.

Other Requirements for
Areas Under Moratoria

- For areas under President
Bush's withdrawal order,
conduct additional environ-
mental studies to ensure
that leasing can be carried
out safely.

aaquuog AI10d SIO


Appendix A
WwW

Side-by-Side
OCS Amendments to the Energy Bill

ESRPS’/ ENVIRONMENTAL STUDIES

H.R. 776 S. 2166 Current Law

- For Alaska: future 5-Year
Plans, lease sales and
Exploration/Development
Plans are subject to Section
810 of ANILCA (subsistence
requirements).

Miscellaneous

- permanent prohibition on - No such provision. ~ No such provision.
oil and gas leasing in the
proposed Olympic Coast
National Marine Sanctuary.

Studies required in Section - No such provision. - No such provision.
20(a) of the OCSLA shall

also include an assessment

of the “adequacy of available
physical oceanographic, econ-}
omical and socioecono-

mic information."

- Defines adequacy as --
“sufficiently complete to
enable necessary decisions
to be made under this Act,
and of sufficient quality to
be repeatable, reliable,
and valid in measurements
and analysis with appropri-
ate methods and subject.”

Authorizes the following - No such provision. - No such provision.
appropriations:

- $21 million in FY '93
- $25 million in FY '94
- $30 million in FY '95
+ $35 million in FY '96
-$40 million in FY '97

80


Chapter 2

vw

consistency provisions of CZMA applied to
OCS lease sales as well as plans and per-
mits, but the Department of the Interior took
the opposite view and was sustained by the
Supreme Court in 1984. The 1990 amend-
ment gave to the states the authority they
had assumed before the Supreme Court's
decision. The MMS now is required to pre-
pare a determination that a lease sale is con-
sistent with state CZM programs and to pro-
vide it to affected coastal states for review. If
a state objects to such a consistency deter-
mination, it can recommend changes, but
MMS is not obliged to accept them. Ifa
state and MMS do not reach accord, the
state can seek mediation or pursue litigation
in federal court.

Legislative Proposals

Since the 1978 amendments to the OCS
Lands Act, various proposals have been
introduced in Congress to strengthen further
the role of states in OCS leasing decisions.
This legislation has focused on the obligation
of the Secretary to accept recommendations
of governors, the nature of the burden of
proof on which decisions are based, and the
legal tests that the Secretary must meet.

To date, no amendments modifying federal-
state roles in decisionmaking, except the one
mentioned above regarding consistency
determinations, have been enacted. The pri-
macy of the federal government on coastal
and ocean issues for the most part remains
intact.

Revenue Sharing

The disposition of revenues generated by
offshore oil and gas activities has been a
prominent issue for as long as OCS activities
have been conducted and was a major factor
underlying the contending claims and arqu-
ments over the continental shelf that predat-
ed establishment of the federal OCS pro-
gram. Coastal states and localities have

18

continuously requested a greater share of
federal OCS revenues.

Coastal Energy Impact Program

The distribution of revenues through the
Land and Water Conservation Fund (LWCF),
National Historic Preservation Fund (NHPF),
and pursuant to section 8(g) of the OCS
Lands Act, as amended, is described in the
discussion of economic considerations pre-
sented {ater in this report. In addition, the
Coastal Energy Impact Program (CEIP) was
authorized by Congress in 1976 amend-
ments to CZMA. That program was enacted
as a compromise among several revenue
sharing proposals that had been advanced
by states. The CEIP authorized grants,
loans, and loan guarantees for planning
assistance, financing public facilities and ser-
vices, and compensation for unavoidable
losses of environmental and recreational
resources. Funding allocation criteria includ-
ed equal division among coastal states,
number of coastal energy facilities, amount
of newly leased OCS acreage, volume of
OCS oil and gas produced and first landed,
and gains in new employment as a result of
OCS activities.

CEIP Termination and Subsequent
Legislative Proposals

The CEIP was funded from 1977 to 1981.
Then, as part of its federal cost cutting effort,
the Reagan administration decided not to
request funding for the CEIP. With Congress
channeling ail available federal funding to
CZMA administrative grants, the CEIP was
unfunded and eventually deauthorized in
1990. A number of new revenue sharing
proposals were then developed during the
1980's that would have provided OCS rev-
enues to coastal States as grants and loans
to be used for implementing the CZMA, for
enhancing and managing living marine
resources, and for related natural resource
activities. Those new revenue sharing pro-


The Outer Continental Sheif
Oil and Gas Program--

Moving beyond Conflict to
Consensus

Report of the OCS Policy
Committee's Subcommittee on
OCS Legislation

October 1993


Appendix B

OCS Policy Committee

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81


Chapter 2

v

Federal Revenue

The federal government has received over
$100 billion from the leasing and production
of OCS oil and gas since 1954. More than
80 percent of this revenue has been dis-
bursed to the General Fund of the U.S.
Treasury. The remainder has gone to the
Land and Water Conservation Fund (LWCF),
the National Historic Preservation Fund
(NHPF), and coastal states.

The LWCF is used by state governments and
federal agencies for planning and acquisition
related to park and recreation land. Approxi-
mately $13.2 billion dollars has been deposit-
ed to the LWCF since it was established in
1965. Approximately $7.7 billion of that total
has been distributed—$3.2 billion to states
and $4.5 billion to federal agencies.

The NHPF is used for preserving historic
properties. Approximately $2.0 billion has
been deposited to the NHPF since it was
established in 1977. Some $618 million of
that total has been appropriated and spent.

Direct distribution of revenues to coastal
States is done pursuant to section 8(g) of the
OCS Lands Act, as amended, which provides
that 27 percent of the receipts from the area
of the OCS within a 3-mile zone adjacent to
state lands is to be distributed to affected
coastal states. A total of about $2.1 billion in
8(g) funds has been paid to eligible states.

The overall distribution of federal revenues
generated by OCS leasing and production
may be illustrated by the following accounting
of deposits for the most recent year for which
relevant figures are available, 1992: $1.5 bil-
lion to the General Fund; $888 million to the
LWCF; $150 million to the NHPF; and $68.4
million for distribution to states pursuant to
section 8(g) of the OCS Lands Act, as
amended. While the actual disposition of all
of the money generated for the U.S. Treasury
by OCS oil and gas activity is too difficult to
track and explain, Table 5 shows that the

41

OCS program produces a significant amount
of revenue for the federal government and
provides financial benefits to all 50 states,
not just to the coastal states. Curtailment of
the program has the direct effect of reducing
such benefits.

Energy Forecast
National Energy Strategy Projections

The Department of Energy (DOE) developed
a comprehensive forecast of U.S. energy
markets through 2030 for the National
Energy Strategy (NES). A review of the pro-
jection reveals the following:

@ Oil, coal, and renewable energy con-
sumption are projected to increase sig-
nificantly over the period.

@ Nuclear energy consumption is pro-
jected to decline.

@ Natural gas consumption is projected
to rise significantly until 2000, then
decline slowly.

m Much of the projected increase in pri-
mary energy consumption is due to a
significant increase in electricity con-
sumption.

m Renewable energy sources would not
be expected to supply even a third of
the demand for petroleum by 2030.

As shown in Table 6, this energy future is
one in which, except for oil, the U.S. is pro-
jected to be largely self-sufficient from a
resource perspective. Dependence on
imported oil is projected to exceed 60 per-
cent in the year 2000 and (although not
shown in the table) to increase over time.
Dependence on natural gas is projected to
be about 10 percent.

aaquU0D AD/10d SOO


Chapter 2

Vv

campaigned pledging support for the meas-
ure that had been passed by Congress.

Subsequently, in 1953 President Eisenhower
signed into law the Submerged Lands Act,
which established state jurisdiction over the
offshore lands within three miles of shore (or
3 marine leagues for Texas and the Gulf
Coast of Florida) and federal jurisdiction over
the offshore lands beyond those state
waters. He stated,

“|. this measure also recognizes the
interests of the Federal Government
in the submerged lands outside the
historic boundaries of the States.
Such lands should be administered
by the Federal Government and
income therefrom should go into the
Federal Treasury.”

Further, the Eisenhower administration was
opposed to bills proposing to share OCS
revenues and decisionmaking authority with
States.

Another significant action regarding the reso-
lution of matters related to ownership and
management of the continental shelf was
enactment of the OCS Lands Act in 1953.
The OCS Lands Act authorized the Secret-
ary of the Interior to lease the federal off-
shore lands—or OCS—for mineral explor-
ation and development and production and
provided for very limited state involvement in
the federal program. Thus, after nearly two
decades of intense haggling over offshore
resources, the federal-state compromise
regarding jurisdiction over offshore lands
gave the federal government the ownership
of the vast majority of the continental shelf
along with ultimate primacy in the manage-
ment of its mineral resources. The OCS.
Lands Act of 1953 also gave the federal gov-
emment a mandate to develop OCS resour-
cas, stating outright that there was

“...an urgent need for further explora-
tion and development of the oil and

gas deposits of the submerged lands
of the Outer Continental Shelf.”

EXPANSION OF THE FEDERAL OCS
PROGRAM

The First Two Decades—Small-scale
Expansion

Activity in the Gulf of Mexico

The management regime that had been
established for the OCS worked well enough
from 1953 to 1973, as both the states and
the federal government were able to receive
ample benefits associated with developing
oil and gas resources in offshore areas that
were established producing provinces.
Those benefits generally were also per-
ceived as greatly outweighing any costs that
were understood at the time. Although the
federal government had ownership and
authority over OCS resources off their
coasts, Louisiana and Texas had robust
state oil and gas programs—both onshore
and offshore—and they generally perceived
the federal program as supporting their pro-
grams and the petroleum based regional
economy.

The federal OCS program did not expand to
areas other than offshore Louisiana and
Texas until the late 1950's and early 1960's,
and this first phase of expansion took place
on a relatively smailscale, piecemeal basis.
Some leasing and exploration took place off
southwest Florida with no resulting discover-
ies, and drilling in the area ceased in 1961.

Activity in the Pacific

Of far greater significance was the OCS pro-
gram's expansion to the Pacific coast begin-
ning in 1963. While exploration off
Washington, Oregon, and Central and
Northern California met with disappointing
results and the cessation of drilling in those
areas by 1967, exploration in the Santa

aeHuMOD A110 S90


Chapter 2
w

First U.S. offshore oil discovered off Santa Barbara, California.
California authorized issuance of state oil and gas leases offshore.

U.S. Department of the Interior (DO}) affirmed state title to
offshore lands within 3-mile limit.

DOI reversed position and asserted federal ownership.

First offshore oil produced in the Gulf of Mexico (off Louisiana).
Louisiana asserted state ownership out to 27 miles offshore.

Truman Proclamation asserted Federal jurisdiction over the OCS.

Texas asserted state ownership out to the seaward limit of the OCS.
Supreme Court upheld Federal jurisdiction.

Submerged Lands Act gave States jurisdiction to lands beneath the
first 3 statute miles/ 3 marine leagues.

OCS Lands Act gave Secretary of the Interior authority to lease
minerals and regulate related activities.

Santa Barbara Channel blowout.
Passage of the National Environmental Policy Act.

Passage of the Coastal Zone Management Act (CZMA).

Oll embargo -- first oll price snock.
10 million acre leasing goal announced.
Congress began to consider amendments to the OCS Lands Act.

Amendment of the CZMA re: consistency on OCS plans.
Passage of the OCS Lands Act Amendments.
Iranian revolution -- second oil price shock.

First 5-year leasing program approved under section 18 of the
OCS Lands Act, as Amended.

Secretary Watt announced areawide leasing approach.
First congressional moratorium enacted.

Oil prices began to decline.
Oil prices bottommed out.
Exxon Valdez tanker spill raised public concern over offshore oil production.

Presidential statement and fact sheet released, canceling several sales
and withdrawing several OCS areas from leasing consideration until
after the year 2000.

Passage of the Oil Pollution Act, Clean Air Act Amendments, and
Reathorization and Amendments to the CZMA.

Current 5-year program (1992-1997) approved.

Figure 1. Key events in the history of the Federal OCS Program.


Chapter 3

Vv

event, nonvoting participants In task force
deliberations would be expected to attempt
to influence the outcome of those delibera-
tions by aligning with core voting members of
like interests and positions.

As with Alternative | above, a vote by the
core members of a task force concerning a
particular matter could result in unanimity or
majority. Similarly, a unanimous vote and
subsequent recommendation should carry
more weight than that achieved only by
majority. However, it should be noted that
under Alternative II it is likely that in many
circumstances even a unanimous vote of the
core members will not reflect a truly unani-
mous consensus that embodies the positions
of all nonvoting participants as well.

Facilitation

The Subcommittee recognizes that under
any design the objective of reaching consen-
sus on difficult issues will be a challenge to
the regional task forces. Thus, the
Subcommittee suggests that in establishing
each task force, provisions be agreed upon
concerning the use of facilitation and media-
tion techniques as appropriate. One such
means that should be considered is the facil-
itation process of the CZMA mentioned in
the background section of this report. The
Subcommittee believes that the CAMA
process could be successful it applied fairly
and objectively.

Federal Advisory Committee Act

Since the proposed regional task forces
would be established for the purpose of pro-
viding to the federal government advice and
counsel reflecting the consensus of various
public and private interests, this recommen-
dation, if adopted, is expected to be imple-
mented consistent with the Federal Advisory
Committee Act (5 App U.S.C. 1-15) [FACA].
The FACA sets forth procedures for charter-
ing, maintaining, and terminating advisory
bodies. Those provisions apply to the exist-

54

ing OCS Advisory Board and would apply te
the proposed task forces. Because the OCS
Advisory Board already is in place under
FACA, consideration should be given to
chartering the proposed regional task forces
under its auspices, as subcommittees of the
OCS Policy Committee.

Examples

One example of a regional task force
approach is the federal-state cooperative
effort that was undertaken for the OCS
Mining Program Norton Sound Lease Sale.
The first step in that effort was establishment
of a federal-state task force to evaluate the
feasibility of developing offshore mineral
resources, to develop technical guidelines
and procedures for such activity, and to iden-
tify potential use conflicts. The federal-state
task force subsequently was organized into a
31-member coordination team representing
federal, state, and focal government and
environmental and other interests. The coor-
dination team provided a forum for the
exchange of information and expertise and
for consultation on decisions leading to the
proposed lease sale and was involved In all
major steps of the decision process.

Another experience from which to draw In
setting up the regional task forces may be
the ongoing California Offshore Oil and Gas
Energy Resources Study, an effort involving
MNS, state and local government, and the
industry. While this effort is still in its early
stages, its goal is to engage interested and
affected parties in addressing and resolving
contentious issues related to the develop-
ment of existing OCS leases off California.

Additional Considerations

It should be noted that in addition to the pro-
posal outlined above, the Subcommittee
looked at revising the legal standard for deci-
sions pursuant to sections 18 and 19 of the
OCS Lands Act, as amended. Raising the
legal standard was examined as a possible


Chapter 2

(sjaueg jo suoiig) WNDzON8d

Source: Department of Energy, Monthly Energy Review: Federal offshore production
trom the Minerals Management Service, Royalty Management Program

Figure 10. Sources of petroleum consumed in the U.S., 1973-1992.

tance of OCS natural gas production to the
Nation is even greater, representing about
one-fourth of domestic supply.

Employment

Oil and natural gas related activities on the
OCS provide thousands of direct jobs. In
addition, it is estimated that OCS activities
indirectly provide about 2.5 jobs for every
person directly employed by industry. While
the effects of employment losses by industry
have been felt across the nation, certain
areas, such as the Gulf of Mexico region,
have been hit particularly hard. Overall, the
petroleum industry has lost about 450,000
jobs over the past decade, some 300,UUU ot
which were in the exploration and production
segment of the industry. Figure 11 contrasts

wv

employment in the petroleum industry with
that in the vehicle manufacturing industry.

The jobs provided by OCS activities are not
confined to producing coastal areas. Table 4
shows the number of equipment supply facil-
ities distributed among the various States. In
total, there are 3,532 facilities in 39 States
and the District of Columbia. As is the case
with jobs provided directly by OCS activities,
the jobs created at these facilities provide
corporate and personal income tax, sales
tax, and property tax revenues.

Balance of Trade
In 1992 the U.S. sperit more than $45 billion

on imported ail, accounting for some 54 per-
cent of the nation's total trade deficit for that

aayjwog Ar1/Od SIO


Appendix A

Ww

Side-by-Side

OCS Amendments to the Energy Bill
MORATORIA (ends)/ BUYBACKS

H.R. 776 S. 2166 Current Law
Acreage Proposed for Acreage Proposed for Acreage Proposed for
Leasing Moratoria Leasing Moratoria Leasing Moratoria
- approximately - approximately - 190 million acres.

500 million acres. 200 million acres.
Lease cancellation/buyback | Lease cancellationfbuyback| Lease cancellation/buyback
provisions, and Drilling provisions, and Drilling provisions, and Drilling
Moratoria. Moratoria. Moratoria.
In general, leases to be can- | Secretary authorized and - No such provision.

celled within 90 days after
enactment of Act; and drilling
bans in effect until cancella-
tion for the following areas:

- Florida area south of
26 degrees N. Latitude
(73 leases).

- North Aleutian Basin
(Alaska) for 23 existing
leases.

- Offshore North Carolina
(21 leases).

directed, subject to availability
of appropriations, to cancel
and buy back leases off south-|
west Florida. Authorization for
appropriations expires
December 31, 1993.

- Same areas as H.R. 776.

- No such provision.

- No such provision.

- Leases under suspension;
President Bush's directive
to begin a process that
could lead to cancellation.

- No such provision.

- No such provision.

Amendments to Lease
Cancellation Provisions of
the OCSLA (section 5).

Congress can suspend
leases as well as Secretary.

- No such provision.

- No such provision.

78



Chapter 2

v

Another example is a proposal for time-
shared use of one electric powered rig off
Califomia to accomplish exploration while
minimizing emissions in an area where air
pollution is of great concem.

The offshore industry's record of technologi-
cal advances is in line with the new presiden-
tial administration's stated emphasis on the
development of new technologies for the
nation’s use. This industry has been at the
forefront of improvements that promote eco-
nomic growth and development while comply-
ing with applicable laws and regulations.

The U.S. offshore industry also exports bil-
lions of dollars worth of equipment and ser-
vices for use overseas. However, in order to
continue such exports and reap the associat-
ed economic benefits it will be necessary to
maintain the domestic base of expertise in
the oil and gas industry.

Leasing and Permitting Processes

The MMS's review and decisionmaking
processes form the basis of an established
administrative and regulatory regime for OCS
leasing, exploration and development and
production activities. Those processes are
described briefly below, and relevant dia-
grams are presented in Appendix B.

Evaluation of Areas for Leasing Decisions

Preparation of the 5-year leasing program for
1992-1997 included the formulation of a new
process for deciding whether and under what
conditions to hold individual lease sales in the
areas proposed for leasing consideration
That process—the Area Evaluation and
Decision Process (AEDP)—provides the
framework for acquiring information, coordi-
nating and consulting with interested and
affected parties, and formulating specific
leasing options for final decision. It is a multi-
step process spanning 2 to 3 years that
affords fiexibility in deciding whether to pro-
ceed, delay, or stop the process at key points.

2

An MMS inspector at work offshore on a driliship.

Figure B-1 depicts the AEDP.
Exploration Plan Review and Permitting

Regulations at Title 30 of the Code of
Federal Regulations, Part 250.33 (30 CFR
250.33), require OCS lessees to submit and
receive approval of an exploration plan and
required permits before proceeding with
drilling for oil and gas. The MMS reviews
each exploration plan and supporting infor-
mation—including a detailed oil spill contin-
gency plan—and forwards copies for simulta-
neous review by affected States and by other
interested and affected federal agencies
including the Fish and Wildlife Service, EPA,
Coast Guard, Army Corps of Engineers, and
National Oceanic and Atmospheric Adminis-

aay/UIwoy A21/0d SIO


CS

aS So
Alter States] 15.336231 | 2assog77
fUncistrouted [968252000] izitsrost

Table 5; 1992 distribution of revenues from the Land and Water Conservation Fund (LWCF), National
Historic Preservation Fund (NHPF), and pursuant to Section 8(g) of the OCS Lands Act.

Comparison with Projections of the Union
of Concerned Scientists

Table 7 compares the NES projections of
petroleum need with several developed by
the Union of Concerned Scientists (UCS)
and others and published in Investing in a
Strong Economy and a Clean Environment
(1991). The first two rows show the base
case numbers, first with the base case pro-
duction and then with the increased domes-
tic production calied for by the NES. The
other three NES projections are for cases
where:

® the world oil price remains low,

TM the recommendations in the NES for
fuel efficiency, fue! substitution, and
other measures are adopted; and

® the NES recommendations are adopt-
ed and there is low economic growth.

The UCS, ef. al. also made three other sets
Of projections. The first assumes that the
U.S. pursues an aggressive market-based
Strategy to reduce oil consumption, the sec-

ond assumes that policies are adopted to

reduce consumption that harms the environ-
ment, and the third assumes strong mea-
Sures are taken to reduce energy consump-
tion that are thought to contribute to global
warming,

The differences in the NES and the UCS pro-
jections are largely the result of differences
in assumptions about how peopie will
behave. For example, the UCS projections
assume a much lower social discount rate,
indicating that people will be willing to pay
more money sooner for investments that will
save thom moncy over the long run through
decreased energy bills.

Despite the large differences in the NES and
the UCS projections, only in two instances is
the U.S. projected to be close to self suffi-
ciency. Those two instances are based on
assumptions of strong restrictions on the
Gemand side coupled with the NES produc-

Production of resources on the OCS and the
Arctic Nationa! Wildlife Reserve. Without the
extra domestic production, even the demand
side restrictions would not bring us below 34

Percent dependency on imported oil by


Chapter 2 :
» 4

24


Chapter 3

vw

A nce Fe

@ All coastal states, Great Lakes states,
and territories are eligible to partici-
pate in the fund.

m Revenues from the Coastal Impact
Assistance fund would be distributed
according to the following fixed share
formula. The allocation formula will
include the following, equally weight-
ed, factors for each participating
state or trust territory:

- percent of EEZ offshore:
- shoreline miles;
- population;

- number and type of energy
facilities;

- cumulative volume of oil and
gas landed;

- number of producing leases;
- total acreage under lease;
~ proven reserves;

- number of acres planned or
offered for lease; and

- percent historical volume pro-
duced oil and gas

Participating states or trust territories
will be assigned a value, ranging from
1 to 10, for each of the above factors.
The point score for each participating
state or trust territory will be convert-
ed to a percentage, based on total
possible points available, to deter-
mine the fixed share of revenues dis-
tributed to them for each year.

m@ The minimum score in the above for-
mula (equal to or greater than 10) will
be assigned a portion of the fund
equal to 0.5 percent of available rev-
enues for a state or territory with an
approved Coastal Zone Management
plan. Those participating states or

61

territories without an approved Coast-
al Zone Management plan would be
eligible to receive only a portion of
the fund equal to 0.25 percent of
available revenues, regardless of
point score.

@ There is no restriction on the use of
payments from this fund.

Recommended Alternative Proposal

oncept Il

The second alternative proposal alters the
mechanism of funding and distribution for
OCS impact assistance. Establishment of
the two funds described in Recommended
Alternative Proposal | remains unchanged.
The funding mechanism, however, involves
establishment of a trust from which annual
appropriations or percentage entitlements
would be made to eligible states and territo-
ties. Key features are described below.

m No payments of OCS receipts would
be made directly to any state or terri-
tory.

@ States and territories would be eligi-
ble for distribution of interest earned
on deposits of OCS receipts to the
two impact assistance funds des-
cribed in Proposal I.

m Annual deposits of OCS receipts to
these two funds would total 12.5 per-
cent of the average of the receipts for
the previous 3 years.

@ The principal from OCS deposits
each year would remain in the corpus
of each fund accruing interest. Distri-
bution of interest would be delayed
for the first 3 years of the program.
Payments from the funds would be
authorized to occur on an annual
basis thereafter either through an
entitlement or annual appropriation
mechanism.

eaHuIWog A2110d SOO


Chapter 1

vr
|. BACKGROUND ON THE SUB-

COMMITTEE ON OCS LEGIS -
LATION

THE OCS ADVISORY BOARD,
COMMITTEES AND SUBCOMMITTEES

The OCS Advisory Board was established by
the Department of the Interior to provide
advice to the Secretary concerning the per-
formance of discretionary functions under
the OCS Lands Act, as amended, including
environmentally sound leasing, exploration,
and development and production of OCS
mineral resources. It is intended to repre-
gent the collective viewpoint of coastal
states, environmental groups, affected indus-
tries, and other interested parties.

The OCS Advisory Board is composed of the
following committees: a Policy Committee;
Regional Technical Working Group Commit-
tees; and a Scientific Committee. The com-
mittees may establish subcommittees as
deemed desirable. Membership of subcom-
mittees is balanced in terms of points of
view. functions to be performed. and neces-
sary expertise, and nonmembers of the par-
ent committee may be included. Each sub-
committee reports to its parent committee.

Subcommittees of the OCS Policy Commit-
tee have been chartered in the past to exam
ine relevant issues and produce findings and
recommendations. Such previous efforts
have included, The Report of Committee on
Energy Policies to Avert Future Energy
Crises (April 1987) and The Report of the
task Group on Improving the Process tor
Developing the 5-Year OCS Oil and Gas
Leasing Program (September 1988). Both
of those reports included findings and rec-
ommendations concerning a number of the
issues considered in the current effort of the
Subcommittee on OCS Legislation.

MEMBERSHIP AND CHARTER OF THE
SUBCOMMITTEE ON OCS LEGIS-
LATION

The Subcommittee on OCS Legislation was
established by the Policy Committee at its

October 1992 meeting as a mechanism
designed to encourage diverse interests to
begin working toward a consensus on the

OCS oil and gas program. The members of
tho Subcommittoo and their affiliatione are:

Paul L. Kelly, Chairman
Rowan Companies, Inc.
Houston, Texas

Kim Crawtord, State of North Carolina

William D. Lastrapes, City of Lafayette,
Louisiana

Gary Magnuson, Center for Marine
Conservation,

Washington, D.C.

Paul C. Rusanowski, State of Alaska

All of the above participants aro mombors of
the Policy Committee. In addition, Dr. Jerry
M. Neff, a member of the Scientific Commit-
tee employed at Battelle Ocean Sciences
Laboratory in Duxbury, Massachusetts, acted
as an advisor to the Subcommittee on behalf

of the Scientific Committee.

The OCS Policy Committee in session, October 1993.

aaHIUIUIOD AD110d SIO



Chapter 2

1.714

[Total by Region | 56,140

8.618

Table 2: OCS acreage leased by region by year (thousands of acres).

15

aaN/WUWOD f91/0d SIO



Appendix A

Side-by-Side

OCS Amendments to the Energy Bill
ENVIRONMENTAL SCIENCE REVEIW PANELS/ ENVIRONMENTAL STUDIES

H.R. 776

S. 2166

Current Law

- Compensation pursuant to
Section 5 of OCSLA, plus
Compensation can take form
of forgiveness of royalty or
rental obligations on other
OCS leases (in addition to
the provisions of section 5
OCSLA).

- No such provisions.

- No such provisions.

Other Requirements for
Areas Under Moratoria

- Establishment of Environ-
mental Sciences Reveiw
Panels to assess adequacy
of, and need for additional
data to make leasing, ex-
ploration and development
decisions and to supervise
peer-review of proposed
studies.

- Each panel comprised of
Federal, State representa-
tives.

- Also, Secretary of
Commerce to appoint 3
scientists to the panel.

- No lease sales can be held
in the areas subject to mora-
toria until the Secretary of
the interior submits a report
to Congress pursuant to the
provisions concerning the
Environmental Sciences
Review Panel.

Other Requirements for
Areas Under Moratoria

- No such provisions.

Other Requirements for
Areas Under Moratoria

- For areas under President
Bush's withdrawal order,
conduct additional environ-
mental studies to ensure
that leasing can be carried
out safely.

79

eayuog Adj0d SIO


Chapter 3

v

approach simply would encourage the OCS
Program’s managers to proceed by consen-
Sus rather than by hierarchical methods.

In addition to considering specific issues
related to proposals in certain OCS regions,
this task force approach would provide a
means for examining some of the more gen-
eral issues related to the OCS decisionmak-
ing process such as:

the use of science;

@ public perception and the use of risk
management techniques;

TM expanded public outreach and educa-
tion;

m@ evolving technology, economic condi-
tions, and political climates as they
relate to the OCS program; and

m the development of a threshold for
Proposing or not proposing OCS act-
ivities based on a consideration of
environmental values and concerns
as well as hydrocarbon potential and
industry interest and economic bene-
fits.

In a typical situation a regional task force
would be made up of members representing
the Department of the Interior and other fed-
eral agencies, state and local governments
(including regional entities), the oil and gas
industry, environmental and other interested
organizations, and perhaps a member from
the public at large. As a general rule, parties
with similar interests in a particular geo-
graphic area would participate in the same
regional task force. The actual composition
of each regional task force would be decided
in consultation with the constituents of the
respective region, with an emphasis on
achieving the broadest and most balanced
membership possible. Under this proposed
approach it is conceivable that the con-
stituents in a particular region might decide

52

that a task force is not necessary to build
consensus on OCS decisions related to that
region, is not wanted, or that some other
means would be more suitable. Subcommit-
tees of the regional task forces could be
established as needed. The task forces also
should include mechanisms for receiving rel-
evant input from local scientists and other
experts. The constituencies represented
would have to be willing to work toward a
consensus on OCS issues as they relate to
their region.

The regional task forces would produce both
5-year programmatic recommendations and
recommendations pertaining to specific leas-
ing proposals that would be submitted to the
Secretary and to the governors of affected
coastal states. While both the Secretary and
the governors would be urged to accept the
task force recommendations, they would
retain the roles and authorities they currently
have under the OCS Lands Act, as amend-
ed. The Subcommittee believes that there
should be flexibility among the regional task
forces as to reporting point, i.e., the level
within the Department of the Interior and the
state governor's administration to which rec-
ommendations will be submitted. Also, while
some degree of latitude probably will be nec-
essary in establishing and implementing
these task forces, they ultimately should be
expected to operate within the procedures
and timeframes outlined in sections 18 and
19 of the OCS Lands Act, as amended, and
related administrative guidelines. Further,
the Subcommittee recommends that the pro-
posed regional task forces be established
before the section 18 process of formulating
a 5-year program for 1997-2002 is initiated
so that they may participate fully in that
process from its beginning.

In addition, although the regional task force
approach is recommended as a means to
design and implement a new OCS program,
each regional task force could be applied to
resolving problems pertaining to already
existing leases. The Subcommittee consid-


Appendix A

wv

Side-by-Side

OCS Amendments to the Energy Bill
IMPACT ASSISTANCE (coni.)

Legislation Proposed by

H.R. 776 S$. 2166 the Bush Administration
(H.R. 4138)
No 2nd Fund. 2) Fund #2. No 2nd Fund.

Administered by Commerce.
All Coastal States (not in-
cluding Great Lakes,
territories, etc.) are eligible
to recieve funds.

Applicable to new revenues -
as defined in previous
provision.

Establishes a Coastal
Resources Enhancement
Fund comprised of 4% of
"new revenues" from the
ocs.

Fund is capped at
$100 million.

Subject to Appropriations.

Block grants made to
states from environmental
and other specific purposes
based on:

- energy facilities

76



Appendix B

WwW

EXPLANATION -
reer Exploration Pian aT
submi Lessee/Operator
[] Non-Federat for modification
r isi or for
‘ederal Decision ‘supplemental
Co) industry Exploration Plan information
complete? ri
Plansentto foo 2 0 a
Governors and v
CZM agencies of 2 "
affected States be working Exploration Plan
and to local days deemed submitted
governments that
request copies 1
t days Technical & Environmental
Govemors submit Evaluation
written comments “I T
ee oe, If disapproved, plan
cae! Exploration Plan may be resubmitted if
conditions change.
(Leases may be
State CZM agencies notify YES canceled in |
MMS of concurrence or accordance with
cone attic at Application for Permit 43 U.S.C. 1994).
earliest practicable time. to Drill (APD) submitted
(Must notify MMS within 3 APD retumed to
months of basis for further Lessee/Operator
delay, or concurrence is . for modification
presumed). State CZM APD technically L woe] or tor
agency may take up to acceptable? H supplemental
6months total. «=f taewee tenn enwennnny poseee! a information
YES
i ‘NO.
CZM
consistency concurrence NO.
Lessee may request
mediation or review
by the
Secretary of Commerce}
{Section 15 CFR 930).

Test well
drilled

SOURCE: MMS, Office of Statistics & Information, 3/91

Figure B-2,

82



Chapter 3

Vv

date the increasing needs of coastal resi-
dents and industries. It would be most ap-
propriate to use OCS revenues, which are
derived from the marine realm, for uses in
coastal and marine areas. Such use of OCS
revenues also would be consistent with the
new administration’s emphasis on maintain-
ing and rebuilding the nation’s infrastructure.
In light of these considerations the Subcom-
mittee has identified the following specific
purposes to which OCS revenues should be
applied:

m to maintain existing coastal and

marine resource programs and pro-
tect renewable resources;

@ to offset the impacts—both onshore
and offshore—of federal OCS oil and
gas exploration and development on
the nation’s coastal areas in recogni-
tion that the benefits of offshore oil
and gas development are national in
scope, but coastal states and locali-
ties bear a disproportionate burden of
environmental and social costs;

@ to strengthen the federal-state part-
nership so necessary in the pursuit of
national energy goals and the protec-
tion of state interests in pursuing
OCS development and the siting of
OCS and other energy facilities in or
near the coastal zone, thereby re-
ducing conflict and confrontation and
resulting in a more productive OCS
Program; and

TM to provide a uniform, reasoned ap-
proach for transferring payments
from the federal government to state
and local governments instead of
having states pursue independent
exactions to compensate for OCS
related impacts (such actions would
inject further uncertainty into the pro-
cess of OCS leasing and develop-
ment and provide disincentives to the

59

production of the nation’s OCS re-
sources).

The Subcommittee believes that one of the
most important purposes of impact assist-
ance relates to fulfilling the needs of coastal
States for some financial assistance to be
able to participate effectively in the OCS pro-
gram decisionmaking process. At least part
of this assistance should come up front to
fund establishment of the regional task
forces recommended above and to support
formulation, review, and analysis of program
proposals under the regional task force
approach. Funds also should be committed
to studies identified by the regional task
forces as critical for decisionmaking. While
the bulk of impact assistance should flow to
states adjacent to OCS oil and gas explo-
ration and development activities, such funds
should not be perceived primarily as an
inducement to states to encourage OCS
development off their coasts, and OCS leas-
ing off a state's coast should not be a prereq-
uisite for that state’s receipt of any revenue.

The Subcommittee recommends adoption of
a revenue sharing/impact assistance propos-
al in keeping with the principles discussed
above. Two alternative proposal concepts
have been outlined below which would satis-
fy these principles and may provide valuable
insight and guidance for crafting an appropri-
ate revenue sharing/impact assistance pro-
gram. In the first proposal a portion of the
present revenue stream to the federal trea-
sury is allocated to revenue sharing/impact
assistance for states and territories. In the
second alternative proposal appropriated
funds would be put into a trust fund annually
and, after a few years of accumulation, the
interest would be distributed as an entitle-
ment to states and territories. Over the long
tun this latter approach would generate a
permanent, and increasing, revenue stream
without causing federal budget problems in
the short run.

aayyjususog Ar1}0d SDO


Chapter 2

4

Reserves under the contro! of members of
the Organization of Petroleum Exporting
Countries (OPEC) increased tremendously,
especially in the West Asian OPEC coun-
tries, such as Saudi Arabia, Iraq, Kuwait, and
Iran.

Throughout the less developed nations of
the world there was a rising tide of national-
ism that would transform the relationship
between the industrialized nations of the
West and the countries that were increasing-
ly supplying the oil that fueled western
economies. At the same time the “environ-
mental” movement began to gain support in
the Western world, as people became more
concerned about the massive changes in the
environment caused by human activities.
Television footage of oiled sea birds and
mammals caused by the biowout off Santa
Barbara in 1969 created a lasting impres-
sion.

During this period production from the OCS
not only increased in volume but also in the
percentage it represented of total domestic
production. By 1970, the peak year for
domestic oil production, OCS oil accounted
for more than one-tenth of the domestic total
and, combined with production in state
waters, accounted for one-sixth of domestic
oil production. By the early 1970's, domestic
production was declining, and reserves were
falling at an even faster rate. The United
States had increased its reliance on Middle
East oil imports to such a degree it was
unable to respond effectively to the Arab oil
embargo of 1973.

Energy Crises in the 1970's

At the start of each of the oil crises of the
1970's, the economy was booming, with low
unemployment. Inflation was increasing,
interest rates were high, and a mild reces-
sion was predicted for the following year.
However, when the Yom Kippur War began
in 1973, Arab countries stopped oil ship-
ments to those countries supporting Israel

32

and for the first time OPEC unilaterally imple-
mented large price increases that sent the
price of oil from about $3 per barrel in
October of that year to more than $11 per
barrel two months later in December. In
1979 the Iranian revolution and the beginning
of a long war between Iran and Iraq created
a second major oil supply disruption and
price shock in world markets. The price of oil
doubled from $17 per barrel to $34 per barrel
with some prices even higher in the spot
market. In the aftermath of these two oil
shocks the import dependent U.S. economy
experienced its two worst post-World War II
recessions during 1973-1975 and 1980-
1982. The National Petroleum Council, ina
study requested by the Secretary of Energy,
estimated that the 1973 and 1979 energy
price increases shrank the economy by
about 2.5 percent and 3.5 percent, respec-
tively.

The last two decades have seen several very
different energy policies under successive
presidents. The U.S. went from price con-
trols and allocation schemes under Nixon to
an emphasis on government incentives for
conservation and synthetic fuels under
Carter to an aggressive market-based, sup-
ply-side policy under Reagan to a less
aggressive market-based strategy under
Bush.

While early federal policies tended to exacer-
bate the problems underlying the symptoms
they addressed, some of the policies initially
implemented during the mid-to-late 1970's
did help to reduce the Nation's vulnerabitity
to future supply disruptions. Among these
were new automobile fuel efficiency stan-
dards (set to more than double fuel efficiency
over 10 years from 13 miles traveled per gal-
lon of gasoline to 27.5 miles per gallon), the
opening of more OCS acreage to leasing,
and decontrol of domestic prices. In addi-
tion, the expectation of higher prices and the
fear of further nationalization in the less
developed countries led to a huge increase
in exploration drilling in the U.S. and other




Chapter 2

v

developed countries. Furthermore, generally
increased energy prices encouraged more
efficient energy use and prompted invest-
ments in the development of alternative
energy sources.

Declining Prices in the 1980's

In 1982 the economic recession, increased
energy efficiency, and lower usage patterns
developed in response to high prices caused
a large drop in U.S. and European demand
for oil, creating a glut on the world oil market.
World oil prices began to decline until sud-
denly in 1986 prices plummeted when cer-
tain Middle East nations increased produc-
tion in order to reclaim market shares lost to
other producers.

While the large drop in oil prices since 1985
has benefitted the economy and consumers
by reducing inflationary pressures, it also
has helped to increase our dependence on
oil imports and our vulnerability2 to the kind
of supply and price disruptions of the 1970's.
Because of increases in both onshore and
offshore production in response to higher
prices and favorable policies and because of
a conscious effort to decrease the share of
imports from OPEC countries, by 1985 the
U.S. had diversified its sources of supply to
the point where the nation would be much
better able to withstand the kind of events
that occurred in 1973 and 1979. However,
lower prices brought increased consumption
and reduced the incentive to develop and
produce the higher-cost domestic supplies,
depressing onshore and offshore exploration
and production activity. Thus, imports and,

more specifically, imports from OPEC coun-
tries began to increase both in total volume
and as a percentage of overall supply. While
OCS oil and gas cannot make the U.S. self
sufficient, they can, in conjunction with other
actions, help the nation lessen its vulnerabili-
ty to supply disruptions, especially if the U.S.
is the target of an embargo or if a war breaks
out between major suppliers.

Recent Consumption Patterns

In the last two decades the United States
has made substantial progress in using ener-
gy more efficiently and in converting many
fuel uses from oil to other energy sources.
However, much of the investment responsi-
ble for this progress was made when oll
prices were high, and fuel efficiency has not
played as important a role in investment
decisions since the mid-1980's. Therefore,
the Nation’s petroleum consumption has
begun to rise again and is at about the same
level as it was twenty years ago, before the
Middle East oil embargo of 1973 that
prompted our efforts at conservation and the
use of alternative energy sources In the first
place.

Three phenomena related to consumption
patterns are clear from recent data on dom-
estic energy use. First, as one might ex-
pect, consumption of oil generally has been
inversely related to price—it fell after the
price hikes of 1973 and 1979, and it rose
after prices dropped dramatically in 1986.
Second, there has been no major shift to
alternative fuels in response to the large oil
price increases of the 1970's and, absent

2 "Dependence" and "vulnerability" are related, but not synonymous concepts. Our dependence on imports is mea-
sured by how much of our oil we buy from foreign sources, while our vulnerability to supply and price disruptions is
determined by how much damage those disruptions would do to the economy. For example, the ability to switch from
oil to other fuels does not by itself reduce our dependence on imports, but it does lessen the vulnerability of our econ-
omy to both supply and price disruptions. Reliance on a variety of sources reduces vulnerability to supply disruptions
(but not to large price increases). The Strategic Petroleum Reserve reduces our vulnerability to short-term supply dis-

ruptions and can be used to moderate price spikes.

eaqjuuog Ar110d SIO


Chapter 2

v

To the extent that the market does not provide
for a smooth transition or does not fully
account for the relative costs and benefits of
the various alternatives, government interven-
tion may be appropriate.

Implications for Energy Planning and
Policy

It is important to realize that the U.S. faces a
“petroleum problem” not an “energy problem.”
For the most part, the U.S. has plenty of ener-
gy, but many of our energy resources are not
as cheap, as low in air pollution, and as well
suited to transportation as is petroleum. The
NES states,

“For the foreseeable future, oil will remain
a critical fuel for the United States and all
other industrialized nations.”

For the moment, the supply and cost of petro-
leum and other forms of energy do not seem
to be a pressing problem to most Americans.
We have ready access to an abundant supply
of energy at relatively low prices—some lower
in real terms than they were two decades ago.
However, underneath the surface, the prob-
lems we faced in the 1970's remain. The
price shocks of the 1970's prompted us to
make energy efficiency improvements and to
make use of appropriate technological innova-
tions, but the U.S. economy in the 1990’s will
require imports of 8 to 10 million bbl per day—
representing 50 percent or more of domestic
needs. This level of reliance on imports could
exacerbate U.S. vulnerability to supply disrup-
tions and cartel manipulation of prices, threat-
en economic growth, and reduce U.S. foreign
policy options. The world’s low-cost resour-
ces are predominantly in the Middle East, so,
at best, greater domestic production brings
only short-term—not long-term—energy secu-

rity.

Improved efficiency in energy use and cost-
effective substitution of other types of energy
for oil are vital components of the nation’s
energy strategy, especially in the long term.

48

Nevertheless, improved efficiency, fuel
switching, and alternative fuel use will be
insufficient, by themselves, to reduce signifi-
cantly U.S. oil import dependency over the
next few decades. While, given a supportive
national mood, there are theoretical combina-
tions of alternatives that could create massive
shifts in consumption and sources of energy
over a period of years, rather than decades,
such shifts could impose high costs on indi-
viduals and on society as a whole. Absent
major long-term increases in oil prices or fun-
damental changes in technology, such rapid
shifts in energy use patterns would be
extremely unlikely without government inter-
vention on a large scale.

Even with a large and effective conservation
program in force, a sound energy strategy for
the nation has to include efforts to find new
domestic reserves of petroleum. Providing
adequate energy for the U.S. economy will
require a consensus understanding of energy
issues that, in addition to aggressive energy
conservation measures, includes reasonable
opportunities for discovery of domestic re-
sources and production of domestic reserves.
This is especially true if the nation seeks to
reduce oil dependency by using more natural
gas. While the emphasis of the nation’s ener-
gy strategy may shift under the current or
future administrations, any substantial addi-
tional restrictions on the development and
production of oil and gas resources on the
OCS will entail direct costs and greater risk
to the economy.


Chapter 2

TANKERS'

OCS FACILITIES?

1 Total of crude oll and refined product spilled in U.S. and coastal offshore waters.

2 Total of crude ofl and condensate spilled from facilites on Federal OCS leases (all spits Ested took place in

the Gull of Mexco OCS).

Table 3: Oil spills from tankers vs. oil spills from OCS facilities (spits of 1,000 barreis or more),

1974-1992.

ities have resulted in 10 bbI of oil spilled per
million bb! handled, while tankers in U.S.
waters have resulted in 18.5 bb! spilled per
million handied. The spill rate for tankers

imported oil over the same period
was 12 bbi per million handled (the 1989
Exxon Valdez spill accounts for the increase
to 18.5 bbi spilled for all tankers in U.S.
waters).

One factor that diminishes the likelihood of
OCS blowouts and oil spills in volumes com-
parable to tanker spills such as the Exxon
Valdez incident is the nature of OCS oil
reservoirs. Oil is currently produced in the

21

Gulf of Mexico and Pacific OCS regions.
Thirty-six percent of the producing wells in
the Pacific Region and 90 percent of the
wells in the Gulf of Mexico Region require
artificial lifting of their oil with pumps or the
use of gas. The average rate ot production
for wells in the Pacific Region is 9 barrels per
hour, and the average rate for the Gulf of
Mexico Region is 8 barrels per hour. Such
reservoir characteristics make extremely
large spills improbable.

Over 98 percent of the production from the
OCS is transported by pipeline. While the
overall spill record of OCS operations is

eeyWWIOD A21/0d SIO


Chapter 3

4

The congressional moratoria have been the
states’ and localities’ weapon of last resort
for preventing impacts to them under a legal
regime that gives them very limited decision-
making authority and little financial assis-
tance for dealing with those impacts. How-
ever, the moratoria are an annual exercise
taken by the legislative branch on behalf of
the states and localities to keep the execu-
tive branch’s OCS program in check. In
terms of getting at the root of the principal
problem of the OCS program and resolving it
the moratoria accomplish nothing.

The Subcommittee recommends that the
OCS decisionmaking process be revised Ina
way that would obviate enactment of con-
gressional moratoria in the future. The Sub-
committee proposes that a regional task
force approach be established and funded to
build consensus on OCS proposals. Under
this proposal a task force composed of inter-
ested and affected parties would take a
cooperative approach to managing OCS
activities. This approach would require flexi-
bility to meet the needs of different areas of
the OCS and the parties involved. Also, if
successful, it could lead to a comprehensive
approach to ocean management involving all
state and federal agencies with a stake in
OCS program activities and related Issues.
The Subcommittee recommends that funding
of the proposed task forces initially be pro-
vided out of Department of the Interior
Appropriations and eventually be provided
pursuant to impact assistance measures rec-
ommended later in this report.

Establishment and use of regional task
forces would foster multiple criteria decision-
making based on consideration of the vari-
ous potential uses of the ocean and coastal
regions. The multiple criteria approach fos-
ters more informed decisions by examining
diverse objectives rather than focusing on
one prime objective. Such an approach has
been applied successfully in other natural
resource management programs to produce
policies that balance competing and conflict-

51

Ing objectives. Examples include decisions
related to managing forests, river basins,
and reservoirs, locating power plants, and
transporting and disposing of certain forms
of nuclear waste. The Subcommittee
believes that multiple criteria decisionmaking
would be best implemented at the regional
level for the OCS program because that is
where ocean and coastal use conflicts are
manifested and should be addressed.

The primary intent of the task force approach
is to provide for the inclusion of interested
and affected parties in more of a partnership
role that will be assured over the long term.
Establishment of officially recognized and
stable regional planning bodies should dis-
courage the executive branch from attempt-
ing to unilaterally effect sweeping policy
changes to the OCS program. As recounted
above, such actions by the program's federal
managers may be perceived as arbitrary and
arrogant, leading those excluded from the
decisionmaking process to seek congres-
sional intervention.

Under the regional task force approach the
Department of the Interior would be more
inclined to give serious consideration to all
comments and recommendations submitted
by its partners in the OCS process. While
the Secretary would retain final decisionmak-
ing authority, the input of the task forces
would be likely to lead to the establishment
of an OCS program that is truly tailored
according to regional conditions and needs.
Such a program would be in step with a con-
sensus of the interested and affected parties
and would be far less likely to be restricted
by the enactment of moratoria by the legisla-
tive branch.

The Subcommittee believes that the regional
task force approach would have a moderat-
ing effect on federal primacy without resur-
recting legal issues about jurisdiction over
the sea and seabed or possibly triggering
constitutional issues related to state/federal
sharing of power. The recommended

aayyuUulog Arljod S90


Chapter 3

4

Recommended Alternative Proposal
concept |

This proposal establishes two funds for
impact assistance. Payments from both
funds would be through an entitlement rather
than an annual appropriation, and there
would generally be no restrictions on uses of
the funds. All coastal states, the Great
Lakes states and territories would be eligible
for participation in both funds. However, the
amount of payment from the second fund,
Coastal Impact Assistance Fund, would be
appropriated based on selected criteria and
an allocation formula. The program is out-
lined below.

General

m Revenue for the two funds will be gen-
erated from all OCS bonuses, rents
and royalties accrued after date of en-
actment. The percentage of revenues
paid into the funds each year should
be fixed between four and 15 percent
of the average annual OCS revenues
for the previous three years. Pay-
ments to states and territories will
commence one year after establish
ment of these funds.

@ Total annual revenues will be divided
between the two funds. The Coastal
Resources Enhancement fund should
receive 50-66 percent of the reven-
ues, and the Coastal Impact Assist-
ance fund 34-50 percent of the avail-
able revenues.

m Payments to states or territories from
either of these funds requires a 50:50
split of payments between local gov-
ernments and the state or territory.

@ Eligibility of local governments for
participation in the program and dis-
tribution formulae for revenues from
the funds is determined by the Gover-
nor of each participating state or trust

60

territory; with mandatory inclusion of
coastal counties, boroughs and par-
ishes within 200 miles of OCS tracts
from which revenues are generated.

U Re Tel ni

@ Allcoastal states, Great Lakes states
and territories are eligible to partici-
pate in the fund.

m Payments from the fund are based on
the coastal zone management fund-
ing formula from the CZMA. Funding
under the CZMA, as a percentage of
total CZMA funding, is used to deter-
mine fixed shares of the revenues
deposited into the Coastal Resources
Enhancement Fund to be distributed
to each state and territory.

@ Coastal states or territories lacking an

approved Coastal Zone Management
pian would receive a fixed share
amount equal to one-half of the smal-
lest fixed share paid to a state or ter-
ritory with an approved plan, respec-
tively.

@ There would be no restrictions on how
money distributed from this fund could
be spent, with the exception of those
states or territories where moratoria
are in place. In those states or territor-
ies where moratoria are in place that
portion of funds paid directly to the
state or territory is restricted to ocean
and coastal resources research, as-
sesment and management related to
the purposes of the OCS Lands Act,
CZMA, Oil Pollution Act, Marine Plas-
tic Pollution Research and Control Act,
and Marine Protection Research and
Sanctuaries Act. However, those funds
distributed to local governments, ac-
cording to the formula determined by
the governor, will remain unrestricted.


Table of Contents

Executive SUMMALPY......0.....csccsceceseneeeeeeeeneeteee

Chapter 1
Background on the Subcommittee on OCS Legislation a
The OCS Advisory Board, Committees and Subcommittees... cesessessseesstecseeeseesneeenees 1

Membership and Charter of the Subcommittee on OCS Legislation.

Chapter 2

vw
Background on the OCS Prograrn.....sc.escsecsssssssecssesssseesessesascseesseneeseseeesssncsneeseenesaeessaessaseneenees 3

Introduction
Origins of the Federal OCS Program.
Expansion of the Federal OCS Progra
Program Constraints......
Conflict Resolution Efforts.
President Bush's June 26, 1990, Order.
Current Status of the OCS Program.. .
Environmental Considerations Related to the OCS Prograt
Energy and Economic Considerations Related to the OCS Program

Chapter 3

v
Findings and Recommendations of the Subcommittee... 2... eseeeeeeeeeeeeeeeeeeees ete teeeeeee ee AD

\ntroduction
Recommendations on OCS Legislation Considered by the 102nd Congress.
Additional Observations and Recommendations

Appendix A
wv

Table Summary of the OCS Provisions of the 1992 Energy Bills.........cccscsesseceessessseevesenee 74
Appendix 8
Vv

Diagrams of Presale and Postsale ProceSs@S........ccseesssesssesecetssssenssessssneseeeaesesreeseeeseseee Bt
Appendix C

vw
Resolution of the OCS Policy Committee, October 20,1998......csccsssscssessesesesnesneesssesseaeed 84

it

sanunuoy Ard S90


Chapter 2

Number of
Facilities

Number of
Facilities

pAlaska | a7 | Nobracka =|
JArkansas | 32 NewJersey |g
| Colorado | tig | NewYork == |
| Georgia | | North Dakota | 60

|ilionois | 48 Oklahoma | 378
a a ee a ee
L Kentucky | og Ptah Tg
| Massachusetts | 4 | Washington [|
| Minnesota | 2 West Virginia | 30

‘Source: Patroleum Equipment Suppliers Association (1992)

Table 4; Petroleum equipment supply facilities by State,

source of technological innovation and some
of the infrastructure that would be needed to
build domestic production back up should
world events drive prices up again.

Ac tho trond of foraign inveetment continue,
OCS holdings have shifted increasingly from
the major multi-national companies to small-
er independent companies. This shift has
resulted not only in less leasing activity but
also in a need for increased emphasis on
inspection and enforcement activities, review
of royalty rates to encourage investments to
extend production from older OCS fields,
and review of measures to assure that com-

panies have adequate financial resources to
plug and abandon OCS wells and to remove
production platforms.

The most promising prospects in the Gulf of
Moxico are now in doop wator. Ac tho major
companies leave, the smaller companies that
take over OCS activities may not have the
financial resources, technical expertise, and
large project management capability needed
to pursue deepwater resources. Likewise,
Ine smaller companies could lack tne capabil-
ity to operate effectively in much of the
Alaska OCS, especially in the Arctic area.


Chapter 2

v

900

850

800

750

700

6504

600

Thousands of Jobs

—— Upstream & Refining
—— Vehicle Manufacturing

550

500

450 T

1980 i} T T T

1981 © 1982 1983

Source: American Petroleum Institute

1984 1985

1986 © 1987 1988 1989 1990 1991

Year

Figure 11. Employment--Petroleum vs. vehicle manufacturing, 1980-1991.

year. Despite concern over the Nation’s
trade deficit, the fact that purchases of
imported oil account for over half the trade
deficit is largely ignored.

According to a recent Arthur Andersen sur-
vey of the 30 largest public energy compa-
nies, U.S. exploration and development
spending decreased by 26 percent to $10.5
billion in 1992, representing the lowest level
of spending on domestic exploration and
development in ten years. The companies’
lower domestic spending in 1992 continued
a five-year trend during which the U.S. oil
and gas industry has been spending more to

explore and develop resources in other
countries than at home. Since 1988, spend-
ing in foreign countries has exceeded spend-
ing in the U.S. by some $20 billion. Domestic
expenditures over the same period have
dropped by a total of 31.4 percent.

Technology

Many of the most technically advanced off-
shore drilling rigs, including those capable of
drilling without discharges into the environ-
ment, are leaving U.S. waters for foreign
waters, where geologic and political circum-
stances are better. With this exodus goes a

38


1504

1004

50 -}--}--}--]--4--

1988 fa
fa

Number oF FieLDS

i i

—— RESERVES (MMBOE/YR.)

Figure 13. Number of fields and average reserves by discovery year, 1954-1990.

Department of the interior initiatives
The Department of the Interior has consid-

Per wells eligible for reduced royalty rates.
On October 27, 1992, the MMS announced
a package of administrative and regulatory
initiatives for the OCS program, one of
which called for changing the water depth
cmenon tor reduced royalty rate to 200
meters from the existing level of 400 meters.
(iis the Subcommiitee's understanding that
the proposed change in water depth criterion
has not been implemented pending a review
by the new administration.) All of the MMS
initiatives, some of which already have been
implemented, reflect the Department of the
Interior's authority under existing law. Add-
itional special allowances for developing and

Producing oil and gas in certain extraordinary
circumstances entailing higher costs also
have been considered by MMS.

Measures Considered by the Congress

The 102nd Congress considered S.3127, the
Outer Continental Shelf Deep Water Produc-
tion Incentives Act, which would have allow-
ed lessees to suspend the payment of royal-
ties on production in water depths of 200

meters or greater in the Central and Western
Gulf of Mexico until capital investment costs
(excluding bonus payments) on the lease

have been recovered. This measure would

have applied to all leases commencing pro-
duction after ite enactment

PaN/WWOD Adr/10d SIO


Chapter 2

4

expansion of leasing, exploration and pro-
duction off their coasts', while at the same
time the Reagan Administration opposed the
funding of State CZM grants that were used
by the states in part to review federal OCS
activities. In response the coastal states and
Jocal governments mounted efforts to curtail
Secretary Watt's plans. As it turned out—pri-
marily due to strong and widespread opposi-
tion—the practice of areawide leasing was
short-lived. As of 1984 it was generally dis-
continued in areas other than the Central
and Western Gulf of Mexico. However, the
opposition to OCS leasing continued to grow.

PROGRAM CONSTRAINTS
Litigation

As the OCS program began to expand in
1982, those with objections made them
known to Secretary Watt. In most cases
such objections and related recommenda-
tions were rejected or not fully adopted by
the Secretary, and the opponents then chal-
lenged the Secretary's decisions in court.
However, the great majority of lawsuits failed
(and even those few that were successful did
not have a significant curtailing effect on the
OCS program). Federal primacy again was
a factor in the results of litigation, as the
decisions challenged were based on statutes
like the OCS Lands Act that give the federal
government great discretion and require that
the lawsuits themselves be tried in the feder-
al court system.

Legislative Moratoria
By 1982, in the face of Secretary Watt's

ambitious OCS pragram, those with objec-
tions to that program were extremely frustrat-

ed. They believed they had made good faith
efforts to consult and coordinate with the fed-
eral government under the OCS Lands Act,
as amended, only to have their objections
and related recommendations summarily dis-
missed by the Secretary. Then, having failed
to persuade the federal government during
that process, they had tried litigation to negti-
gible effect as described above. Finally, start-
ing with the State of California, interested and
affected parties turned to the annual congres-
sional appropriations process as a means for
delaying OCS leasing to which they objected.

Beginning in Fiscal Year (FY) 1982 oppo-
nents of certain OCS lease sales and other
program activities persuaded Congress to
enact as part of the Department of the
Interior's annual appropriations legislation a
series of one-year moratoria of targeted activ-
ities. The enactment of the first moratorium
signaled a change in the legislative branch's
involvement and attitude toward the OCS pro-
gram from a comprehensive view to a more
focused one that centered on certain contro-
versial lease sales. The coastal states devel-
oped a regionalism as many individual geo-
graphic areas came to the conclusion that
their coastlines are unique and should be pro-
tected from the perceived risk of oil spills
through the enactment of congressional
moratoria. From FY 1982 through FY 1993
the acreage covered by these congressional
moratoria grew from 0.7 million acres off
California to a total of over 266 million acres
off the Pacific and Atlantic coasts, in the
Eastern Gulf of Mexico, and in the Bering Sea
off Alaska (see Figure 2). Over the years the
moratoria have also expanded from restrict-
ing the issuance of new leases to prohibiting
prelease activities and exploration and devel-
opment activities on existing leases.

1 While expansion of the OCS program has been perceived by some as arbitrarily targeting certain geographic areas
for leasing and exploration, efforts to discover oil and gas actually are directed at areas which have the requisite geo-
logic characteristics for forming and trapping hydrocarbons. Moreover, given the high degree of uncertainty of occur-

rence, resources can only be proven by drilling.


Chapter 3

v

RECOMMENDATIONS ON THE OCS
LEGISLATION CONSIDERED BY THE
102ND CONGRESS

Moratoria

Provisions of the FY 1993 Interior
Appropriations Act

For FY 1993 Congress enacted appropria-
tions legislation (Public Law 102-381) plac-
ing moratoria on leasing and related activi-
ties in the following OCS areas withdrawn
from leasing consideration by President
Bush in his June 1990 announcement:
Washington/Oregon, Northern California,
Central California, Southern California, North
Atlantic, and Eastern Gulf of Mexico, south
of 26° N. latitude and east of 86° W. longi-
tude. The appropriations legislation for FY
1993 also included the following OCS mora-
torium provisions: no leasing or drilling or
other exploration activity in the North
Aleutian Basin Planning Area; no prelease or
leasing activities related to proposed Sales
137 and 151 in the Eastern Gulf of Mexico
Planning Area (effectively placing the entire
planning area under moratorium); and no
prelease or leasing activities related to Sale
164 in the Mid Atlantic and South Atlantic
Planning Areas (effectively placing both
entire planning areas under moratorium).
The FY 1993 moratorium provisions apply
for the period October 1, 1992 through
September 30, 1993.

Measures Considered by the 102nd
Congress

The 102nd Congress also considered OCS
moratorium measures in both the House and
Senate energy bills. The measures in the
House bill (H.R. 776) were linked to the find-
ings and recommendations of proposed
environmental sciences review panels
(ESRP). A discussion of ESRP’s is present-
ed later in this report.

50

The OCS moratorium provisions of H.R. 776
provided that no preleasing activity would be
allowed in the following areas before
issuance of first the approved 5-year program
after January 1, 2002: North Atlantic; South
Atlantic; Straits of Florida; Eastern Gulf of
Mexico (east of the lateral seaward boundary
between Florida and Alabama); Southern
California; Central California; Washington/
Oregon; and North Aleutian Basin.

The moratorium provisions of S. 2166 provid-
ed that no preleasing or leasing activity would
be allowed in the following OCS planning
areas until after January 1, 2000: North
Atlantic; Mid-Atlantic (offshore New Jersey);
Eastern Gulf of Mexico (south of 26° N. lati-
tude and east of 86° W. longitude); Southern
California; Central California; Northern
California; and Washington/Oregon.

Recommendation of the Subcommittee

Regional task forces representing all OCS
program stakeholders should be estab-
lished to focus more on reaching
consensus on OCS leasing decisions in
an effort to obviate the need for moratoria.

The Subcommittee believes that congres-
sionally enacted moratoria do not provide a
long-term solution to the principal problem
affecting the OCS oil and gas program. That
problem may be characterized somewhat
simply as a disagreement between state gov-
ernments and the federal government con-
cerning uses of the nation’s coasts. At its
root is the nearly absolute authority given by
law to the Secretary of the Interior and others
in the federal executive branch to manage
activities that can have burdensome impacts
at state and local levels. While the authority
bestowed to the federal government by the
OCS Lands Act may have at one time been
more tolerable to interested and affected par-
ties, the moratoria have made it apparent
that—in the current age of decisionmaking by
consultation and consensus—federal primacy
as practiced in the past is no longer appropri-
ate or acceptable.


Chapter 3

wv

purchase process has not been initiated for
the leases off North Carolina and Alaska.

Measures Considered by the 102nd
Congress

The buyback provisions of H.R. 776 provided
for the cancellation and payment of compen-
sation for the following OCS leases within 90
days after enactment into law: the 73 leases
located in the Eastern Gulf of Mexico south
of 26° N. latitude: the 23 leases in the North
Aleutian Basin; and 21 leases off North
Carolina. The House bill also directed that
the amount of compensation due the lessees
be computed pursuant to section 5 and pro-
vided an amendment to section 5 that would
allow the compensation to be in the form of
forgiveness of obligations on other leases (in
lieu of the current requirement for cash pay-
ment). In addition, the House bill proposed
amendments to section 5 that would shorten
the required period of lease suspension,
would recognize Congressional action to initi-
ate suspensions, and would weaken sub-
stantially the cancellation criteria.

S. 2166 authorized and directed the Secret-
ary to cancel and pay compensation for the
73 Eastern Gulf leases (subject to the avail-
ability of appropriations) and provided that
the authorization for appropriations would
expire on December 31, 1993. S. 2166
would have compensated the lessees for
prelease expenses as well as “fost profits.”
The Senate bill’s buyback provisions did not
apply to any other OCS leases.

Recommendation of the Subcommittee

A prompt and suitable resolution should
be attained for the leases that have been
targeted for buyback and are subject to
litigation. Generally, section 5 of the OCS
Lands Act, as amended, should be the
means for considering leases for cancel-
lation and compensation, and section 5 is
not in need of amendment at this time.

With respect to the 117 leases that the
102nd Congress considered for cancellation
and buyback, the Subcommittee favors
attainment of a prompt solution that is
acceptable to the interested and affected
parties. However, noting that those leases
are the subject of litigation in the U.S. Claims
Court, the Subcommittee believes that fur-
ther comment or recommendation concern-
ing their disposition would be inappropriate.

Generally speaking and notwithstanding the
position stated in the paragraph above, the
Subcommittee perceives the increasing
requests for cancellation and buyback of
OCS leases as a symptom of the same prob-
lem underlying moratoria. As such, mea-
sures should be taken to resolve the basic
issues affecting the OCS program in order to
ensure that future OCS leasing actions are
not subject to similar pressure for their rever-
sal. If congressional action mandating buy-
backs were to become the accepted means
for resolving the disposition of controversial
OCS leases, it is possible that consideration
of fundamental issues in an effort to come up
with relevant long-term solutions would be
compromised or preempted.

The Subcommittee generally believes that
section 5 of the OCS Lands Act should be
the sole means for considering OCS leases
for cancellation, as it calls for consideration
of scientific and technical information in a
deliberate and reasoned decisionmaking
process. Further, the Subcommittee finds
that section 5 of the OCS Lands Act provides
adequate criteria and procedures in its pre-
sent form and recommends that it not be
amended. However, as with sections 18 and
19 of the OCS Lands Act, the degree of dis-
cretion given to the Secretary of the Interior
for decisionmaking under section 5 is of
some concern to the Subcommittee.


Chapter 2

WwW

Those who had felt that administrators of the
OCS program were not seriously considering
their concerns view the congressional mora-
toria as an effective means to overrule deci-
sions made by the executive branch that
they perceive as posing unreasonable
adverse impacts at the local level. They
believe moratoria provide a necessary check
to the executive branch's federal primacy.
Proponents of the OCS program believe that
congressional moratoria constitute arbitrary
intervention on the part of the Congress to
circumvent existing law and impede the deci-
sions of the executive branch. They main-
tain that the OCS Lands Act, as amended,
sets forth an effective framework for prudent
deliberation and decisionmaking while pro-
viding for ample consultation and coordina-
tion with state and local governments.

CONFLICT RESOLUTION EFFORTS

While confrontation, litigation and congres-
sional moratoria have besieged the OCS
program since efforts to expand the program
were initiated in the mid-1970's, a few oppor-
tunities for dispute mediation and conflict
resolution have been pursued to resolve dif-
ferences over the program. Unfortunately,
these have been largely unsuccessful. Key
conflict resolution efforts that have been pur-
sued over the last decade are summarized
below.

Mediation under CZMA

In 1979 the first effort at mediation under the
Coastal Zone Management Act (CZMA) per-
tained to whether that law's federal consis-
tency provisions applied specifically to OCS
oil and gas lease sales. While earnest views
were exchanged between the Department of
the Interior and the State of California, the
session lasted less than a day. No agree-
ment was reached, and partly because of the
way in which the mediation process was
handled by the mediator (a representative of
the Secretary of Commerce), the CZMA's
innovative mediation provision was rarely

10

used thereafter. The mediation process was
unworkable because a federal official could
not be viewed as an impartial party in the
mediation of differences between a state and
the Department of the Interior—another fed-
eral agency—concerning an OCS lease sale.

Negotiations Concerning OCS Leasing off
California

During the period from June 1985 to July
1987 Secretary of the Interior Donald P.
Hodel personally promoted a series of nego-
tiations with the California congressional del-
egation and the Governor of California to
resolve conflicts related to the development
of the 5-year OCS leasing program and its
proposals with respect to the California OCS.
Over 20 meetings with members of Con-
gress were held, and numerous consulta-
tions with the governor and his staff took
place in an effort to agree on a leasing pro-
posal for the California OCS that would elimi-
nate the annual congressional moratorium in
effect since 1982. The negotiations failed to
produce a leasing proposal that would be
acceptable to all of the interested and affect-
ed parties. As a result, the 5-year program
for 1987-1992 that ultimately was approved
by Secretary Hodel included for leasing con.
sideration areas that had been requested for
deferral. Moratoria were enacted again to
prohibit all leasing off California proposed in
the approved 5-year program.

Negotiated Rulemaking on Air Quality
Regulations for the California OCS

In 1986 Secretary Hodel commissioned a
negotiated rulemaking on air quality that
included MMS, EPA, the State of California,
affected local governments and others.
Numerous negotiating sessions were held,
and progress was made in narrowing the
gaps between disagreeing parties. However,
the effort ended in 1988 with no final agree-
ment, and the issue was resolved in 1990
with the enactment of amendments to the
Clean Air Act, which effectively rescinded




Chapter 2

v

Scientists collect sampies tor use in Ine Environmemal
Studies Program.

addressed by the ESP. The MMS is, by and
large, focusing the studies on areas where
leasing is scheduled rather than in areas
excluded trom the 5-year program, even
though such excluded areas may have been
cited as needing additional studies by the
NRC. Before the areas excluded by the
president and the Congress can be included
for leasing consideration in a future 5-year
program, the recommended studies are
needed, but there is only enough money to
study areas in the current 5-year program.
Until enough funds are made available to do

the necessary studies in excluded areas as
well as the studiec in aroae included in the

5-year program, MMS will be prevented from
studying the excluded areas or considering
them for leasing.

Information Adequacy

Another dilemma related to the environmen-
tal studies program concems the adequacy
of scientific information. In recent years the
NRC and others have conducted assess-
ments of the volume and quality of data
available for specific OCS planning areas.
While such assessments have proved useful
in identifying specific data gaps, they have
demonstrated that there is no simple pre-
scription for cciontific data that can be ap-
plied across the board for the OCS program.

ENERGY AND ECONOMIC CONSIDER-
ATIONS RELATED TO THE OCS
PROGRAM

Recent History—Oil

Emerging from World War II, the United
States enjoyed dominance in military affairs,
the international economy, and the world
petroleum market. However, the post-World
War I! era brought major changes that would
alter the world forever. The amount of oil
Americans consumed increased faster than
new domestic reserves could be found, and
the U.S. was transformed from the world's
swing producer to a net importer of oil, de-
pending upon imports to supply close to half
of its oil by the latter part of the 1960's.

Dolphins observed by MMS scientists.

aayjuiuoy A21/0d $90


APPENDICES


Chapter 2

Ww

posals generally were designed to replace
the CEIP.

The House twice passed revenue sharing
bills that were killed by filibuster in the
Senate, and no new revenue sharing legisla-
tion ever was enacted. The Reagan adminis-
tration consistently opposed such legislation,
citing concerns about the anticipated effect it
would have on the federal budget. Another
factor cited was the 8(g) settlement in 1985,
which distributed to eligible coastal states
more than $1.4 billion that had been held in
escrow since enactment of the OCS Lands
Act Amendments of 1978 and mandated the
continued sharing of revenues from OCS
tracts within the first three miles seaward of
state waters.

President Bush made a case for revenue
sharing in his June 1990 announcement,
which recognized a need to assist financially
the coastal communities most directly affect-
ed by OCS activity. His concept of impact
assistance differed from past revenue pro-
grams and proposals that were criticized
because they provided for indirect flow of
revenues and inequity in revenue distribution.
Following President Bush’s directive, the
Department of the Interior developed and
submitted to the 102nd Congress a proposal
for providing impact assistance to coastal
states and communities located near OCS

oil and gas activities. That proposal was
adopted in a modified form by the Senate,
but the energy legislation enacted by Con-
gress in October 1992 excluded this and all
other provisions relating to the OCS program.

Public Perception

The 1989 Exxon Valdez tanker oil spill that
occurred in Prince William Sound, Alaska,
had a profound effect on the public’s percep-
tion of the OCS program even though the
spill was not caused by OCS oil and gas
drilling. That event, which rekindled con-
cerns first raised after the Santa Barbara
OCS oil spill some 20 years earlier, received

19

intense and lengthy media coverage. The
overall effect was to heighten concern about
the possibility of similar accidents and to
strengthen negative perceptions about off-
shore oil development. Despite arguments
that development of domestic resources is
necessary and beneficial, as well as reassur-
ances about the environmental soundness of
the OCS program, a large segment of the
population remains unconvinced.

Current Assessment

It appears the OCS program has come full
circle. Strong and broad opposition to most
offshore development and related political
polarization, the lack of new commercially
viable discoveries outside historically pro-
ducing areas, and persistent lower oil prices
have dictated major cut-backs. While there
is some OCS production activity off
California and ongoing leasing and explo-
ration off Alaska, the OCS program—similar
to its beginnings in the 1950’s—is at this time
mainly concentrated in the Central and
Western Gulf of Mexico, where annual lease
sales have continued apace since the mid-
1970's. Even the states in that region have
expressed some concern and disgruntlement
about shouldering the bulk of the nation’s
energy needs. Nevertheless, in that region
offshore oil and gas still is viewed as an
important and integral part of the economy,
relatively few residents are opposed, and
extensive infrastructure and overcapacity in
the service industries have kept operating
costs relatively low.

ENVIRONMENTAL CONSIDERATIONS
RELATED TO THE OCS PROGRAM

Impacts

Oil and gas exploration and development
and production activities that take place
under the federal OCS program can cause a
variety of impacts, some severe, to the
marine and coastal environment. Those
impacts may be the result of two general

aaquoD A21/0d SIO


Foreword

On October 20, 1993, the OCS Policy Committee voted to approve the report of its
Subcommittee on OCS Legislation and to adopt a resolution calling for the Secretary
of the Interior to implement the report's recommendations. A copy of the resolution
adopted by the Policy Committee has been added to this version of the report as
Appendix C.


Chapter 2

Domestic Domestic Foreign
Consumption Production Dependence
(Quadrillion Btu's) | (Quadrillion Btu's) (Percent)

Source: U.S. Department of Energy, National Energy Strategy (1992). Technical Annex 2; integrated Analysis Supporting the Nasona!
Energy Strategy: Methodology, Assumptions anc Results.

Table 6: National Energy Strategy forecast of U.S. dependence on foreign energy supplies in the year

2000.
NES Base Case NES Strategy
PETROLEUM Production Production
2000 } 2010 : 2030 | 2000 } 2010 : 2030
UCS. et. al. : Reference Case 60 : 64 : 77 50: 43 : 72
Other Scenarios i H : i

UCS. et. al.: Market Case aa a ee
UCS. et. al: EnvironmentalCase[ 51: 41 ; 42 | 39 :; 6 + 29 |

UCS. et, al.: Stablization

Sources: US. Department of Energy, Nations! Energy Strategy (1992); America's Energy Choices - investing in 8 Strong Economy and
a Clean Environnent: Union of Concemed Sceniists. Alfance to Save Eneray. American Council for an Eneray-Etficent
Economy, and Natural Resources Detense Council

Table 7. Unmet petroleum needs as a percentage of total petroleum needs: A comparison of contrasting
forecasts by the U.S. Department of Energy and by the Union of Concerned Scientists, et. al.

2010, a period when OCS resources leased tion. Additional domestic onshore production

during the next two S-year programs would can come from conventional production
be in production. methods, enhanced oil recovery techniques,
or tight sands and other such sources.
Future Sources of Oil and Natural Gas However, absent huge price increases, the
Supply only way to replace OCS oil and gas produc-
tion is by increasing imports. Additional im-
Current Sources ports can come from OPEC countries or
from the non-OPEC free market, including
Our oil and natural gas currently are obtain- any available supply from the former Soviet
ed from three basic sources—imports, dom- Union and other Eastern European countries.

estic onshore production, and OCS produc-

43

eaysUMog A21/0d SIO


Chapter 2

Vv

consideration. Since there is a large degree
of uncertainty at the time a new program is
developed or when a lease sale is proposed
tegarding the location and extent of impact-
causing activities that could result, the ElS's
prepared for such proposed actions analyze
a number of scenarios, including highly
unlikely events such as large oil spills.

Public Participation

There are several opportunities for public
participation throughout the preparation of an
EIS. Prior to initiation of the EIS, the public
and federal and state agencies assist MMS
in determining the scope of the EIS. These
same parties also review the published draft
EIS and provide comments in writing or at
public hearings for use by MMS in preparing
the final EIS. As interest in the OCS has
increased, MMS has provided additional
opportunities for public involvement, such as
public meetings in local communities in
Alaska to hear concerns about scheduled
OCS activities.

The effectiveness of public consultation
efforts in the environmental review process
has been questioned by interested and
affected parties. For example, on one hand
some state and local governments and envi-
ronmental groups have complained that
MMS displays a disengaged—if not conde-
scending and dismissive—attitude at public
hearings, and the result is that their concerns
and comments are not treated seriously. On
the other hand MMS believes that opponents
of the OCS program have abused public
hearings by staging media events and taking
other disruptive actions designed to stop pro-
posed OCS actions from proceeding. Also,
the EIS scoping process has been criticized
as being a one-way collection of information
rather than an interactive consultation with
interested and affected parties.

27

The Environmental Studies Program

The Department of the Interior’s Environ-
mental Studies Program was initiated in
1973 to support the OCS oil and natural gas
leasing program. The OCS Lands Act
Amendments of 1978 established the envi-
ronmental studies program by law and cited
its goal as providing information needed for
prediction, assessment, and management of
impacts on the human, marine and coastal
environments of the OCS and nearshore
areas that may be affected by offshore activi-
ties. Through Fiscal Year (FY) 1992 the pro-
gram expended over $562 million on such
research. Figure 6 shows environmental
studies program spending by FY for each
OCS region.

Between 1973 and 1978 the environmental
studies program consisted primarily of base-
line and monitoring studies. The baseline
studies were large-scale, multidisciplinary
projects designed to identify the biology and
physical characteristics of the areas of con-
cern in detail, and they were based on syn-
theses of available literature and data. In
concept the monitoring studies would follow
baseline studies to identify changes in meas-
urable environmental characteristics relative
to the baseline data as OCS activities pro-
ceeded. However, during 1977 to 1978 re-
views of the program by the General
Accounting Office and the National Research
Council criticized the baseline/monitoring
approach because natural variability in the
marine environment made it impossible to
establish statistically valid characterization
over wide geographic areas. Subsequently,
the studies program was restructured to tie
the program to management decisions and
focus on information needed to support the
lease sale process. Figure 7 compares the
total amount of money that has been spent
on environmental studies and the acreage
offered for lease for each OCS region.
Figure 8 provides similar information on
studies expenditures versus acreage actually
leased.

aayjumuod Ar1[od SIO


Chapter 2

Vv

than the legal limits, producers were able to
establish conditions in long-term contracts
that tied future prices to the ever-higher ceil-
ing prices as they increased over time. The
higher prices encouraged aggressive explo-
ration for new reserves and discouraged
consumption at the same time (although
price averaging still prevented consumers
from paying the full cost of new gas). The
combination of higher prices, legal restric-
tions and prohibitions, fear of future supply
disruptions, and the recession of 1982
reduced demand considerably as supply was
increasing. Thus, rather than a shortage,
there became a surplus of natural gas,
sometimes called the “gas bubble.” Linger-
ing effects of previous market distortions,
expectations of a strengthening market, and
the long-term nature of the industry probably
contributed to long duration of the surplus,
which lasted until 1993.

As it has become clear that there was still an
abundance of domestic natural gas and as
environmental concerns gained increasing
prominence in public policy, restrictions on
natural gas usage have been reduced
through legislation and regulatory reform.

Recent Consumption and Domestic
Production

Domestic consumption of natural gas
increased significantly from about 16 Tef in
1986 to almost 20 Tef in 1992, the highest
consumption level since 1980. Meanwhile,
domestic natural gas production, which
declined fairly steadily after 1973, reversed
in 1987, increasing from about 16 Tef in
1986 to almost 18 Tef in 1992. A large pro-
portion of the increase came from co-discov-
eries of gas with oil, the oil being the primary
objective of much of the exploration in the
early 1980's in response to the high prices
occasioned by the 1979 oil price shock. The
natural gas industry itself also added to pro-
duction from reserves discovered in explo-
ration specifically focused on natural gas
deposits. Simultaneously, U.S. natural gas

imports, primarily from Canada, rose during
the post-1987 period. Imports from Canada
alone increased from 1.45 Tef in 1990 to
2.02 Tef in 1992. Some observers expect to
see a change in the chronically low prices in
the North American natural gas market over
the next few years because the drop in
exploration has resulted in fewer discoveries
being identified to supply future demand
growth. Price increases in the last several
months lend some support to these predic-
tions.

OCS Contribution to the Domestic Energy
Supply

The offshore contribution has helped to slow
the decline of domestic oil production. From
1960 through 1989 U.S. onshore oil produc-
tion declined steadily from 76 percent to 41
percent of total U.S. supply of crude oil.
During this decline offshore production
allowed U.S. crude oil imports to remain
below 50 percent of total oi! consumption.
However, OCS oil production crested in 1971
and actually declined as a percentage of
total domestic production until a resurgence
of activity in the 1980's. It has remained at
11-12 percent of domestic oil production
since that time, with absolute volume gener-
ally declining.

Federal OCS natural gas production has
also served to stabilize the domestic energy
supply. Since 1978, over 20 percent of total
U.S. production of natural gas has come
from federal OCS leases. In percentage
terms, OCS natural gas production reached
a record high in 1990 when it accounted for
more than 27 percent of total domestic pro-
duction of natural gas, which in turn was at
its highest level since 1982. (See “Future
Sources of Oil and Natural Gas Supply,”
below, for data on reserves and undiscov-
ered resources.)

Figure 10 shows the relationship of OCS oil
production to domestic onshore and state
Production, as well as to imports. The impor-


Chapter 2

4

better than the record of tanker operations,
in recent years concerns have grown about
the aging pipeline system in the Gulf of
Mexico.

In late 1992 legislation was enacted to
address concerns about the nation’s pipeline
system, both onshore and offshore. The
Pipeline Safety Act (P.L. 102-508) amends
the Natural Gas Pipeline Safety Act of 1968
and the Hazardous Liquid Pipeline Safety
Act of 1979, stressing environmental protec-
tion and providing for increased training,
inspection, and reporting requirements with
respect to pipelines transporting oil, natural
gas, and hazardous liquids. One key feature
of the new law is the requirement for use of
internal inspection devices known as smart
pigs to detect and pinpoint the location of
weakness or damage in pipelines. It also
includes provisions for replacing cast iron
pipelines and for reporting on abandoned
underwater pipeline facilities.

Recent Measures to Improve Safety and
Pollution Prevention in OCS Operations

While the overall environmental record of
OCS operations has been good, the offshore
industry recognized that in the aftermath of
the Exxon Valdez oil spill in 1989 there was
a compelling need for improved manage-
ment in all phases of oil and gas activity in
the nation’s coastal waters. Also in response
to that oil spill and other major spills that fol-
lowed, the Congress in 1990 enacted the Oil
Pollution Act (OPA) to consolidate and
strengthen pollution prevention requirements
applying to petroleum producers, trans-
porters, and handlers both onshore and off-
shore. The offshore industry has taken mea-
sures to promote safety and pollution pre-
vention both on its own initiative and to com-
ply with the OPA. Some of those key mea-
sures are highlighted and discussed below.

American Petroleum Institute (API
Recommended Practice 75 (Safety and
Environmental Management Program):

22

Based on guidance provided by the MMS
Inspection Task Force and the National
Academy of Sciences Marine Board, the
MMS has supported the development of a
structured and comprehensive nonregulatory
method for reducing the risk and occurrence
of accidents, injuries, and oil spills in the
OCS. The API formulated a voluntary stan-
dard—Recommended Practices for
Development of a Safety and Environmental
Management Program for OCS Operations
and Facilities (RP 75)—with input from MMS.
RP 75 recommends that each OCS operator
develop a safety and environmental man-
agement program (SEMP) to govern design,
construction, operation, inspection, and
maintenance of drilling and production facili-
ties and provides guidance to assist opera-
tors in program formulation.

Since RP 75 was published in May 1993, the
API and the Offshore Operators Committee
(OOC) have conducted workshops to pro-
mote its voluntary implementation. The
MMS has informed the API and OOC that
RP 75 provides a good foundation for pro-
moting safety and environmental protection.
Further, the MMS is working with those two
organizations in monitoring and assessing
the offshore industry’s success in implement-
ing RP 75 in order to determine whether
SEMP should be pursued as a regulatory
requirement.

In September 1993 API issued another
Recommended Practice (RP 14J), which
assembles into one document useful proce-
dures and guidelines for planning, designing,
and arranging offshore production facilities
and performing hazards analysis on open-
type offshore production facilities.

Marine Spill Response Corporation (MSRC):

The MSRC was proposed by the offshore
industry in order to meet Coast Guard
requirements for responding to major oil
spills pursuant to the OPA. The Coast Guard
ordered companies that ship or produce oil


Chapter 2

w

Barbara Channel led to sizable oil discover-
ies and eventual production. However, in
1969 a blowout and oil spill from a produc-
tion platform occurred on a federal OCS
lease in the Santa Barbara Channel, causing
significant environmental damage that
attracted national attention, and with it the
first groundswell of opposition to offshore oil
and gas development arose.

The National Environmental Policy Act

The Santa Barbara oil spill commonly is cited
as a major impetus for the enactment of
landmark environmental legislation—The
National Environmental Policy Act (NEPA) of
1969. The new law established a national
Policy calling for a systematic, interdiscipli-
nary approach to federal project planning to
ensure that environmental values and con-
siderations would receive proper attention in
decisionmaking. Under NEPA and the imple-
menting regulations promuigated by the
Council on Environmental Quality federal
OCS actions would be subject to compre-
hensive environmental review, and the feder-
al government would be required to consult
with coastal states and other interested and
affected parties in that environmental review
process.

The Past Two Decades—Large-scale
Expansion

Initial Call for a More Expanded and
Accelerated OCS Program

In 1971, just two years after the Santa
Barbara spill, President Nixon called for ex-
panded and accelerated OCS oil and gas
teasing to trim the nation’s imports and

head off future energy shortages. While the
Department of the Interior responded by pre-
paring an ambitious leasing schedule,
another new law was enacted that in addition
to NEPA would have a significant effect on
the way the federal government conducted
the OCS program.

The Coastal Zone Management Act

Based on the recommendations of an inde-
pendent qualified appointed commission,
passage of the Coastal Zone Management
Act (CZMA) in 1972 provided states with a
generally greater role in the management of
activities affecting their coastal zones.
However, it was not until the consistency
provisions [section 307(c)(3)(B)] were added
to CZMA by amendment in 1976 that states
received explicit authority with respect to
permitting OCS activities. Section
307(c)(3)(B) provided that OCS exploration
plans or development and production plans
would have to be consistent to the maximum
extent practicable with the federally
approved coastal management programs of
affected states if those plans were to be per-
mitted.

The CZMA, as amended, gave the states
their first real voice in federal OCS decisions,
as it conferred to them a way of influencing
OCS projects to assure that activities in fed-
eral waters would be consistent with feder-
ally approved state coastal zone goals and
plans. However, the CZMA preserved the
primacy of the federal government in OCS
matters by setting forth a consistency appeal
process giving the Department of Commerce
final decision authority. Thus, in the early
1970's the federal government’s ambitious
plans and ultimate authority to expand devel-
opment of the OCS—when memories of the
Santa Barbara oil spill were still fresh and
vivid—provided state and local governments
and other interested and affected parties the
impetus to call for a new paradigm for man-

aging the OCS.

Plans for Expansion Following the 1973
Oil Shortage

The debate concerning management of OCS
resources was exacerbated as a result of the
Middle East oil embargo of late 1973 and
early 1974. In 1974, as Americans had their
first experiences with sharply rising fuel


Chapter 3

4

0.25 percent to 10 percent as specified in the
legislation, with a small remainder to be dis-
tributed based on production.

Grants from the fund would have been used
by states and local governments to manage
their ocean and coastal resources and to
ameliorate adverse environmental impacts
on the coastal zone that are related to ener-
gy facilities. Payments from the fund would
have been annual, and before states could
receive their grants, they would have been
required to submit a report describing how
the money would be used. At least 33.3 per-
cent of each state’s grant would have been
allocated to local governments. The states
receiving grants also would have been
required to submit audits to the Secretary of
Commerce. The authority of the Secretary
of Commerce to award grants and the
authority for the revenue sharing fund would
have expired on September 30, 2004.

S. 2166 provided for establishment of two
funds. The Coastal Communities Impact
Assistance Fund would have been adminis-
tered by the Secretary of the Interior. The
Coastal Resources Enhancement Fund
would have been administered by the Sec-
retary of Commerce.

The Coastal Communities Impact Assistance
Fund would have been comprised of 12.5
percent of the revenues derived from leases
coming on production after the date of enact-
ment. The fund would have been subject to
appropriations and capped at $300 million.
All states and counties within 200 miles of a
producing OCS lease would have received
money from the fund in allocations based
inversely on their distance from the produc-
ing lease. Money from the fund would have
been distributed directly to both coastal
states (50 percent) and counties (50 per-
cent). Payments were earmarked for natural
and environmental resource projects and for
purposes related to the CZMA and OPA, as
well as for the coastal impact assistance and
OCS programs that were part of all the ear-

58

marking proposals. Payments from the fund
would have been for each fiscal year, and an
audit for each year would be required. No
expiration date for the fund was provided.

The Coastal Resources Enhancement Fund
would be comprised of 4 percent of the rev-
enues from new OCS leases. The fund
would be subject to appropriations and
would be capped at $100 million. All coastal
states (excluding the Great Lakes States)
would be eligible for grants from the fund if
they have an approved CZM plan or are
making satisfactory progress toward one.
Grants from the fund would be for state and
local government use to manage their ocean
and coastal resources and to ameliorate
adverse environmental impacts on the
coastal zone that are related to energy facili-
ties. Grants to the states would be deter-
mined by factoring in shoreline mileage (25
percent), coastal population (25 percent),
and number, location, and impact of energy
facilities located within the coastal zone (50
percent). At least 33.3 percent of each
state’s grant would be awarded to its local
governments. No audit requirement or expi-
ration date for the fund was provided.

Recommendation of the Subcommittee

A portion of the revenues derived from
OCS program activities should be shared
with coastal states, Great Lakes states,
and U.S. Territories.

The Subcommittee believes that a portion of
OCS revenues should be dedicated to main-
taining and enhancing coastal infrastructure.
Due to changing U.S. demographics, there is
increasing stress on infrastructure in the
nation’s coastal regions. During the 1980's
the number of people living on the nation’s
coasts increased dramatically to the point
where over half the total U.S. population now
resides in coastal regions. Coastal popula-
tion is projected to continue to grow well into
the next century. Billions of dollars will have
to be spent on infrastructure to accommo-


Appendix A

v

Side-by-Side
OCS Amendments to the Energy Bill
IMPACT ASSISTANCE
Legislation Proposed by
H.R. 776 S. 2166 the Bush Administration
(H.R. 4138)
Title XXIV -
OCS Revenue Sharing Composed of 2 Funds
1) Fund #1
Administered by Commerce. } Administered by Interior. Administered by Interior.

Applicable to all revenues.

Applicable to new revenues-
defined as royalties and
miscellaneous payments
received from tracts coming
into production after date of
enactment.

Applicable to new revenues-
defined as royalties and
miscellaneous payments
received from tracts coming
into production after date of
enactment.

Establishes Ocean & Coastal
Resource Management &
Development Fund -
comprised of 4% of the aver-
age amount of OCS revenues
from the three previous fiscal
years.
- Amount deposited

can increase up to

5% each year.

Establishes Coastal
Communities Impact
Assistance Fund - comprised
of 12.5% of "new revenues”
from the OCS.

- Fund is capped at
$300 million.

Establishes Coastal
Communities Impact
Assistance Fund - comprised
of 12.5% of "new revenues"
from the OCS.

- No cap.

Subject to appropriations.

Subject to appropriations.

Permanent indefinite
appropriation.

Coastal states as defined
in the bill (includes Great
Lakes, territories, posses-
sions) are eligible for block
grants if:

- they have an approved
CZM plan (or are making
Satisfactory progress to-
wards one).

Fund is allocated among
states and counties based
on distance of each state
or county from producing
lease.

- All states and counties
within 200 miles of a
producing lease will
receive funds.

Fund is allocated among
states and counties based
on distance of each state
or county from producing
lease.

- All states and counties
within 200 miles of a
producing lease will
receive funds.

74



‘Chapter 2

wv

OCS Resources

Further development of offshore oil and nat-
ural gas could help to reduce imports. As of
January 1, 1992, the total estimated recover-
able reserves in the submerged federal
lands amounted to 3.45 billion bbl of crude
oil and 38.3 Tef of natural gas. This is
approximately 12 percent of the Nation’s oil
reserves and 28 percent of its natural gas
reserves. Re-cent major discoveries in deep
waters of the Gulf of Mexico could add signif-
icantly to these OCS oil and gas reserve
estimates.

In addition, the potential for future discover-
ies on the OCS is still significant. The MMS
estimates that about one-third of the Nation’s
undiscovered oil resources and three-eighths
of its undiscovered natural gas resources are
on the OCS. As of January 1, 1990, the total
risked mean estimate of leased and unleas-
ed undiscovered economically recoverable
resources was 11 billion bb! of crude oil and
75 Tef of natural gas.

Foreign Resources

The other source for the oil and natural gas
needed by the Nation’s economy is imported
fuel. Because we are more dependent on
foreign sources of oil than of natural gas,
and because our vulnerability to supply dis-
ruptions is greatest for oil (of all major ener-
gy sources), the analysis of import sources
will focus on sources of oil. At projected
rates of domestic production and consump-
tion, imported oil will become a greater part
of our total supply, even with continued OCS
production.

As shown in Figure 12, Middle Eastern coun-
tries have greater reserves than the rest of
the world combined. About two-thirds of the
world’s proven oil reserves are in the Middle
East, virtually all in the Persian Guif. The
vast majority of non-OPEC reserves are held
by China, Mexico, Norway, the U.S., and the
former Soviet Union. However, non-OPEC

44

production is expected to peak by the middle
of the decade. The development of proven
reserves discovered in the early 1980's
should allow non-OPEC countries to incre-
ase oil production—but only in quantities suf-
ficient to make up for the decline in other
non-OPEC countries. This would result in
the increasing concentration of proven reser-
ves within a small group of countries, espe-
cially the Gulf states of Saudi Arabia, Iraq,
lran, Kuwait, and the United Arab Emirates.
Furthermore, a look only at comparative
sizes of reserves understates the importance
of those countries as suppliers on the world
market because they hold not only most of
the world's reserves but an even greater
share of reserves that can be produced at
relatively lower costs. In contrast, the reser-
ves remaining in the U.S. and the rest of the
Western world that could be produced at
similar costs have largely been used up (the
lowest cost reserves in the U.S. can cost
about $10 per barrel more to produce than
those in the countries listed above).

The major international oil companies are
actively exploring for oil in non-OPEC coun-
tries in Africa, Asia and Latin America. If they
do not find major new reserves there, it ap-
pears that the U.S. will continue to depend
on the Middle East to supply much of its
additional petroleum for the foreseeable
future.

Alternatives to Reduce Demand for Oil
and Natural Gas

Possible Approaches

There are three basic ways in which the
nation can decrease petroleum consumption:
switching fuels, improving efficiency, and
accepting less service. These can be
achieved through responses to market
forces, to government incentives, or to gov-
ernment requirements (or a combination of
such measures).


Chapter 2

4

portation. Use of hydrogen as an automobile
fuel also will require technological changes
to reduce the cost of generation and the
amount of space needed to store it. Produc-
tion costs—both in dollars and energy con-
sumed—of ethanol are too great for it to
become a widespread alternative fuel at cur-
rent prices and state of technology.

Methanol has many drawbacks as well. Its
manufacture and combustion cause air pollu-
tion—albeit in different forms than pollution
from gasoline; it is highly corrosive, toxic,
and explosive; and it is expensive to pro-
duce. In addition, the cheapest manufactur-
ing process would utilize remote resources
of natural gas, perhaps in Qatar and Abu
Dhabi, which have the world’s largest unuti-
lized natural gas reserves. Assuming that
the necessary technological advances are
achieved, substitution of these fuels for oil
should bring both energy security and envi-
ronmental benefits. For example, while the
generation of electricity also produces pollu-
tants, the sources of those pollutants are rel-
atively few and stationary. Thus, they are
more easily controlled than the millions of
gasoline-powered vehicles in use. In addi-
tion, electricity generating plants in general
have more flexibility to switch fuels than do
owners of automobiles.

Oil and natural gas price increases, techno-
logical advances, and greater availability of
automobile refueling facilities offering alter-
native fuels all could reduce the effects of the
limiting factors discussed above and foster
more rapid and widespread use of alterna-
tives. The Federal Government maintains a
fleet of thousands of vehicles and, as a
result of legislative requirements and execu-
tive branch initiatives, an increasing number
of these will use alternative fuels in the
future. By increasing purchases of alterna-
tive fuel vehicles, the Government hopes to
encourage increased investment by the
major auto makers in alternative fuel tech-
nologies and make more alternative refueling
locations available, thus making it easier for

46

others to own and operate such vehicles. As
increased production makes alternative fuel
vehicles less expensive and alternative refu-
eling locations become more common, cur-
rent barriers to widespread private owner-
ship will be reduced. However, even aggres-
sive programs to improve efficiency and
diversify fuel sources will not alleviate a con-
tinuing transportation fuel supply problem for
many years.

Switching to Natural Gas

Of the primary energy sources—natural gas,
coal, and nuclear—natural gas can be most
readily substituted for oil in a wide variety of
industrial, commercial, and residential appli-
cations. Natural gas also is adaptable to
conventional internal combustion engines
and its use is expected to increase rapidly in
commercial vehicle fleet applications.
Furthermore, naturat gas is easily the most
desirable hydrocarbon fuel from an environ-
mental perspective. Natural gas results in
lower emissions of sulfur dioxide, carbon
monoxide, hydrocarbons, nitrogen oxides,
and particulates than result from burning oil
or coal. In addition, natural gas combustion
produces almost no solid waste, sludge, or
water pollution. On the OCS, natural gas
blowouts do not involve the potential for
environmental damage that is associated
with oil spills. As concerns mount for a
cleaner environment, natural gas will be
increasingly in demand.

The relative abundance of natural gas has
allowed it to remain a domestically produced
fuel source. imports account for only about
8 percent of gas supply. The gas that is
imported is from secure North American
sources, primarily pipelines from Canada.

Several areas where OCS activities have
been strongly opposed, based largely on
fear of oil spilis, are believed to be gas prone
areas having little chance for discovery of oil.
Frontier OCS areas believed to be gas prone
include the Georges Bank Basin off New


Chapter 2

v

Acres
. by Total
Fiscal Planning Area Planning | Acres Fiscal
Year Name Area Year
in millions
1982 Central and Northern California 0.7 1982
Central and Northern California 35.0
1983 Mid-Atlantic 0.3 35.3 1983
Central and Northern California 35.0
Southern California 18
1984 North Atlantic 93 1984
Eastern Gulf of Mexico--
(South of 26 ) 7.4 53.5
Central and Northern California 95.0
1985 Southern Califomia 18 1985
North Atlantic 9.3 46.1
1986-1988 North Atlantic 7.5 7.5 1986-1988
Northern California 11
North Atlantic 12.2
1989 Eastern Gulf of Mexico-- 1989
(South of 26 ) 19.9 33.2
Central California (All) 1.7
Northern California (All) 1.2
Southern California (Alll) 5.0
1990 North Atlantic (All) 13.9 1990
Mid-Atlantic 9.9
Eastern Gulf of Mexico--
(South of 26 ) 19.9
North Aleutian Basin (All) 32.5 84.0
Central Califomia (All) 15.0
Northern California (All) 28.5
Southern California (All) 30.5
Washingtor/Oregon (All) 47.9
1991 North Atlantic (All) 50.6 1991
Mid-Atlantic 9.9
Eastern Gulf of Mexico 49.2
EGOM (South of 26 ) 19.9
North Aleutian Basin (All) 32.5 284.0
Central California (All) 15.0
Northern California (All) 28.5
Southern California (All) 30.5
Washington/Oregon (All) 47.9
North Atlantic (All) 50.6
1992 Mid-Atlantic and South Atlantic-- 1992
(Sale 145) 5.2
Eastern Gulf of Mexico--
(Sale 151 and Presidental Moratoria) 56.3
North Aleutian Basin (All) 32.5 266.5
1993 Same as FY 1992 2665 | 1993

Figure 2. Millions of acres under OCS leasing moratoria.

aayUIUoD A21/0d SDO